The Institute of Chartered Accountants of Nepal

Suggested Answers of Advanced Accounting

Final Examination- December 2012

1. Kathmandu Ltd. and Narayani Ltd. amalgamated to form a new company KN Ltd. The financial positions of these two
companies on the date of amalgamation were as under:
Liabilities Kathmandu Narayani Assets Kathmandu Narayani
Ltd. Ltd. Ltd. Ltd.
Share Capital Goodwill 80,000 -
Equity Shares of Rs. Land & Building 450,000 300,000
100 each fully paid 800,000 300,000 Plant & Machinery 620,000 500,000
7% Preference Share of Furniture & Fittings 60,000 20,000
Rs. 100 each fully paid 400,000 300,000 Sundry Debtors 275,000 175,000
5% Debentures 200,000 - Stores & Stocks 225,000 140,000
General Reserve - 100,000 Cash at Bank 120,000 55,000
Profit & Loss A/c 431,375 97,175 Cash in Hand 41,375 17,175
Sundry Creditors 100,000 210,000 Preliminary expenses 60,000 -
Secured Loan - 200,000 __ ________
1,931,375 1,207,175 1,931,375 1,207,175
The terms of amalgamation are as under:
a) Preference and equity share capital of both the companies to be discharged as follows:
i) Issue of 5 preference shares of Rs. 20 each in KN Ltd. @ Rs. 18 paid up at premium of Rs. 4 per share to each
preference share held in both the companies.
ii) Issue of 6 equity shares of Rs. 20 each in KN Ltd. @ Rs. 18 paid up at a premium of Rs. 4 per share for each
equity share held in both the companies. In addition, necessary cash should be paid to the equity shareholders of
both the companies as is required to adjust the right of shareholders of both the companies in accordance with
the intrinsic value of the shares of both the companies.
b) The assets and liabilities of both the companies to be taken over by KN Ltd. as follows:
i) Issue of such amount of fully paid 6% debentures in KN Ltd. as is sufficient to discharge the 5% debentures in
Kathmandu Ltd. at a discount of 5%.
ii) The assets and liabilities other than debenture are to be taken at book values except stock & stores and debtors
for which provision at 2% and 2.50% respectively to be raised.
iii) The sundry debtors of Kathmandu Ltd. includes Rs. 20,000 due from Narayani Ltd.
c) The KN Ltd. is to issue 15,000 new equity shares of Rs. 20 each, Rs. 18 paid up at premium of Rs. 4 per share so as
to have sufficient working capital.
You are required to prepare: 20
a) Ledger Accounts in the books of Kathmandu Ltd. and Narayani Ltd. to close their books.
b) Balance Sheet of KN Ltd. after merger under the purchase method.

Answer
Books of Kathmandu Ltd.
Realisation Account
(Rs) (Rs)
To Goodwill 80,000 By 5% Debentures 200,000
To Land & Building 450,000 By Sundry Creditors 100,000
To Plant & Machinery 620,000 By KN Ltd.
To Furniture & Fittings 60,000 (Purchase Consideration) (WN i) 1,560,000
To Sundry Debtors 275,000 By Equity shareholder's A/C
To Stores & Stock 225,000 (loss) (balancing figure) 51,375
To Cash at Bank 120,000
To Cash in hand 41,375
To Preference Shareholders
(excess payment) (WN iii) 40,000 _______
1,911,375 1,911,375

Equity Shareholders Account

(Rs) (Rs)
To Preliminary expenses 60,000 By Share Capital 800,000
To Realisation A/c (loss) 51,375 By Profit & Loss Account 431,375
To Equity Shares in KN Ltd. 1,056,000
To Cash (WN i) 64,000 ________
1,231,375 1,231,375
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
Preference Shareholders Account
(Rs) (Rs)
To Preference Share in KN Ltd. 440,000 By Preference Share Capital 400,000
______ By Realisation Account 40,000
440,000 440,000

KN Ltd. Account
(Rs) (Rs)
To Realisation A/c 1,560,000 By Shares in KN Ltd.
For Equity 1,056,000
For Pref. share 440,000 1,496,000
_______ By cash 64,000
1,560,000 1,560,000

Books of Narayani Ltd.

Realisation Account
(Rs) (Rs)
To Land & Building 300,000 By Sundry Creditors 210,000
To Plant & Machinery 500,000 By Secured Loan 200,000
To Furniture & Fittings 20,000 By KN Ltd.
To Sundry Debtors 175,000 (Purchase Consideration) (WN i) 790,000
To Stores & Stock 140,000 By Equity shareholder's A/C
To Cash at Bank 55,000 (loss) (balancing figure) 37,175
To Cash in hand 17,175
To Preference Shareholders
(excess payment) (WN iii) 30,000 _______
1,237,175 1,237,175

Equity Shareholders Account

(Rs) (Rs)
To Equity Shares in KN Ltd. 396,000 By Share Capital 300,000
To Realisation A/c (loss) 37,175 By Profit & Loss Account 97,175
To Cash (WN i) 64,000 By General Reserve 100,000
497,175 497,175

