Gurukripa s Guideline Answers to May 2015 Exam Questions CA Final Financial Reporting

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1 Gurukripa s Guideline Answers to May 2015 Exam Questions CA Final Financial Reporting Question No.1 is compulsory (4 5 = 20 Marks). Answer any five questions from the remaining six questions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7] Working Notes should form part of the answers. Question 1 (a): AS 2 From the following information, value the Inventories as on 31 st March, 2015: 5 Marks Raw Material has been purchased at ` 125 per kg. Prices of Raw Material are on the decline. The Finished Goods being manufactured with the Raw Material is also being sold at below Cost. The Stock of Raw Material is of 15,000 kg and the Replacement Cost of Raw Material is ` 100 per kg. Cost of Finished Goods per kg is as under: Particulars ` per kg Material Cost 125 Direct Labour Cost 20 Direct Variable Production Overhead 10 Fixed Production Overhead for the year for a normal capacity of 1,00,000 kgs of production is ` 10 Lakhs. At the year end, there were 2,000 kgs of Finished Goods in stock. Net Realisable Value of Finished Goods is ` 140 per kg. Solution: Similar to Page 2.4, Q.No.16, Page 2.15, Q.No.50 of Padhuka s Students Referencer on A/cg Standards[N 00] 1. Conversion Cost per kg of Finished Product = Direct Labour + Direct Variable Production OH + Fixed Production OH ` 10 Lakhs = ` 20 + ` 10 + = ` 40 per kg. 1 Lakh Kgs 2. Inventory Valuation is as under (A) For Finished Goods (a) Cost per kg for Finished Product = Material + Conversion (b) Net Realisable Value of Finished Product if sold after Conversion (c) Hence, Valuation Rate for Finished Goods = (a) or (b), whichever is lower = ` 165 per kg Given = ` 140 per kg ` 140 per kg (d) Value of Inventory 2,000 kg of Finished Product 2,000 kgs ` 140 = ` 2,80,000 (a) Cost of Raw Material (B) For Raw Materials (b) Replacement Cost of Material, i.e. Sale without Conversion (c) Valuation Rate for Raw Material (i.e. least of Cost or NRV, least of (a) and (b) Given = ` 125 per kg Given = ` 100 per kg ` 100 per kg (d) Value of Inventory 15,000 kg of Raw Material 15,000 kgs ` 100= ` 15,00,000 Note: When the Finished Products in which the Raw Material is incorporated, are expected to be sold below Cost (NRV ` 140 vs Cost ` 165), it is preferable to sell the product without Conversion. In such case, the Raw Materials will be valued below cost, i.e. at NRV, being the Replacement Cost. Question 1 (b): AS 26 Impairment of Assets 5 Marks SMC Limited is having a Plant (an Asset) whose Carrying Amount as on is ` 38,000 Lakhs and the Plant was having a useful life till The estimated Residual Value is ` 900 Lakhs. The Selling Price on 31 st March 2015 is expected to be ` 20,000 Lakhs and the Cost of Disposal is expected to be ` 100 Lakhs. The Expected Cash Flows from the Plant are as under Financial Year Cash Flow ` Lakhs 4,100 5,900 6,000 7,800 4,500 The Company expects the Discount Rate of 10%. Discount Factor at 10% for 1, 2, 3, 4 and 5 years are 0.909, 0.826, 0.751, and respectively. The Company provides depreciation on SLM basis. You are required to determine as at 31 st March 2015: May

2 (i) Value in Use of the Plant (ii) Impairment Loss, if any, to be recognized for the year. (iii) Revised Carrying Amount for the Financial Year ending 31 st March Solution: Similar to Page 28.15, Q.No.31 of Padhuka s Students Referencer on Accounting Standards [RTP] 1. Computation of Value in Use Fin. Year Cash Flow Discount Rate at 10% Discounted Cash Flow ` 4,100 Lakhs ` 3, Lakhs ` 5,900 Lakhs ` 4, Lakhs ` 6,000 Lakhs ` 4, Lakhs ` 7,800 Lakhs ` 5, Lakhs ` 4,500 + ` 900 = ` 5,400 Lakhs ` 3, Lakhs Value in Use ` 21, Lakhs 2. Computation of Other Particulars Particulars ` Lakhs 1. Original Cost 38, Depreciation for Fin.Years , and (See Note below) (8,656.67) 3. Carrying Amount on before Impairment (1 2) 29, Recoverable Amount (Net Selling Price 19,900 [or] Value in Use 21,787.10, whichever is higher) 21, Impairment Loss = Carrying Amount Less Recoverable Amount (3 4) 7, Revised Carrying Amount = Old Carrying Amount Less Impairment Loss (3 5) 21, Depreciation Charge from onwards (21, ) 5 Years 4, Note: Depreciation as per Initial Cost, etc. = Depreciable Value (38, ) = ` 37,100 Lakhs divided by 7.5 years (i.e. from to ) = ` 4, Lakhs for each of the full financial years ( onwards), and ½ X ` 4, Lakhs = ` 2, Lakhs for the period to (6 months). Total Depreciation upto = 2, , , = ` 8, Lakhs. Question 1 (c): AS 9 5 Marks A Company sells the goods with right the return. The following pattern has been observed: Timeframe of Return from date of purchase % of Cumulative Sales Within 10 days 5% Between 11 days and 20 days 7% Between 21 days and 30 days 8% Between 31 days and 45 days 9% The Company has made Sales of ` 30 Lakhs in the month of February 2015 and of ` 36 Lakhs in the month of March The Total Sales for the Financial Year have been ` 450 Lakhs and the Cost of Sales was ` 360 Lakhs. Determine the amount of Provision to be made and Revenue to be recognized in accordance with AS 9. A year may be considered of 360 days. Solution: See Principles in EAC Opinion on Provisioning towards Sales Returns Similar to Page 9.11, Q.No.32 of Padhuka s Students Referencer on Accounting Standards [M 12 (Aud)] 1. Principle: Delivery made, giving the Buyer an unlimited right of return: [Mar 2012 CA Journal Page 1355]: (a) A Provision should be created on the B/S date, for Sales Returns after the Balance Sheet date, at the best estimate of the loss expected, along with any estimated incremental cost that would be necessary to resell the goods expected to be returned. (b) Necessary adjustments to the provision should be made for actual sales return after Balance Sheet date up to the date of approval of Financial Statements. 2. Analysis and Conclusion: Month Feb 2015 March 2015 Revenue (i.e. Sales) to be recognised ` 30 Lakhs ` 36 Lakhs Relevant Percentage of Sales Returns based on B/s Date 31 st March 9% 8% = 1% 9% May

