PAPER – 5 : ADVANCED ACCOUNTING

Question No.1 is compulsory.

Candidates are also required to answer any five questions from the remaining six questions.
Working notes should form part of the respective answers.
Wherever necessary, candidates are permitted to make suitable assumptions which should be
disclosed by way of a note.
Question 1
Answer the following questions:
(a) From the following information compute Basic and Diluted Earnings Per Share (EPS) of
M/s. XYZ Limited for the year ended 31 st March, 2017 :
Net Profit for the year after tax: ` 75,00,000
Number of Equity Shares of ` 10 each outstanding: ` 10,00,000
Convertible Debentures Issued by the Company:
Particulars Nos.
8% Convertible Debentures of ` 100 each 1,00,000
Equity Shares to be issued on conversion 1,10,000
Rate of Income Tax: 30%.
(b) Legal department of XYZ Limited provides that as on 31st March 2017, there were 25 law
suits pending which have not been settled till the approval of accounts by the Board of
Directors. The possible outcome of suits are as follows:
Particulars Probability Loss (`)
In respect of Seven cases (Win) 100%
Next Twelve cases (Win) 60%
Loss (Low damages) 30% 1,50,000
Loss (High damages) 10% 2,50,000
Remaining Six cases (Win) 50%
Loss (Low damages) 35% 1,25,000
Loss (High damages) 15% 3,00,000
Outcome of each case is to be taken as a separate one. Ascertain the amount of
contingent loss to be reported in the Financial Statement.
(c) Small Limited began construction of a building on 1st April, 2016 which is expected to
cost ` 25,00,000. The construction of the building was financed through a special loan of

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 2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

` 10,00,000 obtained at an interest rate of 10% per annum on 1 st April, 2016. Further,
expenditure on the building was financed through other non-specific finance
arrangements of the company. Details of non-specific finance arrangements are as
under:
Amount Rate of Interest P.a.
` 30,00,000 12%
` 20,00,000 15%
Cumulative expenses incurred on the building were as follows:
Date Amount
1st April, 2016 ` 5,00,000
1st July, 2016 ` 13,00,000
1st November, 2016 ` 20,00,000
31st January, 2017 ` 25,00,000
Construction of the building was completed on 31st March, 2017. Following the principles
specified in AS 16 'Borrowing Cost', calculate the amount of interest to be capitalized.
(d) The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Policy or not
for the year ended 31st March, 2017. Please advise him in the following situations in
accordance with the provisions of relevant Accounting Standard;
(i) Provision for doubtful debts was created @ 2% till 31st March, 2016. From the
Financial year 2016-2017, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2017, the management has introduced a formal
gratuity scheme in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a
period of 5 years. From current year, the useful life of furniture has been changed to
3 years.
(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get pension
of ` 20,000 per month. Earlier there was no such scheme of pension in the
organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in
measuring the cost of inventories. (4 x 5 Marks = 20 Marks)

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 PAPER – 5 : ADVANCED ACCOUNTING 3

Answer
(a) Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares outstanding
during the year
` 75,00,000 / 10,00,000 = ` 7.50 per share
Adjusted net profit for the current year
Computation of diluted earnings per share
Weighted average number of equity shares
Adjusted net profit for the current year
`
Net profit for the current year 75,00,000
Add: Interest expense for the current year 8,00,000
Less: Tax relating to interest expense (30% of ` 8,00,000) (2,40,000)
Adjusted net profit for the current year 80,60,000
Number of equity shares resulting from conversion of debentures
= 1,10,000 Equity shares (given in the question)
Weighted average number of equity shares used to compute diluted earnings per
share
= 11,10,000 shares (10,00,000 + 1,10,000)
Diluted earnings per share
= ` 80,60,000/ 11,10,000
= ` 7.26 per share
Note:
1. Conversion of convertible debentures into Equity Share will be dilutive potential
equity shares. Hence, to compute the adjusted profit the interest paid on such
debentures will be added back as the same would not be payable in case these are
converted into equity shares.
2. The date of issue of convertible debentures is not given in the question. It has been
assumed that debentures were issued at the beginning of the year.
(b) 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.

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 4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(ii) It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also not
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 for first 7 cases is 100% and hence requirement of
providing contingent loss does not arise. The probability of winning of next 12 cases is
60% and for remaining 6 cases is 50%. In other words, probability of losing the cases is
40% and 50% respectively. According to AS 29, we make a provision if the loss is
probable. As the loss does not appear to be probable and the probability or possibility of
an outflow of resources embodying economic benefits is not remote rather there is
reasonable possibility of loss. Hence, disclosure will be made for contingent liability.
For disclosure by way of note of contingent liability, amount may be calculated as under:
Expected loss in 12 cases = [` 1,50,000 x 0.3 + ` 2,50,000 x 0.1] x 12
= [` 45,000 + ` 25,000] x 12
= ` 70,000 x 12 = ` 8,40,000
Expected loss in remaining 6 cases = [` 1,25,000 x 0.35 + ` 3,00,000 x 0.15] x 6
= [` 43,750 + ` 45,000] x 6
= ` 5,32,500
Therefore, the overall expected loss of ` 13,72,500 (` 8,40,000 + ` 5,32,500) will be
disclosed by way of contingent liability
(c) Computation of average accumulated expenses
`
` 5,00,000 x 12 / 12 = 5,00,000
(` 13,00,000 - 5,00,000) x 9 / 12 = 6,00,000
(` 20,00,000 -13,00,000) x 5 / 12 = 2,91,667
(` 25,00,000 -20,00,000) x 2 / 12 = 83,333
14,75,000
Non-specific Borrowings
Non-specific Borrowings = Average accumulated capital expenses – Specific borrowings
= ` 14,75,000 – ` 10,00,000 = ` 4,75,000

