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UNDERWRITING OF SHARES AND DEBENTURES

Q1. (May 2018 - RTP)

Paper Limited comes out with a public issue of share capital on 01-01-2017 of 30,00,000

equity shares of Rs 10 each at a premium of 5%. Rs 2.50 is payable on application (on or

before 31-01-2017) and Rs 3 on allotment (31-3-2017) including premium.

This issue was underwritten by two underwriters namely White and Black, equally, the

commission being 4% of the issue price. Each of the underwriters underwrites 60,000

shares firm. Subscriptions including firm underwriting came for 28,80,000 shares, the

distribution of forms being White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.

One of the allottees (using forms marked with name of White) for 6,000 shares fails to

pay the amount due to allotment, all the other money due being received in full including

any due from the shares devolving upon the underwriters. The commission due was paid

separately.

6,000 shares of one allottee who failed to pay the allotment money were finally forfeited

by 30-06-2017 and were re-allotted for payment in cash of ` 4 per share.

You are required to prepare each underwriter‟s liability (in shares) in statement form

assuming that benefit of firm underwriting is given to individual underwriter and to

prepare necessary journal entries to record the above events and transactions (including

cash).

Solution:

Statement showing liability of underwriters Particulars Basis White Black

A. Gross Liability [No. of Shares) 1:1 15,00,000 15,00,000

B. Less: Marked Applications {Net of

firm underwriting}

(15,00,000) (10,20,000)

C. Balance [A-B] - 4,80,000

D Less: Unmarked Applications 1:1 (1,20,000) (1,20,000)

E Balance [C-D] (1,20,000) 3,60,000

F Less: Firm Underwriting (60,000) (60,000)

G Balance (1,80,000) 3,00,000

H Credit for White ‟s Oversubscription 1,80,000 (1,80,000)

I Net Liability - 1,20,000

J Add: Firm Underwriting 60,000 60,000

K Total Liability [No. Shares] 60,000 1,80,000

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Journal Entries

2017 Jan 31

Bank A/c Dr. 72,00,000

To Equity Share Application A/c 72,00,000

(Being application money received @ Rs 2.50 per share

on 28,80,000 shares)

March 31 Equity Share Application A/c Dr. 72,00,000

To Equity Share Capital A/c 72,00,000

(Being the transfer of application money to share

capital on 28,80,000 shares vide Board‟s Resolution)

March 31 Equity Share Allotment A/c

(28,80,000 x Rs 3)

Dr. 86,40,000

To Equity Share Capital A/c (28,80,000x Rs 2.5) 72,00,000

To Securities Premium A/c (28,80,000 x Rs 0.5) 14,40,000

(Being allotment money due on 28,80,000 shares

allotted to public)

Black (1,20,000 x Rs 5.5) Dr. 6,60,000

To Equity Share Capital A/c

(1,20,000 x Rs 5)

6,00,000

To Securities Premium A/c

(1,20,000 x Rs 0.5)

60,000

(Being the application and allotted money due on net

liability of underwriter i.e. 1,20,000 shares)

March 31 Bank A/c Dr. 92,82,000

To Equity Share Allotment A/c [(28,80,000 – 6,000) x

Rs 3]

86,22,000

To Black (1,20,000 x Rs 5.5) 6,60,000

(Being the receipt of money due on allotment except

from the allottee for 6,000 shares)

March 31 Underwriting Commission A/c Dr. 12,60,000

To Black A/c 6,30,000

To White A/c 6,30,000

(Being commission @ 4 % on issue price of Rs 10.50

for Rs30 lakh shares payable to underwriters)

March 31 Black A/c 6,30,000

White A/c 6,30,000

To Bank A/c 12,60,000

(Being commission paid to underwriters)

June 30 Equity Share Capital A/c (6,000 x 5) 30,000

Securities Premium A/c (6,000 x 0.5) Dr. 3,000

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To Share Allotment A/c (6,000 x 3) 18,000

To Forfeited Shares A/c (6,000 x 2.5) 15,000

(Being 6,000 shares forfeited vide Board‟s Resolution)

June 30 Bank A/c (6,000 x Rs 4) 24,000

Forfeited Shares A/c Dr. 6,000

To Equity Share Capital A/c (6,000 x Rs 5) 30,000

(Being the reissue of 6,000 shares @ Rs 4 as Rs 5

paid up at par)

Forfeited Shares A/c (15,000 – 6,000) Dr. 9,000

To Capital Reserve A/c 9,000

(Being the transfer of profit on reissue)

Q2. (Nov. 2018 - RTP)

M/s. Abhi Ltd. issued 2,00,000 shares of Rs 10 each at a premium of Rs 20. The entire

issue was underwritten as follows:

Amit – 1,20,000 shares (Firm underwriting 10,000 shares)

Sumit – 50,000 shares (Firm underwriting 6,000 shares)

Lalit – 30,000 shares (Firm underwriting 4,000 shares)

Unmarked applications received by the company (excluding firm underwriting) were 25,000

shares.

The marked applications (excluding firm underwriting) were as follows:

Amit – 80,000 shares

Sumit – 35,000 shares

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Lalit– 24,800 shares

Commission payable to underwriters is at 5% of the issue price. The underwriting contract

provides that credit for unmarked applications be given to the underwriters in proportion

to the shares underwritten and benefit of firm underwriting is to be given to individual

underwriters. You are required to :

(i) Calculate the liability of each underwriter (number of shares);

(ii) Compute the amounts payable to or due from underwriters; and

Prepare Journal Entries in the books of the company relating to underwriting.

Solution:

(i) Computation of total liability of underwriters in shares

(In shares)

Amit Sumit lalit Total

Gross liability 1,20,000 50,000 30,000 2,00,000

Less: Marked applications

(excluding firm underwriting)

(80,000) (35,000) (24,800) (1,39,800)

40,000 15,000 5,200 60,200

Less: Unmarked applications in the

ratio of gross liabilities of 12:5:3

(excluding firm underwriting)

(15,000) (6,250) (3,750) (25,000)

Less: Firm underwriting 25,000

(10,000)

15,000

8,750

(6,000)

2,750

1,450

(4,000)

(2,550)

35,200

(20,000)

15,200

Less: Surplus of Lalit adjusted by

Amit and Sumit in 12:5

(1,800) (750) 2,550

Net liability 13,200 2,000 - 15,200

Add: Firm underwriting 10,000 6,000 4,000 20,000

Total liability 23,200 8,000 4,000 35,200

(ii) Calculation of amount payable to or due from underwriters

Amit Sumit Lalit Total

Total Liability in shares 23,200 8,000 4,000 35,200

Amount receivable @ Rs 30 from

underwriter (in Rs)

6,96,000 2,40,000 1,20,000 10,56,000

Less: Underwriting Commission

payable @ 5% of Rs 30 (in Rs)

(1,80,000) (75,000) (45,000) (3,00,000)

Net amount receivable (in Rs) 5,16,000 1,65,000 75,000 7,56,000

(iii) Journal Entries in the books of the company (relating to underwriting)

Rs Rs

1. Amit Dr. 6,96,000

Sumit Dr. 2,40,000

Lalit Dr. 1,20,000

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To Share Capital A/c 3,52,000

To Securities Premium A/c (Being allotment of

shares to underwriters)

7,04,000

2. Underwriting commission A/c Dr. 3,00,000

To Amit 1,80,000

To Sumit 75,000

To Lalit (Being amount of underwriting commission

payable)

45,000

3. Bank A/c Dr. 7,56,000

To Amit 5,16,000

To Sumit 1,65,000

To Lalit (Being net amount received by underwriters

for shares allotted less underwriting commission)

75,000

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IMPORTANT NOTES:

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EMPLOYEES STOCK OPTION PLAN (ESOP)

Q3: (ICAI MODULE) & (Nov. 18 Exam Paper – 10 Marks)

Choice Ltd. grants 100 options to each of its 1000 employees on 01.04.2008 at Rs.20/-

each, Market Value being Rs. 50/- each. Option will vest at the end of 1st Year if the

earnings of Choice Ltd. increases by 16%, or it will vest at the end of 2nd Year if the

average earnings of two years increases by 13%, or lastly it will vest at the end of 3rd Year

if average earnings of 3 years will increase by 10%. 50 employees left the company in year

1, 40 employees left the company in 2ndyear, and finally 35 employees in 3rd Year.

Actual Earnings

1st Year – 14%; 2nd Year – 10% and 3rd Year – 7%

850 Employees exercised their options within a year and remaining options were lapsed.

(Answer: 14,25,000; 3,95,000 & 8,05,000; transfer to GR – 75,000)

Solution:

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BUY-BACK OF SECURITIES

Q4.

On 31st March 2011, the following was the balance sheet of TOKYO Ltd.:

LIABILITES AMOUNT

(in lacs)

ASSETS AMOUNT

(in lacs)

Equity share capital

(fully paid of 10/- each)

Security premium

General Reserve

Profit and Loss a/c

12% Debentures

Sundry Creditors

Provisions

2,400

350

930

340

1,500

750

390

Machinery

Furniture

Investments

Stocks

Debtors

Cash at Bank

3,600

452

148

1,200

520

740

6,660 6,660

On 1st April 2011, the company announced the buy-back of 25% of its equity shares @ 15

per share. For this purpose, it sold all of its investments for 150/- lacs and issued

2,00,000, 14% preference shares of 100/- each at par, the entire amount being payable

with application.

The issue was fully subscribed. The company achieved the target of buy-back. Later the

company issued one fully paid up equity share of 10/- each by way of bonus shares for

every four equity shares held by the equity shareholders.

Show the necessary journal entries for all the transactions including cash transactions.

Q5.

Perotte Ltd. has the following capital structure as on 31.03.2011:

Particulars Rs. (in Crores)

1. Equity Share Capital (share of Rs.

10/- each fully paid)

330/-

2. Reserves and Surplus:

General Reserves

Securities Premium A/c

Profit and Loss A/c

Infrastructure Development

Reserve

240/-

90/-

90/-

180/-

3. Loan Funds 1800/-

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The Shareholders of Perrote Ltd., on the recommendation of their Board of Directors,

have approved on 12.09.2011 a proposal of buyback the maximum permissible number of

equity shares considering the large surplus funds available at the disposal of the company.

The prevailing market value of company‟s share is Rs. 25/- per share and in order to induce

the shareholders to offer their shares for buy back, it was decided to offer a price of

20% over the market price.

You are also informed that infrastructure reserve is created to satisfy income tax act

requirements.

You are required to compute the maximum number of shares that can be bought back in

the lights of the above information and also under a situation where the loan funds of the

company were either Rs. 1200/- Cr. or Rs. 1500/- Cr.

Assuming that the entire buy back is completed on 09.02.2011, show the accounting

entries in the books of company in each situation.

