Gurukripa s Guideline Answers for May 2015 IPCC Exam Questions ADVANCED ACCOUNTING Group II

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1 Gurukripa s Guideline Answers for May 2015 IPCC Exam Questions ADVANCED ACCOUNTING Group II Question No.1 is Compulsory. Answer any 5 Questions from the remaining 6 Questions. Wherever appropriate, suitable assumption(s) should be made and indicated in the answer by the Candidates. Working Notes should form part of the answer. All Page References given are from Padhuka s Students Handbook on Advanced Accounting For CA Inter (IPC) Question 1 (a): AS 29 Provisions 5 Marks Shishir Ltd, a Public Sector Company, provides Consultancy and Engineering Services to its Clients. In the year , the Government set up a Commission to decide about the pay revision. The pay will be revised with respect from based on the recommendations of the Commission. The Company makes the provision of ` 1250 Lakhs for pay revision in the Financial Year on the estimated basis as the report of the Commission is yet to come. As per the contracts with Client on Cost plus Job, the Billing is done on the actual payment made to the Employees and allocated to jobs based on hours booked by these Employees on each job. The Company discloses though Notes to Accounts: Salaries and Benefits include Provision of ` 1250 Lakhs in respect of Pay Revision. The amount chargeable from Reimbursable Jobs will be billed as per the contract when the actual payment is made. The Accountant feels that the Company should also book/recognize the Income by ` 1250 Lakhs in Profit & Loss Account as per the terms of the contract. Otherwise, it will be the violation of matching concept & understatement of profit. Comment on the opinion of the Accountant with reference to relevant Accounting Standards. Solution: Similar to Page No.B.9.19, Illustration 6 [RTP] 1. Principles: Reimbursements from Third Party: Refer Para 46 of AS 29, (a) Reimbursements can be recognised only when it is virtually certain that the reimbursement will be received when the Enterprise settles the obligation. (b) Also, potential loss to an Enterprise may be reduced or avoided because a Contingent Liability is matched by a related counter claim or claim against a third party. In such cases, the amount of the provision is determined after taking into account the probable recovery under the claim if no significant uncertainty as to its measurability or collectability exists. 2. Analysis: In the above case, the provision for Salary to Employees ` 1,250 Lakhs will be ultimately collected from the Client, as per the terms of the contract. So, the liability of ` 1,250 Lakhs is matched by the counter claim from the Client. Therefore, the Provision for Salary of Employees should be made after reducing the claim to be made from the Client. It appears that the whole amount of ` 1,250 Lakhs is recoverable from Client and there is no significant uncertainty about the collection. Hence, the net charge to Profit & Loss Account should be Nil. 3. Conclusion: (a) As per the terms of the agreement, if there is a Reimbursement Clause of Price Escalation with retrospective effect, then the reimbursement can be considered as virtually certain. In such case, it may be recognized as Income. (b) If the certainty criteria is not satisfied, the amount cannot be recognized as Income. Question 1 (b): AS 28 Intangible Assets 5 Marks Mahesh Ltd is developing a new production process. During the Financial Year ended st March 2013, the Total Expenditure incurred on the Process was ` 60 Lakhs. The Production Process met the criteria for recognition as an Intangible Asset on 1 st December Expenditure incurred till this date was ` 32 Lakhs. Further expenditure incurred on the process for the Financial Year ending st March 2014 was ` 90 Lakhs. As on , the Recoverable Amount of Know How embodied in the Process is estimated to be ` 82 Lakhs. This includes estimated of future Cash Outflows and Inflows. You are required to work out: May

2 (i) What is the expenditure to be charged to Profit and Loss Account for the year ended st March 2013? (ii) What is the Carrying Amount of the Intangible Asset as on st March 2013? (iii) What is the expenditure to be charged to Profit & Loss Account for the year ended st March 2014? (iv) What is the Carrying Amount of the Intangible Asset as on st March 2014? Solution: Similar to Page No.B.8.13, Q.No.36 [F A/c M 08] 1. Expenditure charged to P&L A/c for : ` 32 Lakhs will be recognized as an Expense because the recognition criteria were not met until 1 st December This expenditure will not form part of the cost of the Production Process recognized in the Balance Sheet. 2. Carrying Value of Intangibles as on : The Production Process will be recognized (i.e. Carrying Amount) as an Intangible Asset at a cost of ` 28 Lakhs (i.e. expenditure incurred since the date the recognition criteria were met, i.e. Total during FY ` 60 Lakhs Less Expenses upto 1 st Dec 2012 ` 32 Lakhs). 3. Expenditure charged to P&L A/c for : Particulars ` Lakhs Book Value on = Carrying Amt on Expenditure in = Less: Recoverable Amount 82 Impairment Loss to be charged to P&L A/c Carrying Value of Intangibles as on : The Production Process will be shown at Book Value ` 118 Lakhs, or Recoverable Amount ` 82 Lakhs, whichever is less, hence at ` 82 Lakhs. Question 1 (c): AS 16 Borrowing Cost 5 Marks Ayush Ltd began construction of a New Building on 1 st January It obtained ` 3 Lakh Special Loan to finance the construction of the Building on 1 st January 2014 at an interest rate of 12% p.a. The Company s other outstanding two Non Specific Loans were: Amount Rate of Interest ` 6,00,000 11% p.a. ` 11,00,000 13% p.a. The Expenditure that were made on the Building Project were as follows: January, 2014 April, 2014 July, 2014 December, 2014 ` 3,00,000 ` 3,50,000 ` 5,50,000 ` 1,50,000 The Building was completed on st December Following the principles prescribed in AS 16 Borrowing Cost, calculate the amount of interest to be capitalized and pass one Journal Entry for capitalizing the cost and borrowing in respect of the Building. Solution: Similar to Page No.B.5.8, Q.No.21 [F A/c M 08] 1. Computation of Average Accumulated Expenses 2. Computation of Average Interest Rate 1. ` 3,00, / 12 = ` 3,00, ` 3,50,000 9 / 12 = ` 2,62, ` 5,50,000 6 / 12 = ` 2,75, ` 1,50,000 1 / 12 = ` 12,500 ` 8,50,000 Note: Out of the above, ` 3,00,000 is from Specific Loan, and balance ` 5,50,000 is from Non Specific Loans. (a) Total Interest Expense = = (` 6,00,000 11%) + (` 11,00,000 13%) = ` 2,09,000. (b) Total Loan Amount = ` 17,00,000. (c) So, Average Interest Rate = (a b) = % 3. Computation of amount to be capitalised Particulars ` Cost of Building ` (3,00, ,50, ,50, ,50,000) 13,50,000 Add: Interest Cost to be capilised: Specific Borrowings (` 3,00,000 10%) 30,000 Non Specific Borrowings (` 5,50, %) 67,617 Total Amount to be captilized for the Building 14,47,617 May

