PAPER 5 : ADVANCED ACCOUNTING

Transcription

1 Question 1 PAPER 5 : ADVANCED ACCOUNTING Question No. 1 is compulsory. Answer any five questions from the remaining six questions. Wherever necessary, suitable assumption(s) may be made and disclosed by way of note forming part of the answer. Answer the following questions: (a) Working Notes should form part of the respective answers. With reference to AS 4 "Contingencies and events occurring after the balance sheet date", state whether the following events will be treated as contingencies, adjusting events or non-adjusting events occurring after balance sheet in case of a company which follows April to March as its financial year. (i) A major fire has damaged the assets in a factory on 5 th April, 5 days after the year end. However, the assets are fully insured and the books have not been approved by the Directors. (ii) A suit against the company's advertisement was filed by a party on 10 th April, 10 days after the year end claiming damages of 20 lakhs. (iii) It sends a proposal to purchase an immovable property for 30 lakhs in March. The book value of the property is 20 lakhs as on year end date. However, the deed was registered as on 15 th April. (iv) The terms and conditions for acquisition of business of another company have been decided by March end. But the financial resources were arranged in April and amount invested was 40 lakhs. (v) Theft of cash of 2 lakhs by the cashier on 31 st March but was detected the next day after the financial statements have been approved by the Directors. (b) AB Ltd. is in the process of finalizing its account for the year ended 31 st March, The company seeks your advice on the following: (i) The company's sale tax assessment for assessment year has been completed on 14th February, 2015 with a demand of 5.40 crore. The company paid the entire due under protest without prejudice to its right of appeal. The company files its appeal before the appellate authority wherein the grounds of appeal cover tax on additions made in the assessment order for a sum of 3.70 crore. PS: The word purchase should be read as sell.

2 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 (c) (ii) The company has entered into a wage agreement in May 2015 whereby the labour union has accepted a revision in wage from June The agreement provides that the hike till May 2015 will not be paid to the employees but will be settled to them at the time of retirement. The company agrees to deposit the arrears in Government Bonds by September ABC Ltd. purchased fixed assets for 50,00,000. Government grant received towards it is 20%. Residual value is 8,00,000 and useful life is 8 years. Assumed depreciation is on the basis of Straight Line Method, asset is shown in the Balance Sheet net of grant. After one year, grant becomes refundable to the extent of 7,00,000 due to noncompliance of certain conditions. Pass Journal entries for 2nd year in the books of the company. (d) Power Track Ltd. purchased a plant for US$ 50,000 on 31 st October, 2015 payable after 6 months. The company entered into a forward contract for per Dollar. On 31 st October, 2015, the exchange rate was per Dollar. Answer You are required to recognise the profit or loss on forward contract in the books of the company for the year ended 31 st March, ( 4 5 = 20 Marks) (a) According to AS 4 on Contingencies and Events Occurring after the Balance Sheet Date, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. However, adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. Contingencies used in the Standard is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur. (i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the event becomes immaterial and the event is non-adjusting in nature. (ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given case, suit was filed against the company s advertisement by a party on 10 th April for amount of 20 lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event. (iii) In the given case, proposal for deal of immovable property was sent before the closure of the books of accounts. This is a non-adjusting event as only the proposal was sent and no agreement was effected in the month of March i.e. before the balance sheet date. (iv) As the term and conditions of acquisition of business of another company had been decided by the end of March, acquisition of business is an adjusting event

3 PAPER 5 : ADVANCED ACCOUNTING 3 occurring after the balance sheet date. Adjustment to assets and liabilities is required since the event affects the determination and the condition of the amounts stated in the financial statements for the financial year ended on 31st March. (v) Since the financial statements have been approved before detection of theft by the cashier of 2,00,000, it becomes a non-adjusting event and no disclosure is required in the report of the Approving Authority. (b) (i) Since the company is not appealing against the addition of 1.70 crore ( 5.40 crore less 3.70 crore), therefore, the same should be provided/ expensed off in its accounts for the year ended on 31 st March, However, the amount paid under protest can be kept under the heading Long-term Loans & Advances / Short-term Loans and Advances as the case may be alongwith disclosure as contingent liability of 3.70 crore. (c) (ii) The arrears for the period from June, 2014 to March, 2015 are required to be provided for in the accounts of the company for the year ended on 31 st March, 2015 assuming that negotiations for hike in wages had already started in the year i.e. before the balance sheet date though the agreement was entered in May, Journal Entries in the books of ABC Ltd. for 2 nd year Year Particulars in lakhs (Dr.) in lakhs (Cr.) 2 nd year Fixed Asset Account Dr. 7 To Bank Account 7 (Being government grant on asset partly refunded which increased the cost of fixed asset) Depreciation Account (W.N.) Dr. 5 To Fixed Asset Account 5 (Being depreciation charged on SLM on revised value of fixed asset prospectively) Profit & Loss Account Dr. 5 To Depreciation Account 5 (Being depreciation transferred to Profit and Loss Account at the end of year 2) Working Note: Depreciation for year 2 in lakhs Cost of the Asset 50