Preference Shareholders Account

(Rs) (Rs)
To Preference Share in KN Ltd. 330,000 By Preference Share Capital 300,000
_______ By Realisation Account 30,000
440,000 330,000

KN Ltd. Account
(Rs) (Rs)
To Realisation A/c (loss) 790,000 By Shares in KN Ltd.
For Equity 396,000
For Pref. share 330,000 726,000
______ By cash 64,000
790,000 790,000
a)
KN Ltd.
Balance Sheet Ltd. (after Merger)

Liabilities (Rs) Assets (Rs)

Share Capital Goodwill (WN vii) 70,000
Equity Share of Rs. 20 each Land & Building 750,000
Rs. 18 paid up (WN iv) 1,458,000 Plant & Machinery 1,120,000
Preference Share of Rs. 20 Furniture & Fittings 80,000
each Rs. 18 paid up (WN v) 630,000 Sundry Debtors (WN ix) 418,750
Share Premium (WN vi) 464,000 Stores & Stocks 357,700
6% Debentures 190,000 Cash at Bank 175,000
Sundry Creditors (WN viii) 290,000 Cash in Hand (WN x) 260,550
Secured Loan 200,000 ________
3,232,000 3,232,000

The Institute of Chartered Accountants of Nepal

2 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
Working Notes:
(i) Calculation of Purchase Consideration
Kathmandu Ltd. Narayani Ltd.
Rs. Rs.
Payable to Preference Shareholders
Preference shares at Rs. 22 per share 440,000 330,000
(4,000*5*22) (3,000*5*22)
Payable to Equity Shareholders
Equity Shares at Rs. 22 per share 1,056,000 396,000
(8,000*6*22) (3,000*6*22)
Cash (refer Working notes ii) 64,000 64,000
Total Purchase Consideration 1,560,000 790,000

(ii) Calculation of Value of Net Assets

Kathmandu Ltd. Narayani Ltd.
Rs. Rs.
Goodwill 80,000 -
Land & Building 450,000 300,000
Plant & Machinery 620,000 500,000
Furniture & Fittings 60,000 20,000
Debtors less 2.5% 268,125 170,625
Stock less 2% 220,500 137,200
Cash at Bank 120,000 55,000
Cash in Hand 41,375 17,175
1,860,000 1,200,000
Less: Debentures 200,000 -
Creditors 100,000 210,000
Secured Loan - 300,000 200,000 410,000
Net Assets Value 1,560,000 790,000
Less: Payable to Preference
Shareholder (WN i) 440,000 330,000
Net Value of Equity Shareholder 1,120,000 460,000
Payables in Equity Shares (WN i) 1,056,000 396,000
Payable in cash 64,000 64,000

(iii) Calculation of Excess Payment to Preference Shareholder

Kathmandu Ltd. Narayani Ltd.
Rs. Rs.
Purchase consideration to
Preference Shareholder (WN i) 440,000 330,000
Less: Book value of Preference Share 400,000 300,000
Excess consideration 40,000 30,000

(iv) Calculation of Equity Share Capital of KN Ltd. (Rs.)

Number of Share issued
Kathmandu Ltd. (8,000 * 6) 48,000
Narayani Ltd. (3,000 * 6) 18,000
Share issued in cash after merger 15,000
Total number of Share 81,000
Paid-up Value of Share 18
Paid-up Value of Share 1,458,000

(v) Calculation of Preference Share Capital of KN Ltd. (Rs.)

Number of Share issued
Kathmandu Ltd. (4,000 * 5) 20,000
Narayani Ltd. (3,000 * 5) 15,000
Total number of Share 35,000
Paid-up Value of Share 18
Paid-up Value of Share 630,000
(vi) Calculation of Share Premium
On Preference Share
Number of Share Issued (WN v) 35,000
Premium per share 4
Share Premium on Preference Share 140,000
On Equity Share
Number of Share issued (WN iv) 81,000
The Institute of Chartered Accountants of Nepal
3 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
Premium per share 4
Share Premium on Equity Share 324,000
Total Share Premium 464,000

(vii) Computation of Capital Reserve/Goodwill of KN Ltd.

