UCP32 CORPORATE ACCOUNTING-1 Unit-1 ISSUE OF SHARES Type: 80% Problem 20%Theory Question & Answers

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1 UCP32 CORPORATE ACCOUNTING-1 Unit-1 ISSUE OF SHARES Type: 80% Problem 20%Theory Question & Answers PART A ANSWERS 1. What is share discount?(april/may-2013) Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. Discount on issue of shares is a capital loss and it should be debited to a separate account called Discount on issue of shares 2. Classify the shares into various types. (April/May-2013) Authorized (Registered or Nominal) Capital Issued Capital Subscribed Capital Called up Capital Paid up Capital Reserve Capital 3. What is share Premium? (Nov-2012) Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. The excess amount received over the face value is called share premium 4. What is forfeiture of shares? (Nov-2012) The cancellation of shares due to non-payment of allotment money or call money within a specified period is called forfeiture of shares. It is the compulsory termination of membership of the defaulting shareholders. 5. Who is director? (April/May-2014) According to sec2 (13) of the companies act a director means any person occupying the positions of a director by whatever name called. It means that a director is one who is performing the functions of a director like controlling the affairs of the company. RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 1 of 9

2 6. What do you mean by Pro-rata allotment? (NOV-2014) Share may be allotted proportionate to the applications received to all the applicants. it may be possible to reject some applications on the basis of some criterion and for the balance applications, proportionate allotment may be made. This is called pro-rate allotment. 8. What do you mean by share? (NOV-2013) Total capital of the company is divided into units of small denominations; each one is called a share. According to Sec 2(46) of the Companies Act 1956, share has been defined as a share in the share capital of the company; and includes stock except where a distinction between stock and share is expressed or implied. 10.List out the various kinds of shares.(apr-2015) * Preference shares * Equity shares * Shares with differential rights. 11. What is meant by calls-in arrears?(apr-2015) When one or more shareholders fail to pay the amount due from them towards allotment and/or calls, such dues are called calls-in-arrears PART-B 1. Write short notes on the following. (April/May-2013) (i) Share forfeiture * The cancellation of shares due to non payment of allotment money or call money within a specified period is called forfeiture of shares. * It is the compulsory termination of membership of the defaulting shareholders. (ii) Capital reserve. * It is that part of capital which is not issued and can be issued only at the time of liquidation of the company.i.e a portion of the subscribed capital not already called up becomes the reserve capital. RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 2 of 9

3 2. What are the modes of appointment of directors of a company? (Nov-2012) First directors: The first directors are namely by the subscribers to the memorandum or mentioned in the Articles. If no one is appointed either by the subscribers or by the articles, then all the subscribers will become the first directors (sec.254).they will hold the office till the conclusion of the first Annual General Meetings 2. Subsequent Directors: Appointments by the company: As per sec.255 of the act, the subsequent directors must be appointed by the company in a general meeting. In the case of a public company and subsidiary private company, unless the articles provided otherwise, not less than two thirds of the directors must retire by rotation. Appointments by the Board: As per sec.260, the board may appoint as many numbers of additional directors as it wants subject to the provision in the articles. Such additional directors shall hold office up to the next AGM. If the annual general meetings of a company is not held or cannot be held the additional director shall vacate his office on the day on which the annual general meeting should have been held. Appointments by outsiders: If the Articles empower one third of the directors may be allowed to be appointed by third parties like bankers or financial institutions (IFC, NSIFC etc) or other creditors. Such directors are not liable to retire by rotation since they are ex-officio directors. Appointments by the Central Government: If the central government is of the opinion that the affairs of the company are being managed in a manner oppressive to any member or RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 3 of 9

4 prejudicial to public interest, it ma appoint not more than 2 directors for 3 years to protect the interest of the members and the public. 3. Write a note on Pro rate allotment.(nov-2013) When an issue of share is over subscribed heavily pro-rate allotment may be made by the company. Application for shares may received allotment of a portion of shares they have applied for The company may transfer their excess application money towards the amount due to allotment or even calls. Such transfer of the excess application money affects the unpaid calls. The exact amount to be forfeited has to be computed carefully, particular when some pro-rate allottees fail to pay allotment money. 4. Explain the types of share capital.( NOV-2012) Authorized (Registered or Nominal) Capital It is the maximum amount of capital which the company is authorized to raise by way of public subscription. Issued Capital The part of authorized capital which is offered to the public for subscription is called issued capital. Subscribed Capital That part of the issued capital for which applications are received from the public is called subscribed capital. Called up Capital That part of subscribed capital which has been called up or demanded by the company is called called up capital. Paid up Capital The part of called up capital which is offered and actually paid by the members is known as paid up capital. Any unpaid amount of balance on the called up capital is known as unpaid capital or calls in arrears. Reserve Capital It is that portion of the uncalled capital which is called up only at the event of company s winding up. RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 4 of 9