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 PAPER – 5 : ADVANCED ACCOUNTING 5

Interest amount to be capitalized

`
Specific borrowings (` 10,00,000 x 10%) = 1,00,000
Non-specific borrowings (` 4,75,000 × 13.2% - refer Working = 62,700
Note)
Amount of interest to be capitalized = 1,62,700
Working Note:
Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of interest (`)
30,00,000 12% 3,60,000
20,00,000 15% 3,00,000
50,00,000 6,60,000
Weighted average rate of interest 13.2%
 6,60,000 
 ×100 
 50,00,000 
(d) (i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March,
2016. Subsequently in 2016-17, the company revised the estimates based on the
changed circumstances and wants to create 3% provision. Thus change in rate of
provision of doubtful debt is change in estimate and is not change in accounting policy.
This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees
on retirement is a transaction which is substantially different from the previous
policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and
is not a change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur
previously should not be treated as a change in an accounting policy. Hence the
introduction of new pension scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in
accounting policy.

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 6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Question 2
R and S are partners of RS & Co. sharing the profit and losses in the ratio of 3:2 and S and M
were partners in SM & Co. sharing the profits and losses in the ratio of 4:1. On 31 st March,
2017, they decided to amalgamate their firms and form a new firm namely M/s RSM & Co.
wherein R, S, and M will share the profits and losses in the ratio of 5 : 3 : 2. The Balance
Sheets of the two firms as on 31st March, 2017 were as under:
Liabilities RS& Co. SM & Co. Assets RS& Co. SM & Co.
Capitals Fixed Assets
R 2,50,000 Building 75,000 80,000
S 1,50,000 1,75,000 Plant and Machinery 2,00,000 1,50,000
M 1,25,000 Office Equipment 30,000 15,000
Reserves 40,000 1,25,000
Sundry Creditors 60,000 2,25,000 Current Assets:
Due to SM & Co. 50,000 Stock-in-trade 1,30,000 1,25,000
Bank Overdraft 1,00,000 Sundry Debtors 1,50,000 1,75,000
Bank Balances 40,000 35,000
Cash in Hand 25,000 20,000
Due from RS & Co. 50,000
Total 6,50,000 6,50,000 Total 6,50,000 6,50,000
The amalgamation of the firms was done on the following terms:
(a) Building of both the firms were valued at ` 1.00 lac each.
(b) Plant and Machinery of RS & Co. was valued at ` 1,75,000 and of SM & Co. was at
` 1,60,000.
(c) Stock in trade of RS & Co. was to be appreciated by 10% and of SM & Co. by 15%.
(d) Goodwill of RS & Co. was valued at ` 1,50,000 and of SM & Co. at ` 1,00,000, but the
same will not appear in the books of accounts of the amalgamated firm.
(e) Provisions for doubtful debts @ 5% for debtors of both the firms have to be made.
(f) Other assets and liabilities will be taken over at their respective book value.
(g) The partners will bring necessary cash as may be required to pay the other partners to
adjust their capitals according to their profit sharing ratio.
Prepare the Balance Sheet of the Amalgamated Firm and Capital Accounts of the partners in
the books of the old Firms. (16 Marks)

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 PAPER – 5 : ADVANCED ACCOUNTING 7

Answer
Balance Sheet of M/s RSM & Co. as at 31st March, 2017
Liabilities ` Assets `
Capitals: Building
(` 1,00,000 + ` 1,00,000) 2,00,000
R 4,55,250 Plant & machinery
(` 1,75,000 + ` 1,60,000) 3,35,000
S 2,73,150 Office equipment
(` 30,000+` 15,000) 45,000
M 1,82,100 9,10,500 Stock-in-trade
(` 1,43,000+` 1,43,750) 2,86,750
Sundry creditors Sundry debtors
`(60,000+2,25,000) 2,85,000 (` 1,50,000+` 1,75,000) 3,25,000
Bank overdraft 1,00,000 Less: Provision for doubtful
debts (16,250) 3,08,750
(` 7,500 + ` 8,750)
Bank balance (` 40,000+
` 35,000) 75,000
Cash in hand 45,000 ∗
12,95,500 12,95,500
In the books of RS & Co.
Partners’ Capital Accounts
Particulars R S Particulars R S
` ` ` `
To Capital A/cs – 3,67,300 2,28,200 By Balance b/d 2,50,000 1,50,000
M/s RSM & Co. By Reserve (3:2) 24,000 16,000
By Profit on
Realisation A/c
(W.N.4) 93,300 62,200
3,67,300 2,28,200 3,67,300 2,28,200

∗
` 25,000+` 20,000+` 2,12,950 + ` 54,100 –` 2,67,050 = ` 45,000

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 8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

In the books of SM Co.

