Institute of Chartered Financial Analysts of India (ICFAI) University 2009 C.A Chartered Accountant Solved IPCC ACCOUNTS GROUP 2 II. - Question Paper
Solved IPCC Accounts Group two ques. Paper Nov 2009
PAPER - 5 : ADVANCED ACCOUNTING
All questions are compulsory Working notes should form part of the answer.
Wherever necessary, suitable assumption(s) may be made and disclosed by the candidates.
Question 1
Answer the following questions:
(i) Goods worth Rs. 5,00,000 were destroyed due to flood in September, 2006. A claim was lodged with insurance company. But no entry was passed in the books for insurance claim in the financial year 2006-07.
In March, 2008, the claim was passed and the company received a payment of Rs.3,50,000 against the claim. Explain the treatment of such receipt in final accounts for the year ended 31st March, 2008.
(ii) Briefly indicate the items which are included in the expressions Borrowing Cost as per AS 16.
(iii) Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 07 payable after 4 months. The company entered into a forward contract for 4 months @ Rs. 48.85 per dollar. On 31st December, 07, the exchange rate was Rs. 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling Limited for the year ended 31st March, 2008.
(iv) A company created a provision of Rs. 75,000 for staff welfare while preparing the financial statements for the year 2007-08. On 31st March, in a meeting with staff welfare association, it was decided to increase the amount of provision for staff welfare to Rs. 1,00,000. The accounts were approved by Board of Directors on 15th April, 2008.
Explain the treatment of such revision in financial statements for the year ended 31st March, 2008.
(v) Explain Employees stock option plan.
(vi) A company entered into an agreement to sell its immovable property to another company for 35 lakhs. The property was shown in the Balance Sheet at Rs. 7 lakhs. The agreement to sell was concluded on 15th February, 2008 and sale deed was registered on 30th April, 2008. The financial statements for the year 2007-08 were approved by the board on 12th May,2008.
You are required to state, how this transaction would be dealt with in the financial statements for the year ended 31st March, 2008.
(vii) A Ltd. entered into a binding contract with C Ltd. to buy a machine for Rs. 1,00,000. The machine is to be delivered on 15th February, 2009. On 1st January, 2009, A Ltd. changed its process of production. The new process will not require the machine ordered and it shall have to be scrapped after delivery. The expected scrap value of the machine is nil.
Explain how A Ltd. should recognise the entire transaction in the books of account for the year ended 31st March, 2009.
(viii) Goods are transferred from Department P to Department Q at a price 50% above cost.
If closing stock of Department Q is Rs. 27,000, compute the amount of stock reserve.
(ix) X Ltd. received a revenue grant of Rs.10 crores during 2006-07 from Government for welfare activities to be carried on by the company for its employees. The grant prescribed the conditions for utilization.
However during the year 2008-09, it was found that the prescribed conditions were not fulfilled and the grant should be refunded to the Government.
State how this matter will have to be dealt with in the financial statements of X Ltd. for the year ended 2008-09.
(x) Conversion of debt into equity is a non-cash transaction. Comment. (10* 2 = 20 Marks) Answer
(i) As per the provisions, of AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, prior period items are income or expenses, which arise in the current period as a result of error or omissions in the preparation of financial statements of one or more prior periods. Further, the nature and amount of prior period items should be separately disclosed in the statement of profit and loss.
In the given situation, it is clearly a case of error in preparation of financial statements for the financial year 2006-07. Hence claim received in the financial year 2007-08 is a prior period item and should be separately disclosed in the statement of profit and loss for the year ended 31st March, 2008.
(ii) Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. Borrowing cost may include:
(a) Interest and commitment charges on bank borrowings and other short term and long term borrowings.
(b) Amortisation of discounts or premiums relating to borrowings.
(c) Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.
(d) Finance charges in respect of assets required under finance leases or under other similar arrangements; and
(e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
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(iii) Calculation of profit or loss to be recognised in the books of Sterling Limited | ||||||||||||||||
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Balance loss of Rs.6,750 (i.e. Rs. 27,000 - Rs. 20,250) for the month of April, 2008 will be recognised in the financial year 2008-2009. |
(iv) As per AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, the change in amount of staff welfare provision amounting Rs. 25,000 is neither a prior period item nor an extraordinary item. It is a change in estimate, which has been occurred in the year 2007-2008.