4 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Less: Government grant received (10) 40 8 Less: Depreciation for the first year 8 Book value at the end of 1 st year 36 Add: Government grant refundable in 2 nd year Depreciation for the second year 7 (d) Calculation of profit or loss to be recognized in the books of Power Track Limited Forward contract rate Less: Spot rate (61.50) Loss on forward contract 2.75 Forward Contract Amount $ 50,000 Total loss on entering into forward contract = ($ 50, ) Contract period Loss for the period 1 st November, 2015 to 31 st March, 2016 i.e. 5 months falling in the year Hence, Loss for 5 months will be 1,37,500 5 = ,37,500 6 months 5 months 1,14,583 Thus, the loss amounting to 1,14,583 for the period is to be recognized in the year ended 31 st March, Question 2 P and Q are partners of P & Co., sharing Profit and Losses in the ratio of 3:1 and Q and R are partners of R & Co., sharing Profits and Losses in the ratio of 2:1. On 31 st March, 2015, they decide to amalgamate and form a new firm M/s PQR & Co. wherein P, Q and R would be partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on the above date are as under: Liabilities P & Co. R & Co. Assets P & Co. R & Co. Capitals: () () () () Fixed assets: P 2,50,000 - Building 50,000 60,000

5 PAPER 5 : ADVANCED ACCOUNTING 5 Q 1,80,000 2,20,000 Plant & Machinery 1,60,000 1,70,000 R 1,20,000 Office Equipment 50,000 46,000 Reserves 60,000 1,50,000 Current assets: Sundry Creditors 1,30,000 1,36,000 Stock-in-trade 1,20,000 1,40,000 Due to P & Co. - 1,00,000 Sundry Debtors 1,60,000 2,00,000 Bank Overdraft 80,000 - Bank Balance 40,000 1,00,000 Cash in hand 20,000 10,000 Due from R& Co. 1,00,000-7,00,000 7,26,000 7,00,000 7,26,000 The amalgamated firm took over the business on the following terms: (a) Building of P & Co. was valued at 1,50,000. (b) Plant & Machinery of P & Co. was valued at 2,75,000 and that of R & Co. at 2,50,000. (c) All stock in trade is to be appreciated by 20%. (d) Goodwill of P & Co. was valued at 1,20,000 and of R & Co. at 60,000, but the same will not appear in the books of PQR & Co. (e) Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals according to the profit sharing ratio. (f) Provisions for doubtful debts has to be carried forward at 15,000 in respect of debtors of P & Co. and 30,000 in respect of debtors of R & Co. You are required to prepare the Balance Sheet of new firm and capital accounts of the partners in the books of old firms. (16 Marks) Answer Balance Sheet of M/s PQR & Co. as at 31 st March, 2015 Liabilities Assets Capitals: P 6,41,000 Building (1,50, ,000) 2,10,000 Q 4,27,333 Plant & machinery (2,75,000+2,50,000) 5,25,000 R Sundry creditors (1,30,000+1,36,000) Bank overdraft 2,13,667 12,82,000 Office equipment (50,000+46,000) 96,000 2,66,000 80,000 Stock-in-trade (1,44,000+1,68,000) 3,12,000

6 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Sundry debtors (1,60,000+2,00,000) 3,60,000 Less: Provision for doubtful debts (15, ,000) (45,000) 3,15,000 Bank balance (40,000+1,00,000) 1,40,000 Cash in hand 30,000 16,28,000 16,28,000 In the books of P & Co. Partners Capital Accounts Particulars P Q Particulars P Q To Capital A/cs 5,53,000 2,81,000 By Balance b/d 2,50,000 1,80,000 M/s PQR & Co. By Reserve (3:1) 45,000 15,000 By Profit on Realisation A/c (W.N.3) 2,58,000 86,000 5,53,000 2,81,000 5,53,000 2,81,000 In the books of R & Co. Partners Capital Accounts Particulars Q R Particulars Q R To Capital A/cs 4,12,000 2,16,000 By Balance b/d 2,20,000 1,20,000 M/s PQR & Co. By Reserve (2:1) 1,00,000 50,000 By Profit on Realisation (W.N.4) 92,000 46,000 4,12,000 2,16,000 4,12,000 2,16,000 20, ,000+ 1,78, ,667 2,05,667= 30,000.