Book Value of assets and Liability taken over
Kathmandu Ltd. (WN ii) 1,560,000
Narayani Ltd. (WN ii) 790,000 2,350,000
Less: Goodwill of Kathmandu Ltd. 80,000
2,270,000
Add: discount on discharge of 5% debenture holder 10,000
Book value of assets taken over 2,280,000
Purchase Consideration (WN i) 2,350,000
Goodwill of KN Ltd. after merger 70,000

(viii) Calculation of Sundry Creditor of KN Ltd. after merger

Balance taken over from Kathmandu Ltd. 100,000
Balance taken over from Narayani Ltd. 210,000
310,000
Less: Inter-company owing 20,000
Owing to outside parties 290,000

(ix) Calculation of Sundry Debtors of KN Ltd. after merger

Net value taken over from Kathmandu Ltd. 268,125
Balance taken over from Narayani Ltd. 170,625
438,750
Less: Inter-company owing 20,000
Owing to outside parties 418,750

(x) Calculation of Cash in hand of KN Ltd. after merger

Cash taken over on merger
Kathmandu Ltd. 41,375
Narayani Ltd. 17,175 58,550
Proceeds of issue of 15,000 share at Rs. 22 each 330,000
388,550
Less: Cash paid to discharge shareholder of Kathmandu Ltd. 64,000
Less: Cash paid to discharge shareholder of Narayani Ltd. 64,000 128,000
Cash balance after merger 260,550

2. Following are the draft Balance Sheets of K Ltd. and N Ltd. as at 31.03.2069:
(Rs. in thousands)
Liabilities K Ltd. N Ltd. Assets K Ltd. N Ltd.

Share Capital Fixed Assets 500 150

(Rs. 100 each) 600 300 Investment:
Profits: 2,400 Shares in N Ltd. 300 -
Capital Profit 80 85 1,200 Shares in K Ltd. - 200
Reserve Profit 320 29 Current Assets:
Creditors 150 81 Debtors 200 80
Stock 40 30
_____ ____ Cash and Bank 110 35
1,150 495 1,150 495
The following adjustments were not yet made:
1. Stock worth Rs. 5,000 in N Ltd. was found to be obsolete with no value.
2. K Ltd. acquired an asset costing Rs. 50,000 on 31.03.2069. No effect has been given for both the purchase and
payment.
3. During the year K Ltd. sold an asset for Rs. 60,000 (original cost Rs. 40,000). The profit was included in the
revenue profit.
4. Debtors of K Ltd. included a sum of Rs. 50,000 owed by N Ltd.
You are required to prepare the consolidated balance sheet of both the companies as on 31.03.2069 after giving effect to
the above adjustments. 15

OR

The Institute of Chartered Accountants of Nepal

4 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
2. The Balance Sheets of Kathmandu Ltd. for the years ended on 31.3.2010, 31.3.2011 and 31.3.2012 are as follows:
31.3.2010 31.3.2011 31.3.2012
Liabilities Rs. Rs. Rs.
3,20,000 Equity Shares of
Rs. 10 each fully paid 3,200,000 3,200,000 3,200,000
General Reserve 2,400,000 2,800,000 3,200,000
Profit and Loss Account 280,000 320,000 480,000
Creditors 1,200,000 1,600,000 2,000,000
7,080,000 7,920,000 8,880,000

31.3.2010 31.3.2011 31.3.2012

Assets Rs. Rs. Rs.
Goodwill 2,000,000 1,600,000 1,200,000
Building and
Machinery, net 2,800,000 3,200,000 3,200,000
Stock 2,000,000 2,400,000 2,800,000
Debtors 40,000 320,000 880,000
Bank Balance 240,000 400,000 800,000
7,080,000 7,920,000 8,880,000
Actual valuation was as under:
31.3.2010 31.3.2011 31.3.2012
Rs. Rs. Rs.
Building and Machinery 3,600,000 4,000,000 4,400,000
Stock 2,400,000 2,800,000 3,200,000
Net Profit (including
opening balance) after
writing off depreciation
and goodwill, tax provision
and transfer to General
Reserve 840,000 1,240,000 1,640,000
Additional Information:
Capital Employed in the business at market values at the beginning of 2009-10 was Rs. 7,320,000, which included
the cost of goodwill. The normal annual return on Average Capital Employed in the line of business engaged by
Kathmandu Ltd. is 12½%.
The balance in the General Reserve Account on 1st April, 2009 was Rs. 20 lakhs. The goodwill shown on 31.3.2010
was purchased on 1.4.2009 for Rs. 2,000,000 on which date the balance in the Profit and Loss Account was Rs.
240,000.
Required:
Find out the Average Capital Employed for each year. 15

Answer No. 2
Consolidated Balance Sheet of K Ltd. and its subsidiary N Ltd.
as at 31st Ashad 2069
(Rs. in thousands)
Equity and Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
(less: 1,200 shares held by K Ltd. (500+50) 550
N Ltd.) 480 Narayani Ltd. 150 700
Minority Interest (WN 4) 105 Cost of Control (WN 5) 40
Capital profit (WN 3) 60
Revenue Profit (WN 2) 304 Current Assets:
Creditors Stock
K Ltd. 150 K Ltd. 40
N Ltd. 81 N Ltd. 25 65
231 Debtors
Less: Mutual indebtedness 50 181 K Ltd. 200
N Ltd. 80
280
Less: Mutual indebtedness 50 230
Cash and Bank
K Ltd. 110
Less: Payment for assets 50
60
_____ N Ltd. 35 95
1,130 1,130

