Institute of Chartered Financial Analysts of India (ICFAI) University 2009 C.A Chartered Accountant Integrated Professional Competence (IPCC) - Accounting Revision Test s (ember ) - Question Paper

31,800    31,800

(2)    Purchases made during the year

Sundry Creditors Account

Rs.    Rs.

To Cash and bank A/c 39,200 By Balance b/d    11,000

To Discount received A/c 800 By Sundry debtors A/c    400

To Bills Receivable A/c 2,000 By Purchases A/c    45,600 To Balance c/d 15,000 (Balancing figure)

57,000    57,000

(3)    Sales made during the year

Rs.

Opening stock    8,000

Purchases    45,600

Less : For advertising    900 44,700

Freight inwards    3,000

55,700

Less : Closing stock

Cost of goods sold

Add: Gross profit (@ 50% on cost)

(4) Debtors on 31.12.2008

Sundry Debtors Account

To Balance b/d To Sales A/c To Sundry creditors A/c (bill dishonoured)

Average due date = Base date = 8th April +

+

1,175

= 8th April + 53 days = 31st May

Particulars Amount Days Product Date    Particulars Amount Days Product

Due Date

1.4.2009 to By Balance

10.4.2009 To Sales

*4,17,500 x 18/100 x 1/365 = Rs. 205.90

Note that no entry is required for transaction of April 10, 2009.

Income and Expenditure Account of Diana Club for the year ended 30th September, 2008

Bar payments as per receipts and payments account Add: Amount due on 30.9.2008

Less: Amount due on 1.10.2007

3. Calculation of subscriptions accrued during the year:

Subscriptions received as per receipts and payments account Add: Outstanding on 30.9.2008

Less: Outstanding on 1.10.2007

4. Depreciation on club premises and written down value on 30^th September, 2008:

Written down value on 1.10.2007 (58,000-37,600)

Less: Depreciation for the year 2007-2008 @ 5% p.a.

5. Calculation of profit on sale of car:

Sale proceeds of old car

Less: Written down value of old car:

Cost of car on 1. 10.2007    24,380

Less: Depreciation upto 1.10.2007    20,580

Cost of new car purchased (25,200 + 6,000) Less: Depreciation for the year @ 15% p.a. Written down value on 30.9.2008

Note: The opening and closing balance of cash and bank shown in the Receipts and Payments Account (given in the question), include the bank balance as per cash book. Therefore, no adjustment has been made in the above solution on account of cheques issued, but not presented for payment of printing.

Journal Entires

Rs.

2,50,000

Share Capital A/c (old)    Dr.

To Equity Share Capital A/c 2

(5 of Rs. 2,50,000)

To 5% Preference Share Capital A/c 20

( x Rs. 1,00,000)

100

To 6% Second Debentures A/c

To Capital Reduction A/c (Conversion of 25,000 Equity Shares and balance being transferred to Capital Reduction A/c in accordance with the Scheme of internal

reconstruction as per Special Resolution dated..........as confirmed

by the Court Order dated........)

In the books of Piyush Investment Account (Shares in Horizon Limited)

26,000 2,400 36,545    26,000 2,400

Working Notes:

(1) Sale on 15-5-2008:

Cost of 4,000 shares @ Rs. 1.50

Sales price

Profit

Cost of 10,000 shares sold:

Cost of 22,000 shares (24,000 + 3,000) Less: Amount received from rights Cost of 22,000 shares

Rs.26,520

Cost of 10,000 shares

22,000 shares Profit on 10,000 shares (Rs.14,000 - Rs.12,055)

12.

Dr.

Hire Purchase Trading Account for the year ended 31.3.2009

Rs.

62,500 -    25

To Hire purchase stock (25 x Rs. 2,500)

To Hire purchase debtors (5 x Rs. 2,500)

To Goods sold on hire purchase (240 computers x Rs.25,000¹)

To Stock reserve

25

(Rs. 15,00,000 x ) 125

3,00,000 By Repossessed goods (W.N.2)

Hire purchase debtors (2 x 5 x Rs.2,500)

Hire purchase stock [(8x50)+(6x30)+(2x10) x Rs.2,500]

To Profit transferred to P & L A/c

72,72,500

Working Notes:

1. Calculation of cash collected during the year

Down payment received on 240 computers sold during the year (240 x Rs.5,000)

Number of Instalments due and collected:    No. of instalments

Total Instalments (8 instalments x 240 computers)

