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UNDERWRITING OF SHARES AND DEBENTURES
Q1. (May 2018 - RTP)
Paper Limited comes out with a public issue of share capital on 01-01-2017 of 30,00,000
equity shares of Rs 10 each at a premium of 5%. Rs 2.50 is payable on application (on or
before 31-01-2017) and Rs 3 on allotment (31-3-2017) including premium.
This issue was underwritten by two underwriters namely White and Black, equally, the
commission being 4% of the issue price. Each of the underwriters underwrites 60,000
shares firm. Subscriptions including firm underwriting came for 28,80,000 shares, the
distribution of forms being White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.
One of the allottees (using forms marked with name of White) for 6,000 shares fails to
pay the amount due to allotment, all the other money due being received in full including
any due from the shares devolving upon the underwriters. The commission due was paid
separately.
6,000 shares of one allottee who failed to pay the allotment money were finally forfeited
by 30-06-2017 and were re-allotted for payment in cash of ` 4 per share.
You are required to prepare each underwriter‟s liability (in shares) in statement form
assuming that benefit of firm underwriting is given to individual underwriter and to
prepare necessary journal entries to record the above events and transactions (including
cash).
Solution:
Statement showing liability of underwriters Particulars Basis White Black
A. Gross Liability [No. of Shares) 1:1 15,00,000 15,00,000
B. Less: Marked Applications {Net of
firm underwriting}
(15,00,000) (10,20,000)
C. Balance [A-B] - 4,80,000
D Less: Unmarked Applications 1:1 (1,20,000) (1,20,000)
E Balance [C-D] (1,20,000) 3,60,000
F Less: Firm Underwriting (60,000) (60,000)
G Balance (1,80,000) 3,00,000
H Credit for White ‟s Oversubscription 1,80,000 (1,80,000)
I Net Liability - 1,20,000
J Add: Firm Underwriting 60,000 60,000
K Total Liability [No. Shares] 60,000 1,80,000
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Journal Entries
2017 Jan 31
Bank A/c Dr. 72,00,000
To Equity Share Application A/c 72,00,000
(Being application money received @ Rs 2.50 per share
on 28,80,000 shares)
March 31 Equity Share Application A/c Dr. 72,00,000
To Equity Share Capital A/c 72,00,000
(Being the transfer of application money to share
capital on 28,80,000 shares vide Board‟s Resolution)
March 31 Equity Share Allotment A/c
(28,80,000 x Rs 3)
Dr. 86,40,000
To Equity Share Capital A/c (28,80,000x Rs 2.5) 72,00,000
To Securities Premium A/c (28,80,000 x Rs 0.5) 14,40,000
(Being allotment money due on 28,80,000 shares
allotted to public)
Black (1,20,000 x Rs 5.5) Dr. 6,60,000
To Equity Share Capital A/c
(1,20,000 x Rs 5)
6,00,000
To Securities Premium A/c
(1,20,000 x Rs 0.5)
60,000
(Being the application and allotted money due on net
liability of underwriter i.e. 1,20,000 shares)
March 31 Bank A/c Dr. 92,82,000
To Equity Share Allotment A/c [(28,80,000 – 6,000) x
Rs 3]
86,22,000
To Black (1,20,000 x Rs 5.5) 6,60,000
(Being the receipt of money due on allotment except
from the allottee for 6,000 shares)
March 31 Underwriting Commission A/c Dr. 12,60,000
To Black A/c 6,30,000
To White A/c 6,30,000
(Being commission @ 4 % on issue price of Rs 10.50
for Rs30 lakh shares payable to underwriters)
March 31 Black A/c 6,30,000
White A/c 6,30,000
To Bank A/c 12,60,000
(Being commission paid to underwriters)
June 30 Equity Share Capital A/c (6,000 x 5) 30,000
Securities Premium A/c (6,000 x 0.5) Dr. 3,000
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To Share Allotment A/c (6,000 x 3) 18,000
To Forfeited Shares A/c (6,000 x 2.5) 15,000
(Being 6,000 shares forfeited vide Board‟s Resolution)
June 30 Bank A/c (6,000 x Rs 4) 24,000
Forfeited Shares A/c Dr. 6,000
To Equity Share Capital A/c (6,000 x Rs 5) 30,000
(Being the reissue of 6,000 shares @ Rs 4 as Rs 5
paid up at par)
Forfeited Shares A/c (15,000 – 6,000) Dr. 9,000
To Capital Reserve A/c 9,000
(Being the transfer of profit on reissue)
Q2. (Nov. 2018 - RTP)
M/s. Abhi Ltd. issued 2,00,000 shares of Rs 10 each at a premium of Rs 20. The entire
issue was underwritten as follows:
Amit – 1,20,000 shares (Firm underwriting 10,000 shares)
Sumit – 50,000 shares (Firm underwriting 6,000 shares)
Lalit – 30,000 shares (Firm underwriting 4,000 shares)
Unmarked applications received by the company (excluding firm underwriting) were 25,000
shares.
The marked applications (excluding firm underwriting) were as follows:
Amit – 80,000 shares
Sumit – 35,000 shares
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Lalit– 24,800 shares
Commission payable to underwriters is at 5% of the issue price. The underwriting contract
provides that credit for unmarked applications be given to the underwriters in proportion
to the shares underwritten and benefit of firm underwriting is to be given to individual
underwriters. You are required to :
(i) Calculate the liability of each underwriter (number of shares);
(ii) Compute the amounts payable to or due from underwriters; and
Prepare Journal Entries in the books of the company relating to underwriting.
Solution:
(i) Computation of total liability of underwriters in shares
(In shares)
Amit Sumit lalit Total
Gross liability 1,20,000 50,000 30,000 2,00,000
Less: Marked applications
(excluding firm underwriting)
(80,000) (35,000) (24,800) (1,39,800)
40,000 15,000 5,200 60,200
Less: Unmarked applications in the
ratio of gross liabilities of 12:5:3
(excluding firm underwriting)
(15,000) (6,250) (3,750) (25,000)
Less: Firm underwriting 25,000
(10,000)
15,000
8,750
(6,000)
2,750
1,450
(4,000)
(2,550)
35,200
(20,000)
15,200
Less: Surplus of Lalit adjusted by
Amit and Sumit in 12:5
(1,800) (750) 2,550
Net liability 13,200 2,000 - 15,200
Add: Firm underwriting 10,000 6,000 4,000 20,000
Total liability 23,200 8,000 4,000 35,200
(ii) Calculation of amount payable to or due from underwriters
Amit Sumit Lalit Total
Total Liability in shares 23,200 8,000 4,000 35,200
Amount receivable @ Rs 30 from
underwriter (in Rs)
6,96,000 2,40,000 1,20,000 10,56,000
Less: Underwriting Commission
payable @ 5% of Rs 30 (in Rs)
(1,80,000) (75,000) (45,000) (3,00,000)
Net amount receivable (in Rs) 5,16,000 1,65,000 75,000 7,56,000
(iii) Journal Entries in the books of the company (relating to underwriting)
Rs Rs
1. Amit Dr. 6,96,000
Sumit Dr. 2,40,000
Lalit Dr. 1,20,000
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To Share Capital A/c 3,52,000
To Securities Premium A/c (Being allotment of
shares to underwriters)
7,04,000
2. Underwriting commission A/c Dr. 3,00,000
To Amit 1,80,000
To Sumit 75,000
To Lalit (Being amount of underwriting commission
payable)
45,000
3. Bank A/c Dr. 7,56,000
To Amit 5,16,000
To Sumit 1,65,000
To Lalit (Being net amount received by underwriters
for shares allotted less underwriting commission)
75,000
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IMPORTANT NOTES:
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EMPLOYEES STOCK OPTION PLAN (ESOP)
Q3: (ICAI MODULE) & (Nov. 18 Exam Paper – 10 Marks)
Choice Ltd. grants 100 options to each of its 1000 employees on 01.04.2008 at Rs.20/-
each, Market Value being Rs. 50/- each. Option will vest at the end of 1st Year if the
earnings of Choice Ltd. increases by 16%, or it will vest at the end of 2nd Year if the
average earnings of two years increases by 13%, or lastly it will vest at the end of 3rd Year
if average earnings of 3 years will increase by 10%. 50 employees left the company in year
1, 40 employees left the company in 2ndyear, and finally 35 employees in 3rd Year.
Actual Earnings
1st Year – 14%; 2nd Year – 10% and 3rd Year – 7%
850 Employees exercised their options within a year and remaining options were lapsed.
(Answer: 14,25,000; 3,95,000 & 8,05,000; transfer to GR – 75,000)
Solution:
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BUY-BACK OF SECURITIES
Q4.
On 31st March 2011, the following was the balance sheet of TOKYO Ltd.:
LIABILITES AMOUNT
(in lacs)
ASSETS AMOUNT
(in lacs)
Equity share capital
(fully paid of 10/- each)
Security premium
General Reserve
Profit and Loss a/c
12% Debentures
Sundry Creditors
Provisions
2,400
350
930
340
1,500
750
390
Machinery
Furniture
Investments
Stocks
Debtors
Cash at Bank
3,600
452
148
1,200
520
740
6,660 6,660
On 1st April 2011, the company announced the buy-back of 25% of its equity shares @ 15
per share. For this purpose, it sold all of its investments for 150/- lacs and issued
2,00,000, 14% preference shares of 100/- each at par, the entire amount being payable
with application.
The issue was fully subscribed. The company achieved the target of buy-back. Later the
company issued one fully paid up equity share of 10/- each by way of bonus shares for
every four equity shares held by the equity shareholders.
Show the necessary journal entries for all the transactions including cash transactions.
Q5.
Perotte Ltd. has the following capital structure as on 31.03.2011:
Particulars Rs. (in Crores)
1. Equity Share Capital (share of Rs.
10/- each fully paid)
330/-
2. Reserves and Surplus:
General Reserves
Securities Premium A/c
Profit and Loss A/c
Infrastructure Development
Reserve
240/-
90/-
90/-
180/-
3. Loan Funds 1800/-
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The Shareholders of Perrote Ltd., on the recommendation of their Board of Directors,
have approved on 12.09.2011 a proposal of buyback the maximum permissible number of
equity shares considering the large surplus funds available at the disposal of the company.
The prevailing market value of company‟s share is Rs. 25/- per share and in order to induce
the shareholders to offer their shares for buy back, it was decided to offer a price of
20% over the market price.