3 4. Journal Entry Date Particulars Dr. (`) Cr. (`) st Dec Building Account Dr. 14,47,617 To Bank Account 14,47,617 (Being amount of Cost of Building and Borrowing Cost capitalized thereon) Question 1 (d): AS 20 EPS 5 Marks A Ltd had 8,00,000 Equity Shares outstanding on 1 st April The Company earned a Profit of ` 20,00,000 during the year The Average Fair Value per Share during was` 40. The Company has given Share Option to its Employees of 1,00,000 Equity Shares at Option Price of ` 20. Calculate Basic EPS and Diluted EPS. Solution: Similar to Page No.B.7.23, Q.No.51 [M 08, N 10, M 13] Computation of Basic and Diluted EPS Particulars For Basic EPS Adjustment for Dilution For Adjusted EPS (1) (2) (3) (4) = (2) + (3) 1. Net Profit for the period attributable to Equity Shareholders Given ` 20,00,000 NIL ` 20,00, Weighted Avg No. of Equity Given 8,00,000 1,00,000 = 50,000 8,50,000 Shares EPS = 1 2 Basic EPS = ` 2.50 Diluted EPS = ` 2.35 Question 2: Partnership Death, Sharing of Profits and Dissolution 16 Marks X, Y and Z were in Partnership sharing Profits and Losses 3:2:1. There was no provision in the agreement for Interest on Capital or Drawings. X died on and on that date, the Partners balances were as under: Capital Account: X ` 60,000, Y ` 40,000, Z ` 20,000. Current Account: X ` 40,000 (Cr.), Y ` 30,000 (Cr.), Z ` 10,000 (Dr.) By the Partnership Agreement, the sum due to X s Estate was required to be paid within a period of 3 years, and minimum installment of ` 30,000 each were to be paid, the first such installment falling due immediately after death and the subsequent installments at half yearly Intervals. 6% p.a. was to be credited half yearly. In ascertaining his share, Goodwill (not recorded in the books) was to be valued at ` 90,000 and the Assets, excluding the Joint Endowment Policy (mentioned below), were valued at ` 60,000 in excess of the Book Values. No Goodwill Account was raised and no alteration was made to the Book Values of Fixed Assets. The Joint Assurance Policy shown in the Books at ` 40,000 matured on , realizing ` 52,000, Payments of ` 30,000 each were made to X s Executors on , and Y and Z continued trading on the same terms as previously and the Net Profit for the year ending (before charging the Interest due to X s Estate) amounted to ` 52,000. During the period, the Partners Drawings were Y ` 15,000, and Z ` 8,000. On , the Partnership was dissolved and an offer to purchase the business as a going concern for ` 1,80,000 was accepted was accepted on that day. A cheque for that sum was received on The balance due to X s Estate, including Interest, was paid on and on that day, Y and Z received the sums due to them. You are required to write-up the Partners Capital and Current Accounts from to Show also the account of the Executors of X. Solution: Similar to Page No.A.2.54, Q.No. [RTP] Note: Since no Goodwill Account was raised and no alteration was made to the Book Value of Fixed Assets, these adjustments are carried out on Memorandum basis, through Memorandum G/w and Memorandum Fixed Assets A/c. May

4 1. Partners Current Account ( ) Particulars X Y Z Particulars X Y Z To balance b/d 10,000 By balance b/d 40,000 30,000 To Memo.G/w (on death)(w/off in 2:1) To Memo Fixed Assets (w/off in 2:1) To X s Capital A/c transfer 60,000 30,000 To Memo. G/w (on 45,000 30,000 15,000 death) (raised in 3:2:1) 40,000 20,000 By Memo Fixed Assets 30,000 20,000 10,000 (increase in 3:2:1) 1,21,000 By Joint Life Policy A/c 6,000 4,000 2,000 (` 52,000 ` 40,000) By balance c/d 16,000 33,000 Total 1,21,000 1,00,000 60,000 Total 1,21,000 1,00,000 60, Partners Current Account ( to ) Particulars Y Z Particulars Y Z To balance b/d 16,000 33,000 By P&L Approp. A/c (43,704 in 2:1) (WN 1) 29,136 14,568 To Drawings A/c 15,000 8,000 By balance c/d (bal. fig.) 1,864 26,432 Total,000 41,000 Total,000 41, Partners Current Account ( to ) Particulars Y Z Particulars Y Z To balance b/d 1,864 26,432 By Realisation A/c (Profit) (WN 3),674 15,837 To Y s Capital A/c (transfer) 29,810 By Z s Capital A/c (transfer) 10,595 Total,674 26,432 Total,674 26, Partners Capital Account Date Particulars X Y Z Date Particulars X Y Z To X s Exec utor s A/c 1,81, By bal b/d 60,000 40,000 20, To bal c/d 40,000 20, By X Current a/c 1,21,000 Total 1,81,000 40,000 20,000 Total 1,81,000 40,000 20, To bal c/d 40,000 20, By bal b/d 40,000 20, Total 40,000 20,000 Total 40,000 20,000 To Z s Current A/c tfr To Bank A/c (settlement) 10, By bal b/d 40,000 20,000 69,810 9, By Y s Current A/c tfr 29,810 Total 69,810 20,000 Total 69,810 20, X s Executors Account Date Particulars ` Date Particulars ` To Bank A/c 30, By X s Capital A/c 1,81, To balance c/d 1,51,000 Total 1,81,000 Total 1,81, To Bank A/c 30, By balance b/d 1,51, To balance c/d 1,25, By Interest (6% 1,51,000 1/2) 4,530 Total 1,55,530 Total 1,55, To Bank A/c 30, By balance b/d 1,25, To balance c/d 99, By Interest (6% 1,25,530 1/2) 3,766 Total 1,29,296 Total 1,29, To Bank A/c 1,00, By balance b/d 99,296 (final settlement) By Interest (6% 99,296 3/12) 1,489 Total 1,00,785 Total 1,00,785 May