As per the provisions of the standard, normally, all items of income and expense which are recognised in a period are included in the determination of the net profit or loss for the period. This includes extraordinary items and the effects of changes in accounting estimates. However, the effect of such change in accounting estimate should be classified using the same classification in the statement of profit and loss, as was used previously, for the estimate.
(v) "Employee Stock Option Plan is a plan in which option is given for a specified period, to employees of a company, which gives such directors, officers or employees the right, but not the obligation, to purchase or subscribe, the shares of the enterprise at a fixed or determinable price.
(vi) According to para 13 of AS 4 "Contingencies and Events Occurring after the Balance Sheet Date, assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date.
In the given case, sale of immovable property was carried out before the closure of the books of accounts. This is clearly an event occurring after the balance sheet date but agreement to sell was effected on 15th February 2009 i.e. before the balance sheet date. Registration of the sale deed on 30th April, 2009, simply provides additional information relating to the conditions existing at the balance sheet date. Therefore, adjustment to assets for sale of immovable property is necessary in the financial statements for the year ended 31st March, 2009.
(vii) A Ltd. entered into a binding contract with C Ltd. and therefore, it should recognise a liability of Rs.1,00,000. The entire amount of purchase price of the machine should be recognised in the year ended 31st March, 2009 as loss because future economic benefit from the machine to the enterprise is improbable.
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The accounting entry should be as follows: | ||||||
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(viii) Calculation of Stock Reserve | ||||
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(ix) As per para 11 of AS 12 "Government Grants, a grant that became refundable should be treated as an extra-ordinary item as per Accounting Standard 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. The amount refundable in respect of a government grant related to revenue, is applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement. Therefore, refund of grant of Rs. 10 crores should be shown in the profit and loss account of the company as an extra-ordinary item during the financial year 2008-09.
(x) Sometimes debenture holders are offered an option to convert their debts into equity by issuing equity share capital. In such transactions, debentures are redeemed by issuing fresh share capital.
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Journal Entry will be as follows: | ||||||||
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In the above entry, no cash account is opened. Therefore, one can conclude that the conversion of debt to equity is a non-cash transaction. |
Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2009. A new company Star Ltd. was formed to take over the business of the existing companies. The Balance Sheets of Sun Ltd. and Moon Ltd. as at 31st March, 2009 are given below:
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Additional information: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(a) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares for each equity share of Moon Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10 per share.
(b) Preference shareholders of the two companies are issued equivalent number of 15% preference shares of Star Ltd. at a price of Rs. 150 per share (face value Rs. 100).
(c) 10% Debentureholders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing such number of its 15% Debentures of Rs.100 each so as to maintain the same amount of interest.
(d) Investment allowance reserve is to be maintained for 4 more years.
(e) Liquidation expenses are:
Sun Ltd. Rs.2,00,000 Moon Ltd. Rs.1,00,000
It was decided that these expenses would be borne by Star Ltd.
(f) All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value.
(g) Authorised equity share capital of Star Ltd. is Rs. 5,00,00,000, divided into equity shares of Rs. 10 each. After issuing required number of shares to the Liquidators of Sun Ltd. and Moon Ltd., Star Ltd. issued balance shares to Public. The issue was fully subscribed.