(Answer: In situation 1 and 3 company does not qualify for buyback of shares)

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IMPORTANT NOTES:

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Amalgamation of Companies &

Internal Reconstruction

Q6.

Alpha Limited and Beta Limited were amalgamated on and from 1st April 2001. A new

Company Gamma Limited was formed to take over the business of the existing companies.

The balance sheet of Alpha Limited and Beta Limited as on 31st March, 2001 are given

below:

(Rs. in lakhs)

Equity & Liabilities Alpha Ltd. Beta Ltd.

Shareholders Fund:

Share Capital

Equity shares of Rs. 100 each 1,000 800

15% Pref. shares of Rs. 100 each 400 300

Reserve & Surplus

Revaluation Reserve 100 80

General Reserve 200 150

Profit & Loss Account 80 60

Non-Current Liabilities:

Secured Loan

12% Debentures of Rs. 100 each 96 80

Current Liabilities: 204 95

2,080 1,565

: Alpha Ltd. Beta Ltd.

Non-Current Assets

Fixed Assets 1,200 1,000

Current Assets:

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Loans and advances 880 565

2,080 1,565

Other information:

1. 12% Debenture holders of Alpha Limited and Beta Limited are discharged by

Gamma Limited by issuing adequate number of 16% Debentures of Rs. 100 each to

ensure that they continue to receive the same amount of interest.

2. Preference shareholders of Alpha Limited and Beta Limited have received same

number of 15% Preference shares of Rs. 100 each of Gamma Limited.

3. Gamma Limited has issued 1.5 equity shares for each equity share of Alpha Limited

and 1 equity share for each equity share of Beta Limited. The face value of shares

issued by Gamma Limited is Rs. 100 each.

Required:

Prepare the Balance Sheet of Gamma Limited as on 1st April, 2001 after the

amalgamation has been carried out using the pooling of interest method.

(Ans: Purchase Consideration. Alpha 1,900; Beta 1,100 and BS - 3645)

Solution:

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Q7. (May 2018 – 20 Marks)

The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:

X Ltd. (Rs) Y Ltd. (Rs)

Equity and Liabilities

Equity Shares of Rs 10 each 30,00,000 9,00,000

9% Preference Shares of Rs 100 each 3,00,000 -

10% Preference Shares of Rs 100 each - 3,00,000

General Reserve 2,10,000 2,10,000

Retirement Gratuity Fund (long term) 1,50,000 60,000

Trade Payables 3,90,000 2,40,000

Total 40,50,000 17,10,000

Assets

Goodwill 1,50,000 75,000

Land & Buildings 9,00,000 3,00,000

Plant & Machinery 15,00,000 4,50,000

Inventories 7,50,000 5,25,000

Trade Receivables 6,00,000 3,00,000

Cash and Bank 1,50,000 60,000

Total 40,50,000 17,10,000

X Ltd. absorbs Y Ltd. on the following terms:

(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%

Preference Shares of X Ltd.

(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average

profits of preceding three financial years (2016-17 : Rs 90,000; 2015-16 : Rs

78,000 and 2014-15: Rs 72,000). The profits of 2014 -15 included credit of an

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insurance claim of Rs 25,000 (fire occurred in 2013-14 and loss by fire Rs 30,000

was booked in Profit and Loss Account of that year). In the year 2015 -16, there

was an embezzlement of cash by an employee amounting to Rs 10,000.

(iii) Land & Buildings are valued at Rs 5,00,000 and the Plant & Machinery at Rs

4,00,000.

(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts

is to be created @ 2.5%.

(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value

amounted to Rs 15,000 and such asset was also taken over by X Ltd.

(vi) The trade payables of Y Ltd. included Rs 20,000 payable to X Ltd.

(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.

You are required to

(i) Prepare Realisation A/c in the books of Y Ltd.

(ii) Show journal entries in the books of X Ltd.

(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.

Answer

In the Books of Y Ltd. Realisation Account

Rs Rs

To Sundry Assets : By Retirement

Gratuity Fund

60,000

Goodwill 75,000

Land & Building 3,00,000 By Trade

payables

2,40,000

Plant & Machinery 4,50,000 By X Ltd.

(Purchase

15,90,000

Inventory 5,25,000 Consideration)

Trade receivables 3,00,000

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Bank 60,000 17,10,000

To Preference

Shareholders

30,000

(Premium on

Redemption)

To Equity Shareholders

(Profit on Realisation) 1,50,000 _______

18,90,000 18,90,000

In the Books of X Ltd. Journal Entries

Dr. Cr.

Rs Rs

Business Purchase A/c D

r.

15,90,000

To Liquidators of Y Ltd. Account (Being business of Y Ltd.

taken over)

15,90,000

Goodwill Account D

r.

1,50,000

Land & Building Account D

r.

5,00,000

Plant & Machinery Account D

r.

4,00,000

Inventory Account D

r.

4,72,500

Trade receivables Account D

r.

3,00,000

Bank Account D 60,000

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r.

Unrecorded assets Account D

r.

15,000

To Retirement Gratuity Fund Account 60,000

To Trade payables Account 2,40,000

To Provision for Doubtful Debts Account 7,500

To Business Purchase A/c (Being Assets and Liabilities

taken over as per agreed valuation).

15,90,000

Liquidators of Y Ltd. A/c D

r.

15,90,000

To 9% Preference Share Capital A/c 3,30,000

To Equity Share Capital A/c 12,00,000

To Securities Premium A/c (Being Purchase Consideration

satisfied as above).

60,000

Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018

Particulars Notes Rs


1 Shareholders' funds

A Share capital 1 48,30,000

B Reserves and Surplus 2 2,70,000

2 Non-current liabilities

A Long-term provisions 3 2,10,000

3 Current liabilities

A Trade Payables 4 6,10,000

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B Short term provision 5 7,500

Total 59,27,500

Assets

1 Non-current assets

A Fixed assets

Tangible assets 6 33,00,000

Intangible assets 7 3,00,000

2 Current assets

A Inventories 8 12,22,500

B Trade receivables 9 8,80,000

C Other current Assets 10 15,000

D Cash and cash equivalents 11 2,10,000

Total 59,27,500

Notes to accounts:

Rs

1 Share Capital

Equity share capital

4,20,000 Equity Shares of ` 10 each fully paid (Out of above

1,20,000 Equity Shares were issued in consideration other than for

cash)

42,00,000

Preference share capital

6,300 9% Preference Shares of ` 100 each (Out of above 3,300

Preference Shares were issued in consideration other than for cash)

6,30,000

Total 48,30,000

2 Reserves and Surplus

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Securities Premium 60,000

General Reserve 2,10,000

Total 2,70,000

3 Long-term provisions

Retirement Gratuity fund 2,10,000

4 Trade payables (3,90,000 + 2,40,000 - 20,000*)

* Mutual Owings eliminated.

6,10,000

5 Short term Provisions

Provision for Doubtful Debts 7,500

6 Tangible assets

Land & Buildings 14,00,000

Plant & Machinery 19,00,000

Total 33,00,000

7 Intangible assets

Goodwill (1,50,000 +1,50,000) 3,00,000

8 Inventories (7,50,000 + 4,72,500) 12,22,500

9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000

10 Other current Assets 15,000

11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000

Working Notes:

1. Computation of goodwill Rs

Profit of 2016-17 90,000

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Profit of 2015-16 adjusted Rs 78,000 + 10,000) 88,000

Profit of 2014-15 adjusted (Rs 72,000 – 25,000) 47,000

2,25,000

Average profit 75,000

Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = RS 1,50,000

2.

Purchase Consideration: Rs

Goodwill 1,50,000

Land & Building 5,00,000

Plant & Machinery 4,00,000

Inventory 4,72,500

Trade receivables 3,00,000

Unrecorded assets 15,000

Cash at Bank 60,000

18,97,500

Less: Liabilities:

Retirement Gratuity 60,000

Trade payables 2,40,000

Provision for doubtful debts 7,500

(3,07,500)

Net Assets/ Purchase Consideration 15,90,000

To be satisfied as under:

10% Preference Shareholders of Y Ltd. 3,00,000

Add: 10% Premium 30,000

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9% Preference Shares of X Ltd. 3,30,000

Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000

equity Shares of X Ltd. at 5% Premium 12,60,000

Total 15,90,000

Q8. (Nov. 2018 – Internal Reconstruction) (10 Marks)

The summarized Balance Sheet of SK Ltd. as on 31st March, 2018 is given below.

(Rs in „000)

Liabilities Amount

Equity Shares of Rs 10 each

8%, Cumulative Preference Shares of Rs 100 each

6% Debentures of Rs 100 each

Sundry Creditors

Provision for taxation

35,000

17,500

14,000

17,500

350

Total 84,350

Assets

Fixed Assets

Investments (Market value Rs 3325 thousand)

Current Assets (Including Bank Balance)

Profit and Loss Account

43,750

3,500

35,000

2,000

Total 84,350

The following Scheme of Internal Reconstruction is approved and put into effect on 31st

March, 2018.

(i) Investments are to be brought to their market value.

(ii) The Taxation Liability is settled at Rs 5,25,000 out of current Assets.

(iii) The balance of Profit and Loss Account to be written off.

(iv) All the existing equity shares are reduced to Rs 4 each.

(v) All preference shares are reduced to Rs 60 each.

(vi) The rate of interest on debentures is increased to 9%

The Debenture holders surrender their existing debentures of Rs 100 each and

exchange them for fresh debentures of Rs 80 each. Each old debenture is

exchanged for one new debenture.

(vii) Balance of Current Assets left after settlement of taxation liability are

revalued at Rs. 1,57,50,000.

(viii) Fixed Assets are written down to 80%

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(ix) One of the creditors of the Company for Rs 70,00,000 gives up 50% of his

claim. He is allotted 8,75,000 equity shares of Rs 4 each in full and final

settlement of his claim.

Pass Journal entries for the above transactions.

Solution:

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ACCOUNTING FOR LIQUIDATION OF

COMPANIES

Q9. (Nov. 18 – 10 Marks)

Virat Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2018:

Particular Rs Rs

Equity and Liabilitips :

(1) Share holders Funds :

(a) Share Capital

10,000, 12% Pref. Shares of Rs 100 each

fully paid up

1,00,000 Equity shares of Rs 10 each fully

paid up

50,000 Equity shares of Rs 10 each, Rs 8

paid up

(b) Reserve and Surplus

Profit & Loss A/c. (Dr. Balance)

(2) Non-current Liabilities:

12% Debentures

Loan on Mortgage

(3) Current Liabilities:

Bank Overdraft

Trade Payables

10,00,000

10,00,000

4,00,000

15,00,000

4,50,000

2,75,440

7,30,000

24,00,000

(3,50,000)

19,50,000

10,05,000

Total 50,05,000

Assets :

(1) Non-current Assets :

Fixed Assets - Land & Buildings

(2) Current Assets : Sundry Current Assets

6,00,000

44,05,000

Total 50,05,000

1. The mortgage loan was secured against the Land & Buildings.

2. Debentures were secured by a floating charge on all the assets of the company. The

debenture holders appointed a Receiver.

