Answer to MTP_ Intermediate_Syllabus2016_Dec 2019_Set2

Paper 12- Company Accounts & Audit

Full Marks: 100 Time allowed: 3 hours

Section – A (Company Accounts)

Answer Question No. 1 and any three from Question Nos. 2,3,4 and 5.

1. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Transfer to capital redemption reserve account is not allowed from which of these
profits?
(a) Securities premium account
(b) Forfeited shares account
(c) Profit prior to incorporation
(d) All of the above

(ii) While preparing Cash Flow Statement of Amlan Ltd., a finance company, interest
received on loans should be shown as
(a) Cash Flow from Operating Activities
(b) Cash Flow from Investing Activities
(c) Cash Flow from Financing Activities
(d) Cash and Cash Equivalent

(iii) Which of the following is not a criterion for selecting a reportable segment under AS
17?
(a) 10% or more of aggregate revenue of all segment
(b) 10% or more of aggregate assets of all segment
(c) 10% or more of aggregate liabilities of all segment
(d) 10% or more of aggregate profit or loss of all segment (higher of the two)

(iv) Which of the following is a principle of insurance?

(a) Principle of indemnity
(b) Insurable interest
(c) Principle of uberrimae fidei
(d) All of the above

(v) ___________ ___________is the currency of the primary economic environment in

which the entity operates.
(a) Reporting Currency
(b) Foreign Currency
(c) Closing Rate
(d) None of the above

(vi) Instalment of principal amount of long−term loan payable within next 12 months is
shown under Balance Sheet of a company under the heading
(a) Non-current Assets
(b) Non-current liabilities
(c) Current Assets
(d) Current Liabilities

(b) Match the following items in Column 'A' with items shown in Column 'B': 1×4=4

Column 'A' Column 'B'

1. Service Line Development Charges A. Issues to directors or Employees

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2. AS 18 B. No voting right
3. Debentures C. Related Party Disclosure
4. Sweat Equity Shares D. Electricity Company

Answer:

Column 'A' Column 'B'

1. Service Line Development Charges D. Electricity Company
2. AS 18 C. Related Party Disclosure
3. Debentures B. No voting right
4. Sweat Equity Shares A. Issues to directors or Employees

(c) State whether the following statements are True or False: 1x4=4

(i) A company has to create DRR in case of issue of debentures with maturity of more
than 18 months.
(ii) A shareholder will receive dividend whether a company makes a profit or not.
(iii) The maximum number of shares to be bought back is determined by Resource test.
(iv) Issue of fully paid up bonus shares increases the total shareholders fund.
Answer:

(i) True;
(ii) False;
(iii) True;
(iv) False.

Answer any three questions out of the following four questions [3×12=36]

2. (a) Lakshmi Ltd. issued 1,00,000 Equity Shares of `10 each at par. The entire issue was
underwritten as fallowes:
A – 60,000 Shares (Firm underwriting 8,000 Shares)
B – 30,000 Shares (Firm Underwriting 10,000 Shares)
C – 10,000 Shares (Firm Underwriting 2,000 Shares)

The Total Applications including Firm Underwriting were for 80,000 Shares. The marked
Applications were as follows —

A – 20,000 Shares
B – 14,000 Shares and
C – 6,000
The underwriting contract provides that credit for Unmarked Applications to be given to
the Underwriters in Proportion to the Shares underwritten. Determine the liability of each
Underwriter. [7]

(b) On 1st April 2015, Radhe Ltd. received a Government Grant of `1,200 Lakhs for acquisition
of a Machinery costing `6,000 Lakhs. The grant was credited to the cost of asset. The life of
the Machinery is 5 years. The Machinery is depreciated at 20% on WDV basis. The company
had to refund the grant in May 2018 due to non-fulfillment of certain conditions. How you
would deal with the refund of Grant? [5]

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Answer:

(a)

Statement of Underwriters’ Liability (No. of Shares)

Particulars A B C Total
Gross Liability (given ) (6:3:1) 60,000 30,000 10,000 1,00,000
Less: Marked Applications (20,000) (14,000) (6,000) (40,000)
Less: Unmarked Application (Note) (12,000) (6,000) (2,000) (20,000)
Less: Firm Underwriting (8,000) (10,000) (2,000) (20,000)
Net Liability 20,000 - - 20,000
Add: Firm Underwriting 8,000 10,000 2,000 20,000
Total Liability = Share to be taken up by 28,000 10,000 2,000 40,000
Underwriters

Note: Unmarked Application = Total Applications 80,000 Less Marked Applications 40,000 Less
Firm Underwriting 20,000 = 20,000 Shares.

