Financial accounting theory Imp question answer

1. Types of Amalgamation
Ans:
Amalgamation means combination or merger. We have already studied in S.Y.B.Com,
the accounting case of "amalgamation of firms". We will now be studying the accounting treatment of
limited companies. In amalgamation, two companies come together to secure various advantages such
as economies of large scale production, avoiding competition, increasing efficiency expansion and so
on. Companies may combine in the following ways: (a) amalgamation (b) absorption external
reconstruction.
1. AMALGAMATION
Amalgamation a new company is formed to take over the business of two or more old company
For example, if the ABC Limited and DEF Limited are taken over by a new company XYZ
Limited it is called amalgamation. The old Companies taken over (ABC Ltd. and DEF Ltd, in
the above example) are known as the "Vendor Companies", and the new company which takes
over (XYZ Lad) is known as the "Purchasing Company".
2. ABSORPTION
In absorption, an existing company takes over the business of another existing company. For
example, if the business of ABC Limited is taken over by an existing company PQR Limited,
it is called absorption The old Company which is taken over (ABC Ltd., in the above example)
is known as the "Vender Company", and the Company which takes over (PQR Ltd.) is known
as the "Purchasing Company"
3. EXTERNAL RECONSTRUCTION
In external reconstruction, a new company is formed to take over the business of an existing
company (which is, normally, a loss-making, sick company). For example, if the business of
ABC Limited, loss-making company, is taken over by a new company ABC (New) Limited, it
is called external reconstruction. The old Company which is taken over (ABC Ltd., in the above
example) is known the "Vendor Company"; and the new Company which takes over [ABC
(New) Ltd.) is known as the "Purchasing Company".
2. Absorption of company
Ans: ABSORPTION
In absorption, an existing company takes over the business of another existing company. For
example, if the business of ABC Limited is taken over by an existing company PQR Limited, it is
called absorption The old Company which is taken over (ABC Ltd., in the above example) is
known as the "Vender Company", and the Company which takes over (PQR Ltd.) is known as the
"Purchasing Company
3. External reconstruction of company
Ans: In external reconstruction, a new company is formed to take over the business of an
existing company (which is, normally, a loss-making, sick company). For example, if the
business of ABC Limited, loss-making company, is taken over by a new company ABC (New)
Limited, it is called external reconstruction. The old Company which is taken over (ABC Ltd.,
in the above example) is known the "Vendor Company"; and the new Company which takes
over [ABC (New) Ltd.) is known as the "Purchasing Company".
 4. Monetary and Non-Monetary items
Ans:
a. Monetary items are money held an assets or liabilities to be settled in fixed amounts of money
e.g. foreign currency notes included in cash on hand , balance in bank accounts denominated in a
foreign currency .
b. Non-monetary items carried at historical cost: Balances of non-monetary items (e.g. inventory
or machinery), valued at historical cost denominated in a foreign currency, should be translated at
the exchange rate on the date of the original transaction (i.e. historical cost).
5. What do you mean by liquidation of company ? describe the difference mode of winding
up
Ans:
Winding up is one of the methods by which dissolution of a company is brought about. Legal entity of
the company continues at the commencement of the winding up.A company may be allowed to
continue its business as far it is necessary for the beneficial winding up of the company.Winding up is
the first stage of ending the legal existence of the entity. In this stage, the assets of the entity are by
realised, its liabilities paid off and surplus, if any, is distributed amongst the contributories.The
winding up process is handled by a liquidator/insolvency professional.Creditors can prove their claims
during Creditors winding up. Winding up need not result in dissolution in all cases. A company
which is in winding up can be taken over/ amalgamated by any other entity/company which will result
in the company coming out of winding process and being handed over the shareholders.
MODES [S. 270]A company may be wound up under the Companies Act, 2013, by the National
Company Law Tri Broadly speaking, winding up on the ground of 'inability to pay debts' i.e.
'bankruptcy and 'volum winding up is now governed by the IBC; and not the Companies Act. The
following exhibit shows the different modes/grounds for winding up.
6. Liquidators financial statement
Ans: STATEMENT OF AFFAIRS [S. 274]
1 Petition by Company: In case of winding up by Tribunal, Section 272(5) of the Companies 2011
provides that a petition presented by the company for winding up before the Tribunal med only if
accompanied by a statement of affairs in such form and in such manner be prescribed
2. Petition by Others: In accordance with Section 274(1), where a petition for winding up is filed
Tribunal by any person other than the company, the Tribunal shall, if satisfied that a cie case for
winding up of the company is made out, by an order direct the company to objections along with a
statement of its affairs within thirty days of the order in such form and in such manner as may be
prescribed. The Tribunal may allow a further period of thirty days of contingency or special
circumstances.
3. Procedure Contents: The broad lines on which the Statement of Affairs is prepared are the
following:
(a) Include assets on which there is no fixed charge at the value they are expected to realise which
there is a fixed charge. The amount expected to be realised would be compared with the amount due
to the creditor concerned. Any surplus is to be extended to the other column A deficit (the amount
owed to the creditor exceeding the amount realisable from the assets ) is to be added to unsecured
creditors.
b.The total of assets in point (a) and any surplus from assets mentioned in point (b) is available for all
the creditors (except secured creditors already covered by specifically mortgaged assets). From the
total assets available, the following should be deducted one by one:
(i) Preferential creditors,
(i) Debentures having a floating charge, and Unsecured creditors.
(iii)If a minus balance emerges, there would be deficiency as regards creditors, otherwise there would
be a surplus.
(iv) The amount of total paid up capital giving details of each class of shares) should be w and the
figure emerging will be deficiency (or surplus) as regards members.
Lists: Statements of affairs should accompany eight lists:
List A: Fall particulars of every description of property not specifically pledged and includ in any
other list are to be set forth in this list.
Liabilities
List B: Assets specifically pledged and creditors fully or partly secured.
List C: Preferential creditors for rates, taxes, salaries, wages and otherwise.
List D: List of debenture holders secured by a floating charge.
List E:Unsecured creditors
(ii) Share Capital
List F: List of Preference shareholders
List G List of Equity shareholders
(iv) Deficiency /surplus
List H: Deficiency or surplus account.
7. Write a short note on foreign exchange rate