3. The company being voluntarily wound up, a liquidator was also appointed.

4. The Receiver was entrusted with the task of realising the Land & Buildings which

fetched Rs 7,50,000.

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5. Receiver also took charge of Sundry current assets of value Rs 30,00,000 and sold

them for Rs 28,75,000.

6. The Bank overdraft was secured by a personal guarantee of the directors who

discharged their obligations in full from personal resources.

7. The costs of the Receiver amounted to Rs 10,000 and his remuneration Rs 15,000.

8. The expenses of liquidator was Rs 17,500 and his remuneration was decided at 2%

on the value of the Assets realised by him.

9. The remaining assets were realised by liquidator for Rs 12,50,000.

10. Preference dividend was in arrear for 2 years.

11. Articles of Association of the company provide for payment of preference dividend

arrears in priority to return of equity capital.

Prepare the accounts to be submitted by the Receiver and the Liquidator.

(Suggested Answer – Refund – 4.747/- & 2.747/-)

Solution:

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Q10. (May 2018 – 5 Marks)

In a liquidation which commenced on 11th November, 2017 certain creditors could not

receive payments out of the realization of assets and out of the contributions from "A"

list contributories.

The following are the details of certain transfer, which took place in 2016 and 2017:

Share

holders

Number of shares

transferred at the date

of ceasing to be member

Date of ceasing to

be member

Creditors remaining

unpaid and

outstanding (Rs)

C 2,500 1st September, 2016 5,000

P 1,500 1st January, 2017 9,000

D 2,000 1st April, 2017 12,000

B 700 1st August, 2017 13,500

S 300 15th September, 2017 14,500

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All the shares were Rs 10 each, Rs 5 paid up.

Ignoring expenses of and remuneration to liquidators show the amount to be realised from

various persons listed above.

Solution:

Statement of Liabilities of B list contributors (showing the amount realized) Creditors Out standing

on the date of ceasing to

be member

P 1,500

Shares

Rs

D 2,000

Shares Rs

B 700

Shares Rs

S 300

Shares Rs

Amount to be

paid to the

Creditors Rs

(1) 9,000 3,000 4,000 1,400 600 9,000

(2) 3,000 - 2,000 700 300 3,000

(3) 1,500 - - 1,050 450 1,500

(4) 1,000 - - - 1,000 150

Total (a) 3,000 6,000 3,150 2,350

(b) maximum liability on

shares held

7,500 10,000 3,500 1,500

(c) Amount to be realized

(a) or (b)

whichever is lower 3,000 6,000 3,150 1,500

Working Notes:

1. C will not be liable since he transferred his shares prior to one year preceding the date

of winding up.

2. P will not be responsible for further debts incurred after 01.01.2017 (from the date

when he ceases to be a member). Similarly, D & B will not be liable for the debts

incurred after the date of their transfer of shares.

3. The increase between 1st August 2017 and 15th September 2017, is solely the

responsibility of S. Liability of S has been restricted to the maximum allowable limit of

Rs 1,500. Therefore, amount payable by S on 15.09.2017 is ` 150 only.

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4. Ratio of discharge of liability will be in the ratio of no. of shares held by B List

Contributories which is as follows:

Calculation of Ratio for discharge of Liabilities

Date Cumulative

liability

Rs

Increase in

liabilities Rs

Ratio of no. of shares

held by L, M, N, O

01.01.2017 9,000 - 15:20:7:3

01.04.2017 12,000 3,000 20:7:3

01.08.2017 13,500 1,500 7:3

15.09.2017 14,500 1,000 Only S

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IMPORTANT NOTES:

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INSURANCE COMPANIES

Q11 (Nov. 18 – 10 Marks) On 31st March, 2018 the books of Nutan insurance company Limited contained the

following particulars in respect of marine insurance business:

Direct Business (Rs) Re-insurance (Rs)

Premium:

Received

Receivable - 1.4.2017


Paid

Payable - 1.4.2017

Payable - 31.3.2018

35,50,000

2,14,500

1,80,000

3,75,000

19,700

15,500

3,00,500

10,400

15,200

Claims:

Paid

Payable - 1.4.20t7

Payable -31.3.20t9

Received

Receivable - 1.4.20L7


25,10,000

42,500

45,900

2,70,800

15,000

17,500

2,17,000

19,500

19,200

Commission :

Paid

Received

75,800

11,600

12,400

Other Expenses and Income:

Rs

Salaries

Rent rates and taxes

Printing and Stationary

Legal expenses (Inclusive of Rs 18,000 for settlement of claims)

Interest, Dividend & Rent received (net)

Income tax deducted at source in respect of above

Bad Debts

3,75,000

1,21,000

24,800

50,000

1,12,500

12,500

5,800

Balance of fund as on 1-4-2017 was Rs 38,50,000 including Additional Reserve for Rs

3,60,000. Provision for Unexpired Risk to be created @ 100% and Additional Reserve has

to be maintained at 5% of net premium of the year.

Prepare the Revenue Account for the year ended 31st March, 2018.

Solution:

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BANKING COMPANIES

Q12. (May 18) The following are the figures extracted from the books of TOP Bank Limited as on

31.3.2017.

Rs

Interest and discount received 59,29,180

Interest paid on deposits 32,59,920

Issued and subscribed capital 16,00,000

Salaries and allowances 3,20,000

Directors fee and allowances 48,000

Rent and taxes paid 1,44,000

Postage and telegrams 96,460

Statutory reserve fund 12,80,000

Commission, exchange and brokerage 3,04,000

Rent received 1,04,000

Profit on sale of investments 3,20,000

Depreciation on bank‟s properties 48,000

Statutory expenses 44,000

Preliminary expenses 40,000

Auditor‟s fee 28,000

The following further information is given:

(i) A customer to whom a sum of Rs 16 lakhs has been advanced has become insolvent

and it is expected only 40% can be recovered from his estate.

(ii) There were also other debts for which a provision of Rs 2,10,000 was found

necessary by the auditors.

(iii) Rebate on bills discounted on 31.3.2016 was Rs 19,000 and on 31.3.2017 was Rs

25,000.

(iv) Preliminary expenses are to be fully written off during the year.

(v) Provide Rs 9,00,000 for Income-tax.

(vi) Profit and Loss account opening balance was nil as on 31.3.2016.

Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.2017.

Solution:

TOP Bank Limited

Profit and Loss Account for the year ended 31st March, 2017

Schedule Year ended

31.03.2017

(Rs in „000s)

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I. Income:

Interest earned 13 5923.18

Other income 14 728.00

Total 6,651.18

II. Expenditure

Interest expended 15 3259.92

Operating expenses 16 768.46

Provisions and contingencies (960+210+900) 2,070.00

Total 6,098.38

III. Profits/Losses

Net profit for the year 552.80

Profit brought forward nil

552.80

IV. Appropriations

Transfer to statutory reserve (25%) 138.20

Balance carried over to balance sheet 414.60

552.80

Year ended 31.3.

2017 (Rs in „000s)

Schedule 13 – Interest Earned

I. Interest/discount on advances/bills (Refer W.N.) 5923.18

5923.18

Schedule 14 – Other Income

I. Commission, exchange and brokerage 304

II. Profit on sale of investments 320

III. Rent received 104

728

Schedule 15 – Interest Expended

I. Interests paid on deposits 3259.92

Schedule 16 – Operating Expenses

I. Payment to and provisions for employees 320

II. Rent and taxes 144

III. Depreciation on bank‟s properties 48

IV. Director‟s fee, allowances and expenses 48

V. Auditors‟ fee 28

VI. Law (statutory) charges 44

VII. Postage and telegrams 96.46

VIII. Preliminary expenses 40 768.46

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Working Note:

(Rs in „000s)

Interest/discount 5,929.18

Add: Rebate on bills discounted on 31.3. 2016 19.00

Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)

5,923.18

Q13. (Nov. 18)

From the following information, calculate the amount of Provisions and Contingencies and

prepare Profit and Loss Account of „Supreme Bank Limited‟ for the year ending 31st

March, 2018:

Income Rs in lakhs Expenditure Rs in lakhs

Interest and discount 1,835 Interest expended 1,136

Interest accrued on

Investments

8 Printing & stationery 18

Commission, exchange

and brokerage

12 Repair & maintenance 2

Profit on sale of

investments

1 Payment to and provision

for employees (salaries,

bonus etc.)

80

Rent received 2 Other Operating Expenses 5

Additional Information:

Rs in lakhs

(i) Rebate on bills discounted to be provided for 3

(ii) Classifications of Advances:

Standard Assets 4,100

Sub-Standard Assets (fully secured) 380

Doubtful Assets not covered by security 155

Doubtful Assets covered by security

For 1 year 10

More than 1 year, but less than 2 years 18

More than 2 year, but less than 3 years 35

More than 3 year 22

Loss Assets 50

(iii) Make tax provision @ 35% of the profit.

(iv) Profit and Loss Account (Cr.) brought forward from the

previous year

65

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Solution:

Calculation of Provisions and Contingencies

(i) Provision on Non-Performing Assets

Rs in lakhs

Particulars Amount % of Provision Provision

Standard Assets 4,100 0.4 16.40

Sub-standard Assets 380 15 57

Doubtful Assets not covered by security 155 100 155

Doubtful Assets covered by security:

For 1 year 10 25 2.50

More than 1 year, but less than 2 years 18 40 7.20

More than 2 years & but less than 3 years 35 40 14

More than 3 years 22 100 22

Loss Assets 50 100 50

4,770 324.10

(ii) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure

(excluding tax)]

= 35% of [(1,840 +15) – (1,136+105+324.10)] = Rs 101.47 lakhs

Total Provisions and contingencies = Provisions on NPAs + Provisions for tax

= 324.10 + 101.47 = Rs 425.57 lakhs

Supreme Bank Limited

Profit and Loss Account for the year ended 31st March, 2018

Particulars Schedule No. Rs in lakhs

I Income

Interest Earned 13 1,840

Other Income 14 15

1,855

II Expenditures

Interest Expended 1,136

Operating Expenses 16 1,05

Provisions & Contingencies 425.57

1,666.57

III Profit/Loss

Net Profit/Loss for the year 188.43

Profit/Loss brought forward 65

253.43

IV Appropriations

Transfer to Statutory Reserve @ 25% of 188.43 47.11

Transfer to Other Reserves -

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Balance carried over to Balance Sheet 206.32

253.43

Schedule 13 – Interest earned

I Interest & Discount (1,835 – 3) 1,832

II Interest on Investments 8

1,840

Schedule 14- other income

Commission, exchange and brokerage 12

Profit on sale of investments 1

Rent received 2

15

Schedule 16- Operating Expenses

Printing & stationery 18

Repair & maintenance 2

Payment to and provision for employees (salaries, bonus etc.) 80

Other Operating Expenses 5

105

Q14. (Nov18 - 5 Marks)

Forward Bank Ltd furnishes the following information as on 31st March, 2018.