3 Month Feb 2015 March 2015 Amount of Sales Returns expected ` 30,000 ` 3,24,000 Cost of Above Sales Returns ( = 80% on Sales Value) ` 24,000 ` 2,59,200 Provision for Loss due to Sales Returns = 100% 80% = 20% of Returns ` 6,000 ` 64,800 Question 1 (d): AS 25 5 Marks Saurav Limited reported a Profit before Tax of ` 8.00 Lakhs for the 2 nd quarter ending on 30 th September On enquiry, following issues were noticed: (i) Property Tax of ` 60,000 paid during the quarter for the full year has been recognized in full. (ii) 1/5 th of ` 15 Lakhs being Marketing Promotional Expenses incurred on 23 rd September, 2014 has been recognized based on past experience of higher sales in the last quarter of the year. (iii) 50% of the Loss of ` 2 Lakhs incurred on disposal of a Business Segment has been allocated to this quarter. (iv) Cumulative Loss of ` 3 Lakhs resulting from the change in the method of Valuation of Inventory was recognised in the 2 nd quarter, which included ` 2 Lakhs related to earlier quarters. (v) Gain of ` 15 Lakhs from Sale of Investments sold in the 1 st quarter was apportioned equally over the full year. You are required to give proper treatment as required by AS 25 on Interim Financial Reporting and to recast the adjusted Profit before Tax for the 2 nd quarter. Solution: Similar to Page No.25.12, Q.No.33 [N 08, M 12], and Page No Q.No.29 [M 12] of Padhuka s Students Referencer on Accounting Standards Item Property Taxes Marketing Promotional Expenses Loss on Disposal of Business Segment Loss due to change in method of Valuation Gain on Invts Sale Treatment Property Taxes of ` 60,000 relatable to the entire calendar year should be apportioned on time basis, i.e. 3 months period expense ` 15,000 will be reported as Expense. Costs should be anticipated or deferred only when It is appropriate to anticipate that type of cost at the end of the fin.year, and Costs are incurred unevenly during the fin.year of an Enterprise. [Para 38] In this case, recognition of 1/5 th of Expense is not proper. Net Loss on Disposal of Business Segment ` 2,00,000 should be reported in full, since the loss was incurred during the Interim Period. The amount relating to earlier quarters to be taken and adjusted against those respective periods. Apportioned Gain on Sale of Investments in first quarter to be reversed. Particulars ` Lakhs PBT as reported 8.00 Add: Property Taxes to be recognised on time basis ( to be recognised) Loss on change in method of Inventory Valuation relating to previous quarters Less: Sales Promotion Expenses relating to this Quarter (4/5 th i.e. 80% 15.00) Loss on Disposal of Business Segment to be reported in full (balance 50% of 2.00) Apportioned Gain on Sale of Investments in first quarter to be reversed ( ) (12.00) (1.00) (3.75) Adjusted PBT for the Second Quarter (6.30) Note: The Company should also re state the results of the previous quarters based on the above adjustments. Question 2: Corporate Restructuring Amalgamation 16 Marks XY Limited has been incorporated with an Authorized Capital of 70 Lakhs Equity Shares of ` 10 each and 4 Lakhs Preference Shares of ` 100 each. The Subscribers to the Memorandum of Association have subscribed and paid for 1 Lakh Equity Shares. The expenses of incorporation incurred amounted to ` 8.09 Lakhs. XY Limited desires to amalgamate X Limited and Y Limited as at 1 st April, Following information is available. May

4 Balance Sheet as on 31 st March 2015 (Amounts in ` Lakhs) Liabilities X Limited Y Limited Share Capital: Equity Shares (FV ` 100) % Preference Shares (FV ` 100) Reserves and Surplus: Revaluation Reserve Capital Reserve Statutory Reserves Profit and Loss Account Loans Funds: Secured Loans: 12.5% Debentures (FV ` 100) Unsecured Loans 25 0 Current Liabilities: Trade Payables Total 1,900 1,325 Assets Fixed Assets: Land and Building Plant and Machinery Investments Current Assets: Trade Receivables Inventories Cash and Cash Equivalents Total 1,900 1,325 Before amalgamation, X Ltd and Y Ltd will make the following adjustments in their Balance Sheets: (i) Pay off the Unsecured Loans. (ii) X Limited will revalue its Land and Building by enhancing the Book Value by 10% and Y Limited will revalue the Land and Building at ` 330 Lakhs. (iii) Y Limited will revalue its Plant and Machinery at ` 220 Lakhs. (iv) Investments will be disposed off. X Limited sold its Investments for ` 67 Lakhs and Y Limited disposed the same for ` 52 Lakhs. (v) Debentureholders of X Limited and Y Limited will be discharged by XY Limited by issued of 15% Debentures of ` 100 each for such an amount which will not put any additional burden of interest outgo on XY Limited than presently payable by X Limited and Y Limited. (vi) Preference Shareholders of X Limited and Y Limited will be issued 15% Preference Shares in XY Limited in the ratio 2:3, i.e. 2 Shares will be issued for every 3 Shares held at a premium of ` 25. (vii) Equity Shares in XY Limited will be issued as under: (a) Shareholders of X Limited in the ratio of 4:1 at ` 35 per Share, and (b) Shareholders of Y Limited in the ratio of 3:1 at ` 32 per Share. (viii) Statutory Reserves having met its purpose will be merged with Capital Reserves. Prepare the amalgamated Balance Sheet of XY Limited as on 31 st March 2015 as per Schedule III to the Companies Act, 2013 with Notes to Accounts. Solution: 1. Basic Information Selling Co: X Ltd, Y Ltd Date of B/S : Nature of Amalgamation: Buying Co: XY Ltd Date of Amg: Purchase (since all Assets are not taken over at Book Value) 2. Computation of Purchase Consideration: Particulars X Ltd Y Ltd Total Number of Equity Shares = 30 Lakh Equity Shares =21.75 Lakh Equity Shares Number of Preference Shares = 2.8 Lakh Pref. Shares = 1.2 Lakh Pref. Shares Purchase Consideration ` in Lakhs ` in Lakhs Total Equity Share Capital (` 10) = = Premium on ESC at ` 25 & ` = = , (A) 1, , May