You are also informed that infrastructure reserve is created to satisfy income tax act
requirements.
You are required to compute the maximum number of shares that can be bought back in
the lights of the above information and also under a situation where the loan funds of the
company were either Rs. 1200/- Cr. or Rs. 1500/- Cr.
Assuming that the entire buy back is completed on 09.02.2011, show the accounting
entries in the books of company in each situation.
(Answer: In situation 1 and 3 company does not qualify for buyback of shares)
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IMPORTANT NOTES:
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Amalgamation of Companies &
Internal Reconstruction
Q6.
Alpha Limited and Beta Limited were amalgamated on and from 1st April 2001. A new
Company Gamma Limited was formed to take over the business of the existing companies.
The balance sheet of Alpha Limited and Beta Limited as on 31st March, 2001 are given
below:
(Rs. in lakhs)
Equity & Liabilities Alpha Ltd. Beta Ltd.
Shareholders Fund:
Share Capital
Equity shares of Rs. 100 each 1,000 800
15% Pref. shares of Rs. 100 each 400 300
Reserve & Surplus
Revaluation Reserve 100 80
General Reserve 200 150
Profit & Loss Account 80 60
Non-Current Liabilities:
Secured Loan
12% Debentures of Rs. 100 each 96 80
Current Liabilities: 204 95
2,080 1,565
: Alpha Ltd. Beta Ltd.
Non-Current Assets
Fixed Assets 1,200 1,000
Current Assets:
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Loans and advances 880 565
2,080 1,565
Other information:
1. 12% Debenture holders of Alpha Limited and Beta Limited are discharged by
Gamma Limited by issuing adequate number of 16% Debentures of Rs. 100 each to
ensure that they continue to receive the same amount of interest.
2. Preference shareholders of Alpha Limited and Beta Limited have received same
number of 15% Preference shares of Rs. 100 each of Gamma Limited.
3. Gamma Limited has issued 1.5 equity shares for each equity share of Alpha Limited
and 1 equity share for each equity share of Beta Limited. The face value of shares
issued by Gamma Limited is Rs. 100 each.
Required:
Prepare the Balance Sheet of Gamma Limited as on 1st April, 2001 after the
amalgamation has been carried out using the pooling of interest method.
(Ans: Purchase Consideration. Alpha 1,900; Beta 1,100 and BS - 3645)
Solution:
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Q7. (May 2018 – 20 Marks)
The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
X Ltd. (Rs) Y Ltd. (Rs)
Equity and Liabilities
Equity Shares of Rs 10 each 30,00,000 9,00,000
9% Preference Shares of Rs 100 each 3,00,000 -
10% Preference Shares of Rs 100 each - 3,00,000
General Reserve 2,10,000 2,10,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Trade Payables 3,90,000 2,40,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Trade Receivables 6,00,000 3,00,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%
Preference Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average
profits of preceding three financial years (2016-17 : Rs 90,000; 2015-16 : Rs
78,000 and 2014-15: Rs 72,000). The profits of 2014 -15 included credit of an
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insurance claim of Rs 25,000 (fire occurred in 2013-14 and loss by fire Rs 30,000
was booked in Profit and Loss Account of that year). In the year 2015 -16, there
was an embezzlement of cash by an employee amounting to Rs 10,000.
(iii) Land & Buildings are valued at Rs 5,00,000 and the Plant & Machinery at Rs
4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts
is to be created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value
amounted to Rs 15,000 and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included Rs 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.
Answer
In the Books of Y Ltd. Realisation Account
Rs Rs
To Sundry Assets : By Retirement
Gratuity Fund
60,000
Goodwill 75,000
Land & Building 3,00,000 By Trade
payables
2,40,000
Plant & Machinery 4,50,000 By X Ltd.
(Purchase
15,90,000
Inventory 5,25,000 Consideration)
Trade receivables 3,00,000
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Bank 60,000 17,10,000
To Preference
Shareholders
30,000
(Premium on
Redemption)
To Equity Shareholders
(Profit on Realisation) 1,50,000 _______
18,90,000 18,90,000
In the Books of X Ltd. Journal Entries
Dr. Cr.
Rs Rs
Business Purchase A/c D
r.
15,90,000
To Liquidators of Y Ltd. Account (Being business of Y Ltd.
taken over)
15,90,000
Goodwill Account D
r.
1,50,000
Land & Building Account D
r.
5,00,000
Plant & Machinery Account D
r.
4,00,000
Inventory Account D
r.
4,72,500
Trade receivables Account D
r.
3,00,000
Bank Account D 60,000
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r.
Unrecorded assets Account D
r.
15,000
To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c (Being Assets and Liabilities
taken over as per agreed valuation).
15,90,000
Liquidators of Y Ltd. A/c D
r.
15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Equity Share Capital A/c 12,00,000
To Securities Premium A/c (Being Purchase Consideration
satisfied as above).
60,000
Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018
Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 48,30,000
B Reserves and Surplus 2 2,70,000
2 Non-current liabilities
A Long-term provisions 3 2,10,000
3 Current liabilities
A Trade Payables 4 6,10,000
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B Short term provision 5 7,500
Total 59,27,500
Assets
1 Non-current assets
A Fixed assets
Tangible assets 6 33,00,000
Intangible assets 7 3,00,000
2 Current assets
A Inventories 8 12,22,500
B Trade receivables 9 8,80,000
C Other current Assets 10 15,000
D Cash and cash equivalents 11 2,10,000
Total 59,27,500
Notes to accounts:
Rs
1 Share Capital
Equity share capital
4,20,000 Equity Shares of ` 10 each fully paid (Out of above
1,20,000 Equity Shares were issued in consideration other than for
cash)
42,00,000
Preference share capital
6,300 9% Preference Shares of ` 100 each (Out of above 3,300
Preference Shares were issued in consideration other than for cash)
6,30,000
Total 48,30,000
2 Reserves and Surplus
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Securities Premium 60,000
General Reserve 2,10,000
Total 2,70,000
3 Long-term provisions
Retirement Gratuity fund 2,10,000
4 Trade payables (3,90,000 + 2,40,000 - 20,000*)
* Mutual Owings eliminated.
6,10,000
5 Short term Provisions
Provision for Doubtful Debts 7,500
6 Tangible assets
Land & Buildings 14,00,000
Plant & Machinery 19,00,000
Total 33,00,000
7 Intangible assets
Goodwill (1,50,000 +1,50,000) 3,00,000
8 Inventories (7,50,000 + 4,72,500) 12,22,500
9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
10 Other current Assets 15,000
11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000
Working Notes:
1. Computation of goodwill Rs
Profit of 2016-17 90,000
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Profit of 2015-16 adjusted Rs 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (Rs 72,000 – 25,000) 47,000
2,25,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = RS 1,50,000
2.
Purchase Consideration: Rs
Goodwill 1,50,000
Land & Building 5,00,000
Plant & Machinery 4,00,000
Inventory 4,72,500
Trade receivables 3,00,000
Unrecorded assets 15,000
Cash at Bank 60,000
18,97,500
Less: Liabilities:
Retirement Gratuity 60,000
Trade payables 2,40,000
Provision for doubtful debts 7,500
(3,07,500)
Net Assets/ Purchase Consideration 15,90,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd. 3,00,000
Add: 10% Premium 30,000
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9% Preference Shares of X Ltd. 3,30,000
Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000
equity Shares of X Ltd. at 5% Premium 12,60,000
Total 15,90,000
Q8. (Nov. 2018 – Internal Reconstruction) (10 Marks)
The summarized Balance Sheet of SK Ltd. as on 31st March, 2018 is given below.
(Rs in „000)
Liabilities Amount
Equity Shares of Rs 10 each
8%, Cumulative Preference Shares of Rs 100 each
6% Debentures of Rs 100 each
Sundry Creditors
Provision for taxation
35,000
17,500
14,000
17,500
350
Total 84,350
Assets
Fixed Assets
Investments (Market value Rs 3325 thousand)
Current Assets (Including Bank Balance)
Profit and Loss Account
43,750
3,500
35,000
2,000
Total 84,350
The following Scheme of Internal Reconstruction is approved and put into effect on 31st
March, 2018.
(i) Investments are to be brought to their market value.
(ii) The Taxation Liability is settled at Rs 5,25,000 out of current Assets.
(iii) The balance of Profit and Loss Account to be written off.
(iv) All the existing equity shares are reduced to Rs 4 each.
(v) All preference shares are reduced to Rs 60 each.
(vi) The rate of interest on debentures is increased to 9%
The Debenture holders surrender their existing debentures of Rs 100 each and
exchange them for fresh debentures of Rs 80 each. Each old debenture is
exchanged for one new debenture.
(vii) Balance of Current Assets left after settlement of taxation liability are
revalued at Rs. 1,57,50,000.
(viii) Fixed Assets are written down to 80%
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(ix) One of the creditors of the Company for Rs 70,00,000 gives up 50% of his
claim. He is allotted 8,75,000 equity shares of Rs 4 each in full and final
settlement of his claim.
Pass Journal entries for the above transactions.
Solution:
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ACCOUNTING FOR LIQUIDATION OF
COMPANIES
Q9. (Nov. 18 – 10 Marks)
Virat Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2018:
Particular Rs Rs
Equity and Liabilitips :
(1) Share holders Funds :
(a) Share Capital
10,000, 12% Pref. Shares of Rs 100 each
fully paid up
1,00,000 Equity shares of Rs 10 each fully
paid up
50,000 Equity shares of Rs 10 each, Rs 8
paid up
(b) Reserve and Surplus
Profit & Loss A/c. (Dr. Balance)
(2) Non-current Liabilities:
12% Debentures
Loan on Mortgage
(3) Current Liabilities:
Bank Overdraft
Trade Payables
10,00,000
10,00,000
4,00,000
15,00,000
4,50,000
2,75,440
7,30,000
24,00,000
(3,50,000)
19,50,000
10,05,000
Total 50,05,000
Assets :
(1) Non-current Assets :
Fixed Assets - Land & Buildings
(2) Current Assets : Sundry Current Assets
6,00,000
44,05,000
Total 50,05,000
1. The mortgage loan was secured against the Land & Buildings.
2. Debentures were secured by a floating charge on all the assets of the company. The
debenture holders appointed a Receiver.
3. The company being voluntarily wound up, a liquidator was also appointed.
4. The Receiver was entrusted with the task of realising the Land & Buildings which
fetched Rs 7,50,000.