Required :
Prepare the Balance Sheet of Star Ltd. as at 1st April, 2009 after amalgamation has been carried out on the basis of Amalgamation in the nature of purchase. (16 Marks)
Answer
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Balance Sheet of Star Ltd. as at 1st April, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Working Notes: |
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Computation of Purchase Consideration |
Rs. in lakhs | ||
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Sun Ltd. |
Moon Ltd. | ||
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(a) Preference shareholders: | |||
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1,50,00,000/100 = 1,50,000 shares | |||
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Share capital = 1,50,000 shares x Rs.100 each |
150 | ||
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Securities premium = 1,50,000 shares x Rs.50 each |
75 |
225 | |
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1,00,00,000/100 = 1,00,000 shares | |||
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Share capital = 1,00,000 shares x Rs.100 each |
100 | ||
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Securities premium= 1,00,000 shares x Rs.50 each |
50 |
150 | |
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(b) Equity shareholders: | |||
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4,00,00,000/100 x 5 = 20,00,000 shares | |||
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Share capital = 20,00,000 shares x Rs.10 each |
200 | ||
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Securities premium=20,00,000 sharesx Rs.20 each |
400 |
600 | |
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3,75,00,000/100 x 4 = 15,00,000 shares | |||
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Share capital = 15,00,000 shares xRs.10 each |
150 | ||
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Securities premium = 15,00,000 shares xRs.20 each |
300 |
450 | |
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Amount of purchase consideration |
825 |
600 | |
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2. |
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Number of 15% Debentures = R&3,00000 x 100 15 |
20 | |
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Interest = Rs.15,00,000 x 10% | ||
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Number of 15% Debentures = Rs.1,50,000 x100 15 |
10 |
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Net assets taken over |
Rs. in lakhs | |
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Sun Ltd. |
Moon Ltd. | |
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Assets taken over | ||
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Land and building |
275 |
200 |
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Plant and machinery |
175 |
125 |
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Investments |
75 |
25 |
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Stock |
175 |
125 |
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Sundry debtors |
125 |
150 |
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Bills receivable |
25 |
25 |
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Cash and bank |
150 |
100 |
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1,000 |
750 | |
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Less: Liabilities taken over | ||
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Debentures |
20 |
10 |
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Sundry Creditors |
135 |
60 |
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Bills payable |
75 |
35 |
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230 |
105 | |
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Net assets taken over |
770 |
645 |
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Purchase consideration |
825 |
600 |
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(Goodwill)/ Capital Reserve |
(55) |
45 |
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Net goodwill |
(10) | |
4. Liquidation expenses of Sun Ltd. and Moon Ltd., Rs.2 lakhs and Rs.1 lakhs respectively will be debited to Goodwill account in the books of Star Ltd.
Question 3
The Balance Sheet of Dee Limited on 31st March, 2009 was as follows:
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Balance Sheet as at 31st March, 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At the General Meeting it was resolved to: |
1. Pay proposed dividend of 10% in cash.
2. Give existing shareholders the option to purchase one share of Rs.10 each at Rs. 15 for every five shares held. This option was taken up by all the shareholders.
3. Redeem the debentures at a premium of 5% and also confer option to the debentureholders to convert 50% of their holding into equity shares at a predetermined price of Rs. 15 per share and balance payment to be made in cash.
Holders of 3,000 debentures opted to get their debentures redeemed in cash only while the
rest opted for getting the same converted into equity shares as per the terms of issue.
Debenture redemption fund investment realized Rs. 1,80,000 on sales.
You are required to redraft the Balance Sheet after giving effects to the right issue and redemption of debentures. Also show the calculations in respect of number of equity shares issued and cash payment. (16 Marks)
Answer
(a) Balance Sheet of Dee Ltd.
as at 31st March, 2009
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Liabilities |
Amount (Rs.) |
Assets |
Amount (Rs.) |
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Authorised Capital 50,000 Equity shares of Rs.10 each |
5,00,000 |
Fixed Assets (at cost less depreciation) |
8,00,000 |
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Issued and subscribed capital |
Other current assets |
10,00,000 | |
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37,000 Equity shares of Rs.10 each fully paid up |
3,70,000 | ||
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Reserves & surplus |
Cash balance (W.N.4) |
60,000 | |
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General reserve (W.N.2) |
4,80,000 | ||
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Securities premium (W.N.3) |
60,000 | ||
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Profit and loss A/c |
1,00,000 | ||
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Secured loan | |||
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Other secured loan |
2,50,000 | ||
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Current liabilities and provisions |
6,00,000 | ||
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18,60,000 |
18,60,000 |
(b)
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Calculation of number of equity shares issued: | ||
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I. |
Number of equity shares issued as right issue (25,000 shares + 5) |
5,000 shares |
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II. |
Debentureholders who opted for the scheme of conversion into equity shares | |