Add: Opening hire purchase debtors Add: Opening hire purchase stock

Less: Closing hire purchase debtors (2 x 5 )

Less:Closing hire purchase stock

8 x 50 = 400

6 x 30 = 180 2 x 10 = 20

Less:Repossessed computer ( 5 x 2 + 2 x 2)

Total number of instalments received during the year Total amount of instalments received (1,326 instalments x Rs.2,500)

Instalments collected during the year

2. Value of repossessed computers

Hire purchase price of two repossessed computers

= [Rs.5,000 + (8 x Rs. 2,500)] x 2 computers = Rs.50,000

Cost price of the repossessed computers = l⁰⁰⁰ x 100 = Rs. 40,000 Value of repossessed computers    = Rs.40,000 x 50% = Rs.20,000

Alternatively Hire Purchase Trading Account can also be prepared in the following manner:

To Loss on goods repossessed (W.N.2)    8,000

Less : Cost of instalments

not due    8,000    Nil

To Stock reserve    3,00,000

25

15,00,000 x

125

To Profit transferred to P & L A/c 8,97,500

72,77,500

Working Notes:

1. Calculation of hire purchase sales

Cash collected (As per the working note 1 of the Alternate solution given above)

Add: Instalments due but not collected (including repossessed computers)

(2 x Rs.2,500 x 5) + (5 x Rs.2,500 x 2)

2. Calculation of loss on repossessed computers

Cost of instalments due but not collected ^{(2 x 2,500 x5)} x 100

125

Add: Cost of instalments not yet due ^{(2 x} 2,500 x2) x 100

125

1,70,500

To Capital accounts (profit on revaluation transferred)

Mr. P (2/7) 2,000

Mr. Q (3/7) 3,000

Mr. R (2/7) 2,000

To P's Capital A/c -

26,000 36,000 38,000

91,000

Working Notes:

Adjustment for Goodwill:

Goodwill of the firm Mr. P's Share (2/7)

Gaining ratio of Q & R;

Q = ¹/₂- 3/7 = 1/14 R = / - 2/7 = 3/14 Q:R = 1:3

Therefore, Q will bear = % x 4,000 or Rs.1,000 R will bear = % x 4,000 or Rs.3,000

Revaluation Account

15. (i)

By Goodwill A/c (W.N.)

71,000 54,000 25,000

Working Note:

Calculation of goodwill:

C's contribution of Rs. 25,000 consists only 1/6th of capital.

Therefore, total capital of firm should be Rs. 25,000 x 6 = Rs. 1,50,000.

But combined capital of A, B and C amounts Rs. 44,000 + 36,000 + 25,000 =

Rs. 1,05,000.

Thus, Hidden goodwill is Rs. 45,000 (i.e. Rs. 1,50,000 - Rs. 1,05,000).

16. (a) There are many accounting softwares available in the market. To choose the

accounting software appropriate to the need of the organization is a difficult task,

some of the criteria for selection could be the following:

1.    Fulfillment of business requirements: Some packages have few functionalities more than the others. The purchaser may try to match his requirement with the available solutions.

2.    Completeness of reports: Some packages might provide extra reports or the reports match the requirements more than the others.

3.    Ease of Use: Some packages could be very detailed and cumbersome compare to the others.

4.    Cost: The budgetary constraints could be an important deciding factor. A package having more features cannot be opted because of the prohibitive costs.

5.    Reputation of vendor: Vendor support is essential for any software. A stable vendor with good reputation and track records will always be preferred.

6.    Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be preferred to a vendor unwilling to give updates.

(b) Following are the advantages of outsourcing the accounting functions:

(i)    The organisation that outsources its accounting function is able to save time to concentrate on the core area of business activity.

(ii)    The organisation is able to utilise the expertise of the third party in undertaking the accounting work.

(iii)    Storage and maintenance of the data is in the hand of professional people.

(iv)    The organisation is not bothered about people leaving the organisation in key accounting positions.

(v)    The proposition is proving to be economically more sensible.

17. (a) Following are the advantages of self-balancing ledger system:

(i)    It fixes the responsibility on the ledger keeper who had to balance the ledger. The error is localised.

(ii)    Interim accounts can be prepared without personal ledger to be balanced.

(iii)    The total amount due from debtors and total amount payable to suppliers and creditors is readily available.

(iv)    The maintenance of general ledger would be easy as the voluminous debtors and creditors details are maintained in control accounts.