5 10.Explain forfeiture and reissue of shares.(apr-2015) Forfeiture of shares: Meaning : Forfeiture of shares is the termination of membership and taking away of the shares of a shareholder because of default in the payment of allotment and/or call money. A shareholder ceases to be a member His/her name is removed from the register of members of the company The forfeited shares become the property of the company. The amount already collected on them is a gain to the company. Procedure for forfeiting: The following are the requirements for a valid forfeiture of shares. The company should have adopted table A as its Articles or the company s Articles should have an express provision to forfeit shares. Any procedure prescribed in the Articles for such forfeiture must be followed. There should be default on the part of the shareholder in the payment of a valid call. A proper registered notice of demand required. The board of directors has to pass a resolution for the forfeiture ofshares. Forfeiture of shares issued in all three cases: Forfeiture of shares issued at par Forfeiture of shares issued at premium Forfeiture of shares originally issued at discount Re issue of shares: * A forfeited share may be sold or otherwise disposed of, on such terms and in such manner as the Board thinks fit. * Such shares may be re-issued at par, at a premium or even at a discount. * When the forfeited shares are re-issued at par or at a premium, the entries are similar to the entries already passed in connection with the issue of shares at par or at premium. RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 5 of 9

6 * However, the amount receivable on reissue of such shares together with the amount already received from defaulting shareholders, shall not, in any case, be less than the original issue price of shares. For example, if a share of Rs. 10 on which Rs. 2 has already been paid is forfeited and is subsequently reissued, then Rs. 8 must be collected if shares are reissued as fully paid up. PART-C 1. Give specimen journal entries for issue of shares.( April/May-2013) Journal Entries for Share Issue 1. On receipt of application money: Bank A/c To Share Application A/c 2. On acceptance of application: Share application A/c To Share Capital A/c 3. On allotment money due: Share allotment A/c To Share capital A/c 4. On receipt of allotment money: Bank A/c To Share allotment A/c 5. On making first call due: Share first call A/c To Share capital A/c 6. On receipt of first call money: Bank A/c To Share first call A/c Dr Dr Dr Dr Dr Dr RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 6 of 9

7 2. Explain the process of issue of shares.(nov-2013) (i)issue of Share Capital The shares can be issued either at par, premium or at discount. Shares are said to be issued at par when a shareholder is required to pay the face value of the shares to the company. Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. For example, a company issues the shares having the face value of Rs.10 at Rs.10; it is the issue at par. If it is issued at Rs. 12, the issue is at premium. If it is issued at Rs.8, the issue is at discount. (ii)allotment of shares Allotment of shares means the acceptance of offer of the applicant for the purchase of shares. Have the discretionary power to reject or accept the applications. But the public company cannot allot its shares unless the minimum subscription has been subscribed by the public and the amount of application has been received. After the allotment of shares to the applicants who will become the shareholders of the company. (iii)issue of shares at premium Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. The excess amount received over the face value is called share premium. It is a capital receipt. The share premium shall be transferred to Securities Premium A/c. It should be shown on the liability side of balance sheet under the head Reserves and Surplus. (iv)issue of shares at discount Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. Discount on issue of shares is a capital loss and it should be debited to a separate account called Discount on issue of shares A/c. It is shown on the assets side of balance sheet under Miscellaneous Expenditure. The rate of discount should not exceed 10% of nominal value of shares. Generally the discount on issue is recorded at the time of RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 7 of 9

8 allotment. (v)calls in Arrears and Calls in Advance Sometimes shareholders may fail to pay the allotment money and or call money. Such dues are called calls in arrears. It is shown in the balance sheet as a deduction from the called up capital. Directors are authorized to charge interest on calls in arrears at a rate as per Articles. In its absence, the interest does not exceed 5% pa. When a shareholder pays more money than called up, the excess money is called calls in advance. (vi) Forfeiture of shares The company must pay interest on calls in advance at a rate prescribed by Articles. In its absence, the company is liable to pay pa. But the shareholder is not entitled to any dividend on calls in advance. The cancellation of shares due to non payment of allotment money or call money within a specified period is called forfeiture of shares. It is the compulsory termination of membership of the defaulting shareholders. He also losses whatever amount he has paid to the company so far. A company can forfeit the shares only if it is authorized by its Articles. The forfeiting is done only after giving 14 days notice to the defaulting shareholders. The balance of forfeited shares A/c should be shown by way of an addition to called up capital on the liability side of balance sheet till the shares are reissued. (vi)surrender of shares Sometimes a shareholder is not able to pay further calls and returns his shares to the company for cancellation. Such voluntary return of shares to the company by the shareholder himself is called surrender of shares. The accounting treatment of surrender of shares is the same as that of forfeiture of shares. (vii) Reissue of forfeited shares Forfeited shares may be reissued by the company either at pr, premium or discount. But the discount on reissue should not exceed the amount forfeited. RAAK/B.COM(CA)/R.DEVAKI/II YEAR/III Sem/COR.A/C/UNIT- 1Answers/VER 1.0 Unit 1 Answers Page 8 of 9

