Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

Paper-18 : CORPORATE FINANCIAL REPORTING

1. (a) Write a note on IFRS.

(b) Accounts of R Ltd. show a net profit of `7,20,000 for the third quarter of 2014 after
incorporating the following:
(i) Bad debts of `40,000 incurred during the year. 50% of the bad debts have been
deferred to the next quarter.
(ii) Extra ordinary loss of `35,000 incurred during the quarter has been fully
recognized in this quarter.
(iii) Additional depreciation of `45,000 resulting from the change in the method of
charge of depreciation.
Ascertain the correct quarterly income.
(c) A company with a turnover of `500 crores and an annual advertising budget of `4
crore had taken up the marketing of a new product. It was estimated that the
company would have a turnover of `50 crores from the new product. The company
had debited to its Profit and Loss account the total expenditure of `4 crore incurred on
extensive special initial advertisement campaign for the new product. Is the
procedure adopted by the company correct?

(d) J Ltd. has set up its business in a designated backward area which entitles the
company for subsidy of 25% of the total investment from Government of India. The
company has invested `160 crores in the eligible investments. The company is eligible
for the subsidy and has received `40 crores from the government in February 2015. The
company wants to recognize the said subsidy as its income to improve the bottom line
of the company.

Do you approve the action of the company in accordance with the Accounting
Standard?

Answer:
1.(a)
The term IFRS refers to the International Financial Reporting Standards issued by International
Accounting Standard Board (IASB). It also encompasses the International Accounting
Standards (IAS) issued by the International Accounting Standard Committee (IASC).
Interpretations of IASs and IFRSs are developed by the International Financial Reporting
Interpretations Committee (IFRIC). IFRIC is the new name for the Standing Interpretations
Committee (SIC) approved by the IASC Foundation Trustees. IFRS includes these
interpretations also.

1.(b)
In this case, the quarterly income has not been correctly stated as per AS-25 ‗Interim Financial
Reporting‘. The quarterly income should be adjusted and restated as follows:
Bad debt of `40,000 has been incurred during the current quarter. Out of this, the company
has deferred 50% i.e. `20,000 to next quarter. This is not correct. `20,000 therefore should be
deducted from `7,20,000.

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The treatment of extraordinary loss of `35,000 being recognized in the same quarter and
recognized the additional depreciation of `45,000 in the quarter is correct and in tune with
AS-25, so no adjustment required for the two items.
The company should report the quarterly income as `7,20,000 - `20,000 = `7,00,000

1. (c)
According to AS-26 ‗Intangible Assets‘ expenditure of an intangible item should be
recognized as an expense when it is incurred unless it forms part of the cost of an intangible
asset.
In the given case, advertisement expenditure of `4 crores had been taken up for the
marketing of a new product which may provide future economic benefits to an enterprise by
having a turnover of `50 crores. Here, no tangible asset or other asset is acquired or created
that can be recognized. Therefore, the accounting treatment by the company of debiting
the entire advertisement expenditure of `4 crores to the Profit and Loss Account of the year is
correct.

1.(d)

The action of the company is not justified in view of AS-12 ‗Accounting for Government
Grants‘.
Where the government grants are of the nature of promoter contribution i.e. they are given
with reference to the total investment in an undertaking or by way of promoters contribution
towards its total capital outlay and no repayment is ordinary expected in respect thereof the
grants are treated as capital reserve, which can be neither distributed as dividend nor
considered as deterred income.
Therefore it is inappropriate to recognize Government Grants in the P&L statement, since they
are not earned but represent an incentive provided by Government without related cost.

2. (a) Z Ltd. began construction of a new plant on 1st April 2011 and obtained a special loan
of `16 lakhs to finance the construction of the plant. The rate of interest on loan was
10% per annum. The expenditure that was made on the project of plant construction
was as follows:

1-4-2011 20,00,000
1-8-2011 48,00,000
1-1-2012 8,00,000

The Company‘s other outstanding non specific loan was `92,00,000 at an interest of
12% per annum. The construction of the plant was completed on 31.3.2012. You are
required to calculate the amount of interest to be capitalized as per the provision of
AS-16 of the borrowing cost (including cost).

(b) State the Disclosure requirement of Contingent liability as per AS-29.

(c) Explain the classification criteria of IFRS 5 (Non-Current Assets held for sale and
discontinued operations)

Answer:
2. (a)
(i) Calculation of average accumulated expenses

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`20,00,000 ×12/12 20,00,000

`48,00,000 × 8/12 32,00,000
`8,00,000 × 3/12 2,00,000
54,00,000

(i) Non-specific borrowings = Average accumulated capital expenses–Specific

borrowings
= `54,00,000 - `16,00,000 = `38,00,000
(ii) Interest on average accumulated expenses
Specific borrowings (`16,00,000 ×10%) 1,60,000
Non-specific borrowings (`38,00,000 ×12%) 4,56,000
Amount of interest to be capitalized 6,16,000

(iii) Total expenses to be capitalized for plant

Cost of Plant (20,00,000 + 48,00,000 + 8,00,000) 76,00,000
Add: Amount of interest to be capitalised 6,16,000
Total cost of Plant 82,16,000

Answer:
2. (b) An enterprise should disclose for each class of contingent liability at the balance sheet
date
- A brief description of the nature of the contingent liability where practicable.
- An estimate of the amount as per measurement principles as prescribed for
provision.
- Indications of the uncertainties relating ti outflow
- The possibility of any reimbursement
Where any of the information required as above is not disclosed because it is not
practicable to do so, that fact should be stated

Answer:
2. (c) Classification criteria —
 Management is committed to a plan to sell
 The asset is available for immediate sale
 An active programme to locate a buyer is initiated
 The sale is highly probable, within one year of classification as held for sale
 The asset is being actively marketed for sale at a sales price reasonable in relation
to its fair value
 Actions required to complete the plan indicate that it is unlikely that plan will be
significantly changed or withdrawn.
The criteria sale is highly probable within one year of classification as held for sale
needs is not evidenced when the management is indecisive whether the particular
asset will be sold or leased out.

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3. (a) ADS Ltd. has three segments viz. A, D and S. The total assets of the company is `15
crores. The assets of Segment A is `1.85 crores, Segment D is `6.15 crores and Segment
S is `7.00 crores. Assets of each segment include deferred tax assets of `0.50 crores in
A, `0.40 crores in D and `0.30 crores in S. The accountant of ADS Ltd. contends that all
segments are reportable segments. Based on segment assets criteria, determine the
veracity of the contention of the accountant.

(b) X Ltd. purchased a fixed asset four years ago for `300 lakhs and depreciates it at 10%
p.a. on straight line method. At the end of the fourth year it has revalued the asset at
`150 lakhs and has written off the loss on revaluation to the profit and loss account.
However on the date of revaluation, the market price is `135 lakhs and expected
disposal cost are `6 lakhs. What will be the treatment in respect of impairment loss on
the basis that fair value for revaluation purpose is determined by market value and the
value in use is estimated at `120 lakhs

Answer:
3. (a) Statement showing percentage of Segment net assets to total assets of the company
` in crores
Particulars Segments Total
A D S
Segment Assets 1.85 6.15 7.00 15.00
Less: Deferred Tax Assets (0.50) (0.40) (0.30) (1.20)
Net Segment assets 1.35 5.75 6.70 13.80
Percentage to total net 9.78% 41.67% 48.55% 100%
segment assets

As per AS-17 Segment Reporting,one of the basis of segment asset criteria for
identification of a business segment or geographical segment as a reportable segment
is when its segment assets are 10% or more of the total assets of all segments.
Accordingly, the reportable segments will be segments B and C only. Therefore, the
contention of the accountant that all the segments are reportable segments is not
tenable.

(b) According to AS 28 ‗Impairment of Assets‘ if the recoverable amount (higher of net

selling price and its value in use) of an asset is less than its carrying amount, the
carrying amount of the asset should be reduced to its recoverable amount.
In the given case, net selling price is `129 lakhs (`135 lakhs -`6 lakhs) and value in use is
`120 lakhs.
Thus recoverable amount will be `129 lakhs. Impairment loss will be calculated as 21
lakhs [`150 lakhs – 129 lakhs, i.e. (carrying amount after revaluation – Recoverable
amount)]
Therefore, impairment loss of `21 lakhs should be recognized as an expense in the
statement of Profit and Loss immediately since there was downward revaluation of
asset which was already charged to Statement of Profit and Loss.
Working Note:
Calculation of carrying amount of the fixed asset at the end of the fourth year on
revaluation
Particulars ` in lakhs
Purchase price of a fixed asset 300.00

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Less: Depreciation for four years [(300/10 years ) × 4 years 120.00

Carrying value at the end of fourth year 180.00
Less: Downward revaluation charged to Profit and loss account 30.00
Revalued carrying amount 150.00

4. Following is the Extract of Balance Sheet of M/s Sunny Ltd and Money Ltd as on 31.03.2014 -

Equity and Liabilities Sunny Ltd Money Ltd

Authorised Share Capital 15,00,000 5,00,000
Equity Share Capital of ` 10 each fully paid 8,00,000 2,00,000
General Reserve 1,10,000 45,000
Profit and Loss Account 42,000 18,000
Statutory Fund 16,000 8,000
Trade Payables 45,000 24,000
Provisions 95,000 12,000
Total 11,08,000 3,07,000
Assets Sunny Ltd Money Ltd
Goodwill 20,000 0
Machines & Plant 5,10,000 1,95,000
Other Fixed Assets 90,000 15,000
Current Assets Inventories 1,85,000 35,000
Debtors 1,00,500 35,000
Prepaid Expenses 24,500 2,000
Cash in Hand & Bank 1,78,000 25,000
Total 11,08,000 3,07,000

The two Companies have entered into a scheme of Amalgamation and a new company Z Ltd
is formed. The Amalgamation is to take place in the following manner -

i. For the purpose of Amalgamation a new Company Z is to be formed with an Authorized

Share Capital of 2,50,000 Equity Shares of ` 10 each.
ii. Z Ltd to issue fully paid Shares to the shareholders of Sunny Ltd and Money Ltd at a price of
` 5 and ` 3 above the Intrinsic Value of the Shares respectively.
iii. The scheme of Amalgamation was not supported by 100 shareholders of Sunny Ltd and
has to be paid ` 10 per Share above Intrinsic Value as consideration. The amount of the
dissenting shareholders was borne by Z Ltd.
iv. Fixed Assets of Sunny Ltd were last revalued in the year 2010 after which there has been
an increase of 15% in the values, while assets of Money Ltd have not shown any change in
prices. The Current Assets of Money Ltd include Debtors of ` 20,000 which are considered
bad.
v. Money Ltd‘s Stock-in-Trade as on 31.03.2014 includes Stock of ` 25,000 purchased from
Sunny Ltd at a Profit of 25% on Cost Price.
vi. The Statutory Fund of the Companies is to be maintained by Z Ltd for a period of 3 years.
vii. Sunny Ltd had declared Dividend of 10% on 31.03.2014 which has still not been paid.
viii. Goodwill shown in books of Sunny Ltd was considered to be worthless.
ix. All the Assets of the Companies are taken over by Z Ltd at the revalued amounts. Liabilities
have to be paid in full.

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Calculate the Purchase Consideration paid by Z Ltd to the Shareholders of both the
Companies.
Answer:
4.
1. Basic Information
Selling Co : Sunny Ltd and Money Ltd. Date of B/S: 31.03.2014 Nature of Amalgamation:
Buying Co : Z Ltd. Date of Amg: 31.03.2014 Purchase (Since all Assets are
not taken over at Book Value)

2. Computation of Purchase Consideration

Particulars Sunny Ltd Money Ltd
Machines and Plant (Revalued Figure) 5,86,500 1,95,000
Other Fixed Assets (Revalued Figure) 1,03,500 15,000
Inventories (See Note Below) 1,85,000 30,000
Debtors Less Bad Debts 1,00,500 15,000
Prepaid Expenses 24,500 2,000
Cash in Hand and Bank 1,78,000 25,000
Total Assets 11,78,000 2,82,000
Less: Trade Payables (45,000) (24,000)
Less: Provisions (95,000) (12,000)
Net Asset Value / Intrinsic Value 10,38,000 2,46,000
No. of Equity Shares 80,000 20,000
Intrinsic Value per share 12.98 12.3
Issue Price (` 5 and ` 3 above the Intrinsic Value (12.98 + 5) 17.98 (12.3 + 3) 15.3
respectively)
Purchase Consideration - Assenting Shareholders (79,900 Shares x (20,000 Shares x
17.98) = 14,36,602 15.3) = 3,06,000
Purchase Consideration - Dissenting Shareholders (100 Shares x -
22.98) = 2,298
Total Purchase Consideration 14,38,900 3,06,000

Note: Profit included in the Stock of Money Ltd is 25% on Cost Price or 20% on Sales = 20% of
25,000 = X 5,000. Therefore, Value of Inventory = ` 35,000 - ` 5,000 = ` 30,000.

5. Purchasing Company holding Shares in Selling Co.

The following is the Balance Sheet of H Ltd and S Ltd as at 31st March 2014- (` Lakhs)
Equity and Liabilities H Ltd S Ltd Assets H Ltd SLtd
(1) Shareholders‘ Funds: (1) Non-Current Assets:
(a) Share Capital (Shares of 10 each) 50 10 (a) Fixed Assets 60 18
(b) Reserves & Surplus (i) General Res. 50 20 (b) Non-Current Investments
(ii) Profit & Loss Account 20 15 Invt in S Ltd (60,000 Shares) 6 -
(2) Non-Current Liabilities: (2) Current Assets:
Secured Loans 20 3 (a) Inventories 30 25
(3) Current Liabilities: 30 2 (b) Trade Receivables -Debtors 35 5
(c) Cash & Cash Equivalents 39 2
Total 170 50 Total 170 50

H Ltd holds 60% of the Paid Up Capital of S Ltd, and balance is held by a Foreign
Collaborating Company. The Foreign Company agreed with H Ltd as under -

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i. The Shares held by the Foreign Company will be sold to H Ltd at ` 50 above than
Nominal Value per Share.
ii. The actual Cost of the Shares to the Foreign Company was ` 11, Gain arising to Foreign
Company is taxable at 20%. Tax payable will be deducted from the Sale proceeds
and paid to the Government by H Ltd. 50% of the consideration (after payment of tax)
will be remitted to Foreign Company by H Ltd and also any Cash for fractional Shares
allotted.
iii. For the balance of consideration, H Ltd would issue its Shares at their Intrinsic Value.
It was also decided that H Ltd would absorb S Ltd simultaneously by writing down Fixed
Assets of S Ltd by 10%. The Balance Sheet figures included a sum of ` 1 Lakh due by S Ltd
to H Ltd. H Ltd‘s Inventories included a stock of ` 1.25 Lakhs purchased from S Ltd, who
sold them at cost plus 20%.
Pass Journal entries in the books of H Ltd to record the above arrangement on 31.03.2014.
Answer:
5.
1. Basic Information
Selling Co: S Ltd Date of B/S: 31.03.2014 Nature of Amalgamation:
Buying Co : H Ltd Date of Amg: 31.03.2014 Purchase (since the Assets are not taken
over at Book Value)