5 Working Notes: 1. Profit for the year ended Particulars ` Profit before charging Interest on balance due to X s Executors 52,000 Less: Interest payable to X s Executors: (a) From to (1,51,000 ½ year 6%) 4,530 (b) From to (1,25,530 ½ year 6%) 3,766 8,296 Balance of Profit to be shared by Y and Z (in 2:1 ratio) 43, Statement of Affairs as on (to compute Net Assets on takeover by Company) Capital and Liabilities ` Properties and Assets ` Capital Account: Sundry Assets (balancing figure) 1,,000 Y 40,000 Current Account: Z 20,000 Y 1,864 X s Executors A/c 99,296 Z 26,432 Total 1,59,296 Total 1,59, Realisation A/c Particulars ` Particulars ` To Sundry Assets A/c (WN 2) 1,,000 By Bank A/c 1,80,000 To Interest (X s Executors) (6% 99,296 3/12) 1,489 (Purchase Consideration) To Partners Capital A/c (Pft on Realisation) (2:1) Y,674 Z 15,837 47,511 Total 1,80,000 Total 1,80, Bank A/c Receipts ` Payments ` To Realisation A/c (Purchase Consideration recd) 1,80,000 By X s Executors A/c (final settlement) 1,00,785 By Y s Capital A/c (final settlement) 69,810 By Z s Capital A/c (final settlement) 9,405 Total 1,80,000 Total 1,80,000 Question 3(a): Debentures Theory Comment on adequacy of Debenture Redemption Reserve (DRR) w.r.t. following: 4 Marks Solution: Refer Principles in Page No.A.3.59, Q.No.2 Point 4 Question 3(b): Debenture Redemption Purchase and Cancellation Piyush Ltd had the following among their Ledger Opening Balances on 1 st January 2014: 12 Marks 11% Debentures A/c (2002 Issue) ` 80,00,000 Debenture Redemption Reserve A/c ` 70,00, % Debenture in Sneha Ltd A/c (Face Value ` 30,00,000) ` 29,00,000 Own Debentures A/c (Face Value ` 30,00,000) ` 27,00,000 As st December 2014 was the date of redemption of the 2002 Debentures, the Company started buying Own Debentures and made the following purchases in the Open Market: Debentures at ` 98 cum interest Debentures at ` 99 ex interest. Half yearly Interest is due on the Debentures on 30 th June and st December in the case of both the Companies. On st December 2014, the Debentures in Sneha Ltd were sold for ` 95 each ex interest. On that date, the Outstanding Debentures of Piyush Ltd were redeemed by payment and by cancellation. May

6 Show the entries in the following Ledger Accounts of Piyush Ltd during 2014: (a) Debenture Redemption Reserve Account, (b) Own Debenture Account. Note: The Face Value of Debenture was ` 100. Solution: Refer Principles in Page No.A.3.85, Q.No.14 [N 89] 1. 11% Debentures Account Date Particulars ` Date Particulars ` Dec To Own Debentures A/c Cancellation 40,00,000 Jan 1 By balance b/d 80,00,000 Dec To Bank A/c (Bal. Fig.) Redemption 40,00,000 Total 80,00,000 Total 80,00, Debenture Redemption Fund / Reserve Account Date Particulars ` Date Particulars ` Dec To Debentures in Sneha 50,000 Jan 1 By balance b/d 70,00,000 Ltd. (Loss on Sale) June 30 By Interest from Sneha Ltd (I half year) 2,02,500 Dec To General Reserve 77,67,500 Dec By Interest from Sneha Ltd (II half year) 2,02,500 (Transfer) Dec By Interest on Own Debentures (transfer) 4,12,500 Total 78,17,500 Total 78,17,500 Note: Interest from Sneha Ltd for each Half Year = ` 30,00, % ½ year = ` 2,02, Own Debentures Account (amounts in `) Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost Jan 1 To balance b/d Feb 1 To Bank A/c purchase Dec Dec Dec Note: To Bank A/c purchase 30,00,000 27,00,000 June 30 5,00,000 4,583 (Note 1) 5,00,000 22,917 (Note 2) To P&L (Profit on Cancellation) To DRR A/c 4,12,500 (Int. Tfr) 4,85,417 Dec 4,95,000 (5,000 99) Dec By Deb. Interest A/C By Deb. Interest A/C By 11% Debentures 3,19,583 A/c (Cancellation) 2,20,000 2,20,000 40,00,000 40,00,000 Total 40,00,000 4,40,000 40,00,000 Total 40,00,000 4,40,000 40,00, Interest Component of Purchase on 1 st Feb = ` 5,00,000 11% 12 1 (Jan Only) = ` 4,583. Total Amt paid cum interest = (5,000 98) = ` 4,90,000. Balance attributable to Cost = Total ( ) Interest = 4,90,000 4,583 = ` 4,85, Interest Component of Purchase on 1 st Jun= ` 5,00,000 11% 12 5 (Jan to May)=` 22,917. Since this is an ex interest purchase, it need not be deducted / adjusted against cost % Debenture in Sneha Ltd. Date Particulars FV Interest Cost Date Particulars FV Interest Cost Jan 1 Dec To balance b/d To Debenture Redemption Reserve 30,00,000 29,00,000 June 30 4,05,000 (Int. Tfr) Dec Dec Dec By Bank A/C (I half year) By Bank A/C (II half year) By Bank (Sale) By DRR loss on Sale 2,02,500 2,02,500 30,00,000 28,50,000 50,000 Total 30,00,000 4,05,000 29,00,000 Total 30,00,000 4,05,000 29,00,000 Question 4: Amalgamation The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on were as under: 16 Marks May