The Institute of Chartered Accountants of Nepal

5 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012

Working Notes:
(1) Adjustment of Revenue and Capital Profits:
(Rs. in thousand)
K Ltd. N Ltd.
Revenue profits 320 29
Less: Stock written off - 5
Less: Transfer to capital profit 20 -
(Profit on sale of asset) ___ __
300 24

Capital profits 80 85
Add: Transfer from revenue profit 20 -
100 85

(2) Calculation of Minority Interest in Revenue Profits

Let A = Revenue profits of K Ltd., and
B = Revenue profit of N Ltd.
A = 300,000 + (4/5) * B
B = 24,000 + (1/5) * A
B = 24,000 + (1/5) * [3,00,000 + (4/5) * B]
B = 24,000 + 60,000 + (4/25) * B
B = 84,000 + (4/25) * B
(21/25) * B = 84,000
B = Rs. 100,000
Minority interest in revenue profits is 1/5 of Rs. 100,000 or Rs. 20,000. Total revenue profits being Rs. 324,000 for K
Ltd. and N Ltd. together, Rs. 304,000 remains for the group.

(3) Calculation of Minority Interest in Capital Profits

Let A = Capital profits of K Ltd., and
B = Capital profits of N Ltd.
A = 100,000 + (4/5) B
B = 85,000 + (1/5) * A
B = 85,000 + (1/5) * [100,000 + (4/5) * B]
B = 85,000 + 20,000 + (4/25) * B
B = 105,000 + (4/25) * B
(21/25) * B = 105,000
B = Rs. 125,000
Minority interest (1/5 of Rs 125,000) would be Rs. 25,000. Shares of K Ltd. will be Rs. 100,000. Capital profits of K
Ltd. = 185,000 – 125,000 = Rs. 60,000.

(4) Total Minority Interest

Rs.
Shares held by outsiders (300,000 – 240,000) 60,000
Revenue profit (WN 2) 20,000
Capital profit (WN 3) 25,000
Minority Interest 105,000

(5) Cost of control

Rs.
Amount paid by both companies (300,000 + 200,000) 500,000
Less: Face value of shares in N Ltd. 240,000
Face value of shares in K Ltd. 120,000
Capital profits 100,000 460,000
Cost of control 40,000

Note:
In adjustment no. 3 given in the question, the period (whether pre-acquisition or post-acquisition) in which the sale of asset
took place, is not specified. The answer has been given on the basis of assumption that the asset was sold in the pre-
acquisition period and accordingly the profit on sale has been treated as capital profit.
OR
2.
Note:
1. Since goodwill has been paid for, it is taken as part of capital employed. Capital employed at the end of each
year is shown below.
2. Assumed that the building and machinery figure as revalued is after considering depreciation.
The Institute of Chartered Accountants of Nepal
6 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
31.3.2010 31.3.2011 31.3.2012
Rs. Rs. Rs.
Goodwill 20,00,000 16,00,000 12,00,000
Building and Machinery (revalued) 36,00,000 40,00,000 44,00,000
Stock (revalued) 24,00,000 28,00,000 32,00,000
Debtors 40,000 3,20,000 8,80,000
Bank Balance 2,40,000 4,00,000 8,00,000
Total Assets 82,80,000 91,20,000 1,04,80,000
Less: Creditors 12,00,000 16,00,000 20,00,000
Closing Capital 70,80,000 75,20,000 84,80,000
Opening Capital 73,20,000 70,80,000 75,20,000
1,44,00,000 1,46,00,000 1,60,00,000
Average Capital employed during the year 72,00,000 73,00,000 80,00,000

3. The Balance Sheet of Domestic Ltd. as on 31st March, 2010 is as under:

(All figures are in lakhs)
Equity and Liabilities Rs. Rs. Assets Rs.
Equity Shares Rs.10 each 3,000 Goodwill 744
Reserves (including provision for Premises and Land, at cost 400
taxation of Rs.300 lakhs) 1,000 Plant and Machinery 3,000
Motor Vehicles 40
5% Debentures 2,000 (purchased on 1.10.09)
Secured Loans 200 Raw materials, at cost 920
Sundry Creditors 300 Work-in-progress, at cost 130
Profit & Loss A/c Finished Goods, at cost 180
Book Debts 400
Balance from previous B/S Investment (meant for 1,600
32 replacement of Machinery)
Profit for the year (After taxation) 1,100 1,132 Cash at Bank and Cash in hand 192
Discount on Debentures 10
Underwriting Commission 16
7,632 7,632

