Accounting For Debentures & Preference Shares Question No 15

Paper 1 : Advanced Accounting
Assume that all the above transactions are put through on Asadh 31,2071(Calculations to be
made to the nearest Rupee.)
Accounting for Debentures & Preference Shares
Question No 15
The summarized Balance Sheet of X Ltd, as on 31.03.2076 stood as follows:
Liabilities Rs. Assets Rs
500000 equity shares of Rs 10 each Fixed Assets(at cost less
fully paid 50,00,000 depreciation) 1,60,00,000
Debenture Redemption Fund
General Reserve 75,00,000 Investment 40,00,000
Debenture Redemption Fund 50,00,000 Cash & Bank Balances 50,00,000
100000,13.5% convertible debentures
2,00,00,000
of 1,00,00,000 Other current Assets
Rs 100 each
Other Loans 50,00,000
Current liabilities & Provisions 1,25,00,000
4,50,00,000 4,50,00,000
The debentures are due for redemption on 1.04.2077.The terms of issue of debentures provided
that they were redeemable at a premium of 5% and also conferred option to the debenture
holders to convert 20% of their holding into equity shares
Assuming That:
I. Except for 100 debenture holders holding 25000 debentures, the rest opted for
maximum conversion;
II. The investments realized Rs 44,00,000 on sale; and
III. All the transactions are put through, without any lag, on 1.04.2077
Redraft the Balance Sheet of the company as on 1.04.2077, after giving effect to the
redemption. Show your calculations in respect of the number of equity shares to be
allotted and the cash payment necessary.
Question No 16
On 1st July 2015, H.P Ltd issued 2000,6% debentures of R.s 100 each. The interest is payable
on 30th June and 31st December every Year. The company is allowed to purchase its own
debentures which may be cancelled or kept or re-issued at the company’s option. The company
made the following purchases by cheque in the open market.
On 31st May, 2016 200 debentures @ Rs. 98 ex-interest. On 30th September 2017,
100debentures @ R.s 97 cum interest. The debentures, which were purchased on 31st May
2016, were cancelled on 31st December 2017.All payments were made on due dates.
Pass necessary journal entries to record the above transactions (including receipts and
payments) and also show the relevant items in the Balance Sheet as on 31st December, 2017.
© The Institute of Chartered Accountants of Nepal 11

HP Ltd followed English calendars for accounting purpose and closes its book account on 31st
December every year.
Question No 17
Explain about Financial Leverage Multiplier (FLM).
Question No 18
State the difference between Government Accounting and Business Accounting.
Question No 19
Write short notes on:
• Supplementary capital as per capital adequacy norms of banks and financial
institutions.
• Distribution of Management expense in Non-life Business Insurer.
• Annuity method for calculating Goodwill.
• Steps of Acquisition for Business Combination (NFRS 03)
Question No 20
Explain about Capitalization of Dismantling Cost as per NAS 16 “Property, Plant &
Equipment”.

Answers/Hints:
Nepal Financial Reporting Standards (NFRS)
Answer 1.
Total amount to be included in the property, plant and equipment at 31 Asadh 2076:
Particulars Rs Million
Lease 25,000
Buildings 9,000
Fittings 6,000
Interest Capitalized (40,000*10%*9/12) 3,000
43,000
Only nine months’ interest can be capitalized, because NAS 23 states that capitalization of
borrowing costs must cease when substantially all the activities necessary to prepare the asset
for its intended use or sale are complete.
Answer 2
As per NAS 02 “Inventories”
a) Value at Rs.12,000.Rs.10,000 is irrelevant. The rule is lower of cost or NRV, not
lower of cost or replacement cost. Since the special order is known to be profitable,
the NRV will be above the cost.
b) Value at NRV,i.e Rs.15,900,as this is below cost
(NRV=contract price,Rs.18,000-company’s share of modification cost i.e.Rs.2100)
Answer 3
This problem is based on NAS-37.The standard provides that an enterprise should recognize a
provision only when all of the following conditions are met:
1. There is a present obligation as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
3. A reliable estimate can be made of the amount of obligation.
In the present case, V Ltd fulfils all the above conditions the sale of pumps with a warranty
obligation constitutes the present obligation as a result of the past event. It is probable that
some outflow will be involved in setting the warranty obligation, satisfy the second condition.
As per the details based on past precedence reliable estimate can be made as under:
[6000*(5%of 100000)+1000*(10%of 100000)=Rs.400lakhs
Thus, V Ltd as on 31-03-2076 should make a provision for warranty obligation against sale of
vacuum pumps to the extent of rupees 400 lakhs.

Answer 4
The Problem is based on NAS 37. The Lease in question is giving rise to an onerous contract.
An ‘onerous contract’ is a contract in which the unavoidable costs of meeting the obligations
under the contract exceed the economic benefits expected to be received under it. An issue that
arises is as to how the recognition and measurement principles of NAS-37 should be applied
to the onerous contracts. In this connection, the standard provides that if an enterprise has a
contract that is onerous the present obligation under the contract should be recognized and
measured as a provision as per NAS-37.
For a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation
under the contract should exceed the economic benefits expected to be received under it. The
unavoidable costs under a contract reflect the least net cost of exiting from the contract, which
is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to
fulfill it.
The amount of provision in respect of an onerous contract should be measured by applying the
principles laid down in NAS-37.
In view of the above, one can clearly say that lease is an onerous contract and hence, provision
need to be made for rent of balance 33 months upto 30.12.2076. Thus the management view
point is correct.
Answer 5
According to NAS-37 “Provisions, contingent liabilities and contingent assets”, contingent
liability should be disclosed in the financial statements if following conditions are satisfied:
1. There is a present obligation arising out of past events but not recognized as provision.
2. It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
3. The possibility of an outflow of resources embodying economic benefits is also remote.
4. The amount of the obligation cannot be measured with sufficient reliability to be
recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence, question of
providing for contingent loss does not arise. The probability of winning of next ten cases is
60% and for remaining five cases is 50%. As per NAS-37, we make a provision if the loss is
probable. As the loss does not appear to be probable and the possibility of an outflow of
resources embodying economic benefits is not remote rather there is reasonable possibility of
loss, therefore disclosure by way of note should be made. For the purpose of the disclosure of
contingent liability by the way of note, amount may be calculated as under:
Expected loss in next ten cases = 30% of Rs.120000+10% of Rs.200000
=Rs.36,000+Rs.20,000
=Rs.56,000
Expected loss in remaining five cases= 30% of Rs.100000+20% of Rs.210000

