Institute of Chartered Financial Analysts of India (ICFAI) University 2007 C.A Chartered Accountant Solved PCC ACCOUNTS II - Question Paper

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 31^st 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 31^st March, 2007.

(b)    The following information is available in the books of X Bank Limited as on 31^st 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.)

18.25.000

50,00,000

28.20.000

40,60,000

Calculate the rebate on bills discounted as on 31.3.2007 and entries.

Working Notes:

(1) Calculation of closing stock of head office:

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]

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

(iii) Discount on bills Account

To Profit and loss Account

[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

1/3^rd 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.

(ii)    Journal Entry

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.

(c)    Journal Entries

11% Own Debentures Account    Dr. 48,50,000

Debenture interest Account    Dr. 1,50,000

To Bank Account

[Being the purchase of cum - interest own debentures from the market]

11% Debentures Account

To 11% Own Debentures Account To Capital Reserve

[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

9.30 crores shares

Earnings Per Shares

27.90 crores

9.30 crores = Rs.3 per share,

1

Credit to Profit and Loss A/c = Rs.10,56,650 + Rs.2,21,600 - Rs.4,25,254 = Rs.8,52,996