SUGGESTED ANSWERS TO MAY 2015 IPCC EXAMS ADVANCED ACCOUNTS

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1 No.1 for CA/CWA & MEC/CEC MASTER MINDS SUGGESTED ANSWERS TO MAY 2015 IPCC EXAMS ADVANCED ACCOUNTS Dear students, These suggested answers are meant for easy and quick assessment of possible outcome of IPCC aspirants for their inadvance preparation and future course of planning. Copyrights on these suggested answers are reserved to MASTER MINDS. No circulation of these suggested answers is permitted by any means. Those who download these suggested answers can only use them for their self assessment and they don t have any rights to circulate the same through any means. DISCLAIMER 1. Readers must aware that, these are not the suggested answers issued by ICAI. These suggested answers are only the recommendations by MASTER MINDS, Guntur. 2. ICAI will issue its own suggested answers in future and performs paper valuation based on its own suggested answers. So, if any difference in judgment is found in assessment of the readers based on MASTER MINDS Suggested Answers, then MASTER MINDS holds no responsibility. 3. The Suggested answers issued by both ICAI and MASTER MINDS are purely different and their own opinions. So, there is no guarantee that suggested answers issued by MASTER MINDS match with the suggested answer to be released by ICAI. Even if the suggested answers issued by MASTER MINDS match with the Suggested answers to be issued by ICAI, it is purely accidental. 4. These suggested answers are prepared based on the information available to us and with the best of our knowledge. Wherever needed assumptions have been taken. 5. Even after taking maximum care in preparation of these suggested answers, there may be chances for some errors, diverse opinions & judgments. So, MASTER MINDS has no responsibility for any such errors and diverse opinions. Question No. 1 1a) As per para 46 of AS29, Provisions, Contingent Liabilities and Contingent Assets, where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognized when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation. The reimbursement should be treated as a separate asset. The amount recognized for the reimbursement should not exceed the amount of the provision. Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent liability is matched by a related counterclaim or claim against a third party. In such cases, the amount of the provision is determined after taking into account the probable recovery under the claim if no significant uncertainty as to its measurability or collectability exists. In this case, the provision of salary to employees of 1250 lakhs will be ultimately collected from the client, as per the terms of the contract. Therefore, the liability of 1250 lakhs is matched by the counter claim from the client. Hence, the provision for salary of employees should be made reducing the claim to be made from the client. It appears that the whole amount of 1250 lakhs is recoverable from client and there is no significant uncertainty about the collection. Hence, the net charge to profit and loss account should be nil. The opinion of the accountant regarding nonrecognition of income of 1250 lakhs is not as per AS29 and AS9. However, the concept of prudence will not be followed if 1250 lakhs is simultaneously recognized as income lakhs is not the revenue at present but only reimbursement of claim. However the accountant is correct to the extent as that nonrecognition of 1250 lakhs as income will result in the under statement of profit. IPCC May 2015_Suggested Answers_ Advanced Accounts 1

2 Ph: /26 1b) 1c) i) 32 lakhs being the cost incurred till date ( ) when the recognition criteria met is to be charged to Profit & Loss A/c for the year ended 31 st March, ii) 28 lakhs being the cost incurred since the date ( ) when recognition criteria is met shall be the carrying amount as on iii) 36 lakhs being the impairment loss (i.e., total book cost (28+90)82) is to be charged to Profit & Loss A/c for the year ended 31 st March, iv) Rs 82 lakhs, being lower of Book cost or recoverable amount, shall be the carrying amount as on 31 st March, i) Computation of Avg. Accumulated Expenses: 12 3,00,000 X ,50,000 X ,50,000 X ,50,000 X 12 3,00,000 2,62,500 2,75,000 12,500 8,50,000 ii) Calculation of Avg. Interest Rate other than for specific Borrowings. of Loan Rate of Interest of Interest in (Rs) 6,00,000 11% 66,000 11,00,000 13% 1,43,000 Total = 17,00,000 Total = 2,09,000 2,09,000 Avg. rate of interest ( x100 ) = % 17,00,000 iii) Interest on Avg. Accumulated Expenses: Specific Borrowings (3,00,000 X 12%) Non Specific borrowings (5,50,000 X %) of interest to be capitalized iv) Total Expenses to be Capitalized: Cost incurred [ 3,00,000+3,50,000+5,50,000+1,50,000] Add: of interest to be Capitalized (Rs) 36,000 67,617 1,03,617 (Rs) 13,50,000 1,03,617 14,53,617 IPCC May 2015_Suggested Answers_Advanced Accounts 2

