Accounting Group 1 - Important questions for IPCC November 2017

Transcription

1 Accounting Group 1 - Important questions for IPCC November 2017 AS-2 1. Calculate the value of raw materials and closing stock based on the following information: Raw material X - Closing balance 1,000 units Rs per unit Cost price including excise duty 400 Excise duty (Cenvat credit is receivable on the excise duty paid) 20 Freight inward 40 Unloading charges 20 Replacement cost 350 Finished goods Y - Closing Balance 1200 units Rs per unit Material consumed 440 Direct labour 60 Direct overhead 40 Total Fixed overhead for the year was Rs 2,00,000 on normal capacity of 20,000 units. Calculate the value of the closing stock, when Answer (i) Net Realizable Value of the Finished Goods Y is Rs 500. (ii) Net Realizable Value of the Finished Goods Y is Rs Cost of Raw material X Rs per unit Cost price including excise duty 400 Less: Excise duty (Cenvat credit is receivable on the excise duty paid) (20) Add: Freight inward 40 Add: Unloading charges 20 Cost per unit of Raw Material X Net Realisable Value of Raw Material X (Replacement cost) 350 (given) 3. Cost of Finished Goods Y Rs per unit Material consumed 440 Direct labour 60 Direct overhead 40 Fixed Cost per unit (Rs 2,00,000/20,000) 10 Cost per unit of Finished Goods Y 550 Case 1 - Net Realizable Value of the Finished Goods Y is Rs 500 As per AS-2, in the case of raw materials which are part of inventory and which would be used in finished goods which would sell below cost, raw materials should be valued at lower of COST or NRV.

2 In this case, Cost of Finished Goods Y is Rs 550 and Net Realisable Value is Rs 500. Therefore, the Raw Material X should be valued at Lower of Cost or Net Realisable Value. Value of Raw Material X = Lower of Rs 440 or Rs 350 = Rs 350 Total Value of Raw Material X = 1,000 units * Rs 350 = Rs 3,50, (1) Value of Finished Goods Y = Lower of Cost or Net Realisable Value Value of Finished Goods Y = Lower of Rs 550 or Rs 500 = Rs 500 Total Value of Finished Goods Y = 1,200 units * Rs 500 = Rs 6,00, (2) Total Value of Closing Stock = = Rs 9,50,000 Case 2 - Net Realizable Value of the Finished Goods Y is Rs 580 In the case of raw materials which are part of inventory and which would be used in finished goods which would sell at or above cost, the raw materials should be valued at COST In this case, Cost of Finished Goods Y is Rs 550 and Net Realisable Value is Rs 580. Therefore, the Raw Material X should be valued at Cost. Total Value of Raw Material X = 1,000 units * Rs 440 = Rs 4,40, (3) Value of Finished Goods Y = Lower of Cost or Net Realisable Value Value of Finished Goods Y = Lower of Rs 550 or Rs 580 = Rs 550 Total Value of Finished Goods Y = 1,200 units * Rs 550 = Rs 6,60, (4) Total Value of Closing Stock = = Rs 11,00,000 Note: It is assumed that Raw Material X is used for producing Finished Goods Y. 2. Calculate closing inventory in the following case: A company had 5,000 units of stock A, Rs 50 each on Out of this stock, 3,000 units are to be supplied under a firm contract at Rs 45 each. Show how the valuation will be done of such stock when a. The general selling price is Rs 49 each. b. The general selling price is Rs 52 each.

3 Answer As per AS-2, inventory has to be valued at lower of Cost or Net Realisable Value (NRV) a. The general selling price is Rs 49 each. Units Cost per unit (Rs) NRV per unit (Rs) Lower of Cost or NRV Value of Inventory ,35, (Balance) ,000 Total (Rs) 2,33,000 b. The general selling price is Rs 52 each. Units Cost per unit (Rs) NRV per unit (Rs) Lower of Cost or NRV Value of Inventory ,35, (Balance) ,00,000 Total (Rs) 2,35,000