(b) The qualitative characteristics are attributes that improve the usefulness of

information provided in financial statements. The framework suggests that the

financial statements should observe and maintain the following four qualitative

characteristics as far as possible within limits of reasonable cost/ benefit.

1.    Understandability: The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities. It is not right to think that more disclosures are always better. A mass of irrelevant information creates confusion and can be even more harmful than non-disclosure. No relevant information can be however withheld on the grounds of complexity.

2.    Relevance: The financial statements should contain relevant information only. Information, which is likely to influence the economic decisions by the users, is said to be relevant. Such information may help the users to evaluate past, present or future events or may help in confirming or correcting past

evaluations. The relevance of a piece of information should be judged by its materiality. A piece of information is said to be material if its omission or misstatement can influence economic decisions of a user.

3.    Reliability: To be useful, the information must be reliable; that is to say, they must be free from material error and bias. The information provided are not likely to be reliable unless:

(a)    Transactions and events reported are faithfully represented.

(b)    Transactions and events are reported in terms of their substance and economic reality not merely on the basis of their legal form. This principle is called the principle of 'substance over form'.

(c)    The reporting of transactions and events are neutral, i.e. free from bias.

(d)    Prudence is exercised in reporting uncertain outcome of transactions or events.

4.    Comparability: Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison. One essential requirement of comparability is disclosure of financial effect of change in accounting policies.

5.    True and Fair View: Financial statements are required to show a true and fair view of the performance, financial position and cash flows of an enterprise. The conceptual framework does not deal directly with this concept of true and fair view, yet the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise.

(c) Donations may have been raised either for meeting some revenue or capital expenditure; those intended for the first mentioned purpose are credited directly to the Income and Expenditure Account but others, if the donors have declared their specific intention, are credited to special fund account and in the absence thereof, to the Capital Fund Account. If any investments are purchased out of a special fund or an asset is acquired therefrom, these are disclosed separately. Any income received from such investments or any donations collected for a special purpose are credited to an account indicating the purpose and correspondingly the expenditure incurred in carrying out the purpose of the fund is debited to this account. On no account any such expense is charged to the Income and Expenditure Account. The term "Fund" is strictly applicable to the amounts collected for a special purpose when these are invested, e.g. Scholarship Fund, Prize Fund etc. In other cases, when the amounts collected are not invested in securities or assets distinguishable from those belonging to the institution, the word "Account" is more appropriate e.g. Building Account, Tournament Account etc.

18.    (a) As per AS 3 Cash Flow Statements', the term Cash' and Cash equivalents' mean

the following:

Cash: It includes cash on hand and demand deposits with banks.

Cash Equivalents: It means short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.

(b) A change in accounting policy should be made in the following conditions:

(i)    If the change is required by some statute or for compliance with an Accounting Standard.

(ii)    Change would result in more appropriate presentation of the financial statement.

Change in accounting policy may have a material effect on the items of financial statements. For example, if depreciation method is changed from straight-line method to written-down value method, or if cost formula used for inventory valuation is changed from weighted average to FIFO, or if interest is capitalized which was earlier not in practice, or if proportionate amount of interest is changed to inventory which was earlier not the practice, all these may increase or decrease the net profit. Unless the effect of such change in accounting policy is quantified, the financial statements may not help the users of accounts. Therefore, it is necessary to quantify the effect of change on financial statement items like assets, liabilities, profit / loss.

19.    (a) Items that are to be excluded in determination of the cost of inventories as per para

13 of AS 2 on Valuation of Inventories' are:

(i)    Abnormal amounts of wasted materials, labour or other production costs.

(ii)    Storage costs unless those costs are necessary in the production process prior to a further production stage.

(iii)    Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and

(iv)    Selling and distribution costs.

(b) B list contributories are the shareholders who transferred partly paid shares (otherwise than by operation of law or by death) within one year, prior to the date of winding up. They may be called upon to pay an amount (not exceeding the amount not called up when the shares were transferred) to pay off such creditors, as existed on the date of transfer of shares and cannot be paid out of the funds otherwise available with the liquidator, provided also that the existing shareholders have failed to pay the amount due on the shares.

20.    (a) According to Accounting Standard 10 on "Accounting for Fixed Assets

(a)    When fixed assets are revalued in financial statements, the basis of selection should be an entire class of assets or the selection should be done on a systematic basis. The basis of selection should be disclosed.

(b)    The revaluation of any class of assets should not result in the net book value of that class being greater than the recoverable amount of that class of assets.

(c)    The accumulated depreciation should not be credited to profit and loss account.

