Practice Manual- Company Accounts and Auditing Practices

EXECUTIVE PROGRAMME

MODULE 2, PAPER 5

Company Accounts

and

Auditing Practices

NOVEMBER 2015

Price : Rs. 300/-

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The PRACTICE MANUAL has been prepared by competent persons and the Institute hopes that it will facilitate the students in preparing for the Institute's examinations. It is, however, to be noted that the answers are to be treated as model answers and not as exhaustive and there can be alternative solutions available for a questions provided in this practice manual. The Institute is not in any way responsible for the correctness or otherwise of the answers.

The Practice Manual contains the information based on the Laws/Rules applicable at the time of preparation. Students are expected to be well versed with the amendments in the Laws/Rules made upto six months prior to the date of examination.

ISBN No. : 978-98-82207-60-3

Printed at : Samrat Offset Works/500/November 2015

PREFACE

With the continuous developments in the external environment, the role of Company Secretaries is being continuously redefined, which demand that our students - the prospective Company Secretaries, are better prepared, developed and trained by providing regular quality academic inputs, so that they are equipped to face the challenges of dynamic environment with ease and efficiency. To become competitive, a student need not only be aware of the basic theoretical provisions of subjects but also be conversant with the practical aspects of it.

Developing competency in practical papers is a little more challenging as mastering these subjects requires practicing more problems based on them. Although the study materials of the Institute contains a lot of numerical and scenario based problem solving inputs but nevertheless they can be supplemented further.

With the intent of developing our students in practical oriented subjects, the Institute has brought out “Practice Manual”, a repository of solved questions, to build competency in practical oriented subjects by providing the students with a pool of solved practical problems. I am proudly presenting this practice manual prepared specifically for the subject “Company Accounts and Auditing Practices” to the students of professional programme.

Students learn best when they are shown how practical questions are framed and solved on variety of topics, in a step by step method with proper explanation. With this consistency, students would be able to see the underlying patterns clearly and will learn better. The manual has adopted an easy-to-understand method of providing solutions so that students can understand themselves without an aid of a teacher. It will prove to be a significant preparation resource for the students and will also serve as a self assessment tool in the preparation for examination.

I acknowledge with thanks all those experts authors and institutions whose material has been consulted and referred in preparation of this Practice Manual.

I place on record my sincere appreciation to Ms. Khusbu Mohanty, Assistant Education Officer in the Academic Team at the Institute headed by Ms. Sonia Baijal, Director for this new initiative under the overall supervision of CS Sutanu Sinha, Chief Executive and Officiating Secretary.

I will urge my students to take maximum benefit out of it by meticulously practicing the questions given therein. Practicing more will develop better understanding of the concepts and provide stronger grip on the subject, for which Practice Manual will certainly serve as a means. My best wishes to you all!

New Delhi CS Atul H. Mehta 4th November, 2015 President, ICSI

(iii)

I N D E X

Sl. No. Subject Page Nos.

1. Share Capital 1

2. Debentures 64

3. Final Accounts of Companies 102

4. Corporate Restructuring 151

5. Consolidation of Accounts 243

6. Valuation of Shares and Intangible Assets 324

7. Liquidation of Company 347

8. Corporate Financial Reporting 362

9. Accounting Standards 382

10. Auditing Concepts 417

11. Types of Company Audit 430

12. Internal Audit 447

13. Internal Control 454

14. Review of Internal Control 462

15. Audit Engagement and Documentation 469

(v)

1

Question 1

On 1st April, 2014, A Ltd. issued 45,000 shares of Rs.100 each payable as follows:

Rs. 30 on application;

Rs. 20 on allotment;

Rs. 25 on 1st October, 2014; and

Rs. 25 on 1st February, 2015.

By 20th May, 2014 40,000 shares were applied for and all applications were accepted. Allotment was made on 1st June. All sums due on allotment were received on 15th July; those on 1st call were received on 20th October. Journalise the transactions when accounts were closed on 31st March, 2015.

Answer

Case of under subscription

Shares issued by the company 45000

Shares applied by the public 40000

A Ltd. Journal

Date Particular Amount (Dr.)

Amount (Cr.)

May 20

Bank A/c (40000 x Rs. 30) Dr.

To Share Application A/c

(Application money received on 40,000 shares at Rs. 30 per share.)

Share Application A/c Dr.

To Share Capital A/c

(Application money transferred to Share capital)

Note : Share Application A/c will be transferred to share capital A/c on the date of Allotment.

12,00,000

12,00,000

12,00,000

12,00,000

June 1

1

Share Capital

2

June 1 Share Allotment A/c (40000 x Rs. 20) Dr.


(Amount due on allotment on 40000 shares

@ Rs. 20 per share)

Bank A/c Dr.

To Share Allotment A/c

(The amount due on allotment received)

Share First Call A/c (40000 x Rs. 25) Dr.


(Amount due on First call on 40000 shares @ Rs. 25 per Share)

Bank A/c Dr.

To Share First Call Account

(Amount received on First call)

Share second and final Call A/c Dr.

(40000 x Rs. 25)


(Amount due on Second and Final call on 40000 shares @Rs. 25 Per share)

Bank A/c Dr.

To Share Second & Final Call A/c

(Amount received on Second and Final

call)

800000

800000

10,00,000

10,00,000

10,00,000

10,00,000

800000

800000

10,00,000

10,00,000

10,00,000

10,00,000

July 15

Oct. 1

Oct. 20

Feb. 1

Mar. 31

Question 2

Pioneer Equipment Limited received on October 1, 2014 applications for 60,000 Equity Shares of 100 each to be issued at a premium of 25 per cent payable at thus:

On Application Rs. 30

On Allotment Rs. 75 (including premium)

Balance Amount on Shares as and when required

The shares were allotted by the Company on October 20, 2014 and the allotment money was duly received on October 31, 2014.

Record journal entries in the books of the company to record the transactions in connection with the issue of shares.

3

Answer

Pioneer Equipment Limited

Journal

Date Particulars Amount Dr. Amount Cr.

Oct. 1 Bank A/c (60000 x 30) Dr.

To Equity Share Application A/c

(Share Application money received on 60000shares @ Rs. 30 per Share)

_

18,00,000

18,00,000

Oct. 20 Equity Share Application A/c Dr.

To Equity Share Capital A/c

(Share application money transferred to share capital)

18,00,000

18,00,000

Oct. 20 Equity Share Allotment A/c (60000 x 75) Dr.

To Equity Share Capital A/c (60000 x 50)

To Securities Premium A/c (60000 x 25)

(Amount due on allotment of 60,000 Shares @ Rs. 75 per share including premium of Rs. 25)

45,00,000

30,00,000

15,00,000

Oct. 31 Bank A/c Dr.

To Equity Share Allotment A/c

(Amount received on allotment)

45,00,000

45,00,000

Question 3

X Ltd. invited applications for 10,000 shares of Rs. 100 each payable as follows :

On Application Rs. 25

On Allotment (on 1st May, 2014) Rs. 25

On First Call (on 1st Oct., 2014) Rs. 25

On Final Call (on 1st Feb., 2015) Rs. 25

All the shares were applied for and allotted. A shareholder holding 200 shares paid the whole of the amount due along with allotment. Journalise the transactions, assuming all sums due were received. Interest was paid to the shareholder concerned on 1st February, 2015.

4

Answer

Journal of X Ltd.


May 1 Bank A/c (10000 x 25) Dr.

To Shares Application A/c

(Amount of share application received for 10,000 shares @ Rs. 25 per share.)

2,50,000

2,50,000

May 1



(share application money transferred to share capital)

2,50,000

2,50,000

May 1 Share allotment A/c Dr.

To Share capital A/c

(Share allotment money due on 10,000 shares @Rs. 25 per share)

2,50,000

2,50,000

May 1

Bank A/c Dr.

To Shares Allotment A/c

To Calls in Advance A/c

[Receipt of money due on allotment, also the two calls (Rs. 25 and Rs. 25) on 200 shares.]

2,60,000

2,50,000

10,000

Oct. 1 Share First Call A/c Dr.


(The amount due on 10,000 shares @ Rs. 25 on first call.)

2,50,000

2,50,000

Oct.1 Bank A/c Dr.

Calls in Advance A/c Dr.

To Share First Call A/c

(Receipt of the first call on 9,800 shares, the balance having been previously received and now debited to call in advance account.)

2,45,000

5,000

2,50,000

5

The interest on calls in advance paid @ 12% on :

Rs. 5,000 (first call) from 1st May to 1st Oct., 2014–5 months 250

Rs. 5,000 (final call) from 1st May, 2014 to 1st Feb., 2015–9 months 450

700

Question 4

X Ltd. Invited applications for 11,000 shares of Rs.10 each, issued at 20% premium payable as :

Application Rs. 3 (including Re.1 premium) Allotment Rs. 4 (including Re.1 premium) Ist call Rs. 3 IInd call Rs. 2

Applications were received for 24,000 shares

Category I :- One fourth of the shares applied for allotted 2000 shares

Category II :- Two fourth of the shares applied for allotted 9000 share

Category III :- Remaining applications were rejected

Excess amount received is to be adjusted towards allotment and any amount beyond that shall be refunded.

Mr. Remo, holding 300 shares out of category II failed to pay allotment and two calls and his shares were forfeited and re-issued @ Rs.11 fully paid up.

Pass journal entries.

2015

Feb. 1 Share Final Call A/c Dr.


(The amount due on Final Call on 10,000 shares@ Rs. 25 per share.)

2,50,000

2,50,000

Feb. 1 Bank A/c Dr.

Calls in Advance A/c Dr.

To Share Final Call A/c

(Receipt of the moneys due on final call on 9,800 shares, the balance having been previously received.)

2,45,000

5,000

2,50,000

Feb. 1 Interest A/c Dr.

To Bank A/c

700

700

6

Answer

Journal of X Ltd.

Particulars Amount Dr. Amount Cr.

Bank A/c Dr.


(Application money received on 24,000 shares @ Rs.3)

72,000

72,000



To Securities Premium A/c


To Bank A/c

(Amount transferred to share capital on 11,000 shares and excess amount adjusted & refunded)

72,000

22,000

11,000

17,000

22,000

Share Allotment A/c Dr.



(Amount due on allotment on 11,000 shares @ Rs.4 including premium of Rs.1)

44,000

33,000

11,000

Bank A/c Dr.


(Amount received on allotment)

26,100

26,100

Share First Call A/c Dr.


(Amount due on Ist call on 11,000 shares @ Rs.3)

33,000

33,000

Bank A/c Dr.


(Amount received on Ist call on 10,700 share @ Rs.3)

32,100

32,100

Share Second Call A/c Dr.


(Amount due on IInd call on 11,000 shares @ Rs.2)

22,000

22,000

7

Bank A/c Dr.

To Share Second Call A/c

(Amount received on IInd call on 10,700 shares @ Rs.2)

21,400

21,400

Share Capital Account A/c Dr.

Securities Premium A/c Dr.

To Share Forfeiture A/c



To Share Second Call A/c

(300 Shares of Mr. Ram forfeited, who failed to pay his dues)

3000

300

900

900

900

600

Bank A/c Dr.



(Shares reissued @ Rs.11 fully paid up)

3300

3000

300

Share Forfeiture A/c Dr.

To Capital Reserve A/c

(Amount transferred to Capital Reserve)

900

900

Working notes:

Calculation for adjustment and refund

Category No. of Shares applied

for

No. of Shares allotte

d

Amount received on application

Amount required on appli-

cation

Amount adjusted

on allotment

Refund Amount due on allot-ment

Amount received on allot-

ment

I

II

III

6,000

12,000

6,000

2,000

9,000

NIL

18,000

36,000

18,000

6,000

27,000

NIL

8,000

9,000

NIL

4,000

NIL

18,000

8,000

36,000

NIL

NIL

26,100

NIL

Total 24,000 11,000 72,000 33,000 21,000 22,000 44,000 26,100

8

Category I

Excess Money Received on (6000-2000)4000 X3= 12000

Allotment due 2000 x 4= 8000

Excess adjusted towards allotment = 8000

Refund = Excess money Received – Excess Adjusted towards allotment

= 12000-8000=4000

Category II

Excess Money Received on (12000-9000) 3000 x 3=9000

Allotment due 9000 x 4= 36000

Excess adjusted towards allotment 9000

Category III

Refund 6000 x 3 = 18000

Mr. Remo

Allotted shares 300

Applied share 400

Excess shares 100

Excess Application money Rs. 300/-

Allotment due

300 shares x Rs. 4 Rs.1,200/-

-excess amount Rs. 300/-

Amount not received Rs. 900/-

First call due

300 shares x Rs. 3 Rs. 900/-

Second call due

300 shares x Rs. 2 Rs. 600/-

Question 5

Runa Limited issued at par 10,000 Equity shares of Rs. 10 each payable Rs. 3.50 on application; Rs. 4 on allotment; and balance on the final call. All the shares were fully subscribed and paid except a shareholder having 100 shares could not pay the final call. Give journal entries to record these transactions.

9

Answer

Book of Runa Limited


Bank A/c (10,000x3.5) Dr.


(Money received on applications for 10,000 shares @ Rs. 3.50 per share)

35,000

35,000

Equity Share Application A/c Dr.


(Transfer of application money on 10,000 shares to share capital)

35,000

35,000

Equity Share Allotment A/c (10,000 x4) Dr.


(Amount due on the allotment of 10,000 shares @ Rs. 4 per share)

40,000

40,000

Bank A/c Dr.


(Allotment money received)

40,000

40,000

Share Final Call A/c (10,000 x 2.5) Dr.


(Final call money due)

25,000

25,000

Bank A/c (9900 x 2.5) Dr.

Calls-in-Arrears A/c (100x2.5) Dr.

To Share Final Call A/c (10,000x2.5)

(Final call money received and arrears on 100 shares)

24,750

250

25,000

10

Question 6

A limited Company, with an authorized capital of Rs. 2,00,000 divided into shares of Rs. 100 each, issued for subscription 1,500 shares payable at Rs.25 per share on application, Rs. 40 per share on allotment, Rs. 25 per share on first call three months after allotment and the balance as and when required.

The subscription list closed on January 31, 2015 when application money on 1,500 shares was duly received and allotment was made on March 1, 2015.

The allotment amount was received in full but, when the first call was made, one shareholder failed to pay the amount on 100 shares held by him and another shareholder with 50 shares paid the entire amount on his shares.

Give journal entries in the books of the Company to record these share capital transactions assuming that all amounts due were received within one month of the date they were called.

Answer

Books of the Company

Journal


Jan. 31 Bank A/c Dr.


(Money received on applications for 1,500 shares @ Rs. 25 per share)

37,500

37,500

March 1 Equity Share Application A/c Dr.


(Transfer of application money on 1,500 shares to share capital)

37,500

37,500

March 1 Equity Share Allotment A/c Dr.


(Amount due on the allotment of 1,500 shares @ Rs. 40 per share)

60,000

60,000

April 1 Bank A/c Dr.


(Allotment money received)

60,000

60,000

11

June 1 Equity Share First Call A/c Dr.


(First call money due on 1,500 shares@ Rs. 25 per share)

37,500

37,500

July 1 Bank A/c (37,500-2,500+500) Dr.

Calls-in-Arrears A/c Dr.

To Equity Share First Call A/c

To Calls-in-Advance A/c

(First call money received on 1400 shares and calls-in-advance on 50 shares @ Rs. 10 per share)

35,500

2,500

37,500

500

Question 7

A Ltd forfeited 300 equity shares of Rs. 10 fully called-up, held by Mr. X for non-payment of allotment @ Rs. 4 each and final call @ Rs. 4 each. However, he paid application money @ Rs. 2 per share. These shares were originally issued at par. Give Journal Entry for the forfeiture.

Answer

In the books of A Ltd.

Journal


Equity Share Capital A/c (300 x Rs. 10) Dr.

To Equity Share Allotment A/c (300 x Rs. 4)

To Equity Share Final Call A/c (300 x Rs. 4)

To Forfeited Shares A/c (300 x Rs. 2)

(Being the forfeiture of 300 equity shares of Rs. 10 each fully called-up for non-payment of allotment @ Rs. 4 each and final call money@ Rs.4 each)

3,000

1,200

1,200

600

Question 8

X Ltd forfeited 200 equity shares of Rs. 10 each, Rs. 8 called-up for non-payment of allotment @ Rs. 4 each and first call money @ Rs. 2 each. Application money @ Rs. 2 per share have already been received by the company. Give Journal Entry for the forfeiture (assume that all money due is transferred to Calls-in-Arrears Account).

12

Answer

Journal of X Ltd.



To Calls-in-Arrears A/c (200 x Rs. 6)


(Being the forfeiture of 200 equity shares of Rs. 10 each, Rs. 8 called-up for non-payment of allotment @ Rs. 4 each and first call money @ Rs. 2 each )

1,600

1,200

400

Question 9

X Ltd. forfeited 1000 equity shares of Rs. 10 each fully called-up which were issued at a premium of 20%. Amount payable on shares were:

on application Rs. 2; on allotment Rs. 4 (including premium) on First and Final call Rs.6. Only application money was paid by the shareholders in respect of these shares. Pass Journal Entries for the forfeiture.

Answer

Journal of X Ltd.



Securities Premium A/c (1000 x Rs. 2) Dr.


To Equity Share First and Final Call A/c

(1000 x Rs. 6)


(Being the forfeiture of 1000 equity shares of Rs.

10 each fully called-up, issued at a premium of

20%, for non-payment of allotment and call

money)

Note: Mr. X could not pay the amount due on allotment and as such he could not pay the amount of premium also. Hence the securities premium reserve A/c will be debited in the entry of forfeiture.

10,000

2,000

4,000

6,000

2,000

13

Question 10

Mr. Long who was the holder of 300 preference shares of Rs. 100 each, on which Rs. 75 per share has been called up could not pay his dues on Allotment and First call each at Rs. 25 per share. The Directors forfeited the above shares and reissued 150 of such shares to Mr. Short at Rs. 55 per share paid-up as Rs. 75 per share.

Give Journal Entries to record the above forfeiture and re-issue in the books of the company.

Answer


Preference Share Capital A/c (300 x Rs. 75) Dr.

To Preference Share Allotment A/c (300 x 25)

To Preference Share First Call A/c (300 x 25)

To Forfeited Share A/c (300 x 25)

(Being the forfeiture of 300 preference shares Rs. 75 each being called up for non-payment of allotment and first call money)

22,500

7,500

7,500

7,500

Bank A/c (Rs. 55 x 150) Dr.

Forfeited Shares A/c (Rs. 20 x 150) Dr.

To Preference Share Capital A/c (75 x 150)

(Being re-issue of 150 shares at Rs. 55 per share paid-up as Rs. 75 )

8,250

3,000

11,250

Forfeited Shares A/c Dr.

To Capital Reserve A/c (W. N. 1)

(Being profit on re-issue transferred to Capital Reserve)

750

750

Working Note:

(1) Calculation of amount to be transferred to Capital Reserve

Forfeited amount on 300 Shares=7500

Forfeited amount per share = Rs. 7,500/300 = Rs. 25

Forfeited amount on 150 shares = 150 x 25= 3,750

Transferred to capital Reserve =3750 - 3000=750

14

Question 11

Be Beautiful Ltd issued 4,000 equity shares of Rs. 10 each payable as Rs. 3 per share on Application, Rs. 5 per share (including Rs. 2 as premium) on Allotment and Rs. 4 per share on Call. All the shares were subscribed. Money due on all shares was fully received excepting Remu, holding 150 shares, failed to pay the Allotment and Call money and Semu, holding 50 shares, failed to pay the Call Money. All those 200 shares were forfeited. Of the shares forfeited, 125 shares (including whole of Shemu’s shares) were subsequently re-issued to Jadu as fully paid up at a discount of Rs. 2 per share.

Pass the necessary entries in the Journal of the company to record the forfeiture and re-issue of the share. Also prepare the Balance Sheet of the company.

Answer

In the books of Be Beautiful Ltd.

Journal





To Equity Share Call A/c (200 x Rs. 4)

To Forfeited Shares A/c

(Being forfeiture of 200 equity shares for nonpayment of

allotment and call money on 150 shares and for non-

payment of call money on 50 shares.)

Note : Mr. Remu could not pay the amount due on

allotment and as such he could not pay the amount of

premium also. Hence the securities premium reserve A/c

will be debited in the entry of forfeiture.

2,000

300

750

800

750

Bank A/c (125x8) Dr.

Forfeited Shares A/c (125x2) Dr.

To Equity Share Capital A/c (125x10)

(Being re-issue of 125 shares @ Rs. 8 each )

1,000

250

1,250



(Being profit on re-issue transferred to Capital Reserve)

275

275

15

Particulars Notes No.

EQUITY AND LIABILITIES

Shareholders’ funds

Share capital 1 39,475

Reserves and Surplus 2 7975

Total 47450

ASSETS

Current assets

Cash and cash equivalents (bank) 47450

Total 47450

Notes to accounts

1. Share Capital

Equity share capital

Issued share capital

4,000 Equity shares of Rs. 10 each 40,000

Subscribed, called up and paid up share capital

3,925(4000-200+125) Equity shares of Rs. 10 each 39,250

Add : Forfeited shares 225 39,475

2. Reserves and Surplus

Securities Premium 7700 (8000-300)

Capital Reserve 275 7975

Cash and Cash equivalents = application 12000 + allotment 19250 + calls 15200 + reissued 1000 = 47450

16

Working Note :

Calculation of Amount to be Transferred to Capital Reserve

a) Forfeited amount on 150 Shares of Mr. Remu=450

Forfeited amount per share = Rs. 450/150 = Rs. 3

Forfeited amount on 75 shares = 75 x 3 = 225

b) Forfeited amount on 50 shares of Mr. Shyam = 300

Forfeited amount per share = Rs. 300/50 = Rs. 6

Transferred to capital Reserve =525 (225+300)-250=275

Question 12

A holds 200 shares of Rs. 10 each on which he has paid Rs. 2 as application money. B holds 400 shares of Rs. 10 each on which he has paid Rs. 2 per share as application money and Rs. 3 per share as allotment money. C holds 300 shares of Rs. 10 each and has paid Rs. 2 on application, Rs. 3 on allotment and Rs. 3 for the first call. They all fail to pay their arrears on the second and final call of Rs. 2 per share and the directors, therefore, forfeited their shares. The shares are re-issued subsequently for Rs. 12 per share fully paid-up. Journalise the transactions relating to the forfeiture and re-issue.

Answer

Journal


Share Capital A/c (900 x Rs. 10) Dr.

To Share Allotment A/c (200 x 3)

To Share First Call A/c (600 x 3)

To Share Final Call A/c (900 x 2)

To Forfeited Shares A/c (1800+2100+900)

(Being forfeiture of 900 shares of Rs. 10 each for non-payment of allotment, first and final call )

9,000

600

1,800

1,800

4,800

Bank A/c (900 x Rs. 12) Dr.



(Being the re-issue of 900 shares of Rs. 10 each@ Rs. 12)

10,800

9,000

1,800



(Being profit on re-issue transferred to Capital Reserve).

4,800

4,800

17

Working Note :

Amount received on forfeited shares Amount not received on forfeited shares

Applica-tion

Allot-ment

First Call

Allotment First Call Final Call

A 200 - - 200 200 200

B 400 400 - - 400 400

C 300 300 300 - - 300

TOTAL 900 700 300 200 600 900

Money Receivable per share

Rs. 2 Rs. 3 Rs. 3 Rs. 3 Rs. 3 Rs. 2

Rs. 1,800 Rs. 2,100 Rs. 900 Rs. 600 Rs. 1,800 Rs. 1,800

Question 13

B Ltd. issued 20,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows: on application Rs. 5(including Re.1 premium), on allotment Rs. 5(including Re.1 premium); on final call Rs. 2. Applications were received for 24,000 shares. Letters of regret were issued to applicants for 4,000 shares and were allotted to all the other applicants. Mr. A, who is the holder of 200 shares, failed to pay the allotment and call money, the shares were forfeited. Show the Journal Entries and Cash Book in the books of B Ltd.

Answer

In the Books of B Ltd.

Cash Book

To Equity Share Application A/c 1,20,000

To Equity Share Allotment A/c 99,000 By Equity Share Application A/c

20,000

To Equity Share Final Call A/c 39,600 By Balance c/d 2,38,600

2,58,600 2,58,600

18

Particular Amount Dr. Amount Cr.

Equity Share Application A/c (20,000 x 5) Dr.

To Equity Share Capital A/c (20,000 x 4)

To Securities Premium A/c (20.000 x 1)

(Being application money on 20,000 shares @ Rs. 5 each transferred to Equity Share Capital Account )

1,00,000

80,000

20,000

Equity Share Allotment A/c Dr.

(20,000 x 5)


To Securities Premium A/c (20.000 x 1)

(Being allotment money due on 20,000 shares @ Rs. 5 each)

1,00,000

80,000

20,000

Equity share final call A/c Dr.

To share capital A/c

(Being share final call money due on 20,000 shares @ Rs. 2 per share)

40,000

40,000




To Equity Share Final Call A/c

To Forfeited Shares A/c

(Being forfeiture of 200 shares for non payment of

allotment money and final call money )

Note: Mr. A could not pay the amount due on allotment and

as such he could not pay the amount of premium also.

Hence the securities premium reserve A/c will be debited in

the entry of forfeiture.

2,000

200

1,000

400

800

Question 14

X Co. Ltd. was incorporated with an authorized share capital of 1,00,000 equity shares of Rs. 10 each. The directors decided to allot 10,000 shares credited as fully paid to the promoters for their services.

19

The company also purchased land and buildings from Y Co. Ltd for Rs. 4,00,000 payable in fully paid-up shares of the company. The balance of the shares were issued to the public, which were fully subscribed and paid for.

You are required to pass Journal Entries and to prepare the Balance Sheet.

Answer

Journal


Goodwill A/c Dr.


(Being the issue of 10,000 shares of Rs. 10 each fully paid to the promoters for their services )

1,00,000

1,00,000

Land and Buildings A/c Dr.

To Y Co. Ltd A/c

(Being the land and buildings purchased from Y Co. Ltd).

4,00,000

4,00,000

Y Co. Ltd A/c Dr.

To Share capital A/c (40000 x 10)

(Being 40000 shares issued to the vendor @ Rs. 10 per share)

400000

400000

Bank A/c Dr.

To Equity Share Capital A/c (50000 x 10)

(Being the issue of 50,000 shares of Rs. 10 each)

5,00,000

5,00,000

Balance Sheet of X Company Limited

Particulars Notes No. Rs.


Shareholders’ funds

Share capital 1 10,00,000

Total 10,00,000

20

ASSETS

1. Non-current assets

a Fixed assets

i Tangible assets 2 4,00,000

ii Intangible assets 3 1,00,000

2. Current assets

Cash and cash equivalents 4 5,00,000

Total 10,00,000

Notes to accounts

1. Share Capital


Authorised share capital

1,00,000 Equity shares of Rs. 10 each Issued share capital

10,00,000

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

(Out of the above 50,000 shares have been allotted as fully paid up pursuant to contract(s) without payment being received in cash)

2. Tangible Assets

4,00,000

Land and Building

3. Intangible Assets

Goodwill 1,00,000

4. Cash and cash equivalents

Balances with banks 5,00,000

Question 15

What is employee stock option plan? Explain the importance of such plans in the modern time.

Answer

Employee Stock Option Plan is a plan under which the company grants employee stock options. Employee stock option is a contract that gives the employees of the enterprise the right, but not the obligation, for a specified period of time to purchase or subscribe the

21

shares of the company at a fixed or determinable price which is generally lower than the prevailing market price of its shares.

The importance of these plans lies in the following advantages which accrue to both the company and the employees:

1. Stock options provide an opportunity to employees to participate and contribute in the growth of the company.

2. Stock option creates long term wealth in the hands of the employees.

3. They are important means to attract, retain and motivate the best available talent for the company.

4. It creates a common sense of ownership between the company and its employees.

Question 16

X Co. Ltd. has its share capital divided into equity shares of Rs. 10 each. On 1.1.2014 it granted 15,000 employees’ stock option at Rs. 50 per share, when the market price was Rs. 120 per share. The options were to be exercised between 15th March, 2015 and 31st March, 2015. The employees exercised their options for 10,000 shares only and the remaining options lapsed. The company closes its books on 31st March every year. Show Journal entries (with narration) as would appear in the books of the company up to 31st March, 2015.

Answer

In the books of X Co. Ltd. Journal Entries


15.03.2015 Bank A/c (10,000 x 50) Dr.

Employee compensation expense A/c Dr. (10,000 x 70)

To Equity share capital A/c (10,000 x 10)

To Securities premium A/c (10,000 x 110)

(Being shares issued to the employees against the options vested to them in pursuance of Employee Stock Option Plan)

5,00,000

7,00,000

1,00,000

11,00,000

31.03.2015

Statement of Profit and Loss A/ c Dr.

To Employee compensation expenses A/c

(Being transfer of employee compensation transfer to Profit and Loss Account)

7,00,000

7,00,000

22

Working Notes:

1. No entry is passed when Stock Options are granted to employees. Hence, no entry will be passed on 1st April 2014;

2. Market Price = Rs. 120 per share whereas as stock option price = Rs. 50, Hence, the difference Rs. 120 – Rs. 50 = Rs. 70 per share is equivalent to employee cost or employee compensation expense and will be charged to P/L Account as such for the number of options exercised i.e. 10,000 shares.

Question 17

S Ltd. grants 1,000 options to its employees on 1.4.2014 at Rs. 70. The vesting period is two and a half years. The maximum exercise period is one year. Market price on that date is 100. All the options were exercised on 31.7.2015. Journalize, if the face value of equity share is Rs. 10 per share.

Answer

Books of S Ltd.

Journal Entries

Date Particulars Debit Credit

31.3.14 Employees Compensation Expense Account Dr.

To Employees Stock Option Out-standing Account

(Being compensation expense recognized in respect of 1,000 options granted to employees at discount of Rs. 30 each, amortized on straight line basis over 2½ years)

12,000

12,000

Statement of Profit and Loss Account Dr.

To Employees Compensation Expense Account

(Being employees compensation expense of the year transferred to P&L A/c)

12,000

12,000

31.3.14 Employees Compensation Expense Account Dr.

To Employees Stock Option Outstanding Account

(Being compensation expense recognized in respect of 1,000 options granted to employees at discount of Rs. 30 each, amortized on straight line basis over 2½ years)

12,000

12,000

23

31.3.15 Profit and Loss Account Dr.



12,000

12,000

Employees Compensation Expense Account Dr.

To Employees Stock Option Outstanding Account

(Being balance of compensation expense amortized Rs. 30,000 less Rs. 24,000)

6,000

6,000

Statement of Profit and Loss Account Dr.



6,000

6,000

31.7.15 Bank Account (Rs. 70 × 1,000) Dr.

To Equity Share Capital Account

To Securities Premium Account

(Being exercise of 1,000 options at an exercise price of Rs. 60)

70,000

10,000

60,000

31.7.15 Stock Option Outstanding A/c (Rs. 30 x 1,000) Dr.


(Being the balance in the Employees Stock Option Outstanding Account transferred to Securities Premium A/c)

30,000

30,000

Working Notes:

1. Total employees compensation expense = 1,000 x (Rs. 100 – Rs. 70) = Rs. 30,000

2. Employees compensation expense has been written off during 2½ years on straight line basis as under:

I year = Rs. 12,000 (for full year)

II year = Rs. 12,000 (for full year)

III year = Rs. 6,000 (for half year)

Question 18

What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares as per Companies Act, 2013. Explain in brief.

24

Answer

Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to buy-back its own equity shares. The key provisions in this regard are as under:

(a) A company may purchase its own shares or other specified securities out of:

(i) Its free reserves;

(ii) The securities premium account;

(iii) The proceeds of the issue of any shares or other specified securities (not being the proceeds of an earlier issue of the same kind of shares or other specified securities).

(b) The buy-back is authorized by its articles.

(c) A special resolution has been passed in general meeting of the company authorising the buy-back (except where the buy back is of less than 10% of the paid up equity capital and free reserves of the company and the buy back is authorized by the Board by means of a resolution passed at a duly convened Board Meeting)

(d) The buy-back does not exceed 25% of the total paid up capital and free reserves of the company. Provided that in case of buy back of equity shares in any financial year, the 25% of paid up capital shall be construed as 25% of the total paid up equity capital in that financial year.

(e) The ratio of the secured and unsecured debt owed by the company after the buy back is not more than twice the paid up capital and its free reserves.

(f) All the shares and other securities for buy-back are fully paid up.

(g) The buy-back is completed within 12 months of the passing of the special resolution or a resolution passed by the Board.

(h) The buy-back of the shares listed on any recognized stock exchange is in accordance with the regulations made by the SEBI in this behalf.

(i) Before making such buy-back, a listed company has to file with the Registrar and the SEBI a declaration of solvency in the prescribed form.

(i) the buy back may be from;

(i) the existing shareholders or security holders on proportionate basis;

(ii) the open market;

(iii) the shares or securities issued to the employees of the company pursuant to a scheme of Stock Option or Sweat Equity.

(j) Where a company purchases its own shares out of its free reserves or securities premium account it shall transfer an amount equal to the nominal value of such shares to Capital Redemption Reserve Account and details of such transfers should be given in the Balance Sheet.

25

Question 19

KG Limited furnishes the following summarized Balance Sheet as at 31st March, 2015,

Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)


(fully paid up shares of Rs. 10 each)

1,200 Machinery 1,800

Securities premium 175 Furniture 226

General reserve 265 Investment 74

Capital redemption reserve 200 Inventory 500

Profit & loss A/c 170 Trade receivables 160

12% Debentures 750 Cash at bank 740

Trade payables 645

Other current liabilities 95

3,500 3,500

On 1st April, 2015, the company announced the buy back of 25% of its equity shares @ Rs. 15 per share. For this purpose, it sold all of its investments for Rs. 72 lakhs.

On 5th April, 2015, the company achieved the target of buy back. On 30th April, 2015 the company issued one fully paid up equity share of Rs. 10 by way of bonus for every four equity shares held by the equity shareholders.

You are required to:

(1) Pass necessary journal entries for the above transactions.

(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares

Answer

In the books of KG Limited

Journal Entries

Date Particulars Dr. (in lakhs)

Cr. (in lakhs)

April 1 Bank A/ c Dr.

Loss on sale of Investment A/c Dr.

To Investment A/c

(Being investment sold on loss)

72

2

74

26

April 5 Equity share capital A/c Dr. Premium payable on buy back A/c Dr.

To Equity shares holder A/c

(Being the amount due to equity shareholders on buy back)

Equity shareholder A/c Dr.

To Bank A/c

(Being the payment made on account of buy back of 30 Lakh Equity Shares)

300

150

450

450

450

April 5 General reserve A/ c Dr.

Profit and Loss A/ c Dr.

To Capital redemption reserve A/c

(Being amount equal to nominal value of buy back shares from free reserves transferred to capital redemption reserve account as per the law)

Capital redemption reserve A/c Dr.

To Bonus shares A/c (W.N.1)

(Being the utilization of capital redemption reserve to issue bonus shares)

265

35

300

April 30

225

225

Bonus shares A/ c Dr.

To Equity share capital A/c

(Being issue of one bonus equity share for every four equity shares held)

225

225

Securities premium A/c Dr.

To Premium payable on buy back A/c

(Being premium payable on buy back adjusted from securities premium account)

150

150

27

Balance Sheet (After buy back and issue of bonus shares)

Particulars Note No Amount (in Lakhs)

I. Equity and Liabilities

(1) Shareholder's Funds

(a) Share Capital 1 1,125

(b) Reserves and Surplus 2 433

(2) Non-Current Liabilities

(a) Long-term borrowings

- 12% Debentures

750

(3) Current Liabilities

(a) Trade payables 645

(b) Other current liabilities 95

Total 3,048

II.

(1)

Assets

Non-current assets

(a) Fixed assets

(i) Tangible assets 3 2,026

(2) Current assets

(a) Current investments

(b) Inventory 500

(c) Trade receivables 160

(d) Cash and cash equivalents (W.N. 2) 362

Total 3,048

Notes to Accounts

1. Share Capital

Equity share capital (Fully paid up shares of Rs.10 each) 1125


General Reserve 265

Less : Transfer to CRR (265)

Capital Redemption Reserve 200

Add: Transfer due to buy-back of shares from P/L 35

28

Transfer due to buy-back of shares from Gen. res. 265

Less: Utilisation for issue of bonus shares (225) 275

Securities premium 175

Less: Adjustment for premium paid on buy back (150) 25

Profit & Loss A/c 170

less : Loss on sale of investment (2)

Less : Transfer to CRR (35)

133 433

3. Tangible assets

Machinery 1800

Furniture 226 2026

Working Notes:

1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = Rs. 225 lakhs

2. Cash at bank after issue of bonus shares ‘in lakhs’

Cash balance as on 1st April, 2015 740

Add : Sale of investments 72

Less : Payment for buy back of shares (450) 362

Note:

In the given solution, it is possible to adjust transfer to capital redemption reserve account or capitalization of bonus shares from any other free reserves also.

Question 20.

Following is the Balance Sheet of M/s Competent Limited as on 31st March, 2015:

Liabilities Rs. Assets Rs.

Equity Shares of Rs. 10 Each fully paid

12,50,000 Fixed Assets 46,50,000

Revenue reserve 15,00,000 Current Assets 30,00,000

Securities Premium 2,50,000

Profit & Loss Account 1,25,000

Secured Loans:

12% Debentures 18,75,000

Unsecured Loans 10,00,000

Current maturities of long term borrowings

16,50,000

76,50,000 76,50,000

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The company wants to buy back 25,000 equity shares of Rs. 10 each, on 1st April, 2015 at Rs. 20 per share. Buy back of shares is duly authorized by its articles and necessary resolution passed by the company towards this. The payment for buy back of shares will be made by the company out of sufficient bank balance available as part of Current Assets.

Comment with your calculations, whether buy back of shares by company is within the provisions of the companies Act, 2015. If yes, pass necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.

Answer

Determination of Buy back of maximum no. of shares as per the Companies Act, 2013

1. Shares Outstanding Test

Particulars (Shares)

Number of shares outstanding 1,25,000

25% of the shares outstanding 31,250

2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves

Particulars

Paid up capital (Rs.) 12,50,000

Free reserves (Rs.) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000

Shareholders’ funds (Rs.) 1,25,000

25% of Shareholders fund (Rs.) 7,81,250

Buy back price per share Rs. 20

Number of shares that can be bought back (shares) 39,062

Actual Number of shares for buy back 25,000

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy Back

Particulars Rs.

(a) Loan funds (Rs.) (18,75,000+10,00,000+16,50,000) = 45,25,000

(b) Minimum equity to be maintained after buy back in the ratio of 2:1 (a/2) = 22,62,500

(c) Present equity/shareholders fund = 31,25,000

(d) Future equity/shareholders fund (see W.N.) (31,25,000 – 2,87,500) = 28,37,500

30

(e) Maximum permitted buy back of Equity [(d) – (b)] = 5,75,000

(f) Maximum number of shares that can be bought back @Rs. 20 per share 28,750 shares

(g) Actual Buy Back Proposed 25,000 Shares

Summary statement determining the maximum number of shares to be bought back

Particulars Number of shares

Shares Outstanding Test 31,250

Resources Test 39,062

Debt Equity Ratio Test 28,750

Maximum number of shares that can be bought back [least of the above] 28,750 Company qualifies all tests for buy-back of shares and came to the conclusion that it can buy maximum 28,750 shares on 1st April, 2015.

However, company wants to buy-back only 25,000 equity shares @ Rs. 20. Therefore, buyback of 25,000 shares, as desired by the company is within the provisions of the Companies Act, 2013.

Journal Entries for buy-back of shares

Debit (Rs.) Credit (Rs.)

(a) Equity shares buy-back account Dr. 5,00,000

To Bank account

(Being buy back of 25,000 equity shares of Rs. 10 each @ Rs. 20 per share)

5,00,000

(b) Equity share capital account Dr. 2,50,000

Securities premium account Dr. 2,50,000

To Equity shares buy-back account(Being cancellation of shares bought back)

5,00,000

(c) Revenue reserve account Dr. 2,50,000

To Capital redemption reserve account

(Being transfer of free reserves to capital redemption reserve to the extent of nominal value of capital bought back through free reserves)

2,50,000

31

As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company should not be more than twice the capital and its free reserves after such buy-back. Further under Section 69 (1), on buy-back of shares out of free reserves a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR). As per section 69 (2) utilization of CRR is restricted to fully paying up unissued shares of the Company which are to be issued as fully paid-up bonus shares only. It means CRR is not available for distribution as dividend.

Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. shares capital and free reserves, amount transferred to CRR on buy-back has to be excluded from the present equity.

Balance Sheet of M/s. Competent Ltd. as on 31st March, 2015

Particulars Note No Amount


1 Shareholders' funds

(a) Share capital 1 10,00,000

(b) Reserves and Surplus 2 16,25,000

2 Non-current liabilities

(a) Long-term borrowings 3 28,75,000

3 Current liabilities 16,50,000

Total 71,50,000

ASSETS

1 Non-current assets

(a) Fixed assets 46,50,000

2 Current assets (30,00,000-5,00,000) 25,00,000

Total 71,50,000

32

Notes to accounts

1. Share Capital


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


Profit and Loss A/c 1,25,000

Revenue reserves 15,00,000

Less : Transfer to CRR (2,50,000)

12,50,000

Securities premium 2,50,000

Less : Utilisation for share buy-back (2,50,000)

Capital Redemption Reserves 2,50,000

16,25,000

3. Long-term borrowings - Secured


Unsecured loans 10,00,000

28,75,000

Working Note

Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method.

Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.

Then (31,25,000 – x) – 22,62,500 = y (1)

10 x 20

y= x, or 2x = y

by solving the above equation we get

x = Rs. 2,87,500

y = Rs. 5,75,000

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Question 21

X Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2015:

Equity & liabilities Rs. in ‘000’ Rs. in ‘000

Share Capital

Authorized Capital

Issued and subscribed share capital

2,00,000 Equity shares of 10 each fully paid up

20,000 9% Preference Shares of 100 each

(issued two months back for the purpose of buy back)

2000

2000

5000

4,000

Reserve and Surplus:

Capital reserve

Revenue reserve

Securities premium

Profit and Loss account

10

5,000

500

1,800

7,310

Non-current liabilities - 10% Debentures

Current liabilities and provisions

400

40

Total 11,750

Assets

Fixed Assets: Cost

Less: Provision for depreciation

3,000

250

2,750

Non-current investments at cost 4,000

Current assets, loans and advances (including cash and bank balances)

5,000

Total 11,750

(1) The company passed a resolution to buy back 20% of its equity capital @ 15 per share. For this purpose, it sold its investments of 30 lakhs for 27 lakhs.

(2) The company redeemed the preference shares at a premium of 10% on 1st April, 2015.

(3) Included in its investments were 'Investments in own debentures' costing 3 lakhs (face value 3.30 lakhs). These debentures were cancelled on 1st April, 2015.

You are required to pass necessary Journal entries and prepare the Balance Sheet on 01.04.2015.

34

Answer

Journal Entries in the books of X Ltd.

Sl. No.

Particulars Dr. (in ‘000)

Cr. (in ‘000)

1 Bank a/c Dr.

Profit and Loss A/c Dr.

To Investment Account

(Being investment sold for the purpose of buy-back of Equity Shares)

2700

300

3000

2 Preference share capital A/c Dr.

Premium on redemption of

Preference Shares A/c Dr.

To Preference shareholders A/c

(Being redemption of preference share capital at premium of 10%)

2,000

200

2,200

3 Preference shareholders A/c Dr.

To Bank A/c

(Being payment made to preference shareholders)

Revenue Reserve A/c Dr.

To Capital redemption reserve A/c (Refer Note)

(Being creation of capital redemption reserve to the extent of nominal value of preference shares redeemed)

2,200

2,200

4 2,000

2,000

5 Equity share capital A/c Dr.


(Premium payable on buy-back)

To Equity shareholder A/c

(Being the amount due on buy-back of equity shares )

400

200

600

35

6 Equity shareholder A/c Dr.

To Bank A/c

(Being payment made for buy-back of equity shares)

600

600

7 10% Debentures A/c Dr.

To Own debentures A/c

To Capital reserve A/c

(Profit on cancellation)

(Being own debentures cancelled at profit)

330

300

30

8 Securities Premium A/c Dr.

To Premium on redemption of preference shares A/c

(Being premium on redemption of preference shares adjusted through securities premium)

200

200

Balance Sheet of the X Ltd. as on 1st April, 2015

Notes No. Rs. in ‘000

Equity and Liabilities

1 Shareholders funds

Share capital 1 1,600

Reserves and Surplus 2 6,640


Long term borrowings 3 70

3 Current liabilities 40

Total 8,350

Assets


(a) Fixed assets 2,750

(b) Non-current investments 4 700

2 Current assets 5 4,900

Total 8,350

36

Notes to Accounts in ‘000 Rs. in ‘000

1. Share Capital

Authorized share capital: 5,000

Issued, subscribed and fully paid up share capital:

1,60,000 Equity shares of 10 each, fully paid up 1,600

(40,000 equity shares had been bought back and cancelled during the year)


Capital Reserves 10

Add: Profit on cancellation of debentures 30 40

Securities Premium 500

Less: Premium on redemption of preference shares

(200)

Premium on buy-back of equity shares - (200) 100

Revenue Reserve 5,000

Less: Transfer to Capital Redemption Reserve (2,000) 3,000

Capital Redemption reserve 2,000

Surplus (Profit & Loss Account) 1,800

Less: Loss on sale of investment 1,300 5,340 (300) 1,500

Total 6,640

3. Long term borrowings 10% Debentures (400-330)

70

4. Non-current investments

Balance as on 31.03. 2013

Less: Investment sold

Own debentures cancelled

Total

4,000

(3,000)

(300)

700

37

5. Current assets

Balance as on 31.03.2013

Add: Cash received on sale of investment

Less: Payment made to equity shareholders

Payment made to preference shareholders for buy back of shares

Total

5,000

2,700

(600)

(2,200)

4,900

Note : In the given solution, it is assumed that buy-back of shares has been done out of the proceeds of issue of preference shares, therefore, no amount is transferred to capital redemption reserve for buy-back. However, if it is assumed that buy-back is from sale of investments and not from the proceeds of issue of preference shares, then, amount of revenue reserves transferred to capital redemption reserve will be 2,600 instead of 2,000.

Question 22

Explain the term “Firm” underwriting.

Answer

‘Firm’ underwriting signifies a definite commitment to take up a specified number of shares by an underwriter irrespective of the number of shares subscribed for by the public. In such a case, unless it has been otherwise agreed, the underwriter’s liability is determined without taking into account the number of shares taken up by him under the “firm” commitment, i.e. the underwriter is obliged to take up :

1. the number of shares he has applied for ‘firm’; and

2. the number of shares he is obliged to take up on the basis of the underwriting agreement.

Question 23

A joint stock company resolved to issue 10 lakh equity shares of Rs. 10 each at a premium of Re. 1 per share. Two lakh of these shares were taken up by the directors of the company, their relatives, associates and friends, the entire amount being received forthwith. The remaining shares were offered to the public, the entire amount being asked for with applications.

The issue was underwritten by X, Y and Z for a commission @ 2.5% of the issue price, 65% of the issue was underwritten by X, while Y’s and Z’s shares were 25% and 10% respectively. Their firm underwriting was as follows :

X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to submit unmarked applications for shares underwritten firm with full application money along with members of the general public. Marked applications were as follows:

X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.

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Unmarked applications totaled 6,00,000 shares. Accounts with the underwriters were promptly settled.


(i) Prepare a statements calculating underwriters’ liability for shares other than shares underwritten firm.

(ii) Pass journal entries for all the transactions including cash transactions.

Answer

Statement showing underwriters’ liability for shares other than shares underwritten firm

X Y Z TOTAL

Gross liability (Issued shares – purchased by promoters, directors etc. (8,00,000 shares in the ratio of 65 : 25 : 10)

5,20,000 2,00,000 80,000 8,00,000

Less : Marked applications (1,19,500) (57,500) (10,500) (1,87,500)

4,00,500 1,42,500 69,500 6,12,500

Less : Allocation of unmarked applications (including firm underwriting i.e. 7,00,000) in the ratio 65 : 25 : 10

(3,90,000)

(1,50,000) (60,000)

(6,00,000)

10,500 (7,500) 9,500 12,500

Surplus of Y allocated to X and Z in the ratio 65 : 10

(6,500) 7,500 (1,000) -

Additional shares to be purchased by X & Z

4,000 - 8,500 12,500

39

Additional Liability for additional shares@ Rs. 11

44,000 - 93,500

Underwriting commission payable on Gross Liability

(Shares underwritten as Gross liability × 11 × 2.5%)

(1,43,000) (55,000) (22,000)

Net Amount payable/receivables (99,000) (55,000) 71,500

(ii) Journal Entries

Particulars Dr. Cr.

Bank A/c Dr.

To Equity Shares Application A/c

(Being application money received on 2 lakh equity shares purchased by directors etc. @ Rs. 11 per share)

22,00,000

22,00,000

Bank A/c Dr.


(Application money received on 7,87,500 equity shares @ Rs. 11 per share from general public and underwriters for shares underwritten firm)

86,62,500

86,62,500


X’ s A/c Dr.

Z’ s A/c Dr.



(Allotment of 10 lakh equity shares of 10 each at a premium of Rs. 1 per share)

1,08,62,500

44,000

93,500

1,00,00,000

10,00,000

40

Underwriting commission A/c Dr.

To X’s A/c

To Y’s A/c

To Z’s A/c

(Amount of underwriting commission payable to X, Y and Z @ 2.5% on the amount of shares underwritten)

2,20,000

1,43,000

55,000

22,000

Bank A/c Dr.

To Z’s A/c

(Amount received from Z in final settlement)

71,500

71,500

X’s A/c Dr.

Y’s A/c Dr.

To Bank A/c

(Amount paid to X and Y in final settlement)

99,000

55,000

1,54,000

Question 24

Suprima Ltd. came out with an issue of 45,00,000 equity shares of 10 each at a premium of Rs. 2 per share. The promoters took 20% of the issue and the balance was offered to the public. The issue was equally underwritten by A & Co; B & Co. and C & Co. Each underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000 equity shares were received with marked forms for the underwriters as given below:

Shares

A & Co. 8,00,000

B & Co. 7,00,000

C & Co. 13,75,000

Total 28,75,000

The underwriters are eligible for a commission of 3.5% on face value of shares. The entire amount towards shares subscription has to be paid alongwith application. You are required to:

(a) Compute the underwriters’ liabilities (number of shares)

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

(c) Pass necessary journal entries in the books of Suprima Ltd. relating to underwriting.

41

Answer

(a) Computation of liabilities of underwriters (No. of shares)

A & Co. B & Co C & Co.

Gross liability (Total Issue – shares purchased by promoters, directors, employees etc)

12,00,000

12,00,000

12,00,000

Less : Firm underwriting (1,00,000) (1,00,000) (1,00,000)

11,00,000 11,00,000 11,00,000

Less : Marked applications (8,00,000) (7,00,000) (13,75,000)

Unmarked applications 3,00,000 4,00,000 (2,75,000)

Less : Unmarked applications distributed to A & Co. and B & Co. in equal ratio

(1,12,500) (1,12,500) Nil

Total unmarked applications 1,87,500 2,87,500 (2,75,000)

Less : Surplus of C & Co. distributed to A & Co. and B & Co. in equal ratio

(1,05,000) (1,05,000) 2,10,000

Net liability (excluding firm underwriting)

82,500 1,82,500 Nil

Add : Firm underwriting 1,00,000 1,00,000 1,00,000

Total liability (No. of shares) 1,82,500 2,82,500 1,00,000

Total Subscriptions received for 31,00,000 Shares out of which marked shares were Rs. 28,75,000, Hence unmarked shares received were 2,25,000 shares which will be distributed between A & Co and B & Co only equally (agreed ratio underwriting). C & Co has already exceeded the underwriting limit hence will not be required to absorb unmarked shares.

No of shares purchased by Underwriters collectively will be 5 Lakh shares as under:

Total Shares Issued 45,00,000

Less: Purchased by Promoters etc 9,00,000

Shares offered to the Public 36,00,000

Total Subscription received 31,00,000

Shares purchased by Underwriters including firm commitment 5,00,000

42

(b) Computation of amounts payable by underwriters:

A & Co B & Co C & Co

Liability towards shares to be subscribed@ 12 per share

21,90,000 33,90,000 12,00,000

Less : Commission (on Gross Liability) (3.5% on FV Rs. 10 each on 12 lakhs shares

(4,20,000) (4,20,000) (4,20,000)

Net amount to be paid by underwriters

17,70,000 29,70,000 7,80,000

(c) In the Books of Suprima Ltd. Journal Entries

Particulars Dr. Cr.

Underwriting commission A/ c Dr.

To A & Co. A/c

To B & Co. A/c

To C & Co. A/c

(Being underwriting commission on the shares underwritten)

12,60,000

4,20,000

4,20,000

4,20,000

A & Co. A/ c Dr.

B & Co. A/ c Dr.

C & Co. A/c Dr.

To Equity share capital A/c

To Share premium A/c

(Being shares including firm underwritten shares allotted to underwriters)

21,90,000

26,10,000

12,00,000

50,00,000

10,00,000

Bank A/ c Dr.

To A & Co. A/c

To B & Co. A/c

To C & Co. A/c

(Being the amount received towards shares allotted to underwriters less underwriting commission due to them)

55,20,000

17,70,000

29,70,000

7,80,000

43

Question 25

Jumba Ltd. came up with public issue of 30,00,000 Equity shares of Rs. 10 each at Rs. 15 per share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio. Applications were received for 27,00,000 shares. The marked applications were received as under:

A 8,00,000 shares

B 7,00,000 shares

C 6,00,000 shares

Commission payable to underwriters is at 5% on the face value of shares.

(i) Compute the liability of each underwriter as regards the number of shares to be taken up.

(ii) Pass journal entries in the books of Jumba Ltd. to record the transactions relating to underwriters.

Answer

(i) Computation of liability of underwriters in respect of shares (In shares)

A B C

Gross liability (Total Issue – Promoters etc.) in agreed ration of 3 : 2 : 1

15,00,000

10,00,000

5,00,000

Less : Unmarked applications (Subscribed shares – marked shares) in 3 : 2 : 1

(3,00,000)

(2,00,000)

(1,00,000)

Marked shares as per agreed ratio 12,00,000 8,00,000 4,00,000

Less : Marked applications actually received

(8,00,000) (7,00,000) (6,00,000)

Shortfall / surplus in marked shares 4,00,000 1,00,000 (2,00,000)

Surplus of C distributed to A & B in 3:2 ratio

(1,20,000) (80,000) 2,00,000

Net liability for underwriting shares 2,80,000 20,000 Nil

44

(ii) Journal Entries in the books of Jumba Ltd.

Particular Dr. Cr.

A’s Account Dr.

B’s Account Dr.

To Share Capital Account


(Being the shares to be taken up by the underwriters)

42,00,000

3,00,000

30,00,000

15,00,000

Underwriting Commission Account Dr.

To A’s Account

To B’s Account

To C’s Account

(Being the underwriting commission due to the underwriters)

15,00,000

7,50,000

5,00,000

2,50,000

Bank Account Dr.

To A’s Account

(Being the amount received from underwriter

A for the shares taken up by him after adjustmentof his commission)

34,50,000

34,50,000

B’s Account Dr.

To Bank Account

(Being the amount paid to underwriter B after adjustment of the shares taken by him against underwriting commission due to him)

2,00,000

2,00,000

C’s Account Dr.

To Bank Account

(Being the underwriting commission paid to C)

2,50,000

2,50,000

Note : C had sold in excess of the underwriting obligation and hence he will not be required to purchase any shares but will get commission for underwriting.

45

Question 26

‘X’ Ltd., issued 1,00,000 equity shares of Rs. 10 each at par. The entire issue was underwritten as follows:

A – 60,000 shares (Firm underwriting 8,000 shares)

B – 30,000 shares (Firm underwriting 10,000 shares)

C – 10,000 shares (Firm underwriting 2,000 shares)

The total applications including firm underwriting were for 80,000 shares. The marked applications were as follows:

A- 20,000 shares; B- 14,000 shares; C- 6,000 shares.

The underwriting contract provides that credit for unmarked applications be given to the underwriters in proportion to the shares underwritten. Determine the liability of each underwriter.

Answer

Statement showing liability of underwriters

A B C Total

Gross Liability (Total Issue – purchase by promoters etc)

60,000 30,000 10,000 1,00,000

Less : Firm underwriting (8,000) (10,000) (2,000) (20,000)

52,000 20,000 8,000 80,000

Less : Marked applications (20,000) (14,000) (6,000) (40,000)

32,000 6,000 2,000 40,000

Less : Unmarked applications (total application less firm underwriting less marked applications) in gross liability ratio (Unmarked Applications = (80,000 – 20,000 –40,000)=20,000

(12,000)

(6,000) (2,000)

(20,000)

Net Liability 20,000 - - 20,000

Add : Firm underwriting 8,000 10,000 2,000 20,000

Total liability of underwriters 28,000 10,000 2,000 40,000

Total Liability in Amount @ Rs.10/- 2,80,000 1,00,000 2,00,000 4,00,000

The solution is given on the basis that ‘the benefit of firm underwriting is given to individual underwriters.’

46

Question 27

Dolly Ltd. issued 25,00,000 equity shares of Rs.10 each at par. 10,00,000 shares were issued to the promoters and the balance offered to the public was underwritten by three underwriters P, Q & R in the ratio of 2 : 4 : 4 with firm underwriting of 50,000, 60,000 and 70,000 shares each respectively. Total subscription received 12,88,000 shares including marked application and excluding firm underwriting. Marked applications were as follows:

P 3,00,000

Q 3,50,000

R 4,50,000

Unmarked and surplus applications to be distributed in gross liability ratio. Ascertain the liability of each underwriter.

Answer

Calculation of liability of underwriters (In shares)

P Q R Total

Gross Liability (Total Issue – purchase by promoters etc.)

3,00,000 6,00,000 6,00,000 15,00,000


250,000 540,000 530,000 13,20,000

Less Marked applications (3,00,000) (350,000) (450,000) (11,00,000)

(50,000) 190,000 80,000 220,000

Less : Unmarked applications

(In gross liability ratio 4:6:8)

_

(94,000) (94,000)

(188,000)

Net Liability (50,000) 94,000 (14,000) 32,000

Excess of P and taken over by Q 50,000 62,000 14,000 _

Net liability (other than firm underwriting)

- 32,000 _ 32,000

Add : Firm underwriting 50,000 60,000 70,000 1,80,000

Total liability of underwriters

including firm underwriting

50,000

92,000

70,000

2,12,000

Total Liability in Amount @ Rs. 10/-

5,00,000 9,20,000 7,00,000 41,20,000

47

Question 28

ABC Ltd. came up with public issue of 3,00,000 Equity Shares of Rs.10 each at Rs. 15 per share. P, Q and R took underwriting of the issue in ratio of 3 : 2: 1 with the provisions of firm underwriting of 20,000, 14,000 and 10,000 shares respectively.

Applications were received for 2,40,000 shares excluding firm underwriting. The marked applications from public were received as under:

P - 60,000

Q - 50,000

R - 60,000

Compute the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit of firm underwriting is not given to individual underwriters.

Answer

Calculation of liability of each underwriter (in shares) assuming that the benefit of firm underwriting is not given to individual underwriters

P Q R Total


150,000 1,00,000 50,000 3,00,000

Less : Marked applications (excluding firm underwriting)

(60,000) (50,000) (60,000) (170,000)

Balance 90,000 50,000 (10,000) 1,30,000

Less : Surplus of R allocated to P and Q in the ratio of 3:2

(6,000)

(4,000)

10,000

-

84,000 46,000 - 1,30,000

Less : Unmarked applications including firm underwriting (Refer W.N.)

(57,000) (38,000) (19,000)

(1,14,000)

Net Liability 27,000 8,000 (19,000) 232,000

Less : Surplus of R allocated to P and Q in the ratio of 3:2

11,400 (7,600) 19,000

Net liability (other than firm underwriting)

15,600 400 - 16,000


Total liability of underwriters including firm underwriting

35,600

1,4,400

10,000

60,000

48

Working Note:

Applications received from public 2,40,000 shares

Add : Shares underwritten firm (20,000 + 14,000 + 10,000) 44,000 shares

Total applications 2,84,000 shares

Less : Marked applications (60,000 + 50,000 + 60,000) (1,70,000 shares)

Unmarked applications including firm underwriting 1,14,000 shares

Question 29

A company issued 1,50,000 shares of Rs. 10 each at a premium of Rs. 10. The entire issue was underwritten as follows:

X – 90000 shares (Firm underwriting 12000 shares)

Y – 37500 shares (Firm underwriting 4500 shares)

Z – 22500 shares (Firm underwriting 15000 shares)

Total subscriptions received by the company (excluding firm underwriting and marked applications) were 22500 shares.

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

X – 15000 shares

Y – 30000 shares

Z – 7500 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.

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

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

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

Answer

(i) Computation of total liability of underwriters in shares (In shares)

X Y Z Total


90,000 37,500 22,500 1,50,000

Less : Marked applications (excluding firm underwriting)

(15,000) (30,000) (7,500) (52,500)

49

75,000 7,500 15,000 97,500

Less : Unmarked applications (In gross liability ratio 12:5:3)

(13,500)

(5,625)

(3,375)

(22,500)

61,500 1,875 11,625 75,000


Balance 49,500 (2,625) (3,375) 43,500

Less : Surplus of Y and Z adjusted in X’s balance (2,625+3,375)

(6,000) 2,625

3,375

Net liability 43,500 - - 43,500


Total Liability 55,500 4,500 15,000 75,000

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

X Y Z Total

Total liability 55,500 4,500 15,000 75,000

Amount receivable @ Rs. 20 from underwriter (in Rs.)

11,10,000 90,000 3,00,000 15,00,000

Less : Underwriting Commission payable @ 5% of Rs. 20 (in Rs.)

(90,000) (37,500) (22,500) (1,50,000)

Net amount receivable (in Rs.) 10,20,000 52,500 2,77,500 13,50,000

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

Sl. no. Particular Dr. Cr.

1 X Dr.

Y Dr.

Z Dr.

11,10,000

90,000

3,00,000

50



(Being allotment of shares to underwriters)

7,50,000

7,50,000

2 Underwriting commission A/c Dr.

To X

To Y

To Z

(Being amount of underwriting commission payable)

1,50,000

90,000

37,500

22,500

3 Bank A/c Dr.

To X

To Y

To Z

(Being net amount received by underwriters for shares allotted less underwriting commission)

13,50,000

10,20,000

52,500

2,77,500

Question 30

The Balance Sheet of X Ltd. as on 31st March, 2015 is as follows:

Particulars Rs.


1. Shareholders’ funds

a Share capital 2,90,000

b Reserves and Surplus 48,000

2. Current liabilities

Trade Payables 56,500

Total 3,94,500

ASSETS

1. Fixed Assets

Tangible asset 3,45,000

Non-current investments 18,500

51

2. Current Assets

Cash and cash equivalents (bank) 31,000

Total 3,94,500

The share capital of the company consists of Rs. 50 each equity shares of Rs. 2,25,000 and Rs. 100 each Preference shares of Rs. 65,000 (issued on 1.4.2013). Reserves and Surplus comprises Profit and Loss Account only.

In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:

(a) to sell all the investments for Rs. 14,000.

(b) to finance part of redemption from company funds, subject to, leaving a bank balance of 14,000.

(c) to issue minimum equity share of Rs. 50 each at a premium of Rs. 10 per share to raise the balance of funds required.

You are required to pass:

The necessary Journal Entries to record the above transactions and prepare the balance sheet as on completion of the above transactions.9.69

Answer Journal

Particulars Dr. Cr.

Bank A/c Dr.


(For application money received on 675

shares@ Rs.60 per share)

40,500

40,500




(For disposition of application money received)

40,500

33,750

6,750

Preference Share Capital A/c Dr.

Premium on Redemption of Preference Shares A/c Dr.

To Preference Shareholders A/c

(For amount payable on redemption of

preference shares)

65,000

6,500

71,500

52



To Premium on Redemption of

Preference Shares A/c

(For writing off premium on redemption

firstly out of securities premium and balance

out of profits)

6,250

250

6,500

Bank A/c Dr.

Profit and Loss A/c (loss on sale) A/c Dr.

To Investment A/c

(For sale of investments at a loss of Rs. 4,500)

14,000

4,500

18,500


To Capital Redemption Reserve A/c

(For transfer to CRR out of divisible profits an amount equivalent to excess of nominal value over proceeds i.e., Rs. 65,000 – Rs. 33,750)

31,250

31,250

Preference Shareholders A/c Dr.

To Bank A/c

(For payment of preference shareholders)

71,500

71,500

Balance Sheet (after redemption)

EQUITY AND LIABILITIES Notes No. Rs.


a. Share capital 1 2,58,750

b. Reserves and Surplus 2 43,750


Trade Payables 56,500

Total 3,59,000

53

ASSETS

1. Fixed Assets

Tangible asset 3,45,000

2. Current Assets

Cash and cash equivalents 3 14,000

Total 3,59,000

Notes to accounts

1. Share Capital

5175 Equity share @ Rs. 50 each 2,58,750


a) Capital Redemption Reserve 31,250

b) Profit and Loss Account (48,000 – 250 – 4,500 – 31,250) 12,000

c) Securities Premium (6,750-6,250) 500 43,750


Balances with banks (31,000 + 40,500 +14,000 – 71,500) 14,000

Working Note

Calculation of Number of Shares: Rs.

Amount payable on redemption 71,500

Less : Sale price of investment (14,000) 57,500

Less : Available bank balance (31,000 - 14,000) (17,000)

Funds from fresh issue 40,500

No. of shares = 40,500/60 = 675 shares

Question 31

The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 2014.

54

Share capital : 40,000 Equity shares of Rs. 10 each fully paid – Rs. 4,00,000; 1,000 10% Redeemable preference shares of Rs. 100 each fully paid – Rs.1,00,000. Reserve & Surplus: Capital reserve – Rs. 50,000; Securities premium – Rs. 50,000; General reserve – 75,000; Profit and Loss Account – Rs. 35,000

On 1st January 2015, the Board of Directors decided to redeem the preference shares at par by utilisation of reserve.

You are required to pass necessary Journal Entries including cash transactions in the books of the company.

Answer

In the books of ABC Limited Journal Entries

Date Particulars Dr. (Rs.) Cr. (Rs)

Jan 1 10% Redeemable Preference Share Dr.

Capital A/c

1,00,000

To Preference Shareholders A/c 1,00,000


To Bank A/c

1,00,000

1,00,000

(Being the amount paid on

redemption of preference shares)

General Reserve A/c Dr. 75,000

Profit & Loss A/c Dr. 25,000


(Being the amount transferred to Capital Redemption Reserve Account as per the requirement of the Act)

1,00,000

Note:

Securities premium cannot be utilised for transfer to Capital Redemption Reserve because dividend cannot be paid out of Securities Premium Account.

55

Question 32

C Limited had 3,000, 12% Redeemable Preference Shares of Rs. 100 each, fully paid up. The company had to redeem these shares at a premium of 10%.

It was decided by the company to issue the following:

(i) 20,000 Equity Shares of Rs. 10 each at par,

(ii) 1,000 14% Debentures of Rs. 100 each.

The issue was fully subscribed and all amounts were received in full .The payment was duly made. The company had sufficient profits. Show Journal Entries in the books of the company.

Answer

In the books of C Limited Journal Entries

Particulars Dr. Cr.

Bank A/c Dr.


(Being the issue of 20,000 equity shares of Rs. 10 each at par .)

2,00,000

2,00,000

Bank A/c Dr.

To 14% Debenture A/c

(Being the issue of 1,000 Debentures of Rs. 100 each)

1,00,000

1,00,000

12% Redeemable Preference Share Capital A/c Dr.



(Being the amount payable on redemption transferred to Preference Shareholders Account)

3,00,000

30,000

3,30,000


To Bank A/c

(Being the amount paid on redemption of preference shares)

3,30,000

3,30,000

56

Profit & Loss A/c Dr.

To Premium on Redemption of Preference

Shares A/c

(Being the adjustment of premium on redemption against Profits & Loss Account)

30,000

30,000


To Capital Redemption Reserve A/c (W. N.1)


1,00,000

1,00,000

Working Note:

Amount to be transferred to Capital Redemption Reserve Account

Face value of shares to be redeemed 3,00,000

Less: Proceeds from new issue (2,00,000)

Total Balance 1,00,000

Question 33

The capital structure of a company consists of 20,000 Equity Shares of Rs. 10 each fully paid up and 1,000 8% Redeemable Preference Shares of Rs. 100 each fully paid up (issued on 1.4.2015).

Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit and Loss Account 10,000; Investment Allowance Reserve out of which Rs. 5,000, (not free for distribution as dividend) 10,000; Securities Premium Rs. 12,000, Cash at bank amounted to Rs.98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus, subject to the conditions that a sum of Rs.20,000 shall be retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will appear in the Balance Sheet of the company after the redemption carried out.

57

Answer Journal Entries

Particulars Dr. Cr.

Bank A/c Dr.


(Being the issue of 2,500 Equity Shares of Rs. 10 each.)

25,000

25,000

8% Redeemable Preference Share Capital A/c Dr.

Premium on Redemption of Preference

Shares A/c Dr.


(Being the amount paid on redemption transferred to Preference Shareholders Account)

1,00,000

10,000

1,10,000


To Bank A/c

(Being the amount paid on redemption of preference shares)

1,10,000

1,10,000


To Premium on Redemption of

Preference Shares A/c

(Being the premium payable on redemption provided out of Securities Premium Account)

10,000

10,000

General Reserve A/c Dr.


Investment Allowance Reserve A/c Dr.



60,000

10,000

5,000

75,000

58

Balance Sheet as on ………[Extracts]



b. Reserves and Surplus 2 1,02,000

Total ?

ASSETS

2. Current Assets

Cash and cash equivalents 13,000

Total ?

Notes to accounts

1. Share Capital

22,500 Equity shares of Rs. 10 each fully paid up 2,25,000


General Reserve 20,000

Securities Premium (Rs. 12,000 – Rs. 10,000) 2,000

Capital Redemption Reserve 75,000

Investment Allowance Reserve 5,000

1,02,000

Working Note :

(1) No of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed Rs. 1,00,000

Less : Profit available for distribution as dividend:

General Reserve : Rs. (80,000-20,000) Rs. 60,000

Profit and Loss Rs. 10,000

Investment Allowance Reserve: (Rs. 10,000-5,000) Rs. 5,000 (75,000)

25,000

Therefore, No. of shares to be issued = 25,000/Rs. 10 = 2,500 shares.