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10 UCP32 CORPORATE ACCOUNTING-1 Unit-2 ISSUE OF DEBENTURES Type: 80% Problem & 20% Theory Question & Answers PART A ANSWERS PART-A 1. Define Debenture. (April/May-2013) The term debenture has been derived from the Latin word debate, which means to borrow. Debenture is an instrument in writing given by a company acknowledging debt received from the public. 2. Give journal entry for debentures issued at par. (April/May-2013). When debentures are issued at par Bank A/c Dr (face value) To debentures A/c 3. State two features of debentures (Nov-2013) It is an instrument of debt issued by company under its seal. It carries fixed rate of interest. Debenture is a part of borrowed capital. It is repaid after a long period. It is generally secured. 4. Give journal entry of debentures when issued at discount and redeemable at premium. (Nov-2013) When issued at discount and redeemable at premium. Bank A/c Dr (amount received) Loss on issue of debentures A/c Dr (issue discount+ redemption premium) To debentures A/c (face value) To premium on redemption A/c (redemption premium) 5. Give the meaning of redeemable preference shares.(nov-2014) (Nov-2012) A company limited by share may if authorized by its articles of association issue preference shares which are label to be redeemed as per the terms of issue. Such share cannot be redeemed unless they are fully paid up. RAAK/B.COM/B.COM(C.A)/R.CANAGAVALLY/II YEAR/III Sem/COR.A/C/UNIT-2Answers/VER 1.0 Unit 2 Answers Page 1 of 6

11 7.What are the two main stages of accounting for debentures?(apr-2015) (i) Issue of debentures (ii) Creation of provision for their redemption; (iii) Redemption of debentures. 8. What is meant by ex-interest price? Ex-interest price means the interest price will not include in principal amount 9. What is capital redemption reserve?(nov-2015) A fund which exists both on the financial statement of a company and also as part of the company s internal accounts. A business with a capital redemption reserve fund is legally mandated by the U.S. Securities and Exchange Commission to make capital redemptions for certain transactions acting as a hedge against capital reductions. PART B ANSWERS PART-B 1.What are the different types of preference shares? (NOV-2012) ( April/May-2013) A. Preference Shares Shares which enjoy the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares are called preference shares. The holder of preference shares will get a fixed rate o dividend. Types of preference shares (i)cumulative preference shares In case of these shares, the arrears of dividend are carried forward and paid out of the profits of the subsequent years. (ii)non-cumulative p ref eren ce shares If dividend not to accumulate and not to carried forward to next year, these are called non cumulative preference shares. RAAK/B.COM/B.COM(C.A)/R.CANAGAVALLY/II YEAR/III Sem/COR.A/C/UNIT-2Answers/VER 1.0 Unit 2 Answers Page 2 of 6

12 (iii)participating preference shares In addition to a fixed dividend, balance of profit (after meeting equity dividend) shared by some preference shareholders. Such shares are participating preference shares. (iv) Non-participating preferen ce shares These shares get only a fixed rate of dividend. These do not get share in the surplus profit. (v)redeemable preference shares If preference shares are returned after a specified period to shareholders, these preference shares e shares are called redeemable preference shares. (vi) Convertible preference shares These shares are given the right of conversion into equity Shares within a specified period or at a specified date according to the terms of issue 6.Write note on Ex-interest and cum-interest. (Nov-2014) When a company buys and sells its own debentures in the open market, the prices quoted may include or exclude interest accrued till that date on the debentures. It the quoted price includes interest on the debentures from the previous interest date till the date of sale; the price is known as Cum interest price. If the price quoted does not include the interest from the previous interest date till the date of the sales the price is known as Ex-interest price. 7. How preference shares can be redeemed? (Nov-2013) Sources of redemption of debentures Debentures can be deemed out of the following sources Redemption out of fresh issue. A company may issue new shares or debentures or both for redeeming the existing debenture RAAK/B.COM/B.COM(C.A)/R.CANAGAVALLY/II YEAR/III Sem/COR.A/C/UNIT-2Answers/VER 1.0 Unit 2 Answers Page 3 of 6

13 Redemption out of Capital If debentures are redeemed out of capital, no amount of divisible profit is kept aside for Redeeming debentures. Redemption out of Capital reduces the liquid resources available to the company. As per the guidelines issued by SEBI, a company has to create Debenture Redemption Reserve (DRR) equivalent to 50% o the amount of debenture issue before redemption of debentures commences. Redemption out of profit When sufficient profits are transferred from P & L Appropriation A/c to the Debenture Redemption Reserve A/c at the time of redemption of debentures, such redemption is said to be out of profits Redemption by Sinking Fund Under this method of redemption, every year a part of the profit (fixed amount) is set aside and sinking fund (Debenture Redemption Fund) is created. Sinking fund I invested in outside securities. Redemption by Insurance Policy This is an alternative to sinking fund method. Under this method, an insurance policy is purchased by paying annual premium. Such policy will mature on the date of redemption. This method provides funds for redemption and covers the risk involved in the transactions. Redemption by Conversion Sometimes the debenture holders of a company are given the option to convert their debentures into the shares or new debentures within a stipulated period. The new shares or debentures can be issued either at par or at premium or at discount. RAAK/B.COM/B.COM(C.A)/R.CANAGAVALLY/II YEAR/III Sem/COR.A/C/UNIT-2Answers/VER 1.0 Unit 2 Answers Page 4 of 6

14 8. What are debentures? What are its types?(nov-2012) The term debenture has been derived from the Latin word debate, which means to borrow. Debenture is an instrument in writing given by a company acknowledging debt received from the public. Types of debentures. (i) Secured or Mortgage debentures These debentures are secured either on a particular asset or on the assets of the company in general. (ii) Unsecured or Naked debentures These debentures do not create any charge on the assets of the company. (iii) Registered debentures These debentures arte payable to the persons recorded in the Register of debenture holders of the company and these are transferable only with the knowledge of the company. (iv) Bearer debentures In these debentures company maintains no register of debenture holders and these are transferable by mere delivery. (v) Redeemable debentures These debentures are repayable after a fixed period either in lump sum or in installments. ( v i) Perpetual or Irredeemable debentures These debentures are not repayable during the life time of the company. RAAK/B.COM/B.COM(C.A)/R.CANAGAVALLY/II YEAR/III Sem/COR.A/C/UNIT-2Answers/VER 1.0 Unit 2 Answers Page 5 of 6