=Rs.30,000+Rs.42,000
=Rs.72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be disclosing the overall expected loss of
Rs.920,000(Rs.56000*10+Rs.72000*5) as contingent liability.
Answer 6
Statement of Profit or Loss
2071 2070
PARTICULARS Rs. in Thousands Rs. in Thousands
Sales 52,100 48,300
Cost of Sales:
2071(33500-2500) (31,000)
2072(30200+2500) (32,700)
Gross Profit 21,100 15,600
Tax (4,600) (4,300)
Net Profit 16,500 11,300
Retained Earnings
2071 2070
Opening Retained Earnings Rs. in Thousands Rs. in Thousands
As Previously reported
Rs.(11200+13800) 25,000 11,200
Prior Period Adjustment (2,500)
As restated 22,500 11,200
Net Profit for the Year 16,500 11,300
Closing Retained Earning 39,000 22,500
Hire Purchase Accounting

Answer 7
Here,
Total Cash price = Rs. 86,000
Hire Purchase Price = Rs 100,000
Total Interest = Rs 14,000
Total interest shall be allocated as
Total Price = 100,000
Less: Down payment = 20,000
Outstanding Balance = 80,000
Less: First installment = 40,000
Less: Second installment = 20,000


Less: Last installment = 20,000
Outstanding Balance Nil
Now, total interest shall be allocated on the ratio of o/s balance i.e. 80,000:40,000:20,000
=4:2:1
Therefore, Interest included in first installment =4/7*14,000 =Rs.8,000
Interest included in second installment =2/7*14,000 =Rs.4,000
Interest included in first installment =1/7*14,000 =Rs.2,000
Answer 8
Dr. Hire Purchase Stock Account Cr.

Date Particulars Rs. Date Particulars Rs.
To Goods sold on By Hire Purchase
2071 Hire Purchase A/c 900,000 2071 Debtors 570,000
By Balance c/d 330,000
900,000 900,000
By Hire Purchase
2072 To Balance b/d 330,000 2072 Debtors A/c 1,470,000
To Goods sold on
Hire Purchase 1,800,000
2,130,000 2,130,000
Dr. Hire Purchase Debtors Account Cr.

Date Particulars Rs. Date Particulars Rs.
To Hire Purchase Stock By Cash(Down
2071 A/c 570,000 2071 Payment) 180,000
By Cash(Installment) 375,000
570,000 570,000
By Cash(Down
2072 To Balance b/d 15,000 2072 Payment) 360,000
To Hire Purchase Stock
A/c 1,470,000 By Cash(Installment) 1,070,000
By Goods Repossessed
A/c 36,000
1,485,000 1,485,000

Dr. Hire Purchase Adjustment Account(For 2071) Cr.

Particulars Rs. Particulars Rs.
By Goods sold on Hire
To Stock Reserve A/c 110,000 Purchase A/c 300,000
(Loading on Closing Stock ) (Loading on Goods Sold )
To Gross Profit t/f to P/L A/c 190,000
300,000 300,000
Dr. Hire Purchase Adjustment Account(For 2072) Cr.

By Goods sold on Hire
To Stock Reserve A/c 220,000 Purchase A/c 600,000
(Loading on Goods Sold on
(Load on Closing Stock ) HP )
To Goods Repossessed
A/c 12,000
By Stock Reserve A/c 110,000
To Gross Profit t/f P/L A/c 478,000 (Loading on Opening Stock )
710,000 710,000
Dr. Goods Repossessed Account Cr.

To Hire Purchase
To Hire Purchase Debtors 36,000 Adjustments(Loading) 12,000
By Balance C/d 24,000
36,000 36,000
Working Notes:
I. Calculation of H.P price, Cost Price and Loading on goods sold on H.P.
2071
2072
H.P Price Rs.9,00,000
Rs.18,00,000

Cost Price Rs.6,00,000

Rs.12,00,000
Loading Rs.3,00,000
Rs.6,00,000
II. Calculation of total installment due in 2071 & 2072.
Installment due per unit

during Total Installments due during
Units
Month sold 2071 2072 2071 2072
Shrawan 25 12 0 300 0
Bhadra 25 11 1 275 25
Aswin 25 10 2 250 50
Kartik 25 9 3 225 75
Mansir 25 8 4 200 100
Poush 25 7 5 175 125
Magh 25 6 6 150 150
Falgun 25 5 7 125 175
Chaitra 25 4 8 100 200
Baisakh 25 3 9 75 225
Jestha 25 2 10 50 250
Asadh 25 1 11 25 275
1,950 1,650
III. No of installments due in 2072 and in 2073 in respect of sales during 2072
Since the sale during 2072 are 200% of the sales during 2071, the no.of installments due
in 2072 and 2073 will be as under:
Due in 2072-3900, Due in 2073-3300
Accounting for Amalgamation, Absorption and Corporate Structuring

Answer 9
Computation of number of shares issued
Calculation of Rectified Profits and Purchase Considerations
Particulars Rs. Rs.

