The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Integrated Professional Competence (IPCC) Revision Test s- 1–Accounting - Question Paper

Balance in C's Executor's account    52,000

Amount of profit earned out of unsettled capital [calculated in (3)]    7,027

Amount due    59,027

16. Journal Entries in the Books of Trinity Ltd.

Dr.    Cr.

Rs.    Rs.

Securities Premium A/c    Dr. 10,000

To Premium on Redemption of Preference shares    10,000

(Being amount of premium payable on redemption of

preference shares)_

10% Redeemable Preference Capital    Dr. 10,00,000

Premium on redemption of Preference Shares    Dr. 10,000

To Preference Shareholders    1,10,000

(Being the amount payable to preference shareholders

on redemption)_

General Reserve A/c    Dr. 1,00,000

To Capital Redemption Reserve    1,00,000

(Being transfer to the latter account on redemption

of shares)_

Bank A/c    Dr. 45,000

Profit and Loss A/c    Dr. 5,000

To Investments (Being amount realised on sale of Investments and loss

thereon adjusted)_

Preference shareholders A/c    Dr. 1,10,000

To Bank

(Being payment made to preference shareholders)_

Capital Redemption Reserve A/c    Dr. 1,00,000

To Bonus to Shareholders (Amount adjusted for issuing bonus share in the ratio of 1 : 1.)

Bonus to Shareholders A/c    Dr. 1,00,000

To Equity Share Capital

(Balance on former account transferred to latter)_

Cash and Bank A/c

1,50,000

Balance Sheet of Trinity Limited as at 31st March, 2009 (after redemption)

Rs. Assets

Share Capital Authorised Capital

Issued, Subscribed and Paid-up

Capital    upto 31.3.2008 1,00,000

20,000 Equity Share

of Rs. 10 each fully paid 2,00,000 For the year 20,000 1,20,000 1,80,000 (10,000 shares have been

allotted as Bonus Shares    Investments

by capitalising capital    (Market Value Rs. 45,000)    50,000

Redemption Reserve)    Current Assets, Loans and Advances

Reserves and Surplus

General Reserve 20,000    Inventory    25,000

Securities Premium 60,000    Debtors    25,000

Profit and Loss A/c 18,500 98,500 Cash and Bank Balance 30,000 80,000 Current Liabilities and Provisions

Sundry Creditors    11,500    _

3,10,000    3,10,000

Working Notes:

(i)    Profit and Loss Account for the year ending 31st March, 2009    Rs. Balance as on 1.4.2008    18,500

Add : Profit for the year    15,000 33,500

Less: Preference Dividend    10,000

Loss on sale of investments    5,000 15,000

Balance as on 31.3.2009    18,500

(ii)    General Reserve    1,20,000 Less: Transfer to Capital Redemption Reserve    1,00,000 Balance as on 31.3.2009    20,000

(iii)    Securities Premium    70,000 Less: Premium on Redemption of Preference shares    10,000 Balance as on 31.3.2009    60,000

(iv)    Capital Redemption Reserve    1,00,000 Less : Transfer for Bonus Shares    1,00,000 Balance as on 31.3.2009    NIL

17.    Prepackaged accounting softwares are easy to use, relatively inexpensive and readily available. The installation of these softwares are very simple. An installation diskette or CD is provided with the software which can be used to install the software on a personal computer. A network version of this software is also generally available which needs to be installed on the server and work can be performed from the various workstations or nodes connected to the server. Along with the software an user manual is provided which guides the user on how to use the software. After installation of the software, the user should check the version of the software to ensure that they have been provided with the latest. The vendor normally provides regular updates to take care of the changes of law as well as add features to the existing software. These softwares normally have a section which provides for the creation of a company. The name, address, phone numbers and other details of the company like VAT registration number, PAN and TAN numbers are feeded into the system. The accounting period has to be set by inserting the first and the last day of the financial year. The next step in the use of this software could be the creation of accounts. This is done by adding the accounts along with their codes into the master file files. Each account has to be classified into whether it is an asset or liability or an income or expenditure account. Whether the account has other subsidiary ledgers under it needs to be indicated to the system. The opening balances are to be entered into the master file files. The company parameters need to be set at this point of time so that the accounts which are the cash, bank, sundry debtors, sundry creditors, etc are known to the system. The customers name, address and other basic details are also entered in the customer master file. Similarly, the creditors details are entered into the creditor master file files. Product details are entered through the product master file files. Here the unit of measurement and the opening stock quantities including the values are provided. The system of valuation of stock like the FIFO, LIFO, Weighted average, etc are defined in the product master file files.