3 No.1 for CA/CWA & MEC/CEC MASTER MINDS 1d) Computation of Earnings per Share: Net profit for the year Weighted Avg. No. of shares outstanding during the year Basic Earnings per Share = Earnings available toeq.share holders Shares Outstandin g 20,00,000 = = 2.50 / share. 8,00,000 20,00,000 8,00,000 Computation of Diluted Earnings per Share Diluted Earnings per share No.of Shares Outstanding during the year No.of shares under option No.of shares that would have been issued at fair value (1,00,000X 2 1 ) Total Weighted Avg. No.of Shares Diluted Earnings per share = 20,00,000 = 2.35 / share. 8,50,000 8,00,000 1,00,000 (50,000) 8,50,000 Question No. 2. Partners Current Accounts ( to ) Cr. X Y Z X Y Z To Bal. b/d 10,000 By Bal. b/d 30,000 To x s current a/c 30,000 15,000 By y s current A/c 30,000 To X s current A/c To X s Capital A/c ,000 (goodwill) By Z s current A/c (goodwill) 15,000 By Y s current A/c(Revaluation Profit) By Z s current A/c 10,000 (Revaluation Profit) By Joint life policy 6,000 4,000 2,000 ( ) By Bal. c/d 16,000 33,000 1,21,000 50,000 35,000 1,21,000 50,000 35,000 To Bal. b/d 16,000 33,000 ( ) By Profit & Loss 29,136 14,568 To awings 15,000 8,000 appropriation ( ) By Bal. c/d 1,864 26,432 31,000 41,000 31,000 41,000. Partners Current Accounts ( to ) Cr Date X Y Z Date X Y Z To Bal. b/d 1,864 26, By realization A/c 31,674 15,837 To Y s Capital 29,810 By Z s capital ,674 26,432 31,674 26,432 IPCC May 2015_Suggested Answers_ Advanced Accounts 3

4 Ph: /26 Partner s capital Accounts Cr. Date X Y Z Date X Y Z To X s Execution To Bal. c/d To Bal. c/d To Z s Current A/c To Bank 1,81, By Bal. b/d By Bal. b/d By X s Current A/c 60,000 1,21,000 1,81,000 1,81,000 By Bal. b/d By Current A/c 1,81,000 1,81,000 69,810 10,595 9,405 29,810 69,810 69,810. X s Executor s Account Cr. Date Date To bank 30, By X s Capital 1,81, To bal. b/d 1,51,000 1,81,000 1,81, To bank To bal. b/d 30,000 1,25, By bal. b/d By interest (1,51,000 x 6%) x(6/12) 1,51,000 4,530 1,55,530 1,55, To bank 30, By bal. B/d 1,25,530 To bal. b/d 99, By interest (1,25,530 x 6%) x(6/12) 3, To bank 1,29,296 1,29,296 1,00, By bal. B/d 99,296 By interest (99,296 x 6% )x(3/12) 1,489 1,00,785 1,00,785 Working notes 1. Adjustment of Goodwill X Y Z Share of goodwill before death 45,000 30,000 15,000 Share of goodwill after death (45,000) Cr 30,000 15, Adjustment in relation to revaluation of assets X Y Z Share of profit on revaluation credited to partners 30,000 10,000 Debited to continuing parties 60,000 30,000 (30,000) Cr 10, Ascertainment of profit in the year Profit before changing interest on balance due to X s Executor Less: Interest payable to x s executor From to From to X 52,000 4,530 3,766 43,704 IPCC May 2015_Suggested Answers_Advanced Accounts 4