7 Liabilities A Ltd ` B Ltd ` Assets A Ltd ` B Ltd ` Share Capital: Freehold Property 3,00,000 2,40,000 40,000 Equity Shares of ` 10 each, Fully paid 4,00,000 Plant & Machinery 60,000 40,000 30,000 Equity Shares of ` 10 each, Fully paid 3,00,000 Motor Vehicle 30,000 20,000 General Reserve 2,40,000 Trade Receivables 2,00,000 80,000 Profit & Loss Account 50,000 50,000 Inventory 2,30,000 1,80,000 Trade Payables 2,10,000 1,30,000 Cash at Bank 80,000 40,000 6% Debentures 1,20,000 9,00,000 6,00,000 9,00,000 6,00,000 A Ltd and B Ltd carry on business of similar nature and they agreed to amalgamate. A New Company, M/s. AB Ltd is formed to take over the Assets and Liabilities of A Ltd and B Ltd on the following basis: Assets and Liabilities are to be taken on Book Value, with the following exceptions: (a) Goodwill of A Ltd and B Ltd is to be valued at ` 1,40,000 and ` 40,000 respectively. (b) Plant and Machinery of A Ltd are to be valued at ` 1,00,000. (c) The Debentures of B Ltd are to be discharged by the issue of 6% Debentures of AB Ltd at a premium of 5%. You are required to: (i) Compute the basis on which Shares in AB Ltd will be issued to Shareholders of the existing Companies assuming the value of each Share of AB Ltd is ` 10. (ii) Draw up a Balance Sheet of AB Ltd as on 1 st April 2014, when amalgamation is completed. (iii) Pass Journal Entries in the Books of AB Ltd for acquisition of A Ltd and B Ltd. Solution: Similar to Page No.A.5.41, Illustration 18 [M 12] 1. Computation of Purchase Consideration Particulars A Ltd (`) B Ltd (`) Assets taken over: Freehold Property 3,00,000 2,40,000 Plant & Machinery 1,00,000 40,000 Motor Vehicles 30,000 20,000 Trade Receivables 2,00,000 80,000 Inventory 2,30,000 1,80,000 Bank Balance 80,000 40,000 Goodwill 1,40,000 40,000 Total Assets taken over 10,80,000 6,40,000 Liabilities taken over: Sundry Creditors 2,10,000 1,30,000 6% Debentures 1,20,000 Additional Liability for discharge of Debentures (5% Premium) 6,000 Total Liabilities taken over 2,10,000 2,56,000 Net Assets taken over = Purchase Consideration 8,70,000 3,84,000 Number of Shares (Face Value ` 10) 87,000 38, Balance Sheet of AB Ltd (after Amalgamation) Particulars Note This Year Prev. Yr I EQUITY AND LIABILITIES: (1) Shareholders Funds: Share Capital 1 12,54,000 (2) Non Current Liabilities: Long Term Borrowings 6% Debentures (1,20, %) 1,26,000 (3) Current Liabilities: Trade Payables (2,10, ,30,000) 3,40,000 Total 17,20,000 II ASSETS (1) Non Current Assets: Fixed Assets: (i) Tangible Assets 2 7,30,000 (ii) Intangible Assets Goodwill (1,40, ,000) 1,80,000 May

8 Particulars Note This Year Prev. Yr (2) Current Assets: (a) Inventories (2,30, ,80,000) 4,10,000 (b) Trade Receivables (2,00, ,000) 2,80,000 (c) Cash and Cash Equivalents (80, ,000) 1,20,000 Total 17,20,000 Note 1: Share Capital Particulars This Year Prev. Yr Authorised: Equity Shares of each Issued, Subscribed & Paid up: 1,25,400 Equity Shares of ` 10 each 12,54,000 (All the above Shares are issued for non cash consideration as per scheme of amalgamation) Total 12,54,000 Note 2: Tangible Fixed Assets Particulars This Year Prev. Yr Freehold Property (3,00, ,40,000) 5,40,000 Plant & Machinery (1,00, ,000) 1,40,000 Motor Vehicles (30, ,000) 50,000 Total 7,30, Journal Entries in the Books of AB Ltd S.No. Particulars Dr. (`) Cr. (`) 1. Business Purchase A/c Dr. 8,70,000 To Liquidator of A Ltd A/c 8,70,000 (Being Purchase Consideration due in respect of takeover of A Ltd) 2. Goodwill A/c Dr. 1,40,000 Freehold Property A/c Dr. 3,00,000 Plant and Machinery A/c Dr. 1,00,000 Motor Vehicle A/c Dr. 30,000 Trade Receivables A/c Dr. 2,00,000 Inventory A/c Dr. 2,30,000 Cash at Bank A/c Dr. 80,000 To Sundry Creditors A/c 2,10,000 To Business Purchase A/c 8,70,000 (Being various Assets and Liabilities recorded upon acquisition) 3. Liquidator of A Ltd A/c Dr. 8,70,000 To Equity Share Capital A/c 8,70,000 (Being 87,000 Equity Shares of ` 10 each allotted to the Shareholders of A Ltd) 4. Business Purchase A/c Dr. 3,84,000 To Liquidator of B Ltd. 3,84,000 (Being Purchase Consideration due in respect of takeover of B Ltd) 5. Goodwill A/c Dr. 40,000 Freehold Property A/c Dr. 2,40,000 Plant and Machinery A/c Dr. 40,000 Motor Vehicle A/c Dr. 20,000 Trade Receivables A/c Dr. 80,000 Inventory A/c Dr. 1,80,000 Cash at Bank A/c Dr. 40,000 To 6% Debentures A/c 1,26,000 To Sundry Creditors A/c 1,30,000 To Business Purchase A/c 3,84,000 (Being various Assets and Liabilities of B Ltd recorded upon acquisition) May