(b)

Particulars ` Lakhs

Less: Original Cost of the Machinery 6,000

Government Grant [Reduced from Cost] (1,200)

Less: Depreciable Cost as on 1.4.2015 4,800

Depreciation for 2015-16 [` 4,800 x 20%] (960)

Less: WDV on 1.4.2016 3,840

Depreciation for 2016-17 [` 3,840 x 20%] (768)

Less: WDV on 1.4.2017 3,072

Depreciation for 2017-18 [` 3,072 x 20%] (614.4)

WDV on 1.4.2018 2,457.6

Add: Refundable Government Grant 1,200

Revised Book Value of Machinery 3,657.6

Balance Useful Life 2 Years

Depreciation to be provided for the next 2 Years 1,828.8

[` 3,657.6 ÷ 2 Years]

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3. (a) The following relevant items of cash flow statement of Lily Ltd. Prepared for the year
31st March, 2018:

Particulars Amount (`) Amount (`)

Net profit 1,60,00,000
Add: Sale of investment 1,75,00,000
Depreciation of Assets 27,00,000
Issue of preference shares 22,50,000
Loan raised 11,25,000
Decrease in stock 30,00,000
4,25,75,000
Less: Purchase of Fixed Assets 1,62,50,000
Decrease in Creditors 15,00,000
Increase in Debtors 20,00,000
Exchange gain 20,00,000
Profit on sale of investments 30,00,000
Redemption of debentures 14,25,000
Dividend paid 3,50,000
Interest paid 2,36,250 2,67,61,250
1,58,13,750
Add: Opening Cash and Cash equivalent 21,35,250
Closing Cash and Cash equivalent 1,79,49,000

You are required to redraft and reconstruct the cash flow statement of Lily Ltd. in proper
order for the year ended 31st March, 2017 in accordance with AS-3 using indirect method.

[8]
(b) From the following information Calculate Return on Equity as per Regulation 21 of the Central
Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004:
1. Date of Commercial Operation of COD = 1st April 2010
2. Approved Opening Capital Cost as on 1st April 2010 = ` 15,00,000
3. Details of allowed Additional Capital Expenditure. Repayment of Loan and Weighted
Average

Rate of Interest on Loan is as Follows

1st year 2nd year 3rd year 4th year
Additional Capital Expenditure (Allowed) 1,00,000 30,000 20,000 10,000
[4]
Answer:

(a)

LILY LTD.
Cash flow statement for the year ended 31st march, 2018
Amount (`) Amount (`)
1 Cash flow from Operating Activities:
Net profit before Tax and Extra ordinary items: 1,60,00,000
Adjustment for:
Depreciation 27,00,000
Profit on Sale of investment (30,00,000)
Foreign Exchange gain (20,00,000)
Working Capital Adjustment: (23,00,000)
1,37,00,000
Decrease in stock 30,00,000
Decrease in Creditors (15,00,000)
Increase in Debtors (20,00,000) (5,00,000)

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Cash from operation 1,32,00,000

Tax paid
Cash flow from operating activities
Cash flow from investing activities
2 Sale of investments 1,75,00,000
Purchase of fixed assets (1,62,50,000)
Net cash from investing activities 12,50,000
Cash flow from Financing activities:
3 Loan raised 11,25,000
issue of Preference shares 22,50,000
Redemption of Debentures (14,25,000)
Dividend paid (3,50,000)
Interest paid (2,36,250)
Net cash from financing activities 13,63,750
1,58,13,750
Net increase in Cash and Cash Equivalents
Cash and Cash Equivalents at beginning of the
year 21,35,250
Cash and Cash at the end of the year 1,79,49,000

(b)

Computation of Return of Equity

Particulars 1st year 2nd year 3rd year 4th year

A. Opening Equity (30%) 4,50,000 4,80,000 4,89,000 4,95,000
B. Additional Equity (30%) 30,000 9,000 6,000 3,000
c. Closing Equity (A + B) 4,80,000 4,89,000 4,95,000 4,98,000
D. Average Equity [(A + C)/2] 4,65,000 4,84,500 4,92,000 4,96,500
E. Return on Equity (D × 14%) 65,100 67,830 68,880 69,510

4. On 31st March, Bose and Sen Ltd provides to you the following Ledger Balances after
preparing its Profit and Loss Account for the year ended 31st March:

Credit Balances ` Debit Balances `

Equity Share Capital, fully paid 70,00,000 Calls in Arrears 7,000

Shares of ` 10 each

General Reserve 15,49,100 Land 14,00,000

Loan from State Finance 10.50,000 Buildings 20,50,000

Corporation

Secured by hypothecation of P & Plant & Machinery 36,75,000

M (repayable within 1 yr
` 2.00,000)

Loans: Unsecured (Long Term) 8,47,000 Furniture & Fixtures 3,50,000

Sundry Creditors for Goods & 14,00,000 Stocks: Finished Goods 14,00,000
Expenses (Payable within 6
months)