Amount in Rs

Bills Discounted

Rebate on bills discounted as on 1st April, 2O17

Discount received

8,22,300

1,32,960

6,33,990

Details of bills discounted are as given below:

Value of Bills (Rs) Due Date Rate of Discount

10,95,000

30,00,000

16,92,000

24,36,000

15th June, 2018

25th June, 2018

5th July, 2018

15th July, 2018

14%

12%

16%

16%

(i) Calculate the rebate on bills discounted as on 31st March, 2018.

(ii) Pass necessary Journal Entries.

Solution:

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IMPORTANT NOTES:

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ACCOUNTING STANDARD 19

“LEASES” Q15:

B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:

(a) Lease period is 3 years, in the beginning of the year 20X1, for equipment costing Rs

10,00,000 and has an expected useful life of 5 years.

(b) The Fair market value is also Rs 10,00,000.

(c) The property reverts back to the lessor on termination of the lease.

(d) The unguaranteed residual value is estimated at Rs 1,00,000 at the end of the year

20X1.

(e) 3 equal annual payments are made at the end of each year.

(f) Consider IRR = 10%

(g) The present value of Rs. 1 due at the end of 3rd year at 10% rate of interest is Rs.

0.7513.

(h) The present value of annuity of Rs. 1 due at the end of 3rd at 10% IRR is Rs 2.4868.

State whether the lease constitute finance lease and also calculate unearned finance

income.

Solution:

Particulars Amount (Rs.)

Cost of equipment

Unguaranteed residual value

Present value of residual value after third year @ 10%

(1,00,000 × 0.7513)

Fair value to be recovered from lease payments (Rs 10,00,000

– Rs 75,130)

Present value of annuity for three years

Annual lease payment = ₹ 9,24,870/2.4868

10,00,000

1,00,000

75,130

9,24,870

2.4868

3,71,912

The present value of lease payment i.e., Rs 9,24,870 equals 92.48% of the fair market

value, i.e., Rs 10,00,000. As the present value of minimum lease payments substantially

covers the initial fair value of the leased asset and lease term covers the major part of

the life of asset, it constitutes a finance lease.

Particulars Amount (Rs.)

Total lease payments (Rs 3,71,912 × 3)

Add: Unguaranteed residual value

Gross investment in the lease

Less: Net Investment, i.e., Present value of gross investment (lease

11,15,736

1,00,000

12,15,736

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payments and residual value) (₹ 75,130 + Rs 9,24,870)

Unearned finance income

10,00,000

2,15,736

Q16: (Homework)

X Ltd. sold JCB Machine having WDV of Rs 50 Lakhs to Y Ltd. for Rs 60 Lakhs and the

same JCB was leased back by Y Ltd. to X Ltd. The lease is operating lease. Comment

according to relevant Ind AS if:

(a) Sale price of Rs 60 Lakhs is equal to fair value.

(b) Fair value is Rs 50 Lakhs and sale price is Rs 45 Lakhs.

(c) Fair value is Rs 55 Lakhs and sale price Rs 62 Lakhs.

(d) Fair value is Rs 45 Lakhs and sale price is Rs 48 Lakhs.

Solution: As per AS 19, Leases:

(a) Since sale price is equal to fair value, profit of Rs 10 lakhs (i.e., Rs 60 lakhs – Rs50

lakhs) is to be recognised as income immediately.

(b) Assuming, the loss is not compensated by future lease payments at below market price,

the loss of Rs 5 lakhs (i.e., Rs 50 lakhs – Rs 45 lakhs) should be recognised immediately in

the profit and loss account. In case, the loss is compensated by future lease payments at

below market price, then the loss of Rs 5 lakhs should be deferred and amortised in

proportion to the lease payments over the period for which the asset is expected to be

used.

(c) Profit of ₹ 7 lakhs (i.e., Rs 62 lakhs – Rs 55 lakhs) should be deferred and amortised

over the period for which the asset is expected to be used. Profit of Rs 5 lakhs (i.e., Rs 55

lakhs – Rs 50 lakhs) should be recognised immediately.

(d) Rs 3 lakhs (i.e., Rs 48 lakhs – Rs 45 lakhs) should be deferred and amortised over the

period for which the asset is expected to be used. Loss of Rs 5 lakhs (i.e., Rs 50 lakhs – Rs

45 lakhs) should be recognised immediately in the profit and loss account.

Q17:

S. Square P Ltd. has taken machinery on lease from SK Ltd. The information is as under:

Lease term = 4 years

Fair value at inception of lease = Rs. 20,00,000

Lease rent = Rs. 6,25,000 p.a. at the end of year

Guaranteed residual value = Rs. 1,25,000

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Expected residual value = Rs. 3,75,000

Implicit interest rate = 15%

Discounted rates are 0.8696, 0.7561, 0.6575, and 0.5718 respectively.

Calculate the value of the lease liability as per AS 19.

(November 2010: 4 Marks) (Hint: 18,55,850/- )

OPERATING LEASE

Q18:

On April 1, 2012 ABC Ltd. leases equipment for 4 years to XYZ Ltd. The Cost of the

equipment is Rs. 15,00,000 and has a useful life of 10 years (assume straight line method

of depreciation). The lease payments to be made are as follows:

Year Amount

1

2

3

4

1,00,000

1,50,000

1,75,000

2,00,000

The lease is classified as an operating lease. How would this lease be accounted for in the

books of accounts of the Lessee and the Lessor?

(Hint: 156250/- LEASE RENT to be recognised)

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IMPORTANT NOTES:

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IMPORTANT NOTES:

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“EARNINGS PER SHARE”

Q19: (RTP Nov. 10)

Net Profit after Tax including extraordinary profit/losses for the year ended 31st Dec,

2009 = 2,00,000/-

10% Cumulative Preference Shares of Rs. 5,00,000/-

Number of Equity shares = 5,000 of Rs. 100/- each.

Equity dividend declared @ 18%. Corporate Dividend tax 15%

Compute EPS assuming that out of 5,000 equity shares, 2,000 shares were issued on

1.07.09.

(Answer: EPS = Rs. 35.29/-)

Q20: (Nov.18)

From the following information given by Sampark Ltd., Calculate Basic EPS and Diluted EPS

as per AS 20:

Net profit for the current year Rs. 2,50,00,000

No. of Equity shares outstanding 50,00,000

No. of 12% convertible debentures of Rs.

100 each (Each debenture is convertible

into 8 equity shares)

50,000

Interest on debenture for the current year Rs. 6,00,000

Tax Saving relating to interest expense 1,80,000

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(30%)

Solution:

Q21 (Nov. 2018) (EPS on Right Issue of Shares)

The following information is available for TON Ltd. for the accounting year 2015-16 and

2016-17:

Net profit for Rs

Year 2015-16 35,00,000

Year 2016-17 45,00,000

No of shares outstanding prior to right issue 15,00,000 shares.

Right issue : One new share for each 3 shares outstanding i.e. 5,00,000 shares.

: Right Issue price Rs 25

: Last date to exercise rights 31st July, 2016

Fair value of one equity share immediately prior to exercise of rights on 31.07.2016 is Rs

35.

You are required to compute:

(i) Basic earnings per share for the year 2015-16.

(ii) Restated basic earnings per share for the year 2015-16 for right issue.

(iii) Basic earnings per share for the year 2016-17.

Solution:

1. Computation of Basic Earnings per Share

Year Year

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2015-16

(Rs)

2016-17

(Rs)

(i) EPS for the year 2015-16 as originally reported

= Net profit for the year attributable to equity

share holder / weighted average number of equity

shares outstanding during the year

Rs 35,00,000/ 15,00,000 shares

2.33

(ii) EPS for the year 2015-16 restated for the right

issue Rs 35,00,000/15,00,0000 shares x 1.08

2.16

(iii) EPS for the year 2016-17 (including effect of right

issue) Rs 45,00,000 / [(15,00,000x1.08 x 4/12) +

(20,00,000x8/12)]

2.40

Working Notes:

1. Computation of theoretical ex-rights fair value per share =

Fair value of all outstanding shares immediately prior to exercise of rights+total

amount received from exercise / Number of shares outstanding prior to exercise +

number of shares issued in the exercise

[(Rs 35 x15,00,000) + (Rs 25 x 5,00,000)] / (15,00,000 + 5,00,000) = Rs 32.5

2. Computation of adjustment factor

Fair value per share prior to exercise of rights Theoretical ex-rights value per

share = Rs 35 /32.50 = 1.08 (approx.)

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IMPORTANT NOTES:

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IMPORTANT NOTES:

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“INTANGIBLE ASSETS” Q22. (May 2018 – 5 Marks)

A company acquired a patent at a cost of Rs 160 lakhs for a period of 5 years and the

product life cycle is also 5 years. The company capitalized the cost and started amortising

the asset at Rs 16 lakhs per year based on the economic benefits derived from the

product manufactured under the patent. After 2 years it was found that the product life

cycle may continue for another 5 years from then (the patent is renewable and the

company can get it renewed after 5 years). The net cash flows from the product during

these 5 years were expected to be Rs 50 lakhs, Rs 30 lakhs, Rs 60 lakhs, Rs 70 lakhs and

Rs 40 lakhs. Find out the amortization cost of the patent for each of the years.

Solution:

Company amortized Rs 16,00,000 per annum for the first two years. Hence, Amortization

for the first two years (Rs 16,00,000 X 2) = Rs 32,00,000.

Remaining carrying cost after two years =Rs 1,60,00,000 – Rs 32,00,000

= Rs 1,28,00,000

Since after two years it was found that the product life cycle may continue for another 5

years, hence the remaining carrying cost Rs128 lakhs will be amortized during next 5 years

in the ratio of net cash arising from the sale of the products of Fast Limited..

The amortization cost of the patents may be computed as follows:

Year Net cash flows Rs Amortization Ratio Amortization Amount Rs

I - 0.1 16,00,000

II - 0.1 16,00,000

III 50,00,000 0.2 25,60,000

IV 30,00,000 0.12 15,36,000

V 60,00,000 0.24 30,72,000

VI 70,00,000 0.28 35,84,000

VII 40,00,000 0.16 20,48,000

Total 250,00,000 1.000 160,00,000

Q22. Vishnu Ltd. is engaged in research on a new process design for its product- It had

incurred an expenditure of Rs. 265.37 lakhs on research upto 31st March, 2003. The

development of the process began on 1st April, 2003 and the Development Phase

Expenditure was T180 lakhs upto 31st March, 2004. From 1st April, 2004 the Company will

implement the new process design which will result in a after-tax cost saving of Rs. 40

lakhs per annum for the next five years. The Company's Cost of Capital is 10%. At what

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cost should the asset be recorded and what is its amortisation amount?