Partners’ Capital Accounts
Particulars S M Particulars S M
` ` ` `
To Capital A/cs – 3,87,000 1,78,000 By Balance b/d 1,75,000 1,25,000
M/s RSM & Co. By Reserve (4:1) 1,00,000 25,000
By Profit on
Realisation 1,12,000 28,000
(W.N.5)
3,87,000 1,78,000 3,87,000 1,78,000
Working Notes:
1. Computation of purchase consideration
RS& Co. SM & Co.
` `
Assets:
Goodwill 1,50,000 1,00,000
Building 1,00,000 1,00,000
Plant & machinery 1,75,000 1,60,000
Office equipment 30,000 15,000
Stock-in-trade 1,43,000 1,43,750
Sundry debtors 1,50,000 1,75,000
Bank balance 40,000 35,000
Cash in hand 25,000 20,000
Due from RS & Co. - 50,000
(A) 8,13,000 7,98,750
Liabilities:
Creditors 60,000 2,25,000
Provision for doubtful debts 7,500 8,750
Due to SM & Co. 50,000 -
Bank overdraft 1,00,000 -
(B) 2,17,500 2,33,750
Purchase consideration (A-B) 5,95,500 5,65,000

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 PAPER – 5 : ADVANCED ACCOUNTING 9

2. Computation of proportionate capital

`
M/s RSM & Co. (Purchase Consideration) (` 5,95,500+ ` 5,65,000) 11,60,500
Less: Goodwill adjustment (2,50,000)
Total capital of new firm (Distributed in ratio 5:3:2) 9,10,500
R’s proportionate capital 4,55,250
S’s proportionate capital 2,73,150
M’s proportionate capital 1,82,100
3. Computation of Capital Adjustments
R S M Total
` ` ` `
Balance transferred from RS & Co. 3,67,300 2,28,200 5,95,500
Balance transferred from SM & Co. 3,87,000 1,78,000 5,65,000
3,67,300 6,15,200 1,78,000 11,60,500
Less: Goodwill written off in the
ratio of 5:3:2 (1,25,000) (75,000) (50,000) (2,50,000)
Existing capital 2,42,300 5,40,200 1,28,000 9,10,500
Proportionate capital 4,55,250 2,73,150 1,82,100 9,10,500
Amount to be brought in (paid off) 2,12,950 (2,67,050) 54,100
4. In the books of RS & Co.
Realisation Account
` `
To Building 75,000 By Creditors 60,000
To Plant & machinery 2,00,000 By Bank overdraft 1,00,000
To Office equipment 30,000 By Due to SM & Co. 50,000
To Stock-in-trade 1,30,000 By M/s RSM & Co. 5,95,500
To Sundry debtors 1,50,000 (purchase consideration)
To Bank balance 40,000 (W.N.1)
To Cash in hand 25,000
To Partners’ capital A/cs:
R 93,300
S 62,200 1,55,500
8,05,500 8,05,500

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 10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

5. In the books of SM & Co.

Realisation Account
` `
To Building 80,000 By Creditors 2,25,000
To Plant & machinery 1,50,000 By M/s RSM & Co. 5,65,000
To Office equipment 15,000 (purchase consideration)
To Stock-in-trade 1,25,000 (W.N.1)
To Sundry debtors 1,75,000
To Bank balance 35,000
To Cash in hand 20,000
To Due from RS & Co. 50,000
To Partners’ capital A/cs:
S 1,12,000
M 28,000 1,40,000
7,90,000 7,90,000
Note:
1. The adjustments in the Capital Accounts of R, S and M (both for Goodwill and the
amounts paid to S by R and M) can also be shown in their Capital Accounts in the
Books of RS & Co. and SM & Co respectively. In such a case, the Capital Accounts
of the partners carried to RSM & Co will be the same amounts as shown in the
Balance Sheet of RSM & Co.
2. In the above solution, Realization accounts have been prepared in the books of RS
& Co. and SM Co. Alternatively, Revaluation Accounts can also be prepared for
giving effect of profit or loss on revaluation of assets and liabilities without closing
accounts of all assets and liabilities in the books of amalgamating firms.
Question 3
(a) You are provided with the following details in respect of ABC Limited:
(i) 10,000 equity shares of nominal value of ` 10 each (under ESOP) were issued on
31st March, 2014;
(ii) Exercise price of equity shares granted under ESOP was ` 160 per share;
(iii) Market price of share was ` 400 each on the date of the grant;
(iv) Vesting of shares was in the ratio of 30%, 60% and 100% after 1 year, 2 year and
3 year respectively from the date of grant;
(v) Vested options can be exercised up to 1 year from the date of vesting;

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 PAPER – 5 : ADVANCED ACCOUNTING 11

(vi) The number of shares expired and exercised are as under:

Years ended
Particulars 31.03.2015 31.03.2016 31.03.2017
Vested Options Lapsed during the year - 200 600
Unvested Options Lapsed during the year 400 600 1,000
Options Exercised during the year 2,500 2,000