15 (vii) Convertible debentures These debentures can be converted into the shares within or After a Specified period, at the option of the holder. (viii)non-convertible debentures These debentures can t be converted into shares. RAAK/B.COM/B.COM(C.A)/R.CANAGAVALLY/II YEAR/III Sem/COR.A/C/UNIT-2Answers/VER 1.0 Unit 2 Answers Page 6 of 6

16 UCP 31/ UCM32 CORPORATE ACCOUNTING-I Unit-III ACQUISITION OF BUSINESS Type: Problem 80% Theory - 20% QUESTIONS AND ANSWERS PART - A 1. What is Absorption? (Apr 2012) A running business may be acquired by another firm. If one company acquires the business of another, it is called Absorption. 2. What is Acquistion of business? (Nov 2014) (Nov 2012) When a company acquires the running business of a sole trader or partnership firm, it is termed as Acquistion. 3. Explain the meaning of Profit prior to incorporation? A promoter of a new company may start the company from stratch may purchase the running business of a sole trader or partnership firm. They act as a promoters of companies. This company which has no legal existence acquiring a running business prior to its own incorporation 4. What is the profit and loss appropriation account? (Nov 2012,Apr 2016) The profit & loss Appropriation Account may be separately prepared to give details regarding the balance of profit &loss brought forward from last year, the net profit (loss) earned during the year and appropriations made during the year. 5. Calculate sales ratio from the following (May 2014) Sales upto the date of incorporation Rs.1,00,000 Sales upto the date of balance sheet Rs 2,00,000 Total sales for the year Rs 3,00,000 Sales before incorporation = 1,00,000 Sales after incorporation = 2,00,000 Sales Ratio = 1,00,000 : 2,00,000 = 1:2 RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

17 6. What is sales ratio? (May 2013) This is ratio of sales or turnover of the company before and after incorporation. Eg when sales before was 20,000 after incorporation was 60,000 the sales ratio will be 1:3 7. Explain the methods of calculating sales ratio and time ratio? 1. Weighted sales ratio 2. Adjusted time ratio 3. Time ratio 4. Sales ratio 8. What is weighted ratio?(apr 2016) But if the expenses change as salary due to more number of workers employed because of conversion of partnership business into a limited company, then weighted ratio is to be calculated by taking into consideration time and the number of workers in pre and post-incorporation periods. 9. What is time ratio?( Apr 2016) The total amount of certain expenses such as salary, wages etc. does not remain the same throughout the year. If the expenses remain the same throughout the year, these can be easily divided in the time ratio. 10. What are the two methods for calculation the purchase consideration? 1. Net asset method 2. Net payment method 11. What is Purchase Consideration? The price payable by a purchasing company to the vendor company as a consideration for taking over the business. Such price is called purchase consideration and the price may be fixed by agreement between the two parties. 12. What are the different ratio used in computing profit prior to incorporation?(may 2014) 1. Weighted sales ratio 2. Adjusted time ratio 3. Time ratio 4. Sales ratio 5. Allocation of expenses RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

18 6. Actual expenditure PART-B 1. What are the various methods of Purchase Consideration? Methods of purchase consideration: There are different methods of purchase consideration depending upon the terms and conditions settled between the transferor company. 1) Net asset method: under this method the net asset value is calculated by deducting all the liabilities taken over by the transferee company from the entire asset taken by the transferee company. The value of the assets and liabilities is not that appear in the balance sheet but it is that which is decided between the two companies. 2) Net payment method: in this case purchase consideration is calculated by adding all the payments made by the transferee company to the shareholders of the transferor company. Payment can be in the form of cash, shares or debentures. 3) Lump sum method: this is the case when Transferee Company agrees to pay Transferor Company a fixed sum of money. Like xyz limited agrees to pay abc ltd 25 lakh. This is lump sum method. 4) Intrinsic value or share exchange method: in this method to calculate purchase consideration following method is used: Net asset available to the equity shareholders/ number of equity shares. The above is the meaning of purchase consideration and 4 methods of purchase consideration. 2. Ganesh Ltd was incorporated on 1 st May 1996 to purchase the running business of Vinayak and Co., with effect from 1 st January The company obtained certificate of commencement of business on 24 th August Calculate the time ratio, if te accounts were finalized on 31 st December Computation of time Ratio: Pre incorporation period from to = 4 months Post incorporation period from to = 8 months Time Ratio = 4:8= 1:2 RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