2. Intrinsic Value per Share of H Ltd.

Particulars ` Lakhs
Fixed Assets 60.00
Sundry Debtors 35.00
Inventories 30.00
Cash and Bank 39.00
Investments in S Ltd (assuming ` 60 to be Fair Value per Share) (` 60 x 0.6 Lakhs 36.00
Shares)
Less: Secured Loans (20.00)
Current Liabilities (30.00)
Net Asset Value 150.00
` 150 Lakhs
NAV per Share = ` 30.00
5 Lakhs Shares

Note: Shares of S Ltd are valued at ` 60 (Nominal Value ` 10 + Premium ` 50) for discharge
Foreign Company. Such value is assumed to be the Fair Value. Alternatively, Investments
based on Intrinsic Value of S Ltd.
3. Purchase Consideration and Discharge
Description `
Shares held by Foreign Company [40% of 1,00,000] 40,000
Price per share for transfer purposes [Nominal Value ` 10 + Premium ` 50] 60
Total Consideration (in ` Lakhs) (0.4 Lakh Shares x ` 60 per Share) 24,00,000
Gain on Transfer [` 24,00,000 - Cost (40,000 Shares x ` 11)] 19,60,000
Tax on Gain @ 20% (deductible and payable to Government) 3,92,000
Consideration payable to Foreign Company (Total ` 24.00 - ` 3.92 Lakhs) 20,08,000

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(a) Settled by issue of Equity Shares (50% of ` 20.08 Lakhs) 10,04,000

`10,04,000 33,466.67
No. of Equity Shares to be issued =
30
Discharge in the form of Shares at ` 30 per Share In Cash (6.67 Shares
33,460.00 10,03,800
x ` 30) (immediate settlement)
6.67 200
(b) Settled immediately by Cash (50% of ` 20.08 Lakhs)
10,04,000
Total Cash to be paid in the beginning
10,04,200

4. Journal Entries in the Books of H Ltd.

Particulars Debit Credit
1. Business Purchase A/c Dr. 24,00,000
To Foreign Company A/c 24,00,000
(Being Purchase Consideration Due to the Foreign Company for
purchase of shares held by them and absorption of S Ltd)
2. Foreign Company A/c Dr. 24,00,000
To Bank A/c 10,04,200
To Equity Share Capital A/c (33,460 Shares of ` 10 each) 3,34,600
To Securities Premium A/c (33,460 Shares x ` 20) 6,69,200
To TDS Deducted (Payable to Central Government) 3,92,000
(Being Discharge of Purchase Consideration to the Foreign Company by
issue of Shares, cash settlement after deduction of tax at source)
3. Fixed Assets A/c (` 18,00,000 - 10%) Dr. 16,20,000
Sundry Debtors A/c Dr. 5,00,000
Stock in Trade A/c Dr. 25,00,000
Cash and Bank A/c Dr. 2,00,000
To Business Purchase A/c 24,00,000
To Investments in S Ltd A/c 6,00,000
To Secured Loans A/c 3,00,000
To Current Liabilities A/c 2,00,000
To Capital Reserve A/c (Balancing Figure) 13,20,000
(Being Assets taken over and incorporated in the books of H Ltd)
4. Sundry Creditors A/c Dr. 1,00,000
To Sundry Debtors A/c 1,00,000
(Being cancellation of Mutual Owings)
5. Capital Reserve A/c Dr. 25,000 25,000
To Stock in Trade A/c
(Being Unrealized Profit on Inter-Company transfer adjusted. 25/125 x
`1,25,000)
6. TDS Payable to Government A/c Dr. 3,92,000 3,92,000
To Bank A/c
(Being TDS deducted, remitted to Central Government)

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6. The Balance Sheet of Mickey Ltd and Donald Ltd are given below as at 31st December-
Equity and Liabilities Mickey Donald Assets Mickey Donald
(1) Shareholders‘ Funds: (1) Non-Current Assets:
(b) Share Capital (Shares of `10) 2,00,000 4,00,000 (a) Fixed Assets
(c) Reserves & Surplus 44,000 1,00,000 (i) Tangible Assets 3,10,000 5,90,000
(2) Non-Current Liabilities: (ii) Loan to Donald Ltd 30,000 -
- Long Term Borrowings (b) Non-Current Investments 50,000 -
(i) 7% Debentures (`100 each) 1,00,000 - (5,000 Shares of Donald Ltd)
(ii) Loan from Mickey Ltd - 30,000 (2) Current Assets: Cash 10,000
(3) Current Liabilities: 46,000 70,000
Total 3,90,000 6,00,000 Total 3,90,000 6,00,000

Donald takes over Mickey on the following terms:

i. Donald will issue sufficient number of its Shares at ` 11 each and pay ` 0.50 Cash per
Share held by Members of Mickey.
ii. 7% Debentures of Mickey are to be paid at 8% Premium by issue of sufficient number of
8% Debentures of Donald Ltd at ` 90.
Show Journal Entries in Donald‘s books and draft the Balance Sheet of Donald Ltd after
absorption.

Answer:

6.
A. Basic Information
Selling Co: Mickey Ltd Date of B/S: 31st Dec Nature of Amalgamation:
Buying Co : Donald Ltd Date of Amg: 31st Dec Purchase (Since Purchase Consideration
is discharged other than by way of
Equity shares)

B. Computation of Purchase Consideration by Net Assets Method

Particulars `
Tangible Assets 3,10,000
Loan to Donald Ltd 30,000
Invt in Shares of Donald Ltd taken at Fair Value = Issue Price (5,000 Shares x ` 11) 55,000
Total of Assets 3,95,000
Less: Liabilities: 7% Debentures (1,00,000 + 8% Premium) (1,08,000)
Current Liabilities (46,000)
Net Assets taken over = Total Consideration due 2,41,000

C. Settlement of Purchase Consideration

Particulars `
(a) Total Value of Assets taken over = Consideration due as calculated above 2,41,000
(b) Cash Paid at 0.50 per share to all members of Mickey Ltd = 20,000 Shares x 0.50
` 10,000
(c) Balance Consideration to be settled in terms of Shares 2,31,000
(d) Number of Shares of Donald Ltd issuable at ` 11 per Share = ` 2,31,000 /11 21,000 Shares
(e) Shares of Donald Ltd already held by Mickey Ltd 5,000 Shares
(f) Balance Shares now issuable 16,000 Shares
(g) Equity Share Capital = 16,000 x ` 10 per Share 1,60,000

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(h) Securities Premium = 16,000 x ` l per Share 16,000

(i) Total Purchase Consideration settled (b) + (g) + (h) 1,86,000

D. Journal Entries in the books of Donald Ltd.

Particulars Debit Credit

1. Business Purchase Dr. 1,86,000
To Liquidator of Mickey Ltd 1,86,000
(Being consideration due for Purchase of Business of Mickey Ltd)
2. Tangible Assets Dr. 3,10,000
Loan to Donald Ltd Dr. 30,000
To Debenture holders 1,08,000
To Current Liabilities 46,000
To Business Purchase 1,86,000
(Being Asset and Liabilities of Mickey Ltd incorporated in accounts)
3. Liquidator of Mickey Ltd. Dr. 1,86,000
To Equity Share Capital 1,60,000
To Securities Premium 16,000
To Bank 10,000
(Being settlement of Purchase Consideration in the form of Cash and
Shares)
4. Debentureholders Dr. 1,08,000
Discount on issue of debentures Dr. 12,000
To 8% Debentures 1,20,000
(Being Debentureholders settled by issue of own 8% Debentures at ` 90)
5. Loan from Mickey Ltd. Dr. 30,000
To Loan to Donald Ltd. 30,000
(Being mutual cancellation of Inter-Company Owings)

E. Balance Sheet of Donald Ltd as at 31st December

Particulars as at 31st March Note This Year Prev. Yr
I EQUITY AND LIABILITIES
(1) Shareholders‘ Funds:
(a) Share Capital 1 5,60,000
(b) Reserves & Surplus 2 1,04,000
(2) Non—Current Liabilities: Long Term Borrowings (8% 1,20,000
(3) Debentures ) Current Liabilities (46,000 + 70,000) 1,16,000
Total 9,00,000
II ASSETS 9,00,000
Non-Current Assets: Fixed Assets: (Tangible Assets)
[Existing Assets 6,00,000 + Taken Over 3,10,000 (-) Cash paid 10,000]
Total 9,00,000

Notes to the Balance Sheet

Note 1: Share Capital
Particulars This Year Prev. Year

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Authorised: ……… Equity Shares of ` 10 each

Issued, Subscribed & Paid up: (40,000 + 16,000) 56,000 Equity Shares of ` 5,60,000
10 each
(Of the above, 16,000 shares were issued for Non-Cash Consideration
pursuant to a scheme of amalgamation, Order No. ……., dated .../.../...)

Note 2: Reserves and Surplus

Particulars This Year Prev. Year
(a) Securities Premium 16,000
(b) Other Reserves (Assumed Revenue) 1,00,000
(c) Discount on issue of Debentures (12,000)
Total 1,04,000

7. The Balance Sheet of Gupta Ltd as at 31st December is as follows -

Equity and Liabilities ` Assets `
(a) Share Capital (1) Non-Current Assets:
- 8,000 Equity Shares of ` 100 fully paid 8,00,000 (a) Fixed Assets: (i) Tangible Assets
(b) Reserves & Surplus -P&L Account (10,70,000) - Land, Buildings & Machinery 14,30,000
(2) Non-Current Liabilities: - Lonq Term (b) Non-Current Investments 17,000
Borrowinqs
- Debentures 14,00,000 (2) Current Assets:
Add: Interest Accrued 70,000 14,70,000 (a) Inventories 80,000
(b) Trade Receivables - Sundry Drs 30,000
(3) Current Liabilities: (c) Cash & Cash Equivalents 1,03,000
(a) Trade Payables - Sundry Creditors 4,50,000
(b) Other Current Liabilities
- Sundry Creditors: Income Tax 10,000
Total 16,60,000 Total 16,60,000

The Fixed Assets are heavily overvalued. The Debentureholders have a Floating Charge on
the Assets of the Company. They are prepared to accept a modification of their claims in
consideration of a substantial Interest in the Share Capital. A scheme of reorganisation is
accordingly prepared and confirmed by the Court. The salient points of the scheme are the
following –
i. Each Share shall be subdivided into 20 fully paid Equity Shares of ` 5 each.
ii. After sub-division, each Shareholder shall surrender to the Company 95% of his holding,
for the purpose of reissue to Debentureholders and Creditors so far as may be required,
and otherwise for cancellation.
iii. Of those surrendered, 46,000 Shares of ` 5 each shall be converted into 8% Participating
Preference Shares of ` 5 each fully paid.
iv. Debentureholders‘ total claim shall be reduced to ` 2,30,000. This will be satisfied by the
issue of 46,000 Participating Preference Shares of ` 5 each fully paid.
v. Liability for Income Tax is to be satisfied in full.
vi. Claims of Unsecured Creditors shall be reduced by 80% and the balance shall be satisfied
by allotting them Equity Shares of ` 5 each, fully paid, from the Share surrendered.
vii. Shares surrendered and not reissued shall be cancelled.
Pass the Journal Entries and draft the Balance Sheet after giving effect to the above scheme.

Answer:

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 Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

7.
A. Journal Entries
Particulars Debit Credit
1. Equity Share Capital (` 100) A/c Dr. 8,00,000
To Equity Share Capital (` 5) A/c 8,00,000
(Being sub-division of Shares under the scheme of Reconstruction)
2. Equity Share Capital A/c (` 5) Dr. 7,60,000
To Shares Surrendered A/c 7,60,000
(Being surrender of shares (8,00,000 x 95%) owing to scheme of
reconstruction)
3. Debentures A/c Dr. 14,00,000
Accrued Interest A/c Dr. 70,000
To Debenture holders 2,30,000
To Reconstruction 12,40,000
(Being amount due to debenture holders under the scheme of
reconstruction)
4. Shares Surrendered A/c Dr. 2,30,000
To 8% Participating Preference Share Capital 2,30,000
(Being Participating Preference Shares issued out of shares
surrendered (46,000 Shares x ` 5) under the scheme of
reconstruction)
5. Debenturehoiders A/c Dr. 2,30,000
To Reconstruction 2,30,000
(Being cancellation of liability pursuant to the scheme of
reconstruction)
6. Income Tax A/c Dr. 10,000
To Bank A/c 10,000
(Being Income Tax Liability Settled in Full)
7. Sundry Creditors A/c Dr. 3,60,000
To Reconstruction A/c 3,60,000
(Being waiver of Liability to Creditors (4,50,000 x 80%) under the
scheme)
8. Shares Surrendered A/c Dr. 90,000
To Equity Share Capital 90,000
(Being Equity Shares issued to Creditors (4,50,000 - 3,60,000) issued
out of Shares Surrendered balance)
9. Creditors A/c Dr. 90,000
To Reconstruction A/c 90,000
(Being cancellation of liability owing to the scheme of
reconstruction)
10. Shares Surrendered A/c Dr. 4,40,000
To Reconstruction A/c 4,40,000
(Being shares surrendered not reissued cancelled by transfer to
Reconstruction)
11. Reconstruction A/c Dr. 23,60,000
To Profit & Loss A/c 10,70,000
To Land, Buildings & Machinery 12,90,000
(Being balance in Reconstruction Account utilized to write off

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overvalued assets and debit balance in Profit and Loss Account)

B. Reconstruction Account
Particulars ` Particulars `
To Profit & Loss A/c - w/off 10,70,000 By Debentures A/c 12,40,000
To Land, Building, & Machinery 12,90,000 By Debenturehoiders 2,30,000
By Creditors 3,60,000
By Creditors 90,000
By Shares Surrendered 4,40,000
Total 23,60,000 Total 23,60,000

C. Balance Sheet of Gupta Ltd as at 31st December (and Reduced)

Particulars as at 31st December Note This Year Prev. Yr
I EQUITY AND LIABILITIES
Shareholders‘ Funds: Share Capital 1 3,60,000
Total 3,60,000
II ASSETS
(1) Non-Current Assets
(a) Fixed Assets: - Tangible Assets (14,30,000 - 12,90,000) 1,40,000
(b) Non-Current Investments 17,000
(2) Current Assets
(a) Inventories 80,000
(b) Trade Receivables - Debtors 30,000
(c) Cash & Cash Equivalents (1,03,000 - Tax 10,000) 93,000
Total 3,60,000

Notes to the Balance Sheet Note 1: Share Capital

Particulars This Year Prev. Year
Authorised Capital (Division of Shares and Paid Up Value is not 8,00,000
available in Question):
Issued, Subscribed & Paid up:
26,000 Equity Shares of ` 5 each 1,30,000
(Of the Above, 18,000 Equity Shares were issued for Non-Cash
Consideration) 2,30,000
46,000 8% Preference Shares of ` 5 each
(All of the Above were issued for Non-Cash Consideration under a
Scheme of Reconstruction)
Total 3,60,000

Note: Reconciliation of Shares (Quantity & Value) will be provided by the Company along
with annual Financial Statements.