From the above details you are required to calculate:

(i) Employee Compensation Expense for the year ending 31st March, 2015,
31st March, 2016 and 31st March, 2017
(ii) Balance of Employee Stock Option Outstanding Account as on 31 st March, 2015,
31st March, 2016 and 31st March, 2017
Entries relating to ESOP lapsed and options exercised were passed at the end of the
respective financial year. (8 Marks)
(b) The following balances appeared in the books of Heaven Ltd. on 1st April, 2016:
(i) 12% Debentures ` 9,50,000;
(ii) Balance of Sinking Fund ` 8,00,000
(iii) Sinking Fund Investment ` 8,00,000 represented by 10% ` 8,50,000 Secured
Bonds of Government of India.
Annual contribution to the Sinking Fund was ` 1,50,000 made on 31st March every year.
On 31st March, 2017, balance at bank was ` 4,00,000 before receipt of interest. The
company sold the 90% face value of its investments, for redemption of debentures, at a
premium of 10% on the above date.
You are required to prepare the following accounts for the year ended on 31 st March,
2017:
(a) Debentures Account;
(b) Sinking Fund Account;
(c) Sinking Fund Investment Account;
(d) Bank Account; and
(e) Debenture Holders Account. (8 Marks)

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 12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Answer
(a) (i) Calculation of Employee Compensation Expense for the Year ended
31st March 2015, 31st March 2016 and 31st March, 2017 (Refer Working Note)
Vesting Date Cost to be recognized in the year ending on 31st March
as on 31st March 2015 2016 2017
Grade I (30%) 6,24,000
Grade II (30%) 2,88,000 2,88,000
Grade III (40%) 2,40,000 2,40,000 2,40,000
Cost for the year 11,52,000 5,28,000 2,40,000
Cumulative cost 11,52,000 16,80,000 19,20,000
(ii) Balance of ESOP Outstanding Account as on 31st March 2015, 31st March 2016
and 31st March, 2017
Total 2015 2016 2017
ESOP outstanding A/c at the end 11,52,000 11,52,000
of 1st year
Less: Vested Options lapsed (48,000)
during year
(200 x 240)
Less: Vested Options exercised (6,00,000)
during year
(2,500 x 240)
Add: ESOP credited in the 2nd 5,28,000
year
ESOP outstanding A/c at the end 10,32,000 10,32,000
of 2nd year
Less: Vested options lapsed (1,44,000)
(600 x 240)
Less: Vested options exercised (4,80,000)
(2,000 x 240)
Add: ESOP credited in the 3rd 2,40,000
year
ESOP outstanding at the end of 6,48,000 6,48,000
3rd year

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 PAPER – 5 : ADVANCED ACCOUNTING 13

Working Note:
Determination of number of options expected to vest under each group
Shares Value per Compensation
expected to Shares (`) Expense (`)
vest (400 – 160)
Grade I (10,000 shares x 30%) - 2,600 shares 240 6,24,000
(30%) 400 shares
Grade II (10,000 shares x 30%) - 2,400 shares 240 5,76,000
(30%) 600 shares
Grade III (10,000 shares x 40%) - 3,000 shares 240
(40%) 1,000 shares 7,20,000
19,20,000
Total compensation expense of ` 19,20,000, determined at the grant date, is attributed to
3 years.
Note: In the absence of estimated figures regarding lapse of unvested options, it is
assumed that actual lapses were in accordance with the estimation.
(b) 1. Debentures Account
Date Particulars ` Date Particulars `
31.3.17 To Debenture 9,50,000 1.4.16 By Balance b/d 9,50,000
holders A/c

9,50,000 9,50,000
2. Sinking Fund Account
Date Particulars ` Date Particulars `
31.3.17 To General 9,50,000 1.4.16 By Balance b/d 8,00,000
Reserve
To Capital 1,30,000 31.3.17 By Profit and Loss A/c 1,50,000
Reserve
31.3.17 By Interest on sinking
fund A/c (Interest
on 10% stock -
(` 8,50,000 x 10%) 85,000
31.3.17 By Sinking Fund
Investment A/c 45,000
10,80,000 10,80,000

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 14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

3. Sinking Fund Investment A/c (10% Secured Bonds of Govt.)

` `
1.4.16 To Balance b/d 8,00,000 31.3.17 By Bank A/c 7,65,000
(face value `(8,50,000 x 90%
` 8,50,000) = 7,65,000)
To Sinking Fund 45,000 31.3.17 By Balance c/d 80,000
8,45,000 8,45,000

4. Bank A/c
` `
31.3.17 To Balance b/d 4,00,000 31.3.17 By 12% Debenture 10,45,000
31.3.17 To Interest on 85,000 holders A/c
Sinking fund
Investment A/c
31.3.17 To Sinking fund 31.3.17 By Balance c/d 2,05,000
Investment A/c 7,65,000
12,50,000 12,50,000

5. Debenture holders’ A/c

` `
31.3.17 To Bank A/c 10,45,000 31.3.17 By 12% Debentures 9,50,000
31.3.17 By Premium on redemption
of debentures 95,000
10,45,000 10,45,000

Note:
1. It has been considered that the sale of investments and redemption of debentures
take place on 31st March, 2017.
2. The question states that the company sold 90% face value of investments, for
redemption of debentures at a premium of 10%. It has been considered in the
above solution that the sale of investments is at par and redemption of debentures
is at premium.