59

Question 34

The books of B Ltd. showed the following balance on 31st December, 2014:

30,000 Equity Shares of Rs. 10 each fully paid; 15,000 12% Redeemable Preference Shares of Rs. 10 each fully paid; 4,000 10% Redeemable Preference Shares of Rs. 10 each, Rs. 8 paid up (all shares issued on 1st April, 2012).

Undistributed Reserve and Surplus stood as: Profit and Loss Account Rs. 80,000; General Reserve Rs. 1,20,000; Securities Premium Account Rs. 15,000 and Capital Reserve Rs. 21,000.

Preference shares are redeemed on 1st January, 2014 at a premium of Rs. 2 per share. The whereabouts of the holders of 100 shares of Rs. 10 each fully paid are not known.

For redemption, 3,000 equity shares of Rs. 10 each are issued at 10% premium. At the same time, a bonus issue of equity share was made at par, two shares being issued for every five held on that date out of the Capital Redemption Reserve Account.

Show the necessary Journal Entries to record the transactions.

Answer

In the books of B Limited Journal Entries

Date Particulars Dr. Cr.

Jan 1 12% Redeemable Preference Share Capital A/c Dr.

Premium on Redemption of Preference Dr.

Shares A/c


(Being the amount payable on redemption of 15000 12% Redeemable Preference Shares transferred to Shareholders Account)

1,50,000

30,000

1,80,000


To Bank A/c

(Being the amount paid on redemption of 14,900 preference shares)

1,78,800

1,78,800

60

Bank A/c Dr.

To Equity Shares Capital A/c


(Being the issue of 3,000 Equity Shares of Rs. 10 each at a premium of 10% )

33,000

30,000

3,000



(Being the amount transferred to Capital Redemption Reserve A/c as per the requirement of the Act.)

1,20,000

1,20,000

Capital Redemption Reserve A/c Dr.

To Bonus to Shareholders A/c

(Being the amount appropriated for issue of bonus share in the ratio of 5:2)

1,20,000

1,20,000

Bonus to Shareholders A/c Dr.


(Being the utilisation of bonus dividend for issue of 12,000 equity shares of Rs. 10 each fully paid)

1,20,000

1,20,000



To Premium on Redemption of Preference Shares A/c

(Being premium on redemption of preference shares adjusted against Securities Premium Account and the balance charged to Profit & Loss Account)

18,000

12,000

30,000

Working Note:

(1) Partly paid-up preference shares cannot be redeemed.

(2) Amount to be Transferred to Capital Redemption Reserve Account

Face value of share to be redeemed 1,50,000

61

Less : Proceeds from fresh issue (excluding premium) (30,000)

1,20,000

Question 35

The Balance Sheet of XYZ as at 31st December, 2014 inter alia includes the following:

50,000, 8% Preference Shares of Rs. 100 each, Rs. 70 paid up 35,00,000

1,00,000 Equity Shares of Rs. 100 each fully paid up 1,00,00,000


Capital Redemption Reserve 20,00,000

General Reserve 50,00,000

Under the terms of their issue, the preference shares are redeemable on 31st March, 2015 at 5% premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity shares of Rs. 100 each at Rs. 110 per share, Rs. 20 being payable on application, Rs. 35 (including premium) on allotment and the balance on 1st January, 2015. The issue was fully subscribed and allotment made on 1st March, 2015. The money due on allotment were received by 31st March, 2015. The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act, 2013. The company decided to make minimum utilisation of general reserve.

You are asked to pass the necessary Journal Entries.

Answer

Journal Entries

Particulars Dr. Cr.

8% Preference Share Final Call A/c Dr.

To 8% Preference Share Capital A/c

(For final call made on preference shares @ Rs. 30 each to make them fully paid up)

15,00,000

15,00,000

Bank A/c Dr.

To 8% Preference Share Final Call A/c

(For receipt of final call money on preference shares)

15,00,000

15,00,000

62

Bank A/c Dr.


(For receipt of application money on 50,000 equity shares @ Rs. 20 per share)

10,00,000

10,00,000



(For application money transferred to share capital)

10,00,000

10,00,000

Equity Share Allotment A/c Dr.



(For allotment money due on 50,000 equity shares @ Rs. 35 per share including a premium of 10 per share)

17,50,000

12,50,000

5,00,000

Bank A/c Dr.


(For receipt of allotment money on equity shares)

17,50,000

17,50,000

8% Preference Share Capital A/c Dr.



(For amount payable to preference shareholders on redemption at 5% premium)

50,00,000

2,50,000

52,50,000


To Premium on Redemption A/c

(For writing off premium on redemption of preference shares)

2,50,000

2,50,000

63



(For transfer of CRR the amount not covered by the proceeds of fresh issue of equity shares i.e., 50,00,000 - 10,00,000 - 12,50,000)

27,50,000

27,50,000


To Bank A/c

(For amount paid to preference shareholders)

52,50,000

52,50,000

***

64

Question 1

Give the Journal entries in each of the following alternative cases assuming the face value

of a debenture being Rs. 100.

(a) A debenture issued at Rs. 100 repayable at Rs. 100

(b) A debenture issued at Rs. 95 repayable at Rs. 100

(c) A debenture issued at Rs. 105 repayable at Rs. 100

(d) A debenture issued at Rs. 100 repayable at Rs. 105

(e) A debenture issued at Rs. 95 repayable at Rs. 105

(f) A debenture issued at Rs. 90 repayable at Rs. 95

Answer

Journal

Particulars Dr. (Rs.) Cr. (Rs.)

(a) Bank A/c Dr. 100

To Debentures A/c 100

(Being the issue of debentures at par)

(b) Bank A/c Dr. 95

Discount on Issue of Debentures A/c Dr. 5


(Being the issue of debentures at 5%

discount)

2

Debentures

65

(c) Bank A/c Dr. 105


To Securities Premium A/c 5

(Being the issue of debentures at 5%

premium)

(d) Bank A/c Dr. 100

Loss on Issue of Debentures A/c Dr. 5


To Premium on Redemption on

Debentures A/c

(Being the issue of debenture at par

but redeemable at 5% premium)

5

(e) Bank A/c Dr. 95

Loss on Issue of Debentures A/c Dr. 10

To Debentures A/c

To Premium on redemption of

Debentures A/c

100

5

(Being the issue of debenture at 5%

discount which are redeemable at 5%

premium)

(f) Bank A/c Dr. 90

Discount on Issue of Debentures A/c Dr. 10


(Being the issue of debentures at

10% discount)

66

Question 2

Z Ltd. took over the assets of Rs. 6,00,000 and liabilities of Rs. 80,000 of C Ltd. for an

agreed purchase consideration of Rs. 5,40,000 to be satisfied by the issue of 10%

Debentures of Rs. 1,000 each.

Required : Show the necessary journal entries in the books of Z Ltd, assuming that—

Case (a) Such Debentures are issued at par;

Case (b) Such Debentures are issued at 20% premium; and

Case (c) Such Debentures are issued at 10% discount.

Answer

In the Books of Z Ltd.


Sundry Assets A/c Dr.

Goodwill A/c Dr.

To Sundry Liabilities A/c

To C Ltd.

(Being the purchase of assets and liabilities from

B Ltd.)

6,00,000

20,000

80,000

5,40,000

(a) If Debentures are issued at par

C Ltd. Dr.

To 10% Debentures A/c (540 x 1000)

(Being the issue of 540 debentures at par to C Ltd.)

5,40,000

5,40,000

(b) If Debentures are issued at 20% premium

C Ltd. Dr.

To 10% Debentures A/c (450x1000)

To Securities Premium A/c (450x200)

(Being the issue of 450 debentures at a premium

of 20% to C Ltd.)

5,40,000

4,50,000

90,000

67

(c) If Debentures are issued at 10% discount

C Ltd. Dr.

Discount on Issue of Debentures A/c (600x10) Dr.

To 10% Debentures A/c (600x1000)

(Being the issue of 6,00 debentures at a discount of

10% to C Ltd.)

5,40,000

60,000

6,00,000

Working Notes :

(i) The amount by which the purchase consideration exceeds the value of the net assets

(i.e. the difference between the agreed value of the assets taken over and the agreed

amount of liabilities taken over) has been debited to Goodwill Account.

(ii) Calculation of No. of Debentures to be issued in each case.

At 20%

Premium

At 10%

Discount

At Par

A. Issue Price per Debenture (Rs.) 1200 900 1000

B. Purchase Consideration (Rs.) 5,40,000 5,40,000 5,40,000

C. No. of Debentures to be issued

(Purchase Consideration/ Issue

Price)

450 600 540

Question 3

Z Ltd. issued 2,500, 10% Debentures of Rs. 100 each, a premium of 10% payable as Rs. 20

on application, Rs. 50 on allotment (including premium) and the balance on first & final

call. The public applied for 3,500 debentures. Applications for 2,250 debentures were

accepted in full, application for 500 were allotted 250 debentures and remaining

applications were rejected. All moneys were duly received.

Required : Journalise these transactions.

68

Answer

Journal of Z Ltd.


Bank A/c (3500 x 20) Dr. 70,000

To Debenture Application A/c 70,000

(Being application money received on 3,500

debentures)

Debentures Application A/c Dr. 70,000

To 10% Debentures A/c (2500 x 20) 50,000

To Debentures Allotment A/c (250 x 20) 5,000

To Bank A/c (750x20)

(Being the application money adjusted and the surplus refunded)

15,000

Debenture Allotment A/c (2500 x 50) Dr. 1,25,000

To 10% Debentures A/c (2500 x 40) 1,00,000

To Securities Premium A/c (2500 x 10)

(Being the Amount due on allotment @ Rs. 50 on 2,500

debentures)

25,000

Bank A/c (125000-5000) Dr. 1,20,000

To Debentures Allotment A/c

(Being the Balance of the amount due on allotment

received)

1,20,000

Debentures Call A/c (2500 x 40) Dr.

1,00,000

To 10% Debentures A/c 1,00,000

(Being the Amount due on Call @ Rs. 40 on 2,500

debentures)

Bank A/c Dr.

1,00,000

To Debentures Call A/c 1,00,000

(Being the Amount due on call received)

69

Question 4

A company purchased its own 11% debentures in the open market for Rs. 50,00,000 (cum-

interest). The interest amount included in the purchase price is Rs. 1,50,000. The face

value of the debentures purchased is Rs. 52,00,000. The company cancelled the debentures

so purchased.

Pass Journal Entries in the books of the company for purchase and immediate cancellation

of debentures.

Answer

Journal Entries


11% Own Debentures A/c

Debenture interest A/c Dr.

Dr.

Dr.

48,50,000

1,50,000

To Bank 50,00,000

(Being purchase of own debentures from the

market)

11% Debentures A/c Dr. 52,00,000

To 11% Own Debentures A/c

To Capital Reserve

48,50,000

3,50,000

(Being profit on cancellation of debentures

transferred to Capital Reserve A/c)

Question 5

On 1st April, ‘X’ purchased 12% debentures in ‘M’ Ltd. for Rs.6,50,000. The face value of

these debentures were Rs.6,00,000. Interest on debentures falls due on 30th June and 31st

December. Compute the cost of acquisition of debentures.

Answer

Computation of cost of acquisition of debentures: Rs.

Cum- interest purchase price of debentures

Less: Interest from the last date of payment of

interest to the date of purchase i.e. for 3 months

6,00,000 x 3 /12x12%

Cost of debentures at the time of acquisition

6,50,000

18,000

6,32,000

70

Question 6

Arjun Ltd. issued 10,000 (Nos.) of 12% debentures of Rs.100 each in April, 2013. Interest is

payable on 30th September and 31st March every year. The company purchased 2,000

debentures at Rs.104 per debenture on cum-interest basis on 1.7.2014. The own

debentures were cancelled on 30.9.2015.

Show Journal entries that are required to be passed for purchase of own debentures,

interest on own debentures and for cancellation of those debentures.

Answer

Journal Entries

Date Particulars Dr. (Rs.) Cr. (Rs.)

1.7.2014

12% Own Debentures A/c Dr.

Interest on own Debentures A/c Dr.

2,02,000

6,000

To Bank A/c

(Being purchase of 12% own debenture on

cum interest basis)

2,08,000

30.9.2014

12% Debenture Interest A/c Dr.

To Bank A/c

60,000

48,000

To Interest on Own Debentures A/c

(Being interest on Debentures including own

debentures for 6 months i.e. upto 30.9.2014)

12,000

31.3.2015


To Bank A/c




60,000

48,000

12,000

71

Question 7

Piyush Ltd. issued Rs. 10,00,000, 6% Debenture Stock at par on 21.1.2009, Interest was

payable on 30th June and 31st December, in each year.

Under the terms of the Debentures Trust the owned stock is redeemable at par. The trust

deed obliges the Company to pay to the trustees on 31st December, 2013 and annually

thereafter the sum of Rs. 1,00,000 to be utilised for the redemption and cancellation of an

equivalent amount of stock, which is to be selected by drawing lots.

Alternatively, the Company is empowered as from 1st January, 2013 to purchase its own

debentures on the open market. These Debentures must be surrendered to the Trustees for

cancellation and any adjustments for accrued interest recorded in the books of account. If

in any year the nominal amount of the stock surrendered under this alternative does not

amount to Rs. 1,00,000 then the shortfall is to be paid by the Company to the Trustees in

cash on 31st December.

The following purchases of stock were made by the Company:

30.9.2015


To Bank A/c




60,000

48,000

12,000

30.9.2015

12% Debentures A/c Dr.

Loss on cancellation of 12% Dr.

Debentures A/c

To 12% Own Debentures A/c

(Being cancellation of 2,000 own debentures)

2,00,000

2,000

2,02,000

30.9.2015


To Loss on cancellation of 12% Debentures

(Being loss on cancellation transferred)

2,000

2,000

72

Nominal value of Purchase price per

stock purchased Rs. 100 of stock

Rs. Rs.

(1) 30th September, 2013 1,20,000 98

(2) 31st May, 2014 75,000 95 (Ex-interest)

(3) 31st July, 2015 1,15,000 92

The Company fulfilled all its obligations under the trust deed.

Prepare the following Ledger Accounts :

(a) Debenture Stock A/c

(b) Debenture Redemption A/c

(c) Debenture Interest A/c

Note : Ignore costs and taxation

Answer

In the Books of Piyush Ltd.

Debenture Stock Account

Year Particulars Rs. Year Particulars Rs.

2013 Sept. 30

To Debenture Redemption A/c

1,20,000 2013

Jan. 1

By Balance b/d

10,00,000

Dec. 31 To Balance c/d 8,80,000

10,00,000 10,00,000

2014

2014

May 31 To Debenture Redemption A/c

75,000 Jan. 1 By Balance b/d

8,80,000

Dec.31 To Debenture Redemption A/c

25,000

To Balance c/d 7,80,000

8,80,000 8,80,000

2015

2015

July 31 To Debenture Redemption A/c

1,15,000 Jan. 1 By Balance b/d

7,80,000

Dec.31 To Balance c/d 6,65,000

7,80,000 7,80,000

73

Debenture Redemption Account

Year Particulars Rs. Year Particulars Rs.

2013

Sept. 30

To Bank A/c

(Rs. 1,20,000×0.98 – Rs. 1,800)

1,15,800 2013

Sept.30

By Debenture Stock A/c

1,20,000

To Capital Reserve A/c 4,200

1,20,000 1,20,000

2014

2014

May 30 To Bank A/c

(Rs. 75,000 × 0.95) 71,250 May 31 By Debenture

Stock A/c 75,000

To Capital Reserve A/c (Profit on cancellation)

3,750 Dec. 31 By Debenture Stock A/c

25,000

Dec.31 To Bank A/c (Shortfall=Rs.1,00,000– Rs. 75,000)

25,000

1,00,000 1,00,000

2015

2015

July 31 To Bank A/c (Rs. 1,15,000 ×.92– Rs. 575)

1,05,225 July 31 By Debenture Stock A/c

1,15,000

To Capital Reserve A/c (Profit on cancellation)

9,775

1,15,000 1,15,000

Debenture Interest Account

2013 Rs. 2013 Rs.

June 30 To Bank A/c 30,000 Dec. 31 By Profit and Loss A/c 58,200

Sept. 30 To Bank A/c 1,800

Dec. 31 To Bank A/c 26,400

58,200 58,200

74

2014 Rs. 2014 Rs.

May 31 To Bank A/c 1,875 Dec. 31 By Profit and Loss A/c 50,175

June 31 To Bank A/c 24,150


50,175 50,175

2015 Rs. 2015 Rs.

June 30 To Bank A/c 23,400 Dec. 31 By Profit and Loss A/c 43,925

July 31 To Bank A/c 575


43,925 43,925

Working Notes :

Interest paid on Debentures @6% per annum:

Date Amount of Period Interest

Debentures

Rs. Rs.

2013

June 30 10,00,000 6 months 30,000

Sept. 30 1,20,000 3 months 1,800

Dec. 31 8,80,000 6 months 26,400

2014

May 31 75,000 5 months 1,875

June 30 8,05,000 6 months 24,150

Dec. 31 8,05,000 6 months 24,150

2015

June 30 7,80,000 6 months 23,400

July 31 1,15,000 1 month 575

Dec. 31 6,65,000 6 months 19,950

Notes : (1) It has been assumed that debentures are purchased for immediate

cancellation.

(2) The purchases of 30th September, 2013 and 31st July, 2015 have been taken

on cum-interest basis

75

Question 8

Pass journal entries in year 1 in case of the issue of debentures by ABC Co. Ltd.: Issued Rs.

1,00,000, 11% debentures at 95% redeemable at the end of 10 years. (i) at 102%, and (ii)

at 98%

Answer

ABC Co. Ltd. Journal Entries


(i) Bank A/c Dr.

Discount on issue of debentures A/c Dr.

Loss on issue of debentures A/c Dr.

95,000

5,000

2,000


To Premium on Redemption of debentures A/c

(Issue of Rs. 1,00,000 11% debentures at a discount of 5% but redeemable at a premium of 2%)

2,000

(ii) Bank A/c Dr.


To 11% Debentures A/c

(Issue of Rs. 1,00,000, 11% debentures at a discount

of 5% and redeemable at discount of 2%)

95,000

5,000

1,00,000

Question 9

On 1st April, 2014, in Tima Ltd’s ledger 9% debentures appeared with a opening balance of Rs. 50,00,000 divided into 50,000 fully paid debentures of Rs. 100 each issued at par.

Interest on debentures was paid half-yearly on 30th of September and 31st March every year.

On 31.5.2014, the company purchased 8,000 debentures of its own @ Rs. 98 (ex-interest) per debenture.

On 31.12.2014 it cancelled 5,000 debentures out of 8,000 debentures acquired on 31.5.2014.

On 31.1.2015 it resold 2,000 of its own debentures in the market @ Rs. 101 (ex-interest) per debenture.

76

You are required to prepare:

(i) Own debentures account;

(ii) Interest on debentures account; and

(iii) Interest on own debentures account.

Answer

Tima Ltd.’s Ledger

(i) Own Debentures Account

Date Particulars Rs. Date Particulars Rs.

31.5.14 To Bank 7,84,000 31.12.14 By 9%

Debentures

A/c

5,00,000

31.12.14 To Capital

Reserve

(Profit on

cancellation)

10,000 31.1.15 By Bank-

Resale of

2,000

debentures

2,02,000

31.1.15 To Profit and

Loss A/c

6,000 31.3.15 By Balance

c/d

98,000

To (Profit on

resale)

8,00,000 8,00,000

(ii) Interest on Debentures Account


31.5.14 To Bank (Interest

for 2 months on

8,000 debentures)

12,000 31.3.15 By Profit and

Loss A/c

4,38,750

30.9.14 To Interest on own

debentures (Interest

for 4 months on

8,000 debentures)

24,000


for 6 months on

42,000 debentures)

1,89,000

77



for 3 months on

5,000 debentures)

11,250



for 6 months on

1,000 debentures)

4,500


for 6 months on

44,000 debentures)

1,98,000

4,38,750 4,38,750

(iv) Interest on Own Debentures Account


31.3.15 To Profit and

Loss A/c

45,750 30.9.14 By Interest on

Debentures A/c

24,000

31.12.14 By Interest on

Debentures A/c

11,250

31.01.15 By Bank (interest

for 4 months on

2,000 debentures)

6,000

31.03.15 By Interest on

Debentures

4,500

45,750 45,750

Working Note

31.5.14 Acquired 8,000 Debentures @ Rs. 98

per debenture (ex-interest)

Rs.

Purchase price of debenture 8,000 × Rs.

98

= 7,84,000

78

Interest for 2 months Rs. 8,00,000 × 9%

× 122

= 12,000

30.9.14 Interest on own debentures

[Rs. 8,00,000 × 9% × ½ ] less Rs.12,000 = 24,000

Interest on other debentures

Rs. 42,00,000 × 9% × ½

= 1,89,000

31.12.14 Cancellation of 5,000 own debentures

Face value Rs.100 less acquired at Rs.98

= 2 × 5000

= 10,000

31.1.15 Resale of 2,000 Debentures sold for 101

(ex-interest) acquired for Rs. 98 (ex-

interest) 2,000 × Rs.3 per Debenture

= 6,000

31.12.14 Interest on cancelled 5,000 debentures

5,000 × Rs.100 × 9% × 41

= 11,250

31.3.15 Interest on 1,000 own debentures Rs.

1,00,000 × 9% × ½

= 4,500

Question 10

Journalize the following transactions. Narration is not required:

Issue of 12%, 1,00,000 debentures of Rs. 100 each

1. at par and redeemable at par.

2. at 10% discount and redeemable at par.

3. at 10% premium and redeemable at par.

4. at 10% premium and redeemable at a premium of 5%.

5. at par and redeemable at a premium of 5%.

6. at 10% discount and redeemable at a premium of 5%.

Answer

Journal

This amount includes Rs. 1,000 discount on issue of debentures and Rs. 500 premium on

redemption.

Issue for Consideration other than Cash

In this case debentures are issued for consideration other than cash. Examples are allotment of debentures for assets purchased or technical services received. There is no

79

receipt of cash in these transactions for the allotment of debentures. The following are the accounting entries:

Particulars Rs.’000

(Dr.)

Rs.’000

(Cr.)

1. Bank Account Dr.

To 12% Debentures Account

(Being 12% Debentures issued at par)

10,000

10,000

2. Bank Account Dr.

Discount on Issue of Debentures Account Dr.


(Being 12%debentures issued at 10%

discount)

9,000

1,000

10,000

3. Bank Account Dr.



(Being 12% debentures issued at 10%

premium)

11,000

10,000

1,000

4. Bank Account Dr.

Loss on issue of debenture Dr.



To Premium on redemption of Debentures


premium and redeemed at 5% premium)

11,000

500

10,000

1,000

500

5. Bank Account Dr.

Loss on issue of Debentures Account Dr.



10,000

500

10,000

500

80

(Being 12% debentures issued at par and

redeemed at 5% premium)

6. Bank Account Dr.

Loss on Issue of Debentures Account Dr.

(1000+500)




discount and redeemed at 5% premium)

9,000

1,500

10,000

500

Question 11

Nima Limited recently made a public issue in respect of which the following information is

available:

(a) No. of partly convertible debentures issued 2,00,000; face value and issue price

Rs.100 per debenture.

(b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months

from the date of closing of issue.

(c) Date of closure of subscription lists 1.5.2014, date of allotment 1.6.2014, rate of

interest on debenture 15% payable from the date of allotment, value of equity

share for the purpose of conversion Rs. 60 (Face Value Rs. 10).

(d) Underwriting Commission 2%.

(e) No. of debentures applied for 1,50,000.

(f) Interest payable on debentures half-yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the year

ended 31st March, 2015 (including cash and bank entries).

Answer

In the books of Nima Ltd.

Journal Entries

Date Particulars (Dr.) (Cr.)

1.5.14 Bank A/c Dr.

To Debenture Application A/c

(Application money received on

1,50,000 debentures @ Rs. 100

each)

1,50,00,000

1,50,00,000

81

1.6.14 Debenture Application A/c Dr.

Underwriters A/c Dr.


(Allotment of 1,50,000 debentures

to applicants and 50,000

debentures to underwriters)

1,50,00,000

50,00,000

2,00,00,000

Underwriting Commission Dr.

To Underwriters A/c

(Commission payable to

underwriters @ 2% on Rs.

2,00,00,000)

4,00,000

4,00,000

Bank A/c Dr.

To Underwriters A/c

(Amount received from

underwriters in settlement of

account)

46,00,000

46,00,000

30.9.14 Debenture Interest A/c Dr.

To Bank A/c

(Interest paid on debentures for

4 months @ 15% on Rs.

2,00,00,000)

10,00,000

10,00,000

30.10.14




(Conversion of 60% of debentures

into shares of Rs. 60 each with a

face value of Rs. 10)

1,20,00,0000

20,00,000

1,00,00,0000

31.3.15

Debenture Interest A/c Dr.

To Bank A/c

(Interest paid on debentures for

the half year)

7,50,000

7,50,000

82

Working Note :

Calculation of Debenture Interest for the half year ended 31st March, 2015

On Rs. 80,00,000 for 6 months @ 15% = Rs. 6,00,000

On Rs. 1,20,00,000 for 1 months @ 15% = Rs. 1,50,000

Rs. 7,50,000

Question 12

The Sonu Power Ltd. took over assets of Rs. 230 Lacs and liabilities of Rs. 30 Lacs of PQR

Company Ltd. for the purchase consideration of Rs. 220 Lacs. The Sonu Power Ltd. paid the

purchase consideration issuing debentures of Rs. 100 each at 10% premium. Give journal

entries in the books of the Sonu Power Ltd.

Answer

Journal of Sonu Power Ltd. (In lacs)

Particulars Dr. Cr.

Sundry Assets Dr. 230

Goodwill Dr. 20

To Liabilities 30

To PQR Ltd. 220

(Being purchase of assets and liabilities of PQR

Ltd.)

PQR Ltd. Dr. 220

To Debentures 200

To Securities Premium 20

(Being issue of debentures at 10% premium)

Question 13

Write a short note on Debentures issued as Collateral Security.

Answer

Issue of debentures as a collateral security means issue of debentures as a subsidiary or secondary security, that is, a security in addition to the prime security. Secondary security

83

is to be realized only when the prime security fails to pay the amount of loan. Debentures issued as a collateral security can be dealt with in two ways in the books:

a. First Method

No entry is made in the books. On the liability side of the balance sheet below the item of loan a note that it has been secured by the issue of debentures is to be given.

b. Second method

Sometimes issue of debentures as collateral security is recorded by making a journal entry as follows:

Debenture suspense account Dr. (This appears on the assets side)

To Debenture account (This appears on the liabilities side)

Question 14

A Company issued 100,000 debentures of Rs. 100 each redeemable at the end of 10th year, but reserves the right to redeem earlier from the end of 5th year. The company decides at the end of 5th year to redeem 20,000 debentures out of profits it has made.

Pass necessary journal entries relating to redemption.

Answer

Following Journal entries will be passed in the end of 5th year

in thousand

Particulars Dr. Cr.

5th year end

Statement of Profit & loss A/c Dr. 2,000

To Debenture redemption reserve A/c 2,000

(Being Transfer of profit)

Debentures A/c Dr. 2,000

To Debenture holder A/c 2,000

(Being redemption due)

Debenture holder A/c Dr. 2,000

To Bank account 2,000

(Being payment made to Debenture holders)

Question 15

On April 1, 2014 Autoparts Ltd. issued 25,00,000 12% fully convertible debentures of Rs.

100 each at par. The debenture holders were given the call option to convert the

debentures into two equity shares of Rs. 10 each at a premium of Rs. 40 per share on or

84

after July 1, 2014. On January 1, 2015, debenture holders holding 10,00,000 debentures

exercised their option. Pass the necessary Journal entries.

Answer

Journal entries In Lacs


April 1, 2014 Bank A/c Dr. 2,500

To 12% Convertible Debentures A/c

(Issue of 25,00,000 12% convertible debentures of Rs. 100 each)

2,500

12% Convertible debentures A/c Dr. 1,000

To Equity share capital A/c 200

To Security Premium A/c

(Conversion of 10,00,000 debenture of

Rs. 100 each, into two eq. shares of Rs 10

at a premium of Rs. 40 each)

800

Question 16

Bima Ltd. had issued 11% 5,00,000 debentures of Rs. 100 each redeemable on 31st March

2014 at a premium of 5%.

The company offered three options to debenture holders as under:

(i) 13% Preference shares of Rs. 10 each at Rs. 10.50

(ii) 14% debentures of Rs. 100 at par.

(iii) Redemption in cash.

The options were accepted as under.

Option (i) by holders of 1,00,000 debentures.

Option (ii) by holders of 1,00,000 debentures.

Option (iii) by holders of 3,00,000 debentures.

The company carried out the redemption. Pass the necessary journal entries.

85

Answer

Journal entries (in lacs)

Particulars Dr. Cr.


Premium on redemption of debentures A/c Dr.

To Debenture Holder A/c

(Being redemption due at premium@5%)

500

25

525

Debenture holders account Dr.

To 13% Preference share capital account

To Securities premium account

(Being debentures converted into preference shares)

105

100

5

Debenture holders A/c Dr.

To 14% Debenture A/c

(being debentures converted into 14%debentures)

105

105

Debenture holders A/c Dr.

To Bank A/c

(Being payment made to remaining debenture

holders)

315

315

Question 17

On 1st April, 2011 A Ltd. made an issue of 10,00,000 14% debentures of Rs. 100 each at Rs.

98 per debenture. According to the terms of issue, the company should redeem 10000

debentures either by purchasing them from the open market or by drawing lots at par at

the company’s option. Profit, if any, on redemption is to be transferred to capital reserve.

The company’s accounting year ends on 31st March. Interest is payable on 30th Sep and

31st March.

During 2011-12, the company wrote off 20% of debenture discount account.

During 2014-15, the company purchased and cancelled the debentures as given below:

(i) Rs. 200,00,000 at Rs. 95 per debenture on 30th September, and

(ii) Rs. 300,00,000 at Rs. 97 per debenture on 31st March.

Give the journal entries in the books of A Ltd. for both the years

86

Answer

Journal Entries in lacs


1.4.11 Bank A/c Dr.


To 14 % Debentures A/c

(Being debentures issued at discount)

980

20

1000

30.9.11 Debentures interest A/c Dr.

To Bank A/c

(Being interest paid to debentureholders)

70

70


To Bank A/c

(being interest paid to debentureholders)

70

70

31.3.12 Profit and loss A/c Dr.

To Debenture interest A/c (70+70)

To Discount on issue of Debentures

A/c (20x20%)

(Being debenture interest and 20%

discount transferred to Profit and loss

account)

144

140

4


To Bank A/c

(Being interest paid to debenture holders)

70

70

30.9.14 Own debentures A/c Dr.

To Bank A/c

(Being own debentures purchased)

190

190

14 % Debentures A/c Dr.



(Being own debentures cancelled and

profit transferred to capital reserve)

200

190

10

87


To Bank A/c

(Being interest paid to debenture holders)

56

56

Own debentures A/c Dr.

To Bank A/c

(Being own debentures purchased)

291

291

14 % Debentures A/c Dr.



(Being own debentures cancelled and

profit tranfered to capital reserve)

300

291

9

31.3.15 Profit and loss A/c Dr.

To Debenture interest A/c

(Being debenture interest transferred to

Profit and loss account)

126

126

Question 18

The Summary Balance Sheet of Boxco. LTD. on 31st March, 2015 read as under :


Share Capital :

Authorised:

30,000 Equity Shares of Rs.

10 each

3,00,000

Freehold property 1,15,000

Issued and Subscribed:

20,000 Equity Shares of Rs.

10 each fully paid

2,00,000 Stock 1,35,000

Profit and Loss Account 1,20,000 Debtors 75,000

12% Debentures 1,20,000 Cash 30,000

Creditors 1,15,000 Balance at Bank 2,20,000

Proposed Dividends 20,000

5,75,000 5,75,000

88

At the Annual General Meeting it was resolved :

(a) To pay the proposed dividend of 10 per cent in cash.

(b) To give existing shareholders the option to purchase one Rs. 10 share at Rs. 15 for

every four shares (held prior to the bonus distribution), this option being taken up

by all shareholders.

(c) To issue one bonus share for every four shares held.

(d) To repay the debentures at a premium of 3 per cent.

Give the necessary journal entries and the company’s Balance Sheet after these

transactions are completed.

Answer

Journal of Boxco Ltd.

Particulars Dr. Cr.

Proposed Dividend A/c Dr. 20,000

To Bank A/c 20,000

(Proposed Dividend paid to existing

shareholders)

Bank A/c Dr. 75,000

To Equity Shareholders A/c

(Application money received on 5,000 shares @

Rs. 15 per share to be issued as rights shares in

the ratio of 1:4)

75,000

Equity Shareholders A/c Dr. 75,000

To Equity Share Capital A/c 50,000


(Share application money on 5,000 shares @

Rs.10 per share transferred to Share Capital

Account, and RS. 5 per share to Securities

Premium Account)

25,000

89

Securities Premium A/c Dr. 25,000


To Bonus to Shareholders A/c 50,000

(Amount transferred for issue of bonus shares to existing shareholders in the ratio of 1:4)

Bonus to Shareholders A/c Dr.

50,000

To Equity Share Capital /c

(Issue of bonus shares in the ratio of 1 for 4)

50,000

12% Debentures A/c Dr. 1,20,000

Premium Payable on Redemption A/c Dr.

To Debenture holders A/c

3,600

1,23,600

(Amount payable to debentures holders)


To Premium Payable on Redemption A/c

(Premium payable on redemption charged to

Profit & Loss A/c)

3,600

Debenture holders A/c Dr. 1,23,600

To Bank A/c 1,23,600

(Amount paid to debenture holders on

redemption)

90

Balance Sheet of Boxco Ltd. (after completion of transactions)

Particulars Note No. Note Amount

I. Equity and liabilities


(a) Share Capital 1 3,00,000

(b) Reserves and Surplus 2 91,400


(a) Trade payables 1,15,000

Total 5,06,400

II. Assets

(1) Non-current assets

(a) Fixed assets 3 1,15,000

(2) Current assets

(a) Inventories 1,35,000

(b) Trade receivables 75,000

(c) Cash and cash equivalents 1,81,400

Total 5,06,400

Notes to Accounts

1. Share Capital Rs.

30,000 shares of Rs.10 each fully paid= 3,00,000

(5,000 shares of Rs. 10 each, fully paid issued

as bonus shares out of securities premium

and P&L Account)

2. Reserve and Surplus

Profit & Loss Account 91,400

91

3. Fixed Assets

(i) Tangible assets

Property 1,15,000


Cash at Bank 1,51,400

Cash in Hand 30,000 1,81,400

Note : The number of bonus shares issued has been calculated on the basis of issued capital

before rights issued i.e., 20,000 shares (and not 25,000 shares after rights issue).

Question 19

The summarised Balance Sheet of Corpus Limited, as on 30th June, 2015, stood as follows:

Liabilities Rs.

Share Capital :

5,00,000 equity shares of Rs.10 each fully paid

50,00,000


Debenture Redemption Reserve 50,00,000

13.5% Convertible Debentures, 1,00,000 Debentures of Rs. 100 each 1,00,00,000

Other loans 50,00,000

Current Liabilities and Provisions 1,25,00,000

4,50,00,000

Assets : Rs.

Fixed Assets (at cost less depreciation) 1,60,00,000

Debenture Redemption Reserve Investments 40,00,000

Cash and bank Balances 50,00,000

Other Current Assets 2,00,00,000

4,50,00,000

The debentures are due for redemption on 1st July, 2015. The terms of issue of debentures

provided that they were redeemable at a premium 5% and also conferred option to the

92

debenture holders to convert 20% of their holding into equity shares at a predetermined

price of Rs. 15.75 per share and the payment in cash.

Assuming that :

(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of

them exercised the option for maximum conversion.

(ii) the investments realise Rs. 44 lakhs on sale; and

(iii) all the transactions are put through, without any lag, on 1st July, 2012.

Redraft the balance sheet of the company as on 1st July, 2012 after giving effect to the

redemption. Show your calculations in respect of the number of equity shares to be

allotted and the cash payment necessary.

Answer

Corpus Limited Balance Sheet as on July 1, 2015

Particulars Note No Amount




(b) Reserves and Surplus 2 1,29,75,000


(a) Long-term borrowings - Unsecured Loans 50,00,000


(a) Short-term provisions 1,25,00,000

Total 3,64,75,000

II. Assets


(a) Fixed assets

(i) Tangible assets 1,60,00,000

(2) Current assets

(a) Cash and cash equivalents 4,75,000

(b) Other current assets 2,00,00,000

Total 3,64,75,000

93

Notes to Accounts Rs.

1 Share Capital

6,00,000 Equity Shares of Rs. 10 each 60,00,000

2 Reserve and Surplus

General Reserve 1,24,00,000

Securities Premium Account 5,75,000

1,29,75,000

Working Notes :

(i) Calculation of number of shares to be allotted :

Total number of debentures 1,00,000

Less : Number of debentures not opting for conversion 25,000

75,000

20% of 75,000 =15,000

Redemption value of 15,000 debentures Rs. 15,75,000

Number of Equity Shares to be allotted :

15.75

15,75,000= 1,00,000 shares of Rs. 10 each.

(ii) Calculation of cash to be paid : Rs.

Number of debentures 1,00,000

Less : number of debentures to be

converted into equity shares 15,000 85,000

Redemption value of 85,000 debentures (85,000 × Rs. 105) = 89,25,000

(iii) Cash and Bank Balance :

Balance before redemption 50,00,000

Add : Proceeds of investments sold 44,00,000

Less : Cash paid to debenture holders 89,25,000

4,75,000

(iv) Calculation of General Reserve :

Opening Balance 75,00,000

Add : Debenture Redemption Reserve transfer 50,00,000

Profit on sale of investments 4,00,000

Less : Premium on redemption of debentures 5,00,000 1,24,00,000

Note : The premium on redemption of debentures may also be adjusted against Securities

Premium Account.

94

Question 20

The following balances appeared in the books of a company as on December 31, 2014:

6% Mortgage 10,000 debentures of Rs. 100 each; Debenture Redemption Reserve (for

redemption of debentures) Rs. 10, 42,000;

Investment Rs. 5,28,000, 4% Government Loan purchased at par and 5,60,000,

3-1/2% Government paper purchased for Rs. 5,42,000.

The Interest on debentures had been paid up to December 31, 2010. On February 28, 2015,

the investments were sold at Rs. 90 and Rs. 87 respectively and the debentures were paid

off at 101, together with accrued interest.

Write up the ledger accounts concerned. The Debenture Redemption Reserve is non

cumulative.

Answer

6% Mortgage Debentures Account

Feb. 28 To

Debenture

holders A/c

10,00,000 Jan. 1 By Balance

b/d

10,00,000

10,00,000 10,00,000

Premium on Redemption of Debentures Account

To Debenture holders A/c 10,000 By Debenture

Redemption

Reserve. A/c

10,000

10,000 10,000

Debentures Redemption Reserve Investment Account

To Balance b/d 10,70,000 By Bank Rs. 5,28,000

Govt. Loan @ Rs. 90

4,75,200

By Bank Rs. 5,60,000

Govt. Paper @ Rs. 87

4,87,200

By D.R.R. (Loss) 1,07,600

10,70,000 10,70,000

95

Debentures Interest Account

To cash A/c 10,000 By P& L A/c 10,000

10,000 10,000

Debentures Redemption Reserve Account

To Premium on

Redemption

To DRR investment A/c

To General Reserve

10,000

1,07,600

10,00,000

By Balance b/d

By Profit & Loss

Appropriation A/c

10,42,000

75,600

11,17,600 11,17,600

Question 21

Seema Limited issued Rs. 1,50,000 ,5% Debentures on which interest is payable half

yearly on 31st March and 30th September. The company has power to purchase

debentures in the open market for cancellation thereof. The following purchases were

made during the year ended 31st December, 2015 and the cancellation were made on the

following 31st March :

1st March Rs. 25,000 nominal value purchased for Rs. 24,725 ex-interest.

1st September Rs. 20,000 nominal value purchased for Rs. 20,125 cum-interest.

You are required to draw up the following accounts up to the date of cancellation :

(i) Debentures Account;

(ii) Own Debenture Investment Account; and

(iii) Debenture Interest Account.

Ignore taxation and make calculations to the nearest rupee.

Debentures Account

Particulars Rs. Date Particulars Rs.

To Balance c/d 1,50,000 Jan. 1

By Balance

b/d

1,50,000

1,50,000 1,50,000

96

To Own Debenture A/c 45,000 Jan. 1 By Balance

b/d

1,50,000

To Balance c/d 1,05,000

1,50,000 1,50,000

By Balance

b/d

1,05,000

Own Debentures Investment Account

Date Particular Face

Value

Interest Cost Date Particular Face

Value

Interest Cost

Mar. 1 To Bank 25,000 521 24,725 Mar.

31

By

Debenture

Interest

625

Sep. 1

To Bank 20,000 417 19,708 Sep.

30

By

Debenture

Interest

1,125

Dec.

31

To P & L

A/c

1,375 Dec.

31

By

Debenture

Interest

563

By Balance

c/d

45,000 44,433

45000 2313 44,433 45000 2313 44,433

Jan . 1

To

Balance

b/d

45,000 563 44,433 Mar.

31

By

Debenture

Interest

1,125

Mar .31

To

Capital

Reserve

567 By 5%

Debenture

a/c

45,000 45,000

To P&L 562

45,000 1,125 45,000 45,000 1,125 45,000

97

Debentures Interest Account


Mar. 31

To Bank (on 1,25,000

for 6 months)

3,125 Jan.31

By Accrued Interest

(on 1,50,000 @ 5% for

3 months)

1,875

Mar. 31

To Interest on own

Debentures

625 Dec. 31

By P & L A/c 7,500

Sep 30

To Bank (on Rs.

1,05,000 @ 5% for 3

months)

2,625

To Interest on own

Debentures

1,125

Dec. 31

To Interest accrued

(on Rs. 1,05,000 for 3

months)

1,312

Dec. 31

To Interest on own

debentures (on

45,000 for 3 months)

563

9375 9375

Mar. 31

To Bank (on Rs.

1,05,000

for 6 months)

2,625 Jan. 1

By Interest Accrued 1,312

Mar. 31

To Interest on own

Debentures (on Rs.

45,000 for 3 months)

563 Mar. 31

By P & L A/c 1,876

3188 3188

Question 22

MM Ltd. had the following among their ledger opening balances on January 1, 2014 :

11% Debentures A/c (2000 issue) 50,00,000

Debenture Redemption Reserve A/c 45,00,000

13.5% Debentures in XX Ltd. A/c (Face Value Rs. 20,00,000) 19,50,000

Own Debentures A/c (Face value Rs. 20,00,000) 18,50,000

98

As 31st December, 2014 was the date for redemption of the 2000 debentures, the company

started buying own debentures and made the following purchases in the open market :

1-2-2014 2,000 debentures at Rs. 98 cum-interest.

1-6-2014 2,000 debentures at Rs. 99 ex-interest.

Half yearly interest is due on the debentures on the 30th June and 31st December in the

case of both the companies.

On 31st December, 2014, the debentures in XX Ltd. were sold for Rs. 95 each ex-interest. On

that date, the outstanding debentures of MM Ltd. were redeemed by payment and by

cancellation. Show the entries in the following ledger accounts of MM Ltd. during 2014 :

(a) Debenture Redemption Reserve A/c

(b) Own Debentures A/c

The face value of a debenture was Rs. 100 (Round off calculations to the nearest rupee.)

Answer

11% Mortgage Debentures Account

Debentures Redemption Reserve Account

Particulars Rs. Particulars Rs.

To 13.5% Deb. In XX Ltd. 50,000 By Balance b/d 45,00,000

(Loss on sale of

investment)

13.5% Deb. in

XX Ltd.

2,70,000

To General Reserve

(transfer)

49,73,000 By Own Deb.

A/c (Int. on

own Deb.)

2,53,000

50,23,000 50,23,000


Dec 31 To Own Debentures

A/c

24,00,000 Jan. 1 By Balance

b/d

50,00,000

To Bank 26,00,000

50,00,000 50,00,000

99

Own Debentures Account

Date Particular Face

Value

Interest Cost Date Particular Face

Value

Interest Cost

Jan. 1

To Balance

b/d

20,00,000 - 18,50,000 June.

30

By

Debenture

Interest

1,32,000

Feb.

1

To Bank 2,00,000 1833 194,167 Dec.

31

By

Debenture

Interest

1,32,000

June.

1

To Bank 2,00,000 9167 198,000 By 11%

debenture

To Capital

reserve

1,57,833 By Balance

c/d

24,00,000 24,00,000

24,00,000 2,64,000 24,00,000 24,00,000 2,64,000 24,00,000

13% Debentures in XY Ltd. Account

Date Particular Face Value Interest Cost Date Particular Face

Value

Interest Cost

Jan. 1

To Balance

b/d

20,00,000 - 19,50,000 June.

30

By Bank 1,35,000

Debenture

Redemption

reserve

270,000 Dec. 31

By Bank 1,35,000

Dec. 31

By Bank 19,00,000

By

Debenture

Redemption

reserve

20,00,000 50,000

20,00,000 270,000 1950,000 20,00,000 270,000 1950,000

100

Question 23

A Ltd. issued 750, 12% Debentures of Rs. 1000 each at a discount of 10% payble Rs. 200 on

application, Rs. 400 on allotment and Rs. 300 on first and final call. The public applied for

1,050 debentures. Application for 675 debentures were accepted in full, applicants for 150

debentures were allotted 75 debentures and the remaining applications were rejected. All

moneys were duly received.

Required : Journalise these transactions.

Answer

Journal of A Ltd.


Bank A/c (1050 x 200) Dr. 2,10,000

To Debenture Application A/c

(Being the Receipt of application money on 1,050

debentures)

2,10,000

Debentures Application A/c Dr. 2,10,000

To 12% Debentures A/c (750 x 200) 1,50,000

To Debentures Allotment A/c (75 x 200) 15,000

To Bank A/c (225x200)

(Being the application money adjusted and surplus

refunded)

45,000

Debentures Allotment A/c (750 x 400) Dr. 3,00,000

Discount on issue of Debentures A/c (750x100) Dr. 75,000

To 12% Debentures A/c (750 x 500)

(Being the amount due on allotment @ Rs. 500 on

750 debentures)

3,75,000

Bank A/c (300000 - 15000) Dr. 2,85,000

To Debentures Allotment A/c

(Being the Balance of the amount due on allotment

received)

2,85,000

101

Debentures Call A/c (750 x 300) Dr. 2,25,000


(Being the Amount due on debentures @ Rs. 300 on

750 debentures)

2,25,000

Bank A/c (750 x 300) Dr. 2,25,000

To Debenture Call A/c

(Being the Amount due on call received)

2,25,000

***

102

Question 1

The following information has been extracted from the books of account of Minati Ltd. as at 31st March, 2015:

Particulars Dr. (Rs. ’000) Cr. (Rs. ’000)

Administration Expenses 480

Cash at Bank 228

Cash Received on Sale of Fittings 10

Long Term Loan 70

Investments 200

Depreciation on Fixtures, Fittings,

Tools and Equipment (1st April, 2014)

260

Distribution Costs 102

Factory Closure Costs 60

Fixtures, Fittings, Tools and Equipment at Cost 680

Profit & Loss Account (at 1st April, 2014) 80

Purchase of Equipment 120

Purchases of Goods for Resale 1710

Sales (net of Excise Duty) 2,400

Other income 600

Share Capital (50,000 shares of Rs. 20 each fully paid)

1,000

Stock (at 1st April, 2014) 140

Trade Creditors 80

Trade Debtors 780

4,500 4,500

3

Final Accounts of Companies

103

Additional Information:

(1) The stock at 31st March, 2015 (valued at the lower of cost or net realizable value) was estimated to be worth Rs.2,00,000.

(2) Fixtures, fittings, tools and equipment all related to administration. Depreciation is charged at a rate of 20% per annum on cost. A full year’s depreciation is charged in the year of acquisition, but no depreciation is charged in the year of disposal.

(3) During the year ended on 31st March, 2015, the Company purchased equipment of Rs. 1,20,000. It also sold some fittings (which had originally cost Rs. 60,000) for Rs. 10,000 and for which depreciation of Rs.30,000 had been set aside.

(4) The average Income tax for the Company is 50%. Factory closure cost is to be presumed as an allowable expenditure for Income tax purpose.

(5) The company proposes to pay a dividend of 20% per Equity Share. Prepare Prem Ltd.’s Profit and Loss Account for the year to 31st March, 2015 and balance Sheet as at that date in accordance with the Companies Act, 2013

Answer

Profit and Loss Statement for the year ended: 31st March, 2015 (Rs. in‘000.)

Note No.

I Revenue From Operation

Less: Excise duty

11 2,400

II Other Income 600

III Total Revenue(I+II) 3000

IV EXPENSES:

Cost of material consumed

a) Purchase of products for sale

b) Changes in inventories of finished goods, work in-progress and products for sale (140-200) [Opening-Closing]

c) Depreciation and amortization expenses

d) Expenditure transfer to capital and other account

12

1,710

(60)

148

602

Total Expenses 2,400

V Profit Before Exceptional And Extraordinary Items And Tax ( III-IV)

600

104

VI Exceptional Items VII Profit Before Extraordinary Items And Tax (V-VI)

600

VIII Extraordinary Items[Factory Closure] 60

IX Profit Before Tax From Continuing Operations (VII-VIII)

540

X Tax expenses:

(1) Current Tax 540*50/100

(2) Deferred tax

270

XI Profit After Tax For The Year From Continuing Operation(IX-X)

270

XII Profit (Loss) From Discontinuing Operations -

XIII Tax Expenses From Discontinuing Operations -

XIV Profit (Loss) From Discontinuing Operations (After Tax) (XII-XIII)

XV Profit (Loss) For The Period (XI+XIV) 270

Balance brought forward from previous year (as at 1st April, 2014)

Profit available for appropriation

80

350

Appropriation:

Proposed dividend 1000000 x 20% 200

Balance carried forward 150

Minati Ltd.

Balance Sheet as at : 31st March, 2015 (Rs. in ‘000)

S. No. Particulars Notes Amount (Rs.)

I.

1.

Equity And Liabilities

Shareholder’s Fund

(a) Share capital

(b) Reserves and surplus

1

2

1,000

150

2. Share application money pending allotment NIL

105

3. Non-current liabilities

(a) Long-term borrowings

3

70

4. Current Liabilities

(a) Other current liabilities

(b) Short-term provisions

4

5

80

470

Total (1+2+3+4) 1,770

II Assets


(a) Fixed assets

(i) Tangible assets

(b) Non-current investments

6

7

362

200

2. Current assets

(a) Inventories

(b) Trade receivables

(c) Cash and cash equivalents

8

9

10

200

780

228

Total (1+2) 1,770

(Rs. in ‘000) Note 1. Share Capital

Authorized, Issued, Subscribed and paid-up Share capital 50,000

Equity share of Rs. 10 each 1,000

Note 2. Reserve & Surplus

Profit and loss A/c 150

Note 3. Long term borrowings

Long term loan 70

Note 4. Trade Payables

Sundry Creditors 80

Note 5. Short- term provisions

Proposed dividend (20% on Rs. 10,00,000) 200

Provision for Taxation 270

Total 470

106

Note 6. Tangible Assets

Fixtures, Fittings, Tools and equipment at cost-

Opening 680

Add : Additions 120

Less : Sale/ disposed (60)

Less : Depreciation (260+148) (408)

Total 362

Note 7.Non Current Investments

Investments (given) 200

Note 8. Inventories

Stock (given) 200

Note 9.Trade Receivables

Trade Debtors (more than six months considered good) 780

Note 10. Cash and cash equivalents

Cash at Bank 228

Note 11. Revenue from operation


Note 12. Other Expenses

Administrative Expenses 480

Distribution Expenses 102

Loss on sale of Fixed Assets 20

[60000-30000-10000]

Total 602

Notes:

(1) The rate of interest on long term loan is not given in the question. Reasonable assumption may be made regarding the rate of interest and accordingly it may be accounted for.

(2) In the absence of details regarding factory closure costs, there costs are treated as extraordinary items in the above solution assuming that the factory is permanently closed. However, the factory may close for a short span of time on account of strikes, lockouts etc. and such type of factory closure costs should be treated as loss from ordinary activities. In that case also, a separate disclosure regarding the factory closure costs will be required as per para 12 of AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.’

107

Working Notes:

Particulars (Rs. in ‘000)

(1) Tangible Asset Furniture and Fixtures Gross Block As on 1.4.2014 680

Add : Additions during the year 120 800

Less : Deductions during the year 60

As on 31.3.2015 740

Depreciation As on 1.4.2014 260

For the year (20% on 740) 148

Less: Deduction during the year 30

As on 31.3.2015 378

Net block as on 31.3.2015 362

(2) Provision for taxation Profit as per profit and loss account 540

Add back : Loss on sale of asset (short term capital loss) 20

Depreciation 148

Less : Depreciation under Income-Tax Act 168

Taxable income 540

Provision for tax @ 50% 270

It has been assumed that depreciation calculated under Income-Tax Act amounts to Rs. 1,68,000.

Question 2

The following balances are extracted from the books of Ruby Ltd., a property company, on 31st March, 2015:

Particulars Dr. (’000) Cr. (’000)

Sales 13,800

Purchases of materials 6,090

Share capital fully paid 500

Land purchased in the year as stock 365

Leasehold premises 210

Creditors 2,315

Debtors 3,675

108

Directors’ salaries 195

Wages 555

Work in progress on 01.04.2014 1,050

Sub-contractors’ cost 4,470

Equipment, Fixtures and Fittings at cost on 01.04.2014 1,320

Stock on 01.04.2014 295

Profit and Loss Account, Credit Balance on 01.04.2014 640

Secured Loan 560

Bank Overdraft 525

Interest on Loan and Overdraft 110

Depreciation on Equipment on 01.04.2014 820

Administration Expenses 735

Office Salaries 90

19,160 19,160

You also obtain the following information:

(a) On 31st March, 2015, stock on hand including the land acquired during the year, is valued at Rs. 7,10,000. Work in progress at that date is valued at Rs. 7,00,000.

(b) On 1st October, 2014 the company moved to new premises. The premises are on a 12 years lease and the lease premium paid amounted to Rs. 2,10,000. The company used sub-contract labour of Rs. 2,00,000 and materials at cost of Rs.1,90,000 in the refurishment of the premises. These are to be considered as part of the cost of leasehold premises.

(c) A review of the debtors reveals specific doubtful debts of Rs. 1,75,000 and the directors wish to provide for these together with a general provision based on 2% of the balance.

109

(d) Depreciation on equipment, fixtures and fittings is provided at 15% on the written down value.

(e) Ruby Ltd. sued Simple Ltd. for supplying defective materials which has been written off as valueless. The Directors are confident that Shallow Ltd. will agree for a settlement of Rs. 2,50,000.

(f) The directors propose a dividend of 25%.

(g) Rs. 1,00,000 is to be provided as audit fee.

(h) The company will provide 10% of the pre-tax profit as bonus to employees in the accounts before charging the bonus.

(i) Income tax to be provided at 50% of the profits.

You are required: (i) to prepare the company’s financial statements for the year ended 31st March, 2015 as near as possible to proper form of company final accounts; and

Notes: Workings should form part of your answer. Previous year figures can be ignored. Figures are to be rounded off to nearest thousands.

Answer

Balance Sheet of Ruby Ltd. as at : 31st March, 2015 ( in ‘000)

S.No. Particulars Note No. As at 31st March, 2015

I EQUITY AND LIABILITIES

1 Shareholder’s Fund

(a) Share capital 1 500

(b) Reserves and surplus 2 945

2 Share application money pending allotment

NIL


(a) Long-term borrowings 3 560

4 Current Liabilities

(a) Short-term borrowings 4 525

(b) Trade payables 5 2,315

110

(c) Other current liabilities 6 100

(d) Short-term provisions 7 895

Total (1+2+3+4) 5840

II ASSETS


(a) Fixed assets

(i) Tangible assets 7 1,000

2 Current assets

(a) Inventories 8 1,410

(b) Trade receivables 9 3,430

Total (1+2) 5840

Profit and Loss Statement for the year ended: 31st March, 2015

S. No. Particulars Note No. As at 31st March, 2015

I REVENUE FROM OPERATION

Less : Excise duty

11 13,800

II OTHER INCOME

III TOTAL REVENUE(I+II) 13,800

IV EXPENSES:

a) Cost of material consumed 12 11,025

b) Purchase of products for sale

c) changes in inventories of finished goods, work-in-progress and products for sale

d) Employees cost/ benefits expenses 13 405

111

e) Finance cost 110

f) Depreciation and amortization expenses

100

g) Other expenses 14 1,080

TOTAL EXPENSES 12,720

V PROFIT BEFORE TAX ( III-IV) 1,080

VI EXCEPTIONAL ITEMS

VII PROFIT BEFORE EXTRAORDINARY ITEMS AND TAX (V-VI)

1,080

VIII EXTRAORDINARY ITEMS IX PROFIT BEFORE TAX FRON CONTINUING OPERATIONS (VII-VIII)

1,080

X Tax expenses:

(1) Current Tax 650

(2) deferred tax

XI PROFIT AFTER TAX FOR THE YEAR FROM CONTINUING OPERATION(IX-X)

430

PROFIT (LOSS) FOR THE PERIOD (XI+XIV) 430

Balance brought forward from previous year

640

Profit available for appropriation 1,070

Appropriation: Proposed dividend 125

Transfer to General Reserve 45

Balance carried forward 900

Note 1. Share Capital

Authorized, Issued, Subscribed and paid-up Share capital: 50,000

Equity share of Rs. 10 each 500

Total 500

112


General Reserve 45

Profit and loss A/c 900

Total 945

Note 3. Long term borrowings

Secured Loan 560

Total 560

Note 4. Short-term borrowings

Bank Overdraft 525


Sundry Creditors 2,315

Note 6. Other Current Liabilities

Audit fees 100


Proposed dividend [25*50000/100=125000] 125


Provision for bonus 120

Total 895


Equipment, Fixtures & Fittings at cost-

Opening 1,320

Less :Depriciation 895 425

Leasehold premises (210+200+190) 600

Less : Witten off 25 575

Total 1,000

Note 9. Inventories

Stock – Finished stock 710

Work in progress 700

Total 1410

Note 10.Trade Receivables-

Trade Debtors (more than six months ) 3,675

Less : Provision for doubtful debts 245

Total 3,430



113

Note 12. Cost of materials Consumed

Manufacturing expenses-

Opening Stock (FG) 295

Opening WIP 1,050

Purchase of materials (6,090-190)[Material Refurishment] 5,900

Purchase of land as stock 365

Wages 555

Sub-contract Cost (4,470-200) [Subcontract Used for Premises] 4,270

Less : Closing Stock- Finished goods 710

Less : Work in progress 700

Total 11,025

Note 13. Employees benefit expenses

Salary- office staff (90+195)[ DIRECTOR FEE] 285

Bonus 120

Total 405



Provision for doubtful debts {675-175=3500*2%=70+175=245} 245

Auditors remuneration 100

Total 1,080

Working notes

1) Bonus

Sales 13,800

Less : Manufacturing Expenses 11,025

Other Exp. (excluding bonus) [1080+285] 1,365

Depreciation 100

Interest 110

Pre-tax Profit 1,200

Bonus (10%) 120

2) Fixed Asset:

Tangible Asset

(a) Gross block Furniture and Fixture 1,320

Leasehold Premises (210 + 200 + 190) 600

(Lease+ Contractor+ Material ) 1,920

114

(b) Depreciation Furniture and fixture (1.4.2014) 820

For the year [15% on (1,320– 820)] 75

Cost of Leasehold Premises written off for 6 month

[(210 + 200 + 190) x 1/12 x 1/2] 25 920

Net 1000

3) Provision for Taxation

Profit as per Profit and Loss Account 1,080

Add back: Provision for doubtful debts 245

Cost of Leasehold premises written off 25

Depreciation on equipment, fixtures and fittings 75

Less : Depreciation under Income-tax Act 125

Taxable income 1,300

Provision for Tax (@ 50%) 650

(It has been assumed that depreciation calculated under Income - tax Act amounts to Rs. 1,25,000)

Question 3

On 1st November, 2014 Squash Ltd. was incorporated with an authorized capital of Rs. 200 crores. It issued to its promoters equity capital of Rs. 10 crores which was paid for in full. On that day it purchased the running business of Jam Ltd. for Rs. 40 crores and allotted at par equity capital of Rs. 40 crores in discharge of the consideration. The net assets taken over from Jam Ltd. were valued as follows: Fixed Assets Rs. 30 crores, Inventory Rs. 2 crores, Customers’ dues Rs. 14 crores and Creditors Rs. 6 crores. Squash Ltd. carried on business and the following information is furnished to you:

(a) Summary of cash/bank transactions (for year ended 31st October, 2015).

(Rs. in crores)

Equity capital raised:

Promoters (as shown above) 10

Others 50

Collections from customers 800

Sale proceeds of fixed assets (cost Rs. 18 crores) 4 864

Payments to suppliers 400

115

Payments to employees 140

Payment for expenses 100 -640

Investments in Upkar Ltd. -20

Payments to suppliers of fixed assets:

Instalment due 120

Interest 10 -130

Tax payment -54

Dividend -10

Closing cash/bank balance 10

864

(b) On 31st October, 2015 Squash Ltd.’s assets and liabilities were: (Rs. in Crores)

Inventory at cost 3

Customers’ dues 80

Prepaid expenses 2

Advances to suppliers 8

Amounts due to suppliers of goods 52

Amounts due to suppliers of fixed assets 150

Outstanding expenses 6

(c) Depreciation for the year under: (i) Companies Act, 2013 Rs. 36 crores (ii) Income tax Act, 1961 Rs. 40 crores

(d) Provide for tax at 38.5% of “total income”.

There are no disallowed expenses for the purpose of income taxation. Provision for tax is to be rounded off.

For Squash Ltd. prepare:

(i) Revenue statement for the year ended 31st October, 2015 and

(ii) Balance Sheet as on 31st October, 2015

116

Answer

Balance Sheet of Squash Ltd as at : 31st October, 2015 (Rs. inCrores)



1 Shareholder’s Fund

(a) Share capital 1 100

(b) Reserves and surplus 2 77.4

2 Share application money pending allotment NIL

3 Non-current liabilities NIL


(a) Trade payables 3 52

(b) Other current liabilities 4 156

(c) Short-term provisions 5 52

Total (1+2+3+4) 437.40

II ASSETS


(a) Fixed assets

(i) Tangible assets 6 260.4

(b) Non-current investments 7 20

(c) Long-term loans and advances 8 54

2 Current assets

(a) inventories 9 3

(b) trade receivables 10 80

(c) Cash and cash equivalents 11 10

(d) Short-term loans and advances 12 10

Total (1+2) 437.40

117

Profit and Loss Statement for the year ended: 31st October, 2015 (Rs. in Crores)


I REVENUE FROM OPERATION Less: Excise duty 13 866

II OTHER INCOME

III TOTAL REVENUE(I+II) 866

IV EXPENSES:

(a) Cost of material consumed 14 437

(b) Purchase of products for sale

(c) Changes in inventories of finished goods, work-in-progress and products for sale

(d) Employees cost/ benefits expenses 140

(e) Finance cost 10

(f) Depreciation and amortization expenses 36

(g) Other expenses 15 104

TOTAL EXPENSES 727

V PROFIT BEFORE EXCEPTIONAL AND EXTRAORDINARY ITEMS AND TAX ( III-IV)

139

VI EXCEPTIONAL ITEMS

VII PROFIT BEFORE EXTRAORDINARY ITEMS AND TAX (V-VI)

139

VIII EXTRAORDINARY ITEMS sale of fixed asset 0.4

IX PROFIT BEFORE TAX FRON CONTINUING OPERATIONS (VII-VIII)

139.40

X Tax expenses:

(1) Current Tax 139.40-30+40=135.40*38.5%= 52 rounded off

(2) deferred tax

118

XI PROFIT AFTER TAX FOR THE YEAR FROM CONTINUING OPERATION(IX-X)

87.4

XII Profit (loss) from discontinuing operations

XIII Tax expenses from discontinuing operations

XIV Profit(loss) from discontinuing operations (after tax)(XII-XIII)

XV PROFIT (LOSS) FOR THE PERIOD (XI+XIV) 87.4

Balance brought forward from previous year Profit available for appropriation

87.4

Appropriation:

Proposed dividend 10

Balance carried forward 77.40

Note 1. Share Capital

Authorized Equity share capital of Rs. 10 each 200

Issued, Subscribed and paid-up Share capital:

10 Crores Equity share of Rs. 10 each 100 (of which 4 crores equity share have been issued for a consideration other than cash, on take-over of business of Jam Ltd. )

Total 100


Profit and loss A/c 77.40


Sundry Creditors 52

Note 4. Other Current Liabilities

Amount due to supplier of fixed assets 150

Outstanding expenses 6

Total 156



119

Note 6.Tangible Assets

Fixed Assets taken over from Jam Ltd 30

Add : Purchase (120+150)Cash+Credit 270 300

Less : Sale proceeds 3.60

Less : Depreciation 36

Total 260.40

Note 7. Non-current Investments

Investments in Upkar Ltd 20

Note 8. Long term loans and advances

Advance Tax 54

Note 9. Inventories

Inventories at cost

Note 10. Trade receivables

Customer’s Due 80

Note 11.Cash and cash equivalents

Cash/bank balance 10

Note 12. Short-term loans and advances

Advance to suppliers 8

Prepaid expenses 2

Total 10


Sales (net of Excise Duty) 866

Note 14.Cost of materials Consumed

Stock taken over 2

Purchase 438

Less : Closing Stock 3

Total 437


Payment for expenses 100

Add : Outstanding expenses 6

Less : Prepaid expenses (2)

Total 104

Working Notes: (Rs. in crores)

(1) Net assets of Jam Ltd. taken over:

Fixed Assets 30

120

Inventory 2

Customers’ dues 14

Less : Creditors -6 40

Purchase consideration: 4 crores equity shares of Rs. 10 each.

(2) Customers’ Account

Particulars Dr. Particulars Cr.

To Business Purchase A/c 14 By Bank A/c 800

To Sales A/c (Balancing figure) 866 By Balance c/d 80

880 880

(3) Suppliers’ (Goods) Account

To Bank A/c (400 – 8) Advance 392 By Business Purchase A/c

6

To Balance c/d 52 By Purchases A/c (Balancing figure)

438

444 444

Question 4

From the following particulars, calculate Commission to the managing Director:

Profit as per Profit and Loss A/c is Rs. 1,45,09,000, after deducting the depreciation of Rs. 1,24,24,000,

Salary and remuneration to the managing director of Rs. 72,000 a nd director fees of Rs. 4,000.

The depreciation as per U/S 198 of the Companies Act, 2013 is of Rs. 1,04,24,000.

Answer

Computation of Commission to the Managing Director

Particulars Rs. 000’s Rs. 000’s

Profit as per Profit and Loss A/c 14,509

Add: Depreciation charged in the Profit and Loss A/c 12,424

Salary and remuneration to the managing director 72

Director fees 4

Less : Depreciation u/s 198 of the Companies Act 27,009 (10,424)

121

Profit u/s 198 for the purpose of Managerial Remuneration 16,585

Maximum remuneration (5%) 829

Less : Salaries and remuneration paid (director’s fees is excluded here)

(72)

Maximum commission payable to Managing Director 757

Commission to be provided for at 1% of Net Profits (1% of Rs. 16,585)

166

Question 5

AnandaPvt Ltd. has furnished that the net profit before tax and managing director’s remuneration is 5,85,60,000, after adjusting the Depreciation as per books of Rs. 71,00,000 (Depreciation as per schedule II is Rs. 80,00,000), provision for doubtful debts of Rs. 80,000. The managing director’s remuneration is at 5% of Net Profit as per law subject to maximum of Rs. 2,40,000 p.a. Compute the Managing Director’s remuneration.

Answer

Computation of Managing Director’s Remuneration

Particulars 000’s

Net profit before tax and managing director’s remuneration 58,560

Add : Depreciation as per books 7,100

Provision for doubtful debts 80

Less : Depreciation as per schedule II to Companies Act, 2013 (8,000)

Net profit for the purpose of Managerial remuneration 57,740

Maximum managerial remuneration at 5% of net profit 2,887

Restricted to actual payment under the agreement 240

Question 6

The following are the balances from the Ledger of Mount View Hotel Ltd., on 31st March 2015:

Share Capital - Credit Balance on 1st January, 2015 56,685

Freehold Premises 46,800

Furniture and Fittings 8,934

Glass and China 1,101

Linen 840

Cutlery and Plate 390

Rates, Taxes and Insurance 1,713

122

Salaries 2,400

Wages 4,305

Inventories on 31st March, 2014 :

Wines, Rs. 1,239 ; Spirits, Rs. 378 ; Beer, Rs. 165 ; 1,782

Minerals, Rs. 147 ; Cigars and Cigarettes, Rs. 114 261

Sundry Provisions and Stores, Rs. 183; Coal, Rs. 150 333

Purchases :

Meat, Rs. 3,627 ; Fish and Poultry Rs. 3,960 7,587

Sundry Provisions and Stores, Rs. 5,220 5,220

Wines Rs. 1,881; Spirits Rs. 2,190 ; Beer Rs. 1,152 5,223

Minerals, Rs. 1,050 : Cigars and Cigarettes, Rs. 240 1,290

Laundry 951

Coal and Gas 2,160

Electric Light 1,128

General Expenses 1,710

Sales —

Wines, Rs. 3,870 ; Spirits, Rs. 4,335 ; Beer, Rs. 1,863 10,068

Minerals, Rs. 2,160 ; Cigars and Cigarettes, Rs. 390 2,550

Meals 23,829

Rooms 9,375

Fires in Bedrooms 582

Washing Charges 219

Repairs, Renewals, and Depreciation -

Premises, Rs. 348 ; Furniture and Fittings, Rs. 660 1,008

Glass and China, Rs. 609 ; Linen, Rs. 390 999

Cutlery and Plate 207

Cash Book - Debit Balances:

In Bank 7,500

On hand 2,367

Visitors Accounts unpaid 489

Trade payables 3,390

123

Inventories on 31st March, 2015 were valued as follows -

Wines, Rs. 1,197; Spirits, Rs. 333 ; Beer, Rs. 174 ;

Minerals, Rs. 357; Cigars and Cigarettes, Rs. 69;

Sundry Provisions and Stores, Rs. 141; Coal, Rs. 99

The Manager is entitled to a commission of 5% of the net profits after charging his commission. The authorised share capital is 10,000 shares of Rs. 10 each of which 5,700 shares were issued, the whole of the amount being called up. The final call on 210 shares @ Rs. 1.50 per share was unpaid; the directors forfeited these shares at their meeting held on 15th March, 2015.