8. Globetrotters Ltd. has two divisions – ‗Inland‘ and ‗International‘. The Balance
Sheet as at 31st December, 2014 was as under:
Inland International Total

( ` crores) ( ` crores) ( ` crores)

Fixed Assets:

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Cost 300 300 600

Depreciation 250 100 350
W.D.V. (written down value) 50 200 250
Net Current Assets:
Current assets 200 150 350
Less: Current liabilities 100 100 200
100 50 150
Total 150 250 400
Financed by:
Loan funds:
 50 50
(Secured by a charge on fixed assets)

Own Funds:
Equity capital (fully paid up ` 10 shares) 25

Reserves and surplus 325

? ? 350

Total 150 250 400

It is decided to form a new company ‗Beautiful World Ltd.‘ for international tourism to
take over the assets and liabilities of international division.
Accordingly ‗Beautiful World Ltd.‘ was formed to takeover at Balance Sheet figures
the assets and liabilities of international division. ‗Beautiful World Ltd.‘ is to allot 2.5
crore equity shares of ` 10 each in the company to the members of ‗Globetrotters
Ltd.‘ in full settlement of the consideration. The members of ‗Globetrotters Ltd.‘ are
therefore to become members of ‗Beautiful World‘ as well without having to make any
further investment.
i. You are asked to pass journal entries in relation to the above in the books of
‗Globetrotters Ltd.‘ and also in ‗Beautiful World Ltd‘. Also show the Balance
Sheets of both the companies as on 1st January, 2015 showing corresponding
figures, before the reconstruction also.
ii. The directors of both the companies ask you to find out the net asset value of
equity shares pre and post-demerger.
iii. Comment on the impact of demerger on ―shareholders wealth‖.

Answer:

8.
Journal of Globetrotters Ltd.

(` in Crores)

Particulars Dr. (`) Cr.(`)

CurrentliabilitiesA/c Dr. 100
Loanfund(Secured)A/c Dr. 50
ProvisionfordepreciationA/c Dr. 100
LossonreconstructionA/c(Balancingfigure) Dr. 200
To Fixed assets A/c 300
To Current assets A/c 150
(being the assets and liabilities of International division
taken out of the books on transfer of the division to
Beautiful World Ltd.; the consideration being allotment to
the members of the company of one equity share of `10

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each of that company at par every share held in the

company vide scheme of reorganization)*

Journal of Beautiful World Ltd.

(` in cores)

Particulars Dr. (`) Cr.(`)

FixedassetsA/c(300–100) Dr. 200
CurrentassetsA/c Dr. 150
To Current liabilities A/c 100
To Loan funds (secured) A/c 50
To Equity share capital A/c 25
To Capital reserve A/c 175
(being the assets and liabilities of international division of
Globetrotters Ltd. taken over by Beautiful World Ltd. and
allotment of 2.5 crore equity shares of `10 each at par as
fully paid up to the members of Globetrotters Ltd.)

Name of the Company: Globetrotters Ltd.

Balance Sheet as at: 1st January, 2015
(` in cores)
After Before
Note No.

Reconstruction Reconstruction
Ref No.

Particulars
As at 1st As at 1st As at 1st As at 1st
January, January, January, January,
2015 2014 2015 2014
I EQUITY AND LIABILITIES
1 Shareholder‘s Fund
(a) Share capital 1 25 25
(b) Reserves and surplus 2 125 325
(c)Money received against share warrants
2 Share application money pending allotment
3 Non-current liabilities
(a) Long-term borrowings
(b)Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
4 Current Liabilities
(a) Short-term borrowings 3 50
(b) Trade payables
(c)Other current liabilities 4 100 200
(d) Short-term provisions
Total (1+2+3+4) 250 600
II ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 5 50 250

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(ii) Intangible assets

(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (Net)
(d) Long-term loans and advances
(e) Other non-current assets
2 Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets 6 200 350
Total (1+2) 250 600

(` in Crores)
After Before
Reconstruction Reconstruction
Note 1. Share Capital As at 1st As at 1st As at 1st As at 1st
January, January, January, January,
2015 2014 2015 2014

Authorized, Issued, Subscribed and

paid-up Share capital:
Equity share of ` 10 each 25 25
Total 25 25

RECONCILIATION OF SHARE CAPITAL

After Before
Reconstruction Reconstruction
FOR EQUITY SHARE As at 1st January, As at 1st January, As at 1st January, As at 1st
2015 2014 2015 January,
2014
Nos. Amount Nos. Amount Nos. Amount Nos. Amount
(`) (`) (`) (`)
Opening Balance as on 1st 2.5 25 2.5 25
January ,2014
Add: Fresh Issue (Including
Bonus shares, right shares, split
shares, share issued other
than cash)
2.5 25 2.5 25
Less: Buy Back of share
Total 2.5 25 2.5 25

After Before
Reconstruction Reconstruction

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Note 2. Reserve & Surplus As at 1st As at 1st As at 1st As at 1st

January, January, January, January,
2015 2014 2015 2014

Reserve & Surplus 125 325

Total 125 325

After Before
Reconstruction Reconstruction
Note 3. Short term Borrowings As at 1st As at 1st As at 1st As at 1st
January, January, January, January,
2015 2014 2015 2014

Secured Loans (Assumed to be 50

payable within 1 year)
Total 50

After Before
Reconstruction Reconstruction
Note 4. Other Current Liabilities As at 1st As at 1st As at 1st As at 1st
January, January, January, January,
2015 2014 2015 2014

Other Current Liabilities 100 200

Total 100 200

After Before
Reconstruction Reconstruction
Note 5. Tangible Assets As at 1st As at 1st As at 1st As at 1st
January, January, January, January,
2015 2014 2015 2014
Fixed Assets Less Depreciation 50 250
(`300-`250)
(`600-`350)
Total 50 250

After Before
Reconstruction Reconstruction
Note 6. Other Current Assets As at 1st As at 1st As at 1st As at 1st
January, January, January, January,
2015 2014 2015 2014

Other Current Assets 200 350

Total 200 350

Computation of Reserves and Surplus

(` in Crores)
After Before
Reconstruction Reconstruction
Particulars ` `
A. Reserves and surplus 325 325
Less: Loss on reconstruction 200 -

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125 325

Note to Accounts: Consequent to reconstruction of the company and transfer of international

divisions of Globetrotters Ltd. to newly incorporated Company Beautiful World Ltd.; the
members of the company have been allotted 2.5 crore equity shares of `10 each at par of
‗Beautiful World Ltd.;

Name of the Company: Beautiful World Ltd.

Balance Sheet as on January 01, 2015

(` in Crores)
Ref No. Note No. As at 1st As at 1st
Particulars
January, 2015 January, 2014
` `

I. Equity and Liabilities

1 Shareholders‘ funds

(a) Share capital 1 25

(b) Reserves and surplus 2 175

(c) Money received against share

warrants

2 Share application money pending

allotment

3 Non-current liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long-term provisions

4 Current Liabilities

(a) Short-term borrowings 3 50

(b) Trade payables

(c) Other current liabilities 4 100

(d) Short-term provisions

Total 350

II. Assets

1 Non-current assets

(a) Fixed assets 5 200

(i) Tangible assets

(ii) Intangible assets

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(iii) Capital work-in-progress

(iv) Intangible assets under development

(b) Non-current investments

(c) Deferred tax assets (Net)

(d) Long-term loans and advances

(e) Other non-current assets

2 Current assets

(a) Current investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short-term loans and advances

(f) Other current assets 6 150

Total 350

Annexure

` `
Note 1. Share Capital As at 1st As at 1st
January, January,
2015 2014
Share Capital 2.5 Equity shares of ` 10 each 25
(Issued for consideration other than cash, pursuant to scheme of
amalgamation)
Total 25

Reconciliation for Equity Share Capital As at 1st As at 1st

January, 2015 January, 2014
No. Amount No. Amount
(`) (`)
Opening Balance as on 1.01.2010 - - - -
Add: Fresh Issue 2.5 25
Less: Buy Back - -
Total 2.5 25

Note 2. Reserves and Surplus As at 1st As at 1st

January, 2015 January, 2014
Reserves and Surplus 175
Total 175

Note 3. Short term Borrowings As at 1st As at 1st

January, January,
2015 2014
Secured Loans (to be payable within 1 year) 50

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Total 50

Note 4. Other Current Liabilities As at 1st As at 1st

January, January,
2015 2014
Current Liabilities 100
Total 100

Note 5. Tangible Assets As at 1st As at 1st

January, January,
2015 2014
Fixed Assets 200
Total 200

Note 6. Other Current Assets As at 1st As at 1st

January, January,
2015 2014
Current Assets 150
Total 150

A. Net Asset Value of an equity share

Particulars
Globetrotters Ltd. Pre – Demerger `350 Post – Demerger `150
Crores 2.5 Crore Crores 2.5 Crore Shares
Share = `140 = `60
` 200 Crores
= `80
Beautiful World Ltd. 2.5 Crore Shares

B. Demerger into two companies has no impact on ‗net asset value‘ of shareholding. Pre-
Demerger, it was `140 per share. After Demerger, it is `60 + `80 = `140 per original share.
It is only the yield valuation that is expected to changes because of separate focusing
on two distinct business whereby profitability is likely to improve in account of de –
merger.

9. The following are the Extracted Balance sheets of AB Ltd. and XY Ltd. as on 31.03.2015.
(‗000)
Liabilities AB Ltd. XY Ltd. Assets AB Ltd. XY Ltd.
` ` ` `
Share capital : Fixed assets
Equity Shares of ` 100 2,000 1,000 (net of depreciation) 2,700 850
each fully paid up Investments 700 –
Reserves and surplus 800 – Sundry Debtors 400 150
10% Debentures 500 – Cash and Bank 250 –
Loan from Financial Profit and Loss A/c – 800
Institutions 250 400
Bank Overdraft – 100
Sundry creditors 300 300
Proposed Dividend 200 –
Total 4,050 1,800 Total 4,050 1,800

Note: Loan from financial institution is assumed to be of more than 12 months (ignoring
interest) hence treated as long term borrowings.

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It was decided that XY Ltd. will acquire the business of AB Ltd. for enjoying the benefit of carry
forward of business loss. After acquisition, XY Ltd. will be renamed as Z Ltd. The following
scheme has been approved for the merger.
i. XY Ltd. will reduce its shares to ` 10 and then consolidate 10 such shares into one share of
` 100 each (New Share).
ii. Financial institutions agreed to waive 15% of the loan of XY Ltd.
iii. Shareholders of AB Ltd. will be given one new share of XY Ltd. in exchange of every share
held in AB Ltd.
iv. AB Ltd. will cancel 20% holdings of XY Ltd. Investments were held at ` 250 thousands.
v. After merger, the proposed dividend of AB Ltd. will be paid to the shareholders of AB Ltd.
vi. Authorised Capital of XY Ltd. will be raised accordingly to carry out the scheme.
vii. Sundry creditors of XY Ltd. includes payables to AB Ltd. ` 1,00,000.
Pass the necessary entries to implement the scheme in the books of AB Ltd. and XY Ltd.

Answer:

9.
Part - I Purchase consideration
WN # 1 : Shareholding of AB Ltd. in XY Ltd.

Particulars Amount `

a. Original Share capital of XY Ltd. 10,00,000

[10,000 equity shares of ` 100 each]
b. Share capital of XY Ltd. after reduction 1,00,000
[10,000 equity shares of ` 10 each]
c. Share capital of XY Ltd. after reconsolidation 1,00,000
[1000 equity shares of ` 100 each]
d. Holding of AB Ltd in XY Ltd. 20%
e. Value of holding of AB Ltd in XY Ltd. 20,000
[200 equity shares of ` 100 each]

WN # 2 : Purchase consideration
a. No. of equity shares of AB Ltd. (20,00,000 ÷ 100) 20,000
b. Exchange ratio 1:1
c. No. of equity shares to be given by XY Ltd. to AB Ltd. 20,000
d. Less : No. of Equity shares held by AB Ltd. in XY Ltd. 200
e. No. of shares now to be given 19,800
f. Purchase consideration (19,800 equity shares of ` 100 each) 19,80,000

Part - II : Journal entries in the books of AB Ltd.

(` ‗000)

Particulars Debit Credit

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1. a. Transfer to realisation account of all Assets taken

over except investment held by selling company in
purchasing company
Realisation A/c Dr. 3,800
To Fixed assets A/c 2,700
To Investments [700 - 250] A/c 450
To Sundry Debtors A/c 400
To Cash and Bank A/c 250
b. Transfer to realisation account of all liabilities taken over
10% Debentures A/c Dr. 500
Loan from financial institations A/c Dr. 250
Sundry Creditors A/c Dr. 300
Proposed Dividend A/c Dr. 200
To Realisation A/c 1250
2. Purchase consideration
a. Due entry
XY Ltd. A/c Dr. 1,980
To Realisation A/c 1,980

Particulars Debit Credit

b. Receipt
Shares in XY Ltd. A/c Dr. 1,980
To XY Ltd. A/c 1,980
3. Transfer of realisation loss to share holders
Equity shareholders A/ c Dr. 570
To Realisation A/c 570
4. Transfer of Share capital and Reserves and surplus to equity share holders
Share capital A/c Dr. 2,000
Reserves and surplus A/c Dr. 800
To Equity shareholders 2,800
5. Settlement to share holders by transfer of purchase
consideration now received and shares already held
by AB Ltd. in XY Ltd.
Equity shareholders A/c Dr. 2,230
To Equity shares of XY Ltd. 2,230

Part. III. Journal entries in the books of XY Ltd.

(` ‗000)

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Particulars Debit Credit

1. Reduction of Share capital

Equity Share Capital (` 100) A/c Dr. 1,000
To Equity Share Capital (` 10) A/c 100
To Reconstruction A/c 900
2. Consolidation of equity shares of `10 each to ` 100 each
Equity Share Capital (` 10) A/c Dr. 100
To Equity Share Capital (` 100) A/c 100
3. Waiver of loan by financial institution
Loan from financial institution A/c Dr. 60
To Reconstruction A/c 60
4. Write off the debit balance of Profit and Loss A/c by utilising
Reconstruction A/c and balance of Reconstruction A/c
transferred to Capital reserve
Reconstruction A/c Dr. 960
To Profit and Loss A/c 800
To Capital Reserve A/c 160

Entries relating to Amalgamation :

• Nature of Amalgamation - Merger
• Method of Accounting - Pooling of Interest Method (` ‗000)

Particulars Debit Credit

1. For Purchase Consideration Due

Business Purchase A/c Dr. 1,980
To Liquidator of AB Ltd. A/c 1,980
2. For assets and liabilities taken over
Purchase consideration now paid
Shares already held by AB Ltd. 200
Total consideration 2,230
Less: Paid-up Share capital of AB Ltd. 2,000
Excess Purchase Consideration Paid 230
This excess is to be adjusted against reserves of AB Ltd.
Reserves of AB Ltd. 800
Less: Excess as above 230
Balance to be incorporated 570
Fxed assets (net of depreciation) A/c Dr. 2,700
Investment A/c Dr. 450

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Sundry Debtors A/c Dr. 400

Cash and Bank A/c Dr. 250
To Reserves and Surplus A/c 570
To Debentures A/c 500
To Loan from financial institutions A/c 250
To Sundry Creditors A/c 300
To Proposed Dividend A/c 200
To Business Purchase A/c 1,980
3. Discharge of purchase consideration
Liquidator of AB Ltd. A/c Dr. 1,980
To Equity Share capital of XY Ltd. A/c 1,980
4. Payment of proposed divided to shareholders of AB Ltd.
Proposed Dividend A/c Dr. 200
To Bank A/c 200
5. Cancellation of intercompany Owings
Sundry Creditors A/c Dr. 100
To Sundry Debtors A/c 100

10. The following are the Balance Sheets as at 31st December of Laila Ltd and Majnu Ltd
Equity and Liabilities Laila Ltd Majnu Ltd Assets Laila Ltd Majnu Ltd
(1) Shareholders‘ Funds: (1) Non-Current Assets:
(a) Share Capital 4,00,000 3,00,000 (a) Fixed Assets 1,50,000 1,00,000
– Equity Shares of ` 10 each (i) Tangible – Mchny 30,000 10,000
(b) Reserves & Surplus 60,000 80,000 (ii) Intangible – 10,000
(2) Current Liabilities: Goodwill 40,000 18,000
Trade Payables – Sundry Crs 40,000 30,000 (b) Other Non-Current 2,10,000 72,000
Assets 60,000 1,20,000
– Prelim Expenses 90,000
(2) Current Assets:
(a) Inventories
(b) Trade Receivables –
Drs
(c) Cash & Cash
Equivalents
Total 5,00,000 4,10,000 Total 5,00,000 4,10,000

Goodwill of the Companies is to be valued at ` 50,000 and ` 40,000 respectively. Machinery of

Laila s worth ` 2,00,000 and of Majnu ` 90,000. Stock of Majnu has been shown at 90% of its
cost. It is decided that Laila will acquire Majnu, without liquidating the latter, by taking over its
entire business by issue of shares at the Intrinsic Value. You are required to draft the Balance
Sheet of Laila Ltd. after takeover of Manju‘s assets & liabilities.