Small Ltd.
Given Profits 5,000,000
Less: Irrecoverable Trade receivables 100,000
50% Contingent Liability 250,000 (3,50,000)

4,650,000
Add: Profit on Omitted sale(15% of Rs.250,000) 37,500
4,687,500
Less: Debenture Interest(400,000* Rs.10*5%) (200,000)
4,487,500
Less: Income Tax @ 25% (1,121,875)
Profits after Tax(PAT) 3,365,625
Less: Preference Dividend(10%of Rs.20,000,000) (2,000,000)
Rectified Profits 1,365,625

Average P/E Ratio=10
Total Consideration for all equity shareholders 13,656,250

(Average P/E ratio*Profit)
Less:10% thereof for shareholders of little ltd.
(As little ltd holds 4lakhs out of 40 lakhs shares
of small ltd) (1,365,625)

Balance available for other Shareholders of small ltd
(A) 12,290,625
Little Ltd.
Given Profits 2,500,000

Less: Increase in FOREX liability(USRs.
10000*50) 500,000
50% Contingent Liability 500,000 1,000,000
1,500,000
Add: Undervaluation of Inventory(4500000*10/90) 500,000
2,000,000
Less: Debenture Interest(400,000* Rs.10*5%) (200,000)
1,800,000
Less: Income Tax @ 25% 450,000

Profits after Tax(PAT) 1,350,000
Less: Preference Dividend(10%of Rs.20,000,000) (200,000)
Rectified Profits 1,150,000

Average P/E Ratio=8
Total Consideration for all equity shareholders
(Average P/E ratio*Profit) 9,200,000

Less:10% thereof for shareholders of small ltd.
(As small ltd holds 2lakhs out of 20 lakhs shares
of small ltd) (920,000)

Balance available for other Shareholders of little ltd
(B) 8,280,000
Statement showing disposal of purchase Consideration
Small Ltd
Particulars (Rs) Little Ltd (Rs) Total (Rs)
Purchase Consideration 12,290,625 8,280,000 20,570,625

(A) above (B) above
No. of shares(Purchase
Consideration/Face
value +securities Premium) 534,375 331,200 865,575
Share Capital 5,343,750 3,312,000 8,655,750
Securities Premium 6,946,875 4,968,000 11,914,875
Purchase Consideration 12,290,625 8,280,000 20,570,625
Projected Profit And Loss Account Of Big Ltd.
For the period 1st Baisakh, 2075 to 31st Asadh,2075
Note No. Rs.

I. Revenue from operations -
II. Other Income 5 1,700,000
III. Total Revenue(I+II) 1,700,000
IV. Expenses:
Employee benefit Expense 7 1,400,000

Finance Costs 6 90,000

Other Expenses 8 1,600,000
V. Total Expenses 3,090,000
VI. Loss for the Period(V-III) (1,390,000)
Projected Balance Sheet Of Big Ltd.
As on 31st Asadh,2075
Particulars Note No. Rs.

I. Equity and Liabilities
1.Shareholder's Funds
a. Share Capital 1 10,655,750
b. Reserve and Surplus 2 15,951,760
Total 26,607,510
II. Assets
1.Non-Current assets
Non-Current Investments 3 26,570,625
2.Current assets
Cash and cash equivalents 4 36,885
Total 26,607,510
Notes to Accounts:
Particulars Rs. Rs.

1.Share Capital
Authorized 20 lakhs shares of Rs 10 each 20,000,000
Issued & Paid up 1065575 shares of Rs 10Each(out 10,655,750

of the above 865575 shares have been issued for
consideration other than cash) 10,655,750

2.Reserve and Surplus
Securities Premium (Rs.11914875+5600000) 17,514,875
Loss for the Period (1,390,000)
Less: Proposed Dividend(2% of Rs 8655750) 173,115 (1,563,115)
Balance of Profit and Loss account carried Forward 15,951,760

3.Non-Current Investments

Shares in subsidiaries(W.N.4) 26,570,625

4.Cash and Cash equivalents
Cash at Bank (W.N.3) 36,885

5.Other income
Dividends Received From Subsidiaries 1,700,000

(Rs.1200000+500000)
6.Financial costs
Interest On Bank O/D 90,000

7.employee benefits expenses
Management expenses 1,400,000

8.Other expenses
Preliminary expenses 1,600,000
Working Notes:
1. Shares issued by Big Ltd.to Virgin capital Ltd.(VCL)
No. of shares issued 200,000

face value of Share Capital@ Rs 10 each 2,000,000
Securities Premium @ Rs.28 each 5,600,000
Total Cash Received From VCL 7,600,000
2.Overdraft of Big Ltd.as on 31.3.2075
Particulars Rs.
Towards Incorporation expenses 1,600,000
(Preliminary Expenses)
Towards Management expenses 1,400,000
Total Bank Overdraft availed 3,000,000
Interest @ 18% p.a for 2 months 90,000
3.Bank balance of Big Ltd.as on 31.3.2075
Bank account of Big Ltd.

Rs. Rs.
By Incorporation
01.02.2075 To overdraft 3,000,000 01.02.2075 Expenses 1,600,000
By management
31.03.2075 To VCL 7,600,000 31.03.2075 expenses 1,400,000
To dividend By Interest on
31.03.2075 small 1,200,000 31.03.2075 Overdraft 90,000
To dividend
Little 500,000 31.03.2075 By Overdraft 3,000,000
31.03.2075 By Dividend Paid 173,115

By Shares in small
31.03.2075 Ltd
bought from little ltd. 4,000,000

By Shares in Little
31.03.2075 Ltd bought
from small Ltd. 2,000,000

By Balance c/d (bal
Fig) 36,885
12,300,000 12,300,000
4.Investments of Big Ltd.in Projected Balance Sheet
Particulars Rs.
Purchase consideration paid for acquiring
shares of outside holders of:
Small Ltd 12,290,625
Little Ltd 8,280,000
Consideration paid in cash for acquiring
cross holdings:
From Small Ltd(shares of little ltd) 2,000,000
From Little Ltd(Shares of Small Ltd) 4,000,000
26,570,625
Answer 10
Calculation of Purchase Consideration
(i) Value of Net Assets of AB Ltd. MB Ltd. as on 31st Asadh, 2075
Particulars AB Ltd MB Ltd

Assets Taken Over:
Fixed Assets 700,000 300,000

Current Assets 400,000 1,100,000 100,000 400,000

Less :Liabilities taken Over:
Debentures(WN) 240,000 80,000
Trade Payables 60,000 (300,000) 20,000 (100,000)
800,000 300,000
(ii) Value of Shares of AB Ltd. MB Ltd.

