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Test Series: October, 2023

MOCK TEST PAPER 2
INTERMEDIATE: GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
1. (a) (i) According to AS 18 ‘Related Party Disclosures’, parties are considered to be related if at any
time during the reporting period one party has the ability to control the other party or exercise
significant influence over the other party in making financial and/or operating decisions.
Hence, Mr. Arnav a relative of key management personnel should be identified as related
party as at the closing date i.e. on 31.3.2023.
(ii) As per AS 18, transactions of company with its associate company for the first quarter ending
30.06.2023 only are required to be disclosed as related party transactions. The transactions
for the period in which related party relationship did not exist need not be reported.
(b) (i) As per AS 29, an obligation is a present obligation if, based on the evidence available, its
existence at the balance sheet date is considered probable, i.e., more likely than not.
Liability is a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic
benefits.
In the given case, there are 75% chances that the penalty may not be levied. Accordingly,
Saharsh Ltd. should not make the provision for penalty.
However, a provision should be made for remaining 50% fees of the lawyer in the financial
statements of financial year 2022-2023.
(ii) Loss due to accident ` 30,00,000
Insurance claim receivable by company = ` 30,00,000 x 90% = ` 27,00,000
Loss to be recognised in the books for 2022-2023 ` 3,00,000
Insurance claim receivable to be recorded in the books ` 27,00,000
Compensation claim by dealer against company to be provided for in the books
= ` 30,00,000 x 15% = ` 4,50,000
(c) Statement showing the amount of profit/loss to be taken to Profit and Loss Account and
additional provision for the foreseeable loss as per AS 7
Cost of Construction ` `
Material used 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on 31.03.2023 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred upto 31.03.2023 1,34,00,000
Add: Estimated future cost 33,50,000
Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%

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Revenue recognized (80% of 1,50,00,000) 1,20,00,000

Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000
(d) The entity amortised ` 48,00,000 per annum for the first two years i.e. ` 96,00,000. The remaining
carrying cost can be amortized during next 5 years on the basis of net cash flows arising from the
sale of the product. The amortisation may be found as follows:
Year Net cash flows Amortization Ratio Amortization Amount
` `
I - 0.20 48,00,000
II - 0.20 48,00,000
III 36,00,000 0.180 25,92,000
IV 46,00,000 0.230 33,12,000
V 44,00,000 0.220 31,68,000
VI 40,00,000 0.200 28,80,000
VII 34,00,000 0.170 24,48,000
Total 2,00,00,000 1.000 2,40,00,000
It may be seen from above that from third year onwards, the balance of carrying amount i.e.,
` 1,44,00,000 has been amortized in the ratio of net cash flows arising from the product of Change
Ltd.
2. (a) (i) Number of Shares to be issued to Partners
`
Assets: Machinery ` 1,40,000 + Inventory ` 1,37,400 + Trade Receivable 5,01,400
` 1,24,000 + Bank ` 1,00,000
Less: Liabilities taken over (1,69,400)
Net Assets taken over (Purchase Consideration) 3,32,000

Classes of Shares to be issued: M N O Total

10% Preference Shares of ` 10 each 1,36,000 90,000 46,000 2,72,000
(to retain rights as to Interest on Capital)
Balance in Equity Shares of ` 10 each 30,000 18,000 12,000 60,000
(3,32,000 -2,72,000) (issued in profit
sharing ratio)
1,66,000 1,08,000 58,000 3,32,000
(ii) Partners’ Capital Accounts
Particulars M N O Particulars M N O
To Drawings 50,000 46,000 34,000 By balance b/d 1,36,000 90,000 46,000
To 10% 1,36,000 90,000 46,000 By Interest on Capital 13,600 9,000 4,600
Preference
share
capital
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To Equity 30,000 18,000 12,000 By profit for the 1,10,700 66,420 44,280
Shares year 5:3:2
(W.N. 1)
To Bank – 54,300 17,420 6,880 By Machinery* A/c 10,000 6,000 4,000
Additional
Drawings
(W.N. 2)
Total 2,70,300 1,71,420 98,880 2,70,300 1,71,420 98,880