Profit & Loss Account 10,98,300 Raw Materials 3,50,000

Provision for Taxation 3,25,500 Sundry Debtors 14,00,000

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Advances: Short-Term 2,98,900

Cash in Hand 2,10,000

Balances with Banks 17,29,000

Patents & Trade Marks 4,00,000

Total 1,32,69,900 Total 1,32,69,900

The following additional information is also provided:

(i) 4,20,000 fully paid Equity Shares were allotted as consideration for Land & Buildings.
(ii) Cost of Building ` 28,00,000
(iii) Cost of Plant & Machinery ` 49,00,000
(iv) Cost of Furniture & Fixtures ` 4,37,500
(v) Sundry Debtors for ` 3,80,000 are due for more than 6 months.
(vi) The amount of Balances with Bank includes ` 18,000 with a Bank which is not a
Scheduled Bank, and the deposits of ` 5 Lakhs are for a period of 9 months.
(vii)Unsecured Loan includes ` 2,00,000 from a Bank and ` 1,00.000 from Related Parties.
You are required to prepare the Balance Sheet of the Company as on 31s’ March, as required
under the Companies Act. [12]

Answer:
Balance Sheet of Bose and Sen Ltd as on 31st March
Particulars as at 31st March Note This Year Prev. Yr

I EQUITY AND LIABILITIES:

(1) Shareholders’ Funds:
(a) Share Capital 1 69,93,000
(b) Reserves and Surplus 2 26,47,400
(2) Non-Current Liabilities: - Long Term Borrowings 3 16,97,000
(3) Current Liabilities: 4
(a) Trade Payables 14,00,000
(b) Other Current Liabilities 2,00,000
(c) Short Term Provisions - Provision for Tax 3,25,500

Total 1,32,62,900

Particulars as at 31st March Note This Year Prev. Yr

II ASSETS Non-Current Assets

(1) Fixed Assets: Tangible Assets 5 74,75,000
(2) Intangible Assets - Patents and Trade Marks 4,00,000
Current Assets:
(a) Inventories 6 17,50,000
(b) Trade Receivables 7 14,00,000
(c) Cash and Cash Equivalents 8 19,39,000
(d) Short Term Loans and Advances 2,98,900

Total 1,32,62,900

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Note 1: Share Capital

Particulars This Year Prev. Yr

Authorised: ................ Equity Shares of ......... each

............... Preference Shares of .......... each

Issued, Subscribed & Paid up: 7,00,000 Equity Shares of ` 70,00,000

10 each
Out of the above, 4,20,000 Shares of `10 each are allotted for
Non Cash Consideration (7,000)
Less: Calls in Arrears

Total 69,93,000

Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year)
Particulars Opg. Bal. Additions Deductions Clg. Bal

General Reserve - - 15,49,100

Surplus (P & L A/c) - - 10,98,300

Total - - 26,47,400

Note 3: Long Term Borrowings

Particulars This Year Prev. Yr

(a) Term Loans from Banks: Secured against Hypothecation of

Plant and Machinery
(10,50,000 less Amount Repayable within one year shown under
8,50,000
Other Current Liabilities = 10,50,000-2,00,000)

(b) Unsecured – Loan from Bank 2,00,000

(c) Loans from Related Parties Unsecured 1,00,000
(d) Loans from Other Parties Unsecured 5,47,000

Total 16,97,000

Note 4: Other Current Liabilities

Particulars This Year Prev. Yr

Current Maturities of Long Term Debt - Loan from State Finance 2,00,000
Corporation

Total 2,00,000

Note 5: Tangible Fixed Assets (Note: n the absence of data, Other Columns are not filled up
in this Table).

Item Gross Block / Cost Depreciation Net Block / WDV

Opg Addns/ Clg Bal Opg Addns/ Clg Bal As at Yr As at Yr End

Bal. (Dedns) Bal. (Dedns) Beginning

Tangible Assets

Land 14,00,000 0 14,00,000

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Building 28,00,000 (b/f) 7,50,000 20,50,000

Furniture 4,37,500 (b/f) 87,500 3,50,000
Plant & M/c 49,00,000 (b/f) 12,25,000 36,75,000

Total 95,37,500 20,62,500 74,75,000

Intangible Assets

Patents/Trademarks 4,00,000 4,00,000

Note 6: Inventories
Particulars This Year Prev. Yr

Raw Materials 3,50,000

Finished Goods 14,00,000

Total 17,50,000

Note 7: Trade Receivables (assumed as Secured and considered good)

Particulars This Year Prev. Yr

Sundry Debtors
(a) Debt Outstanding for a period exceeding 6 months from the 3,80,000
date they are due for payment
(b) Other Debts (balancing figure) 10,20,000

Total 14,00,000

Note 8: Cash and Cash Equivalents

Particulars This Year Prev. Yr

Balances with Banks

- Scheduled Banks (17,29,000 - 18,000) 17,11,000
- Other Banks 18,000 17,29,000
Cash on Hand 2,10,000

Total 19,39,000

Out of the above, Bank Balances to the extent of ` 5,00,000 have Maturity Period less than 12
Months, and Bank Balances to the extent of ` 12,29,000 have Maturity Period more than 12
Months.

