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PAPER – 5 : ADVANCED ACCOUNTING

Question No.1 is compulsory.


Candidates are also required to answer any five questions from the remaining six questions.
Working notes should form part of the respective answers.
Wherever necessary, candidates are permitted to make suitable assumptions which should be
disclosed by way of a note.

Question 1
Answer the following Question:
(a) A Ltd. manufactures engineering goods, provides after sales warranty for 2 years to its
customers. Based on past experience, the company has been following the policy for
making provision for warranties on the invoice amount, on the remaining balance
warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:
Invoice Date Amount (`)
19th January. 2016 80,000
29th January, 2017 50,000
15th October, 2017 1,80,000

Calculate the provision to be made for warranty under Accounting Standard 29 as at


31st March, 2017 and 31 st March, 2018. Also compute amount to be debited to profit and
loss Account for the year ended 31 st March, 2018.
(b) Rutu Builders Limited has borrowed a sum of US$ 20,00,000 at the beginning of
Financial year 2017-18 for its residential project at LIBOR +3%. The interest is payable at
the end of the financial year.
At the time of availment exchange rate was 61 per US $ and the rate as on 31 st March,
2018 was 65 per US $. If Rutu Builders Limited had borrowed the loan in India in Indian
Rupee equivalent, the pricing of loan would have been @ 10.50%.
Compute Borrowing cost and exchange difference for the year ending 31 st March, 2018
as per Accounting Standards 16. (Applicable LIBOR is 1%).
(c) Ram Ltd. sold a machine having WDV of ` 125 lakhs to Shyam Ltd. for ` 150 lakhs and
the same machine was leased back by Shyam Ltd. to Ram Ltd. under Operating lease
system :

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2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

Comment according to relevant Accounting Standard if:


(i) Sale price of ` 150 lakhs. is equal to fair value.
(ii) Fair value is ` 125 lakhs and Sale price is ` 112.50 lakhs.
(iii) Fair value is ` 137.50 lakhs and Sale price is ` 155 lakhs.
(iv) Fair value is ` 112.50 lakhs and Sale price is ` 120 lakhs.
(d) A company acquired patent right for ` 1200 lakhs. The product life cycle has been
estimated to be 5 years and the amortization was decided in the ratio of estimated future
cash flows which are as under:
Year 1 2 3 4 5
Estimated future cash flows
(` in lakhs) 600 600 600 300 300

After 3rd year, it was ascertained that the patent would have an estimated balance future
life of 3 years and the estimated cash flow after 5th year is expected to be ` 150 lakhs.
Determine the amortization under Accounting Standard 26.
(4 Parts x 5 Marks = 20 Marks)
Answer
(a) Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities
and Contingent Assets’
As at 31 st March, 2017 = ` 80,000 x .02 + ` 50,000 x .03
= ` 1,600 + ` 1,500 = ` 3,100
As at 31 st March, 2018 = ` 50,000 x .02 + ` 1,80,000 x .03
= ` 1,000 + ` 5,400 = ` 6,400
Amount debited to Profit and Loss Account for year ended 31 st March, 2018
`
Balance of provision required as on 31.03.2018 6,400
Less: Opening Balance as on 1.4.2017 (3,100)
Amount debited to profit and loss account 3,300
Note: No provision will be made on 31 st March, 2018 in respect of sales amounting
` 80,000 made on 19 th January, 2016 as the warranty period of 2 years has already
expired.
(b) (i) Interest for the period 2017-18
= US $ 20 lakhs x 4% × ` 65 per US $ = ` 52 lakhs

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PAPER – 5 : ADVANCED ACCOUNTING 3

