Institute of Chartered Financial Analysts of India (ICFAI) University 2007 C.A Chartered Accountant Solved PCC ACCOUNTS II - Question Paper
SOLVED PCC ACCOUNTS ques. PAPER NOV 2007
Question 1
PAPER - 1 : ADVANCED ACCOUNTING
Answer all questions.
Working notes should form part of the answer.
X and Y are partners sharing profits and losses in the ratio of 3:2. On 30th September, 2006 they admitted Z as a partner. The new profit sharing ratio agreed was 2:2:1.
At the time of admission Z brought in a fixture valued at Rs. 6,000 and a machinery worth Rs.24,000. No accounting entry was passed for the fixture brought in by partner Z in the books of the firm.
Also at the time of admission the valuation of goodwill was made. The value of goodwill of X and Y was decided at Rs. 40,000 and value of goodwill of partner Z was fixed at Rs. 20,000. No effect was given to the goodwill value in the books of the firm.
On 31.3.2007, it was decided that partner X would retire and the other partners viz., Y and Z would continue the business of the firm by converting it into a company called YZ Ltd., with equal shareholding in the company.
The partners agreed as below:
(i) The goodwill of the firm shall be fixed at Rs.80,000. Necessary effect for goodwill value not recorded earlier shall be given. The present goodwill value being Rs. 80,000 shall be reflected in the books of the company.
(ii) All the assets and liabilities of the firm shall be taken over by the company.
(iii) Partner X would take motor car of the firm at a value of Rs. 7,400.
(iv) A plant owned by the firm is sold for Rs. 6,000.
(v) The profit of the firm upto 30.9.2006 was Rs. 44,000.
(vi) Partner X agreed to leave Rs.90,000 as loan with the firm in return for 12% interest per annum.
Following is the Trial Balance of the firm as on 31.3.2007:
Particulars Dr. Cr.
Question 1
Rs.
Rs.
Capital Account:
X
Y
Z
80,000
50.000
24.000
Drawings Account:
X
Y
22,000
20,000
9,600
70.000
46.000
14.000
24.000 5,400
34,600
2,45,600
Z
Sundry Debtors Sundry Creditors
32,000
Plant (Book value of plant sold Rs.8,000)
Fixtures
Stock
Motor car
Cash at bank
Profit and Loss A/c (for the year)
59,600
2,45,600
You are required to prepare:
(i) Goodwill Adjustment Account
(ii) Profit and Loss Appropriation Account
(iii) Partners Capital Accounts
(iv) Balance Sheet of YZ Ltd. after conversion.
(20 Marks)
Rs.
24.000
24.000
12.000
80,000
Answer (i) Goodwill Adjustment Account
30.9.06 To Partners' Capital A/cs |
Rs. 30.9.06 |
By |
Partners' Capital A/cs |
X (3/5) |
24,000 |
X (2/5) | |
Y (2/5) |
16,000 |
Y (2/5) | |
Z |
20,000 |
Z (1/5) | |
31.3.07 To Partners' Capital A/cs |
31.3.07 |
By |
Goodwill A/c |
X (2/5) |
32,000 |
(Goodwill raised in the | |
Y (2/5) |
32,000 |
books) | |
Z(1/5) |
16,000 1,40,000 |
Profit and Loss Appropriation Account | ||
To Plant- Loss on sale of plant |
2,000 By Motor Car |
2,000 |
To Partners' Capital A/cs* |
By Profit and Loss A/c |
59,600 |
X |
32,640 | |
Y |
23,840 | |
Z |
3,120 | |
61,600 |
61,600 |
*Calculation of profit apportionment: |
Total |
x |
Y |
Z |
Rs. |
Rs. |
Rs. |
Rs. | |
Upto 30.9.2006 ( in 3:2) |
44,000 |
26,400 |
17,600 |
NIL |
From 01.10.2006 to 31.3.2007 (in 2:2:1) |
15,600 |
6,240 |
6,240 |
3,120 |
59,600 |
32,640 |
23,840 |
3,120 |
Partners Capital Accounts
(iii)
x
Rs.
Y
Rs.
Z
Rs.
x
Rs.
YZ Rs. Rs.