The tax liability is estimated at Rs. 4,300 and the directors propose to declare a dividend at the rate of 6 per cent. Prepare the Balance Sheet and Statement of Profit and Loss with notes to accounts for presentation to the shareholders.

Answer

Balance Sheet of Mount-View Hotel Ltd., as on 31st March, 2015

S.No. Particulars Note No Rs.



a) Share capital 1 56,685

b) Reserves and Surplus 2 2052.18

2 Current liabilities

a) Trade Payables 3 3,390

b) Other current liabilities 4 510

c) Short-term provisions 5 8153.82

Total 70,791

Assets


a) Fixed assets

124

b) Tangible assets 6 55,734

2 Current assets

a) Inventories 7 4,701

b) Trade receivables 489

c) Cash and cash equivalents 8 9,867

Total 70,791

Statement of Profit and Loss of Mount-View Hotel Ltd. for the year ended 31st March, 2015

S.No. Particulars Notes Rs.

I. Revenue from operations (A) 9 46,623.0

II Expenses:

Cost of materials consumed 10 7,587.0

Purchases of Inventory-in-Trade 11 11,733.0

Changes in inventories of finished goods work-in-progress and Inventory-in-Trade

12 6.0

Employee benefits expense 13 7,215.0

Other operating expenses 14 6,453.0

Administrative and general expenses 15 3,423.0

Total expenses (B) 36,417.0

III Profit before tax (VII- VIII) (A – B) 10,206.0

IV Provision for tax (4,300.0)

V Profit (Loss) for the period 5,906.0

125

Notes to accounts

1 Share Capital


Authorised Rs.

10,000 Shares of Rs. 10 each 100,000

Issued & subscribed & called up

5,490 Equity Shares of Rs, 10 each 54,900

Forfeited Shares (210 x 8.5) 1,785 56,685

Total 56,685

2. Reserve & Surplus

Surplus (Profit & Loss A/c) 5906.0

Appropriations

Proposed Dividend 3,294.0

Dividend Distribution tax (3,294 × 0.16995) 559.82 (3,853.82)

Profit (Loss) carried forward to Balance Sheet 2052.18

3 Trade Payables 3,390

4 Other current liabilities

Manager's Commission Outstanding 510

5 Short-term provisions

Provision for taxation 4,300

Proposed Dividend 3,294

Dividend Distribution tax 559.82

Total 8153.82

6 Tangible assets

Freehold Premises 47,148

Less: Depreciation (348) 46,800

Furniture & Fittings 9,594


Total 55,734

126

7 Inventories

Raw Material

Wines, Spirits & Beer 1,704

Minerals, Cigars & Cigarettes 426

Sundry Provisions & Stores and Coal 240 2,370

Loose tools

Linen 1,230

Less: Depreciation (390) 840

Cutlery & Plate 597

Less: Depreciation (207) 390

Glass & China 1,710


Total 4,701

8 Cash and cash equivalents

Cash at bank 7,500

Cash in hand 2,367

Total 9,867

9 Revenue from operations

Sale of products Rs. Rs.

Wines, Spirits, Beer 10,068

Minerals, Cigars and Cigarettes 2,550 12,618.0

Sale of services

Meals 23,829

Rooms 9,375

Fires in Bed Rooms 582

Washing Charges 219 34,005.0

Total 46,623.0

10 Cost of materials consumed

Meat, Fish and Poultry 7,587.0

127

11 Purchases of Inventory-in-Trade

Wines, Spirits, Beer 5,223.0

Minerals, Cigars & Cigarettes 1,290.0

Sundry Provisions & Stores 5,220.0

Total 11,733.0

12 Changes in inventories of finished goods work-in-progress and Inventory-in-Trade

Opening Inventory Rs. Rs.

Wines, Spirit & Beer 1,782


Sundry Provisions & Stores and Coal 0 333 2,376.

Less: Closing Inventory

Wines, Spirit & Beer 1,704


Sundry Provisions & Stores and Coal 240 (2,370.0)

Total 6.0

13 Employee benefits expense

Salaries 2,400.0

Wages 4,305.0

Manager's commission (on Rs. 10,206 @ 5%) 510.0

Total 7215.0

14 Other operating expenses

Coal and Gas 2,160.0

Laundry 951.0

Electricity Light 1,128.0

128

Repairs, Renewals and Depreciation

Premises 348

Furniture & Fittings 660

Glass and China 609

Linen 390

Cutlery & Plate 207

Total 6453.0

15 Administrative and general expenses

Rates, Taxes and Insurances 1,713.0

General Expenses 1,710.0

Total 3,423.0

Question 7

From the following particulars of Ajanta Ltd, you are required to calculate the managerial remuneration in the following situation:

(i) There is only one whole time director;

(ii) There are two whole time directors;

(iii) There are two whole time directors, a part time director and a manager;

Particulars Amount (`)

Net profit before provision for income tax and managerial remuneration, but after depreciation and provision for repairs

8,70,410

Depreciation provided in the books 3,10,000

Provision for repairs of office premises during the year 25,000

Depreciation allowable under schedule II 2,60,000

Actual expenditure incurred on repairs during the year 15,000

129

Answer

Section 197 of the Companies Act,2013 prescribe the maximum percentage of profit that can be paid as managerial remuneration. For this purpose, profit is to be calculated in the manner a specified in section 198.

Calculation of net profit U/S 198 of the Companies Act, 2013

Particulars Amount Rs.

Net profit before provision for income tax and managerial remuneration, but after depreciation and for provision for repairs

8,70,410

Add back: Depreciation provided in the books 3,10,000

Provision for repairs of office premises 25,000

Less : Depreciation allowable under schedule II 260000

Less : Actual expenditure incurred on repairs 15000

Profit u/s 198 9,30,410

Calculation of Managerial Remuneration

(i) There is only one whole time director : Managerial Remuneration = 5% of Rs. 9,30,410 = Rs. 46,520.50

(ii) There are two whole time directors : Managerial Remuneration = 10% of Rs. 9,30,410 = Rs. 93,041

(iii) There are two whole time directors, a part time director and a manager: Managerial Remuneration = 11% of Rs. 9,30,410 = Rs. 1,02,345.10

Question 8

What are requirement of Companies Act, in respect of maitenence of books of accounts?

Answer

As per Section 128 of the Companies Act, 2013, Every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting:

Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed.

130

Maintenance at Place other than Registered Office

It is a duty of the company to inform the Registrar of Companies within seven days of the decision in case the Board of Directors decides to maintain books at the place other than the registered office.

Question 9

What are requirement of Companies Act, in respect of maintenance of books of accounts in case of a company having branches throughout India or outside India?

Answer

Where a company has a branch office in India or outside India, it shall be deemed to have complied with the provisions of the Act, if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarised returns periodically are sent by the branch office to the company at its registered office or such other place.

Section 128 (3) further lays down that the books of account and other books and papers maintained by the company within India shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours, and in the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as may be prescribed.

Section 128(5) further states that the books of account of every company relating to a period of not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years together with the vouchers relevant to any entry in such books of account shall be kept in good order.

Question 10

What do you mean by small company?

Answer

Small company” means a company, other than a public company, -

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

131

(C) a company or body corporate governed by any special Act;

Question 11

What do you mean by statutory Books?

Answer

As per Companies Act , 2013, certain books are to be maintained by every company. The following statutory books are required to be maintained by a company under different sections of the Companies Act, 2013:

Register of Investments of the company held in its own name (Section 187).

Register of Charges (Section 85).

Register of Members (Sections 88).

Register of Debenture-holders and other Security holders (Section 88).

Minute Books (Section 118).

Register of Contracts, or arrangements in which directors are interested (Section 189).

Register of directors and key managerial personnels and their shareholding (Section 170).

Register of Loans to Directors etc. (Section 185)

Register of Loans and Investments by Company (Section 186).

Question 12

What do you mean by statistical Books?

Answer

In addition, to statutory books a company usually maintains a number of other books called statistical books to keep a record of its transactions which have resulted either in the payment of money to it or constitute the basis on which certain payments have been made by it. Some of the statistical books are as follows:

(i) Share Application and Allotment Book;

(ii) Share Call Book; and

(iii) Certificate Book.

(iv) Register of Members

(v) Share Transfer Book

(vi) Dividend Register

Question 13

Write a brief note on Annual return to be filed by a company.

132

Answer

(1) Section Applicable

Section 92 of the Companies Act, 2013.

(2) Number of Days

Within 60 days from the day on which each of the annual general meeting (AGM) is held or where no AGM is held in any year, within 60 days from the date on which AGM should have been held along with a statement showing the reasons why AGM was not held.

(3) Documents to be filed

Prepare and file with the Registrar the annual return containing the particulars specified under Section 92 of the Act.

(4) Form Applicable

The annual return shall be in the Form prescribed by the Companies Act, 2013.

Question 14

Briefly explain the term financial statements.

Answer

Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia include

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in subclause (i) to sub-clause (iv):

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement.

Question 15

In the financial statements of the financial year 2014-15, Gammon Ltd. has mentioned in the notes to accounts that during financial year, 24,000 equity shares of Rs. 10 each were issued as fully paid bonus shares. However, the source from which these bonus shares were issued has not been disclosed. Is such non-disclosure a violation of the Schedule III to the Companies Act? Comment.

Answer

Schedule III has come into force for the Balance Sheet and Profit and Loss Account prepared for the financial year commencing on or after 1st April, 2014. As per Part I of the Schedule III, a company shall, inter alia, disclose in notes to accounts for the period of 5

133

years immediately preceding the balance sheet date (31st March, 2015 in the instant case) the aggregate number and class of shares allotted as fully paid-up bonus shares. Schedule III does not require a company to disclose the source from which bonus shares have been issued. Therefore, nondisclosure of source from which bonus shares have been issued does not violate the Schedule III to the Companies Act.

Question 16

The management of Loyal Ltd. contends that the work in process is not valued since it is difficult to ascertain the same in view of the multiple processes involved. They opine that the value of opening and closing work in process would be more or less the same.

Accordingly, the management had not separately disclosed work in process in its financial statements. Comment in line with Schedule III.

Answer

Schedule III to the companies Act does not require that the amounts for which WIP have been completed at the beginning and at the end of the accounting period should be disclosed in the statement of profit and loss. Therefore, the non-disclosure in the financial statements by the company may not amount to violation of Schedule III if the differences between opening and closing WIP are not material.

Question 17

Explain theprovisions in companies Act, 2013 regarding managerial Remuneration.

Answer

Section 197 prescribes the overall maximum managerial remuneration payable and also managerial remuneration in case of absence or inadequacy of profits.

As per Section 197 of the Companies Act, 2013, total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits: provided that the company in general meeting may, with the approval of the Central Government, authorize the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V.

Provided further that, except with the approval of the company in general meeting,—

(i) the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent. of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent of the net profits to all such directors and manager taken together;

(ii) the remuneration payable to directors who are neither managing directors nor wholetime directors shall not exceed,—

(A) one per cent of the net profits of the company, if there is a managing or whole-time director or manager;

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(B) three per cent of the net profits in any other case.

Section 198 lays down how the net profit of the company will be ascertained for the purpose of calculating managerial remuneration.

Question 18

The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2006


To Adm., Selling and

distribution expenses

8,22,542 By Balance b/d 5,72,350

Donation to charitable funds

25,500 Balance from Trading A/c

40,25,365

Directors fees 66,750 Subsidies received from Govt.

2,32,560

Interest on debentures 31,240 Interest on Investments 15,643

Compensation for breach of contract

42,530 Transfer fees 722

Managerial remuneration

2,85,350 Profit on sale of Machinery:

Depreciation on fixed assets

5,22,543 Amount realised 55,000

Written down value

25,000

30,000

Provision for Taxation 12,42,500


Investment Revaluation Reserve

12,500

Balance c/d 14,20,185

48,71,640 48,71,640

Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was Rs. 5,75,345. You are required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013.

Answer

Calculation of net profit u/s 198 of the Companies Act, 2013

Rs.

Balance from Trading A/c 40,25,365

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Add : Subsidies received from Government 2,73,925

Less : Administrative, selling and distribution expenses 8,22,542

Director’s fees 1,34,780

Interest on debentures 31,240

Depreciation on fixed assets as per Schedule II 5,75,345

Profit u/s 198 27,35,383

Maximum Managerial remuneration under Companies Act, 2013 = 11% of Rs. 27,35,383 = Rs.3,00,892

Question 19

The following extract of Balance Sheet of Yale Ltd. was obtained:

Balance Sheet (Extract) as on 31st March, 2015

The following extract of Balance sheet of Yale Ltd. was obtained:

Balance sheet (Extract) as on 31st march, 2006

Liabilities Rs. Assets: Rs.

Authorised capital:

20,000, 14% preference shares of Rs. 100

20,00,000

Investment in shares, debentures, etc.

75,00,000


2,00,00,000

2,20,00,000

Issued and subscribed capital:


15,25,000

15,000, 14% preference shares of Rs. 100 each fully paid

15,00,000 Preliminary expenses not written off

55,000

1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up

96,00,000

Share suspense account 20,00,000

Reserves and surplus

Capital reserves (60% is revaluation reserve)

2,50,000

Securities premium 50,000

Secured loans:


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Unsecured loans:

Public deposits 3,70,000

Cash credit loan from SBI 4,65,000

Current Liabilities:

Sundry creditors 3,45,000

Share suspense account represents application money received on shares, the allotment of which is not yet made.

You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if Yale Ltd. is an investment company?

Answer

Computation of effective capital

Paid-up share capital — Rs.

15,000, 14% Preference shares 15,00,000

1,20,000 Equity shares 96,00,000

Capital reserves 45,000

Securities premium 50,000


Public Deposits 3,70,000

(A) 1,80,65,000

Investments 75,00,000

Profit and Loss account (Dr. balance) 15,25,000

(B) 90,25,000

Effective capital (A–B) 1,65,40,000 90,40,000

If company happens to be an investment company then investment will not be reduced. Hence effective capital will be increased by Rs. 75,00,000.

Effective capital (90,40,000+75,00,000) 1,65,40,000

Question 20

What are the sources of dividend?

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Answer

Under Section 123 (1) of the Companies Act, 2013, no dividend shall be declared or paid by a company for any financial year except-

(a) Out of the profits of the company for that financial year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or

(b) Out of the profits for any previous financial years arrived at after providing for depreciation in accordance with the provisions of that sub section and remaining undistributed; or

(c) Out of both the above;

(d) Out of the moneys provided by the Central Government or any State Government for the payment of dividend by the Company in pursuance of any guarantee given by that government.

Provided that no dividend shall be declared or paid by a company from its reserves other than free reserves.

Question 21

Can dividend be paid out of past profits?

Answer

For the purpose of second proviso to sub-section (1) of section 123, a company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject to the fulfillment of the following conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014

(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year: provided that this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(3) The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.

(5) No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company

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of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.

Question 22

What do you mean by capital profit? Give examples.

Answer

It is the reserve which does not include any amount regarded as free for distribution through the Profit and Loss account. Only profits or a surplus of a capital nature can be credited to such a reserve. The following are instances of profit or surpluses which can be so credited:

1. Profit prior to incorporation.

2. Profit on sale of fixed assets

3. The excess of the value of net assets over the price paid for the acquisition of a business.

4. Profit on re-issue of forfeited shares.

5. The credit balance in the Capital Reduction Account, where there has been a reduction of capital with the consent of the Court.

Question 23

Whether dividend can be paid out of capital profits arising on sale of fixed asstes?

Answer

Dividend is an appropriation of profit. As per Section 123 of the Companies Act, 2013, Board of Directors of a company may declare dividend including interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.

Dividend can be paid out of capital profits, but in the circumstances mentioned below, these are not available for distribution as dividends:

(i) Where the profit on sale of a fixed asset has not been realised; or

(ii) Where the profit on sale of fixed assets though realised is likely to be wiped out by the deficiency on revaluation of other assets; or

(iii) Where the Articles of Association do not permit distribution of such profit as a dividend.

Question 24

Due to inadequacy of profits during the year ended 31st March, 2015, Marry Ltd. proposes to declare 10% dividend out of general reserves. From the following particulars, ascertain the amount that can be utilized from general reserves, according to the Companies (Declaration of dividend out of Reserves) Rules, 2014: Rs.

17,500 9% Preference shares of Rs.100 each, fully paid up 17,50,000

8,00,000 Equity shares of Rs. 10 each, fully paid up 80,00,000

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General Reserves as on 1.4.2014 25,00,000

Capital Reserves as on 1.4.2014 3,00,000

Revaluation Reserves as on 1.4.2014 3,50,000

Net profit for the year ended 31st March, 2015 3,00,000

Average rate of dividend during the last five year has been 12%.

Answer

Amount that can be drawn from reserves for 10% dividend

Amount (Rs.)

10% dividend on Rs. 80,00,000 8,00,000

Profits available

Current year profit 3,00,000

Less : Preference dividend (1,57,500)

(1,42,500)

Amount which can be utilized from reserves 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014:

Condition I

Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.

Condition II

Maximum amount that can be drawn from the accumulated profits and reserves should not exceed 10% of paid up capital plus free reserves ie. Rs. 12,25,000 [10% of (80,00,000+17,50,000+25,00,000)]

Condition III

The balance of reserves after drawl Rs. 18,42,500 (Rs. 25,00,000 – Rs. 6,57,500) shall not fall below 15 % of its paid up capital ie. Rs. 14,62,500 (15% of Rs. 97,50,000]

Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from accumulated reserves.(as per Declaration and Payment of Dividend Rules, 2014.)

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Question 25

The following is the Trial Balance of Pearl Ltd. as on 31.3.2015: (Figures in Rs. ‘000)

Debit Credit

Land 220 Equity Capital (Shares of Rs. 10 each)

300

Plant & Machinery 770 10% Debentures 200

Trade Receivables 96 General Reserve 130

Inventories (31.3.15) 86 Profit & Loss A/c 72

Bank 20 Securities Premium 40

Adjusted Purchases 320 Sales 700

Factory Expenses 60 Trade Payables 52

Administration Expenses 30 Provision for Depreciation 172

Selling Expenses 30 Suspense Account 4

Debenture Interest 20

Interim Dividend Paid 18

1670 1670

*Note : Land and plant & machinery are given in the balance sheet at cost.

Additional Information:

(i) The authorised share capital of the company is 40,000 shares of Rs. 10 each.

(ii) The company on the advice of independent valuer wish to revalue the land at Rs. 3,60,000.

(iiii) Proposed final dividend @ 10%.

(iv) Suspense account of Rs. 4,000 represents cash received for the sale of some of the machinery on 1.4.14. The cost of the machinery was Rs. 10,000 and the accumulated depreciation thereon being Rs. 8,000.

(v) Depreciation is to be provided on plant and machinery at 10% on cost.

You are required to prepare Pearl Ltd. Balance Sheet as on 31.3.2015 and Statement of Profit and Loss with notes to accounts for the year ended 31.3.2015 as per Schedule III. Ignore previous years’ figures & taxation.

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Answer

Pearl Ltd.

Balance Sheet as at 31st March, 2015

Particulars Note No. (` in 000)


1. Shareholders' funds

a) Share capital 1 300

b) Reserves and Surplus 2 500

2. Non-Current liabilities

Long term borrowings 3 200


a) Trade Payables 52

b) Short-term provisions 4 30

Total 1082

Assets


a) Fixed assets

b) Tangible assets 5 880

2. Current assets

a) Inventories 86

b) Trade receivables 96

c) Cash and cash equivalents 20

Total 1082

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Pearl Ltd.

Statement of Profit and Loss for the year ended 31st March, 2015

S. No. Particulars Notes (`in 000)

I. Revenue from operations 700

II. Other Income 6 2

III. Total Revenue 702

IV. Expenses

Purchases 320

Finance costs 7 20

Depreciation (10% of 760) 76

Other expenses 8 120

Total Expenses 536

V. Profit (Loss) for the period (III – IV) 166

Notes to accounts (in ‘000)

1. Share Capital


Authorized

40,000 shares of Rs. 10 each 400

Issued & subscribed & called up

30,000 shares of Rs. 10 each 300

Total 300


Securities Premium Account 40

Revaluation reserve 140

General reserve 130

Profit & loss Balance

143

Opening balance 72

Profit for the period 166

Less: Appropriations

Interim Dividend (18)

Proposed Final Dividend (30) 190

500

3. Long term borrowing

10% Debentures 200

4. Short term provision

Proposed Final Dividend 30

5. Tangible assets

Land Opening balance 220

Add : Revaluation adjustment 140

Closing balance 360

Plant and Machinery

Opening balance 770

Less: Disposed off (10)

Less: Depreciation (172-8+76) (240)

Closing balance 520

Total 880

6. Other Income

Profit on sale of machinery:

Sale value of machinery 4

Less: Book value of machinery (10-8) (2) 2

7. Finance costs

Debenture interest 20

8. Other expenses:

Factory expenses 60

144

Selling expenses 30

Administrative expenses 30

Total 120

Question 27

You are required to prepare Balance sheet and statement of Profit and Loss from the following trial balance of Shobit Ltd. for the year ended 31st March, 2015.

Shobit Ltd. Trial Balance as at 31st March, 2015


Stock 6,80,000 Equity Shares

Furniture 2,00,000 Capital (Shares of Rs. 10 each)

25,00,000

Discount 40,000 11% Debentures 5,00,000

Loan to Directors 80,000 Bank loans 6,45,000

Commission 20,000 Bills payable 1,25,000

Bad debts 35,000 Creditors 1,56,000

Advertisement 1,20,000 Sales 42,68,000

Purchases 23,19,000 Rent received 46,000

Plant and Machinery 8,60,000 Transfer fees 10,000

Rentals 25,000 Profit & Loss account 1,39,000

Current account 45,000 Depreciation provision :

Cash 8,000 Machinery 1,46,000

Interest on bank loans 1,16,000

Preliminary expenses 10,000

Fixtures 3,00,000

Wages 9,00,000

Consumables 84,000

145

Land & building 15,46,000

Tools &Equipments 2,45,000

Goodwill 2,65,000

Debtors 2,87,000

Bills receivable 1,53,000

Dealer aids 21,000

Fire insurance Premium

30,000

Trade expenses 72,000

Distribution freight 54,000

Debenture interest 20,000

85,35,000 85,35,000

Additional information : Closing Inventory on 31-3-2015: Rs.8,23,000.

Answer

Shobit Ltd.

Balance Sheet as at 31st March, 2015

S.No. Equity and Liabilities Note Rs.

(1) Shareholders’ funds :



(2) Non Current Liabilities

(a) Long term borrowings 3 11,45,000


(a) Trade payables 2,81,000

Total 46,66,000

Assets

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(1) Non current assets

Fixed Assets :

(a) Tangible assets 4 30,05,000

(b) Intangible assets(goodwill) 2,65,000

(2) Current assets


(b) Trade receivables 4,40,000

(c) Cash and cash equivalents 5 53,000

(d) Short term loans and advances 6 80,000

Total 46,66,000

Shobit Ltd.

Statement of Profit and Loss for the year ended 31st March, 2015

Particulars Note Rs.

Revenue from operations 42,68,000

Other income (A) 8 56,000

43,24,000

Expenses

Cost of materials consumed 9 23,19,000

Change in inventory of finished goods (1,43,000)

Employee benefit expenses 10 9,00,000

finance cost 11 1,36,000

Other expenses (B) 12 5,11,000

37,23,000

Profit before tax (A – B) 6,01,000

Provision for tax —

Profit for the period 6,01,000

Notes to Accounts

1. Share capital Rs.

Authorised :

Equity share capital of Rs. 10 each 25,00,000

147

Issued and Subscribed :

Equity share capital of Rs. 10 each 25,00,000


Balance as per last balance sheet 1,39,000

Balance in profit and loss account 6,01,000

7,40,000

3. Long term Borrowings


Bank loans 6,45,000

11,45,000

4. Tangible Assets

Gross block Depreciation Net Block

Land & Building 15,46,000 15,46,000

Furniture 2,00,000 2,00,000

Fixtures 3,00,000 3,00,000

Plant & Machinery 8,60,000 1,46,000 7,14,000

Tools & Equipment 2,45,000 2,45,000

Total 31,51,000 1,46,000 30,05,000


Current account balance 45,000

Cash 8,000

53,000

6. Short-term loans and Advances

Loan to directors 80,000

7. Other Income

Rent received 46,000

Transfer fees 10,000

56,000

8. Cost of materials consumed

Add: purchases 23,19,000

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9. Changes in inventory of finished goods, WIP & Stock in trade

Opening inventory 6,80,000

Closing inventory 8,23,000

(1,43,000)

10. Employee benefit expense

Wages 9,00,000

11. Finance cost

Interest on bank loans 1,16,000

Debenture interest 20,000

1,36,000

12. Other Expenses

Consumables 84,000

Preliminary expenses 10,000

Bad debts 35,000

Discount 40,000

Rentals 25,000

Advertisement 1,20,000

Commission 20,000

Dealers’ aids 21,000

Insurance premium for fire insurance 30,000

Trade expenses 72,000

Distribution freight 54,000

5,11,000

Question 28

Holy Ltd. engaged in the business of manufacturing wine. The process of manufacturing this wine takes around 15 months. Due to this reason Holy Ltd. has prepared its financial

149

statements considering its operating cycle as 15 months and accordingly classified the raw material purchased and held in stock for less than 15 months as current asset. Comment on the accuracy of the decision and the treatment of asset by Holy Ltd. as per Companies Act, 2013.

Answer

As per Companies Act, 2013, one of the criteria for classification of an asset as a current asset is that the asset is expected to be realised in the company’s’ operating cycle or is intended for sale or consumption in the company’s normal operating cycle.

Further, operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. However, when the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months.

As per the facts given in the question, the process of manufacturing of wine takes around 18 months; therefore, its realisation into cash and cash equivalents will be done only when it is ready for sale i.e. after 15 months. This means that normal operating cycle of the product is 15 months. Therefore, the contention of the company's management that the operating cycle of the product wine is 15 months and not 12 months is correct. Holy Ltd. will classify the raw material purchased & held in stock as current asset in its Balance Sheet.

Question 29

Gale Ltd. has been in the business of sale of Gale Wines for the last 20 years and is an extremely cash rich company. In FY 2011-12 the Board of the company decided to venture into new areas of business and identified the activity of acquiring old Properties such as old Bungalows, Heritage buildings and the like at prime locations and after carrying out renovation and refurbishment of the same to let out these properties on lease to willing parties. The new business was commenced as a separate division of the company in FY 2012-13 during which the company managed to identify 20 such properties of which 11 were acquired and 9 given on lease. Being the initial year of operations and also since some of the lease arrangements were entered into at the fag end of the year the income from leasing was only a paltry amount. After the acquisition of the properties as aforesaid very attractive offers for sale of 7 of the properties were received. Vintage Ltd. after negotiation accepted 5 of the offers and sold these 5 properties making large profits in the bargain. The accountant of Gale Ltd. has accounted the acquisition and disposals of properties as 'Purchases' and 'Sales' in the Profit & Loss account of the Property Division and treated the lease incomes as part of the other income of the company. The contention of the accountant of Gale Ltd., was that since a majority of the properties were disposed off within a short span of time, the properties are to be considered as stock in trade only. Further since the lease income was insignificant it does not become the main source of income and hence considered as part of other income. You are required to examine the correctness of the contentions of the accountant of Gale Ltd. considering the relevant Accounting Standards and provisions of Revised Schedule III of Companies Act, 2013.

150

Answer

As per AS 2 “Valuation of Inventories”, inventories are assets that are (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

The properties acquired by Gale Ltd. Should not be construed as stock in trade in spite of the fact that they are being sold within a short span of time.

As per the definition of Fixed asset given in para 6 of AS 10, a fixed asset is one which is held with the intention of being used for the purpose of producing goods or services and is not held for sale in the normal course of business.

In the given question the acquisition of the old properties is done by the company with the intention to provide the service of leasing of such properties. Hence the intention of the company was to use such property for generating revenue for the company by leasing out such properties. The sale of 5 properties can’t be considered as part of normal business operations of the company. Hence the treatment of the properties as ‘Stock-in- Trade’ is incorrect as the properties are to be considered only as Fixed Assets of the company. The lease income from these properties will be considered as main business income and cannot be considered as part of other income. Such income will be disclosed under the head Revenue from operations.

Thus, the contentions regarding accounting the acquisition and sale of these properties as sale and purchase, treating them as stock in trade, considering lease income as other income are not in line with provisions of the relevant accounting standards.

Question 30

A Ltd. lodged a claim to insurance company for Rs. 8,00,000 in June, 2014. The claim was settled in January, 2015 for Rs. 5,00,000. How will you record the short fall in claim settlement in the books of the company.

Answer

Journal Entry

Profit and Loss A/c Dr. 3,00,000

To Insurance Company A/c 3,00,000

[Being the shortfall in insurance claim is the loss, transferred to Profit and Loss A/c]

Question 31

The Managing Director of Arun Ltd. is entitled to 5% of the annual net profits, as his remuneration, subject to a minimum of Rs.25,000 per month. The net profits, for this purpose, are to be taken without charging income-tax and his remuneration itself. During the year, Arun Ltd. made net profit of Rs.43,00,000 before charging MD’s remuneration, but after charging provision for taxation of Rs.17,20,000. Compute remuneration payable to the Managing Director.

Answer

Calculation of remuneration of the Managing Director Rs. in Lacs

Net profit as per books 43.00

151

Add: Provision for taxation 17.20

Annual profit for the purpose of managerial remuneration 60.20

Managing Director’s Remuneration @ 5% of above 3.01

Minimum remuneration to be paid to the Managing Director

= Rs.25,000 per month x 12 3.00

Hence, in this case, remuneration to be paid to the Managing Director of A Ltd. = Rs.3,01,000.

***

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Question 1

Write short notes on comparison between Amalgamation and Absorption of companies.

Answer

In accounting parlance, amalgamation means merger of two or more companies into one new or existing company. Absorption, on the other hand, refers to acquisition of business of one company by another company. But, it may be noted that the Companies Act, 2013 does not make any distinction between amalgamation and absorption.

The Income-tax Act, 1961, however, defines the term amalgamation to mean “the merger of one or more companies with another company or the merger of two or more companies to form one company”. Therefore, it seems that legally there is no difference between amalgamation and absorption of companies. According to the Accounting Standard 14, “Accounting for Amalgamations”, amalgamations fall into two broad categories. In the first category are those amalgamations where there is a genuine pooling, not merely of the assets and liabilities of the two companies but also of the shareholders’ interests and of the businesses of these companies. Such amalgamations are known as “amalgamation in the nature of merger”. The second type of amalgamations are those which are in effect a mode by which one company acquires another company and as a consequence the shareholders of the company, which is acquired normally do not continue to have a proportionate share in the equity of the combined company or the business of the company which is acquired is not intended to be continued. Such amalgamations are known as “amalgamation in the nature of purchase.” Therefore, it can be said that amalgamations include absorption.

Question 2

Write short note on Pooling of interests method of amalgamation.

Answer

Pooling of interests method of accounting for amalgamation records amalgamation transactions as if the separate businesses of the amalgamating companies were intended to be continued by the transferee company. Accordingly, only the minimal changes are made in aggregating the individual financial statements of the amalgamating companies.

Under the pooling of interests methods, the assets, liabilities and reserves of the transferor company will be taken over by the transferee company at existing carrying amounts unless any adjustment is required due to difference in accounting policies. As a result, the difference between the amounts recorded as share capital issued (plus any additional consideration in the form of cash or other assets) by the transferee company and the

4

Corporate Restructuring

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amount of share capital of transferor company should be adjusted in reserves. At the time of amalgamation, if the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation.

Question 3

What are the conditions, which, according to AS 14 on Accounting for Amalgamations, must be satisfied for an amalgamation in the nature of merger?

Answer

According to AS 14 on Accounting for Amalgamations; the following conditions must be satisfied for an amalgamation in the nature of merger :

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

(vi) All reserves & surplus of the transferor company shall be preserved by the transferee company.

If any one of the condition is not satisfied in a process of amalgamation, it cannot be treated as amalgamation in the nature of merger.

Question 4

The paid-up capital of Sapna Ltd. amounted to Rs. 2,50,000 consisting of Rs. 25,000 equity shares of Rs. 10 each.

Due to losses incurred by the company continuously, the directors of the company prepared a scheme for reconstruction which was duly approved by the court. The terms of reconstruction were as under:

(i) In lieu of their present holdings, the shareholders are to receive:

(a) Fully paid equity shares equal to 2/5th of their holding.

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(b) 5% preference shares fully paid-up to the extent of 20% of the above new equity shares.

(c) 3,000, 6% second debentures of Rs. 10 each.

(ii) An issue of 2,500, 5% first debentures of Rs. 10 each was made and fully subscribed in cash.

(iii) The assets were reduced as follows:

(a) Goodwill from Rs. 1,50,000 to Rs. 75,000.

(b) Machinery from Rs. 50,000 to Rs.37,500.

(c) Leasehold premises from Rs. 75,000 to Rs. 62,500.

Show the journal entries to give effect to the above scheme of reconstruction.

Answer

Journal Entries

Rs. Rs.

Share Capital A/c (old) Dr. 2,50,000

To Equity Share Capital A/c 1,00,000

(5

2of Rs. 2,50,000)

To 5% Preference Share Capital A/c 20,000

(100

20 × Rs. 1,00,000)

To 6% Second Debentures A/c 30,000

To Capital Reduction A/c 1,00,000

(Conversion of 25,000 Equity Shares and balance being transferred to Capital Reduction A/c in accordance with the Scheme of internal reconstruction as per Special Resolution dated as confirmed by the Court Order dated........)

Bank A/c Dr. 25,000

To 5% First Debenture A/c 25,000

(Issue of Rs.25,000 5% First Debentures for cash as per scheme of internal reconstruction)

Capital Reduction A/c Dr. 1,00,000

To Goodwill A/c 75,000

To Plant & Machinery A/c 12,500

To Leasehold premises A/c 12,500 (Sundry Assets written down as per scheme of internal reconstruction

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Question 5

Balance Sheet of Asmi Ltd. as on 31.12.2014

Liabilities Rs.in ’000s

Assets Rs. in’000s

Share Capital:

Equity shares of Rs. 10 each

5050 Sundry Fixed Assets

5000

8% Preference shares 950 Stock 2000

12% Debentures 1500 Debtors 1000

Sundry Creditors & Other Liabilities

1000 Cash & Bank 500

8500 8500

Radhika Ltd. agreed to take over Asmi Ltd. by issuing requisite number of preference shares of Rs. 10 each at 5% discount to the preference shareholders of Asmi Ltd. and requisite number of equity shares of Rs. 10 each at par to the equity shareholders of Asmi Ltd. Purchase consideration is settled as per book value of the assets and the debentures will be taken over by Radhika Ltd. on the agreement that such will be paid off at 10% premium after one year.

Debenture-holders of Asmi Ltd. will accept 12% debentures of Radhika Ltd.

Answer

Purchase Consideration

in Rs.‘000

Book Value of assets taken over 8500

Less : Debentures 1500@110% -1650

Sundry Creditors & Other Liabilities -1000

Purchase Consideration 5850

Computation of number of shares to be issued:

1) Preference shares to be issued:discount) 5% - 10 Rs. (i.e. 9.5 Rs.

thousand 950 = Rs.100 thousand

Balance of purchase consideration:Rs.58,50 thousand - Rs.950 thousand = Rs.49,00 thousand

2) Equity shares to be issued forRs.4900 thousand = 490 thousand equity shares of Rs. 10 each

155

Question 7

Given below is the Balance Sheet of Sita Ltd. as on 31.03.2014 at which date the company was taken over by Ram Ltd.

Liabilities Rs. in ’000s

Assets Rs. in ’000s

Share Capital Sundry fixed assets 8000

Equity Shares of Rs.100 each

7000 Sundry current assets

4200

Preference shares 1200

12% Debentures 2500

Sundry Creditors 1500

12200 12200

It was decided that sundry fixed assets of Sita Ltd. will be taken over at a valuation of Rs. 102,00 thousand. 8% preference shareholders of Sita Ltd. are to be discharged by issuing 8% preference shares of the transferee company to the extent of 50% and the balance in cash.

Claims of the equity shareholders to be discharged by issuing equity shares of the transferee company to the extent of 60% and the balance in cash. The transferee company will issue preference shares at par but equity shares of Rs. 10 each at a premium of 20%

Answer


Rs.in ’000

Value of fixed assets takenover

Sundry current assets

102,00

42,00

Less: Sundry Creditors & Other Liabilities -40,00

Purchase Consideration 104,00

Discharge of Purchase Consideration

To be discharged by: Rs.in ’000 Issue price Rs.

Number of shares

Preference shares 6,00 10 60,000

Equity shares (104,00 – 12,00) x 60% 55,20 12 460,000

Cash 42,80

Total 104,00

156

Question 8

Given below are Balance Sheets of X Ltd. & Y Ltd. as on 31st Dec. 2014 at which date the companies were amalgamated and a new company C Ltd. was formed.

Balance Sheets of X Ltd. &Y Ltd.

Liabilities Rs. in ’000s Assets Rs. in ’000s

Share Capital X Ltd. Y Ltd. X Ltd. Y Ltd.

Equity Shares of Rs. 10 each

70,00 60,00 Sundry fixed assets

85,00 70,00

Reserve 2,000 4,000 Sundry current assets

20,00 30,00

Miscellaneous expenditure

1,000

Sundry Creditors 1500 1000

105,00 110,00 105,00 110,00

Agreed that sundry fixed assets of X Ltd. would be valued at Rs. 100,00 thousand and that of Y Ltd. at Rs. 95,00 thousand. Z Ltd. would issue requisite number of equity shares of Rs. 10 each at 10% premium to discharge claim of the equity shareholders of X Ltd. &Y Ltd. How many shares of Z Ltd. should be issued to take over the businesses of X Ltd. &YLtd.

Answer

Calculation of No. of shares to be issued

X Ltd. Rs. in ’000s

Y Ltd. Rs. in ’000s

Sundry fixed assets 100,00 95,00

Sundry current assets 20,00 30,00

Less: Liabilities taken over: (15,00) (10,00)

105,00 115,00

Total 220,00

Issue Price 11

Number of equity shares to be issued by Z Ltd.

20,00 thousand

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Question 9

Giant Company Ltd. was incorporated on 1st April 2014 for the purpose of acquiring A Ltd., B Ltd., and C Ltd. The balance sheets of these companies as on 31st March 2015 are as follows:

A Ltd. B Ltd. C Ltd.

Assets Rs. Rs. Rs.

Tangible fixed assets –at cost less depreciation

5,00,000 4,00,000 3,00,000

Goodwill 60,000

Other assets 2,00,000 2,80,000 85,000

Total 7,00,000 7,40,000 3,85,000


Equity and Liabilities Rs. Rs. Rs.

Issued Equity share capital shares of Rs. 10 each

4,00,000 5,00,000 2,50,000

P & L A/c 1,50,000 1,10,000 60,000

10% Debentures 70,000 40,000

Sundry Creditors 80,000 1,30,000 35,000

Total 7,00,000 7,40,000 3,85,000

Rs. Rs. Rs.

Average annual profits before Debentures interest (April 2014 to Mar 2015 inclusive)

90,000 1,20,000 50,000

Professional valuation of tangible assets on 31st March 2015

6,20,000 4,80,000 3,60,000

1. The directors in their negotiations agreed that:

(a) The recorded goodwill of B Ltd. is valueless.

(b) The “Other assets” of A Ltd. are worth Rs. 30,000.

(c) The valuation of 31st March 2015 in respect of tangible fixed assets should be accepted.

(d) These adjustments are to be made by the individual company before the completion of the acquisition.

2. The acquisition agreement provides for the issue of 12 per cent unsecured Debentures to the value of the net assets of companies A Ltd., B Ltd., and C Ltd., and for the

158

issuance of Rs.10 nominal value equity shares for the capitalized average profit of each acquired company in excess of net assets contributed. The capitalisation rate is established at 10 per cent.

You are required to calculate purchase consideration and show the purchase consideration as discharged.

Answer

Calculation of Purchase Consideration

A Ltd. Rs.

B Ltd. Rs.

C Ltd. Rs.

Tangible Fixed assets 6,20,000 4,80,000 3,60,000

Other Assets 30,000 2,80,000 85,000

Less : Sundry Creditors (80,000) (1,30,000) (35,000)

10% Debenture (70,000) - (40,000)

Net assets 5,00,000 6,30,000 3,70,000

Capitalized average profits

(Purchase Considerations)

8,30,000 12,00,000 4,60,000

Excess over net assets 3,30,000 5,70,000 90,000

Issue by Giant Ltd. (Discharge of Purchase Considerations)

Rs. Rs. Rs.

Equity shares 3,30,000 5,70,000 90,000

12% Debentures 5,00,000 6,30,000 3,70,000

WN.1.Capitalised value of profit

Rs. Rs. Rs.

Profit as given 90,000 1,20,000 50,000

Debenture Interest 7,000 Nil 4000

Profit after Debenture interest 83,000 1,20,000 46,000

capitalized at the rate of 10% 8,30,000 12,00,000 4,60,000

159

Question 10

The Balance Sheet of M/s. Hot Ltd. as on 31-03-2015 is given below:


1,00,000 Equity shares of Rs.10 each fully paid up

10,00,000 Freehold property 5,50,000

4,000, 8% Preference shares of Rs.100 each fully paid

4,00,000 Plant and machinery 2,00,000

6% Debentures

(secured by freehold property)

4,00,000 Trade investment 2,00,000

Sundry debtors 4,50,000

Arrear interest 24,000 Stock-in trade 3,00,000

Sundry creditors 1,01,000 Deferred advertisement Expenses

50,000

Director’s loan 3,00,000 Profit and loss account

4,75,000

22,25,000 22,25,000

The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective stakeholders:

(i) Preference shares are to be written down to Rs. 80 each and equity shares to Rs.2 each.

(ii) Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1/3rd, equity shares of Rs. 2 each to be allotted.

(iii) Debentureholders agreed to take one freehold property at its book value of 3,00,000 in part payment of their holding. Balance debentures to remain as liability of the company.

(iv) Arrear debenture interest to be paid in cash.

(v) Remaining freehold property to be valued at Rs.4,00,000.

(vi) Investment sold out for Rs. 2,50,000.

(vii) 75% of Director’s loan to be waived and for the balance, equity shares of Rs. 2 each to be allotted.

(viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to be written off.

160

(ix) Company’s contractual commitments amounting to Rs.6,00,000 have been settled by paying 5% penalty of contract value.

Show the Journal Entries for giving effect to the internal re-construction and draw the Balance Sheet of the company after effecting the scheme.

Answer In the books of Hot Ltd.

Journal Entries

Rs. Rs.

i 8% Preference share capital A/c (Rs. 100 each) Dr. 4,00,000

To 8% Preference share capital A/c (Rs.80 each)

3,20,000

To Capital reduction A/c 80,000

(Being the preference shares of Rs. 100 each fully paid reduced to Rs. 80 each fully paid as per the approved scheme of reconstruction)

ii Equity share capital A/c (Rs. 10 each) Dr. 10,00,000

To Equity share capital A/c (Rs.2 each) 2,00,000

To Capital reduction A/c 8,00,000

(Being the equity shares of Rs. 10 each fully paid reduced to Rs. 2 each fully paid under the scheme of reconstruction as approved)

iii Capital reduction A/c Dr. 32,000

To Equity share capital A/c (Rs.2 each) 32,000

(Being arrears of preference share dividend of one year to be settled by issue of 16,000 equity shares of Rs. 2 each fully paid as per the approved scheme of reconstruction)

iv 6% Debentures A/c Dr. 3,00,000

To Freehold property A/c 3,00,000

(Being claim settled in part by transfer of freehold property under the approved scheme of reconstruction)

v Accrued debenture interest A/c Dr. 24,000

To Bank A/c 24,000

(Being accrued debenture interest paid)

161

vi Freehold property A/c Dr. 1,50,000


(Being appreciation on revaluation of freehold property under scheme of reconstruction)

vii Bank A/c Dr. 2,50,000

To Trade investment A/c 2,00,000

To Capital reduction A/c 50,000

(Being trade investment sold on profit)

viii Director’s loan A/c Dr. 3,00,000

To Equity share capital A/c (Rs.2 each) 75,000


(Being director’s loan waived by 75% and balance being discharged by issue of 37,500 equity shares ofRs. 2 each under scheme of reconstruction)

ix Capital Reduction A/c Dr. 12,73,000

To Profit and loss A/c 4,75,000

To Sundry debtors A/c 1,80,000

To Stock-in-trade A/c 2,40,000

To Deferred advertisement expenses A/c 50,000

To Bank A/c 30,000

To Capital reserve A/c 2,98,000

(Being various assets, penalty on cancellation of contract, profit and loss account debit balance written off, and balance transferred to capital reserve account as per the scheme of reconstruction)

162

Balance Sheet of Hot Ltd. (As reduced)

Particulars Notes Rs.






Long-term borrowings 3 1,00,000


a. Trade Payables 1,01,000

11,26,000

Assets


a. Fixed assets

Tangible assets 4 6,00,000

2 Current assets

a. Inventories 60,000

b. Trade receivables 2,70,000

c. Cash and cash equivalents 5 1,96,000

11,26,000

Note to Accounts

1 Share Capital Rs.

1,53,500 Equity shares of Rs. 2 each 3,07,000 (out of which 53,500 shares have been issued for consideration other than cash) 4,000, 8%

Preference shares of Rs. 80 each fully paid up 3,20,000

Total 6,27,000

163

2 Reserves and Surplus

Capital Reserves 2,98,000

3 Long-term borrowings


4 Tangible assets

Freehold property 4,00,000

Plant and machinery 2,00,000

Total 6,00,000


Cash at bank(2,50,000 – 24,000 –30,000) 1,96,000

Question 11

Sun and Earth had been carrying on business independently. They agreed to amalgamate and form a new company Mars Ltd. with an authorised share capital of Rs. 2,00,000 divided into 40,000 equity shares of Rs. 5 each.

On 31st March, 2015, the respective Balance Sheets of Sun and Earth were as follows :

Sun Earth

Rs. Rs.

Fixed Assets 3,17,500 1,82,500

Current Assets 1,63,500 83,875 4,81,000 2,66,375

Less: Current Liabilities 2,98,500 90,125

Representing Capital 1,82,500 1,76,250 4,81,000 2,66,375

Additional Information :

(a) Revalued figures of Fixed and Current Assets were as follows :

Sun Earth

Rs. Rs.

Fixed Assets 3,55,000 1,95,000

Current Assets 1,49,750 78,875

(b) The debtors and creditors—include Rs. 21,675 owed by Sun to Earth.

The purchase consideration is satisfied by issue of the following shares and debentures :

(i) 30,000 equity shares of Mars Ltd., to Sun and Earth in the proportion to the profitability of their respective business based on the average net profit during the last three years which were as follows :

164

Sun Earth Rs. Rs.

2012-13 Profit 2,24,788 1,36,950

2013-14(Loss)/Profit (1,250) 1,71,050

2014-15 Profit 1,88,962 1,79,500

(ii) 15% debentures in Mars Ltd., at par to provide an income equivalent to 8% return on capital employed in their respective business as on 31st March, 2015 after revaluation of assets.

You are requested to :

(1) Compute the amount of debentures and shares to be issued to Sun and Earth.

(2) A Balance Sheet of Mars Ltd., showing the position immediately after amalgamation.

Answer

(1) Computation of Amount of Debentures and Shares to be issued:

Sun Earth

Rs. Rs.

(i) Average Net Profit

3

1,88,9621,250–2,24,788

1,37,500

3

1,79,5001,71,050 1,36,950

1,62,500

(ii) Equity Shares to be Issued:

(a) Ratio of distribution 1,375 1,625

(b) Number of Equity Shares

Sun : 13,750

Earth : 16,250

30,000Shares

(c) Amount

13,750 shares of Rs. 5 each = 68,750

16,250 shares of Rs. 5 each = 81,250

165

(iii) Capital Employed (after revaluation of assets)

Rs. Rs.

Fixed Assets 3,55,000 1,95,000

Current Assets 1,49,750 78,875

5,04,750 2,73,875

Less: Current Liabilities 2,98,500 90,125 2,06,250 1,83,750

(iv) Debentures Issued

8% Return on capital employed 16,500 14,700

15% Debentures to be issued to provide

equivalent income :

Sun : 16,500 × 15

100=1,10,000

Earth : 14,700 × 15

100=98,000

(2) Balance Sheet of Mars Ltd. As on 1st April 2015

Particulars Note

I. Equity and Liabilities Rs.

1 Shareholders’ funds

(a) Share capital 1 1,50,000

(b) Reserves and surplus 2 32,000


(a) Long-term borrowings 3 2,08,000


(a) Other current liabilities 3,66,950

Total (1+2+3+4) 7,56,950

II. Assets


(a) Fixed assets

(i) Tangible assets 4 5,50,000

2 Current assets

(a) Other current assets 2,06,950

Total (1+2) 7,56,950

166

* Notes are not prepared

Working Notes :

Sun Earth Total Rs. Rs. Rs.

(1) Purchase Consideration

Equity Shares Issued 68,750 81,250 1,50,000

15% Debentures Issued 1,10,000 98,000 2,08,000 1,78,750 1,79,250 3,58,000

(2) Capital Reserve

(a) Net Assets Taken Over

Fixed Assets 3,55,000 1,95,000 5,50,000

Current Assets 1,49,750 57,200* 2,06,950 5,04,750 2,52,200 7,56,950

Less :Current Liabilities 2,76,825** 90,125 3,66,950

Net Assests 2,27,925 1,62,075 3,90,000

(b) Purchase Consideration 1,78,750 1,79,250 3,58,000

(c) Capital Reserve [(a) - (b)] 49,175 - -

(d) Goodwill [(b) - (a)] - 17,175 -

(e) Capital Reserve [Final Figure(c) - (d)] - - 32,000

*78, 875 - 21,675 = Rs. 57,200

**2,98,500 - 21,675 = Rs.2,76,825

Question 12

White Limited had decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the Balance Sheet of the Company on 31.3.2015 before reconstruction:

Balance Sheet of White Limited as at 31.3.2015


Share Capital: Fixed Assets:

Authorised: Goodwill 20,00,000

1,50,000 Equity Shares of Rs. 50 each

75,00,000 Building 10,00,000

Subscribed and Paid up Plant 10,00,000

167

Capital:

50,000 Equity Shares of Rs. 50 each

25,00,000 Computers 25,00,000

1,00,000 Equity Shares of Rs. 50 each, Rs. 40 per share paid up

40,00,000 Investments Nil

12% First Debentures 5,00,000 Profit and Loss A/c—Loss

20,00,000

12% Second Debentures 10,00,000

Sundry Creditors 5,00,000

85,00,000 85,00,000

The following is the interest of Mr. X and Mr. Y in White Limited:

Mr. X Mr. Y

Rs. Rs.

12% First Debentures 3,00,000 2,00,000

12% Second Debentures 7,00,000 3,00,000

Sundry Creditors 2,00,000 1,00,000

12,00,000 6,00,000

Fully paid up Rs. 50 shares 3,00,000 2,00,000

Partly paid up shares (Rs. 40 paid up) 5,00,000 5,00,000

The following Scheme of Reconstruction is approved by all parties interested and also by the Court:

(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted into equity shares of Rs. 20 each.

(b) Mr. X is to cancel Rs. 7,00,000 of his total debt (other than share amount) and to pay Rs. 2 lakhs to the company and to receive new 14% First Debentures for the balance amount.

(c) Mr. Y is to cancel Rs. 3,00,000 of his total debt (other than equity shares) and to accept new 14% First Debentures for the balance.

(d) The amount thus rendered available by the scheme shall be utilised in writing off of Goodwill, Profit and Loss A/c Loss and the balance to write off the value of computers.

You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the reconstructed company.

168

Answer

White Limited

Journal Entries

Dr. Cr. Particulars Rs. Rs.

Equity share final call Account Dr. 10,00,000

To Equity Share Capital Account 10,00,000

(Balance of Rs.10 per share on 1,00,000 equity Shares called up as final call)

Bank Account Dr. 10,00,000

To Equity Share Final call Account 10,00,000 (Equity share final call money received)

Equity Share Capital Account (Rs. 50) Dr. 75,00,000

To Equity Share Capital Account (Rs. 20) 30,00,000

To Capital Reduction Account 45,00,000

(Reduction of equity shares of Rs. 50 each to shares of Rs. 20 each as per reconstruction scheme)

12% First Debentures Account Dr. 3,00,000

12% Second Debentures Account Dr. 7,00,000

Sundry Creditors Account Dr. 2,00,000

To X 12,00,000 (The total amount due to X, transferred to his account)

Bank Account Dr. 2,00,000

To X 2,00,000 (The amount paid by X under the reconstruction scheme)

12% First Debentures Account Dr. 2,00,000

12% Second Debentures Account Dr. 3,00,000

Sundry Creditors Account Dr. 1,00,000

To Y 6,00,000

(The total amount due to Y, transferred to his account)

X Dr. 14,00,000

To 14% First Debentures Account 7,00,000

To Capital Reduction Account 7,00,000

(The cancellation of Rs.7,00,000 out of total debt of

169

Mr. X and issue of 14% first debentures for the balance amount as per reconstruction scheme)

Y Dr. 6,00,000

To 14% First Debentures Account 3,00,000

To Capital Reconstruction Account 3,00,000

(The cancellation of Rs.3,00,000 out of total debt of Mr. Y and issue of 14% first debentures for the balance amount)

Capital Reduction Account Dr. 55,00,000

To Goodwill Account 20,00,000

To Profit and Loss Account 20,00,000

To Computers Account 15,00,000

(The balance amount of capital reduction account utilised in writing off goodwill, profit and loss account, and computers—Working Note)

Balance Sheet of White Limited (and reduced)


Shareholders' funds

Share capital 1 30,00,000

Non-current liabilities


Current liabilities

Trade Payables 3 2,00,000

Total 42,00,000

Non-current assets

a. Fixed assets

Tangible assets

4

30,00,000

Current assets

Cash and cash equivalents (10 Lakhs + 2 Lakhs)

12,00,000

Total 42,00,000

170

Notes to accounts

1. Share Capital


Issued, subscribed and paid up

1,50,000 equity shares of Rs.20 each 30,00,000

Total 30,00,000

2. Long-term borrowings

Secured 14% First Debentures 10,00,000

Total 10,00,000

4. Tangible assets

Building 10,00,000

Plant 10,00,000

Computers 10,00,000

Total 30,00,000

Working Note:

Capital Reduction Account

Rs. Rs.

To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000

To P & L A/c 20,00,000 By X 7,00,000

To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000

55,00,000 55,00,000

171

Question 13

The following were the Balance Sheets of Pawan Ltd. and Varun Ltd. as at 31st March, 2015:

Liabilities Pawan Ltd. Varun Ltd. (Rs. in lakhs) (Rs. in lakhs)

Equity Share Capital (Fully paid shares ofRs. 10 each) 15,000 6,000

Securities Premium 3,000 –

Foreign Project Reserve – 310

General Reserve 9,500 3,200

Statement of Profit and Loss 2,870 825

12% Debentures – 1,000

Bills Payable (Payable to Varun Ltd. For Rs.80 Lakhs) 120

Sundry Creditors 1,080 463

Sundry Provisions 1,830 702

33,400 12,500

Assets P Ltd. V Ltd.

(Rs. in lakhs) (Rs. in lakhs)

Land and Buildings 6,000 –

Plant and Machinery 14,000 5,000

Furniture, Fixtures and Fittings 2,304 1,700

Stock 7,862 4,041

Debtors 2,120 1,020

Cash at Bank 1,114 609

Bills Receivable (Received from P Ltd.) — 80

Cost of Issue of Debentures — 50

33,400 12,500

All the bills receivable held by Varun Ltd. were Pawan Ltd.’s acceptances.

On 1st April 2015, Pawan Ltd. took over Varun Ltd in an amalgamation in the nature of merger. It was agreed that in discharge of consideration for the business Pawan Ltd. would allot three fully paid equity shares of Rs. 10 each at par for every two shares held in Varun Ltd. It was also agreed that 12% debentures in Varun Ltd. would be converted into 13% debentures in Pawan Ltd. of the same amount and denomination.

172

Expenses of amalgamation amounting to Rs. 1 lakh were borne by Pawan Ltd.

You are required to :

(i)Pass journal entries in the books of Pawan Ltd. and

(ii)Prepare Pawan Ltd.’s Balance Sheet immediately after the merger.

Answer

Books of Pawan Ltd.

Journal Entries

Dr. Cr.

(Rs. in Lacs) (Rs. in Lacs)

Business Purchase A/c Dr. 9,000

To Liquidator of Varun Ltd. 9,000

(Being business of Varun Ltd. taken over for consideration settled as per agreement)

Plant and Machinery Dr. 5,000

Furniture & Fittings Dr. 1,700

Stock Dr. 4,041

Debtors Dr. 1,020

Cash at Bank Dr. 609

Bills Receivable Dr. 80

To Foreign Project Reserve 310

To General Reserve (3,200 - 3,000) 200

To Profit and Loss A/c (825 - 50) 775

To 12% Debentures 1,000

To Sundry Creditors 463

To Sundry Provisions 702

To Business Purchase 9,000

(Being assets & liabilities taken over from Varun Ltd.)

Liquidator of Varun Ltd. A/c Dr. 9,000

To Equity Share Capital A/c 9,000

(Purchase consideration discharged in the form

of equity shares)

Statement of Profit and loss Dr. 1

To Bank A/c 1

(Liquidation expenses paid by Pawan Ltd.)

173

12% Debentures A/c Dr. 1,000

To 13% Debentures A/c 1,000

(12% debentures discharged by issue of 13% debentures)

Bills Payable A/c Dr. 80

To Bills Receivable A/c 80

(Cancellation of mutual owing on account of bills)

Balance Sheet of Pawan Ltd. as at 1st April, 2015 (after merger)

Particulars Notes Rs.(in lakhs)



a. Share capital 1 24,000

b. Reserves and Surplus 2 16,654


a. Long-term borrowings 3 1,000


a. Trade Payables (1,543 + 40) 1,583

b. Short-term provisions 2,532

Total 45,769

Assets


a. Fixed assets

Tangible assets 4 29,004

2 Current assets

a. Inventories 11,903

b. Trade receivables 3,140

c. Cash and cash equivalents 1,722

Total 45,769

174

Notes to accounts Rs.in Lakhs

1. Share Capital


Authorised, issued, subscribed and paid up

24 crores equity shares of Rs. 10 each (of the above shares, 9 crores shares have been issued for consideration other than cash)

24,000

Total 24,000


General Reserve (9500 + 200) 9,700

Securities Premium 3,000

Foreign Project Reserve 310

Statement of Profit and Loss (2870 +775-1) 3,644

Total 16,654


Secured

13% Debentures 1,000

4 Tangible assets

Land & Buildings 6,000

Plant & Machinery 19,000

Furniture & Fittings 4,004

Total 29,004

Working Notes :

1. Computation of purchase consideration

The purchase consideration was discharged in the form of three equity shares of Pawan Ltd. for every two equity shares held in Varun Ltd.

Purchase consideration = Rs. 6,000 lacs × 2

3 = Rs. 9,000 lacs.

Note : The question is silent regarding the treatment of fictitious assets and therefore they are not transferred to the amalgamated company. Thus the cost of issue of debentures shown in the balance sheet of the Varun Ltd. company is not transferred to the P Ltd. company.

175

Question 14

The following is the Balance Sheet of Rama Ltd. as at March 31, 2015:

Liabilities Rs.in lacs

Fully paid equity shares of Rs. 10 each 500

Capital Reserve 6

12% Debentures 400

Debenture Interest Outstanding 48

Trade Creditors 165

Directors’ Remuneration Outstanding 10

Other Outstanding Expenses 11

Provisions 33

1,173

Assets Rs.in lacs

Goodwill 15

Land and Building 184

Plant and Machinery 286

Furniture and Fixtures 41

Stock 142

Debtors 80

Cash at Bank 27

Discount on Issue of Debentures 8

Profits and Loss Account 390

1,173

The following scheme of internal reconstruction was framed, approved by the Court, all the concerned parties and implemented:

(i) All the equity shares be converted into the same number of fully-paid equity shares of Rs. 2.50 each.

(ii) Directors agree to forego their outstanding remuneration.

(iii) The debentureholders also agree to forego outstanding interest in return of their 12% debentures being converted into 13% debentures.

(iv) The existing shareholders agree to subscribe for cash, fully paid equity shares of Rs. 2.50 each for Rs. 125 lacs.

176

(v) Trade creditors are given the option of either to accept fully-paid equity shares of Rs. 2.50 each for the amount due to them or to accept 80% of the amount due in cash. Creditors for Rs. 65 lacs accept equity shares whereas those for Rs. 100 lacs accept Rs. 80 lacs in cash in full settlement.

(vi) The Assets are revalued as under :

Rs. in lacs

Land and building 230

Plant and Machinery 220

Stock 120

Debtors 76

Pass Journal Entries for all the above mentioned transactions and draft the company’s Balance Sheet immediately after the reconstruction.

Answer Journal Entries

Rs. in lacs

Dr. Cr.

Equity Share Capital (Rs. 10 each) A/c Dr. 500

To Equity Share Capital (Rs.2.50 each) A/c 125

To Reconstruction A/c 375

(Conversion of all the equity shares into the same number of fully paid equity shares of Rs. 2.50 each as per scheme of reconstruction)

Director’s Remuneration Outstanding A/c Dr. 10


(Outstanding remuneration foregone by the directors as per scheme of reconstruction)

12% Debentures A/c Dr. 400

Debenture Interest Outstanding A/c Dr. 48

To 13% Debentures A/c 400


(Conversion of 12% debentures into 13% debentures, Debentureholders forgoing outstanding debenture interest)

Bank Dr. 125

To Equity Share Application A/c 125

(Application money received for equity shares)

177

Equity Share Application A/c Dr. 125

To Equity Share Capital (Rs. 2.50 each) A/c 125

(Application money transferred to share capital)

Trade Creditors Dr. 165

To Equity Share Capital (Rs. 2.50 each) A/c 65

To Bank A/c 80


(Trade creditors for Rs.64 lakhs accepting shares for full amount and those for Rs.100 lakhs accepting cash equal to 80% of claim in full settlement)

Capital Reserve Dr. 6


(Capital Reserve being used for purpose of reconstruction)

Land and Building A/c Dr. 46


(Appreciation made in the value of land and building as per scheme of reconstruction)

Reconstruction A/c Dr. 505

To Goodwill 15

To Plant and Machinery 66

To Stock 22

To Debtors 4

To Discount on issue of Debentures 8

To Profit and Loss Account 390

(Writing off losses and reduction in the values of assets as per scheme of reconstruction—W.N. 1)

178

Balance Sheet of Rama Ltd. (and Reduced) as on 31st March, 2015

Equity & Liabilities Rs. in lacs

Share Capital

1,26,000 Fully paid equity shares of Rs. 2.50 each (W.N. 2)

315

(26,000 shares have been issued for consideration other than cash)

Borrowings

13% Debentures

400

Current Liabilities

Outstanding Expenses

11

Short Term Provisions

Provisions

33

Total 759

Tangibles

Land and Building 184+46

230

Plant and Machinery 286-66 220 491


Inventory 120

Trade Receivable (80-4) 76

Cash & Cash Equivalent 72

759

Working Notes: (Rs.inlacs)

1. Reconstruction Account

Rs. Rs.

To Goodwill 15 By Equity Share Capital A/c 375

To Plant and Machinery 66 By Director’s Remuneration Outstanding A/c 10

To Stock 22 By Debenture Interest Outstanding A/c 48

To Debtors 4 By Trade Creditors 20

To Discount on issue of By Capital Reserve 6

Debentures 8 By Land and Building 46

To Profit and Loss A/c 390

505 505

179

2. Equity share capital as on 31st March, 2002 (after reconstruction)

Rs.

Equity Share Capital (Rs. 2.50 each) 125

Add: Fresh issue 125

Add: Equity shares issued to creditors 65

315

3. Cash at bank as on 31st March, 2002 (after reconstruction) 27

Cash at bank (before reconstruction) 125

Add: Proceeds from issue of equity shares 152

Less: Payment made to creditors 80

72

Question 15

The financial position of two companies X Ltd. and Y Ltd. as on 31st March, 2015 was as under:

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

Goodwill 50,000 25,000

Building 3,00,000 1,00,000

Machinery 5,00,000 1,50,000

Stock 2,50,000 1,75,000

Debtors 2,00,000 1,00,000

Cash at Bank 50,000 20,000

Preliminary Expenses 30,000 10,000

13,80,000 5,80,000

180

Liabilities

Share Capital: X Ltd. (Rs.) Y Ltd. (Rs.)

Equity Shares of Rs. 10 each 10,00,000 3,00,000

9% Preference Shares of Rs. 100 each 1,00,000 –

10% Preference Shares of Rs. 100 each – 1,00,000

General Reserve 1,00,000 80,000

Retirement Gratuity fund 50,000 20,000

Sundry Creditors 1,30,000 80,000

13,80,000 5,80,000

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

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of X Ltd.

(b) Goodwill of Y Ltd. is valued at Rs. 50,000, Buildings are valued at Rs. 1,50,000 and the Machinery at Rs. 1,60,000.

(c) Stock to be taken over at 10% less value and Reserve for Bad and Doubtful Debts to be created @ 7.5%.

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

Prepare necessary Ledger Accounts to close the books of Y Ltd.

Show the acquisition entries in the books of X Ltd.

Also draft the summarized Balance Sheet after absorption as at 31st March, 2015.

Answer In the Books of Y Ltd. Realisation Account


To Sundry Assets (5,80,000 – 10,000)

5,70,000 ByGratuity Fund 20,000

To Preference Shareholders

(Premium on Redemption)

10,000 By Sundry Creditors

80,000

To Equity Shareholders

(Profit on Realisation)

50,000 By X Ltd.

(Purchase Consideration)

5,30,000

6,30,000 6,30,000

181

Equity Shareholders Account

Rs. Rs.

To Preliminary Expenses 10,000 By Share Capital 3,00,000

To Equity Shares of Hari Ltd. 4,20,000 By General Reserve 80,000

_______

By Realisation Account

(Profit on Realisation)

50,000

4,30,000 4,30,000

Preference Shareholders Account

Rs. Rs.

To 9% Preference Shares of X Ltd.

1,10,000 By Preference Share Capital 1,00,000

By Realisation Account (Premium on Redemption of Preference Shares)

10,000

1,10,000 1,10,000

X Ltd. Account

Rs. Rs.

To Realisation Account 5,30,000 By 9% Preference Shares 1,10,000

__________ By Equity Shares 4,20,000

5,30,000 5,30,000

In the Books of X Ltd. Journal Entries

Particulars Dr. Cr.

(Rs.) (Rs.)

Goodwill Account Dr. 50,000

Building Account Dr. 1,50,000

Machinery Account Dr. 1,60,000

Stock Account Dr. 1,57,500

Debtors Account Dr. 1,00,000

Bank Account Dr. 20,000

182

To Gratuity Fund Account 20,000

To Sundry Creditors Account 80,000

To Provision for Doubtful Debts Account 7,500

To Liquidators of Vayu Ltd. Account 5,30,000

(Being Assets and Liabilities takenover as per agreed valuation).

Liquidators of Vayu Ltd. A/c Dr. 5,30,000

To 9% Preference Share Capital A/c 1,10,000


To Securities Premium A/c 20,000

(Being Purchase Consideration satisfied as above).

Summarized Balance sheet After Amalgamation

Particulars Rs.

Share capital(10,00,000 + 400,000 + 100,000+110,000)

16,10,000

Reserve & surplus (100,000 + 20,000) 120,000

Current liabilities (50,000 + 130,000 + 20,000 +80,000)

2,80,000

20,10,000

Non Current Assets:

a. Tangible (300,000 + 150,000 + 500,000+ 160,000)

11,10,000

b. Intangible (50,000 + 50,000) 100,000

Current Assets:

a. Inventory (250,000 + 157,500)

4,07,500

b. Trade receivable (200,000 + 92,500) 2,92,500

c. Cash & Cash Equivalent (50,000 + 20,000)

70,000

d. Other current assets (Pre. Exp) 30,000

20,10,000

183

Working Notes:

Purchase Consideration: Rs.

Goodwill 50,000

Building 1,50,000

Machinery 1,60,000

Stock 1,57,500

Debtors 92,500

Cash at Bank 20,000

6,30,000

Less: Liabilities

Gratuity

20,000


Net Assets 5,30,000

To be satisfied as under:

10% Preference Shareholders of Y Ltd. 1,00,000

Add: 10% Premium 10,000

1,100 9% Preference Shares of X Ltd. 1,10,000

Equity Shareholders of Y Ltd. to be satisfied by issue of 40,000

Equity Shares of X Ltd. at 5% Premium 4,20,000

Total 5,30,000

184

Question 16

Amy Limited was wound up on 31.3.2015 and its Balance Sheet as on that date was given below:

Balance Sheet of Exe Limited as on 31.3.2015


Share capital: Fixed assets 9,64,000


12,00,000

Current assets:

Stock

7,75,000

Reserves and surplus: Sundry debtors 1,60,000

Profit prior to incorporation

42,000

Less: Provision for bad and doubtful debts 8,000

1,52,000

Contingency reserve 2,70,000 Bills receivable 30,000

Profit and loss A/c 2,52,000 Cash at bank 3,29,000 12,86,000

Current liabilities:

Bills payable 40,000


Provisions:

Provision for income tax 2,20,000 ________

22,50,000 22,50,000

Samy Limited took over the following assets at values shown as under:

Fixed assets Rs. 12,80,000, Stock Rs. 7,70,000 and Bills Receivable Rs. 30,000.