19 3. A company is incorporated on 1st May, The total amount of wages paid is Rs. 90,000. Number of workers employed in pre-incorporation period 6, postincorporation period 24.( Apr 2016) Wages Pre-incorporation period will be = 90,000 x 1/9 = Rs. 10,000 Post-incorporation wages are = 90,000 x 8/9 = Rs. 80,000. The ratio is calculated as under: Simple time ratio = 4 month : 8 months or 1 : 2 Weighted time ratio = (1 x 6): (2 x 24) = 6 : 48 or 1 : 8 4. From the following details. Calculate profit before and after incorporation time ratio 3:4 sales ratio 2:3 gross profit Rs 5,00,000(Apr 2016) Expenses Rs Salaries 96,000 Discount 40,000 Rent 15,000 General expenses 12,000 PARTICULARS BASIS OF TOTAL PRE POST APPORTIONMENT INCORPORATIO INCORPORATION Gross profit (A) Sales ratio 2:3 5,00,000 2,00,000 3,00,000 Expenses : Salaries Rent 96,000 41,143 54,857 RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

20 General expenses Time ratio 3:4 15,000 6, Discount 12,000 5,143 6,857 TOTAL EXPENSES (B) Sales ratio 2:3 40,000 16,000 68,715 24,000 94,285 1,63,000 1,31,295 2,05,715 3,37,000 NET PROFIT(A-B) 5. What are the steps of ascertaining profit prior to Incorporation? (1)Prepare the trading account for the whole period i.e., from the date of purchase of business to the last date of accounts closing in order to calculate the gross profit. Date of incorporation will not affect the calculation of gross profit. (2) Calculate time ratio and sales ratio. Time ratio is calculated by taking into consideration the time falling from the last date of balance sheet to the date of incorporation and the period between the date of incorporation to the last date of presenting final accounts. For example, if (he business is purchased on 1st January 1998 and certificate of incorporation is granted on 1st May 1998 and final accounts are being prepared on 31st December, 1998, then the time ratio is 4 months : 8 months or 1 RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

21 : 2. Sales ratio is calculated taking into consideration the sales of pre-incorporation period to that of sales of post-incorporation period. For example, if sales of preincorporation period are Rs. 1,00,000 and that of post-incorporation Rs. 3,00,000, then the sales ratio is 1 : 3. (3) Prepare the profit and loss account for the pre-incorporation and post-incorporation periods separately. This is done on the following basis : (i) Gross profit should be apportioned between the two periods on the basis of their respective sales ratio. (ii) Such expenses which are directly related on sales such as cost of sales, discount or commission on sales, discount allowed, bad debts, advertising, selling expenses, etc. should be apportioned on the basis of sales ratio of the two periods. (iii) Fixed expenses such as salaries, rent, audit fees, insurance, general expenses, stationery, printing, depreciation and administrative expenses, etc. should be allocated on the basis of time ratio as these expenses are incurred on the basis of time. (iv) Expenses which are incurred after the incorporation of the company such as directors fees, preliminary expenses, interest on debentures, goodwill written off etc. should be charged wholly to the period after incorporation. Similarly expenses as salary of partners is debited lo the pre-incorporation period. 6. How do you calculate of Sales Ratio? The calculation of sales ratio may be simple in those cases where the turnover is spread during the whole financial period. But where the turnover fluctuates from month to month according to the nature of product (as woolen garments where the sales are made in the month of October, November, December, and January as compared to other months), the calculation of sales ratio becomes difficult. Moreover, the sales of month of October may be different from the month of December or January. Under such circumstances the sales ratio is determined taking into consideration the relationship of monthly sales with that of total sales. RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

22 7. How do you Calculate of Weighted Ratio? The total amount of certain expenses such as salary, wages etc. does not remain the same throughout the year. If the expenses remain the same throughout the year, these can be easily divided in the time ratio. But if the expenses change as salary due to more number of workers employed because of conversion of partnership business into a limited company, then weighted ratio is to be calculated by taking into consideration time and the number of workers in pre and post-incorporation periods. For example, a company is incorporated on 1st May, The total amount of wages paid is Rs. 90,000. Number of workers employed in pre-incorporation period 6, post-incorporation period 24. The wages for pre-incorporation period will be 90,000 x 1/9 = Rs. 10,000 and post-incorporation wages are 90,000 x 8/9 = Rs. 80,000. The ratio is calculated as under: Simple time ratio = 4 month : 8 months or 1 : 2 Weighted time ratio = (1 x 6): (2 x 24) = 6 : 48 or 1 : 8 PART- C 1. Answer in Hard Copy 2. Answer in Hard Copy RAAK/B.COM (CA)/B.COM/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/UCM 31 /UNIT-3/ANSWERS/VER 1.0

23 UCP 32 CORPORATE ACCOUNTING-I Unit-IV AMALGAMATION, ABSORPTION & EXTERNAL RECONSTUCTION Type: Problem 80% Theory - 20% QUESTIONS AND ANSWERS PART - A 1. What is Amalgamation?(Apr 2016) When two or more existing companies combine together to form a new company, it is amalgamation. All the combining companies are liquidated. A new company formed to take over their businesses. 2. What is Absorption? When one existing company takes over the business of or more existing companies, it is absorption. The companies taken over are liquidated. No new company is formed. 3. What is External Reconstruction? (Apr 2016) When an existing company is liquidated and a new company is formed with the same shareholders or take over its business, it is external reconstruction. Sick companies with huge losses usually undergo reconstruction. 4. What are the four methods of Purchase consideration? Lumpsum Method Net Payment Method Net Assets Method Intrinsic Method 5. What are the two methods Accounting for Amalgamation? (Apr 2016) Pooling of Interest Method Purchase Method RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