9 S.No. Particulars Dr. (`) Cr. (`) 6. Liquidator of B Ltd A/c Dr. 3,84,000 To Equity Share Capital A/c 3,84,000 (Being 38,400 Shares of ` 10 each allotted to the Shareholders of B Ltd) Question 5(a): Accounts of Banking Companies Various Accounting Aspects 12 Marks Following facts have been taken out from the records of Sneha Bank Ltd in respect of the year ending st March (i) On , Bills for Collection were ` 10,15,000. During the year , Bills Received for Collection amounted to ` 89,75,000, Bills Collected were ` 64,50,000 and Bills Dishonoured and Returned were ` 11,25,000. Prepare Bills for Collection (Assets) Account and Bills for Collection (Liability) Account. (ii) On , Acceptances, Endorsements, etc. not yet satisfied amounted to ` 27,50,000. Druing the year under question, Acceptances, Endorsements, Guarantees, etc. amounted to ` 67,50,000. The Bank honoured Acceptances to the extent of ` 44,50,000. Clients paid off ` 15,00,000 against the guaranteed liability. The Clients failed to pay ` 4,00,000 which the Bank had to pay. Prepare the Acceptances, Endorsements and other obligations Account as it would appear in the General Ledger. (iii) It is found from the Books, that a Loan of ` 50,00,000 was advanced on 14% p.a. Interest payable half yearly, but the Loan was outstanding as on without any payment recorded in the meantime, either towards Principal or towards Interest. The Security for the loan was 1,00,000 Fully Paid Shares of ` 100 each (Market Value was ` 98 per Share as per the Stock Exchange information as on 30 th September 2014.) But due to fluctuations, the Price fell to ` 45 per Share in January On , the Price as per Stock Exchange rate was ` 85 per Share. Show how would you classify the Loan as Secured / Unsecured in the Balance Sheet of the Company. (iv) The following balances are extracted from the Trial Balance as on : Dr.(`) Cr.(`) Interest and Discounts 98,00,000 Rebate for Bills Discounted 45,000 Bills Discounted and Purchased 5,00,000 It is ascertained that the proportionate discounts not yet earned for bills of mature in amount to ` 24,000. Prepare Ledger Accounts. Solution: 5(a)(i) Similar to Page No.A.7.46, Illustration 20 [M 06] 1. Bills for Collection (Asset) A/c Particulars ` Particulars ` To Balance b/d (as on ) 10,15,000 By Bills for Collection (Liability) A/c 64,50,000 To Bills for Collection (Liability) A/c 89,75,000 By Bills for Collection (Liability) A/c 11,25,000 By balance c/d (as on.03.15) (bal. fig.) 24,15,000 Total 99,90,000 Total 99,90, Bills for Collection (Liability) A/c Particulars ` Particulars ` To Bills for Collection (Asset)A/c 64,50,000 By balance b/d (as on ) 10,15,000 To Bills for Collection (Asset)A/c 11,25,000 By Bills for Collection (Asset) A/c 89,75,000 To balance c/d (as on.03.15) (bal. fig.) 24,15,000 Total 99,90,000 Total 99,90,000 Solution: 5(a)(ii) Similar to Page No.A.7.47, Illustration 21 [N 99] Acceptances, Endorsements and Other Obligations Account (in General Ledger) Date Particulars ` 000 s Date Particulars ` 000 s To Constituents Liabilities for Acceptances / Guarantees etc. (Paid off by Clients) To Constituents Liabilities for Acceptances / Guarantees etc. (Honoured by Bank) 1, By balance b/d 2,750 4, By Constituent s Liabilities for acceptance / guarantees, etc. 6,750 May

10 Date Particulars ` 000 s Date Particulars ` 000 s To Constituents Liabilities for Acceptances / 400 Guarantees etc. (Honoured by Bank on Party s failure to pay) To balance c/d Acceptance not yet satisfied [Will be shown as Contingent Liability] 3,150 Total 9,500 Total 9,500 Solution: 5(a)(iii) Refer Principles in Chapter 7 Asset Classification Security Evaluation (a) Date of Loan: [Interest Payable Half Yearly] (b) The First Instalment is due on Hence, as on that date, the Account is not overdue. Hence, it is a Performing Asset. (a) The Loan is secured by 1,00,000 fully paid shares of ` 100 each. (b) The value of security should be reckoned with respect to Balance Sheet Date (i.e. ` 85 1,00,000 = ` 85 Lakhs) (c) Hence, the Loan should be disclosed as Fully Secured Performing Asset as on Solution: 5(a)(iv) Similar to Page No.A.7.40, Illustration 8 [N 03, M 12] Note: It is assumed that the Rebate on Bills Discounted A/c ` 45,000 is as on , i.e. Opening Balance. 1. Computation of amount to be credited to P&L A/C Particulars ` Opening Balance of Rebate on Bills Discounted 45,000 Add: Interest & Discounts 98,00,000 Less: Rebate on Bills as on March (24,000) Amount to be credited in P&L A/C 98,21, Rebate on Bills Discounted Account Date Particulars ` Date Particulars ` To Interest & Discount A/c 45, By balance b/d 45, To balance c/d 24, By Interest & Disc.(Rebate Reqd at end) 24,000 Total 69,000 Total 69, Interest and Discount Account Date Particulars ` Date Particulars ` To Rebate on Bills Discounted 24, By Rebate on Bills Discounted 45, To Profit & Loss A/c (bal. fig.) 98,21,000 (Opening Balance) (Income for the year) By Customers A/C (given) 98,00,000 Total 98,45,0000 Total 98,45,000 Question 5(b): Accounts of Banking Companies Provisioning with DICGC Cover 4 Marks From the following information of XY Bank Ltd for the year ended st March 2014, Compute the Provisions to be made in the Bank s Books for Doubtful Assets: (Amounts ` in Lakhs) Doubtful Assets (More than 3 Years) 2,000 DICGC 100% Cover 200 Value of Security including DICGC Cover 1,000 Solution: Similar to Page No.A.7.43, Illustration 14 [M 00, M 02, M 04, N 12] Particulars ` Lakhs Loan Outstanding 2,000 Less: Realisable Value of Securities (excluding ECGC Cover) (1, ) (800) Unsecured Portion subject to ECGC Cover 1,200 Less: DICGC/ ECGC Coverage (100% on 200) (200) Unsecured Portion 1,000 May

