The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Final Revision Test s- 1 – Advanced Accounting (old ) - Question Paper
May 2010: The Institute of Chartered Accountants of India - Revision Test ques. papers (RTPs) Final Examination: Paper one Advanced Accounting (old course): May 2010 University ques. paper
PAPER -1 : ADVANCED ACCOUNTING QUESTIONS
Holding Company Accounts
1. The Balance Sheets of Bat Ltd. and Ball Ltd. as on 31.3.2009 are as follows:
Bat Ltd. Ball Ltd. Rs. Rs.
Bat Ltd. Rs.
Ball Ltd. Rs.
Share Capital (Shares of Rs. 10 each)
Investments Shares in Ball
1,60,000 2,00,000 Ltd.
1,96,000
Profit and account
Creditors
Loss
Debtors
- 1,20,000
50,000 60,000
16,000 Stock
80,000
70,000
6,000
Cash at Bank Cash in hand
14,000
2,10,000 2,76,000
Particulars of Bat Ltd.:
(1) This company was formed on 1.4.2008.
(2) It acquired the shares of Ball Ltd. as under: Date of Acquisition
2,10,000 2,76,000
No. of Shares
8,000
6,000
Cost
Rs.
1,10,000
86,000
1.4.2008
31.7.2008
The shares purchased on 31.7.2008 are ex-dividend and ex-bonus from existing holders.
(3)
(4)
(5)
(6)
(7)
(8)
On 31.7.2008 dividend at 10% was received from Ball Ltd. and was credited to Profit and Loss Account.
On 31.7.2008 it received bonus shares from Ball Ltd. in the ratio of one share on every four shares held.
Bat Ltd. incurred an expenditure of Rs. 500 per month on behalf of Ball Ltd. and this was debited to the Profit and Loss Account of Bat Ltd., but nothing has been done in the books of Ball Ltd.
The balance in the Profit and Loss Account as on 31.3.2009 included Rs. 36,000 being the net profit made during the year.
Dividend proposed for 2008-2009 at 10% was not provided for as yet.
Particulars of Ball Ltd.
(1) The balance in the Profit and Loss Account as on 31.3.2009 is after the issue of bonus shares made on 31.7.2008.
(2) The net profit made during the year is Rs. 24,000 including Rs. 6,000 received from insurance company in settlement of the claim towards loss of stock by fire on 30.06.2008 (Cost Rs. 10,800 included in opening stock).
(3) Dividend proposed for 2008-2009 at 10% was not provided for in the accounts. Prepare the Consolidated Balance Sheet of Bat Ltd. as on 31.3.2009.
Statutory Financial Statements of a Company
2. On 1st November, 2008 Yash Ltd. was incorporated with an authorized capital of Rs.
1,000 crores. It issued to its promoters equity capital of Rs. 50 crores which was paid for in full. On that day it purchased the running business of Vijay Ltd. for Rs. 200 crores and allotted at par equity capital of Rs. 200 crores in discharge of the consideration. The net assets taken over from Vijay Ltd. were valued as follows: Fixed Assets Rs. 150 crores, Inventory Rs. 10 crores, Customers' dues Rs. 70 crores and Creditors Rs. 30 crores.
Yash Ltd. carried on business and the following information is furnished to you:
(a) Summary of cash/bank transactions (for year ended 31st October, 2009).
(Rs. in crores)
Equity capital raised:
Promoters (as shown above)
50
250
Others
Collections from customers
Sale proceeds of fixed assets (cost Rs.18 crores)
300
4,000
_20
4,320
Payments to suppliers Payments to employees Payment for expenses Investments in Upkar Ltd.
Payments to suppliers of fixed assets:
Instalment due
Interest
Tax payment
Dividend
Closing cash/bank balance
2,000
700
500
3,200
100
600
50
650
270
50
_50
4,320
(b) On 31st October, 2009 Yash Ltd.'s assets and liabilities were:
(Rs. in crores)
Inventory at cost 15
Customers' dues 400
Prepaid expenses 10
Advances to suppliers 40
Amounts due to suppliers of goods 260
Amounts due to suppliers of fixed assets 750
Outstanding expenses 30
(c) Depreciation for the year under:
(i) Companies Act, 1956 Rs. 180 crores
(ii) Income tax Act, 1961 Rs. 200 crores
(d) Provide for tax at 38.5% of "total income. There are no disallowables for the purpose of income taxation. Provision for tax is to be rounded off.
Yash Ltd. asks you to prepare:
(i) Revenue statement for the year ended 31st October, 2009 and
(ii) Balance Sheet as on 31st October, 2009 from the above information.
Corporate Restructuring
Amalgamation of Companies
3. System Ltd. and HRD Ltd. decided to amalgamate as on 01.04.2008. Their Balance Sheets as on 31.03.2008 were as follows:
(Rs. in 000)
Particulars System Ltd. HRD Ltd.
Source of Funds :
Equity share capital (Rs. 10 each) 150 140
9% preference share Capital (Rs. 100 each) 30 20
Investment allowance Reserve 5 2
Profit and Loss Account 10 6
10 % Debentures 50 30
Sundry Creditors 25 15
Tax provision 7 4
Equity Dividend Proposed _30 28
Total 307 245
Building |
60 |
50 |
Plant and Machinery |
80 |
70 |
Investments |
40 |
25 |
Sundry Debtors |
45 |
35 |
Stock |
36 |
40 |
Cash and Bank |
40 |
25 |
Preliminary Expenses |
_6 | |
Total |
307 |
245 |
From the following information, you are required to prepare the draft Balance Sheet as on 01.04.2008 of a new company, Intranet Ltd., which was formed to take over the business of both the companies and took over all the assets and liabilities:
50 % Debenture are to be converted into Equity Shares of the New Company.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Out of the investments, 20% are non-trade investments.
Fixed Assets of Systems Ltd. were valued at 10% above cost and that of HRD Ltd. at 5% above cost.
10 % of sundry Debtors were doubtful for both the companies. Stocks to be carried at cost.
Preference shareholders were discharged by issuing equal number of 9% preference shares at par.
Equity shareholders of both the transferor companies are to be discharged by issuing Equity shares of Rs. 10 each of the new company at a premium of Rs. 5 per share.
Amalgamation is in the nature of purchase.
Internal Reconstruction of a Company
4. The Balance Sheet of Neptune Ltd. as on 31.3.2009 is given below:
Liabilities Rs. Equity shares of Rs.10 each fully paid (80,000 shares) 6% Cumulative pref. shares of 100 each fully paid (5,000 shares) 6% Debentures (secured by 3,75,000 freehold property) Arrear interest 22,500 |
Rs. Assets Rs. 5,00,000 1,80,000 1.70.000 4.50.000 8.00.000 Freehold property 5.00.000 Plant & machinery Trade investment (at cost) 3,97,500 Sundry debtors |
17,500 Stock in trade
3,00,000 Deferred
Sundry creditors Director's loan
advertisement
expenditure
Profit and Loss A/c
1.50.000
3.65.000
20,15,000
20,15,000
The Court approved a scheme of re-organisation to take effect on 1.4.2009 and the terms are given below:
(i) Preference shares are to be written down to Rs.75 each and equity shares to Rs.2 each.
(ii) Preference dividend in arrear for 4 years to be waived by 75% and for the balance equity shares of Rs.2 each to be allotted.
(iii) Arrear of debenture interest to be paid in cash.
(iv) Debentureholders agreed to take one freehold property (Book value Rs.3,00,000) at a valuation of Rs.3,00,000 in part payment of their holding. Balance debentures to remain as liability of the company.
(v) Deferred Advertisement Expenditure to be written off.
(vi) Stock value to be written off fully in the books.
(vii) 50% of the Sundry Debtors to be written off as bad debt.
(viii) Remaining freehold property (after take over by Debentureholders) to be valued at Rs.3,50,000.
(ix) Investments sold out for Rs.2,00,000.
(x) 80% of the Director's loan to be waived and for the balance equity shares of Rs.2 each to be issued.
(xi) Company's contractual commitments amounting to Rs.5,00,000 to be cancelled by paying penalty at 3% of contract value.
(xii) Cost of Re-construction Scheme is Rs.20,000.
Show the Journal entries (with narration) to be passed for giving effect to the above transactions and draw Balance Sheet of the company after effecting the Scheme.
Buy-Back of Shares
5. Dee Limited furnishes the following Balance Sheet as at 31st March, 2009:
Liabilities Rs.000 Rs.000
Share Capital:
Authorised Capital 30,00
Issued and subscribed capital:
2,50,000 equity shares of Rs.10 each fully paid up 25,00
2,000, 10% Preference shares of Rs.100 each
(Issued two months back for the purpose of buy back) 2,00
27.00
Reserves and Surplus:
Capital Reserve 10,00
Revenue Reserve 30,00
Securities Premium 22,00
Profit and Loss A/c 35,00
97.00
Current liabilities and provisions: 14,00
1,38,00
Assets Rs.000
Fixed assets 93,00
Investments 30,00
Current assets, loans and advances
(Including cash and bank balance) 15,00
1,38,000
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 investments for Rs.22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet.
6. The following abridged Balance Sheet as at 31st March, 2009 pertains to Omega Ltd.
Liabilities |
Rs. in lakhs |
Assets |
Rs. in lakhs |
Share Capital: |
Goodwill, at cost |
420 | |
180 lakh Equity shares of Rs. |
Other Fixed Assets |
11,166 | |
10 each, fully paid up |
1,800 |
Current Assets |
2,910 |
90 lakh Equity shares of Rs. 10 |
Loans and Advances |
933 | |
each, Rs. 8 paid up |
720 |
Miscellaneous Expenditure |
171 |
150 lakh Equity shares of Rs. 5 | |||
each, fully paid-up |
750 | ||
Reserves and Surplus |
5,628 | ||
Secured Loans |
4,500 |
Current Liabilities 1,242
Provisions 960 _
15,600 15,600
You are required to calculate the following for each one of the three categories of equity shares appearing in the above mentioned Balance Sheet:
(i) Intrinsic value on the basis of book values of Assets and Liabilities including goodwill;
(ii) Value per share on the basis of dividend yield.
Normal rate of dividend in the concerned industry is 15%, whereas Glorious Ltd. has been paying 20% dividend for the last four years and is expected to maintain it in the next few years; and
(iii) Value per share on the basis of EPS.
For the year ended 31st March, 2009 the company has earned Rs. 1,371 lakh as profit after tax, which can be considered to be normal for the company. Average EPS for a fully paid share of Rs. 10 of a Company in the same industry is Rs. 2.
Valuation of Goodwill
7. From the following information supplied to you, ascertain the value of goodwill of A Ltd., which is carrying on business as retail trader, under Super Profit Method (at 5 years' purchase of Super Profits):-
Balance Sheet as on 31st March, 2009
| ||||||||||||||||||||||||||||||||
9,50,000 9,50,000 |
The company commenced operations in 1990 with a paid up capital of Rs.5,00,000. Profits for recent years (after taxation) have been as follows:-
Year ended 31st March Rs.