5 No.1 for CA/CWA & MEC/CEC MASTER MINDS 4. Ascertainment of sundry Assets in the year Capital of Y Capital of Z X s Executor Liabilities (Rs) Assets Sundry Assets (b/f) Partner s current A/c Y Z (Rs) 1,31,000 99,296 1,864 26,432 1,59,296 1,59, Realisation A/c Cr To Sundry Assets To Interest A/c To Partners Account of Y 31,674 of Z 15,837 1,31,000 1,489 47,511 By Bank A/c (Purchases Consideration) 1,80, ,80,000 Question No. 3 3a) Ministry of corporate Affairs has made the following classification on adequacy of debentures Redemption Reserve (DRR) vide Circular No.04/2013, dated.11 th February, i) All Indian Financial Institutions regulated by Reserve Bank of India and Banking companies ii) For other Financial Institution with in the meaning given in the companies act. iii) For Debentures issued by NBFC s registered with RBI iv) For Debentures issued by other companies including manufacturing and infrastructure company. Adequacy of Debenture Redemption Reserve No DRR is required DRR will be as applicable to NBFC s registered with RBI 25% of the value of Debentures issued though public issue. No DRR is required is case of privately placed debentures. 25% of the value of debentures issued through public issue. Also 25% DRR is required in the case of privately placed debentures by listed companies For unlisted companies issuing debentures on private placement basis the DRR will be 25% of the value of Debentures. 3b). Own Debentures A/c Cr. Date Nominal Value To Bal B/d 30,00, To Bank A/c 5,00, To Bank A/c 5,00, To DRR A/c Interest Cost Date Nominal Value 27,00, By Deb.Int ,85, By Deb.Int. 22,917 4,95, By 11% 40,00,000 4,12,500 Debentures Interest 2, 2, IPCC May 2015_Suggested Answers_ Advanced Accounts 5 Cost 36,80,417 40,00,000 44,00,000 36,80,417 40,00,000 44,00,000 36,80,417

6 Ph: /26 Debenture Redumption reserve A/c Cr. Date Date To 13.5 Debenture (Loss on sale) To general Reserve 50,000 80,87, By bal b/d By Interest on 13.5% Debenture By Interest on 13.5 Debenture By interests on own debenture By 11% Debenture s 70,00,000 2,02,500 2,02,500 4,12,500 3,19,583 81,37,083 81,37,083 W.N.1: Purchase on No. of Debentures 5,000 Purchase price 98 Purchase Value 4,90,000 Interest included above (5000 X100 X11%X1/12) (4,583) Cost of Debentures 4,85,417 W.N.2: Purchase on No. of Debentures Purchase price Purchase Value Interest included above (5000 X100 X11%X5/12) i) Calculation of purchase consideration Question No. 4 Assets Good will Free hold property Plant & Machinery Motor vehicle Trade receivable Inventory Cash at bank (Less) liabilities 6% Debenture s (120000) + 5% Premium) Trade payables 5, ,95,000 (22,917) M/s A Ltd M/s B Ltd 1, 3,00,000 1,00,000 30,000 2,00,000 2,30,000 80,000 2, 80,000 1,80,000 (2,10,000) (1,26,000) (1,30,000) Net Assets taken over 8,70,000 3,84,000 To be Satisfied by issue of shares of M/s AB 10% Each 87,000 38,400 ii) Balance sheet of M/s AB Ltd as on 1 st April, 2014 Equity & Liabilities Share holders funds Share capital Reserves & surplus Noncurrent liabilities Long term borrowings Current liabilities Trade payables Note No Total IPCC May 2015_Suggested Answers_Advanced Accounts ,54,000 6,000 1, 3, 17,

7 No.1 for CA/CWA & MEC/CEC MASTER MINDS Assets Noncurrent asset Fixed Assets Tangible Asset Intangible Asset Current asset Inventory Trade Receivable Cash & Cash Equivalents Total ,30,000 1,80,000 4,10,000 2,80,000 1, 17, Notes: Share capital Equity share capital A Ltd (87000 x 10) B Ltd (38400 x 10) Reserve and surplus Securities premium Long term borrowing 6% Debentures Current liabilities Trade Payable Tangible Assets Free hold property Plant & Machinery Motor Vehicle Intangible Asset Good will Current Asset Inventory Trade receivable Cash & Cash Equivalents 8,70,000 3,84,000 12,54,000 2,10,000 1,30,000 6,000 1, 3, 3,00,000 2, 5, 1,00,000 30,000 1, 1, 50,000 7,30,000 1,80,000 2,30,000 1,80,000 4,10,000 2,00,000 80,000 2,80,000 80,000 1, IPCC May 2015_Suggested Answers_ Advanced Accounts 7