7 PAPER 5 : ADVANCED ACCOUNTING 7 Working Notes: 1. Computation of purchase considerations P & Co. R & Co. Assets: Goodwill 1,20,000 60,000 Building 1,50,000 60,000 Plant & machinery 2,75,000 2,50,000 Office equipment 50,000 46,000 Stock-in-trade 1,44,000 1,68,000 Sundry debtors 1,60,000 2,00,000 Bank balance 40,000 1,00,000 Cash in hand 20,000 10,000 Due from R & Co. 1,00,000 - (A) 10,59,000 8,94,000 Liabilities: Creditors 1,30,000 1,36,000 Provision for doubtful debts 15,000 30,000 Due to P & Co. - 1,00,000 Bank overdraft 80,000 - (B) 2,25,000 2,66,000 Purchase consideration (A-B) 8,34,000 6,28, Computation of Capital Adjustments P Q R Total Balance transferred from P & Co. 5,53,000 2,81,000 8,34,000 Balance transferred from R & Co. 4,12,000 2,16,000 6,28,000 5,53,000 6,93,000 2,16,000 14,62,000 Less: Goodwill written off in the ratio of 3:2:1 (90,000) (60,000) (30,000) (1,80,000) Existing capital 4,63,000 6,33,000 1,86,000 12,82,000 Proportionate capital (3:2:1) 6,41,000 4,27,333 2,13,667 12,82,000 Amount to be brought in (paid off) 1,78,000 (2,05,667) 27,667

8 8 INTERMEDIATE (IPC) EXAMINATION: MAY, In the books of P & Co. Realisation Account To Building 50,000 By Creditors 1,30,000 To Plant & machinery 1,60,000 By Bank overdraft 80,000 To Office equipment 50,000 By M/s PQR & Co. 8,34,000 To Stock-in-trade 1,20,000 (purchase consideration) To Sundry debtors 1,60,000 (W.N.1) To Bank balance 40,000 To Cash in hand 20,000 To Due from R & Co. 1,00,000 To Partners capital A/cs P 2,58,000 Q 86,000 3,44, In the books of R & Co. 10,44,000 10,44,000 Realisation Account To Building 60,000 By Creditors 1,36,000 To Plant & machinery 1,70,000 By Due to P & Co. 1,00,000 To Office equipment 46,000 By M/s PQR & Co. 6,28,000 To Stock-in-trade 1,40,000 (purchase consideration) To Sundry debtors 2,00,000 (W.N.1) To Bank balance 1,00,000 To Cash in hand 10,000 To Note: Partners capital A/cs Q 92,000 R 46,000 1,38,000 8,64,000 8,64, In the above solution, goodwill is treated through purchase consideration. However, goodwill can alternatively be treated through partners Capital A/cs directly.

9 PAPER 5 : ADVANCED ACCOUNTING 9 2. In the above solution, profit/loss on revaluation of assets has been credited/debited directly to Capital A/cs. However, Revaluation account, may be prepared for crediting/debiting the change in value of assets and transfer the net profit/loss to capital accounts. Question 3 (a) Following is the summarized Balance Sheet of Complicated Ltd. as on 31 st March, 2016 : Liabilities Amount () Equity shares of 10 each fully paid up 12,50,000 Bonus shares 1,00,000 Share option outstanding Account 4,00,000 Revenue Reserve 15,00,000 Securities Premium 2,50,000 Profit & Loss Account 1,25,000 Capital Reserve 1,00,000 Revaluation Reserve 1,00,000 Unpaid dividends 1,00,000 12% Debentures (Secured) 18,75,000 Advance from related parties (Unsecured) 10,00,000 Current maturities of long term borrowings 16,50,000 Application money received for allotment due for refund 2,00,000 86,50,000 Fixed Assets 46,50,000 Current Assets 40,00,000 86,50,000 The Company wants to buy back equity shares of 10 each, on 1 st April, 2016 at 20 per share. Buy back of shares is duly authorised by its Articles and necessary resolution has been passed by the Company towards this. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets. Comment with your calculations, whether buy back of shares by the Company is within the provisions of the Companies Act, If yes, pass necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares. (12 Marks)

10 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 (b) Mention the ways by which Redeemable Debentures may be redeemed under the Companies Act, (4 Marks) Answer (a) Determination of Buy back of maximum no. of shares as per the Companies Act, Shares Outstanding Test Particulars (Shares) Number of shares outstanding (12,50, ,00,000)/ 10 1,35,000 25% of the shares outstanding 33, Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves Particulars Paid up capital () 13,50,000 Free reserves () (15,00, ,50, ,25,000) 18,75,000 Shareholders funds () 32,25,000 25% of Shareholders fund () 8,06,250 Buy back price per share 20 Number of shares that can be bought back (shares) 40,312 Actual Number of shares for buy back 25, Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy Back Particulars (a) Loan funds () (18,75,000+10,00,000+16,50, ,25,000 1,00, ,00,000) (b) Minimum equity to be maintained after buy back in the ratio 24,12,500 of 2:1 () (a/2) (c) Present equity/shareholders fund () 32,25,000 (d) Future equity/shareholders fund () (see W.N.) (32,25,000 2,70,833) 29,54,167 (e) Maximum permitted buy back of Equity () [(d) (b)] 5,41,667 As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company should not be more than twice the capital and its free reserves after such buy-back. Further under Section 69 (1), on buy-back of shares out of free reserves a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR). As per section 69 (2) utilization of CRR is restricted to fully paying up unissued shares of the Company which are to be issued as fully paid-up bonus shares only. It means CRR is not available for distribution as dividend. Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves, amount transferred to CRR on buy-back has to be excluded from the present equity.