30.9.06 To Goodwill Adjustment A/c 31.3.07 To Motorcar To Drawings 22,000 20,000 9,600 To 12% Loan 90,000 To Bank 25,240 Balance To - 77,840 47,520 31.3.07 By c/d By |
24,000 24,000 12,000 7,400 - - |
30.9.06 By Balance b/d By Plant & machinery By Fixtures By Goodwill Adjustment A/c Profit upto 30.9.06 Profit for 6 months ended 31.3.07 Goodwill Adjusment A/c By |
80.000 50,000 - - - 24,000 - - 6,000 24.000 16,000 20,000 26,400 17,600 - 6,240 6,240 3,120 32.000 32,000 16,000 |
1,68,640 1,21,840 69,120
31.3.07 To Bank
Balance
b/d
Bank
To
Shares of YZ Ltd. (W.N. 2)
- 31.3.07 By By
62,680 62,680
15,160
1,68,640 1,21,840 69,120 77,840 47,520
- 15,160
77,840 62,680
77,840
62,680
Liabilities Share capital 12% Loan Sundry creditors Working Notes: 1. |
Balance Sheet of YZ Ltd. Rs. Assets 70.000 15,360 1.25.360 Goodwill 90.000 Plant (46,000 - 8,000) 32.000 Fixtures (14,000 + 6,000) Stock Sundry debtors _ Cash at bank (W.N. 1) 2.47.360 Bank Account |
| ||||||||||||||||||||
55,760 Total capital of the firm before conversion |
Rs.
77,840
47,520
Y
Z
1,25,360
As Y and Z would continue with equal shareholding, therefore, share capital of Y and Z would be Rs. 1,25,360 / 2 = Rs.62,680 each.
Rs.
Z should bring cash Rs.(62,680 |
- 47,520) = |
15,160 | |
Y should withdraw cash Rs.(77,840 - 62,680) = |
15,160 | ||
Question 2 | |||
Following is the Balance Sheet of ABC Ltd. as at 31st March, 2007: | |||
Liabilities |
Rs. Assets |
Rs. | |
Share capital: |
Plant and machinery |
9,00,000 | |
2,00,000 Equity shares of |
Furniture and fixtures |
2,50,000 | |
Rs 10 each fully paid up |
20,00,000 Patents and copyrights |
70,000 | |
6,000 8% Preference shares |
Investments (at cost) |
| ||||||||||||||||||||||||
The following scheme of reconstruction was finalised: |
(i) Preference shareholders would give up 30% of their capital in exchange for allotment of 11% Debentures to them.
(ii) Debentureholders having charge on plant and machinery would accept plant and machinery in full settlement of their dues.
(iii) Stock equal to Rs.5,00,000 in book value will be taken over by sundry creditors in full settlement of their dues.
(iv) Investment value to be reduced to market price.
(v) The company would issue 11% Debentures for Rs.3,00,000 and augment its working capital requirement after settlement of bank overdraft.
Pass necessary Journal Entries in the books of the company. Prepare Capital Reduction
account and Balance Sheet of the company after internal reconstruction. (16 Marks)
Answer In the Books of ABC Ltd. Journal Entries
Particulars Rs. Rs.
8% Preference share capital A/c Dr. 6,00,000
To Preference shareholders A/c 4,20,000
To Capital reduction A/c 1,80,000
[Being 30% reduction in liability of preference share capital]
Preference shareholders A/c Dr. 4,20,000
To 11% Debentures A/c 4,20,000
[Being the issue of debentures to preference shareholders]
9% Debentures A/c Dr. 12,00,000
To Debenture holders A/c 12,00,000
[Being transfer of 9% debentures to debenture holders A/c]
Debenture holders A/c Dr. 12,00,000
[Being settlement of debenture holders by allotment of plant & machinery]
Sundry creditors A/c Dr. 5,92,000
[Being settlement of creditors by giving stocks]
Bank A/c Dr. 3,00,000
[Being fresh issue of debentures]
Bank overdraft A/c Dr. 1,50,000
[Being settlement of bank overdraft]
Capital reduction A/c Dr. 5,72,000
[Being decrease in investment and profit and loss account (Dr. bal.); and balance of capital reduction account transferred to capital reserve]
Capital Reduction Account
To Investments A/c 13,000 By Preference share capital A/c 1,80,000
To Profit and loss A/c 4,05,000 By 9% Debenture holders A/c 3,00,000
To Capital reserve A/c(Bal. Fig.) 1,54,000 By Sundry creditors A/c 92,000
Balance Sheet of ABC Ltd. (And Reduced) As on 31st March 2007
| ||||||||||||||||||||||||||||||||||||||||||||
28,74,000 28,74,000 |
Working Note:
Cash at bank = Opening balance + 11% Debentures issued - Bank overdraft paid = Rs.10,000 + Rs.3,00,000 - Rs.1,50,000 = Rs.1,60,000
Question 3
J Ltd. presents you the following information for the year ended 31st March, 2007:
(Rs. in lacs) | |||||||||||||||||||||||||||||||||||||||
|