18.    (a) In the Debtors method, Hire purchase Trading account is prepared. The objective of

preparing Hire Purchase Trading Account is to measure the profitability of the Hire Purchase division separately. The following are the steps to be followed while preparing a Hire Purchase Trading Account:

(1) Credit all down payments and instalments falling due to hire purchase sales account. Transfer balance in Hire Purchase Sales Account to Hire Purchase

Trading Account.

(2)    Transfer cost of all transactions to Hire Purchase Trading Account.

Hire Purchase Trading A/c    Dr.

To Shop Stock A/c

(3)    Charge any special expenses to Hire Purchase Trading Account.

(4)    Treat instalments not yet due as stock lying with customers and transfer to Hire Purchase Trading Account.

(5)    Charge appropriate stock reserve.

(b)    Profit and Loss Appropriation Account: Profit and Loss Appropriation Account is prepared by a partnership firm to distribute the net profit among the partners in accordance with the partnership deed. Any interest on drawing is added to the net profit and thereafter out of such total profit, interest on partners' capital, salaries, commission, rent etc. are distributed as per agreement. Lastly, the balance of profit is distributed among the partners at the profit sharing ratio.

(c)    Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in the company's economic performance. Accounting Standards reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises.

Accounting Standards deal with the issues of

(i)    recognition of events and transactions in the financial statements,

(ii)    measurement of these transactions and events,

(iii)    presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the reader, and

(iv)    the disclosure requirements which should be there to enable the public at large and the stakeholders and the potential investors in particular, to get an insight into what these financial statements are trying to reflect and thereby facilitating them to take prudent and informed business decisions.

Accounting Standards standardize diverse accounting policies with a view to eliminate, to the maximum possible extent,

(i)    the non-comparability of financial statements and thereby improving the reliability of financial statements, and

(ii)    to provide a set of standard accounting policies, valuation norms and disclosure requirements.

(d) A company taking over a running business may also agree to collect its debts as an agent for the vendors and may further undertake to pay the creditor on behalf of the vendors. In such a case, the debtors and creditors of the vendors will be included in the accounts for the company by debit or credit to separate Total Accounts in the General Ledger to distinguish them from the debtors and creditors of the business and contra entries will be made in corresponding Suspense Accounts. Also details of debtors' and creditors' balance will be kept in separate ledgers. In order that the collections from debtors and payments of creditors of vendors may not get mixed up with those of the company, it is a desirable procedure further to distinguish them by having separate columns for them in the Cash Book.

19. (a) AS-14 Accounting for Amalgamations'. Para 3(g) of AS-14 defines the term purchase consideration as the "aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company. Therefore purchase consideration does not include the sum which the transferee company will directly pay to the creditors of the transferor company. The purchase consideration essentially depends upon the fair value of its elements. For example, when the consideration includes securities, the value fixed by the statutory authority may be taken as the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up or in the absence of market value, book value of the assets are considered.

Sometimes adjustments may have to be made in the purchase consideration in the light of one or more future events. When the additional payment is probable and can be reasonably estimated it is to be included in the calculation of purchase consideration.

(b)    The advantages of this system are:

(i)    It fixes the responsibility of the ledger keeper, as to the balancing of the ledger or ledger under his/her charge and the person responsible for the mistake can be called upon to work overtime to locate it. Errors are localised.