AB Ltd. holds 1,500shares in Mb Ltd .i.e.1/4th of the shares of MB Ltd.
The Value Of shares of AB Ltd is Rs. 800,000 plus 1/4th of the value of the shares of MB
Ltd.
MB Ltd holds 4,000shares in AB Ltd i.e. 2/5th of the shares of AB Ltd.
Similarly, the value of shares of MB Ltd is Rs. 300,000 plus 2/5th of the value of shares of
AB Ltd.
Let ‘a’ denote the value of shares of AB Ltd. and ‘m’ denote the value of shares of MB ltd
then,
a=800000 + 1/4m; and
m=300000 + 2/5a.
Substituting the value of m,
a=800000+1/4(300000+2/5a)
a=800000+75000+1/10a
9/10a=875000
a=972222
m=300000+2/5(972222)
m=688889
(iii) Amount of Purchase Consideration
Particulars AB Ltd Rs. MB Ltd Rs.

Total Value of Shares(as determined Above) 972,222 688,889
Less: Internal Investments:
2/5 for shares held by MB LTD (388,889)
1/4 for shares held by AB LTD (172,222)
Amount due to outsiders 583,333 516,667

Purchase Consideration will be satisfied by AM Ltd.as follows.

In Shares(of Rs. 100 each) 583300 516600
In cash 33 67
(iv) Net amount of goodwill Capital Reserve

Particulars Rs. Rs.
Total Purchase Consideration
AB Ltd 583,333
MB Ltd 516,667 1,100,000
Less: Net Assets Taken Over
AB Ltd 800,000
MB Ltd. 300,000 (1,100,000)
Nil
(Alternatively, the calculations may be made separately for both companies)

Balance Sheet of AM Ltd
As on 31st Asadh, 2075
I .Equity and Liabilities
a. Share Capital 1 1,099,900
b. Reserve And Surplus 2 70,000
2.Non-Current Liabilities
Long tem Borrowings 3 320,000
3.Current Liabilities
Trade Payables 80,000
Total 1,569,900
II.Assets
1.Non-Current assets
a.Fixed assets 4 1,000,000
b.Other non current assets 5 70,000
2. Current assets 499,900
Total 1,569,900
Notes to accounts
Particulars (Rs.) (Rs.)
1.Share Capital
10999 shares of Rs. 100 each 1,099,900
(all above shares are alloted as
fully paid up for consideration
other than cash)
Investment allowance Reserve 70,000
3.Long term Borrowings

15% debentures(WN) 320,000

4.Other Non-current assets
Amalgamation Adjustment A/c 70,000
5.Current assets(400000+100000) 500,000
Less: Purchase consideration paid
in cash Rs. (33+67) (100) 499,900
Working Note:
Calculation of Debentures to be issued

12% Debentures 300,000 100,000
Interest on debentures@ 12%(a) 36,000 12,000
AM Ltd. Debentures rate of interest (b) 15% 15%
Debenture value to earn above calculated
interest (a/b) 240,000 80,000
Answer 11
Total No. of Shares of X. Ltd =600000/10 60,000shares

X. Ltd shares held by Y. Ltd 5,000 shares
Total No. of Shares of Y. Ltd =300000/10 30,000shares
Y. Ltd shares held by X. Ltd 6,000shares
Hence, X ltd holds 1/5th(6,000/30000) of Y Ltd total Shares
a) Statement of purchase Consideration payable by X Ltd.

I. For Equity Shareholders
8 equity shares of X Ltd for every 6 equity shares of Y. Ltd.
30000 shares *8/6=40000shares
th
Less:1/5 shares of X Ltd (8000) shares
Balance for Outsiders 32000shares
Less: 5000shares of X Ltd already with Y Ltd. (5000) shares
Shares to be issued 27000shares
Value of 27000 equity shares at Rs. 10 Rs. 270,000
II. For Preference Share Holders
Preference Share Capital of Y Ltd Rs. 100,000

Less: 10% discount Rs. 10,000
X Ltd's preference to be issued Rs. 90,000

Total purchase Consideration

Particulars Numbers Amount
Equity Shares @ Rs. 10 each 27000 Rs.270,000
Preference shares@ Rs. 100 each 900 Rs.90,000

Total Purchase Consideration Rs.360,000
b) Balance sheet of X Ltd after its absorption of Y Ltd

Particulars Note No. Rs.
I.Equity and Liabilities
a.Share Capital 1 11,60,000
b.Reserve and Surplus 2 376,000
2.Non-Current Liabilities
Long Term Borrowings 3 380,000
3.Current Liabilities
Trade Payables 4 390,000
Total 23,06,000
II.Assets
1.Non Current Assets
a.Fixed assets(700000*115%+287500) 10,92,500
b.Other Non Current Assets 5 18,000
2.Current Assets
a.Inventories(240000+304000) 544,000
b.Trade Receivables 6 610,500
c.Cash and Cash equivalents 7 41,000
Total 23,06,000
Notes to Accounts
Particulars Rs. Rs.
1.Share Capital
Equity Share Capital
87000(60000+27000)equity
shares of Rs. 10 each, fully paid up 870,000
(Out of the above,27000equity
shares have been issued for
consideration other than cash)
20000 10%preference shares of Rs.10
200,000
each
900 10%preference shares of Rs. 100
90,000 1,160,000
each
Revaluation reserve (15%Of Rs.700000) 105,000
Capital Reserve (WN-1) 25,000
Other Reserves (WN-4) 246,000 376,000

3.Long Term Borrowings

Secured(assumed)
12% debentures Existing 200,000
Add:Issued to Y.Ltd(WN-5,calculation
180,000
B)
4.Trade Payables
Creditors(220000+125000-10000) 335,000
Bills Payable(30000+25000) 55,000 390,000
5.Other Non Current Assets
Discount on issue of debentures
(WN-5,Calculation C) 18,000
6.Trade Receivables
Debtors(360000+180500-10000) 530,500
Bills Receivable(60000+20000) 80,000 610,500
7.Cash and Cash Equivalents
Cash at Bank (WN-3) 41,000
Working Notes:
1. Calculation of Capital Reserve
Net Assets Taken over from Y Ltd Rs.