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5. Receiver also took charge of Sundry current assets of value Rs 30,00,000 and sold
them for Rs 28,75,000.
6. The Bank overdraft was secured by a personal guarantee of the directors who
discharged their obligations in full from personal resources.
7. The costs of the Receiver amounted to Rs 10,000 and his remuneration Rs 15,000.
8. The expenses of liquidator was Rs 17,500 and his remuneration was decided at 2%
on the value of the Assets realised by him.
9. The remaining assets were realised by liquidator for Rs 12,50,000.
10. Preference dividend was in arrear for 2 years.
11. Articles of Association of the company provide for payment of preference dividend
arrears in priority to return of equity capital.
Prepare the accounts to be submitted by the Receiver and the Liquidator.
(Suggested Answer – Refund – 4.747/- & 2.747/-)
Solution:
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Q10. (May 2018 – 5 Marks)
In a liquidation which commenced on 11th November, 2017 certain creditors could not
receive payments out of the realization of assets and out of the contributions from "A"
list contributories.
The following are the details of certain transfer, which took place in 2016 and 2017:
Share
holders
Number of shares
transferred at the date
of ceasing to be member
Date of ceasing to
be member
Creditors remaining
unpaid and
outstanding (Rs)
C 2,500 1st September, 2016 5,000
P 1,500 1st January, 2017 9,000
D 2,000 1st April, 2017 12,000
B 700 1st August, 2017 13,500
S 300 15th September, 2017 14,500
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All the shares were Rs 10 each, Rs 5 paid up.
Ignoring expenses of and remuneration to liquidators show the amount to be realised from
various persons listed above.
Solution:
Statement of Liabilities of B list contributors (showing the amount realized) Creditors Out standing
on the date of ceasing to
be member
P 1,500
Shares
Rs
D 2,000
Shares Rs
B 700
Shares Rs
S 300
Shares Rs
Amount to be
paid to the
Creditors Rs
(1) 9,000 3,000 4,000 1,400 600 9,000
(2) 3,000 - 2,000 700 300 3,000
(3) 1,500 - - 1,050 450 1,500
(4) 1,000 - - - 1,000 150
Total (a) 3,000 6,000 3,150 2,350
(b) maximum liability on
shares held
7,500 10,000 3,500 1,500
(c) Amount to be realized
(a) or (b)
whichever is lower 3,000 6,000 3,150 1,500
Working Notes:
1. C will not be liable since he transferred his shares prior to one year preceding the date
of winding up.
2. P will not be responsible for further debts incurred after 01.01.2017 (from the date
when he ceases to be a member). Similarly, D & B will not be liable for the debts
incurred after the date of their transfer of shares.
3. The increase between 1st August 2017 and 15th September 2017, is solely the
responsibility of S. Liability of S has been restricted to the maximum allowable limit of
Rs 1,500. Therefore, amount payable by S on 15.09.2017 is ` 150 only.
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4. Ratio of discharge of liability will be in the ratio of no. of shares held by B List
Contributories which is as follows:
Calculation of Ratio for discharge of Liabilities
Date Cumulative
liability
Rs
Increase in
liabilities Rs
Ratio of no. of shares
held by L, M, N, O
01.01.2017 9,000 - 15:20:7:3
01.04.2017 12,000 3,000 20:7:3
01.08.2017 13,500 1,500 7:3
15.09.2017 14,500 1,000 Only S
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IMPORTANT NOTES:
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INSURANCE COMPANIES
Q11 (Nov. 18 – 10 Marks) On 31st March, 2018 the books of Nutan insurance company Limited contained the
following particulars in respect of marine insurance business:
Direct Business (Rs) Re-insurance (Rs)
Premium:
Received
Receivable - 1.4.2017
Receivable - 31.3.2018
Paid
Payable - 1.4.2017
Payable - 31.3.2018
35,50,000
2,14,500
1,80,000
3,75,000
19,700
15,500
3,00,500
10,400
15,200
Claims:
Paid
Payable - 1.4.20t7
Payable -31.3.20t9
Received
Receivable - 1.4.20L7
Receivable - 31.3.20
25,10,000
42,500
45,900
2,70,800
15,000
17,500
2,17,000
19,500
19,200
Commission :
Paid
Received
75,800
11,600
12,400
Other Expenses and Income:
Rs
Salaries
Rent rates and taxes
Printing and Stationary
Legal expenses (Inclusive of Rs 18,000 for settlement of claims)
Interest, Dividend & Rent received (net)
Income tax deducted at source in respect of above
Bad Debts
3,75,000
1,21,000
24,800
50,000
1,12,500
12,500
5,800
Balance of fund as on 1-4-2017 was Rs 38,50,000 including Additional Reserve for Rs
3,60,000. Provision for Unexpired Risk to be created @ 100% and Additional Reserve has
to be maintained at 5% of net premium of the year.
Prepare the Revenue Account for the year ended 31st March, 2018.
Solution:
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BANKING COMPANIES
Q12. (May 18) The following are the figures extracted from the books of TOP Bank Limited as on
31.3.2017.
Rs
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank‟s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor‟s fee 28,000
The following further information is given:
(i) A customer to whom a sum of Rs 16 lakhs has been advanced has become insolvent
and it is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs 2,10,000 was found
necessary by the auditors.
(iii) Rebate on bills discounted on 31.3.2016 was Rs 19,000 and on 31.3.2017 was Rs
25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was nil as on 31.3.2016.
Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.2017.
Solution:
TOP Bank Limited
Profit and Loss Account for the year ended 31st March, 2017
Schedule Year ended
31.03.2017
(Rs in „000s)
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I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
III. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80
IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80
Year ended 31.3.
2017 (Rs in „000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees 320
II. Rent and taxes 144
III. Depreciation on bank‟s properties 48
IV. Director‟s fee, allowances and expenses 48
V. Auditors‟ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40 768.46
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Working Note:
(Rs in „000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2016 19.00
Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)
5,923.18
Q13. (Nov. 18)
From the following information, calculate the amount of Provisions and Contingencies and
prepare Profit and Loss Account of „Supreme Bank Limited‟ for the year ending 31st
March, 2018:
Income Rs in lakhs Expenditure Rs in lakhs
Interest and discount 1,835 Interest expended 1,136
Interest accrued on
Investments
8 Printing & stationery 18
Commission, exchange
and brokerage
12 Repair & maintenance 2
Profit on sale of
investments
1 Payment to and provision
for employees (salaries,
bonus etc.)
80
Rent received 2 Other Operating Expenses 5
Additional Information:
Rs in lakhs
(i) Rebate on bills discounted to be provided for 3
(ii) Classifications of Advances:
Standard Assets 4,100
Sub-Standard Assets (fully secured) 380
Doubtful Assets not covered by security 155
Doubtful Assets covered by security
For 1 year 10
More than 1 year, but less than 2 years 18
More than 2 year, but less than 3 years 35
More than 3 year 22
Loss Assets 50
(iii) Make tax provision @ 35% of the profit.
(iv) Profit and Loss Account (Cr.) brought forward from the
previous year
65
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Solution:
Calculation of Provisions and Contingencies
(i) Provision on Non-Performing Assets
Rs in lakhs
Particulars Amount % of Provision Provision
Standard Assets 4,100 0.4 16.40
Sub-standard Assets 380 15 57
Doubtful Assets not covered by security 155 100 155
Doubtful Assets covered by security:
For 1 year 10 25 2.50
More than 1 year, but less than 2 years 18 40 7.20
More than 2 years & but less than 3 years 35 40 14
More than 3 years 22 100 22
Loss Assets 50 100 50
4,770 324.10
(ii) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure
(excluding tax)]
= 35% of [(1,840 +15) – (1,136+105+324.10)] = Rs 101.47 lakhs
Total Provisions and contingencies = Provisions on NPAs + Provisions for tax
= 324.10 + 101.47 = Rs 425.57 lakhs
Supreme Bank Limited
Profit and Loss Account for the year ended 31st March, 2018
Particulars Schedule No. Rs in lakhs
I Income
Interest Earned 13 1,840
Other Income 14 15
1,855
II Expenditures
Interest Expended 1,136
Operating Expenses 16 1,05
Provisions & Contingencies 425.57
1,666.57
III Profit/Loss
Net Profit/Loss for the year 188.43
Profit/Loss brought forward 65
253.43
IV Appropriations
Transfer to Statutory Reserve @ 25% of 188.43 47.11
Transfer to Other Reserves -
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Balance carried over to Balance Sheet 206.32
253.43
Schedule 13 – Interest earned
I Interest & Discount (1,835 – 3) 1,832
II Interest on Investments 8
1,840
Schedule 14- other income
Commission, exchange and brokerage 12
Profit on sale of investments 1
Rent received 2
15
Schedule 16- Operating Expenses
Printing & stationery 18
Repair & maintenance 2
Payment to and provision for employees (salaries, bonus etc.) 80
Other Operating Expenses 5
105
Q14. (Nov18 - 5 Marks)
Forward Bank Ltd furnishes the following information as on 31st March, 2018.
Amount in Rs
Bills Discounted
Rebate on bills discounted as on 1st April, 2O17
Discount received
8,22,300
1,32,960
6,33,990
Details of bills discounted are as given below:
Value of Bills (Rs) Due Date Rate of Discount
10,95,000
30,00,000
16,92,000
24,36,000
15th June, 2018
25th June, 2018
5th July, 2018
15th July, 2018
14%
12%
16%
16%
(i) Calculate the rebate on bills discounted as on 31st March, 2018.
(ii) Pass necessary Journal Entries.
Solution:
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IMPORTANT NOTES:
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ACCOUNTING STANDARD 19
“LEASES” Q15:
B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:
(a) Lease period is 3 years, in the beginning of the year 20X1, for equipment costing Rs
10,00,000 and has an expected useful life of 5 years.
(b) The Fair market value is also Rs 10,00,000.
(c) The property reverts back to the lessor on termination of the lease.
(d) The unguaranteed residual value is estimated at Rs 1,00,000 at the end of the year
20X1.
(e) 3 equal annual payments are made at the end of each year.
(f) Consider IRR = 10%
(g) The present value of Rs. 1 due at the end of 3rd year at 10% rate of interest is Rs.
0.7513.
(h) The present value of annuity of Rs. 1 due at the end of 3rd at 10% IRR is Rs 2.4868.