2005 40,000 (Loss)
2006 88,000
2007
2008 2009
1.03.000
1.16.000 1,30,000
The loss in 2005 occurred due to a prolonged strike.
The income-tax paid so far has been at the average rate of 40%, but it is likely to be 50% from 2010 onwards. Dividends were distributed at the rate of 10% on the paid up capital in 2006 and 2007 and the rate of 15% in 2008 and 2009. The market price of shares is ruling at Rs.125 at the end of the year ended 31st March, 2009. Profits till 2009 have been ascertained after debiting Rs.40,000 as remuneration to the managing director. The government has approved a remuneration of Rs.60,000 with effect from 1st April, 2009. The company has been able to secure a contract for supply of materials at advantageous prices. The advantage has been valued at Rs.40,000 per annum for the next five years.
Valuation of Business
8. Shree Ltd. gives the following information:
Current profit Rs.210 lakhs
Compound growth rate of profit 7.5% p.a.
Current cash flows from operations Rs.270 lakhs
Compound growth rate of cash flows 6.5% p.a.
Current price earning ratio 12
Discount factor 20%
Find out the value of Shree Ltd. taking 10 years' projected profit or cash flows based on
(i) Discounted earnings method, and (ii) Discounted cash flows method.
Value Added Statement
9. The following is the Profit and Loss Account of Ganpati Ltd. for the year ended 31.03.2009. Prepare a Gross Value Added Statement of Ganpati Ltd. and show also the reconciliation between Gross Value Added and Profit before taxation.
Profit and Loss Account for the year ended 31.03.2009
Notes Amount
(Rs. in lakhs)
Income:
Sales - 890
Other Income - 55
945
Expenditure:
Production and operational expenses (a) 641 -
Administration expenses (Factory) (b) 33 -
Interest (c) 29 -
Depreciation _17 720
Profit before taxes - 225
Provision for taxes (d) - 30
Profit after tax - 195
Balance as per last Balance Sheet - 10
205
Transferred to General Reserve 45
Dividend paid _95
140
Surplus carried to Balance Sheet 65
205
Notes:
(a) Production and Operational expenses Rs. in lakhs
Consumption of raw materials 293
Consumption of stores 59
Salaries, Wages, Gratuities etc. (Admn.) 82
Cess and Local taxes 98
Other manufacturing expenses 109
641
(b) Administration expenses include salaries, commission to Directors Rs.9.00 lakhs Provision for doubtful debts Rs. 6.30 lakhs.
Rs. in lakhs
(c) Interest on loan from ICICI Bank for working capital 9
Interest on loan from ICICI Bank for fixed loan 10
Interest on loan from IFCI for fixed loan 8
Interest on Debentures _2
_29
(d) The charges for taxation include a transfer of Rs. 3.00 lakhs to the credit of Deferred Tax Account.
(e) Cess and Local taxes include Excise Duty, which is equal to 10% of cost of bought-in material.
Economic Value Added
10. (a) What is economic value added and how is it calculated? Discuss.
(b) Calculate economic value added (EVA) with the help of the following information Sun Limited.
Financial leverage: 1.4 times;
Equity Capital Rs.170 lakh;
Reserve and surplus Rs.130 lakh;
10% Debentures Rs.400 lakh;
Cost of Equity: 17.5%
Income Tax Rate: 30%.
Human Resource Accounting
11. From the following details, compute value of human resources according to Lev and Schwartz (1971) model .
(i) |
Annual average earning of an employee till the retirement age |
Rs.50,000 |
(ii) |
Age of retirement |
65 years |
(iii) |
Discount rate |
15% |
(iv) |
No. of employees |
20 |
(v) |
Average age |
62 years |
Corporate Social Reporting
12. (a) "The content of corporate social report is essentially based on social objectives. Discuss.
(b) From the following information of Steel India Ltd. for the year ended 31st March, 2009, prepare their Social Balance Sheet as on that date:
- A specialist has valued their human assets at Rs.828 lakhs.
- Their investments were classified as:
(Rs. in lakhs)
Residential Hospital School Welfare
Buildings 17.00 1.00 1.40 0.80
Equipments 2.80 1.00 1.00 -
- Water, electricity and gas supply systems totalled Rs.1 lakh.
- Their Net owned funds were Rs.26 lakhs.
Financial Reporting of Financial Institutions
13. Write short notes on:
(i) Minimum net owned fund in the context of NBFC
(ii) Valuation of portfolio for a mutual fund
(iii) Obligations of stock broker on inspection by the Board
(iv) Books of account required to be maintained by a Stock Broker
(v) Asset management company in the context of a mutual fund
14. A Mutual Fund raised 100 lakh on April 1, 2009 by issue of 10 lakh units of Rs. 10 per unit. The fund invested in several capital market instruments to build a portfolio of Rs. 90 lakhs. The initial expenses amounted to Rs. 7 lakh. During April, 2009, the fund sold certain securities of cost Rs. 38 lakhs for Rs. 40 lakhs and purchased certain other securities for Rs. 28.20 lakhs. The fund management expenses for the month amounted to Rs. 4.50 lakhs of which Rs. 0.25 lakh was in arrears. The dividend earned was Rs. 1.20 lakhs. 75% of the realized earnings were distributed. The market value of the portfolio on 30.04.2009 was Rs. 101.90 lakh. Determine NAV per unit.
15. Krishna Finance Ltd. is a non-banking finance company. It makes available to you the costs and market price of various investments held by it.
(Rs. in lakhs)
Cost Market price
Equity Shares:
Scrip A 40.00 40.80
Scrip B 21.00 16.00
Scrip C 4000 24.00
101.00 80.80
Mutual Funds
MF1 26.00 16.00
MF2 2000 24.00
46.00 40.00
Government Securities
GV1 50.00 44.00
GV2 5000 58.00
100.00 102.00
(i) Can the company adjust depreciation of a particular item of investment within a category?
(ii) What should be the value of investments?
Accounting for Not-for-profit Organizations
16. A University receives two grants one from the Ministry of Human Resources to be used for Aids Research. This grant is for Rs. 45,00,000, which includes Rs. 3,00,000 to cover indirect expenses incurred in administering the grant. The second grant of Rs.
35.00.000 received from a reputed Trust is to be used to set up a centre to conduct seminars on Aids related matters from time to time. During the year, it also received Rs.
5.00.000 worth of equipment donated by a well wisher to be used for Aids research. During the year 2008-2009, the University spent Rs. 32,25,000 of the government grant and incurred Rs. 3,00,000 overhead expenses. Rs. 28,00,000 were spent from the grant received from the Trust. Show the necessary Journal Entries.
Indian AS, IFRS and US GAAPs
17. State the treatment of the following items with reference to Indian Accounting Standards and IFRS:
(i) Impairment of assets
(ii) Business combinations.
Accounting Standards and Guidance Notes
18. Write short notes on:
(i) Disclosure of carrying amounts of financial assets and financial liabilities in Balance Sheet
(ii) Financial guarantee contract
(iii) De-recognition of financial liability
(iv) Impairment of asset and its application to inventory
19. Write short notes on:
(i) Graded vesting under an employee stock option plan
(ii) Presentation of MAT credit in the financial statements
(iii) Accounting for investment by a holding company in subsidiaries.
(iv) Provisions of AS 26 relating to retirement and disposal of intangible assets.
(v) Change in accounting estimates.
20. (i) Mr. X' as a contractor has just entered into a contract with a local municipal body
for building a flyover. As per the contract terms, X' will receive an additional Rs.2 crore if the construction of the flyover were to be finished within a period of two years of the commencement of the contract. Mr. X wants to recognize this revenue since in the past he has been able to meet similar targets very easily.
Is X correct in his proposal? Discuss.
(ii) The accounting year of X Ltd. ends on 30th September, 2009 and it makes its reports quarterly. However for the purpose of tax, year ends on 31st March every year. For the Accounting year beginning on 1-10-2008 and ends on 30-9-2009, the quarterly income is as under:-
1st quarter ending on 31-12-2008 2nd quarter ending on 31-3-2009 3rd quarter ending on 30-6-2009 4th quarter ending on 30-9-2009 Total
Rs. 200 crores Rs. 200 crores Rs. 200 crores Rs. 200 crores Rs. 800 crores
Average actual tax rate for the financial year ending on 31-3-2009 is 20% and for financial year ending 31-3-2010 is 30%. Calculate tax expense for each quarter.
(iii) P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The management of R Ltd. has not disclosed its relationship with P Ltd.
How would you assess the situation from the viewpoint of AS -18 on Related Party Disclosures?
(iv) On March 01, 2009, X Ltd. purchased Rs. 5 lakhs worth of land for a factory site. Company demolished an old building on the property and sold the material for Rs.
10,000. Company incurred additional cost and realized salvaged proceeds during the March 2009 as follows:
Legal fees for purchase contract and recording ownership Rs. 25,000
Title guarantee insurance Rs. 10,000
Cost for demolition of building Rs. 50,000
Compute the balance to be shown in the land account on March 31, 2009 balance sheet.
(v) The closing inventory at cost of a company amounted to Rs. 2,84,700. The following items were included at cost in the total:
(a) 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a defect in manufacture, they were all sold after the balance sheet date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds.
(b) 800 skirts, which had cost Rs. 20 each. These too were found to be defective. Remedial work in April cost Rs. 5 per skirt, and selling expenses for the batch totaled Rs. 800. They were sold for Rs. 28 each.
What should the inventory value be according to AS 2 after considering the above items?
21. (i) A Ltd. acquired 45% of B Ltd. shares on April 01, 2008, the price paid was Rs.
15,00,000. Following are the extract of balance sheet of B Ltd.:
Paid up Equity Share Capital Rs. 10,00,000
Securities Premium Rs. 1,00,000
Reserve & Surplus Rs. 5,00,000
B Ltd. has reported net profits of Rs. 3,00,000 and paid dividends of Rs. 1,00,000. Calculate the amount at which the investment in B Ltd. should be shown in the consolidated balance sheet of A Ltd. as on March 31, 2009.
(ii) Mr. X set up a new factory in the backward area and purchased plant for Rs. 500 lakhs for the purpose. Purchases were entitled for the CENVAT credit of Rs. 10 lakhs and also Government agreed to extend the 25% subsidy for backward area development. Determine the depreciable value for the asset.