5 Particulars X Ltd Y Ltd Total Preference Share Capital (` 100) = = Premium on PSC at ` 25 Per Share = = (B) Total of A + B 1, , Computation of Debentures to be issued Total Debentures of X Ltd & Y Ltd (50 Lakhs + 28 Lakhs) = ` 78 Lakhs. 12.5% thereon = ` 9.75 Lakhs Number of 15% Debentures to be issued at ` 100 each = 9.75 Lakhs 15% = 0.65 Lakhs Thus, Total Value of 15% Debentures issued = 0.65 Lakhs 100 = ` 65 Lakhs (X: Y as 50:28, i.e. ` & ` Lakhs) 3. Balance Sheet of X Ltd and Y Ltd as on (before absorption) in ` Lakhs Particulars as at 31 st March Note X Ltd Y Ltd I EQUITY AND LIABILITIES (1) Shareholders Funds: (a) Share Capital Equity Shares of ` 100 each Preference Shares of ` 100 each (b) Reserves & Surplus: (Note 1) (2) Non Current Liabilities: Secured Loan 12.5% Debentures (3) Current Liabilities: Trade Payables (Creditors) Total 1,914 1,377 II ASSETS (1) Non Current Assets: Fixed Assets Land & Building = 517 Given = 330 Plant & Machinery (2) Current Assets (a) Inventories (b) Trade Receivables Debtors (c) Cash and Cash Equivalents (Note 2) Total 1,914 1,377 Note 1: Reserves & Surplus (` Lakhs) Particulars X Ltd Y Ltd Revaluation Reserves: Given Balance + Revaluation of L&B & P&M % of 470= = 125 Capital Reserve (after Transfer of Statutory Reserves) = = 230 P&L A/C (Net of Loss/ Gain on Sale of Investments) 35 8 = = 14 Total Note 2: Cash & Cash Equivalents (` Lakhs) Particulars X Ltd Y Ltd Given Balance Less: Repayment of Unsecured Loan (25) Add: Sale of Investments Revised Balance Computation of Goodwill / Capital Reserve on in ` Lakhs Particulars X Ltd Y Ltd Total A) Assets taken over (a) Land & Building (b) Plant & Machinery (c) Trade Receivables (d) Inventories (e) Cash & Cash Equivalents Total [A] 1,914 1,377 3,291 May

6 Particulars X Ltd Y Ltd Total Less: Liabilities taken over (a) Trade Payables (b) Debentures issued Total [B] Net Worth [A B] 2,986 Less: Purchase Consideration 2,246 Capital Reserve Other Adjustments (a) Subscribers to the Memorandum (Promoters) subscribed 1 Lakh Equity Shares at ` 10 each = ` 10 Lakhs. (b) Preliminary Expenses incurred = ` 8.09 Lakhs. Hence, Balance Cash in Hand = = ` 1.91 Lakhs. 7. Balance Sheet of XY Ltd as on in ` Lakhs Particulars as at 31 st March Note This Year Prev. Yr I EQUITY AND LIABILITIES (1) Shareholders Funds: (a) Share Capital (b) Reserves & Surplus 2 2, (2) Non Current Liabilities: Long Term Borrowings Secured Loan 15% Debentures (3) Current Liabilities: Trade Payables (Creditors) Total 3, II ASSETS (1) Non Current Assets (a) Fixed Assets: ( ) 1, (2) Current Assets (a) Inventories (b) Trade Receivables (c) Cash & Cash Equivalents ( ) (d) Preliminary Expenses (See Note below) 8.09 Total 3, Note: It is assumed that the Preliminary Expenses shall be written off in the short term against Profits. Alternatively, the Company may resolve to write off Preliminary Expenses against Capital Reserve arising on Amalgamation. Notes to the Balance Sheet Note 1: Share Capital in ` Lakhs Particulars This Year Prev. Year Authorised: 70 Lakhs Equity Shares of ` 10 each Lakhs Preference Shares of ` 100 each Issued, Subscribed & Paid up: Lakhs Equity Shares of ` 10 each Lakhs Preference Shares of ` 100 each (Of the above, Lakhs Equity Shares and 4 Lakhs Preference Shares are issued for Non Cash Consideration pursuant to a scheme of amalgamation, Order No... dated / / ) Total Shares Reconciliation Statement: Particulars Equity Preference Lakh Shares ` Lakhs Lakh Shares ` Lakhs Opening Balance 1 10 Add: Issued on Amalgamation Closing Balance May

7 Note 2: Reserves and Surplus Particulars Capital Reserve Share Premium Total Opening Balance Add: Acquired on Amalgamation 740 1, , Closing Balance 740 1, , Question 3: Consolidation of Financial Statements 16 Marks Draw the Consolidated Balance Sheet as on 31 st March 2015 as per Schedule III with Notes to Accounts (following Indirect Method) based on the following information: Balance Sheet as on 31 st March 2015 (` in Lakhs) Liabilities P Q R Share Capital: Equity Share Capital (FV ` 100) Reserves and Surplus: Reserves Surplus in Profit and Loss Account Current Liabilities: Trade Payables Other Payables: Q Limited 15 R Limited 50 Total Assets P Q R Fixed Assets (Net of Depreciation) Investments: Q Limited 320 R Limited Current Assets: Inventories Trade Receivables Other Receivables: R Limited 40 P Limited 30 Bank Balance Total Additional Information: (a) P Limited acquired 1,50,000 (cum Bonus) Shares of Q Limited and 30,000 Shares or R Limited and Q Limited acquired 50,000 Shares of R Limited on 29 th March (b) Q Limited fixed 1 st April 2014 as Record Date for allotment of Bonus Shares in the ratio of 1:1 and the same were duly allotted. (c) P Limited proposed Dividend at 7.50% for the year ended on 31 st March (d) In December 2014, Q Limited invoiced goods to P Limited for ` 30 Lakhs on a load of 25% on cost. 1/3 rd of such goods are in Stock with P Limited as at the end of the year. (e) R Limited sold to Q Limited on 1 st January 2015, as asset costing ` 20 Lakhs and made a profit of 20% on Invoice Value. Q has provided depreciation at 10% per annum on such assets. (f) As on 31 st March 2014, the balances in Reserves and Profit & Loss Account of Q Limited were ` 5 Lakhs and ` 15 Lakhs respectively. (g) R Limited made a Profit of ` Lakhs during the current year. During the year, ` 0.55 Lakhs was received from Insurance Company against Loss of Stock due to flood which occurred on 31 st January 2014 in which goods worth ` 0.75 Lakhs were damaged and were part of R s Stock as on 31 st March (h) R Limited transferred, at the year end on 31 st March 2015, an amount from Profit and Loss Account to Reserves which equals to 20% of the reported aggregate figures of Reserves and Profit and Loss Account in the Balance Sheet. Solution: Refer Page No , Q.No 42 of Padhuka s Students Guide on Financial Reporting [M 98, N 08, M 11] Holding Company Subsidiary Sub Subsidiary 1. Basic Information Company Status Dates Holding Status = P = Q = R Acquisition: Consolidation: (a) Holding Co. (b) Minority Int. Q (P) 75% 25% R (P) 30% (Q) 50% 20% May