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 PAPER – 5 : ADVANCED ACCOUNTING 15

Question 4
The summarized balance sheet of Z Limited as on 31st March, 2017 is as under:

Liabilities Amount in `
Share Capital:
5,00,000 Equity shares of ` 10 each fully paid up 50,00,000
9%, 20,000 Preference shares of ` 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (14,60,000)
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000
Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000
Total 81,00,000
Assets:
Non-Current Assets:
Fixed Assets:
(a) Tangible Assets:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
(b) Intangible Assets:
Goodwill 10,00,000
Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000

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 16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Inventory 10,00,000
Discount on issue of debentures 1,00,000
Total 81,00,000

Note: Preference dividend is in arrears for last 2 years.

Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover ` 1,00,000 and
` 60,000 were also payable to Mr. Y and Mr. Z respectively as trade payable.
The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of ` 5.00 each.
(ii) The Preference shares be reduced to ` 50 each and the preference shareholders agreed
to forego their arrears of preference dividends, in consideration of which 9% preference
shares are to be converted into 10% preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including
interest on debentures. Mr. Y and Mr. Z also agreed to pay ` 1,00,000 and ` 60,000
respectively in cash and to receive new 12% debentures for the balance amount.
(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their
50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for the balance.
(vi) Capital commitments of ` 3.00 lacs were cancelled on payment of ` 15,000 as penalty.
(vii) Directors refunded ` 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid ` 15,000.
(ix) The taxation liability of the company was settled for ` 75,000 and was paid immediately.
(x) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to pass journal entries for all the above mentioned transactions
including amounts to be written off of Goodwill, Patents, Loss in Profit and Loss account
arid Discount on issue of debentures. And also prepare Bank Account and
Reconstruction A/c. (16 Marks)

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 PAPER – 5 : ADVANCED ACCOUNTING 17

Answer
Journal Entries in the Books of Z Ltd.
Dr. Cr.
` `
(i) Equity Share Capital (` 10 each) A/c Dr. 50,00,000
To Equity Share Capital (` 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of
` 10 each fully paid into same number of fully paid
equity shares of ` 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (` 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 50 each) A/c 10,00,000
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of
` 100 each into same number of 10% preference
share of ` 50 each and claims of preference
dividends settled as per scheme of reconstruction.)
(iii) 10% Secured Debentures A/c Dr. 9,60,000
Trade payables A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
To Reconstruction A/c 5,78,000
(Being ` 11,56,000 due to Y (including trade
payables) cancelled and 12% debentures allotted
for the amount after waving 50% as per scheme of
reconstruction.)
(iv) 10% Secured Debentures A/c Dr. 6,40,000
Trade Payables 60,000
Interest on debentures outstanding A/c 64,000
Bank A/c 60,000

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 18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

To 12% debentures A/c 4,42,000

To Reconstruction A/c 3,82,000
(Being ` 7,64,000 due to Z (including trade
payables) cancelled and 12% debentures allotted
for the amount after waving 50% as per scheme of
reconstruction.)
(v) Trade payables A/c Dr. 1,70,000
To Reconstruction A/c 1,70,000
(Being remaining trade payables sacrificed 50% of
their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (` 5) A/c 40,000
To Reconstruction A/c 60,000
(Being Directors' loan claim settled by issuing
12,000 equity shares of ` 5 each as per scheme of
reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for
cancellation of capital commitments of ` 3 Lakhs.)
(viii) Bank A/c Dr. 1,00,000
To Reconstruction A/c 1,00,000
(Being refund of fees by directors credited to
reconstruction A/c.)
(ix) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement
against provision for tax)

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 PAPER – 5 : ADVANCED ACCOUNTING 19

(xi) Land and Building A/c Dr. 2,00,000

To Reconstruction A/c 2,00,000
(Being appreciation in value of Land & Building
recorded)
(xii) Reconstruction A/c Dr. 49,85,000
To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 14,60,000
To Discount on issue of Debentures A/c 1,00,000
To Plant and Machinery A/c 6,50,000
To Furniture & Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction,
balance of reconstruction A/c transfer to Capital
Reserve.)