11 Particulars ` Lakhs Provision to be created: (Doubtful more than 3 years) Unsecured Portion at 100% (100% 1,000) 1,000 Secured Portion at 100% (100% 800) 800 Total Provision to be made 1,800 Question 6(a): Branch Accounts 8 Marks M/s. Sandeep, having Head Office at Delhi has a Branch at Kolkata. The Head Office does Wholesale Trade only at Cost plus 80%. The Goods are sent to Branch at the Wholesale Price, viz. cost plus 80%. The Branch at Kolkata wholly engaged in Retail Trade and the goods are sold at cost to Head Office plus 100%. Following details are furnished for the year ended st March 2014: Particulars Head Office (`) Kolkata Branch (`) Opening Stock (as on ) 1,25,000 Purchases 21,50,000 Goods sent to Branch (cost to H.O. plus 80%) 7,38,000 Sales 23,79,600 7,30,000 Office Expenses 50,000 4,500 Selling Expenses 32,000 3,300 Staff Salary 45,000 8,000 Prepare Trading and Profit & Loss Account of the Head Office and Branch for the year ended st March Solution: Similar to Page No.A.1.48, Illustration 10 [N 07] A. Trading and Profit and Loss Account for the year ended on st March (in `) Particulars HO Branch Particulars HO Branch To Opening Stock 1,25,000 Nil By Sales 23,79,600 7,30,000 To Purchases 21,50,000 Nil By Goods Sent to Branch 7,38,000 Nil To Goods received from HO 7,38,000 By Closing Stock (WN 2,3) 5,43,000 81,000 To Gross Profit (bal.figure) 13,85,600 73,000 Total 36,60,600 8,11,000 Total 36,60,600 8,11,000 To Staff Salary 45,000 8,000 By Gross Profit b/d 13,85,600 73,000 To Office Expenses 50,000 4,500 To Selling Expenses 32,000 3,300 To NP trfd to General P&L (b/f) 12,58,600 57,200 Total 13,85,600 73,000 Total 13,85,600 73,000 B. General Profit and Loss Account Particulars ` Particulars ` 80 To Stock Reserve on Branch Clg Stock (` 81,000 ) ,000 By Head Office Profit b/d 12,58,600 To Net Profit (balancing figure) 12,79,800 By Branch Profit b/d 57,200 Total 13,15,800 Total 13,15,800 Working Notes: 1. Computation of Loading Margin Particulars ` Cost of Goods to Head Office 100 Add: Loading by HO to Branch 80 Whole Sale Price, i.e. Invoice Price to Branch 180 Sale Price at Branch 200 May

12 2. Closing Stock at Branch Goods Received from HO at Whole Sale Price ` 7,38, Less: Sales converted in to Wholesale Price (` 7,30,000 ) ` 6,57, Closing Stock at Branch ` 81, Closing Stock of HO = Opening Stock + Purchases Cost of Goods Sent to Branch Cost of Goods Sold by HO = ` 1,25,000 + ` 21,50,000 (` 7,38,000 ) (` 23,79,600 ) = ` 1,25,000 + ` 21,50,000 ` 4,10,000 ` 13,22,000 = ` 5,43,000 Question 6(b): Departmental Accounts 8 Marks Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm Itself out of leather supplied by Leather Department at its usual Selling Price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended st March 2014: Particulars Finished Leather Department (`) Shoes Department (`) Opening Stock (as on ) 30,20,000 4,30,000 Purchases 1,50,00,000 2,60,000 Sales 1,80,00,000 45,20,000 Transfer to Shoes Department 30,00,000 Manufacturing Expenses 5,00,000 Selling Expenses 1,50,000 60,000 Rent and Warehousing 5,00,000 3,00,000 Stock on ,20,000 5,00,000 The following further information are available for necessary consideration: (i) The Stock in Shoes Department may be considered as consisting of 75% of Leather and 25% of Other Expenses. (ii) The Finished Leather Department earned a Gross 15% in (iii) General Expenses of the Business as a whole amount to ` 8,50,000. Solution: Similar to Page No.A.1.12, Illustration 6 [N 03, N 11] Departmental Trading and Profit and Loss A/c for the year ending st March (`) Particulars Leather Shoes Total Particulars Leather Shoes Total To Opg Stock 30,20,000 4,30,000 34,50,000 By Sales 1,80,00,000 45,20,000 2,25,20,000 To Purchases 1,50,00,000 2,60,000 1,52,60,000 By Tfr. to RM 30,00,000 30,00,000 To Tfr from 30,00,000 30,00,000 By Clg Stock 12,20,000 5,00,000 17,20,000 Leather Dept. To Mfg. Exps. 5,00,000 5,00,000 To GP c/d 42,00,000 8,30,000 50,30,000 Total 2,22,20,000 50,20,000 2,72,40,000 Total 2,22,20,000 50,20,000 2,72,40,000 To Selling Expenses 1,50,000 60,000 2,10,000 By GP b/d 42,00,000 8,30,000 50,30,000 To Rent & 5,00,000 3,00,000 8,00,000 Warehousing To Profit c/d 35,50,000 4,70,000 40,20,000 Total 42,00,000 8,30,000 50,30,000 Total 42,00,000 8,30,000 50,30, General Profit and Loss Account Particulars Total Particulars Total To General Expenses 8,50,000 By Profit b/d 40,20,000 To Stock Reserve (Note) 26,625 To Net Profit (balancing figure),43,375 Total 40,20,000 Total 40,20,000 May