8 Note: Shareholding Pattern is as under Company Held by P Held by Q Total Holdings Minority Interest Total No. of Shares Q 300 (75%) N.A. 300 (75%) 100 (25%) 400 (100%) R 30 (30%) 50 (50 %) 80 (80%) 20 (20%) 100 (100%) Less: ` 5 Bonus issue (2) 2. Analysis of Reserves and Surplus of Subsidiary Companies (a) General Reserve (` in Lakhs) Q R On B/s date ` 10 On B/s date ` 20 DoA to DoC ` ` 10 (Bal. fig) Transfer (` 50 ` 10 20%) Pre Acquisition ` 3 Post Acquisition Pre Acquisition Post Acquisition Q (b) Profit & Loss Account (` in Lakhs) R (See Note) On B/s date ` 40 On B/s date ` ` 15 DoA to DoC ` ` Less: Adjustment (0.20) DoA to DoC ` Add: Adjustment 0.20 Pre Acquisition Post Acquisition Pre Acquisition Post Acquisition Note: Since loss on damaged goods (` = `0.20) relates to last year, it is added to Current year Profit and deducted from last year Profit i.e. Pre acquisition reserve. 3. Consolidation of Balances (` in Lakhs) Particulars Total Minority Pre Acqn. Post Acquisition R Ltd (Holding 80%, Minority 20%) Interest Reserves P&L A/c Equity Capital Reserves 20 4 (10 80%) (10 80%) P&L A/c 30 6 ( %) ( %) Unrealized Profit on Sale of Asset (4.875) (0.975) %=(3.9) Sub Total Q Ltd (Holding 75%, Minority 25%) Equity Capital Reserves P&L A/c (15 75%)=11.25 (25 75%)=18.75 Stock Reserve [Upstream] (2) (0.5) (1.5) Share in Pre Acquisition Reserves of R Ltd 50% [( ) Q s Share 25%)] (3.425) 80% Minority s Share in Post Acqn. Res. of R Ltd: 50% Gen. Res. (8 Q s Share 25%) 1.25 (1.25) 80% (3 75%) (7 75%) 50% P&L A/c (6.18 Q s Share 25%) 80% (0.966) Sub Total Total [Cr] Cost of Investment [Dr.] [ ] (460) Parent s Balances in Reserves Proposed Dividend (7.5% ` 600) (45) For Consolidated B/s Goodwill or Cost of Control May

9 Notes: Sale by Q Ltd to P Ltd: Q Ltd has sold goods at ` 30 Lakhs at Cost Plus 25%. Therefore, the unrealized profit on 25 Upstream Transaction is ` 6 Lakhs [` 30 ]. Since only 1/3 rd of such goods are in Stock, Proportionate unrealized 125 gain is ` 2 Lakhs [6 1/3]. The unrealized profits should be adjusted against Group Reserves and Minority Interest. Sale of Fixed Assets by R Ltd to Q Ltd: (` in Lakhs) 20 Profit on Sale [` 20 ] Less: Proportionate Depreciation [` 25 10% ] (0.125) Unrealized Profit The above Unrealized Profit is in the nature of Upstream Transaction, and hence should be adjusted against Group Reserves and Minority Interest. 4. Consolidated Balance Sheet of P and its Subsidiaries Q and R as at (` in Lakhs) Particulars as at 31 st March WN This Year Prev. Yr I EQUITY AND LIABILITIES (1) Shareholders Funds: (a) Share Capital: 6,00,000 Equity Shares of ` 100 each 600 (b) Reserves & Surplus (2) Minority Interest (3) Current Liabilities (a) Trade Payables Creditors ( ) 75 (b) Short Term Provisions Proposed Dividend 45 Total II ASSETS (1) Non Current Assets Intangible Assets (Good Will or Cost of Control) Fixed Assets Tangible Assets ( ) (2) Current Assets (a) Inventories = (b) Trade Receivables Debtors ( ) 130 (c) Cash and Cash Equivalents Total Note: Inter Company Owings have been eliminated in full. Detailed Notes under Schedule III Requirements have not been provided for the above items. Computational Notes for items in CBS: Note 1: Reserves and Surplus Particulars ` Lakhs (a) Reserves (b) Surplus (Balance in P & L A/c) Total Note 2: Cash and Cash Equivalents Particulars ` Lakhs (a) Cheque in Transit = (b) Bank Balance = Total 185 May