(xii) Purchase of fixed assets 22,092
(xiii) Expenditure on construction work 41,688
(xiv) Grant received for capital projects 18
(xv) Long term borrowings from banks 55,866
(xvi) Provision for Income-tax debited in P & L A/c 6,000 Cash and bank balance on 1.4.2006 6,000 Cash and bank balance on 31.3.2007 8,000
You are required to prepare a cash flow statement as per AS 3 (Revised). (16 Marks)
Answer
Cash Flow Statement as per AS 3
Cash flows from operating activities Rs. in lacs
Net profit before tax provision 36,000
Add: Non-cash expenditures
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure 12,000 36,048
72,048
Less: Non-cash income
Amortisation of capital grant received (10)
Profit on sale of investments (120)
Interest income from investment (3,000) (3,130)
Operating profit 68,918
Less: Increase in working capital (67,290)
Cash from operations 1,628
Less: Income tax paid (5,100)
Net cash used in operating activities (3,472)
Cash flows from investing activities
Sale of assets (222 - 48) 174
Sale of investments (33,318+120) 33,438
Interest income from investments 3,000
Purchase of fixed assets (22,092)
Expenditure on construction work (41,688)
Net cash used in investing activities (27,168)
Cash flows from financing activities
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)
Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2006 6,000
Cash and bank balance as on 31.3.2007 8,000
Note: For calculating cash flows from operating activities, net profit before tax provision' has been considered for calculation. Therefore, no effect for provision for income tax debited in P & L A/c' has been given.
Question 4
(a) Beta Ltd. having head office at Mumbai has a branch at Nagpur. The head office does wholesale trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 2007:
Head Office Branch
(Rs.) (Rs.)
Opening stock (as on 1.4.2006) 2,25,000 -
Purchases 25,50,000 -
Goods sent to branch (Cost to H.O. plus 80%) 9,54,000 -
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year ended 31st March, 2007.
(b) The following information is available in the books of X Bank Limited as on 31st March, 2007:
Rs.
Bills discounted 1,37,05,000
Rebate on Bills discounted (as on 1.4.2006) 2,21,600
Discount received 10,56,650
Details of bills discounted are as follows:
Due date
Value of bill (Rs.)
Rate of Discount
12%
12%
14%
16%
18.25.000
5.6.2007
12.6.2007
25.6.2007
6.7.2007
50,00,000
28.20.000
40,60,000
Calculate the rebate on bills discounted as on 31.3.2007 and entries.
Answer
(a)
Ltd.
Head |
Branch |
Head |
Branch | ||||
office |
office | ||||||
Rs. |
Rs. |
Rs. |
Rs. | ||||
To |
Opening stock |
2,25,000 |
- |
By |
Sales |
27,81,000 |
9,50,000 |
To |
Purchases |
25,50,000 |
- |
By |
Goods sent to branch |
9,54,000 | |
To |
Goods received from head office |
- |
9,54,000 |
By |
Closing stock (W.N.1 & 2) |
7,00,000 |
99,000 |
To |
Gross profit c/d |
16,60,000 |
95,000 | ||||
44,35,000 |
10,49,000 |
44,35,000 |
10,49,000 | ||||
To |
Office expenses |
90,000 |
8,500 |
By |
Gross profit b/d |
16,60,000 |
95,000 |
To |
Selling expenses |
72,000 |
6,300 | ||||
To |
Staff salaries |
65,000 |
12,000 | ||||
To |
Branch Stock Reserve (W.N.3) |
44,000 | |||||
To |
Net Profit |
13,89,000 |
68,200 | ||||
16,60,000 |
95,000 |
16,60,000 |
95,000 |
Working Notes:
(1) Calculation of closing stock of head office:
Rs.
2,25,000
25.50.000
27.75.000
20.75.000 7,00,000
Opening Stock of head office Goods purchased by head office
Less: Cost of goods sold [37,35,000* x 100/180]
(2) Calculation of closing stock of branch:
Goods received from head office [At invoice value]
9.54.000
8.55.000 99,000
Rs.99,000 80% of cost Rs.44,000
Discount
Amount
39,600
1,20,000
93,021
1,72,633
4,25,254
Less: Invoice value of goods sold [9,50,000 x 180/200]
(3) Calculation of unrealized profit in branch stock:
Branch stock Profit included
Hence, unrealized profit would be = Rs. 99,000 x 80/180 =
(b) Statement showing rebate on bills discounted
| ||||||||||||||||||||
1,37,05,000 Rebate on bills discounted on 31.3.2007 |
2,21,600
2,21,600
4,25,254
4,25,254
In the books of X Bank Ltd. Journal Entries
(i) Rebate on bills discounted Account Dr.