11 PAPER 5 : ADVANCED ACCOUNTING 11 (f) Maximum number of shares that can be bought 27, per share Shares (g) Actual Buy Back Proposed Shares 25,000 Summary statement determining the maximum number of shares to be bought back Particulars Number of shares Shares Outstanding Test 33,750 Resources Test 40,312 Debt Equity Ratio Test 27,083 Maximum number of shares that can be bought back [least of the above] 27,083 Company qualifies all tests for buy-back of shares and conclusion is that it can buy maximum 27,083 shares on 1 st April, However, company wants to buy-back only 25,000 equity 20. Therefore, buy-back of 25,000 shares, as desired by the company is within the provisions of the Companies Act, Journal Entries for buy-back of shares Debit () (a) Equity shares buy-back account Dr. 5,00,000 Credit () To Bank account 5,00,000 (Being buy back of 25,000 equity shares of per share) (b) Equity share capital account Dr. 2,50,000 Securities premium account Dr. 2,50,000 To Equity shares buy-back account 5,00,000 (Being cancellation of shares bought back) (c) Revenue reserve account Dr. 2,50,000 To Capital redemption reserve account 2,50,000 (Being transfer of free reserves to capital redemption reserve to the extent of nominal value of capital bought back through free reserves)

12 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Particulars EQUITY AND LIABILITIES 1 Shareholders' funds Balance Sheet of Complicated Ltd. as on 1 st April, 2016 Note No Amount (a) Share capital 1 11,00,000 (b) Reserves and Surplus 2 22,25,000 2 Non-current liabilities (a) Long-term borrowings 3 28,75,000 3 Current liabilities (a) Other current liabilities 4 19,50,000 ASSETS 1 Non-current assets Total 81,50,000 (a) Fixed assets 46,50,000 2 Current assets (40,00,000-5,00,000) 35,00,000 Notes to Accounts 1. Share Capital Equity share capital Total 81,50,000 1,10,000 Equity shares of 10 each 11,00, Reserves and Surplus Profit and Loss A/c 1,25,000 Revenue reserves 15,00,000 Less: Transfer to CRR (2,50,000) 12,50,000 Securities premium 2,50,000 Less: Utilization for share buy-back (2,50,000) - Share Option Outstanding Account 4,00,000 Capital Reserve 1,00,000 Revaluation Reserve 1,00,000

13 PAPER 5 : ADVANCED ACCOUNTING 13 Capital Redemption Reserve 2,50,000 22,25, Long-term borrowings Secured 12% Debentures 18,75,000 Unsecured loans 10,00,000 28,75, Other Current Liabilities Working Note: Current maturities of long term borrowings 16,50,000 Unpaid dividend 1,00,000 Application money received for allotment due for refund 2,00,000 19,50,000 Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method. Suppose amount transferred to CRR account is x and maximum permitted buy-back of equity is y. Then ( 32,25,000 x) 24,12,500 = y (1) y 10 = x 20 Or 2x = y (2) by solving the above equation we get x = 2,70,833 and y = 5,41,667 (b) Redemption of debentures must be done according to the terms of issue of debentures and any deviation will be treated as a default by the company. Redemption by paying off the debt on account of debentures issued can be done in one of the following four methods viz: (a) By payment in lump sum at the end of a specified period of time; (b) By payment in annual installments; (c) By purchasing its own debentures in the open market. (d) By conversion into shares in full or in part depending on the terms of issue.

14 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Question 4 From the following particulars, prepare a Statement of Affairs and the Deficiency Account for submission to official liquidator of Sun City Development Ltd., which went into liquidation on 31 st March, 2016: Liabilities () () 6,00,000 Equity shares of 10 each, 8 paid-up 48,00,000 6% 2,00,000 Preference shares of 10 each 20,00,000 Less: Calls in arrear 1,00,000 19,00,000 5% Debentures having a floating charge on the assets (interest paid up to 30 th September, 2015) 20,00,000 Mortgage on Land & Building 16,00,000 Trade Payable 53,10,000 Wage Payable 4,00,000 Secretary's Salary 10,000 p.m. 60,000 Managing Director's Salary 30,000 p.m. 1,20,000 Assets Estimated to produce () Book value() Land & Building 26,00,000 24,00,000 Plant & Machinery 26,00,000 40,00,000 Tools & Equipments 80,000 4,00,000 Patents & Copyrights 6,00,000 10,00,000 Inventory 14,80,000 17,40,000 Investments in the hand of a Bank for an Overdraft of 38,00,000 34,00,000 36,00,000 Trade Receivables 12,00,000 18,00,000 On 31 st March, 2011 the Balance Sheet of the Company showed a General Reserve of 8,00,000 accompanied by a debit balance of 5,00,000 in the Profit & Loss Account. In 2012, the Company made a profit of 8,00,000 and declared a dividend of 10% on Equity Shares. The Company suffered a total loss of 21,80,000 besides loss of stock due to fire to the tune of 8,00,000 during financial years ending March 2013, 2014 and For the financial year ended 31 st March, 2016, accounts were not made. The cost of winding-up is expected to be 3,00,000. (16 Marks)