Purchase consideration was settled by Wye Limited as under:

Rs. 5,10,000 of the consideration was satisfied by the allotment of fully paid 10% Preference shares of Rs. 100 each. The balance was settled by issuing equity shares of Rs. 10 each at Rs. 8 per share paid up.

Sundry debtors realisedRs. 1,50,000. Bills payable was settled for Rs. 38,000. Income tax authorities fixed the taxation liability at Rs. 2,22,000.

Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to Rs. 8,000.


(i) Calculate the number of equity shares and preference shares to be allotted by Samy Limited in discharge of purchase consideration.

(ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders account and Samy Limited account in the books of Amy Limited.

185

(iii) Pass journal entries in the books of Samy Limited.

Answer

(i) Purchase consideration

Rs.

Fixed assets 12,80,000

Stock 7,70,000

Bills receivable 30,000

Purchase consideration 20,80,000

Amount discharged by issue of preference shares = Rs. 5,10,000

No. of preference shares to be allotted = shares 5,100 100

5,10,000 Rs.

Amount discharged by allotment of equity shares = Rs.20,80,000 – Rs.5,10,000

= Rs. 15,70,000

Paid up value of equity share = Rs. 8

Hence, number of equity shares to be issued = 8

15,70,000 Rs.

= 1,96,250 shares

(ii) Realisation Account In the books of Amy Ltd.

Dr. Cr.

(Rs.) (Rs.)

To Fixed assets 9,64,000 By Provision for bad and doubtful debts

8,000

To Stock 7,75,000 By Bills payable 40,000

To Sundry debtors 1,60,000 By Sundry creditors 2,26,000

To Bills receivable 30,000 By Provision for taxation 2,20,000

To Bank account: By Samy Ltd. Account

Liquidation expenses 8,000 (Purchase consideration)

20,80,000

Bills payable 38,000 By Bank account: Sundry debtors

1,50,000

Tax liability 2,22,000


To Equity shareholders

(profit transferred)

3,16,000

27,24,000 27,24,000

186

Cash/Bank Account

Dr. Cr. (Rs.) (Rs.)

To Balance b/d 3,29,000 By Realisation account:

To Realisation account: Liquidation expenses 8,000

Sundry debtors 1,50,000 Bills payable 38,000

Tax liability 2,22,000

_______

Sundry creditors (Balancing figure)

2,11,000

4,79,000 4,79,000

Equity Shareholders Account

Dr. Cr. (Rs.) (Rs.)

To 10% Preference shares in Samy Ltd.

5,10,000

By

By

Equity share capital account

Profit prior to incorporation

12,00,000

42,000

To Equity shares in Samy Ltd.

15,70,000 By Contingency reserve 2,70,000

By Profit and loss account 2,52,000

By Realisation account (Profit)

3,16,000

20,80,000 20,80,000

Samy Limited Account

Rs. Rs.

To Realisation account

20,80,000 By 10% Preference shares in Wye Ltd.

5,10,000

____________ By Equity shares in Wye Ltd. 15,70,000

20,80,000 20,80,000

187

(iii)

In the books of Samy Ltd.

Journal Entries

Particulars Dr Rs. Cr. Rs.

Business purchase account Dr. 20,80,000

To Liquidator of Exe Ltd. account 20,80,000

(Being the amount of purchase consideration

payable to liquidator of Exe Ltd. for assets taken over)

Fixed assets account Dr. 12,80,000

Stock account Dr. 7,70,000

Bills receivable account Dr. 30,000

To Business purchase account 20,80,000

(Being assets taken over)

Liquidator of the Exe Ltd. account Dr. 20,80,000

To 10% Preference share capital account 5,10,000

To Equity share capital account 15,70,000

(Being the allotment of 10% fully paid up

preference shares and equity shares of

Rs 10 each, ` 8 each paid up as per

agreement for discharge of purchase consideration)

Question 17

The following is the Balance sheet of Day Ltd. as on 31.3.2015:


Equity shares of Rs.100 each 1,00,00,000 Fixed assets 1,25,00,000

12% cumulative preferenceshares of Rs.100 each

50,00,000 Investments (Market value Rs.9,50,000)

10,00,000

188

10% debentures of Rs.100 each 40,00,000 Current assets 1,00,00,000

Sundry creditors 50,00,000 P & L A/c 4,00,000

Provision for taxation 1,00,000 Preliminary expenses 2,00,000

2,41,00,000 2,41,00,000

The following scheme of reorganization is sanctioned:

(i) All the existing equity shares are reduced to Rs.40 each.

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

(iii) The rate of interest on debentures is increased to 12%. The debentureholders surrender their existing debentures of Rs.100 each and exchange the same for fresh debentures of Rs.70 each for every debenture held by them.

(iv) One of the creditors of the company to whom the company owes Rs.20,00,000 decides to forgo 40% of his claim. He is allotted 30,000 equity shares of Rs.40 each in full satisfaction of his claim.

(v) Fixed assets are to be written down by 30%.

(vi) Current assets are to be revalued at Rs.45,00,000.

(vii) The taxation liability of the company is settled at Rs.1,50,000.

(viiii) Investments to be brought to their market value.

(ix) It is decided to write off the fictitious assets.

Pass Journal entries and show the Balance sheet of the company after giving effect to the above.

Answer

Journal Entries in the books of Day Ltd.


(i) Equity share capital (Rs.100) A/c Dr. 1,00,00,000

To Equity Share Capital (Rs.40) A/c 40,00,000


(Being conversion of equity share capital of Rs.100 each into Rs.40 each as per reconstruction scheme)

189

(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr.

50,00,000

To 12% Cumulative Pref. Share Capital (Rs.60) A/c 30,00,000


(Being conversion of 12% cumulative preference share capital of Rs.100 each into Rs.60 each as per reconstruction scheme)

(iii) 10% Debentures A/c Dr. 40,00,000



(Being 12% debentures issued to 10% debenture-holders for 70% of their claims. The balance transferred to capital reduction account as per reconstruction scheme)

(iv) Sundry Creditors A/c Dr. 20,00,000



(Being a creditor of 20,00,000 agreed to surrender his claim by 40% and was allotted 30,000 equity shares of Rs.40 each in full settlement of his dues as per reconstruction scheme)

(v)

Provision for Taxation A/c Dr.

1,00,000

Capital Reduction A/c Dr. 50,000

To Liability for Taxation A/c 1,50,000

(Being conversion of the provision for taxation into liability for taxation for settlement of the amount due)

(vi) Capital Reduction A/c Dr. 99,50,000

To P & L A/c 4,00,000

To Preliminary Expenses A/c 2,00,000

To Fixed Assets A/c 37,50,000

190

To Current Assets A/c 55,00,000

To Investments A/c 50,000

To Capital Reserve A/c 50,000

(Being amount of Capital Reduction utilized in writing off P & L A/c (Dr.) Balance, Expenses, Fixed Assets, Current Assets, Investments and the Balance transferred to Capital Reserve)

(vii) Liability for Taxation A/c Dr. 1,50,000

To Current Assets (Bank A/c) 1,50,000

(Being the payment of tax liability)

Balance Sheet of Day Ltd. (and reduced) as on 31.3.2015




a Share capital 1 82,00,000

b Reserves and Surplus 2 50,000


a Long-term borrowings 3 28,00,000


a Trade Payables 30,00,000

Total 1,40,50,000

Assets


a Fixed assets


b Investments 5 9,50,000

2 Current assets 6 43,50,000

Total 1,40,50,000

191

Working Note:

Capital Reduction Account


To Liability for taxation A/c 50,000 By Equity share capital 60,00,000

To P & L A/c 4,00,000 By 12% Cumulative preference share capital

20,00,000

To Preliminary expenses 2,00,000 By 10% Debentures 12,00,000

To Fixed assets 37,50,000 By Sundry creditors 8,00,000

To Current assets 55,00,000

To Investment 50,000

To Capital Reserve (balancing figure)

50,000

1,00,00,000 1,00,00,000

Notes to accounts Rs. Rs.

1. Share Capital



1,30,000 equity shares of Rs. 40 each 52,00,000

Preference share capital

50,000 12% Cumulative Preference shares

of Rs.60 each

30,00,000

Total 82,00,000


Capital Reserve 50,000


Secured


4. Tangible assets

Fixed Assets 1,25,00,000

Adjustment under scheme of reconstruction (37,50,000) 87,50,000

5. Investments 10,00,000

Adjustment under scheme of reconstruction (50,000) 9,50,000

6. Current assets 45,00,000

Adjustment under scheme of reconstruction (1,50,000) 43,50,000

192

Question 18

The following is the Balance Sheet of ‘A’ Ltd. as on 31.3.2015:


14,000 Equity shares of Rs.100 each fully paid

14,00,000

Sundry assets

18,00,000

General reserve 10,000 Discount on issue of Debentures

10,000

10% Debentures 2,00,000 Preliminary expenses 30,000

Sundry creditors 2,00,000 P & L A/c 60,000

Bank overdraft 50,000


19,00,000 19,00,000

‘Y’ Ltd. agreed to take over the business of ‘X’ Ltd. Calculate purchase consideration under Net Assets method on the basis of the following:

The market value of 75% of the sundry assets is estimated to be 12% more than the book value and that of the remaining 25% at 8% less than the book value. The liabilities are taken over at book values. There is an unrecorded liability of Rs.25,000.

Answer

Calculation of Purchase Consideration under Net Assets Method

Sundry assets Rs. Rs.

18,00,000

100

112

100

75

15,12,000

100

92

100

25 18,00,000

4,14,000

19,26,000

Less:Liabilities:



Bank overdraft 50,000


Unrecorded liability 25,000 5,15,000

Purchase consideration 14,11,000

193

Question 19

Why is corporate structuring exercise carried out?

Answer

The various needs for undertaking a Corporate Restructuring exercise are as follows:

(i) to focus on core strengths, operational synergy and efficient allocation of managerial capabilities and infrastructure.

(ii) consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.

(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.

(iv) acquiring constant supply of raw materials and access to scientific research and technological developments.

(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed.

(vi) improve corporate performance to bring it at par with competitors by adopting the radical changes brought out by information technology.

Question 20

What are the different types of corporate structuring?

Answer

Restructuring may be of the following kinds:

Financial restructuring which deals with the restructuring of capital base and raising finance for new projects. This involves decisions relating to acquisitions, mergers, joint ventures and strategic alliances.

Technological restructuring which involves, inter alia, alliances with other companies to exploit technological expertise.

Market restructuring which involves decisions with respect to the product market segments, where the company plans to operate based on its core competencies.

Organizational restructuring which involves establishing internal structures and procedures for improving the capability of the personnel in the organization to respond to changes. This kind of restructuring is required in order to facilitate and implement the above three kinds of restructuring. These changes need to have the cooperation of all levels of employees to ensure that the restructuring is successful.

The most commonly applied tools of corporate restructuring are amalgamation, merger, demerger, slump sale, acquisition, joint venture, disinvestment, strategic alliances and franchises.

194

Question 21

What are the methods of calculation of purchase consideration?

Answer

(i) Lump Sum Method: The amount to be paid by the transferee company as consideration may be stated in the problem as a lump sum. In such a case, no calculation is required.

(ii) Net Assets Method: The amount of consideration or the amount of net assets is ascertained under thismethod in the following manner:

Assets taken over (at their revalued figures, if any, otherwise at their book figures).

Less: Liabilities taken over (at their agreed values, if any, otherwise at their book figures).

(iii) Net Payment Method: The amount of consideration under this method is ascertained by adding up the total value of shares and other securities issued and the payments made in the form of cash and other assets by the transferee company to the transferor company in discharge of consideration. So the consideration constitutes the total payment in whatever form either in shares, debentures, or in cash to the liquidator of the transferor company for payment to the shareholders of the transferor company.

1. The value of assets and liabilities taken over by the transferee company are not to be considered in calculating the consideration.

2. The payments made by the transferee company for shareholders, whether in cash or in shares or in debentures must to be taken into account.

3. Where the liabilities are taken over by the transferee company and subsequently discharged such amount should not be added to consideration.

4. When liabilities are taken over by the transferee company they are neither deducted nor added to the amount arrived at as consideration.

5. Any payments made by the transferee company to some other party on behalf of the transferor company are to be ignored.

6. If the liquidation expenses of the transferor company are paid by the transferee company, the same should not be taken as a part of the consideration.

(iv) Shares Exchange Method: In this method, the consideration is ascertained on the basis of the ratio in which the shares of the transferee company are to be exchanged for the shares of the transferor company.

This exchange ratio is generally determined on the basis of the value of each company’s shares.

195

Question 22

The Balance Sheet of M/s. Square Limited as on 31-03-2015 is given below:

Balance Sheet of Ice Ltd. (As reduced)

Particulars Notes Rs. in lacs



a. Share capital 1 700

b. Reserves and Surplus 2 (261)


Long-term borrowings 3 350


a. Trade Payables 4 51

Other liabilities 5 12

852

Assets


a. Fixed assets

Tangible assets 6 375

2 Current assets

a. Current investments 7 100

b. Inventories 8 150

c. Trade receivables 9 225

d. Cash and cash equivalents 10 2

Total 852

Notes to Accounts: Rs.in Lacs

(1) Share Capital

Authorised :

100 lakh shares of Rs.10 each 1,000

4 lakh, 8% Preference Shares of Rs. 100 each 400 1,400

Issued, Subscribed and paid up:

196

50 lakh Equity Shares of Rs.10 each, full paid up 500

2 lakh 8% Preference Shares of Rs. 100 each, fully paid up 200

Total 700

(2) Reserves and Surplus

Debit balance of Profit & Loss A/c (261)

(3) Long Term Borrowings

6% Debentures (Secured by Freehold Property) 200

Directors’ Loan 150 350

(4) Trade Payables

Sundry Creditors for Goods 51

(5) Other Current Liabilities

Interest Accrued and Due on 6% Debentures 12

(6) Tangible Assets

Freehold Property 275

Plant & Machinery 100 375

(7) Current Investment

Investment in Equity Instruments 100

(8) Inventories

Finished Goods 150

(9) Trade Receivables

Sundry Debtors for Goods 225

(10) Cash and Cash Equivalents

Balance with Bank 2

The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective shareholders:

(1) Preference Shares are to be written down to Rs. 80 each and Equity Shares to Rs.2 each.

(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3 rd, Equity Shares of Rs.2 each to be allotted.

(3) Debenture holders agreed to take one Freehold Property at its book value of Rs. 150 lakh in part payment of their holding. Balance Debentures to remain as liability of the company.

(4) Interest accrued and due on Debentures to be paid in cash.

(5) Remaining Freehold Property to be valued at Rs.200 lakh.

197

(6) All investments sold out for Rs. 125 lakh.

(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of Rs.2 each to be allowed.

(8) 40% of Sundry Debtors and 80% of Inventories to be written off.

(9) Company's contractual commitments amounting to Rs.300 lakh have been settled by paying 5% penalty of contract value.

You are required to :

(a) Pass Journal Entries for all the transactions related to internal reconstruction;

(b) Prepare Reconstruction Account; and

(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after the implementation of scheme of internal reconstruction.

Answer

In the books of Square Ltd.

Journal Entries


i. 8% Preference share capital A/c (Rs.100 each) Dr. 200

To 8% Preference share capital A/c (Rs. 80 each) 160

To Capital reduction A/c 40

(Being the preference shares of Rs. 100 each fully paid reduced to Rs.80 each fully paid as per the approved scheme of reconstruction)

ii. Equity share capital A/c (Rs.10 each) Dr. 500

To Equity share capital A/c (Rs.2 each) 100


(Being the equity shares of Rs.10 each fully paid reduced to Rs.2 each fully paid under the scheme of reconstruction as approved)

iii. Capital reduction A/c Dr. 16

To Equity share capital A/c (Rs. 2 each) 16

(Being 1/3rd arrears of preference share dividend of 3 years settled by issue of 8 lakhs equity shares of Rs. 2 each fully paid)

198

iv. 6% Debentures A/c Dr. 150

To Freehold property A/c 150

(Being claim settled in part by transfer of freehold property under the approved scheme of reconstruction)

v. Accrued debenture interest A/c Dr. 12

To Bank A/c 12

(Being accrued debenture interest paid)

vi. Freehold property A/c Dr. 75


(Being appreciation on revaluation of freehold property under scheme of reconstruction)

vii. Bank A/c Dr. 125

To Trade investment A/c 100


(Being trade investment sold on profit)

viii. Director’s loan A/c Dr. 150

To Equity share capital A/c (Rs.2 each) 45


(Being director’s loan waived by 70% and balance discharged by issue of 22.5 lakhs equity shares ofRs.2 each fully paid)

ix. Capital Reduction A/c Dr. 629

To Profit and loss A/c 261

To Sundry debtors A/c 90

To Stock-in-trade A/c 120

To Bank A/c 15

To Capital reserve A/c 143

(Being various assets, penalty on cancellation of contract, profit and loss account debit balance writtenoff, and balance transferred to capital reserve account as per the scheme of reconstruction)

199

Reconstruction Account

Particulars Dr. (Rs. in lacs)

Particulars Cr. (Rs. in lacs)

To Equity Share Capital 16 By Preference Share Capital

40

To Sundry Debtors 90 By Equity Share Capital

400

To Finished Goods 120 By Freehold Property 75

To Profit & Loss A/c 261 By Bank 25

To Bank A/c 15 By Director’s Loan 105

To Capital Reserve 143

645 645

(c) Notes to Balance Sheet (Rs.in lacs)

1. Share Capital Authorised:

100 lakhs Equity shares of Rs. 2 each 200

4 lakhs 8% Preference shares of Rs. 80 each 320 520

Issued:

80.5 lakhs equity shares of Rs. 2 each 161

2 lakhs Preference Shares of Rs. 80 each 160 321

2. Tangible Assets

Freehold Property 275

Less: Utilized to pay Debenture holders (150) 125

Add: Appreciation 75 200

Plant and Machinery 100 _____

300

Question 23

Following are the Balance Sheet of companies as at 31.12.2015:

Liabilities P Ltd. Rs. Q Ltd. Rs. Assets P Ltd. Rs. Q Ltd. Rs.

Equity share capital (Rs.100)

8,00,000

6,00,000

Goodwill Fixed Assets

6,00,000 5,00,000

― 8,00,000

General Reserve 4,00,000 3,00,000 Investments 2,00,000 4,00,000

200

Current Assets

4,00,000 3,00,000

Investment AllowanceReserve

― 4,00,000

Sundry Creditors 5,00,000 2,00,000 ________ ________

17,00,000 15,00,000 17,00,000 15,00,000

P Ltd. took over Q Ltd. on the basis of the respective shares value, adjusting wherever necessary, the book values of assets and liabilities on the basis of the following information:

(i) Investment Allowance Reserve was in respect of addition made to fixed assets by Q Ltd. in the year 2012-2015 on which income tax relief has been obtained. In terms of the Income Tax Act, 1961, the company has to carry forward till 2018 reserve of Rs. 2,00,000 for utilization.

(ii) Investments of Q Ltd. included 1,000 shares in P Ltd. acquired at cost of Rs. 150 per share. The other investments of Q Ltd. have a market value of Rs. 1,92,500.

(iii) The market value of investments of P Ltd. are to be taken at Rs. 1,00,000.

(iv) Goodwill of P Ltd. and Q Ltd. are to be taken at Rs. 5,00,000 and Rs. 1,00,000 respectively.

(v) Fixed assets of P Ltd. and Q Ltd. are valued at Rs. 6,00,000 and Rs. 8,50,000 respectively.

(vi) Current assets of P Ltd. included Rs. 80,000 of stock in trade received from Q Ltd. at cost plus 25%.

The above scheme has been duly adopted. Pass necessary Journal Entries in the books of P Ltd. and prepare Balance Sheet of P Ltd. after taking over the business of Q Ltd. Fractional share to be settled in cash, rest in shares of P Ltd. Calculation shall be made to the nearest of a rupee.

Answer

Journal Entries in the Books of P Ltd.

Particulars Dr. (Amount) Cr. (Amount)

Business Purchase Account Dr. 12,42,500

To Liquidator of Q Ltd. 12,42,500

(For purchase consideration due)

201

Investments Account Dr. 1,92,500

Goodwill Account (Balancing figure) Dr. 1,00,000

Fixed Assets Account Dr. 8,50,000

Current Assets Account Dr. 3,00,000

To Sundry Creditors Account 2,00,000

To Business Purchase Account 12,42,500

(For assets and liabilities taken over at agreed value)

Liquidator of Q Ltd. Dr. 12,42,500

To Equity Share Capital Account (Rs. 100) 9,03,600

To Securities Premium Account (Rs.37.50) 3,38,850

To Cash Account 50

(For purchase consideration discharged)

Goodwill Account Dr. 16,000

To Current Assets (Stock) Account 16,000

(For elimination of unrealized profit on unsold stock)

Amalgamation Adjustment Account Dr. 2,00,000

To Investment Allowance Reserve Account 2,00,000

(For incorporation of statutory reserve)

Balance Sheet of P Ltd. as on 31st December, 2015

Particulars Notes Rs. (Amount)


1. Shareholders' funds




a. Trade Payables 3 7,00,000

Total 33,42,450

Assets


a. Fixed assets

Tangible assets (5,00,000 + 8,50,000) 13,50,000

202

Intangible assets 4 7,16,000

b. Investments (2,00,000 + 1,92,500) 3,92,500

c. Amalgamation Adjustment Account 2,00,000

2. Current assets (7,00,000 – 50 – 16,000) 6,83,950

Total 33,42,450

Notes to accounts

1 Share Capital


17,036 shares of Rs. 100 each (out of which 9036 shares are issued in favour of vendor forconsideration other than cash) 17,03,600

Total 17,03,600




Investment allowance reserve 2,00,000 9,38,850

3 Trade payables

Creditors 7,00,000

4 Intangible assets

Goodwill (6,00,000 + 1,00,000 + 16,000) 7,16,000

Working Notes:

1. Calculation of net asset value of shares

Particulars P Ltd. Q Ltd.

Goodwill 5,00,000 1,00,000

Fixed Assets 6,00,000 8,50,000

Investments 1,00,000 3,30,000*

Current Assets 4,00,000 3,00,000

Less: Sundry Creditors 5,00,000 2,00,000

Net assets 11,00,000 13,80,000

203

Number of shares 8,000 6,000

Value per equity share 137.50 230

*Investments of Q Ltd. are calculated as follows:

Shares in P Ltd. (1,000 x 137.50) 1,37,500

Market value of remaining investments (given) 1,92,500

3,30,000

2. Calculation of Purchase Consideration Rs.

Value of Assets of Q Ltd 15,00,000

Less: Value erosion on investments (Rs. 2,50,000 – Rs. 1,92,500) 57,500

Less: Sundry Creditors 2,00,000

12,42,500

Or

Total Purchase Consideration (Net Assets) 13,80,000

Less :Intrinsic Value of shares of P Ltd.

(1000X137.50) 137500

Purchase Consideration for Accounting Purpose 12,42,500

Settlement of Purchase Consideration Rs.

Net assets of Q Ltd. 13,80,000

Value of Shares of P Ltd. 137.50

Number of shares to be issued in P Ltd. to Q Ltd.

(13,80,000 / 137.50) 10,036.36

Less: Shares already held by Q Ltd. 1,000

Additional shares to be issued 9,036.36

Total value of shares to be issued (9036 x 137.50) 12,42,450

Cash payment for fractional share (.36 x 137.50) 50

12,42,500

204

Question 24

The following are the Balance Sheets of A Ltd. and B Ltd. as at 31st March, 2015:

(Rs. in lacs)

Liabilities A Ltd. B Ltd.

Fully paid equity shares of Rs.10 each 3,600 900

10% preference shares of Rs.10 each, fully paid up

1,200 -

Capital Reserve 600 -

General Reserve 2,100 -

Profit and Loss Account 780 -

8% Redeemable debentures of Rs.1,000 each - 300

Trade Creditors 2,421 369

Provisions 870 93

11,571 1,662

Assets

Plant and Machinery 4,215 468

Furniture and Fixtures 2,400 183

Motor Vehicles - 51

Stock 2,370 444

Sundry Debtors 1,044 237

Cash at Bank 1,542 240

Preliminary Expenses - 33

Discount on Issue of Debentures - 6

11,571 1,662

A new Company AB Ltd. was incorporated with an authorised capital of Rs. 15,000 lakhs divided into shares of Rs.10 each. For the purpose of amalgamation in the nature of merger, A Ltd. and B Ltd. were merged into AB Ltd. on the following terms:

(i) Purchase consideration for A Ltd.’s business is to be discharged by issue of 120 lakhs fully paid 11% preference shares and 720 lakhs fully paid equity shares of AB

205

Ltd. to the preference and equity shareholders of M Ltd. in full satisfaction of their claims.

(ii) To discharge purchase consideration for B Ltd.’s business, AB Ltd. to allot 90 lakhs fully paid up equity shares to shareholders of B Ltd. in full satisfaction of their claims.

(iii) Expenses on the liquidation of A Ltd. and B Ltd. amounting to Rs.6 lakhs are to be borne by AB Ltd.

(iv) 8% redeemable debentures of B Ltd. to be converted into 8.5% redeemable debentures of AB Ltd.

(v) Expenses on incorporation of AB Ltd. were Rs.15 lakhs.

You are requested to:

(a) Pass necessary Journal Entries in the books of MN Ltd. to record above transactions, and

(b) Prepare Balance Sheet of MN Ltd. after merger.

Answer

In the books of AB Ltd. Journal Entries (Rs. in lacs)

Particulars Dr. Cr.

Business Purchase Account Dr. 9,300

To Liquidator of A Ltd. 8,400

To Liquidator of B Ltd.

(Being consideration payable to liquidators of the two companies taken over)

900

Plant and Machinery Account (4,215+468) Dr. 4,683

Furniture and Fixtures Account (2,400+183) Dr. 2,583

Motor Vehicles Account Dr. 51

Stock Account (2,370+444) Dr. 2,814

Sundry Debtors Account (1,044+237) Dr. 1,281

Cash at Bank Account (1,542+240) Dr. 1,782

Preliminary Expenses Account Dr. 33

Discount on issue of Debentures Account Dr. 6

206

Profit and Loss Account (Refer W.N.) Dr. 120

To 8% Redeemable Debentures of B Ltd. Account 300

To Trade Creditors Account (2,421+369) 2,790

To Provisions Account (870+93) 963

To Business Purchase Account

(Being incorporation of all the assets and liabilities and the excess of consideration over the share capital being adjusted against reserves and surplus)

9,300

Liquidator of A Ltd. Account Dr. 8,400

Liquidator of B Ltd. Account Dr. 900

To Equity Share Capital Account (7,200+900) 8,100

To 11% Preference Share Capital Account

1,200

Profit and Loss Account Dr. 6

To Bank Account 6

(Being payment of liquidation expenses of A Ltd. and B Ltd.)

Preliminary Expenses Account Dr. 15

To Bank Account 15

(Being expenses on incorporation of AB Ltd.)

8% Redeemable Debentures of A Ltd. Account Dr. 300

To 8.5% Redeemable Debentures Account 300

(Being conversion of 8% Debentures of A Ltd. into 8.5% Debentures)

Profit and Loss Account Dr. 48

To Preliminary Expenses Account (33+15)

(Being Preliminary Expenses are charged to Profit & Loss A/c in the year it is incurred)

48

207

Balance Sheet of AB Ltd.

Particulars Notes Rs. in lacs

EQUITY & LIABILITY

1. Shareholders’ Funds

a Share capital 1 9,300

b Reserve & Surplus 2 (174)

2. Non-Current-Liabilities

a Long- term borrowings 3 300

3. Current-Liabilities

Trade Payables 4 2,790

Short term provisions 963

Total 13,179

ASSETS


a Fixed assets


b Other Non-current asset 6 6

2. Current assets

a Inventories 2,814

b Trade receivables 1,281

c Cash and cash equivalents 7 1,761

Total 13,179

Note to Accounts Rs. in lacs

1 Share Capital

Authorised share capital

15 crore shares of Rs. 10 each 15,000


810 lakhs Equity shares of Rs.10 each, fully paid Reserves and Surplus 8,100

120 lakhs 11% Preference shares of Rs. 10 each, fully paid 1,200

(All the above mentioned shares have been issued for consideration

other than cash)

Total 9,300


Profit and Loss Account (120+6+48) (174)

208


Secured

8.5% Redeemable Debentures 300

4 Short-term provisions

Others 963

5 Tangible assets

Plant and Machinery 4,683

Furniture and Fixtures 2,583

Plant and machinery 51

Total 7,317

6 Other non-current assets

Discount on Issue of Debentures 6


Cash at Bank (1,782–6–15) 1,761

Working Note:

Profit and Loss Account (Rs.in lacs)

Total consideration = Rs. (8,400 + 900) lacs 9,300

Less: Share Capital of Companies taken over [Rs. (3,600+1,200+900) lacs] 5,700

3,600

Amount to be adjusted:

Capital Reserve 600

General Reserve 2,100

Profit & Loss A/c 780 3,480

Debit balance of Profit & Loss Account 120

Question 25

The summarized Balance Sheet of Om Ltd. as on 31st March, 2015 was as follows:

Liabilities Amount Assets Amount

Equity Shares of Rs. 10 fully paid

30,00,000 Goodwill 5,00,000

Export Profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000

General Reserves 50,000 Stock 10,40,000

Profit and loss Account 5,50,000 Debtors 1,80,000

9% Debentures 5,00,000 Cash & Bank 2,80,000

Trade Creditors 1,00,000 Preliminary Expenses 50,000

50,50,000 50,50,000

209

Shiv Ltd. agreed to absorb the business of Om Ltd. with effect from 1st April, 2015.

(a) The purchase consideration settled by Shiv Ltd. as agreed:

(i) 4,50,000 equity Shares of Rs. 10 each issued by Shiv Ltd. by valuing its share @ 15 per share.

(ii) Cash payment equivalent to Rs. 2.50 for every share in Om Ltd.

(b) The issue of such an amount of fully paid 8% Debentures in Shiv Ltd. at 96% as is sufficient to discharge 9% Debentures in O Ltd. at a premium of 20%.

(c) Shiv Ltd. will take over the Tangible Fixed Assets at 100% more than the book value, Stock at Rs. 7,10,000 and Debtors at their face value subject to a provision of 5% for doubtful Debts.

(d) The actual cost of liquidation of Om Ltd. was Rs. 75,000. Liquidation cost of Om Ltd. is to be reimbursed by Shiv Ltd. to the extent of Rs. 50,000.

(e) Statutory Reserves are to be maintained for 1 more year.


(i) Close the books of Om Ltd. by preparing Realisation Account, Shiv Ltd. Account, Shareholders Account and Debenture Account, and

(ii) Pass Journal Entries in the books of Shiv Ltd. regarding acquisition of business.

Answer

(i) Purchase consideration computation Rs.

Cash payment for (3,00,000 x 2.5) 7,50,000

Equity Shares (4,50,000 x Rs. 15) 67,50,000

75,00,000

In the books of Om Ltd.

Realisation Account

Particulars Amount Particulars Amount

To Goodwill 5,00,000 By 9% Debentures 5,00,000

To Tangible Fixed Assets 30,00,000

To Stock 10,40,000 By Creditors 1,00,000

To Debtors 1,80,000 By ByAnu Ltd. 75,00,000

To Cash & Bank A/c

(2,80,000- 25,000)

2,55,000 (Purchase consideration)

To Cash & Bank A/c 25,000

(Realization expenses)

210

To Profit on realization transfer to shareholders

31,00,000

81,00,000 81,00,000

Equity Shareholders A/c

To Preliminary expenses 50,000 By Equity Share Capital 30,00,000

To Equity Shares in Anu Ltd. 67,50,000 By Export Profit Reserves

8,50,000

To Cash & Bank A/c 7,50,000 By General Reserves 50,000

By P & L A/c 5,50,000

By Realization A/c 31,00,000

75,50,000 75,50,000

Shiv Ltd.

To Realization A/c 75,00,000 By Share Capital 67,50,000

By Bank A/c 7,50,000

75,00,000 75,00,000

(ii) Journal Entries in the books of Shiv Ltd.

Particulars Dr. Cr.

1 Business Purchase A/c Dr. 75,00,000

To Liquidator of Om Ltd 75,00,000

(Being business of Om Ltd. taken over)

2 Tangible Fixed Assets Dr. 60,00,000

Stock Dr. 7,10,000

Debtors Dr. 1,80,000

Cash & Bank A/c Dr. 2,55,000

Goodwill A/c (Bal. fig.) Dr. 10,64,000

To Provision for doubtful debts 9,000

To Liability for 9 % Debentures 6,00,000

211

To Creditors 1,00,000

To Business Purchase account 75,00,000

(Being assets and liabilities taken over)

3 Amalgamation Adjustment A/c Dr. 8,50,000

To Export Profit Reserves 8,50,000

(Being statutory Reserves taken over)

4 Goodwill Dr. 50,000

To Bank A/c 50,000

(Liquidation expenses reimbursed))

5 Liquidator of Om Ltd. Dr. 75,00,000

To Equity Share Capital 45,00,000

To Securities Premium 22,50,000


(Being purchase consideration discharged)

6

Liability for 9% Debentures (5,00,000 x Dr. 120/100)

6,00,000

Discount on issue of debentures Dr. 25,000

To 8% Debentures (6,00,000 x 100/96) 6,25,000

(Being liability of debenture holders’ discharged)

Question 26

The following is the Balance Sheet of A Ltd. as at 31st March, 2015:


8,000 equity shares of Rs.100 each 8,00,000 Building 3,40,000

10% debentures 4,00,000 Machinery 6,40,000

Loan from A 1,60,000 Stock 2,20,000

212

Creditors 3,20,000 Debtors 2,60,000

General Reserve 80,000 Bank 1,36,000

Goodwill 1,30,000

Misc. Expenses

34,000

17,60,000 17,60,000

B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

(1) B Ltd. would take over all Assets, except bank balance at their book values less 10%. Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the normal rate of return be 8% on the combined amount of share capital and general reserve.

(2) B Ltd. is to take over creditors at book value.

(3) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and the balance in fully paid equity shares of Rs. 100 each at Rs. 125 per share.

The average profit is Rs. 1,24,400. The liquidation expenses amounted to Rs. 16,000. B Ltd. sold prior to 31st March, 2015 goods costing Rs.1,20,000 to A Ltd. for Rs. 1,60,000. Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31 st March, 2015. Creditors of A Ltd. include Rs.40,000 still due to B Ltd.

Show the necessary Ledger Accounts to close the books of A Ltd. and Prepare balance sheet of B Ltd. as on 1-04-15.

Answer Books of A Limited

Realisation Account

Rs. Rs.

To Building 3,40,000 By Creditors 3,20,000

To Machinery 6,40,000 By B Ltd. 12,10,000

To Stock 2,20,000 By Equity Shareholders (Loss)

76,000

To Debtors 2,60,000 By Loan from A 1,60,000

To Goodwill 1,30,000 By 10% debentures 4,00,000

To Bank (loan) 160,000

To Bank (10% debenture) 4,00,000

To Bank (exp) 16,000

21,66,000 21,66,000

213

Equity Share Holders Account

Rs. Rs.

To Realisation 76,000 By Equity share capital 8,00,000

To Misc. Expenses 34,000 By General reserve 80,000

To Equity shares in B Ltd. 6,10,000

To Bank 1,60,000

8,80,000 8,80,000

Bank Account

To Balance b/d 136,000 By realization 576,000

To B ltd 6,00,000 By Equity share holders (bf) 160,000

7,36,000 736,000

B Ltd

Balance Sheet as on 1st April, 2015 (An extract)







a. Trade Payables 3 2,80,000

b. Bank overdraft 6,00,000

Total 14,75,000

Assets


a. Fixed assets


Intangible assets 5 2,16,000

214

2 Current assets

a. Inventories 6 1,83,000

b. Trade receivables 7 1,94,000

14,75,000

Notes to accounts

1 Share Capital


4,880 Equity shares of Rs. 100 each

(Shares have been issued for consideration other than cash) 4,88,000

Total 4,88,000

2 Reserves and Surplus (an extract)


Profit and loss account

Less: Unrealised profit (15,000)

Total 1,07,000

3 Trade payables

Opening balance 3,20,000

Less: Inter-company transaction cancelled upon (40,000)

amalgamation 2,80,000

4 Tangible assets

Buildings 3,06,000

Machinery 5,76,000

Total 8,82,000

5 Intangible assets

Goodwill 2,16,000

6 Inventories


Less: Cancellation of profit upon amalgamation (15,000)

1,83,000

215

7 Trade receivables


Less: Intercompany transaction cancelled upon amalgamation (40,000)

Less: Provision for doubtful debts (26,000)

1,94,000

Working Notes:

1. Valuation of Goodwill Rs.

Average profit 1,24,400

Less: 8% of 8,80,000 (70,400)

Super profit 54,000

Value of Goodwill = 54,000 x 4 2,16,000

2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 2,16,000

Building 3,06,000

Machinery 5,76,000

Stock 1,98,000

Debtors 2,34,000

Total Assets 15,30,000

Less: Creditors 3,20,000

Net Assets 12,10,000

Out of this Rs. 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000) =6,10,000 in shares of Rs. 125. Thus, the number of shares to be allotted 6,10,000/125 = 4,880 shares.

3. Unrealised Profit on Stock

The stock of A Ltd. includes goods worth Rs. 1,00,000 which was sold by B Ltd. on profit. Unrealized profit on this stock will be :

1,60,000

40,000 x 1,00,000 = 25,000

As B Ltd purchased assets of A Ltd. at a price 10% less than the book value, 10% need to be adjusted from the stock i.e., 10% of ` 1,00,000. (10,000) Amount of unrealized profit 15,000.

216

Question 27

Semi Ltd. and Demi Ltd. were amalgamated on and from 1st April, 2015. A new company Telly Ltd. was formed to take over the businesses of the existing companies. The balance sheets of Semi Ltd. and Demi Ltd. as on 31st March, 2015 are given below:

Liabilities Rs. in Lacs Assets Rs. in Lacs

Semi Ltd. Demi Ltd. Semi Ltd. Demi Ltd.

Share Capital Long Short


850 725 Land & Building 460 275

14% Preference Shares of Rs. 100 each

320 175 Plant & Machinery 325 210

P & L Account

Revaluation reserve

75

125

52

80

Investments 75 50

Investment Allowance

Reserve General Reserve

50

240

30

160

Debtors 305 270

13% Debentures

(Rs. 100 each)

50 28 Cash & Bank 385 251

Bills payable 20 — Stock 325 269

Sundry Creditors 145 75 Bills receivable 25 —

19,00 13,25 19,00 13,25

Other information

(i) 13% Debenture holders of Semi Ltd. and Demi Ltd. are discharged by Telly Ltd. by issuing such number of its 15% Debentures of Rs.100 each so as to maintain the same amount of interest.

(ii) Preference Shareholders of the two companies are issued equivalent number of 15% preference shares of Telly Ltd. at a price of Rs. 125 per share (face value Rs. 100).

(iii) Telly Ltd. will issue 4 equity shares for each equity share of Semi Ltd. and 3 equity shares for each equity share of Demi Ltd. The shares are to be issued @ Rs. 35 each, having a face value of Rs.10 per share.

(iv) Investment allowance reserve is to be maintained for two more years.

Prepare the balance sheet of Telly Ltd. as on 1st April, 2015 after the amalgamation has been carried out in the nature of purchase.

217

Answer

Working Notes:

1. Computation of Purchase consideration (Rs. in lacs)

Semi Ltd. Demi Ltd.

(i) Preference Shareholders:

3,20,000 shares @ Rs. 125 each 400

1,75,000 shares @ Rs. 125 each 218.75

(ii) Equity Shareholders:

(4 × 8,50,000) = 34,00,000 equity shares @ Rs. 35 each 1190

(3 × 7,25,000) = 21,75,000 equity shares @ Rs. 35 each 761.25

15,90 9,80.00

Total Purchase Consideration Rs. 25,70,00,000

2. Calculation of Capital Reserve:

Value of Assets taken over- (Rs. In lacs)

Assets of Semi Ltd. 1900

Assets of Demi Ltd. 1325

3225

Less: Liabilities taken over

Debentures= 50+ 28 = 78 X 13%/ 15 % = 67.60

Public Deposit 25.00

Bills Payable 20.00

Sundry Creditors (145+ 75) 220.00 332.60

Net Assets 2892.40

Less: Purchase Consideration 2570.00

Capital Reserve 322.40

3. Securities Premium:

On preference shares :4,95,000 shares @ Rs. 25 per shares 123.75

On Equity Shares: 5,57,5000 shares @25 per share 1393.75

1517.50

218

a) Amalgamation in the nature of Purchase

Balance Sheet of Telly Ltd. as on 1st April, 2015

Particulars Note No. (Rs. in lacs)



(a) Share Capital 1 1052.50

(b) Reserves and Surplus 2 1,919.90


Long-term borrowings 3 92.60


Trade payables 240.00

Total 3305.00

II. Assets


(a) Fixed assets

Tangible assets 5 1270.00

(b) Non-current Investments ( 75+50)

(c) Other Non-current assets (Amalgamation Adjustment Account)

125.00

80

(2) Current assets

(a) Stock (325 + 269) 594.00

(b) Trade Receivables 6 600.00

(c) Cash & Cash equivalents (385 + 251) 636.00

Total 3305.00

219

Notes to Accounts

(Rs. in lacs) (Rs.in lacs)

1. Share Capital

55,75,000 Equity Shares of Rs. 10 each 5,57.5

4,95,000 15% Preference shares of 100 each 4,95.0 1,052.5

2. Reserves and surplus

Investment Allowance Reserve 80.0

Securities Premium

Capital Reserve

1517.50

322.40

1919.90

3. Long Term Borrowings

15% Debentures (50+28= 78X 13 %/15 %) 67.6

Public Deposit 25.0 92.6

4. Trade payables

Creditors 220.0

Bills Payable 20.0 240

5. Tangible assets

Land & Building 735.0

Plant & Machinery 535.0 1270

6. Trade Receivables

Debtors (305 + 270) 575.0

Bills receivables 25.0 600

220

Question 28

Given below Balance Sheets of AB Ltd. and XY Ltd. as on 31.03.2015. XY Ltd. was merged with AB Ltd. with effect from 1.4.2015 and the merger was in the nature of purchase.

Balance Sheets as on 31.03.2015


AB XY AB XY

Share Capital


7,00,000 2,50,000 Sundry Fixed Assets

9,50,000 4,00,000

General Reserve 3,50,000 1,20,000 Investments (Non-trade)

2,00,000 50,000

P & L Account 2,10,000 65,000 Debtors 75,000 80,000

Export Profit Reserve

70,000 40,000 Stock 1,20,000 50,000

12% Debentures

(Rs. 100 each)

1,00,000 1,00,000 Cash & Bank

Advance Tax

2,75,000

80,000

1,30,000

20,000

Prov. for Taxation 1,00,000 60,000 Preliminary Exp.

10,000 —

Sundry Creditors 40,000 45,000

Proposed Dividend 1,40,000 50,000

17,10,000 7,30,000 17,10,000 7,30,000

AB Ltd. would issue 12% Debentures to discharge the claims of the debenture holders of XY Ltd. at par. Non-trade investments of AB Ltd. fetched @25% while those of XY Ltd. fetched @18% Profit (pre- tax) by AB Ltd. and XY Ltd. during the year ended on 31st March 2013, 2014 and 2015 and were as follows:

AB Ltd. XY Ltd.

Rs. Rs.

2013 5,00,000 1,50,000

2014 6,50,000 2,10,000

2015 5,75,000 1,80,000

Goodwill may be calculated on the basis of capitalisation method taking 20% as the pre-tax normal rate of return. Purchase consideration is discharged by AB Ltd. on the basis of intrinsic value per share. The company decided to cancel the proposed dividend. Prepare Balance Sheet of ABLtd. after merger.

221

Answer

(1) Valuation of Goodwill

(i) Capital Employed

AB Ltd.

XY Ltd.

Sundry-Assets as per Balance Sheet

17,10,000 7,30,000

Less: Preliminary Expenses 10,000

Non-trade Investment 2,00,000 2,10,000

Less: 12% Debentures 1,00,000 1,00,000


Provision for Taxation 1,00,000 2,40,000

12,60,000 4,75,000

(ii) Average Pre-Tax Profit

AB Ltd. XY Ltd.

2013 5,00,000 1,50,000

2014 6,50,000 2,10,000

2015 5,75,000 1,80,000

17,25,000 5,40,000

Simple Average 5,75,000 1,80,000

Less: Non-trading income 50,000 9,000

Actual Average Profits 5,25,000 1,71,000

Goodwill:

Capitalisation Value of Average Profits=

Less : Capital Employed:

Goodwill

525000/20% = 2625000

1260000

1365000

171000/20%= 855000

475000

380000

222

(2) Intrinsic Value per Share

AB Ltd. XY Ltd.

Goodwill 13,65,000 3,80,000

Sundry Assets less pre. Expenses 17,00,000 7,30,000

Less: 12% Debentures 1,00,000 1,00,000


Provision for Tax 1,00,000 60,000

28,25,000 9,05,000

No. of Shares 70,000 25,000

Intrinsic value per share 40.40 36.20

(3) Purchase Consideration

Equity shares (25,000 x 36.20/40.40)=22,400 @ Rs. 40.40

9,04,960

Cash for fraction .99 x 40.40 40

9,05,000

Balance Sheet of AB Ltd. (after merger with XY Ltd.)








223


(a) Trade payables 4 85,000

(b) Other Current Liabilities 5 1,60,000

Total 28,49,960

II. Assets


(a) Fixed assets


Intangible assets (Goodwill) 3,80,000

(b) Non-current Investments (2,00,000+,50,000)

2,50,000

(c) Other non-current assets 40,000

(2) Current assets

(a) Stock (1,20,000 + 50,000) 1,70,000

(b) Debtors (75,000 + 80,000) 1,55,000

(c) Cash & Cash equivalents (2,75,000 + 1,30,000 – 40)

4,04,960

(d) Other current assets 7 1,00,000

Total 28,49,960

Notes to Accounts

1. Share Capital (Rs.) (Rs.)

92,400 Equity Shares of Rs. 10 each 9,24,000

(Of the above shares, 22,400 shares were issued otherwise than cash)



P&L A/c 2,10,000

Add : Proposed dividend written off 1,40,000

224

Less: Preliminary expenses (10,000) 3,40,000


Export profit reserve 70,000 1,10000

Add : Balance of XY Ltd. 40,000 1,10000

3.

Long Term Borrowings

14,80,960


Add : 12% debentures issued at par other than cash

1,00,000 2,00,000

4. Trade payables

Creditors 40,000

Add : Taken over 45,000 85,000

5. Other Current Liabilities

Provision for Taxation 1,00,000

Add: Provision for Taxation of TX ltd. 60,000 1,60,000

6. Tangible assets

Fixed Assets 9,50,000

Add : Taken over 4,00,000 13,50,000

Other non-current assets

Amalgamation Adjustment A/c 40,000 40,000

7. Other current assets

Advance Tax (80,000 + 20,000) 1,00,000

Question 29

Mahua Ltd. agreed to absorb Hezal Ltd. on 31st March 2015, whose balance sheet stood as follows:


80,000 shares of Rs. 10 each fully paid

8,00,000 Fixed Assets 7,00,000

General Reserve 1,00,000 Stock in trade 1,00,000

225

Sundry Creditors 1,00,000 Sundry Debtors 2,00,000

10,00,000 10,00,000

The consideration was agreed to be paid as follows:

(a) A payment in cash of Rs. 5 per share in Hezal Ltd. and

(b) The issue of shares of Rs. 10 each in Mahua Ltd., on the basis of 2 Equity Shares (valued at Rs. 15) and one 10% cum. preference share (valued at Rs. 10) for every five shares held in Hezal Ltd. The whole of the share capital consists of shareholdings in exact multiple of five except the following holding.

A 116

B 76

C 72

D 28

Other individuals 8

(eight members holding one share each) 300

It was agreed that Mahua Ltd. will pay in cash for fractional shares equivalent at agreed value of shares in Hezal Ltd. i.e. Rs. 65 for five shares of Rs. 50 paid.

Prepare a statement showing the purchase consideration receivable in shares and cash.

Answer

Schedule of Fraction Holding of Shares

Shareholders Exchangeable in multiple of Five

Non Exchangeable

A 116 115 1

B 76 75 1

C 72 70 2

D 28 25 3

Others 8 - 8

300 285 15

Shares Exchangeable: Equity shares in Mahua Ltd.

(i) 80,000-300 = 79,700; 2/5 shares of = 31880

(ii) 300-15 = 285; 2/5 Shares of = 114

79,985 31,994

226

Share Exchangeable: Preference shares in Mahua Ltd.

Share held in (i) 79700; 1/5 share of = 15940

Share held in (ii) 285; 1/5 shares of = 57

79,985 15,997


)5

2 x (79985 = 31,994 Equity Shares @ Rs. 15 each 4,79,910

5

1) x (79985= 15,997 Preference shares @ Rs. 10 each 1,59,970

Cash on 80,000 @ Rs. 5 each 4,00,000

Add: Cash for fraction in lieu of equity 15 x 2/5 shares @15 90

Cash for fraction in lieu of preference 15 x 1/5 shares @10 30

10,40,000

Question 30

Alpha Limited and Beta Limited were amalgamated on and from 1st April, 2015. A new Company Gamma Limited was formed to take over the business of the existing companies. The Balance Sheets of Alpha Limited and Beta Limited as on 31st March, 2015 are given below:

Liabilities Rs. in Lacs Assets Rs. in Lacs

Alpha Ltd. Beta Ltd. Alpha Ltd. Beta Ltd.

Share Capital


1000 800 Fixed Assets

1200 1000

14% Preference Shares of Rs. 100 each

400 300 Current Assets, Loans & Advances

880 565

P & L Account

Revaluation reserve

80

100

60

80

General Reserve 200 150

12% Debentures (Rs. 100 each)

96 80

227

Current Liabilities &

Provisions

204 95

2,080 1565 2,080 1565

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:

(i) Calculate Purchase consideration

(ii) Pass Journal entries in the books of Gamma Limited.

(iii) Also Prepare notes to the Balance Sheet of Gamma Limited as on 1st April, 2015 after the amalgamation has been carried out using the 'pooling of interest method'.

Answer

Working Note 1 : Calculation of purchase consideration

Purchase consideration Alpha Ltd. (Rs.) Beta Ltd. (Rs.)

i. No. of equity shares 10,00,000 8,00,000

Exchange Ratio 1:1.5 1:1

No. of equity shares to be issued 15,00,000 8,00,000

Equity Shares capital 1,500 Lakhs 800 Lakhs

ii. No. of preference shares 4,00,000 3,00,000

Exchange Ratio 1:1 1:1

No. of preference share to be issued

4,00,000 3,00,000

Preference Share Capital 400 Lakhs 300 Lakhs

Total Purchase Consideration 900 1100

228

Journal Entries in the books of Gamma Ltd.

Notes

a.

Particulars Dr. Cr.

For Business Merger

Business Purchase A/c Dr. 3,000

To Liquidator of Selling Co. A/c 3,000

b. Incorporation of Assets and Liabilities taken over:

Fixed Assets A/c Dr. 2,200

Current Assets A/c Dr. 1,445

General reserve Dr. (b.f.) 456

To Current Liabilities A/c 299


To Revaluation Reserve A/c 180

To General Reserve A/c 350

To Profit and Loss A/c 140

To Business Purchase A/c 3,000

c. Discharge of Purchase Consideration

Liquidator of Selling Co. A/c Dr. 3,000

To Equity Share Capital A/c 2300

To Preference Share Capital A/c 700

d. Discharge of Debentures:

12% Debentures A/c Dr. 132


Amount of debentures

Particulars Alpha Ltd. Beta Ltd.

(i) Value of 12% Debentures 96 80

(ii) Interest Payable 11.52 9.6

(iii) 16% Debentures to be issued 72 60

132

229

Notes

1. Share Capital

Equity share capital 2300

Preference share capital 700

Total 3,000


P&L 34

Revaluation Reserve 180

Total 214


16% Debentures(Rs.100 each)(72+60) 132

Total 132

4. Other Current Liabilities

Current Liabilities and Provisions (204+95) 299

Total 299

5. Tangible Assets

Fixed assets (1,200+1,000) 2,200

Total 2,200

6. Short-term Loans and Advances

Current assets, Loans and Advances (880+565) 1,445

Total 1,445

Question 31.

T. Ltd. and V. Ltd. propose to amalgamate. Their balance sheets as at 31st March, 2015 were as follows:

Liabilities T. Ltd Rs. V. Ltd Rs.

Assets T. Ltd Rs. V. Ltd Rs.

Equity shares of

Rs.10 each

15,00,000 6,00,000 Fixed assets

Less: Depreciation

12,00,000 3,00,000

General reserve

6,00,000 60,000 Investments (face value of Rs. 3 lacs, 6% tax free G.P. notes)

3,00,000

230

Profit & Loss A/c

3,00,000 90,000 Stock 6,00,000 3,90,000

Creditors 3,00,000 1,50,000 Debtors 5,10,000 1,80,000

Cash and bank 90,000 30,000

27,00,000 9,00,000 27,00,000 9,00,000

Their net profits (after taxation) were as follows:

Year T. Ltd.(Rs.) V. Ltd.(Rs.)

2012-13 3,90,000 1,35,000

2013-14 3,75,000 1,20,000

2014-15 4,50,000 1,68,000

Normal trading profit may be considered as 15% on closing capital invested. Goodwill may be taken as 4 years’ purchase of average super profits. The stock of T. Ltd. and V. Ltd. are to be taken at Rs.6,12,000 and Rs.4,26,000 respectively for the purpose of amalgamation. W. Ltd. is formed for the purpose of amalgamation of two companies. Corporate tax rate is 40%.

(a) Suggest a scheme of capitalization of W. Ltd. and ratio of exchange of shares; and

(b) Draft the opening balance sheet of W. Ltd.

Answer

(a) Scheme of capitalization of W. Ltd. and ratio of exchange of shares

Computation of Net Assets of amalgamating companies

T. Ltd.(Rs.) V. Ltd.(Rs.)

Goodwill (W.N.2) 3,19,200 1,21,200

6% investments (Non-trade) 3,00,000

Net Assets 21,12,000 7,86,000

Net Assets 27,31,200 9,07,200

No. of Equity shares 1,50,000 60,000

Intrinsic value of a share Rs. 18.208 15.12

No of shares to be issued by W

T. Ltd 1,50,000 x 18.208/10

V. Ltd 60,000 x 15.12/10

2,73,120 shares

90,720 shares

231

In total 2,73,120 + 90,720 i.e. 3,63,840 shares will be issued by W. Ltd.

Ratio of exchange of shares will be as follows:

1. Holders of 1,50,000 equity shares of T Ltd. will get 2,73,120 shares in W. Ltd.

2. Similarly, holders of 60,000 equity shares of V Ltd. will get 90,720 shares in W. Ltd.

(b) Opening Balance Sheet of W. Ltd.




Share Capital 36,38,400


Trade payables 4,50,000

Total 40,88,400

II. Assets


(a) Fixed assets

i. Tangible assets 2 15,00,000

ii. Intangible assets 3 4,40,400

(b) Non-current investments 4 3,00,000

(2) Current assets




Total 40,88,400

232

Notes to Accounts

1. Share Capital


3,63,840 Equity shares of Rs. 10 each 36,38,400

2. Tangible Assets

Other Fixed Assets (Rs. 12,00,000+Rs. 3,00,000) 15,00,000

3. Intangible assets

Goodwill (W.N.2) (Rs. 3,19,200 +Rs. 1,21,200) 4,40,400

4. Non-current investments

Investments in 6% Tax free G.P. Notes 3,00,000

Working Notes:

1. Calculation of closing trading capital employed on the basis of net assets

T. Ltd. V. Ltd.

Fixed Assets 12,00,000 3,00,000

Stock 6,12,000 4,26,000

Debtors 5,10,000 1,80,000

Cash and Bank Balances 90,000 30,000

Less: Creditors (3,00,000) (1,50,000)

Net Assets 21,12,000 7,86,000

2. Calculation of value of goodwill

(i) Average Trading Profit

2012-13 3,90,000 1,35,000

2013-14 3,75,000 1,20,000

2014-15 4,50,000 1,68,000

Profit after tax 12,15,000 4,23,000

Profit before tax (40%) 20,25,000 7,05,000

Add : Under valuation of closing stock

12,000 36,000

Total 20,37,000 7,41,000

233

Average of 3 years’ profit before tax

6,79,000 2,47,000

Less: non-trade income (3,00,000 x6%)

(18,000)

(ii) Average profit before tax 6,61,000 2,47,000

Less: 40% tax (2,64,400) (98,800)

Average profit after tax 3,96,600 1,48,200

Less: Normal Profit -15% (3,16,800) (1,17,900)

79,800 30,300

Value of goodwill at 4 years’ purchase

3,19,200 1,21,200

Question 32

The Balance Sheets of Sama Ltd. and Wahida Ltd. as on 31.03.2015 is as below:

Balance Sheet as on 31.03.2015

Liabilities Sama Ltd (Rs.)

Wahida Ltd (Rs).

Assets Sama Ltd (Rs.)

Wahida Ltd (Rs.)

Share capital (Share of Rs.100 each)

50,00,000 30,00,000 Fixed assets otherthan Goodwill

30,00,000 20,00,000

General reserves 4,00,000 2,00,000 Stock 8,00,000 6,00,000


6,00,000 4,00,000 Sundry debtors

14,00,000 9,00,000

Current liabilities 5,00,000 3,00,000 Inventories 30,00,000 25,00,000

Cash and bank

Preliminary Expenses

12,00,000

1,00,000

3,50,000

50,000

65,00,000 39,00,000 65,00,000 39,00,000

234

Sama Ltd. takes over Wahida Ltd. on 01.07.15 No Balance Sheet of Wahida Ltd. is available as on that date. It is however estimated that Wahida Ltd. earns estimated profit of Rs.2,00,000 after charging proportionate depreciation @ 10% p.a. on fixed assets, during April-June, 2015.

Estimated profit of Sama Ltd. during these 3 months is Rs. 4,00,000 after charging proportionate depreciation @ 10% p.a. on fixed assets.

Both the companies have declared and paid 10% dividend within this 3 months’ period. Goodwill of Wahida Ltd. is valued at Rs.2,00,000 and Fixed Assets are valued at Rs.1,00,000 above the estimated book value. Purchase consideration is to be satisfied by Sama Ltd. by shares at par. Ignore Income-tax.

You are required to calculate the following:

(i) No. of shares to be issued by Sama Ltd. to Wahida Ltd. against purchase consideration;

(ii) Net Current Assets of Sama Ltd. and Wahida Ltd. as on 01.07.2015;

(iii) P/L A/c balance of the Sama Ltd. as on 01.07.2015;

(iv) Fixed Assets as on 01.07.2015;

(v) Balance Sheet of Sama Ltd. as on 01.07.2015 after take over of Wahida Ltd.

Answer

(i) Number of shares to be issued by Sama Ltd. to Wahida Ltd. against purchase consideration

Wahida Ltd. (Rs.) (Rs.)

Goodwill 2,00,000

Fixed Assets 20,00,000

Less: Depreciation (50,000)

19,50,000

Add: Appreciation 1,00,000 20,50,000

Stock 6,00,000

Debtors 9,00,000

Cash and Bank balances 3,50,000

Add: Profit after Depreciation 2,00,000

Add: Depreciation(non-cash) 50,000

Less: Dividend (300000)

3,00,000

Less: Creditors (3,00,000)

Purchase Consideration 37,50,000

235

(ii) Calculation of Net Current Assets as on 01.07.2015

Sama Ltd. Wahida Ltd.

Stock 8,00,000 6,00,000

Debtors 14,00,000 9,00,000

Cash and Bank

Less: Dividend

Add: Profit before depreciation

12,00,000

5,00,000

4,75,000

1175000

3,50,000

3,00,000

2,50,000

3,00,000

Less: Creditors (5,00,000) (3,00,000)

28,75,000 15,00,000

(iii) Profit and Loss Account balance of Sama Ltd. as on 1.07.2015

P & L A/c balance as on 31.03.2015 6,00,000

Less: Dividend paid (5,00,000)

Add: Estimated profit for 3 months after depreciation

4,00,000

Less: Preliminary expenses (1,00,000)

4,00,000

(iv) Fixed Assets as on 01.07.2015

(Rs.) (Rs.)

Fixed Assets of Sama Ltd. as on 31.03.2015 30,00,000

Less: Depreciation for 3 months (75,000)

Fixed assets taken over of Weak Ltd. as on 31.03.2015

20,00,000

Less: Proportionate depreciation for 3 months on fixed assets

(50,000)

Add: Appreciation above the estimated book value 1,00,000 20,50,000

49,75,000

236

(v) Balance Sheet of Sama Ltd. as on 01.07.2015 (after Take Over)






Trade payables 3 8,00,000

Total 1,03,50,000

II. Assets


(a) Fixed assets


ii. Intangible assets 5 2,00,000

(2) Current assets




Total 1,03,50,000

Notes to Accounts:

1. Share Capital

87,500 (50,000+ 37,500) Equity shares of Rs. 100 each

87,50,000


Reserves 4,00,000

Profit and Loss Account [as computed in (iii)]

4,00,000 8,00,000

237

3. Trade payables

Creditors (Rs. 5,00,000 + Rs. 3,00,000) 8,00,000

4. Tangible Assets

Fixed assets [as computed in (iv)] 49,75,000


Goodwill 2,00,000

W.N.1. Calculation of Cash

Sama Ltd. Wahida Ltd.

Cash and Bank 12,00,000 3,50,000

Profit in 3 months 4,00,000 2,00,000

Depreciation in 3 months 75,000 50,000

Dividend paid -5,00,000 -3,00,000

11,75,000 3,00,000

Question 33

The abridged Balance Sheet (draft) of V Ltd. as on 31-03-2015 is as under:


24,000 Equity shares of Rs. 10 each

2,40,000 Goodwill

Fixed assets

5,000

2,57,000

5,000 8% Preference shares of Rs.10 each

50,000 Stock

Debtors

50,000

60,000

8% debentures 1,00,000 Bank 1,000

Interest accrued on debentures

8,000 Preliminary expenses 15,000

Sundry creditors 1,00,000 Profit and Loss A/c 1,10,000

4,98,000 4,98,000

238

The following scheme is passed and sanctioned by the court:

(i) A new company P Ltd. is formed with Rs. 3,00,000, divided into 30,000 Equity shares of Rs. 10 each.

(ii) The new company will acquire the assets and liabilities of V Ltd. on the following terms:

(a) Old company's debentures are paid by similar debentures in new company and for outstanding accrued interest, shares of equal amount are issued at par.

(b) The creditors are paid for every Rs. 100, Rs. 16 in cash and 10 shares issued at par.

(c) Preference shareholders are to get equal number of equity shares at par. For arrears of dividend amounting to Rs. 12,000, 5 shares are issued at par for each Rs. 100 in full satisfaction.

(d) Equity shareholders are issued one share at par for every three shares held.

(e) Expenses of Rs. 8,000 are to be borne by the new company.

(iii) Current Assets are to be taken at book value (except stock, which is to be reduced by Rs. 3,000). Goodwill is to be eliminated, balance of purchase consideration being attributed to fixed assets.

(iii) Remaining shares of the new company are issued to public at par and are fully paid.

You are required to show:

(a) In the old company's books:

(i) Realisation Account

(ii) Equity Shareholder's Account

(b) In the new company's books:

(i) Bank Account

(ii) Summarised Balance Sheet as per the requirements of Revised Schedule III of the Companies Act, 2013.

Answer

(a) (i) In the books of V Ltd. i.e Old company’s

Realisation Account

Rs. Rs.

Goodwill 5,000 8% Debentures 1,00,000

Fixed assets 2,57,000 Interest accrued on deb. 8,000

Stock 50,000 Creditors 1,00,000

239

Debtors 60,000 P Ltd. (P.C) 1,36,000

Bank 1,000 Equity shareholders a/c (b.f.)

35,000

Preference share holders A/c (W.N.3)

6,000

3,79,000 3,79,000

(ii) (a) Equity shareholders’ Account

Rs. Rs.

Preliminary expenses 15,000 Equity Share capital 2,40,000

Profit & loss A/c 1,10,000

Equity shares in P Ltd. 80,000

Realisation and Reconstruction A/c

35,000

2,40,000 2,40,000

(b) In the Books of P Ltd.

Bank Account

Rs. Rs.

To V ltd. (balance shown on B/S)

1,000 By V Ltd. (For creditors) 16,000

To Equity Share application A/c

56,000 By Goodwill 8,000

By Balance 33,000

57,000 57,000

240

(ii) Balance Sheet as on 31st March, 2015

Particulars Note No. Rs.


(1) Shareholder's Funds 1 3,00,000

Share Capital



Total 4,00,000

II. Assets


Fixed assets

(a) Tangible assets∗∗ (W.N.2) 2,52,000

(b) Intangible assets 3 8,000

(2) Current assets

(a) Inventories 47,000


(c) Cash and cash equivalents 33,000

Total 4,00,000

Notes to Accounts Rs.

1. Share Capital

Authorised share capital 30,000 equity shares of R`s10 each

3,00,000

Issued and Subscribed30,000 shares of Rs. 10 each fully paid up

(out of 24,400 (W.N.4) issued for consideration other than cash)

3,00,000


Secured 8% Debentures 1,00,000


Goodwill 8,000

241

Working Notes: Rs.

1. Calculation of Purchase consideration

Payment to preference shareholders

5,000 equity shares @ Rs. 10

50,000

For arrears of dividend: (Rs. 12,000 x 5 shares /s Rs.100) @ Rs. 10

6,000

Payment to equity shareholders

(24,000 shares x 1/3) @ Rs. 10

80,000

Total purchase consideration 1,36,000

2. Calculation of fair value at which fixed assets have been acquired by P Ltd.

Since, the question states that “balance of purchase consideration is being attributed to fixed assets”, it is implied that the amount of purchase consideration is equal to the fair value at which the net assets have been acquired. Therefore, the difference of fair value of net assets (excluding fixed assets) and the purchase consideration is the fair value at which the fixed assets have been acquired.

Purchase consideration / Net assets 1,36,000

Add: Liabilities:


Creditors 1,00,000 x 16/100 +1,00,000 x 10x10/100 1,16,000

3,60,000

Less: Stock Rs. (50,000- 3,000)= 47,000

Debtors 60,000

Bank 1,000 (1,08,000)

Fair value at which fixed assets has been acquired 2,52,000

242

3. Preference shareholders’ Account Rs.

To Equity Shares in P Ltd. 56,000 By Preference Share capital 50,000

By Realisation and Reconstruction A/c (B.f.)

6,000

56,000 56,000

4. Calculation of number of Equity shares issued to public

Number of shares

Authorised equity shares 30,000

Less: Equity shares issued for

Interest accrued on debentures 800

Creditors of V Ltd.1,00,000x10 shares/100

10,000

Preference shareholders of V Ltd. 5,000

Arrears of preference dividend 12,000x5/100

600

Equity shareholders of V Ltd. 24,000/3 8,000 (24,400)

Number of equity shares issued to public at par for cash

5,600

***

243

Question 1

H Ltd. acquires 3/4 of the share capital of S Ltd. On 31-03-2015 whose Balance Sheets are as follows:

H

(Rs.)

S

(Rs.)

H

(Rs.)

S

(Rs.)

Share Capital @ Rs. 10 each

20,000 10,000 Fixed assets (Tangible)

20,000

10,000

General Reserves 5,000 3,000 Current assets 13,000 12,000

P/L Account 3,000 2,000 7,500 Shares in S Ltd. (3/4)

10,000

10% Debentures 10,000 5,000

Sundry creditors 5,000 2,000

43,000 22,000 43,000 22,000

Required to compile consolidated Balance Sheet on 31-12-2015.

Answer

1. Cost of Control (Rs.)

Cost of acquisition of shares 10,000

Less : Paid up value in S Ltd. (3/4 of Rs. 10000) 7,500

Share of General Reserve (3/4 of Rs. 3000) 2,250

Share of P/L Account (3/4 of Rs. 2000) 1,500


Minority Interest

Paid up value 2,500

General Reserve (1/4) 750

P/L Account (1/4) 500

Minority Interest 3,750

5

Consolidation of Accounts

244

Consolidated Balance Sheet as at 31st March, 2015


A EQUITY AND LIABILITIES


(a) Share capital 20,000.00

(b) Reserves and surplus 1 9,250.00

2 Minority Interest 3,750.00


(a) Long-term borrowings (10% debentures) 2 15,000.00


(a) Trade payables 3 7,000.00

TOTAL (1+2+3+4+5) 55,000.00

B ASSETS


(a) Fixed assets

(i) Tangible assets 4 30,000.00

2 Current assets

(a) Other current assets 5 25,000.00

TOTAL (1+2) - 55,000.00

Note 1. Reserve & Surplus Note Rs.

General Reserve 5,000.00

P/L A/c 3,000.00

Capital Reserve 1,250.00

9,250.00


10% Debenture H 10,000.00

S 5,000.00

15,000.00

245

Note 3. Trade Payable

H 5,000.00

S 2,000.00

7,000.00


H 20,000.00

S 10,000.00

30,000.00

Note 5. Other Current Assets

H 13,000.00

S 12,000.00

25,000.00

Question.2

H Ltd. Holds share capital of S Ltd. On 31-12-2015 whose Balance Sheets are as follows:

H

(Rs.)

S

(Rs.)

H

(Rs.)

S

(Rs.)


20,000 10,000 Fixed assets (Tangible)

30,000

15,000

General Reserves 10,000 5,000 Current assets 35,000 25,000

P/L Account (1.4.14) 5,000 4,000 8,000 Shares in S Ltd.

10,000

10% Debentures 20,000 10,000

Sundry creditors 10,000 5,000

P/L Account for the year

10,000 6,000

75,000 40,000 75,000 40,000

H Limited acquired shares in S Limited on 01-10-2014. S limited has a balance of Rs. 4000 in General Reserve on 01-04-2014. On the account fire goods costing Rs. 2000 of S Limited were destroyed in June, 2014. The loss has been charged to the Profit and Loss Account for the year.

Required to prepare a consolidated Balance Sheet. Required to compile consolidated Balance Sheet on 31-12-2015.

246

Answer

Analysis of Profit (of S)

Particulars Capital Profit (Rs.)

Revenue Profit (Rs.)