(iii) The following date apply to X' Ltd. defined benefit pension plan for the year ended 31.03.09, calculate the actual return on plan assets:
- Benefits paid |
2,00,000 | |
- Employer contribution |
2,80,000 | |
- Fair market value of plan assets on 31.03.09 |
11,40,000 | |
- Fair market value of plan asset as on 31.03.08 |
8,00,000 | |
The following are the summarized Balance Sheet of Star Ltd. as on 31st March, 2008 anc 2009: (Rs.OOO) | ||
2008 |
2009 | |
Equity share capital of Rs.10 each |
3,400 |
3,800 |
Profit and Loss A/c |
400 |
540 |
Securities Premium |
40 |
80 |
Debentures |
800 |
900 |
Long term borrowings |
180 |
240 |
Sundry Creditors |
360 |
440 |
Provision for Taxation |
20 |
40 |
Proposed Dividend |
300 |
480 |
Sundry Fixed Assets: |
5,500 |
6,520 |
Gross Block |
3,200 |
4,000 |
Less: Depreciation |
640 |
1,440 |
Net Block |
2,560 |
2,560 |
Investment Inventories Sundry Debtors Cash and Bank Balance
1,200 1,400
1,000 1,400
640 900
100 260
5,500 6,520
The Profit and Loss account for the year ended 31st March, 2009 disclosed:
(Rs.000)
Profit before Tax Less: Taxation Profit after tax
780
160
620
480
140
Less: Proposed dividends Retained Profit
The following information is also available:
(1) 40,000 equity share issued at a premium of Re.1 per share.
(2) The Company paid taxes of Rs.1,40,000 for the year 2008-09.
(3) During the period it discarded fixed assets costing Rs.4 lacs, (accumulated depreciation Rs.80,000) at Rs.40,000 only.
You are required to prepare a cash flow statement as per AS-3 (Revised), using indirect method. Ignore debenture interest.
23. (i) S Ltd. grants 1,000 stock options to its employees on 1.4.2005 at Rs.60. The vesting period is two and a half years. The maximum period is one year. Market price on that date is Rs.90. All the options were exercised on 31.7.2008. Journalize, if the face value of equity share is Rs.10 per share.
(ii) Moon Ltd. entered into agreement with Sun Ltd. for sale of goods of Rs.8 lakhs at a profit of 20 % on cost. The sale transaction took place on 1st February, 2009. On the same day Sun Ltd. entered into another agreement with Moon Ltd. to resell the same goods at Rs. 10.80 lakhs on 1st August, 2009. The pre-determined re-selling price covers the holding cost of Sun Ltd. State the treatment of this transaction in the financial statements of Moon Ltd. as on 31.03.09.
(iii) XY Ltd. was making provisions for non-moving stocks based on no issues for the last 12 months upto 31.03.08. Based on technical evaluation the company wants to make provisions during the year 31.03.09.
Total value of stock --- Rs. 150 lakhs.
Provisions required based on 12 months issue Rs. 4.0 lakhs.
Provisions required based on technical evaluation Rs. 3.20 lakhs.
Does this amount to change in accounting policy ? Can the company change the method of provision?
(iv) From the following information relating to X Ltd., calculate Diluted Earnings Per Share as per AS 20:
Net Profit for the current year Number of equity shares outstanding Basic earnings per share
50,000
Rs.5,50,000
Rs.1,65,000
Number of 11% convertible debentures of Rs.100 each Each debenture is convertible into 8 equity shares. Interest expense for the current year Tax saving relating to interest expense (30%)
24. (i) A company is engaged in the business of ship building and ship repair. On completion of the repair work, a work completion certificate is prepared and countersigned by ship owner (customer). Subsequently, invoice is prepared based on the work completion certificate describing the nature of work done together with the rate and the amount. Customer scrutinizes the invoice and any variation is informed to the company. Negotiations take place between the company and the customer. Negotiations may result in a deduction being allowed from the invoiced amount either as a lumpsum or as a percentage of the invoiced amount. The accounting treatment followed by the company is as follows:
(i) When the invoice is raised, the customer's account is debited and ship repair income account is credited with the invoiced amount.
(ii) Deduction, if any, arrived after negotiation is treated as trade discount by debiting the ship repair income account.
(iii) At the close of the year, negotiation in respect of certain invoices had not been completed. In such cases, based on past experience, a provision for anticipated loss is created by debiting the Profit and Loss account. The provision is disclosed in Balance Sheet.
Following two aspects are settled in the negotiations:
(i) Errors in billing arising on account of variation between the quantities as per work completion certificate and invoice and other clerical errors in preparing the invoice.
(ii) Disagreement between the company and customer about the rate/cost on which prior agreement has not been reached between them.
Comment whether the accounting treatment of deduction as trade discount is correct? If not, state the correct accounting treatment.
(ii) A major fire has damaged the assets in a factory of a Limited Company on 5th April
- five days after the year end and closure of accounts. The loss is estimated at
Rs.10 crores out of which Rs.7 crores will be recoverable from the insurers. Explain briefly how the loss should be treated in the final accounts for the previous year.
(iii) X Ltd. is a subsidiary of Y Ltd. It holds 9% Rs.100 5-year debentures of Y Ltd. and designated them as held to maturity as per AS 30 "Financial Instruments: Recognition and Measurement. Can X Ltd. designate this financial asset as hedging instrument for managing foreign currency risk?
(iv) Rose Ltd. had made an investment of Rs.500 lakhs in the equity shares of Nose Ltd. on 10.01.2009. The realizable value of such investment on 31.03.2009 became Rs.200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How will you recognize this reduction in Financial statements for the year 2008-09?
25. (i) Axe Limited began construction of a new plant on 1st April, 08 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%.
The expenditure that was made on the project of plant is as follows:
1st April, 08 1st August, 08 1st January, 09
5.00.000 12,00,000
2.00.000
The company's 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, 09. You are required to calculate the amount of interest to be capitalized as per the provisions of AS-16 "Borrowing cost.
(ii) X Ltd. has entered into a contract by which it has the option to sell its identified Property, Plant and Equipment (PPE) to Y Ltd. for Rs.100 million after 3 years whereas its current market price is Rs.180 million. Is the put option of X Ltd. a financial instrument? Is the written put option of Y Ltd. a financial instrument? Explain.
(iii) X Ltd. received a revenue grant of Rs.10 cores during 2006-07 from Government for welfare activities to be carried on by the company for its employees. The grant prescribed the conditions for utilizations. 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.
(iv) Goods of 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 March, 2009, 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, 2009.
SUGGESTED ANSWERS/HINTS Consolidated Balance Sheet of Bat Ltd. and its subsidiary Ball Ltd. as at 31st March, 2009
Liabilities |
Amount Rs. |
Assets |
Share Capital |
Stock | |
(Shares of Rs. 10 each) |
1,60,000 |
Debtors |
Minority Interest |
50,800 |
Cash at Bank |
Capital Reserve |
3,040 |
Cash in hand |
Profit and Loss Account |
44,160 | |
Creditors |
16,000 | |
Proposed Dividend |
16,000 2,90,000 |
Working Notes:
Amount
Rs.
80,000
1,20,000
70.000
20.000
2,90,000
Revenue
Profits
Rs.
(1) Analysis of profits of Ball Ltd.
Capital
Profits
Rs.
Profit and Loss Account on 1.4.2008 (60,000 - 24,000)
36,000
Profit for the year Add back: Loss by fire
24,000
4.800 28,800
6,000
22,800
7,600
4.800
Less: Expenses not considered
4
Pre-acquisition profits = x 22,800 =
Less: Loss in pre-acquisition period = Post-acquisition profits
2,800
x 22,800 12
15.200
15.200 12,160
3,040
38,800
31,040
7,760
Bat Ltd.'s share (80%*) Minority's share (20%)
8,000 + 6,000 +Bonus shares 8,000 i.e. 2,000 * _4
20,000
x100
=16000 X100 = 80%
20,000
(2) Minority interest Share capital Capital profits Revenue profits
40.000 7,760
3.040 50,800
1,60,000 31,040 1,91,040
1,96,000
8,000 (1,88,000)
3.040 Rs.
50.000 8,000
16.000 26,000
44,160
(Rs. in crores)
500
387
(3) Cost of control
Face value of investments Capital profits
Investment in Ball Ltd.
Less: Pre-acquisition dividend Capital Reserve
(4) Profit and Loss Account - Bat Ltd.
Balance
Less: Pre-acquisition dividend wrongly credited
Less: Proposed dividend
Add: Expenses of Ball Ltd. written back Add: Share in Ball Ltd.
2. Yash Ltd.
Balance Sheet as at 31st October, 2009
Schedule
I SOURCES OF FUNDS
(1) Shareholders' funds:
(a) Capital A
(b) Reserves and surplus
(2) Loan funds 750
(1) Fixed assets:
(a) Gross block 1,482
(b) Less: Depreciation 180
(2) Investments in Upkar Ltd. 100
(3) Current assets, loans and advances:
(a) Inventories 15
(b) Sundry debtors 400
(c) Cash and bank balances 50
(d) Loans and advances:
Advances to suppliers 40
Prepaid expenses 10
Tax payment 270 785
Less: Current liabilities and provisions:
(a) Creditors for
Goods 260
Expenses _30
290
(b) Provision for taxation 260 550
TOTAL 1,637
Schedule to Balance Sheet (Rs. in crores)
A. Share Capital:
Authorised: 1,000
Issued and paid-up:
50 crores equity shares of Rs. 10 each fully paid up 500
Of the above shares, 20 crores equity shares have been issued for consideration other than cash, on take over of business of Vijay Ltd.
Profit and Loss Account for the year ended 31st October, 2009
(Rs. in crores)
Sales 4,330 Expenditure:
Stock taken over from Vijay Ltd. 10
Purchases 2,190
2,200
Closing stock _15
Inventory consumed/sold 2,185
Employee cost 700
Expenses 520 (3,405)
Profit before interest, depreciation and tax 925
Interest (50)
Profit after interest but before depreciation 875
Depreciation (180)
Profit after depreciation 695
Profit on sale of fixed assets _2
Profit before tax 697
Provision for tax (260)
Net profit 437
Dividend {50}
Balance carried forward 387
Working Notes:
(Rs. in crores)
(1) Net assets of Vijay Ltd. taken over:
Fixed Assets 150
Inventory 10
Customers' dues 70
230
Less: Creditors _30
200
Purchase consideration: 20 crores equity shares of Rs. 10 each.
(2) Customers Account
Rs. Rs.
To Business Purchase A/c 70 By Bank A/c 4,000
To Sales A/c (Balancing figure) 4,330 By Balance c/d 400
4,400 4,400
Suppliers (Goods) Account
Rs. Rs.
To Bank A/c (2,000- 40) 1,960 By Business Purchase A/c 30
To Balance c/d 260 By Purchases A/c 2,190
____ (Balancing figure) ____
2,220 2,220
Suppliers (Fixed Assets) Account
Rs. Rs.