Bank Account
` `
To Reconstruction (Y) 1,00,000 By Balance b/d 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 (capital commitment
(refund of earlier fees by penalty paid)
directors)
By Reconstruction A/c 15,000
(reconstruction
expenses paid)
By Provision for tax A/c 75,000
(tax paid)

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 20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

By Balance c/d 55,000

2,60,000 2,60,000

Reconstruction Account
` `
To Bank (penalty) 15,000 By Equity Share
To Bank (reconstruction expenses) 15,000 Capital A/c 25,00,000
To Goodwill 10,00,000 By 9% Pref. Share
To Patent 5,00,000 Capital A/c 10,00,000
To P & L A/c 14,60,000 By Mr. Y (Settlement) 5,78,000
To Discount on issue of debentures 1,00,000 By Mr. Z (Settlement) 3,82,000
To P & M 6,50,000 By Trade Payables A/c 1,70,000
To Furniture and Fixtures 1,00,000 By Director’s loan 60,000
To Trade investment 50,000 By Bank 1,00,000
To Inventory 2,50,000 By Provision for tax 25,000
To Trade Receivables 1,00,000 By Land and Building 2,00,000
To Capital Reserve (bal. fig.) 7,75,000
50,15,000 50,15,000
Question 5
(a) From the following information as on 31st March, 2017 from the books of Ocean
Insurance Company Limited, which is engaged in Marine Insurance business prepare the
Revenue Account.
Particulars Direct Business Re-Insurance
(`) (`)
I Premium
Received 22,00,000 3,40,000
Receivable – 1st
April, 2016 1,20,000 21,000
31St March, 2017 1,80,000 28,000
Premium paid 2,50,000 -
Payable - 1st April, 2016 22,000
31st March, 2017 40,000
II Claims:
Paid 16,50,000 1,25,000

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 PAPER – 5 : ADVANCED ACCOUNTING 21

Payable - 1st April, 2016 98,000 12,000

31st March, 2017 1,90,000 24,000
Received 1,05,000
Receivable – 1st April, 2016 - 12,000
31St March, 2017 - 10,000
III Commissions
On Insurance accepted 1,40,000 12,000
On Insurance ceded - 16,000
Other expenses and income:
Salaries - ` 2,50,000; Rent, Rates and Taxes - ` 15,000; Printing and Stationery -
` 22,000; Interest, Dividend and Rent Received (Net) - ` 1,10,000; Income tax deduction
at source - ` 24,000; Legal expenses (Inclusive of ` 15,000 in connection with the
settlement of claims)- ` 50,000;
Balance of fund as on 1st April, 2016 was ` 25,50,000 including additional reserve of
` 3,25,000. Additional Reserve has to be maintained at 5% of the net premium of the
year. (10 Marks)
(b) The following is an extract from the trial balance of Novel Bank Limited as on 31st March
2017:
Rebate on bills discounted as on 1st April 2016 ` 78,566 (Cr. bal)
Discount Received ` 1,60,572 (Cr. bal)
An analysis of bills discounted is as follows:
Amount ` Due Date
2,90,000 01 June 2017
8,75,000 08 June 2017
5,65,000 21 June 2017
8,12,000 01 July 2017
6,50,000 05 July 2017

Find out the amount of discount to be credited to Profit and Loss Account for the year
ending on 31st March, 2017 and pass the necessary journal entries. The rate of discount
shall be taken at 10% per annum. (6 Marks)

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 22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Answer
(a) Form B – RA (Prescribed by IRDA)
Revenue Account for the year ended 31st March, 2017
(Marine Insurance Business)
Schedule Current Previous
Year Year
` `
Premiums earned (net) 1 24,33,050
Profit/(Loss) on sale/redemption of investments -
Others (to be specified) -
Interest, Dividends and Rent – Gross (Net + 1,34,000
TDS) (1,10,000 +24,000)
Total (A) 25,67,050
Claims incurred (net) 2 17,91,000
Commission 3 1,36,000
Operating expenses related to Insurance 4 3,22,000
business
Total (B) 22,49,000
Operating Profit from Marine Insurance 3,18,050
business (A-B)
Schedules forming part of Revenue Account
Current Previous
Year Year
` `
Schedule –1
Premium earned (net) (22,60,000 +3,47,000)
Total Premiums earned 26,07,000
Less: Premium on reinsurance ceded (2,68,000)
Total Premium earned (net) 23,39,000
Change in provision for unexpired risk (Required provision –
existing reserve)
[(` 23,39,000 +5% of 23,39,000 i.e. 24,55,950) – 94,050
` 25,50,000)]
Net Premium earned 24,33,050

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 PAPER – 5 : ADVANCED ACCOUNTING 23

Schedule – 2
Claims incurred (net) 17,91,000
Schedule – 3
Commission paid
Direct 1,40,000
Add: Re-insurance accepted 12,000
Less: reinsurance ceded (16,000)
1,36,000
Schedule – 4
Operating expenses related to insurance business*
Employees’ remuneration and welfare benefits 2,50,000
Rent, Rates and Taxes 15,000
Printing and Stationery 22,000
Legal and Professional charges 35,000
3,22,000
*Assumed to be related with Marine insurance business.
Working Notes:
1. Total Premium Income Direct Re-insurance
` `
Received 22,00,000 3,40,000
Add: Receivable on 31st March, 2017 1,80,000 28,000
23,80,000 3,68,000
Less: Receivable on 1st April, 2016 (1,20,000) (21,000)
22,60,000 3,47,000
Total premium income ` 22,60,000 + ` 3,47,000 = ` 26,07,000
2. Premium Expense on reinsurance `
Premium Paid during the year 2,50,000
Add: Payable on 31st March, 2017 40,000
2,90,000
Less: Payable on 1st April, 2016 (22,000)
2,68,000

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 24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