Answer:

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 Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

10.
A. Basic Information
Selling Co : Majnu Ltd Date of B/S: 31st Dec Nature of Amalgamation:
Buying Co : Laila Ltd Date of Amg: 31st Dec Purchase Method (Assets and Liabilities
are not taken over at Book Values)

B. Computation of Intrinsic Value of Laila‘s Shares and Net Assets Value of Majnu Ltd
Particulars Laila Majnu
Goodwill (as agreed) 50,000 40,000
Machinery (as per valuation) 2,00,000 90,000
Stock 40,000 72,000
= 80,000
90%
Debtors 2,10,000 1,20,000
Bank 60,000 90,000
Total Assets 5,60,000 4,20,000
Less: Creditors (40,000) 30,000
Net Assets Value 5,20,000 3,90,000
Net Assets
Intrinsic Value per Share = 40,000 Shares `13

C. Purchase Consideration and Discharge thereof

• Purchase Consideration = Net Assets Value of Majnu Ltd = ` 3,90,000
` 3,90,000
• Shares of Laila Ltd, issuable at the Intrinsic Value of ` 13 = = 30,000 shares.
`13

• Hence, the Shares of ` 10 each are issuable at a premium of ` 3 each.

D. Revaluation Reserve of Laila Ltd

Upward Revaluation of Goodwill (` 50,000 - ` 30,000) ` 20,000

Upward Revaluation of Machinery (` 2,00,000 - ` 1,50,000) ` 50,000
Total Revaluation Reserve ` 70,000
Less: Own Goodwill written off (See Note below) ` 50,000
Balance Revaluation Reserve taken to Balance Sheet ` 20,000

Note: As per AS-26, only purchased goodwill can be shown in the accounts, so at the earliest,
inherent own goodwill of ` 50,000 has been adjusted against Revaluation Reserve. However,
the balance of Revaluation Reserve can be utilised to write off the Purchased Goodwill of
`40,000 (relating to Majnu Ltd) partly.
E. Capital Reserve of Majnu Ltd
Upward Revaluation of Goodwill (` 40,000 - ` 10,000) ` 30,000
Upward Revaluation of Stock (` 80,000 - ` 72,000) ` 8,000
Total of above Less: Downward (` 1,00,000 - ` 90,000) ` 38,000
Revaluation of Machinery ` 10,000
Net Amount taken to Capital Reserve (after takeover of entire business) ` 28,000

Note: The term ―Revaluation Reserve‖ is relevant for Laila which will continue its trading
business, whereas the term ―Capital Reserve‖ may be used for Majnu which will now be an
Investment Company only.

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F. Balance Sheet of Laila Ltd (after takeover of Majnu‘s assets and liabilities)
Particulars as at 31st March Note This Year Prev. Yr
I EQUITY AND LIABILITIES
(1) Shareholders‘ Funds:
(a) Share Capital 1 7,00,000
(b) Reserves & Surplus 2 1,60,000
(2) Current Liabilities 70,000
Trade Payables - Creditors (40,000 + 30,000)
Total 9,30,000
II ASSETS
(1) Non-Current Assets
Fixed Assets: (i) Tangible Assets (2,00,000 + 90,000) 2,90,000
(ii) Intangible Assets - Goodwill 40,000
(2) Current Assets
(a) Inventories (40,000 + 80,000) 1,20,000
(b) Trade Receivables (2,10,000 + 1,20,000) 3,30,000
(c) Cash & Cash Equivalents (60,000 + 90,000) 1,50,000
Total 9,30,000

Notes to the Balance Sheet: Note 1: Share Capital

Particulars This Year Prev. Year
Authorised: …….. Equity Shares of ` 10 each
Issued, Subscribed & Paid up: 70,000 Equity Shares of ` 10 each 7,00,000
(Of the above, 30,000 shares are allotted as fully paid up for
consideration other than cash)
Total 7,00,000

Note 2: Reserves and Surplus

Particulars This Year Prev. Year
(a) Securities Premium (30,000 Shares at ` 3 each) 90,000
(b) Revaluation Reserve (after adjusting own goodwill) 20,000
(c) Other Reserves 60,000
(d) Surplus (Balance in P & L A/c) - Being Prelim Exp. Written off (10,000)
Total 1,60,000

11. In each of the following cases, ascertain (a) Unrealized Profits to be eliminated, (b)
Unrealized Profits adjusted against Holding Company‘s Reserve and Minority Interest, and
(c) balance in Asset Account as appearing in the Consolidated Balance Sheet -
(i) A Rolling Machine costing ` 35,00,000 has been sold by HiFi Ltd to its subsidiary Down
to Earth Ltd for ` 42,00,000. During the year Down to Earth Ltd has charged Depreciation of
` 3,50,000 on the Machinery. HiFi Ltd holds 80% of the Equity of Down to Earth Ltd.
Machinery Account balance as appearing in the books of Companies – HiFi Ltd
`95,75,000, Down to Earth Ltd ` 68,50,000.
(ii) C Ltd sold 8 Workstations to its parent S Ltd at ` 2,50,000 each. The total cost of the
Workstations to C Ltd was ` 9,75,000. S Ltd holds 70% of the Equity Capital in C Ltd. The
balances in the Asset Account ―Computer and Peripherals‖ were – C Ltd ` 25,00,000, S
LTd ` 50,00,000. Depreciation at 30% was charged by S Ltd on the Workstations
purchased from C Ltd.
Answer:

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11.
Particulars Case A Case B
Sold by HiFi Ltd C Ltd
(Holding Co.) (Subsidiary Co.)
Purchased by Down to Earth Ltd S Ltd
(Subsidiary Co.) (Holding Co.)
Nature of transfer Downstream Transfer Upstream Transfer
Sale Price ` 42,00,000 ` 2,50,000 x 8 =
Less: Cost to Seller ` 35,00,000 ` 20,00,000
`9,75,000
A. Profit on Transfer ` 7,00,000 ` 10,25,000
B. Rate of Depreciation 3,50,000/42,00,000 = 8.33% 30%
C. Depn. on profit element (A x B) 7,00,000 x 8.33% = ` 58,310 10,25,000 x 30% =
` 3,07,500
Unrealized Profit to be eliminated ` 6,41,690 ` 7,17,500
(A - C)
- Adjusted against Holding Co‘s 100% x ` 6,41,690 = `6,41,690 Share of Holding Co.
Reserves 70% x ` 7,17,500 =
` 5,02,250
- Adjusted against Minority Interest Unrealized Profits on Downstream Share of Minority 30% x
Transfer are adjusted fully against ` 7,17,500 =
Group Reserves only. ` 2,15,250
Consolidated Asset Balance 95,75,000 + 68,50,000 - 6,41,690 25,00,000 + 50,00,000 -
(Holding Co. bal. + Subsidiary Co. = ` 1,57,83,310 7,17,500 = ` 67,82,500
bal. Less Unrealized Profit)

12. On 31.03.2009, Rajiv Ltd acquired 1,05,000 Shares of Naresh Ltd for ` 12,00,000. The
Balance Sheet of Suresh Ltd on that date was as under – (` 000‘s)
Equity and Liabilities ` Assets `
(1) Shareholders‘ Funds: (1) Non-Current Assets:
(a) Share Capital Fixed Assets 1,050
-1,50,000 Eq Sh of ` 10 each fully paid 1,500 (2) Current Assets 645
(b) Reserves & Surplus
(i) Pre-lncorporation Profits 30
(ii) Profit & Loss A/c 60
(2) Current Liabilities: Trade Payables (Sundry 105
Creditors)
Total 1,695 Total 1,695

On 31.03.2015, the Balance Sheets of the two Companies were as follows - (` 000‘s)
Equity and Liabilities Rajiv Naresh Assets Rajiv Naresh
Ltd Ltd Ltd Ltd
(1) Shareholders‘ Funds: (1) Non-Current Assets:
(a) Share Capital (a) Fixed Assets 7,920 2,310
- Eq Sh of ` 10 each fully paid 4,500 1,500 (b) Non-Current Investments
(before Bonus Issue) -1,05,000 Equity Shares in

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Naresh Ltd at cost 1,200 —

(b) Reserves & Surplus
- Securities Premium 900 - (2) Current Assets: 4,410 1,755
- Pre-lncorporation Profits - 30
- General Reserve 6,000 1,905
- Profit & Loss A/c 1,575 420
(2) Current Liabilities:
Trade Payables (Crs) 555 210
Total 13,530 4,065 Total 13,530 4,065

Directors of Suresh Ltd made a Bonus Issue on 31.03.2010 in the ratio of one Equity Share off 10
each fully paid for every two Equity Shares held on that date.
Calculate as on 31.3.2015 (i) Cost of Control/Capital Reserve, (ii) Minority Interest,
(iii) Consolidated Profit and Loss Account in each of the following cases: (1) Before issue of
Bonus Shares, (2) Immediately after the issue of Bonus Shares. It may be assumed that Bonus
Shares were issued out of Post-Acquisition Profits by using General Reserve.
Prepare a Consolidated Balance Sheet after the Bonus Issue.
Answer:
12.
A. Basic Information

Company Status Dates Holding Status

Holding Company = Rajiv Acquisitiuon: 31.03.2009 Holding Company = 70%
Subsidiary = Naresh Consolidation: 31.03.2015 Minority Interest = 30%

B. Analysis of Reserves and Surplus of Naresh Ltd

(a) Pre-lncorporation Profits = ` 30,000 - Capital Profit

(b) General Reserve

Before Bonus Issue After Bonus Issue
As on 31.3.2015 = 19,05,000 As on 31.3.2015 19,05,000
Bonus Issue 7.50.000 (15 Lakhsx1/2)
As on 01.04.2009 Tfr between 01.04.2009 & 31.3.2015 Corrected Bal 11,55,000
NIL 19,05,000
Capital Revenue 01.04.2009 Tfr between 1.4.2009 & 31.3.2015
NIL 11,55,000 Revenue
Capital

Group Interest-Pre Minority Interest

= 19,05,000 x 70% = 19,05,000 x 30%
= 13,33,500 = 5,71,500 Group Interest-Pre Minority Interest
= 11,55,000 x 70% = 11,55,000x30%
= 8,08,500 = 3,46,500

C. Profit & Loss Account

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As on 31.03.2015 = ` 4,20,000

As on 01.04.2009 60,000 Profits between 01.04.2009 & 31.03.2015 3,60,000

Capital Revenue

Group Interest-Pre Minority Interest Group Interest-Post Minority Interest

= 60,000 x 70% = 42,000 = 60,000 x 30% = 18,000 = 3,60,000 x 70% = 2,52,000 = 3,60,000 x 30% = 1,08,000

D. Consolidation of Balances (amounts in `)

Particulars Total Minority Pre- Post

Interest Acquisition Acquisition
Naresh Ltd (Holding - 70%, Minority - 30%) General P&L A/c Securities
BEFORE BONUS ISSUE Reserve Premium
Equity Capital 15,00,000 4,50,000 10,50,000 – – –
Pre-incorporation profits 30,000 9,000 21,000 – – –
General Reserves 19,05,000 5,71,500 – 13,33,500 – –
Profit & Loss A/c 4,20,000 1,26,000 42,000 – 2,52,000 –
Minority Interest 11,56,500
Total [Cr] 11,13,000 13,33,500 2,52,000
Cost of Investment [Dr.] (12,00,000)
Parent‘s Balances 60,00,000 15,75,000 9,00,000
For Consolidated Balance Sheet 11,56,500 (87,000) 73,33,500 18,27,000 9,00,000
Minority Goodwill Gen. Res P & L A/c Sec Prem
AFTER BONUS ISSUE
Equity Capital [15,00,000 + 7,50,000] 22,50,000 6,75,000 15,75,000
Pre-incorporation Profits 30,000 9,000 21,000
General Reserve 11,55,000 3,46,500 8,08,500 2,52,000
Profit & Loss A/c 4,20,000 1,26,000 42,000
Minority Interest 11,56,500
Total [Cr] 16,38,000 8,08,500 2,52,000
Cost of Investment [Dr.] (12,00,000)
Parent‘s Balances 60,00,000 15,75,000 9,00,000
For Consolidated Balance Sheet 11,56,500 4,38,000 68,08,500 18,27,000 9,00,000
Minority Cap. Res. Gen. Res P & L A/c Sec Prem

E. Consolidated Balance Sheet of Rajiv Ltd and its Subsidiary Naresh Ltd as at 31.03.2015

Particulars as at 31st March Note 31.03.2015 31.03.2014

I EQUITY AND LIABILITIES
(1) Shareholders‘ Funds:
(a) Share Capital 1 45,00,000
(b) Reserves & Surplus 2 99,73,500
(2) Minority Interest 11,56,500
(3) Current Liabilities - Trade Payables (5,55,000 + 2,10,000) 7,65,000
Total 1,63,95,000
II ASSETS Non-Current Assets
(1) Fixed Assets = 79,20,000 + 23,10,000 1,02,30,000
(2) Current Assets = 44,10,000 + 17,55,000 61,65,000
Total 1,63,95,000

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Notes to the Balance Sheet: Note 1: Share Capital

Particulars 31.03.2015 31.03.2014

Authorised: ....... Equity Shares of ` 10 each
Issued, Subscribed & Paid up: 4,50,000 Equity Shares of ` 10 each 45,00,000
Total 45,00,000

Note 2: Reserves and Surplus

Particulars 31.03.2015 31.03.2014

(a) Capital Reserve on Consolidation 4,38,000
(b) Securities Premium 9,00,000
(c) Other Reserves - General Reserve 68,08,500
(d) Surplus (Balance in P & L A/c) 18,27,000
Total 99,73,500

