The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Integrated Professional Competence (IPCC) Revision Test s- 5- Advanced Accounting - Question Paper

B ¹/2% on Loan from Electricity Board and Approved Institution

and on Debentures and Development Reserve (Rs. 70.00 x    .35 /%)

C Income from investments other than Contingencies Reserve

Investments (Rs. 50 x 4/%)    2.25

D Reasonable Return (A + B + C)    6.38

III    Total Surplus:

A.    Clear profit after paying Debenture Interest (Rs. 7,90,000    - Rs. 6,30,000 1,60,000)

B.    Less: Reasonable Return    6,38,000

C.    Total Surplus (A - B)    _Nil

Since the amount of surplus is nil, the entire amount of clear profit (i.e. Rs. 6,38,000) is at the disposal of the company. No journal entry is required to be passed since the entire amount already lying in the Net Revenue Appropriation Account is at the option of the company.

12. Statement Showing Liability of underwriters on the basis that The Benefit of Firm Underwriting is not given to Individual Underwriters.

March 31, 2009    Rs.

(i)    Equity Share Capital A/c (Rs. 100)    Dr. 24,00,000

To Equity Share Capital A/c (Rs. 40)

Working Note:

An unrecorded asset is in the nature of gain hence realization account is credited. Since these assets have been taken over by Q, his account has been debited.

15. (i)    In the books of XYZ & Co.

Realisation Account

Y's Capital A/c Z's Capital A/c

9,50,000

Partners Capital Accounts

' It is assumed that cash at bank has been withdrawn to pay to Partner Y.

To Capital Reserve (B.F.)

(Being take over of all assets and liabilities)

3.    Liquidators of XYZ & Co.    Dr. 6,00,000

To Equity Share Capital Account

To Securities Premium Account

(Being purchase consideration discharged in the form of shares of Rs. 10 each issued at a premium of Rs. 2 each)

4.    Sundry Creditors Account    Dr. 1,00,000

To Sundry Debtors Account (Being mutual owing eliminated)

Balance Sheet of ABC Ltd. as at 31.3.2009 (After take over of XYZ & Co.)

Working Note:

Computation of purchase consideration:

50,000 Equity shares of Rs.12 each = Rs.6,00,000 Equity shares to be given to partners.

Partners X    = 20,000 Shares @

Partner Y    = 20,000 shares @

Partner Y    = 10,000 shares @

Reserve and Surplus:

Capital Reserve

Capital Redemption Reserve

Revenue Reserve

Profit and Loss A/c (35,00 - 8,00)

Current Liabilities and Provisions

Fixed Assets

Current assets loans and advances (including cash and bank balance) (15,00+22,00- 25,00)

10,500

17. (a) Section 530 specifies the creditors that have to be paid in priority to unsecured

creditors or creditor having a floating charge. Such creditors are known as

Preferential Creditors. These are the following:

(a)    All revenues, taxes, cesses and rates, becoming due and payable by the company within 12 months next before the commencement of the winding up.

(b)    All wages or salaries (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee due for the period not exceeding 4 months within the twelve months next before commencement of winding up provided the amount payable to one claimant will not exceed Rs. 20,000.

(c)    All accrued holiday remuneration becoming payable to any employee on account of winding up.

Note: Persons who advance money for the purpose of making preferential payments under (b) and (c) above will be treated as preferential creditors, provided the money is actually so used.

(d)    Unless the company is being wound up voluntarily for the purpose of reconstruction, all contributions payable during the 12 months next under the Employees State Insurance Act, 1948, or any other law for the time being in force.

(e)    All sums due as compensation to employees under the Workmen's Compensation Act, 1923.

(f)    All sums due to any employee from a provident fund, pension fund, gratuity fund or any other fund, for the welfare of the employees maintained by the

company.

(g) The expenses of any investigation held under section 235 or 237 in so far as they are payable by the company.

(b)    Banking companies have to maintain sufficient liquid assets in the normal course of business. In order to safeguard the interest of depositors and to prevent banks form overextending their resources, liquidity norms have been settled and given statutory recognition. Every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25%of its demand and time liabilities in India. However, this percentage is changed by the Reserve Bank of India from time to time considering the general economic conditions. This is in addition to the average daily balance which a scheduled bank is required to maintain under Section 42 of the Reserve Bank of India Act and in case of other banking companies, the cash reserve required to be maintained under Section 18 of the Banking Regulation Act.

(c)    The law seeks to prevent an electricity undertaking from earning too high a profit. For this purpose, "reasonable return has been defined as consisting of:

(a)    an yield at the standard rate which is Reserve Bank rate plus two per cent on the capital base as defined below;

(b)    Income derived from investment except investment made against Contingencies Reserve;

(c)    An amount equal to / percent on loans advanced by the Electricity Board;

(d)    An amount equal to /% on the amounts borrowed from organizations or institutions approved by the Statement Government;

(e)    An amount equal to /% on the amount raised by the issue of debentures;

(f)    An amount equal to /% on balance of Development Reserve; and

(g)    Such other amounts as may be allowed by the Central Government having regard to the prevailing tax structure in the country.

