Institute of Chartered Financial Analysts of India (ICFAI) University 2008 C.A Chartered Accountant Solved PCC ACCOUNTS II - exam paper

Dr.

90.000 8,00,000

Less: Re-insurance ceded

Premium amount to be credited to Revenue A/c

(x) Loan outstanding

Guaranteed by DICGC - Risk weight

Value of risk adjusted asset Rs.50,00,000 x 50% =

Question 6

Answer any four out of the following:

(a)    When can an item qualify to be a prior period item as per AS 5?

(b)    Ram & Co. acquired a motor lorry on hire-purchase basis. It has to make cash down payment of Rs. 1,00,000 at the beginning. The payments to be made subsequently are Rs.2,63,000; Rs.1,85,000 and Rs.1,14,000 at the end of first year, second year and third year respectively. Interest charged is @ 14% per annum. Calculate the cost price of motor lorry and interest paid in each instalment.

(c)    Explain Garner v/s Murray rule applicable in the case of partnership firms. State, when is this rule not applicable.

(d)    Albert Ltd. issued 50,00,000 Equity shares of Rs.10 each. The whole issue was underwritten by A, B and C as below:

Applications were received for 48,50,000 shares of which the marked applications were as follows:

A    12,00,000 shares

B    25,00,000 shares

C    8,50,000 shares

Calculate the number of shares to be taken up by the underwriters.

(e)    Explain the factors to be considered before selecting the pre-packaged accounting software.

(f)    What are the items that are to be excluded in determination of the cost of inventories as per AS-2?    (4 x 4 =16 Marks)

Answer

(a)    According to para 16 of AS 5 on 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies', prior period items refers to those income or expenses, which arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods. The term does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period e.g., arrears payable to workers in current period as a result of revision of wages with retrospective effect.

(b)    Calculation of cost price and total interest to be paid on motor lorry

No. of Amount due at the time of Interest on cumulative    Cash Price in

instalment    instalment    instalment    each instalment

III    14

1.14.000    1,14,000 _ = 14,000    1,00,000

114

II    14

1.85.000    2,85,000* _= 35,000    1,50,000

114

2,63,000

Cash down payment Total

* 1,00,000 + 1,85,000 = 2,85,000.

**2,63,000 + 1,50,000 + 1,00,000 = 5,13,000.

(c) In the case of dissolution of a partnership firm due to insolvency, Garner vs Murray rule

is applicable at the time of any partner becoming insolvent. It requires -

1. That the solvent partners should bear the loss arising due to insolvency of a partner in their capital ratio after making adjustments for past accumulated reserves, profits or losses, drawings, interest on drawings/capitals, remuneration to partners etc., to the date of dissolution but before making adjustment for profit or loss on realization in case of fluctuating capital. In case of fixed capital no such adjustments are required.

2. That the solvent partners should bring in cash equal to their respective shares of the loss on realization.

This rule is not applicable when:

1.    Only one partner is solvent.

2.    All partners are insolvent.

3.    The partnership deed provides for a specific method to be followed in case of insolvency of a partner, then the conditions given in the deed would prevail.

(d)    (Number of shares)

(e) 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.

(f) 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.

1

The journal entries given are on the assumption that the revaluation is done for the first time, for that particular fixed asset.

(viii) Account current is a running statement of transactions between parties, maintained in the form of a ledger account, for a given period of time and includes interest allowed or charged on various items. It is prepared when transactions regularly take place between two parties. An account current has two parties - one who renders the account and the other to whom the account is rendered.