* Gain on Transfer of Machinery = ` 1,40,000 – (` 2,00,000-` 80,000) = ` 20,000 in 5:3:2

ratio.
(iii) Balance sheet of MNO Ltd. as on 31 st March, 2023 (after Takeover of Firm)
Note no. `
I Equity and Liabilities:
(1) Shareholders Funds
Share Capital 1 3,32,000
(2) Current Liabilities
Trade Payables 1,69,400
Total 5,01,400
II Assets
(1) Non-Current Assets
Property, plant and equipment - Machinery 1,40,000
(2) Current Assets:
(a) Inventories 1,37,400
(b) Trade Receivables 1,24,000
(c) Cash and Cash Equivalents 1,00,000
Total 5,01,400
Notes to Accounts
Particulars `
1. Share capital
Authorized shares capital 20,00,000
Issued, Subscribed & paid up
6,000 Equity Shares of ` 10 each 60,000
27,200 10% Preference Shares capital of ` 10 each 2,72,000
(All above shares issued for consideration other than cash, in takeover 3,32,000
of partnership firm)
Working Notes:
1. Profit & Loss Appropriation Account for the year ended 31 st March, 2023
Particulars ` ` Particulars `
To Interest on Capital: By Net Profit 2,48,600
M [` 1,36,000 x 10%] 13,600 (given)
N [` 90,000 x 10%] 9,000
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O [` 46,000 x 10%] 4,600 27,200

To Profits transferred to
Capital in profit sharing
ratio 5:3:2
M 1,10,700
N 66,420
O 44,280 2,21,400
2,48,600 2,48,600
2. Statement showing Additional Drawings in Cash
(a) Funds available for Drawings
Total Drawing of Partners (given) 1,30,000
Add: Further Funds available for Drawings (1,78,600-1,00,000) 78,600
2,08,600
Less: Interest on Capital (27,200)
Amount available for Drawings 1,81,400
(b) Ascertainment of Additional Drawings
Particulars M N O
As per above statement ` 1,81,400 (in 90,700 54,420 36,280
profit sharing ratio)
Add: Interest 13,600 9,000 4,600
1,04,300 63,420 40,880
Less: Already drawn (50,000) (46,000) (34,000)
Additional Drawings 54,300 17,420 6,880
(b) This would be the case of downstream transaction. In the consolidated profit and loss account for
the year ended 31 March 2023, entire transaction of sale and purchase of ` 200 lacs each, would
be eliminated by reducing both sales and purchases (cost of sales). Further, the unrealized profits
of ` 20 lacs (i.e. ` 200 lacs – ` 180 lacs), would be eliminated from the consolidated financial
statements for financial year ended 31 March 2023, by reducing the consolidated profits/ increasing
the consolidated losses, and reducing the value of closing inventories as of 31 March 2023.
3. (a) (i) In the Books of Beta Ltd.
Realisation Account
` `
To Sundry Assets 15,96,000 By Retirement Gratuity Fund 56,000
To Preference Shareholders By Trade payables 2,24,000
(Premium on Redemption) 28,000 (Purchase Consideration)
To Equity Shareholders By Alex Ltd. 14,84,000
(Profit on Realisation) 1,40,000 _______
17,64,000 17,64,000

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Equity Shareholders Account

` `
To Equity Shares of Alex Ltd. 11,76,000 By Share Capital 8,40,000
By General Reserve 1,96,000
By Realisation Account
(Profit on Realisation)
_______ 1,40,000
11,76,000 11,76,000
Preference Shareholders Account
` `
To 8% Preference 3,08,000 By Preference Share Capital 2,80,000
Shares of Alex Ltd.
By Realisation Account (Premium on
Redemption of Preference Shares) 28,000
3,08,000 3,08,000
Alex Ltd. Account

` `
To Realisation Account 14,84,000 By 8% Preference Shares 3,08,000
_______ By Equity Shares 11,76,000
14,84,000 14,84,000
(ii) In the Books of Alex Ltd.
Journal Entries
Dr. Cr.
` `
Business Purchase A/c Dr. 14,84,000
To Liquidators of Beta Ltd. Account 14,84,000
(Being business of Beta Ltd. taken over)
Goodwill Account Dr. 1,40,000
Building Account Dr. 4,20,000
Machinery Account Dr. 4,48,000
Inventory Account Dr. 4,41,000
Trade receivables Account Dr. 2,80,000
Bank Account Dr. 56,000
To Retirement Gratuity Fund Account 56,000
To Trade payables Account 2,24,000
To Provision for Doubtful Debts Account 21,000
To Business Purchase A/c 14,84,000