(d)    Foreign branches generally maintain independent and complete record of business transacted by them in currency of the country in which they operate. Thus problems of incorporating balances of foreign branches relate mainly to translation of foreign currency into Indian rupees. This is because exchange rate of Indian rupees is not stable in relation to foreign currencies due to international demand and supply effects on various currencies.

(e)    ' Firm' underwriting' signifies a definite commitment to take up a 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, i.e. 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.

(i) That the solvent partners should bring in cash equal to their respective shares of the loss on realisation;

(ii) That the solvent partners should bear the loss arising due to the insolvency of a partner in the ratio of their Last Agreed Capitals.

The Last Agreed Capital should be interpreted as follows:

(b)    Expenses to be allocated on the basis of turnover are: Sales Expenses as travelling salesman, salary and commission, selling expenses after sales service, discount allowed, bad debts, freight outwards, provision for discount on debtors, sales manager's salary and other benefits etc.

(c)    In branch accounts by invoice price method-

(i)    Goods sent to branch;

(ii)    Goods returned by the branch;

(iii)    Opening stock at the branch; and

(iv)    Closing stock at the branch are shown at invoice price.

(d)    Goods are marked on invoice price to achieve the following objectives:

(i)    In order to keep secret from the branch manager the cost price of the goods and profit made, so that the branch manager may not start a rival and competitive business with the concern; and

(ii)    In order to have effective control on stock i.e. stock at any time must be equal to opening stock plus goods received from head office minus sales made at branch.

(e)    Underwriting commission on shares is 5% whereas on debentures it is 2.5%.

Closing Stock of Department Q

Goods send by Department P to Department Q at a price 50% above cost

27,000x50

Hence profit of Department P included in the stock will be -

Amount of the Stock Reserve will be Rs.9,000.

Particulars    Rs.

Equity Shares (42,000 x 10)

Preference Share Capital    1,70,000

Add: Premium on Redemption    17,000

Purchase Consideration

ABC Co. Ltd.

Journal Entries

150

(b) Paragraphs 8 and 14 of AS 12 on Accounting for Government Grants deal with presentation of government grants related to specific fixed assets.

Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be

allocated to income over the periods and in proportion in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a nondepreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements.

21.    (a) Capitalisation of borrowing costs as part of the cost of a qualifying asset should

commence only when all the following conditions are satisfied:

1.    The expenditure is being incurred for the Acquisition, construction or production of a qualifying asset;

2.    Borrowing costs are being incurred; and

3.    Activities that are necessary to prepare the asset for its intended use or sale, (including any technical or administrative work prior to the commencement of physical construction but excluding such activities during which no production or development takes place) are in progress.

(b) Accounting Standard 19 on Leases has defined the term non-cancellable lease as a lease that is cancellable only:

-    upon the occurrence of some remote contingency; or

-    with the permission of the lessor ; or

-    if the lessee enters into a new lease for same or an equivalent asset with the same lessor; or

-    upon payment by the lessee of an additional amount such that, at inception, continuation of the lease is reasonably certain.

22.    (a) As per paragraph 25 of Accounting Standard 20 on Earnings Per Share:

" The theoretical ex-rights fair value per share is calculated by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights, and dividing by the number of shares outstanding after the exercise of the rights. Where the rights themselves are to be publicly traded separately from the shares prior to the exercise date, fair value for the purposes of this calculation is established at the close of the last day on which the shares are traded together with the rights.

(b) Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognized as intangible assets.

Expenditure on internally generated brands, mastheads, publishing titles, customer

lists and items similar in substance cannot be distinguished from the cost of

developing the business as a whole. Therefore, such items are not recognized as

intangible assets.

(c) The following principles/aspects apply in relation to measurement of a Provision.

1.    Best Estimate [Para 35]: The amount recognized as Provision should be the best estimate of the expenditure required to settle the present obligation at the Balance Sheet data.

2.    Actual Value [Para 35]: The amount of a Provision should not be discounted to its Present Value.

3.    Evidence Analysis [Para 36]: The estimates of outcome and its financial effect are determined by - (a) the judgement of the management; (b) experience of similar transactions in the past; (c) reports from independent experts; (d) additional evidence provided by events occurring after the Balance Sheet date.

4.    Pre-Tax Effect [Para 37]: Provision should be measured before tax. The tax consequence on the provision shall be dealt as per AS -22.

5.    Risks and Uncertainties [Para 38]: The outcome of an event at a future date is subject to (a) Risk of Variability and (2) uncertainty. Hence, Risks and Uncertainties that inevitably surround events and circumstances should be taken into account in reaching the best estimate of a provision.