24 6. What is AS I4? Amalgamation as used in AS 14 includes Absorption also.as 14 is introduced by Chartered Accountants of India is applicable for accounting periods Amalgamation means an amalgamation pursuant to the companies Act 1956 or any statute which may be applicable. Transferor company means the company which is amalgamated into another company. Transferee company means the company into which a transferor company is amalgamated. 7. What are the types of Amalgamation? a. Amalgamation in the nature of merger b. Amalgamation in the nature of purchase 8. What is Lumpsum method? The purchase price to be paid to shareholders may be mentioned in the agreement directly. The lumpsum is to be taken as purchase consideration eliminating the need to compute it. 9. What is net payment method? The agreement between the selling and purchasing companies may specify the amount payable to the shareholders of the selling company in the form of cash, shares or debentures the total of the payments represents the Net Payment made by the purchasing company. 10. What is net asset method? Nets Assets taken over by the purchasing company is deemed as the purchase consideration under the net assets method. Net assets =agreed value of assets taken over Agreed value of liabilities of taken over. RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

25 11. What is intrinsic method? Under this method, the purchase consideration is ascertained on the basis of the ratio in which the shares of the purchasing company exchanged with those of the selling company. The exchange ratio is generally determined on the basis of Intrinsic values = assets available for equity shareholders Number of equity shares 12. What is Capital Reduction or Internal Reconstruction? Reconstruction refers to reorganization of the capital structure of a company. It may result in the reduction of claims of both the shareholders and creditors against the company. Reconstruction may be necessary for those companies whose financial position is bad. PART-B 1. What are the different methods of Purchase Consideration? (April 2012, (Apr 2016) Purchase Consideration Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company. Accounting Standard 14 defines the term purchase consideration as the aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below: a. Lump sum method b. Net payments method c. Net Assets Method d. Other basis for purchase consideration Lump sum Method: strictly speaking, this is not a method. Where the purchase consideration amount is mentioned in the problem itself, it is called Lump Sum RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

26 consideration. This method, does not involve any calculation regarding purchase consideration. Net Payments Method: under this method, the purchase consideration will be the total of payments made (in any form)by purchasing company to vendor company, on any basis. Generally, purchasing company decides the payment to be made towards liabilities of Vendor Company, not taken over and towards expenses. The total of such payment s will be the purchase consideration. Net Assets Method: under this method, purchase consideration will be the excess of value of assets taken over by the purchasing company, over the value of liabilities taken over. that is, under this method, the purchase consideration will be Purchase Consideration = Assets taken over Liabilities taken over (at taken over values) (at taken over value) Other basis of arriving at Purchasing Consideration 1. Intrinsic value 2. Exchange Ratio How to identify the method of purchase consideration, applicable for the given problem? 1. If the problem specifies the method to be adopted adopt the method specified 2. If the method is not specified in the problem, but the amount of purchase consideration is given, it is lump sum method and does not need any calculation. External Reconstruction, Internal Reconstruction & Liquidation of Companies 3. When the payments made by purchasing company to vendor company is given, with the statement Balance in then, Net Asset Method must be adopted. 4. When the payment made by purchasing company to Vendor Company is given liability wise or any other item wise without the statement Balance in.. then, Net Payments Method must be adopted. 2. Raman Ltd agrees to purchase the business of Krishna Ltd on the following terms a) For each of the 10,000 shares of Rs 10 each in Krishnan Ltd 2shares in Raman Ltd of Rs 10 each will be issued at an agreed value of Rs 12per share In Addition, Rs 4 per share cash asso will be paid b) 8%Debentures worth Rs 80,000 will be issued to settle the Rs 60,000 9% debentures in Krishnan Ltd. c) Rs 10,000 will be paid towards expenses of winding up Calculate the purchase Consideration. (Apr 2016) RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

27 Calculation of Purchase Consideration. Shares to be issued for shareholders of the selling Co 10,000 * 2 * 12 2,40,000 Cash to be paid for shareholders of the SellingCo 10000*4 40,000 Purchase Consideration 2,80, Ram and shyam ltd have agreed to amalgamate. A new company Rajesh Ltd has been formed to take over the combined concern as on 31 December After negotiations the two companies have been agreed upon as shown below: BALANCE SHEET AS AN Liabilities Ram Ltd Shyam Ltd Share Capital Shares of Rs 10 each 10,00,000 Reserve fund - Profit&Loss 50,000 A/C 80,000 Creditors 5,00,000 50,000 50,000 50,000 Assets Land &building Plant &Machinery Goodwill Furniture Stock Debtors Bank Ram Ltd 5,00,000 2,00,000-1,10,000 1,50,000 1,20,000 50,000 Shyam Ltd 3,00,000 2,50,000 50,000-20,000 20,000 10,000 11,30,000 6,50,000 11,30,000 6,50,000 Prepare the balance sheet of Rajesh Ltd assuming a. The entire purchase price is paid off in the form of equity shares of Rs 100each in Rajesh Ltd. b. The amalgamation is in the nature of Merger. PART C 1. Distinguish between Amalgamation, Absorption and Reconstruction? (April 2012, Apr 2016) RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