15 PAPER 5 : ADVANCED ACCOUNTING 15 Answer In the matter of the Companies Act and in the matter of Sun City Development Ltd. (in winding up) Assets Statement of Affairs on 31 st March, 2016, the date of winding up Assets not specifically pledged (as per list A) Estimated realisable value Trade receivables 12,00,000 Inventory 14,80,000 Plant and Machinery 26,00,000 Tools and Equipment 80,000 Patents and copyrights 6,00,000 Unpaid calls 1,00,000 Assets specifically pledged (as per list B) Estimated Realisation Due to Secured Creditors Deficiency Ranking as Unsecured Creditors Investments 34,00,000 38,00,000 4,00,000 Surplus carried to the last column 60,60,000 Land & Building 26,00,000 16,00,000 10,00,000 60,00,000 54,00,000 Estimated surplus from assets specifically pledged 10,00,000 Estimated total assets available for preferential creditors, debenture holders and unsecured creditors Summary of Gross Assets: Gross realisable value of - assets specifically charged 60,00,000 others assets 60,60,000 1,20,60,000 70,60,000 Estimated total assets available for preferential creditors, debenture holders, bank overdraft and unsecured creditors brought forward 70,60,000

16 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Gross Liabilities 50,00,000 (34,00, ,00,000) Liabilities Secured creditors (as per List B) to the extent to which claims are estimated to be covered by assets specifically pledged 4,20,000* Preferential creditors as per list C 4,20,000* 20,50,000 (20,00, ,000) Estimated balance of assets available for Debenture holders, Bank & unsecured creditors 66,40,000 Debenture holders secured by a floating charge as per list D (20,50,000) Surplus as regards debenture holders 45,90,000 Unsecured creditors as per list E Estimated unsecured balance of claim of creditors partly secured on Specific assets 4,00,000 Trade payable 53,10,000 58,70,000 Outstanding expenses (40, ,20,000) - 1,60,000 58,70,000 Estimated deficiency as regards creditors being the difference between gross liabilities and gross assets 12,80,000 1,33,40,000 Issued & Called up Capital: *Note (i) 6,00,000 Equity shares or 10 each, 8 48,00,000 paid 6% 2,00,000 Preference shares of 10 each fully called 20,00,000 68,00,000 Estimated Deficiency as regards members as per list H 80,80,000 The Secretary of a Company, being an officer, is to be included within the definition of employee for the purpose of computing preferential creditors. The preferential creditor for secretary s salary has been restricted 4 months salary but maximum pay shall not exceed 20,000 per claimant as per the requirement of the law.

17 PAPER 5 : ADVANCED ACCOUNTING 17 (ii) The above is subject to cost of winding up estimated as 3,00,000 and to any surplus / deficiency on realisation of assets. (iii) There are 6,00,000 shares 2 per share liable to be called up. List H - Deficiency Account A. Item contributing to Deficiency 1. Excess of capital & liabilities over assets on NIL 2. Net dividend & bonuses during the period (4,80, ,14,000) 5,94, Net trading losses after charging depreciation, taxation, interest on debentures, etc. during the same period ( 21,80, ,26,000) 48,06, Losses other than trading losses written off or for which provision has been made in the books during the same period - stock loss. 8,00, Estimated losses now written off or for which provision has been made for the purpose of preparing the statement: Plant and Machinery 14,00,000 Tools and equipments 3,20,000 Patents and copyrights 4,00,000 Inventories 2,60,000 Investments 2,00,000 Debtors 6,00,000 31,80, Other items contributing to deficiency NIL 93,80,000 B. Items reducing Deficiency 7. Excess of assets over capital and liabilities on 1 st April, 2011 (8,00,000 5,00,000) 3,00, Net trading profit during the period 8,00, Profit & Incomes other than trading profit during the same period Other items - Profit expected on Land & Building (26,00,000-24,00,000) 2,00,000 13,00,000 Deficiency as shown by the Statement of Affairs (A) - (B) 80,80,000 Working Notes: (1) Trial Balance to ascertain the amount of loss for the year ended 31 st March, 2016 Land & Building 24,00,000 Dr. Cr.