(RTP; November 2005)

Ans.: Research Expenditure: As per Para 41 of AS-26, the expenditure on research Rs.

265.37 lakhs should be expensed in the year in which it is incurred. It is presumed that

the entire expenditure of Rs. 265.37 lakhs is incurred in financial year 2002-2003. Hence,

it should be written off as an expense in that year itself.

Cost of internally generated intangible asset: Para 53 specifies the items which can be

included in the cost of an internally generated intangible asset, while Para 54 specifies the

exclusions there from. It is presumed that the expenditure of Rs.180 lakhs is determined

in accordance with Para 53 and 54 of AS-26.

Discounting Future Cash Flows: As per Para 30 of AS-26, fair value of an intangible asset

can be estimated by discounting estimated future net cash flows. Even if this paragraph is

primarily related to estimation of fair value of an intangible asset acquired in the course

of amalgamation in the nature of purchase, the concept can be extended for internally

generated intangible asset also.

Cost savings from the new process design for five = Rs. 40 lakhs per years

Company's Cost of Capital = 10%

Annuity Factor at 10% for five years = 3.7908

(from the annuity tables)

Present value of future cash flows = Rs. 40 x 3.7908= Rs. 151.63 lakhs

Carrying Amount of the Asset: Since the Present Value of Future Cash Flows is only Rs.

151.63 lakhs, (which is lower than the cost of Rs.180 lakhs), it is prudent to recognise an

impairment loss of Rs. 180.00 lakhs - Rs. 151.63 lakhs = Rs. 28.37 lakhs in the financial year

2003-2004.

Amortisation Period and Amount: The Company can amortise Rs. 151.63 lakhs over a five

year period by charging Rs. 30.33 lakhs per annum from the financial year 2004-2005

onwards.

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IMPORATANT NOTES:

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IMPORATANT NOTES:

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ACCOUNTING STANDARD – 29

“PROVISIONS, CONTINGENT LIABILITIES

AND CONTINGENT ASSETS”

Q23.

An engineering goods company provides after sales warranty for 2 years to its customers.

Based on past experience, the company has the following policy for making provision for

warranties on the invoice amount, on the remaining balance warranty period:

Less than 1 year: 2% provision

More than 1 year: 3% provision

The company has raised invoices as under:

Invoice Date Amount

19th Jan, 2011

29th Jan, 2012

15th Oct, 2012

40,000

25,000

90,000

Calculate the provision to be made for warranty under AS – 29 as at 31st March, 2012 and

31st March, 2013. Also compute the amount to be debited to Profit and Loss a/c for the

year ended 31st March, 2013.

(Answer: (i) 2012 – 1,550/-; 2013 – 3,200/- (ii) Amount debited to P&L - 1,650/-)

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Q24. (Nov. 2018)

M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged

infringement of Copyrights. The competitor has filed a suit in the court of law seeking

damages of Rs 200 lakhs.

The Directors are of the view that the claim can be successfully resisted by the Company.

How would the matter be dealt in the annual accounts of the Company in the light of AS

29? You are required to explain in brief giving reasons for your answer.

Solution:

As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets‟, a provision should

be recognized when

(a) an enterprise has a present obligation as a result of a past event;

(b) it is probable that an outflow of resources embodying economic benefits will be

required to settle the obligation; and

(c) A reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision should be recognized.

In the given situation, since, the directors of the company are of the opinion that the

claim can be successfully resisted by the company; therefore there will be no outflow of

the resources. Hence, no provision is required. The company will disclose the same as

contingent liability by way of the following note:

“Litigation is in process against the company relating to a dispute with a competitor who

alleges that the company has infringed copyrights and is seeking damages of Rs 200 lakhs.

However, the directors are of the opinion that the claim can be successfully resisted by

the company.”

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IMPORTANT NOTES:

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IMPORTANT NOTES:

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CONSOLIDATION OF FINANCIAL

STATEMENTS

Calculation of Cost of Control (Goodwill/Capital Reserve):

Book Value of Investment held at Balance

Sheet Date

Less: Net Assets of Subsidiary co. Owned

by Parent co. on the date of investment,

still held by subsidiary

(Share capital +/- Pre-Acquisition Share

of P/L - Dividend Adjustment

XXX

XXX

Goodwill/(CR)

SPECIAL ADJUSTEMETNS:

Balances of

Reserves and

Surplus –

Missing

For Balance of Profit & Loss A/c : Assume Zero Balance as on 1st Day of

the year.

For Balance of Other Reserves : Assume the Same amount as at the end

of the year.

Treatment of

Abnormal

Items

While preparing AOP:

1. Effect of Abnormal Items should be eliminated (Ab. Loss will be added

and Ab. Profit will be deducted) – (Jaha se already adjust hua hai

vahi se eliminate karenge)

2. Apply time adjustment (if required)

3. Re-instate the effect of Abnormal Items (Ab. Loss deducted and Ab.

Profit added) – (Jis period me A.Item occur hua hai vahi pe adjust

karenge)

Ab. Loss will be calculated net of claims

Treatment of

Revaluation

of Assets

Revaluation of Assets of Parent co. is not relevant.

Revaluation of Assets of Subsidiary co. is relevant to find out the

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fair value of Net Assets of Subsidiary co. for the calculation of

Cost of Control. (Net assets ki real aukaat pata karne k liye

market value of assets dekhenge, book value nai)

Revaluation of Assets will be checked on the acquisition date of

investments.

Revaluation Profit or Loss is calculated as follows:

Book Value of Assets on the date of Acquisition – XXX

Less: Market Value of Assets on the date of Acquistions - XXX

Revaluation Profit/Loss is treated as pre-acquisition profit/loss.

(profit ko plus aur loss ko minus karenge)

Additional Depreciation will be calculated in case of Revaluation

profit and adjusted in post acquisition profit. (minus karenge)

Saving in depreciation will be calculated in case of Revaluation loss

and adjusted in post acquisition profit. (plus karenge)

Revaluation adjustment will be done after applying Time

Adjustment.

Treatment of

Bonus issue

of Shares by

Subsidiary

Bonus issue of shares effects calculation of holding ratio. So we should be

very careful while calculating holding ratio.

We will always assume that bonus is distributed out of past

profits/reserves (purane kamaye hue profits me se bonus issue hoga,

na ki current year k profits me se)

There can be either of the two possible cases:

1. Bonus entry has been passed in books: Treat like Abnormal

Loss/Dividend paid.

2. Bonus entry has not been passed yet:

Pre-Acquisition Profits A/c Dr

To Share Capital A/c

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Bonus shares receive karne wala koi bhi entry nai karega, kyunki usko

shares free me mile hai.

Dividend Paid

by

Subsidiary

Co.

(Same as

Abnormal

Items)

Two types of Dividends Final Dividend and Interim dividend

We always assume that:

Dividend paid is Final if question is silent

Pre-acquisition dividend received by parent is wrongly credited to its

P&L A/c

Necessary appropriation for final dividend was not made by subsidiary in

last year.

Dividend is calculated on paid up share capital

At the end of the year in case of Final Dividend

On the date of Distribution for Interim Dividend

Dividend Received by Parent can be:

Pre-acquisition : to be adjusted in COC (i.e. deducted from

investments)

Post acquisition : to be transfer to Cons. P&L A/c of Holding

(Agar pre acquisition dividend galti se p&l me daal diya parent ne to

vaha se hatana padega to minus karenge and COC me dalna padega to

vaha pe bhi minus karenge)

Treatment of Dividend paid in AOP:

1. Added back to the profits from where it has been

appropriated.

2. Apply time adjustment

3. Reduce dividend from its actual source of profits

Final Dividend source is profit of last year and moving backwards

Interim Dividend source is profit of current year upto the date of

distribution.

CDT will be appropriated just like dividend, but it will not be received or

rectified by parent.

Unrealised

Profit/Loss

on

assets/stocks

1. Calculate Book value of asset/stock transferred within the group

(net of depreciation if any)

2. Calculate U.profit/loss on above book value.

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transferred

within the

group

3. If such transaction is upstream (i.e. sale by subsy to parent) then

eliminate profit/loss in AOP with similar effect in Asset/Stock value

4. If such transaction is downstream (i.e. sale by parent to subsy) then

eliminate profit/loss Cons. P&L with similar effect in Asset/Stock

value)

If date of transaction is missing then assume such date to be the last

date of period.

Rectification

of Errors

If question specifies any error then such errors should be rectified

before time adjustment.

Contra Items Whenever Payable and Receivable are within group (i.e. H and S), then

such payable/receivable should be eliminated.

Payable A/c Dr.

To Receivable A/c

Note:

1. If payable is less than receivable then difference is called cheque

in transit

2. If payable is more than some Error will be given in the question.

Such error will be rectified and then contra adjustment will be

made.

Contingent

Liabilities

The Portion which is discounted and shown as Contingent liability will not

to be shown in Consolidated BS

Contra Adjustment will be made only for that portion which is not yet

discounted and shown under Bills receivable and Bills payable

Proposed

Dividend

(Equity)

If dividend is proposed after the date of Balance Sheet then According

to Schedule III of Companies Act, 2013, then it is not required to

recognize as a liability, it will be shown as Contingent Liability.

(Matlab ye ki jis saal me dividend propose/declare kiya hai ussi saal me

record karo)

Therefore, we will ignore the treatment of proposed dividend in the

Consolidated FS

However if Proposed dividend is declared before or up to balance sheet

date then it is to be provided for in the Balance sheet of the year it

belongs. Treatment will be:

1. Add back in AOP, if entry is already passed (ignore if entry not

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passed)

2. Deduct from Minority Interest and show MI’s share of PD as

Short Term Provisions

Proposed

Dividend

(Pref Share)

1. Add back in AOP, if entry is already passed (ignore if entry not

passed)

2. Apply Time Adjustment

3. Deduct in AOP from Pre and/or Post according to the date of

Investment.

4. If this dividend is receivable by Parent then share of parent will be

transfer to COC (Pre) or CPL (Post)

5. MI’s Share in dividend will be shown as Short Term Provisions

separately.

Q25. (May 18 – 20 Marks)

The following summarized Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepaid

as on 31st March, 2017:

H Ltd. (Rs.) S Ltd. (Rs.)


Shareholder’s Funds

Equity Share Capital

(fully paid up share of Rs 10 each )

Reserve and Surplus

General Reserve

Profit and Loss Account

Current Liabilities

Trade Payables

Total

12,00,000

4,35,000

2,80,000

3,22,000

22,37,000

2,00,000

1,55,000

65,000

1,23,000

5,43,000

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Assets

Non-Current Assets

Fixed Assets

Machinery

Furniture’

Non-Current Investments

Shares in S Ltd.