10 Question 4 (a): Financial Institutions 8 Marks Team Ltd is a Non Banking Finance Company. It accepts Public Deposits and also deals in Hire Purchase business. It provides you with the following information regarding major hire purchase deals as on Few Machines were sold on Hire Purchase basis. The Hire Purchase Price was set at ` 100 Lakhs as against the Cash Price of ` 80 Lakhs. ` 20 Lakhs were payable as Down Payment and the balance was payable in 5 equal installments. The Hire Vendor collected the first installment as on , but could not collect the second installment which was due on The Company was finalizing accounts for the year ended on Till , the date on which the Board of Directors signed the accounts, the second installment was not collected. Presume IRR to be 10.42%. Required: (i) What should be the Principal Outstanding on ? Should the Company recognize Finance Charge for the year as Income? (ii) What should be the Net Book Value of Assets as on as per NBFC Prudential Norms Requirement for provisioning? (iii) What should be the amount of Provision to be made as per Prudential Norms of NBFC laid down by the RBI? Solution: Same as Page No. 6.27, Q.No.5 of Padhuka s Students Guide on Financial Reporting [N 12] 1. Basic Computations Particulars ` in Lakhs (a) HP Price 100 (b) Down Payment 20 (c) Balance amount payable (a) (b) 80 (d) Amount payable in each instalment (80 Lakhs 5 instalments) 16 (e) Annuity Factor at 10.42% for 5 Years (f) PV of the instalments (d) (e) 60 (g) Interest Component (c) (f) Loan Repayment Schedule Year Opening Principal Instalment Amt Interest Principal Repaid Closing Principal (1) (2) (3) (4)=(2) 10.42% (5) = (3) (4) (6) = (2) (5) Nil Total Principal Outstanding as on = ` Lakhs. Finance Charges for the year can be recognized as Income, since the instalments are overdue for a period less than 12 months. 3.Computation of Net Book Value Assets Particulars ` in Lakhs (a) Aggregate of Overdue and Future Instalments Receivable (` 16 Lakhs 4) (b) Balance of Unmatured Finance Charges ( ) (c) Provision for Non Performing Assets (Note) (d) Net Book Value of the Asset Note: Particulars ` in Lakhs (a) Aggregate of Overdue and Future Instalments Receivable (b) Balance of Unmatured Finance Charges (c) Depreciated Value of the Asset [` 80 Lakhs (80 Lakhs 20% 2 years)] (d) Provision to be created (a) (b) (c) May

11 Question 4 (b): AS 31 8 Marks Lovely Limited has advanced Staff Loan of ` 50 Lakhs to its Employees on 1 st July 2014 at a concessional rate of 6% per annum, to be repaid in 5 semi annual installments along with interest thereon. The prevailing rate is 8% per annum. Find out the value at which the Loan should initially be recognsied and its amortization till closure thereof. Also give necessary journal entries with appropriate narration for financial year The Discounted Values at 8% and 4% are as under: Period % % Solution: Similar to Page 32.14, Q.No.21 of Padhuka s Students Referencer on Accounting Standards [M 10] 1. Computation of Initial Recognition Amount of Loan to Employees (Amount in `) Cash Inflow Total PVF at 4% Present Value Period Principal Interest at 6% Jul to Dec ,00,000 50,00,000 6% ½ yr = 1,50,000 11,50, ,05,725 Jan to Jun ,00,000 40,00,000 6% ½ yr = 1,20,000 11,20, ,35,552 Jul to Dec ,00,000 30,00,000 6% ½ yr = 90,000 10,90, ,69,010 Jan to Jun ,00,000 20,00,000 6% ½ yr = 60,000 10,60, ,06,088 Jul to Dec ,00,000 10,00,000 6% ½ yr = 30,000 10,30, ,46,557 Present Value or Fair Value at Initial Recognition 48,62,932 Note: Discounting is at 8% p.a (or) 4% for the 6 Months Period. Period 2. Computation of Amortised Cost of Loan to Employees (Amount in `) Amortised Cost Interest to be Repayment (Opening Balance) recognized at 8% (including interest) Amortised Cost (Closing Balance) (1) (2) (3) (4) = (1) + (2) (3) Jul to Dec ,62,932 1,94,517 11,50,000 39,07,449 Jan to Jun ,07,449 1,56,298 11,20,000 29,43,747 Jul to Dec ,43,747 1,17,750 10,90,000 19,71,497 Jan to Jun ,71,497 78,860 10,60,000 9,90,357 Jul to Dec ,90,357 (bal. fig.) 39,643 10,30,000 Nil 3. Journal Entries for first half year (regarding Loan to Employees) S.No. Particulars Dr.(`) Cr.(`) 1 Staff Loan A/c Dr. 50,00,000 To Bank A/c 10,00,000 (Being the disbursement of Loans to Staff) 2 Staff Cost A/c (WN 2) (50,00,000 48,62,932) Dr. 1,37,068 To Staff Loan A/c 1,37,068 (Being write off of excess of Loan Balance over present value thereof, in order to reflect the Loan at its Present Value of ` 48,62,932) [W.N. 1] 3 Profit and Loss A/c Dr. 1,37,068 To Staff Cost A/c 1,37,068 (Being transfer of balance in the Staff Cost A/c to P&L A/c) 4 Staff Loan A/c Dr. 1,94,517 To Interest on Staff Loan A/c 1,94,517 (Being Interest charged at market rate of 8% on the Loan, for first 6 months period) 5 Bank A/c Dr. 11,50,000 To Staff Loan A/c 11,50,000 (Being amount received on repayment) 6 Interest on Staff Loan A/c Dr. 1,94,517 To Profit & Loss A/c 1,94,517 (Being transfer of bal. in Staff Loan Int. A/c to P&L) May

12 Question 5 (a): Valuation of Business 8 Marks The summarized Balance Sheets of Rose Ltd for 3 years ended on 31 st March are as follows: (` in Thousands) Particulars as on 31 st March st March st March 2015 Liabilities: 6,40,000 Equity Shares of ` 10 each fully paid up 6,400 6,400 6,400 General Reserves 4,800 5,600 6,400 Profit and Loss Account Trade Payables 2,400 3,200 4,000 Total Liabilities 14,160 15,840 17,760 Assets: Goodwill 4,000 3,200 2,400 Tangible Assets (Net) 5,600 6,400 6,400 Inventories 4,000 4,800 5,600 Trade Receivables ,760 Cash and Cash Equivalents ,600 Total Assets 14,160 15,840 17,760 Additional Information: (i) Actual Valuation were as under: Tangible Assets 7,200 8,000 8,800 Inventories 4,800 5,600 6,400 Net Profit (including Opening Balance after writing off Depreciation, Goodwill, Tax Provision and Transfer to General Reserves) 1,680 2,480 3,280 (ii) Capital Employed in the business at Market Value at the beginning of was ` 1,46,40,000 which included Cost of Goodwill. The Normal Annual Return on Average Capital Employed in the line of business in which Rose Limited is engaged is 12.50% (iii) The balance in General Reserve as on 1 st April 2012 was ` 40 Lakhs. (iv) The Goodwill shown as on 31 st March 2013 was purchased on 1 st April 2012 for ` 40 Lakhs and the balance in Profit and Loss Account as on 1 st April 2012 was ` 4,80,000. (v) Goodwill is to be valued at 5 years purchase of Super Profit by using Simple Average Method. Find out the Average Capital Employed in each year and Total Value of Business as on 31 st March Solution: Refer Page No , Q.No.1 of Padhuka s Students Guide on Financial Reporting [N 03, M 09] 1. Computation of Average Maintainable Profit Year ending 31 st March Net Profit as given 16,80,000 24,80,000 32,80,000 Less: Opening Balance (4,80,000) (5,60,000) (6,40,000) Less: Undervaluation of Opening Stock (8,00,000) (8,00,000) Add: Undervaluation of Closing Stock 8,00,000 8,00,000 8,00,000 Add: Goodwill written off (Diff. between Closing & Opening Balance.) 8,00,000 8,00,000 Add: Transfer to Reserves (Diff. between Closing & Opening Balance.) 8,00,000 8,00,000 8,00,000 Adjusted Net Profit 28,00,000 35,20,000 42,40, Computation of Average Capital Employed Particulars As at As at As at Tangible Assets (Actual Amount) 72,00,000 80,00,000 88,00,000 Inventories (Actual Amount) 48,00,000 56,00,000 64,00,000 Trade Receivables 80,000 6,40,000 17,60,000 Cash and Cash equivalents 4,80,000 8,00,000 16,00,000 Less: Trade Payables (24,00,000) (32,00,000) (40,00,000) A. Closing Capital Employed 1,01,60,000 1,18,40,000 1,45,60,000 B. Opening Capital Employed (Excluding G/w) 1,06,40,000 1,01,60,000 1,18,40,000 Total of above 2,08,00,000 2,20,00,000 2,64,00,000 C. Average Capital Employed = (A + B) 2 1,04,00,000 1,10,00,000 1,32,00,000 May