13 Note 1: Stock Reserve to be additionally provided is 75,000 48,375= ` 26,625, computed as under Particulars Last Year i.e. Opg Stock This Year i.e. Closing Stock Rate of GP on Sales in Leather Dept Given = 15% 42,00,000 2,10,00,000 = 20% Element of Leather Stock in Shoes Department 75% of 4,30,000 = ` 3,22,500 75% of 5,00,000 = ` 3,75,000 Stock Reserve required to be maintained 3,22,500 15% = ` 48,375 3,75,000 20% = ` 75,000 Note 2: In this case, it is possible to ascertain the Reserve already created against Unrealised Profit in the Opening Stock. In the absence of information, the Reserve should be computed on the difference in the Opening and Closing Stocks i.e. ` 70,000 in this question. Since the Closing Stock has increased, the Stock Reserve computed would be debited to P&L A/c. In case of decrease in Stocks, the Reserve would be credited to P&L A/c. Question 7(a): Insurance Companies Theory What are the differences between Life Insurance and other forms of insurance? 4 Marks Solution: Same as Page No.A.8.1, Illustration 3 Question 7(b): AS 12 Government Grants 4 Marks A Ltd has set up its business in a designated backward area with an investment of ` 200 Lakhs. The Company is eligible for 25% Subsidy and has received ` 50 Lakhs from the Government. Explain the treatment of the Capital Subsidy received from the Government in the books of the Company. Solution: Similar to Page No.B.4.9, Illustration 26 [M 12] Hint Answer: Subsidy received in this case, is not in relation to specific Fixed Asset or in relation to revenue. Hence, it should not be treated as Deferred Income or as an item of Revenue. The correct treatment is to credit the Subsidy to Capital Reserve. Question 7(c): Liquidation Computation of Remuneration 4 Marks A Liquidator is entitled to receive remuneration at 2% on the Assets realized, 3% on the amount distributed to Preferential Creditors and 3% on the payment made to Unsecured Creditors. The Assets were realized for ` 45,00,000 against which payment was made as follows: Liquidation Expenses ` 50,000, Secured Creditors ` 15,00,000, Preferential Creditors ` 1,25,000 The amount due to Unsecured Creditors was ` 15,00,000. You are asked to calculate the Total Remuneration Payable to the Liquidator. Calculation shall be made to the nearest multiple of a rupee. Solution: Similar to Page No.A.6.7, Illustration 2 [M 12] Particulars Computation ` 2% on Assets realized ` 45,00,000 2% 90,000 3% on Amount distributed to Preferential Creditors ` 1,25,000 3% 3,750 3% on Amount distributed to Unsecured Creditors ` 15,00,000 3% 45,000 Total Remuneration to Liquidator 1,38,750 Note: Amount available for Unsecured Creditors + Liquidator s Remuneration at 3% thereon = Assets realized ` 45,00,000 Liquidation Expenses ` 50,000 Payment to Secured Creditors ` 15,00,000 ` Payment to Preferential Creditors ` 1,25,000 Liquidator s Other Remuneration ` 90,000 and ` 3,750 = ` 27,,250. Hence, amount due = ` 15,00,000. Question 7(d): AS 19 Leases State any four situations when a Lease would be classified as Finance Lease. Solution: Same as Page No.B.6.5, Illustration 14 [N 12] 4 Marks Question 7(e): LLP Theory 4 Marks Under what circumstances, an LLP can be wound up by the Tribunal? As per Sec.64 of the Limited Liability Partnership Act, an LLP may be wound up by the Tribunal if 1. The LLP decides that it would be wound up by the Tribunal, 2. For a period of more than 6 months, the number of Partners of the LLP is reduced below 2, 3. LLP is unable to pay its debts, 4. LLP has acted against the interests of the sovereignty and integrity of India, the Security of the State or Public Order, 5. LLP has made default in filing the Statement of Accounts, its Solvency, Annual Return with the Registrar for any 5 consecutive Financial Years, 6. The Tribunal is of the opinion that the LLP be wound up. May

14 Additional Questions for Practice Question 1: Inter Departmental Profits RTP The following balances were extracted from the books of Hari Associates. You are required to prepare Departmental Trading Account and Profit and Loss Account for the year ended st March after adjusting the unrealized Department Profits if any. Particulars Deptt. A Deptt. B Opening Stock ` 50,000 ` 40,000 Purchases ` 6,50,000 ` 9,10,000 Sales ` 10,00,000 ` 15,00,000 General Expenses incurred for both the Departments were ` 1,25,000 and you are also supplied with the following information: (a) Closing Stock of Department A ` 1,00,000 including goods from Department B for ` 20,000 at cost of Department A. (b) Closing Stock of Department B ` 2,00,000 including goods from Department A for ` 30,000 at cost to Department B. (c) Opening Stock of Department A and Department B include goods of the value of ` 10,000 and ` 15,000 taken from Department B and Department A respectively at cost to Transferee Departments. (d) The rate of Gross Profit is uniform from year to year. Solution: 1.Departmental Trading and Profit & Loss Account for the year ended st March Particulars Deptt. A Deptt. B Particulars Deptt. A Deptt. B To Opening Stock 50,000 40,000 By Sales 10,00,000 15,00,000 To Purchases 6,50,000 9,10,000 By Closing Stock 1,00,000 2,00,000 To Gross Profit 4,00,000 7,50,000 Total 11,00,000 17,00,000 Total 11,00,000 17,00,000 To General Expenses (in ratio of Sales) 50,000 75,000 By Gross Profit 4,00,000 7,50,000 To Profit tfr to General Profit and Loss A/c 3,50,000 6,75,000 Total 4,00,000 7,50,000 Total 4,00,000 7,50,000 2.General Profit and Loss Account Particulars ` Particulars ` To Stock Reserve (Additional) By Profit from: Stock in Deptt. A: (` 20,000 ` 10,000) 50% GP of B 5,000 Deptt. A 3,50,000 Stock in Deptt. B: (` 30,000 ` 15,000) 40% GP of A 6,000 Deptt. B 6,75,000 To Net Profit 10,14,000 Total 10,25,000 Total 10,25,000 Note: GP Rates: 4,00,000 Dept A. = 40%; 10,00,000 7,50,000 Dept B. = 50% 15,00,000 Question 2: Partnership What are the Liabilities of Designated Partners in a LLP? Explain in brief. RTP Solution: Liabilities of Designated Partners of LLP As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a Designated Partner shall be 1. responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the LLP Act, including filing of any Document, Return, Statement, Report, etc. pursuant to the provisions of the LLP Act and as may be specified in the LLP agreement, and 2. liable to all penalties imposed on the LLP for any contravention of those provisions. Question 3: ESOP Expense Recognition Lapse of All Options RTP The following particulars in respect of Stock Options granted by a Company are available: Grant Date April 1, 2012 Number of Employees covered 50 Number of Options granted per Employee 1,000 Fair value of Option per Share on Grant Date (`) 9 The Option will vest to employees serving continuously for 3 years from vesting date, provided the Share Price is ` 70 or above at the end of May