To Bank A/c 650 By Fixed Assets A/c 1,350 To Balance c/d (Loan funds) 750 (Balancing figure)
____ By Interest A/c _50
1,400 1,400
Fixed Assets Account
Rs. Rs.
To Business Purchase A/c 150 By Bank A/c 20
To Profit and Loss A/c 2 By Balance c/d 1,482
To Suppliers' A/c 1,350 ____
1,502 1,502
Expenses Account
Rs. Rs.
To Bank A/c 500 By Profit and Loss A/c 520
To Balance c/d 30 (Balancing figure)
(Outstanding
expenses)
By Balance c/d
__ (Prepaid expenses) _10
530 530
Rs.
Profit before depreciation 875
Less: Depreciation under Income Tax Act 200
Total income under Income Tax Act 675
Tax due thereon @ 38.5% (rounded off) 260
As sale proceeds of fixed assets are reduced from the appropriate "block of assets for income tax purpose, and depreciation under Income Tax Act is given in the question, no adjustment for profit on sale of fixed assets Rs. 2 crores needs to be made for tax purposes.
Notes:
(1) Students may provide for dividend distribution tax @ 15%.
(2) The par value of an equity share has been taken as Rs. 10.
3. M/s Intranet Ltd.
Draft Balance Sheet as at 1.4.2008
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5,64,985 5,64,985 |
HRD Ltd. (Rs.)
52.500
73.500
25.000
40.000
31.500
25.000 2,47,500
(Rs.)
66,000
88,000
40.000
36.000 40,500
40.000 3,10,500
50.000
25.000 7,000
30.000
15.000 4,000
82,000
2,28,500
30,000
49.000 1,98,500
20.000
Working Notes:
1. Calculation of value of equity shares issued to transferor companies
System
Ltd.
Assets taken over:
Building
Plant and machinery Investments (trade and non-trade) Stock
Sundry Debtors Cash & Bank
Less: Liabilities:
10% Debentures Sundry Creditors Tax Provision
Less: Preference Share Capital
1,78,500
1,98,500
Number of shares issued to equity shareholders, debenture holders and preference shareholders
2
System Ltd.
HRD Ltd.
Total
Equity shares issued @ Rs.15 per share (including Rs.5 premium) Rs. 1,98,500 15 Rs.1,78,500 11,900 shares 25,133 shares 15 Equity share capital @ Rs.10 Securities premium @ Rs.5 |
Rs. 1,32,330 Rs. 66,165 Rs.1,98,495 |
Rs.1,19,000 Rs. 59,500 Rs. 1,78,500 |
Rs. 2,51,330 Rs. 1,25,665 Rs. 3,76,995 |
50% of Debentures are converted into equity shares @ Rs.15 per share
9% Preference share capital issued
In the Books of Neptune Ltd.
Journal Entries
Particulars Rs.
(i) 6% Preference Share Capital A/c (Rs. 100) Dr. 5,00,000
To 6% Preference Share Capital A/c (Rs. 75)
To Capital Reduction A/c
(Being the Preference Shares of Rs.100/- each reduced to Rs.75/- as per scheme)
(ii) Equity Share Capital A/c (Rs.10) Dr. 8,00,000
To Equity Share Capital A/c (Rs.2) 1,60,000
To Capital Reduction A/c 6,40,000
(Being the equity shares of Rs.10/- each reduced to Rs.2/- as per scheme)
(iii) Capital Reduction A/c Dr. 30,000
To Equity Share Capital A/c 30,000
(Arrears of preference share dividend of one year to be satisfied by issue of 1,500 equity shares of Rs.2/- each i.e. to the extent of 25% of arrear dividend)
(iv) Accrued Debenture Interest A/c Dr. 22,500
To Bank A/c 22,500
(Accrued Debenture Interest paid)
(v) 6% Debenture A/c Dr. 3,00,000
To Freehold Property 3,00,000
(Claim settled in part by transfer of freehold property as per scheme)
50,000/2 = 25,000/15 30,000/2 = 15,000/15 Equity share capital @ Rs.10 Security premium@ Rs.5
Rs. 30,000 Rs. 20,000
1,000 shares Rs.10,000 Rs. 5,000 Rs. 15,000
2,666 shares Rs. 26,660 Rs. 13,330 Rs. 39,990 Rs. 50,000
Rs.
3.75.000
1.25.000
(vi) Capital Reduction A/c Dr. 9,40,000
To Profit and Loss A/c To Deferred Advertising Expenses A/c To Stock A/c To Sundry Debtors A/c (Being the various assets written off as per scheme)
3.65.000
1.50.000 2,00,000
2.25.000
1,50,000
1.70.000
30.000
60,000
2,40,000
15,000
20,000
1,80,000
(vii) Freehold Property A/c Dr. 1,50,000
To Capital Reduction
(Appreciation in the value of property i.e. (Rs.3,50,000-
2,00,000)
(viii) Bank A/c Dr. 2,00,000
To Trade Investment To Capital Reduction (Trade Investment sold and profit made)
(ix) Director's Loan A/c Dr. 3,00,000
To Equity Share Capital A/c
To Capital Reduction A/c
(Directors loan reduced by 80% and remaining balance discharged by issue of equity shares of Rs. 2 each)
(x) Capital Reduction A/c Dr. 15,000
To Bank A/c
(Payment of 3% penalty for cancellation of Capital Commitments)
(xi) Capital Reduction A/c Dr. 20,000
To Bank A/c (Reconstruction expenses paid)
(xii) Capital Reduction Account Dr. 1,80,000
To Capital Reserve Account
(Being balance of capital reduction account transferred)
Balance Sheet of Neptune Ltd. as at 1st April, 2009 ( As Reduced)
Liabilities Rs. Assets
1,80,000 75,000 17,500 8,97,500
Books of Dee Limited Journal Entries
Cash at Bank
1.42.500
8.97.500
Cr.000
30.00
25.00
20.00
3,00
25,00
5.
Dr.000
22,00
8,00
Dr.
Dr.
Dr.
Dr.
5,00
20,00
Dr. 20,00
Dr.
Dr.
2,00
1,00
Dr. 25,00
Securities Premium A/c
To Premium payable on buy back A/c
(Being the premium payable on buy back provided for)
Securities Premium A/c
Revenue Reserve A/c
To Capital Redemption Reserve A/c
(Being the amount equal to nominal value of equity shares bought back out of securities premium and free reserves transferred to capital redemption reserve a/c)
Date Particulars Bank A/c
Profit and Loss A/c To Investment A/c (Being the Sale of all investments)
Rs.2/- each (out of above 45,000 shares have been issued for consideration other than cash)
5,000, 6% Cumulative Preference Shares of Rs.75/-each fully paid
Capital Reserve
6% Debentures
Creditors
Equity Share Capital A/c Premium payable on buy back A/c To Equity shares buy back A/c (Being the amount due on buy back)
Equity shares buy-back A/c To Bank A/c (Being the payment made on buy back)
Balance Sheet of Dee Limited as on 1st April, 2009 (After buy back of shares)
Liabilities Rs.000
Share Capital Authorised Capital:
30,00
22,00
Issued and Subscribed Capital:
2,00,000 equity shares of Rs.10 each fully paid up 20,00
2,000 10% Preference shares of Rs.100 each fully paid up 2,00
Reserve and Surplus:
Capital Reserve 10,00
Capital Redemption Reserve 3,00
Revenue Reserve 29,00
Profit and Loss A/c (35,00 - 8,00) 27,00
10.500
93.00
12.00
10.500
Rs. in lakhs 420 11,166 2,910 933 15,429
6,702
Current Liabilities and Provisions
Fixed Assets
Current assets loans and advances (including cash and bank balance) (15,00+22,00- 25,00)
6.
(i) Intrinsic value on the basis of book values Rs. in lakhs
Goodwill
Other Fixed Assets Current Assets Loans and Advances
Less: Secured loans 4,500
Current liabilities 1,242
Provisions 960
Add: Notional call on 90 lakhs equity shares @ Rs. 2 per share
Equivalent number of equity shares of Rs. 10 each.
Rs. in lakhs
Fully paid shares of Rs. 10 each 180
Partly-paid shares after notional call 90
- x Rs.5
Fully paid shares of Rs. 5 each,
_75
345
Rs.10
Value per equivalent share of Rs. 10 each = Rs.8,907lakhs = Rs. 25.82
345 lakhs
Hence, intrinsic values of each equity share are as follows:
Value of fully paid share of Rs. 10 = Rs. 25.82 per equity share.
Value of share of Rs. 10, Rs. 8 paid-up = Rs. 25.82 - Rs. 2 = Rs. 23.82 per equity share.
Value of fully paid share of Rs. 5 = Rs.5.82 = Rs.12.91 per equity share.
(ii) Valuation on dividend yield basis:
20
Value of fully paid share of Rs. 10 = x Rs.10 = Rs.13.33
20
Value of share of Rs. 10, Rs. 8 paid-up = x Rs.8 = Rs.10.67
15
20
Value of fully paid share of Rs. 5 = x 5 = Rs.6.67
(iii) Valuation on the basis of EPS:
Profit after tax = Rs. 1,371 lakhs
Total share capital = Rs. (1,800 + 720 + 750) lakhs = Rs. 3,270 lakhs
Earning per rupee of share capital = Rs. 1,371 lakhs = Re.0.419
3,270 lakhs
Earning per fully paid share of Rs. 10 = Re. 0.419 x 10 = Rs. 4.19 Earning per share of Rs. 10 each, Rs. 8 paid-up = Re. 0.419 x 8 = Rs. 3.35 Earning per share of Rs. 5, fully paid-up = Re. 0.419 x 5 = Rs. 2.10
4.19
Value of fully paid share of Rs. 10 = Rs. x 10 = Rs.20.95
3.35
Value of share of Rs. 10, Rs. 8 paid-up = Rs. x 10 = Rs.16.75
2.10
Value of fully paid share of Rs. 5 = Rs.-x 10 = Rs.10.50
7. Valuation of Goodwill of A Ltd.
Rs.
3.00.000 1,80,000
Land and Building at Cost Plant and Machinery at Cost Stock in trade Sundry Debtors
Less: Sundry Liabilities:
Bank overdraft Sundry Creditors Provision for taxation Capital employed at the end of the year Add Back: Dividend paid for the year Less: Half of the profits Average Capital employed Normal Rate of Return Average Dividends for the last 4 years 1212 % Market price of shares on 31st March Rs.125.
1,16,700
1,81,000
39.000
75.000
65.000
3,36,700
5.63.300
10,000
5.73.300
Normal Rate of Return: 12.5x10 =10%
125
Normal Profit on average capital employed
@ 10% on Rs.5,73,300
57,330
(iv) Future maintainable profit-weighted average
Year Profit
Weight
1
5.20.000 11,62,000
1,16,200
1,93,667
Rs.