(ii) Increase in the liability towards the principal amount


= US $ 20 lakhs × ` (65 - 61) = ` 80 lakhs.
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 20 lakhs × ` 61 x 10.5% = ` 128.1 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing= ` 128.1 lakhs - ` 52 lakhs = ` 76.1 lakhs.
Therefore, out of ` 80 lakhs increase in the liability towards principal amount, only
` 76.1 lakhs will be considered as the borrowing cost. Thus, total borrowing cost
would be `128.1 lakhs being the aggregate of interest of ` 52 lakhs on foreign
currency borrowings plus the exchange difference to the extent of difference
between interest on local currency borrowing and interest on foreign currency
borrowing of ` 76.1 lakhs.
Hence, ` 128.1 lakhs would be considered as the borrowing cost to be accounted
for as per AS 16 “Borrowing Costs” and the remaining ` 3.9 lakhs
(`s 80 lakhs– ` 76.1 lakhs) would be considered as the exchange difference to be
accounted for as per AS 11 “The Effects of Changes in Foreign Exchange Rates”.
(c) According to AS 19, following will be the treatment in the given situations:
(i) When sales price of ` 150 lakhs is equal to fair value, Ram Ltd. should immediately
recognize the profit of `25 lakhs (i.e. 150 – 125) lakhs in its books.
(ii) When fair value of leased machine is ` 125 lakhs & sales price is ` 112.50 lakhs,
then loss of ` 12.5 lakhs (125 – 112.50) lakhs to be immediately recognized by Ram
Ltd. in its books provided loss is not compensated by future lease payment s.
(iii) When fair value is ` 137.5 lakhs & sales price is ` 155 lakhs, profit of ` 12.5 lakhs
(137.5- 125) lakhs to be immediately recognized by Ram Ltd. in its books and
balance profit of ` 17.5 lakhs (155-137.50) lakhs is to be amortised/deferred over
lease period.
(iv) When fair value is ` 112.5 lakhs & sales price is ` 120 lakhs, then the loss of ` 12.5
lakhs (125-112.5) lakhs to be immediately recognized by Ram Ltd. in its books and
profit of ` 7.5 lakhs (120-112.5) lakhs should be amortised/deferred over lease
period.
(d) Amortization of cost of patent as per AS 26
Year Estimated future cash Amortization Ratio Amortized Amount
flow (` in lakhs) (` in lakhs)
1 600 .25 300
2 600 .25 300

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4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

3 600 .25 300


4 300 .40 (Revised) 120
5 300 .40 (Revised) 120
6 150 .20 (Revised) 60
1,200

In the first three years, the patent cost will be amortized in the ratio of estimated future
cash flows i.e. (600: 600: 600: 300: 300).
The unamortized amount of the patent after third year will be ` 300 lakh (1,200-900)
which will be amortized in the ratio of revised estimated future cash flows (300:300:150)
in the fourth, fifth and sixth year.
Question 2
Sunil and Sachin carrying on business in partnership sharing profit and losses equally, wished
to dissolve the firm and sell the business to Sargam Ltd. on 31-3-2018, when the firm's
position was as follows:
Liabilities ` Assets `
Sunil's 'Capital 7,50,000 Land and Building 5,00,000
Sachin's Capital 5,00,000 Furniture 2,00,000
Sundry Creditors 3,00,000 Stock 5,00,000
Debtors 3,30,000
Cash 20,000
15,50,000 15,50,000
The arrangement with Sargam Ltd. was as follows :
(i) Land and Building was purchased at 25% more than the book value.
(ii) Furniture and stock were purchased at book values less 20 %.
(iii) The goodwill of the firm was valued at ` 2,00,000.
(iv) The firm's debtors, cash and creditors were not to be taken over, but Sargam Ltd. agreed
to collect the book debts of the firm and discharge the creditors of the firm as an agent,
for which services, the company was to be paid 7.5% on all collections from the firm's
debtors and 4.5% on cash paid to firm's creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares of
` 15 each at a premium of ` 5 per share.
(vi) The partners distributed the company's shares between themselves in their final claim
ratio.