Fixed Assets(Rs.250000*115%) 287,500
Inventory(Rs.320000*95%) 304,000
Debtors(Rs.190000*95%) 180,500
Bills Receivable 20,000
Cash at Bank 15,000
Total Assets 807,000
Liabilities Taken over :
Debentures(WN-5,Calculation A) 162,000
Creditors 125,000
Bills Payable 25,000
Total Liabllities(B) 312,000
Net assets taken over (A-B) 495,000
Less:Investment cancelled(i.e 5000shares (80,000)
held in X ltd)
415,000
Purchase Consideration (360,000)
Capital reserve 55,000
Less:Liquidation expenses reimbursed (30,000)
to Y Ltd)
Capital reserve 25,000
2.Cash taken over from Y. Ltd

Rs.
Cash balance given in Balance sheet of

Y.Ltd 40,000
Add:Dividend received from X.Ltd 5,000
(5000shares * Rs. 1)
45,000
Less:Dividend paid (30000shares *Rs.1) (30,000)
15,000
3.Cash balance in Balance Sheet (after absorption)

Rs.
Cash balance given in Balance sheet of
X.Ltd 110,000
Add:Cash taken over from Y.Ltd(WN-2) 15,000
125,000
Less:Dividend paid Rs.60000
Expenses on liqidation Rs.30000 (90,000)
35,000
Add:Dividend from Y Ltd 6,000
41,000
4. Other Reserves in the Balance Sheet (after absorption)

Rs.
Reserve given in Balance sheet of
X.Ltd 300,000
Add:Dividend from Y.Ltd(6000shares*Rs.1) 6,000
306,000
Less:Dividend declared (60000shares*Rs.1) (60,000)
246,000
5. Debenture holders Payment

Rs.
Debentureholders of Y Ltd 150,000
Add:Premium@ 8% 12,000
Value of debentureholder liability taken over
by X Ltd (A) 162,000
Issue Price of X.Ltd debentures@10% discount
(A/90%) (B) 180,000
Discount on issue of debentures © 18,000
6. Intercompany transactions
Creditors of Y Ltd include Rs. 10000 due to X.ltd
Therefore journal entry in the books of X Ltd will be
Creditor’s a/c dr. 10,000
To Debtors a/c 10,000
Branch Accounting
Answer 12

Dr. Chitwan Branch Stock Account Cr.

By Goods sent to Branch
To Balance b/d 40,000 A/c(Return) 15,000
To Goods Sent to Branch A/c 420,000 By Goods sent to Branch A/c 12,000
To Goods Returned by B.
Debtors 500 (Transfer to Gwalior Branch)
By Branch Cash A/c (Cash Sales) 105,000

By Branch Debtors A/c(Credit
sales) 180,000
By Branch Adjustments(Normal
Loss) 350
(Rs.280*125/100)
By Branch
Adjustments(Pilferage) 600
(Rs.3000*25/125)
By Branch Profit & loss A/c 2,400

(Rs.3000*100/125)
By Branch Adjustment a/c(Load) 800
By Branch Profit & loss A/c(cost) 3,200
By Balance C/d 141,150
460,500 460,500
Dr. Chitwan Branch Stock Account Cr.

To Branch Stock A/c(Normal Loss) 350 By Stock Reserve A/c 8,000

To Branch Stock A/c(Pilferage) 600 (Rs 40000*25/125)
To Branch Stock A/c(Lost In Fire) 800 By Goods Sent to Branch A/c 78,600
To Stock Reserve A/c 28,230
(141150*25/125)
To Gross Profit t/f to Branch P/L
A/c 56,620
86,600 86,600

Dr. Chitwan Branch Profit and Loss Account Cr.

To Branch Expenses A/c: By Branch Adjustment A/c 56,620

Petty Expenses
31,900 (Gross Profit)
Insurance Charges
200 By Insurance Claim 3,000
Bad debts
400 32,500
To Branch Stock A/c(Pilferage) 2400
To Branch Stock A/c(Lost in Fire) 3200
To Net profit t/f to General P/L A/c 21,520
59,620 59,620
Dr. Chitwan Branch Stock Reserve Account Cr.

To Branch Adjustment A/c 8,000 By Balance B/d 8,000
To Balance C/d 28,230 By Branch Adjustment A/c 28,230
36,230 36,230
Answer 13.
Trading and Profit And Loss Account
For the year ending on 31st Asadh, 2072
Dr. Cr.
Particulars Head Branch Rs. Particulars Head Office Branch
Office Rs Rs Rs.
To Opening Stock 124,150 32,150 By Sales 410,160 168,200
To Purchases 307,250 - By Goods sent to 81,900 -
Branch
To Goods Received By Closing Stock 45,270 14,160
from
Head Office - 81,900
To Gross profit c/d 105,930 68,310
537,330 182,360 537,330 182,360
To Salaries 35,280 14,680 By Gross Profit b/d 105,930 68,310
To Sundry Expenses 16,170 2,290

To Branch Manager’s - 10,040

Commission
outstanding
To Net Profit 54,480 41,300
105,930 68,310 105,930 68,310
Balance Sheet as at Asadh 31,2072

Liabilities Rs. Assets Rs.
Capital: 94,200 Cash on hand & at bank
Add: Profit-H.O 54,480 H.O 24,800
Branch 41,300 189,980 Branch 3,260 28,060
Sundry Creditors: Cash In 29,030
Transit(23230+5800)
H.O 24,600 Sundry Debtors:
Branch 6,150 30,750 H.O 89,700
Branch 7,550 97,250
Branch Manager’s Commission 10,040 Stock At Cost:
Outstanding
H.O 45,270
Branch 14,160 59,430
Furniture:
H.O 15,000
Branch 2,000 17,000
230,770 230,770
Working Note: Calculation of Manager’s Commission
Memorandum Mahendranagar Branch Trading and Profit and Loss Account
(Invoice value)
Dr. Cr.
To Opening Stock 36,270 By Sales 168200
By Closing Stock 17660
To Goods Received from HO 102,500
To Gross profit c/d 47,090
185,860 185,860
To salaries 14,680 By Gross Profit b/d 47,090
To sundry expenses 2,290
To Manager's Commission
1/3 of Rs 30,120
(Rs.47,090-Rs.14,680- 10,040
Rs2,290)
To Net Profit 20,080
47,090 47,090