16,000 shares @ Rs 20 each

Current Assets

Inventories

Trade Receivables

Cash and Bank

Total

H Ltd. (Rs.)

6,40,000

3,75,000

3,20,000

2,68,000

4,70,000

1,64,000

22,37,000

S Ltd. (Rs.)

1,80,000

34,000

-

62,000

2,35,000

32,000

5,43,000

H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2016. On the date of acquisition,

General Reserve and profit and loss Account of S Ltd. stood at Rs 50,000 and Rs 30,000

respectively.

Machinery (book value Rs 2,00,000) and Furniture (book value Rs 40,000) of S Ltd. were

revaluated at Rs 3,00,000 and Rs 30,000 respectively on 1st April, 2016 for the purpose of

fixing the price of its shares (rates of depreciation computed on the basis of useful lives:

Machinery 10% and Furniture 15%). Trade payables of H Ltd. include Rs 35,000 due to S

Ltd. for goods supplied since the acquisition of the shares. These goods are charged at

10% above cost. The inventory of H Ltd. includes goods costing Rs 55,000 purchased from

S Ltd.

You are required to prepare the consolidated balance sheet as at 31st March, 2017.

Solution:

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March,

2017

Particulars Note No. (Rs)

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I. Equity and Liabilities

(1) Shareholder's Funds

(a) Share Capital

(1,20,000 equity shares of Rs 10 each)

12,00,000

(b) Reserves and Surplus 1 8,16,200

(2) Minority Interest (W.N.4) 99,300

(3) Current Liabilities

(a) Trade Payables 2 4,10,000

Total 25,25,500

II. Assets

(1) Non-current assets

(a) Fixed assets

(i) Tangible assets 3 13,10,500

(ii) Intangible assets 4 24,000

(b) Current assets

(i) Inventories 5 3,25,000

(ii) Trade Receivables 6 6,70,000

(iii) Cash at Bank 7 1,96,000

Total 25,25,500

Notes to Accounts

Rs

1. Reserves and Surplus

General Reserves 4,35,000

Add: 80% share of S Ltd.’s post-acquisition

reserves (W.N.3)

84,000 5,19,000

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Profit and Loss Account 2,80,000

Add: 80% share of S Ltd.’s post-acquisition

profits (W.N.3)

21,200

Less: Unrealised gain (4,000) 17,200 2,97,200

8,16,200

2. Trade Payables

H Ltd. 3,22,000

S Ltd. 1,23,000

Less: Mutual transaction (35,000) 4,10,000

3. Tangible Assets

Machinery

H. Ltd. 6,40,000

S Ltd. 2,00,0

00

Add: Appreciation 1,00,00

0

3,00,0

00

Less: Depreciation (30,00

0)

2,70,000 9,10,000

Furniture

H. Ltd. 3,75,000

S Ltd. 40,000

Less: Decrease in value (10,00

0)

30,000

Less: Depreciation (4,500) 25,500 4,00,500

13,10,500

4. Intangible assets

Goodwill [WN 5] 24,000

5. Inventories

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H Ltd. 2,68,000

S Ltd. 62,000 3,30,000

Less: Inventory reserve (5,000)

3,25,000

6. Trade Receivables

H. Ltd. 4,70,000

S Ltd. 2,35,000

7,05,000

Less: Mutual transaction (35,000)

6,70,000

7. Cash and Bank

H. Ltd. 1,64,000

S Ltd. 32,000 1,96,000

Working Notes:

1. Profit or loss on revaluation of assets in the books of S Ltd. and their book values

as on 1.4.2016

Rs

Machinery

Revaluation as on 1.4.2016 3,00,000

Less: Book value as on 1.4.2016 (2,00,000)

Profit on revaluation 1,00,000

Furniture

Revaluation as on 1.4.2016 30,000

Less: Book value as on 1.4.2016 (40,000)

Loss on revaluation (10,000)

2. Calculation of short/excess depreciation

Machinery Furniture

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Upward/ (Downward) Revaluation (W.N. 4) 1,00,000 (10,000)

Rate of depreciation 10% p.a. 15% p.a.

Difference [(short)/excess] (10,000) 1,500

3. Analysis of reserves and profits of S Ltd. as on 31.03.2017

Pre-acquisition profit

upto 1.4.2016

Post-acquisition profits

(1.4.2016 – 31.3.2017)

(Capital

profits)

General

Reserve

Profit and loss account

General reserve as on

31.3.2017

50,000 1,05,000

Profit and loss account as on

31.3.2017

30,000 35,000

Upward Revaluation of

machinery as on 1.4.2016

1,00,000

Downward Revaluation of

Furniture as on 1.4.2016

(10,000)

Short depreciation on

machinery (W.N. 5)

(10,000)

Excess depreciation on

furniture (W.N. 5)

1,500

Total 1,70,000 1,05,000 26,500

4. Minority Interest

Rs

Paid-up value of (2,00,000 x 20%) 40,000

Add: 20% share of pre-acquisition profits and reserves

[(20% of (50,000 + 30,000)]

16,000

20% share of profit on revaluation 18,000

20% share of post-acquisition reserves 21,000

20% share of post-acquisition profit 5,300

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1,00,300

Less: Unrealised Profit on Inventory

(55,000 x 10/110)* x 20%

(1,000)

99,300

considered that Rs 55,000 is cost to H Ltd. Alternative solution considering it as cost

to S Ltd. is also possible

5. Cost of Control or Goodwill

Cost of Investment 3,20,000

Less: Paid-up value of 80% shares 1,60,000

80% share of pre-acquisition profits and reserves

(Rs 64,000 + Rs 72,000)

1,36,000 (2,96,000)

Cost of control or Goodwill 24,000

Q26. (May 18)

Given below are the Profit & Loss Accounts of Hello Ltd. and its subsidiary Sun Ltd. for

the year ended 31st March, 2017:

Hello Ltd.

(Rs in lacs)

Sun Ltd.

(Rs in lacs)

Incomes:

Sales and other income 10,000 2,000

Increase in Inventory 2,000 400

12,000 2,400

Expenses:

Raw material consumed 1,600 400

Wages and Salaries 1,600 300

Production expenses 400 200

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Administrative Expenses 400 200

Selling and Distribution Expenses 400 100

Interest 200 100

Depreciation 200 100

4,800 1,400

Profit before tax 7,200 1,000

Provision for tax 2,400 400

Profit after tax 4,800 600

Dividend paid 2,400 300

Balance of Profit 2,400 300

Other Information:

Hello Ltd. sold goods to Sun Ltd. of Rs 240 lacs at cost plus 20%. Inventory of Sun Ltd.

includes such goods valuing Rs 48 lacs. Administrative expenses of Sun Ltd. include Rs 10

lacs paid to Hello Ltd. as consultancy fees. Selling and distribution expenses of Hello Ltd.

include Rs 20 lacs paid to Sun Ltd. as commission.

Hello Ltd. holds 80% of equity share capital of Rs 2,000 lacs in Sun Ltd. prior to 2015-

2016. Hello Ltd. took credit to its Profit and Loss Account, the proportionate amount of

dividend declared and paid by Sun Ltd. for the year 2015-2016.

You are required to prepare a consolidated profit and loss account of Hello Ltd. and its

subsidiary Sun Ltd. for the year ended 31st March, 2017.

Solution:

Consolidated Profit & Loss Account of Hello Ltd. and its subsidiary Sun Ltd. for the

year ended on 31st March, 2017

Particulars Note No. Rs in Lakhs

I. Revenue from operations 1 11,730

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II. Total revenue 11,730

III. Expenses

Cost of Material purchased/Consumed 3 2,360

Changes of Inventories of finished goods 2 (2,392)

Employee benefit expense 4 1,900

Finance cost 6 300

Depreciation and amortization expense 7 300

Other expenses 5 1,070

Total expenses 3,538

IV. Profit before Tax(II-III) 8,192

V. Tax Expenses 8 2,800

VI. Profit After Tax 5,392

Profit transferred to Consolidated Balance Sheet

Profit After Tax 5,392

Dividend paid

Hello Ltd. 2,400

Sun Ltd. 300

2,700

Less: Share of Hello Ltd. in dividend of Sun Ltd.

80% of Rs 300 lacs (240) (2,460)

Profit to be transferred to consolidated balance

sheet

2,932

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Notes to Accounts

Rs in Lacs Rs in Lacs

1. Revenue from Operations

Sales and other income

Hello Ltd. 10,000

Sun Ltd. 2,000

12,000

Less: Inter-company Sales (240)

Consultancy fees received by Hello Ltd. from Sun

Ltd.

(10)

Commission received by Sun Ltd. from Hello Ltd. (20) 11,730

2. Increase in Inventory

Hello Ltd. 2,000

Sun Ltd. 400

2,400

Less: Unrealized profits Rs 48 lacs × 20 120 (8) 2,392

14,122

3. Cost of Material purchased/consumed

Hello Ltd. 1,600

Sun Ltd. 400

2,000

Less: Purchases by Sun Ltd. from Hello Ltd. (240) 1,760

Direct Expenses

Hello Ltd. 400

Sun Ltd. 200 600

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2,360

4. Employee benefits and expenses

Wages and Salaries:

Hello Ltd. 1,600

Sun Ltd. 300 1,900

5. Other Expenses

Administrative Expenses

Hello Ltd. 400

Sun Ltd. 200

600

Less: Consultancy fees received by Hello Ltd.

from Sun Ltd.

(10) 590

Selling and Distribution Expenses:

Hello Ltd. 400

Sun Ltd. 100

500

Less: Commission received from Sun Ltd. from

Hello Ltd.

(20) 480

1,070

6. Finance Cost

Interest:

Hello Ltd. 200

Sun Ltd. 100 300

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7. Depreciation and Amortization

Depreciation:

Hello Ltd. 200

Sun Ltd. 100 300

8. Provision for tax

Hello Ltd. 2,400

Sun Ltd. 400 2,800

Note: Since the amount of dividend received by Hello Ltd. for the year 2015-2016 is not

given, it has not been deducted from ‘sales and other income’ in consolidated profit and

loss account and not added to consolidated opening retained earnings (which is also not

given).

(We can assume that the dividends paid given in the question are relating to FY

2015-16 if declared and paid after 31.03.2016, accordingly students should mention

a note relating to this point as we discussed in the class)

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IMPORTANT NOTES:

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Valuation of Goodwill

Methods of Valuing Goodwill:

Average Profit Method – FMP x No. of years purchased

Super Profit Method – (FMP – Normal Profit) x No. of years purchased

Capitalisation Method – Super Profit / Capitalisation Rate

Annuity Method – SP x Annuity Value (as per Present value factor)

NO. OF YEARS PURCHASE – It will always be given in the question, if not given we will

use capitalization rate. If it is required to be used but not given then we can assume NYP

as 3-5 years.