2006 88,000
2007 1,03,000
2008 1,16,000 2009 1,30,000
Average annual profit (after tax)
Average annual profit (before tax)
100
Adjustments
Increase in remuneration -20,000
Saving in cost of materials +40,000 20,000
2,13,667
Less: Taxation @ 50% 1,06,833
Super Profits 1,06,834
8. Valuation of Business
Discounted earnings method
(Rs. in lakhs) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
8
9
10
446.85
475.89
506.83
0.2326
0.1938
0.1615
103.937
92.227
81.853
1484.272
Value of the business = Rs.1484.272 Lakhs
9. Ganpati Ltd.
Gross Value Added Statement for the year ended 31st March, 2009
Rs. in lakhs Rs. in lakhs
Sales 890
Less: Cost of bought in materials and services:
Production and operational expenses (293 + 59 + 109) 461
Administration expenses (33 - 9) 24
Interest on working capital loan 9
Excise duty (Refer working note) 55
549
341
55
396
%
82 20.71% 9 2.27%
70 17.68%
Value added by manufacturing and trading activities Add: Other income
Total value added
Application of Value Added
To Employees
Salaries, wages, gratuities etc.
To Directors
Salaries and commission
To Government
Cess and local taxes (98 - 55)
43
_2Z
2
18
95
Income tax
To Providers of capital Interest on debentures
Interest on fixed loan
Dividends
115 29.04%
To Provide for maintenance and expansion of the company Depreciation
General reserve Deferred tax
Retained profits (65- 10) 55 120 30.30%
396 100%
Statement showing reconciliation of Gross Value Added with Profits before taxation
Rs. in lakhs 225
Profits before taxes Add:
Depreciation Directors' remuneration Salaries, wages & gratuities etc. Cess and local taxes Interest on debentures Interest on fixed loan Total value added
17 9 82 43
.18 J71
396
Calculation of Excise Duty
Say cost of bought in materials and services is x'
Excise Duty is 10% of x = x/10
x = 461 + 24 + 9 + x/10
x = 494 + x/10 = 549 (approx.)3
Excise Duty = 549 - 494 = Rs. 55
10. (a) Economic Value Added (EVA) is primarily a benchmark to measure earnings efficiency. EVA as a residual income measure of financial performance is simply the operating profit after tax less a charge for the capital employed, equity as well as debt, used in the business.
Mathematically EVA= OPBT - Tax - (TCE x COC)
Where:
OPBT = Opening Profit Before Tax TCE = Total Capital Employed
Because EVA includes both profit and loss as well as balance sheet efficiency as well as the opportunity cost of investor capital - it is better linked to changes in shareholders wealth and is superior to traditional financial measures such as PAT or percentage of return measures such as ROCE or ROE.
EVA, additionally, is a tool for management to focus on the impact of their decisions in increasing shareholders wealth. These include both strategic decisions such as what investments to make, which business to exit, what financing structure is optimal; as well as operational decisions involving trade-offs between profit and asset efficiency such as whether to make inhouse or outsource, repair or replace an equipment, whether to make short or long production runs etc.
Most importantly the real key to increasing shareholders wealth is to integrate EVA framework in four key areas, viz., to measure business performance, to guide managerial decision making, to align managerial incentives with the shareholders' interests and to improve the financial and business literacy throughout the organisation.
(b) Financial Leverage = =--=1.40
EBIT-Interest EBIT-10%of 400
EBIT = {(10% of 400) X 1.40] /0.40 = 140 EBIT (l- t) = 140 (1 - 0.30) = 98 Equity capital = 170 + 130 = 300 Debt Capital = 400
Post-tax cost of debt = 10% (1 - 0.30) = 7%
Overall cost of capital [Post-tax] = 17.5% of 300 + 7% of 400 = 80.5 Economic Value Added (EVA)
= EBIT (l - t) - Overall cost of capital (Post-tax) = 98 - 80.5 = 17.5 (Rs. Lakh)
11. Value of employees as per Lev and Schwartz method:
50,000 50,000 50,000
(1 + 0.15)(65-62) (1 + 0.15)(65-63) (1 + 0.15)(65-64)
= 32,875.81 + 37,807.18 + 43,478.26 = 1, 14,161.25
Total value of employees is Rs.1, 14,161.25 x 20 = Rs.22,83,225.
12. (a) The content of Corporate Social Report is essentially based on the social objectives. Brummet identified five areas wherein social objectives can be traced out, namely, Net Income Contribution, Human Resource Contribution, Public Contribution, Environmental Contribution and Product or Service Contribution.
In view of the social objectives, the importance of earning objective is not understated; rather attainment of social objectives is dependent on earning objective. A sick business entity becomes liability to the society and sustains social costs instead of generating social benefits.
Human Resource Contribution is the indicator of the impact of organizational activities (viz. pay and allowances, perks and incentives, recruitment, training and development, placement, promotion and transfer, welfare measure, etc.) on people of the organization. Public Contribution is the indicator of general philanthropy in the cultural and social welfare programmes and contribution to national exchequer by way of tax and duties. . .
Industrial activity is supposed to consume irreplaceable resources and produces solid wastes. By this process it pollutes air and water, causes noise and spoils the environment. These are termed as negative social effects. The corporate social objective is the abatement of such negative effect. It is covered by environmental contribution.
Although Brummet covered wide range of objectives, still these are not essentially exhaustive. Social objectives are determined by socio-economic conditions of a country. It is difficult to set universal list of social objectives to be pursued by the corporate sector. For example, in India, regional imbalance, unemployment, reservation for weaker sections of the population, scarcity of foreign exchange, energy deficit, population pressure and illiteracy are some of the widely accepted socio-economic problems. And obviously the general expectation is that the corporate sector will positively contribute to such socio-economic problems. Since the socio-economic problems of a country change over time or the priority attached to a problem shifts.
(b) Social Balance Sheet of Steel India Ltd.
as at 31.03.2009
(Rs. in lakhs)
Liabilities:
Organization Equity
26.00
828.00
854.00
Social Equity (Contribution by staff)
Total
Assets:
Social Capital Investment:
(a) Buildings
(i) Residential
17.00
1.00
1.40
(ii) Hospital
(iii) School
(iv) Welfare
(b) Equipments
(i) Residential
2.80
1.00
(ii) Hospital
(iii) School
(c) Water, Electricity and Gas supply systems Human assets (as valued by the specialist) Total
13. (i) The term net owned fund (NOF) is given in the explanation to Section 45-IA of the Reserve Bank of India Act, 1934. As per the definition:
Owned Fund = Aggregate of the paid-up equity capital + Free reserves as disclosed in the latest balance sheet of the company - Accumulated balance of loss -Deferred revenue expenditure - Other intangible assets.
Net Owned Fund = Owned Fund - Investments in shares of subsidiaries/ companies in same group/Other NBFC. - Book value of debentures, bonds, outstanding loans and advances made to and deposits with subsidiaries and companies in the same group (to the extent such sum exceeds 10% of owned fund)
(ii) Market value of portfolio has a direct bearing on the NAV and consequently on portfolio performance. The market value of portfolio is the aggregate market value of different investments. Marker value of a traded security is the last closing price quoted in a stock exchange immediately before the valuation day. In case, a security is traded in more than one stock exchange, the price quoted in an exchange where the security is mostly traded is taken as market value of the security.
Non-traded securities, i.e. securities not traded in a period of 30 days prior to the valuation day, should be valued in the spirit of good faith subject to SEBI regulations. For example, a non-traded debt instrument can be valued by discounting cash flows by YTM of a comparable debt instrument as increased for lack of liquidity. The discounting rate for non-traded government securities should the prevailing market rate.
(iii) It shall be the duty of broker on inspection by the Board every director, proprietor, partner, officer and employee of the stock-broker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to the transactions in securities market within such time as the said officer may require.
The stock-broker shall allow the inspecting authority to have reasonable access to the premises occupied by such stock- broker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the stock- broker or any other person and
also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant.
The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any member, director, partner, proprietor and employee of the stock- broker. It shall be the duty of every director proprietor, partner, officer and employee of the stock broker to give to the inspecting authority all assistance in connection with the inspection, which the stock broker may be reasonably expected to give.
(iv) Every stock broker is required to maintain the following books of account and records as per Rule 15 of the Securities Contracts (Regulation) Rules, 1957 and Regulation 17 of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992:
(a) Register of transactions (Sauda book)/Daily transaction list;
(b) Clients ledger;
(c) General ledger;
(d) Journals;
(e) Cash book;
(f) Bank Pass Book;
(g) Documents register/Inward-outward register showing full particulars of shares and securities received and delivered;
(h) Members' contract book showing details of all contracts entered into by him with other members of the stock exchange or counterfoils or duplicates of memos of confirmation issued to such other members;
(i) Counterfoils or duplicates of contract notes issued to clients;
(j) Written consent of clients in respect of contracts entered into as principals;
(k) Margin deposit book;
(l) Register of accounts of sub-brokers;
(m) An agreement with a sub-broker specifying the scope of authority and responsibilities of the stock broker and such sub-brokers.
In addition to the above statutory requirements, stock brokers are also required to maintain scrip wise client wise list in respect of scripts of specified group, client upla statement, duplicate copies of self-certificates submitted on monthly basis, copies of margin statements downloaded by the stock exchange, copies of valan balance sheet (Form 31), details of spot delivery transactions, client data base and broker client agreement, copy of registration certificate of each sub-broker issued by SEBI, copies of the power of attorney/board resolution authorizing directors and employees and copies of pool account statements.
(v) "Asset Management Company means a company formed and registered under the Companies Act, 1956 and approved as such by the Securities and Exchange Board of India to manage the funds of a mutual fund.
Rs. in lakhs Rs. in lakhs Rs. in lakhs Opening Bank (100- 90-7) 3.00
Add: Proceeds from Sale of Securities 40.00
Add: Dividend Received 1.20 44.20
Deduct:
Cost of Securities purchased 28.20
Fund Management Expenses paid
(4.50- 0.25) 4.25
Capital Gains distributed
75% of (40.00- 38.00) 1.50
Dividend Distributed (75% of 1.20) 090 (34.85)
Closing Bank 9.35
Closing Market Value of Port Folio 101.90
111.25
Less: Arrears of Expenses 0.25
Closing Net Assets 111.00
Number of Units (Lakhs) 10.00
Closing NAV (Rs.) 11.10
15. (i) Yes, Costs and Market price of current investments should be aggregated under
each group.
Rs.
(ii) Equity Shares 80.80
Mutual Funds 40.00
Government Securities 100.00
Bank A/c Dr.
To Revenue Fund (Restricted) A/c
Cr
Rs.
