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Test Series: April, 2014

MOCK TEST PAPER 2
FINAL COURSE: GROUP I
PAPER 1: FINANCIAL REPORTING
Question No. 1is compulsory.
Attempt any five questions from the remaining six Questions.
Working notes should form part of the answer.
Wherever necessary, suitable assumptions may be made by the candidates.
Time Allowed 3 Hours Maximum Marks 100
1. (a) FINMIN Ltd. is engaged in the business of financial services and is undergoing tight
liquidity position, since most of the assets of the company are blocked in various
claim/petitions in a Special Court. FINMIN Ltd. has accepted Inter-Corporate
Deposits (ICDs) and is making its best efforts to settle the dues. There were claims
at varied rates of interest from lenders from the due date of ICDs to the date of
repayment. The company has provided interest, as per the terms of the contract till
the due date and a note for non provision of interest from the due date to date of
repayment was affected in the financial statements. On account of uncertainties
existing regarding the determination of the amount and in the absence of any
specific legal obligation at present as per the terms of contracts, the company
considers that these claims are in the nature of claims against the company not
acknowledged as debt, and the same has been disclosed by way of a note in the
accounts instead of making a provision in the Statement of profits and loss.
Comment on the correctness of the treatment for such claims as done by the
company.
(b) Topsy Ltd. has two divisions. It provides depreciation for both the divisions on
straight line basis as per the rates prescribed by Schedule XIV to the Companies
Act. While finalising the accounts for the year ended 31.3.2012, the company wants
to change the method to Written Down Value method for one of its divisions as the
management thinks that the assets of the said division suffer faster wear and tear.
Please advise the company on the above and also state whether the change should
be prospective or retrospective?
(c) M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company
are ` 10.00 crores. Segment X has ` 2.00 crores, segment Y has ` 3.00 crores
and segment Z has ` 5.00 crores. Deferred tax assets included in the assets of
each segments are X- ` 0.50 crores, Y` 0.40 crores and Z` 0.30 crores. The
accountant contends that all the three segments are reportable segments.
Comment.
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(d) Determine the order to include dilutive securities in the computation of weighted
average number of shares for the purpose of calculation of diluted earnings per
share on the basis of the following information pertaining to financial year ended
31
st
March, 2012:
Earnings, i.e., Net profit attributable to equity shareholders ` 1,00,00,000
No. of equity shares outstanding 20,00,000
Average fair value of one equity share during the year ` 75.00
Details of Potential Equity Shares:
Options 1,00,000 with exercise price of ` 60
Convertible Preference Shares 8,00,000 shares entitled to a
cumulative dividend of ` 8 per share.
Each preference share is convertible
into 2 equity shares.
Attributable tax, e.g. Dividend
distribution tax (DDT)
16.2225%
12% Convertible Debentures of ` 100
each
Nominal amount ` 10,00,00,000. Each
debenture is convertible into 4 equity
shares.
Tax rate 30%
(4 5 = 20 Marks)
2. The following are the summarized Balance Sheets of Sonu Ltd. and Monu Ltd. for the
year ending on 31
st
March, 2012: (` in crores)
Sonu
Ltd.
Monu Ltd.
Equity share capital in equity shares of ` 10 each 50 40
Preference share capital in 10% preference shares of ` 100
each
60
Reserves and Surplus 200 150
250 250
Loans Secured 100 100
Total funds 350 350
Applied for: Fixed assets at cost less depreciation 150 150
Current assets 200 200
350 350
The present worth of fixed assets of Sonu Ltd. is ` 200 crores and that of Monu Ltd. is
` 429 crores. Goodwill of Sonu Ltd. is ` 40 crores and of Monu Ltd. is ` 75 crores.
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Monu Ltd. absorbs Sonu Ltd. by issuing equity shares at par in such a way that intrinsic
net worth is maintained.
Goodwill account is not to appear in the books. Fixed assets are to appear at old figures.
(a) Show the Balance Sheet after absorption.
(b) Draft a statement of valuation of shares on intrinsic value basis and prove the
accuracy of your workings. (16 Marks)
3. (a) Following is an extract of Profit & Loss Account of Aman Ltd. for the year ended
31
st
March, 2012.
Particulars ` 000s
Sales (including Excise Duty Recoveries) 1,454
Other Income 26
Total 1,480
Materials 1,060
Excise Duty 124
Salaries, Wages & Employee Benefits 38
Other Expenses 94
Interest & Finance Charges 14
Depreciation 10
Provision for Taxation 62
Preliminary Expenses written off 10
Transfer to Debenture Redemption Reserve 10
Proposed Dividend 10
Transfer to General Reserve 48
Total 1,480
Other Expenses include Fees & Commissions to Whole Time Directors
amounting to ` 18,000 and Loss on Sale of Fixed Assets of ` 6,000.
Interest and Finance Charges include interest on Long Term Loans of ` 8,000;
and the balance being on Short-term Borrowings.
Prepare a Value Added Statement for the year ended 31
st
March, 2012. Also show
statement showing application of value added. (10 Marks)
(b) Black Rock Mutual Fund has invested in 2,00,000 shares of Profit Ltd. No quotation
is available for last thirty days prior to the valuation date. The P/E ratio of a
comparable company, which is regularly traded, is 12. Earning per share of Profit
Ltd. is ` 20. The Net Asset Value of Profit Ltd. is ` 160 and the comparable
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company is ` 200. The current market price of comparable equity share is ` 240. A
policy is taken to give 40% weightage to net assets value and to reduce from
comparable P/E ratio for relatively less liquidity of Profit Ltd. stock.
Required:
(a) Explain whether the investment in Profit Ltd. will be classified as trade
investment, or 'non-trade investment' giving the reason for the stand taken by
you.
(b) What do you think, to be the appropriate criteria for selection of comparable
stock?
(c) How much discounting should be made from comparable P/E ratio for valuing
investment in non- traded scrip?
(d) What should be the value of 2,00,000 equity shares of Profit Ltd.? (6 Marks)
4. As on 31-3-2013, the summarized balance sheets of companies in a group showed the
following position:
Assets A B C
` ` `
Fixed assets 1,35,000 60,000 70,000
Investments at cost 1,60,000 1,50,000 10,000
Inventory 55,240 36,840 61,760
Trade Receivables 1,10,070 69,120 93,880
Bank Balance 1,31,290 16,540 52,610
Total 5,91,600 3,32,500 2,88,250
Liabilities ` ` `
Equity shares of ` 10 each 2,00,000 1,50,000 80,000
Capital Reserve 50,000 - 23,000
Revenue Reserve 99,540 49,370 45,060
Trade Payables 1,12,060 73,130 78,190
Provision for Taxation 30,000 - 22,000
Proposed Dividends 1,00,000 60,000 40,000
Total 5,91,600 3,32,500 2,88,250