6.    Prudence [Para 39]: Uncertainty does not justify the creation of excessive provisions or deliberate overstatement of liabilities. The concept of Prudence should be considered in determining the quantum of a liability.

7.    Future Events [Para 41]: Future events that may affect the amount required to settle an obligation should be reflected in the amount of a Provision where there is sufficient objective evidence that they will occur.

8.    Gain on expected disposal of assets [Para 44, 45]: Gains from the expected disposal of assets should not be taken into account in measuring a Provision. Even if the expected disposal is closely linked to the event giving rise to the provision, such gains should be recognized only at the time specified by other AS.

9.    Reimbursements from Third Party [Para 46, 47]: The treatment for reimbursements is given below:

(a) Where some or all of the expenditure required to settle a Provision is expected to be reimbursed by another party, the reimbursement should be recognized when, and only when, it is virtually certain that

reimbursement will be received if the enterprise settles the obligation.

(b)    The reimbursement should be treated as a Separate Asset.

(c)    The amount recognized for the reimbursement should not exceed the amount of the provision.

(d)    In the Profit and Loss Statement, the expense relating to a Provision may be presented net of the amount recognized for a reimbursement.

10.    Review of Provision [Para 52]: Provisions should be reviewed at each Balance Sheet date and adjusted to reflect the current best estimate.

11.    Reversal of Provision [Para 52]: Upon review, if it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed.

12.    Use/Adjustment of Provision [Para 53, 54]: A provision should be used only for expenditures for which the provision was originally recognized. Any expenditure shall not be adjusted against a provision that was not originally recognized for that purpose.

Example: Payment of Gratuity shall not be adjusted against Provision for VRS Compensation.

13.    Future Operating Losses ignored [Para 55-57]:

(a)    Provisions should not be recognized for Future Operating Losses since they do not meet the definition of a liability and the general recognition criteria for Provisions, under Para 14.

(b)    Where an expectation of Future Operating Losses is an indication of Impairment of Assets, it shall be dealt with as per AS-28.

14.    Restructuring Costs [Para 59, 60]: Provision for Restructuring Costs should be recognized only when the recognition criteria for Provisions under Para 14 are met. No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e. there is a binding sale agreement.

23. (a) As per para 20 of AS 12, "Government Grants that became refundable should be accounted for as an extra-ordinary item as per Accounting Standard 5.

Therefore, refund of grant should be shown in the profit and loss account of the company as an extra ordinary item during the year 2008-09.

(b) The preparation of financial statements involve making estimates which are based on the circumstances existing at the time when the financial statements are prepared. It may be necessary to revise an estimate in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate, by its nature, does not bring the adjustment within the definitions of a prior period item or an extraordinary item [para 21 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies].

In the given case, a limited company created 2.5% provision for doubtful debts for the year 2008-2009. Subsequently in 2009 they revised the estimates based on the changed circumstances and wants to create 8% provision. As per AS-5 (Revised), this change in estimate is neither a prior period item nor an extraordinary item.

However, as per para 27 of AS 5 (Revised), a change in accounting estimate which has material effect in the current period, should be disclosed and quantified. Any change in the accounting estimate which is expected to have a material effect in later periods should also be disclosed.

24.

Notes:

1.    FCMITD A/c denotes Foreign Currency Monetary Item Translation Difference Account

2.    Losses/debit balance are depicted within brackets.

3.    Total loss of Rs.90 crore parked in FCMITD A/c and amortised over 4 years till 2011. The amount of Rs.67.50 crore would be credited to General reserve & debited to FCMITD A/c in the year 2008-09.

4.    The amount written off 2008-09 will 1/4^th of Rs.90 crore i.e. Rs.22.50 crore + 1/3^rd of Rs.20 crore = Rs.29.17 crore.

5. The amount written off in 2009-10 is 1/4^th of Rs.90 crore + 1/3^rd of Rs.20 crore + / of Rs.10 crore = Rs.34.17 crore.

6.    The entire balance including loss on current year repayment is fully amortised.

PAPER - 5 : ADVANCED ACCOUNTING

7.    The losses on amount repaid in 2010-11 are also routed through FCMITD A/c.

Interest payments will be charged to the Profit & Loss account as done in earlier

years at transaction value.

25. (a) (i) The total cost of the fixed asset is Rs. 250 lakhs and the grant is 40% i.e., Rs.

100 lakhs. In the balance sheet, the asset will be shown at the net amount (Rs. 250 lakhs - Rs. 100 lakhs) i.e, Rs. 150 lakhs only. This will depreciated over the life of the asset.

(ii)    In this case, the subsidy received for setting up a plant in the notified region, should be treated as a capital subsidy. The amount of subsidy i.e. Rs. 100 lakhs be added to the Capital Reserves and the plant should be shown at Rs. 300 lakhs.