18 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Plant and Machinery 40,00,000 Tools and Equipments 4,00,000 Patents and Copyrights 10,00,000 Inventories 17,40,000 Investment 36,00,000 Trade Receivables 18,00,000 Equity Capital 48,00,000 6% Preference share capital 19,00,000 5% Debentures 20,00,000 Interest Outstanding 50,000 Mortgage on Land & Building 16,00,000 Trade Creditors 53,10,000 Owing for Wages 4,00,000 Secretary s Salary 60,000 Managing Director s Salary 1,20,000 Bank Overdraft 38,00,000 Profit & Loss Account on ,74,000 1,74,14,000 2,00,40,000 Loss for the year (balancing figure) 26,26, Reserve & Surplus Account Question To Profit & Loss A/c (Transfer) To Dividend- Equity Preference to To Profit & Loss A/c (Loss) 2,00,40,000 2,00,40,000 5,00, By Balance b/d 4,80,000 1,14,000 To Loss of Stock 8,00, By Profit for the year 21,80, By Balance c/d 8,00,000 8,00,000 24,74,000 40,74,000 40,74,000 (a) From the following information of Wealth Bank Limited, Prepare Profit and Loss Account for the year ended 31 st March, 2016:

19 PAPER 5 : ADVANCED ACCOUNTING 19 Particulars in lakhs Particulars in lakhs Interest on Cash Credit 364 Interest paid on Recurring Deposits Interest on Overdraft 150 Interest paid on Savings Bank Deposits Interest on Term Loans 308 Auditor s Fees and Allowances Income on Investments 168 Directors Fees and Allowance Interest on Balance with RBI 30 Advertisement 36 Commission on remittances and transfer Commission on Letters of Credit Commission on Government Business Profit on Sale of Land & Building Loss on exchange transactions Interest paid on Fixed Deposits Other Information: 15 Salaries, allowances and bonus to employees Payment to Provident Fund Printing & Stationery 28 5 Repairs & Maintenance Postage, courier & telephones (i) (ii) in lakhs Earned Collected Interest on NPA is as follows: Cash Credit Term Loans Overdraft Classification of Non-performing Advances: Standard 60 Sub-standard-fully secured 22 Doubtful assets-fully unsecured 40 Doubtful assets covered fully by security: Less than 1 year 6

20 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 More than 1 year upto 3 years 3 More than 3 years 2 Loss 38 (iii) Investments Bank should not keep more than 25% of its investment as held-for-maturity' investment; the market value of its rest 75% investment is 3,95,00,000 as on (iv) Provide 35% of the profits towards provision for taxation. (v) Transfer 20% of the profit to Statutory Reserves. (b) Write short notes on the following principles and terms of Insurance Business: (i) (ii) Answer (a) Principle of Indemnity Insurable Interest (iii) Principle of UBERRIMAE FIDEI (iv) Catastrophic Loss I II III Wealth Bank Limited Profit and Loss Account For the year ended 31st March, 2016 ( = 16 Marks) in lakhs Particulars Schedule Year ended Income Interest earned Other income Expenditure Interest expended Operating expenses Provisions and Contingencies (Refer W.N.) Profit/Loss Net Profit/(Loss) for the year Net Profit/(Loss) brought forward Nil

21 PAPER 5 : ADVANCED ACCOUNTING 21 IV Appropriations: Transfer to Statutory reserve (20% of the profits) Balance carried to the balance sheet Total Schedule 13 - Interest Earned Year ended ( in lakhs) I Interest/discount on advances/bills Interest on cash credit (364-84) 280 Interest on overdraft ( ) 50 Interest on term loans (308-70) II Income on investments 168 III Interest on Balance with RBI Interest on NPA is recognized on cash basis, hence difference of accrued interest not received have been reduced from the total accrued interest. Schedule 14 - Other Income Year ended ( in lakhs) I Commission, Exchange and Brokerage: Commission on remittances and transfer 15 Commission on letter of credit 24 Commission on Government business II Profit on sale of Land and Building 5 III Loss on Exchange Transactions (10) 50 Schedule 15 - Interest Expended Year ended ( in lakhs) I Interest on Deposits Fixed deposits 25 Recurring deposits 17 Saving bank deposits 12 54

22 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 I Schedule 16 - Operating Expenses Payment to and provision for employees Salaries, allowances and bonus 248 Year Ended ( in lakhs) Provident Fund Contribution II Printing and Stationery 28 III Advertisement and publicity 36 IV Directors fees, allowances and expenses 50 V Auditors fees and expenses 24 VI Postage, telegrams, telephones etc. 16 VII Repairs and maintenance 10 Working Note: Provisions and contingencies Provision for Advances: 468 ( in lakhs) Standard % 0.24 Sub-standard 22 15% 3.3 Doubtful not covered by security % 40 Doubtful covered by security: Less than 1 year More than 1 year but less than 3 years More than 3 years 6 x 25% 3 x 40% 2 x 100% Loss Assets (38 100%) 38 Provision for tax 35% of (Total Income Total Expenditure) 35% of [816-( )] 35% of [ ] % of