13. Kapil Ltd has made the following investments in Lily Ltd a few years before -
i. 60,000 Equity Shares of ` 10 each at ` 15,00,000.
ii. 2,000 12% Preference Shares of ` 100 each at ` 3,00,000.
iii. 5,000 10% Debentures at ` 95 per Debenture.
The Capital Profits of Lily Ltd have been ascertained at ` 9,60,000.
Determine the cost of control, under the following situations -
Shares were purchased Ex-Dividend and Equity Dividend was declared at 20% and the
dividends were
(a) Credited to Profit and Loss Account
(b) Credited to the Investment Accounts
Answer:
13.
Cost of Control
Particulars Ex-Dividend
Credited to P&L A/c Invt. A/c
Nominal Value of Equity Capital (60,000 x ` 10) 6,00,000 6,00,000
Nominal Value of Pref. Capital (2,000 x ` 100) 2,00,000 2,00,000
Share in Capital Profit 9,60,000 9,60,000
Adjustment for Dividend out of Pre-Acquisition Profits

Less: Only for Ex-Dividend Purchase

Preference Dividend (12% x ` 2,00,000) – (24,000)
Equity Dividend (20% x ` 6,00,000) – (1,20,000)
Total Cr. (A) 17,60,000 16,16,000
Less: Cost of Investment 15,00,000 15,00,000
Equity Capital Preference Capital 3,00,000 3,00,000
Total Cost of Investment (B) 18,00,000 18,00,000
Capital Reserve (if A > B) (A - B) - -
Goodwill (if B > A) (B - A) 40,000 1,84,000

14. On 31.03.2014 the Balance Sheets (draft) of H Ltd. and its subsidiary S Ltd. stood as follows:
(in ` Lakhs)

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Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Share Capital: Land and Buildings 2,718 –

Authorised 15,000 6,000 Plant and Machinery 4,905 4,900
Issued and Subscribed: Furniture and Fittings 1,845 586

Equity Shares (` 10) Fully 12,000 4,800 Investments in shares in S 3,000 –

Paid Ltd.
General Reserve 2,784 1,380 Stock 3,949 1,956
Profit and Loss Account 2,715 1,620 Debtors 2,600 1,363
Bills Payable 372 160 Cash and Bank Balances 1,490 204
Sundry Creditors 1,461 854 Bills Receivable 360 199

Provision for Taxation 855 394 Sundry Advances 520 –

Proposed Dividend 1,200 –

21,387 9,208 21,387 9,208

The following information is also provided to you:

i. H Ltd. purchased 180 Lakhs shares in S Ltd. on 01.04.2013 when the balances to General
Reserve and Profit and Loss Account of S Ltd. stood at ` 3,000 Lakhs and ` 1,200 Lakhs
respectively.
ii. On 04.07.2013 S Ltd. declared a dividend @ 20% for the year ended 31.03.2013. H Ltd.
credited the dividend received by it to its Profits and Loss Account.
iii. On 01.01.2014 S Ltd. issued 3 fully paid-up shares for every 5 shares held as Bonus Shares
out of balances in its General Reserve as on 31.03.2013.
iv. On 31.03.2014 all the Bills Payable in S Ltd.‘s Balance Sheet were acceptances in favour of
H Ltd. But on that date, H Ltd. held only ` 45 Lakhs of these acceptances in hand, the rest
having been endorsed in favour of its Creditors.
v. On 31.03.2014 S Ltd.‘s stock included goods which it had purchased for ` 200 Lakhs from H
Ltd. which made a profit @ 25% on cost.
Prepare the Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31.03.2014
bearing in mind the requirements of AS 21.
Answer:
14.
A. Basic Information
Company Status Dates Holding Status

Holding Company = H Acquisition: 01.04.2013 Holding Company = 60%

Subsidiary =S Consolidation: 31.03.2014 Minority Interest = 40%

Shareholding Pattern - % of Holding by H Ltd.

Date Particulars No. of Shares
(Lakhs)

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01.04.2013 Original Purchase 180

01.01.2014 First Bonus Issue (3/5 x 1,80,000) 108
31.03.2014 Total Shares held by H Ltd. in S Ltd. 288

Total Shares outstanding in S Ltd. 480

% of Holding (28.8 / 48) 60%

B. Analysis of Reserves and Surplus of S Ltd. (` Lakhs)

(a) General Reserves
Balance as on 31.03.2014 ` 1,380

Balance on 1.4.2013 (as oi. acqn. date) ` 3,000 Transfer during 2013-14 (upto
Consolidation
Less: Bonus Issue (108/60% x ` 10) ` 1,800 (balancing figure) ` 180
Balance Capital Profit ` 1,200 Revenue Reserve

(b) Profit and Loss Account

Balance as on 31.03.2014 ` 1,620

Balance on 01.04.2013(as on acqn. date) ` 1,200 Profit for 2013-14 (upto Consolidation)
Less: Dividend (` 3000 x 20%) ` 600 (balancing figure) ` 1020
Balance Capital Profit ` 600 Revenue Profit

C. Analysis of Net Worth of S Ltd. (` Lakhs)

Total H Minority
Particulars
100% 60% 40%

(a) Equity Capital 4,800 2,880 1,920

(b) Capital Profits General Reserve 1,200
Profit and Loss Account 600
Total Capital Profits 1,080 720
1,800
(c) Revenue Res. General Reserve 108 72
(d) Revenue Profit Profit and Loss Account 180
612 408
1,020

Minority Interest 3,120

D. Cost of Control

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Particulars ` Lakhs

Cost of Investment 3,000

Less: Pre-Acquisition Dividend Received (` 1,800 x 20%) 360

Adjusted Cost of Investment 2,640

Less: Nominal Value of Share Capital 2.880
Share in Capital Profit of S Ltd. 1,080 (3,960)

Capital Reserve on Consolidation 1,320

E. Consolidation of Reserves and Surplus (` Lakhs)

Particulars Gen. Res. P&LA/c

Balance as per Balance Sheet of H Ltd. 2,784 2,715

Less: Pre-Acquisition Dividend wrongly credited to P&L A/c (360)

Adjusted Cost of Investment 2,784 2,355

Add: Share of Revenue from S Ltd. 108 612

Consolidated Balance 2,892 2,967

Less: Unrealized Profit on Closing Stock (` 200 x 25%/125%) (40)

Adjusted Consolidated Balance 2,892 2,927

Name of the Company: H Ltd. And its subsidiary S Ltd.

Consolidated Balance Sheet as at 31st March 2014

Ref No. Particulars Note As at 31st As at 31st

No. March, 2014 March, 2013
` `
A EQUITY AND LIABILITIES
1 Shareholders‘ funds
(a) Share capital @ ` 10 each 1 12,000 -
(b) Reserves and surplus 2 7,139 -

2 Minority Interest 3,120 -

3 Non-current liabilities
(a) Long-term borrowings - -
(b) Deferred tax liabilities (net) - -
(c) Other long-term liabilities - -

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(d) Long-term provisions - -

- -
4 Current liabilities
(a) Short-term borrowings - -
(b) Trade payables 3 2,315 -
(c) Other current liabilities 4 487 -
(d) Short-term provisions 5 2,449 -

5,251 -

TOTAL 27,510 -

B ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 6 14,954 -
(ii) Intangible assets - -
(iii) Capital work-in-progress - -
(iv) Intangible assets under - -
development
(v) Fixed assets held for sale - -
(b) Non-current investments - -
(c) Deferred tax assets (net) - -
(d) Long-term loans and advances - -
(e) Other non-current assets - -
14,954 -

2 Current assets
(a) Current investments - -
(b) Inventories 7 5,865 -
(c) Trade receivables 8 3,963 -
(d) Cash and cash equivalents 9 1,694 -
(f) Short-term loans and advances 520 -
(Sundry advance)
(f) Other current assets 10 514 -

12,556 -

TOTAL 27,510 -

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Note 1. Share Capital

As at 31st As at 31st
March, 2014 March, 2013
Authorised Capital 15,000 -

Issued and Paid Up 12,000 -

Total 12,000 -

Note 2. Reserve and Surplus

As at 31st As at 31st
March, 2014 March, 2013
General Reserve 2,892 -
Profit and loss 2,947 -
Capital Reserve on Consolidation 1,320 -
Total 7,159 -

Note 3. Trade Payable

As at 31st As at 31st
March, 2014 March, 2013
Sundry Creditors

H 1,461 -
S 854 -
Total 2,315 -

Note 4. Other Current Liabilities

As at 31st As at 31st
March, 2014 March, 2013
Bills Payable:-

- H Ltd 372 -
- S Ltd 160 -
532 -

Less: Mutual Owings 45 -

487

Note 5. Short Term Provisions

As at 31st As at 31st
March, 2014 March, 2013
Prov. For taxations

H Ltd. 855 -
S Ltd. 394 -

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1,249 -

Proposed dividend 1,200 -

Total 2,449 -

Note 6. Tangible Assets

As at 31st As at 31st
March, 2014 March, 2013
Land and Building 2,718 -
Plant and Machinery

(4905+4900) 9,805 -
Furniture

(1845+586) 2,431 -
Total 14,954 -

Note 7. Inventories
As at 31st As at 31st
March, 2014 March, 2013
Stock

H Ltd 3,949 -
S Ltd. 1,956 -

5,905 -

Less: Unrealized profit 40 -

Total 5,865 -

Note 8. Trade Receivable

As at 31st As at 31st
March, 2014 March, 2013
Debtors

H Ltd 2,600 -
S Ltd. 1,363 -
Total 3,963 -

Note 9.
Cash and Cash Equivalents
As at 31st As at 31st
March, 2014 March, 2013
Cash & Bank

H Ltd 1,490 -
S Ltd. 204 -
Total 1,694 -

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Note 10. Other Current assets

As at 31st As at 31st
March, 2014 March, 2013
Bills Receivable

H Ltd 360 -
S Ltd. 199 -
559 -

Less: set off 45 -

Total 514 -

15. The summarised Balance Sheet of Apple Ltd., Orange Ltd. and Banana Ltd. as
on 31st March, 2014 are given below:
(` in, 000)

Liabilities Apple Orange Banana Assets Apple Orange Banana

Ltd. Ltd. Ltd. Ltd. Ltd. Ltd.
Shareholders‘ Funds: Non-Current
Equity Share 300 200 120 Assets: 140 240 206
Fixed Assets
Reserves and Non-Current Invt -
Surplus
Reserves 100 80 60 (at cost):
Shares in Orange 180 100
Ltd. 80
Shares in Banana
Ltd.
Profit & Loss A/c 120 100 80 Current Assets:
Current Liabilities Inventories 80 60 40
Trade Payables — Trade Receivables
—
Sundry Creditors 60 70 50 Sundry Debtors 40 50 60
Apple Ltd. — 20 16 Due from:
Orange Ltd. 24
Banana Ltd. 16
Cash & Cash 20 20 20
Equivalents
Total 580 470 326 Total 580 470 326

Additional information:
(i) Apple Ltd., held 16,000 shares of Orange Ltd. and 3,600 shares of Banana Ltd.
(ii) Orange Ltd. held 7,200 shares of Banana Ltd.
(iii) All investments were made on 1st July, 2013
(iv) The following were the balances on 1st July, 2013:

Orange Ltd. Banana Ltd.

Reserves 50,000 30,000
Profit & Loss A/c 40,000 50,000

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 Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

(v) Orange Ltd. invoiced goods to Apple Ltd. for ` 8,000 at a cost plus 25% in December, 2013.
The closing stock of Apple Ltd. includes such goods valued at ` 10,000. (vi) Apple Ltd. proposed
dividend at 15%.

Prepare the consolidated Balance Sheet as per Schedule III of the group as on
31st March, 2014. Working notes should form part of the answer.

Answer:

15.
Consolidated Balance Sheet of Apple Ltd. and
its Subsidiaries Orange Ltd. and Banana Ltd.
as on 31st March 2014
Particulars Note No `
I. EQUITY AND LIABILITIES
(1) Shareholder's Funds
(a) Share Capital 3,00,000
(b) Reserves and Surplus 1 3,44,200
(2) Share application money pending allotment
(3)Minority Interest 2 1,08,800
(4) Non-current liabilities
(5)Current Liabilities
(a)Trade Payables 3 1,80,000
(b)Other current liabilities 4 45,000
Total 9,78,000
II. ASSETS
(1) Non-current assets
(a) Fixed assets 5 5,86,000
(2) Current assets
(a) Inventories 6 1,78,000
(b) Trade receivables 7 1,54,000
(c) Cash and cash equivalents 8 60,000
Total 9,78,000

[Relevant Notes]

1. Reserve and Surplus ` `

Capital Reserve 52,000
Other Reserves 1,47,400
2. Profit and Loss A/c 1,44,800 3,44,200
Minority interest
Orange Ltd. 82,800
3. Banana Ltd. 26,000 1,08,800
Trade Payables
4. Apple Ltd. 60,000
Orange Ltd. 70,000
5. Banana Ltd. 50,000 1,80,000
Other current Liabilities
6. Proposed Dividend 45,000
Fixed Assets
Apple Ltd. 1,40,000
Orange Ltd. 2,40,000
Banana Ltd. 2,06,000 5,86,000

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Inventories
Apple Ltd 80,000 78,000
Less: Unrealised profit 2,000
7.
Orange Ltd 60,000
Banana Ltd 40,000 1,78,000
Trade Receivables
8. Apple Ltd. 40,000
Orange Ltd. 50,000
Banana Ltd. 60,000
Cash in Transit 4,000 1,54,000
Cash and cash equivalents
Cash in hand
Apple Ltd. 20,000
Orange Ltd. 20,000
Banana Ltd. 20,000 60,000

Working Notes:

Shareholding Pattern:

Number of shares % of holding

In Orange Ltd.
Apple Ltd. 16,000 80%
Minority Interest 4,000 20%
In Banana Ltd.
Apple Ltd. 3,600 30%
Orange Ltd. 7,200 60%
Minority Interest 1,200 10%

1. Analysis of profit of Banana Ltd.

Pre-acquisition Post acquisition
Capital Reserve Revenue Reserve Revenue Profit
Reserve as on 1.7.2013 30,000 -- --
Profit and Loss A/c on 01.07.2013 50,000
Increase in Reserves - 30,000 -
Increase in Profit - - 30,000
80,000 30,000 30,000
Less: Minority Interest (10%) 8,000 3,000 3,000
72,000 27,000 27,000
Share of Apple Ltd 24,000 9,000 9,000
Share of Orange Ltd 48,000 18,000 18,000

2. Analysis of profit of Orange Ltd.

Pre-acquisition Post acquisition
Capital Reserve Revenue Reserve Revenue Profit
Reserve as on 1.7.2013 50,000 -- --
Profit and Loss A/c on 1.7.2013 40,000
Increase in Reserves - 30,000 -
Increase in Profit - - 60,000
90,000 30,000 60,000
Share in profit of Banana - 18,000 18,000
Ltd. (post acquisition)

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 Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

90,000 48,000 78,000

Less: Minority Interest (20%) 18,000 9,600 15,600
Share of Apple Ltd. 72,000 38,400 62,400

3. Cost of control
` `
Investment in Orange Ltd 1,80,000
Investment in Banana Ltd 1,00,000 1,80,000
By Orange Ltd By Apple 80,000
Ltd
3,60,000
Less: Paid value of shares
In Orange Ltd. 1,60,000
In Banana Ltd. 1,08,000 2,68,000
Capital Profit of Apple Ltd
In Orange Ltd 72,000
In Banana Ltd. 24,000 96,000
Capital Profit of Orange Ltd in Banana 48,000 4,12,000
Ltd.
Capital Reserve 52,000

4. Minority Interest
Orange Ltd Banana Ltd
(`) (`)
Share Capital 40,000 12,000
Capital Profit 18,000 8,000
Revenue Reserve 9,600 3,000
Revenue Profit 15,600 3,000
83,200 26,000
Less: Unrealised profit on stock 20% of (` 10,000 x 25/125) 400 -
82,800 26,000

5. Profit and Loss A/c - Apple Ltd.

`
Balance as per separate Balance Sheet 1,20,000
Less: Proposed dividend 45,000
75,000
Add: Share of Orange Ltd 62,400
Share of Banana Ltd 9,000
1,46,400
Less: Unrealised profit on Stock (10,000 x 25/125 x 80%) 1,600
1,44,800

6. Other Reserve-Apple Ltd.

`
Balance as per separate Balance Sheet 1,00,000
Share of Orange Ltd. 38,400
Share of Banana Ltd. 9,000
1,47,400

7. Cash in transit

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`
Due to Apple Ltd .from Orange Ltd. 24,000
Less: Due by Orange Ltd. 20,000
4,000

16. R Ltd owns 80% of voting power of S Ltd, its only investment, acquired on 01.04.2013 for
`87,500. The net assets of S Ltd on 01.04.2013 was `1,25,000. On 01.10.2014, the investment in S
Ltd was sold for ` 2,25,000. The Net Assets of S Ltd on 31.03.2014 and 30.09.2014 were `1,87,500
and `2,25,000, respectively the difference representing the profit for the period. Compute the
gain/ Loss on disposal of the subsidiary. Determine the gain or loss if the sale consideration
was `1,37,500 and the shares were sold on 31.03.2014.
Answer:

16.