Ans: The Accounting Standard 11: Accounting for Effects of changes in Foreign Exchange Rates,
comes into effect in respect of accounting periods commencing on or after 1-4-2004 and is mandatory
in nature from that date. This revised standard supersedes the earlier (1993) Accounting standard (AS
11) The main provisions of this AS are as follows: Objective:
The following terms are used in this Statement with meanings specified: (a) Average rate is the mean
of the exchange rates in force during a period. Closing rate is the exchange rate at the balance sheet
date. Exchange difference is the difference resulting from reporting the same number of units foreign
currency in the reporting currency at different exchange rates.Exchange rate is the ratio for exchange
of two currencies. Fair Value is the amount for which an asset could be exchanged, or a liability
settled, betwee knowledgeable, willing parties in an arm's length transaction.Foreign Currency is a
currency other than the reporting currency of an enterprise. Monetary items are money held and
assets and liabilities to be received or paid in fixed determinable amounts of money. Non-monetary
items are assets and liabilities other than monetary items. Reporting currency is the currency used in
presenting the financial statements.
8. Explain ACCOUNTING FOR EXCHANGE DIFFERENCE
Ans:AS 11 defines Exchange Difference, as the difference resulting from reporting the same numbe
units of a foreign currency in the reporting currency at different exchange rates.
A transaction recorded in terms of rupees is quite simple in nature. Thus, in case of credit purcha of
50,000, purchases are recorded at 50,000; payment, if made, is recorded at 50,000; and if payment is
made, the balance of creditor is shown in the balance sheet at 50,000. However similar purchase in
foreign currency may give rise to exchange differences. Exchange difference arise because different
exchange rates are used at different stages to record a transaction and report the balances at the year-
end. Thus, in case of an import of goods for US $ 1,000; purchase may be translated and recorded at
50,000 (if US $1-50 on date of purchase); payment may b recorded at 51,000 (if US $ 1-51 on the
date of payment, leading to a loss of 1,000 due t exchange rate difference); if, on the other hand, no
payment is made, creditors may be reported 249,500 (if US $1-749.50 on the date of balance sheet,
leading to a gain of 500 due to exchange rate difference). Exchange difference on foreign currency
transactions/balances should be recorded in the accounts in the following manner laid down in AS 11.
EXCHANGE DIFFERENCE ON SETTLEMENT AND BALANCES
(1) Difference on Settlement: Exchange differences arising on settling foreign currency transaction
should be recorded as income or as exchange in the period in which they arise.
9. Explain UNDERWRITING COMMISSION of shares
Ans:
(1) The consideration payable to the underwriters for underwriting the issue of shares debentures of a
company is called underwriting commission. Such a commission is paid at specified rate on the issue
price of the whole of the shares or debentures underwritten whether not the underwriters are called
upon to take up any shares or debentures. Underwriting commission may be in addition to brokerage.
(2) Companies Act, 2013: Section 40(6) of the Companies Act 2013, provides that a company may
pay commission to any person in connection with the subscription or procurement of subscription to
its securities, whether absolute or conditional, subject to the following conditions which are
prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) the payment of such commission shall be authorized in the company's articles of association; (b)
the commission may be paid out of proceeds of the issue or the profit of the company or both; (c) the
rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent (5%) of
the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in
case of debentures, shall not exceed two and a half per cent (2.5%) of the price at which the
debentures are issued, or as specified in the company's articles. whichever is less;
(d) the prospectus of the company shall disclose- the name of the underwriters; the rate and amount of
the commission payable to the underwriter; and the number of securities which is to be underwritten
or subscribed by the underwriter absolutely or conditionally.
10. Firm Underwriting