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PAPER – 5 : ADVANCED ACCOUNTING 5

The company collected all the amounts from debtors. The creditors were paid off less by
` 10,000, allowed by them as discount. The company paid the balance due to the vendors in
cash.
Prepare the Realisation account, the Capital Accounts of the partners and the cash account in
the books of partnership firm. (16 Marks)
Answer
Books of Partnership Firm
Realisation Account
` `
To Land & Building 5,00,000 By Sundry Creditors 3,00,000
To Furniture 2,00,000 By Sargam Ltd. -
To Stock 5,00,000 Purchase 13,85,000
consideration–(W.N.1)
To Debtors 3,30,000
To Sargam Ltd. - By Sargam Ltd. –
Sundry Creditors 2,90,000 Sundry Debtors 3,30,000
To Sargam Ltd.–Commission 13,050 Less: Commission 24,750 3,05,250
4.5% on 2,90,000 7.5% on 3,30,000
To Profits transferred to
Sunil’s Capital A/c 78,600

Sachin’s Capital A/c 78,600 1,57,200


19,90,250 19,90,250

Capital Accounts of Partners


Sunil Sachin Sunil Sachin
` ` ` `
To Shares in Sargam By Balance b/d 7,50,000 5,00,000
Ltd. – (W.N.2) 8,15,520 5,69,480
To Cash – Final By Realisation
Payment 13,080 9,120 A/c - Profit 78,600 78,600
8,28,600 5,78,600 8,28,600 5,78,600

Cash Account
` `
To Balance b/d 20,000 By Sunil’s Capital A/c- Final payment 13,080

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6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

To Sargam Ltd. (Amount realized By Sachin’s Capital A/c- Final


from Debtors less amount Payment 9,120
paid to creditors) – (W.N.3) 2,200
22,200 22,200
Working Notes:
1 Calculation of Purchase consideration
`
Land & Building 6,25,000
Furniture 1,60,000
Stock 4,00,000
Goodwill 2,00,000
13,85,000
2 Shares received from Sargam Ltd
The shares received from Sargam ltd have been distributed between the two partners
Sunil& Sachin in the ratio of their final claims i.e., 8,28,600: 5,78,600.
13,85,000
No. of shares received from the company = = 69,250
20
69,250×8,28,600
Sunil gets = 40,776 shares valued at ` 20 = ` 8,15,520.
14,07,200
Sachin gets the remaining 28,474 shares, valued at ` 5,69,480 (28,474 ` 20)
3 Calculation of net amount received from Sargam Ltd
`
Amount realized from Debtors 3,30,000
Less: Commission for realization from debtors (7.5% on 24,750
` 3,30,000) 3,05,250
Less: Amount paid to creditors 2,90,000
15,250
Less: Commission for cash paid to creditors (4.5% on 13,050
` 2,90,000)
Net amount received 2,200

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PAPER – 5 : ADVANCED ACCOUNTING 7

Question 3
(a) Z Limited came up with an issue of 60,00,000 equity shares of ` 10 each at par. 15,00,000
shares were issued to the promoters and the balance offered to the public was underwritten
by three underwriters D, E and F - equally with firm underwriting of 1,40,000 shares each,
Subscriptions totalled 38,91,000 shares including the marked forms which were:
D 12,75,000 shares
E 13,50,000 shares
F 10,50,000 shares
The underwriters had applied for the number of shares covered by firm underwriting. The
amounts payable on application and allotment were ` 2.50 and ` 2.00 respectively. The
agreed commission was 5%.
Pass Summary journal entries for -
(a) The allotment of shares to the underwriters
(b) The commission due to each of them and
(c) The net cash paid and or received.
Note: Unmarked applications are to be credited to underwriters equally. Benefit of firm
underwriting is given to individual underwriter. (8 Marks)
(b) The following balances appeared in the books of a company as on December 31 st, 2017,
6% Mortgage 25,000 Debentures of ` 100 each. Debenture Redemption Reserve (for
redemption of debentures) ` 26,05,000.
The following were the investments:
(i) ` 13,20,000, 4% Government Loan purchased at par (face value of ` 100 each)
1
(ii) ` 14,00,000, 3 % Government paper purchased for ` 13,55,000 (face value of
2
` 100 each)
The interest on debentures had been paid up to December 31st, 2017.
On February 28 th, 2018, the investments were sold at ` 87 and ` 90 respectively and the
debentures were paid off at ` 101 together with accrued interest.
Write up the ledger accounts concerned. The Debenture Redemption Reserve is non -
cumulative. (8 Marks)