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(Being Assets and Liabilities taken over as per agreed

valuation).
Liquidators of Beta Ltd. A/c Dr. 14,84,000
To 8% Preference Share Capital A/c 3,08,000
To Equity Share Capital A/c 11,20,000
To Securities Premium A/c 56,000
(Being Purchase Consideration satisfied as above).
(iii) Balance Sheet of Alex Ltd. (after absorption) as at 31 st March, 2023
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 45,08,000
B Reserves and Surplus 2 2,52,000
2 Non-current liabilities
A Long-term provisions 1,96,000
3 Current liabilities
A Trade Payables 5,88,000
B Short term provision 21,000
Total 55,65,000
Assets
1 Non-current assets
A Property, Plant and Equipment (PPE) 3 31,08,000
B Intangible assets 2,80,000
2 Current assets
A Inventories 11,41,000
B Trade receivables 8,40,000
C Cash and cash equivalents 1,96,000
Total 55,65,000
Notes to accounts:
`
1 Share Capital
Equity share capital
3,92,000 Equity Shares of ` 10 each fully paid (Out of above 1,12,000 39,20,000
Equity Shares were issued in consideration other than for cash)
Preference share capital
5,880 8% Preference Shares of ` 100 each (Out of above 3,080 5,88,000
Preference Shares were issued in consideration other than for cash)
Total 45,08,000

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2 Reserves and Surplus

Securities Premium 56,000
General Reserve 1,96,000
Total 2,52,000
3 PPE
Buildings 12,60,000
Machinery 18,48,000
Total 31,08,000
Working Notes:
Purchase Consideration: `
Goodwill 1,40,000
Building 4,20,000
Machinery 4,48,000
Inventory 4,41,000
Trade receivables 2,59,000
Cash at Bank 56,000
Less: Liabilities:
Retirement Gratuity (56,000)
Trade payables (2,24,000)
Net Assets/ Purchase Consideration 14,84,000
To be satisfied as under:
Preference Shareholders of Beta Ltd. 2,80,000
Add: 10% Premium 28,000
Satisfied by issue of 3,080 no. of 8% Preference Shares of Alex Ltd. 3,08,000
Equity Shareholders of Beta Ltd. to be satisfied by issue of 1,12,000 Equity
Shares of Alex Ltd. at 5% Premium 11,76,000
Total 14,84,000
(b) Pooling of Interest Method
Under pooling of interests method, the assets, liabilities and reserves of the Transferor Company
will be taken over by Transferee Company at existing carrying amounts unless any adjustment is
required due to different accounting policies followed by these compa nies. As a result the
difference between the amount recorded as share capital issued (plus any additional consideration
in the form of cash or other assets) and the amount of share capital of Transferor Company should
be adjusted in reserves.
Purchase Method
The assets and liabilities of the transferor company should be incorporated at their existing carrying
amounts or the purchase consideration should be allocated to individual identifiable assets and
liabilities on the basis of their fair values at the date of amalgamation. No reserves, other than

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statutory reserves, of the transferor company should be incorporated in the financial statements of
transferee company.
4. (a) (i) Capital Funds –
Tier I : ` in crore
Equity Share Capital 600
Statutory Reserve 470
Capital Reserve (arising out of sale of assets) 105
Less: Profit & Loss (Dr. bal.) (30)
1,145
Capital Funds - Tier II :
Capital Reserve (arising out of revaluation of assets) 25
Less: Discount to the extent of 55% (13.75)
11.25
(ii) Risk Adjusted Assets
Funded Risk Assets ` in Percentage Amount
crore weight ` in crore
Cash Balance with RBI 35.50 0 —
Balances with other Banks 15 20 3
Claims on banks 52.50 20 10.50
Other Investments 70 100 70
Loans and Advances:
(i) guaranteed by government 22.50 0 —
(ii) guaranteed by PSUs 110 0 —
(iii) Others 9,365 100 9,365
Premises, furniture and fixtures 92.50 100 92.50
Leased Assets 40 100 40
9,581
(b) Statement showing computation of 'Net Owned Fund'
S. No ` in lakhs
Paid up Equity Capital 200
Free Reserves 600
(i) A 800
Investments
In shares of subsidiaries 250
In debentures of group companies 400
(ii) B 650
(iii) 10% of A 80

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(iv) Excess of Investment over 10% of A (650 – 80) C 570