13 Less: 3. Computation of Super Profits Year ending 31 st March Adjusted Net Profit (WN 1) 28,00,000 35,20,000 42,40,000 Normal Return at 12½% of Average Capital Employed 1,04,00,000 12½% = 13,00,000 1,10,00,000 12½% = 13,75,000 1,32,00,000 12½% = 16,50,000 Super Profits 15,00,000 21,45,000 25,90,000 Average Super Profits (15,00, ,45, ,90,000) 3 = ` 20,78,333 Goodwill 4. Valuation of Goodwill = Amount of Super Profits No. of. Years of Purchase of Super Profits agreed upon = ` 20,78,333 5 = ` 1,03,91, Valuation of Business Closing Capital Employed as at ` 1,45,60,000 Add: Goodwill as per WN 4 above ` 1,03,91,667 Value of Business ` 2,49,51,667 Question 5 (b): Valuation of Brand 8 Marks Agile Limited is a Manufacturer cum Dealer of R Tuff Brand of Trousers. With passage of time, its Brand has been well accepted in the market, the Company has been approached by a Foreign Company engaged in the same trade to enter as Partner in its business. Agile, in order to negotiate the deal, wants to get its Brand valued. The following information based on Market Research is available: (i) Garment Industry of which Agile is a constituent, is expected to grow by 9% annum during the next five years. The present Market Size of the Industry is ` 7,500 Crores. (ii) There are other brands both National and International in the market. The existence of Duplicate Brands is unavoidable. The Share of such players is estimated to be 63% of the Total Industry Market. The Market Share of other National Brands will 0.25% year on year basis in the next 5 years. The share of International Brands is expected to grow 1.5 times of National Brands. But the existence of Duplicate Brands is to fall by 2.5% over the period of next 5 years, spread equally. (iii) The expected Foreign Partner needs the production line of the company to be re engineered which will lead to an increase in the yield of the Company by 3% after one year over the present yield of 10%, followed thereafter by further increase of 5% year on year. Following the Market Oriented Approach, determine the Brand Value to be used for negotiation with the Foreign Company, considering the Discount Factor for 1 st five years as 0.909, 0.826, 0.751, and (Monetary value in Crores to be rounded off to nearest 2 decimal places). Solution: Refer Page No. 4.8, Q.No.1 of Padhuka s Students Guide on Financial Reporting 1. Market Share of Agile Ltd (a) Current Market Share = 100% (National + International + Duplicate Brands) = 100% 63% = 37% (b) Increase or Decrease in Market Share: National Brands 0.25% + International Brands 0.375% Fall in Duplicate Brands 0.5% = 0.125% increase other product s market share. Hence, Agile s Market Share is expected to fall by 0.125% every year, from current 37%. Therefore, next year it will be %, the year after 36.75%, etc. Year Market Size (%) 2. Brand Valuation under Market Approach (` Crores) Market Share Market Share Discount Expected Profit (%) (Amt) Factor at 15% PV of Profit 1 7, % = 8, % 13% = , % = 8, % 18% = , % = 9, % 23% = , % = 10, % 28% = , % = 11, % 33% = Brand Value 3, Brand Value of Agile Ltd under Market Oriented Approach is ` 3, Crores May

14 Question 6 (a): Value Added Statement 8 Marks Famous Corporation has been preparing Value Added Statement for the past five years. The Human Resource Manager of the Company has suggested introducing a Value Added Incentive Scheme to motivate the Employees for their better performance. To introduce the Scheme, it is proposed that the Best Index Performance (favourable to Employer), i.e. Employee Costs to Added Value for the last five years, will be used as the Target Index for future calculations of the bonus to be paid After the Target Index is determined, any actual improvement in the Index will be rewarded. The Employer & the Employee will be sharing any such improvement in the ratio 1:2. The bonus is given at the end of the year, after the profit for the year is determined. The following information is available: Value Added Statement for 5 years (` in Thousands) Particulars Sales ,600 9,200 10,400 12,000 Less: Bought in Goods, Services 2,560 4,000 5,000 5,600 6,400 Added Value 3,040 3,600 4,200 4,800 5,600 Employee Costs 1,300 1,520 1,680 1,968 2,240 Dividend Taxes ,120 Depreciation ,120 Debenture Interest Retained Earning Added Value 3,040 3,600 4,200 4,800 5,600 Summarized Profit and Loss Account for the year ended on 31 st March 2015 (` in Thousands) Particulars Amount Income: Sales less Returns 13,600 Dividends and Interest 500 Miscellaneous Income ,600 Expenditure: Production and Operational Expenses: Cost of Materials 5,000 Wages & Salaries 1,800 Other Manufacturing Expenses 1,400 8,200 Administrative Expenses: Administration Salaries 600 Administration Expenses 600 1,200 Selling and Distribution Expenses: Selling and Distribution Salaries 120 Selling Expenses Finance Expenses: Debenture Interest 80 Depreciation 1,520 Total Expenditure 11,520 Profit before Taxation 3,080 Less: Provision for Taxation 770 Profit after Taxation 2,310 From the above information, prepare Value Added Statement for the year and determine the amount of Bonus Payable to Employees, if any. Solution: Refer Page No. 7.14, Q.No.5 of Padhuka s Students Guide on Financial Reporting 1. Computation of Target Index Year ending 31 st March Employee Cost 1,300 1,520 1,680 1,968 2,240 Value Added 3,040 3,600 4,200 4,800 5,600 Ratio (Employee Cost Value Added) 42.76% 42.22% 40.00% 41.00% 40.00% Target Index is taken as least of the above on conservative basis = 40% (Favorable to Employer) May