Additional Information:
The resale value of Premises and Land is Rs. 1,200 lakhs and that of Plant and Machinery is Rs. 2,400 lakhs.
Depreciation @ 20% is applicable to Motor Vehicles. Applicable depreciation on Premises and Land is 2%, and that on
Plant and Machinery is 10%. Market value of the Investments is Rs. 1,500 lakhs. 10% of book debts is bad. In a
similar company, the market value of equity shares of the same denomination is Rs. 25 per share and in such company
dividend is consistently paid during last 5 years @ 20%. Contrary to this, Domestic Ltd. is having a marked upward or
downward trend in the case of dividend payment.
Past 5 years’ profits of the company were as under:
2004-05 Rs. 67 lakhs
2005-06 Rs. 1,305 lakhs (loss)
2006-07 Rs. 469 lakhs
2007-08 Rs. 546 lakhs
2008-09 Rs. 405 lakhs
The unusual negative profitability of the company during 2005-06 was due to the lock out in the major manufacturing
unit of the company which happened in the beginning of the second quarter of the year 2004-05 and continued till the
last quarter of 2005-06.
Required: 15
Value the Goodwill of Domestic Ltd. on the basis of 4 years’ purchase of the Super Profit (Necessary assumption for
adjustment of the company’s inconsistency in regard to the dividend payment may be made).
OR
3. Followings are the Balance Sheets of Himal Ltd. as of 31st December 2011 and 2010 and their net changes: Rs.
Assets: 2011 2010 Change
Cash 471,000 307,000 164,000
Marketable equity securities, at cost 150,000 250,000 (100,000)
Provision for marketable equity securities (10,000) (25,000) 15,000
Accounts Receivable, net 550,000 515,000 35,000
Inventories 810,000 890,000 (80,000)
Investment in Equity share of SAT Ltd. 420,000 390,000 30,000
Property, Plant & Equipment 1,145,000 1,070,000 75,000
Accumulated depreciation (345,000) (280,000) (65,000)
Patent ,net 109,000 118,000 (9,000)
Total assets 3,300,000 3,235,000 65,000
The Institute of Chartered Accountants of Nepal
7 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
Liabilities and Equity
Accounts Payable 845,000 960,000 (115,000)
Payable-long term 600,000 900,000 (300,000)
Deferred income tax 190,000 190,000 -
Equity shares, Rs 10 par value 850,000 650,000 200,000
Additional paid in capital 230,000 170,000 60,000
Retained Earnings 585,000 365,000 220,000
Total Liabilities and Equity 3,300,000 3,235,000 65,000

Additional information:
a) On January 2, 2011, Himal sold equipment costing Rs. 45,000, with a carrying amount of Rs. 28,000, for Rs. 18,000
cash.
b) On March 31, 2011 Himal sold one of its marketable equity security holding for Rs. 119,000 cash. There were no other
transactions involving marketable equity securities.
c) On April 15, 2011 Himal issued 20,000 shares of its common stock for cash at Rs. 13 per share.
d) On July 1, 2011 Himal purchased equipment for Rs. 120,000 cash.
e) Himal’s net income for 2011 is Rs. 305,000.
f) Himal paid a cash dividend of Rs. 85,000 on October 26, 2011.
g) Himal acquired a 20 % interest in SAT Ltd.’s Equity during 2008.
h) There was no goodwill attributable to the investment which is appropriately accounted for by the equity method.
i) SAT Ltd. reported net income of Rs. 150,000 for the year ended 31.12.2011.
j) No dividend was paid on SAT’s equity share during 2011.

Required:
Prepare a statement of cash flows for Himal Ltd. for the year ended 2011 using indirect method. 15
Answer No. 3
1. Calculation of capital employed
Present value of assets: Rs.(in lacs)
Premises and land 1,200
Plant and machinery 2,400
Motor vehicles (book value less depreciation for ½ year) 36
Raw materials 920
Work-in-progress 130
Finished goods 180
Book debts (400 x 90%) 360
Investments 1,500
Cash at bank and in hand 192
6,918
Less: Liabilities:
Provision for taxation 300
5% Debentures 2,000
Secured loans 200
Sundry creditors 300 2,800
Total capital employed on 31 March 2010 4,118

2. Profit available for shareholders for the year 2009/10

Profit for the year as per Balance Sheet 1,100
Less: Depreciation to be considered (Also refer
note 1)
Premises and land 24∗
Plant & machinery 240*
Motor vehicles 4 268
832
Less: Bad debts 40
Adjusted Profit for the year 2009/10 792
3. Average capital employed
Total capital employed 4118
Less: ½ of profit for the current year [Refer 396
point 2]
Average capital employed during 2009/10 3722

∗
Depreciation on premises and land and plant and machinery have been provided on the basis of assumption that the same has not
been provided for earlier.
The Institute of Chartered Accountants of Nepal
8 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
Rs. (in lacs)
4. Average profit to determine Future Maintainable Profits
Profit for the year 2009/10 792
Profit for the year 2008/09 405
Profit for the year 2007/08 546
Profit for the year 2006/07 469
2212 / 4 553
5. Calculation of General Expectation:
Domestic Ltd. pays Rs.2 as dividend (20%) for each share of Rs.10.
Market value of equity shares of the same denomination is Rs.25 which fetches dividend of
20%.
Therefore, share of Rs.10 (Face value of shares of Domestic Ltd.) is expected to fetch
(20/25)x10 = 8% return.
Since Domestic Ltd. is not having a stable record in payment of dividend, in its case the
expectation may be assumed to be slightly higher, say 10%.
6. Calculation of super profit
Rs. (in lacs)
Future maintainable profit [See point 4] 553
Normal profit (10% of average capital employed as computed in point 3) 372.2
Super Profit 180.8
7. Valuation of Goodwill
Goodwill at 4 years’ purchase of Super Profit 723.2
0
Notes:
(1) It is evident from the Balance Sheet that depreciation was not charged to Profit & Loss Account.
(2) It is assumed that provision for taxation already made is sufficient.
(3) While considering past profits for determining average profit, the years 2004-05 and 2005-06 have been left out, as
during these years normal business was hampered.