(v) Net Owned Fund [(A) - (C)] (800 – 570) 230
(c) Journal entries
In the books of Bhoomi Ltd.
Dr. Cr.
` in lakhs
1 Bank A/c Dr. 25,000
To Investments A/c 24,000
To Profit and Loss A/c 1,000
(Being Investments sold and, profit being credited to
Profit and Loss Account)
2 10% Redeemable Preference Share Capital A/c Dr. 20,000
Premium payable on Redemption of Preference Shares Dr. 2,000
A/c
To Preference Shareholders A/c 22,000
(Being amount payable on redemption of Preference
shares, at a Premium of 10%)
3 Securities Premium A/c Dr. 2,000
To Premium payable on Redemption of
Preference Shares A/c 2,000
(Being Securities Premium utilised to provide Premium
on Redemption of Preference Shares)
4 Equity Share Capital A/c Dr. 16,000
Premium payable on Buyback A/c Dr. 16,000
To Equity Share buy back A/c 32,000
(Being the amount due on buy-back)
5 Securities Premium A/c (6,400 – 2,000) Dr. 4,400
General Reserve A/c (balancing figure) Dr. 11,600
To Premium payable on Buyback A/c 16,000
(Being premium on buyback provided first out of
Securities Premium and the balance out of General
Reserves.)
6 Bank A/c Dr. 16,000
To Bank Loan A/c 16,000
(Being Loan taken from Bank to finance Buyback)
7 Preference Shareholders A/c Dr. 22,000
Equity Shares buy back A/c Dr. 32,000
To Bank A/c 54,000
(Being payment made to Preference Shareholders and
Equity Shareholders)
8 General Reserve Account Dr. 36,000
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To Capital Redemption Reserve Account 36,000

(Being amount transferred to Capital Redemption
Reserve Account to the extent of face value of
preference shares redeemed and equity Shares bought
back) (20,000 + 16,000)
5. (a) Restated Balance Sheet of MNT Ltd.
as at 31 st March 2023
Particulars Note No. (`)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 7,50,000
(b) Reserves and Surplus 1 7,18,500
(2) Current Liabilities
(a) Short term borrowings 2 1,70,000
(b) Trade Payables 2,46,000
(c) Short-term provision 3 4,30,000
Total 23,14,500
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment 4 6,37,500
(b) Non-current Investment 5,30,000
(2) Current assets
(a) Inventories (6,90,000 +12,000) 5 7,02,000
(b) Trade Receivables 3,50,000
 3,43,000 
 98 x100 
 
(c) Cash & Cash Equivalents 42,500
(d) Other current assets 6 52,500
Total 23,14,500
Notes to Accounts
`
1. Reserves and Surplus
Revenue Reserve (refer W.N.) 5,11,500
Securities Premium 2,07,000 7,18,500
2. Short term borrowings
Bank overdraft 1,70,000
3. Short-term provision
Provision for taxation 4,30,000
4. Property, Plant and Equipment
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Cost 9,20,000
Less: Depreciation to date (2,82,500) 6,37,500
5. Inventories 6,90,000
Increase in value as per FIFO 12,000 7,02,000
6. Other current assets
Prepaid expenses (After adjusting sales 52,500
promotion expenses to be written off each
year) (65,000 -12,500)
Working Note:
Adjusted revenue reserves of MNT Ltd.:
` `
Revenue reserves as given 5,05,000
Add: Provision for doubtful debts [3,43,000 X 2/98) 7,000
Add: Increase in value of inventory 12,000 19,000
5,24,000
Less: Sales Promotion expenditure to be written off (12,500)
Adjusted revenue reserve 5,11,500
(b) Calculation of Profit/Loss on disposal of investment in subsidiary
Particulars `
Proceeds from the sale of Investment 30,00,000
Less: A Ltd.'s share in net assets of B Ltd. (28,00,000)
2,00,000
Working Note:
A Ltd.’s share in net assets of B Ltd.

`
Net Assets of B Ltd. on the date of disposal 35,00,000
Less: Minority Interest (20% of ` 35 lakhs) (7,00,000)
A Ltd.'s share in the net assets of B Ltd. 28,00,000
6. (a) Basic Earnings per share (EPS) =
Net profit attributable to equity shareholders
Weighted average number of equity shares outstanding during the year

21,96,000
= = ` 4.80 per share
4,57,500 Shares (as per working note)

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Working Note:
Calculation of weighted average number of equity shares
As per AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of equity
share to the extent that they were entitled to participate in dividend relative to a fully paid equity
share during the reporting period. Assuming that the partly paid shares are entitled to participate
in the dividend to the extent of amount paid, weighted average number of shares will be calculated
as follows:
Date No. of equity Amount paid Weighted average no. of equity
shares per share shares
` ` `
1.4.2023 6,00,000 5 6,00,000 х 5/10 х 5/12 = 1,25,000
1.9.2023 5,40,000 10 5,40,000 х 7/12 = 3,15,000
1.9.2023 60,000 5 60,000 х 5/10 х 7/12 = 17,500
Total weighted average equity shares 4,57,500