4 AS-7 3. Prasad Construction Limited commenced a construction contract on 1st April, The Fixed Contract price agreed was Rs 50,00,000. The company incurred Rs 21,00,000 in for 40% work and received Rs 19,00,000 as progress payment from the customer. The company estimated that a further Rs 31,50,000 would incurred to complete it. What amount should be charged to revenue for the year as per AS 7? Show the extract of Profit & Loss A/c for the year in the books of the company. Answer According to AS 7, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized immediately. In the given case, there seems to be an overall loss on the contract. Hence, it must be fully recognised. (i) Calculation of Profit/Loss to be recognised (Rs) Total Contract Cost (21,00, ,50,000) 52,50,000 Less: Total contract price (50,00,000) Loss to be recognised 2,50,000 (ii) Revenue to be recognised during the year Percentage of completion 40% (Given) Revenue to be recognised during the year = 40% * 50,00,000 (A) Rs 20,00,000 Contract Cost incurred till now (given) (B) Rs 21,00,000 Loss on contract (B-A) Rs 1,00,000 Expected loss recognized as per AS 7 - As per (i) Rs 2,50,000 Further provision required in respect of Expected Loss Rs 1,50,000 (Rs 2,50,000 - Rs 1,00,000) Contract Profit and Loss Account for Particulars Rs Particulars Rs To Contract Cost 21,00,000 By Contract Revenue 20,00,000 To Provision for loss 1,50,000 By Net Loss 2,50,000 Total 22,50,000 Total 22,50,000

5 AS-9 4. Victory Ltd. purchased goods on credit from Lucky Ltd. for Rs 250 crores for export. The export order was cancelled due to some reason. Victory Ltd. decided to sell the same goods in the local market with a price discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by Victory Ltd. Discuss whether this treatment is justified. Answer Lucky Ltd. had sold goods to Victory Ltd on credit worth for Rs 250 crores and the sale was completed in all respects. Victory Ltd s decision to sell the same in the domestic market at a discount does not and should not affect the amount recorded as sales by Lucky Ltd. The discount of 15% offered by Lucky Ltd. after request of Victory Ltd. was not in the nature of a discount given during the ordinary course of trade as it was given once the sale was completed. It is a special discount which is being allowed at the request of the buyer. Therefore, it would be appropriate to make a separate charge to P&L Account rather than to adjust the amount of revenue originally recorded. Therefore, such discount should be written off to the profit and loss account and not shown as a deduction from the sales figure.

6 AS DLF, a manufacturing company, has an existing freehold factory property, which it intends to knock down and redevelop. During the redevelopment period the company will move its production facilities to another (temporary) site. The following incremental costs will be incurred: i. Setup costs of Rs 5,00,000 to install machinery in the new location. ii. Rent of Rs 15,00,000 iii. Removal costs of Rs 3,00,000 to transport the machinery from the old location to the temporary location. You are required to advise can these costs be capitalised into the cost of the new building as per AS- 10 (revised)? Answer As per AS-10 (revised), the following costs should be considered for a self-constructed asset: 1. Cost of construction 2. Any directly attributable costs 3. General overhead expenses incurred to the extent they are attributable to the asset 4. Decommissioning, restoration and similar liabilities In the given case, the costs incurred relate to the shifting of the production facility to a temporary location and are not related to the redevelopment of the existing freehold factory property. Therefore, these costs are not be included in the cost of the freehold factory property as they are not directly attributable to bringing the freehold factory property to the location and condition necessary for it to be capable of operating in the manner intended by management.

7 AS Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1st May 2012 at a cost of Rs 3,00,000 with the intention of holding more than a year. The published accounts of unlisted company received in March, 2017 reveals that the company has incurred cash losses with decline market share and investment of Paridhi Electronics Ltd. may not fetch more than Rs 45,000. Answer As per AS-13, long term investments are to be valued at Cost. Where there is a decline, other than temporary, in the carrying amounts of long term investments, the resultant reduction is charged to P&L Account. In the given case, the cost of the investment is Rs 3,00,000. However, the investee company has incurred cash losses with decline market share and investment of Paridhi Electronics Ltd. may not fetch more than Rs 45,000. Therefore, considering this decline to be other than temporary, it would be better to value the investment at Rs 45,000. Therefore, Paridhi Electronics Ltd. should re-state the investment at Rs 45,000 and charge Rs 2,55,000 to the P&L Account. Note: The reduction in carrying amount may be reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exists. 7. A Pvt. Ltd. follows the calendar year for accounting purposes. The company purchased 5,000 nos. of 13.5% Convertible Debentures of Face Value of Rs 100 each of P Ltd. on 1st May Rs 105 on cum interest basis. The interest on these instruments is payable on 31st March & 30th September respectively. On August 1st 2016 the company again purchased 2,500 of such Rs each on cum interest basis. On October 1st, 2016 the company sold 2,000 Rs 103 each. On 31st December, 2016 the company received 10,000 equity shares of Rs 10 each in P Ltd. on conversion of 20% of its holdings. The market value of the debentures as at the close of the year was Rs 106. Prepare the Debenture Investment Account in the books of A Pvt. Ltd. for the year 2016 on Average Cost Basis. Answer in next page