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Additional information:
(i) B Ltd. acquired 6,800 shares in C Ltd. at ` 22 per share in 2009 when the balance
on capital reserve was ` 15,000 and revenue reserve was ` 30,500.
(ii) A Ltd. purchased 8,000 shares in B Ltd. in 2009 when the balance in revenue
reserve was ` 40,000. A Ltd. purchased further 4,000 shares in B Ltd. in 2010
when revenue reserve stood at ` 45,000. There was no other investment held by A
Ltd. as on 31.3.2013.
(iii) Parent companies included their share of proposed dividend in debtors account.
Prepare consolidated balance sheet of the group as on 31.3.2013 from the above
information. (16 Marks)
5. (a) Jayadev Ltd. had earned a PAT of ` 48 lakhs for the year just ended. It wants you
to ascertain the value of its business, based on the following information.
1. Tax rate for the year just ended was 36%. Future tax rate is estimated at 34%.
2. The company's equity shares are quoted at ` 120 at the Balance Sheet date. The
company had an equity capital of ` 100 lakhs, divided into shares of ` 50 each.
3. Profits for the year have been calculated after considering the following in the
Profit and Loss Account:
(i) Subsidy ` 2 lakhs received from the Government towards fulfilment of
certain social obligations. The Government has withdrawn this subsidy
and hence, this amount will not be received in future.
(ii) Interest ` 8 lakhs is on term loan. The final instalment of this term loan
was fully settled in this year.
(iii) Managerial remuneration ` 15 lakhs. The shareholders have approved an
increase of ` 6 lakhs in the overall managerialremuneration, from the
next year onwards.
(iv) Loss on sale of fixed assets and Investments amounting to ` 8 lakhs.
(10 Marks)
(b) On April 1, 2012, a company offered 100 shares to each of its 500 employees at
` 40 per share. The employees are given a month to decide whether or not to
accept the offer. The shares issued under the plan shall be subject to lock-in on
transfers for three years from grant date. The market price of shares of the company
on the grant date is ` 50 per share. Due to post-vesting restrictions on transfer, the
fair value of shares issued under the plan is estimated at ` 48 per share.
On April 30, 2012, 400 employees accepted the offer and paid ` 40 per share
purchased. Nominal value of each share is ` 10.
Record the issue of shares in book of the company under the aforesaid plan. (6 Marks)
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6. (a) A Ltd. and its subsidiary B Ltd. get their supply of some essential raw materials from
C Ltd. To co-ordinate their production on a more profitable basis, A Ltd. and C Ltd.
agreed between themselves each to acquire a quarter of shares in the other's
Authorized Capital by means of exchange of shares. The terms are as follows:
(i) A Ltd.'s shares are quoted at ` 14, but for the purpose of exchange the value
is to be taken at the higher of the two values, e.g. (a) quoted and (b) on the
basis of the Balance Sheet Valuation;
(ii) C Ltd.'s shares which are unquoted are to be taken at the higher of the value
as on (a) yield basis and (b) the Balance sheet basis. The future profits are
estimated as ` 1,05,000 subject to one-third to be retained for development
purposes. Shares of similar companies yield 8%;
(iii) Tangible Fixed Assets of C Ltd. are to be taken at ` 8,70,000;
(iv) Balance due on settlement is to be treated as loan between two companies.
The summarised Balance Sheets of the companies at the relevant date stood as
follows:
A Ltd. B Ltd. C Ltd.
` ` `
Authorised Share Capital 12,00,000
5,00,000 10,00,000
Equity Shares of ` 10 each issued
and fully paid up