3. Claims Paid
Direct Business 16,50,000
Re-insurance 1,25,000
Legal Expenses 15,000
17,90,000
Less: Re-insurance claims received (1,05,000)
16,85,000
4. Claims outstanding as on 31st March, 2017
Direct 1,90,000
Re-insurance 24,000
2,14,000
Less: Recoverable from Re-insurers on 31st March, 2017 (10,000)
2,04,000
5. Claims outstanding as on 1st April, 2016
Direct 98,000
Re-insurance 12,000
1,10,000
Less: Recoverable from Re-insurers on 1st April, 2016 (12,000)
98,000
(b) The amount of rebate on bills discounted as on 31st March, 2017 the period which has
not been expired upto that day will be calculated as follows:
Discount on ` 2,90,000 for 62 days @ 10% 4,926
Discount on ` 8,75,000 for 69 days @ 10% 16,541
Discount on ` 5,65,000 for 82 days @ 10% 12,693
Discount on ` 8,12,000 for 92 days @ 10% 20,467
Discount on ` 6,50,000 for 96 days @ 10% 17,096
Total 71,723
Note: The due date of the bills discounted is included in the number of days above.
The amount of discount to be credited to the profit and loss account will be:
`
Transfer from rebate on bills discounted as on 1.4. 2016 78,566
Add: Discount received during the year 1,60,572
2,39,138

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 PAPER – 5 : ADVANCED ACCOUNTING 25

Less: Rebate on bills discounted as on 31.03. 2017 (as above) (71,723)

1,67,415
Journal Entries
` `
Rebate on bills discounted A/c Dr. 78,566
To Discount on bills A/c 78,566
(Transfer of opening unexpired discount on 31.03. 2016)
Discount on bills A/c Dr. 71,723
To Rebate on bills discounted 71,723
(Unexpired discount on 31.03. 2017 taken into account)
Discount on Bills A/c Dr. 1,67,415
To P & L A/c 1,67,415
(Discount earned in the year, transferred to P&L A/c)
Question 6
(a) M & S Co. of Lucknow has a branch in Canberra, Australia. At the end of 31st March
2017, the following ledger balances have been extracted from the books of the Lucknow
office and the Canberra.
Lucknow office Canberra Branch
(` In thousand) (Aust. Dollars in thousand)
Dr. Cr. Dr. Cr.
Capital 2,000
Reserves & Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Dep. Reserves 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery Dep.
Reserves 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2016 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salary 75 45

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 26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
The following information is also available:
(i) Stock as at 31st March, 2017
Lucknow ` 1,50,000
Canberra A$ 3125 (all stock are out of purchases made at Abroad)
(ii) Head Office always sent goods to the Branch at cost plus 25%
(iii) Provision is to be made for doubtful debts at 5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at
20% on written down value.
You are required to:
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A $ = ` 50
Closing rate 1 A $ = ` 53
Average rate 1 A $ = ` 51.00
For Fixed Asets 1 A $ = ` 46.00
(2) Prepare Trading and Profit and Loss Account for the year ended 31st March 2017
showing to the extent possible H.O. results and Branch results separately.
(12 Marks)
(b) Department X sells goods to Department Y at a profit of 50% on cost and to Department
Z at 20% on cost. Department Y sells goods to Department X and Z at a profit of 25%
and 15% respectively on sales. Department Z charges 30% profit on cost to Department
X and 40 profit on sale to Y.
Stocks lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000

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 PAPER – 5 : ADVANCED ACCOUNTING 27

Calculate the unrealized profit of each department and also total unrealized profit.
(4 Marks)
Answer
(a) M & S Co. Ltd.
Canberra, Australia Branch Trial Balance
As on 31st March 2017

($ ‘thousands) (` ‘thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 ` 46 9,200
Plant & Machinery Dep. 130 ` 46 5,980
Reserve
Trade receivable/payable 60 30 ` 53 3,180 1,590
Stock (1.4.2016) 20 ` 50 1,000
Cash & Bank Balances 10 ` 53 530
Purchase / Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918
Commission Receipts 100 ` 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss
(bal. fig.) 208
390 390 19,063 19,063
Closing stock 3.125 53 165.625*

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 28 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

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

H.O. Branch Total H.O. Branch Total

To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent to 100 – 100.000
To Goods received Branch

from Head Office – 100.000 100.000 By Closing Stock 150 165.625 315.625
To Wages & Salaries 75 2,295.000 2,370.000
To Gross profit c/d 355 2,023.625 2,378.625
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent – 612.000 612.000 By Gross profit 355 2,023.625 2,378.625
b/d
To Office expenses 25 918.000 943.000 By Commission 256 5,100.000 5,356.000
To Provision for receipts
doubtful debts @ 14 159.000 173.000
5%
To Depreciation 460 644.000 1,104.000
(W. N.)
To Balance c/d 112 4,790.625 4,902.625
611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing 30.000 By Balance b/d 4,902.625
Partner’s Salary
To Exchange Loss 208.000 By Branch stock 4.000
reserve
To Balance c/d 4,668.625
4,906.625 4,906.625

Working Note:
Calculation of Depreciation
H.O Branch
` ‘000 ` ‘000
Building – Cost 1,000
Less: Dep. Reserve (200)
800