General Reserve of 01.04.14 4000.00

Profit & Loss of 01.04. 14 4000.00

Profit for the year prior to Transfer + General Reserve (6000+1000+2000)/2

4500.00 4500.00

Less: Loss on fire in March 2000.00

10500.00 4500.00

Holding Company’s share (80%) 8400.00 3600.00

Minority Company’s share (20%) 2100.00 900.00

Cost of Control (Rs.)

Cost acquiring share 10000.00

Less: Nominal Value of shares (800*10) 8000.00

Share of Capital profits 8400.00


Minority Interest (Rs.)

Nominal Value of share Capital (200*10) 2000.00

Share of Capital Profit 2100.00

Share of Revenue Profit 900.00

5000.00

247

Consolidated Balance Sheet as at 31st December, 2015

Particulars Note No. (Rs.)





2 Minority Interest 5,000





TOTAL (1+2+3+4+5) 105,000.00

B ASSETS


(a) Fixed assets


2 Current assets

(a) Other current assets 5 60,000.00

TOTAL (1+2) - 105,000.00

Note

1. Resesrve & Surplus Note


P/L A/c

H 15,000.00

S 3600


35000.00


12% Debenture

H 20,000.00

S 10,000.00

30,000.00

248

3. Trade Payable H 10,000.00

S 5,000.00

15,000.00

4. Tangible Assets

H 30,000.00

S 15,000.00

45,000.00

5. Other Current Assets

H 35,000.00

S 25,000.00

60,000.00

Question 3

From the Extract Balance Sheets and information given below, prepare Consolidated Balance Sheet of H Ltd. and S Ltd. as at 31st March, 2015:

H S H S


30,000 20,000 Fixed assets

(Tangible)

20,000

15,000

General Reserves 5,000 5,000 1,600 Shares in S Ltd.

16,000 -

10% Debentures 10,000 5,000 Stock 8,000 10,000

Sundry creditors 5,000 5,000 Debtors 4,000 7,000

Cash 2,000 3,000

50,000 35,000 50,000 35,000

H Ltd. holds 80% of Equity Shares in S since its incorporation. Prepare Consolidated Balance Sheet.

Answer

Analysis of Profit (of S)

Particulars Capital Profit (Rs.)

Revenue Profit (Rs.)


Holding Company’s share (80%) 0 4,000.00

Minority Company’s share (20%) 0 1,000.00

249

Cost of Control (Rs.)

Cost acquiring share 16000.00

Less: Nominal Value of shares (1600*10) 16000.00

Share of Capital profits 0


Minority Interest (Rs.)

Nominal Value of share Capital (400*10) 4000.00

Share of Revenue Profit 1000.00

5000.00

Consolidated Balance Sheet as at 31st December, 2015






2 Minority Interest 5,000





TOTAL (1+2+3+4+5) 69,000.00

B ASSETS


(a) Fixed assets


250

2 Current assets

(a) Inventories 5 18,000.00

(b) Trade receivable 6 11,000

(c) Cash & Cash equivalent 7 5,000

TOTAL 69,000.00

Note

1. Resesrve & Surplus Note



8% Debenture

H 10,000.00

S 5,000.00

15,000.00

3. Trade Payable

H 5,000.00

S 5,000.00

10,000.00 4. Tangible Assets

H 20,000.00 S 15,000.00

35,000.00 5. Inventories

H 8,000.00 S 10,000.00

18,000.00 6. Trade receivable

H 4,000.00 S 7,000.00

11,000.00 7. Cash & Cash equivalent

H 2,000.00 S 3,000.00

5,000.00

251

Question 4

From the following balance sheets of H Ltd. and its subsidiary S Ltd. drawn up at 31st March, 2015, prepare a consolidated balance sheet as at that date, having regard to the following :

(i) Reserves and Profit and Loss Account of S Ltd. stood at Rs. 25,000 and Rs. 15,000 respectively on the date of acquisition of its 80% shares by H Ltd. on 1st April, 2014.

(ii) Machinery (Book-value Rs.1,00,000) and Furniture (Book value Rs.20,000) of S Ltd. were revalued at Rs.1,50,000 and Rs.15,000 respectively on 1.4.2014 for the purpose of fixing the price of its shares. [Rates of depreciation: Machinery 10%, Furniture 15%.]

Balance Sheet of H Ltd. as on 31st March, 2015

Liabilities H Ltd. (Rs.)

S Ltd. (Rs.)

Assets H Ltd. (Rs.)

S Ltd. (Rs.)

Share Capital Shares of Rs. 100 each

6,00,000

1,00,000 Machinery 3,00,000 90,000

Reserves 2,00,000 75,000 Furniture 1,50,000 17,000

Profit and Loss Account

1,00,000 25,000 800 shares in S Ltd.: Rs. 200 each

1,60,000

Creditors 1,50,000 57,000 Other assets 4,40,000 1,50,000

10,50,000 2,57,000 10,50,000 2,57,000

Answer

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2015






(2) Minority Interest 48,150


(a) Trade Payables 2,07,000

Total 11,99,750

252

II Assets


(a) Fixed assets


(ii) Intangible assets 4 12,000

(b) Other assets (Asssumed non- current)

5 5,90,000

Total 11,99,750

Working

(1) Consolidated assets balances

Machinery F&F Other assets

H Ltd. 3,00,000 1,50,000 4,40,000

S Ltd. 90,000 17,000 1,50,000

Revaluation +50,000 -5,000

Depreciation Adjustment

-5,000 +750

4,35,000 162,750 5,90,000

(2) Consolidated Equity & Liabilities balances

(3) Minority Interest

Face value of shares 20,000

Capital Profit 17,000

Revenue profit 11,150

48,150

Capital Reserve P&L Creditors

H Ltd. 6,00,000 2,00,000 1,00,000 1,50,000

S Ltd. 40,000 4600 57,000

240,000 104,600 207000

253

(4) Cost of control

(5) AOP-S Ltd.

Question 5

A Ltd. acquired 1,600 ordinary shares of Rs. 100 each of B Ltd. on 1st July 2014. On December 31, 2014 the Balance Sheets of the two companies were as given below:

Liabilities A Ltd. (Rs.)

B Ltd. (Rs.)

Assets A Ltd. (Rs.)

B Ltd. (Rs.)

Share Capital Shares of Rs. 100 each

5,00,000

2,00,000 Land & Buildings

1,50,000 1,80,000

Reserves 2,40,000 1,00,000 Plant & Machinery

2,40,000 1,35,000

Rs.

Cost of investments 1,60,000

Less: Face value of shares 80,000

Capital profits 68,000

G/W 12,000

Capital Profits Revenue Profits Total

Profit & Loss A/c G/R P&L

15,000 10,000 25,000

General Reserve 25,000 50,000 75,000

Profit on revaluation

50,000

Less : Loss on Furniture

5,000 (5,000) +750

Total 85,000 5,750

M.I.-20% 17,000 1150

H Ltd. 80% 68000 10,000 4600

40,000

254

Profit & Loss Account

57,200 82,000 Investments in B Ltd.

3,40,000

Creditors 47,100 9,000 Stock 1,20,000 36,400

Bank Overdraft

80,000 — Sundry Debtors

44,000 40,000

Bills Payable

— 8,400 Bills Receivable

15,800 —

Cash 14,500 8,000

9,24,300 3,99,400 9,24,300 39,940

The Profit & Loss Account of B Ltd. showed a credit balance of Rs. 30,000 on 1st January, 2014 out of which a dividend of 10% was paid on 1st August, 2014. A Ltd. has credited the dividend received to its Profit & Loss Account. The Plant & Machinery which stood at Rs. 1,50,000 on 1st January, 2014 was considered as worth Rs. 1,80,000 on 1st July, 2014; this figure is to be considered while consolidating the Balance Sheets.

Prepare consolidated Balance Sheet as on December 31, 2014.

Answer

Consolidated Balance Sheet of A Ltd. and its Subsidiary B Ltd.








(a) Trade Payables 64,500

(b) Short term borrowings 80,000

Total 10,36,525

255

II Assets


(a) Fixed assets



(2) Current assets

(a) Inventories

5 1,56,400


(c) Cash & Cash equivalents 22,400

10,36,525

Working


Land and building

(Rs.)

Plant & Machinery

(Rs.)

Inventories (Rs.)

Sundry debtors

(Rs.)

Bills receivables

(Rs.)

Cash (Rs.)

A Ltd. 1,50,000 2,40,000 1,20,000 44,000 14,500

B Ltd. 1,80,000 1,35,000 36,400 40,000 15,800 8,000

Revaluation +37,500

Depreciation Adjustment

-1875

3,30,000 4,10,625 1,56,400 84,000 15,800 22,500

(2) Consolidated Equity & liabilities balances

Capital (Rs.)

Reserve (Rs.)

P&L (Rs.)

Creditors (Rs.)

Bills Payable

(Rs.)

Short term borrowings

(Rs.)

H Ltd. 5,00,000 2,40,000 57,200 47,100 80,000

S Ltd. 27,300 9,000 8,400

Dividend rectification

-16,000

5,00,000 2,24,000 84,500 56,100 8,400 80,000

256


Rs.




83,525

(4) Cost of control

(5) AOP-B Ltd.

Rs.

Cost of investments

Less : Face value of shares

3,40,000

160,000

Capital profits 1,46,800

Rectification of dividend -16,000

G/w 17,200

Capital Profits (Rs.)

Revenue Profits Total (Rs.)

G/R (Rs.) P&L (Rs.)

Profit & Loss A/c 30,000 52,000 82,000

General Reserve 100,000 - - 100,000

+ Dividend paid +20,000

Time adjustments +36,000 -36,000

Dividend as per source -20,000

Revaluation profit 37,500

Additional depreciation (1,875)

Total 1,83,500 34,125

M.I.-20% 36,700 6,825

A Ltd. 80% 1,46,800 27,300

257

Question 6

On 31st March, 2015, the Balance Sheets of H Ltd. and S Ltd. stood as follows:

(Rs. in 000’s)

Liabilities H Ltd. S Ltd.

Equity Share (Capital – Authorised) 5,000 3,000

Issued and subscribed in Equity Shares of Rs. 10 each full paid

4,000 2,400


Profit and Loss Account 1,305 810

Bills Payable 124 80

Sundry Creditors 487 427

Provision for Taxation 220 180

Other Provisions 65 17

7,129 4,604

Assets:


Furniture and Fittings 615 298

Investment in the Equity Shares of S Ltd. 1,500

Stock 983 786

Debtors 700 683

Bills Receivables 120 95

Cash and Bank Balances 410 102

Sundry Advances 260 190

7,129 4,604

Following Additional Information is available:

(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2014 at which date the following balances stood in the books of S Ltd. General Reserve Rs. 1,500 thousand; Profit and Loss Account Rs. 633 thousand.

(b) On 14th July, 2014 S Ltd. declared a dividend of 20% out of pre-acquisition profits and paid corporate dividend tax (including surcharge) at 11%. H Ltd. credited the dividend received to its Profit and Loss Account.

258

(c) On 1st November, 2014 S Ltd. issued a 3 fully paid Equity Shares of Rs. 10 each, for every 5 shares held as bonus shares out of pre-acquisition General Reserve.

(d) On 31st March, 2015, the Stock of S Ltd. included goods purchased for Rs. 50 thousand from H Ltd., which had made a profit of 25% on Cost.

Prepare a consolidated Balance Sheet as on 31st March, 2015.

Answer

Consolidated Balance Sheet (CBS) of H Ltd. with its subsidiary S Ltd. as on 31st March, 2015

I. Equity and Liabilities (Rs. in ‘000)




(2) Minority Interest (W.N.6) 1,560


Trade payables 1 1,118

Short term provisions 1 482

Total 10,223

II. Assets


Fixed assets


(2) Current assets



(c) Cash and cash equivalents 2 512

(d) Short term loans and advances 2 450

Total 10,223

259

Working

(1) Consolidated assets balances (Rs. in ‘000)

P&M (Rs.)

F&F (Rs.)

Stock (Rs.)

Debtors (Rs.)

B/R (Rs.)

Cash (Rs.)

S.T Adv. (Rs.)

H Ltd. 2,541 615 983 700 120 410 260

S Ltd. 2,450 298 786 683 95 102 190

Less : URP (50 x 1/5)

(10)

4,991 913 1,759 1,383 215 512 450

(2) Consolidated Equity & liabilities balances (Rs. in ‘000)

Capital Reserve P&L B/P Creditors S.T.Prov. Other Prov.

H Ltd. 4,000 928 1,305 124 487 220 65

S Ltd. 54 306 80 427 180 17

Less : URP

(10)

Less: dividend

(180)

982 1,421 204 914 400 82


(Rs. in ‘000)

Face value of shares 960

Capital Profit 360

Revenue profit 240

1560

Note : Because Holding Ratio is 60%, thus minority ratio would be 40% i.e. (2400 x 40%) = 960.

260

(4) Cost of Control

(Rs. in ‘000)

Cost of investments 1500

Less : Face value of shares 1440

Capital profits 540

Rectification of dividend 180

Capital Reserve 660

(5) AOP-S Ltd.

Capital (Rs.)

Revenue (Rs.) Total (Rs.)

G/R P&L

Profit & Loss A/c 633 177 (B/F) 810

General Reserve 1500 -810 690

Add : Bonus and dividend

+900 +333

Total 2133 90 510

Time adjustment - - -

Less : dividend Paid

-333

Bonus as per source

-900

Total 900 90 510

M.I.-40% 360 36 204

H Ltd. 60% 540 54 306

6. Holding Ratio

For every 5 shares – 3 Bonus Shares

90,000 shares = 5

3 x 90,000 = 54,000 share (Bonus)

Existing holding shares by H Ltd. = 90,000

Total Holding = 90,000 + 54,000 = 1,44,000 shares

261

Total number of shares issued by S Ltd.

= 10

24,00,000 = 2,40,000 shares

% of Holding = 100% x 2,40,000

1,44,000

= 60%

7. For every 5 shares the shareholder gets 3 shares Bonus

Thus total shares = 5 + 3 = 8 shares

Accordingly No. of shares before bonus issue is 8

2,40,000 x 5

= 1,50,000 shares

8. 20% Dividend declared on 1,50,000 shares by S Ltd. is Rs. 3,00,000 (20% of 1,50,000 x 10)

Corporate dividend Tax @ 11% of 3,00,000 = 33,000

Total Amount = 3,33,000

9. Calculation of Reserve and Surplus :

General Reserve of H Ltd. : 928

Profit & Loan A/c of H Ltd. : 1305

Capital Reserve of S Ltd. : 660

Revenues Profit (54 + 306) : 360

Less : Unrealised Profit on Stock of S Ltd. : (10)

Less : Rectification of Dividend : (180)

3063

Question 7

On 31st March, 2015 the Balance Sheets of H Ltd. & its subsidiary S Ltd. stood as follows:

Liabilities Rs. in lakhs

Share Capital: H Ltd. S Ltd.

Authorised 15,000 6,000

Issued and Subscribed:

Equity Shares of Rs. 10 each, fully paid up 12,000 4,800


262

Profit and Loss Account 2,715 1,620

Bills Payable 372 160

Sundry Creditors 1,461 854

Provision for Taxation 855 394

Proposed Dividend 1,200

21,387 9,208

Assets

Land and Buildings 2,718


Furniture and Fittings 1,845 586

Investments in shares in S Ltd. 3,000

Stock 3,949 1,956

Debtors 2,600 1,363

Cash and Bank Balances 1,490 204

Bills Receivable 360 199

Sundry Advances 520

21,387 9,208

The following information is also provided to you:

(a) H Ltd. purchased 180 lakh shares in S Ltd. on 1st April, 2014 when the balances to General Reserve and Profit and Loss Account of S Ltd. stood at Rs. 3,000 lakh and 1,200 lakh respectively.

(b) On 4th July, 2014 S Ltd. declared a dividend @ 20% for the year ended 31st March, 2014. H Ltd. credited the dividend received by it to its Profit and Loss Account.

(c) On 1st January, 2015 S Ltd. issued 3 fully paid-up shares for every 5 shares held as bonus shares out of balances to its general reserve as on 31st March, 2020.

(d) On 31st March, 2015 all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H Ltd. But on that date, H Ltd. held only Rs. 45 lakh of these acceptances in hand, the rest having been endorsed in favour of its creditors.

(e) On 31st March, 2015 S Ltd.’s stock included goods which it had purchased for Rs. 100 lakh from H Ltd. which made a profit @ 25% on cost.

Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 2015 bearing in mind the requirements of AS 21.

263

Answer

CBS of H Ltd. with its subsidiary S Ltd. as on 31st March, 2015

(Rs. in lacs)







Short term provisions 1 1,249

Other Current Liabilities 1 1,200

Total 27,530 II. Assets


Fixed assets


(2) Current assets




(d) Short term loans and advances 2 520

Total 27,530

Working

(1) Consolidated assets balances (Rs. in lacs)

L&B (Rs.)

P&M (Rs.)

F & F (Rs.)

Stock (Rs.)

Debtors (Rs.)

B/R (RS.)

Cash (Rs.)

S.T Adv. (Rs.)

H Ltd. 2,718 4,905 1,845 3,949 2600 360 1,490 520

S Ltd. - 4,900 586 1,956 1,363 199 204

Less: URP (100 x 1/5)

(20)

Less: Contra

-45

2,718 9,805 2,431 5,885 3,963 514 1,694 520

264

(2) Consolidated Equity & liabilities balances (Rs. in lacs)

Capital (Rs.)

Reserve (Rs.)

P&L (Rs.)

B/P (Rs.)

Creditors (Rs.)

S. T.Prov. (Rs.)

Pro. Div (Rs.)

H Ltd. 12,000 2784 2,705 372 1461 855 1200

S Ltd. 108 612 160 854 394

Less URP

(20)

Less: dividend

(360)

Less: Contra

-45

12,000 2892 2,937 487 2315 1249 1200


(Rs. in lacs)

Face value of shares 1920

Capital Profit

Revenue profit 480

Proposed dividend 720

3120

(4) Cost of control

(Rs. in lacs)

Cost of investments 3000

Less: Face value of shares 2880


Rectification of dividend 360

C/R 1320

265

(5) AOP - S Ltd. (Rs. in lacs)

Capital Revenue Total

G/R P & L

Profit & Loss A/c 1200 420 (B/F) 1620

General Reserve 3000 -1620 1380

Add: dividend and Bonus

+1800 +600 2400

Total 4200 180 1020 5400

Time adjustment - - -

Less: dividend Paid -600

Bonus as per source -1800

Total -1800 180 1020

M.I.-40% 720 72 408

H Ltd. 60% 1080 108 612

6. Holding ratio

% of Holding =2400

100 x 1800) x (3/5 1800 =60%, Bonus Amount =4800 x 3/8=1800

Question 8

On 31st March, 2013, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs. 12,00,000. The Balance Sheet of Q Ltd. on that date was as under:


1,50,000 equity shares of Rs. 10

each fully paid

15,00,000

Fixed Assets

Current Assets

10,50,000

6,45,000

Pre-incorporation profits 30,000

Profit and Loss Account 60,000

Creditors 1,05,000 _______

16,95,000 16,95,000

266

On 31st March, 2015 the Balance Sheets of two companies were as follows:

Liabilities P Ltd. (Rs.)

Q Ltd. (Rs.)

Assets P Ltd. (Rs.)

Q Ltd. (Rs.)

Equity shares of Rs. 10 each fully paid (before bonus issue)

45,00,000 15,00,000 Fixed Assets

Invest-ments

79,20,000 23,10,000

Securities Premium

9,00,000 – 1,05,000 equity shares in

Pre-incorporation profits

– 30,000 Q Ltd. at cost

12,00,000

General Reserve

60,00,000 19,05,000 Current Assets

44,10,000 17,55,000

Profit & Loss Account

15,75,000 4,20,000

Creditors 5,55,000 2,10,000

1,35,30,000 40,65,000 1,35,30,000 40,65,000

Directors of Q Ltd. made bonus issue on 31.3.2013 in the ratio of one equity share of Rs. 10 each fully paid for every two equity shares held on that date.

Calculate as on 31st March, 2015 (i)Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss Account in each of the following cases:

(i) Before issue of bonus shares.

(ii) Immediately after issue of bonus shares.

It may be assumed that bonus shares were issued out of post-acquisition profits by using General Reserve.

Prepare a Consolidated Balance Sheet after the bonus issue.

267

Answer

(i) Before issue of bonus shares

(i) Cost of control/capital reserve Rs.

Investment in Q Ltd. 12,00,000

Less: Face value of investments 10,50,000

Capital profits (W.N.) 63,000

Cost of control 87,000

(ii) Minority Interest Rs.


Capital profits (W.N.) 27,000

Revenue profits (W.N.) 6,79,500

11,56,500

(iii) Consolidated profit and loss account – P Ltd.

Rs.

Balance 15,75,000

Add: Share in revenue profits of Q Ltd. (W.N.)

15,85,500

31,60,500

(ii) Immediately after issue of bonus shares

(i) Cost of control/capital reserve Rs.

Face value of investments (Rs. 10,50,000 + 5,25,000)

15,75,000

Capital Profits (W.N.) 63,000

Less: Investment in Q Ltd. 12,00,000

Capital reserve 4,38,000

(ii) Minority Interest Rs.

Share Capital (Rs. 4,50,000 + 2,25,000) 6,75,000

Capital Profits (W.N.) 27,000

Revenue Profits (W.N.) 4,54,500

11,56,500

(iii) Consolidated Profit and Loss Account – P td. Rs.

Balance 15,75,000

Add: Share in revenue profits of Q Ltd. (W.N.) 10,60,500

26,35,500

268

Consolidated Balance Sheet of P Ltd. and its subsidiary Q Ltd.

Liabilities Rs.


Reserve & surplus 99,73,500

Creditors 7,65,000

Minority Interest 11,56,500

1,63,95,000

Tangible Assets 1,02,30,000

Current Assets 61,65,000

1,63,95,000

Working Note:

(Before and after issue of bonus shares)

1. Analysis of Profits of Q Ltd.

Revenue Profits

Capital Profits

(Rs.)

Before bonus

(Rs.)

After Bonus

(Rs.)

Pre-incorporation profits 30,000

Profit and loss account on 31.3.2013 60,000

90,000

General reserve* 19,05,000 19,05,000

Less: Bonus shares 7,50,000

11,55,000

Profit from 1.4.13 to 31.03.2015 3,60,000 3,60,000

(4,20,000 – 60,000)

90,000 22,65,000 15,15,000

P Ltd.’s share (70%) 63,000 15,85,500 10,60,500

Minority’s share (30%) 27,000 6,79,500 4,54,500

Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account.

269

2. Reserve & surplus (Rs.)


Capital Reserve 4,38,000


Profit and Loss Account 26,35,500

99,73,500

Question 9

Write a short note on Minority Interest.

Answer

The claim of outside shareholders in the subsidiary company has to be assessed and shown as a liability in the consolidate balance sheet.

While calculating the amount of minority interest, all these items have to be taken into account and proportionate share of all such profits and reserves should be added to the amount of minority interest while proportionate share of all such losses should be deducted from the minority interest, thus,

Minority Interest = paid-up value of shares held by minority shareholders + proportionate share of the company’s profits and reserves + proportionate shares of profits on revaluation of assets of the company - proportionate share of company’s losses – proportionate share of loss on revaluation of assets of the company.

But, if there are some preference shares of the subsidiary company held by outsiders, the minority interest in respect of the preference share will consist only of the face value of such shares and the dividend due on such shares if there are profits.

of bonus shares by the subsidiary company will increase Question 10

What is the treatment of Bonus issue by subsidiary company.

Answer

The issue the number of shares held by the holding company as well as the minority shareholders. Issue of bonus shares may or may not affect the cost of control depending upon whether such shares are issued out of capital profits or revenue profits.

(a) Issue of bonus shares out of capital profit (Pre-acquisition profits): In this case there will be no effect on accounting treatment because while calculating the cost of control the share of the holding company in pre-acquisition profit is reduced because of capitalisation of profit and the paid-up value of shares held in subsidiary company is increased. Hence there is no effect on cost of control when bonus shares are issued from pre-acquisition profit.

270

(b) Issue of bonus shares out of post acquisition profit: In this case, a part of the revenue profits will get capitalised resulting in decrease of cost of control or increase in capital reserve.

Question 11

What is the treatment of dividend paid by subsidiary company.

Answer

Dividends may be received out of capital or revenue profits of the subsidiary company. Dividend received by the holding company from the capital profits of the subsidiary company are credited to investment in shares of the subsidiary account thereby reducing the cost of control or increasing capital reserve.

On the other hand, dividend received out of the revenue profits (i.e., post-acquisition profits) are treated as income and credited to profit & loss Account by the holding company. If dividend declared partly out of capital profits (i.e., pre-acquisition profits) and partly out of revenue profits (i.e., post- acquisition profits), the dividend received is divided into two parts in proportion to its declaration out of capital profits and revenue profits. The dividend pertaining to the first part (i.e., capital profits) is credited to Investment Account reducing the cost of control or increasing the capital reserve and dividend pertaining to the second part (i.e., revenue profits) is credited to profit and loss Account or surplus account.

Question 12

Able Ltd. made an offer to acquire all the shares of Baker Ltd. at a price of Rs. 25 per share, to be satisfied by the allotment of five shares in Able Ltd. for every four shares in Baker Ltd. By the date of expiration of the offer, which was on 1st January, 2015, share-holders owning 75% of the shares in Baker Ltd. accepted the offer and the acquisition was effective from that date.

The accounting date of Baker Ltd. was on 31st March in each year, but to conform with Able Ltd. accounts were prepared to 30th June, 2015, covering the fifteen months to the date. The draft summarised accounts of the companies on 30th June, 2015 which do not include any entries regarding the acquisition of shares in Baker Ltd., were as follows:

Balance Sheet as on 30th June, 2015

Liabilities Able Ltd. Baker Ltd.

Share Capital -Equity shares of Rs. 10 each

Rs. Rs.

Authorised : 3,00,000 75,000

Issued & fully paid: 1,50,000 60,000

General Reserve 55,000 —

271

Profit & Loss Account 62,000 20,000

Current liabilities 27,000 7,000

Provision for taxation 33,000 6,000

3,27,000 93,000

Assets

Freehold property, at cost 2,00,000 38,000

Plant & Machinery at cost 50,000 12,000

Less: Depreciation 18,000 3,000

32,000 9,000

Quoted Investment at Cost 7,000 -

Stock at Cost 32,000 21,000

Debtors 41,000 17,000

Balance at Bank 15,000 8,000

3,27,000 93,000

Profit & Loss Account for the period ended on 30th June, 2015

Able Ltd. Baker Ltd.

One Year Rs. 15 months Rs.

Balance brought forward 14,000 12,000

Profit for the period 80,000 18,000

Total 94,000 30,000

Taxation for the period 32,000 6,000

Interim Dividend paid, 30th Nov., 2014 — 4,000

Balance carried forward 62,000 20,000

94,000 30,000

272

The Directors of Able Ltd. recommended a final dividend of 20% to the shareholders on register as on 30th June, 2015. The Directors of Baker Ltd., proposed a final dividend of 12½% payable on 30th September, 2015.

You are required to prepare the consolidated Balance Sheet of Able Ltd. and Baker Ltd. On 30th June, 2015.

Answer

CBS of Able Ltd. and its subsidiary Baker Ltd. as on 30th June, 2015


1 Equity and Liabilities


(a) Share Capital 2,06,250

(b) Reserves and Surplus 1,35,600

(2) Minority Interest(W.N 3) 18,125


(a) Trade Payables 34,000

(b) Short term provisions 39,000

(b) Other current liabilities 43,125

Total 4,76,100

II. Assets


(a) Fixed assets

Tangible assets 2,79,000

Intangible assets 56,100

(b) Non-current investment 7,000

(2) Current assets

(a) Inventories 53,000

(c) Trade receivable 58,000

(c) Cash & Cash equivalents Rs. 23,000

Total 4,76,100

273

Working


P&M

(Rs.)

F & F

(Rs.)

Investments

(Rs.)

Stock

(Rs.)

Debtors

(Rs.)

Cash

(Rs.)

H Ltd.

32,000 2,00,000 7,000 32,000 41,000 15,000

S Ltd.

9,000 38,000 - 21,000 17,000 8,000

41,000 2,38,000 7,000 53,000 58,000 23,000


Capital (Rs.)

Reserve (Rs.)

P&L (Rs.)

Securities Premium (Rs.)

Current Liabilities (Rs.)

Tax Prov. (Rs.)

Pro. Div (Rs.)

H Ltd. 2,06,250 55,000 62,000 56,250 27,000 33,000 41,250

S Ltd. - - 3,600 - 7,000 6,000 1,875

Less: P. Div. (20% on 2,06,250)

41,250

2,06,250 55,000 24,350 56,250 34,000 39,000 43,125


Rs.




Proposed dividend -1,875

18,125

274

(4) Cost of control

Rs.

Cost of investments 1,12,500

Less : Face value of shares

-45,000

Capital profits -11,400

G/w 56,100

(5) AOP- Baker Ltd.

Capital (Rs.)

Revenue Total (Rs.)

P & L (Rs.)

Profit & Loss A/c 12,000 8,000 20,000

Add: Dividend +4,000

Total 12,000 12,000

Time adjustment 12,000x 9/15

+7,200 -7,200

Less : Dividend Paid as per source

-4,000

Total 15,200 4,800

M.I.-25% 3,800 1,200

H Ltd. 75% 11,400 3,600

(6) Value of investments

Value of 6,000x 75% Shares @ Rs. 25 =1,12,500

No. of shares of Able Ltd. 4,500 × 5/4= 5,625

Face value of 5,625 Shares @ 10 =56,250

Securities Premium = 56,250

275

Question 13

From the following Summarised Balance Sheets of A Ltd. and its subsidiary B Ltd., prepare a consolidated Balance Sheet as on 31st December, 2014.

Liabilities A Ltd. (Rs.)

B Ltd. (Rs.)

Assets A Ltd. (Rs.)

B Ltd. (Rs.)

Equity Shares

of Rs. 10 each

1,00,000 20,000

Sundry Assets 93,000 32,000

Profit on sale of

Shares

3,000

Shares in B Ltd. 1,200 shares at Rs. 15 each

18,000

Profit and Loss A/c Brought forward

6,000 7,200

For the year 2,000 4,800

1,11,000 32,000 1,11,000 32,000

A Ltd. bought in earlier year 1,600 equity shares in B Ltd.@ 15 when the Profit and Loss Account balance in B Ltd. was Rs. 4,400. A Ltd. sold 400 shares @ Rs. 22.50, credited the difference between the sale proceeds and cost to “Profit on sale of investment account” on 30 June, 2014 and crediting the balance to the investment account. Profit during the year accrued uniformly.

Answer

Consolidated Balance Sheet of A Ltd., and its subsidiary B Ltd. as at 31st December, 2014

Note Rs.

I.

(1)


Shareholder's Funds



(2) Minority Interest 4 12,800

Total 1,28,360

II. Assets

Non-current assets



Total 1,28,360

276

(1) Consolidated Balances

Share Capital (Rs.)

Profit & Loss (Rs.)

Fixed Assets (Rs.)

A Ltd. 1,00,000 8,000 93,000

B Ltd. - 4,560 32,000

Profit on sale

3,000

1,00,000 15,560 125,000

(2) Analysis of Profits of B Ltd.

Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

Profit 4400 7600 12000 (7200+4800)

A Ltd.’s share (60%) 2640 4560

Minority’s share (40%) 1760 3040

(3) Cost of Control

Rs.

Cost of Investments 18,000

Less: Face value shares 12,000


Goodwill 3,360


Rs.

Share capital 8,000

Capital profit 1,760

Revenue profits 3,040

12,800

277

Question 14

The draft balance sheet of X Ltd. and its subsidiary Y Ltd. in U.S.A as at 31st March 2015 are as follows:

Assets X Ltd. (Rs.) Y Ltd. $

Fixed assets 18,00,000 20,000

Investments 16,00,000 -

Stock 12,00,000 30,000

Debtors 24,00,000 60,000

Cash 8,00,000 10,000

Total 78,00,000 1,20,000

Equity share capital 30,00,000 30,000

Profit & Loss account 20,00,000 40,000

Loans 12,00,000 20,000

Trade creditors 6,00,000 10,000

Taxation 10,00,000 20,000

78,00,000 1,20,000

X Ltd. acquired 80% shares in Y Ltd. on 1.4.2014 when profit & loss account balance was $23,000. Y Ltd. paid a dividend of $3,000 out of the balance of profit as on 1.4.2014 on 30.09.2014 for the year 2013-14. When amount was remitted by Y Ltd. the exchangre rate was 1$= Rs. 40. The rate of exchange prevailing on 1.4.2014 was Rs. 30 and on 31.03.2015 was Rs. 42.

There was no change in the fixed assets or share capital. Prepare balance sheet as on 31.03.2015.

278

Answer

(Foreign Subsidiary) consolidated Balance Sheet of X Ltd. with Y Ltd.



(a) Share Capital 30,00,000

(b) Reserves and Surplus (24,80,000 + 27,2000)

27,52,000


Borrowings 20,40,000


(a) Trade Payables 10,20,000

(c) Short term Provisions 18,40,000

(b) Other current liabilities

Total 112,40,000

II. Assets


(a) Fixed assets

(i) Tangible assets 26,40,000

(ii) Intangible assets

(2) Current assets


(b) Trade Receivables 49,20,000

(c) Cash & Cash equivalents 12,20,000

Total 11,240,000

279

Working

1. Analysis of Profits in foreign currency

Capital $ Revenue $ Total $

P & L Accounts 23,000 17,000 40,000

+ dividend paid 3,000

23,000 20,000

Time adjustments - -

Less: dividend as per source -3,000

Total 20,000 20,000

Applicable Exchange Rate 30 (30 +42)/2 = 36

Total amount in Indian rupees

600000 720000

X Ltd.’s share : 80% 480000 576000

Minority Share : 20% 120000 144000

2. Balance sheet in Indian currency

Assets Y Ltd. $ Rate (Rs.) (Rs.)

Fixed assets 20,000 42 8,40,000

Stock 30,000 42 12,60,000

Debtors 60,000 42 25,20,000

Cash 10,000 42 4,20,000

1,20,000 50,40,000

Equity share capital 30,000 30 9,00,000

Profit & Loss account-Capital 20,000 30 6,00,000

Profit & Loss account-Revenue 20,000 36 (30+42)/2

7,20,000

Loans 20,000 42 8,40,000

Trade creditors 10,000 42 4,20,000

280

Taxation 20,000 42 8,40,000

F.C.T.R (b.f.) - 720,000

1,20,000 50,40,000

3. Assets consolidated

Fixed assets (Rs.)

Stock (Rs.)

Debtors (Rs.)

Cash (Rs.)

X Ltd. 1,800,000 1,200,000 2,400,000 800,000

Star Ltd. 840,000 1,260,000 2,520,000 420,000

2,640,000 2,460,000 4,920,000 1,220,000

4. Liabilities

Capital (Rs.)

P& L (Rs.)

Loans (Rs.)

Creditors (Rs.)

Taxation (Rs.)

X Ltd 3,000,000 2,000,000 1,200,000 600,000

1,000,000

Star

576,000 840,000 420,000 840,000

Dividend rectification

(96,000)

3,000,000 2,480,000 2,040,000 1,020,000 1,840,000

5. Cost of control

Cost of investments

1,600,000

Share in share capital 80% 720,000

Capital Profits

480,000

Rectification of dividend 3000*40*80% 96,000

Share in FCTR 80% 576,000


281

6. Minority interest

Share capital 20% 180,000

Capital Profits

120,000

Revenue Profits

144,000

FCTR 20% 144,000

588,000

Question 15

The summarised Balance Sheets of A Ltd. and B Limited are as follows:

Balance Sheets as at 31st December, 2014

A Ltd. B Ltd.

Sources of Funds: Rs. Rs.

Share Capital in equity shares of Rs. 10 each 2,00,000 50,000

Reserves 20,000 5,000

Profit and Loss Account as on 1st January, 2014 30,000 10,000

Profit for the year 8,000 8,000

Add: Dividends from B Ltd. 4,000

Less: Dividends paid (5,000)

Creditors 30,000 20,000

2,92,000 88,000

Application of Funds:

Fixed Assets 2,00,000 80,000

Current Assets 32,000 8,000

Shares in B Ltd. at cost – 3,000 shares 60,000

2,92,000 88,000

A Limited had acquired 4,000 shares in B Ltd. at Rs. 20 each on 1st January, 2014 and sold 1,000 of them at the same price on 1st October, 2014. The sale is ex dividend. An interim dividend of 10% was paid by B Limited on 1st July, 2014.

Draft the consolidated Balance Sheet as at 31st December, 2014.

282

Answer

CBS of A Limited and its subsidiary B Limited as at 31st December, 2014






(2) Minority Interest 4 27,200

(3) Trade payables 1 50,000

Total 3,41,000

II. Assets

Fixed assets


(ii) Intangibles 3 21,00

(iii) Current assets 1 40,000

Total 3,41,000

(1) Consolidated Balances

Share Capital

(Rs.)

Reserve (Rs.)

Profit & Loss (Rs.)

Creditors (Rs.)

Fixed Assets (Rs.)

Current Assets (Rs.)

A Ltd. 2,00,000 20,000 42,000 30,000 2,00,000 32,000

B Ltd. - - 1,800 20,000 80,000 8,000

2,00,000 20,000 43,800 50,000 2,80,000 40,000

(2) Analysis of Profits of B Ltd.

Capital Profits (Rs.)

Revenue Profits (Rs.)

Total (Rs.)

Reserves 5,000 5,000

Profit and loss account on 1.1.2000

10,000 3,000 13,000

Interim Dividend paid ______ 8,000

Total 15,000 5,000

283

Dividend as per source - 5,000

Total 15,000 3,000

A Ltd.’s share (60%) 9,000 1,800

Minority’s share (40%) 6,000 1,200

(3) Cost of Control

Rs.

Cost of Investments 60,000

Less : Face value shares 30,000


Cost of control (Goodwill) 21,000


Rs.

Share capital 20,000

Capital profit 6,000

Revenue profits 1,200

27,200

Question 16

Prepare the Consolidated Balance Sheet as on December 31, 2015 of group of companies A Ltd., B Ltd. and C Ltd. Their balance sheets on that date are given below:

Liabilities A Ltd. Rs.

B Ltd. Rs.

C Ltd. Rs.

Share Capital (share of Rs. 100 each) 1,25,000 1,00,000 60,000

Reserves 18,000 10,000 7,200

Profit & Loss A/c 16,000 4,000 5,000

Sundry Creditors 7,000 10,000 3,000

1,66,000 1,24,000 75,200

Assets

284

Fixed Assets 28,000 55,000 37,200

Investments in shares

750 shares in B Ltd. 85,000 — —

400 shares C Ltd. — 53,000 —

Stocks 30,000 6,000 23,000

Debtors 23,000 10,000 15,000

1,66,000 1,24,000 75,200

Other information:

(i) All the shares were acquired on 30th June, 2015.

(ii) On lst January, 2015 the following balances stood in the books of B Ltd. and C Ltd.

B Ltd. C Ltd.

Rs. Rs.

Reserves 8,000 6,000

P & L Account 1,000 1,000

Answer

CBS of A Ltd. and its subsidiaries B Ltd. and C Ltd. as on 31st December, 2015

Particulars Note (Rs.)


(1) Shareholder's Funds 2




(3) Current Liabilities 2


Total 2,35,175

II. Assets


Fixed assets


ii. Intangible assets 1 7,975

285

(2) Current assets



Total 2,35,175

Working


F.A. (Rs.) Stock(Rs.) Debtors(Rs.)

A Ltd. 28,000 30,000 23,000

B Ltd. 55,000 6,000 10,000

C Ltd. 37,200 23,000 15,000

120,200 59,000 48,000


Capital (Rs.)

Reserve (Rs.)

P&L (Rs.)

Creditors (Rs.)

A Ltd. 125,000 18,000 16,000 7,000

B Ltd. - 1,050 2,125 10,000

C Ltd. - - - 3,000

1,25,000 19,050 18,125 20,000

(3) Analysis of Profit-B Ltd.

Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

G/R P&L

General Reserve 8,000 2,000 10,000

Profit & Loss A/c 1,000 3,000 4,000

Time adjustment +2,500 -1,000 -1,500

Add: Transfer form C 400 1,333

286

Total 11,500 1400 2,833

M.I.-25% 2,875 350 708

A. Ltd. 75% 8,625 1050 2125

(4) Analysis of profit-C Ltd.


G/R P&L

Profit & Loss A/c 1,000 - 4,000 5,000

General Reserve 6,000 1,200 - 7,200

Time adjustments +2,600 -600 -2,000

Total 9,600 600 2,000

B Ltd 2/3 6,400 400 1,333

M.I. 1/3 3,200 200 667


Rs.

Shares held by outsiders B 25,000

Shares held by outsiders C 20,000

Profits from B 3,933

Profits from C 4,067

53,000

(6) Cost of Control

Rs.

Amount paid by both companies 1,38,000

Less: Face value of shares in B Ltd. -75,000

Face value of shares in C Ltd. -40,000

Capital profits C -6,400

Capital profits B -8,625

G/w 7,975

287

Question 17

A Limited is a holding company and B Limited and C Limited are subsidiaries of A Limited. Their Balance Sheets as on 31.12.2014 are given below:

Liabilities A Ltd. B Ltd. C Ltd. Assets A Ltd. B Ltd. C Ltd.

Rs. Rs. Rs. Rs. Rs. Rs.

Share Capital

1,00,000 1,00,000 60,000 Fixed Assets

20,000 60,000 43,000

Reserves 48,000 10,000 9,000 Investments

Profit & Loss 16,000 12,000 9,000 Shares in B Ltd.

95,000

C Ltd. Balance

3,000 Shares in C Ltd.

13,000 53,000

Creditors 7,000 5,000 Stock in Trade

12,000

A Ltd. Balance

7,000 B Ltd. Balance

8,000

Sundry Debtors

26,000 21,000 32,000

_______ _______ _____ A Ltd. Balance

_______ _______ 3,000

1,74,000 1,34,000 78,000 1,74,000 1,34,000 78,000

The following particulars are given:

(i) The Share Capital of all companies is divided into shares of Rs. 10 each.

(ii) A Ltd. held 8,000 shares of B Ltd. and 1,000 shares of C Ltd.

(iii) B Ltd. held 4,000 shares of C Ltd.

(iv) All these investments were made on 30.6.2014.

(v) On 31.12.2013, the position was as shown below:

288

B Ltd. C Ltd.

Rs. Rs.

Reserve 8,000 7,500

Profit & Loss Account 4,000 3,000


Fixed Assets 60,000 43,000

Stock in Trade 4,000 35,500

Sundry Debtors 48,000 33,000

(vi) 10% dividend is proposed by each company.

(vii) The whole of stock in trade of B Ltd. as on 30.6.2014 (Rs. 4,000) was later sold to A Ltd. for Rs. 4,400 and remained unsold by A Ltd. as on 31.12.2014.

(viii) Cash-in-transit from B Ltd. to A Ltd. was Rs. 1,000 as at the close of business.

You are required to prepare the Consolidated Balance Sheet of the group as on 31.12.2014.

Answer






(b) Reserves and Surplus (49325 + 20980) 2 70305

(2) Minority Interest 37820



Total 2,08,188

289

II. Assets


Fixed assets


ii. Intangible assets 1 5,525

Current assets




Total 2,20,125

Working


F.A. (Rs.)

Stock (Rs.)

Debtors (Rs.)

Cash in transit (Rs.)

Inter Co. (Rs.)

A Ltd. 20,000 12,000 26,000 8,000

B Ltd. 60,000 - 21,000 -

C Ltd. 43,000 - 32,000 3,000

URP/ Cash in transit

-400 +1,000 -11,000

1,23,000 11,600 79,000 1,000 Nil


Capital (Rs.)

Reserve (Rs.)

P&L (Rs.)

Creditors (Rs.)

Inter Co. (Rs.)

Prop. Dividend

(Rs.)

A Ltd. 1,00,000 48,000 16,000 7,000 3,000 10,000

C Ltd. 125 500 5,000 7,000 2,000

B Ltd. - - 1,000

-Contra 1,200 4,480 -10,000

1,00,000 49,325 20,980 12,000 Nil 13,000

290

(3) Analysis of profit-B Ltd.

Capital (Rs.) Revenue (Rs.) Total (Rs.)

G/R P&L


Profit & Loss A/c 4,000 8,000 12,000

Time Adjustments +5,000 -1,000 -4,000

Less URP -400

Total 17,000 1,000 3,600

+Transfer From B - 500 2,000

Total 17,000 1,500 5,600

20 % M.I. 3,400 300 1,120

A. Ltd. 80% 13,600 1,200 4,480



G/R P&L

Profit & Loss A/c 3,000 6,000 9,000


Time adjustments +3,750 -750 -3,000

14,250 750 3,000

B Ltd. 4 /6 9,500 500 2,000

A Ltd 1/6 2,375 125 500

M.I. 1/6 2,375 125 500


Share Capital in B Ltd. 20000

Share Capital in C Ltd. 10000

Profits in B Ltd. (3400 + 300 + 1120)

4820

Profits in C Ltd. (2375 + 125 + 528) 3000

37820

291

(6) Cost of control

Rs.

Amount paid by both companies 161,000

Less: Face value of shares in B Ltd. -80,000

Face value of shares in C Ltd. -50,000

Capital profits C 9500+2375 -11,875


G/w 5,525

Question 18

The following are the Balance Sheets of A Ltd. and Subsidiaries B Ltd. and C Ltd. as on 31st December, 2014.


Rs. Rs. Rs.

Share Capital (in shares of Rs. 100 each)

12,50,000 10,00,000 6,00,000

Profit & Loss Account 1,60,000 20,000 51,000

Reserves 1,80,000 1,00,000 72,000

Sundry Creditors 1,03,000 1,20,000 —

Total 16,93,000 12,40,000 7,23,000

Fixed Assets 2,80,000 5,50,000 3,75,000

Investment at cost 10,30,000 5,30,000

Sundry Debtors 2,63,000 1,60,000 3,48,000

Stock-in- trade— 1,20,000

16,93,000 12,40,000 7,23,000

(a) The break-up of investments, which were all made on 30th June, 2014 is as under:

(i) A Ltd. held 7,500 shares in B Ltd. at a cost of Rs. 8,50,000 and 1,500 shares in C Ltd. at a cost of Rs. 1,80,000

(ii) B Ltd. held 4,000 shares in C Ltd. at cost of Rs. 5,30,000.

(b) (i) Sundry Creditors of A Ltd. include Rs. 33,000 due to C Ltd. which amount is duly reflected in the books of C Ltd.

(ii) Sundry Creditors of B Ltd. include Rs. 72,000 due to A Ltd. whereas Sundry Debtors of A Ltd include Rs. 86,000 due from B Ltd. The difference of

292

Rs.14,000 being cash in transit from B Ltd. to A Ltd. as on 31st December, 2014.

(c) (i) The subsidiaries’ position as on the date acquisition of shares (ie, on 30th June. 2014) was as follows :

B Ltd. Rs.

C Ltd. Rs.

Reserves 90,000 60,000

Profit and Loss Account 10,000 8,400


Fixed Assets 5,50,000 3,68,400

Stock-in-trade 40,000

Sundry Debtors 5,50,000 30,000

(ii) The whole of the stock-in-trade of B Ltd. as on 30th June, 2014 was subsequently sold to A Ltd. at a profit of 20% on selling price.

(d) The stock-in-trade of A Ltd. as on 31st December, 2014 includes Rs. 25,000 being cost to A Ltd. of the above stock purchased from B Ltd. and remaining unsold as on that date.

Prepare a Consolidated Balance Sheet as on 31st December, 2014.

Answer






(b) Reserves and Surplus (1994507+192750) 2 3,92,200



(a) Trade payables 2 1,18,000

Total 21,08,300

II. Assets


Fixed assets

i. Tangible assets 1 12,05,000 ii. Intangible assets 1 1,22,300

293

(2) Current assets

(a) Inventories 1 1,15,000

(b) Trade receivables 1 6,52,000


Total 21,08,300

Working


F.A. (Rs.) Stock (Rs.)

Debtors (Rs.)

Cash in transit (Rs.)

A Ltd. 2,80,000 1,20,000 2,63,000

B Ltd. 5,50,000 - 160,000

C Ltd. 3,75,000 - 348,000

Cash in transit -19,000 14,000

12,05,000 1,20,000 6,52,000 14,000


Capital (Rs.)

P&L (Rs.)

Reserve (Rs.)

Creditors (Rs.)

A Ltd. 12,50,000 160,000 180,000 1,03,000

B Ltd. - 28,800 9,750 120,000

C Ltd. - 10,650 3,000 -

-Contra - - - 105,000

12,50,000 1,99,450 192,200 1,18,000

(3) Analysis of profit-B Ltd.

Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

G/R P&L

General Reserve 90,000 10,000 1,00,000

Profit & Loss A/c 10,000 10,000 20,000

294

Add: Transfer from C

URP (20% of 25000)

- 8,000

-5,000

28,400

Total 100,000 13,000 38,400

M.I.-25% 25,000 3250 9,600

A. Ltd. 75% 75,000 9,750 28,800


Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

G/R P&L

Profit & Loss A/c 60,000 12,000 - 72,000

General Reserve 8,400 - 42,600 51,000

Total 68,400 12,000 42,600

A 15/60 17,100 3,000 10,650

B Ltd 40/60 45,600 8,000 28,400

M.I. 5/60 5,700 1,000 3,550


Rs.

Shares held by outsiders B 250,000

Shares held by outsiders C 50,000

Profits from C (5700 + 1000 + 3550)

10,250

Profits from B (25000 + 3250 + 9600)

37,850

3,48,100

295

(6) Cost of control

Rs.

Amount paid by both companies 15,60,000

Less: Face value of shares in B Ltd. -7,50,000

Face value of shares in C Ltd. -5,50,000

Capital profits C (17100 + 45600) -62,700


G/w 122,300

Question 19

X Ltd. purchases its raw materials from Y Ltd. and sells goods to Z Ltd. In order to ensure regular supply of raw materials and patronage for finished goods, X Ltd. through its wholly owned subsidiary, X Investments Ltd. acquires on 31st December, 2014, 51% of equity capital of Y Ltd. for Rs. 15 crores and 76% of equity capital of Z Ltd. for Rs.30 crores. X Investments Ltd. was floated by X Ltd. in 2008 from which date it was wholly owned by X Ltd.

The following are the Balance Sheets of the four companies as on 31st December, 2014:

Rs. in crore

X Ltd. (Rs.)

X Invest Ltd. (Rs.)

Y Ltd. (Rs.)

Z Ltd. (Rs.)

Equity (Fully paid) Rs. 10 each 25 5 10 15

Reserves and Surplus 75 20 15 20

Loan Funds: Secured 15 - 5 20

Unsecured 10 50 10 15

Current Liabilities 10 - 64 143

135 75 104 213

Fixed Assets: Cost 60 15 30

Less: Depreciation - 35 - 7 - 17

Net Fixed Assets 25 8 13

Investments Equity Shares of:

X Investments Ltd. 5

296

Y Ltd. 15

Z Ltd. 30

Other Companies (Market Value Rs. 116)

29

Current Assets 105 1 96 200

135 75 104 213

There are no intercompany transactions outstanding between the companies. You are asked to prepare consolidated balance sheet as at 31st December, 2014.

Answer

Consolidated Balance Sheet of X Ltd. and its subsidiaries as on 31.12.2014

Rs. in crore



(a) Share Capital 25

(b) Reserves and Surplus (75 + 20) 95

(2) Minority Interest 20.65

(3) Non Current Liabilities 125


Total 482.65

II Assets


Tangible assets 46

Intangible assets 5.65

Non current investments 29

Current assets 402

Total 482.65

297

Working

(1) Consolidated assets balances (Rs. in crores)

Fixed assets (Rs.)

Investments (Rs.)

Current assets (Rs.)

X Ltd. 60 - 105

X Investments Ltd. - 29 1

Y Ltd. 15 - 96

Z Ltd. 30 - 200

Less depreciation -59 - -

46 29 402

(2) Consolidated Equity & liabilities balances (Rs. in crores)

Capital (Rs.)

R& S (Rs.)

Uns. Loan (Rs.)

Sec. loan (Rs.)

Current liabilities (Rs.)

X Ltd. 25 75 10 15 10

X Investments Ltd.

- 20 50 - -

Y Ltd. - - 10 5 64

Z Ltd. - - 15 20 143

25 95 85 40 217

3. Analysis of Profits of X Investments Ltd. (Rs. in crores)

Capital Profit (Rs.)

Revenue (Rs.)

Total (Rs.)

Reserves & surplus 0 20 20

Transfer from Y & Z 0 0

X Ltd.-100% 0 20

298

4. Analysis of Profits of Y Ltd. (Rs. in crores)


Revenue (Rs.)

Total (Rs.)


Less: Minority Interest (49%) 7.35

X Investments Ltd.-51% 7.65

5. Analysis of Profits of Z Ltd. (Rs. in crores)


Revenue (Rs.)

Total (Rs.)


Less: Minority Interest (24%) 4.8

X Investments Ltd. 76% 15.2 0

6. Cost of Control

(Rs. in crores)

Investment in X Investments Ltd. 5

Investment in Y Ltd. 15

Investment in Z Ltd. 30

Less: Share capital X Investments -5

Less: Share capital Y Ltd. -5.1

Less : Share capital Z Ltd. -11.4

Capital Profits x Investments Y & Z Ltd. (0+15.2+7.65)

-22.85

Goodwill 5.65

299

7. Minority Interest

Question 20

Following are the Balance Sheets of Mumbai Limited, Delhi Limited, Amritsar Limited and Kanpur Limited as at 31st December, 2014:

Liabilities Mumbai (Rs.)

Delhi (Rs.)

Amritsar (Rs.)

Kanpur (Rs.)

Share Capital (Rs. 100 face value)

50,00,000 40,00,000 20,00,000 60,00,000

General Reserve 20,00,000 4,00,000 2,50,000 10,00,000

Profit & Loss Account 10,00,000 4,00,000 2,50,000 3,20,000

Sundry Creditors 3,00,000 1,00,000 50,000 80,000

83,00,000 49,00,000 25,50,000 74,00,000

Assets

Investments: 30,000 shares in Delhi Ltd.

35,00,000

10,000 shares in Amritsar Ltd

11,00,000

5,000 shares in Amritsar Ltd.

5,00,000

Shares in Kanpur Ltd. @ Rs. 120

36,00,000 18,00,000 6,00,000

Fixed Assets 20,00,000 15,00,000 70,00,000

Current Assets 1,00,000 6,00,000 4,50,000 4,00,000

83,00,000 49,00,000 25,50,000 74,00,000

(Rs. in crores)

Share capital X Investments 0

Share capital Y Ltd. 4.9

Share capital Z Ltd. 3.6

Capital profit Y Ltd. 7.35

Capital Profit Z Ltd. 4.8

20.65

300

Balance in General Reserve Account and Profit & Loss Account, when shares were purchased in different companies were:

Mumbai Delhi Amritsar Kanpur

Ltd. Ltd. Ltd. Ltd.

General Reserve Account 10,00,000 2,00,000 1,00,000 6,00,000

Profit & Loss Account 6,00,000 2,00,000 50,000 60,000

Required: Prepare the consolidated Balance Sheet of the group as at 31st December, 2000 (Calculations may be rounded off to the nearest rupee).

Answer

CBS of Mumbai With its subsidiaries

(1) Consolidated Assets & Liabilities

Share Capital

(Rs.)

G/R (Rs.)

P & L (Rs.)

F.A (Rs.)

C.A. (Rs.)

Mumbai 50,00,000 20,00,000 10,00,000.00 - 1,00,000

Delhi 259,375 2,40,312.50 20,00,000 6,00,000

Amritsar 91,666.67 1,10,833.33 15,00,000 450,000

Kanpur 2,00,000 1,30,000. 70,00,000 400,000

50,00,000 25,51,041.67 14,81,145.83 105,00,000 15,50,000


(a) Share Capital 50,00,000.00

(b) Reserves and Surplus 40,32,187.50

(2) Minority Interest(W.N.) 31,25,312.50


Trade payables 5,30,000.00

Total 1,26,87,500.00

Fixed assets

i. Tangible assets 105,00,000.00

ii. Intangible assets 6,37,500.00

(2) Current assets 15,50,000.00

Total 1,26,87,500.00

301

(2) Analysis of profit-Kanpur Ltd.

Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

G/R P&L

General Reserve 6,00,000 4,00,000 10,00,000

Profit & Loss A/c 60,000 260,000 320,000

Total 6,60,000 4,00,000 260,000

Minority Interest 1,10,000 66,666.67 43,333.33

Mumbai -1/2 3,30,000 2,00,000 1,30,000

Delhi-1/4 165,000 1,00,000 65,000

Amritsar 1/12 55,000 33,333.33 21,666.67

(3) Analysis of profit-Amritsar Ltd.

Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

G/R P&L

General Reserve 1,00,000 1,50,000 2,50,000

Profit & Loss A/c 50,000 200,000 250,000

Kanpur 33,333.33 21,666.67

Total 1,50,000 1,83,333.33 2,21,666.67

Minority Interest - 37,500.00 45,833.33 55,416.67

Delhi-1/4 37,500 45,833.33 55,416.67

Mumbai 1/2 75,000 91,666.67 1,10,833.33

302

(4) Analysis of profit-Delhi Ltd.

Capital (Rs.) Revenue (Rs.) Total (Rs.)

G/R —

General Reserve 2,00,000 2,00,000 — 4,00,000

Profit & Loss A/c 2,00,000 — 2,00,000 4,00,000

Kanpur Ltd. 1,00,000 65,000

Amritsar Ltd. 45833.33 55416.67

Total 4,00,000 345833.33 320416.67

Mumbai ¾ 3,00,000 259375.00 240312.50

Minority Interest ¼

100,000.00 86458.33 80104.17

5. Cost of Control

(Rs.) (Rs.)

Investments in Delhi Ltd. 35,00,000

Amritsar Ltd. (1100000 + 500000) 16,00,000

Kanpur Ltd. (3600000 + 1800000 + 600000) 60,00,000 1,11,00,000

Paid up value of Delhi Ltd. 30,00,000

Amritsar Ltd. 15,00,000

Kanpur Ltd. 50,00,000 (95,00,000)

Capital profits in Delhi Ltd. 3,00,000

Amritsar Ltd. (75000 + 37500) 1,12,500

Kanpur Ltd. (330000 + 165000 +55000) 5,50,000 (9,62,500)

Goodwill 6,37,500

303

6. Minority Interest

Share Capital in Delhi 10,00,000

In Amritsar 5,00,000

In Kanpur 10,00,000 25,00,000

Profits in Delhi 2,66,562.50

In Amritsar 1,38,750.00

In Kanpur 2,20,000.00 6,25,312.5

31,25,312.5

Question 21

Given below are the Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the year ended 31st March, 2015.

H Ltd. S Ltd.

Incomes: (Rs. in lacs) (Rs. in lacs)

Sales and other income 5,000 1,000

Increase in stock 1,000 200

6,000 1,200

Expenses:

Raw material consumed 800 200

Wages and Salaries 800 150

Production expenses 200 100

Administrative Expenses 200 100

Selling and Distribution Expenses 200 50

Interest 100 50

Depreciation 100 50

2,400 700

304

Profit before tax 3,600 500

Provision for tax 1,200 200

Profit after tax 2,400 300

Proposed dividend 1,200 150

Balance of Profit 1,200 150

Other Information:

H Ltd. sold goods to S Ltd. of Rs. 120 lacs at cost plus 20%. Stock of S Ltd. includes such goods valuing Rs. 24 lacs. Administrative Expenses of S Ltd. includes Rs. 5 lacs paid to H Ltd. as consultancy fees. Selling and Distribution expenses of H Ltd. include Rs.10 lacs paid to S Ltd. as commission.

H Ltd. holds 80% of equity share capital of Rs. 1,000 lacs in S Ltd. on 31.03.2004.

Prepare consolidated Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the year ended 31st March, 2015.

Answer

CPL of H Ltd. and its subsidiary S Ltd. for the year ended on 31st March, 2015

Particulars Note No.

Rs. in Lacs Rs. in Lacs

I Revenue from operations 1 5,865

II Total revenue 5,865

III Expenses

Cost of Material purchased/Consumed 3 1,180

Changes of Inventories of finished goods 2 (1,196)

Employee benefit expense 4 950

Finance cost 6 150

Depreciation and amortization expense 7 150

Other expenses 5 535

Total expenses 1,769

IV Profit before Tax (II-III) 4,096

V Tax Expenses 8 1,400

305

VI Profit After Tax 2,696

Profit transferred to Consolidated Balance Sheet

Profit After Tax 2,696

Proposed dividend

H Ltd. 1,200

S Ltd. 150

Less: Share of H Ltd. in proposed dividend 80% x150

(120) 1,230

Profit to be transferred to consolidated balance sheet

1,466

Notes to Accounts

1. Revenue form Operations

Sales and other income

H Ltd. 5,000

S Ltd. 1,000

Less: Inter-company Sales (120)

Consultancy fees received by H Ltd. from S Ltd.

(5)

Commission received by S Ltd. from H Ltd. (10) 5,865

2. Increase in Stock

H Ltd. 1,000

S Ltd. 200

Less: Unrealised profits Rs. 24 lacs ×20/120 (4) 1,196

306

3 Cost of Material purchased/consumed

H Ltd. 800

S Ltd. 200

Less: Purchases by S Ltd. from H Ltd. (120) 880

Direct Expenses

H Ltd. 200

S Ltd. 100 300

4. Employee benefits and expenses

Wages and Salaries:

H Ltd. 800

S Ltd. 150 950

5. Other Expenses

Administrative Expenses

H Ltd. 200

S Ltd. 100

Less: Consultancy fees received by H Ltd. from S Ltd.

(5) 295

Selling and Distribution Expenses :

H Ltd. 200

S Ltd. 50

Less : Commission received from S Ltd. from H Ltd.

(10) 240

535

6. Finance Cost

Interest:

H Ltd. 100

S Ltd. 50 150

307

7. Depreciation and Amortisation

Depreciation:

H Ltd. 100

S Ltd. 50 150

8. Provision for tax

H Ltd. 1,200

S. Ltd. 200 1,400

It is assumed that H Ltd. acquired shares in S Ltd. before 2010-2011.

Question 22

Write a short note on Minority Interest.

Answer

In actual practice, it rarely happens that the cost of acquisition of shares in the subsidiary company agrees exactly with intrinsic value of the shares (i.e. the net assets of the subsidiary company) on the date of acquisition.

If the price paid by the holding company for the shares acquired in the subsidiary company is more than the intrinsic value of the shares acquired, the difference should be treated as Cost of Control or Goodwill. If on the other hand, the price paid by the holding company for the shares acquired in the subsidiary company is less than the intrinsic value of the shares acquired, the difference should be treated as capital profits and credited to Capital Reserve. It should be noted that while computing the intrinsic value of the shares as on the date of acquisition of control, all profits and losses upto that date, have to be taken into account.

While preparing the consolidated balance sheet, such Goodwill or Capital Reserve, whatever may be the case, must be shown in the Balance Sheet.

Question 23

Write a short note on treatment of contingent liabilities..

Answer

Contingent Liabilities: A contingent liability appears as a footnote. This is on account of a liability which may or may not arise in the future. While preparing a consolidated Balance Sheet they may be categorized as external current liabilities or internal current liabilities. External liabilities between the holding and subsidiary firm and the outsiders. Internal current liabilities is on account of transactions between the firms belonging to the same group. The external liabilities continue unchanged for the same group while internal liabilities no longer appears as a footnote as it is generally incorporated on the liability side.

308

Question 24

Write a short note on inter company transaction between holding and subsidiary.

Answer

Inter Company Transactions: The holding and subsidiary firm may have centered into the following transaction and these common transactions will be eliminated while compiling the consolidated Balance Sheet.

(a) The holding or the subsidiary firm may have granted loans (short term) to each other.

(b) They may have sold goods on credit in which case the inter company transactions will be included in debtors and creditors.

(c) The subsidiary or holding company may have drawn Bills of Exchange on each other in which case the common transaction will be included in Bills Payable/ Bills Receivable.

In all the above cases where the companies were treated as separate entities, these transactions would appear on the liabilities side on the Balance Sheet of one and on the assets side of the other’s Balance Sheet. However, when the entire group is being treated as a single entity it is undesirable to include common transaction and therefore they will be eliminated in the consolidated Balance Sheet from the liabilities as well as assets side.

Question 25

Write a short not Revaluation of assets and Liabilities of subsidiary company.

Answer

The Holding company may revalue the Assets and Liabilities of the subsidiary firm at the time of acquisition of shares in terms of market prices. In such a case the rate of revaluation is, assumed to be the same date as acquisition of shares. The profit or loss on revaluation is capital in nature and accordingly will be adjusted for in the analysis of profit under capital profits. The date of acquisition of shares as considered earlier also may not coincide with date of Balance Sheet in which case as stated earlier the current years profit has to be segregated between capital and revenue. Since the date of revaluation of assets is the date of acquisition of shares, a change in depreciation may be required on the revalued assets from the date of acquisition till the closing of Balance Sheet. For, presumably the Balance Sheet of the subsidiary company has been made or complied in terms of its original values. Information with respect to revaluation has to be explicitly stated by an agreement between the firms at the time of acquisition of majority share by the holding company.

Question 26

Write a short not preference share in subsidiary company.

309

Answer

With respect to the Subsidiary firm if preference share capital has been issued there are 2 possibilities.

• All preference shares are held by the outsiders i .e. other than holding company i.e which case the paid up value of the preference shares of the Subsidiary company is added to the minority interest.

• It is possible that part whole of the preference. shares of the Subsidiary company is held by the Holding Company. In such a case the cost of acquiring of the preference shares (shown in the investment account in the assets side in the Balance Sheet of the holding company) is compared with the paid up value (shown in Balance Sheet of Subsidiary firm) and the difference if any, adjusted in the cost of control. (if preference shares are issued after date of acquisition the adjustments remain the same)

Arrears of preference dividends may be payable or outstanding at the time of consolidation of Balance Sheet and usually preference dividends are cumulative in nature. If the subsidiary company, has adequate profits, it is reasonable to assume that these dividends will be paid. The minorities shares will be added to Minority Interest while with respect to the holding company the treatment will differ in terms of the divided being paid out of pre acquisition or post acquisition profits or both.

In case the dividends are paid out of pre-acquisition profits (capital profit), the dividend due to the holding company will be adjusted for in the cost of control. In case post acquisitions revenue profits are employed, the dividend due to the holding company will be credited (added on) to the Profit and Loss Account of the holding company in the consolidated Balance Sheet. It is possible that a combination of both pre and post acquisition profit is employed for the purpose of making dividend payment in which case the dividend paid out of the capital profit will be adjusted for in the cost of control and the portion out of revenue profit will be adjusted for in the P/L Account of Holding company.

Question 27

On 31st March, 2015 the balance sheets of H. Ltd. and S. Ltd. appeared as follows :

H. Ltd. (Rs.)

S. Ltd. (Rs.)


(1) Shareholders' funds (a) Share capital (in Rs. 100 shares)

50,00,000 20,00,000


Securities premium 4,00,000 —

310

General reserve (as on 1.4.2014) 20,00,000 4,00,000

Surplus 15,40,000 3,10,000

(2) Current liabilities Trade payables 5,60,000 1,30,000

TOTAL 95,00,000 28,40,000

II ASSETS


(a) Fixed assets Land and building 28,00,000 10,00,000

Plant and machinery 14,00,000 5,16,000

(b) 75% Shares in S. Ltd. 20,25,000 —

(2) Current assets

(a) Inventories 16,80,000 6,42,000

(b) Trade receivables 15,00,000 5,80,000

(c) Cash 95,000 1,02,000

TOTAL 95,00,000 28,40,000

Additional information :

(i) H. Ltd. acquired the shares of S. Ltd. on 1st August, 2014.

(ii) Surplus of H. Ltd. includes interim dividend @15% received from S. Ltd. on 1st January, 2015.

(iii) On 1st April, 2014, S. Ltd.'s surplus showed credit balance of Rs. 1,90,000.

You are required to prepare a consolidated balance sheet of H. Ltd. and S. Ltd. on 31st March, 2015.

Answer


I Equity and Liabilities Rs.



311

(b) Reserves and Surplus (4,00,000+20,00,000+15,25,000+22,500)

1 39,47,500

(2) Minority Interest (W.N.3) 6,77,500


Trade payables 1 6,90,000

Total 1,03,15,000

II Assets


Fixed assets

Tangible assets (38,00,000+19,16,000) 1 57,16,000

(2) Current assets

(a) Inventories 1 23,22,000

(b) Trade receivables 1 20,80,000

(c) Cash and cash equivalents 1 1,97,000

Total 1,03,15,000

Working


Particulars L& B Rs.

P&M Rs.

Stock Rs.

Debtors Rs.

Cash Rs.

H 28,00,000 14,00,000 16,80,000 15,00,000 95,000

S 10,00,000 5,16,000 6,42,000 5,80,000 1,02,000

38,00,000 19,16,000 23,22,000 20,80,000 1,97,000

312


Capital Rs.

Premium Rs.

General Reserve

Rs.

Surplus Rs.

Trade Payable

Rs.

H Ltd 50,00,000 4,00,000 20,00,000 15,40,000 5,60,000

S Ltd. - - - 85,000 1,30,000

-Dividend Rectification (133,333 x 75%)

-1,00,000

50,00,000 4,00,000 20,00,000 15,25,000 6,90,000


Rs.


Capital Profit 1,49,167


6,77,500

(4) Cost of control

Rs.

75% Shares in S. Ltd. 20,25,000

Share Capital -15,00,000

-Dividend Rectification (133,333 x 75%) -1,00,000

Capital Profit -4,47,500

Capital reserve 22,500

313

(5) AOP- S Ltd.

Capital Rs.

Revenue Rs.

Total Rs.

G/R P&L

General Reserve 4,00,000 - - 4,00,000

Surplus 1,90,000 1,20,000 3,10,000

Interim Dividend Paid @ 15% on Rs. 20 lacs share capital

3,00,000

Total 5,90,000 4,20,000

Time adjustment (4,20,000 x 4/12)

+140,000 -140,000

-interim Dividend in the ratio of 4:5

-133,333 -166,667

Total 5,96,667 1,13,333

H-75% 4,47,500 85,000

MI-25% 1,49,167 28,333

Dividend has been paid in January, hence it is assumed that profit for 9 months has been distributed. 4 Months profit will be capital & 5 Months profit will be revenue.