15 Less: Gurukripa s Guideline Answers for May 2015 CA Final Financial Reporting Exam 2. Computation of Bonus for Year ending 31 st March 2015 Particulars ` 000s ` 000s Sales 13,600 Bought in Goods & Services: Cost of Materials 5,000 Production Expenses 1,400 Administration Office Expenses 600 Sales Office Expenses 400 7,400 Value Added from Manufacturing and Trading Activities 6,200 Add: Other Income ( ) 1, Net Value Added 7, Employees Cost, i.e. Wages & Salaries [Wages & Salaries ` 1,800 + Administration Salaries ` Selling & Distribution Salaries ` 120] 3. Employee Cost Net Value Added for the Year 2,520 7, Improvement for the Year eligible for Bonus = Target 40% Ratio as above 35% 5% 5. Bonus Payable for the Year = Value Added ` 7,200 5% Employee Share 2/3 rd Statement of Application of Value Added Particulars ` 000s ` 000s % 1. To Employees: As above 2,520 + Bonus 240 2, % 2. To Government: Taxes % 3. To Providers of Capital: Interest on Debentures % 4. To Retained Profits, etc. (a) Depreciation 1,520 (b) Retained Profits (given 2,310 Incentive 240) 2,070 3, % Total 7, % Note: It is assumed that Taxation Expense is not affected by the above Bonus/ Incentive Payment. 2,520 35% Question 6 (b):ifrs vs AS Give major differences between IFRS and AS (applicable in India) with respect to Property, Plant and Equipment. 8 Marks Solution: Refer Page No. 9.79, Para 9B.3.16 of Padhuka s Students Guide on Financial Reporting Particulars IFRS / IAS Indian A/cg Stds Historical Cost, Revaluation, Fair Value, etc. Non Current Assets held for sale or disposal Biological Assets Historical Cost or Revalued Amounts are used. On opting for revaluation, regular valuations of entire classes of assets are required. Some Intangible Assets, Property, Plant and Equipment and also Investments may be revalued to Fair Value. IFRS / IAS requires revaluation of Derivatives, Biological Assets and certain securities at Fair Value. Non Current Asset is classified as held for sale, if its Carrying Amount will be recovered through a sale transaction rather than through continuing use. A Non Current Asset classified as held for sale is measured at the lower of its Carrying Amount and Fair Value less costs to sell. Comparative B/Sheet is not re stated. Measured at Fair Value less estimated Point of Sale costs. Historical Cost is used. Revaluations are permitted. But, frequency of revaluation is not mentioned. On revaluation, an entire class of assets is revalued, or assets to be revalued are selected on systematic basis. Certain Financial Instruments (AS 30, 31, 32) are carried at Fair Value. There is no specific requirement to classify and present an asset as held for sale on the face of the Balance Sheet or in the Notes. No specific guidance has been issued. Historical Cost is used in general. May

16 Question 7 (a): AS 10, 11, 16 4 Marks AB Limited acquired at the start of the financial year, Fixed Assets from USA at a price of US$ 1,25,000 and made a down payment of US$ 25,000. The Exchange Rate was ` per Dollar at the date of transaction. The balance amount was payable in 4 equal half yearly installments with 8% per annum. The Exchange Rate on the due dates of installment has been ` 61.60, ` 61.80, ` and ` The Asset was under construction during the period of six months from its acquisition. Ascertain the amount to be capitalized and the Gain or Loss to be recognised in each of the years. Solution: Note: Borrowed Amount = Cost USD 1,25,000 ( ) Down Payment USD 25,000 = 1,00,000 USD 1. Computation of Interest Costs & its treatment Repayment Principal Interest (USD) Total (USD) INR to USD Interest Exp ` 6 th Month 25,000 10,0000 8% 6/12 = 4,000 29, ,46, th Month 25,000 75,000 8% 6/12 = 3,000 28, ,85, th Month 25,000 50,000 8% 6/12 = 2,000 27, ,23, th Month 25,000 25,000 8% 6/12 = 1,000 26, ,100 Note: The above Interest Cost will be expensed in the Statement of P&L under the head Finance Charges. The above asset is a Qualifying Asset for Capitalizing Interest Costs on the following grounds (a) Qualifying Asset is an asset that takes substantial period of time to get ready for its intended use. [Substantial Period of Time = 12 months unless shorter time is justified] (b) It is given that the Asset was under construction for 6 months. So, it is assumed that the same is not a Qualifying Asset. (c) Even if it is assumed to be a Qualifying Asset, for capitalising the FOREX Costs as Borrowing Cost, the information on prevailing interest rates in India is not available. Hence, no part of Interest Cost is capitalised. Hence, Asset will be capitalized initially at ` USD 1,25,000 = ` 76,87,500 2.Computation of FOREX Loss on Settlement As per AS 11, the Settlement Difference on account of FOREX Loan will be written off to the Statement of P&L. Also, since the Forex Loan is a Monetary Item, the same has to be restated based on Closing Rate. The difference thereon is taken to the Statement of P&L. The above loan is recognized ` per USD. On repayment the Forex Loss /Gain is recognised. Repayment Loss on Settlement (`) Balance Loan O/s (USD) Restatement Loss on o/s Bal. 6 th Month ( ) 25,000 = 2,500 75,000 No restatement 12 th Month ( ) 25,000 = 7,500 50,000 ( ) 50,000= 15, th Month ( ) 25,000 = 2,500 25,000 No restatement 24 th Month ( ) 25,000 = 7,500 0 No restatement 3.Summary of Debit to P&L A/c: Year Interest Cost Settlement Loss Restatement Loss Year 1 2,46, ,85,400 = 4,31,800 2, ,500 = 10,000 15,000 Year 2 1,23, ,100 = 1,85,900 2, ,500 =10,000 Note: Option is available to Companies, to adjust the Exchange Differences relating to Foreign Currency Borrowings for Depreciable Fixed Assets, in the Cost of such Asset, as per MCA Notification. Question 7 (b): Guidance Note in Excise Duty 4 Marks HS Limited manufactures goods and caters to both national and international markets. As on 31 st March 2015, it has the following Stocks in its Warehouse at Factory: Goods meant for National Market Sale Value of ` 100 Lakhs Goods meant for International Market Export Value of ` 50 Lakhs The Company has a policy to mark up the products for national markets at one third of cost while those for exports are marked up at 150% of its cost. Excise Duty on goods is 12.36%. The Management is of the opinion that Excise is payable only on clearance of goods from Factory and as such the same should not be a part of Cost of Inventory. You are required to guide the Company in the light of relevant Guidance Note. May

