Institute of Chartered Financial Analysts of India (ICFAI) University 2009 C.A Chartered Accountant Solved PCC ACCOUNTS II - Question Paper

Date

Particulars

Nominal

Value

(Rs.)

Cost (Rs.)

Date

Particulars

Nominal

Value

(Rs.)

Cost (Rs.)

1.4.08

To

Bank A/c (W.N.1)

5,00,000

6,15,000

31.3.09

By

Bank A/c (W.N.2)

2,50,000

2,20,500

31.01.09

To

Bonus

Shares

2,50,000

-

31.3.09

By

Balance

c/d

(W.N.4)

5,00,000

4,10,000

31.03.09

To

Profit and Loss A/c (W.N.3)

'

15,500

7,50,000

6,30,500

7,50,000

6,30,500

Unsecured creditors Preference shareholders 2,30,000

5,00,000 7,70,300

3,000 equity share of Rs.100 each Rs.75 paid up 2,25,000

7,000 equity share of Rs.100 each Rs.60 paid up 4,20,000 Total loss to be borne by equity shareholders No. of equity shares

6,65,300

Loss per equity shares ¹=Rs.66.53

10,000

Amount receivable from 7,000 equity shareholders = 7,000 x6.53 (i.e. 66.53- 60) = Rs. 45,710 Amount payable to 3,000 equity shareholders = 3,000 x 8.47 (i.e. 75 - 66.53) = Rs. 25,410

Question 5

Answer any eight out of the following:

(i)    Amount of Life Assurance Fund is Rs.5,000 lacs and net liabilities were Rs.4,800 lacs. Calculate profit under Valuation Balance Sheet.

(ii)    What is average clause under insurance claim ?

(iii)    Give the journal entry to be passed for accounting unrealized profit on stock, under amalgamation.

(iv)    A and M are partners, sharing profits and losses in the ratio of 3:2. G is admitted for 114^th share. Thereafter, N enters the partnership for 20 Paise in a Rupee. Compute new profit sharing ratio.

(v)    A company entered into an underwriting agreement with Mr. B for 60% of the issue of Rs.50,00,000, 15% debentures, with a firm underwriting of Rs.5,00,000. Marked applications were in respect of debentures worth Rs.35,00,000. Compute liability of Mr. B and commission payable to him.

(vi)    Enumerate two points which the financial statements should disclose in respect of Borrowing Costs as per AS 16.

(vii)    Mr. X purchased a machine on hire-purchase system, Rs.30,000 being paid on delivery and the balance in five instalments of Rs.60,000 each, payable annually on 31^st December. The cash price of the machine was Rs.3,00,000. Compute the amount of interest for each year.

(viii)    Mr. T purchased 1,000 nos. 10% debentures of Rs.100 each on 1^st April, 2009 at Rs.96 cum-interest, the previous interest date being 31^st December, 2008. Compute cost of investment.

(ix)    Name two methods of accounting for amalgamations as contemplated by AS 14.

(x) The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration, subject to a minimum of Rs.25,000 per month. The net profits, for this purpose, are to be taken without charging income-tax and his remuneration itself. During the year, A Ltd. made net profit of Rs.43,00,000 before charging MDs remuneration, but after charging provision for taxation of Rs.17,20,000. Compute remuneration payable to the Managing Director.    (8 x 2 = 16 Marks)

Answer

Valuation Balance Sheet³ as on..............

(i)    Rs. in Lacs Rs. in Lacs To Net liabilities 4,800 By Life Assurance Fund 5,000 To Profit b/d 200    _

5,000    5,000

(ii)    When a businessman wants to reduce the burden of Insurance Premium and wants to take an insurance policy which is less than the value of average stock, it is known as under insurance. For discouraging the under-insurance, fire insurance policies contain an average clause. In such a case, the net claim is calculated by using following formula:

Amount of claim = ^{AmountofPolicy} xActualLoss InsurableAmount

(iii)    Journal entry to be passed for accounting unrealized Profit on stock:

Under amalgamation in the nature of merger:

General Reserve/Profit and Loss A/c    Dr.

To Stock A/c (Stock Reserve A/c)

(Being amount adjusted for unrealized profit on stock)

OR

If amalgamation is in nature of purchase, Journal entry would be:

Goodwill or Capital Reserve A/c    Dr.

To Stock A/c (Stock Reserve A/c)

(Being adjustment for unrealized profit on stock)

(iv)    Let the total share be = 1

1

Share of new partner G =

1 3

Remaining share of profit = 1 =

4 4

New ratio of (A)

New ratio of (M) New ratio of

A:M:G 9: 6: 5

Again, let the total share at the time of admission of N = 1

1

Share of new partner N is 20% i.e. 5

(v) Gross Liability (Rs.50,00,000 x60%)

Less: Marked applications Rs.35,00,000 which is more than the Liability but credit will not be given more than gross liability

Net liability

Add: Firm underwriting Total liability

2 5

Calculation of underwriting commission = 30,00,000 x - Rs.75,000 Underwriting Commission payable @ 2.5%⁴

As per AS 16, the Financial Statements should disclose the following:

(a)    The accounting policy adopted for borrowing costs and

(b)    The amount of borrowing costs capitalized during the period.