80,00,000
(To record grants received from the Government Department and Private organisation)
Expenses A/c
Dr. 60,25,000
To Bank A/c
60,25,000
(To account for Rs.32,25,000 spent from out of Government grant and Rs.28,00,000 from out of Private grant)
Equipment A/c
(iii)
Dr. 5,00,000
To Restricted Revenue Fund A/c
5,00,000
(To record the receipt of donation of assets from a well wisher)
Revenue Fund (Restricted) A/c
(iv)
Dr. 60,25,000
To Income (Govt. grant) A/c
32,25,000
28,00,000
To Income (Private grant) A/c
(To recognise revenue)
Revenue Fund (Restricted ) A/c Dr.
(v)
3,00,000
To Bank A/c (To account for overhead expenses incurred)
3,00,000
17. Treatment under Indian Accounting Standards (AS)and International Financial Reporting Standards (IFRS) | ||||||||
|
| ||||||||
18. (i) As per AS 32, carrying amounts of each of the following categories, as defined in AS 30, should be disclosed either on the face of the balance sheet or in the notes: |
(a) financial assets at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with AS 30;
(b) held-to-maturity investments;
(c) loans and receivables;
(d) available-for-sale financial assets;
(e) financial liabilities at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with AS 30; and
(f) financial liabilities measured at amortised cost.
(ii) According to para 8.6 of AS 30, A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
(iii) In accordance with paragraphs 43 to 45 of AS 30, An entity should remove a financial liability (or a part of a financial liability) from its balance sheet when, and only when, it is extinguished i.e., when the obligation specified in the contract is discharged or cancelled or expires.
An exchange between an existing borrower and lender of debt instruments with substantially different terms should be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) should be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.
The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, should be recognized in the statement of profit and loss.
(iv) The objective of AS 28 Impairment of Assets' is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Statement requires the enterprise to recognize an impairment loss. This standard should be applied in accounting for the impairment of all assets, other than (i) inventories (AS
2, Valuation of Inventories); (ii) assets arising from construction contracts (AS 7, Accounting for Construction Contracts); (iii) financial assets, including investments that are included in the scope of AS 13, Accounting for Investments; and (iv) deferred tax assets (AS 22, Accounting for Taxes on Income). AS 28 does not apply to inventories, assets arising from construction contracts, deferred tax assets or investments because other accounting standards applicable to these assets already contain specific requirements for recognizing and measuring the impairment related to these assets.
19. (i) Graded vesting under an employee stock option plan
In case the options/shares granted under an employee stock option plan do not vest on one date but have graded vesting schedule, total plan should be segregated into different groups, depending upon the vesting dates. Each of such groups would be having different vesting period and expected life and, therefore, each vesting date should be considered as a separate option grant and evaluated and accounted for accordingly. For example, suppose an employee is granted 100 options which will vest @ 25 options per year at the end of the third, fourth, fifth and sixth years. In such a case, each tranche of 25 options would be evaluated and accounted for separately.
(ii) Presentation of MAT credit in the financial statements Balance Sheet
Where a company recognizes MAT credit as an asset on the basis of the considerations specified in the Guidance Note on Accounting for Credit Available in respect of Minimum Alternate Tax under the Income Tax Act, 1961 , the same should be presented under the head Loans and Advances' since, there being a convincing evidence of realization of the asset, it is of the nature of a pre-paid tax which would be adjusted against the normal income tax during the specified period. The asset may be reflected as MAT credit entitlement'.
In the year of set-off of credit, the amount of credit availed should be shown as a deduction from the Provision for Taxation' on the liabilities side of the balance sheet. The unavailed amount of MAT credit entitlement, if any, should continue to
be presented under the head Loans and Advances' if it continues to meet the considerations stated in paragraph 11 of the Guidance Note.
Profit and Loss Account
According to paragraph 6 of Accounting Standards Interpretation (ASI) Accounting for Taxes on Income in the context of Section 115JB of the Income-tax Act, 1961', issued by the Institute of Chartered Accountants of India, MAT is the current tax. Accordingly, the tax expense arising on account of payment of MAT should be charged at the gross amount, in the normal way, to the profit and loss account in the year of payment of MAT. In the year in which the MAT credit becomes eligible to be recognized as an asset in accordance with the recommendations contained in this Guidance Note, the said asset should be created by way of a credit to the profit and loss account and presented as a separate line item therein.
(iii) Investments by a holding company in the shares of its subsidiary company are normally considered as long term investments. Indian holding companies show investment in subsidiary just like any other investment and generally classify it as trade investment. As per AS 13 Accounting for Investments', investments are classified as long term and current investments. A current investment is an investment that by its nature is readily realizable and is intended to be held for more than one year from the date of acquisition. A long term investment is one that is not a current one.
Costs of investment include besides acquisition charges, expenses such as brokerage, fees and duties. If an investment is acquired wholly or partly by an issue of shares or other securities, the acquisition cost is determined by taking the fair value of the shares/securities issued. If an investment were to be acquired in exchange - part or whole - for another asset, the acquisition cost of the investment is determined with reference to the value of the other asset exchanged. Dividends received out of incomes earned by a subsidiary before the acquisition of the shares by the holding company and not treated as income but treated as recovery of cost of the assets (investment made in the subsidiary). The carrying cost for current investment is the lower of cost or fair/market value whereas investment in the shares of the subsidiary (treated as long term) are carried normally at cost.
(iv) Para 87, 88 and 89 of AS 26 states that an intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal.
Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss.
An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the asset for impairment under
Accounting Standard on Impairment of Assets, and recognises any impairment loss accordingly.
(v) The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:
(a) the period of the change, if the change affects the period only; or
(b) the period of the change and future periods, if the change affects both.
The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate.
The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.
20. (i) According to para 14 of AS 7 (Revised) Construction Contracts', incentive payments are additional amounts payable to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract. Incentive payments are included in contract revenue when: (i) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and
(ii)the amount of the incentive payment can be measured reliably. In the given problem, the contract has not even begun and hence the contractor (Mr. X) should not recognize any revenue of this contract.
(ii) Calculation of tax expense
1st quarter ending on 31-12-2008 200x20% Rs. 40 lakhs
2nd quarter ending on 31-3-2009 200x20% Rs. 40 lakhs
3rd quarter ending on 30-6-2009 200x30% Rs. 60 lakhs
4th quarter ending on 30-9-2009 200x30% Rs. 60 lakhs
(iii) P Ltd. has direct economic interest in R Ltd to the extent of 14%, and through Q Ltd. in which it is the majority shareholders; it has further control of 12% in R Ltd. (60% of Q Ltd's 20%). These two taken together (14% + 12%) make the total control of 26%.
AS 18 defines related party as one that has at any time during the reporting period, the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.
Here, Control is defined as ownership directly or indirectly of more than one-half of the voting power of an enterprise; and Significant Influence is defined as participation in the financial and/or operating policy decisions of an enterprise but not control of those policies.
In the present case, control of P Ltd. in R Ltd. directly and through Q Ltd., does not go beyond 26%. However, significant influence may be exercised as an investing party (P Ltd.) holds, directly or indirectly through intermediaries 20% or more of the voting power of the R Ltd.
As R Ltd. is a listed company and regularly supplies goods to P Ltd. Hence, related party disclosure, as per AS 18, is required.
Calculation of the cost for Purchase of Land
Particulars Rs.
Cost of Land 500,000
Legal Fees 25,000
Title Insurance 10,000
Cost of Demolition 50,000
Less: Salvage value of Material 10,000 40,000
Cost of the Asset 575,000
(v) Valuation of Closing Stock
Particulars Rs. Rs.
Closing Stock at cost 2,84,700
Less /Cost of 400 coats (400 x 80) 32,000
Less: Net Realisable Value (400 x 75) - 5% 28,500 3,500
2,81,200
Provision for repairing cost to be incurred in future (800 x 5) 4,000
Value of Closing Stock 2,77,200
21. (i) Calculation of the carrying amount of Investment as per equity method
Particulars Rs. Rs.
Equity Shares 1,000,000
Security Premium 100,000
Reserves & Surplus 500,000
Net Assets 1,600,000
45% of Net Asset 720,000
Add: 45% of Profits for the year 135,000
855,000
Less: Dividend Received 45,000 810,000
Less: Cost of Investment Goodwill Assets |
Consolidated Balance Sheet (Extract) Rs. Rs. |
Investment in B Ltd. Add: Goodwill
Cost of the plant Less: CENVAT
Less: Subsidy Depreciable Value
810,000
690,000
1,500,000
Rs.(in lakhs) 500
490
_98
392
(iii)
Rs.
8,00,000
2,80,000
2,00,000
8,80,000
11,40,000
2,60,000
Fair Value of Plan Assets on 31.3.08 Add: Employer Contribution Less: Benefits Paid
(A)
Fair Market Value of Plan Asset at 31.3.09 Actual Return on Plan Asset
(B)
(B-A)
22.
(A) Cash flow statement for the year ended 31st March, 2009 Net Profit before taxation Add: Adjustment for Depreciation Loss on sale of fixed assets Operating profit before changes in working capital Less: Increase in Sundry Debtors Less: Increase in Inventories Add: Increase in Sundry Creditors Cash generated from operations Less: Income tax paid Net Cash Generated from operating activities
Rs.(000)
1,220
(B) Cash flow from investing activities Purchase of fixed assets
Sale of fixed assets 40
Purchase of investments (200)
Cash used for investing activities (1,360)
(C) Cash flow from financing activities
Proceeds from issue of shares including premium
(400 + 40) 440
Proceeds from issue of 14% debentures 100
Proceeds from long term borrowings 60
Payment of Dividend (300)
Cash generated from financing activities 300
Net increase in Cash and Cash equivalent (A+B+C) 160
Cash and Cash equivalent at the opening 100
Cash and Cash equivalent at the closing 260
Working Notes:
1. Income tax paid Rs.(000) Income tax expenses for the year 160 Add: Tax liability at the beginning of the year 20
180
Less: Tax liability at the end of the year _40
140
2. Fixed assets purchased
Closing gross block 4,000
Add: Cost of assets discarded during the year 400
4,400
Less: Opening gross block (3,200)
Fixed assets purchased during the year 1,200
3. Depreciation charged during the year
Closing accumulated depreciation 1,440
Add: Depreciation charged on assets discarded during the _80
year
1,520
Less: Closing accumulated depreciation (640)
Depreciation charged during year 880
Books of S Ltd. Journal Entries
Date Particulars
Debit
Rs.
12,000
Credit
Rs.