State whether the lease constitute finance lease and also calculate unearned finance
income.
Solution:
Particulars Amount (Rs.)
Cost of equipment
Unguaranteed residual value
Present value of residual value after third year @ 10%
(1,00,000 × 0.7513)
Fair value to be recovered from lease payments (Rs 10,00,000
– Rs 75,130)
Present value of annuity for three years
Annual lease payment = ₹ 9,24,870/2.4868
10,00,000
1,00,000
75,130
9,24,870
2.4868
3,71,912
The present value of lease payment i.e., Rs 9,24,870 equals 92.48% of the fair market
value, i.e., Rs 10,00,000. As the present value of minimum lease payments substantially
covers the initial fair value of the leased asset and lease term covers the major part of
the life of asset, it constitutes a finance lease.
Particulars Amount (Rs.)
Total lease payments (Rs 3,71,912 × 3)
Add: Unguaranteed residual value
Gross investment in the lease
Less: Net Investment, i.e., Present value of gross investment (lease
11,15,736
1,00,000
12,15,736
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payments and residual value) (₹ 75,130 + Rs 9,24,870)
Unearned finance income
10,00,000
2,15,736
Q16: (Homework)
X Ltd. sold JCB Machine having WDV of Rs 50 Lakhs to Y Ltd. for Rs 60 Lakhs and the
same JCB was leased back by Y Ltd. to X Ltd. The lease is operating lease. Comment
according to relevant Ind AS if:
(a) Sale price of Rs 60 Lakhs is equal to fair value.
(b) Fair value is Rs 50 Lakhs and sale price is Rs 45 Lakhs.
(c) Fair value is Rs 55 Lakhs and sale price Rs 62 Lakhs.
(d) Fair value is Rs 45 Lakhs and sale price is Rs 48 Lakhs.
Solution: As per AS 19, Leases:
(a) Since sale price is equal to fair value, profit of Rs 10 lakhs (i.e., Rs 60 lakhs – Rs50
lakhs) is to be recognised as income immediately.
(b) Assuming, the loss is not compensated by future lease payments at below market price,
the loss of Rs 5 lakhs (i.e., Rs 50 lakhs – Rs 45 lakhs) should be recognised immediately in
the profit and loss account. In case, the loss is compensated by future lease payments at
below market price, then the loss of Rs 5 lakhs should be deferred and amortised in
proportion to the lease payments over the period for which the asset is expected to be
used.
(c) Profit of ₹ 7 lakhs (i.e., Rs 62 lakhs – Rs 55 lakhs) should be deferred and amortised
over the period for which the asset is expected to be used. Profit of Rs 5 lakhs (i.e., Rs 55
lakhs – Rs 50 lakhs) should be recognised immediately.
(d) Rs 3 lakhs (i.e., Rs 48 lakhs – Rs 45 lakhs) should be deferred and amortised over the
period for which the asset is expected to be used. Loss of Rs 5 lakhs (i.e., Rs 50 lakhs – Rs
45 lakhs) should be recognised immediately in the profit and loss account.
Q17:
S. Square P Ltd. has taken machinery on lease from SK Ltd. The information is as under:
Lease term = 4 years
Fair value at inception of lease = Rs. 20,00,000
Lease rent = Rs. 6,25,000 p.a. at the end of year
Guaranteed residual value = Rs. 1,25,000
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Expected residual value = Rs. 3,75,000
Implicit interest rate = 15%
Discounted rates are 0.8696, 0.7561, 0.6575, and 0.5718 respectively.
Calculate the value of the lease liability as per AS 19.
(November 2010: 4 Marks) (Hint: 18,55,850/- )
OPERATING LEASE
Q18:
On April 1, 2012 ABC Ltd. leases equipment for 4 years to XYZ Ltd. The Cost of the
equipment is Rs. 15,00,000 and has a useful life of 10 years (assume straight line method
of depreciation). The lease payments to be made are as follows:
Year Amount
1
2
3
4
1,00,000
1,50,000
1,75,000
2,00,000
The lease is classified as an operating lease. How would this lease be accounted for in the
books of accounts of the Lessee and the Lessor?
(Hint: 156250/- LEASE RENT to be recognised)
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IMPORTANT NOTES:
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IMPORTANT NOTES:
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ACCOUNTING STANDARD 20
“EARNINGS PER SHARE”
Q19: (RTP Nov. 10)
Net Profit after Tax including extraordinary profit/losses for the year ended 31st Dec,
2009 = 2,00,000/-
10% Cumulative Preference Shares of Rs. 5,00,000/-
Number of Equity shares = 5,000 of Rs. 100/- each.
Equity dividend declared @ 18%. Corporate Dividend tax 15%
Compute EPS assuming that out of 5,000 equity shares, 2,000 shares were issued on
1.07.09.
(Answer: EPS = Rs. 35.29/-)
Q20: (Nov.18)
From the following information given by Sampark Ltd., Calculate Basic EPS and Diluted EPS
as per AS 20:
Net profit for the current year Rs. 2,50,00,000
No. of Equity shares outstanding 50,00,000
No. of 12% convertible debentures of Rs.
100 each (Each debenture is convertible
into 8 equity shares)
50,000
Interest on debenture for the current year Rs. 6,00,000
Tax Saving relating to interest expense 1,80,000
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(30%)
Solution:
Q21 (Nov. 2018) (EPS on Right Issue of Shares)
The following information is available for TON Ltd. for the accounting year 2015-16 and
2016-17:
Net profit for Rs
Year 2015-16 35,00,000
Year 2016-17 45,00,000
No of shares outstanding prior to right issue 15,00,000 shares.
Right issue : One new share for each 3 shares outstanding i.e. 5,00,000 shares.
: Right Issue price Rs 25
: Last date to exercise rights 31st July, 2016
Fair value of one equity share immediately prior to exercise of rights on 31.07.2016 is Rs
35.
You are required to compute:
(i) Basic earnings per share for the year 2015-16.
(ii) Restated basic earnings per share for the year 2015-16 for right issue.
(iii) Basic earnings per share for the year 2016-17.
Solution:
1. Computation of Basic Earnings per Share
Year Year
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2015-16
(Rs)
2016-17
(Rs)
(i) EPS for the year 2015-16 as originally reported
= Net profit for the year attributable to equity
share holder / weighted average number of equity
shares outstanding during the year
Rs 35,00,000/ 15,00,000 shares
2.33
(ii) EPS for the year 2015-16 restated for the right
issue Rs 35,00,000/15,00,0000 shares x 1.08
2.16
(iii) EPS for the year 2016-17 (including effect of right
issue) Rs 45,00,000 / [(15,00,000x1.08 x 4/12) +
(20,00,000x8/12)]
2.40
Working Notes:
1. Computation of theoretical ex-rights fair value per share =
Fair value of all outstanding shares immediately prior to exercise of rights+total
amount received from exercise / Number of shares outstanding prior to exercise +
number of shares issued in the exercise
[(Rs 35 x15,00,000) + (Rs 25 x 5,00,000)] / (15,00,000 + 5,00,000) = Rs 32.5
2. Computation of adjustment factor
Fair value per share prior to exercise of rights Theoretical ex-rights value per
share = Rs 35 /32.50 = 1.08 (approx.)
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IMPORTANT NOTES:
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IMPORTANT NOTES:
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ACCOUNTING STANDARD 26
“INTANGIBLE ASSETS” Q22. (May 2018 – 5 Marks)
A company acquired a patent at a cost of Rs 160 lakhs for a period of 5 years and the
product life cycle is also 5 years. The company capitalized the cost and started amortising
the asset at Rs 16 lakhs per year based on the economic benefits derived from the
product manufactured under the patent. After 2 years it was found that the product life
cycle may continue for another 5 years from then (the patent is renewable and the
company can get it renewed after 5 years). The net cash flows from the product during
these 5 years were expected to be Rs 50 lakhs, Rs 30 lakhs, Rs 60 lakhs, Rs 70 lakhs and
Rs 40 lakhs. Find out the amortization cost of the patent for each of the years.
Solution:
Company amortized Rs 16,00,000 per annum for the first two years. Hence, Amortization
for the first two years (Rs 16,00,000 X 2) = Rs 32,00,000.
Remaining carrying cost after two years =Rs 1,60,00,000 – Rs 32,00,000
= Rs 1,28,00,000
Since after two years it was found that the product life cycle may continue for another 5
years, hence the remaining carrying cost Rs128 lakhs will be amortized during next 5 years
in the ratio of net cash arising from the sale of the products of Fast Limited..
The amortization cost of the patents may be computed as follows:
Year Net cash flows Rs Amortization Ratio Amortization Amount Rs
I - 0.1 16,00,000
II - 0.1 16,00,000
III 50,00,000 0.2 25,60,000
IV 30,00,000 0.12 15,36,000
V 60,00,000 0.24 30,72,000
VI 70,00,000 0.28 35,84,000
VII 40,00,000 0.16 20,48,000
Total 250,00,000 1.000 160,00,000
Q22. Vishnu Ltd. is engaged in research on a new process design for its product- It had
incurred an expenditure of Rs. 265.37 lakhs on research upto 31st March, 2003. The
development of the process began on 1st April, 2003 and the Development Phase
Expenditure was T180 lakhs upto 31st March, 2004. From 1st April, 2004 the Company will
implement the new process design which will result in a after-tax cost saving of Rs. 40
lakhs per annum for the next five years. The Company's Cost of Capital is 10%. At what
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cost should the asset be recorded and what is its amortisation amount?
(RTP; November 2005)
Ans.: Research Expenditure: As per Para 41 of AS-26, the expenditure on research Rs.
265.37 lakhs should be expensed in the year in which it is incurred. It is presumed that
the entire expenditure of Rs. 265.37 lakhs is incurred in financial year 2002-2003. Hence,
it should be written off as an expense in that year itself.
Cost of internally generated intangible asset: Para 53 specifies the items which can be
included in the cost of an internally generated intangible asset, while Para 54 specifies the
exclusions there from. It is presumed that the expenditure of Rs.180 lakhs is determined
in accordance with Para 53 and 54 of AS-26.
Discounting Future Cash Flows: As per Para 30 of AS-26, fair value of an intangible asset
can be estimated by discounting estimated future net cash flows. Even if this paragraph is
primarily related to estimation of fair value of an intangible asset acquired in the course
of amalgamation in the nature of purchase, the concept can be extended for internally
generated intangible asset also.