Ans:
(1) Open or Conditional Underwriting: Under this type of agreement, the underwriter take up agreed
proportion of shares, not taken up by the public. The liability of under conditional ie he is liable only
if issue is under-subscribed. If the shares are fully subscribed the public, the underwriter does not take
up any share.
(2) Firm Underwriting: Under this type of agreement, the underwriter agrees to take up a specified
number of shares irrespective of the number of shares subscribed for by the public. His is absolute. In
such a case, even if the issue is over-subscribed, the underwriters are liable up the agreed number of
shares of debentures. Normally, the underwriters' liability is deter without considering the number of
shares taken up 'firm' by him. However, if the agree includes 'abatement clause', then the firm' liability
has to be adjusted (abated) against the nor liability.
11. Explain Partial underwriting
Ans:
1. Partial Underwriting: If only a part of the issue of shares or debentures of a company is
underwritten, it is said to be partial underwriting. In case of partial underwriting, the company is
treated as "Underwriter" for the remaining part of the issue.
12. What do you mean by limited liability partnership
Ans:
Limited Liability Partnership entities, the world wide recognized form of business organization has
now been introduced in India by way of Limited Liability Partnership Act, 2008 that came into effect
by way of notification dated 31st March 2009. A Limited Liability Partnership, popularly known as
LLP combines the advantages of both the Company and Partnership into a single form of organization
In an LLP one partner is not responsible or liable for another partner's misconduct or negligence This
is an important difference from that of a unlimited partnership. In an LLP, all partners have a form of
limited liability for each individual's protection within the partnership, similar to that of the
shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to
manage the business directly. An LLP also limits the personal liability of a partner for the errors,
omissions, incompetence, or negligence of the LLP's employees or other agents. While LLP as a
separate legal entity is liable to the full extent of its assets, the liability of the partners would be
limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the
independent or un-authorized actions of other partners, thus allowing individual partners to be
shielded from joint liability created by another partner's wrongful business decisions or misconduct.
(2) Agreement/Schedule
Limited Liability Limited Liability Partnership is managed as per the LLP Agreement; however in
the absence of such agreement the LLP would be governed by the framework provided in Schedule 1
of Limited Liability Partnership Act, 2008 which describes the matters relating to mutual rights and
duties of partners of the LLP and of the limited liability partnership and its partners.
ADVANTAGES
Partnership Act, 2008 which describes the matters relating to mu the LLP and of the limited liability
partnership and its partners
Advantages
2. Well-known and accepted form of business worldwide in comparison to Company
ADVANTAGES
a. Low cost of formation.

b. Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier.

c. No requirement as to Minimum Alternate Tax.

d. Easy to establish

e.Easy to manage & run.

f. No requirement of any minimum capital contribution.
g. No restrictions as to maximum number of partners.
h. LLP & its partners are distinct from each other.
i.Partners are not liable for Act of other partners.
j.Less compliance level.

DISADVANTAGES
Under some cases, liability may extend to personal assets of partners. LLP cannot raise money from
Public like companies.

13. Explain pooling method and purchase method

Ans: Pooling method: - Applies to amalgamation in the nature of merger known as pooling of interest
method
Assets, liabilities even capital and reserve are taken over
At least 90% of equity shareholder of the vendor’s co. become the shareholder of the purchasing co.
All reserves of vendor co. are recorded by purchasing co.
Purchase method: - Applies to amalgamation in the nature of purchase
Assets and liabilities are taken over
Shareholder of vendor co. may not become shareholders of purchasing co.
Difference between net assets and purchase consideration is adjusted in goodwill or capital reserve
14. Explain Foreign exchange reserve A/C:-
Ans:
Exchange difference arising on settling foreign currency transaction should be recorded as income or
as expenses in the period in which they are:
Exchange difference arising due to translation of year end balances is also recorded as income or
expenses in the relevant period. Thus gain or loss due to translation of balances as at 31-3-2013 would
be transferred to the profit and loss account for the year ended 31-3-2013.