Question 28

The following are the balance sheets of H Ltd. and S Ltd. as at 31st March, 2015 :

I EQUITY AND LIABILITIES H. Ltd. S. Ltd.

(1) Shareholders’ Funds Rs. Rs.

(a) Share capital (Rs.100 each) 5,00,000 2,00,000


General reserve (1.4.2014) 1,00,000 60,000

314

Surplus (Profit & Loss a/c) 1,40,000 90,000

(2) Current Liabilities Trade payables 80,000 90,000

TOTAL 8,20,000 4,40,000

II ASSETS


(a) Fixed assets

(i) Tangible assets 3,60,000 2,20,000

(ii) Goodwill 40,000 30,000

(b) Investments (1,500 shares in S. Ltd.) 2,40,000 —

(2) Current assets

(a) Inventories 1,00,000 90,000

(b) Trade receivables 20,000 75,000

(c) Cash 60,000 25,000

TOTAL 8,20,000 4,40,000

The profit and loss account of S Ltd. showed a balance of Rs. 53,000 on 1st April, 2014. A dividend of 15% was paid on 15th October, 2014 for the year 2013-14. Corporate Dividend tax @15% was also paid on the dividend. The dividend was credited by H Ltd. in its profit and loss account. H Ltd. acquired the shares on 1st October, 2014. The trade payables of S. Ltd. include Rs.20,000 for goods supplied by H. Ltd. The stock of S Ltd. includes goods to the value of Rs.8,000 which were supplied by H Ltd. at a profit of 33 % on cost. Prepare a consolidated balance sheet.

Answer


Rs.




(b) Reserves and Surplus (1,00,000+141,750+18,750) 1 2,60,500




Total 10,18,000

315

II. Assets


Fixed assets 580,000

Tangible assets 1

Intangible –goodwill 70,000

(2) Current assets

Inventories 188,000

Trade receivables 95,000

Cash 1 85,000

Total 10,18,000

Working


Particulars F. A (Rs.) Intangible (Rs.)

Inventories (Rs.)

Trade Receivables

(Rs.)

Cash (Rs.)

H 3,60,000 40,000 1,00,000 20,000 60,000

S

2,20,000 30,000 90,000 75,000 25,000

Unrealised Profit (8,000 x25%)

-2,000

5,80,000 70,000 188,000 95,000 85,000


Capital (Rs.)

General reserve

(Rs.)

Surplus account

(Rs.)

Trade Payable

(Rs.)

H Ltd. 5,00,000 1,00,000 1,40,000 80,000

S Ltd. - - 26,250 90,000

Dividend rectification (30,000x75%)

-22,500

Unrealised Profit (8,000 x 25%)

-2,000

5,00,00 1,00,000 141,750 170,000

316


Rs.


Revenue Profit 8,750


87,500

(4) Cost of control

Rs.

Investment in S 2,40,000

Share capital -150,000

Capital Profit -86,250

Dividend rectification (30,000x75%) -22,500


(5) AOP- S Ltd.


G/R P&L


Surplus 53,000 37,000 90,000

Dividend 30,000 + CDT 3,000

33,000

Total 113,000 70,000

Time adjustment +35,000 -35,000

-Dividend as per source -33,000

Total 1,15,000 35,000

H-75% 86,250 26,250

MI-25% 28,750 8,750

317

Question 29

A Ltd. acquired 2,000 equity shares of Rs. 100 each in B Ltd. on 31st December, 2014. A summarised balance sheet of the two companies, A Ltd. and B Ltd., as on 31st December, 2015 was as follows :

A Ltd. (Rs.)

B Ltd. (Rs.)


(1) Shareholders' funds

(a) Shares of Rs. 100 each

8,00,000 2,50,000


General reserve 3,00,000 50,000

Surplus 1,00,000 1,00,000


Trade payables 2,00,000 50,000

TOTAL 14,00,000 4,50,000

II ASSETS


(a) Fixed assets 7,00,000 2,50,000

(b) 2,000 shares in B Ltd. (at cost) 3,00,000 —

(2) Current assets 4,00,000 2,00,000

TOTAL 14,00,000 4,50,000

318

When A Ltd. acquired shares, B Ltd. had a credit balance of Rs. 50,000 in the general reserve and Rs. 20,000 as surplus in the statement of profit and loss.

B Ltd. issued bonus shares in the ratio one for every five shares held out of the profit earned during the year 2014. This is not shown in the above balance sheet of B Ltd. You are required to prepare consolidated balance sheet for H Ltd. as on 31st December, 2015 from the above information.

Answer

CBS of A Ltd. with its subsidiary B Ltd. as on 31st December, 2015

I. Equity and Liabilities Rs.



(b) Reserves and Surplus (3,00,000+100,000+64,000) 1 4,64,000




Total 15,94,000

II. Assets


Fixed assets 950,000

Tangible assets 1

Intangible –goodwill (W.N.4) 44,000

(2) Current assets 1 6,00,000

Total 15,94,000

Working


Particulars F. A. (Rs.)


A 7,00,000 4,00,000

B 2,50,000 2,00,000

9,50,000 6,00,000

319


Capital (Rs.)

General reserve

(Rs.)

Surplus account

(Rs.)

Trade Payable

(Rs.)

A Ltd. 8,00,000 3,00,000 1,00,000 2,00,000

B Ltd. - - 64,000 50,000

8,00,000 3,00,000 1,64,000 2,50,000


Rs.


Revenue Profit 16,000


Bonus shares 10,000

80,000

(4) Cost of control

Rs.

Investment in A 3,00,000

Share capital -2,00,000


Bonus shares (50,000 x 80%)

-40,000

Goodwill 44,000

320

(5) AOP - B Ltd.


G/R P&L


Surplus 20,000 80,000 1,00,000

Bonus -50,000

Total 20,000 80,000

A-80% 16,000 64,000

MI-20% 4,000 16,000

Question 30

H Ltd. acquired 4,000 shares on 30th June, 2014 in S Ltd. H Ltd. received 10% dividend for the year 2013 and it is credited in profit and loss account of H Ltd. Following are the balance sheets of H Ltd. and S Ltd. as on 31st December, 2014 :

H Ltd. Rs.

S Ltd. Rs.

I Equity and Liabilities

Share capital Equity share capital of Rs.10 each

60,000 50,000

Reserves and surplus

General reserve (1.1.2014) 12,000 10,000

Profit/loss (as on 1.1.2014) 4,000 8,000

Profit for the year ended 31.12.2014 30,000 20,000

Current liabilities

Trade payables 10,000 8,000

Total 1,16,000 96,000

321

II Assets Non-current assets

Fixed assets 44,000 60,000

Investment Investment in S Ltd. 52,000 —

Current assets 20,000 36,000

Total 1,16,000 96,000

You are required to prepare consolidated balance sheet for H Ltd. as on 31st December, 2014 from the above information.

Answer

CBS of H Ltd. with its subsidiary S Ltd. as on 31st December, 2014

I Equity and Liabilities Rs.



(b) Reserves and Surplus (40,000+12,000+12,400)

1 64,400




Total 1,60,000

II Assets


Fixed assets


(2) Current assets 1 56,000

Total 1,60,000

Working


Particulars F. A (Rs.)


H 44,000 20,000

S 60,000 36,000

1,04,000 56,000

322


Capital General reserve

P&L account Trade Payable

H Ltd. 60,000 12,000 34,000 10,000

S Ltd. - - 10,000 8,000

Dividend Rectification

-4,000

60,000 12,000 40,000 18,000


Rs.



2,500

17,600

(4) Cost of Control

Rs.

Investment in S 52,000

Share capital -40,000


Dividend Rectification (5,000x80%) -4,000


(5) AOP- S Ltd.

Capital (Rs.)

Revenue (Rs.)

Total (Rs.)

G/R P&L


Profit & Loss 8,000 20,000 28,000

323

Dividend Paid @ 10% 5,000

Total 18,000 25,000

Time adjustment (25,000 x 6/12)

+12,500 -12,500

- Dividend –capital -5,000

Total 25,500 12,500

H-80% 20,400 10,000

MI-20% 5,100 2,500

***

324

Question 1

Briefly discuss methods of valuation of intangible assets.

Answer

Valuation of intangible assets is a complex exercise, as the non-physical form of intangible assets pose the difficulty of identifying the future economic benefits that the enterprise can expect to derive from them. There are three main approaches for valuing intangible assets:

(1) Cost approach : In cost approach, historical expenditure incurred in developing the asset is aggregated. Cost is measured by purchase price, where the asset has been acquired recently.

(2) Market value approach : In comparable market value approach, intangible assets are valued with reference to transactions involving similar assets that have cropped up recently in similar markets. This approach is possible when there is an active market in which arm’s length transactions have occurred recently involving comparable intangible assets and adequate information of terms of transactions is available.

(3) Economic value approach : This approach is based on the cash flows or earnings attributable to those assets and the capitalization thereof, at an appropriate discount rate or multiple. Some of the key parameters used in this approach are projected revenues, projected earnings, discount rate, rate of return etc. The information required can be derived from either internal sources, external sources or both. Under this approach, the valuer has to identify cash flows or earnings directly associated with the intangible assets like the cash flows arising from the exploitation of a patent or copyright, licensing of an intangible asset etc. This approach can be put to practice only if cash flows arising from the intangible assets are identifiable from the management accounts and budgets, forecasts or plans of the company. In most situations of valuation of intangible assets, the economic based approach is used, because of the uniqueness of intangible assets and the lack of comparable market data for the use of market value approach.

6

Valuation of

Shares & Intangible Assets

325

Question 2

Find out the average capital employed of India Ltd. from its Balance sheet as at 31st March, 2006:

Liabilities (Rs. in lakhs)

Assets (Rs. in lakhs)

Share Capital: Fixed Assets:

Equity shares of Rs.10 each 100.00 Land and buildings 50.00

9% Pref. shares fully paid up 20.00 Plant and machinery 160.5

Reserve and Surplus: Furniture and fixture 11.00

General reserve 24.00 Vehicles 10.00

Profit and Loss 40.00 Investments 20.00

Secured loans: Current Assets:

16% debentures 10.00 Stock 13.5

16% Term loan 36.00 Sundry Debtors 9.80

Cash credit 26.60 Cash and bank 20.80

Current Liabilities and Provisions: Preliminary expenses 1.00

Sundry creditors 5.40

Provision for taxation 12.80

Proposed dividend on:

Equity shares 20.00

Preference shares 1.80

296.60 296.60

Non-trade investments were 20% of the total investments.

Balances as on 1.4.2005 to the following accounts were:

Profit and Loss account Rs. 16.40 lakhs, General reserve Rs. 13.0 lakhs.

326

Answer

Computation of Average Capital employed

(Rs. in Lakhs)

Total Assets as per Balance Sheet 296.6

Less: Preliminary Expenses 1.00

Non-trade investments (20% of Rs. 10 lakhs) 4.00 5.00

291.60

Less: Outside Liabilities:

16% Debentures 10.00

16% Term Loan 36.00

Cash Credit 26.60

Sundry Creditors 5.40

Provision for Taxation 12.80 90.80

Capital Employed as on 31.03.2006 200.80

Less: ½ of profit earned:

Increase in reserve balance 11.00

Increase in Profit & Loss A/c 22.60

Proposed Dividend 21.80

55.40 X 50 % 27.70

Average capital employed 173.10

Question 3

On the basis of the following information, calculate the value of goodwill of Ganesh Ltd. at three years’ purchase of super profits, if any, earned by the company in the previous four completed accounting years.

327

Balance Sheet of Ganesh Ltd. as at 31st March, 2015

Liabilities Rs. in lakhs Assets Rs. in lakhs

Share Capital: Goodwill 210

Authorised 10,000 Land and Buildings 1950

Issued and Subscribed Machinery 4,760

5 crore equity shares of Rs. 10 each, fully paid up

7,000

Furniture and Fixtures

Patents and Trade Marks

15

32

Capital Reserve 260 9% Non-trading Investments

600

General Reserve 543 Stock 873

Surplus i.e. credit balance of Profit and Loss (appropriation) A/c

477

Debtors

Cash in hand and at Bank

1,114

46

Trade Creditors 468 Preliminary Expenses 20

Provision for Taxation (net) 122

Proposed Dividend for 2002-2003 750 _____

9,620 9,620

The profits before tax of the four years have been as follows:

Year ended 31st March Profit before tax in lakhs of Rupees

2011 3,190 2012 2,500 2013 3,108 2014 2,900

The rate of income tax for the accounting year 2010-2011 was 40%. Thereafter it has been 38% for all the years so far. But for the accounting year 2014-2015 it will be 35%.

In the accounting year 2010-2011, the company earned an extraordinary income of Rs. 1 crore due to a special foreign contract. In August, 2011 there was an earthquake due to which the company lost property worth Rs. 50 lakhs and the insurance policy did not cover the loss due to earthquake or riots.

328

9% Non-trading investments appearing in the above mentioned Balance Sheet were purchased at par by the company on 1st April, 2012.

The normal rate of return for the industry in which the company is engaged is 20%. Also note that the company’s shareholders, in their general meeting have passed a resolution sanctioning the directors an additional remuneration of Rs. 50 lakhs every year beginning from the accounting year 2015-2016.

Answer

(1) Capital employed as on 31st March, 2015

(Refer to ‘Note’)

Rs. in lakhs

Land and Buildings 1,950

Machinery 4,760


Patents and Trade Marks 32

Stock 873

Debtors 1,114

Cash in hand and at Bank 46

8,690

Less: Trade creditors 468

Provision for taxation (net) 122 590

8,100

(2) Future maintainable profit

(Amounts in lakhs of rupees)

2010-2011 2011-2012 2012-2013 2013-2014

Rs. Rs. Rs. Rs.

Profit before tax 3,190 2,500 3,108 2,900

Less: Extra-ordinary income due to foreign contract

100

Add: Loss due to earthquake 50

Less: Income from non-trading Investments

—

3,090

—

2,550

54

________ 3,054

54

________ 2,846

329

As there is no trend, simple average profits will be considered for calculation of goodwill.

Total adjusted trading profits for the last four years = Rs. (3,090 + 2,550 + 3,054 + 2,846) = Rs. 11,540 lakhs

Rs. in lakhs

Average trading profit before tax =

4

lakhs 11,540 Rs.

2,885

Less: Additional remuneration to directors 50

Less: Income tax @ 35%(approx.) 992 (Approx)

1,843

(3) Valuation of goodwill on super profits basis

Future maintainable profits 1,843

Less: Normal profits (20% of Rs. 8,100 lakhs) 1,620

Super Profits 223

Goodwill at 3 years’ purchase of super profits = 3 x Rs. 223 lakhs = Rs. 669 lakhs

Note:

In the above solution, goodwill has been calculated on the basis of closing capital employed (i.e. on 31st March, 2015).

Question 4

Write short Note on capital market information-P/E ratio, yield ratio and market value/book value of shares.

Answer

Capital market information-P/E ratio, yield ratio and market value/book value of shares : Frequently share prices data are punched with the accounting data to generate new set of information. These are (i) Price-Earning Ratio, (ii) Yield Ratio, (iii) Market Value/Book Value per share.

EPS

Price Share Average Ratio) (P/E Ratio Earnings-Price

(Sometimes it is also calculated with reference to closing share price)

EPS

Price Share Closing Ratio P/E

330

It indicates the pay back period to the investors or prospective investors. The P/E ratio can be interpreted on a comparison with the industry P/E. A low P/E in comparison to the Industry can indicate that there are prospects for growth in share price and hence could be an indicator to buy/hold the shares. A high P/E ratio in comparison to the Industry can be an indicator to sell the shares.

100 Price Share Average

Dividend Yield

100 Price Share Closing

Dividend or

This ratio indicates return on investment; this may be on average investment or closing investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is the indicator of true return in which share capital is taken at its market value.

Shares Equity of Worth/No. Net

Price Share Closing

Shares Equity of Worth/No. Net

Price Share Average

share per ValueBook

share per Value Market

or

This ratio indicates market response of the shareholders' investment. Undoubtedly, higher the ratio, better is the shareholders' position in terms of return and capital gains.

Question 5

The Balance Sheet of RNR Limited as on 31.12.2010 is as follows :

Liabilities (Rupees Assets (Rupees in Lakhs) in Lakhs)

1,00,000 equity shares of Goodwill 5

Rs. 10 each fully paid 10 Fixed assets 15

1,00,000 equity shares of Other tangible assets 5

Rs. 6 each, fully paid up 6 Intangible assets (market value) 3

Reserves and Surplus 4 Miscellaneous expenditure to

Liabilities 10 the extent not written off 2 30 30

Fixed assets are worth Rs. 24 lakhs. Other Tangible assets are revalued at Rs. 3 lakhs. The company is expected to settle the disputed bonus claim of Rs. 1 lakh not provided for in the accounts. Goodwill appearing in the Balance Sheet is purchased goodwill. It is considered reasonable to increase the value of goodwill by an amount equal to average of the book value and a valuation made at 3 years’ purchase of average super-profit for the last 4 years.

331

After tax, profits and dividend rates were as follows :

Year PAT Dividend % (Rs. in Lakhs)

2007 3.0 11%

2008 3.5 12%

2009 4.0 13%

2010 4.1 14%

Normal expectation in the industry to which the company belongs is 10%.

Akbar holds 20,000 equity shares of Rs. 10 each fully paid and 10,000 equity shares of Rs. 6 each, fully paid up. He wants to sell away his holdings.

(i) Determine the break-up value and market value of both kinds of shares.

(ii) What should be the fair value of shares, if controlling interest is being sold ?

Answer

(i) Break up value of Re. 1 of share capital = lakhs 16.00 Rs.

lakhs 28.98 Rs.

= Rs. 1.81

Break up value of Rs. 10 paid up share= 1.81 × 10 = Rs. 18.10

Break up value of Rs. 6 paid up share = 1.81 × 6 = Rs. 10.86

Market value of shares :

Average dividend = 4

14% 13% 12% 11%

= 12.5%

Market value of Rs. 10 paid up share = 10%

12.5% × 10 = Rs. 12.50

Market value of Rs. 6 paid up share = 10%

12.5% × 6 = Rs. 7.50

(ii) Break up value of share will remain as before even if the controlling interest is being sold. But the market value of shares will be different as the controlling interest would enable the declaration of dividend upto the limit of disposable profit.

shares of value up Paid

*Profit Average × 100 = lakhs 16 Rs.

lakhs 3.4 Rs. × 100 = 21.25%

Market value of shares :

For Rs. 10 paid up share = 10%

21.25%× 10 = Rs. 21.25

For Rs. 6 paid up share = 10%

21.25% × 6 = Rs. 12.75

332

Fair value of shares = 2

value Market value Breakup

Fair value of Rs. 10 paid up share = 2

21.25 18.10 = Rs. 19.68

Fair value of Rs. 6 paid up share = 2

12.75 10.86= Rs. 11.81

* (Transfer to reserves has been ignored)

Working Notes:

(Rs. in lakhs)

(a) Calculation of average capital employed

Fixed assets 24.00

Other tangible assets 3.00

Intangible assets 3.00 30.00

Less : Liabilities 10

Bonus 1 11.00

19.00

Less : ½ of profits [½ (4.1 – Bonus 1.0)] 1.55

Average capital employed 17.45

(b) Calculation of super profit

Average profit = ¼ ( 3 + 3.5 + 4 + 4.1 – Bonus 1.0 )

= ¼ × 13.6 3.400

Less : Normal profit = 10 % of Rs. 17.45 lakhs 1.745

Super profit 1.655

(c) Calculation of goodwill

3 Years’ purchase of average super-profit = 3 × 1.655 = Rs. 4.965 lakhs

Increase in value of goodwill = ½ (book value + 3 years’ super profit)

= ½ (5 + 4.965)

= Rs. 4.9825 lakhs

Net assets as revalued including book value of goodwill 24.00

Add : Increase in goodwill (rounded-off) 4.98

Net assets available for shareholders 28.98

333

Question 6

Following are the information of two companies for the year ended 31st March, 2002 :

Particulars Company A Company B

Equity Shares of Rs. 10 each 8,00,000 10,00,000

10% Pref. Shares of Rs. 10 each 6,00,000 4,00,000

Profit after tax 3,00,000 3,00,000

Assume the Market expectation is 18% and 80% of the Profits are distributed.

(i) What is the rate you would pay to the Equity Shares of each Company ?

(a) If you are buying a small lot.

(b) If you are buying controlling interest shares.

(ii) If you plan to invest only in preference shares which company’s preference shares would you prefer ?

(iii) Would your rates be different for buying small lot, if the company ‘A’ retains 30% and company ‘B’ 10% of the profits?

Answer

(i) (a) Buying a small lot of equity shares: If the purpose of valuation is to provide data base to aid a decision of buying a small (non-controlling) position of the equity of the companies, dividend capitalisation method is most appropriate. Under this method, value of equity share is given by:

100rate tioncapitalisa Market

share per Dividend

Company A : Rs. 10018

4.2 = Rs. 13.33

Company B : Rs. 10018

208 = Rs. 11.56

(b) Buying controlling interest equity shares

If the purpose of valuation is to provide data base to aid a decision of buying controlling interest in the company, EPS capitalisation method is most appropriate. Under this method, value of equity is given by:

100rate tioncapitalisa Market

share(EPS) per Earning


3 = Rs. 16.67


62

.= Rs. 14.44

334

(ii) Preference Dividend coverage ratios of both companies are to be compared to make such decision.

Preference dividend coverage ratio is given by:

100Dividend Preference

tax after Profit

Company A : times 5Rs.60,000

3,00,000 Rs.

Company B : times 7.540,000 Rs.

3,00,000 Rs.

If we are planning to invest only in preference shares, we would prefer shares of B Company as there is more coverage for preference dividend.

(iii) Yes, the rates will be different for buying a small lot of equity shares, if the company ‘A’ retains 30% and company ‘B’ 10% of profits.

The new rates will be calculated as follows:


12

.= Rs. 11.67


342

. = Rs. 13.00

Working Notes:

1. Computation of earning per share and dividend per share (companies distribute 80% of profits)

Company A Company B

Profit before tax 3,00,000 3,00,000

Less: Preference dividend 60,000 40,000

Earnings available to equity shareholders (A) 2,40,000 2,60,000

Number of Equity Shares (B) 80,000 1,00,000

Earning per share (A/B) 3.0 2.60

Retained earnings 20% 48,000 52,000

Dividend declared 80% (C) 1,92,000 2,08,000

Dividend per share (C/B) 2.40 2.08

335

2. Computation of dividend per share (Company A retains 30% and Company B 10% of profits)

Earnings available for Equity Shareholders 2,40,000 2,60,000

Number of Equity Shares 80,000 1,00,000

Retained Earnings 72,000 26,000

Dividend Distribution 1,68,000 2,34,000

Dividend per share 2.10 2.34

Question 7

The following abridged Balance Sheet as at 31st March, 2005 pertains to Glorious Ltd.

Liabilities Rs. in lakhs Assets Rs. in lakhs

Share Capital: Goodwill, at cost 220

180 lakh Equity shares of Rs. 10 each, fully paid up

1,800

Other Fixed Assets

Current Assets

11,366

1,910

90 lakh Equity shares of Rs. 10 each, Rs. 8 paid up

720 Loans and Advances

Miscellaneous Expenditure

1,933

171

150 lakh Equity shares of Rs. 5 each, fully paid-up

750

Reserves and Surplus 5,628

Secured Loans 4,000

Current Liabilities 1,242

Provisions 1,460 ______

15,600 15,600

You are required to calculate the following for each one of the three categories of equity shares appearing in the above mentioned Balance Sheet:

(i) Intrinsic value on the basis of book values of Assets and Liabilities including goodwill;

(ii) Value per share on the basis of dividend yield.

336

Normal rate of dividend in the concerned industry is 15%, whereas Glorious Ltd. has been paying 20% dividend for the last four years and is expected to maintain it in the next few years; and

(iii) Value per share on the basis of EPS.

For the year ended 31st March, 2005 the company has earned Rs. 1,371 lakh as profit after tax, which can be considered to be normal for the company. Average EPS for a fully paid share of Rs. 10 of a Company in the same industry is Rs. 2.

Answer

(i) Intrinsic value on the basis of book values Rs. in lakhs Rs. in lakhs

Goodwill 220

Other Fixed Assets 11,366

Current Assets 1,910

Loans and Advances 1,933

15,429

Less: Secured loans 4,000

Current liabilities 1,242

Provisions 1,460 6,702

8,727

Add: Notional call on 90 lakhs equity shares @ Rs. 2 per share

180

8,907

Equivalent number of equity shares of Rs. 10 each.

Rs. in lakhs

Fully paid shares of Rs. 10 each 180

Partly-paid shares after notional call 90

Fully paid shares of Rs. 5 each,

5 Rs.

10 Rs.

lakhs 150 Rs.

75

345

337

Value per equivalent share of Rs. 10 each = 25.82 Rs. lakhs 345

lakhs 8,907 Rs.

Hence, intrinsic values of each equity share are as follows:

Value of fully paid share of Rs. 10 = Rs. 25.82 per equity share.

Value of share of Rs. 10, Rs. 8 paid-up = Rs. 25.82 – Rs. 2 = Rs. 23.82 per equity share.

Value of fully paid share of Rs. 5 = 12.91 Rs. 25.82

2

.Rs per equity share.

(ii) Valuation on dividend yield basis:

Value of fully paid share of Rs. 10 = 13.33 Rs. 10 Rs. 15

20

Value of share of Rs. 10, Rs. 8 paid-up = 10.67 Rs. 8 Rs. 15

20

Value of fully paid share of Rs. 5 = 6.67 Rs. 5 15

20

(iii) Valuation on the basis of EPS:

Profit after tax = Rs. 1,371 lakhs

Total share capital = Rs. (1,800 + 720 + 750) lakhs = Rs. 3,270 lakhs

Earning per rupee of share capital = 0.419 Re. lakhs 3,270

lakhs 1,371 Rs.

Earning per fully paid share of Rs. 10 = Re. 0.419 10 = Rs. 4.19

Earning per share of Rs. 10 each, Rs. 8 paid-up = Re. 0.419 8 = Rs. 3.35

Earning per share of Rs. 5, fully paid-up = Re. 0.419 5 = Rs. 2.10


4.19 Rs.

Value of share of Rs. 10, Rs. 8 paid-up = 16.75 Rs. 10 2

3.35 Rs.


2.10 Rs.

338

Question 8

Balance Sheet of KNR Ltd. as on 31.12.2006 is given below:

Balance Sheet (Figures in 000)


Share Capital -

1,50,000 Equity Shares of Rs.10 each

1,500

Sundry Fixed Assets 3,200

2,00,000 Equity Shares of Rs. 10

each Rs. 6 paid up

1,200

Investments 350

9% Cum Pref. Shares 600 Stock 850

18% Term Loan 1,000 Debtors 400

Sundry Creditors 1,200 Cash & Bank 400

P & L A/c 300

5,500 5,500

Other Information:

(1) Current Cost of Sundry Fixed Assets Rs. 38,00 thousand and stock Rs.9,00 thousand,

(2) Investments could fetch only Rs. 100 thousand,

(3) 50% debtors are doubtful,

(4) Preference dividend was in arrear for the last five years.

Find out the intrinsic value per share of John Engg. Ltd.

Answer 8

Statement showing Valuation of Equity Shares Amount in ’000

Sundry fixed assets 38,00

Investments 1,00

Stock 9,00

Debtors 2,00

Cash & Bank 4,00

Less: Sundry Creditors 12,00

18% Term Loan 1,000

9% Cumulative Pref. Shares 6,00

Arrear Pref. Dividend 2,70

Net Assets 23,30

339

Add : Notional call on 2,00,000 partly paid up equity shares @ Rs. 4 each 8,00

31,30

Number of equity shares 350

Value per fully paid up equity share = Rs. 31,30 / 3,50 = 8.94

Value per partly paid up equity share = Rs. 8.94 – 4 =4.94

Question 9

From the following figures calculate the value of the share of Rs.10 on (i) yield on capital employed basis, and (ii) dividend basis, the market expectation being 12%.

Year Capital employed (Rs.)

Profit (Rs.) Dividend %

2011 5500,000 880,000 12

2012 8000,000 1600,000 15

2013 1,00,00,000 2200,000 18

2014 150,00,000 3750,000 20

Answer 9

Since the dividend has been rising it would be better to take the weighted average which comes to 17.6%:

Year Rate Weight Product

2011 12 1 12

2012 15 2 30

2013 18 3 54

2014 20 4 80

176

The value of the share on the basis of dividend should be 17.6/12 × 10 =14.67

The yield on capital employed for each year and its weighted average is as follows:

Year Yield on capital employed (%)

Weight Product

2011 16 1 12

2012 20 2 30

2013 22 3 54

2014 25 4 80

222

Weighted average is 22.2%: on this basis the value should be 22.2/12 x Rs. 100 = Rs. 185.

340

Question 10

From the following data, compute the ‘Intrinsic’ value of each category of equity shares of Ankit Ltd.:

Shareholders funds

100,000 ‘A’ Equity shares of Rs.10 each, fully paid

100,000 ‘B’ Equity shares of Rs.10 each, Rs. 8 paid

100,000 ‘C’ Equity shares of Rs.10 each, Rs. 5 paid

Retained Earnings Rs.9,00,000

Answer 10

(i) Computation of Net assets

Worth of net assets is equal to shareholders’ fund, i.e.

Paid up value of ‘A’ equity shares 100,000 x Rs. 10 = 10,00,000

Paid up value of ‘B’ equity shares 100,000 x Rs. 8 = 8,00,000

Paid up value of ‘C’ equity shares 100,000 x Rs. 5 = 5,00,000

Retained earnings = 9,00,000

Net assets = 32,00,000

Add: Notional calls (100,000 x 2 + 100,000 x Rs. 5) = 7,00,000

= 39,00,000

Intrinsic Value of each equity share of Rs. 100 fully paid up =39,00,000 / 300,000= Rs. 13

(ii) Intrinsic values of each category of equity shares

‘A’ equity shares of Rs. 10 fully paid up 13

‘B’ equity shares of Rs. 10 each, out of which Rs. 8 paid up(13-2)=11

Value of ‘C’ Equity shares of Rs. 10 each, out of which Rs. 5 paid up (13-5)= 8

Question 11

From the following particulars of three companies, ascertain the value of goodwill. Terms and conditions are as follows:

(i) Assets are to be revalued.

(ii) Goodwill is to be valued at four years’ purchase of average super profits for three years. Such average is to be calculated after adjustment of depreciation at ten per cent on the amount of increase/decrease on revaluation of fixed assets. Income tax is to be ignored.

(iii) Normal profit on capital employed is to be taken at 10 percent, capital employed being considered on the basis of net revalued amounts of tangible assets

341

The summarized Balance Sheets and relevant information are given below:

(Rs. in Lakhs)

Liabilities P Ltd. Q Ltd. R Ltd.

Equity shares of Rs.10 each 24.0 28.0 12.0

Reserves 4.00 2.00 4.00

10 percent debentures 8.00 - 4.00

Expenses and creditors 8.00 6.00 4.00

44.00 36.00 24.00

Assets

Goodwill - 2.0 -

Net tangible block 32.00 24.00 20.00

Current assets 12.00 10.00 4.00

44.00 36.00 24.00

P Ltd. Rs.

Q Ltd. Rs.

R Ltd. Rs.

Revaluation of tangible block 40,00,000 20,00,000 24,00,000

Revaluation of current assets 14,00,000 5,60,000 3,20,000

Average annual profit for three years before charging debenture interest

7,20,000 576,000 272,000

342

Answer 11

Valuation of Goodwill

P Ltd. Q Ltd. R Ltd.

Average profit after charging debenture interest

640,000 576,000 272,000

Less/Add : Depreciation on revaluation (80,000) 40,000 (40,000)

560,000 6.16,000 232,000

Less : Normal profit at 10% (WN1) (380,000) (196,000) (192,000)

Super Profit 180,000 420,000 40,000

Goodwill at 4 years’ purchase of super profits

720,000 16,80,000 160,000

W.N.1.Calculation of Capital Employed

P Ltd. Q Ltd. R Ltd.

Tangible fixed assets 40,00,000 20,00,000 24,00,000

Current assets 14,00,000 560,000 320,000

Less : Debentures and Creditors (16,00,000) (6,00,000) (8,00,000)

38,00,000 19,60,000 19,20,000

Question 12

The following are the summarized Balance Sheets of two Companies, A Ltd and B Ltd as on 31.03.2010 –

Liabilities A Ltd B Ltd Assets A Ltd B Ltd


15,00,000 10,00,000 Goodwill 2,00,000 1,00,000

Reserves 3,00,000 2,00,000 Tangible Block

17,00,000 14,00,000

10% Debentures 6,00,000 4,00,000 Current Assets

8,00,000 6,00,000

Creditors 3,00,000 5,00,000

27,00,000 21,00,000 27,00,000 21,00,000

343

Additional Information —

1. Assets are to be revalued as follows —

A Ltd B Ltd

Revaluation of Tangible Block 21,00,000 12,00,000

Revaluation of Current Assets 10,00,000 4,00,000

2. Average Annual Profits for three years before charging Debenture Interest, A Ltd Rs.4,50,000; B Ltd Rs. 3,10,000.

3. Goodwill is to be valued at four year’s purchase of Average Super Profits for three years. Such average is to be calculated after adjustment of depreciation at 10% on the amount of increase/decrease on revaluation of fixed assets. In the case of B Ltd, a claim of Rs. 10,000 which was omitted, is to be adjusted against its average profit. Income tax is to be ignored.

4. Normal profit on Capital Employed is to be taken at 15%, capital employed being considered on the basis of net revalued amount of tangible assets.

Ascertain the value of Goodwill of A Ltd and B Ltd.

Answer

Calculation of Goodwill

(Rs.)

A Ltd. B Ltd.

Average annual profit 4,50,000 3,10,000

Less : Debenture Interest (60,000) (40,000)

Less : Depreciation on revaluation (W.N.2) (40,000) -

Add : Depreciation on revaluation (W.N.2) - 20,000

Less : Omission of claim - (10,000)

Average profit 3,50,000 2,80,000

Less : Normal profit @ 15% on CCE (W.N.1) (3,30,000) (1,03,500)

Super profit 20,000 1,76,500

Goodwill at four years’ purchase 80,000 7,06,000

344

W.N.1. Calculation of Closing Capital Employed

A Ltd. B Ltd.

Tangible Fixed Assets (Revalued) 21,00,000 12,00,000

Current Assets (Revalued) 10,00,000 4,00,000

Less : Debentures (6,00,000) (4,00,000)

Creditors (3,00,000) (5,00,000)

Claim - (10,000)

Closing Capital Employed 22,00,000 6,90,000

2. Excess / short depreciation A Ltd. B Ltd.

Revalued Assets 21,00,000 10,00,000

Tangible Assets as per the Balance Sheet 17,00,000 12,00,000

Upward/(Downward) revaluation 4,00,000 (2,00,000)

(Increase)/decrease in depreciation @ 10% (40,000) 20,000

Question 13

U.K. International Ltd. is developing a new production process. During the financial year ending 31st March, 2007, the total expenditure incurred was Rs.50 lakhs. This process met the criteria for recognition as an intangible asset on 1st December, 2006.

Expenditure incurred till this date was Rs. 22 lakhs. Further expenditure incurred on the process for the financial year ending 31st March, 2008 was Rs.80 lakhs. As at 31st March, 2008, the recoverable amount of know-how embodied in the process is estimated to be Rs. 72 lakhs. This includes estimates of future cash outflows as well as inflows.

You are required to calculate:

(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2007 and carrying value of intangible as on that date.

(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March, 2008. Ignore depreciation.

Answer 13

(a) As per AS 26 ‘Intangible Assets’

(i) For the year ending 31.03.2007

(1) Carrying value of intangiblet as on 31.03.2007:

At the end of financial year 31st March 2007, the production process will be recognized (i.e. carrying amount) as an intangible asset at a cost of Rs. 28 lakhs

345

(expenditure incurred since the date the recognition criteria were met, i.e., on 1st December 2006).

(2) Expenditure to be charged to Profit and Loss account:

The Rs. 22 lakhs is recognized as an expense because the recognition criteria were not met until 1st December 2007. This expenditure will not form part of the cost of the production process recognized in the balance sheet.

(ii) For the year ending 31.03.2008

(1) Expenditure to be charged to Profit and Loss account: (Rs. in lakhs)

Carrying Amount as on 31.03.2007 28

Expenditure during 2007–2008 80

Total book cost 108

Recoverable Amount 72

Impairment loss 36

Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2008.

(2) Carrying value of intangible as on 31.03.2008: (Rs. in lakhs)

Total Book Cost 108

Less : Impairment loss 36

Carrying amount as on 31.03.2008 72

Question 14

Dell International Ltd. is developing a new production process. During the financial Year 31st March, 2006, the total expenditure incurred on this process was Rs. 40 lakhs. The production process met the criteria for recognition as an intangible asset on 1st December 2005. Expenditure incurred till this date was Rs. 16 lakhs.

Further expenditure incurred on the process for the financial year ending 31st March 2007, was Rs.70 lakhs. As at 31-3-2007, the recoverable amount of know-how embodied in the process is estimated to be Rs. 62 lakhs. This includes estimates of future cash outflows as well as inflows. You are required to work out:

(a) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st March 2006? (Ignore depreciation for this purpose)

(b) What is the carrying amount of the intangible asset as at 31st March 2006?

(c) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st March 2007? (Ignore depreciation for this purpose)

(d) What is the carrying amount of the intangible asset as at 31st March 2007?

Answer

(a) Rs. 16 lakhs

346

(b) Carrying amount as on 31-3-2006 will be expenditure incurred after 1-12-2005 = Rs. 24 lakhs

(c) Book cost of intangible asset as on 31-3-2007 is as follows

Total Book cost = Rs.(70 + 24) lakhs = Rs. 94 lakhs

Recoverable amount as estimated = Rs. 62 lakhs

Difference to be charged to Profit and Loss account = Rs. 32 lakhs (d) Rs. 62 lakhs

Question 15

A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2006 on a research project to develop a drug to treat “AIDS”. Experts are of the view that it may take four years to establish whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed. The company wants to treat the expenditure as deferred revenue expenditure. Comment.

Answer

As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research (or from the research phase of an internal project) should be recognized. Expenditure on research (or on the research phase of an internal project) should be recognized as an expense when it is incurred.

Thus the company cannot treat the expenditure as deferred revenue expenditure. The entire amount of Rs. 33 lakhs spent on research project should be charged as an expense in the year ended 31st March, 2006.

***

347

WORK

Question 1

What are the contents of “Liquidators’ statement of account”? How frequently does a liquidator has to submit such statement?

Answer

The statement prepared by the liquidator showing receipts and payments of cash in case of voluntary winding up is called “Liquidators’ statement of account”. There is no double entry involved in the preparation of liquidator’s statement of account. It is only a statement though presented in the form of an account.

While preparing the liquidator’s statement of account, receipts are shown in the following order:

(a) Amount realised from assets are included in the prescribed order.

(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if any, is entered as ‘surplus from securities’.

(c) In case of partly paid up shares, the equity shareholders should be called up to pay necessary amount (not exceeding the amount of uncalled capital) if creditors’ claims/claims of preference shareholders can’t be satisfied with the available amount. Preference shareholders would be called upon to contribute (not exceeding the amount as yet uncalled on the shares) for paying of creditors.

(d) Amounts received from calls to contributories made at the time of winding up are shown on the Receipts side.

(e) Receipts per Trading Account are also included on the Receipts side.

Payments made to redeem securities and cost of execution and payments per Trading Account are deducted from total receipts.

Payments are made and shown in the following order :

(a) Legal charges;

(b) Liquidator’s expenses;

(c) Preferential (i) Overriding Preferential Creditors (ii) Remaining Preferential Creditors;

(d) Secured loan including, Debenture holders (including interest up to the date of winding up if the company is insolvent and to the date of payment if it is solvent);

(e) Unsecured Loan, Creditors:

(i) Unsecured creditors (Excluding Preferential Creditors);

7

Liquidation of

Company

348

(f) Preferential shareholders (Arrears of dividends on cumulative preference shares should be paid up to the date of commencement of winding up); and

(g) Equity shareholders.

Liquidator’s statement of account of the winding up is prepared for the period starting from the commencement of winding up to the close of winding up by the Liquidators.

Question 2

Briefly explain the liability of contributories included in the list B of Contributories.

Answer

The shareholders who transferred partly paid shares (otherwise than by operation of law or by death) within one year, prior to the date of winding up may be called upon to pay an amount (not exceeding the amount not called up when the shares were transferred) to pay off such creditors as existed on the date of transfer of shares.

Their liability will crystallize only (i) when the existing assets available with the liquidator are not sufficient to cover the liabilties; (ii) when the existing shareholders (“A” Contributors) fail to pay the amount due on the shares to the liquidator.

Question 3

The following is the Balance Sheet of Chilli Limited as at 31st March, 2014:


10%, 1,900 preference shares of Rs. 100 each fully paid up

1,900 equity shares of Rs. 100 each, Rs. 75 per share paid up

5700 equity shares of Rs. 100 each, Rs. 60 per share paid up

Secured Loans

10% debentures(Having a floating charge on all assets)

Interest accrued on above

Sundry creditors

1,90,000

1,42,500

3,42,000

1,90,000

9500

4,65,500

13,39,500

Fixed Assets

Land &Buildings

Plant and Machinery

Current Assets

Stock at cost

Sundry debtors

Cash at bank

Miscellaneous expenses Profit and Loss A/c

3,80,000

3,61,000

1,04500

2,09,000

57,000

2,28,000

13,39,500

On that date, the company went into Voluntary Liquidation. The dividends on preference shares were in arrear for the last two years. Sundry Creditors include a loan of Rs. 85,500 on mortgage of Land and Buildings. The assets realised were as under :-

Rs.

Land and Buildings 3,23,000

Plant & Machineries 3,42,000

Stock 1,14,000

Sundry Debtors 1,52,000

349

Interest accrued on loan on mortgage of buildings upto the date of payment amounted to Rs. 9500. The expenses of Liquidation amounted to Rs. 4,370. The Liquidator is entitled to a remuneration of 3% on all the assets realised (except cash at bank) and 2% on the amounts distributed among equity shareholders. Preferential creditors included in sundry creditors amount to Rs. 28,500. All payments were made on 30th June, 2014. Prepare the liquidator’s final statement of account.

Answer

Chilli Ltd. Liquidator’s Final Statement of Account

Receipts Rs. Payments Rs. Rs.

Assets Realised: Cash at Bank

Sundry Debtors

Stock

Plant and Machinery

Surplus from Land & building

Amount realised 3,23,000

Creditors 95000

57,000

152,000

1,14,000

3,42,000

2,28,000

Liquidator’s Remuneration (W.N. 1)

Liquidation Expenses

Debenture holders:

14% Debentures

Interest Accrued (W.N. 2)

Creditors :

Preferential

Unsecured (See W. N. 4)

Preference Shareholders :

Preference Share Capital

Arrears of Dividend

Equity Shareholders (W.N. 3) :

Rs. 17.50 per share on 1,900 shares


190,000

14250

28,500

3,51,500

1,90,000

38,000

33,250

14,250

28,880

4,370

2,04,250

3,80,000

228,000

47500

893000 893000

350

Working Notes :

(1) Liquidator’s remuneration Rs.

3% on Assets realised (3% of Rs. 9,31,000) 27930

2% of the amounts distributed among Equity Shareholders

(2/102 × Rs. 48450) 950

28880

(2) Interest accrued on 10% debentures

Interest accrued as on 31.3.2014 9,500

Interest accrued upto the date of payment

(upto 30th June, 2014) 4750

14250

(3) Amount payable to Equity Shareholders

Equity Share Capital 4,84,500

Less: Surplus available for Equity Shareholders 47500

Loss to be borne by them 4,37,000

Loss per Equity share (Rs. 4,37,000/7600) 57.50

Calculation of % of Total Deficiency to each share holder

=[Total face Value 7600*Rs. 100- {Uncalled money (1900*25)+(5700*40)}-surplus available Rs. 47,500]*100/ Total face Value

=(7,60,000-2,75,500-47,500)*100/7,60,000= 57.5%

Amount payable to Equity shareholders :

Each Equity share of Rs. 75 paid up (75-57.50) 17.50

Each Equity share of Rs. 60 paid up (60-57.50) 2.50

(4) Calculation of amount paid to Unsecured creditor other than Preferential creditors (Amount in Rs.)

Total Sundry Creditors (given) 4,65,500

Less: Amount related to Secured Loan 85,500

Less preferential Creditors 28,500

Amount paid to Unsecured Sundry Creditors 3,51,000

351

Question 4

The following was the Balance Sheet of X Limited as on 31.3.2015 :

Balance Sheet of X Limited as at 31.3.2015


14%, 38,000 preference shares of Rs. 100 each fully paid up

7,600 equity shares of Rs. 100 each, Rs. 60 per share paid up

Secured Loans

14% debentures

(Having a floating charge on all assets)

Interest accrued on above

Loan on mortgage of land and building

Sundry creditors

3,80,000

4,56,000

2,18,500

30,590

1,42,500

1,11,910

Fixed Assets Land

Buildings

Plant and Machinery

Patents

Current Assets

Stock at cost

Sundry debtors

Cash at bank

Miscellaneous expenses Profit and Loss A/c

38,000

1,52,000

5,13,000

38,000

95000

2,18,500

57,000

2,28,000

13,39,500 13,39,500

On 31.3.2015 the company went into voluntary liquidation. The dividend on 14% preference shares was in arrears for one year. Sundry creditors include preferential creditors amounting to Rs. 28,500.

The assets realised the following sums

Land Rs. 76,000; Buildings Rs. 1,90,000; Plant and machinery Rs. 475,000; Patent Rs. 47,500; Stock Rs. 1,52,000; Sundry debtors Rs. 1,90,000.

The expenses of liquidation amounted to Rs. 27,962. The liquidator is entitled to a commission of 2% on all assets realised (except cash at bank) and 2% on amounts among unsecured creditors other than preferential creditors. All payments the on 30th June, 2015. Interest on mortgage loan shall be ignored at the time of payment.

Prepare the liquidator’s final statement of account.

352

Answer

X Ltd. Liquidator’s Final Statement of Account

Receipts Rs. Payments Rs. Rs.

Assets Realised : Cash at Bank

57,000

Liquidator’s Remuneration (W.N. 1)

24278

Sundry Debtors 1,90,000 Liquidation Expenses 27,962

Stock 1,52,000 Debenture holders:

Plant and Machinery

Patents

4,75,000

47,500

14% Debentures

Interest Accrued (W.N. 2)

2,18,500

38,238

256738

Surplus from Securities

(W.N. 3)

1,23,500

Creditors :

Preferential

Unsecured

28,500

83,410

1,11,910

Preference Shareholders :

Preference Share Capital

Arrears of Dividend

3,80000

53200

4,33,200

Equity Shareholders (W.N.4)


1,90,912

10,45,000 10,45,000

Working Notes : Rs.

1. Liquidator’s remuneration :

2% on assets realised (2% of Rs. 11,30,500) 22,610

2% on payments to unsecured creditors (2% on Rs. 83410) 1668

24278

2. Interest accrued on 14% Debentures :

Interest accrued as on 31.3.2015 30,590

Interest accrued upto the date of payment i.e. 30.6.2015 7,648

[2,18500*14/100*3/12= 7,648] 38238

3. Surplus from Securities :

Amount realised from Land and Buildings (Rs. 76,000 + Rs. 1,90,000) 2,66,000

Less : Mortgage Loan 142,500

1,23,500

353

4. Amount payable to Equity Shareholders :

Equity share capital (paid up) 4,56,000

Less : Amount available for equity shareholders 1,90,912

Loss to be born by equity shareholders 2,65,088

Loss per equity share (Rs. 2,65,088/7,600) 34.88

Amount payable to equity shareholders for each equity share (60-34.88) 25.12

Notes:

(1) Commission due to the liquidator has been calculated on the total realisation on the supposition that the securities (land and buildings) are realised by the liquidator on behalf of the lender.

(2) Preference shares have been taken as cumulative.

Question 5

Pine Ltd. has gone into liquidation on 10th May, 2013. The details of members, who have ceased to be members, within the year ended 31st March, 2013 are given below. The debts that could not be paid out of realisation of assets and contribution from present membrs (‘A’ contributories) are also given with their date-wise break up. Shares are of Rs. 10 each, Rs. 6 per share paid up.

You are to determine the amount realisable from each person.

Shareholders No. of shares Date of transfer Proportionate transferred unpaid debts

P 950 20.04.2012 2850

Q 1,140 15.05.2012 4,750

R 1,425 18.09.2012 8,740

S 760 24.12.2012 9,975

T 475 12.03.2013 10,450

Answer

Statement of liabilities of B List Contributories

Creditors outstanding on the date of transfer

Q R S T Amount to paid to creditors

No. of shares

1,140 1,425 760 475

354

Date Rs. Rs. Rs. Rs. Rs.

15.5.2012 4750 1425

1781 950 594 4750

18.9.2012 8740

–4750 =3990

2138 1,140 713 3,990

24.12.2012 9975

-8,740=1,235

760 475 1235

12.3.2013 10450

-9975=475

475 119

10,450 1,425 3,919 2,850 2,256 10,094

Maximum liability on shares held (b)

4560 5,700 3,040 1,900

Amount paid (a) and (b) whichever is lower

1,425 3,919 2,850 1,900

Working Note :

P Will not be liable since he transferred his shares prior to one year preceding the date of winding up.

The amount of Rs. 4,750 outstanding on 15th May, 1999 will have to contributed by Q, R, S and T in the ratio of number of shares held by them, i.e. in the ratio of 12:15:8:5; thus Q will have to contribute Rs. 1,425; R Rs. 1,781; S Rs. 950; T Rs. 594.

Similarly, the further debts incurred between 15th May, 1999 to 18th September, 1999, viz. Rs.3990 for which Q is not liable will be contributed by R, S and T in the ratio of 15:8:5. R will have to contribute Rs. 2,138. S and T will contribute Rs. 1,140 and Rs. 713 respectively.

The further increase from Rs. 8,740 to Rs. 9,975 viz. Rs. 1,235 occurring between 18th September and 24th December will be shared by S and T who will be liable for Rs. 760 and Rs. 475 respectively. The increase between 24th December and 12th March, is solely the responsibility of T.

Question 6

Liquidation of Tempoo Ltd. commenced on 2nd April, 2014. Certain creditors could not receive payments out of the realisation of assets and out of the contributions from A list contributories. The following are the details of certain transfers which took place in 2013 and 2014:

355

Shareholders No. of Shares transferred

Date of Ceasing to be a member

Creditors remaining unpaid and outstanding on the date of such transfer

Abhay 1,900 1st March, 2013 Rs. 4,750

Parul 1,425 1st May, 2013 Rs. 3,135

Mahesh 950 1st October, 2013

Rs. 4,085

Ram 475 1st November, 2013

Rs. 4,370

Sanjay 285 1st February, 2014

Rs. 5,700

All the shares were of Rs. 10 each, Rs. 8 per share paid up. Show the amount to be realised from the various persons listed above ignoring expenses and remuneration to liquidator etc.

Answer

Statement of liabilities of B list contributories

Share- holders

No. of shares transferred

Maximum liability (upto Rs. 2 per share)

Division of Liability as on

1.5.2013 1.10.2013 1.11.2013 1.2.2014 Total

Rs. Rs. Rs. Rs. Rs. Rs.

Parul 1425 2,850 1,425 1,425

Mahesh 950 1,900 950 527 1,477

Ram 475 950 475 264 179 918

Sanjay 285 570 285 159 106 20 570

3,135 6,270 3135 950 285 20 4,390

356

Working Note:

Date Cumulative liability Increase in liability Ratio of no. of shares held by the members

1.5.2013 3,135 30 : 20 : 10 : 6

1.10.2013 4,085 950 20 : 10 : 6

1.11.2013 4,370 285 10 : 6

1.2.2014 5,700 1330 Only S

Liability of Sanjay has been restricted to the maximum allowable limit of Rs. 570, therefore amount payable by Sanjay is restricted to Rs. 20 only, on 1.2.2014.

Notes:

1. Abhay will not be liable to pay to the outstanding creditors since he transferred his shares prior to one year preceding the date of winding up.

2. Parul will not be responsible for further debts incurred after 1st May, 2013 (from the date when he ceases to be member). Similarly, Mahesh and Ram will not be responsible for the debts incurred after the date of their transfer of shares.

Question 7

The position of Lisa Ltd. on its liquidation is as under:

Issued and paid up Capital:

2,850 11% preference shares of Rs. 100 each fully paid.

2,850 Equity shares of Rs. 100 each fully paid.

950 Equity shares of Rs. 50 each Rs. 30 per share paid.

Calls in Arrears are Rs. 9,500 and Calls received in Advance Rs. 4,750. Preference Dividends are in arrears for one year. Amount left with the liquidator after discharging all liabilities is Rs. 3,92,350. Articles of Association of the company provide for payment of preference dividend arrears in priority to return of equity capital. You are required to prepare the Liquidators final statement of account.

Answer

Liquidators’ Final Statement of Account

Receipts Rs. Payments Rs.

Cash 3,92,350 Return to contributors:

Realisation from:

Calls in arrears

9,500

Preference dividend

Preference shareholders

31,350

2,85,000

357

Final call of Rs. 5 per Calls in advance 4,750

equity share of Rs. 50 each (Rs. 5 950)

4750

Equity shareholders of

Rs. 100 each (2,850 Rs. 30)

85,500

406,600 406,600

Working Note:

Rs.

Cash account balance 3,92,350

Less : Payment for dividend 31,350

Preference shareholders 2,85,000

Calls in advance 4,750 3,21,100

71,250

Add: Calls in arrears 9,500

80,750

Add: Amount to be received from equity shareholders of Rs. 50 each (950 20)

19,000

Amount disposable 99,750

Number of equivalent equity shares:

2,850 shares of Rs. 100 each = 5,700 shares of Rs. 50 each

950 shares of Rs. 50 each = 950 shares of Rs. 50 each

= 6,650 shares of Rs. 50 each

Final payment to equity shareholders = shares equity equivalent of number Total

ondistributi for left Amount

= Rs. 99,750 / 6,650 shares = Rs. 15 per share to equity shareholders of Rs. 50 each.

Therefore for equity shareholders of Rs. 100 each 50

100 15 Rs.

= Rs. 30 per share to equity shareholders of Rs. 100 each.

Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity shareholders of Rs. 50 each have to pay Rs. 20 and receive Rs. 15 each.

As a result, they are required to pay net [20-15] Rs. 5 per share i.e. 1000*5=5000.

358

Question 8

The following particulars relate to a Limited Company which has gone into voluntary liquidation. You are required to prepare the Liquidator’s Statement of Account allowing for his remuneration @ 2½% on all assets realized excluding call money received and 2% on the amount paid to unsecured creditors including preferential creditors.

Share capital issued:

9,500 Preference shares of Rs.100 each fully paid up.

47,500 Equity shares of Rs.10 each fully paid up.

28,500 Equity shares of Rs.10 each, Rs.8 paid up.

Assets realized Rs.19,00,000 excluding the amount realized by sale of securities held by partly secured creditors.

Rs.

Preferential creditors 47,500

Unsecured creditors 17,10,000

Partly secured creditors (Assets realized Rs. 3,04,000) 3,32,500

Debenture holders having floating charge on all assets of the company

5,70,000

Expenses of liquidation 9,500

A call of Rs.2 per share on the partly paid equity shares was duly received except in case of one shareholder owning 950 shares.

Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured creditors.

Answer

(i) Liquidator’s Final Statement of Account

Rs. Rs.

To Assets Realised 19,00,000 By Liquidator’s remuneration

To Receipt of call money on 27,550 equity shares @ 2 per share

55,100

2.5% on 22,04,000 (W. N.4)

2% on 47,500

2% on 12,47,108 (W.N.3)

55,100

950

24942

80992

359

By Liquidation Expenses

9,500

By Debenture holders having a

floating charge on all assets

5,70,000

By Preferential creditors

47,500

________ By Unsecured creditors 12,47,108

19,55,100 19,55,100

(ii) Percentage of amount paid to unsecured creditors to total unsecured creditors

= 71.73%10017,38,500

1247108

Working Notes:

1. Unsecured portion in partly secured creditors = Rs.3,32,500-Rs.3,04,000

= Rs.28,500

2. Total unsecured creditors = 17,10000 + 28,500 (W.N.1)

= Rs. 1738,500

3. Liquidator’s remuneration on payment to unsecured creditors

Cash available for unsecured creditors after all payments including payment to preferential creditors & liquidator’s remuneration on it = Rs .12,72,050

[ 19,00,000+55,100]-[55,100+950+9,500+5,70,000+47,500]= 12,72,050

Liquidator’s remuneration on unsecured creditors = 24,942 Rs. 1272050 102

2

or on Rs. 12,47,116 x 2/100 = Rs. 24,942

4. Total assets realised = Rs. 19,00,000 + Rs. 3,04,000 = Rs. 22,04,000

Question 9

‘A’ Ltd is to be liquidated. Their summarised Balance Sheet as at 30th September, 201 4 appears as under:

Liabilities: Rs.

4,75,000 equity shares of Rs. 10 each 47,50,000

Secured debentures (on Land and Buildings) 19,00,000

Unsecured loans 38,00,000

360

Trade creditors 66,50,000

1,71,00,000

Assets:

Land and buildings 9,50,000

Other fixed assets 38,00,000

Current assets 85,50,000

Profit and loss account 38,00,000

1,71,00,000

Contingent liabilities are:

For bills discounted 1, 90,000

For excise duty demands 2,85,000

On investigation, it is found that the contingent liabilities are certain to devolve and that the assets are likely to be realised as follows:

Land and Building 20,90,000

Other fixed assets 34,20,000

Current assets 66,50,000

Taking the above into account, prepare the statement of affairs.

Answer

Statement of Affairs of ‘A’ Ltd. (in Liquidation) as at 30th September, 2014

Estimated Realisable

Value

Assets not specifically pledged (as per List A):

Other Fixed Assets

Current Assets

34,20,000

66,50,000

Assets specifically pledged (as per List B): 1,00,70,000

Estimated Realizable Value

Due to secured creditors

Deficiency ranking as unsecured

Surplus carried to the last column

Land & Building

20,90,000 19,00,000 - 1,90,000 1,90,000

Estimated total assets available for preferential creditors, debenture holders secured by a floating charge and unsecured creditors

1,02,60,000

361

Summary of Gross Assets:

Gross realizable value of assets specifically pledged 20,90,000

Other Assets 1,00,70,000

Total Assets 1,21,60,000

Gross Liabilities

Liabilities

19,00,000 Secured creditors (as per List B) to the extent to which claims are estimated to be covered by assets specifically pledged

2,85,000 Preferential creditors (as per List C) – for demand of excise duty 2,85,000

Balance of assets available for debenture holders secured by floating charge and unsecured creditors

99,75,000

Unsecured creditors (as per List E):

38,00,000 Unsecured Loans 38,00,000

66,50,000 Trade creditors 66,50,000

1,90,000 Liability for bills discounted (Contingent) 1,90,000

1,28,25,000 Estimated deficiency as regards creditors (difference between gross assets and gross liabilities)

6,65,000

Issued and called up capital:

4,75,000 Equity shares of Rs. 10 each (as per List G)

47,50,000

Estimated deficiency as regards members/ contributories 54,15,000

***

362

Question 1

On the basis of the profit and loss statement available for the year ended on 31st March, 2015, prepare Gross Value Added Statement.

Profit and Loss Account for the year ended 31st March, 2015

Income Notes (Rs. in crores)

(Rs. in crores)

Sales 210.20

Other Income 06.42

216.62

Expenditure

Production and Operational Expenses 1 166.57

Administration Expenses 2 8.42

Interest and Other Charges 3 5.70

Depreciation 5.69 186.38

Profit before Taxes 30.24

Provision for taxes 3.00

27.24

Investment Allowance Reserve Written Back 0.46

Balance as per Last Balance Sheet 1.35

29.05

Transferred to:

General Reserve 24.30

Proposed Dividend 3.00 27.30

Surplus Carried to Balance Sheet 1.75

29.05

8

Corporate Financial Reporting

363

Notes:

(1) Production and Operational Expenses (Rs. In crores)

Increase in Stock 30.50

Consumption of Raw Materials 80.57

Consumption of Stores 5.30

Salaries, Wages, Bonus and Other Benefits 12.80

Cess and Local Taxes 3.20

Other Manufacturing Expenses 34.20

(2)

Administration expenses include inter-alia Audit fees of Rs. 1 crore, Salaries and commission to directors Rs. 2.20 crores and Provision for doubtful debts Rs. 2.50 crores.

166.57

(3) Interest and Other Charges:

On Fixed Loans from HDFC Bank 3.90

Debentures 1.80

5.70

Answer

Value added statement for the year ended 31st March, 2015

Particulars Rs. in crores

Rs. in crores

%

Sales 210.20

Less: Cost of bought in material and services:

Production and operational expenses 150.57

Administration expenses 6.22 156.79

Value Added by manufacturing and trading activities

53.41

Add: Other income 06.42

Total Value Added 59.83

364

Application of Value Added:

To Pay Employees:

Salaries, Wages, Bonus and other benefits

12.80 21.39

To Pay Directors:

Salaries and Commission 2.20 3.68

To Pay Government:

Cess and Local Taxes 3.20

Income Tax 3.00 6.20 10.36

To Pay Providers of Capital:

Interest on Debentures 1.80

Interest on Fixed Loan from HDFC Bank

3.90

To

Dividend

Provide for maintenance and Expansion of the company:

3.00 8.70 14.54

Depreciation

General Reserve (24.30 – 0.46)

5.69

23.84

Retained profit (1.75 – 1.35) 0.40 29.93 50.03

59.83 100.00

Question 2

From the given Profit & Loss Account of Shyama Co. Ltd., for the year ended 31.03.2015 prepare:

(a) Gross value added statement

(b) Reconciliation statement between gross value added and profit before taxation.

Profit and Loss Account for the year ended 31.03.2015

Notes (Rs. in lakhs) (Rs. in lakhs)

Income :

Sales 6,255

Other Income 40 6,295

Expenditure:

Production and operational expenses 1 4,320

365

Administration expenses 2 180

Interest & Other charges 3 624

Depreciation 16 5,140

Profit before tax 1,155

Provision for tax 55

1,100

Balance as per last Balance Sheet 60

1,160

Transferred to fixed assets replacement reserve 400

Dividend paid 160 560

Surplus carried to Balance Sheet 600

Notes:

1. Production & Operation expenses :

Consumption of raw materials 3,210

Consumption of stores 40

Local tax 8

Salaries to administrative staff 620

Other manufacturing expenses 442

4,320

2. Administration expenses include salaries and commission to directors 5

3. Interest & other charges include :

(a) Interest on temporary bank overdraft 109

(b) Fixed loan from banks 51

(c) Working capital loan from banks 20

(d) Excise duties 180

(e) Remaining are miscellaneous charges

Consider the miscellaneous charges for arriving at Value Added.

366

Answer

Value Added Statement For the year ended 31st March, 2015

Rs. Rs. in lakhs in lakhs

Sales 6,255

Less: Cost of bought in material and services:

Production and operational expenses

(4,320 - 8 - 620) 3,692

Administration expenses (180 - 5) 175

Interest on bank overdraft 109

Interest on working capital loan 20

Excise duties 180

Miscellaneous charges (Refer to working note) 264 4,440

Value added by manufacturing and trading activities 1,815

Add: Other income 40

Total Value Added 1,855


To pay Employees :

Salaries to Administrative staff 620 33.42

To pay Directors:

Salaries and Commission 5 0.27

To Pay Government :

Local Tax 8

Income Tax 55 63 3.40

To Pay Providers of Capital :

Interest on Fixed Loan 51

Dividend 160 211 11.37

To provide For Maintenance and Expansion of the Company :

Depreciation 16

Fixed Assets Replacement Reserve 400

Retained Profit (600 - 60) 540 956 51.54

1,855 100.00

367

Reconciliation Between Total Value Added and Profit Before Taxation:

Particulars Rs. Rs. in lakhs in lakhs

Profit before Tax 1,155

Add back:

Depreciation 16

Salaries to Administrative Staff 620

Director's Remuneration 5

Interest on Fixed Loan 51

Local Tax 8 700

Total Value Added 1,855

Working Note :

Calculation of Other Miscellaneous Charges

Rs. In lakhs

Interest and other charges 624

Less : Interest on bank overdraft 109

Interest on loan from banks 51

Interest on loan from banks 20

Excise duties 180 360

Other/miscellaneous charges 264

Question 3

Prepare Gross Value Added Statement from the given profit and loss account for the year ended on 31.03.2015

Income (Rs. in ‘000) (Rs. in ‘000)

Sales 850

Other Income Nil

850

Expenditure

Production and Operational Expenses 600


Interest and Other Charges 30

368

Depreciation 20 680

Profit before taxes 170

Provision for taxes 30

140

Balance as per last Balance Sheet 10

150

Transferred to:

General Reserve 80

Proposed Dividend 20

Surplus carried to Balance Sheet 50

150

Production and Operational Expenses:

Consumption of Raw Materials 200

Salaries, Wages and Bonus 60

Cess and Local Taxes 20

Other Manufacturing Expenses 320

600

Administrative Expenses:

Audit Fee 6

Salaries and Commission to Directors 8

Provision for Doubtful Debts 6

Other Expenses 10

30

Interest and other Charges:

On Working Capital Loans from HDFC Bank

10

On Term Loans from banks 15

On Debentures 5

30

369

Answer

Gross Value Added Statement for the year ended 31st March, 2015

Particulars Rs. in ‘000 Rs. in ‘000

Sales 850

Less: Cost of bought in material or services:

Production and Operational Expenses (320 + 200) 520

Administrative Expenses (6 + 6 +10) 22

Interest on working capital loans 10 552

Valued added by manufacturing and trading activities

298

Add: Other Income Nil

Total Value Added 298


To Pay Employees:

Salaries, Wages and Bonus

60

%

20.14

To Pay Directors:

Salaries and Commission

8

2.68

To Pay Government:

Cess and Local taxes

Income Tax

20

30

50

16.78

To Pay Providers of Capital:

Interest on Debentures

Interest on Fixed Loans

Dividend

5

15

20

40

13.42

To Provide for Maintenance and Expansion of the Company: Depreciation

General Reserve

Retained Profit (50 – 10)

20

80

40

140

46.98

298 100.00

370

Question 4

On the basis of the given extract of the income statement of Square Ltd., prepare Gross Value Added Statement.

Profit and Loss Account of Square Ltd. for the year ended on 31st March, 2015

Particulars Rs. in lakhs Rs. in lakhs

Income

Net Sales Revenue 15,27,956

Interest received 174

Other Revenue 430

(A) 15,28,560

Expenditure

Production and operational expenses:

Consumption of raw materials 7,66,875

Power and lighting 32,565

Wages, salaries and bonus 3,81,240

Staff welfare expenses 26,760

Excise duty 14,540

Other manufacturing expenses 1,20,030 13,42,010

Administrative expenses:

Directors' remuneration 7,810

Other administrative expenses 32,640 40,450

Interest on:

Term loan from ICICI Bank 24,400

Bank overdraft 100 24,500

Depreciation on fixed assets 50,600

371

(B) 14,57,560

Profit before Taxation, (A) ─ (B) 71,000

Provision for Income-tax @ 35.875% 25,470

Profit after Taxation 45,530

Balance of account as per last Balance Sheet

6,300

51,830

Transferred to:

General reserve 40% of Rs. 45,530 18,212

Proposed dividend @ 22% 22,000

Tax on distributed profits @ 12.81% 2,818 43,030

Surplus transferred to Balance Sheet 8,800

Answer

Square Ltd.

Value Added Statement for the year ended 31st March, 2015

Particulars Rs. in lakhs Rs. in lakhs

Net sales revenue 15,27,956

Less:

Cost of production (working note)

Administrative expenses

Interest on bank overdraft

9,19,470

32,640

100

9,52,210

Value added by manufacturing and trading activities

5,75,746

Add: Interest received 174

Other Revenue 430

Total value added 5,76,350

372

Application of valued added

Particulars Rs. in lakhs Rs. in lakhs %

To pay Employees:

Wages, salaries and bonus

3,81,240

Staff welfare expenses 26,760 4,08,000 70.79

To pay Directors:

Directors' remuneration

7,810

1.36

To pay Government:

Excise duty 14,540

Income tax 25,470

Tax on distributed profits 2,818 42,828 7.43

To pay providers of capital:

Term loan from ICICI Bank 24,400

Dividend to shareholders 22,000 46,400 8.05

To provide for maintenance and expansion of the company:

Depreciation on Fixed assets 50,600

Transfer to General reserve

Retained profit, Rs. (8,800-6,300) (in 000’s)

18,212

2,500

71,312

12.37

5,76,350 100.00

Working Note:

Calculation of cost of production

Particulars Rs. in lakhs

Consumption of raw materials 7,66,875

Power and lighting 32,565

Other manufacturing expenses 1,20,030

9,19,470

373

Question 5

From the given details, prepare a Gross Value Added Statement for Alpha Ltd. and show also the reconciliation between Gross Value Added and Profit before taxation.

Profit and Loss Account for the year ended 31.03.2015

Particulars Notes Amount (Rs. in ‘000)

Total income 945

Expenditure:

Production and operational expenses

1 641 —

Administration expenses (Factory) 2 33 —

Interest 3 29 —

Depreciation 17 720

Profit before taxes — 225

Provision for taxes 4 — 30

Profit after tax — 195

Balance as per last Balance Sheet — 10

205

Transferred to General Reserve 45 —

Dividend paid 95 —

140 —

Surplus carried to Balance Sheet 65 —

205 —

Notes:

1 Production and Operational expenses Rs. in ‘000

Consumption of raw materials 352

Salaries, Wages, Gratuities etc. (Admn.) 82

Cess and Local taxes 98

Other manufacturing expenses 109

641

374

2 Administration expenses include salaries, commission to Directors Rs.9.00 lakhs Provision for doubtful debts Rs. 6.30 lakhs.

Rs. in ‘000

3 Interest on loan from ICICI Bank for working capital 9

Interest on loan from ICICI Bank for fixed loan 16

Interest on Debentures 4

29

4 The charges for taxation include a transfer of Rs. 3.00 lakhs to the credit of Deferred Tax Account.

5 Excise Duty is Rs. 55,000

Answer

Alpha Ltd.