Cost savings from the new process design for five = Rs. 40 lakhs per years
Company's Cost of Capital = 10%
Annuity Factor at 10% for five years = 3.7908
(from the annuity tables)
Present value of future cash flows = Rs. 40 x 3.7908= Rs. 151.63 lakhs
Carrying Amount of the Asset: Since the Present Value of Future Cash Flows is only Rs.
151.63 lakhs, (which is lower than the cost of Rs.180 lakhs), it is prudent to recognise an
impairment loss of Rs. 180.00 lakhs - Rs. 151.63 lakhs = Rs. 28.37 lakhs in the financial year
2003-2004.
Amortisation Period and Amount: The Company can amortise Rs. 151.63 lakhs over a five
year period by charging Rs. 30.33 lakhs per annum from the financial year 2004-2005
onwards.
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IMPORATANT NOTES:
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IMPORATANT NOTES:
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ACCOUNTING STANDARD – 29
“PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS”
Q23.
An engineering goods company provides after sales warranty for 2 years to its customers.
Based on past experience, the company has the following policy for making provision for
warranties on the invoice amount, on the remaining balance warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:
Invoice Date Amount
19th Jan, 2011
29th Jan, 2012
15th Oct, 2012
40,000
25,000
90,000
Calculate the provision to be made for warranty under AS – 29 as at 31st March, 2012 and
31st March, 2013. Also compute the amount to be debited to Profit and Loss a/c for the
year ended 31st March, 2013.
(Answer: (i) 2012 – 1,550/-; 2013 – 3,200/- (ii) Amount debited to P&L - 1,650/-)
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Q24. (Nov. 2018)
M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged
infringement of Copyrights. The competitor has filed a suit in the court of law seeking
damages of Rs 200 lakhs.
The Directors are of the view that the claim can be successfully resisted by the Company.
How would the matter be dealt in the annual accounts of the Company in the light of AS
29? You are required to explain in brief giving reasons for your answer.
Solution:
As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets‟, a provision should
be recognized when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognized.
In the given situation, since, the directors of the company are of the opinion that the
claim can be successfully resisted by the company; therefore there will be no outflow of
the resources. Hence, no provision is required. The company will disclose the same as
contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed copyrights and is seeking damages of Rs 200 lakhs.
However, the directors are of the opinion that the claim can be successfully resisted by
the company.”
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IMPORTANT NOTES:
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IMPORTANT NOTES:
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CONSOLIDATION OF FINANCIAL
STATEMENTS
Calculation of Cost of Control (Goodwill/Capital Reserve):
Book Value of Investment held at Balance
Sheet Date
Less: Net Assets of Subsidiary co. Owned
by Parent co. on the date of investment,
still held by subsidiary
(Share capital +/- Pre-Acquisition Share
of P/L - Dividend Adjustment
XXX
XXX
Goodwill/(CR)
SPECIAL ADJUSTEMETNS:
Balances of
Reserves and
Surplus –
Missing
For Balance of Profit & Loss A/c : Assume Zero Balance as on 1st Day of
the year.
For Balance of Other Reserves : Assume the Same amount as at the end
of the year.
Treatment of
Abnormal
Items
While preparing AOP:
1. Effect of Abnormal Items should be eliminated (Ab. Loss will be added
and Ab. Profit will be deducted) – (Jaha se already adjust hua hai
vahi se eliminate karenge)
2. Apply time adjustment (if required)
3. Re-instate the effect of Abnormal Items (Ab. Loss deducted and Ab.
Profit added) – (Jis period me A.Item occur hua hai vahi pe adjust
karenge)
Ab. Loss will be calculated net of claims
Treatment of
Revaluation
of Assets
Revaluation of Assets of Parent co. is not relevant.
Revaluation of Assets of Subsidiary co. is relevant to find out the
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fair value of Net Assets of Subsidiary co. for the calculation of
Cost of Control. (Net assets ki real aukaat pata karne k liye
market value of assets dekhenge, book value nai)
Revaluation of Assets will be checked on the acquisition date of
investments.
Revaluation Profit or Loss is calculated as follows:
Book Value of Assets on the date of Acquisition – XXX
Less: Market Value of Assets on the date of Acquistions - XXX
Revaluation Profit/Loss is treated as pre-acquisition profit/loss.
(profit ko plus aur loss ko minus karenge)
Additional Depreciation will be calculated in case of Revaluation
profit and adjusted in post acquisition profit. (minus karenge)
Saving in depreciation will be calculated in case of Revaluation loss
and adjusted in post acquisition profit. (plus karenge)
Revaluation adjustment will be done after applying Time
Adjustment.
Treatment of
Bonus issue
of Shares by
Subsidiary
Bonus issue of shares effects calculation of holding ratio. So we should be
very careful while calculating holding ratio.
We will always assume that bonus is distributed out of past
profits/reserves (purane kamaye hue profits me se bonus issue hoga,
na ki current year k profits me se)
There can be either of the two possible cases:
1. Bonus entry has been passed in books: Treat like Abnormal
Loss/Dividend paid.
2. Bonus entry has not been passed yet:
Pre-Acquisition Profits A/c Dr
To Share Capital A/c
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Bonus shares receive karne wala koi bhi entry nai karega, kyunki usko
shares free me mile hai.
Dividend Paid
by
Subsidiary
Co.
(Same as
Abnormal
Items)
Two types of Dividends Final Dividend and Interim dividend
We always assume that:
Dividend paid is Final if question is silent
Pre-acquisition dividend received by parent is wrongly credited to its
P&L A/c
Necessary appropriation for final dividend was not made by subsidiary in
last year.
Dividend is calculated on paid up share capital
At the end of the year in case of Final Dividend
On the date of Distribution for Interim Dividend
Dividend Received by Parent can be:
Pre-acquisition : to be adjusted in COC (i.e. deducted from
investments)
Post acquisition : to be transfer to Cons. P&L A/c of Holding
(Agar pre acquisition dividend galti se p&l me daal diya parent ne to
vaha se hatana padega to minus karenge and COC me dalna padega to
vaha pe bhi minus karenge)
Treatment of Dividend paid in AOP:
1. Added back to the profits from where it has been
appropriated.
2. Apply time adjustment
3. Reduce dividend from its actual source of profits
Final Dividend source is profit of last year and moving backwards
Interim Dividend source is profit of current year upto the date of
distribution.
CDT will be appropriated just like dividend, but it will not be received or
rectified by parent.
Unrealised
Profit/Loss
on
assets/stocks
1. Calculate Book value of asset/stock transferred within the group
(net of depreciation if any)
2. Calculate U.profit/loss on above book value.
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transferred
within the
group
3. If such transaction is upstream (i.e. sale by subsy to parent) then
eliminate profit/loss in AOP with similar effect in Asset/Stock value
4. If such transaction is downstream (i.e. sale by parent to subsy) then
eliminate profit/loss Cons. P&L with similar effect in Asset/Stock
value)
If date of transaction is missing then assume such date to be the last
date of period.
Rectification
of Errors
If question specifies any error then such errors should be rectified
before time adjustment.
Contra Items Whenever Payable and Receivable are within group (i.e. H and S), then
such payable/receivable should be eliminated.
Payable A/c Dr.
To Receivable A/c
Note:
1. If payable is less than receivable then difference is called cheque
in transit
2. If payable is more than some Error will be given in the question.
Such error will be rectified and then contra adjustment will be
made.
Contingent
Liabilities
The Portion which is discounted and shown as Contingent liability will not
to be shown in Consolidated BS
Contra Adjustment will be made only for that portion which is not yet
discounted and shown under Bills receivable and Bills payable
Proposed
Dividend
(Equity)
If dividend is proposed after the date of Balance Sheet then According
to Schedule III of Companies Act, 2013, then it is not required to
recognize as a liability, it will be shown as Contingent Liability.
(Matlab ye ki jis saal me dividend propose/declare kiya hai ussi saal me
record karo)
Therefore, we will ignore the treatment of proposed dividend in the
Consolidated FS
However if Proposed dividend is declared before or up to balance sheet
date then it is to be provided for in the Balance sheet of the year it
belongs. Treatment will be:
1. Add back in AOP, if entry is already passed (ignore if entry not
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passed)
2. Deduct from Minority Interest and show MI’s share of PD as
Short Term Provisions
Proposed
Dividend
(Pref Share)
1. Add back in AOP, if entry is already passed (ignore if entry not
passed)
2. Apply Time Adjustment
3. Deduct in AOP from Pre and/or Post according to the date of
Investment.
4. If this dividend is receivable by Parent then share of parent will be
transfer to COC (Pre) or CPL (Post)
5. MI’s Share in dividend will be shown as Short Term Provisions
separately.
Q25. (May 18 – 20 Marks)
The following summarized Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepaid
as on 31st March, 2017:
H Ltd. (Rs.) S Ltd. (Rs.)
Equity and Liabilities
Shareholder’s Funds
Equity Share Capital
(fully paid up share of Rs 10 each )
Reserve and Surplus
General Reserve
Profit and Loss Account
Current Liabilities
Trade Payables
Total
12,00,000
4,35,000
2,80,000
3,22,000
22,37,000
2,00,000
1,55,000
65,000
1,23,000
5,43,000
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Assets
Non-Current Assets
Fixed Assets
Machinery
Furniture’
Non-Current Investments
Shares in S Ltd.
16,000 shares @ Rs 20 each
Current Assets
Inventories
Trade Receivables
Cash and Bank
Total
H Ltd. (Rs.)
6,40,000
3,75,000
3,20,000
2,68,000
4,70,000
1,64,000
22,37,000
S Ltd. (Rs.)
1,80,000
34,000
-
62,000
2,35,000
32,000
5,43,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2016. On the date of acquisition,
General Reserve and profit and loss Account of S Ltd. stood at Rs 50,000 and Rs 30,000
respectively.
Machinery (book value Rs 2,00,000) and Furniture (book value Rs 40,000) of S Ltd. were
revaluated at Rs 3,00,000 and Rs 30,000 respectively on 1st April, 2016 for the purpose of
fixing the price of its shares (rates of depreciation computed on the basis of useful lives:
Machinery 10% and Furniture 15%). Trade payables of H Ltd. include Rs 35,000 due to S
Ltd. for goods supplied since the acquisition of the shares. These goods are charged at
10% above cost. The inventory of H Ltd. includes goods costing Rs 55,000 purchased from
S Ltd.