A. Cost of Control

Particulars `

Share in Net Assets as on date of acquisition (`1,25,000 x 80%) 1,00,000

Less: Cost of Investment (87,500)

Capital Reserve 12,500

B. Gain / Loss on disposal of investment in Subsidiary

Date of Sale 01.10.2014 31.03.2014

Sale Consideration
2,25,000 1,37,500
Less: Share in Net Assets as on date of sale (2,25,000 x 80%) /
(1,80,000) (1,50,000)
(1,87,500 x 80%)

Transfer to Profit and Loss Account 45,000 12,500

Gain Loss

17. The Balance Sheets of S Ltd. and B Ltd. as at 31st December are given below –

Liabilities S B Assets S B

Equity Capital (` 10) 60,00,000 30,00,000 Fixed Assets (Tangible) 60,00,000 35,00,000

General Reserve 15,00,000 10,00,000 Investment

Profit and Loss Account 10,00,000 5,00,000 - in 24,000 Shares of B 26,00,000 –

8% Debentures (` 100) 20,00,000 10,00,000 - in 500 Debentures of B 6,00,000 –

Bills Payable 6,00,000 7,00,000 - in 1000 Debentures of S – 9,50,000

Creditors 10,00,000 7,00,000 Current/asset

Stock in Trade 10,00,000 12,00,000

Debtors 16,00,000 9,00,000

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Cash & Bank 3,00,000 3,50,000

Total 1,21,00,000 69,00,000 Total 121,00,000 69,00,000

The investments in B Ltd. were made on the same day when B‘s General Reserve was ` 5,00,000
and Profit and Loss Account balance showed ` 2,00,000.
Prepare Consolidated Balance Sheet.

Answer:
17.
Basic Information

Company Status Dates Holding Status

Holding Co. = S Acquisition: Not Given Holding Company (240,000 ÷ 300,000) = 80%
Subsidiary = B Consolidation: 31st December Minority Interest = 20%

Analysis of Reserves and Surplus of B Ltd.

(a) General Reserve
Balance as per Balance Sheet ` 10,00,000

Balance on date of acquisition Acquisition to Consolidation

` 5,00,000 (balancing figure) ` 5,00,000
Capital Profit Revenue Reserve

(b) Profit and Loss A/c

Balance as per Balance Sheet ` 5,00,000

Balance on date of acquisition Acquisition to Consolidation

` 2,00,000 (balancing figure) ` 3,00,000
Capital Profit Revenue Reserve

Analysis of Net Worth of B Ltd.

S Minority
Particulars Total
80% 20%

(a) Share Capital Equity Share Capital 30,00,000 24,00,000 6,00,000

(b) Capital Profits
5,00,000
General Reserve
2,00,000
Profit and Loss Account
Total 7,00,000 5,60,000 1,40,000

(c) Revenue Reserve General Reserve 5,00,000 4,00,000 1,00,000

(d) Revenue Profits Profit and Loss Account 3,00,000 2,40,000 60,000
Minority Interest 9,00,000

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Cost of Control
Particulars `

Cost of Investment 26,00,000

Less: Nominal Value of Equity Capital (24,00,000)
Less: Share of Capital Profits (5,60,000)

Capital Reserve on Consolidation 3,60,000

Gain or Loss on elimination of Intra-Group Debentures

Particulars `

Cost of Investment S in B 6,00,000

B in S 9,50,000

Less: Total Cost of Investment 15,50,000

Nominal Value of Debentures (5,00,000 + 10,00,000) (15,00,000)

Loss on Elimination (Adjusted against Group Reserves) 50,000

Consolidation of Reserves and Surplus

Particulars Gen. Res. P&L A/c

Balance as per Balance Sheet 15,00,000 10,00,000

Add: Share of Revenue 4,00,000 2,40,000
Less: Loss on Elimination of Debentures – (50,000)

Consolidated Balance 19,00,000 11,90,000

Name of the Company: B Ltd. And its subsidiary S. Ltd.

Consolidated Balance Sheet of the Current year

Particulars Note Current Previous

No. Year Year
` `

A EQUITY AND LIABILITIES

1 Shareholders‘ funds

Share capital @ ` 10 each 60,00,000 -

Reserves and surplus 1 34,50,000 -

2 Minority Interest 9,00,000 -

3 Non-current liabilities

Long-term borrowings (8% Debenture) 2 15,00,000 -

4 Current liabilities

Trade payables 3 17,00,000 -

Other current liabilities 4 13,00,000 -

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Particulars Note Current Previous

No. Year Year
` `

TOTAL 1,48,50,000 -

B ASSETS

1 Non-current assets

Fixed Assets — Tangible assets 5 95,00,000 -

2 Current assets

Inventories 6 22,00,000 -

Trade receivables 7 25,00,000 -

Cash and cash equivalents 8 6,50,000 -

TOTAL 1,48,50,000 -

[Relevant Notes]

Note 1. Reserve and Surplus

Current Year Previous Year

General Reserve 19,00,000 -

Profit and loss 11,90,000 -
Capital reserve on consolidation 3,60,000 -

34,50,000 -

Note 2. Long Term Borrowings

Current Year Previous Year

8% Debentures

20000, 8% Debenture in S 20,00,000 -

10000,8% Debenture in B 10,00,000 -
30,00,000 -

Less: Mutual Owing 15,00,000 -

15,00,000 -

Note 3. Trade Payables

Current Year Previous Year

Sundry Creditors
- S Ltd 9,00,000.00 -
- B Ltd 8,00,000.00 -

1,700,000.00 -

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Note 4. Current Liabilities

Current Year Previous Year

Bills Payable:-
- S Ltd 6,00,000 -
- B Ltd 7,00,000 -

13,00,000 -

Note 5. Tangible Assets

Current Year Previous Year

Fixed Assets
- S Ltd 60,00,000 -
- B Ltd 35,00,000 -

95,00,000 -

Note 6. Inventories
Current Year Previous Year

Stock
- S Ltd 10,00,000 -
- B Ltd 12,00,000 -

22,00,000 -

Note 7. Trade Receivable

Current Year Previous Year

Debtors
- S Ltd 15,00,000 -
- B Ltd 10,00,000 -

25,00,000 -

Note 8.
Cash and Cash Equivalents
Current Year Previous Year

Cash & Bank

- S Ltd 3,00,000 -
- B Ltd 3,50,000 -
6,50,000

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18. (a) ‘Communities and stakeholders generally are likely to be more supportive of
companies that communicate openly and honestly about their management and
performance in relation to environmental, social and economic factors.‘- Justify.

(b) Describe the qualities and characteristics of information in TBL reports.

Answer:

18. (a)

Communities and stakeholders generally, are likely to be more supportive of companies

that communicate openly and honestly about their management and performance in
relation to environmental, social and economic factors.

Attraction and retention of high calibre employees - Existing and prospective employees
have expectations about corporate environmental, social and economic behaviour, and
include such factors in their decisions. The publication of TBL-related information can play
a role in positioning an employer as an 'employer of choice' which can enhance
employee loyalty, reduce staff turnover and increase a company's ability to attract high
quality employees.

Improved access to the investor market - A growing number of investors are including
environmental and social factors within their decision making processes. The growth in
socially responsible investment and shareholder activism is evidence of this. Responding
to investor requirements through the publication of TBL-related information is a way of
ensuring that the company is aligning its communication with this stakeholder group, and
therefore enhancing its attractiveness to this segment of the investment market.

Establish position as a preferred supplier - Obtaining a differentiated position in the

market place is one way to establish the status of preferred supplier. Effectively
communicating with stakeholder groups on environmental, social and economic issues is
central to obtaining a differentiated position in the market place.

Reduced risk profile - There is an expanding body of evidence to suggest that

performance in respect of economic, social and environmental factors has the capacity
to affect the views of market participants about a company's exposure to, and
management of, risk. TBL reporting enables a company to demonstrate its commitment
to effectively managing such factors and to communicate its performance in these
areas. A communication policy that addresses these issues can play an important role in
the company's overall risk management strategy.

Cost savings - TBL reporting often involves the collection, collation and analysis of data on
resource and materials usage, and the assessment of business processes. For example, this
can enable a company to better identify opportunities for cost savings through more
efficient use of resources and materials.

Innovation - The development of innovative products and services can be facilitated

through the alignment of R&D activity with the expectations of stakeholders. The process
of publishing TBL reporting provides a medium by which companies can engage with
stakeholders and understand their priorities and concerns.

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Aligning stakeholder needs with management focus - External reporting of information

focuses management attention on not only the integrity of the data but also the
continuous improvement of the indicator being reported.

Creating a sound basis for stakeholder dialogue - Publication of TBL reporting provides a
powerful platform for engaging in dialogue with stakeholders. Understanding stakeholder
requirements and alignment of business performance with such requirements is
fundamental to business success. TBL reporting demonstrates to stakeholders the
company's commitment to managing all of its impacts, and, in doing so, establishes a
sound basis for stakeholder dialogue to take place.

In addition to the benefits obtained through superior relationships with key stakeholder
groups, the decision to be publicly accountable for environmental and social
performance is often recognised as a powerful driver of internal behavioural change.
The availability of relevant information on economic, environmental and social
performance that previously may not have been collected and evaluated in a readily
understood manner may enable executives to identify and focus attention on specific
aspects of corporate performance where improvement is required.

18. (b) Qualities and characteristics of information in TBL reports

TBL reports usually contain both qualitative and quantitative information. In order for all
reported information to be credible, regardless of whether the information is qualitative or
quantitative, it is suggested that it should possess the following characteristics. These
include:

Reliability - information should be accurate, and provide a true reflection of the activities
and performance of the company.

Usefulness - the information must be relevant to both internal and external stakeholders,
and be relevant to their decision-making processes.

Consistency of presentation - throughout the report there should be consistency of

presentation of data and information. This includes consistency in aspects such as format,
timeframes, graphics, and metrics.

Full disclosure - reported information should provide an open explanation of specific

actions undertaken and performance outcomes.

Reproducible - information is likely to be published on an ongoing basis, and companies

must ensure that they have the capacity to reproduce data and information in future
reporting periods.

Auditability - alignment with the trend towards external verification requires that all
statements and data within the report be able to be readily substantiated.

Where the reported information possesses these characteristics, the reporting company is
able to present objective, balanced and credible information that delivers benefits to both
the reporting company and its stakeholders, while also minimising any potential reputation
risk associated with the publication of TBL reporting.

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19. List the benefits of an effective sustainability reporting cycle.

Answer:
An effective sustainability reporting cycle should benefit all reporting organizations.
Internal benefits for companies and organizations can include:

 Increased understanding of risks and opportunities

 Emphasizing the link between financial and non-financial performance
 Influencing long term management strategy and policy, and business plans
 Streamlining processes, reducing costs and improving efficiency
 Benchmarking and assessing sustainability performance with respect to laws, norms,
codes, performance standards, and voluntary initiatives
 Avoiding being implicated in publicized environmental, social and governance failures

 Comparing performance internally, and between organizations and sectors

External benefits of sustainability reporting can include:

 Mitigating - or reversing - negative environmental, social and governance impacts

 Improving reputation and brand loyalty

 Enabling external stakeholders to understand company‘s true value, and tangible and
intangible assets

 Demonstrating how the organization influences, and is influenced by, expectations

about sustainable development

20. (a) Describe Post-Balance Sheet Events.

(b)Discuss Sensitivity Analysis as per AS-32.
(c) Define financial assets and state its classification.

Answer:
20. (a)
Post-balance sheet events are those events, both favourable and unfavourable, which occur
between the balance sheet date and the date on which the financial statements are
approved by the board of directors.

Adjusting events are post-balance sheet events which provide additional evidence of
conditions existing at the balance sheet date. They include events which because of
statutory or conventional requirements are reflected in financial statements.

Non-adjusting events are post-balance sheet events which concern conditions which did not
exist at the balance sheet date.

The date on which the financial statements are approved by the board of directors is the
date the board of directors formally approves a set of documents as the financial statements.

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20. (b)
Sensitivity analysis
An analysis showing how profit or loss and equity would have been affected by changes
in relevant risk variable (interest rate, foreign currency exchange rates and other prices)
that were reasonably possible at reporting date.

Financial instruments should be grouped according to its class, for which an entity should
consider at a minimum, whether instruments are measured at amortised cost or fair value
and whether these are within or outside the scope of this standard. Such classification
should render better understanding of the significance, impact, nature and extent of risks
associated with the financial instruments to the users of financial statements easier.

20. (c)
A financial asset is an asset that is:
 Cash
 Equity Instruments of other enterprise, e.g. Investment in ordinary shares.
 A contractual right to receive cash, or to exchange financial assets or liabilities
with other enterprise under conditions that are potentially favourable to the
enterprise.

A financial asset has four classification

 Held for trading: Financial assets at fair value through Profit & Loss.
 They are held for trading or they are designated as such. It includes derivatives
also.
 Held to maturity: Assets with fixed maturity and the entity has a positive intention
and ability to hold till maturity.
 Loans & receivables: Assets with fixed payments (determinable and which are not
quoted in the market).
 Available for sale: These & those assets which are not classified under the above 3
categories. (residual)

21. (a) Mr. A buys the following equity stock options and the seller/writer of the options is Mr B.
Date Type of options Expiry Date Market lot Premium per Strike price
of purchase unit (`)
29.06.2014 A Co. Ltd.-Call 30.08.2014 100 15 230
option
30.06.2014 C Ltd.- Put 30.08.2014 200 20 275
Option

Prepare Journal Entries. Assume price of A Co. Ltd. on 30.08.2014 is `240 and C Ltd. is `290.