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8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

Answer
(a) Z Ltd.
Journal Entries
Dr. Cr.
` `
Bank A/c Dr. 10,50,000
To Share Application A/c 10,50,000
(Application money received on firm applications for
140,000 shares each @ ` 2.50 per share from D, E & F)
D Dr. 2,80,000
E Dr. 2,80,000
F Dr. 11,30,500
Share Application A/c Dr. 10,50,000
To Share Capital A/c 27,40,500
(Allotment of shares to underwriters - 1,40,000 to D;
1,40,000 to E and 3,29,000 to F; application and
allotment money credited to share capital)
Underwriting Commission A/c Dr. 22,50,000
To D 7,50,000
To E 7,50,000
To F 7,50,000
(Amount of underwriting commission payable to D, E
and F @ 5% on the amount of shares underwritten.)
Bank A/c Dr. 3,80,500
To F 3,80,500
(Amount received from F on shares allotted less
underwriting commission)
D Dr. 4,70,000
E Dr. 4,70,000
To Bank A/c 9,40,000
(Amount paid to D & E in final settlement of underwriting
commission due less amount payable on shares allotted
payable by them.)

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PAPER – 5 : ADVANCED ACCOUNTING 9

Working Notes:
(1) Calculation of Liability of Underwriters
D E F
Gross Liability (No. of shares) 15,00,000 15,00,000 15,00,000
Less: Marked Applications (excluding
firm underwriting) (12,75,000) (13,50,000) (10,50,000)
2,25,000 1,50,000 4,50,000
Less: Unmarked Applications (equally) (72,000) (72,000) (72,000)
1,53,000 78,000 3,78,000
Less: Firm Underwriting (1,40,000) (1,40,000) (1,40,000)
13,000 (62,000) 2,38,000
Surplus of E distributed between D & F
equally (31,000) 62,000 (31,000)
(18,000) - 2,07,000
Surplus of D allocated to F totally 18,000 — (18,000)
Net Liability, excluding Firm Underwriting - - 1,89,000
Add: Firm underwriting 1,40,000 1,40,000 1,40,000
Total liability of underwriters 1,40,000 1,40,000 3,29,000
(2) Calculation of Amounts Payable by Underwriters
D E F
Liability (No. of shares) 1,40,000 1,40,000 3,29,000
Amount payable @ ` 4.50 per share 6,30,000 6,30,000 14,80,500
Less: Amount paid on Firm
Applications of 1,40,000 each @
` 2.50* (3,50,000) (3,50,000) (3,50,000)
Balance payable 2,80,000 2,80,000 11,30,500
Underwriting Commission Receivable 7,50,000 7,50,000 7,50,000
Amount Paid 4,70,000 4,70,000 —
Amount received by the Co. — — 3,80,500
* Underwriters had already paid the application money on these shares.
(b) 6% Mortgage Debentures Account
2018 ` 2018 `
Feb. 28 To Debenture- 25,00,000 Jan. 1 By Balance b/d 25,00,000
holders A/c

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10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

Premium on Redemption of Debentures Account


2018 ` 2018 `
Feb. 28 To Debenture- 25,000 Feb. 28 By Debenture 25,000
holders A/c Redemption
Reserve A/c
Debentures Redemption Reserve Investment Account
2018 ` 2018 `
Jan. To Balance b/d 26,75,000 Feb. By Bank – 13,200 11,48,400
1 (` 13,20,000 + 28 4% Govt. Loan
`13,55,000) (face value of
`100) sold @
` 87*
By Bank - 14,000 12,60,000
3.5% Govt.
Paper (face
value of `100)
sold @
` 90*
By Debenture
Redemption
Reserve A/c
(Loss) 2,66,600
26,75,000 26,75,000
*Interest on investments on ` 13,20,000 (4% Govt. Loan) and ` 14,00,000 (3.5% Govt.
Paper) not considered.
Debenture Interest Account
2018 ` 2018 `
Feb. To Cash 25,000 Feb. 28 By Profit & Loss 25,000
28 A/c
Debenture Redemption Reserve Account
2018 ` 2018 `
Feb. To Debenture Jan. 1 By Balance b/d 26,05,000
28 Redemption
Reserve
Investment
Account