You are required to prepare the consolidated balance sheet as at 31st March, 2017.
Solution:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March,
2017
Particulars Note No. (Rs)
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I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital
(1,20,000 equity shares of Rs 10 each)
12,00,000
(b) Reserves and Surplus 1 8,16,200
(2) Minority Interest (W.N.4) 99,300
(3) Current Liabilities
(a) Trade Payables 2 4,10,000
Total 25,25,500
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 3 13,10,500
(ii) Intangible assets 4 24,000
(b) Current assets
(i) Inventories 5 3,25,000
(ii) Trade Receivables 6 6,70,000
(iii) Cash at Bank 7 1,96,000
Total 25,25,500
Notes to Accounts
Rs
1. Reserves and Surplus
General Reserves 4,35,000
Add: 80% share of S Ltd.’s post-acquisition
reserves (W.N.3)
84,000 5,19,000
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Profit and Loss Account 2,80,000
Add: 80% share of S Ltd.’s post-acquisition
profits (W.N.3)
21,200
Less: Unrealised gain (4,000) 17,200 2,97,200
8,16,200
2. Trade Payables
H Ltd. 3,22,000
S Ltd. 1,23,000
Less: Mutual transaction (35,000) 4,10,000
3. Tangible Assets
Machinery
H. Ltd. 6,40,000
S Ltd. 2,00,0
00
Add: Appreciation 1,00,00
0
3,00,0
00
Less: Depreciation (30,00
0)
2,70,000 9,10,000
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000
Less: Decrease in value (10,00
0)
30,000
Less: Depreciation (4,500) 25,500 4,00,500
13,10,500
4. Intangible assets
Goodwill [WN 5] 24,000
5. Inventories
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H Ltd. 2,68,000
S Ltd. 62,000 3,30,000
Less: Inventory reserve (5,000)
3,25,000
6. Trade Receivables
H. Ltd. 4,70,000
S Ltd. 2,35,000
7,05,000
Less: Mutual transaction (35,000)
6,70,000
7. Cash and Bank
H. Ltd. 1,64,000
S Ltd. 32,000 1,96,000
Working Notes:
1. Profit or loss on revaluation of assets in the books of S Ltd. and their book values
as on 1.4.2016
Rs
Machinery
Revaluation as on 1.4.2016 3,00,000
Less: Book value as on 1.4.2016 (2,00,000)
Profit on revaluation 1,00,000
Furniture
Revaluation as on 1.4.2016 30,000
Less: Book value as on 1.4.2016 (40,000)
Loss on revaluation (10,000)
2. Calculation of short/excess depreciation
Machinery Furniture
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Upward/ (Downward) Revaluation (W.N. 4) 1,00,000 (10,000)
Rate of depreciation 10% p.a. 15% p.a.
Difference [(short)/excess] (10,000) 1,500
3. Analysis of reserves and profits of S Ltd. as on 31.03.2017
Pre-acquisition profit
upto 1.4.2016
Post-acquisition profits
(1.4.2016 – 31.3.2017)
(Capital
profits)
General
Reserve
Profit and loss account
General reserve as on
31.3.2017
50,000 1,05,000
Profit and loss account as on
31.3.2017
30,000 35,000
Upward Revaluation of
machinery as on 1.4.2016
1,00,000
Downward Revaluation of
Furniture as on 1.4.2016
(10,000)
Short depreciation on
machinery (W.N. 5)
(10,000)
Excess depreciation on
furniture (W.N. 5)
1,500
Total 1,70,000 1,05,000 26,500
4. Minority Interest
Rs
Paid-up value of (2,00,000 x 20%) 40,000
Add: 20% share of pre-acquisition profits and reserves
[(20% of (50,000 + 30,000)]
16,000
20% share of profit on revaluation 18,000
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300
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1,00,300
Less: Unrealised Profit on Inventory
(55,000 x 10/110)* x 20%
(1,000)
99,300
considered that Rs 55,000 is cost to H Ltd. Alternative solution considering it as cost
to S Ltd. is also possible
5. Cost of Control or Goodwill
Cost of Investment 3,20,000
Less: Paid-up value of 80% shares 1,60,000
80% share of pre-acquisition profits and reserves
(Rs 64,000 + Rs 72,000)
1,36,000 (2,96,000)
Cost of control or Goodwill 24,000
Q26. (May 18)
Given below are the Profit & Loss Accounts of Hello Ltd. and its subsidiary Sun Ltd. for
the year ended 31st March, 2017:
Hello Ltd.
(Rs in lacs)
Sun Ltd.
(Rs in lacs)
Incomes:
Sales and other income 10,000 2,000
Increase in Inventory 2,000 400
12,000 2,400
Expenses:
Raw material consumed 1,600 400
Wages and Salaries 1,600 300
Production expenses 400 200
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Administrative Expenses 400 200
Selling and Distribution Expenses 400 100
Interest 200 100
Depreciation 200 100
4,800 1,400
Profit before tax 7,200 1,000
Provision for tax 2,400 400
Profit after tax 4,800 600
Dividend paid 2,400 300
Balance of Profit 2,400 300
Other Information:
Hello Ltd. sold goods to Sun Ltd. of Rs 240 lacs at cost plus 20%. Inventory of Sun Ltd.
includes such goods valuing Rs 48 lacs. Administrative expenses of Sun Ltd. include Rs 10
lacs paid to Hello Ltd. as consultancy fees. Selling and distribution expenses of Hello Ltd.
include Rs 20 lacs paid to Sun Ltd. as commission.
Hello Ltd. holds 80% of equity share capital of Rs 2,000 lacs in Sun Ltd. prior to 2015-
2016. Hello Ltd. took credit to its Profit and Loss Account, the proportionate amount of
dividend declared and paid by Sun Ltd. for the year 2015-2016.
You are required to prepare a consolidated profit and loss account of Hello Ltd. and its
subsidiary Sun Ltd. for the year ended 31st March, 2017.
Solution:
Consolidated Profit & Loss Account of Hello Ltd. and its subsidiary Sun Ltd. for the
year ended on 31st March, 2017
Particulars Note No. Rs in Lakhs
I. Revenue from operations 1 11,730
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II. Total revenue 11,730
III. Expenses
Cost of Material purchased/Consumed 3 2,360
Changes of Inventories of finished goods 2 (2,392)
Employee benefit expense 4 1,900
Finance cost 6 300
Depreciation and amortization expense 7 300
Other expenses 5 1,070
Total expenses 3,538
IV. Profit before Tax(II-III) 8,192
V. Tax Expenses 8 2,800
VI. Profit After Tax 5,392
Profit transferred to Consolidated Balance Sheet
Profit After Tax 5,392
Dividend paid
Hello Ltd. 2,400
Sun Ltd. 300
2,700
Less: Share of Hello Ltd. in dividend of Sun Ltd.
80% of Rs 300 lacs (240) (2,460)
Profit to be transferred to consolidated balance
sheet
2,932
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Notes to Accounts
Rs in Lacs Rs in Lacs
1. Revenue from Operations
Sales and other income
Hello Ltd. 10,000
Sun Ltd. 2,000
12,000
Less: Inter-company Sales (240)
Consultancy fees received by Hello Ltd. from Sun
Ltd.
(10)
Commission received by Sun Ltd. from Hello Ltd. (20) 11,730
2. Increase in Inventory
Hello Ltd. 2,000
Sun Ltd. 400
2,400
Less: Unrealized profits Rs 48 lacs × 20 120 (8) 2,392
14,122
3. Cost of Material purchased/consumed
Hello Ltd. 1,600
Sun Ltd. 400
2,000
Less: Purchases by Sun Ltd. from Hello Ltd. (240) 1,760
Direct Expenses
Hello Ltd. 400
Sun Ltd. 200 600
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2,360
4. Employee benefits and expenses
Wages and Salaries:
Hello Ltd. 1,600
Sun Ltd. 300 1,900
5. Other Expenses
Administrative Expenses
Hello Ltd. 400
Sun Ltd. 200
600
Less: Consultancy fees received by Hello Ltd.
from Sun Ltd.
(10) 590
Selling and Distribution Expenses:
Hello Ltd. 400
Sun Ltd. 100
500
Less: Commission received from Sun Ltd. from
Hello Ltd.
(20) 480
1,070
6. Finance Cost
Interest:
Hello Ltd. 200
Sun Ltd. 100 300
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7. Depreciation and Amortization
Depreciation:
Hello Ltd. 200
Sun Ltd. 100 300
8. Provision for tax
Hello Ltd. 2,400
Sun Ltd. 400 2,800
Note: Since the amount of dividend received by Hello Ltd. for the year 2015-2016 is not
given, it has not been deducted from ‘sales and other income’ in consolidated profit and
loss account and not added to consolidated opening retained earnings (which is also not
given).
(We can assume that the dividends paid given in the question are relating to FY
2015-16 if declared and paid after 31.03.2016, accordingly students should mention
a note relating to this point as we discussed in the class)
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IMPORTANT NOTES:
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D-FORTUNE CLASSES
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Valuation of Goodwill
Methods of Valuing Goodwill:
Average Profit Method – FMP x No. of years purchased
Super Profit Method – (FMP – Normal Profit) x No. of years purchased
Capitalisation Method – Super Profit / Capitalisation Rate
Annuity Method – SP x Annuity Value (as per Present value factor)
NO. OF YEARS PURCHASE – It will always be given in the question, if not given we will
use capitalization rate. If it is required to be used but not given then we can assume NYP
as 3-5 years.
NRR: It means normal rate of return expected in the same business. It is generally given
in question. If it is not given then it will be calculated as under:
NRR = Div/MPS *100
(Avg Dividends and Avg MPS is allowed) (NRR is considered Post Tax Always)
CALCULATION OF FMP is based on Projected profits method and past profits method.
While calculating Past profits approach following items will be adjusted:
1. Tax Expenses
2. Abnormal Items
3. Rectification of Errors
4. Effects of Changes in A/c Policy
5. Revaluation of Current Assets and Liabilities
6. Non recurring items (eg. Loss/profit on sale of assets)
7. Non operating Incomes (eg. Interest on investments)
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8. Goodwill w/off added back
9. Additional Depreciation due to revaluation of FAs
10. Future Incomes and Exp
11. Future Tax Rate
Note: When NRR is given after Tax for both SH then FMP after Tax is to be considered.