OR
3.
Himal Limited
Statement of cash flow for the year ended 31.12.2011 (in Rs.)
Cash flow from operating activities : Rs. Rs.
Net income 305,000
Adjustment:
Depreciation (Refer working note 1) 82,000
Amortization of patents 9,000
Loss on sale of equipment 10,000
Equity in income of SAT Ltd (Refer working note 2) (30,000)
Gain sale of marketable equity securities (19,000)
Decrease in provision on marketable equity securities (15,000)
Operating profit before working capital changes 342,000

Increase in accounts receivable (35,000)

Decrease in inventories 80,000
Decrease in accounts payable (115,000)
Net cash from operating activities 272,000
Cash flow from Investing activities:
Sale of marketable equity securities 119,000
Sale of equipments 18,000
Purchase of equipments (120,000) 17,000
Cash Flow from financing activities:
Issuance of common stock (Refer working note 3) 260,000
Cash dividend paid (85,000)
Payment on note payable (300,000) (125,000)
Net increase in cash ( during the year) 164,000
Cash at the beginning of the year 307,000
Cash at the end of year 471,000

Working:
(1) Depreciation:
Net increase in accumulated depreciation for the year ended 12/31/2011Rs 65,000
Accumulated depreciation o equipment sod Rs 17,000
Rs 82,000
The Institute of Chartered Accountants of Nepal
9 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
(2) Equity in income SAT:
Reported net income for 2011 Rs 150,000
Himals ownership 20%
Rs 30,000
(3) Issuance of common stock
4/15/2011 issued 20,000 shares for cash @ Rs 13 per share Rs 260,000
4.
a) From A Limited Company closed its accounting year on 30.6.2012 and the accounts for that period were considered and
approved by the board of directors on 20th August, 2012. The company was engaged in laying pipeline for an oil
company deep beneath the earth. While doing the boring work on 1.9.2012 it had met a rocky surface for which it was
estimated that there would be an extra cost to the tune of Rs. 80 lakhs. You are required to state with reasons, how the
event would be dealt with in the financial statements for the year ended 30.6.2012.
b) Y Co. Ltd., used certain resources of X Co. Ltd. In return X Co. Ltd. received Rs. 10 lakhs and Rs. 15 lakhs as interest
and royalties respectively from Y Co. Ltd. during the year 2011-12.
You are required to state whether and on what basis these revenues can be recognised by X Co. Ltd.
c) A Ltd. purchased fixed assets costing Rs. 3,000 lakhs on 1.1.2010 and the same was fully financed by foreign currency
loan (U.S. Dollars) payable in three annual equal installments. Exchange rates were 1 Dollar = Rs. 80.00 and Rs. 82.50
as on 1.1.2010 and 31.12.2010 respectively. First installment was paid on 31.12.2010. The entire difference in foreign
exchange has been capitalized.
You are required to state, how these transactions would be accounted for.
d) A Limited Company finds that the stock sheets as on 31.3.2011 had included twice an item the cost of which was Rs.
20,000.
You are asked to suggest, how the error would be dealt with in the accounts of the year ended 31.3.2012.
(2+2+3+3=10)
Answer No. 4
(a) Para NAS 05 on Events after the Balance Sheet Date defines 'events occurring after the balance sheet date' as
'significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on
which financial statements are approved by the Board of Directors in the case of a company'. The given case is
discussed in the light of the above-mentioned definition.
In this case the incidence, which was expected to push up cost became evident after the date of approval of the
accounts. So that was not an 'event after the balance sheet date'. However, this may be mentioned in the Directors’
Report. The event described in the given case is non-adjusting event.

(b) As per NAS 7 on Revenue, revenue arising from the use by others of enterprise resources yielding interest and
royalties should only be recognised when no significant uncertainty as to measurability or collectability exists.
These revenues are recognised on the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.