8,00,000

5,00,000

7,50,000
Securities Premium
80,000
- -
7% Debentures
3,00,000 - -
Profit and Loss A/c 2,40,000
2,20,000 2,10,000
Trade Payables
2,80,000 1,80,000 2,10,000
Bank Overdraft 1,00,000 50,000 -
18,00,000 9,50,000 11,70,000
Tangible Fixed Assets
11,10,000
7,00,000 7,70,000
Investment (40,000 Shares in B Ltd.) 4,70,000 - -
Current Assets
2,10,000
2,40,000 3,90,000
Underwriting Commission
10,000
10,000 10,000
18,00,000 9,50,000 11,70,000
Compute the value of the shares according to the terms of the agreements and to
present the final settlement, showing all the necessary workings.

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(b) Forever Finance Ltd. is a non-banking finance company. It makes available to you
the costs and market price of various investments held by it as on 31.3.2013:
(` in lakhs)
Scripts: Cost Market Price
A. Equity Shares
A 60.00 61.20
B 31.50 24.00
C 60.00 36.00
D 60.00 120.00
E 90.00 105.00
F 75.00 90.00
G 30.00 6.00
B. Mutual funds
MF-1 39.00 24.00
MF-2 30.00 21.00
MF-3 6.00 9.00
C. Government securities
GV-1 60.00 66.00
GV-2 75.00 72.00
(i) Can the company adjust depreciation of a particular item of investment within a
category?
(ii) What should be the value of investments as on 31.3.2013?
(iii) Is it possible to off-set depreciation in investment in mutual funds against
appreciation of the value of investment in equity shares and government
securities? (10 + 6= 16 Marks)
7. Answer any four of the following:
(a) Differentiate the following items with reference to Accounting Standards (AS
applicable in India) and International Financial Reporting Standards (IFRS):
(i) Extra ordinary items
(ii) Contingencies.
(b) The following information is available as regards to the fixed asset of a company:
(i) Carrying amount of the asset shown in the balance sheet net of accumulated
depreciation is ` 340 lakhs. Assets are 2 years old. The present market price
of the asset is ` 300 lakhs. The company charges depreciation @10% on SLM
assuming 10 years as its useful life.

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(ii) At the beginning of the current year, on review, remaining useful life of the
asset has been assessed as 5 years because of technological changes.
(iii) Market rate of interest has declined. Accordingly, there is decline in the
discount factor from 16% to 15%.
(iv) Book value to market capitalisation ratio of the company is 0.80.
Is there an indication of impairment of asset? If yes, then how should it be adjusted?
(c) Raja Ltd. had announced a Voluntary Retirement Scheme (VRS) for its employees
on 1
st
January 2012. The scheme is scheduled to close on 30
th
June 2012. The
scheme envisaged an initial lump-sum payment of maximum of ` 2 Lakhs and
monthly payments over the balance period of service of employees coming under
the plan. 200 employees opted for the scheme as on 31
st
March 2012. The total
lump sum payment for these employees would be ` 250 Lakhs and the aggregate of
future payments to them would amount to ` 1,500 Lakhs.
However no payment had been made to the employees under the scheme up to 31
st

March 2012. The Company had not made any provision in its accounts towards any
liability under the scheme. Give your views on the above.
(d) From the following information, ascertain the value of stock as on 31
st
March, 2013:

`
Stock as on 01.04.2012 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31
st
March, 2012 a sum of ` 3,500 was written off
on a particular item, which was originally purchased for ` 10,000 and was sold
during the year for ` 9,000. Barring the transaction relating to this item, the gross
profit earned during the year was 20% on sales.
(e) Identify the host and embedded derivative in the following cases:
(i) Entity A holds a debenture bond of entity B which is convertible into ordinary
shares of entity B at the option of entity A.
(ii) Sun Ltd. enters into a lease agreement for usage of plant and equipment,
rentals in respect of which lease rentals are payable annually. The lease
includes a clause that lease rentals payable will be linked to changes in Cost
Inflation Index announced u/s 48 of Income tax Act, and contingent rentals will
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be payable on the basis of Benchmark interest of PLR of SBI.
(iii) Moon Ltd. enters into a lease agreement for usage of plant and equipment,
rentals in respect of which are payable annually. The lease includes a clause
that lease rentals payable will be increasing annually by ` 1,20,000
(iv) A floating rate debt - (1) with no cap (2) with a cap on interest and
(3) a separate agreement for a cap on interest. (4 x 4 =16 Marks)
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