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2,000 debentureholders opted for the scheme Total value (2,000 debentures x Rs.100) Premium on redemption @ 5% 50% of their holding converted into equity shares |
Rs.2,00,000 Rs.10,000 | |
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Rs.2,10,000 | ||
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Rs.1,05,000 | ||
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Nu |
mber of eq ' Rs.1,05,000 _ Rs.15 _ |
rs er ld ol h re tu nt e b e d to d e u s is e b to s re ar h s ty ui |
7,000 shares | |
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Total number of equity shares issued (5,000 + 7,000) shares |
12,000 shares | |||
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(c) Cash payment to debentureholders: | ||||||||||||||||||||||||||||||||||||||||||||
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Working Notes: 1. Debenture Redemption Reserve Account | ||||||||||||
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2. General Reserve Account | ||||||||||||
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3. Calculation of Securities Premium
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4. Cash Account |
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Particulars |
Amount (Rs.) |
Particulars |
Amount (Rs.) |
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To Balance b/d To Equity shareholders (5,000x15) To Sale of Debenture Redemption Reserve Investment |
2.50.000 75,000 1.80.000 |
By Proposed dividend By Debentureholders (Rs. 1,05,000+Rs.3,15,000) By Balance c/d |
25.000 4,20,000 60.000 |
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5,05,000 |
5,05,000 |
Question 4
DM Ltd., Delhi has a branch in London. London branch is an integral foreign operation of DM Ltd. At the end of the year 31st March, 2009, the branch furnishes the following trial balance in U.K. Pound:
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Particulars | ||
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Dr. |
Cr. | |
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Fixed assets (Acquired on 1st April, 2005) |
24,000 | |
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Stock as on 1st April, 2008 |
11,200 | |
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Goods from head office |
64,000 | |
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Expenses |
4,800 | |
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Debtors |
4,800 | |
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Creditors |
3,200 | |
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Cash at bank |
1,200 | |
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Head office account |
22,800 | |
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Purchases |
12,000 | |
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Sales |
96,000 | |
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1,22,000 |
1,22,000 |
In head office books, the branch account stood as shown below:
London Branch A/c
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Particulars |
Amount |
Particulars |
Amount |
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To Balance b/d To Goods sent to branch |
Rs. 20,10,000 49,26,000 |
By Bank A/c By Balance c/d |
Rs. 52.16.000 17.20.000 |
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69,36,000 |
69,36,000 |
The following further information are given:
(a) Fixed assets are to be depreciated @ 10% p.a on straight line basis.
(b) On 31st March, 2009:
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Expenses outstanding Prepaid expenses 400 200 | |||||||||||||
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(c) |
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You are required to prepare: | |||||||||||||
(i) Trial balance, incorporating adjustments of outstanding and prepaid expenses, converting U.K. pound into Indian rupees.
(ii) Trading and profit and loss account for the year ended 31st March, 2009 and the Balance Sheet as on that date of London branch as would appear in the books of Delhi head office of DM Ltd. (16 Marks)
Answer
(i)
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Trial Balance of London Branch as on 31st March, 2009 | ||||||||||||||||||||
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Closing stock will be ( 8,000 x Rs. 77) = Rs.6,16,000 (ii) Trading and Profit & Loss Account for the year ended 31st March, 2009 |
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Particulars |
Amount (Rs.) |
Particulars |
Amount (Rs.) | ||
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To |
Opening stock |
8,51,200 |
By |
Sales |
72,00,000 |
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To |
Purchases |
9,00,000 |
By |
Closing stock |
6,16,000 |
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To |
Goods from head office |
49,26,000 | |||
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To |
Gross profit |
11,38,800 | |||
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78,16,000 |
78,16,000 | ||||
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To |
Expenses |
3,75,000 |
By |
Gross profit |
11,38,800 |
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To |
Depreciation |
1,68,000 |
By |
Profit due to foreign exchange difference |
12,400 |
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To |
Net profit |
6,08,200 | |||
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11,51,200 |
11,51,200 | ||||
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(iii) Balance Sheet as on 31st March, 2008 | ||||||||||||
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Outstanding |
30,800 |
Prepaid expenses |
15,400 |
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expenses | |||
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Creditors |
2,46,400 |
Closing stock |
6,16,000 |
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Cash at bank |
92,400 | ||
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26,05,400 |
26,05,400 |
Question 5
(a) From the following information, you are required to prepare Profit and Loss Account of Zee Bank Ltd., for the year ending 31st March, 2009:
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Additional information: (a) Rebate on bills discounted to be provided for Rs. 15,000 (b) Classification of advances: |
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Rs. | |
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Standard assets |
25,00,000 |
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Sub-standard assets |
5,60,000 |
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Doubtful assets not covered by security |
2,55,000 |
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Doubtful assets covered by security | |
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For 1 year |
25,000 |
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For 2 years |
50,000 |
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For 3 years |
1,00,000 |
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For 4 years |
75,000 |
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Loss assets |
1,00,000 |
(c) Make tax provision @ 35%
(d) Profit and Loss A/c (Cr.) Rs. 40,000.