(ii)    It enables preparation of interim accounts without personal ledgers having to be balanced.

(iii)    The figures of total debtors or creditors is readily available.

(c)    Features of Hire Purchase Instalment system

1.    Possession: The hire vendor transfers only possession of the goods to the hire purchaser immediately after the contract for hire purchase is made.

2.    Instalments: The goods is delivered by the hire vendor on the condition that a hire purchaser should pay the amount in periodical instalments.

3.    Down Payment: The hire purchaser generally makes a down payment on signing the agreement.

4.    Constituents of Hire purchase instalments: Each instalment consists partly of a finance charge (interest) and partly of a capital payment.

5.    Ownership: The property in goods is to pass to the hire purchaser on the payment of the last instalment and exercising the option conferred upon him under the agreement.

6.    Repossession: In case of default in respect of payment of even the last instalment, the hire vendor has the right to take the goods back without making any compensation.

(d)    Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm :

Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section. This way, the outgoing partner has the option to receive, interest at the rate of 6% p.a. or the share of profit earned on the unsettled amounts for the period till his dues are settled by the firm in the absence of any contract made to the contrary.

It may be noted that the outgoing partner is not bound to make election until the share of the profit that would be payable to him has been ascertained.

(e)    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.

20. (a) If debit side exceeds credit side then the difference may be any of the following item:

(i)    Closing cash balance or bank balance; or

(ii)    Opening bank overdraft;

(iii)    Cash purchase; or

(iv)    Payment to creditors; or

(b) Calculation of Closing Stock:

Cost of goods sold    =

2.10,000- 2,10,000 x = Rs.1,68,000 125

Opening Stock + Purchases

30,000 + 1,70,000 Rs.2,00,000

Total stock available - Cost of goods sold

Rs.2,00,000 - 1,68,000

Rs.32,000

In the books of Y Co. Ltd. Journal Entry

Journal Entries    Dr. (Rs.) Cr. (Rs.)

A's Capital A/c    Dr.    20,000

To C's Capital A/c    20,000

(Being adjusting entry passed for goodwill on change in profit and loss sharing ratio)

Journal entry to be passed for accounting unrealized pProfit 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)

22.    (a) For a company under liquidation, the fundamental accounting assumption of "going

concern is apparently not valid. The assets and liabilities would stand appropriately adjusted to reflect the realizable value, by way of carrying amounts. This information will be required to be disclosed by the company under AS 1 on Disclosure of Accounting Policies.

(b)    Inventories are usually written down to Net Realisable Value on an item-by-item basis. They should not be valued at Net Realisable Value on-

1.    Wholistic basis i.e. all items of inventory taken together and

2.    Classification basis e.g. all finished goods, or all inventories in a particular business segment.

Exceptions: In special circumstances, it may be appropriate to group similar or related items, viz.,

1.    Inventory items relating to the same product line that have similar purposes or end uses;

2.    produced and marketed in the same geographical area; and

3.    Cannot be practicably evaluated separately from other items in the product line.

(c)    Where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the useful lives of such assets.

If revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out.

(d)    Interest: On time proportion basis considering the amount outstanding and rate of interest.

Royalties: On accrual basis in accordance with the terms of relevant agreement. Dividends: When the owner's right to receive payment is established.

23.    (a) As a result of the uncertainties in business activities, many financial statement items

cannot be measured with precision but can only be estimated. These are called accounting estimates. Therefore, the 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 judgements 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.

(b)    (i) Revaluation of fixed Assts

According to Accounting Standard 10 on "Accounting for Fixed Assets

(a)    When fixed assets are revalued in financial statements, the basis of selection should be an entire class of assets or the selection should be done on a systematic basis. The basis of selection should be disclosed.

(b)    The revaluation of any class of assets should not result in the net book value of that class being greater than the recoverable amount of that class of assets.

(c)    The accumulated depreciation should not be credited to profit and loss account.