(b) Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case of a c ompany, and by the
corresponding approving authority in the case of any other entity.
Assets and liabilities should be adjusted for events occurring after the balance sheet date that
provide additional evidence to assist the estimation of amounts relati ng to conditions existing at
the balance sheet date or that indicate that the fundamental accounting assumption of going
concern is not appropriate.
In the given case, financial statements are approved by the approving authority on 30 June 202 3.
On the basis of above principles, following will be the accounting treatment in the financial
statements for the year ended at 31 March 2023:
(i) Since on 31 March 2023, Tee Ltd. was expecting a heavy decline in the demand of the
stitching machine. Therefore, decline in the value during April, 2023 will be considered as an
adjusting event. Hence, Tee Ltd. needs to adjust the amounts recognized in its financial
statements w.r.t. net realisable value at the end of the reporting period. Accordingly, inventory
should be written down to ` 4,000 per machine. Total value of inventory in the books will be
50 machines x ` 4,000 = ` 2,00,000.
(ii) A fire took place after the balance sheet date i.e. during 2023-2024 financial year. Hence,
corresponding financials of 2022-2023 financial year should not be adjusted for loss occurred
due to fire. However, in this circumstance, the going concern assumption will be evaluated.
In case the going concern assumption is considered to be appropriate even after the
occurrence of fire, no disclosure of the same is required in the financial statements.
Otherwise, disclosure be given.
(iii) Since the transfer of risk and reward and sale was complete in the month of
May, 2023 when conveyance and possession got complete, no revenue should be recognised
with respect to it in the financial statements of 2022-2023. However, a disclosure for the
same should be given by the entity.

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(iv) Since the notice has been received after 31 March but before 30 June 2023 (approval date),
the said grant shall be adjusted in the financial statements for financial year 2022-2023
because the violation of the conditions took place in the financial year 2022-2023 and the
company must be aware of it.
(c) As per AS 9 ‘Revenue Recognition’, in a transaction involving the rendering of services,
performance should be measured either under the completed service contract method or under the
proportionate completion method as the service is performed, whichever relates the revenue to the
work accomplished. In the given case, income accrues when the related advertisement appears
before public. The advertisement service would be considered as performed on the day the
advertisement is published and hence revenue is recognized on that date. In this case, 15.03.202 3
is the date of publication of the magazine. Hence, ` 3,00,000 (` 2,40,000 + ` 60,000) is recognized
as income in March, 2023. The terms of payment are not relevant for considering the date on which
revenue is to be recognized. Since, the revenue of ` 3,00,000 will be recognised in the March,
2023, ` 60,000 will be treated as amount due from advertisers as on 31.03.202 3 and
` 2,40,000 will be treated as payment received against the sale. However, if the publication is
delayed till 02.04.2023 revenue recognition will also be delayed till the advertisements get
published in the magazine. In that case revenue of ` 3,00,000 will be recognized in the year ended
31.03.2023 after the magazine is published on 02.04.2023. The amount received from sale of
advertising space on 10.03.2023 of ` 2,40,000 will be considered as an advance from advertisers
as on 31.03.2023.
(d) Calculation of Total Remuneration payable to Liquidator
Amount in `
2% on Assets realized 25,00,000 x 2% 50,000
3% on payment made to Preferential creditors 75,000 x 3% 2,250
3% on payment made to Unsecured creditors (Refer W.N) 39,255
Total Remuneration payable to Liquidator 91,505
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses,
payment to secured creditors, preferential creditors & liquidator’s remuneration
= ` 25,00,000 – ` 25,000 – ` 10,00,000 – ` 75,000 – ` 50,000 – ` 2,250 = ` 13,47,750.
Liquidator’s remuneration on payment to unsecured creditors = 3/103 x ` 13,47,750 = ` 39,255
(e) Journal Entries in the books of Suvidhi Ltd.
Date Particulars Dr. (`) Cr. (`)
31.3.23 Bank A/c (60,000 shares x ` 30) Dr. 18,00,000
Employees stock compensation expense A/c Dr. 4,80,000
To Share Capital A/c (60,000 shares x ` 10) 6,00,000
To Securities Premium 16,80,000
(60,000 shares x ` 28)
(Being shares issued under ESOP @ ` 30 to 1,200
employees)

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Profit & Loss A/c Dr. 4,80,000

To Employees stock compensation expense A/c 4,80,000
(Being Employees stock compensation expense transferred
to Profit & Loss A/c)
Working Note:
Fair value of an option = ` 38 – ` 30 = ` 8
Number of shares issued = 1,200 employees x 50 shares = 60,000 shares
Fair value of ESOP which will be recognized as expenses in the year 2022-2023
= 60,000 shares x ` 8 = ` 4,80,000
Vesting period = 1 year
Expenses recognized in 2022-2023 = ` 4,80,000

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