(c) As per NAS 11 ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on the
settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which
they were initially recorded during the period, or reported in previous financial statements, should be recognized
as income or expenses in the period in which they arise. Thus exchange differences arising on repayment of
liabilities incurred for the purpose of acquiring fixed assets are recognized as income or expense.
Calculation of Exchange Difference:
Rs. 3,000 lakhs
Foreign currency loan = = 37.5 lakhs US Dollars
Rs. 80
Exchange difference = 37.5 lakhs US Dollars × (82.50 – 80.00)
= Rs.93.75 lakhs
(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting Rs. 93.75 lakhs should be charged to profit and loss
account for the year.
(d) The error in the recording of closing stock of the year ended 31st March, 2011 must have also resulted in
overstatement of profits of previous year, brought forward to the current year ended 31st March, 2012. NAS 2 on
Accounting Policies Change in Accounting Estimates & Errors, the rectifications as required in the current year are
'Prior Period Items'. Accordingly, Rs. 20,000 should be deducted from opening stock in the profit and loss account.
And Rs. 20,000 should be charged as prior period adjustment in the profit and loss account for the year ended 31st
March 2012. Para 42 of NAS 2 states that material prior period error should be corrected retrospectively by restarting
the comparative amounts for the prior period(s) presented in which the error occurred as if the error never occurred

5.
a) From the following information of Nepal Finance Company Ltd. extracted from its financial statement for the fiscal year
2068/69, calculate Core, Supplementary and Total Capital fund as on Ashadh end 2069 as per the provision of relevant
directive of Nepal Rastra Bank: 6

The Institute of Chartered Accountants of Nepal

10 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
Particulars Amount (Rs.)
Paid-up Capital 140,000,000
Retained earning 6,000,000
Proposed bonus share 14,000,000
Proposed dividend 14,000,000
General Reserve 12,000,000
Provision for Share Investment 2,000,000
Provision for Pass Loan 10,000,000
Provision for Non-Performing Loan 9,000,000
Provision for Non-Banking Assets 3,000,000
Deferred tax liability 1,000,000
Investment Adjustment Fund 1,500,000
Exchange Fluctuation Fund 2,500,000
Share issue expenses not written off 1,000,000
Dividend Equalization Fund 7,000,000
Share investment from fiscal year 2065-66 from underwriting 4,000,000
Assets revaluation Reserve 1,000,000

b) The following data pertain to A Ltd’s defined pension plan for the year ended 31.03.2069. Calculate the actual
return on plan assets: 4
Benefits paid Rs. 200,000
Employer contribution Rs. 280,000
Fair market value of plan assets as on 31.03.2069 Rs. 1,140,000
Fair market value of plan assets as on 31.03.2068 Rs. 800,000

c) The profit and loss account of A limited for the year ended 31.3.2069. was as follows:
Rs. ‘000 Rs. ‘000
Income:
Sales 25,400
Other income 525 25,925

Expenses: 21,267
Operating cost 1,500
Excise duty 200
Interest on bank over draft 1,500 24,467
Interest on debentures 1,458
Profit before depreciation 505
Depreciation 953
Profit before tax 320
Provision for tax 633
Profit after tax 133
Proposed dividend 500
Retained profit
Additional information available are as follows:
(1) Sales represent net sales after adjusting discount, returns and sales tax.
(2) Operating cost includes Rs. 8,250,000 as wages, salaries and other benefit to employees.
(3) Bank overdraft is temporary.
Prepare a value added statement for the year ended on 31.3.2069 and reconciliation of total value added with profit
before taxation from above accounts and information. 10

Answer No. 5
a)

Nepal Finance Company Ltd.

Computation of Core, Supplementary and Total Capital Fund as on Ashad end 2069

S. Particulars (Rs.)
No.
A. Core Capital
1. Paid-up Capital 140,000,000
2. Proposed Bonus Share 14,000,000
3. General Reserve 12,000,000
The Institute of Chartered Accountants of Nepal
11 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
4. Retained Earning 6,000,000
5. Dividend Equalization Fund 7,000,000
Total 179,000,000
Less:
Fictitious Assets (Share issue expenses) 1,000,000
Share issue arising out of underwriting 4,000,000 5,000,000
Total Core Capital (A) 174,000,000
B. Supplementary Capital
1. Provision for pass loan 10,000,000
2. Exchange Fluctuation Fund 2,500,000
3. Investment Adjustment Fund 1,500,000
4. Assets Revaluation Reserve (refer note 4) 300,000
Total Supplementary Capital (B) 14,300,000
Total Capital Fund (A+B) 188,300,000

Note: 1) Proposed dividend is a liability and hence does not form part of capital.
2) Provision for share investment, provision for Non Banking Assets and provision for non-performing assets does not
qualify for to be counted as either core or supplementary capital.
3) Deferred tax liability also does not qualify for capital fund.
4) The provision of Section 3 subsection 2 (kha) of NRB Directives 1 states that assets revaluation reserve upto 2% of the
total supplementary capital including the amount assets revaluation reserve could be included as supplementary capital.
Total supplementary capital with the amount of assets revaluation reserve amounts to Rs. 15,000,000, 2% of which
amount to Rs. 300,000 only. Hence, the whole amount of assets revaluation reserve i.e. Rs. 1,000,000 does not count to be
incorporated under supplementary capital and Rs. 300,000 only should be incorporated.

b) Calculation of actual plan on assets:

Fair value plan on assets as on 31.03.2068 Rs 800,000
Add: employer contribution Rs 280,000
Less: benefits paid Rs (200,000)
(A) Rs 880,000
Fair market value of plan assets as on 31.03. 2069 (B) Rs 1,140,000
Actual Return on plan assets ( B – A) Rs 260,000

c) Value added statement of A ltd.