(b) Dee Limited furnishes the following Balance Sheet as at 31st March, 2008:
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Rs. 000 |
Rs. 000 | |
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Liabilities | ||
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Share capital: | ||
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Authorised capital |
30,00 | |
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The company passed a resolution to buy back 20% of its equity capital @ Rs.50 per share. For this purpose, it sold all of its investment for Rs. 22,00,000. | ||||||||||||||||||||||||||||||||||||||||||||||||
You are required to pass necessary journal entries and prepare the Balance Sheet.
(8+8 = 16 Marks)
Answer
(a) Form B
Zee Bank Ltd.
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Profit & Loss Account for the year ended 31st March, 2009 | ||||||||||||||||||||
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Schedule 13: Interest Earned |
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Working Notes: |
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1. Calculation of provisions on non-performing assets | ||||||||||||||||||||||||||||||||
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* It is assumed that the all sub-standard assets are fully secured. |
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For 4 years |
75,000 |
100 |
75,000 |
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Loss assets |
1,00,000 |
100 |
1,00,000 |
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5,46,000 |
2. Calculation of provision for tax
Tax = 35% of [Total income - Total expenditure (excluding tax)].
Tax = 35% of [Rs.44,30,000+Rs. 1,25,000-(Rs. 13,60,000+Rs. 13,31,000+Rs.5,46,000+Rs. 15,000)] Tax = Rs.4,56,050
3. Total amount of provisions and contingencies
= Provision for non-performing assets + Provision for tax + Rebate on bills discounted = Rs.5,46,000 + Rs.4,56,050 + Rs.15,000 = Rs. 10,17,050
(b) In the books of Dee Limited
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Journal Entries | |||||||||||||||||||||||||
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(iv) |
To Capital Redemption Reserve Account (Being the amount equal to nominal value of equity shares bought back out of free reserves transferred to capital redemption reserve account) |
3,00 |
3,00 |
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(v) |
Equity shares buy-back Account Dr. To Bank Account (Being the payment made on buy back) |
25,00 |
25,00 |
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Balance Sheet of Dee Limited as on 1st April, 2008 (After buy back of shares) | ||||||||||||||||||||||||||||||||||||
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Question 6
(a) P, Q and R are partners sharing profits and losses in the ratio of 2 : 2 : 1. Their Balance Sheet as on 31st March, 2009 is as follows:
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They decided to dissolve the firm. The following are the amounts realized from the assets: |
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Rs. | |
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Plant and Machinery |
1,02,000 |
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Fixtures |
18,000 |
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Stock |
84,000 |
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Sundry debtors |
44,400 |
Creditors allowed a discount of 5% and realization expenses amounted to Rs.1,500. A bill for Rs.4,200 due for sales tax was received during the course of realization and this was also paid.
You are required to prepare:
(a) Realization account
(b) Partners' capital accounts
(c) Cash account. (6 Marks)
(b) Answer the following:
(i) Axe Limited began construction of a new plant on 1st April, 2008 and obtained a special loan of Rs.4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
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The expenditure that were made on the project of plant were as follows: | ||||||||
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The companys other outstanding non-specific loan was Rs.23,00,000 at an interest rate of 12%. |
The construction of the plant completed on 31st March, 2009. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS 16 Borrowing Cost.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant. (5 Marks)
(ii) Compute Basic Earnings per share from the following information:
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Net profit for the year ended 31st March, 2009 was Rs.2,75,000. (5 Marks) |
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Answer (a) Realisation Account | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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To Profit on realisation | ||||
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P |
2,040 | |||
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Q |
2,040 | |||
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R |
1,020 |
5,100 | ||
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2,96,400 |
2,96,400 | |||
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Partners Capital Accounts | ||||||||||||||||||||||||
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Cash Account | ||||||||||||
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(b) Total expenses to be capitalised for borrowings as per AS 16 "Borrowing Costs: | ||||||
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Journal Entry | ||||||||
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Working Notes: 1. Computation of average accumulated expenses | |||||||||||||||||
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2. Amount of interest capitalised | ||||||
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(b) (ii) Computation of weighted average number of shares outstanding during the period | ||||||||||||||||||||||||||||||
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_ . _ . Net Profit or Loss for the period attributable to Equity Shareholders Basic Earnings Per Share = | ||||||||||||||||||||||||||||||
Weighted Average Number of Equity Shares outstanding during the period
Rs. 2,75,000
= Rs.144.74
1,900 shares
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Alternatively, Securities Premium account may also be used for transfer to Capital Redemption Reserve Account.
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Attachment: |
| Earning: Approval pending. |