Gross Value Added Statement for the year ended 31st March, 2015


Sales 945

Less: Cost of bought in materials and services:

Production and Operational expenses (352+ 109)

461

Administration expenses (33 – 9) 24

Interest on working capital loan 9

Excise duty 55 549


396

Add: Other income Nil

Total value added 396

375

Application of Value Added

Particulars Rs. in ‘000 %

To Employees

Salaries, wages, gratuities etc.

82

20.71%

To Directors

Salaries and commission

9

2.27%

To Government

Cess and local taxes (98 – 55)

43

Income tax 27 70 17.68%

To Providers of capital

Interest on debentures

4

Interest on fixed loan 16

Dividends 95 115 29.04%

To Provide for maintenance and expansion of the company

Depreciation

17

General reserve 45

Deferred tax 3

Retained profits (65 – 10) 55 120 30.30%

396 100%

Statement showing reconciliation of Gross Value Added with Profits before taxation

Rs. in ‘000

Profits before taxes 225

Add:

Depreciation 17

Directors’ remuneration 9

Salaries, wages & gratuities etc. 82

Cess and local taxes 43

Interest on debentures 4

Interest on fixed loan 16 171

Total value added 396

376

Question 6

Prepare Gross Value Added Statement on the basis of the following information provided. Also prepare statement showing reconciliation of Gross Value Added with Profit before Taxation.

Profit and Loss Account of OTEX Limited for the year ended 31st March, 2015.

Amount Amount

(Rs. in ‘000) (Rs. in ‘000)

Income

Sales 5,010

Other Income 130

5,140

Expenditure

Production and Operational Expenses

3,550


Interest 235


Profit before Taxation 800


Profit after Taxation 520

Credit Balance as per last Balance Sheet 40

560

Appropriations

Transfer to General Reserve 100

Preference Dividend (Interim) paid 50

Proposed Preference Dividend (Final) 350

Balance carried to Balance Sheet 60

560

Supplementary Information

Production and Operational Expenses:

Raw Materials 1,920

377

Wages, Salaries and Bonus 610

Local Taxes including Cess 220

Other Manufacturing Expenses 800

3,550

Administrative Expenses consist of:

Salaries and Commission to Directors

60

Provision for Bad and Doubtful Debts

44

Other Administrative Expenses 81

185

Interest is on:

Loan from Bank for Working Capital

35

Debentures 200

235

Answer

Gross Value Added Statement of OTEX Ltd. for the year ended 31st March, 2015


Sales 5,010

Less: Production and Operational Expenses (1920+800)

2,720

Administrative expenses 125

Interest on loan from bank for working capital

35 2,880


2,130

Add: Other income 130

Total value added 2,260

378

Application of Value Added

Particulars Rs.in ‘000 Rs. in ‘000 %

To pay employees

Wages, salaries and bonus 610 26.99

To pay directors

Salaries and commission to Directors 60 2.66

To pay Government

Local taxes including cess 220

Income tax 280 500 22.12

To pay providers of capital


Dividend 400 600 26.55

To provide for the maintenance and expansion of the company:

Depreciation 370

Transfer to general reserve 100

Retained profit Rs.(60 – 40) lakhs 20 490 21.68

2,260 100

Statement showing Reconciliation between Gross Value Added with Profit before Taxation


Profit before taxation 800

Add back:

Wages, salaries and bonus 610

Salaries and commission to Directors 60

Local taxes including cess 220



Gross Value Added 2,260

379

Question 7

Explain the concept of ‘Corporate Financial Reporting’.

Answer

Financial reporting may be defined as communication of published financial statement and related information from a business enterprise to stakeholders. It is the reporting of accounting information of an entity and contains booth qualitative and quantitative information. The Financial report made to the management is generally known as internal reporting, while financial reporting made to the shareholder investors/management is known as external reporting. The internal reporting is a part of management information system and the uses MIS reporting for the purpose of analysis and as an aid in decision making process.

Corporate Reporting is a very hot topic now days. Various statues have prescribed certain statements to be disclosed periodically by a corporate entity. The purpose of such mandate is to convey a true and fair view of the operating results and financial position to the users of financial reports. Within a corporate context, financial reporting generally covers accounting data sets in the form of balance sheet, a statement of profit and loss, a statement of cash flows.

Question 8

What is value added statement? Discuss.

Answer

Value Added Statement is a simplified financial statement that shows how much wealth has been created by a company. A value added statement calculates total output by adding sales, changes in stock, and other incomes, then subtracting depreciation, interest, taxation, dividends, and the amounts paid to suppliers and employees. Such value added can be taken to represent in monetary terms the net output of an enterprise. This is the difference between the total value of its output and the value of the inputs of materials and services obtained from other enterprises. The value added is seen to be due to the combined efforts of capital, management and employees, and the statement shows how the value added has been distributed to each of these factors.

The conventional Value added statement is divided into two parts:

1. The first part shows value added

2. The second part shows application of the value added

Question 9

What is Economic Value Added and how is it calculated?

Answer

Economic Value Added (EVA) is a residual income particularly considered as a benchmark to measure earning efficiency. It is simply the operating profit after tax less a charge for the capital employed, equity as well as debt, used in the business.

380

Mathematically EVA= OPBT - Tax - (TCE × COC)

Where:

OPBT = Opening Profit Before Tax

TCE = Total Capital Employed

COC = Cost of Control

Since, EVA includes both profit and loss as well as balance sheet efficiency as well as the opportunity cost of investor capital - it is better linked to changes in shareholders wealth and is superior to traditional financial measures such as Profit After Tax.

EVA, additionally, is a tool for management to focus on the impact of their decisions in increasing shareholders wealth. These include both strategic decisions such as what investments to make, which business to exit, what financing structure is optimal; as well as operational decisions involving trade-offs between profit and asset efficiency such as whether to make inhouse or outsource, repair or replace an equipment, whether to make short or long production runs etc.

Question 9

What is Shareholder Value Added and how is it calculated? Discuss.

Answer

Shareholder Value Added (SVA) represents the economic profits generated by a business above and beyond the minimum return required by all providers of capital. “Value” is added when the overall net economic cash flow of the business exceeds the economic cost of all the capital employed to produce the operating profit.

Therefore, SVA integrates financial statements of the business (profit and loss, balance sheet and cash flow) into one meaningful measure.

The SVA approach is a methodology which recognises that equity holders as well as debt financiers need to be compensated for the bearing of investment risk. The SVA methodology is a highly flexible approach to assist management in the decision making process. Its applications include performance monitoring, capital budgeting, output pricing and market valuation of the entity.

Question 10

What are the drawbacks of adopting Shareholder Value Added (SVA) discuss.

Answer

Some of the drawbacks of Shareholder Value added as a measure are:

1. It is by nature an aggregate measure, in order to analyse the underlying cause of any change in calculated value between years, it is necessary to fully comprehend the value drivers and activities specific to a given firm.

2. There may be certain enterprises which are subject to any degree of price regulation then it may not be possible for management to adjust output prices to achieve a

381

commercial return in response to upward movements in input prices. Such a situation may result in SVA being reduced even though there may have been no decrease in overall efficiency.

3. Combined with the use of traditional accounting measures, a thorough knowledge of the value drivers of the business will assist in determining the underlying causes of fluctuations in the value added measure.

4. The use of SVA is not a substitute for detailed analysis of business drivers, rather it is an additional measurement tool with an economic foundation

Question 11

What is benefit of adopting Shareholder Value Added discuss? Discuss.

Answer

To create value, management must have an understanding of the variables that drive the value of the business. An organisation cannot act directly on value. It has to act on factors it can influence, such as client satisfaction, cost, capital expenditures, the debt / equity mix and so forth. Through an understanding of these drivers of value, management is able to establish a consistent dialogue, both internally and with the Shareholder, regarding what needs to be accomplished to create value. The benefits of moving towards SVA include: 1. Overall, value-based performance measures will result in greater accountability for the investment of new capital, as well as for the use of existing investments. 2. Organisation will have the opportunity to apply a meaningful private sector benchmark to evaluate performance. 3. Managers will be provided with an improved focus on maximizing shareholder value.

***

382

Accounting Standard –1 Disclosure of Accounting Policies

Question 1

X Ltd. has sold its building for Rs. 50 lakhs to Y Ltd. and has also given the possession to Y Ltd. The book value of the building is Rs. 30 Lakhs. As on 31st March, 2015, the documentation and legal formalities are pending. The company has not recorded the sale and has shown the amount received as advance. Do you agree with this treatment?

Answer

The economic reality and substance of the transaction is that the rights and beneficial interest in the property has been transferred although legal title has not been transferred. X Ltd. should record the sale and recognize the profit of Rs. 20 lakhs in its profit and loss account. The building should be eliminated from the balance sheet.

Question 2

XYZ Ltd. was making provision for non-moving stocks based on no issues for the last 12 months up to 31.3.2014. The company wants to provide during the year ending 31.3.2015 based on technical evaluation:

Total value of stock Rs. 100 lakhs

Provision required based on 12 months issue Rs. 3.5 lakhs

Provision required based on technical evaluation Rs. 2.5 lakhs

Does this amount to change in Accounting Policy? Can the company change the method of provision?

Answer

The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Accounting policy of a company may require that provision for non-moving stocks should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate can be made.

In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock from Rs.3.5 lakhs to Rs.2.5 lakhs is also not material. The disclosure can be made for such change in the following lines by way of notes to the accounts in the annual accounts of XYZ Ltd. for the year 2014-15:

9

Accounting Standards

383

“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on the year end net assets would have been higher by Rs.1 lakh.”

Accounting Standards-2 Valuation of Inventories

Question 1

Anand Ltd. purchased 1,00,000 MT for Rs. 100 each MT of raw material and introduced in the production process to get 85,000 MT as output. Normal wastage is 5%. In the process, company incurred the following expenses:

Direct Labour Rs.10,00,000

Direct Variable Overheads Rs. 1,00,000

Direct Fixed Overheads Rs. 1,00,000

(Including interest Rs. 40,625)

Of the above 80,000 MT was sold during the year and remaining 5,000 MT remained in closing stock. Due to fall in demand in market the selling price for the finished goods on the closing day was estimated to be Rs. 105 per MT. Calculate the value of closing stock.

Answer

Calculation of cost for closing stock Rs.

Cost of Purchase (1,00,000 x 100) 1,00,00,000

Direct Labour 10,00,000

Variable Overhead 1,00,000

Fixed Overhead

(1,00,000− 40,625) × 85,000 53,125 (1,00,000-5,000) or 95000

Cost of Production 1,11,53,125

Cost of closing stock per unit (1,11,53,125/85,000) = Rs. 131 (approx)

Net Realisable Value per unit Rs. 105

As per AS – 2, Since net realisable value is less than cost, closing stock will be valued at Rs. 105. Therefore closing stock is Rs. 5,25,000 (5,000 x 105).

384

Question 2

From the following details you are required to calculate the closing stock as on that date.

Particulars Kg. Rs.

Opening Stock: Finished Goods 1,000 25,000

Raw Materials 1,100 11,000

Purchase of Raw Materials 10,000 1,00,000

Labour - 76,500

Overheads (Fixed) - 75,000

Sales 10,000 2,80,000

Closing Stock: Raw Materials 900

Finished Goods 1200

The expected production for the year was 15,000 kg of the finished product. Due to fall in market demand the sales price for the finished goods was Rs. 20 per kg and the replacement cost for the raw material was Rs. 9.50 per kg on the closing day.

Answer

Calculation of cost for closing stock Rs.

Cost of materials (10,200 x 10) 1,02,000

Direct Labour 76,500

Fixed Overhead 75,000 x 10,200/15,000 51,000

Cost of Production 2,29,500

Cost per unit (2,29,500/10,200) 22.50

Net Realisable Value per unit 20.00

Since net realisable value is less than cost, closing stock will be valued at Rs. 20. As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost i.e. Rs. 9.50. Therefore, value of closing stock: Finished Goods (1,200 x 20) Rs. 24,000, and Raw Materials (900 x 9.50) Rs. 8,550.

385

Question 3

The company deals in three products, P, Q and R, which are neither similar nor interchangeable. At the time of closing of its account for the year 2014-15. The Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:

Items Historical Cost (Rs. in lakhs)

Net Realisable Value (Rs. in lakhs)

P 40 28

Q 32 32

R 16 24

What will be the value of Closing Stock in accordance with AS-2?

Answer

Value of inventory

Items Historical Cost (Rs. in lakhs)

NRV (Rs. in lakhs)

Value

P 40 28 28

Q 32 32 32

R 16 24 16

Total 76

Accounting Standards-4 Contingencies and Events occurring after Balance Sheet Date

Question 1

Asmi Ltd., whose accounting year ends on 31/03/2015, agreed in principle to sell a plot of land on 18/03/2015 at a price to be determined by an independent valuer. Pending the agreement for sale and due to non-receipt of valuers report, the sale of the land could not be completed up to 31/03/15. The company received the report on April 7, 2015 and the agreement was signed on April 10, 2015. The financial statements for 2014-15 were approved by the board on May 12, 2015.

Answer

The sale of land, is an event occurring after the balance sheet date. Also, the condition, which led to the sell, existed on the balance sheet date. The signing of the agreement

386

provides further evidence as to the condition that existed on the balance sheet date. The sale of land after the balance sheet date is therefore an adjusting event, which means the sale transaction should be recorded in books of A Ltd. for the purpose of its financial statements for 2014-15.

Question2

A company follows April-March as its financial year. The company recognizes cheques dated 31st March or before, received from customers after balance sheet date but before approval of financial statement by debiting Cheques in hand A/c and crediting the Debtors A/c. The Cheques in hand is shown in balance sheet as an item of cash and cash equivalents. All Cheques in hand are presented to bank in the month of April and are also realised in the same month in normal course after deposit in the bank.

Answer

Even if the cheques bear the date 31st March or before, the cheques received after 31st March do not represent any condition or situation existing on 31st March. Thus the collection of cheques after balance sheet date is not an adjusting event. Recognition of cheques in hand is therefore not consistent with requirements of AS 4. Also the collection of cheques after balance sheet date does not amounts to any material change or commitments affecting financial position of the enterprise, and so no disclosure of such collections in the Directors’ Report is necessary.

Hence cheques in hand do not qualify to be recognized as asset on 31st March.

Question 3

An earthquake destroyed a major warehouse of Anu Ltd. on 20.5.2015. The accounting year of the company ended on 31.3.2015. The accounts were approved on 30.6.2015. The loss from earthquake is estimated at Rs.30 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or non-adjusting event and how the fact of loss is to be disclosed by the company?

Answer 3

AS 4 states that adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The destruction of warehouse due to earthquake did not exist on the balance sheet date i.e. 31.3.2015. Therefore, loss occurred due to earthquake is not to be recognised in the financial year 2014-2015.

However, unusual changes affecting the existence or substratum of the enterprise after the balance sheet date may indicate a need to consider the use of fundamental accounting assumption of going concern in the preparation of the financial statements.

As per the information given in the question, the earthquake has caused major destruction; therefore fundamental accounting assumption of going concern is called upon. Hence, the fact of earthquake together with an estimated loss of Rs. 30 lakhs should be disclosed in the Report of the Directors for the financial year 2014-2015.

387

Accounting Standards-5

Question 1

The company has to pay delayed cotton clearing charges over and above the negotiated price for taking delayed delivery of cotton from the Suppliers' Godown. Upto 2013-14, the company has regularly included such charges in the valuation of closing stock. This being in the nature of interest the company has decided to exclude it from closing stock valuation for the year 2014-15. This would result into decrease in profit by Rs. 7.60 lakhs

Answer

AS 5 states that a change in an accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate presentation of the financial statements of an enterprise. Therefore the change in the method of stock valuation is justified in view of the fact that the change is in line with the recommendations of AS 2 and result in more appropriate preparation of the financial statements. As per AS 2, this accounting policy adopted for valuation of inventories including the cost formulae used should be disclosed in the financial statements.

Also, appropriate disclosure of the change and the amount by which any item in the financial statements is affected by such change is necessary as per AS 1, AS 2 and AS 5. Therefore, the under mentioned note should be given in the annual accounts.

"In compliance with the Accounting Standards issued by the ICAl, delayed cotton clearing charges which are in the nature of interest have been excluded from the valuation of closing stock unlike preceding years. Had the company continued the accounting practice followed earlier, the value of closing stock as well as profit before tax for the year would have been higher by Rs. 7.60 lakhs."

Question 2

Mr. Raju an employee of CCO Ltd. went on leave with a pay for 9 months on 1.1.2015 up to 30.9.2015. His monthly pay was Rs.25,000. While preparing the financial statement on 30.6.2015 for the year ended 31.3.15, the expense of salary of Mr. Raju for 3 months (1.1.15 to 31.3.15) was not provided due to omission. When Mr. Raju joined on 1.10.15, the whole salary for 9 months was duly paid to him. Give the accounting treatment as per AS- 5, if Mr. Raju was terminated from services on 01.01.15 and was reinstated in service by court on 30.9.15 with full pay protection, then what would be the accounting treatment?

Answer

In this case, three month salary of Rs.75,000 is prior period expense and following entry should be passed:

Salary A/c Dr. 1,50,000

Prior period expense (Salary) A/c Dr. 75,000


388

If Mr. Raju was terminated from service on 1.1.15 and was re-instated in service by the Court on 30.9.15 with full pay protection(i.e. total salary was rewarded to him). As the employee was reinstated in service as per the Court’s Order as on 30.9.2015, the following entry should be made:

Salary A/c Dr. 2,25,000


In such a case, there shall arise no error or omission while preparing the financial statements for the earlier year.

Accounting Standard-6

Question 1

Mr. Ram set up a new factory in the backward area and purchased plant for Rs. 500 lakhs for the purpose. Purchases were entitled for the CENVAT credit of Rs. 10 lakhs and also Government agreed to extend the 25% subsidy for backward area development. Determine the depreciable value for the asset.

Answer

Depreciable amount Rs.

Cost of assets 500

Less: Cenvat credit 10

Balance 490

Less: Subsidy 25% of 500 125

Depreciable value of the asset 365

Question 2

Mr. Atul purchased a machine on 01.04.2010 for Rs. 1,00,000. On 01.07.2011 he purchased another machine for Rs.1,50,000. On 01.10.2012, he purchased the third machine for Rs. 2,00,000 and on 31.12.2013 he sold the second machine for Rs. 1,25,000. On 31.03.2015 he decided to change the method of charging depreciation from Straight Line Method @ 10% p.a. to Written Down Value Method @ 15 % p.a. You are required to calculate the amount of additional depreciation chargeable.

Answer

1. Depreciation charged under old method: Rs. Rs.

Purchase of first machine on 1.4.2010 100,000

Depreciation for 4 years (1,00,000 x 10% x 5) 50,000

389

Purchase of second machine on 1.7.11 and sold on 31.12.13

1,50,000

Purchase of third machine on 1.10.12 200,000

Depreciation for 2.5 years

(1,50,000 x 10% x 2.5)

37,500

Depreciation for 2.5 years (2,00,000 x 10% x 2.5) 50,000

Total Depreciation charged 1,37,500

2. Depreciation to be charged under new method:

Year Opening WDV Purchases/sales Depreciation Closing WDV

2010-11 1,00,000 100,000 On 1.4.2010

15,000 85,000

2011-12 85,000 1,50,000

(on 1.7.2011

12,750 (i)

16,875 (ii)

72,250 (i)

133,125 (ii)

2012-13 72,250 (i)

133125 (ii)

200,000 (iii)

(on 1.10.12)

10,838 (i)

19,969 (ii)

15,000 (iii)

61,412 (i)

1,13,156 (ii)

1,85,000 (iii)

2013-14 61,412 (i)

1,13,156 (ii)

1,85,000 (iii)

Sold (ii) on 31.12.2013

9,212 (i)

12,730 (ii)

27,750 (iii)

52200 (i)

157250 (iii)

2014-15 209450 31,418 1,78,032

Total Depreciation = 1,71,542

Additional Depreciation chargeable = 1,71,542 – 1,37,500 = Rs. 34,042


Question 1

Mohan undertook a contract for Rs. 15,00,000 on an arrangement that 80% of the value of work done as certified by the architect of the contractee, should be paid immediately and that the remaining 20% be retained until the contract was completed.

In 2013, the amounts expended were Rs. 3,60,000; the work was certified for Rs. 3,00,000 and 80% of this was paid as agreed. It was estimated that future expenditure to complete the contract would be Rs. 10,00,000. In 2014, the amounts expended were Rs. 4,75,000.

390

Three-fourths of the contract was certified as done by December 31st and 80% of this was received accordingly. It was estimated that future expenditure to complete the contract would be Rs. 4,00,000. In 2015, the amounts expended were Rs. 3,10,000 and on June 30th the whole contract was completed.

Show how the contract revenue would be recognised in the profit & loss account for each year.

Answer

2013

Contract work in progress = 10,00,000 3,60,000

100 x 3,60,000

= 26.47%

Revenue (15,00,000x26.47%) = 3,97,050

Less: Contract cost = 3,60,000

Profit = 37050

2014

Contract work in progress =

4,00,000 8,35,000

100 x 4,75,000 3,60,000

= 67.61%

Revenue (15,00,000x67.61%) = 10,14,150

Less: Contract cost = 8,35,000

Profit = 1,79,150

Less : Profit already recognized = 37,050

Profit = 142,100

2015

Contract Revenue = 15,00,000

Contract Cost (8,35,000+3,10,000) = 11,45,000

Total Profit = 3,55,000

Less: profit already recognized = 1,79,150

Profit = 1,75,850

Question 2

A firm of contractors obtained a contract for construction of bridges across river Shipra. The following details are available in the records kept for the year ended 31st March, 2015.

(Rs. in lakhs)

Total Contract Price 1,000

Work Certified 500

391

Work not Certified 105

Estimated further Cost to Completion 495

Progress Payment Received 400

To be Received 140

The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements of AS 7 (Revised).

Answer

(a) Amount of foreseeable loss (Rs. in lakhs)

Total cost of construction (500 + 105 + 495) 1,100

Less: Total contract price (1,000)

Total foreseeable loss to be recognized as expense 100

According to AS 7, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately.

(b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs

(Rs.in lakhs)

Work certified 500

Work not certified 105

605

This is 55% (605/1,100 × 100) of total costs of construction.

(c) Proportion of total contract value recognised as revenue as per para 21 of AS 7 (Revised).

55% of Rs. 1,000 lakhs = Rs. 550 lakhs

(d) Amount due from/to customers = Contract costs + Recognised profits – Recognised losses – (Progress payments received + Progress payments to be received)= [605 + Nil – 100 – (400 + 140)] Rs. in lakhs, = [605 – 100 – 540] Rs. in lakhs = Rs. 35 lakh.

Amount due to customers = Rs. 35 lakhs, The amount of Rs. 35 lakhs will be shown in the balance sheet as liability.

(e) The relevant disclosures under AS 7 (Revised) are given below: Rs.

Contract revenue 550

Contract expenses 605

Recognized profits less recognized losses (100)

Progress billings(400 + 140) 540

Retentions (billed but not received from contractee) 140

Gross amount due to customers 35

392


Question 1

The Board of Directors decided on 31.3.2015 to increase the sale price of certain items retrospectively from 1st January, 2015. In view of this price revision with effect from 1st January 2015, the company has to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 2015 to 31st March, 2015 and the Accountant cannot make up his mind whether to include Rs. 15 lakhs in the sales for 2014-2015

Answer

Price revision was effected during the current accounting period 2014-2015. As a result, the company stands to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 2015 to 31st March, 2015. If the company is able to assess the ultimate collection with reasonable certainty, then additional revenue arising out of the said price revision may be recognised in 2015- 2016 vide Para 10 of AS 9.

Question 2

B Co. Ltd., used certain resources of A Co. Ltd. In return A Co. Ltd. received Rs. 10 lakhs and Rs. 15 lakhs as interest and royalties respective from B Co. Ltd. during the year 2014-15. You are required to state whether and on what basis these revenues can be recognised by A Co. Ltd.

Answer

As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise resources yielding interest and royalties should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:

(i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.

(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.

Question 3

A Limited has recognized Rs. 10 lakhs on accrual basis income from dividend on units of mutual funds of the face value of Rs. 50 lakhs held by it as at the end of the financial year 31st March, 2015. The dividends on mutual funds were declared at the rate of 20% on 15th June, 2015. The dividend was proposed on 10th April, 2015 by the declaring company. Whether the treatment is as per the relevant Accounting Standard? You are asked to answer with reference to provisions of Accounting Standard.

393

Answer

Accounting Standard 9 on Revenue Recognition states that dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established.

In the given case, the dividend is proposed on 10th April, 2015, while it is declared on 15th June, 2015. Hence, the right to receive payment is established on 15th June, 2015. As per the above mentioned paragraphs, income from dividend on units of mutual funds should be recognised by A Ltd. in the financial year ended 31st March, 2015.

The recognition of Rs. 10 lakhs on accrual basis in the financial year 2014-2015 is not as per AS 9 'Revenue Recognition'.


Question 1

Rama Ltd. is constructing a fixed asset. Following are the expenses incurred on the construction:

Materials Rs. 10,00,000

Direct Expenses Rs. 2,50,000

Total Direct Labour Rs. 5,00,000

(1/10th of the total labour time was chargeable to the construction)

Total office & administrative expenses Rs. 8,00,000

(5% is chargeable to the construction)

Depreciation on the assets used for the construction of this assets Rs. 10,000

Calculate the cost of fixed assets.

Answer

Material 10,00,000

Direct expenses 2,50,000

Direct labour (1/10 of 5,00,000) 50,000

Administrative expenses (5% of 8,00,000) 40,000

Depreciation on assets used 10,000

13,50,000 Question 2

On March 01, 2015, Sonu Ltd. purchased Rs. 5 lakhs worth of land for a factory site. Company demolished an old building on the property and sold the material for Rs. 10,000. Company incurred additional cost and realized salvaged proceeds during the March 2015 as follows:

394

Legal fees for purchase contract and recording ownership Rs. 25,000, Title guarantee insurance Rs. 10,000 Cost for demolition of building Rs. 50,000

Compute the balance to be shown in the land account on March 31, 2015 balance sheet.

Answer Rs.

Purchase price 5,00,000

Recovery on sale -10,000

Legal fee 25,000

Cost of demolition 50,000

Title guarantee fee 10,000

Land to be shown at 5,75,000

Question 3

What are the various disclosures to be made as per AS-10.

Answer

As per AS 10, the following information should be disclosed in the financial statements:

(i) gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements ;

(ii) expenditure incurred on account of fixed assets in the course of construction or acquisition;

(iii) revalued amount substituted for historical costs of fixed assets, the method adopted to compute the revalued amounts, the nature of indices used, the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amounts.


Question 1

Kamal Ltd. borrowed US$ 4,50,000 on 01/01/2015, which will be repaid as on 31/07/2015. Kamal Ltd. prepares financial statement ending on 31/03/2015. Rate of exchange between reporting currency (INR) and foreign currency (USD) on different dates are as under:

01/01/2015 1 US$ = Rs.48.00

31/03/2015 1 US$ = Rs.49.00

31/07/2015 1 US$ = Rs.49.50

Pass the necessary journal entries as per AS-11, to record the above.

395

Answer

Journals in the Books of Kamal Ltd.

Date Particulars (Dr.) (Cr.)

Jan. 01, 2015 Bank Account (4,50,000 x 48) Dr. 21,60,000

To Foreign Loan Account 21,60,000

Mar. 31, 2015 Foreign Exchange Difference Account Dr. 4,50,000

To Foreign Loan Account [4,50,000 x(49-48)] 4,50,000

Jul. 01, 2015 Foreign Exchange Difference Account Dr. 2,25,000

Foreign Loan Account Dr. 26,10,000

To Bank Account 28,35,000

Question 2

Rohan Ltd. purchased a plant for US$ 1,00,000 on 01st February 2015, payable after three months. Company entered into a forward contract for three months @ Rs. 49.15 per dollar. Exchange rate per dollar on 01st Feb. was Rs. 48.85. How will you recognize the profit or loss on forward contract in the books of Rohan Ltd.

Answer

Forward Rate Rs.49.15

Less : Spot Rate Rs.48.85

Premium on Contract Rs.0.30

Contract Amount US$ 1,00,000

Total Loss (1,00,000 x 0.30) = Rs. 30,000

Contract period 3 months Two falling the year 2014-15; therefore loss to be recognized (30,000/3) x 2 = Rs. 20,000. Rest Rs. 10,000 will be recognized in the following year.


Question 1

Zoya Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 year swith the salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for Rs. 10 lakhs. Pass the necessary journal entries in the books of the company for first two years.

396

Answer

Journal in the books of Zoya Ltd.

Particulars Rs. (Dr.) Rs. (Cr.)

1st Fixed Assets Account Dr. To Bank Account (Being Fixed Assets purchased)

50,00,000

50,00,000

Bank Account Dr. To Fixed Assets Account (Being grant received from the government)

10,00,000

10,00,000

Depreciation Account Dr. To Fixed Assets Account (Being Depreciation charged on SLM)

7,00,000

7,00,000

Profit & Loss Account Dr. To Depreciation Account (Being Depreciation transferred to P/L Account)

7,00,000

7,00,000

2nd Depreciation Account Dr. To Fixed Assets Account (Being Depreciation charged on SLM)

7,00,000

7,00,000

Profit & Loss Account Dr. To Depreciation Account (Being Depreciation transferred to P/L Account)

7,00,000

7,00,000

Method II 1st Fixed Assets Account Dr. To Bank Account (Being Fixed Assets purchased)

5,00,0000

5,00,0000

Bank Account Dr. To Deferred Govt. Grant Account (Being grant received from the government)

1,00,0000

1,00,0000

Depreciation Account Dr. To Fixed Assets Account (Being Depreciation charged on SLM)

9,00,000

9,00,000

Profit & Loss Account Dr. To Depreciation Account (Being depreciation transferred to P/L Account)

9,00,000

9,00,000

397

Question 2

Sanvi Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with the salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for 10 lakhs. Grant was considered as refundable in the end of 2nd year to the extent of Rs. 7,00,000. Pass the journal entry for refund of the grant.

Answer

Fixed Assets Account Dr. 7,00,000


(Being government grant on asset refunded)

OR

Deferred Govt. Grant Account Dr. 6,00,000

Profit & Loss Account Dr. 1,00,000


(Being government grant on asset refunded)

Question 3

How Government grant relating to specific fixed asset is treated in the books as per AS-12?

Answer

In accordance with AS 12, government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognized in the profit and loss statement on a systematic and rational basis over the useful life of the

Deferred Govt. Grants Account Dr. To Profit & Loss Account (Being proportionate government grant taken to P/L Account)

2,00,000

2,00,000

2nd Depreciation Account Dr. To Fixed Assets Account (Being Depreciation charged on SLM)

9,00,000

9,00,000

Profit & Loss Account Dr. To Depreciation Account (Being depreciation transferred to P/L Account)

9,00,000

9,00,000

Deferred Govt. Grant Account Dr. To Profit & Loss Account (Being proportionate government grant taken to P/L Account)

2,00,000

2,00,000

398

asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-depreciable assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss account

Question 4

How would you record a non-monetary grant received from the Government as per AS 12?

Answer

According to para 7.1 of AS 12 ‘Accounting for Government Grants’, Government grants may take the form of non-monetary assets such as land or other resources, given at concessional rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary grants given free of cost are recorded at a nominal value.


Question 1

An unquoted long term investment is carried in the books at a cost of Rs. 2 lakhs. The published accounts of the unlisted company received in May, 2015 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than Rs. 20,000. How will you deal with this in preparing the financial statements of X Ltd. for the year ended 31st March, 2015?

Answer

As it is stated in the question that financial statements for the year ended 31st March, 2015 are under preparation, the views have been given on the basis that the financial statements are yet to be completed and approved by the Board of Directors. Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Para 17 of AS 13 ‘Accounting for Investments’ states that indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. On these bases, the facts of the given case clearly suggest that the provision for diminution should be made to reduce the carrying amount of long term investment to Rs. 20,000 in the financial statements for the year ended 31st March, 2015.

Question 2

Ashu Ltd. acquired 2,000 debentures in Vikas Ltd. by issue of 10,000 equity shares having a face of Rs.100 each, whose market value is Rs.150 per share. The debentures of Vikas Ltd were listed at Rs.800 but the face value is Rs.500 only. What should be the cost of the investments? Ignore pre-acquisition interest.

399

Answer

As per AS-13, if investments has been purchased in exchange of assets then fair value of assets given up or fair value of assets acquired whichever is clearly evident can be taken as consideration.

Hence cost of investment 10,000 equity shares @150=15,00,000.

Question 3

On 1st April, Kalpana Ltd. purchased 12% Debentures in Soni Ltd. for Rs.7,50,000. The face value of these debentures were Rs.5,00,000. Interest on debentures falls due for payment on 30th June, and 31st December. Compute the cost of acquisition of debentures.

Answer

Amount Paid for debentures 7,50,000

Pre acquisition interest 5,00,000 x 12% x 3/12 = 15,000

Cost = 7,35,000

Question 4

What are the disclosure requirements of AS-13.

Answer

The disclosure requirements as per para 35 of AS 13 are as follows:

(i) Accounting policies followed for valuation of investments.

(ii) Classification of investment into current and long term in addition to classification as per Schedule VI of Companies Act in case of company.

(iii) The amount included in profit and loss statements for

(a) Interest, dividends and rentals for long term and current investments, disclosing therein gross income and tax deducted at source thereon;

(b) Profits and losses on disposal of current investment and changes in carrying amount of such investments;

(c) Profits and losses and disposal of long term investments and changes in carrying amount of investments.

(iv) Aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments;

(v) Any significant restrictions on investments like minimum holding period for sale/disposal, utilisation of sale proceeds or non-remittance of sale proceeds of investment held outside India.

(vi) Other disclosures required by the relevant statute governing the enterprises.

400

Accounting Standard -14

Question 1

List the conditions to be fulfilled as per Accounting Standard 14 for an amalgamation to be in the nature of merger, in the case of companies.

Answer

An amalgamation should be considered to be an amalgamation in the nature of merger if the following conditions are satisfied:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

Question 2

What are the methods of Accounting for Amalgamations.

Answer

As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of accountingfor amalgamations:

(i) The Pooling of Interest Method

Under this method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (after making the necessary adjustments).

If at the time of amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with AS 5 on ‘Net

401

Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’.

(ii) The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company.

Question 3

Briefly describe the disclosure requirements for amalgamation including additional disclosure, if any, for different methods of amalgamation as per AS 14.

Answer

The disclosure requirements for amalgamations have been prescribed in paragraphs 43 to 46 of AS 14 on Accounting for Amalgamation.

For all amalgamations, the following disclosures should be made in the first financial statements following the amalgamation:

(a) names and general nature of business of the amalgamating companies;

(b) the effective date of amalgamation for accounting purpose;

(c) the method of accounting used to reflect the amalgamation; and

(d) particulars of the scheme sanctioned under a statute.

For amalgamations accounted under the pooling of interests method, the following additional disclosures should be made in the first financial statements following the amalgamation:

(a) description and number of shares issued, together with the percentage of each company’s equity shares exchanged to effect the amalgamation; and

(b) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

For amalgamations, accounted under the purchase method, the following additional disclosures should be made in the first financial statements following the amalgamation;

(a) consideration for the amalgamation and a description of the consideration paid or contingently payable; and

(b) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof including the period of amortisation of any goodwill arising on amalgamation.

402


Question 1

Alpha Limited belongs to the engineering industry. The company received an actuarial valuation for the first time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It wants to spread the same over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs. The average remaining life of the employees is estimated to be 6 years. You are required to advise the company on the following items from the viewpoint of finalisation of accounts, taking note of the mandatory accounting standards.

Answer

According to AS 15, actuarial gains and losses should be recognized immediately in the statement of profit and loss as income or expense. Therefore, surplus amount of Rs. 6 lakhs is required to be credited to the profit and loss statement of the current year.

Question 2

As on 1st April, 2014 the fair value of plan assets was Rs.1,00,000 in respect of a pension plan of Zebra Ltd. On 30th September, 2014 the plan paid out benefits of Rs.19,000 and received inward contributions of Rs.49,000. On 31st March, 2015 the fair value of plan assets was Rs.1,50,000. On 1st April, 2014 the company made the following estimates, based on its market studies, understanding and prevailing prices.

%

Interest & dividend income, after tax payable by the fund 9.25

Realised and unrealised gains on plan assets (after tax) 2.00

Fund administrative costs (1.00)

Expected Rate of Return 10.25

You are required to find the expected and actual returns on plan assets.

Answer

Computation of Expected and Actual Returns on Plan Assets

Rs.

Return on Rs. 1,00,000 held for 12 months at 10.25% 10,250

Return on Rs. 30,000 (49,000-19,000) held for six months at 5%

(Equivalent to 10.25% annually, compounded every six months) 1,500

Expected return on plan assets for 2014-15 11,750

Fair value of plan assets as on 31 March, 2015 1,50,000

Less: Fair value of plan assets as on 1 April, 2014 1,00,000

Contributions received 49,000 1,49,000

1,000

Add: Benefits paid 19,000

Actual return on plan assets 20,000

403

Question 3

Hero Bank has followed the policies for retirement benefits as under:

(a) Contribution to pension fund is made based on actuarial valuation at the year end. In respect of employees who have opted for pension scheme.

(b) Contribution to the gratuity fund is made based on actuarial valuation at the year end.

(c) Leave encashment is accounted for on “PAY-AS-YOU-GO” method.

Comment whether the policy is in accordance with AS-15.

Answer

(a) As the contribution to Pension Fund is made on actuarial basis every year, there fore the policy is as per AS-15, which is based on actuarial basis of a counting.

(b) As the contribution is being made on annual basis to gratuity fund on actuarial basis, the policy is in accordance with AS-15.

(c) As regard leave encashment, which is accounted for on PAY-AS-YOU-GO basis, it is not in accordance with AS-15. It should be accounted for on accrual basis.


Question 1

A company borrowed Rs. 40,00,000 for purchase of machinery on 1.6.2014. Interest on loan is 9% per annum. The machinery was put to use from 1.1.2015. Pass journal entry for the year ended 31.3.2015 to record the borrowing cost of loan as per AS 16.

Answer Rs.

Interest upto 31.3.2015 (40,00,000 × 9% ×10 /12) = 3,00,000

Less: Interest relating to pre-operative period 10

7 x 3,00,000 = 2,10,000

Amount to be charged to P&L A/c = 90,000

Pre-operative interest to be capitalized = 2,10,000

Journal Entry Rs. Rs.

Machinery A/c Dr. 2,10,000

To Loan A/c 2,10,000

(Being interest on loan for pre-operative period capitalized)

Interest on loan A/c Dr. 90,000

To Loan A/c 90,000

(Being the interest on loan for the post-operative period)

Profit and Loss A/c Dr. 90,000

To Interest on loan A/c 90,000

(Being interest on loan transferred to P&L A/c)

404

Question 2

Naman Ltd. obtained a loan from a bank for Rs. 120 lakhs on 30-04-2014. It was utilized as follows:

Particulars Amount (Rs.in lakhs)

Construction of a shed 50

Purchase of a machinery 40

Working Capital 20

Advance for purchase of truck 10

Construction of shed was completed in March 2015. The machinery was installed on the same date. Delivery truck was not received. Total interest charged by the bank for the year ending 31-03- 2015 was Rs.18 lakhs. Show the treatment of interest.

Answer

Qualifying Asset as per AS-16 = Rs. 50 lakhs (construction of a shed)

Borrowing cost to be capitalized = 18X 50/120 =Rs. 7.5 lakhs

Interest to be debited to Profit or Loss account = Rs. (18 – 7.5) lakhs = Rs. 10.5 lakhs

Question 3

A company has obtained Institutional Term Loan of Rs. 580 lakhs for modernisation and renovation of its Plant & Machinery. Plant & Machinery acquired under the modernization scheme and installation completed on 31st March, 2015 amounted to Rs. 406 lakhs, Rs. 58 lakhs has been advanced to suppliers for additional assets and the balance loan of Rs. 116 lakhs has been utilized for working capital purpose. The Accountant is on a dilemma as to how to account for the total interest of Rs. 52.20 lakhs incurred during 2014-2015 on the entire Institutional Term Loan of Rs.580 lakhs.

Answer

As per para 6 of AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred. Borrowing costs should be expensed except where they are directly attributable to acquisition, construction or production of qualifying asset. A qualifying asset is an asset that necessary takes a substantial period of time to get ready for its intended use or sale.

Question 4

Briefly indicate the items which are included in the expressions “Borrowing Cost” as per AS 16.

405

Answer 4

Borrowing cost may include:

(a) Interest and commitment charges on bank borrowings and other short term and long term borrowings.

(b) Amortisation of discounts or premiums relating to borrowings.

(c) Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.

(d) Finance charges in respect of assets required under finance leases or under other similar arrangements; and

(e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.


Question 1

Identify the related parties in the following cases as per AS-18

A Ltd. holds 51% of B Ltd.

B Ltd holds 51% of O Ltd.

Z Ltd holds 49% of O Ltd

Answer

A Ltd., B Ltd. & O Ltd. are related to each other. Z Ltd. & O Ltd. are related to each other by virtue of Associate relationship. However, neither A Ltd. nor B Ltd. is related to Z Ltd. and vice versa.

Control: (a) ownership, directly or indirectly, of more than one half of the voting power of anenterprise, or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or (c) a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise.

Question 2

Kaveri Ltd. sold goods for Rs.90 lakhs to Yamuna Ltd. during financial year ended 31-3-2015. The Managing Director of Kaveri Ltd. own 100% of Yamuna Ltd. The sales were made to Yamuna Ltd. at normal selling prices followed by Kaveri Ltd. The Chief accountant of Kaveri Ltd. contends that these sales need not require a different treatment from the other sales made by the company and hence no disclosure is necessary as per the accounting standard. Is the Chief Accountant correct?

Answer

As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is able to exercise significant influence are related parties. This includes

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enterprises owned by directors or major shareholders of the reporting enterprise that have a member of key management in common with the reporting enterprise transaction between them is required irrespective of whether the transaction was done at normal selling price.

Hence the contention of Chief Accountant of Kaveri Ltd is wrong.

Question 3

Mr. Kapil a relative of key Management personnel received remuneration of Rs. 2,50,000 for his services in the company for the period from 1.4.2014 to 30.6.2014. On 1.7.2014 he left the service. Should the relative be identified as at the closing date i.e. on 31.3.2015 for the purposes of AS 18?

Answer

According to para 10 of AS 18 on Related Party Disclosures, parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.

Hence, Mr. Kapil, a relative of key management personnel should be identified as relative as at the closing date i.e. on 31.3.2015.

Question 4

A Ltd. sold goods to its associate Company for the 1st quarter ending 30.6.2014. After that, the related party relationship ceased to exist. However, goods were supplied as was supplied to any other ordinary customer. Decide whether transactions of the entire year has to be disclosed as related party transaction.

Answer

As per para 23 of AS 18, transactions of A Ltd. with its associate company for the first quarter ending 30.06.2014 only are required to be disclosed as related party transactions. The transactions for the period in which related party relationship did not exist need not be reported.


Question 1

Tim Ltd. wishes to obtain a machine tool costing Rs. 20 lakhs by way of lease. The effective life of the machine tool is 12 years but the Company requires it only for the first five years. It enters into an agreement with Sim Ltd. for a lease rental of Rs. 2 lakhs p.a.

The company is not sure about the treatment of these lease rentals and hence requests your assistance in proper disclosure of the same. For calculation purposes, take the implicit rate of interest at 15%. PV factors are : 0.87, 0.76, 0.66, 0.57, and 0.50.

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Answer

AS 19 ‘Leases’, a lease will be classified as finance lease if at the inception of the lease, the present value of minimum lease payment amounts to at least substantially all of the fair value of leased asset. In the given case, the implicit rate of interest is given at 15%. The present value of minimum lease payments at 15% using PV- Annuity Factor can be computed as follows:

Annuity Factor (Year 1 to Year 5) 3.36 (approx.)

Present value of minimum lease payments (for Rs.2 lakhs each year) Rs.6.72 lakhs (approx.)

Thus, present value of minimum lease payments is Rs.10.08 lakhs and the fair value of the machine is Rs.20 lakhs. In a finance lease, lease term should be for the major part of the economic life of the asset even if title is not transferred. However, in the given case, the effective useful life of the machine is 12 years while the lease is only for five years.

Therefore, lease agreement is an operating lease. Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.


Question 1

Calculate Weighted Number of Shares.

Date Particulars Purchased Sold Balance

1st January Balance at beginning of year 1,800 - 1,800

31st May Issue of shares for cash 600 - 2,400

1st November Buy Back of shares - 300 2,100

Answer

Computation of Weighted Average: (1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares.

Question 2

Net profit for the year 2013 Rs. 18,00,000


No. of equity shares outstanding until 30th September 2006

20,00,000

Bonus issue 1st October 2014 was 2 equity shares for each equity share outstanding at 30th September, 2014

Calculate Basic Earnings Per Share.

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Answer

No. of Bonus Issue 20,00,000 x 2 = 40,00,000 shares

2014 2013

Profit to equity (Rs.) 60,00,000 18,00,000

No. of shares including bonus 60,00,000 60,00,000

Earnings per share / Adjusted Earning per share Rs. 1 Rs. 0.3

Since the bonus issue is an issue without consideration, the issue is treated as if it had occurred prior to the beginning of the year 2013, the earliest period reported.

Question 3



No. of shares outstanding prior to rights issue 5,00,000 shares

Rights issue price Rs. 15.00

Last date to exercise rights 1st March 2015

Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares)

Fair value of one equity share immediately prior to exercise of rights on 1st March 2015 was Rs. 21.00. Compute Basic Earnings Per Share.

Answer

Number of shares outstanding prior to exercise Number of shares issued in the exercise,

Fair value of shares =6

1 x 15 21 x shares 5 = Rs. 20.00

Paid part in Right issue = 20

15 x 1,00,000=75,000

Bonus shares in Right issue=1,00,000-75,000=25,000

Computation of earnings per share:

EPS for the year 2014 as originally reported: 11,00,000/5,00,000 shares = Rs. 2.20

EPS for the year 2014 restated for rights issue: 11,00,000/ (5,00,000 shares +25,000) = Rs. 2.10

EPS for the year 2015 including effects of rights issue:

(5,00,000 x 12/12) + (75,000 x 10/12) +25,000x12/12= 5,87,500 shares, EPS = 15,00,000/5,87,500= Rs. 2.55

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Question 4

Net profit for the current year Rs. 1,00,00,000

No. of equity shares outstanding 50,00,000

Basic earnings per share Rs. 2.00

No. of 12% convertible debentures of Rs. 100 each 1,00,000

Each debenture is convertible into 10 equity shares

Interest expense for the current year Rs. 12,00,000

Tax relating to interest expense (30%) Rs. 3,60,000

Compute Diluted Earnings Per Share.

Answer

2015 (Rs.)

Adjusted net profit for the current year (1,00,00,000 + 12,00,000 – 3,60,000)

1,08,40,000

No. of equity shares resulting from conversion of debentures: 10,00,000 Shares

No. of equity shares used to compute diluted EPS: (50,00,000 + 10,00,000)

60,00,000

Diluted earnings per share: (1,08,40,000/60,00,000) 1.81


Question 1

Exo Ltd. has provided the following information.

Depreciation as per accounting records = Rs. 2,00,000

Depreciation as per tax records = Rs. 5,00,000

Unamotised preliminary expenses as per tax record = Rs. 30,000

There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability should be recognized as transition adjustment.

Tax rate 30%.

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Answer

Calculation of difference between taxable income and accounting income Rs.

Excess depreciation as per tax Rs, (5,00,000 – 2,00,000) 3,00,000

Less: Expenses provided in taxable income (30,000)

Timing difference 2,70,000

Tax expense is more than the current tax due to timing difference.

Therefore deferred tax liability = 30%*2,70,000 81,000

Accounting Standard - 24

Question 1

A healthcare goods producer has changed the product line as follows:

Washing soap Bathing soap

January 2014 – September, 2014 per month 2,00,000 2,00,000

October 2014 – December, 2014 per month 1,00,000 3,00,000

January 2015 – March, 2015 per month 0 4,00,000

The company has enforced a gradual enforcement of change in product line on the basis of an overall plan. The Board of Directors of the Company has passed a resolution in March, 2015 to this effect. The company follows calendar year as its accounting year. Should it be treated as discontinuing operation?

Answer

Business enterprises frequently close facilities, abandon products, or even product lines, and reduce the size of their workforce in response to market forces. These kinds of terminations, generally, are not in themselves discontinuing operations unless they satisfy the definition criteria. By gradually reducing the size of operations in the product line of Washing Soap, the company has increased its scale of operations in Bathing Soap. Such a change is a gradual or evolutionary, phasing out of a product line or class of services does not meet definition criteria in AS 24 – namely, disposing of substantially in its entirety, a component of the enterprise. Hence, changeover is not a discontinuing operation.

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Question 1

Holy Corporation is dealing in seasonal product sales pattern of the product, quarter wise is as follows:

1st quarter 30th June 10%

2nd quarter 30th September 10%

3rd quarter 31st December 60%

4th quarter 31st March 20%

Information regarding the 1st quarter ending on 30th June, 2015 is as follows:

Sales 80 crores

Salary and other expenses 60 crores

Advertisement expenses (routine) 4 crores

Administrative and selling expenses 8 crores

While preparing interim financial report for first quarter Holy Corporation wants to defer Rs. 10 crores expenditure to third quarter on the argument that third quarter is having more sales therefore third quarter should be debited by more expenditure. Considering the seasonal nature of business and the expenditures are uniform throughout all quarters, calculate the result of the first quarter as per AS-25. Also give a comment on the company’s view.

Answer

Particulars (Rs. in crores)

Result of first quarter ending 30th June, 2015

Turnover 80

Other Income Nil

Total (a) 80

Less: Changes in inventories Nil

Salaries and other cost 60

Administrative and selling Expenses (4+8) 12

Total (b) 72

Profit (a)-(b) 8

According to AS-25 the Income and Expense should be recognized when they are earned and incurred respectively. Therefore seasonal incomes will be recognized when they occur. Thus the company’s view is not as per AS-25.

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Question 1

MN International Ltd. is developing a new production process. During the financial year ending 31st March, 2014, the total expenditure incurred was Rs.50 lakhs. This process met the criteria for recognition as an intangible assets on 1st December, 2013.

Expenditure incurred till this date was Rs.22 lakhs. Further expenditure incurred on the process for the financial year ending 31st March, 2015 was Rs.80 lakhs. As at 31st March, 2015, the recoverable amount of know-how embodied in the process is estimated to be Rs.72 lakhs. This includes estimates of future cash outflows as well as inflows.

You are required to calculate:

(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2014 and carrying value of intangible assets as on that date.

(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March, 2015. Ignore depreciation.

Answer

(a) As per AS 26 ‘Intangible Assets’

(i) For the year ending 31.03.2014

(1) Carrying value of intangible asset as on 31.03.2014:

At the end of financial year 31st March 2014, the production process will be recognized (i.e. carrying amount) as an intangible asset at a cost of Rs. 28 lakhs (expenditure incurred since the date the recognition criteria were met, i.e., on 1st December 2013).


The Rs. 22 lakhs is recognized as an expense because the recognition criteria were not met until 1st December 2014. This expenditure will not form part of the cost of the production process recognized in the balance sheet.

(ii) For the year ending 31.03.2015


(Rs. in lakhs)

Carrying Amount as on 31.03.2014 28

Expenditure during 2014–2015 80

Total book cost 108

Recoverable Amount 72

Impairment loss 36

Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2015.

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(2) Carrying value of intangible as on 31.03.2015:

(Rs. in lakhs)

Total Book Cost 108

Less: Impairment loss 36

Carrying amount as on 31.03.2015 72

Question 2

Roma International Ltd. is developing a new production process. During the financial Year 31st March, 2014, the total expenditure incurred on this process was Rs. 40 lakhs. The production process met the criteria for recognition as an intangible asset on 1st December 2013. Expenditure incurred till this date was Rs. 16 lakhs.

Further expenditure incurred on the process for the financial year ending 31st March 2015, was Rs.70 lakhs. As at 31-3-2015, the recoverable amount of know-how embodied in the process is estimated to be Rs. 62 lakhs. This includes estimates of future cash outflows as well as inflows. You are required to work out:

(a) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st March 2014? (Ignore depreciation for this purpose)

(b) What is the carrying amount of the intangible asset as at 31st March 2014?

(c) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st March 2015? (Ignore depreciation for this purpose)

(d) What is the carrying amount of the intangible asset as at 31st March 2015?

Answer

(a) Rs. 16 lakhs

(b) Carrying amount as on 31-3-2014 will be expenditure incurred after 1-12-2013= Rs. 24 lakhs

(c) Book cost of intangible asset as on 31-3-2015 is as follows

Total Book cost = Rs.(70 + 24) lakhs = Rs. 94 lakhs

Recoverable amount as estimated = Rs. 62 lakhs

Difference to be charged to Profit and Loss account = Rs. 32 lakhs

(d) Rs. 62 lakhs

Question 3

A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2015 on a research project to develop a drug to treat “AIDS”. Experts are of the view that it may take four years to establish whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed. The company wants to treat the expenditure as deferred revenue expenditure. Comment.

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Answer

As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research (or from the research phase of an internal project) should be recognized. Expenditure on research (or on the research phase of an internal project) should be recognized as an expense when it is incurred.

Thus the company cannot treat the expenditure as deferred revenue expenditure. The entire amount of Rs. 33 lakhs spent on research project should be charged as an expense in the year ended 31st March, 2015.


Question 1

Excellent Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 2014 for Rs.60 lakhs. The machine was expected to have a productive life of 6 years. At the end of financial year 2014-15 the carrying amount was Rs.41 lakhs. A short circuit occurred in this financial year but luckily the machine did not get badly damaged and was still in working order at the close of the financial year. The machine was expected to fetch Rs.36 lakhs, if sold in the market. The machine by itself is not capable of generating cash flows. However, the smallest group of assets comprising of this machine also, is capable of generating cash flows of Rs.54 crore per annum and has a carrying amount of Rs.3.46 crore. All such machines put together could fetch a sum of Rs.4.44 crore if disposed. Discuss the applicability of Impairment loss.

Answer1

As perAS 28 impairment loss is not to be recognized for a given asset if the related cash generating unit (CGU) is not impaired. In the given question, the related cash generating unit, which is group of asset to which the damaged machine belongs, is not impaired; as the recoverable amount is more than the carrying amount of group of assets. Hence there is no need to provide for impairment loss on the damaged sachet filling machine.

Question 2

Mars Ltd. has an asset, which is carried in the Balance Sheet on 31.3.2015 at Rs. 500 lakhs. As at that date the value in use is Rs. 400 lakhs and the net selling price is Rs. 375 lakhs.

From the above data:

(i) Calculate impairment loss.

(ii) Prepare journal entries for adjustment of impairment loss.

(iii) Show, how impairment loss will be shown in the Balance Sheet.

Answer

(i) Recoverable amount is higher of value in use Rs. 400 lakhs and net selling price 375 lakhs, Recoverable amount = Rs. 400 lakhs

Impairment loss = Carried Amount – Recoverable amount= Rs. 500 lakhs – Rs. 400 lakhs = Rs. 100 lakhs.

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(ii) Journal Entries Rs. Rs.

Profit and loss account Dr. 100

To Provision for Impairment loss 100

(Being the entry to transfer impairment loss to profit and loss account)

(iii) Balance Sheet of Mars Ltd. as on 31.3.2015 (Rs. in lakhs)

Fixed Asset Asset less depreciation 500

Less: Impairment loss (100)

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Question 1

At the end of the financial year ending on 31st December, 2014, a company finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors. The possible outcome as estimated by the Board is as follows:

Probability Loss (Rs.)

In respect of five cases (Win) 100% −

Next ten cases (Win) 60% −

Lose (Low damages) 30% 1,20,000

Lose (High damages) 10% 2,00,000

Remaining five cases Win 50% −

Lose (Low damages) 30% 1,00,000

Lose (High damages) 20% 2,10,000

Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent loss and the accounting treatment in respect thereof.

Answer

According to AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’, contingent liability should be disclosed in the financial statements if following conditions are satisfied:

(i) There is a present obligation arising out of past events but not recognized as provision.

(ii) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

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(iii) The possibility of an outflow of resources embodying economic benefits is also remote.

(iv) The amount of the obligation cannot be measured with sufficient reliability to be recognized as provision.

In this case, the probability of winning of first five cases is 100% and hence, question of providing for contingent loss does not arise. The probability of winning of next ten cases is 60% and for remaining five cases is 50%. As per AS 29, we make a provision if the loss is probable. As the loss does not appear to be probable and the possibility of an outflow of resources embodying economic benefits is not remote rather there is reasonable possibility of loss, therefore disclosure by way of note should be made. For the purpose of the disclosure of contingent liability by way of note, amount may be calculated as under:

Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000

= Rs. 36,000 + Rs. 20,000 = Rs. 56,000

Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000

= Rs. 30,000 + Rs. 42,000 = Rs. 72,000

To disclose contingent liability on the basis of maximum loss will be highly unrealistic. Therefore, the better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000 x 10 +Rs. 72,000 x 5) as contingent liability.

Question 2

A Company has entered into a sale contract of Rs.10,00,000 with B Company during financial year 2014-15. The profit on this transaction is Rs.2,00,000. The delivery of the goods to be taken place during the first month of the financial year 2015-2016. In case of failure of A Company to deliver within the schedule, a compensation of Rs.3,00,000 is to be paid to B Company. A Company planned to manufacturer the goods during the last month of the financial year 2014-2015. As on the Balance Sheet date (i.e., 31-3-2015), goods were not manufactured and it was unlikely that A Company would be in a position to meet the contractual obligation.

(a) Should A Company provide for the contingency?

(b) Should A company measure provision as the excess of compensation to be paid over the profit?

Answer

(a) Yes, A company should provide for the contingency because it is unlikely that A Company should be in a position to meet contractual obligation.

(b) No, A Company can’t measure provision as the excess of compensation to be paid over profit. It has to provide for the total compensation amount.

***

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Question 1

Discuss the procedure for issuing auditing standards.

Answer

Procedure of issuing auditing standards

The Auditing and Assurance Standards Board (AASB) identifies the areas where auditing standards need to be formulated and the priority in regard to their selection.

In the preparation of the auditing standards, the Board is normally, assisted by study groups comprising of a cross section of members of the Institute of Chartered Accountants of India.

On the basis of the work of the study groups, an Exposure Draft of the proposed auditing standard is prepared by the Board and issued for comments of the members.

After taking into the comments received, the draft of the proposed auditing standard is finalized by the Board and submitted to the Council of the Institute.

The Council considers the final draft of the proposed auditing standard and, if necessary, modifies the same in consultation with the Board. The auditing standard is then issued under the authority of the Council.

While formulating the auditing standards, the Board also takes into consideration the applicable laws, customs, usages and business environment in the country.

Question 2

What are the important matters which an auditor should ensure to ascertain and establish true and fair view ?

Answer

In order to show a true and fair view the auditor should ensure that:

The final accounts (Trading and Profit and loss Account and Balance Sheet) agree with the books of accounts.

The closing stock is physically verified and valued properly.

Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue expenses are valued and written off properly.

10

Auditing Concepts

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Expenses/income of capital nature is not treated as revenue and vice versa.

Contingent liabilities are not treated as actual liabilities and vice versa

Provision is made for all known losses and liabilities

Transactions are recorded on accrual basis, i.e. outstanding expenses, prepaid expenses, income accrued and advance income is recorded properly

The exceptional or non-recurring transactions are disclosed separately in the accounts.

Question 3

Distinguish between ‘audit’ and ‘investigation’.

Answer

The following are the difference between audit and investigation

Legal binding : Audit of annual financial statements of a company is compulsory under the Companies Act, 2013. However, investigation is voluntary depending upon necessity.

Objective : Audit is conducted to ascertain whether the financial statements show a true and fair view. Investigation is conducted with a particular object in view, viz to know financial position, earning capacity, prove fraud, invest capital, etc.

Period covered : Audit is conducted on annual basis. Investigation may be conducted as and when required for several years or several months together.

Parties for whom conducted : Audit is conducted on behalf of shareholders (or proprietor, or partners). Investigation is usually conducted on behalf of outsiders like prospective buyers, investors, lenders, etc.

Documents : Audit is not carried out of audited financial statements. Investigation may be conducted even though the accounts have been audited.

Extent of work : Audit is normally conducted on test verification basis. Investigation is a thorough examination of books of accounts.

Report : Audit report of a company is addressed to shareholders (or proprietors or partners). Investigation report is addressed to the party on whose instruction investigation was conducted.

Person performing work : Audit is to be conducted by a person having prescribed qualification i.e. Chartered accountant, Cost accountant. No statutory qualification is prescribed for Investigation. It may be undertaken by any one.

Question 4

What does Standards on Auditing (SA) 230 {Revised) say about utility, ownership, custody and retention of working papers?

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Answer

SA 230(Revised) on Audit Documentation deals with the auditor’s responsibility to prepare audit documentation; documentation of the audit procedures performed and audit evidence obtained and assembly of the final audit file. It outlines about utility, ownership, custody and retention of working papers.

Utility: The Working papers aid in the planning and performance of the audit; aid in the supervision and review of the audit work; and provide evidence of the audit work performed to support the auditor’s opinion.

Ownership: Working papers are the property of the auditor. The auditor may, at his discretion, make portions of or extracts from his working papers available to his client.

Custody: The auditor should adopt reasonable procedures for custody and confidentiality of his working papers.

Retention of working papers: The auditor should retain them for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional requirements of record retention.

Question 5

Explain the basic principles governing an audit.

Answer

SA 200 “Basic Principals Governing an Audit”, describes the basic principles which govern the auditor’s professional responsibilities and which should be complied with wherever an audit is carried. They are described below:

(i) Integrity objectivity and independence: An auditor should be honest, sincere, impartial and free from bias. He should be a man of high integrity and objectivity.

(ii) Confidentiality: The auditor should respect confidentiality of information acquired during the course of his work and should not disclose the information without the prior permission of the client, unless there is a legal duty to disclose.

(iii) Skill and competence: The auditor must acquire adequate training and experience. He should be competent, skillful and keep himself abreast of the latest developments including pronouncements of ICAI on accounting and auditing matters.

(iv) Work performed by others: If the auditor delegates some work to others and uses work performed by others including that of an expert, he continues to be responsible for forming and expressing his opinion on the financial information.

(v) Documentation: The auditor should document matters which are important in providing evidence to ensure that the audit was carried out in accordance with the basic principles.

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(vi) Planning: The auditor should plan his work to enable him to conduct the audit in an effective, efficient and timely manner. He should acquire knowledge of client’s accounting system, the extent of reliance that could be placed on internal control and coordinate the work to be performed.

(vii) Audit evidence: The auditor should obtain sufficient appropriate evidences through the performance of compliance and other substantive procedures to enable him to draw reasonable conclusions to form an opinion on the financial information.

(viii) Accounting System and Internal Control: The management is responsible for maintaining an adequate accounting system incorporating various internal controls appropriate to the size and nature of business.

The auditor should assure himself that the accounting system is adequate and all the information which should be recorded has been recorded. Internal control system contributes to such assurance.

(ix) Audit conclusions and reporting: On the basis of the audit evidence, he should review and assess the audit conclusions. He should ascertain:

1. As whether accounting policies have been consistently applied;

2. Whether financial information complies with regulations and statutory requirements; and

3. There is adequate disclosure of material matters relevant to the presentation of financial information subject to statutory requirements.

The auditor’s report should contain a clear written opinion on the financial information. A clean audit report indicates the auditor’s satisfaction in all respects and when a qualified, adverse or a disclaimer of opinion is to be given or reservation of opinion on any matter is to be made, the audit report should state the reasons thereof.

Question 6

Explain the scope of SA 210 agreeing the terms of audit engagement.

Answer

SA 210 deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and those charged with governance.

It includes establishing that certain pre-conditions for an audit, responsibility for which rests with management and those charged with governance, are present.

Question 7

What do you understand by ‘audit documentation’?

Answer

According to SA 230, Audit Documentation refers to the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. Preparing sufficient and appropriate audit documentation on a timely basis helps to

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enhance the quality of audit and facilitates effective review and evaluation of audit evidence obtained and conclusions reached before finalizing auditor’s report. According to this standard, retention period for audit engagements ordinarily is no shorter than ten years from the date of auditor’s report, or, if later, the date of group auditor’s report.

Question 8

What would be the form, content and extent of Audit Documentation?

Answer

The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand:

The nature, timing, and extent of the audit procedures performed to comply with the Standards on Auditing (SA) and applicable legal and regulatory requirements;

The results of the audit procedures performed, and the audit evidence obtained; and

Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.

Question 9

What are the examples of the audit documentation?

Answer

Examples of audit documentation include the following:

Engagement letter

Audit programmes defined, with details of work carried out and results filled, including planning memorandum

Analyses of various account balances through comparatives and corroborative.

Issues memoranda

Summaries of significant matters

Letters of confirmation and representation.

Checklists

Correspondence (including e-mail) concerning significant matters

Abstracts or copies of the entity’s records (for example, significant and specific contracts and agreements)

Audit documentation, however, is not a substitute for the entity’s accounting records.

Question 10

Explain briefly duties and responsibilities of an auditor in case of material misstatement resulting from Management Fraud.

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Answer

Misstatement in the financial statements can arise from fraud or error. The term fraud refers to an ‘Intentional Act’ by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. The auditor, conducting an audit, is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the SAs.

Question 11

In the books of accounts of M/s ABC Ltd. huge differences are noticed between the control accounts and subsidiary records. The Chief Accounts Officer informs that this is common due to huge volume of business done by the company during the year. As a company auditor, how would you deal with the situation?

Answer

The huge differences found between control accounts and subsidiary records in the books of M/s ABC Ltd. indicate that there may be material misstatements requiring detailed examination by the auditor to ascertain the cause. The contention of Chief Accounts Officer cannot be accepted simply because the company has done huge volume of business. Such a phenomenon indicates that recording of transactions is not being done properly or the accounting system in the company which might have several branches spread over the country fails to capture all transactions in time. It would also be interesting to see whether it is a recurring phenomenon or such reconciliation could not be done at a subsequent date. Having regard to all these circumstances, it appears from the facts of the case that these differences indicate the possibility of some kind of material misstatements.

As per SA 240, “The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements” when the auditor encounters circumstances that there is material misstatement, the auditor should perform procedures to determine whether the financial statements are materially misstated. If as a result of such examination the auditor comes across any material information involving fraud or gross irregularity the same shall be reported by him appropriately.

Question 12

Write short notes on ‘preliminary engagement activities’ under SA 300.

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Answer

The auditor shall undertake the following activities at the beginning of the current audit engagement-

(a) performing procedures on Quality control for audit work (as per SA 220) regarding the continuance of the client relationship and the specific audit engagement;

(b) evaluating compliance with ethical requirements, including independence as per SA 220; and

(c) establishing an understanding of the terms of the engagement, as required by SA 210.

Question 13

As an auditor of Limca Ltd., Mr. Xian applied the concept of materiality for the financial statements as a whole. On the basis of obtaining additional information of significant contractual arrangements that draw attention to a particular aspect of a company's business, he wants to re-evaluate the materiality concept. Please advise.

Answer

In the instant case, Mr. Xian, as an auditor of Limca Ltd., has applied the concept of materiality for the financial statements as a whole. But he wants to re-evaluate the materiality concept, on the basis of additional information of significant contractual arrangements which draws attention to a particular aspect of the company’s business.

As per SA 320 “Materiality in Planning and Performing an Audit”, while establishing the overall audit strategy, the auditor shall determine materiality for the financial statement as a whole. He should set the benchmark on the basis of which he performs his audit procedure. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures.

Question 14

An assistant of Y & Co. Chartered Accountant detected an error of Rs. 10 per interest payment, which recurred a number of times. The General Manager (Finance) of X Ltd. advised him not to request for passing any adjustment entry as individually the errors were of very small amounts. The company had 2000 deposit accounts and interest was paid quarterly. Share your view in this issue, with reasons.

Answer

Principle : Mis-statements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

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Analysis : In the instant case, an error of Rs. 10 in the interest computation, even if small individually, will have a material effect due to the large number of transactions.

Conclusion : Hence Y & Co., need not pay any attention to the advise given by the General Manger

(Finance) of X Ltd. The necessary adjustment should be carried out in the accounts of the company.

Question 15

State, how the reliability of audit evidence gets affected by the types of Audit evidences. (SA 500)

Answer

The audit evidences provide credence to the assertions that a transaction seeks to reveal out. Depending upon the sources, forms or nature of audit evidences, the credence or reliability value of the evidences may vary. Generally

1. The external evidence is usually more reliable than internal evidence. (Source)

2. Internal evidence is more reliable when related internal control is satisfactory. (Nature)

3. Evidence in the form of document or written representation is usually more reliable than oral representation. (Form)

4. Evidence obtained by the auditor himself is more reliable than the evidence obtained through the entity. (Nature)

Question 16

While planning the audit of X Ltd, you want to apply sampling techniques. What are the risk factors you should keep in mind?

Answer

SA 530 “Audit Sampling” deals with auditor use of sampling in performing audit procedures. However, due to application of sampling in audit procedures, there arises risk of sampling.

Sampling Risk may be defined as the risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

Sampling risk can lead to two types of erroneous conclusions:

(i) In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.

(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it

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does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

Question 17

Cipsa Ltd. holds the ownership of 10% of voting power and control over the composition of Board of Directors of Lipsa Ltd. While planning the statutory audit of Cipsa Ltd., what factors would be considered by you for audit of financial statements?

Answer

In this case, Cipsa Ltd. holds only 10 percent of the voting power and control over the composition of the Board of Directors of Lipsa Ltd. In such a case, Cipsa Ltd. would be considered as a parent of Lipsa Ltd. and, therefore, it would consolidate Lipsa Ltd., in the consolidated financial statements as subsidiary.

The auditor should verify whether the parent controls the composition of the Board of Directors or corresponding governing body of any entity. There would be various means by which such kind of control can be obtained.

In this regard, the auditor may verify the Board’s minutes, shareholder agreements entered into by the parent, agreements with the entities to which the parent might have provided any technology or know how, enforcement of statute, as the case may be, etc.