NRR: It means normal rate of return expected in the same business. It is generally given

in question. If it is not given then it will be calculated as under:

NRR = Div/MPS *100

(Avg Dividends and Avg MPS is allowed) (NRR is considered Post Tax Always)

CALCULATION OF FMP is based on Projected profits method and past profits method.

While calculating Past profits approach following items will be adjusted:

1. Tax Expenses

2. Abnormal Items

3. Rectification of Errors

4. Effects of Changes in A/c Policy

5. Revaluation of Current Assets and Liabilities

6. Non recurring items (eg. Loss/profit on sale of assets)

7. Non operating Incomes (eg. Interest on investments)

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8. Goodwill w/off added back

9. Additional Depreciation due to revaluation of FAs

10. Future Incomes and Exp

11. Future Tax Rate

Note: When NRR is given after Tax for both SH then FMP after Tax is to be considered.

When NRR is given for ESH then FMP after Tax after Pref. Dividend is considered.

Average of FMP is not specified in Question

Check Trend in NP ratios if these are available: Apply Weighted Avg if trend is

available otherwise Simple Avg.

If NP ratios are not available then check trend in Adjusted Profits: Apply

Weighted Avg if trend is available otherwise Simple Avg.

CAPITAL EMPLOYED: Capital employed means Shareholders fund (Eqt + Pref) applied in

the business for operating activities. It is calculated as under:

All Assets XXX

Less: All Liabilities XXX

Assets are to be considered after – Revaluation, Rectification and Change in

Accounting Policy

Non Operating Investment will be excluded in Capital employed. (if nothing is

specified in question we always assume that Investments are Non Operating)

If there is Purchased Goodwill in BS then it is considered otherwise it is will be

excluded.

These are not Liabilities for the purpose of capital employed – Proposed Dividend

and Pref Share Capital. But if NRR given in question is for ESH then they are

deducted.

Capital employed may be “Closing Capital Employed” or “Average Capital Employed”

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Tangible capital employed means Closing Capital employed excluding Intangible

Assets.

Avg. Capital Employed may be –

½ (Opening CE + Closing CE)

Or

Closing CE – ½ Rectified PAT

Which Capital Employed to Use ?

If Not Specified in the question, then we have to check the basis of FMP. If FMP is based

on Projected Profits, Trendline Avg. or Weighted Avg. then we may use Closing Capital

Emp. and if FMP is based on Simple Avg. then we may use Avg. Capital Employed.

Note: Tangible Capital Employed means Closing Capital Employed excluding Intangible

Assets.

Some Important Key Points:

Investment for Replacement of P&M/Building is Trade Investment.

RPAT is the actual profit earned after rectifications since we take capital emp

after rectification also. Moreover RPAT also includes income on Non Trade

Investment assuming that it is utilized in business activities.

Abnormal Year is not to be considered in the valuation until and unless the loss due

to abnormal activity is mentioned and quantified separately.

If the Goodwill is shown in balance sheet and nothing is given in question about

goodwill, then we will assume it as Self Generated.

We need to consider the additional provision of Tax due to increase in Tax Rate.

Rectification is required when there is any Error or Omission or any information is

given which shows that there is wrong treatment in books. (Eg. Some trade

receivables are bad – it is assumed as error and to be rectified)

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Q27. (Imp for Exam)

A Company Q is willing to sell its business. The purchaser has sought professional advice

for the valuation of the goodwill of the company. He has the last audited financial

statements together with some additional information. The extract of the Balance Sheet

as on 31-3-2016 is as under:

Liabilities Rs Assets Rs

Equity Share Capital

(shares of Rs 100 each)

9,50,000 Land & Building 5,45,000

8% Preference Share

Capital (shares of Rs 100

each)

2,25,000 Plant & Machinery

Investments in

shares

Inventories

4,55,000

4,85,000

3,80,000

Reserves & Surplus 7,50,500 Trade Receivables

(net)

4,25,620

9% Debentures 5,60,000 Cash & Bank balance 5,20,520

Current Liabilities 3,25,640

28,11,140 28,11,140

(1) The Debentures will be redeemed at a discount of 25% of the value in Balance Sheet

and investments in share will be sold at their present market value which is quoted as

Rs 4,95,200. The above transactions will be prior to the purchase of the equity shares.

For the purpose of pricing of Goodwill:

(2) The normal rate of return on net assets for equity shares is 10%.

(3) Profits for the past three years after debenture interest but before Preference

Share Dividend have been as under:

31-3-2016 Rs 2,95,000

31-3-2015 Rs 4,99,000

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31-3-2014 Rs 3,25,000

(4) Goodwill is valued at three years purchase of the adjusted average super profit.

(5) In the year 2015, 20% of the profit mentioned above was due to non-recurring

transaction resulting in increase of profit.

(6) The Land & Building has a current rental value of Rs 62,400 and 8% return is expected

from the property.

(7) On 31-3-2016, 8% of debtors existing on the date had been written as bad and

charged to Profit and Loss Account as Provision for Bad debts. The same are now

recoverable. Tax is applicable at 35%.

(8) A claim of compensation long contingent of Rs 25,000 has perspired and is to be

accounted for.

(9) No Debenture interest shall be payable in future due to its redemption.

Answer

Valuation of goodwill: Super profits method

Particulars Rs Rs

Net trading assets attributable to equity share

holders

As computing in (WN 1) 23,18,506

Less: Preference share Capital (2,25,000) 20,93,506

Normal Rate of Return (NRR) to equity share

holders

10%

Normal Profit available to equity share holders (a

× b)

2,09,351

Future Maintainable Profits (FMP) to equity

share holders

As computed in (WN 3) 3,75,096

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Less: Preference dividend* (8% of 2,25,000) (18,000) 3,57,096

Super profits to equity share holders 1,47,745

Goodwill (1,47,745 x 3) 4,43,235

*Since, NRR is given as percentage of net assets attributable to equity shareholders,

preference share capital and preference share dividend have been deducted from the net

assets and future maintainable profit respectively.

Working Notes:

1. Computation of net trading assets

Particulars Rs Rs

Sundry assets

i Land & Building (62,400 ÷ 8%) 7,80,000

ii Plant and Machinery 4,55,000

iii Inventory 3,80,000

iv Trade receivables (4,25,620 ÷ 92%) 4,62,630

v Bank balance (given balance 5,20,520 + Sale of

investment 4,95,200 - redemption of debentures

5,60,000 × 75%)

5,95,720 26,73,350

Less: Outside liabilities:

i Current Liabilities 3,25,640

ii Contingent Liability now to be accounted for 25,000

iii Tax provision (WN 2) 4,204 (3,54,844)

Net assets 23,18,506

2. Calculation of tax provision

Rs

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Profit on reversal of provision for bad debts 37,010

Loss on recognizing omitted claim (assuming tax deductible) (25,000)

Net incremental profit on which tax is payable 12,010

Tax provision 35% 4,204

3. Computation of future maintainable profit for the year ended on 31st March

Particulars 2014 2015 2016

Profit after tax 3,25,000 4,99,000 2,95,000

Less: Non-recurring profits (after

tax) (20% of 2015 Profit)

- (99,800) -

Less: Claims not recorded (after tax)

[25,000 x (1-35%)]

- - (16,250)

Add: Provision no longer required

(net of tax) [4,25,620 × 8/92 × (1-

35%)]

- - 24,057

Adjusted profits after tax 3,25,000 3,99,200 3,02,807

Simple average of the profits (as profits are fluctuating) 3,42,336

Adjustments for items which will not be reflected in future

Add: Debenture interest (net of tax) [5,60,000 × 9% × (1 – 0.35)] 32,760

Future maintainable profit [for shareholders- both preference

and equity)

3,75,096

Assumptions

1. Tax effect has been ignored on profit on sale of investments and discount on

redemption of debentures.

2. Assets and liabilities are recorded at realizable value or fair value. In the absence of

information, book values are assumed to be fair values.

3. Additional depreciation on revaluation of property is ignored.

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Profits for past three years given in the question have been assumed as profits after tax.

Q28:

Find out Leverage effect on Goodwill from the following information:

(i) Average capital employed (Equity Approach) Rs. 11,50,000

(ii) FMP on equity fund (After Tax) Rs. 1,80,000

(iii) 10% Long Term Loan Rs. 4,50,000

(iv) Tax Rate 40%

(v) Normal Rate of return

On equity capital employed 15%

On Long term capital employed 12%

Solution:

Determination of leverage effect on goodwill

Rs.

A

B

C

D

E

Profit available for equity fund after tax

Profit (as per long term fund approach)

Profit for equity fund

Add: Interest on long term loan (net of tax

4,50,000×{10%×(1-0.4)]

Capital employed (by Equity approach)

Capital employed as per long term fund approach

Capital employed (by Equity approach)

Add: 10% long term loan

Value of goodwill

(a) By equity approach

Capitalized value of profit as per equity approach

(1,80,000/15×100)

Less: capital employed as per equity approach

value of Goodwill

(b) By long term fund approach

Capitalized value of profit as per long-term fund

approach (2,07,000/12×100)

1,80,000

27,000

11,50,000

4,50,000

1,80,000

2,07,000

11,50,000

16,00,000

12,00,000

(11,50,000)

50,000

17,25,000

16,00,000

1,25,000

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Less: capital employed as per long term fund

approach

Value of Goodwill

Leverage effect on Goodwill:

Adverse leverage effect on goodwill is Rs 75,000 (i.e. Rs 1,25,000 – Rs 50,000)

In other words, leverage ratio is low for which its goodwill value has been reduced when

calculated with reference to equity fund as compared to value arrived at with reference to

long term fund.

D-FORTUNE CLASSES

89

IMPORTANT NOTES:

D-FORTUNE CLASSES

90

D-FORTUNE CLASSES

91

Mutual Fund

HOW TO CALCULATE NAV?

Total Market Value of all MF

holdings - All MF Liabilities

Total Units of the Scheme (Unit Size)

Purchase of

Investments

Investments A/c Dr.

To Bank A/c

Depreciation

of Investment

Revenue A/c Dr.

To Provision for Depreciation A/c

Appreciation

of Investment

Investment A/c Dr.

To Unrealised Appreciation Reserve A/c

Reversal of

UAR in the

Next Year

UAR A/c Dr.

To Investments A/c

Sale of

Investments

Bank A/c Dr.

Provision for Depreciation A/c Dr.

Revenue A/c Dr. (balance loss)

To Investments A/c

To Revenue A/c

DIVIDEND EQUALISATION

New investors are not entitled to any share of the income of a mutual fund scheme

which arose before they bought their units.

However, at the end of each distribution period the fund management allocates the

same amount from the income of the fund to each unit.

To compensate for this an equalisation payment is added to the cost of new units.