(iii)    Rs. 50 lakhs received from state government for setting up of water treatment plant should be deducted fro the cost of the plant in the balance sheet.

(iv)    It is a case of revenue grant and should be shown in the profit and loss account. However, if the medical facilities are to be provided over a period of more than one year, it may be treated as deferred income and then taken to Profit and Loss Account on a systematic basis.

(b) 1. Computation of Actual Borrowing Costs incurred during the year

Weighted Average Capitalisation Rate for General Borrowings =

Total Interest - Interest on Specific Borrowings Total Borrowings- Specific Borrowings

_ (40.40-17.75)

- x 100 _ (22.65 * 210) x 100 _ 10.79%

Note: The amount of borrowing costs capitalized should not exceed the actual interest cost.

(c)    Para 11 of AS 20 states that "for the purpose of calculating basic earnings per share, the net profit or loss for the period attributable to Equity shareholders should be the net profit or loss for the period after deducting preference dividends and any attributable tax thereto for the period.

With an emphasis on the phrase "attributable to equity shareholders, it may be construed that amounts appropriated to Mandatory Reserves as described in this case, though not available for distribution as dividend, are still attributable to equity shareholders.

Therefore, the appropriation made to mandatory reserve created for the redemption of debentures would be included in the net profit attributable to equity shareholders for the computation of Basic EPS. The treatment made by the company is not correct.

(d)    Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognized as intangible assets.

Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognized as intangible assets.

(e)    According to AS 29 Provisions, Contingent Liabilities and Contingent Assets', contingent liability should be disclosed in the financial statements if following conditions are satisfied:

(i)    There is a present obligation arising out of past events but not recognized as provision.

(ii)    It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

(iii)    The possibility of an outflow of resources embodying economic benefits is also remote.

(iv)    The amount of the obligation cannot be measured with sufficient reliability to be recognized as provision.

In this case, the probability of winning of first five cases is 100% and hence, question of providing for contingent loss does not arise. The probability of winning of next ten cases is 60% and for remaining five cases is 50%. As per AS 29, we make a provision if the loss is probable. As the loss does not appear to be probable and the possibility of an outflow of resources embodying economic benefits is not remote rather there is reasonable possibility of loss, therefore disclosure by way of note should be made. For the purpose of the disclosure of contingent liability by way of note, amount may be calculated as under:

Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000

= Rs. 36,000 + Rs. 20,000

= Rs. 56,000

Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000

= Rs. 30,000 + Rs. 42,000 = Rs. 72,000

To disclose contingent liability on the basis of maximum loss will be highly unrealistic. Therefore, the better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000 x 10 + Rs. 72,000 x 5) as contingent liability.

Note: AS 4, 5, 11, 12, 16, 19, 20, 26, 29 are applicable for May, 2010 Examination.

Companies (Accounting Standards) Amendment Rules, 2009 - Amendments in Annexure

NOTIFICATION NO. G.S.R.225 (E)

DATED 31-3-2009

In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 read with subsection (1) of section 21A and sub-section (3C) of section 211 of the Companies Act, 1956 (1 of 1956), the Central Government in consultation with the National Advisory Committee on Accounting Standards, hereby makes the following rules to amended the Companies (Accounting Standards) Rules, 2006, namely:-

1.    (1) These rules may be called the Companies (Accounting Standards) Amendment Rules, 2009.

(2) They shall come into force on the date of their publication in the Official Gazette.

2.    In the Companies (Accounting Standard) Rules, 2006, in the Annexure, under the heading "B. ACCOUNTING STANDARDS, in the sub-heading "Accounting Standard (AS) 11 relating to "The Effects of Changes in Foreign Exchange Rates, after paragraph 45, the following shall be inserted, namely:-

"46. In respect of accounting periods commencing on or after 7^th December, 2006 and ending on or before 31^st March, 2011, at the option of the enterprise (such option to be irrevocable and to be exercised retrospectively for such accounting period, from the date this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired, whichever is later and applied to all such foreign currency monetary items), exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, insofar as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a "Foreign Currency Monetary Item Translation Difference Account in the enterprise's financial statements and amortized over the balance period of such long-term asset/liability but not beyond 31^st March, 2011, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with paragraph 15. For the purposes of exercise of this option, an asset or liability shall be designated as a long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of 12 months or more at the date of origination of the asset or liability. Any difference pertaining to accounting periods which commenced on or after 7^th December, 2006, previously recognized in the profit and loss account before the exercise of the option shall be reversed insofar as it relates to the acquisition of a depreciable capital asset by addition or deduction from the cost of the asset and in other cases by transfer to "Foreign Currency Monetary Item Translation Difference Account in both cases, by debit or credit, as the case may be, to the general reserve. If the option stated in this paragraph is exercised, disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized.

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