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PAPER – 5 : ADVANCED ACCOUNTING 11

(Loss) 2,66,600 Feb. 28 By Profit & Loss A/c 1,86,600


To Premiumon (By Bal. fig)
Redemption of
Debentures A/c 25,000
To General reserve 25,00,000
(Nominal value of
debentures
redeemed)
27,91,600 27,91,600

Question 4
Sun and Neptune had been carrying on business independently. They agreed to amalgamate
and form a new company Jupiter Ltd. with an authorised share capital of ` 4.00,000 divided
into 80,000 equity shares of ` 5 each. On 31st March, 2018 the respective Summarised
Balance Sheets of Sun and Neptune were as follow:
Sun (`) Neptune (`)
Fixed Assets 6,35,000 3,65,000
Current Assets 3,27,000 1,67,750
9,62,000 5,32,750
Less: Current Liabilities (5,97,000) (1,80,250)
Representing Capital 3,65,000 3,52,500
Additional Information:
(a) Revalued figures of Fixed and Current assets were as follows:
Sun (`) Neptune (`)
Fixed Assets 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750
(b) The debtors and creditors include ` 43,350 owed by Sun to Neptune.
The purchase consideration is satisfied by issue of the following shares and debentures.
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the
profitability of their respective business based on the average net profit during the
last three years which were as follows:
Sun (`) Neptune (`)
2016 Profit 4,49,576 2,73,900

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12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

2017 (Loss)/Profit (2,500) 3,42,100


2018 Profit 3,77,924 3,59,000

(ii) 15% debenture in Jupiter Ltd. at par to provide an income equivalent to 8% return
business as on capital employed in their respective business as on 31st March, 2018
after revaluation of assets.
You are required to :
(1) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after
amalgamation. (16 Marks)
Answer
(1) Computation of Amount of Debentures and Shares to be issued:
Sun Neptune
` `
(i) Average Net Profit
(4,49,576-2,500+3,77,924)/3 = 2,75,000
(2,73,900+,3,42,100+3,59,000)/3 = 3,25,000
(ii) Equity Shares Issued
(a) Ratio of distribution
Sun : Neptune
275 325
(b) Number
Sun : 27,500
Neptune : 32,500
60,000
(c) Amount
27,500 shares of ` 5 each = 1,37,500
32,500 shares of ` 5 each = 1,62,500

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PAPER – 5 : ADVANCED ACCOUNTING 13

(iii) Capital Employed (after revaluation of assets)


Fixed Assets 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750
10,09,500 5,47,750
Less: Current Liabilities (5,97,000) (1,80,250)
4,12,500 3,67,500
(iv) Debentures Issued
8% Return on capital employed 33,000 29,400
15% Debentures to be issued to provide
equivalent income:
100
Sun: 33,000 × = 2,20,000
15
100
Neptune: 29,400 × = 1,96,000
15
(2) Balance Sheet of Jupiter Ltd.
As at 31st March 2018 (after amalgamation)
Particulars Note No `
I. Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 3,00,000
(b) Reserves and Surplus 2 64,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 4,16,000
(3) Current Liabilities
(a) Other current liabilities 7,33,900
Total 15,13,900
II. Assets
(1) Non-current assets
(a) Fixed assets 11,00,000
(2) Current assets
(a) Other current assets 4,13,900
Total 15,13,900

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14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