8 Ph: /26 iii) Journal entries in the books of M/s AB Ltd. on accounting of M/s A Ltd (Amalgamation in the nature of purchase) Date Business purchase A/c To Liquidation (Being Purchase consideration due) Free hold property A/c Plant & Machinery A/c Motor vehicle A/c Trade receivable A/c Inventory A/c Cash at Bank A/c Good will A/c To Trade Payable A/c To Business Purchase A/c (Being incorporation of assets & Liabilities) Liquidator A/c To Equity share capital A/c (Being discharge of purchase consideration) LF No Debit () 8,70,000 3,00,000 1,00,000 30,000 2,00,000 2,30,000 80,000 1, 8,70,000 Credit () 8,70,000 2,10,000 8,70,000 8,70,000 Journal entries in the books of M/s AB Ltd. on taken over of M/s B Ltd Date Business purchase A/c To Liquidation (Being Purchase consideration due) Free hold property A/c Plant & Machinery A/c Motor vehicle A/c Trade receivable A/c Inventory A/c Cash at Bank A/c Good will A/c To 6% Debenture s in B Ltd A/c To Trade Payable A/c To Business Purchase A/c (Being incorporation of assets & Liabilities) Liquidator To Equity share capital A/c (Being discharge of purchase consideration) 6% Debenture s in B Ltd A/c To 6% Debenture s A/c To Securities Premium A/c (Being Debenture s issued at premium) LF No Debit () 3,84,000 2, 80,000 1,80,000 3,84,000 1,26,000 Credit () 3,84,000 1,26,000 1,30,000 3,84,000 3,84,000 1, 6,000 IPCC May 2015_Suggested Answers_Advanced Accounts 8

9 No.1 for CA/CWA & MEC/CEC MASTER MINDS 5a) Question No. 5 i). Bills for collection (Assets) A/c Cr. Date Date To Bal. b/d To Bills for collection A/c (liability) 10,15,000 89,75, By Bills for collection a/c (liability) By Bills for collection a/c (liability) (Dishonored) By Bal. C/d 64,50,000 11,25,000 24,15,000 99,90,000 99,90,000. Bills for collection (Liabilities) A/c Cr. Date Date To Bills for collection (Asset)A/c (collected) To Bills for collection (asset) A/c To Bal. c/d 64,50,000 11,25,000 24,15, By Bal. b/d By Bills for collection (asset) A/c 10,15,000 89,75,000 99,90,000 99,90,000 Note: Bills for collection acts as both contingent asset and contingent liability in bank book ii). Acceptances, Endorsements and other obligations A/c Cr. Date Date To Constituent liability By Bal b/d 27,50,000 for acceptance A/c Honored by bank 44,50, By Constituent liability Paid by client 15,00,000 for acceptance, Honoured by bank 4,00,000 endorsement and To Bal C/d 31,50,000 other obligation A/c 67,50,000 95,00,000 95,00,000 Note: Generally Bank maintains Acceptance, endorsements and other obligations register. iii) As per RBI guidelines, for classifying loan as secured/unsecured usually consider value of security on B/S date i.e., on 31/3/2015 but not on sanctioned/ disbursed date and middle of the year. As per problem O/s Bal on 31/3/15 = 50 lakhs lakhs = lakhs Security value on 31/3/2015 = 100,000 shares x 85 = 85 lakhs (1,00, Each) Therefore above loan is classified as secured loans. iv). Rebate for bills discounted A/c Cr. Date Date To Discount on bills discounted A/c To Bal C/d 45,000 24, To Bal C/d By Discount on bills dishonored A/c 45,000 24,000 69,000 69,000 IPCC May 2015_Suggested Answers_ Advanced Accounts 9