To Discount on bills Account
[Being opening balance of rebate on bills discounted account transferred to discount on bills account]
(ii) Discount on bills Account Dr.
To Rebate on bills discounted Account [Being provision made on 31st March, 2007]
(iii) Discount on bills Account
To Profit and loss Account
8,52,996
[Being transfer of discount on bills, of the year, to profit and loss account]
Question 5
Answer any eight out of the following:
(i) A, B, and C are partners sharing profits and losses in the ratio of 3:2:1. B retired from the firm. Partners A and C decided to take his share in 3:1 ratio. What is the new ratio of the partners A and C?
(ii) A company lodged a claim to insurance company for Rs. 5,00,000 in September, 2006. The claim was settled in February, 2007 for Rs. 3,50,000. How will you record the short fall in claim settlement in the books of the company.
(iii) X Ltd. acquired a fixed asset for Rs. 50,00,000. The estimated useful life of the asset is
5 years. The salvage value after useful life was estimated at Rs.5,00,000. The State Government gave a grant of Rs. 10,00,000 to encourage the asset acquisition. At the end of the second year, the subsidy of the State Government became refundable. What is the fixed asset value after refund of grant/subsidy to the State Government but before amortising the asset value at the end of the second year?
(iv) What is meant by Red-Ink interest in an Account Current?
(v) What do you understand by the term Firm Underwriting?
(vi) The closing capital of Mr. A on 31.3.2007 was Rs. 1,50,000. On 1.4.2006 his capital was Rs. 60,000. During the year he had drawn Rs. 40,000 for domestic expenses. He introduced Rs. 25,000 as additional capital in February, 2007. Find out his net profit for the year.
(vii) What is the percentage of NPA provision to be made by banks in respect of fully secured doubtful advances of more than 3 years old?
(viii) A concern made a net profit of Rs. 2,00,000 for the year ended 31.3.2007. The normal rate of return in that type of business is 20%. What is the value of business under Profit Capitalisation method?
(ix) What are the two main methods of accounting for amalgamation of companies?
(x) What is meant by accounting estimate? Give two examples for accounting estimate.
(8 x 2 = 16 Marks)
Answer
(i) Calculation of new profit and loss sharing ratio of partners A and C
1/3rd share of B taken by partners A & C in 3:1 i.e.
13 1
A will receive from B = x =
3 4 4
C will receive from B = 1 x 1 = 3 4 12
Total share of A and C will be:
. 3 1 12 + 6 18 3
A = - + - =-= or-
6 4 24 24 4
~ 1 1 2 +1 3 1
C = - + =-= or-
6 12 12 12 4
Therefore, new profit and loss sharing ratio of A and C will be 3 : 1.
Rs. Rs.
Profit and Loss A/c Dr. 1,50,000
To Insurance Company A/c 1,50,000
[Being the shortfall in insurance claim is the loss, transferred to Profit and Loss A/c]
(iii) Statement showing the calculation of fixed assets at the end of the second year
Rs.
Original cost of fixed assets 50,00,000
Less: State Government grant received (10,00,000)
40.00.000
Less: Amount to be written off in the first year
40,00,000 - 5,00,000 (7,00,000)
5 years
33.00.000
Add: Refund of State Government grant 10,00,000
Value of fixed assets, at the end of the second year, after refund of grant
but before depreciation 43,00,000
(iv) Red ink interest: In an Account Current, interest is calculated on the amount of a bill from the date of transaction to the closing date of the period concerned. In case the due date of the bill falls after the closing date of the account, then no interest is allowed for that period. Such interest is customarily written in red ink in the appropriate side of the Account Current. This interest is called Red-Ink Interest and is treated as negative interest.
(v) Firm under-writing: Firm underwriting' signifies a definite commitment by underwriters to take up specified number of shares irrespective of the number of shares subscribed for by the public. In such a case, unless it has been otherwise agreed, the underwriter's liability is determined without taking into account the number of shares taken up firm' by
him. In other words, the underwriter is obliged to take up:
1. the number of shares he has applied for firm'; and
2. the number of shares he is obliged to take up on the basis of the underwriting agreement.