Notes to Accounts
`
1 Share Capital
Authorized
80,000 Equity Shares of ` 5 each 4,00,000
Issued and Subscribed
60,000 Equity Shares of ` 5 each 3,00,000
(all the above shares are allotted as fully paid-up pursuant to a
contract without payment being received in cash)
2 Reserve and Surplus
Capital Reserve 64,000
3 Long-term borrowings
Secured Loans
15% Debentures 4,16,000
Working Notes:
Sun Neptune Total
` ` `
(1) Purchase Consideration
Equity Shares Issued 1,37,500 1,62,500 3,00,000
15% Debentures Issued 2,20,000 1,96,000 4,16,000
3,57,500 3,58,500 7,16,000
(2) Capital Reserve
(a) Net Assets taken over
Fixed Assets 7,10,000 3,90,000 11,00,000
Current Assets 2,99,500 1,14,400* 4,13,900
10,09,500 5,04,400 15,13,900
Less: Current Liabilities (5,53,650**) (1,80,250) (7,33,900)
4,55,850 3,24,150 7,80,000
(b) Purchase Consideration 3,57,500 3,58,500 7,16,000
(c) Capital Reserve [(a) - (b)] 98,350
(d) Goodwill [(b) - (a)] 34,350
(e) Capital Reserve [Final Figure(c) -(d)] 64,000
* 1,57,750–43,350= 1,14,400
** 5,97,000–43,350= 5,53,650

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PAPER – 5 : ADVANCED ACCOUNTING 15

Question 5
(a) The following are the figures extracted from the books of National Bank Limited as on
31-3-2018.
`
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, Exchange and Brokerage 3,04,000
Rent received 1,04,000
Profit on sales of investments 3,20,000
Depreciation on bank's properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor's fee 28,000
The following further information is given:
(i) A customer to whom a sum of ` 16 lakhs has been advanced has become insolvent
and it is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of ` 2,10,000 was found
necessary by the auditors.
(iii) Rebate on bills discounted on 31-3-2017 was ` 19,000 and on 31-3-2018 was
` 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide ` 9,00,000 for Income-tax.
(vi) Profit and loss account opening balance was Nil as on 31-3-2017.
(vii) The directors desire to declare 10% dividend after transfer of 25% of the year's
profit to statutory reserve.

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16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

You are required to prepare profit & loss Account of the National Bank Ltd. with all the
necessary schedules for the year ended 31 st March 2018. Ignore figures for the Previous
year and corporate dividend tax. (8 Marks)
(b) On 31st March, 2018 the books of Priya Insurance Company Limited, contained the
following particulars in respect of fire insurance:
Particulars Amount (`)
Reserve for unexpired risks on 31 st March, 2017 10,00,000
Additional Reserve for unexpired risks on 31 st March, 2017 2,00,000
Premiums 22,40,000
Claims paid 12,80,000
Estimated liability in respect of outstanding claims:
On 31st March, 2017 1,30,000
On 31st March, 2018 1,80,000
Expenses of Management (including ` 60,000 legal
expenses paid in connection with the claims) 5,60,000
Interest and Dividend (Gross) 1,28,500
Income tax on the above 13,040
Profit on sale of investments 22,000
Commission paid 3,04,000
On 31st March 2018 provide ` 11,20,000 as unexpired risk reserve and ` 1,50,000 as
additional reserve.
You are required to prepare the fire Insurance Revenue account as per the regulations of
IRDA, for the year ended 31 st March 2018. (8 Marks)
Answer
(a) National Bank Limited
Profit and Loss Account for the year ended 31 st March, 2018
Schedule Year ended
31.03.2018
(` in 000’s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6651.18

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PAPER – 5 : ADVANCED ACCOUNTING 17

II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46
Provisions and contingencies 2070.00
Total 6098.38
IIII. Profits/Losses
Net profit for the year 552.80
Profit brought forward Nil
552.80
IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Dividend 160.00
Balance carried over to balance sheet* 254.60
552.80
*The Profit & Loss Account balance of ` 254.60 thousand will appear in the Balance
Sheet under Schedule 2 ‘Reserves and Surplus’.
Year ended
31.3. 2018
`’ in 000
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304.00
II. Profit on sale of investments 320.00
III. Rent received 104.00
728.00
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92
3259.92
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees(Salaries) 320.00
II. Rent, taxes and lighting 144.00

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18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