D-FORTUNE CLASSES

92

This is the amount of income that has arisen up to the date of purchase of the unit.

Because these payments are included in the amount available for distribution they

are effectively repaid to the purchaser.

Issue (Sale)

of Units First

Time

Bank a/c Dr.

To Unit Capital A/c

To Reserve A/c

Issue (Sale )

of Units Next

Time

Bank a/c Dr.

To Unit Capital A/c (FV)

To Reserve A/c (NAV – FV)

To Dividend Equalisation Reserve (Extra)

Distribution of

Income to

Unit Holders

Revenue A/c Dr.

Dividend Equalisation A/c Dr.

To Cash/Bank A/c

Q29.

Sparrow Holdings is a SEBI Registered Mutual Fund which made its maiden N.F.O (New

Fund Offer) on 10th April, 2016 at ` 10 face value per unit. Subscription was received for

90 lakhs units. An underwriting arrangement was also entered into with Affinity Capital

Markets Ltd., that agreed to underwrite the entire NFO of 100 lakh units on a commission

of 1.5%.

Out of the monies received ` 892.50 lakhs was invested in various capital market

instruments. The marketing expenses for the N.F.O amounted to ` 11.25 lakhs. During the

financial year ended March 2013 the Fund sold securities having cost of ` 127.25 lakh (FV

` 54.36 lakhs) for ` 141.25 lakhs. The fund in turn purchased securities for ` 130 lakhs.

The management expenses of the fund are regulated by SEBI stipulations which state

that the same shall not exceed 0.25% of the average funds invested during the year. The

actual amount spent towards management expenses was ` 2.47 lakhs of which ` 47,000

was in arrear. The dividends earned on the investments held amounted to ` 2.51 lakhs of

which a sum of ` 25,000 is yet to be collected. The fund distributed 80% of realized

earnings. The closing market value of the portfolio was ` 1120.23 lakhs.

You are required to determine the closing per unit NAV of the fund.

Solution:

Particulars Amount

Net Assets of Sparrow holding

Closing cash balance (W.N.2)

Closing Market Value of Investments

Accrued Dividends (collectable)

79.99

1,120.23

0.25

1,200.47

D-FORTUNE CLASSES

93

Less: Current Liabilities

Outstanding Management Fee (payable)

Closing Net Assets (A)

Units outstanding (in lakhs) (B)

NAV per unit (A/B)

(0.47)

1,200.00

100.00

12.00

Working Notes:

Rs. in

Lakhs

Computation of opening cash balance

Proceeds of NFO in full including underwriters

commitment

Less: Initial Purchase of Securities

Less: Underwriting Commission

Marketing Expenses

Opening Cash Balance

2. Computation of Closing cash balance

Opening bank balance (W.N.1)

Add: Proceeds from sale of securities

Dividends received on investment

Less: Cost of Securities purchased

Management Expenses (W.N.3)

Capital Gains Distributed (141.25 – 127.25 x 80%0

Dividends Distributed (2.26 x 80%)

Closing cash balance

3. Computation of Management Expenses Chargeable

Actual Expense Incurred [A]

Opening Investment Made

Closing Funds Invested (892.50 - 127.25 + 130)

Total

Average Funds Invested (1,787.75/2)

0.25% of Average Funds Invested [B]

Lower of A or B

15.00

11.25

141.25

2.26

130.00

1.76

11.20

1.81

892.50

895.25

1787.75

893.875

1000.00

(892.50)

107.50

26.25

81.25

81.25

143.51

224.76

(144.77)

79.99

2.47

2.23

2.23

(0.47)

D-FORTUNE CLASSES

94

Less: Amount unpaid

Management expenses paid

1.76

Q30. Calculate the year-end NAV of the Mutual Fund scheme on the basis of the information

given below:

(i) UTI launched a new Fund scheme for ` 6,000 crore.

(ii) Underwriting Commission is 1% of the fund shared equally by SBI, PNB, Syndicate Bank

and UTI Bank.

(iii) The Fund was launched on 1.4.2016 with a face value of ` 1000 per unit.

(iv) Underwriting Commission was paid in full.

(vi) Management Expense was allowed by SEBI @ 1% of the Fund raised. However, during

the year management expense was of ` 45 crore only. The management decided to defer

the payment of ` 5 crore to the next financial year.

(vii) On 1.5.2016, the total fund received was invested after deduction of underwriting

commission and ` 100 crore to meet the day to day management expenses. The investment

fund received yielded 10% interest per annum. The interest was received for 3 quarters

and the interest of last quarter is yet to be received. The interest realized in cash has

been distributed to the unit holders @ 80%. The financial year runs from April to March.

The quarter starts from the date of investment i.e. 1.5.2016.

Solution: Calculation of Net Asset Value of a fund

Rs. In Crores

Total Assets:

Investment (6,000 - 60 -100)

Add: Closing Cash Balance (Refer

W.N.)

Add: Interest for two months due to

be received

5840 x 10% 2/12

Less: Outstanding Management

Expenses

Total value of the fund

5840.00

147.60

97.33

6084.93

(5.00)

6079.93

No. of units = 6000 / 1000 = 6 Cr Units

NAV per unit = 6079.93 crores / 6 Crore = Rs. 1013.32 per unit

Working Note:

Calculation of year-end cash/bank balance of the fund Rs. In

Crores

D-FORTUNE CLASSES

95

Cash received during the year for the fund

Sale of units

Add: Interest for 3 quarters on investment

5840 x 10% x 9/12

Less: Underwriting commission

Management expenses paid in cash

Investment

Dividend paid (438 x 80%)

60

40

5840

350.40

6,000

438

6,438

(6290.40)

147.60

Q31: (ICAI Module – Test your knowledge Q2)

On 1.4.2008, a mutual fund scheme has 18 lakh units of face value of Rs. 10 each was

outstanding. The scheme earned Rs. 162 lakhs in 2008-09, out of which Rs.90 lakhs was

earned in the first half of the year. On 30.9.2008, 2 lakh units were sold at a "NAV of

Rs.70.

Pass Journal entries for sale of units and distribution of dividend at the end of 2008-09.

(Answer: DER – 5/- per unit; Dividend Distribution – 8.60/-)

D-FORTUNE CLASSES

96

IMPORTANT NOTES:

D-FORTUNE CLASSES

97

ACCOUNTING STANDARD – 7

CONSTRUCTION CONTRACTS

Q32. MOHIT LTD. has undertaken bridge construction contract to be constructed in 3 years.

Initial contract revenue Rs.900 crores. Initial contract cost Rs. 800 crores.

Particulars Years

1st 2nd 3rd

Estimated contract cost

Increase in contract revenue

Estimated additional increase cost

Contract cost incurred upto

805

---

---

161

---

20

15

584

---

---

---

820

At the end of 2nd year cost incurred includes Rs.10 crores, for material stored at the sites

to be used in 3rd year to complete the project.

Sol.: Amount of revenue, expenses and profit recognised in statement of P&L a/c in three

years:

Particulars

Up to

reporting

Date

Recognised in

earlier years

Recognised in

C. Year

Year I:

Revenue (900X20%)

Expenses

Profit

Year II:

Revenue (920X70%)

Expenses (584 - 10)

Profit

Year III:

Revenue (920X100%)

Expenses

Profit

180

161

19

644

574

70

920

820

100

---

---

---

180

161

19

644

574

70

180

161

19

464

413

51

276

246

30

D-FORTUNE CLASSES

98

WN:

Initial revenue agreed

Variation

Total contract value

Contract cost incurred upto the date of

reporting

Total estimated contract cost

Stage of completion

900

---

900

161

805

20%

(161/805

X 100)

900

20

920

584[incl. 10

crores mat)

820

70%

(584-10/820

X 100]

900

20

920

820

820

100%

(820/820

X 100)

Q33.

A firm of contractors obtained a contract for construction of bridges across river

Krishna. The following details are available for the year ended 31.3.04

Total Contract Price

Work Certified

Work not Certified

Estimated further Cost of Completion

1,000

500

105

495

Sol.:

Cost incurred up to the date 605

Cost incurred further cost 495

Total cost of contract 1100

Degree of Completion = 55% (605/1100). Turnover = 1000 X 55% = 550. Loss in C.Year = 550 –

605 = 55.

Provision to be created in current year for future loss:

Total cost 1100

Less: Total revenue 1000

Total loss 100

Less: C.Y. loss 55

Future loss 45

D-FORTUNE CLASSES

99

GUIDANCE NOTE ON ACCOUNTING FOR

REAL ESTATE TRANSACTIONS

ACCOUNTING FOR REAL ESTATE TRANSACTIONS

APPLICATION OF PERCENTAGE COMPLETION METHOD There is a rebuttable presumption that the outcome of a real estate project can be

estimated reliably and that revenue should be recognised under the percentage completion

method only when the events in (a) to (d) below are completed.

a. All the critical approvals necessary for commencement of the project

have been obtained

b. If the expenditure incurred on the construction and development costs is

less than 25%, nothing is recognised as in the profit and loss A/C of the

contract.

c. At least 25% of the saleable project area is secured by contracts or

agreements with buyers.

d. At least 10% of the contract consideration as per the agreements of

sale or any other legally enforceable documents are realised at the

reporting date in respect of each of the contracts and it is reasonable

to expect that the parties to such contracts will comply with the

payment terms as defined in the contracts.

Example:

If there are 10 Agreements of sale and 10% of gross amount is realised in case

of 8 agreements, revenue can be recognised with respect to these 8

agreements only.

Q34.

Facts Details

Total saleable area 20,000 sqft

Land cost Rs. 300 lacs

Estimated construction and development cost Rs. 300 lacs

Total area sold 5000 sqft

Total sale agreement value Rs. 200 lacs

Amount realized Rs.50 lacs

Construction cost incurred including land cost Rs. 360 Lacs

D-FORTUNE CLASSES

100

Whether revenue to be recognised as threshold limit is achieved or not?

Solution

Percentage of completion for threshold limit is 20%

Area sold is 25% of total saleable area

Amount realized exceeds 10% of agreement value

Final answer – No revenue to be recognized as threshold limit not achieved

Q35.

Facts Details

Total saleable area 20,000 sqft

Land cost Rs.300 lacs

Estimated construction and development cost Rs.300 lacs

Total area sold 5,000 sqft

Total sale agreement value Rs.200 lacs

Amount realized Rs.50 lacs

Cost incurred including land cost Rs.390 lacs

Compute profit.

Solution

Percentage of completion for threshold limit is 30%

Area sold is 25% of total saleable area

Amount realized exceeds 10% of agreement value

Revenue to be recognized at 65 % of Rs. 200 lacs i.e. Rs. 130 lacs

Cost [5000/20,000 x 390] Rs. 97.50 lacs

Work in progress = Rs. 292.50 lacs

Profit = Rs. 32.50 lacs

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