28 Meaning of external reconstruction Reconstruction refers to certain arrangements made by financially unsound companies. The reconstruction arrangement made by a company, to come out of its financial difficulties, may be external or internal. External reconstruction refers to closing/liquidating the company and starting again a new or a fresh. That is technically, a new company will be floated or formed to take over the existing company. Internal reconstruction refers to making internal arrangements for overcoming financial difficulties. A detailed discussion of internal reconstruction of companies. Differences between amalgamation and external reconstruction 1. Amalgamation of companies involves liquidation of two or more companies, while external reconstruction involves liquidation of only one company, 2. Amalgamation of companies results in combination of companies, but external reconstruction does not result in any such combination. Differences between absorption and external reconstruction 1. Absorption of companies does not involve formation of a new company, however, external reconstruction involves formation of a new company, 2. Absorption of companies results in liquidation of one or more companies while external reconstruction results in liquidation of only one company. 3. Absorption of companies involves combination of companies, whereas external reconstruction does not involve any combination. 2..Balance Sheet of Lucky Ltd as as follows. (Apr 2014). Particulars Rs Particulars Rs 2,00,00Equity share of 10 each Creditors 20,00,000 15,00,000 Goodwill Machinery Stock Debtors Cash P & Loss 5,00,000 17,00,000 8,00, ,000 10,000 1,90,000 35,00,000 35,00,000 RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

29 The following scheme of reconstruction was approved by Court. a) To reduce equity share capital by Rs 5 per share. b) To write off goodwill, preliminary expenses and P/ L Account. c) To write down machinery by Rs 3,10,000. Give journal entries and balance sheet. 3. The following are the abridged balance sheet of P Ltd and SLtd as on 31 st March (Apr 2016) Liabilities PLtd SLtd Assets P Ltd S Ltd Equity Share Capital Rs 10 10% Preference share Capital General Reserve Profit/Loss A/C 12% Debentures Current Liabilitess 8,000-4, ,437 3,000 1, Fixed Assets Current Assets 11,000 4,000 4,730 1,970 15,000 6,700 15,000 6,700 On 1 st April.1999, P ltd takes over S Ltd on the following terms. a) P Ltd will issue 3,50,000 equity shares of Rs 10 each at par to the equity shareholders of S Ltd. b) P Ltd will issue 11,000 10% preference shares of Rs 100 each at par to the Preference shareholders of S ltd. c) The Debentures of SLtd will be converted into an equal number of 12.5% Debentures of the same Denomination You are required to show the Balance sheet of P Ltd under Amalgamation RAAK/B.COM /B.COM (CA)/A.CANAGAVALLY/II YEAR/III SEM/CORPORATE ACCOUNTING I /UCP 31/ UCM 31 /UNIT-4/ANSWERS/VER 1.0

30 ACADEMIC YEAR: REGULATION CBCS UCM32 CORPORATE ACCOUNTING-I Unit-V LIQUIDATION OF COMPANIES Type: Problem 80% Theory - 20% QUESTIONS AND ANSWERS PART - A 1. What is winding up? (Apr 20) Liquidation or winding up is the process by which a company is dissolved. Liquidation means the assets realized are used to pay the debts and remaining in balance is to pay back members in proportion to the contribution made by them to the capital of the company. 2. What is the process of winding up? (Nov 2014) (Nov 2012) Selling of assets of the company Paying off liabilities If any deficiency to pay the creditors the shareholders are called upon to pay unpaid amount on the shares. If any surplus it is distributed to the contributories according to their rights. The name of the company will be removed from the register of the company. 3. Explain the modes of winding up? 4. What is the profit and loss appropriation account? (Nov 2012) The profit & loss Appropriation Account may be separately prepared to give details regarding the balance of profit &loss brought forward from last year, the net profit (loss) earned during the year and appropriations made during the year. 5. Calculate sales ratio from the following (May 2014) Sales upto the date of incorporation Rs.1,00,000 Sales upto the date of balance sheet Rs 2,00,000 Total sales for the year Rs 3,00,000 Sales before incorporation = 1,00,000 Sales after incorporation = 2,00,000 Sales Ratio = 1,00,000 : 2,00,000 = 1:2 RAAK/B.COM/HELEN PREETHA.B /II YEAR/III SEM/CORPORATE ACCOUNTING I /UCM 31 /UNIT-3/ANSWERS/VER 1.0

31 ACADEMIC YEAR: REGULATION CBCS What is sales ratio? (May 2013) This is ratio of sales or turnover of the company before and after incorporation. Eg when sales before was 20,000 after incorporation was 60,000 the sales ratio will be 1:3 7. Explain the methods of calculating sales ratio and time ratio? 1. Weighted sales ratio 2. Adjusted time ratio 3. Time ratio 4. Sales ratio 8. What is weighted ratio? But if the expenses change as salary due to more number of workers employed because of conversion of partnership business into a limited company, then weighted ratio is to be calculated by taking into consideration time and the number of workers in pre and post-incorporation periods. 9. What is time ratio? The total amount of certain expenses such as salary, wages etc. does not remain the same throughout the year. If the expenses remain the same throughout the year, these can be easily divided in the time ratio. 10. What are the two methods for calculation the purchase consideration? 1. Net asset method 2. Net payment method 11. What is Purchase Consideration? The price payable by a purchasing company to the vendor company as a consideration for taking over the business. Such price is called purchase consideration and the price may be fixed by agreement between the two parties. 12. What are the different ratio used in computing profit prior to incorporation?(may 2014) 1. Weighted sales ratio 2. Adjusted time ratio 3. Time ratio 4. Sales ratio 5. Allocation of expenses 6. Actual expenditure RAAK/B.COM/HELEN PREETHA.B /II YEAR/III SEM/CORPORATE ACCOUNTING I /UCM 31 /UNIT-3/ANSWERS/VER 1.0