12,000
12,000
12,000
12,000
6,000
6,000
10,000
80,000
31.3.06 Employees Compensation Expense Account Dr.
To Employees Stock Option Outstanding Account
(Being compensation expense recognized in respect of
1.000 options granted to employees at discount of Rs.30 each, amortized on straight line basis over 21/2 years)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense Account
(Being employees compensation expense of the year transferred to P&L A/c)
31.3.07 Employees Compensation Expense Account Dr. 12,000
To Employees Stock Option Outstanding Account
(Being compensation expense recognized in respect of
1.000 options granted to employees at discount of Rs.30 each, amortized on straight line basis over 2/ years)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense Account
(Being employees compensation expense of the year transferred to P&L A/c)
31.3.08 Employees Compensation Expense Dr. 6,000
To Employees Stock Option Outstanding Account
(Being balance of compensation expense amortized Rs.30,000 less Rs. 24,000)
Profit and Loss Account Dr. 6,000
To Employees Compensation Expense Account
(Being employees compensation expense of the year transferred to P&L A/c)
31.7.08 Bank Account (Rs. 60 x 1,000) Dr. 60,000
Employees Stock Option Outstanding Account Dr. 30,000 (Rs.30x1,000)
To Equity Share Capital Account
To Securities Premium Account
(Being exercise of 1,000 options at an exercise price of Rs.60 each)
1. Total employees compensation expense = 1,000 x (Rs.90 - Rs.60) = Rs.30,000
2. Employees compensation expense has been written off during 21/2 years on straight line basis as under:
I year = Rs.12,000 (for full year), II year = Rs.12,000 (for full year),
III year = Rs.6,000 (for half year)
(ii) As the substance of transaction is financing rather than sale and the resulting cash flow of Rs.9.60 lakhs received by Moon Ltd., cannot be considered as revenue as per AS 9 Revenue Recognition. Moon Ltd. will account the transaction as financing rather than sale.
Disclosure in the balance sheet will be as follows:
Assets Rs. in lakhs
Current Assets, Loan and Advances Goods lying with Sun Ltd.
(Under sale and repurchase agreement) 8.00
Liabilities
Secured Loan
Advance from Sun Ltd. 9.60
Add: Accrued Finance Charges 0.40
10.00
(iii) The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Accounting policy of company may require that provision for non-moving stocks should be made. The method of estimating the amount of provision may be changed, in case, a more prudent estimate can be made.
In the instant case, as per AS 1, considering the total value of stocks, the change in the amount of required provision of non-moving stocks from Rs.4.0 lakhs to Rs.3.20 lakhs is not material in nature Such change can be disclosed by way of notes to the accounts in the financial statements of XY Ltd., for the year ending on 31.03.09, in the following manner:
"The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on the year end, the net assets would have been higher by Rs.0.80 lakhs.
(iv) 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 (in number)
Total number of equity shares resulting from conversion of debentures = 40,00,000 + 4,00,000= 44,00,000 Shares
Rs.2,03,85,000
Diluted Earnings per share =
44,00,000 = Rs.4.63 (Approximately)
24. (i) As per AS 9 "Revenue Recognition, revenue is recognized at the time when the invoice is raised to the customers; however the treatment of deduction as trade discount is not as per AS 9. Considering the treatment prescribed by AS 4 "Contingencies and Events occurring after the Balance Sheet Date, the correct treatment of the difference between the invoice amount and finally settled amount should be under:
The adjustment of the difference between the invoiced amount and the amount finally settled against "Ship Repair Income account is in order. Events occurring up to the date of approval of the accounts by the Board of Directors should be taken into consideration in determining the amount of adjustment to be made in this regard. The description of the difference as "trade discount is not appropriate.
(ii) The loss due to break out of fire is an example of event occurring after the balance sheet date. The event does not relate to conditions existing at the balance sheet date. It has not affected the financial position as on the date of balance sheet and therefore requires no specific adjustments in the financial statements. However, paragraph 8.6 of AS 4 states that disclosure is generally made of events in subsequent periods that represent unusual changes affecting the existence or substratum of the enterprise at the balance sheet date. In the given case, the loss of assets in a factory is considered to be an event affecting the substratum of the enterprise. Hence, as recommended in paragraph 15 of AS 4, disclosure of the event should be made in the report of the approving authority.
(iii) Para 82 of AS 30 states that for hedge accounting purposes only instruments that involve a party external to the reporting entity can be designated as hedging instrument. Therefore, debenture issued by the parent company cannot be designated as hedging instrument for the purpose of consolidated financial statements of the group. However, it can be designated as hedging instrument for separate financial statements of X Ltd.
(iv) Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline as per AS13. If the investments were acquired for long term and decline is temporary in nature, reduction in value will not be recognized and investments would be carried at cost. If the decline is of permanent nature, it will be charged to profit and loss account. If the investments are current investments, the reduction should be recognized and charged to Profit and Loss Account as the current investments are carried at cost or fair value which ever is less.
Rs.
1st April, 2008 Rs.5,00,000 x
8,00,000
8
1st August, 2008 Rs.12,00,000 x
3 50,000
1st January, 2009 Rs.2,00,000 x
13.50.000
Interest on average accumulated expenses
On specific borrowing (4,00,000 x10%) 40,000
On Non-specific borrowings (13,50,000 - 4,00,000) x 12% 1,14,000
Amount of interest to be capitalized 1,54,000
Total expenses to be capitalized for borrowings:
Cost of Plant (5,00,000 + 12,00,000 + 2,00,000) 19,00,000
Add: Amount of interest to be capitalized 1,54,000
20.54.000
(ii) It is necessary to evaluate the past practice of X Ltd. If X Ltd. Has the past practice of settling net, then it becomes a financial instrument. If X Ltd. Intends to sell the identified PPE and settle by delivery and there is no past practice of settling net, then the contract should not be accounted for as derivative under AS-30 and AS-31.
(iii) 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.
(iv) As per 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 a manner that their impact on current profit or loss can be perceived.
In the given example, it is clearly a case of error in preparation of financial statement for financial year 2006-07. Hence, claim received in financial year 2008-09 is a prior period items and should be separately disclosed in the statement of Profit and Loss.
Note: AS 1 to AS 32 (including limited revisions) and ASI 1 to ASI 30 are applicable for May, 2010 examination. However, it may be noted that ASI 2 and ASI 11 have been withdrawn.
APPENDIX-I
LIST OF INSTITUTES PUBLICATIONS RELEVANT FOR MAY, 2010 EXAMINATIONS
The following List of Institute's Publications is relevant for the forthcoming examination i.e. May, 2010. Students may kindly take it into consideration while preparing for the examinations.
Final Examination Paper 1: Advanced Accounting I. Statements and Standards
1. Framework for the Preparation and Presentation of Financial Statements
2. Accounting Standards (including limited revisions) - AS 1 to AS 32.
II. Guidance Notes on Accounting Aspects
1. Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets.
2. Guidance Note on Accrual Basis of Accounting.
3. Guidance Note on Accounting Treatment for Excise Duty.
4. Guidance Note on Accounting for Depreciation in Companies.
5. Guidance Note on Availability of Revaluation Reserve for Issue of Bonus shares.
6. Guidance Note on Accounting Treatment for MODVAT/CENVAT.
7. Guidance Note on Accounting for Corporate Dividend Tax.
8. Guidance Note on Accounting for Employee Share-based Payments.
9. Guidance Note on Accounting for Fringe Benefits Tax.
10. Guidance Note on Accounting for Credit Available in respect of Minimum Alternate Tax under the Income Tax Act, 1961.
11. Guidance Note on Measurement of Income Tax for Interim Financial Reporting in the context of AS 25
Note: Official Announcements and Notifications (in relation to syllabus) issued till 31st October, 2009 will be 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 sub-section (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 7th December, 2006 and ending on or before 31st 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 31st 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 7th 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.
GUIDANCE NOTE ON MEASUREMENT OF INCOME TAX EXPENSE FOR INTERIM FINANCIAL REPORTING IN THE CONTEXT OF AS 25
(The following is the text of the Guidance Note on Measurement of Income-tax Expense for
Interim Financial Reporting in the context of AS 25, issued by the Council of the Institute of
Chartered Accountants of India.)
1. Accounting Standard (AS) 25, Interim Financial Reporting', issued by the Council of the Institute of Chartered Accountants of India (ICAI), prescribes the minimum content of an interim financial report and the principles for recognition and measurement in complete or condensed financial statements for an interim period. AS 25 became mandatory in respect of accounting periods commencing on or after 1st April, 2002. In accordance with the Accounting Standards Interpretation (ASI) 27, Applicability of AS 25 to Interim Financial Results', the recognition and measurement principles laid down in AS 25 should be applied for recognition and measurement of items contained in the interim financial results presented under Clause 41 of the Listing Agreement entered into between stock exchanges and the listed enterprises. This Guidance Note deals with the measurement of income tax expense for the purpose of inclusion in the interim financial reports.
2. The general principles for recognition and measurement have been laid down in AS 25 as below:
27. An enterprise should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. However, the frequency of an enterprises reporting (annual, half-yearly, or quarterly) should not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes should be made on a year-to-date basis.
28. Requiring that an enterprise apply the same accounting policies in its interim financial statements as in its annual financial statements may seem to suggest that interim period measurements are made as if each interim period stands alone as an independent reporting period. However, by providing that the frequency of an enterprise's reporting should not affect the measurement of its annual results, paragraph 27 acknowledges that an interim period is a part of a financial year. Year-to-date measurements may involve changes in estimates of amounts reported in prior interim periods of the current financial year. But the principles for recognising assets, liabilities, income, and expenses for interim periods are the same as in annual financial statements.
3. Paragraph 29(c) of AS 25 illustrates the application of the general principles for recognition and measurement of tax expense in interim periods, as below:
(c) income tax expense is recognized in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year. Amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the annual income tax rate changes.
4. Appendix 3 to AS 25 illustrates the general recognition and measurement principles for the preparation of interim financial reports. Paragraphs 8 to 16 of the Appendix provide guidance on the computation of income-tax expense for the interim period, which are reproduced in Appendix A to this Guidance Note for ready reference. Paragraph 8 of the Appendix states as below:
"8. Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.
5. The various steps involved in the measurement of income tax expense for the purpose of interim financial reports are as below:
(i) An enterprise will first have to estimate its annual accounting income. For this purpose, an enterprise would have to take into account all probable events and transactions that are expected to occur during the financial year. Such an estimate would involve, e.g., estimating on prudent basis, the depreciation on expected expenditure on acquisition of fixed assets, profits from sale of fixed assets/investments, etc. Such future events and transactions should be taken into account only if there is a reasonable certainty that the same would take place during the financial year.
(ii) The enterprise should next estimate its tax liability for the financial year. For this purpose, the enterprise will have to estimate taxable income for the year. By applying the enacted or the substantively enacted tax rate on the taxable income, an estimate of the current tax for the year is arrived at. The estimates of tax liability would have to be based on the estimated deductions, allowances, etc., that would be available to the enterprise, provided there is a reasonable certainty for the same. The enterprise would also have to estimate the deferred tax assets/liabilities by applying the principles of Accounting Standard (AS) 22, Accounting for Taxes on Income', issued by the Institute of Chartered Accountants of India. Special considerations may have to be applied in certain cases as below:
(a) Where brought forward losses exist from the previous financial year (when deferred tax asset was not recognised on considerations of prudence as per AS 22): In such a situation, for estimating the current tax liability, the brought forward losses would have to be deducted from the estimated annual accounting income as explained in paragraph 16 of Appendix 3 to AS 25 (reproduced in Appendix A to this Guidance Note). Since such carried forward losses will get set-off during the year, these would not have any tax consequence in future periods.