(vi) Statement showing calculation of profit for the year ended 31.3.2007
Rs.
Capital as on 31.3.2007 1,50,000
Add: Drawings during the year 40,000
1.90.000
Less: Additional capital introduced in February 2007 (25,000)
1.65.000
Less: Capital as on 1.4.2006 (60,000)
Net profit for the year 2006-2007 1,05,000
(vii) In case of Banking Companies, 100% NPA provision is made in respect of fully secured doubtful advances of more than 3 years. This provision is made irrespective of whether the advance is fully / partly secured or unsecured. However, in the case of government guaranteed advances this rate of provision does not apply.
(viii) Value of business as per profit capitalisation method =-Net profit-x100
Normal rate of return
= Ra2,00,000 x100 20
= Rs.10,00,000
(ix) Two main methods of accounting for amalgamations are:
(i) The Pooling of Interests method: Under this method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts after making the adjustments required in para 11 of AS 14.
(ii) The Purchase method: Under this method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or on the basis of their individual fair values on the date of amalgamation.
(x) As a result of the uncertainties in business activities, many financial statement items cannot be measured with precision but can only be estimated. This is called accounting estimates. On account of such uncertainties, management makes various estimates and assumptions of assets, liabilities, incomes and expenses as on the date of preparation of financial statements. This process of estimation involves judgments, which is based on the latest information available.
Examples of estimation in some fields are:
(i) Estimation of useful life of depreciable assets.
(ii) Estimation of provision to be made for bad and doubtful debts.
Question 6
Answer any four out of the following:
(a) Mention six areas in which different accounting policies are followed by companies.
(b) What are the advantages of outsourcing the accounting functions?
(c) A company purchased its own 11% debentures in the open market for Rs. 50,00,000 (cum-interest). The interest amount included in the purchase price is Rs. 1,50,000. The face value of the debentures purchased is Rs. 52,00,000. The company cancelled the debentures so purchased.
Pass Journal Entries in the books of the company for purchase and immediate cancellation of debentures.
(d) What are the advantages of self-balancing ledger system?
(e) List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of compliance of Accounting Standards in India.
(f) From the following information relating to Y Ltd. Calculate Earnings Per Share (EPS):
Rs. in crores
Profit before V.R.S. payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00
Paid up share capital (shares of Rs.10 each fully paid) 93.00
(4X4=16 Marks)
Answer
(a) Following are some of the areas in which different accounting policies may be adopted by different enterprises:
(i) Methods of depreciation, depletion and amortisation.
(ii) Treatment of expenditure during construction.
(iii) Valuation of inventories.
(iv) Treatment of goodwill.
(v) Valuation of investments.
(vi) Valuation of fixed assets.
(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.
11% Own Debentures Account Dr. 48,50,000
Debenture interest Account Dr. 1,50,000
To Bank Account
50,00,000
[Being the purchase of cum - interest own debentures from the market]
11% Debentures Account
Dr. 52,00,000
To 11% Own Debentures Account To Capital Reserve
48,50,000
3,50,000
[Being profit on cancellation of own debentures transferred
to Capital Reserve Account]
(d) 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.
(e) Enterprises which fall in any one or more of the following categories, at any time during
the accounting period, are classified as Level I enterprises:
(i) Enterprises, whose equity or debt securities are listed or is in the process of being
listed in India or outside India.
(ii) Banks (including co-operative banks), Insurance companies and Financial Institutions.
(iii) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds. Rs.50 crores. Here turnover does not include other income'.
(iv) All commercial, industrial and business reporting enterprises whose total borrowings including public deposits exceeds Rs.10 crores, at any time during the accounting
period.
(v) Holding and subsidiary companies of any of the above enterprises at any time during the accounting period.
(f) Statement showing calculation of Earnings for share of Y Ltd.
Rs. in crores
Profit after depreciation but before VRS payment
75.00
Less: Depreciation VRS payments Provision for taxation Fringe benefit tax
Net Earnings
No adjustment required
32.10
10.00
5.00
47.10
27.90
9.30 crores shares
Number of shares
Earnings Per Shares
Net Earnings
Number of shares
27.90 crores
9.30 crores = Rs.3 per share,
Credit to Profit and Loss A/c = Rs.10,56,650 + Rs.2,21,600 - Rs.4,25,254 = Rs.8,52,996
Attachment: |
Earning: Approval pending. |