23 PAPER 5 : ADVANCED ACCOUNTING 23 (b) (i) Notes : 1 As per RBI norms, every banking company incorporated in India is required to transfer at least 25% of its profit to the statutory reserve. However, in the above solution, 20% of current profit has been done strictly on the basis of the information given in the question. 2. Cost of investment is missing in the question. Therefore, it is assumed that cost of 75% of the investments, other than the investments held for maturity, is same as its market value. Hence no diminution in the value is provided for in the given solution. Principle of indemnity: Insurance is a contract of indemnity. The insurer is called indemnifier and the insured is the indemnified. In a contract of indemnity, only those who suffer loss are compensated to the extent of actual loss suffered by them. One cannot make profit by insuring his risks. (ii) Insurable interest: All cannot enter into contract of insurance. For example, A cannot insure the life of B who is a total stranger. But if B. happens to be his wife or his debtor or business manager, A has insurable interest i.e. vested interest and therefore he can insure the life of B. For every type of policy insurable interest is insisted upon. In the absence of such interest the contract will amount to a wagering contract. (iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive duty to tell the whole truth in relation to the subject-matter of the contract. There is only the negative obligation to tell nothing but the truth. In a contract of insurance, however there is an implied condition that each party must disclose every material fact known to him. All contracts of insurance are contracts of uberrima fidei, i.e., contracts of utmost good faith. This is because the assessment of the risk and the determination of the premium by the insurer depend on the full and frank disclosure of all material facts in the proposal form. (iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes severe consequences such as bankruptcy to a family, organization, or insurer. Question 6 (a) There is transfer/sale among the three departments as below: Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively. Department Z charges 20% and 25% profit on cost to Departments X and Y respectively. Department Managers are entitled to 10% commission on net profit subject to urealised profit on departmental sales being eliminated.

24 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 Departmental profits after charging Managers' commission, but before adjustment of unrealised profit are as under: Department X 1,80,000 Department Y 1,35,000 Department Z 90,000 Stocks lying at different Departments at the end of the year are as under: Dept. X Dept. Y Dept. Z Transfer from Department X - 75,000 57,000 Transfer from Department Y 70,000-60,000 Transfer from Department Z 30,000 25,000 - Find out the correct departmental profits after charging Managers' commission. (b) M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India). Bangalore branch is an integral foreign operation of ABC & Co. Bangalore branch furnishes you with its trial balance as on 31 st March, 2015 and the additional information given thereafter: Stock on 1 st April, Dr. Cr. (Rupees in thousands) Purchases and Sales 800 1,200 Sundry Debtors & Creditors Bills of Exchange Wages & Salaries Rent, Rates & Taxes Sundry Charges Computers Bank Balance New York Office A/c - 1,620 Information: 3,360 3,360 (a) Computers were acquired from a remittance of US $ 6,000 received from New York head office and paid to the suppliers. Depreciate computers at 60% for the year.

25 PAPER 5 : ADVANCED ACCOUNTING 25 (b) Unsold stock of Bangalore branch was worth 4,20,000 on 31 st March, (c) Answer The rates of exchange may be taken as follows: - On 55 per US $ - On 60 per US $ - Average exchange rate for the 58 per US $ - Conversion in $ shall be made up to two decimal accuracy. You are asked to prepare in US dollars the revenue statement for the year ended 31 st March, 2015 and the balance sheet as on that date of Bangalore branch as would appear in the books of New York head office of ABC & Co. You are informed that Bangalore branch account showed a debit balance of US $ on in New York books and there were no items pending reconciliation. (8 + 8= 16 Marks) (a) Calculation of Correct Profit Department X Department Y Department Z Profit after charging managers 1,80,000 1,35,000 90,000 commission Add back : Managers commission (1/9) 20,000 15,000 10,000 2,00,000 1,50,000 1,00,000 Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000) Profit before Manager s commission 1,75,500 1,27,500 90,000 Less : Commission for Department 10% (17,550) (12,750) (9,000) Departmental Profits after manager s commission 1,57,950 1,14,750 81,000 Working Note: Stock lying with Unrealized Profit of: Dept. X Dept. Y Dept. Z Total Department X 1/5 75,000=15,000 20/120 57,000=9,500 24,500 Department Y ,000=10, ,000=12,000 22,500 Department Z 20/120 30,000=5,000 25/125 25,000=5,000 10,000