(d)    The net increase in book value should be credited to a revaluation reserve account.

(e)    On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss account except that to the extent to which such a loss is related to an increase and which has not been subsequently reversed or utilised may be charged directly to that account.

(b) As per AS 9 Revenue Recognition, revenue from sales transactions should be recognised when the following requirements as to performance are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection :

(i)    The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and

(ii)    No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of goods.

21.    The convergence of financial reporting and accounting standards is a valuable process that contributes to the free flow of global investment and achieves substantial benefits for all capital market stakeholders. It improves the ability of investors to compare investments on a global basis and thus lowers their risk of errors of judgment. It facilitates accounting and reporting for companies with global operations and eliminates some costly requirements say reinstatement of financial statements. It has the potential to create a new standard of accountability and greater transparency, which are values of great significance to all market participants including regulators. It reduces operational challenges for accounting firms and focuses their value and expertise around an increasingly unified set of standards. It creates an unprecedented opportunity for standard setters and other stakeholders to improve the reporting model. For the companies with joint listings in both domestic and foreign country, the convergence is very much significant.

22. (a) As per AS 1 "Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.

Notes on Accounts :

(i)    During the year inventory has been valued at factory cost, against the practice of valuing it at prime cost as was the practice till last year. This has been done to take cognisance of the more capital intensive method of production on account of heavy capital expenditure during the year. As a result of this change, the year-end inventory has been valued at Rs. 50 crores and the profit for the year is increased by Rs. 20 crores.

(ii)    In view of the heavy capital intensive method of production introduced during the year, the company has decided to change the method of providing depreciation from reducing balance method to straight line method. As a result of this change, depreciation has been provided at Rs. 27 crores which is lower than the charge which would have been made had the old method and the old rates been applied, by Rs. 18 crores. To that extent, the profit for the year is increased.

(b)    As per para 21 of AS 6 Depreciation Accounting', when a change in the method of depreciation is made, depreciation should be calculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation should be adjusted in the accounts in the year in which the method of depreciation is changed. The deficiency should be charged to profit and loss account. Similarly, any surplus should be credited in the statement of profit and loss. Such change is a change in the accounting policy, and its effect should be quantified and disclosed.

In the given case, the deficiency of Rs. 500 lakhs would be charged to the profit and loss account of 31.3.2009. In the notes to account, the fact of change in method of depreciation should be elaborated along with the effect of Rs. 500 lakhs. The current depreciation charge of 200 lakhs determined in accordance with the written down value method should be debited to the profit and loss account.

(c)    As per para 12.1 of AS 10 on Accounting for Fixed Assets, expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity. Hence, in the given case, Repairs amounting Rs. 5 lakhs and Partial replacement of roof tiles should be charged to profit and loss statement. Rs. 10 lakhs incurred for substantial improvement to the electrical writing system which will increase efficiency should be capitalized.

23.    (a) As per AS 9 "Revenue Recognition, where the ability to assess the ultimate

collection with reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably certain that the ultimate collection will be made.

In this case, the company never realized interest for the delayed payments make by the dealers. Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income hence is not to be recognized.

(b)    As per Para 5 of AS 2 "Valuation of Inventories, the inventories are to be valued at lower of cost and net realizable value.

In this case, the cost of inventory is Rs.10 lakhs. The net realizable value is

11,00,000 x 90% = Rs.9,90,000. So, the stock should be valued at Rs.9,90,000.

(c)    As per AS 3 on Cash flow Statement', cash and cash equivalents consists of cash in hand, balance with banks and short-term, highly liquid investments². If investment, of Rs.10 lacs, made in debentures is for short-term period then it is an item of cash equivalents'.

However, if investment of Rs.10 lacs made in debentures is for long-term period then as per AS 3, it should be shown as cash flow from investing activities.

24.    (a) As per para 32 of AS 13 on Accounting for Investments', any investment of long

term period is shown at cost. Hence, the investment in Gold and Silver (purchased on 1^st April 2006) shall continue to be shown at cost i.e., Rs.2,00,000 and Rs.1,50,000 respectively as their value have increased.

Also as per AS 13, for investment in shares - if the investment is for short-term period then the loss of Rs.3,00,000 is to be charged to profit & loss account for the year ended 31^st March, 2006. If investment is of long term period then it will continue to be shown at cost in the Balance Sheet of the company. However, provision for diminution shall be made to recognize a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.

(b)

(a) Amount of foreseeable loss