(b) ‗A financial derivative is a financial investment with all the three characteristics.‘-List
them.
(c) DCL has been consistently preparing Value Added Statement(VAS) as part of Financial
Reporting. The Human Resource Department of the company has come up with a new
scheme to link Employee Incentive with ‗Value Added‘ as per VAS. As per the scheme
an Annual Index of Employee Cost to Value Added rounded off to nearest whole

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 Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

number shall be prepared for the last 5 years and the best index out of results of the last
5 years shall be selected as the ‗Target Index‘. The Target Index percentage shall be
applied to the figure of value added for a given year and the Target Employee Cost
ascertained. Any saving in the Actual Employee Cost for the given year compared to
the Target Employee Cost will be rewarded as variable incentive to the extent of 70% of
the savings. From the given data, you are requested to ascertain the eligibility of
Variable Incentive for the year 2014-2015 of the employees of DCL.

Value Added Statement of DCL for the last 5 years (`lakhs)

Year 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014
Sales 3,200 3,250 2,900 3,800 4,900
Less: Bought out goods 2,100 2,080 1,940 2,510 3,200
and Services
Value Added 1,100 1,170 960 1,290 1,700

Application of Value Added

Year 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014
To Pay Employees 520 480 450 600 750
To Providers of Capital 160 170 120 190 210
To Government Tax 210 190 220 300 250
For maintenance and 210 330 170 200 490
expansion

Summarized Profit and Loss Account of DCL for 2013-2014 (` in lakhs)

Sales 5,970
Less: Material Consumed 1,950
Wages 400
Production Salaries 130
Production Expenses 500
Production Depreciation 150
Administrative Salaries 150
Administrative Expenses 200
Administrative Depreciation 100
Interest 150
Selling and Distribution Salaries 120
Selling Expenses 350
Selling Depreciation 120 4,320
Profit 1,650

Answer:
21. (a)

In the books of the buyer/holder, i.e. Mr. A

Date Particulars Debit (`) Credit (`)
29.06.2014 Option Premium A/c Dr. 5,500
To Bank A/c 5,500
[Being option premium paid]
30.08.2014 Bank A/c Dr. 1,000
To profit on derivatives 1,000
[Being profit recognized on call (240-
230)×100,and put not exercised]
30.08.2014 P/L A/c Dr. 5,500
To Option Premium A/c 5,500

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[ Being option premium written off]

In the books of the writer, i.e. Mr. B

Date Particulars Debit (`) Credit (`)
29.06.2014 Bank A/c Dr. 5,500
To Option Premium A/c 5,500
[Being option premium received]
30.08.2014 Loss on derivatives A/c Dr. 1,000
To Bank A/c 1,000
[Being loss recognized on call (240-
230)×100,and put not exercised]
30.08.2014 Option Premium A/c Dr. 5,500
To P/L A/c 5,500
[ Being option premium transferred to income]

21.(b) A financial derivative is a financial investment with all the three characteristics
(a) Its value changes in response to change in the underlying
(b) It requires no initial investment or very small initial investment
(c) It is settled on a future date,
21. (c)
1. Computation of Target Index: Target Index = Ratio of Employee Compensation on
Value Added
Year 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014
Employees Expense 520 480 450 600 750
(given)
Value Added 1100 1170 960 1290 1700
Index (1/2) 47% 41% 47% 47% 44%
Target Index= Best Index =47%
2. Computation of Value Added for current Financial Year (2014-2015)
Sales 5,970
Less: Material Consumed 1,950
Production Expenses 500
Administration Expenses 200
Selling Expenses 350 3,000
Gross Value Added 2,970

22. The following particulars in respect of Stock Options granted by a company are
available:
Grant date April 1,2011
Number of employees covered 50
Number of options granted per employee 1,000
Fair value of option per share on grant date (`) 9
The option will vest to employees serving continuously for 3 years from vesting date,
provided the share price is `70 or above at the end of 2013-14.
The estimate of number of employees satisfying the condition of continuous employment
were 48 on 31.03.2012 and 47 on 31.03.2013. The number of employees actually satisfying
the condition of continuous employment was 45. The share price at the end of 2013-2014
was `68.
Compute expenses to recognize in each year and show Stock Options Outstanding
Account in books of the company.

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Answer:
22.

Notes:
A. The vesting of Options is subject to satisfaction of two conditions viz, service condition
of continuous employment for 3 years and market condition that the share price at
the end of 2013-14 is not less than `70.
B. Since the share price on 31.03.2014 was `68, the actual vesting is nil. Despite this, the
company should recognize the value of option over 3-year vesting period from 2011-
12 to 2013-14.
C. At the end of the three year period, the balance in Options Outstanding will stand
transferred to General Reserve, since the options couldn‘t vest.

1. Amount of Employee Compensation Expense to be recognized

(a) Year 2011-12
Fair Value of Option per share 9
Number of shares expected to vest = 48 employees ×1000 shares 48,000
Total Fair Value for the options to vest = 48,000 ×`9 per shares 4,32,000
Expected vesting period 3 years
Value of option recognized as expense in 2011-12=4,32,000/3 `1,44,000

(b) Year 2012-13

Fair Value of Option per share 9
Number of shares expected to vest = 47 employees ×1000 shares 47,000
Total Fair Value for the options to vest = 47,000 ×`9 per shares 4,23,000
Expected vesting period 3 years
Cumulative value of option to be recognized as expense for two 2,82,000
years = (4,23,000/3 years) ×2 years
Less: Value of option recognized as expense in 2011-12 1,44,000
Value of Option recognized as expense in 2012-13 `1,38,000

(c) Year 2013-14

Fair Value of Option per share 9
Number of shares expected to vest = 45 employees ×1000 shares 45,000
Total Fair Value for the options to vest = 45,000 ×`9 per shares 4,05,000
Expected vesting period 3 years
Cumulative value of option to be recognized as expense for two 4,05,000
years = (4,05,000/3 years) ×3 years
Less: Value of option recognized as expense in 2011-12 and 2,82,000
2012-13
Value of Option recognized as expense in 2013-14 `1,23,000

2. Ledger Account – Stock Options Outstanding A/c

Year Particulars ` Particulars `
2011-12 To Balance c/d 1,44,000 By Employees 1,44,000
Compensation A/c
1,44,000 1,44,000
2012-13 To Balance c/d 2,82,000 By Balance b/d 1,44,000
By Employees 1,38,000
Compensation A/c
2,82,000 2,82,000
2013-14 To General Reserve (Year 4,05,000 By Balance b/d 2,82,000

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End)
By Employees 1,23,000
Compensation A/c
4,05,000 4,05,000

23. (a) From the following data, prepare a Value Added Statement of B Ltd. for the year-
ended 31.03.2015.

Particulars ` Particulars `
Decrease in Stock 24,000 Sales 40,19,000
Purchases 20,20,000 Other Income 55,000
Wages & Salaries 10,00,000
Manufacturing & Other 2,30,000
Expenses
Finance Charges 4,69,000
Depreciation 2,44,000
Profit before taxation 87,000
Total 40,74,000 Total 40,74,000

Particulars `
Profit before taxation 87,000
Less: Tax Provisions (40,000)
Income Tax Payments (for earlier years) (3,000)
Add: Earlier Year Profit brought forward 38,000
Profit After Taxation 82,000
Appropriations of PAT
Debenture Redemption Reserve 10,000
General Reserve 10,000
Proposed Dividend 35,000
Balance carried to Balance Sheet 27,000
Total 82,000

(b) Care Industries Ltd (CIL) furnishes the following information from which you are required to
calculate the Prevailing Economic Value Added of the company and also explain the reason
for difference, if any, between the EVA as calculated by you and the MVA.(Market Value
Added) of CIL amounting to `14,005 crore.
Common Shares of `1,000 face value 1,58,200
12% Debentures `10 face value 50,00,000
Current Tax rate 30%
Financial Leverage 1.1 times
Securities Premium Account (Lakh Rupees) 155
Free Reserves (Lakh Rupees) 154
Capital Reserve (Lakh Rupees) 109
It is a prevailing practice for companies in the industry to which CIL belongs to pay at least
a dividend of 15% p.a. to its common shareholders.

(c) A company has a capital base of `30 crore and has earned profits of `330 lakhs. Return on
Investment of the particular industry to which the company belongs is 12.5%. If the services of
a particular executive are acquired by the company, it is expected that the profits will
increase by `75 lakhs over and above the target profit. Determine the amount of maximum
bid price for that particular executive and the maximum salary that could be offered to him.

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 Revisionary Test Paper_Final_Syllabus 2012_Dec 2015

Particulars `
Capital Base 30,00,00,000
Actual Profit 3,30,00,000
Target Profit 3,75,00,000

Answer:
23. (a)

Value Added Statement of B Ltd. for the year ended 31.03.2015

Particulars ` `
Sales/Turnover 40,19,000
Less: Bought in materials
 Decrease in Stock 24,000
 Purchases 20,20,000 20,44,000
Value added by trading activities 19,75,000
Add: Other Income 55,000
Gross Value Added 20,30,000
Applied as follows -
1. To Employees, Salaries, Wages etc. 10,00,000
2. To other service providers as 2,30,000
manufacturing &other expenses
3. To government as taxes, Duties etc. 43,000
(40,000 +3,000)
4. To financiers as interest on 4,69,000
borrowings
5. To shareholders as dividends 35,000
6. To retained earnings as -
 Depreciation 2,44,000
 Debenture Redemption Reserve 10,000
 General Reserve 10,000
Total Application 20,41,000
Value Deficit (Reduction in P&L A/c (11,000)
balances=(38,000 – 27,000)
Note: Alternatively, the reduction in Retained Profits (38,000 – 27,000) may be considered as
an adjustment/reduction against the entry ‗To retained Earnings‘ and the value deficit need
not be shown.

23. (b)
1. Computation of Operating Profit Before Taxes
EBIT EBIT x
Assuming EBIT = x, Financial Leverage = 1.1 =  
EBT EBIT Less Interest x Less `60 lakhs
Therefore, EBIT = x = 1.1x less 66 lakhs
0.1x = `66 lakhs, this implies x = `660 lakhs = Operating Profit (EBIT)
Therefore, Operating Profit after taxes = `660 lakhs × (1- tax rate of 30%) = `462 lakhs.

2. Computation of Capital Employed and weighted average Cost of Capital

Sources of Finance Capital Amount (` lakhs) Cost Product
Equity Capital 1,582 15% 237.30
Reserves 154 15% 42.00
Securities Premium 155 15% 23.25
Capital Reserve 109 15% 16.35
12% Debentures 500 8.4%(12%-30%) 42.00
Total 2,500 342.00

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Weighted Average Cost of Capital =342/2,500 = 13.68%

23. (c)

1. Maximum Salary Payable

Particulars ` lakhs
Capital Base 3000.00
Target Profits (=capital base × 12.5%) 375.00
Add: Extra Profits due to induction of the 75.00
Executive
Total Profits of the company (anticipated after 450.00
induction of the Executive)
Less: Current Profits 330.00
Incremental Profit 120.00

Maximum salary = Incremental Profit due to introduction = `120.00 lakhs per annum.
2. Maximum Bid Price:
= Value of salary payable in perpetuity
= Maximum salary payable / Desired rate of return on Investment
= `120 lakhs /12.5% = `960 lakhs

24. (a)Discuss the relationship between EVA and MVA.

(b) Describe Jaggi & Lau Model –valuation on group basis of Human resources.
(c) State the aspects covered in Corporate Environmental Accounting System.
(d) List the requirements to be fulfilled by a merchant banker for registration with SEBI.

Answer:
24. (a)

The relationship between EVA and Market Value Added is more complicated than the
one between EVA and Firm Value
• The market value of a firm reflects not only the Expected EVA of Assets in place but also
the Expected EVA from future projects
• To the extent that the actual economic value added is smaller than the expected EVA
the market value can decrease even though the EVA is higher.

This does not imply that increasing EVA is bad from a corporate finance stand point. In fact,
given a choice between delivering a ―below-expectation‖ EVA and no EVA at all, the firm
should deliver the ―below- expectation‖ EVA. It does suggest that the correlation between
increasing year-to-year EVA and market value will be weaker for firms with high anticipated
growth (and excess returns ) than for firms with low or no anticipated growth. It does suggest
also that ―investment strategies‖ based upon EVA have to be carefully constructed,
especially for firms where there is an expectation built into prices of ―high‖ surplus returns.

MVA is presented below:

Total market capitalization: `500 million

(minus) Investor's capital + retained `400 million

earnings:

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Sample firm's MVA: `100 million

At a particular point in time, a firm's MVA is equal to the discounted present value of the
annual EVA it is expected to generate. Thus, a firm's MVA communicates the market's
evaluation on the net present value of that firm's current and expected capital investment
projects.

24. (b)

―Jaggi & Lau Model‖ on valuation on group basis of Human Resources:

(i) Recognition of Group Aspect: This model is based on the group aspect i.e. the fact that
humans work as group in an organisation. Here, a Group refers to a set of homogenous
employees working in the same department or in different departments.

(ii) Procedure: This model calculated the Present Values of all existing employees in each
rank as under –

Step Procedure

1 Ascertain the number of employees in each rank / hierarchy.

2 Estimate the probability that an employee will be in his rank within the organisation or
terminated/ promoted in the next period. Estimate this probability for a specified time period.

3 Ascertain the Economic Value of an employee in a specified rank during each time period.

4 Multiply the above three factors and apply an appropriate discount rate to arrive at the
Present Value of existing employees.

(iii) Advantages: The appreciation for this model stems from the following –

(a) I t recognises the Group concept since an organisation consists of people working
together.

(b) It is easier to estimate the percentage of people in a group likely to continue or leave
the organisation, rather than on an individual basis.

(c) Having the group of employees as a valuation base simplifies the process of valuing
human resources.

(iv) Disadvantages: The disadvantage of the Group Valuation Model that it ignores the
special skills and qualities of employees in specific ranks. The exit of a single important
person in a certain group may affect the valuation of that entire group.

24. (c)

Aspects covered in Corporate Environmental Accounting system.

Environmental Accounting System should include aspects such as –

(i) Concept of National Income arising out of the use of Natural Resources;

(ii) Concept of Costs incurred to make use of such Resources;

(iii) Depreciation of Natural Resources;

(iv) Valuation of Natural Resources;

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(v) Disclosing the value of Natural Resources in the Balance Sheet;

(vi) Contribution of Natural Resources to Industrial Development;

(vii) Contribution of Industries to the Environment; and

(viii) Extent to which changes in the environment due to business activities has affected
social well-being.

24. (d)

Requirements to be fulfilled by a Merchant Banker for registration with SEBI:

The applicant should comply with the following requirements for applying certificate of
Registration for to act as a Merchant Banker –

i. Body Corporate: The applicant should be a Body corporate other than a NBFC
under the RBI Act, 1934.
ii. Infrastructure: Applicant should have necessary infrastructure like adequate office
Space, Equipments, and Manpower to effectively discharge its activities.
iii. Expertise: Atleast 2 persons who have experience in to conduct the business of
Merchant banker should be in employment with the Merchant banker.
iv. Bar on Registration: Person directly or indirectly connected with the applicant should
not have been granted registration by SEBI. Such person include Associate,
subsidiary, Group Company of the Applicant Body Corporate.
v. Capital Adequacy requirements: Applicant should fulfill the Capital adequacy
requirements.
vi. Litigations: Applicant, its partner, Director or principal officer should not be involved
in any litigation connected with the securities market which has an adverse effect
on the applicant‘s business;
vii. Economic offence: Applicant, its Director, partner or principal officer should not
have been convicted for any offence involving moral turpitude or found guilty of
any economic offence;
viii. Professional Qualification: Applicant should have a professional qualification from
an Institution recognised by the Government in Finance, Law or Business
Management;
ix. Fit and Proper: The Applicant should be a fit and proper person.

x. Investor‘s interest: Grant of Certificate to the applicant is in the best interest of the
investors.