(d)    The net increase in book value should be credited to a revaluation reserve account.

(e)    On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss account except that to the extent to which such a loss is related to an increase and which has not been subsequently reversed or utilised may be charged directly to that account.

(c)    As per AS 14 on Accounting for Amalgamations', there are two main methods of

accounting for amalgamations:

(i)    The Pooling of Interest 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 necessary adjustments).

If at the time of amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with AS 5 on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies'.

(ii)    The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include

assets and liabilities not recorded in the financial statements of the transferor company.

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company.

(d) According to paragraphs 38, 39 and 41 of AS 7, an enterprise should disclose:

(a)    the amount of contract revenue recognized as revenue in the period;

(b)    the methods used to determine the contract revenue recognized in the period; and

(c)    the methods used to determine the stage of completion of contracts in progress.

In case of contract still in progress the following disclosures are required at the reporting date:

(a)    the aggregate amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;

(b)    the amount of advances received; and

(c)    the amount of retentions.

An enterprise should also present:

(a)    the gross amount due from customers for contract work as an asset; and

(b)    the gross amount due to customers for contract work as a liability.

24. (a) The use of standard cost of elements of cost of production has been suggested by AS-2 as a matter of convenience only. In fact, AS-2 aims to suggest the use of absorption costing based on normal capacity. AS-2 says that standard cost system may be used for convenience if the results approximate the actual cost. If the company can adopt absorption costing for value of inventory, then the standard cost systems need not be adopted.

(b) The company should disclose the change in method of depreciation adopted for the accounting year. The impact on depreciation charge due to change in method must be quantified and reported by the enterprise.

Following aspects may be noted in this regard as per AS 6 on Depreciation Accounting.

(a)    The depreciation method selected should be applied consistently from period to period.

(b)    A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.

(c)    When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed.

(d)    In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss.

(e)    In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

(c)    Paragraph 8.4 and 13 of Accounting Standard 9 on Revenue Recognition states that dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established.

In the given case, the dividend is proposed on 10th April, 2009, while it is declared on 15th June, 2003. Hence, the right to receive payment is established on 15th June, 2009. As per the above mentioned paragraphs, income from dividend on units of mutual funds should be recognised by X Ltd. in the financial year ended 31st March, 2010.

The recognition of Rs. 10 lakhs on accrual basis in the financial year 2008-2009 is not as per AS 9 'Revenue Recognition'.

(d)    As per para 14.4, and para 32 of AS 10 loss of Rs. 150 lakhs should be taken to Revaluation reserve corresponding to these assets. Surplus of revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve. (Debit profit on sale of property, and credit loss on sale, and credit general reserve).

25. (a) The transfers should be made at lower of (a) Cost, and (b) Fair value at the date of transfer.

1.    In this case, the transfer should be made at cost (being lower of Rs. 20 lakhs and Rs. 25 lakhs) and hence the long term investments should be carried at Rs. 20 lakhs.

2.    In the second case, the transfer should be made at Market Value (being lower of Rs. 15 lakhs and Rs. 6.5 lakhs) and hence the long term investments should be carried at Rs. 6.50 lakhs. The loss of Rs. 15 - Rs. 6.5 = Rs. 8.5 lakhs should be provided for in the profit and loss account.

3.    Here, the transfer should be made at carrying amount (being lower of Rs. 18 lakhs and Rs. 12 lakhs) and hence these reclassified current investments should be carried at Rs. 12 lakhs.

(b)    According to Para 21 of AS 3 (Revised) Cash Flow Statements', an enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in para 22 and 24 of the standard.

Hence, the company cannot disclose net cash flow in respect of acquisition of plant and machinery and disposal of furniture and fixtures.

(c)    As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the construction contract should be recognized as an expense immediately irrespective of (i) whether or not the work has commenced on the contract; or (ii) the stage of completion of the contract; or (iii) the amount of profits expected to arise in other contracts.

Hence, the company must recognize the loss immediately

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