Rs. in Rs. in Rs. in
‘000’ ‘000’ ‘000’
Sales 25,400
Less: operating cost – cost of bought in material and
services ( 21,267- 8,250). 13,017
Excise duty 1,500
Interest on bank overdraft 200 (14,717)
Value added by trading and manufacturing activities
Add: other income 10,683
Total value added 525
Application of value added 11,208 %
To pay employees:
Wages, salaries and other benefits.
To pay government : corporate tax 73.61
To pay providers of capital: 8,250 2.86
Interest on 9 % debentures 320
Dividend 1,500
To provide for maintenance and expansion of 133 14.57
companies: 1,633
Depreciation
Retained profit 505
500 8.96
Reconciliation: 1,005 100.00
Profit before tax 11,208
Depreciation
Wages, salaries and other benefits to employees 953
Debenture interest 505
8,250
1,500
11,208

The Institute of Chartered Accountants of Nepal

12 of 13
 Suggested Answers –Advanced Accounting
Final Examination – December 2012
6. Write short notes on the following: (4×5=20)
a) Meaning and Objectives of General Purpose Financial Statement.
b) A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices are
generally 25% above cost. Is the policy adopted by the company correct?
c) Treatment of borrowing costs as per Nepal Accounting Standards.
d) Give an account of the growing scope of human capital reporting.

Answer
a) General purpose financial statements means a financial report intended to meet the information needs of user/general
public who are not in a position to demand reports tailored to meet their specific information needs. General purpose
financial statements include those that are presented separately or within another public document such as an annual
report or a prospectus.
Financial Statement are a structured representation of the financial position of and the transactions undertaken by the
entity. The objective of general purpose financial statement is to provide information about the financial position,
financial performance, cash flow and changed in equity of an entity that is useful to a wide range of users in making
economic decisions. Financial statements also show the result of management’s stewardship of the resources entrusted to
it. To meet this objective, financial statements provide information about an entity’s:
i) Assets
ii) Liabilities
iii) Equity
iv) Income and expenses, including gains and losses
v) Other changes in equity and
vi) Cash flow
This information along with other information in the notes to financial statements, assist user in predicting the entity’s
future cash flows and in particular the timing and certainty of the generation of cash and cash equivalent.

b) NAS 23 ‘Segment Reporting’ requires that inter segment transfers should be measured on the basis that the enterprises
actually used to price these transfers. The basis of pricing intersegment transfers and any change therein should be
disclosed in f/s. Hence enterprise can have its own policy for pricing intersegment transfers and hence, inter segment
transfers may be based on cost, below cost or market price. However whichever policy is followed the same should be
followed, the same should be disclosed and applied consistently. Therefore in given case intersegment transfer pricing
policy adapted by the company is correct if followed consistently.

c) According to NAS 8, borrowing costs are interest and other costs incurred by an enterprise in connection with the
borrowing of funds. Borrowing costs may include: (i) interest and commitment charges on bank borrowings and other
short-term and long-term borrowings; (ii) amortization of discounts or premiums relating to borrowings; (iii)
amortization of ancillary costs incurred in connection with the arrangement of borrowings; (iv) finance charges in respect
of assets acquired under finance leases or under other similar arrangements; and (v) exchange differences arising from
foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs that
are directly attributable to the acquisition, construction or production of a qualifying asset• should be capitalized as part
of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they are
incurred. Benchmark treatment can also be described here.

d) Of late there is a growing trend of shift from the traditional focus on financial reporting of quantifiable resources (which
can be measured in monetary terms) to a more comprehensive approach of reporting under which human resources are
also considered as measurable assets. Having followed the methods of accounting of fixed assets, one can take into
account the employee-related costs like cost of recruitment, training and orientation of employees, for the purpose of
capitalization and then the appropriate portion thereof can be amortised each year over the estimated years of effect of
such costs.
The relevance of human resource information lies in the fact that it concerns organizational changes in the firm’s
human resources. The ratio of human to non-human capital indicates the degree of labour intensity of an
organization. Comparison of the specific values of human capital based on the organisation’s scales of wages and
salaries with the general industry standards, can be a good source of information to the management. There is no
standard human capital reporting format as employment reporting is relatively a new form of reporting. Usually,
the report inter alia contains data pertaining to employee numbers, employment and training policies, collective
bargaining arrangements, industrial disputes, pension and pay arrangement and disabled employee numbers.
Human capital reporting provides scope for planning and decision-making in relation to proper manpower planning.
Also, such reporting can bring out the effect of various rules, procedures and incentives relating to work force, and in
turn, can act as an eye opener for modifications of existing statutes, laws and the like.

The Institute of Chartered Accountants of Nepal

13 of 13