26 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 (b) M/s ABC & Co. Bangalore Branch Trial Balance in (US $) as on 31st March, 2015 Trading and Profit & Loss Account for the year ended 31st March, 2015 US $ US $ To Opening Stock 5, By Sales 20, To Purchases To Wages and salaries 13, , By Closing stock ( 4,20,000/60) 7, By Gross Loss c/d 1, , , To Gross Loss b/d 1, By Net Loss 13, To Rent, rates and taxes 6, To Sundry charges 2, To Depreciation on computers 3, (US $ 6, ) Conversion Dr. Cr. rate per US $ US $ US $ Stock on , Purchases and sales 58 13, , Sundry debtors and creditors 60 6, , Bills of exchange 60 2, , Wages and salaries 58 9, Rent, rates and taxes 58 6, Sundry charges 58 2, Computers 6, Bank balance 60 7, New York office A/c 29, () 59, , , ,778.68

27 PAPER 5 : ADVANCED ACCOUNTING 27 Balance Sheet of Bangalore Branch as on 31st March, 2015 Liabilities US $ Assets US $ US $ New York Office A/c 29, Computers 6, Less: Net Loss (13,778.68) 16, Less: Depreciation (3,600.00) 2, Sundry creditors 5, Closing stock 7, Bills payable 4, Sundry debtors 6, Bills receivable Bank balance 2, , Question 7 Answer any four of the following: 25, , (a) What is the distinction between an Ordinary Partnership Firm and a Limited Liability Partnership (LLP)? (b) With reference to AS 29 "Provisions, Contingent Liabilities and Contingent Assets", define: (c) (i) (ii) A Provision A Liability (iii) A Contingent Asset (iv) Present Obligation Write short note on classification of advances in case of Banking Company. (d) Give the basis of allocation of the following common expenditure among different departments: (i) (ii) Insurance of Building Discount and bad debts (iii) Discount received (iv) Repairs and maintenance of capital assets (v) Advertisement expenses (vi) Labour welfare expenses (vii) PF/ESI contributions (viii) Carriage inward

28 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 (e) Write short note on 'Suspension of Capitalisation' in context of Accounting Standard 16. Answer (4 x 4= 16 Marks) (a) Distinction between an ordinary partnership firm and a Limited Liability Partnership (LLP) Key Elements Partnerships LLPs 1 Applicable Law Indian Partnership Act, 1932 Limited Liability Partnerships Act, Registration Optional Compulsory with ROC 3 Creation Created by an Agreement Created by Law 4 Body Corporate Not a body corporate Yes, after registration with ROC, it becomes a body corporate 5 Separate Legal Identity 6 Perpetual Succession It has no separate legal identity Partnerships do not have perpetual succession 7 Number of Partners Minimum 2 and Maximum 20 (subject to 10 for banks) 8 Ownership of Assets 9 Liability of Partners/Members 10 Principal Agent Relationship Firm cannot own any assets. The partners own the assets of the firm Liability of the partners is unlimited. Partners are severally and jointly liable for actions of other partners and the firm and their liability extends to personal assets Partners are the agents of the firm and of each other Yes, all body corporate are said to have a separate legal identity. It has perpetual succession and individual partners may come and go Minimum 2 but no maximum limit The LLP as an independent entity can own assets Liability of the partners is limited to the extent of their contribution towards LLP except in case of intentional fraud or wrongful act of omission or commission by a partner. Partners are agents of the firm only and not of other partners (b) (i) A Provision is a liability which can be measured only by using a substantial degree of estimation.

29 PAPER 5 : ADVANCED ACCOUNTING 29 (ii) A Liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. (iii) A Contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. (iv) Present obligation - An obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e., more likely than not. (c) Banks are required to classify their advances into four broad groups: (d) (i) (ii) Standard Assets Standard assets are those which do not disclose any problems and which do not carry more than normal risk attached to the business. Such an asset is not a NPA (Non-performing asset). Sub-standard Assets Sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months. In other words, such an asset will have well-defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected. (iii) Doubtful Assets A doubtful asset is one which has remained sub-standard for a period of at least 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard with added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. (iv) Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off, wholly or partly. In other words such assets are considered uncollectable or if collected of such low value that their being shown as bankable assets is not warranted even though there may be some salvage or recoverable value. The classification of advances should be done taking into account (i) Degree of well defined credit weakness and (ii) Extent of dependence on collateral security for the recovery of dues. This classification is meant for the purpose of computing the amount of provision to be made in respect of advances. S.No. Expenses Basis (i) Insurance of building Floor area occupied by each department (if given) otherwise on time basis

30 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016 (ii) Discount and bad debts Sales of each department (iii) Discount received Purchases of each department (iv) Repairs and maintenance of capital assets Value of assets of each department otherwise on time basis (v) Advertisement expenses Sales of each department otherwise on time basis or equally among departments (vi) Labour welfare expenses Number of employees in each department (vii). PF/ESI contributions Wages and salaries of each department (viii) Carriage inward Purchases of each department (e) Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted. Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding partially completed assets and do not qualify for capitalization. However, capitalization of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalization continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographic region involved.