Partnership Accounting
Answer 14
Dr. Realisation Account Cr.
To Sundry Assets: By Sundry Creditors 12,500
Land & Building 37,500 By Bank A/c:
Plant 11,250 Furniture Sold 3,700
Furniture 5,000 By A&B's Realisation A/c
Furniture 5,000 By A&B's Realisation A/c
Stock 53,250 (Assets taken over)
Debentures 15,000 Land and Building 50,000
To A & B Realisation Plant at 90% 10,125
A/C:
Creditors taken over 12,500 Stock at 80% 42,600
Debtors 10575 113,300
To Bank (Realisation 2,500 By Partners' Capital A/c:
expenses paid)
Loss on Realisation
A 3,500
B 2,500
K(7:5:3) 1,500 7,500
137,000 137,000
Dr. Partner's Capital Accounts Cr.

Particulars A (Rs.) B (Rs) K (Rs) Particulars A(Rs) B (Rs) K (Rs)
By Balance
To Realisation A/c 3,500 2,500 1,500 b/d 45,000 30,000 12,500
To Bank A/c - - 11,000 By Bank A/c 1,050 750 -

By A's & B's
To Share Capital 35,000 25,000 - A/c. 3,908 2,792 -
To Bank-(final Realisation
Payment) 11,458 6,042 - A/c.
7:5
(Profit)
49,958 33,542 12,500 49,958 33,542 12,500
Dr. Bank Account Cr.

To Balance b/d 8,000 By Realisation A/c (expenses) 2,500
To Realisation A/c(Furniture) 3,700 By K's capital A/c 11,000

To A's Capital A/c 1,050
To B's Capital A/c 750
13,500 13,500
To COJIG & Co. P .Ltd. 60,000 By A & B's realisation A/c 12,500
(Sundry Creditors)
By A's Loan A/c 30,000
By B's Capital A/c 11,458
By B's Capital A/c 6,042
60,000 60,000
Dr. A & B's Realisation Account Cr.

To Realisation A/c 113,300 By Realisation A/c 12,500
To Bank A/c 12,500 By COJIG & Co. P Ltd 120,000

To A's Capital A/c 3,908 (Purchase Considerations)
To B's Capital A/c 2,792
132,500 132,500
Dr. COJIG & Company P Ltd Account Cr.

To A & B Realisation A/c 120,000 By Bank A/c 60,000
(Purchase Considerations) By Equity Share Capital A/c 60,000

(Shared by A& B 7:5)
120,000 120,000

Accounting for Shares & Debentures

Answer 15
Balance sheet of X Ltd as on 01.04.2077

Fixed Assets(at cost less
Share Capital: depreciation) 1,60,00,000
600000Equity shares of Rs 10Each 60,00,000 Investments Nil
Current assets,Loans and
(500000+100000) Advances
Reserve & Surplus Other current Assets 2,00,00,000
General Reserve(Note 5) 1,24,00,000 Cash & Bank Balances(note 6) 4,75,000
Share Premium
Account(100000*Rs 5.75) 5,75,000 Miscellaneous Expenditure Nil
Secured Loans Nil
Unsecured Loans
Other Loans 50,00,000
Current Liabilities & Provisions 1,25,00,000
3,64,75,000 3,64,75,000
Working notes:
1. Calculation of the number of shares to be allotted for conversion
Nos.
Total number of debentures outstanding 100000
Less: Number of debentures opting for cash 25000
Total Number of debentures opting for conversion 75000
Since 20% of the holding to be converted into equity shares, 15000 debentures (20% of 75000)
are to be converted. Therefore, the total number of equity shares to be allotted:
(15000*105)/Rs 15.75 = 100000equity shares of Rs 10 each at a premium of Rs 5.75 per Share.
2. Calculation of Required Cash for Payment
Rs.
Amount Payable to the debenture holders opting
for conversion:80% of (75000*Rs 105) 63,00,000
Amount Payable to the debenture holders opting
for cash(25000*105) 26,25,000
Required amount of Cash Payment 89,25,000

3. Debenture Redemption Fund Investment Account
Dr. Cr.
Date Particulars Rs Date Particulars Rs
To Balance b/d 40,00,000 By Bank A/C 44,00,000
To Debenture Redemption fund
A/C 4,00,000
(Profit)
44,00,000 44,00,000
4. Debenture Redemption Fund Account

Dr. Cr.
To Premium on Redemption of
debenture 500,000 By Balance c/d 50,00,000
By Debenture
To general Reserve A/c 49,00,000 Redemption
Fund Investment A/c 400,000
54,00,000 54,00,000
5. General Reserve Account

Dr. Cr.
To Balance C/d 1,24,00,000 By Balance b/d 75,00,000
By Debenture
Redemption
Fund A/c 49,00,000
1,24,00,000 1,24,00,000
6. Cash and Bank A/c

Dr. Cr.
By Debenture holders
To Balance b/d 50,00,000 A/C 89,25,000
By Debenture Redemption Fund
Investment A/C 44,00,000 By Balance c/d 475,000
94,00,000 94,00,000