32 ACADEMIC YEAR: REGULATION CBCS PART-B 1. What are the various methods of Purchase Consideration? Methods of purchase consideration: There are different methods of purchase consideration depending upon the terms and conditions settled between the transferor company. 1) Net asset method: under this method the net asset value is calculated by deducting all the liabilities taken over by the transferee company from the entire asset taken by the transferee company. The value of the assets and liabilities is not that appear in the balance sheet but it is that which is decided between the two companies. 2) Net payment method: in this case purchase consideration is calculated by adding all the payments made by the transferee company to the shareholders of the transferor company. Payment can be in the form of cash, shares or debentures. 3) Lump sum method: this is the case when Transferee Company agrees to pay Transferor Company a fixed sum of money. Like xyz limited agrees to pay abc ltd 25 lakh. This is lump sum method. 4) Intrinsic value or share exchange method: in this method to calculate purchase consideration following method is used: Net asset available to the equity shareholders/ number of equity shares. The above is the meaning of purchase consideration and 4 methods of purchase consideration. 2. Ganesh Ltd was incorporated on 1 st May 1996 to purchase the running business of Vinayak and Co., with effect from 1 st January The company obtained certificate of commencement of business on 24 th August Calculate the time ratio, if te accounts were finalized on 31 st December Computation of time Ratio: Pre incorporation period from to = 4 months Post incorporation period from to = 8 months Time Ratio = 4:8= 1:2 3. A company is incorporated on 1st May, The total amount of wages paid is Rs. 90,000. Number of workers employed in pre-incorporation period 6, postincorporation period 24. Wages RAAK/B.COM/HELEN PREETHA.B /II YEAR/III SEM/CORPORATE ACCOUNTING I /UCM 31 /UNIT-3/ANSWERS/VER 1.0

33 ACADEMIC YEAR: REGULATION CBCS Pre-incorporation period will be = 90,000 x 1/9 = Rs. 10,000 Post-incorporation wages are = 90,000 x 8/9 = Rs. 80,000. The ratio is calculated as under: Simple time ratio = 4 month : 8 months or 1 : 2 Weighted time ratio = (1 x 6): (2 x 24) = 6 : 48 or 1 : 8 4. From the following details. Calculate profit before and after incorporation time ratio 3:4 sales ratio 2:3 gross profit Rs 5,00,000 Expenses Rs Salaries 96,000 Discount Rent General expenses 40,000 15,000 12,000 PARTICULARS BASIS OF APPORTIONMENT TOTAL PRE INCORPORATIO POST INCORPORATION Gross profit (A) Sales ratio 2:3 5,00,000 2,00,000 3,00,000 Expenses : Salaries Rent General expenses Discount TOTAL EXPENSES (B) Time ratio 3:4 Sales ratio 2:3 96,000 15,000 12,000 40,000 1,63,000 41,143 6,429 5,143 16,000 68,715 54, ,857 24,000 94,285 NET PROFIT(A-B) 3,37,000 1,31,295 2,05,715 RAAK/B.COM/HELEN PREETHA.B /II YEAR/III SEM/CORPORATE ACCOUNTING I /UCM 31 /UNIT-3/ANSWERS/VER 1.0

34 ACADEMIC YEAR: REGULATION CBCS What are the steps of ascertaining profit prior to Incorporation? (1)Prepare the trading account for the whole period i.e., from the date of purchase of business to the last date of accounts closing in order to calculate the gross profit. Date of incorporation will not affect the calculation of gross profit. (2) Calculate time ratio and sales ratio. Time ratio is calculated by taking into consideration the time falling from the last date of balance sheet to the date of incorporation and the period between the date of incorporation to the last date of presenting final accounts. For example, if (he business is purchased on 1st January 1998 and certificate of incorporation is granted on 1st May 1998 and final accounts are being prepared on 31st December, 1998, then the time ratio is 4 months : 8 months or 1 : 2. Sales ratio is calculated taking into consideration the sales of pre-incorporation period to that of sales of post-incorporation period. For example, if sales of preincorporation period are Rs. 1,00,000 and that of post-incorporation Rs. 3,00,000, then the sales ratio is 1 : 3. (3) Prepare the profit and loss account for the pre-incorporation and post-incorporation periods separately. This is done on the following basis : (i) Gross profit should be apportioned between the two periods on the basis of their respective sales ratio. (ii) Such expenses which are directly related on sales such as cost of sales, discount or commission on sales, discount allowed, bad debts, advertising, selling expenses, etc. should be apportioned on the basis of sales ratio of the two periods. (iii) Fixed expenses such as salaries, rent, audit fees, insurance, general expenses, stationery, printing, depreciation and administrative expenses, etc. should be allocated on the basis of time ratio as these expenses are incurred on the basis of time. (iv) Expenses which are incurred after the incorporation of the company such as directors fees, preliminary expenses, interest on debentures, goodwill written off etc. RAAK/B.COM/HELEN PREETHA.B /II YEAR/III SEM/CORPORATE ACCOUNTING I /UCM 31 /UNIT-3/ANSWERS/VER 1.0