17 Solution: Refer Page No. 8.14, Part 3 Illustration of Padhuka s Students Guide on Financial Reporting 1. Local Market: As per the ICAI s Guidance Note on Accounting Treatment for Excise Duty, Provision for the Unpaid Liability of Excise Duty should be made. Therefore, in the above case, Excise Duty on the goods meant for Local Sales should be provided at the rate of 12.36% on the Selling Price, of ` 100 Lakhs for valuation of Stock. 2. Export Goods: Assuming that all the conditions specified in the Central Excise Rules, regarding export of excisable goods without payment of duty are fulfilled by the Company, Excise Duty may not be provided for the goods meant for exports, even though the manufacture thereof is complete. Question 7 (c): AS 9 8 Marks Krishna sold goods to Madhav for ` 100 Crores against an export order of Madhav. Subsequent to the sale by Krishna, the export order of Madhav was cancelled for unavoidable reasons. Madhav decided to sell the good in local market, provided a Price Discount is allowed by Krishna. Krishna acceded to the request of Madhav. Advise how the discount given shall be dealt in the books of accounts of Krishna. Solution: Similar to Page 9.8, Q.No.22 of Padhuka s Students Referencer on A/cg Standards [M 06, M 00] 1. Krishna has sold goods for ` 100 Crores to Madhav. Hence, the sale is complete in all respects. Madhav s decision to sell the same in the domestic market at a discount does not affect the amount recognised as Sales Income by Krishna. 2. Price Discount offered by Krishna at the request of Madhav is not in the nature of discount given during the ordinary course of trade, since it would have been given at the time of sale itself. 3. As there appears to be an uncertainty relating to realisability of the Discount portion, which has arisen subsequent to the time of sale, Krishna should make a separate provision to reflect the uncertainty relating to collectibility, rather than to adjust the amount of Revenue originally recorded. 4. The Discount Allowed should be shown as an Expense in the Statement of P & L of Krishna separately, and not shown as deduction from the Sales figure. Question 7 (d): AS 5 4 Marks A Company desires to make provision in respect of its non moving or slow moving items of stock. The following information is available: (amounts ` in Lakhs) Particulars Current Year Previous Year Value of Closing Stock Provision based on No. of issues during the year Provision based on products technicality The Company has been making provision based on number of issues. However, from this year, the Management has decided to make provision based on technical evaluation. Explain whether such change will amount to change in Accounting Policy. Also draw a suitable Note, if in your view the proposed change requires the same to be given in the Financial Statement of the Current Year. Solution: Refer Page No.5.9, Q.No.29 of Padhuka s Students Referencer on Accounting Standards [M 03, N 08, M 12] 1. Analysis: (a) Changes: The Company s accounting policy requires that provision should be made in respect of non moving stocks. The method of estimating the provision can be changed based on new developments, additional information, etc. if a more prudent estimate of the amount can be made. (b) Nature: The decision to make provision for non moving stock on the basis of technical evaluation is only a change in accounting estimate, and does not amount to a change in accounting policy. (c) Materiality: The change in the amount of required provision is ` 1,00,000 which is only 0.59 % of the Total Stock Value, and is hence not material. May

18 2. Conclusion: (a) Change in Provision from Number of issues to technical evaluation will not result in any change in accounting policy, as there will only be a change in accounting estimate. (b) The Company should be able to demonstrate reasonably that provision made on the basis of technical evaluation provides more satisfactory results than the provision based on Number of Issues. In such case, the Company can change the method of provision. Question 7 (e): AS 29 4 Marks Lucky P Limited has been assessed to Income Tax, in which a demand of ` 10 lakhs has been made. The Company has gone in appeal. The Company has deposited ` 6.00 Lakhs against the demand, on being pursued by the Department. The Company has been advised by its Counsel that there is 80% chance of losing in respect of one of the ground which may end up confirming the demand of ` 4.00 Lakhs, while on other ground, there is fair chance of winning the appeal. How the Company should treat the same while preparing the Final Accounts for the year ending 31 st March 2015? Solution: Refer Page No.29.13, Q.No.29 of Padhuka s Students Referencer on Accounting Standards 1. Recognition: As per AS 29 a Provision should be recognized if the following conditions are satisfied Condition (1) Condition (2) Condition (3) Present obligation as a result of past event. Liability for Income Tax existed on the B/S date, as per the Demand Notice. There is a present obligation. Outflow of Resources to settle the obligation is probable. There will be an outflow of resources to settle the obligation, if the Company does not win the case in appeal. Note: Merely because an appeal has been made, the character of the obligation is not lost. Reliable estimate of the amount. Tax Liability is ascertained at an amount of ` 10 Lakhs, as per the Demand Notice. 2. Provision and Contingent Liability: (a) Since all the conditions for recognition of a Provision are satisfied, a Provision for Tax Liability ` 4 Lakhs should be recognized for , since the probability of confirmation of demand for this amount is very high 80%. This will be disclosed as Short Term Provisions under Current Liabilities (b) For the balance portion of ` 6 Lakhs, where there is a fair chance of winning the appeal, the Company should disclose a Contingent Liability, in the Notes to Accounts. (c) The amount paid as Deposit ` 6 Lakhs should be shown as Other Non Current Assets in the Financial Statements, along with a clear description of the nature of item. May

19 STUDENTS NOTES May