Answer 16
In the Books of HP Ltd Journal.
Dr. Cr.
Date Particulars Rs. Rs.
2015 July 1 Bank A/C……….Dr. 200,000
To Debentures Application A/C 200,000
(Being money received in respect of 2000,6%
debentures of Rs 100 each)
2015 July 1 Debentures Application A/C……….Dr. 200,000
To 6% Debentures A/C 200,000
(Being the issue of 2000,6% debentures Of Rs 100
each at par)
2015 Dec 31 Debentures Interest A/C……….Dr. 6,000
To Bank A/C 6,000
(Being Payment of the half yearly interest on
2000 debentures)
2015 Dec 31 Profit and Loss A/C……….Dr. 6,000
To Debentures Interest A/C 6,000
(Being the interest on debentures transferred
to Profit and Loss Account)
2016 May 31 Investment on own debentures A/C(98*200)….Dr 19,600
Debentures Interest A/C 500
To Bank A/C 20,100
(Being Purchase of 200 debentures @ Rs 98 ex-
interest)
2016 June 30 Debentures Interest A/C……….Dr. 5,500
To Bank A/C 5,400
To interest on own debentures A/C 100
(Being the interest on 1800 debentures paid in
cash and Interest on own debentures for 1 month
credited to Interest on own Debentures account)
To Bank A/C 5,400
cash and Interest on 200 debentures credited to
Interest on own Debentures account)
Interest on own debentures A/C……….Dr 700
To Profit and Loss A/C 700
(Being the interest on own debentures credited

2017 June 30 Debentures Interest A/C……….Dr. 6,000

To Bank A/C 5,400
cash and Interest on 200 debentures credited to
Interest on own Debentures account)
2017 Sept 30 Investment in own debentures A/C(Note1)……Dr 9,550
Debentures Interest A/C 150
To Bank A/C 9,700
(Being Purchase of 100 debentures @ Rs 97 cum-
interest;interest on 3 months included on the
purchase price)
To Bank A/C 5,100
cash and Interest on 200 debentures for 6months
and the interest on 100 debentures for 3 months
credited to Interest on own Debentures account)
2017 Dec 31 6% Debentures A/C……….Dr. 20,000
To Investment in own debentures A/C 19,600
To Profit on Cancellation A/C 400
(Being the cancellation of 200 debentures
Purchased on May 2016)
2017 Dec 31 Profit on Cancellation A/C………Dr. 400
To Capital Reserve A/C 400
(Being the profit on cancellation of debentures
transferred to Capital Reserve Account)
2017 Dec 31 Interest on own debentures A/C……….Dr 1,350
To Profit and Loss A/C 1,350
2017 Dec 31 Profit and Loss A/C……….Dr 20,000
To General Reserve A/C 20,000
(Being amount transferred to general reserve)
Balance Sheet of HP Limited as on 31.12.2017(extracts)

Secured Loan Investments
1800,6% debentures 180,000 Own debentures 9,550
Reserve & Surplus (face value Rs.10000)

Capital Reserve 400

General Reserve 20,000
Working Notes:
1. When debentures are purchased cum-interest, Investment in Own Debentures account
is debited with the amount of purchase price less interest accrued up to the date of
purchase. Therefore, investment in Own debentures account is to be debited by Rs
9,700 less Rs 150=Rs 9,550.It should be noted that even though Rs 9700 debentures
have been purchased for Rs 9550,there is no profit. Question of profit or loss will arise
at the time of cancellation of these debentures.
2. An Amount equal to the face value of debentures redeemed is to be transferred to
general reserve.
Answer 17
Financial Leverage Multiplier(FLM):
Financial Leverage Multiplier (FLM) is the connection between return on assets and return on
equity of the firm. The FLM is one of several ways of looking at the relative amounts of debt
and equity the firm is using to finance its assets. An important feature of FLM is the
relationship:
ROA*FLM=ROE
That implies that if ROE is important to investors in a firm, then the relative level of ROE can
be managed by changes in the FLM once ROA results can be anticipated.
FLM=Total Assets/Equity
Since Total Assets=Debt+Equity,
FLM is alternatively:
FLM =(Debt +Equity)/Equity=Debt/Equity+1
Answer 18
The objectives of government accounting and business accounting differ significantly. Hence,
there are various differences between government accounting and business accounting which
are described as follows:
Purpose
Government account is maintained by government offices to know the position of public fund
while business accounting is maintained by the business organizations to show the financial
performance, financial position, change in cash position and change in equity of the
organization during an accounting period.
Cash Basis and Accrual Basis of Accounting

Government accounting is prepared on cash basis while accrual basis of accounting is the
fundamental concept of business accounting.
Income Statement
Financial Statement of the commercial enterprises show the performance of the entity during a
period and financial position at a specific date. Income statement of the commercial enterprise
show the result of the operation of the entity, whereas government prepares the income and
expenditure account and it shows the cash surplus or deficit during a specific period.
Rules and Regulations

Government accounting is prepared following the rules and regulations prescribed by the
government while business accounting is prepared following the generally accepted accounting
principles namely Nepal Accounting Standard prescribed by Accounting Standard Board of
Nepal.
Auditing
Internal Audit of Government accounts is conducted by the office of Comptroller General and
final audit is conducted by the office of Auditor General. Internal audit of business account is
conducted by the person, either internal staff or external professional, appointed by the
management of business organization and final audit is conducted by the person holding
Certificate of Practice issued by ICAN.
Consolidated Fund
All revenues received by government of Nepal, all loans raised on the security of revenues and
all the money received in repayment of any loan made under the authority of any act and any
amount received by the government of Nepal is credited to the government fund known as
consolidated fund. Revenue of business can be kept in a single account or different accounts as
per the necessity of the business.
Level of Accounting
Books of account are divided into Central Level Accounting and Operating Level Accounting
in case of Government accounting while the business accounts may not be classified in such
manner.
Budgetary Control
Government accounting is totally based on budget approved by the parliament; any expenditure
not provision in approved budget cannot be incurred. Business organizations also prepare
budget but it is not necessary that all the transaction will be based on the budgets only.
Budgetary Control System is strictly followed in government accounting.
Solution 19
A. Supplementary Capital as per Capital Adequacy norms of banks and financial
institutions:

Supplementary Capital means the funds of a bank or financial institution kept under
such headings as may be prescribed by the Nepal Rastra Bank from time to time.
Provisions of directive 1 of Unified Directives on “Provisions relating to Capital
Adequacy’’ states that with a condition of not allowing to include more than core
capital, the amount under the following heads shall be included in the following
supplementary capital:
a. Provisions for General Loan Loss
b. Assets Revaluation Fund
c. Hybrid Capital Instrument
d. Unsecured Subordinated Term Loan
e. Exchange Equalization Fund
f. Investment Equalization Fund
B. Distribution of Management Expense:

Distribution of the management expense among the Profit and Loss account and
Revenue Account shall be done as per the Directives of the Insurance Board. The
separate directives issued for life Insurance Business Insurer and Non-life insurance
business insurer prescribes separate method of distribution of management expense.
The distribution shall be as follows for Non-Life Insurance Business Insurer.
Method of Distribution for Non-Life Insurance Business Insurer
a. Distribute 10% of the total management expense to the profit and loss account
b. Distribute the remaining 90% to the each of the revenue account as per the
following formula:
Management Expense = Weight/Total Weight *Total Management Expenses*0.9
Explanation:
1. Weight = Direct Insurance Premium-Agent commission of concerned category
of insurance business the insurer carried out.
2. Total Weight = Sum of Weight of every category of Insurance Business.
C. Annuity method for calculating Goodwill:

In the super profit method for calculating goodwill time value of money is not
considered. Although it was expected that super profit would be earned in five future
years, still no devaluation was done on the value of money for the time difference. In
fact, when money will be received in different points of time, its values should be
different depending upon the rate of interest. If 15% rate of interest and annual super
profit is Rs 3,000(say), then discounted value of super profit to be earned in different
future years will be as follows:
Super Discount Factor
Year Profit @ 15% Discounted value of super Profit
1 3,000 0.8696 2,608.8
2 3,000 0.7561 2,268.3
3 3,000 0.6575 1,972.5

4 3,000 0.5718 1,715.4

5 3,000 0.4972 1,491.6
10,056.6
So under the annuity method, discounted value of super profit becomes Rs 10,056.60
and not Rs 15,000
The word annuity is used to mean identical annual amount of super profit, so for
discounting it is possible to refer to annuity table. As per the annuity table, present value
of re 1 to be received at the end of each year for 5 years @15% interest p.a is 3.3522.So
value of goodwill under annuity method is Rs 3000*3.3522=10,056.60.
D. Steps of Acquisition for Business Combination (NFRS 03)

The following steps are involved in the acquisition for business combination:
Step 1: Identify the acquirer
Step 2: Determining the acquisition date
Step 3: Recognizing and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree; and
Step 4: Recognizing and measuring goodwill or a gain from bargain purchase
Answer 20
NAS 16 property, plant and equipment requires capitalization of expenses for
decommissioning, site restoration and similar liabilities. Paragraph 16 (c) of NAS 16 is
of critical significant. The cost of an item of PPE inter alia comprises of
“The initial estimate of the cost of dismantling and removing the item and restoring the
site on which it is located, the obligation for which an entity incurs either when the item
is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.”
The present value of these costs should be capitalized, with an equivalent liability set
up. The discount on this liability would then be unwound over the period until the costs
are paid. This means that the liability increases by the interest rate each year, with the
interest taken to finance costs in the statement of profit or loss.

Paper 2: Audit and Assurance
Paper 2: Audit and Assurance

Accounting For Debentures & Preference Shares Question No 15

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Paper 1 : Advanced Accounting

© The Institute of Chartered Accountants of Nepal 11

© The Institute of Chartered Accountants of Nepal 12

© The Institute of Chartered Accountants of Nepal 1

© The Institute of Chartered Accountants of Nepal 2

Hire Purchase Accounting

© The Institute of Chartered Accountants of Nepal 3

Outstanding Balance = 20,000

Dr. Hire Purchase Stock Account Cr.

By Balance c/d 330,000

By Balance c/d 660,000

Dr. Hire Purchase Debtors Account Cr.

By Balance c/d 15,000

© The Institute of Chartered Accountants of Nepal 4

Dr. Hire Purchase Adjustment Account(For 2071) Cr.

To Gross Profit t/f to P/L A/c 190,000

Dr. Hire Purchase Adjustment Account(For 2072) Cr.

By Stock Reserve A/c 110,000

To Gross Profit t/f P/L A/c 478,000 (Loading on Opening Stock )

Dr. Goods Repossessed Account Cr.

By Balance C/d 24,000

© The Institute of Chartered Accountants of Nepal 5

Cost Price Rs.6,00,000

Installment due per unit

Accounting for Amalgamation, Absorption and Corporate Structuring

Particulars Rs. Rs.

© The Institute of Chartered Accountants of Nepal 6

Add: Profit on Omitted sale(15% of Rs.250,000) 37,500

Less: Debenture Interest(400,000* Rs.10*5%) (200,000)

Less: Income Tax @ 25% (1,121,875)

Profits after Tax(PAT) 3,365,625

Less: Preference Dividend(10%of Rs.20,000,000) (2,000,000)

Rectified Profits 1,365,625

Total Consideration for all equity shareholders 13,656,250

of small ltd) (1,365,625)

Given Profits 2,500,000

50% Contingent Liability 500,000 1,000,000

Add: Undervaluation of Inventory(4500000*10/90) 500,000

Less: Debenture Interest(400,000* Rs.10*5%) (200,000)

Less: Income Tax @ 25% 450,000

© The Institute of Chartered Accountants of Nepal 7

Profits after Tax(PAT) 1,350,000

Less: Preference Dividend(10%of Rs.20,000,000) (200,000)

Rectified Profits 1,150,000

(Average P/E ratio*Profit) 9,200,000

of small ltd) (920,000)

Statement showing disposal of purchase Consideration

Purchase Consideration 12,290,625 8,280,000 20,570,625

value +securities Premium) 534,375 331,200 865,575

Share Capital 5,343,750 3,312,000 8,655,750

Securities Premium 6,946,875 4,968,000 11,914,875

Purchase Consideration 12,290,625 8,280,000 20,570,625

Projected Profit And Loss Account Of Big Ltd.

For the period 1st Baisakh, 2075 to 31st Asadh,2075

Note No. Rs.

© The Institute of Chartered Accountants of Nepal 8

Finance Costs 6 90,000

Projected Balance Sheet Of Big Ltd.

Particulars Note No. Rs.