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Depreciation @ 10% (A) 80

Plant & Machinery Cost 2,500 9,200
Less: Dep. Reserve (600) (5,980)
1,900 3,220
Depreciation @ 20% (B) 380 644
Total Depreciation (A+B) 460 644
Note:
1. In the above solution, it has been assumed that the Australia branch is an integral
foreign operation of M & S Co.
2. As the closing stock of Branch does not consist any stock transferred from M& S
Co., there is no need to create closing stock reserve. But the opening branch stock
reserve has to be reversed in the P&L A/c.
(b) Calculation of unrealized profit of each department and total unrealized profit
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized Profit of:
Department X 75,000 x 50/150 = 48,000 x 20/120
25,000 = 8,000 33,000
Department Y 50,000 x .25 = 82,000 x .15 =
12,500 12,300 24,800
Department Z 52,000 x 30/130 56,000 x 40/100 =
= 12,000 22,400 34,400
92,200

Question 7
Answer any FOUR of the followings:
(a) Rahul Ltd. purchased a plant for US$ 2,00,000 on 1st January 2017, payable after 5
months. Company entered into a forward contract for five months @ ` 64.75 per dollar.
Exchange rate per dollar on 1st Jan. 2017 was ` 64.25. How will you recognize the profit
or loss on forward contract in the books of Rahul Ltd.?
(b) Briefly define the Fundamental Accounting Assumptions?
(c) Explain the nature of Limited Liability Partnership. Who can be a designated partner in a
Limited Liability Partnership?

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 30 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(d) Discuss the following types of FIRE INSURANCE Policies:

(i) Average Policy;
(ii) Comprehensive Policy;
(iii) Excess Policy; and
(iv) Floating Policy.
(e) List out the criteria laid down for classification of non-corporate entities to bring them
under Level I category as per ICAI. (4 x 4 = 16 Marks)
Answer
(a) Calculation of profit or loss to be recognized in the books of Rahul Limited
`
Forward contract rate 64.75
Less: Spot rate (64.25)
Loss 0.50
Forward Contract Amount $2,00,000
Total loss due to entering into forward contract ` 1,00,000
($ 2,00,000 × ` 0.5)
Contract period is 5 months
Loss for the period 1st January, 2017 to 31st March, 2017 i.e. 3
3
months falling in the year 2016-2017 will be ` 1,00,000 × = ` 60,000
5
Balance loss of ` 40,000 (i.e. ` 1,00,000 – ` 60,000) for the month of May, 2017 will
be recognized in the financial year 2017-2018.
(b) As per the Framework on Preparation and Presentation of Financial Statements, there
are three fundamental accounting assumptions: Going Concern, Accrual Basis and
Consistency.
(a) Going Concern: Financial statements are normally prepared on the assumption
that an enterprise will continue in operation in the foreseeable future and neither
there is intention, nor there is need to materially curtail the scale of operations.
(b) Accrual Basis: Under this basis of accounting, transactions are recognized as soon
as they occur, whether cash or cash equivalent is actually received or paid. Accrual
basis ensures better matching between revenue and cost and profit/loss obtained
on this basis reflects activities of the enterprise during an accounting period, rather
than cash flows generated by it.

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 PAPER – 5 : ADVANCED ACCOUNTING 31

(c) Consistency: It refers to the practice of using same accounting policies for similar
transactions in all accounting periods. The consistency improves comparability of
financial statements through time.
(c) Nature of Limited Liability Partnership: A limited liability partnership is a body
corporate formed and incorporated under the LLP Act, 2008 and is a legal entity separate
from that of its partners. A limited liability partnership shall have perpetual succession
and any change in the partners of a limited liability partnership shall not affect the
existence, rights or liabilities of the limited liability partnership.
Designated partners: Every limited liability partnership shall have at least two
designated partners who are individuals and at least one of them shall be a resident in
India.
In case of a limited liability partnership in which all the partners are bodies corporate or in
which one or more partners are individuals and bodies corporate, at least two individuals
who are partners of such limited liability partnership or nominees of such bodies
corporate shall act as designated partners
(d) (i) Average policy - An average policy contains the ‘average clause’ which lays down
that if the property is under-insured, i.e. insured for a sum smaller than the value of
the property, the insurer will bear only that proportion of the actual loss which the
sum assured bears to the actual value of the property at the time of loss.
(ii) Comprehensive policy - A policy which covers risks such as fire, flood, riots,
strikes, burglary etc. up to a certain specified amount is known as the
comprehensive policy.
(iii) Excess policy - Where the stocks of the insured fluctuate he may take out a policy
for the amount below which his stocks normally do not fall and another policy to
cover the maximum amount of stocks which may be reached at times. The former
type of policy is known as the First Loss Policy and the latter as the Excess Policy.
(iv) Floating policy - It is the policy which covers several types of goods lying at
different locations under one amount and for one premium. The premium normally
charged under this policy is the average of the premia that would have been paid if
each lot of the goods had been insured under specific policies for specific sums.
(e) Criteria for classification of non-corporate entities as decided by the Institute of
Chartered Accountants of India
Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on
any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on
insurance business.

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 32 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.

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