The auditor should verify that the adjustments warranted by the relevant accounting standards have been made wherever required and have been properly authorised by the management of the parent. The preparation of consolidated financial statements gives rise to permanent consolidation adjustments and current period consolidation adjustments. The auditor should make plans, among other things, for the understanding of accounting policies of the parent, subsidiaries, associates and joint ventures and determining and programming the nature, timing, and extent of the audit procedures to be performed etc. Further, the duties of an auditor with regard to reporting of transactions with related parties as required by Accounting Standard 18 are given in SA 550 on Related Parties.

As per SA 550 on, “Related Parties”, the auditor should review information provided by the management of the entity identifying the names of all known related parties. A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity are considered as Related Party.

In forming an opinion on the financial statements the auditor shall evaluate whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework and whether the effects of the related party relationships and transactions prevent the financial statements from achieving true and fair presentation (for fair presentation frameworks); or cause the financial statements to be misleading (for compliance frameworks).

Question 18

Can the statutory auditor rely upon the work of an internal auditor?

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Answer

SA 610 “Using the work of Internal auditors” deals with the external auditor’s responsibilities regarding the work of internal auditors when the external auditor has determined, in accordance with SA 315 that the internal audit function is likely to be relevant to the audit. With respect to relationship between statutory auditor and internal auditor, SA 610 provides the following:

(a) The role and objectives of the internal audit function are determined by management and, where applicable, those charged with governance. While the objectives of the internal audit function and the external auditor are different, some of the ways in which the internal audit function and the external auditor achieve their respective objectives may be similar.

(b) Irrespective of the degree of autonomy and objectivity of the internal audit function, such function is not independent of the entity as is required of the external auditor when expressing an opinion on financial statements.

(c) Therefore, the external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor’s use of the work of the internal auditors.

Question 19

State in brief about SA- 620, using the work of an auditor’s expert.

Answer

SA 620 “Using the work of an Auditor’s Expert” deals with the auditor’s responsibilities regarding the use of an individual or organisation’s work in a field of expertise other than accounting or auditing, when that work is used to assist the auditor in obtaining sufficient appropriate audit evidence.

With respect to reference of Expert in Auditor’s Report, SA 620 provides the following:

The auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing an unmodified opinion unless required by law or regulation to do so.

If such reference is required by law or regulation, the auditor shall indicate in the auditor’s report that the reference does not reduce the auditor’s responsibility for the audit opinion.

If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion.

Question 20

While reading the other information, auditor finds certain misstatement which requires revision of audited financial statements, but management refuses. Comment on the statement.

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Answer

SA 720 “The auditor’s Responsibility in relation to other information in Documents containing audited financial statements.” deals with the auditor’s responsibility in relation to other information in documents containing audited financial statements and the auditor’s report thereon.

When material inconsistencies identified in Other Information which requires revision of audited financial statements, the auditors procedures depends upon the timing of availability of other information.

If other information was obtained prior to the date of the Auditor’s Report and misstatements identified by the auditor which requires revision of audited financial statements, but management refuses to make the revision, the auditor shall modify the opinion in accordance with SA 705.

If other Information was obtained Subsequent to the Date of the Auditor’s Report and misstatements identified by the auditor which requires revision of the audited financial statements, the auditor shall follow the relevant requirements in SA 560.

Question 21

Write a short note on harmonization of Indian auditing standards with international auditing standards?

Answer 21

The Institute of Chartered Accountants of India (ICAI) is a founder member of the International Federation of Accountants. (IFAC). It is one of the membership obligations of the Institute to actively propagate the pronouncements of the International Auditing and Assurance Standards Boards (IAASB) of the IFAC to contribute towards global harmonization and acceptance of the standards issued by IAASB. Accordingly, while formulating engagement and quality control standards the AASB takes into consideration the corresponding standards if any, issued by the IAASB.

With effect from 1st April, 2008 the AASB re-categorised and renumbered the existing Auditing and Assurance Standards on the lines as followed by the IAASB with this change, all auditing and assurance standards (AAS) were renamed as standards on Auditing (SAs).

Question 22

Explain the term Auditing, its objective and scope?

Answer 22

Institute of Chartered Accountants of India (ICAI) defines auditing as a systematic and independent examination of data, statements, records, operations and performance of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognizes the propositions before him for examination, collect evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report.

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The primary objective of the auditor is to report to the owners whether the balance sheet gives a true and fair view of the company’s state of affairs and the profit & loss account gives a correct figure for the financial year.

The incidental objective of auditing is detection and prevention of frauds and detection and prevention of errors.

Audit scope determines the time involved in audit exercise, depth of auditing, aspects to be covered etc.

Audit scope depends on nature of audit, objectives of audit & terms of engagement, requirement of applicable legislations and auditing standard.

Question 23

Explain the concept of materiality in auditing?

Answer 23

Materiality is a concept or convention within auditing and accounting relating to the significance of an amount, transaction or discrepancy.

Materiality can be defined as the magnitude of an omission or misstatement of accounting information that in the light of surrounding circumstances makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Question 24

Is it true to say that modifications can be done in the opinion of the Independent Auditor or opinion in the Independent Auditors report? Justify?

Answer 24

It is true to say that modifications to the opinion in the Independent Auditor’s report could be done and even considered necessary in few situations.

SA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 (revised) the auditor concludes that a modification to the auditor’s opinion on the financial statement is necessary. The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that are necessary when:

(a) The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement or

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement

Question 25

How the audit work is distributed among Joint Auditors? Who remains responsible and accountable among them for the work done?

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Answer 25

SA 299, lays down that the joint auditors should normally by mutual discussion, divides the audit work among themselves. The division of work among joint auditors as also the areas of work to be covered by all of them should be adequately documented and preferably communicated to the entity. The SA also states that each joint auditor is responsible only for the work allotted to him. It also deals with the reporting responsibilities of the joint auditors. This standard very specifically states that the majority opinion would not be binding upon the other joint auditor(s)

***

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Question 1

Enumerate the various types of audit prescribed under Companies Act, 2013?

Answer

The Companies Act, 2013 is focused on transparency and disclosure. In the new Act, attempt has been made to cover each aspect of corporate functioning under audit by prescribing various types of audits like internal audit and secretarial audit. The various types of audits prescribed under the Companies Act, 2013 are:

• Statutory Audit

• Internal Audit

• Secretarial Audit

• Cost Audit.

Question 2

Briefly discuss the various provisions prescribed under Companies Act, 2013 for selection and appointment of auditors.

Answer

A company shall follow the procedure prescribed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014 for the selection and appointment of auditors under section 139(1) which is as follows:

A company that is required to constitute an Audit Committee under section 177, such committee and where such committee is not required, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.

While considering the appointment, the Audit Committee or the Board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or any Court.

The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit.

11

Types of Company Audit

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Where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases; the Board shall consider and recommend an individual or a firm as auditor to the members in the annual general meeting for appointment.

If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the annual general meeting.

If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.

If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the annual general meeting.

The auditor so appointment shall be subject to ratification in every annual general meeting till the sixth such meeting by way of passing of an ordinary resolution. If the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.

The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being counted as the first meeting:

Question 3

The first auditor did not give notice to the ROC for accepting the audit.

Answer

The requirement of giving notice to the ROC has been prescribed only in respect of appointment in an AGM under section 139 (1) read along with rule 4 of Companies (Audit and Auditors) Rules, 2014 and therefore is not applicable to appointment of first auditor being appointed by the Board of director’s or shareholders in the general meeting.

Question 4

Whether the following persons can be appointed as the auditor of a company?

1. Mr. X who is a Chartered Accountant of the Canadian Institute of Chartered Accountants but is not a member of the Institute of Chartered Accountants of India.

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2. Mrs. P is a member of the Institute of Chartered Accountants of India. The directors of a limited company say that she being a lady can not be appointed as an auditor of the company.

3. Mr. A owes Rs. 1,000 to ABC Ltd. of which he is an auditor.

4. Mr. A, a member of the ICAI, does not hold a certificate of practice.

5. ABC Consultants Ltd is a registered company with A, K and V as its Directors. All the three Directors are Chartered Accountants. Can the Co. be appointed as auditor of another Company?

6. A, a partner in the firm of M/s Rama & Co., Chartered Accountants, is the Secretary of C Ltd. Can A or Rama & Co., be appointed as the Company Auditor?

7. B, Chartered Accountant, is the partner of N, who is a Director in P Ltd. Can B be appointed as Statutory Auditor?

8. A, a Chartered Accountant, is a director of A Ltd., which is a subsidiary of B Ltd. The Board of Directors of B Ltd. proposes to appoint Mr. A as the auditor of B Ltd. Discuss.

Answer

1. Mr. X cannot be appointed an auditor of a limited company in India. He must be a chartered accountant within the meaning of the Chartered Accountants Act, 1949.

2. Mrs. P can be appointed as an auditor of the company. There is no bar on a lady.

3. Mr. A is not disqualified. He will be disqualified only if he owes an amount in excess of 1,000.

4. A does not hold a COP and hence cannot be appointed as an auditor of a company.

5. A Body Corporate cannot be appointed as Statutory Auditor of a Company. In the above case, the Company cannot be appointed as Statutory Auditor of another Company.

6. A, being an Officer of the Company is disqualified. Also, M/s Rama & Co., is not qualified to be appointed as auditor as one of its partners is an employee of the Company.

7. B is not qualified to be appointed as auditor, as u/s 141 (3) (d), a person who is a partner of an officer of a Company cannot be appointed as its auditor.

8. A is not qualified to be appointed as auditor of B Ltd., because a person who is not qualified to be the auditor of a company would also not be qualified to be auditor of such company’s subsidiary, or holding company.

Question 5

Can a director of the company be appointed as an auditor?

Answer

There is no express prohibition that a director cannot be appointed as an auditor. But the below given two provisions of the Companies Act, 2013 prohibits a director to be appointed as an auditor:

(a) Sec.141 (3) (b) enumerates that an officer of the company cannot be appointed as an auditor.

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(b) Section 2(59), which defines the officer to include the director.

Question 6

Mr Abhishek is appointed as an auditor in X Ltd. Further, Mr Abhishek is a relative of a director of X Ltd. Comment.

Answer

Section 141 of the Companies Act, 2013 deals with the eligibility criteria, qualifications and disqualifications of an Auditor. Sub-section (3) (f) of the Section 141 of the Act, explicitly disqualifies a person from being appointed as an auditor of a company whose relative is a director or is in the employment of the company as a director or key managerial personnel.

In the instant case, Mr. Abhishek is the relative of a Director of the company, therefore he should not accept the appointment as an auditor of that company.

Question 7

X, Y and Z together are forming a new company. They wish to include the following clause in the Articles of Association of the company. “The first auditors of the company will be M/s RS & Co, Chartered Accountants who will hold office for five years”. They seek your advice in the matter.

Answer

The above clause will not be valid. As per section139 (6) of the Companies Act, 2013 the first auditors can be appointed only by a resolution of the board of directors within thirty days from the date of registration of the company, or by the shareholders who shall within ninety days at an extra ordinary general Meeting appoint the first auditors if the board fails to do so. Moreover, the first auditors can hold office only until the conclusion of the first annual general meeting (provided they are not removed by the shareholders earlier at a general meeting by passing special resolution).

Question 8

Discuss the provision relating to rotation of auditors under the Companies Act, 2013.

Answer

Under Section 139(2), the system of rotation of auditors has been introduced for the auditors of listed companies and other class of companies. The provisions for rotation of auditors under sub sections 2, 3 and 4 of section 139 are given below:

• If the auditor is an individual, he cannot be auditor of such a company for more than 5 consecutive years.

• If an audit firm/LLP is auditor of the company, it cannot be auditor of such a company for more than two terms of 5 consecutive years (i.e. 10 years)

• If an individual auditor who has completed his one term of 5 years, shall not be eligible for reappointment as auditor in the same company for 5 years from the completion of his term.

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• In an audit firm/LLP which has completed its one term of 10 years, shall not be eligible for reappointment as auditor in the same company for 5 years from the completion of its term.

• It may be noted that any firm/LLP which has one or more partners who are also partners in the outgoing audit firm/LLP cannot be appointed as auditors during this 5 year period.

• There is a transition period of three years, from date of enactment of the 2013 Act, to comply with this requirement. All listed companies or specified companies will have to comply with the above provisions relating to rotation of auditors within 3 years from the date of commencement of this Act i.e. within 31st March 2017.

• However there will be no effect on the right of the company to remove an auditor or the right of the auditor to resign from such office of the company because of the provisions mentioned above.

• The members of a company may also provide for the rotation of auditing partner and his team at specified intervals in the audit firm appointed by the company.

• The members of a company may also provide that the audit shall be conducted by more than one auditor.

Illustration explaining rotation in case of individual auditor

Illustration 1:-

Number of consecutive years for which an individual auditor has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]

Maximum number of consecutive years for which he may be appointed in the same company (including transitional period)

Aggregate period which the auditor would complete in the same company in view of column I and II

I II III

5 years (or more than 5 year) 3 years 8 years or more

4 years 3 years 7 years




Note:

1. Individual auditor shall include other individuals or firms whose name or trade mark or brand is used by such individual, if any.

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2. Consecutive years shall mean all the preceding financial years for which the individual auditor has been the auditor until there has been a break by five years or more.

Illustration explaining rotation in case of audit firm

Illustration 2:-

Number of consecutive years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]

Maximum number of consecutive years for which the firm may be appointed in the same company (including transitional period)

Aggregate period which the firm would complete in the same company in view of column I and II

I II III

10 years (or more than 10 year) 3 years 13 years or more










Note:

1. Audit Firm shall include other firms whose name or trade mark or brand is used by the firm or any of its partners.

2. Consecutive years shall mean all the preceding financial years for which the firm has been the auditor until there has been a break by five years or more.

Question 9

Mr. Raja, a practicing chartered accountant, holds 35 company audits including 15 public companies, 7 other companies out of which 5 are private companies having paid capital exceeding One hundred crores rupees and 2 are small companies and the rest are audit

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of branches of companies. Has Mr. Raj violated any provisions of the companies Act, 2013 or is he guilty of professional misconduct?

Answer

Audits which are taken for counting as per Section 141 (3) (g) read along with Section 143 (8) of the Companies Act, 2013:

Public companies

Private Companies (> one hundred crore rupees, excluding small companies)

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5

The audits are within the ceiling limit (i.e. 20 excluding small companies, branches etc.) prescribed by the Act. Therefore there is no violation of the act.

Question 10

Mr. X, who was appointed as the first auditors, of the company, was removed without the prior approval of the Central Government before the expiry of their term, by calling an EGM.

Answer

As per section 140 (1) which says that, the auditor appointed may be removed before the expiry of his term only by a special resolution of the company, after obtaining the prior approval of the Central Government in that behalf in the prescribed manner.

So in the instant case, the company has to obtain Central Government approval for removal of X before the expiry of his term.

Question 11

How is an auditors' remuneration fixed under the Companies Act, 2013?

Answer

According to section 142 of the Companies Act, 2013 the remuneration of the auditor of a company shall be fixed in its general meeting or in the manner as determined in the general meeting.

The remuneration of the first auditor appointed by the board may be fixed by the Board.

The remuneration shall be in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.

Question 12

Can the Board of Directors fill the casual vacancy arising as a result of the resignation of an auditor?

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Answer

No, the Board of Director cannot fill the casual vacancy arising as a result of the resignation of an auditor under the provisions of section 139(8) (i) of the Companies Act, 2013.

Question 13

Due to the resignation of the existing auditor(s) the board of directors of X Ltd appointed Mr. Om as the auditor. Is it valid?

Answer

The resignation of the existing auditor(s) would give rise to a casual vacancy. As per section 139 (8) (i), casual vacancy can be filled by the Board of Directors, provided such vacancy has not been caused by the resignation of the auditor.

The appointment shall be approved by the company at a general meeting convened within three months of the recommendation of the Board and he/she shall hold the office till the conclusion of the next annual general meeting.

So in the given case the above procedure has to be followed by X Ltd.

Question 14

At the AGM of ABC Ltd. Mr. X was appointed as the statutory auditor. He, however, resigned after 3 months since he wants to shift from practice to job. State how the new auditor will be appointed by ABC Ltd.

Answer

As per Section 139 (8) (i), casual vacancy can be filled in the following way:

a. If it was due to resignation - only by shareholders.

b. If it was due to other reasons - By board of directors.

Thus, in this case ABC Ltd will have to call an extra-ordinary general meeting (EGM) and appoint another auditor. The new auditor so appointed shall hold office only till the conclusion of the next annual general meeting.

Question 15

The auditor of Y Ltd. resigned after valid and accepted appointment whereupon the Board of Directors appointed another auditor treating it as a casual vacancy.

Answer

Section 139 (8) (i) states that the Board may fill any casual vacancy, provided such vacancy has not been caused by the resignation of the auditor. In the instant case, a casual vacancy has arisen on account of resignation since the auditor of Y Ltd resigned after accepting the appointment. Under these circumstances, the shareholder’s can only fill the vacancy in the general meeting.

Question 16

AB Ltd. does not send to its auditors the notice of an extraordinary general meeting on the plea that accounts are not being discussed at the aforesaid meeting.

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Answer

This is not correct since the requirements of section 146 of Companies Act, 2013 provides that all notices of, and other communications relating to, any general meeting shall be forwarded to the auditors of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

So this section applies to all general meetings held during the period when the auditor holds his office.

Question 17

A company has a branch office which recorded a turnover of Rs. 1, 20,000 in the financial year 2014-15. No audit of the branch has been carried out. The statutory auditor of the company has made no reference of the above branch in his report. The total turnover of the company is Rs. 10 crores for the year 2014-15. Comment on the issue.

Answer

As per section 143(8) of the Companies Act, 2013 if a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company's auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company's auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

Therefore, the company has to get its branch audited. In case no branch audit has been carried out, company’s auditor is required to mention this fact in the audit report and deal appropriately.

Question 18

XYZ & Company Limited by passing a resolution by the entire body of shareholders wants to limit the powers of the statutory auditors.

Answer

Section 143 (1) of the Companies Act, 2013 specifies the rights of a company auditor which include right of access to the books of accounts, etc. These rights have been granted to the auditor to carry out his duties and responsibilities prescribed under the Act.

The rights of the auditor cannot be restricted in any manner.

Any resolution passed by the entire body of shareholders limiting the powers of the auditor or any such provisions in the Articles of Association is void.

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Question 19

Amit is appointed as the auditor of ABC Ltd. on 25th July, 2015. He informs the company that he will visit its head office on August 16, 2015 (a holiday for the company, being a Sunday) and examine the cash book. The accountant argues that Amit should come after March 31, 2016 when the accounts are closed. Moreover, he should not come on a Sunday as the office is closed on that day. Is the position taken by the accountant correct?

Answer

The auditor has access to books etc. “at all times”. This implies that he can examine them at any time after assuming his office as the auditor and he need out wait for the closing of the accounts, i.e., March 31, 2016. However, the expression “at all times” refers to only the normal business hours on any working day. Thus, Amit can only examine the books during normal business hours on any working day of the company.

Question 20

Explain the penal provisions which are applicable to auditors under the Companies Act, 2013.

Answer

The penal provisions applicable to auditors under the Companies Act 2013 are as under-

• If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

• If an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

• Where an auditor has been convicted he shall be liable to— I. refund the remuneration received by him to the company; and

II. pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

Question 21

Differentiate between ‘Secretarial Audit’ and ‘Internal Audit’.

Answer

Basis Secretarial Audit Internal Audit

Definition Secretarial Audit is an audit to check compliance of various legislations including the Companies Act and

Internal audit is an independent management function, which involves a continuous and critical

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other corporate and economic laws applicable to the company.

appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal control system.

Applicability It is applicable to every listed company and every public company having a paid-up share capital of fifty crore rupees or more; or every public company having a turnover of two hundred fifty crore rupees or more.

It is applicable to-

(i) every listed company;

(ii) every unlisted public company having-

paid up share capital ≥ 50 crores rupees during the preceding financial year; or

turnover ≥ 200 crore rupees or more during the preceding financial year; or

outstanding loans or borrowings from banks or public financial institutions > 100 crore rupees or more at any point of time during the preceding financial year; or

outstanding deposits ≥ twenty five crore at any point of time during the preceding financial year; and

(iii) every private company having-

turnover ≥ 200 crore crore rupees or more during the preceding financial year; or

outstanding loans or borrowings from banks or public financial institutions > 100 crore rupees or more at any point of time during the preceding financial year.

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Qualifications for auditor

A Secretarial Audit has to be conducted by a Practising Company Secretary in respect of the secretarial and other records of the company.

The internal auditor shall either be a chartered accountant whether engaged in practice or not or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

Report of the audit

A secretarial audit report shall be annexed with the Board’s report of the company.

The report of internal audit shall be submitted to the Board of the company.

Question 22

What are the services which cannot be rendered by a statutory auditor of a company under section 144 of the Companies Act, 2013?

Answer

An Auditor cannot render to a company the following services under section 144 of the Companies Act, 2013:-

- Accounting & Book-keeping

- Internal Audit

- Financial Information System

- Actuarial Services

- Investment Advisory Services

- Investment Banking Services

- Outsourced Financial Services

- Management Services and

- Any other kind of services as may be prescribed.

Question 23

Alma Limited, a company having a sum of Rs. 70 crores each, outstanding towards a Bank and a public financial institution, has appointed its employee Mr. Siva, a CS, as its internal auditor with effect from 15 October, 2014, for the financial year 2014-2015. Comment on this statement.

Answer

As per Section 138 of the Companies Act, 2013 read along with Rule 13 of Companies (Accounts) Rules, 2014, every unlisted public company having outstanding loans or borrowings from banks or public financial institutions, for atleast Rs. 100 crore at any point of time during the preceding financial year, shall be required to appoint an internal auditor.

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Such internal auditor shall be a chartered accountant or cost accountant or such other professional as may be decided by the Board who shall conduct internal audit of the functions and activities of the company.

Section 138 which came into force w.e.f. 1st April 2014, further states that an existing company covered under the above criteria shall comply with the requirements of section 138 within six months of commencement of such section.

In the given question, Alma Limited has outstanding loans/ borrowings towards Bank and public financial institution amounting to Rs. 140 crores (i.e. more than Rs. 100 crores), it is required mandatorily to appoint internal auditor within 6 months, i.e. by 30th September 2014. Thus, the company has defaulted in compliance with the requirements of section 138.

Question 24

Lamba Pvt Ltd. is having only 2 members Manish & Satish. During the audit for the year ended on 31.3.2015, the auditor of the company found that:

(i) Manish, who is in charge of purchases has introduced fictitious purchase bills of Rs. 60 lakhs;

(ii) Satish, who is in charge of sales, has sold goods worth Rs. 90 lakhs without bringing the same in the books of account.

The auditor raises the matter with Manish & Satish in their capacity as directors. They contest that as this is a position known to them and within their own fold, the auditor should not report the same under the Companies Act, 2013. Discuss whether these arguments are acceptable under the Companies Act, 2013 for non-reporting. If not, state the reasons and the manner of reporting.

Answer

The arguments made by Manish & Satish, directors of Lamba Pvt. Ltd., for non-reporting of fictitious purchases of Rs. 60 lakhs and omission of recording of sales of Rs. 90 lakhs under the Companies Act, 2013 are not acceptable in view of the following reasons:

(i) The scope of audit of a company is determined by provisions of the Companies Act, 2013. Even the terms of the engagement cannot restrict the scope of audit in relation to matters which are prescribed by legislation [SA 200R read with Newton v. Birmingham Small Arms Co.]

(ii) Section 143 requires the auditor to state whether “in his opinion and to the best of his information and according to the explanations given to him”, the accounts “give a true and fair view in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year and in the case of the profit and loss account, of the profit or loss for its financial year”. Thus, the primary duty of the auditor is to determine whether the balance sheet shows a true and fair view of the state of the company’s affairs as at the end of the financial year and whether the profit and loss account shows a true and fair view of the working results of the company for the year.

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(iii) The fact that there are only two members and they are fully aware of such transactions would not have any impact as far as scope of audit is concerned.

Therefore, it would, therefore, be obligatory on the part of auditor to report these aspects in the audit report.

The following paragraph in the audit report under section 143 of the Companies Act, 2013 should be included:

“On the basis of information and explanation given to us, together with our audit examination, subject to the purchases of Rs………. as reflected in the profit and loss account being overstated by Rs.60 lakhs and sales of Rs………as reflected in the Profit and Loss Account being understated by Rs.90 lakhs and thus resulting in understating the profits of the company by Rs.1.50 crores, we report that the financial statements are reflecting true and fair view”.

Question 25

Explain the role of CAG in the functioning of financial committees of Parliament.

Answer

The Comptroller & Auditor General of India plays a key role in the functioning of the financial committees of Parliament and the State Legislatures. He has been recognised as a ‘friend, philosopher and guide’ of the Committee. His Reports generally form the basis of the Committees’ working, although they are not precluded from examining issues not brought out in his Reports. He scrutinizes the notes which the Ministries submit to the Committees and helps the Committees to check the correctness of facts and figures in their draft reports.

The Financial Committees present their Report to the Parliament/ State Legislature with their observations and recommendations. The various Ministries / Department of the Government are required to inform the Committees of the action taken by them on the recommendations of the Committees (which are generally accepted) and the Committees present Action Taken Reports to Parliament / Legislature. In respect of those cases in Audit Reports, which could not be discussed in detail by the Committees, written answers are obtained from the Department / Ministry concerned and are sometimes incorporated in the Reports presented to the Parliament / State Legislature. This ensures that the Audit Reports are not taken lightly by the Government, even if the entire report is not deliberated upon by the Committee.

Question 26

CAG audit is audit of public enterprises done by Comptroller and Auditor General of India? Explain

Answer 26

CAG audit is known as audit of public enterprises done by comptroller and Auditor General of India.

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In India, government audit is performed by an independent constitutional authority is comptroller and Audit General of India (CAG), The constitution of India gives a special status to the C&AG and contains to safeguard his independence.

The organisations should to the audit of the Comptroller and Auditor General of India are:-

1 All the Union and State Government departments and offices including the Indian Railways and Post and Telecommunications.

2 About 15000 public commercial enterprises controlled by the Union and State Governments, is government companies and corporations.

3 Around 400 non-commercial autonomous bodies and authorities owned or controlled by the Union or the states

4 Over 4400 authorities and bodies substantially financed from Union or State revenues.

Question 27

Explain the provision regarding the appointment of C&AG and its term of office?

Answer 27

Article 148 of the constitution provides that the C&AG shall be appointed by the President and can be removed from the office only in a like manner and on the like grounds as a judge of the Supreme Court. Article 151 of the Constitution requires that the audit reports of the C&AG relating to the accounts of the Central/State Government should be submitted to the President/Governor of the State who shall cause them to be laid before Parliament/State legislative.

The Comptroller and audit Generals Act 1971, prescribes that the C&AG shall hold office for a term of six years or upto the age of 65 years, whichever is earlier. He can resign at any time through a resignation letter addressed to the President.

Question 28

State the requirement of Cost audit in brief.

Answer 28

Section 148 of the Companies Act provides that the Central government may by order in respect of such class of Companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of Companies.

If the Central Government is of the opinion, that it is necessary to do so, it may by order, direct that the audit of cost records of class of companies which are covered under sub-section (1) of Section 148 and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed.

The audit shall be conducted by a Cost Accountant in practice who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as

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may be prescribed provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records.

Question 29

Differentiate between the Regularity Audit and Performance audit done by C&AG.

Answer 29

The audit done by C&AG is classified into Regularity Audit and Performance Audit

Regularity Audit (Compliance)

- Audit against provision of funds to ascertain whether the moneys shown as expenditure in the Accounts were authorised for the purpose for which they were spent.

- Audit against rules and regulation to see that the expenditure incurred was in conformity with the laws, rules and regulations framed to regulate the procedure for expending public money.

- Audit of sanctions to expenditure to see that every item of expenditure was done with the approval of the competent authority in the government for expending the public money.

Regularity Audit (Financial)

Under this, auditors analyze the financial statements to establish whether acceptable accounting standards for financial reporting and disclosure are complied with. Analysis of financial statements is performed to such a degree that a rational basis is obtained to express an opinion on financial statements.

Performance Audit

Performance Audit is done to see that government programmes have achieved the desired objectives at lowest cost and given the intended benefits.

Question 30

Write a short note on PAC (Public Accounts Committee)?

Answer 30

The Committee on Public Accounts is constituted by Parliament each year for examination of accounts showing the appropriation of sums granted by Parliament for expenditure of government of India, the annual Finance Accounts of Government of India and such other Accounts laid before Parliament as the Committee may deem fit such as accounts of autonomous and semi-autonomous bodies.

The Committee consists of not more than 22 members comprising 15 members elected by Lok Sabha every year from amongst its members according to the principle of proportional representation by means of single transferable vote and not more than 7 members of Rajya Sabha elected by that house in the like manner. The Chairman is appointed by the speaker from amongst it s members of Lok Sabha.

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The PAC satisfies itself:

(a) that the money shown in the accounts as having been disbursed were legally available for and applicable to the service or purpose to which they have been applied or charged.

(b) that the expenditure conforms to the authority which governs it.

(c) that every re-appropriation has been made has been made in accordance with the provisions made in this behalf under rules framed by the competent authority.

It is also the duty of the PAC to examine the statement of account of autonomous and semi-autonomous bodies, the audit of which is conducted by the comptroller & Auditor General either under the directions of the President or by a statute of Parliament.

***

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Question 1

Define the term ‘Internal Audit’.

Answer

As per the institute of internal auditors (IIA) - “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

Internal audit is performed by professionals with an in depth understanding of the business culture, systems and processes, the internal audit activity provides assurance that internal controls in place are adequate to mitigate the risk, the governance processes are effective and efficient, and organizational goals and objectives are met.

Question 2

Differentiate between ‘internal audit’ and ‘statutory audit’.

Answer

The difference between ‘internal audit’ and ‘statutory audit’ is as under:

(i) The management of the organization makes the appointment of an internal auditor. The statutory auditor is appointed by different authorities according to different circumstances.

(ii) Qualifications of the statutory auditor are prescribed in the Companies Act, 2013. There is no fixed qualification for the position of an internal auditor.

(iii) The main objective of the statutory audit is to form an opinion on the financial statement of the organization. Auditor has to state whether the financial statements are showing the true and fair view of the affairs of the organization or not. The main objective of the internal audit is to detect and prevent the errors and frauds.

(iv) The scope of the statutory audit is fixed by the Companies Act, 2013. It cannot be changed by mutual consent between the auditor and the management of the audited business unit. The scope of the internal audit is fixed by the mutual consent of the auditor and the management of the unit under audit.

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Internal Audit

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(v) Remuneration of the statutory auditor is fixed by the appointing authority, i.e. in case of first auditors, the directors fix the remuneration and in case of the subsequent auditors, the company in its general meeting fixes the remuneration. In case of internal auditor, the management who appoints him fixes his remuneration.

(vi) The procedure for removal of the statutory auditor is very complex. Only the company in its general meeting can remove the auditor. It is required to take permission of the central government. The management of the entity can remove internal auditor.

Question 3

Discuss the scope of Efficiency-cum-performance Audit.

Answer

Following are the scope of Efficiency-cum-performance Audit:

i. Economy Audit : It ensures that entity has acquired the financial, human and physical resources economically. It implies that resources have been procured in appropriate quantity, quality and at minimum cost.

ii. Efficiency Audit : It ensures the economical execution of various schemes and policies. It refers to the relationship between inputs and output i.e. the goods and services produced and resources used to produce them, yielding the expected results.

iii. Effectiveness : It is an appraisal of the performance of schemes and projects with reference to the overall targeted objectives as well as efficiency of the ways and methods adopted for the attainment of objectives.

Question 4

What do you understand by Compliance Audit?

Answer

Compliance audit is a comprehensive review of an organization’s adherence to regulatory guidelines.

It is common to us that the business undertakings require some certified statement on various matters and the auditors certify such statements after carrying out audit which might be necessary under the particular cases. All such audits are called Compliance Audit. Suppose when a company applies to a bank for some loan, a certified statement showing the turnover of the company for the past two or three years along with the current year might be necessary, and for this purpose the certified statements are to be attached with the application, otherwise the application will be rejected. So these certified statements showing the turnover of the company fall under the category of compliance audit. Internal audit for compliance could be the broader base to include compliance with documented procedures/policies, compliance with statutory requirements in the relevant areas etc.

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Question 5

What process should be followed for doing compliance audit?

Answer

Doing a Compliance Audit, a stepwise approach is required:

First the compliance auditor needs to have a clear knowledge of audit’s objective and scope. Accordingly he decides the time to be devoted in the compliance audit.

Before beginning a particular compliance audit, the auditor must gain thorough understanding of applicable rules, guidelines and procedures to be evaluated.

He should decide how to recognize when a deviation has occurred, and how to evaluate evidence obtained through audit tests.

The auditor must figure out, for each event to be tested, just what evidence signifies compliance and what evidence signifies non-compliance. The auditor may also prepare a detailed questionnaire about key compliance issues.

Assessing compliance may be simple, requiring a brief inspection to find out whether rules were followed or not however in some cases making a judgment may require extensive research of regulatory requirements, interpretations, and technical materials.

If the auditor is not sufficiently experienced in very specialized compliance topics then the opinions of an expert should be sought.

Compliance audit reports must be made in the format that is relevant to the auditee or sponsoring entity i.e. government.

Reports usually describe the objectives of the compliance audit, the number of conditions examined during the time period considered, the frequency of events conforming to conditions, and the number of exceptions.

When a statistical sample of events has been tested and required assumptions are appropriate, results from the sample may be used to predict the level of compliance for all events or transactions within the scope of the audit.

Compliance audit reports often indicate reasons for deviations from standards, describe implications of those deviations, and recommend actions that strengthen control procedures for assuring compliance.

Question 6

Differentiate between ‘efficiency audit’ and ‘propriety audit’.

Answer

Difference between efficiency audit and propriety audit are as under :

Efficiency audit

1. Efficiency audit is related to that whether corporate plans are effectively executed.

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2. In this, auditor investigates the reasons of variances in actual performance and planned performance.

3. It also investigates that capital resources of company are properly utilized or not.

Propriety audit

1. It is related to that whether executive plans and action are perfectly executed or not.

2. In this auditor investigates that the planned expenditure are designed to give optimum results or not.

3. It also investigates, whether the return from expenditure on capital as well as current operation could be better by some other alternative plan of action.

Question 7

Discuss about propriety audit.

Answer

The Propriety Audit means the verification of following main aspects to find out whether:

(i) Proper recording has been done in appropriate books of accounts.

(ii) The assets have not been misused and have been properly safeguarded.

(iii) The business funds have been utilized properly.

(iv) The concern is yielding the expected results.

The system of Propriety Audit is applied in respect to Government companies, Government Department because public money and public interest are involved therein. It is an essential function of audit to bring to light not only cases of clear irregularity but also every matter which in its judgement appears to involve improper expenditure or waste of public money or stores, even though the accounts themselves may be insufficient to see that sundry rules or orders of competent authority have been observed.

Question 8

‘Internal Audit has become an important management tool’ Explain.

Or What is the scope of internal audit?

Answer

Internal Audit has become an important management tool for the following reasons:

1. Internal Auditing is a specialized service to look into the standards of efficiency of business operation.

2. Internal Auditing can evaluate various problems independently in terms of overall management control and suggest improvement.

3. Internal Audit’s independent appraisal and review can ensure the reliability and promptness of MIS and the management reporting on the basis of which the top management can take firm decisions.

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4. Internal Audit system makes sure the internal control system including accounting control system in an organization is effective.

5. Internal Audit ensures the adequacy, reliability and accuracy of financial and operational data by conducting appraisal and review from an independent angle.

6. Internal Audit is an integral part of “Management by System”.

7. Internal Audit can break through the power ego and personality factors and possible conflicts of interest within the organization.

8. It ensures compliance of accounting procedures and accounting policies.

9. Internal Auditor can be of valuable assistance to management in acquiring new business, in promoting new products and in launching new projects for expansion or diversification of business.

Question 9

Explain the role of internal audit in corporate governance.

Answer

Internal auditing activity as it relates to corporate governance is generally informal, accomplished primarily through participation in meetings and discussions with members of the Board of Directors. Corporate governance is a combination of processes and organizational structures implemented by the Board of Directors to inform, direct, manage, and monitor the organization's resources, strategies and policies towards the achievement of the organizations objectives. The internal auditor is often considered one of the "four pillars" of corporate governance, the other pillars being the Board of Directors, management, and the external auditor.

A primary focus area of internal auditing as it relates to corporate governance is helping the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities effectively. This may include reporting critical internal control problems, informing the Committee privately on the capabilities of key managers, suggesting questions or topics for the Audit Committee's meeting agendas, and coordinating carefully with the external auditor and management to ensure the Committee receives effective information.

Question 10

Briefly discuss the advantages of efficiency audit.

Answer

Auditing efficiency enables the management/owner to know whether the departments and agencies manage resources with due regard to efficiency. It can also directly or indirectly help departments and agencies to identify opportunities to provide more or better services at the same or lower cost. More specifically, such audits can:

help managers and staff to be more sensitive to their obligation of due regard to efficiency;

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underline the importance of measuring efficiency and of using that information for managing operations and providing accountability;

identify means for improving efficiency, even in operations where efficiency is difficult to measure;

demonstrate the scope for lowering the cost of delivering programs without reducing the quantity or quality of outputs or the level of service;

increase the quantity or improve the quality of outputs and level of service without increasing spending; and

identify needed improvements in existing controls, operational systems, and work processes for better use of resources.

Question 11

What is the process of Internal Audit?

Answer

Audit Planning Conducting Audits Improvement Actions

Feedback

1. The Scope and objectives for the audit is required to be established and then communicated to the management.

2. Review of documents is done. Flow charts and narratives can be created for this.

3. Identify the key risks facing the business activities.

4. Identify the control procedures to control the above risks.

5. Report problems or any deviations identified.

6. Follow-up on reported findings at appropriate interval of time.

Question 12

What are the roles/responsibilities of an internal auditor?

Answer 12

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisations operations. This is done by an internal auditor in the organisation.

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Major roles and responsibilities of internal auditor are

1) To plan organise and carry out the internal audit function. For this purpose, preparation of an audit plan is done which includes scheduling and assigning of work and estimating the need of resources.

2) To provide support to company anti-fraud programmes.

3) To evaluate the key risks facing the business activities and the information security.

4) To review and report the internal control deficiencies and risk management issues to the audit committee.

5) To review and report on the accuracy, timeliness and relevance of the financial and other information.

***

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Question 1

What do you understand by ‘Internal Control’ ?

Answer

Internal control means different things to different people. This causes confusion among businessman, legislators, regulators and others.

Internal control is broadly defined as a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

1. Effectiveness and efficiency of operations.

2. Reliability of financial reporting.

3. Compliance with applicable laws and regulations.

De Paula [1989] defined internal controls as a system of controls, financial and otherwise established by management in order to carry on the business of the company in an orderly and efficient manner to ensure the adherence to management policies, safeguard the assets, and secure as much as possible the completeness of an internal control system.

Gibbins [1990] argues that the safeguarding of assess , prevention and detection of frauds and errors , the accuracy and completeness of accounting records and timely preparation of reliable information, he argues that internal controls may be incorporated with in computerized accounting system, which extends beyond those matters which are related directly to the accounting system.

Lucy argues that internal controls comprise the control environment and control procedures. It includes all the policies and procedures adopted by the directors and management of an entity to assist in achieving their objective of ensuring are efficient and orderly conduct of its business and adherence to internal policies.

Thomas Evans, in his book “International Accounting and reporting “defines internal controls as policies and procedures that an organization develops to safe guard its resources and provide for the reliability of financial records.

The international standards of auditors define internal controls as a system comprising of controls environment and procedures. It includes polices and ways adapted by management of an enterprise to assist it in achieving its objectives.

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Question 2

In a medium size trading organisation, the accountant was given additional responsibility of making recoveries from receivables. On one occasion, an insurance claim of Rs.75,000 was received. He credited the same to the account of a debtor and misappropriated the cash which he had recovered from the said receivable. Pinpoint the weaknesses in the internal control which led to this situation.

Answer

Following two essential features of internal control are relevant here:

(i) Breaking the chain of the work in a manner so that no single person can handle a transaction from the beginning to the end and

(ii) Segregation of accounting and custodial functions.

Weakness in internal control system in the instant case:

(i) The accountant is receiving cash and also passing the entries in the books. The accountant should not have been allowed to effect recoveries.

(ii) It also appears that system for issuing receipts for amount received - whether cash or cheque is also lacking.

(iii) In a small and to some extent medium size organization, the supervision of the owner offsets the deficiencies in internal control system. But in this case, it appears, that supervision and personal control is also lacking.

Thus, in the given case, the main weakness of the system is that it is ignoring the basic requirements of a good internal control system.

Question 3

What are the techniques of ‘internal control system? Discuss with examples.

Answer

There are two types of techniques used in internal control system : Preventive internal control techniques and Detective internal control techniques.

(I) Preventive Controls techniques are designed to discourage errors or irregularities from occurring. They are proactive in nature that helps to ensure departmental objectives are being met. Examples of preventive controls techniques are:

Segregation of Duties:

Approvals, Authorizations, and Verifications

Security of Assets (Preventive and Detective)

(II) Detective Controls techniques are designed to find errors or irregularities after they have occurred. Examples of detective controls techniques are:

Reviews of Performance

Reconciliations

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Physical Inventories

Internal Audits

Question 4

What is internal check? Distinguish between ‘internal check’ and ‘internal audit’?

Answer

Internal check is best regarded as indicating checks on the day-to-day transactions which operate continuously as a part of the routine systems whereby work of one person is proved independently or is complementary to the work of another, the object being the prevention of or early detection of errors and frauds. Internal check is a continuous process and is part of the day-to-day routine. Internal check is a part of internal control system. It ensures that all financial transactions are properly recorded and efficiency of the accounting system followed by the organization and enables easy preparation of financial statements.

Difference between internal check and internal audit

Way of checking : In internal check system work is automatically checked whereas in internal audit system work is checked specially.

Cost involvement : Cost of internal check is the part of the system cost whereas cost of internal audit is additional cost to the system.

Thrust of system : Thrust of internal check system is to prevent the errors and whereas the thrust of internal audit system is to detect the errors and frauds.

Time of checking : In internal check system checking is done when the work is being done whereas in internal audit system work is checked after it is done. Mistakes can be checked at an early stage in internal check system.

Question 5

What are the limitations of Internal Control?

Answer

No matter how well the internal controls are designed, they can only provide a reasonable assurance that objectives will be achieved. Some limitations are inherent in all internal control systems. These limitations include:

Judgment - the effectiveness of controls will be limited by decisions made with human judgment under pressures to conduct business based on the information available at hand.

Breakdowns - even well designed internal controls can break down. Employees sometimes misunderstand instructions or simply make mistakes. Errors may also result from new technology and the complexity of computerized information systems.

Management Override - high level personnel may be able to override prescribed policies or procedures for personal gains or advantages. This should not be confused

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with management intervention, which represents management actions to depart from prescribed policies and procedures for legitimate purposes.

Collusion - control system can be circumvented by employee collusion. Individuals acting collectively can alter financial data or other management information in a manner that cannot be identified by control systems.

A well designed process with appropriate internal controls should meet most if not all of these control objectives.

Question 6

What are the tools available to the auditor for review of internal control?

Answer

An auditor can use the following tools to collect information required for the proper review and evaluation of internal controls:-

(1) Narrative record : It is a complete and exhaustive description of the system as found in operation by the auditor. Actual testing and observation are necessary before such a system is in operation and would be more suited to small business.

(2) Check list : A check list is a series of instruction and/or answer. When he completes instruction, he initials the space against the instruction. Answers to the check list instruction are usually Yes, No or Not applicable. This is again an on the job requirement and instructions are framed having regard to the desirable element of control. The complete check list is studied by the principle/manager/senior to ascertain existence of internal control and evaluate its implementation and efficiency.

(3) Questionnaire : It is a comprehensive series of questions concerning internal control. This is the most widely used from for collecting information about the existence, operation and efficiency of internal control in an organization. The questionnaire form also provides an orderly means of disclosing control defects. It is the general practice to review the internal control system annually and record the review the detail. In the questionnaire, generally questions are so framed that a ‘Yes’ answer denotes satisfactory position and a ‘No’ answer suggests weakness. Provision is made for an explanation or further details of ‘No’ answers. In respect of questions not relevant to the business, ’Not applicable’ reply is given.

The questionnaire is annually issued to the client and the client is requested to get it filled by the concerned executives and employees. If on a perusal of the answers, inconsistencies or apparent incongruities are noticed, the matter is further discussed by auditor’s staff with the client employees for a clear picture. The concerned auditor then prepares a report of deficiencies and recommendation for improvement.

(4) Flow chart : Flow chart is a graphical presentation of each part of the company’s system of internal control. A flow chart is considered to be the most concise way of recording the auditor’s review of the system. It minimizes the amount of narrative explanation and thereby achieves and consideration or presentation not possible in

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any other form. It gives bird’s eye view of the system and the flow of transactions and integration and in documentation, can be easily spotted and improvements can be suggested.

Question 7

Write a short note on audit in depth.

Answer

Audit in depth as the name implies means checking a transaction extensively from origin to end. It is an audit technique which is used to evaluate the effectiveness of internal control system in an organisation. It is used in investigation exercises whereby the objective is to thorough examination of transactions or records. In this technique all aspects relating to the transaction are checked such as sanctity of transaction, validity of transaction, adherences of prescribed procedures, arithmetical accuracy of transaction, accounting treatment of transaction etc. It is also called vertical vouching as against horizontal vouching.

Question 8

Explain the objectives of internal control system in an organisation.

Answer

Internal audit evaluates the organisation’s system of internal control by accessing the ability of individual process controls to achieve seven pre-defined control objectives.

The objectives of internal control system in an organisation include:

Authorization - the objective is to ensure that all transactions are approved by responsible personnel in accordance with their specific or general authority before the transaction is recorded.

Completeness - the objective is to ensure that no valid transactions have been omitted from the accounting records.

Accuracy - the objective is to ensure that all valid transactions are accurate, consistent with the originating transaction data, and information is recorded in a timely manner.

Validity - the objective is to ensure that all recorded transactions fairly represent the economic events that actually occurred, are lawful in nature, and have been executed in accordance with management’s general authorization.

Physical Safeguards and Security - the objective is to ensure that access to physical assets and information systems are controlled and properly restricted to authorized personnel.

Error Handling - the objective is to ensure that errors detected at any stage of processing receive prompts corrective action and are reported to the appropriate level of management.

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Segregation of Duties - the objective is to ensure that duties are assigned to individuals in a manner that ensures that no one individual can control both the recording function and the procedures relative to processing a transaction.

Question 9

What do you mean by inter firm comparison?

Answer

Inter firm comparison is the technique of evaluating the performance efficiency, costs and profits of firm in an industry. It consists of voluntary exchanges of information/data concerning costs, prices, profits, productivity and overall efficiency among firms engaged in similar type of operations for the purpose of bringing improvement in efficiency and indicating the weakness. Such a comparison will be possible where uniform costing is in operation.

An inter-firm comparison indicates the efficiency of production and selling, adequacy of profits, weak spots in the organisation, etc. and thus demands from the firm’s management an immediate suitable action. Inter-firm comparison may enable the management to challenge the standards which it has set for itself and to improve upon them in the light of the current information gathered from more efficient units. Such a comparison may be carried out in electrical industry, printing firms, cotton spinning firms, pharmaceuticals, cycle manufacturing, etc.

Question 10

What do you mean by intra firm comparison?

Answer

The term intra firm comparison means comparison of two or more departments or division’s belonging to the same firm with the objective of making meaningful analysis for the purpose of increasing the effectiveness or efficiency of the departments or division’s involved.

This may also mean comparison of results achieved by an organization over two different financial periods or period’s consideration. The idea is to compare the firm’s performance with its own performance in some other department other point in time.

Question 11

What are the elements of internal control?

Answer

Management Objectives

Information Monitoring

& Control Activities

Communication Risk Assessment

Control Environment

Elements of Internal Control

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Internal Control consists of five inter-related components. These all are integrated with the management process. The components are

1. Control Environment: - It sets the tone of on organization, influencing the control conscious of its people. It is the foundation for all other components of internal control, providing discipline and structure.

2. Risk Assessment:- Risk assessment is the identification and analysis of relevant risks to the achievement of the objectives, forming a basis for determining how the risk should be managed

3. Control Activities:- These are the policies and procedures that help ensure management diver mining are carried out . They help ensure that necessary actions are token to address risks to achievement of the entity’ objective.

4. Information and communication: - Pertinent information must be identified, captured and communicated is a form and timeframe that enable people to carry out their responsibilities. Information Systems Produce reports, containing operational, financial and compliance related information that make it possible to run and control the business.

Effective communication must occur in a broader sense, flowing down, across and up the organisation.

5. Monitoring

Internal control systems need to be monitored a process that assesses the quality of the systems performance over time.

Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board.

Question 12

What is sampling in Audit testing? What are the approaches to statistical Sampling?

Answer

Sampling is a process of selection a subset of a population of items for the purpose of making inferences to the whole population.

Sampling is used is both compliance and substantive testing and is described in numerous textbooks in auditing.

Approaches to statistical sampling

Samples during an audit are normally selected through one of the probability sampling methods as discussed below :

- Simple Random sampling

This method uses sampling without replacement in once an item has been selected for testing it is removed from the population & is not subject to re selection.

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- Systematic (Interval) Sampling

This method provides for the selection of sample items in such a way that there is a uniform interval between each sample item. Under this method, every “Nth” item is selected with a random start.

- Stratified (Cluster) sampling

This method provides for the selection of sample items by breaking the population down into stratas or clusters.

An example of cluster sampling is the inclusion in the sample of all remittances or cash disbursements for a particular month.

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Question 1

What is Internal Control Review (ICR) and how different it is to Internal Audit?

Answer

Internal Control Review is an overall assessment of the internal control system and its adequacy of each business area in an organization to address the relevant risks. Through control review, an organization's resources are directed, monitored, and measured in an effective manner. It plays an important role in protecting the organization's tangible and intangible resources.

Whereas, Internal audit as defined by the Institute of Internal Auditors is "an activity that provides independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes".

Question 2

Explain the term ‘segregation of duties’ in context of purchase control review.

Answer

To ensure proper separation of duties, assign related buying functions to different people. Ensure proper segregation, no single person has complete control over all buying activities. It is always preferable to have different people who –

I. Approve purchases

II. Receive ordered materials

III. Approve invoices for payment

IV. Review and reconcile financial records

V. Perform inventory counts

If segregation of duties does not exist in purchases operations, this may result into unauthorized or unnecessary purchases, improper charges to department budgets, purchase of goods at excessive costs, use of goods for personal purposes.

Question 3

What are the objectives of review of management information system of an organisation?

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Review of Internal Control

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Answer

The following are the objectives of review of management information system of an organisation:

1. To determine whether review procedures are necessary to achieve stated objectives.

2. To determine whether MIS policies or practices, processes, objectives, and internal controls are adequate.

3. To evaluate whether MIS applications provide users with timely, accurate, consistent, complete, and relevant information.

4. To assess the types and level of risk associated with MIS and the quality of controls over those risks.

5. To determine whether MIS applications and enhancements to existing systems adequately support corporate goals.

6. To determine whether MIS is being developed in compliance with an approved corporate MIS policy or practice statement.

7. To determine whether management is committed to providing the resources needed to develop the required MIS.

8. To determine if officers are operating according to established guidelines.

9. To evaluate the scope and adequacy of audit activities.

10. To initiate corrective action when policies or practices, processes, objectives, or internal controls are deficient.

11. To determine if any additional work is needed to fulfill the examination strategy of the institution.

Question 4

Explain the internal control review points for reviewing the marketing function of an organisation?

Answer

The following are the review points for reviewing the marketing function of an organisation:

1. Are standard price lists maintained? Is a special sanction from a senior manager required in the case of sales at prices lower than the standard price?

2. Does the system of allowing rebates and discount provide for adequate controls? In particular is there a clear cut policy for allowing such rebates and discounts? Are the authorities for various managers in this regard clearly laid down and are they reasonable?

3. Are special sanctions required in case of sales to those companies/ other enterprises in which the managerial personnel or senior employees are interested?

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4. Is there a well defined policy for making sales to employees at concessional prices? Does it laid down any limits in this regard?

5. Is there a timely preparation of a written sale order on receipt of an order from a customer?

6. Are sale orders pre numbered? Is a lack of continuity in sale order number duly enquired into?

7. Is there a proper authorization of credit, price, quantity and other important terms of the sale order?

8. Is there a system of fixing credit limit for regular customer? Are these limits approved by a senior manager as per the sales policy determined by the top management? Are these limits reviewed periodically in the light of the experienced in dealing with the customer?

9. Is credit limit of the customer concerned checked before sanctioning the credit on the sale order? Is up to date information on the extent of the credit already extended to the customer readily available for this purpose?

10. Is a copy of each sale order sent to the dispatch department and the accounts department?

11. Is a dispatch document, e.g. a good outward challan, prepared at the time the goods are dispatch to the customer? Is it matched with the bill of lading or railway receipt/transporter receipt?

12. Are dispatch documents pre numbered and missing document numbered duly enquired into?

13. Is there a system of checking each consignment of good leaving the premises with the related dispatch document?

14. Is a copy of dispatch document, i.e. goods outward challan /gate pass sent to the customer and to the accounts department?

15. Is an acknowledgement of receipt of goods obtained from the customer or from his agent on the copy of the dispatch document?

Question 5

What are the points to be considered while reviewing the quality management system of a manufacturing organisation?

Answer

The following points are to be considered while reviewing the quality management system of a manufacturing organisation:

1. Whether formal documented instructions / procedures are available on:

I. Quality tests to be performed at each stage of the production process.

II. Steps to be taken in the case of negative results.

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III. Documentation required to evidence completion and results of quality checks.

2. Whether sufficient quantities of each production run are tested to enable compliance with quality control standards.

3. Whether Quality assurance procedures are integrated into the production process.

4. Whether defect rates, customer returns and complaints due to poor quality are monitored.

5. Whether measuring equipment and devices are calibrated on a periodic basis i.e. quarterly, half yearly.

Question 6

What are the points to be considered while carrying out the internal control review of recruitment function?

Answer

Organization’s recruitment and selection process shapes part of company’s reputation. Reviewing human resources employment function involves a review of the way applicants are received. A review should reveal how knowledgeable the engaged employment specialists are concerning organizational structure, positions within each department, and fair employment practices in recruiting and hiring candidates.

Question 7

Explain the main points to be considered in reviewing the decision making process of management.

Answer

Decision-making is an essential aspect of modern management. It is a primary function of management. A manager takes hundreds of decisions consciously and subconsciously. A decision may be defined as “a course of action which is consciously chosen from among a set of alternatives to achieve a desired result.” It represents a well-balanced judgment and a commitment to action. Decision-making pervades all managerial actions and a continuous process. Decision-making is an indispensable component of the management process itself.

Management decision-making process steps:

1. Define the problem.

2. Identify limiting factors.

3. Develop potential alternatives.

4. Analyze the alternatives.

5. Select the best alternative.

6. Implement the decision.

7. Establish a control and evaluation system.

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Question 8

What are the internal control aspects in relation to Bank Reconciliation Statement?

Answer

The following are the internal control aspects in relation to Bank Reconciliation Statement :

1. Receipt of Bank Statement : Decision regarding handling over/receipt of bank Statements.

2. Frequency of Reconciliation : How frequently reconciliation should be performed.

3. Authorisation : By whom and the detailed procedure to be followed for reconciliation. The person responsible for carrying out the bank reconciliation should not normally be concerned with handling cash and cheques received or with arrangements for disbursements.

4. Attention points : Special attention to be given for long standing unpresented cheques, stop payment notices, examination of the sequence of cheque numbers and compilation of cheque details with details recorded in the cash book.

Question 9

Explain the points to be considered while carrying out the internal control review of an organisation over the selection of transporter.

Answer

The following points are to be considered while carrying out the internal control review of an organisation over the selection of transporter:

1. Check the system of sending enquiry and receiving quotations.

2. Check the control over sending enquiry and receiving, how followed up, record keeping, etc.

3. Check whether basis of taking decision is documented properly or not.

4. Check whether date of approval, name of approving authority is mentioned on the approval document or not.

5. Check whether the contract is entered into with thee selected transporter. Check the terms and conditions of transporter agreement and report lapses if any.

Question 10

Prepare a small questionnaire enlisting the important things to be reviewed in case of hiring by the HR department of an organisation.

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Answer

The following important things to be reviewed in case of hiring by the HR department of an organisation:

Question Yes No N/A Comments

1. Do job descriptions exist?

2. Are job descriptions up to date?

3. Are forms and acceptable documentation reviewed annually?

4. Are job openings offered to current employees?

5. Are applicant references checked?

6. Are turnover rates monitored?

7. Are selection processes used with reference to the Uniform Guidelines?

8. Are all applicants required to fill out and sign an application form?

9. Are applicants asked to voluntarily identify their affirmative action information?

10. If applicable, do application forms identify that the employment relationship at the organization “at-will”?

11. Do employment applications refrain from requesting protected information?

12. Are independent contractors accurately identified?

13. If the organization has a qualifying federal contract, is there an affirmative action plan?

14. Is medical information kept separately from personnel files?

Question 11

What is management information system (MIS)? List down the points to be considered while evaluating the MIS.

Answer

MIS is an information system which provides information to the management so that management may take timely decisions. MIS is concerned with processing data into

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information which is then communicated to the various departments in an organisation for appropriate decision making.

Points to be considered while evaluating MIS are:

1. Has management developed and maintained a current MIS policy or practice?

2. Is the policy or practice reviewed and updated regularly?

3. Is the policy or practice distributed to appropriate employees?

4. Is the user manual for MIS system (s) meaningful, easy to understand and current?

5. Does the organisation use a consistent and standardized approach or a structured methodology for developing MIS projects?

6. Does the policy or practice in corporate or require :-

- User approval for each phase?

- Installation of MIS enhancements is a controlled change environment?

- Employees to be sufficiently trained for new systems and subsequent enhancements.

- Employees to follow policy or practice and processes as data are acquired, merged, manipulated and uploaded to other systems?

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469

Question 1

What is the meaning of audit plan? State the reasons why audit plan is prepared?

Answer

An audit plan is a step-by-step, methodical approach that enables auditors to focus on important areas under review. Audit Planning steps run the gamut, from engagement preparation and staff appointment to testing financial accounts and internal processes.

In order to ensure a high standard of performance, it is important that the auditor should prepare adequately for his work. Planning ahead for an audit work will not only guarantee a valid audit opinion but will also help the auditor to ensure that:

The audit objective is established and achieved;

The audit is properly controlled and adequately directed at all stages;

High risk and critical areas of the engagement are not omitted but that adequate

attention is focused on these areas; and

The work is completed economically and expeditiously, hence, savings on audit

resources.

Audit plan relates to preparations made by the auditor for one specific audit engagement of one client for one year.

Question 2

Explain the term Audit programme and distinguish it from Audit plan.

Answer

Audit programme is nothing but a list of examination and verification steps to be applied set out in such a way that the inter-relationship of one step to another is clearly shown and designed, keeping in view the assertions discernible in the statements of account produced for audit or on the basis of an appraisal of the accounting records of the client.

In other words, an audit programme is a detailed plan of applying the audit procedures in the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing the audit objectives. Businesses vary in nature, size and composition work which is suitable to one business may not be suitable to others; efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the

15

Audit Engagement and

Documentation

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other factors that vary from assignment to assignment. Because of such variations, evolving one audit programme applicable to all business under all circumstances is not practicable. However it becomes a necessity to specify in detail in the audit programme the nature of work to be done so that no time will be wasted on matters not pertinent to the engagement and any special matter or any specific situation can be taken care of.

Audit programme contains step by step instructions to be carried out by team members i.e. it is simply a list of audit procedures to be executed by team members.

Audit programmes are prepared on the basis of audit plan usually by the auditor who in the audit team is either partner or manager. But sometimes, audit firms have a basic audit programme and the same is used by the auditor after making some modifications to it to make it according the audit engagement in hand.

An audit plan is a step-by-step, methodical approach that enables auditors to focus on important areas under review. Audit Planning steps run the gamut, from engagement preparation and staff appointment to testing financial accounts and internal processes.

In order to ensure a high standard of performance, it is important that the auditor should prepare adequately for his work. Planning for an audit, just like every human endeavour, is essential for the smooth performance of the audit work and its successful completion. Planning ahead for an audit work will not only guarantee a valid audit opinion but will also help the auditor to ensure that:

(a) The audit objective is established and achieved;

(b) The audit is properly controlled and adequately directed at all stages;

(c) High risk and critical areas of the engagement are not omitted but that adequateattention is focused on these areas; and

(d) The work is completed economically and expeditiously, hence, saving on audit resources.

Question 3

What do you mean by the term Vouching? Explain the importance of vouching in Auditing.

Answer

Vouching means the examination of documentary evidence in support of entries passed in order to establish their arithmetic accuracy. When the auditor checks the entries with some documents it is called vouching. Vouching is the acid test of audit. It tests the truth of the transaction recorded in the books of accounts. It is an act of examining documentary evidence in order to ascertain the accuracy and authenticity of the entries in the books of accounts.

According to Dicksee, “Vouching consists of comparing entries in the books of accounts with documentary evidence in support thereof.” Thus, vouching means testing the truth of entries appearing in the primary books of accounts. In short, vouching means to examine the evidence in support of any transaction or entry recorded in the books of accounts. Vouching does not merely see that the entries and transactions are supported by proper

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documentary evidence. The auditor should be satisfied that they are properly maintained, they are supported by all evidence and they are correctly recorded in the books of accounts.

Following points enumerate the importance of vouching in auditing:

– Ensures genuineness of the transactions

– Enables to know transactions

– Helps to know relevance of the transaction

– Facilitates proper allocation of capital & revenue, expenditure

– Detects frauds and errors

– Decides authenticity of transactions

– Ensures proper accounting

– Compliance with law

– Ensures proper disclosure

Question 4

Write the distinction between verification and Vouching.

Answer

Difference between Verification and Vouching

Basis Verification Vouching

Meaning Verification is the act of checking title, possession and valuation of assets.

Vouching is the act of checking the records with the help of evidential documents.

Nature Verification is specially related to the assets and liabilities.

Vouching is related to all the accounting documents.

Person Auditor himself performs the work of verification.

Generally, assistant staff or auditor performs the work of vouching.

Time Verification is made at the end of auditing or at the time of checking balance sheets.

Vouching is made at the beginning of auditing.

Question 5

Explain the different approaches used in statistical sampling during an audit.

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Answer

In statistical sampling, samples during an audit are normally selected through probability sampling methods. Probability sampling provides an objective method of determining sample size and selecting the items to be examined. It also provides a means of quantitatively assessing precision and reliability.

(a) Simple Random Sampling : A simple random sampling is a method in which each item in the sample has equal chance of selection. In auditing, sampling without replacement method is used; that is, once an item has been selected for testing it is removed from the population and is not subject to re-selection. An auditor can implement simple random sampling in following ways: computer programs or random number tables.

(b) Systematic (Interval) Sampling : This method provides for the selection of sample items in such a way that there is a uniform interval between each sample item. Under this method of sampling, every “Nth” item is selected with a random start.

(c) Stratified (Cluster) Sampling : This method provides for the selection of sample items by breaking the population down into stratas, or clusters. Each strata is then treated separately. For this plan to be effective, dispersion within clusters should be greater than dispersion among clusters. An example of cluster sampling is the inclusion in the sample of all remittances or cash disbursements for a particular month. If blocks of homogeneous samples are selected, the sample will be biased.

Question 6

Prepare a sample audit programme for auditing the receipt of fees from the students of a government college.

Answer

A sample audit programme for auditing of the receipt of fees from the students of a government college is given below:

Check names entered in the Students’ Fee Register for each month or term, with the respective class registers, showing names of students on rolls and test amount of fees charged; and verify that there operates a system of internal check which ensures that demands against the students are properly raised.

Check fees received by comparing counterfoils of receipts granted with entries in the cash book and tracing the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for.

Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance have been carried forward and the arrears that are irrecoverable have been written off under the sanction of an appropriate authority.

Check admission fees with admission slips signed by the head of the institution and confirm that the amount had been credited to a Capital Fund, unless the Managing Committee has taken a decision to the contrary.

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See that free studentship and concessions have been granted by a person authorised to do so, having regard to the prescribed Rules.

Confirm that fines for late payment or absence, etc., have either been collected or remitted under proper authority.

Confirm that hostel dues were recovered before students’ accounts were closed and their deposits of caution money refunded.

Confirm that caution money and other deposits paid by students on admission have been shown as liability in the balance sheet and not transferred to revenue.

If admission process is going through online, than check the all application received.

To check Bank Reconciliation statement with receipts.

Check the Bank receipts, Credit card receipt and reconciliation plan to be made.

Check the all email correspondence regarding the receipts of fee.

Check the reminder system SMS alert, e-mails, call log book, to proper collection of fee.

Check fee policy for different category of Students

Check the authentication of system and software used by the concern in this regard.

Question 7

The scope of verification is much wider than that of vouching.

Answer

The statement is true. Vouching enables the auditor to know whether the transactions are

Genuine and valid to enable the auditor to report on the financial statements with reference to relevant documentary evidence.

Vouching is the substantive testing/examination of transaction at their point of origin.

On other hand, verification process encompasses the inquiry into the ownership/ title, existence, valuation, completeness and presentation of assets and liabilities in the balance sheet.

Verification usually deals with the final balance in the Final Accounts viz the balance sheet and profit and loss account.

Question 8

Define documentation and explain the form and contents of documentation.

Answer

“Documentation” refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of the audit.

The form and content of audit documentation should be designed to meet the circumstances of the particular audit. The information contained in audit documentation

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constitutes the principal record of the work that the auditors have performed in accordance with standards and the conclusions that the auditors have reached. The quantity, type, and content of audit documentation are a matter of the auditors’ professional judgment. The Audit documentation therefore is not restricted to being only on papers, but can also be on electronic media.

Generally the factors that determine the form and content of documentation for a particular engagement are:

(a) The nature of the engagement.

(b) The nature of the business activity of the client.

(c) The status of the client.

(d) Reporting format.

(e) Relevant legislations applicable to the client.

(f) Records maintained by the client.

(g) Internal controls in operation.

(h) Quality of audit assistants engaged in the particular assignment and the need to direct and supervise their work.

Question 9

What is test checking in audit? What are the advantages of test checking?

Answer

Test checking is an accepted auditing procedure wherein only a part of its transactions is checked to form an opinion instead of checking the transactions. The advantages of test checking include:

1. Audit objective : The auditor is required to form an opinion on the financial statements. Even after 100 % checking, he may not derive absolute satisfaction. Hence, proper and careful test checking serves the audit objective in obtaining reasonable audit assurance.

2. Expertise : Application of test check principles involves the application of mind and intelligent judgement. It enables the auditors to use his expertise effectively.

3. Exception Principle : Test checking adopts the principle of exception in control. If certain aspects of internal control do not create suspicion, there is no need to verify all these transactions exhaustively.

4. Scientific assessment of risk : The auditor assesses the risk of material mis-statements in the Financial Statements in a scientific manner by drawing suitable samples and studying the same in detail.

5. Saving in time : As fewer transactions are verified, time is saved to a great extent. This, in turn, enables completion of all the audits/verification procedures in time.

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6. Reduction in Work : Volume of work is reduced by test checking methods. Audit processes are not carried out mechanically on all transactions.

Answer 10

What is tolerable terror?

Answer

Tolerable error is the maximum error in the population that the auditor would be willing to accept and still concludes that the result from the sample has achieved the audit objective. Tolerable error is considered during the planning stage and, for substantive procedures, is related to the auditor’s judgement about materiality. The smaller the tolerable error, the greater the sample size will need to be. In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept, based on the preliminary assessment of control risk. In substantive procedures, the tolerable error is the maximum monetary error in an account balance or class of transactions that the auditor would be willing to accept so that when the results of all audit procedures are considered, the auditor is able to conclude, with reasonable assurance, that the financial statements are not materially misstated.

Question 11

What is the guideline for preparation of good working papers?

Answer

Working papers are the property of the auditor. The auditor may, at his discretion, make portions of or extracts from his working papers available to his client.

General guidelines for the preparation of working papers are :

1. Clarity and Understanding – As a preparer of audit documentation, step back and read your work objectively. Would it be clear to another auditor? Working papers should be clear and understandable without supplementary oral explanations. With the information the working papers reveal, a reviewer should be able to readily determine their purpose, the nature and scope of the work done and the preparer’s conclusions.

2. Completeness and Accuracy – As a reviewer of documentation, if you have to ask the audit staff basic questions about the audit, the documentation probably does not really serve the purpose. Work papers should be complete, accurate, and support observations, testing, conclusions, and recommendations. They should also show the nature and scope of the work performed.

3. Pertinence – Limit the information in working papers to matters that are important and necessary to support the objectives and scope established for the assignment.

4. Logical Arrangement – File the working papers in a logical order.

5. Legibility and Neatness – Be neat in your work. Working papers should be legible and as neat as practical. Sloppy work papers may lose their worth as evidence.

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Crowding and writing between lines should be avoided by anticipating space needs and arranging the work papers before writing.

6. Safety – Keep your work papers safe and retrievable.

7. Initial and Date – Put your initials and date on every working paper.

8. Summary of conclusions – Summarize the results of work performed and identify the overall significance of any weaknesses or exceptions found.

Question 11

What is the need for working papers ?

Answer 11

The need for working papers are :

(1) They aid in the planning and performance of the audit.

(2) They provide evidence of the audit work performed to support the auditors opinion

(3) The working papers should evidence compliance with technical standards.

(4) They retain a record of matters of continuing significance to future audits of the

entity.

Question 12

What are the different types of audit files which are classified under working paper files?

Or

Differentiate between permanent audit files and current audit file?

Answer 12

In case of recurring audits, some working paper files may be classified as permanent audit

files, which are updated currently with information of continuing importance to succeeding

audits. In contrast, audit files contain information relating primarily to the audit of a single

period.

The permanent audit file includes

- Copy of initial appointment letter if the engagement is of recurring nature.

- NOC from previous auditor

- Details of Bankers, Registrars, Lawyers etc.

- Details of sister concerns

- Organisational structure of the client.

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The current audit file includes

- Letters of representation or confirmation received from the client

- Analysis of transactions and balances

- Audit review points and highlight

- Major weakness in internal control

- Evidence of the planning process of the audit and audit programme.

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