10 Ph: /26 Interest and Discounts A/c Cr. Date Date To Rebate on bills discounted A/c To P & L A/c 24,000 98,21, By Rebate on bills discounted A/c By Bill Discounted A/c 45,000 98,00,000 98,45,000 98,45,000 5b) Computation of provision to be made as per prudential norms: Outstanding Balance () Value of security (reliable) ( ) Unsecured Portion (in lakhs) 2, ,200 () DICGC cover (200) Net unsecured portion 1,000 Provision : Status = Doubtful More than 3 years (D3) Secured Portion (800 X 100%) = 800 Net unsecured Portion (1000 X 100%) = 1,000 Total Provision = 1,800 6a) In the Books of M/s. Sandeep Question No. 6. Trading and Profit & Loss A/c for the year ended Cr. To Opening Stock To Purchases To Goods received from H.O To Gross Profit c/d To Office Exp. To Selling Exp. To Staff Salary To Stock Reserve To Net Profit H.O 1,25,000 21,50,000 13,85,600 Branch 7,38,000 73,000 Total 1,25,000 21,50,000 14,58,600 By Goods sent to Branch A/c. By Sales By closing Stock H.O 7,38,000 23,79,600 5,43,000 Branch 7,30,000 81,000 Total 31,09,600 6,24,000 36,60,600 8,11,000 37,33,600 36,60,600 8,11,000 37,33,600 50,000 4,500 54,500 By Gross profit b/d 13,85,600 73,000 14,58,600 32,000 3,300 35,300 45,000 8,000 53,000 36,000 36,000 12,22,600 57,200 12,79,800 W.N.1: Gross Profit of Head Office 13,85,600 73,000 14,58,600 13,85,600 73,000 14,58,600 23,79,600 On sales made to outsiders X80 10,57,600 7,38, Goods sent to Branch X80 3,28, Total 13,85,600 W.N.2: Gross Profit of Branch 7,30, On sales made by branch at retail price X20 = 73,000 IPCC May 2015_Suggested Answers_Advanced Accounts 10

11 No.1 for CA/CWA & MEC/CEC W.N.3: Computation of closing stock at Head office Opening Stock at Cost (+) Purchases made () Cost of goods sent to Branch 7,38,000 X () Cost of sales made by H.O. 23,79,600 X Closing Stock at Cost W.N.4: Computation of closing stock at Branch (at whole sale price) Opening Stock (+) Goods received from H.O(at whole sale price) () Whole sale price of Goods sold 7,30,000 X Closing Stock at wholesale price W.N.5: Stock Reserve to be created by H.O on Branch Note: 81, Closing Stock = X80 36,000 Let Cost Price to H.O be (+) Loading (100X80%) Cost of goods to Branch / Wholesale price Branch Profit (Bal. fig.) Retail price / Selling Price (Cost to H.O + 100%) MASTER MINDS 1,25,000 21,50,000 22,75,000 (4,10,000) (13,22,000) 5,43,000 7,38,000 6,57,000 81, b) In the Books of M/s. Suman Enterprises. Departmental Trading and Profit & Loss A/c for the year ending Cr. To Opening Stock To Purchases To Transfer from finished Leather Dept To Manufacturing Expenses Finished Leather Department 30, 1,50,00,000 Shoes Depart ment 4,30,000 2,60,000 30,00,000 5,00,000 Total 34,50,000 1,52,60,000 30,00,000 5,00,000 By Sales By Transfer to shoes Dept By Closing stock Finished Leather Department 1,80,00,000 30,00,000 12, Shoes Depart ment 45, 5,00,000 Total 2,25, 30,00,000 17, To Goss Profit c/d To selling Exp To Rent and Warehousing To Net Profit 42,00,000 8,30,000 50,30,000 2,22, 50, 2,72, 2,22, 50, 2,72, 1,50,000 5,00,000 35,50,000 60,000 3,00,000 4,70,000 2,10,000 8,00,000 40, By Gross profit b/d 42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000 IPCC May 2015_Suggested Answers_ Advanced Accounts 11