When NRR is given for ESH then FMP after Tax after Pref. Dividend is considered.
Average of FMP is not specified in Question
Check Trend in NP ratios if these are available: Apply Weighted Avg if trend is
available otherwise Simple Avg.
If NP ratios are not available then check trend in Adjusted Profits: Apply
Weighted Avg if trend is available otherwise Simple Avg.
CAPITAL EMPLOYED: Capital employed means Shareholders fund (Eqt + Pref) applied in
the business for operating activities. It is calculated as under:
All Assets XXX
Less: All Liabilities XXX
Assets are to be considered after – Revaluation, Rectification and Change in
Accounting Policy
Non Operating Investment will be excluded in Capital employed. (if nothing is
specified in question we always assume that Investments are Non Operating)
If there is Purchased Goodwill in BS then it is considered otherwise it is will be
excluded.
These are not Liabilities for the purpose of capital employed – Proposed Dividend
and Pref Share Capital. But if NRR given in question is for ESH then they are
deducted.
Capital employed may be “Closing Capital Employed” or “Average Capital Employed”
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Tangible capital employed means Closing Capital employed excluding Intangible
Assets.
Avg. Capital Employed may be –
½ (Opening CE + Closing CE)
Or
Closing CE – ½ Rectified PAT
Which Capital Employed to Use ?
If Not Specified in the question, then we have to check the basis of FMP. If FMP is based
on Projected Profits, Trendline Avg. or Weighted Avg. then we may use Closing Capital
Emp. and if FMP is based on Simple Avg. then we may use Avg. Capital Employed.
Note: Tangible Capital Employed means Closing Capital Employed excluding Intangible
Assets.
Some Important Key Points:
Investment for Replacement of P&M/Building is Trade Investment.
RPAT is the actual profit earned after rectifications since we take capital emp
after rectification also. Moreover RPAT also includes income on Non Trade
Investment assuming that it is utilized in business activities.
Abnormal Year is not to be considered in the valuation until and unless the loss due
to abnormal activity is mentioned and quantified separately.
If the Goodwill is shown in balance sheet and nothing is given in question about
goodwill, then we will assume it as Self Generated.
We need to consider the additional provision of Tax due to increase in Tax Rate.
Rectification is required when there is any Error or Omission or any information is
given which shows that there is wrong treatment in books. (Eg. Some trade
receivables are bad – it is assumed as error and to be rectified)
D-FORTUNE CLASSES
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Q27. (Imp for Exam)
A Company Q is willing to sell its business. The purchaser has sought professional advice
for the valuation of the goodwill of the company. He has the last audited financial
statements together with some additional information. The extract of the Balance Sheet
as on 31-3-2016 is as under:
Liabilities Rs Assets Rs
Equity Share Capital
(shares of Rs 100 each)
9,50,000 Land & Building 5,45,000
8% Preference Share
Capital (shares of Rs 100
each)
2,25,000 Plant & Machinery
Investments in
shares
Inventories
4,55,000
4,85,000
3,80,000
Reserves & Surplus 7,50,500 Trade Receivables
(net)
4,25,620
9% Debentures 5,60,000 Cash & Bank balance 5,20,520
Current Liabilities 3,25,640
28,11,140 28,11,140
(1) The Debentures will be redeemed at a discount of 25% of the value in Balance Sheet
and investments in share will be sold at their present market value which is quoted as
Rs 4,95,200. The above transactions will be prior to the purchase of the equity shares.
For the purpose of pricing of Goodwill:
(2) The normal rate of return on net assets for equity shares is 10%.
(3) Profits for the past three years after debenture interest but before Preference
Share Dividend have been as under:
31-3-2016 Rs 2,95,000
31-3-2015 Rs 4,99,000
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31-3-2014 Rs 3,25,000
(4) Goodwill is valued at three years purchase of the adjusted average super profit.
(5) In the year 2015, 20% of the profit mentioned above was due to non-recurring
transaction resulting in increase of profit.
(6) The Land & Building has a current rental value of Rs 62,400 and 8% return is expected
from the property.
(7) On 31-3-2016, 8% of debtors existing on the date had been written as bad and
charged to Profit and Loss Account as Provision for Bad debts. The same are now
recoverable. Tax is applicable at 35%.
(8) A claim of compensation long contingent of Rs 25,000 has perspired and is to be
accounted for.
(9) No Debenture interest shall be payable in future due to its redemption.
Answer
Valuation of goodwill: Super profits method
Particulars Rs Rs
Net trading assets attributable to equity share
holders
As computing in (WN 1) 23,18,506
Less: Preference share Capital (2,25,000) 20,93,506
Normal Rate of Return (NRR) to equity share
holders
10%
Normal Profit available to equity share holders (a
× b)
2,09,351
Future Maintainable Profits (FMP) to equity
share holders
As computed in (WN 3) 3,75,096
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Less: Preference dividend* (8% of 2,25,000) (18,000) 3,57,096
Super profits to equity share holders 1,47,745
Goodwill (1,47,745 x 3) 4,43,235
*Since, NRR is given as percentage of net assets attributable to equity shareholders,
preference share capital and preference share dividend have been deducted from the net
assets and future maintainable profit respectively.
Working Notes:
1. Computation of net trading assets
Particulars Rs Rs
Sundry assets
i Land & Building (62,400 ÷ 8%) 7,80,000
ii Plant and Machinery 4,55,000
iii Inventory 3,80,000
iv Trade receivables (4,25,620 ÷ 92%) 4,62,630
v Bank balance (given balance 5,20,520 + Sale of
investment 4,95,200 - redemption of debentures
5,60,000 × 75%)
5,95,720 26,73,350
Less: Outside liabilities:
i Current Liabilities 3,25,640
ii Contingent Liability now to be accounted for 25,000
iii Tax provision (WN 2) 4,204 (3,54,844)
Net assets 23,18,506
2. Calculation of tax provision
Rs
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Profit on reversal of provision for bad debts 37,010
Loss on recognizing omitted claim (assuming tax deductible) (25,000)
Net incremental profit on which tax is payable 12,010
Tax provision 35% 4,204
3. Computation of future maintainable profit for the year ended on 31st March
Particulars 2014 2015 2016
Profit after tax 3,25,000 4,99,000 2,95,000
Less: Non-recurring profits (after
tax) (20% of 2015 Profit)
- (99,800) -
Less: Claims not recorded (after tax)
[25,000 x (1-35%)]
- - (16,250)
Add: Provision no longer required
(net of tax) [4,25,620 × 8/92 × (1-
35%)]
- - 24,057
Adjusted profits after tax 3,25,000 3,99,200 3,02,807
Simple average of the profits (as profits are fluctuating) 3,42,336
Adjustments for items which will not be reflected in future
Add: Debenture interest (net of tax) [5,60,000 × 9% × (1 – 0.35)] 32,760
Future maintainable profit [for shareholders- both preference
and equity)
3,75,096
Assumptions
1. Tax effect has been ignored on profit on sale of investments and discount on
redemption of debentures.
2. Assets and liabilities are recorded at realizable value or fair value. In the absence of
information, book values are assumed to be fair values.
3. Additional depreciation on revaluation of property is ignored.
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Profits for past three years given in the question have been assumed as profits after tax.
Q28:
Find out Leverage effect on Goodwill from the following information:
(i) Average capital employed (Equity Approach) Rs. 11,50,000
(ii) FMP on equity fund (After Tax) Rs. 1,80,000
(iii) 10% Long Term Loan Rs. 4,50,000
(iv) Tax Rate 40%
(v) Normal Rate of return
On equity capital employed 15%
On Long term capital employed 12%
Solution:
Determination of leverage effect on goodwill
Rs.
A
B
C
D
E
Profit available for equity fund after tax
Profit (as per long term fund approach)
Profit for equity fund
Add: Interest on long term loan (net of tax
4,50,000×{10%×(1-0.4)]
Capital employed (by Equity approach)
Capital employed as per long term fund approach
Capital employed (by Equity approach)
Add: 10% long term loan
Value of goodwill
(a) By equity approach
Capitalized value of profit as per equity approach
(1,80,000/15×100)
Less: capital employed as per equity approach
value of Goodwill
(b) By long term fund approach
Capitalized value of profit as per long-term fund
approach (2,07,000/12×100)
1,80,000
27,000
11,50,000
4,50,000
1,80,000
2,07,000
11,50,000
16,00,000
12,00,000
(11,50,000)
50,000
17,25,000
16,00,000
1,25,000
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Less: capital employed as per long term fund
approach
Value of Goodwill
Leverage effect on Goodwill:
Adverse leverage effect on goodwill is Rs 75,000 (i.e. Rs 1,25,000 – Rs 50,000)
In other words, leverage ratio is low for which its goodwill value has been reduced when
calculated with reference to equity fund as compared to value arrived at with reference to
long term fund.
D-FORTUNE CLASSES
89
IMPORTANT NOTES:
D-FORTUNE CLASSES
90
D-FORTUNE CLASSES
91
Mutual Fund
HOW TO CALCULATE NAV?
Total Market Value of all MF
holdings - All MF Liabilities
Total Units of the Scheme (Unit Size)
Purchase of
Investments
Investments A/c Dr.
To Bank A/c
Depreciation
of Investment
Revenue A/c Dr.
To Provision for Depreciation A/c
Appreciation
of Investment
Investment A/c Dr.
To Unrealised Appreciation Reserve A/c
Reversal of
UAR in the
Next Year
UAR A/c Dr.
To Investments A/c
Sale of
Investments
Bank A/c Dr.
Provision for Depreciation A/c Dr.
Revenue A/c Dr. (balance loss)
To Investments A/c
To Revenue A/c
DIVIDEND EQUALISATION
New investors are not entitled to any share of the income of a mutual fund scheme
which arose before they bought their units.
However, at the end of each distribution period the fund management allocates the
same amount from the income of the fund to each unit.
To compensate for this an equalisation payment is added to the cost of new units.
D-FORTUNE CLASSES
92
This is the amount of income that has arisen up to the date of purchase of the unit.
Because these payments are included in the amount available for distribution they
are effectively repaid to the purchaser.
Issue (Sale)
of Units First
Time
Bank a/c Dr.
To Unit Capital A/c
To Reserve A/c
Issue (Sale )
of Units Next
Time
Bank a/c Dr.