1^st year = Amount outstanding for interest after down payment

2^nd year = Amount outstanding for interest after 1^st Instalment

3^rd year = Amount outstanding for interest after 2^nd instalment

4^th year = Amount outstanding for interest after 3^rd instalment

5^th year = Amount outstanding for interest after 4^th instalment

Total interest = Hire Purchase price - Cash Price = 3,30,000- 3,00,000 = 30,000 Instalment outstanding ratio = 3,00,000 : 2,40,000 : 1,80,000 : 1,20,000 = 5:4:3:2:1

(viii) Total amount payable 1,000 x 96 =

Less: Interest included in the price for January, February and

10 3

March i.e. 1,00,000 x x =

100 12

Cost of the Investment

(ix)    Two methods of accounting for amalgamation as contemplated by AS 14 are:

(a)    The pooling of interests method and

(b)    The purchase method

(x)    Calculation of remuneration of the Managing Director    Rs. in Lacs Net profit as per books    43.00 Add: Provision for taxation    17.20 Annual profit for the purpose of managerial remuneration    60.20

Managing Director's Remuneration @ 5% of above    3.01

Minimum remuneration to be paid to the Managing Director

= Rs.25,000 per month x 12    3.00

Hence, in this case,

remuneration to be paid to the Managing Director of A Ltd. = Rs.3,01,000.

Question 6

Answer any four of the following:

(a)    Sony Pharma ordered 12,000 kg. of certain material at Rs.80 per unit. The purchase price includes excise duty Rs.4 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to Rs.77,400. Normal transit loss is 3%. The company actually received 11,600 kg. and consumed 10,100 kg. of material. Compute cost of inventory under AS 2 and abnormal loss.

(b)    Explain the provisions of AS -5 regarding accounting treatment of prior period items.

(c)    Mention, four advantages and four disadvantages of pre-packaged accounting software.

(d)    From the following information relating to X Ltd., calculate Diluted Earnings Per Share as per AS 20:

Net Profit for the current year    Rs. 2,00,00,000

Number of equity shares outstanding    40,00,000

Basic earnings per share    Rs. 5.00

Number of 11% convertible debentures of Rs. 100 each    50,000 Each debenture is convertible into 8 equity shares.

Interest expense for the current year    Rs. 5,50,000

Tax saving relating to interest expense (30%)    Rs. 1,65,000

(e)    The Revenue Account of a Life Insurance Company shows the Life Assurance Fund on 31^st March, 2009 at Rs.62,21,310 before taking into account the following items:

(i)    Claims recovered under re-insurance Rs. 12,000.

(ii)    Bonus utilized in reduction of Life Insurance premium of Rs.4,500.

(iii)    Interest accrued on securities Rs. 8,260.

(iv)    Outstanding premium Rs.5,410.

(v)    Claims intimated but not admitted Rs.26,500.

Compute the Life Assurance Fund on 31^st March, 2009, after taking into account the above omission.

(f)    What is the difference between the Sectional and Self-balancing system?

(4x4 = 16 Marks)

Answer

(a)

Purchase price (12,000 kg x Rs.80)

Less: CENVAT credit (12,000 kg. x Rs.4)

Add: Freight Total material cost

Number of units after normal loss = 97% of 12,000 kgs. 9,89,400'

Normal cost per kg.

11,640

Value of closing stock under AS 2= (11,600 kgs. - 10,100 kgs.) x Rs.85 = Rs. 1,27,500 Abnormal loss = (11,640 kgs. - 11,600 kgs.) x Rs.85 = Rs.3,400

(b) As per AS 5, prior period items are income or expenses, which arise, in the current period as a result of errors or omission 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. Example: arrears payable to workers in current period as a result of retrospective revision of wages.

The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in manner that their impact on current profit or loss can be perceived.

As per para 19 of AS 5, prior period items are normally included in determination of net profit or loss for the current profit, they can be added (or deducted as the case may be) from the current profit. An alternative approach is to show such items in the statement of profit or loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss.

(c) Advantages of Pre-packaged Accounting Software

(d) Adjusted Net profit for the current year

= 2,00,00,000+5,50,000 - 1,65,000 = Rs. 2,03,85,000

Number of equity shares resulting from conversion of debentures = 50,000 x 8 = 4,00,000 equity shares

Total number of equity shares resulting from conversion of debentures

= 40,00,000 + 4,00,000 = 44,00,000 shares

Diluted Earnings per share = ^Rs.^2,03,85,000

44,00,000

= Rs.4.63 (Approximately)

(e) Statement showing Correct Life Assurance Fund⁵

Balance of Life Assurance Fund Add: (i) Bonus utilized in reduction of premium

(ii) Interest on Securities Outstanding premium

(iii)

Less:

(i) Claims intimated but not admitted Less: Recovered under reinsurance

(ii) Bonus in reduction of premium Correct Balance of Life Assurance Fund

(i)    Under sectional balancing system only one trial balance is prepared in General Ledger while under self balancing system, separate trial balance is prepared in each ledger.

(ii)    Under sectional balancing system, Total Debtors account and Total Creditors account are memorandum accounts and not the part of double entry system but under self balancing system adjustment accounts are the parts of double entry system.

(iii)    Under sectional balancing system, arithmetical accuracy of Sales Ledger and Bought Ledger can be checked by preparing Total Debtors account and Total Creditors account while under self balancing arithmetical accuracy of each ledger can be checked by preparing trial balance of each ledger.

(iv)    Under sectional balancing system, Total Debtors account and Total Creditors account are opened in General Ledger while under Self Balancing System, adjustment accounts are opened in General Ledger, Sales Ledger and bought ledger.

24

1

This question is not in accordance with Insurance Regulatory Development Authority Regulations, 2002.

4

Section 76 of the Companies Act provides that underwriting commission is provided only at a rate authorized by the articles of the company, not exceeding 2.5% of the issue price of debentures. Therefore, in the above solution, underwriting commission has been calculated at 2.5%.

5

This question is not in accordance with Insurance Regulatory Development Authority Regulations, 2002.

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