12 Ph: /26 General Profit & Loss A/c Cr. To General Expenses To Unrealised Profit (W.N.1) 8,50,000 10,500 By Net Profit 40, To General Net Profit 31,59,500 (Bal.fig.) 40, 40, W.N.1: Calculation of Stock Reserve. Rate of Gross Profit of Finished Leather Department for year Gross Profit = X100 Sales 42,00,000 = X100 1,80,00, ,00,000 = 20% Closing Stock of Leather in Shoes Department = 75% i.e., 5,00,000 x 75% = 3,75,000 Stock Reserve on Closing Stock 3,75,000 x 20% = 75,000 Stock Reserve on Opening Stock 4,30,000x75% = 3,22,500x20% = 64,500 Additional Stock Reserve to be maintained = 10,500 Question No. 7 7a) Differences between Life Insurance and other forms of Insurance Criteria Life Insurance Other Forms of Insurance Name Life Assurance Contract General Insurance Contracts Contract Coverage Life Risk of Insured Other than Life Risk Premium Claim Insurable Value Period Types Based on Policy amount period of policy Death / Maturity which ever is earlier Unlimited because human life being invaluable Generally Long term contracts running over no.of years Only one type Life Insurance Based on Policy To the extent of Actual loss on happening of an uncertain event only. Based on value of property. Maximum 1 year but renewable 3 Types Fire, Marine and Miscellaneous Insurance. Ex. Companies LIC, Pru. ICICI etc., National In. co.etc., IPCC May 2015_Suggested Answers_Advanced Accounts 12

13 No.1 for CA/CWA & MEC/CEC MASTER MINDS 7b) i) Provision of AS12: If grant is given with reference to total Investment to setup its business in a designated Backward area, such grants are treated as grant in the nature of shareholder / promoter contribution. AS12 prescribes that such grant should be credited to Capital Reserve. ii) Analysis: Grant received by M/s. A Ltd., is with reference to Investment for setup its business in Backward Area. iii) Conclusion: Grant should be credited to Capital Reserve. a) Bank A/c. 50 Lakhs To Govt. Grant A/c. 50 Lakhs b) Govt. Grant A/c.. 50 Lakhs To Capital Reserve A/c. 50 Lakhs. 7c) Calculation of Total Remuneration payable to Liquidator % Remuneration () 2% on Assets realised; Assets realized 3% on Payment made to preferential creditors; Payment to preferential creditors 3% on Payment to unsecured creditors; Payment to unsecured creditors Total Remuneration payable to Liquidator 45,00,000 1,25,000 15,00,000 Note: available for payment to unsecured creditors: Assets Realised = 45,00,000 (Less) Liquidation exp. = 50,000 (Less) Liquidation Remuneration excluding on Pref.Creditors 93,750 IPCC May 2015_Suggested Answers_ Advanced Accounts 13 2% 3% 3% 43,56,250 (Less) Secured Creditors = 15,00,000 28,56,250 (Less) Preferential Creditors = 1,25,000 Available amount for unsecured creditors 27,31,250 7d) In the following situations lease is classified as finance lease: 9,0000 3,750 45,000 1,38, The lease transfers ownership of the asset to the lessee by the end of the lease term. 2. The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that at the inception of the lease, it is reasonably certain that the option. 3. The lease term is for the major part of the economic life of the asset even if title is not transferred. 4. At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and. 5. The leased asset is of a specialized nature such that only the lessee can use it without major modifications being made.

14 Ph: /26 7e) As per Sec.64 of LLP Act, 2008 Tribunal can order for winding up of a LLP. i) LLP declares that it should be woundup ii) For as period of more than 6 months, the number of partners of LLP are reduced below 2. iii) The LLP is not in position (unable) to pay its debt. iv) LLP has acted against the interest of the sovereignty and integrity of India, the security of the state (or) public order. v) LLP has not filed with the registrar the statement of Account and solvency (sec.34) (or) annual return sec.535 for any five consecutive financial years. vi) The tribunal is of the opinion that it is just and equitable the LLP should be wound up. THE END IPCC May 2015_Suggested Answers_Advanced Accounts 14

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