To Unit Capital A/c (FV)
To Reserve A/c (NAV – FV)
To Dividend Equalisation Reserve (Extra)
Distribution of
Income to
Unit Holders
Revenue A/c Dr.
Dividend Equalisation A/c Dr.
To Cash/Bank A/c
Q29.
Sparrow Holdings is a SEBI Registered Mutual Fund which made its maiden N.F.O (New
Fund Offer) on 10th April, 2016 at ` 10 face value per unit. Subscription was received for
90 lakhs units. An underwriting arrangement was also entered into with Affinity Capital
Markets Ltd., that agreed to underwrite the entire NFO of 100 lakh units on a commission
of 1.5%.
Out of the monies received ` 892.50 lakhs was invested in various capital market
instruments. The marketing expenses for the N.F.O amounted to ` 11.25 lakhs. During the
financial year ended March 2013 the Fund sold securities having cost of ` 127.25 lakh (FV
` 54.36 lakhs) for ` 141.25 lakhs. The fund in turn purchased securities for ` 130 lakhs.
The management expenses of the fund are regulated by SEBI stipulations which state
that the same shall not exceed 0.25% of the average funds invested during the year. The
actual amount spent towards management expenses was ` 2.47 lakhs of which ` 47,000
was in arrear. The dividends earned on the investments held amounted to ` 2.51 lakhs of
which a sum of ` 25,000 is yet to be collected. The fund distributed 80% of realized
earnings. The closing market value of the portfolio was ` 1120.23 lakhs.
You are required to determine the closing per unit NAV of the fund.
Solution:
Particulars Amount
Net Assets of Sparrow holding
Closing cash balance (W.N.2)
Closing Market Value of Investments
Accrued Dividends (collectable)
79.99
1,120.23
0.25
1,200.47
D-FORTUNE CLASSES
93
Less: Current Liabilities
Outstanding Management Fee (payable)
Closing Net Assets (A)
Units outstanding (in lakhs) (B)
NAV per unit (A/B)
(0.47)
1,200.00
100.00
12.00
Working Notes:
Rs. in
Lakhs
Computation of opening cash balance
Proceeds of NFO in full including underwriters
commitment
Less: Initial Purchase of Securities
Less: Underwriting Commission
Marketing Expenses
Opening Cash Balance
2. Computation of Closing cash balance
Opening bank balance (W.N.1)
Add: Proceeds from sale of securities
Dividends received on investment
Less: Cost of Securities purchased
Management Expenses (W.N.3)
Capital Gains Distributed (141.25 – 127.25 x 80%0
Dividends Distributed (2.26 x 80%)
Closing cash balance
3. Computation of Management Expenses Chargeable
Actual Expense Incurred [A]
Opening Investment Made
Closing Funds Invested (892.50 - 127.25 + 130)
Total
Average Funds Invested (1,787.75/2)
0.25% of Average Funds Invested [B]
Lower of A or B
15.00
11.25
141.25
2.26
130.00
1.76
11.20
1.81
892.50
895.25
1787.75
893.875
1000.00
(892.50)
107.50
26.25
81.25
81.25
143.51
224.76
(144.77)
79.99
2.47
2.23
2.23
(0.47)
D-FORTUNE CLASSES
94
Less: Amount unpaid
Management expenses paid
1.76
Q30. Calculate the year-end NAV of the Mutual Fund scheme on the basis of the information
given below:
(i) UTI launched a new Fund scheme for ` 6,000 crore.
(ii) Underwriting Commission is 1% of the fund shared equally by SBI, PNB, Syndicate Bank
and UTI Bank.
(iii) The Fund was launched on 1.4.2016 with a face value of ` 1000 per unit.
(iv) Underwriting Commission was paid in full.
(vi) Management Expense was allowed by SEBI @ 1% of the Fund raised. However, during
the year management expense was of ` 45 crore only. The management decided to defer
the payment of ` 5 crore to the next financial year.
(vii) On 1.5.2016, the total fund received was invested after deduction of underwriting
commission and ` 100 crore to meet the day to day management expenses. The investment
fund received yielded 10% interest per annum. The interest was received for 3 quarters
and the interest of last quarter is yet to be received. The interest realized in cash has
been distributed to the unit holders @ 80%. The financial year runs from April to March.
The quarter starts from the date of investment i.e. 1.5.2016.
Solution: Calculation of Net Asset Value of a fund
Rs. In Crores
Total Assets:
Investment (6,000 - 60 -100)
Add: Closing Cash Balance (Refer
W.N.)
Add: Interest for two months due to
be received
5840 x 10% 2/12
Less: Outstanding Management
Expenses
Total value of the fund
5840.00
147.60
97.33
6084.93
(5.00)
6079.93
No. of units = 6000 / 1000 = 6 Cr Units
NAV per unit = 6079.93 crores / 6 Crore = Rs. 1013.32 per unit
Working Note:
Calculation of year-end cash/bank balance of the fund Rs. In
Crores
D-FORTUNE CLASSES
95
Cash received during the year for the fund
Sale of units
Add: Interest for 3 quarters on investment
5840 x 10% x 9/12
Less: Underwriting commission
Management expenses paid in cash
Investment
Dividend paid (438 x 80%)
60
40
5840
350.40
6,000
438
6,438
(6290.40)
147.60
Q31: (ICAI Module – Test your knowledge Q2)
On 1.4.2008, a mutual fund scheme has 18 lakh units of face value of Rs. 10 each was
outstanding. The scheme earned Rs. 162 lakhs in 2008-09, out of which Rs.90 lakhs was
earned in the first half of the year. On 30.9.2008, 2 lakh units were sold at a "NAV of
Rs.70.
Pass Journal entries for sale of units and distribution of dividend at the end of 2008-09.
(Answer: DER – 5/- per unit; Dividend Distribution – 8.60/-)
D-FORTUNE CLASSES
96
IMPORTANT NOTES:
D-FORTUNE CLASSES
97
ACCOUNTING STANDARD – 7
CONSTRUCTION CONTRACTS
Q32. MOHIT LTD. has undertaken bridge construction contract to be constructed in 3 years.
Initial contract revenue Rs.900 crores. Initial contract cost Rs. 800 crores.
Particulars Years
1st 2nd 3rd
Estimated contract cost
Increase in contract revenue
Estimated additional increase cost
Contract cost incurred upto
805
---
---
161
---
20
15
584
---
---
---
820
At the end of 2nd year cost incurred includes Rs.10 crores, for material stored at the sites
to be used in 3rd year to complete the project.
Sol.: Amount of revenue, expenses and profit recognised in statement of P&L a/c in three
years:
Particulars
Up to
reporting
Date
Recognised in
earlier years
Recognised in
C. Year
Year I:
Revenue (900X20%)
Expenses
Profit
Year II:
Revenue (920X70%)
Expenses (584 - 10)
Profit
Year III:
Revenue (920X100%)
Expenses
Profit
180
161
19
644
574
70
920
820
100
---
---
---
180
161
19
644
574
70
180
161
19
464
413
51
276
246
30
D-FORTUNE CLASSES
98
WN:
Initial revenue agreed
Variation
Total contract value
Contract cost incurred upto the date of
reporting
Total estimated contract cost
Stage of completion
900
---
900
161
805
20%
(161/805
X 100)
900
20
920
584[incl. 10
crores mat)
820
70%
(584-10/820
X 100]
900
20
920
820
820
100%
(820/820
X 100)
Q33.
A firm of contractors obtained a contract for construction of bridges across river
Krishna. The following details are available for the year ended 31.3.04
Total Contract Price
Work Certified
Work not Certified
Estimated further Cost of Completion
1,000
500
105
495
Sol.:
Cost incurred up to the date 605
Cost incurred further cost 495
Total cost of contract 1100
Degree of Completion = 55% (605/1100). Turnover = 1000 X 55% = 550. Loss in C.Year = 550 –
605 = 55.
Provision to be created in current year for future loss:
Total cost 1100
Less: Total revenue 1000
Total loss 100
Less: C.Y. loss 55
Future loss 45
D-FORTUNE CLASSES
99
GUIDANCE NOTE ON ACCOUNTING FOR
REAL ESTATE TRANSACTIONS
ACCOUNTING FOR REAL ESTATE TRANSACTIONS
APPLICATION OF PERCENTAGE COMPLETION METHOD There is a rebuttable presumption that the outcome of a real estate project can be
estimated reliably and that revenue should be recognised under the percentage completion
method only when the events in (a) to (d) below are completed.
a. All the critical approvals necessary for commencement of the project
have been obtained
b. If the expenditure incurred on the construction and development costs is
less than 25%, nothing is recognised as in the profit and loss A/C of the
contract.
c. At least 25% of the saleable project area is secured by contracts or
agreements with buyers.
d. At least 10% of the contract consideration as per the agreements of
sale or any other legally enforceable documents are realised at the
reporting date in respect of each of the contracts and it is reasonable
to expect that the parties to such contracts will comply with the
payment terms as defined in the contracts.
Example:
If there are 10 Agreements of sale and 10% of gross amount is realised in case
of 8 agreements, revenue can be recognised with respect to these 8
agreements only.
Q34.
Facts Details
Total saleable area 20,000 sqft
Land cost Rs. 300 lacs
Estimated construction and development cost Rs. 300 lacs
Total area sold 5000 sqft
Total sale agreement value Rs. 200 lacs
Amount realized Rs.50 lacs
Construction cost incurred including land cost Rs. 360 Lacs
D-FORTUNE CLASSES
100
Whether revenue to be recognised as threshold limit is achieved or not?
Solution
Percentage of completion for threshold limit is 20%
Area sold is 25% of total saleable area
Amount realized exceeds 10% of agreement value
Final answer – No revenue to be recognized as threshold limit not achieved
Q35.
Facts Details
Total saleable area 20,000 sqft
Land cost Rs.300 lacs
Estimated construction and development cost Rs.300 lacs
Total area sold 5,000 sqft
Total sale agreement value Rs.200 lacs
Amount realized Rs.50 lacs
Cost incurred including land cost Rs.390 lacs
Compute profit.
Solution
Percentage of completion for threshold limit is 30%
Area sold is 25% of total saleable area
Amount realized exceeds 10% of agreement value
Revenue to be recognized at 65 % of Rs. 200 lacs i.e. Rs. 130 lacs
Cost [5000/20,000 x 390] Rs. 97.50 lacs
Work in progress = Rs. 292.50 lacs
Profit = Rs. 32.50 lacs