8 Answer Investment in 13.5% Convertible Debentures in P Ltd. Account Note 1: Rs 3,713 received on represents interest on the debentures converted till date of conversion. (Rs 1,10,000*13.5%*3/12) Note 2: Cost being lower than Market Value, the debentures are carried forward at Cost. Working Note for calculation of Ex Interest, Interest and Cum Interest Date Transaction Ex Interest Interest Cum Interest May1 Purchase 5,19,375 (5,25,000-5,625) Aug 1 Purchase 2,45,000 (2,56,250-11,250) 5,625 5,00,000*13.5%*1/12 11,250 2,50,000*13.5%*4/12 5,25,000 (5,000*105) 2,56,250 (2,500*102.5) Oct 1 Sale 2,06, ,06,000 (2,000*103)

9 Calculation of Profit or Loss on Sale of Investment Sale Value of 2,000 debentures Rs 2,06,000 Cost of 2,000 debentures (Average price) (5,19, ,45,000)*2,000/7,500 Cost of 2,000 debentures (Average price) Rs 2,03,833 Therefore, Profit on Sale (2,06,000-2,03,833) Rs 2,167 Conversion Value of equity shares Number of debentures before conversion = (5,000+2,500-2,000) 5,500 Book Value of above 5,500 debentures = (5,19, ,45,000-2,03,833) Rs 5,60,542 Number of debentures converted = 20%*5,500 1,100 Cost of 1,100 debentures (Average price) = 5,60,542*(1,100/5,500) Rs 1,12, On 1st April 2015, Mr Verma had 30,000 equity shares in Xavier Ltd. Face value of the shares was Rs 10 each but their book value was Rs 16 per share. On 1st June 2015, Mr Verma purchased 5,000 more equity shares in the company at a premium of Rs 4 per share. On 30th June, 2015, the directors of Xavier Ltd. announced a bonus and rights issue. Bonus was declared at the rate of one equity share for every five shares held and these shares were received on 2nd August, The terms of the rights issue were: (i) Rights shares to be issued to the existing holders on 10th August, (ii) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at the rate of one share per every three held at Rs 15 per share - the whole sum being payable by 30th September, (iii) Mr Verma exercised his option under the issue for 50% of his entitlements and the balance of rights he sold to Anand for a consideration of Rs 1.50 per share. (iv) Dividends for the year ended 31st March, 2015, at the rate of 15% were declared by the Company and received by Mr Verma on 20th October, (v) On 1st January, 2016, Mr Verma sold 20,000 equity shares at a premium of Rs 3 per share. The market price of share on was Rs 13. Show the Investment Account as it would appear in Mr Verma s books on and the value of shares held on that date.

10 Answer Equity shares in Xavier Ltd Date Particulars No's Face Value Amount Date Particulars No's By Bank A/c 1/4/15 To Balance b/d 30,000 3,00,000 4,80,000 20/10/15 (Note 2) Face Value Amount 7,500 1/6/15 To Bank A/c 5,000 50,000 70,000 1/1/16 By Bank A/c 20,000 2,00,000 2,60,000 2/8/15 To Bonus issue 7,000 70,000 - (Sale Proceeds) 30/9/15 To Bank A/c 7,000 70,000 1,05,000 1/1/16 By P&L A/c (Loss) 4,286 (WN 1) 31/3/16 By Balance c/d 29,000 2,90,000 3,83,214 (Note 4) Total 49,000 4,90,000 6,55,000 Total 49,000 4,90,000 6,55,000 Working Note 1 - Calculation of Profit/Loss on Sale of Investments Book Value of Investments before sale Balance in the Investment A/c = Number of shares held before sale Book Value of 20,000 shares sold = (647500/49000*20000) 2,64,286 Sale Price of 20,000 shares (given) 2,60,000 Loss on Sale of Shares (Book Value - Sale Price) 4,286 Notes to the solution 1. The investment account has been worked out using Weighted Average Basis 2. Total Dividend Received = 35,000 shares * Rs 10 * 15% = Rs 52,500 Of the above, dividend relating to 5,000 shares, that is, Rs 7,500 can be considered as "Pre-acquisition dividend". Hence, it is reduced from cost of investment by crediting Investment A/c. The balance dividend on 30,000 shares, that is, Rs 45,000 will be credited to Profit and Loss Account. 3. Rights received = *1/3 = 14,000. Sale of Right (50% of above) 7,000 * Rs 1.5 = Rs 10,500 will be taken to Profit and Loss Account. W.r.t. the balance 7,000 rights, purchase has been made for Rs 1,05,000 (7,000 * Rs 15) 4. The shares have been assumed to be Long Term Investments. As per AS-13, Long Term Investments should be carried at Cost. They may be written down to Market Value if there is a decline other than temporary. Since there is no such indication in the question, Market Value of Rs 13 has not been considered while valuing investment on 31/3/2016 and the investments have been valued at COST. Rs