5. Write short note (any three): [3×4=12]

(a) Differences between Shares and Debentures;
(b) Types of Cash Flow;
(c) Related Party as per AS 18;
(d) Distinguish between Life and Non-Life Insurance.

Answer:

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(a) Differences between Shares and Debentures

SHARES DEBENTURES
Definition An instrument to acknowledge An instrument to
the ownership of the company acknowledge the creditors of the
company
Status A shareholder is the owner and a A debenture holder is not a
member of the company. member but a creditor.
Return A shareholder may receive dividend A debenture holder has a right to
only when a company makes a interest even if the company does
profit. not make profit.
Rate of Dividend rate can vary depending Debenture carries a fixed rate of
return on the profit position. interest.
Accounting Dividend is given out of Debenture interest is chargeable to
treatment appropriable profit and not Profit and Loss account.
chargeable to Profit and Loss
account.
Redemption In the case of shares, the concept Debentures are normally
of redemption does not apply. redeemable although a company
However as per the recent change can issue perpetual debentures
in the companies Act, a company
can buy back shares in accordance
with the provisions in the Act.
Voting rights A shareholder has voting rights. A debenture holder cannot have
voting rights.
Status at the At the time of winding up share At the time of winding up debenture
time of holders have the least priority holders have a priority over the
winding up regarding the return of amount due share holders regarding the return of
to them. amount due to them

(b) Cash Flow Statement explains cash movements under three different heads, namely
• Cash flow from operating activities;
• Cash flow from investing activities;
• Cash flow from financing activities.
Sum of these three types of cash flow reflects net increase or decrease of cash and cash
equivalents.
Operating activities are the principal revenue - producing activities of the enterprise and
other activities that are not investing and financing. Operating activities include all
transactions that are not defined as investing or financing. Operating activities
generally involve producing and delivering goods and providing services.
Investment activities are the acquisition and disposal of long term assets and other
investments not included in cash equivalents.
Financing activities are activities that result in changes in the size and composition of the
owners‘ capital (including preference share capital in the case of a company) and
borrowings of the enterprise.

(c) Related Party

A related party is essentially any party that controls or can significantly influence the
management or operating policies of the company during the reporting period.

AS-18, deals only with the following relationships:

 Enterprises that directly, or indirectly through one or more intermediaries, control, or

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are controlled by, or are under common control with the reporting enterprise;
 Associates and joint ventures of the reporting enterprise and the investing party or
venture in respect of which the reporting enterprise is an associate or a joint
venture;
 Individuals owing, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the
enterprise and relatives of any such individual.
Here "relative" means the spouse, son, daughter, brother, sister, father and mother
who may be expected to influence, or be influenced by that individual in his/her
dealings with the reporting enterprise.
 Key management personnel and relatives of such personnel are those persons
who have authority and responsibility for planning, directing and controlling the
activities of the reporting enterprise; and enterprise over which individual or key
management personnel described as above is able to exercise significant
influence.

(d) There are certain basic differences between life policies and other types of policies. These
are listed below:
(i) Human life cannot be valued exactly. Therefore each insured is permitted to insure his life
for a specified sum, depending on his capacity to pay premiums. This is also one form of
investment and the policy amount depends on his investment decision. In the event of
the policy maturing, the insurer must pay the policy amount, as actual loss cannot be
determined. This is not the case with other policies. Other policies are contracts of
indemnity. Therefore, notwithstanding the amount for which the policy is taken, the
insurer would pay (reimburse) only the actual loss suffered or the liability incurred.
(ii) Life insurance contracts are long-term contracts. Once a policy is taken, premiums have
to be paid for number of years till maturity and the policy amount is paid on maturity. Of
course, a life policy can be surrendered after certain number of years and the insured is
paid a proportion of the premiums paid known as surrender value. In the case of other
policies, they are for a short period of one year although the policy can be renewed
year after year.
(iii) Life insurance is known also by another term 'assurance' since the insured gets an assured
sum. Other policies are known as insurance.
(iv) The determination of profit is by different methods for life and general insurance business.
In the case of life business, periodically actuaries estimate the liability under existing
policies. On that basis, a valuation Balance Sheet is prepared to determine the profit. In
the case of general insurance business, a portion of the premium is carried forward as a
provision for unexpired liability and the balance net of claims and expenses is taken as
profit (or loss).

Section – B (Auditing)

Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Appointment of first auditor for government company is done by

(a) BOD
(b) Audit committee
(c) Managing Director
(d) CAG.

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