15 The estimates of number of employees satisfying the condition of continuous employment were 48 on and 47 on The number of employees actually satisfying the condition of continuous employment was 45. The Share Price at the end of was ` 68. Compute the Expenses to recognize in each year and show important accounts in books of the Company. Solution: Notes: 1. The vesting of Options is subject to satisfaction of two conditions, viz. Service Condition of continuous employment for 3 years and Market Condition that the Share Price at the end of is not less than ` Since the Share Price on was ` 68, the actual vesting is Nil. Despite this, the Company should recognize the value of Option over 3 year vesting period from to At the end of 3 year period, the balance in ESOP Outstanding A/c will be transferred to General Reserve, since the options could not vest. 1. Amount of Employee Compensation Expense to be recognized Details FY FY FY (a) No. of Employees expected to satisfy condition (b) Total No. of Options Expected to Vest on Exercise Date = [(a) 1,000] 48,000 47,000 45,000 (c) Total Value of Options Expected to Vest at the end of Vesting Period = [(b) FV of Option ` 9] ` 4,32,000 ` 4,23,000 ` 4,05,000 (d) Proportionate Cost of Options [(c) 1/3] [(c) 2/3] [(c) 3/3] = ` 1,44,000 = ` 2,82,000 = ` 4,05,000 (e) Less: Already recognized in Previous Years 0 (` 1,44,000) (` 2,82,000) (f) Amount to be Expensed this Year ` 1,44,000 ` 1,38,000 ` 1,23, Employees Compensation Expense Account Year Particulars ` Particulars ` To ESOP Outstanding A/c 1,44,000 By Profit and Loss Account 1,44,000 1,44,000 1,44, To ESOP Outstanding A/c 1,38,000 By Profit and Loss Account 1,38,000 1,38,000 1,38, To ESOP Outstanding A/c 1,23,000 By Profit and Loss Account 1,23,000 1,23,000 1,23, ESOP Outstanding A/c Year Particulars ` Particulars ` To Balance c/d 1,44,000 By Employees Compensation Expense A/c 1,44,000 1,44,000 1,44, To Balance c/d 2,82,000 By Balance b/d 1,44,000 By Employees Compensation Expense A/c 1,38,000 2,82,000 2,82, To General Reserve (Year End) 4,05,000 By Balance b/d 2,82,000 By Employees Compensation Expense A/c 1,23,000 4,05,000 4,05,000 Question 4: Redemption of Debentures RTP Mallika Ltd has Authorized Capital of 8,00,000 Equity Shares of ` 10 each. But out of these 2,40,000 Shares have been issued as fully paid. The Company has an outstanding 14% Debentures Loan of ` 24,00,000 redeemable at 102% and Interest has been paid up to date. The Directors resolved to redeem the Debentures on 1 st January and the Holders are given an option to receive payment either wholly in cash or wholly in fully Paid Equity 8 Shares for every ` 100 of Debentures. On that date, the balance of the Debenture Redemption Reserve Account is ` 20,00,000 and corresponding Investment Account ` 20,00,000 (at cost) of which the Market Value is ` 18,00, % of the Holders decided to exercise the option for taking Shares in repayment and cash for the rest is procured by realizing an adequate amount of Investment at the prevailing Market Value. Draw up Journal Entries (including Cash Book Entries) to give effect to the above transactions. May

16 Solution: Journal Entries Particulars Debit ` Credit ` 1. 14% Debentures A/c Dr. 24,00,000 Premium on Redemption of Debentures A/c Dr. 48,000 To Debentureholders A/c 24,48,000 (Being amount payable on redemption of ` 24,00,000 Debentures at 2% Premium) 2. Profit and Loss A/c Dr. 48,000 To Premium on Redemption of Debentures A/c 48,000 (Being Premium on Redemption provided out of Profits.) Note: Alternatively, General Reserve A/c, Debenture Redemption Reserve A/c, may be used for this purpose. 3. Debentureholders A/c ` 24,48,000 75% Dr. 18,36,000 To Equity Share Capital A/c (1,44,000 `10) 14,40,000 To Securities Premium A/c (1,44,000 x ` 2.75) 3,96,000 (Being issue of 1,44,000 Shares of ` 10 each at a premium of ` 2.75 per share to 75% debenture holders who exercised conversion option) (WN 1 & 2) 4. Bank A/c (` 24,48,000 25%) Dr. 6,12,000 Profit & Loss A/c (6,80,000 10%) or (balancing figure) Dr. 68,000 To Debenture Redemption Reserve Investment A/c (WN 3) 6,80,000 (Being investment sold & loss transferred to Profit & Loss A/c) 5. Debentureholders A/c (24,48,000 x 25%) Dr. 6,12,000 To Bank A/c 6,12,000 (Being cash payment for settlement to debenture holders of 25%) 6. Debenture Redemption Reserve A/c (` 20,00,000 68,000) Dr. 19,32,000 To General Reserve A/c 19,32,000 (Being balance of Debenture Redemption Reserve transferred on 100% redemption) 7. Investment A/c Dr. 13,20,000 To Debenture Redemption Reserve Investment A/c (20,00,000 6,80,000) 13,20,000 (Being balance of Debenture Redemption Reserve Investment transferred to Investment (General) A/c) Working Notes: Particulars ` (1) For every ` 100 Debenture, amount payable on Redemption including Premium = ` 102 Less: Face Value of 8 Shares of ` 10 each to be issued for redemption of each debenture (8 ` 10) ` 80 Premium on Issue of 8 Shares ` 22 So, Premium on issue of each Share = ` 22 8 shares = ` 2.75 (2) 8 Shares to be issued on conversion = 8 Shares for every `100 Debenture = ` 24,00,000 75% 1,44, Shares (3) Investments Cost = ` 20,00,000 but Market Value = ` 18,00,000. So, Mkt Value realizable = 90% of Cost. So, to realise ` 6,12,000 for payment, Cost of Investments to be sold = ` 6,12,000 90% = ` 6,80,000 Question: AS 5 Changes not regarded as Accounting Policy Change RTP Explain whether the following will constitute a change in accounting policy or not as per AS Introduction of a formal Retirement Gratuity Scheme by an Employer in place of ad hoc Ex Gratia Payments to Employees on retirement. 2. Management decided to pay Pension to those Employees who have retired after completing 5 years of service in the Firm. Such Employees will get Pension of ` 20,000 per month. Earlier there was no such scheme of Pension in the Firm. Solution: See Page B.2.6, Q.20, Para of AS 5. Both items will not be considered as a change in accounting policy. May