(b) Where brought forward losses exist (when deferred tax asset was recognised on the considerations of prudence as per AS 22): In such a situation, current tax would be computed in the same manner as explained in (a) above. However, in the determination of deferred tax, the tax expense arising from the reversal of the deferred tax asset recognised previously, to the extent of reversal of deferred tax asset in the current year, would also be considered.
(iii) The enterprise would now have to calculate the weighted average annual effective tax rate. This tax rate would be determined by dividing the estimated tax expense as arrived at step (ii) above by the estimated annual accounting income as arrived at step (i) above. Where different tax rates are applicable to different portions of the estimated annual accounting income, e.g., normal tax rate and a different tax rate for capital gains, the weighted average annual effective tax rate would have to be calculated separately for such portions of estimated annual accounting income.
(iv) The weighted average annual effective tax rate arrived at step (iii) would be applied to the accounting income for the interim period for determining the income tax expense to be recognised in the interim financial reports.
6. Accounting for interim period income-tax expense as suggested above is based on the approach prescribed in AS 25 that the interim period is part of the whole accounting year (often referred to as the integral approach') and, therefore, the said expense should be worked out on the basis of the estimated weighted average annual effective income-tax rate. According to this approach, the said rate is determined on the basis of the taxable income for the whole year, and applied to the accounting income for the interim period in order to determine the amount of tax expense for that interim period. This is in contrast to accounting for certain other expenses such as depreciation which is based on the approach prescribed in AS 25 that the interim period should be considered on stand-alone basis (often referred to as the discrete approach') because expenses such as depreciation are worked out on the basis of the period for which a fixed asset was available for use. The aforesaid treatments are, however, consistent with the requirement contained in paragraph 27 of AS 25 that an enterprise should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements.
7. Appendix B contains examples of computing weighted average annual effective tax rate.
EXTRACTS FROM APPENDIX 3 TO ACCOUNTING STANDARD (AS) 25,
INTERIM FINANCIAL REPORTING Measuring Income Tax Expense for Interim Period
8. Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.
9. This is consistent with the basic concept set out in paragraph 27 that the same accounting recognition and measurement principles should be applied in an interim financial report as are applied in annual financial statements. Income taxes are assessed on an annual basis. Therefore, interim period income tax expense is calculated by applying, to an interim period's pre-tax income, the tax rate that would be applicable to expected total annual earnings, that is, the estimated average effective annual income tax rate. That estimated average annual income tax rate would reflect the tax rate structure expected to be applicable to the full year's earnings including enacted or substantively enacted changes in the income tax rates scheduled to take effect later in the financial year. The estimated average annual income tax rate would be re-estimated on a year-to-date basis, consistent with paragraph 27 of this Statement. Paragraph 16(d) requires disclosure of a significant change in estimate.
10. To the extent practicable, a separate estimated average annual effective income tax rate is determined for each governing taxation law and applied individually to the interim period pre-tax income under such laws. Similarly, if different income tax rates apply to different categories of income (such as capital gains or income earned in particular industries), to the extent practicable a separate rate is applied to each individual category of interim period pre-tax income. While that degree of precision is desirable, it may not be achievable in all cases, and a weighted average of rates across such governing taxation laws or across categories of income is used if it is a reasonable approximation of the effect of using more specific rates.
11. As illustration, an enterprise reports quarterly, earns Rs. 150 lakhs pre-tax profit in the first quarter but expects to incur losses of Rs 50 lakhs in each of the three remaining quarters (thus having zero income for the year), and is governed by taxation laws according to which its estimated average annual income tax rate is expected to be 35 per cent. The following table shows the amount of income tax expense that is reported in each quarter:
(Amount in Rs. lakhs)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Annual
Tax Expense 52.5 (17.5) (17.5) (17.5) 0
Difference in Financial Reporting Year and Tax Year
12. If the financial reporting year and the income tax year differ, income tax expense for the interim periods of that financial reporting year is measured using separate weighted average estimated effective tax rates for each of the income tax years applied to the portion of pre-tax income earned in each of those income tax years.
13. To illustrate, an enterprise's financial reporting year ends 30 September and it reports quarterly. Its year as per taxation laws ends 31 March. For the financial year that begins 1 October, Year 1 ends 30 September of Year 2, the enterprise earns Rs 100 lakhs pre-tax each quarter. The estimated weighted average annual income tax rate is 30 per cent in Year 1 and 40 per cent in Year 2.
(Amount in Rs. lakhs)
| ||||||||||||||||
Tax Expense 30 30 40 40 140 |
Tax Deductions/Exemptions
14. Tax statutes may provide deductions/exemptions in computation of income for determining tax payable. Anticipated tax benefits of this type for the full year are generally reflected in computing the estimated annual effective income tax rate, because these deductions/exemptions are calculated on an annual basis under the usual provisions of tax statutes. On the other hand, tax benefits that relate to a one-time event are recognised in computing income tax expense in that interim period, in the same way that special tax rates applicable to particular categories of income are not blended into a single effective annual tax rate.
Tax Loss Carry forwards
15. A deferred tax asset should be recognised in respect of carry forward tax losses to the extent that it is virtually certain, supported by convincing evidence, that future taxable income will be available against which the deferred tax assets can be realised. The criteria are to be applied at the end of each interim period and, if they are met, the effect of the tax loss carry forward is reflected in the computation of the estimated average annual effective income tax rate.
16. To illustrate, an enterprise that reports quarterly has an operating loss carryforward of Rs 100 lakhs for income tax purposes at the start of the current financial year for which a deferred tax asset has not been recognised. The enterprise earns Rs 100 lakhs in the first quarter of the current year and expects to earn Rs 100 lakhs in each of the three remaining quarters. Excluding the loss carryforward, the estimated average annual income tax rate is expected to be 40 per cent. The estimated payment of the annual tax on Rs. 400 lakhs of earnings for the current year would be Rs. 120 lakhs {(Rs. 400 lakhs - Rs. 100 lakhs) x 40%}. Considering the loss carryforward, the estimated average annual effective income tax rate would be 30% {(Rs. 120 lakhs/Rs. 400 lakhs) x 100}. This average annual effective income tax rate would be applied to earnings of each quarter. Accordingly, tax expense would be as follows:
(Amount in Rs. lakhs)
1st |
2nd |
3rd |
4th | ||
Quarter |
Quarter |
Quarter |
Quarter |
Annual | |
Tax Expense |
30.00 |
30.00 |
30.00 |
30.00 |
120.00 |
Appendix B
Example 1: When deferred tax asset was not recognised for carried forward losses from earlier accounting periods.
Quarter I |
Quarter II |
Quarter III |
Quarter IV |
Total | |
Rs. |
Rs. |
Rs. |
Rs. |
Rs. | |
Estimated Pre-tax Income (after considering estimated depreciation on the probable acquisition of fixed assets during the year) |
(25) |
175 |
(25) |
50 |
175 |
Carried forward losses from earlier accounting periods, the deferred tax asset in respect of which was not recognised as it did not meet the requirements of prudence laid down in AS 22. During this year, in view of the expected taxable income, this loss is expected to be set off thereagainst. Therefore, it will not have any tax effect on future periods. |
(25) | ||||
Additional estimated depreciation as per tax laws as compared to the accounting depreciation after considering depreciation on probable capital expenditure on acquisition of fixed assets during the year. |
(50) | ||||
Estimated taxable income on which tax payable. |
100 | ||||
Applicable tax rate (say) |
30% | ||||
Estimated current tax expense for the year. |
30 | ||||
Estimated deferred tax expense for the year (50x30/100) |
15 |
| ||||||||||||||||||||||||||||||||||||
(a) The above calculation needs to be done for every interim period for which recognition and |
measurement of tax expense is required.
(b) It is presumed that there are no other differences between accounting income and taxable income.
Example 2: When deferred tax asset was recognised for carried forward losses from earlier
accounting periods. | ||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||
(a) The above calculation needs to be done for every interim period for which recognition and |
measurement of tax expense is required.
(b) It is presumed that there are no other differences between accounting income and taxable income.
Example 3: When progressive rates of tax are applicable
Under the Indian tax system, the tax rates for corporates and firms are not progressive (i.e., based on levels of income), but are flat rates. Therefore, the tax rate to be applied in the interim period would be the normal rate applicable to the entity. However, the calculation of weighted average annual effective tax rate can be illustrated as below where the tax rates are progressive:
Estimated annual income Rs.1 lakh
Assumed Tax Rates:
On first Rs. 40,000 30%
On the balance income 40%
Tax expense: 30% of Rs. 40,000 + 40% of Rs. 60,000 = Rs. 36,000
36 000
Weighted average annual effective tax rate = 1-x 100 = 36%
'1,00,000
Supposing the estimated income of each quarter is Rs. 25,000, the tax expense of Rs. 9,000 (36% of Rs. 25,000) would be recognised in each of the quarterly financial reports.
Example 4: When different rates of tax are applicable to different portions of the estimated annual accounting income (refer para5(iii))
Estimated annual income Rs. 1 lakh
(inclusive of Estimated Capital Gains (earned in Quarter II) Rs. 20,000 Assumed Tax Rates:
On Capital Gains 10%
On other income:
First Rs. 40,000 30%
Balance income 40%
Assuming there is no difference between the estimated taxable income and the estimated accounting income,
Tax Expense:
On Capital Gains portion of annual income:
10% of Rs. 20,000 Rs. 2,000
On other income: 30% of Rs. 40,000 + 40% of Rs.40,000 Rs.28,000
Total: Rs.30,000
Weighted Average Annual Effective Tax Rate:
On Capital Gains portion of annual income: 2,000 x 100 = 10%
20,000
28 000
On other income: 1x 100 = 35%
80,000
Supposing the estimated income of each quarter is Rs.25,000, when income of Rs.25,000 for 2nd Quarter includes capital gains of Rs.20,000, the tax expense for each quarter will be calculated as below:
Income Tax Expense | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Total tax expense for the year Rs. 30,000 |
*******
62
Cash paid for fraction of shares = Rs. 1,98,500 less Rs. 1,98,495 = Rs. 5
Cash paid for fraction of shares = Rs. 25,000 less Rs. 24,990 = Rs. 10
The above calculated excise duty is not exactly 10% of cost of bought in material amounting Rs. 549. The difference is due to approximation.
Attachment: |
Earning: Approval pending. |