25. Discuss the working principle of XBRL.

Answer:
25.

XBRL is a member of the family of languages based on XML, or Extensible Markup

Language, which is a standard for the electronic exchange of data between businesses
and on the internet. Under XML, identifying tags are applied to items of data so that they
can be processed efficiently by computer software.

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XBRL, a more powerful and flexible version of XML, has been defined specifically to meet
the requirements of business and financial information. It enables unique identifying tags
to be applied to items of financial data, such as say ‗net profit‘ or say ―Asset‖. For
example let us take the item ―Asset‖. It is defined in XBRL as follows:

<Asset>1000</Asset>

The word Asset together with brackets ―<‖ and ―>‖ is called a tag. Opening tags are
denoted by <…> while closing tags are denoted by </…>.

However besides the numerical value of the asset, the computer needs to be told about
accounting perspective of the term ―Asset‖, its normal balance nature of ―Debit‖ as well
its relationship with other financial terms like Equity or Liabilities etc.

This is done by the powerful XBRL tags. Besides being identifiers, these tags provide a
range of information about the item, such as whether it is a monetary item, percentage or
fraction. XBRL allows labels in any language to be applied to items, as well as accounting
references or other subsidiary information.

XBRL can show how items are related to one another and can thus represent how they
are calculated. It can also identify whether they fall into particular groupings for
organisation or presentation purposes. Most importantly, XBRL is easily extensible, so
companies and other organisations can adapt it to meet a variety of special
requirements.

The rich and powerful structure of XBRL allows very efficient handling of business data by
computer software. It supports all the standard tasks involved in compiling, storing and
using business data. Such information can be converted into XBRL by suitable mapping
processes or generated in XBRL by software. It can then be searched, selected,
exchanged or analysed by computer, or published for ordinary viewing.

Working of XBRL is governed mainly by two main features namely Specifications and
Taxonomies.

26. (a) Distinguish between Government Accounting and Commercial Accounting.

(b) Describe the constitution of the Public Accounts Committee.
(c) Discuss the role of Public Accounts Committee.

Answer:
26. (a)

The principles of Commercial and Government Accounting differ in certain essential

points. The difference is due to the fact that, while the main function of a commercial
concern is to take part in the production, manufacture or inter-change of goods or
commodities between different groups or individuals and thereby to make profit,
Government is to govern a country and, in connection therewith, to administer the several
departments of its activities in the best way possible.

Government Accounts are designed to enable Government to determine how little

money it need take out of the pockets of the tax-payers in order to maintain its necessary
activities at the proper standard of efficiency. Non-Government Commercial accounts, on
the other hand, are meant to show how much money the concern can put into the

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pockets of the proprietors consistently with the maintenance of a profit-earning standard in

the concern.

26.(b)
The Committee consists of not more than 22 members comprising 15 members elected by
Lok Sabha every year from amongst its members according to the principle of proportional
representation by means of single transferable vote and not more than 7 members of
Rajya Sabha elected by that House in like manner are associated with the Committee. The
Chairman is appointed by the Speaker from amongst its members of Lok Sabha. The
Speaker, for the first time, appointed a member of the Opposition as the Chairman of the
Committee for 1967-68. This practice has been continued since then. A Minister is not
eligible to be elected as a member of the Committee. If a member after his election to the
Committee is appointed a Minister, he ceases to be a member of the Committee from the
date of such appointment. The Public Accounts Committee consists of fifteen Members
elected by Lok Sabha every year from amongst its members according to the principle of
proportional representation by means of single transferable vote. Seven members of Rajya
Sabha elected by that House in like manner are associated with the Committee. This
system of election ensures that each Party/Group is represented on the Committee in
proportion to its respective strength in the two Houses.
26.(c)

The role of the Public Accounts Committee is to assess the integrity, economy, efficiency
and effectiveness of government financial management. It achieves this by:

• examining Government financial documents; and

• considering the reports of the Auditor - General.

A significant amount of the committee‘s work involves following up matters raised in the
reports to Parliament by the Auditor - General. This ensures that public sector financial
issues are scrutinised for the benefit of the Parliament and the public.

While scrutinising the Appropriation Accounts of the Government of India and the Reports
of the Comptroller and Auditor General thereon, it is the duty of the Committee to satisfy
itself—

– that the moneys shown in the accounts as having been disbursed were legally
available for and applicable to the service or purpose to which they have been
applied or charged;

– that the expenditure conforms to the authority which governs it; and

– that every re-appropriation has been made in accordance with the provisions made
in this behalf under rules framed by competent authority.

An important function of the Committee is to ascertain that money granted by Parliament

has been spent by Government ―within the scope of the demand‖. The functions of the
Committee extend ―beyond the formality of expenditure to its wisdom, faithfulness and
economy‖. The Committee thus examines cases involving losses, nugatory expenditure
and financial irregularities.

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It is also the duty of the PAC to examine the statement of accounts of autonomous and
semi-autonomous bodies, the audit of which is conducted by the Comptroller & Auditor
General either under the directions of the President or by a Statute of Parliament.

27. (a)Discuss the structure of the Government Accounting Standards Advisory Board
(GASAB).
(b) Describe the procedures adopted by the GASAB for formulating standards.
(c) State the IGAS notified by Government of India and IGAS under consideration.

Answer:

27.(a)

GASAB is a representative body and is represented by main stakeholders connected with

accounting reforms of Union Government of India and States. The board consists of the
following members:
1. Deputy Comptroller and Auditor General (Accounts) as Chairperson
2. Controller General of Accounts
3. Financial Commissioner, Railways
4. Controller General of Defence Accounts
5. Member (Finance) Telecom Commission, Department of Telecom
6. Additional / Joint Secretary (Budget), Ministry of finance, Govt. of India
7. Secretary, Department of Post
8. Deputy Governor, Reserve Bank of India or his nominee
9. Director General, National Council of Applied Economic Research (NCAER), N. Delhi
10. President, Institute of Chartered Accountants of India (ICAI) or his nominee
11. President, Institute of Cost and Works Accountants of India or his nominee
12-15. Principal Secretary (Finance) of four States by rotation
16. Principal Director in GASAB as Member secretary.

27.(b)

The following procedures are adopted by the GASAB for formulating Standards:
 The GASAB Secretariat identifies areas for Standard formulation and places them
before the GASAB for selection and approval. While doing so, the Secretariat places
before the GASAB all important suggestions, references, proposals received from
various sections of the Union and State Governments, members of GASAB, members
of Civil Society, Professional Bodies and other stakeholders. The priorities, as approved
by the GASAB, guide further functioning of the GASAB Secretariat.
 The GASAB Secretariat thereafter prepares the discussion paper on the selected
issues for consideration of the GASAB.
 While doing so, the Secretariat studies the existing rules, codes and principles as
internal sources, and documents/pronouncements/Standards issued by other
national and international Standard setting and regulatory bodies. The Secretariat
may also hold consultation with such other persons as are considered necessary for
this purpose.

 On consideration of the Discussion paper and the comments received thereon, the
GASAB finalizes the Exposure Draft.

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 The GASAB may constitute Standing Committee and/or Task based Groups from
amongst the Members or their representatives to consider specific areas before
finalization.
 The Exposure Draft, as approved for issue by the GASAB, are widely circulated in the
public domain and forwarded to all stakeholders. The Exposure Draft is required to be
hosted at the website of GASAB.
 Based on the comments received on the Exposure Draft, the Standards are finalized
by the GASAB. The Standards, as finalized, are forwarded to the Government for
notification in accordance with the provisions of the Constitution of India.
The meetings are normally chaired by the Chairperson. In unforeseen circumstances
when Chairperson is unable to attend, the senior-most member from the Central
Government will chair the meeting. The Comptroller & Auditor General of India will be
kept informed of the important developments in the meetings of GASAB.
The GASAB may meet as often as is deemed necessary but generally not less than four
times in a financial year. The decisions of the GASAB may preferably be by general
consensus. In case differences persist, the decision shall be on the basis of voting favoring
the recommendation. The dissenting views should also be forwarded to the Government
along with the recommendations.
GASAB allows an exposure period of 90 days for inviting comments on Exposure Draft.
27. (c)

IGAS Notified by Government of India

 Guarantees given by Governments: Disclosure Requirements (IGAS1)

[Notified by the Govt. of India]
 Accounting and Classification of Grants-in-aid (IGAS2)
[Notified by the Govt. of India]
 Loans and Advances made by Governments (IGAS 3)
[Notified by the Govt. of India]
IGAS Under Consideration
 Foreign Currency transactions and loss or gain by Exchange Rate variations (IGAS 7)
[Under consideration of the Govt. of India for notification]
 Public Debt and Other Liabilities of Governments: Disclosure Requirements (IGAS 10)
[Under consideration of the Govt. of India for notification]

28.(a)Describe Indian Government Accounting Standard 5(Loans and Advances made by

Government).
(b)Describe the objectives and scope of Indian Government Accounting Standard
4(General Purpose Financial Statements of Government).

Answer:

28.(a)

Loans and Advances made by Governments

Introduction
1. The Government of India has been empowered under proviso (2) of Article 293 of the
Constitution of India to make loans to the States, subject to such conditions as may be

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laid down by or under any law made by Parliament, any sums required for the purpose
of making such loans being chargeable to the Consolidated Fund of India.
2. The Union Government has been providing financial assistance to the State
Governments, a substantial portion of which is in the form of loans. These loans are
advanced to the States both in the form of plan and non-plan assistance intended for
both developmental and non-developmental purposes. Loans are also provided by the
Union Government to Foreign Governments, Government companies and Corporations,
Non-Government institutions and Local bodies. The Union Government also disburses
recoverable advances to Government servants.
3. The State Governments disburse loans to Government Companies, Corporations, Local
Bodies, Autonomous Bodies, Cooperative Institutions, Statutory Corporations, quasi-public
bodies and other non-Government/private institutions for developmental and socio-
economic purposes. The State Governments also disburse recoverable advances to
Government servants
Objectives

4. The objective of the Standard is to lay down the norms for Recognition, Measurement,
Valuation and Reporting in respect of Loans and Advances made by the Union and the
State Governments in their respective Financial Statements to ensure complete,
accurate, realistic and uniform accounting practices, and to ensure adequate
disclosure on Loans and Advances made by the Governments consistent with best
international practices.
Scope

5. This Standard applies to Loans and Advances given by the Government for incorporation
and presentation in the Financial Statements of the Government. Financial Statements
will not be considered as giving fair and complete picture of Loans and Advances unless
they comply with these standards. This standard will apply only to government accounts
being maintained on a cash basis.

28. (b) General Purpose Financial Statements of Government

Objectives
 The purpose of this Standard is to lay down the principles to be followed in presentation
of general purpose financial reports of Governments and to prescribe the minimum
requirements relating to structure and contents of financial statements of government
prepared under cash basis of accounting.
 The statement of receipts and disbursements during the year and information about cash
flows of an Entity enable stakeholders to evaluate the likely sources and uses of cash and
the ability of an Entity to generate adequate cash in the future. This information also
indicates the expenditure priorities of the Entity in the delivery of goods and services as
well as the impact of the taxation policies of the Entity. Stakeholders can then assess the
sustainability of the Entity‘s activities (whether future budgetary resources will be sufficient
to sustain public services and to meet obligations as they become due) and appraise
financial accountability.
 All Financial Statements need to be standardized to obtain optimal information, to
ensure comparability with the Entity‘s own financial Statements of previous periods and
with those of other entities. The basis and policies of accounting need to be uniform to
permit meaningful consolidation to develop Whole of Government Accounts. Desirable
attributes need to defined to obtain a basic standard for financial reporting.
 To achieve these objectives, this Standard sets out the financial elements for the
presentation of financial reports prepared under the cash basis of accounting. It also
requires that the selection of accounting policy should ensure certain qualitative

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characteristics in the information being presented. Desirable attributes of financial

reporting are required to heighten their value to the users.
 General Purpose Financial Statements (GPFS) essentially consists of Finance Accounts
and Appropriation Accounts. The Financial Statements referred to in this standard are the
General Purpose Financial Reports (GPFR).
Scope
 An Entity, which prepares and presents Financial Statements under the cash basis of
accounting as defined in this Standard, should apply the requirements o this Standard in
presentation of its financial statements.
 The standard applies to financial reports of a government – Union or State. The standard
does not apply to accounts of (i) local bodies and (ii) Government Business Enterprises or
Departmental Commercial Undertakings.
 An Entity whose Financial Statements comply with the requirements of this Standard
should disclose that fact. Financial Statements should not be described as complying
with this Standard unless they comply with all the requirements of this Standard.
 The standard lays down the minimum requirements that governments should follow in
presentation of financial reports. The requirements in terms of contents of the financial report
are the mandatory minimum requirements that financial reports should present.

29.(a)Write a note on voted & charged expenditure.

(b)Describe the classification of Government Accounts.

Answer:

29.(a)

Voted & Charged Expenditure

• The estimates of expenditure embodied in the annual financial statement shall show
separately
 the sums required to meet expenditure described by this constitution as
expenditure charged upon the Consolidated Fund of India and
 the sums required to meet other expenditure proposed to be made from the
Consolidated Fund of India
Estimates relating to charged expenditure not to be submitted to the vote of Parliament.
• Each house competent to discuss such estimates.
• Estimates relating to other expenditure to be submitted in the form of demands for grants
to the house of the People
• House of People shall have power to
○ assent
○ refuse to assent to any demand
○ assent to any demand subject to reduction.
• Expenditure on and related to
○ The President & his office
○ Chairman, Deputy Chairman of the Council of States
○ Speaker, Deputy Speaker of House of People
○ Judges of Supreme Court & High Court
○ Comptroller & Auditor General of India

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• Debt liability of GOI and related charges

• Sums required to satisfy a Judgment, decree, award
• Any other expenditure declared by Parliament

29. (b)

30. (a) List the Organisations subject to the audit of the Comptroller and Auditor General
of India.
(b)Write a note on Committee on Public Undertaking.

Answer:

30.(a)

The organisations subject to the audit of the Comptroller and Auditor General of India are:

• All the Union and State Government departments and offices including the Indian
Railways and Posts and Telecommunications.

• About 1200 public commercial enterprises controlled by the Union and State
governments, i.e. government companies and corporations.

• Around 400 non-commercial autonomous bodies and authorities owned or controlled by

the Union or the States.

Over 4400 authorities and bodies substantially financed from Union or State revenues

30. (b)

The Committee on Public Undertakings exercises the same financial control on the public
sector undertakings as the Public Accounts Committee exercises over the functioning of the
Government Departments. The functions of the Committee are:-

a. to examine the reports and accounts of public undertakings.

b. to examine the reports of the Comptroller & Auditor General on public undertakings.

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c. to examine the efficiency of public undertakings and to see whether they are being
managed in accordance with sound business principles and prudent commercial
practices.

The examination of public enterprises by the Committee takes the form of comprehensive
appraisal or evaluation of performance of the undertaking. It involves a thorough
examination,including evaluation of the policies, programmes and financial working of the
undertaking.

The objective of the Financial Committees, in doing so, is not to focus only on the individual
irregularity, but on the defects in the system which led to such irregularity, and the need for
correction of such systems and procedures.

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