III. Depreciation on bank’s properties 48.00


IV. Director’s fee, allowances and expenses 48.00
V. Auditors’ fee 28.00
VI. Law (statutory) charges 44.00
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40.00
768.46
Working Notes:
1.
(` in ‘000s)
Interest/discount (net of rebate on bills discounted) 5929.18
Add: Rebate on bills discounted on 31.3. 2017 19.00
Less: Rebate on bills discounted on 31.3. 2018 (25.00)
5923.18
2. Provisions and Contingencies
(` in ‘000s)
Provision for doubtful debts:
Doubtful debts due to insolvency of customer (60% of ` 16 960
lakhs)
Provision for debts 210
Provision for Income Tax 900
2,070
(b) FORM B– RA
Name of the Insurer: Priya Insurance Company Limited
Registration No. and Date of registration with IRDA: ……………………..
Revenue Account for the year ended 31st March, 2018
Particulars Schedule Amount (`)
Premium earned (net) 1 21,70,000
Profit or loss on sale/redemption of investments 22,000
Others –
Interest and dividend (gross) 1,28,500

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 19

Total (A) 23,20,500


Claims incurred (Net) 2 13,90,000
Commission 3 3,04,000
Operating expenses related to insurance 4 5,00,000
Total (B) 21,94,000
Operating profit/loss from insurance business (B) – (A) 1,26,500

Schedule –1 Premium earned (net)


`
Premium received 22,40,000
Less: Adjustment for change in Reserve for Unexpired risk (as per (70,000)
W.N.)
Total premium earned 21,70,000
Schedule -2 Claims incurred (net)
`
Claims paid 12,80,000
Add: Legal expenses regarding claims 60,000
13,40,000
Add: Claims outstanding as on 31 st March, 2018 1,80,000
15,20,000
Less: Claims outstanding as on 31 st March, 2017 (1,30,000)
13,90,000
Schedule -3 Commission
`
Commission paid 3,04,000
Schedule-4 Operating expenses related to Insurance Business
`
Expenses of management (` 5,60,000 – ` 60,000) 5,00,000
Working Note:
Calculation for change in Reserve for Unexpired risk:
`
Reserve for Unexpired Risk as on 31 st March, 2018 11,20,000

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

Additional Reserve as on 31 stMarch, 2018 1,50,000 12,70,000


Less: Reserve for Unexpired Risk as on 31st March, 2017 10,00,000
Additional Reserve as on 31 st March, 2017 2,00,000 (12,00,000)
Transfer to reserve for unexpired risk on 31 st March 2018 70,000
Note: Interest and dividends are shown at gross value in Revenue account. Income tax on it
will not be included in the Revenue account as it is the part of Profit and Loss account of an
insurance company.
Question 6
(a) M/s P have 2 Departments - X and Y. From the following information, prepare
departmental Trading A/c and General Profit & Loss Account for the year ended on
31st March 2018.
Amount (`)
Department X Department Y
Opening stock as on 1-04-2017 (at cost) 2,45,000 2,43,000
Purchases 13,72,000 13,41,000
Carriage Inward 21,000 40,500
Wages 1,89,000 1,62,000
Sales 20,02,000 20,70,000
Purchased Goods Transferred:
By Department Y to X 2,25,000
By Department X to Y 1,26,000
Finished Goods Transferred:
By Department Y to X 6,75,000
By Department X to Y 6,12,500
Return of Finished Goods:
By Department Y to X 1,57,500
By Department X to Y 1,44,000
Closing Stock:
Purchased Goods 84,000 1,35,000
Finished Goods 3,57,000 2,79,000
Purchased goods have been transferred mutually at their respective departmental
purchase cost and finished goods at departmental market price and 30 % of the closing
finished stock with each department represents finished goods received from the other
department. (8 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 21

(b) M/s Marena, Delhi has a branch at Bangalore to which office goods are invoiced at cost
plus 25%. The branch sells both for cash and on credit. Branch Expenses are paid direct
from head office and the Branch has to remit all cash received into the Head Office Bank
Account.
From the following details, relating to calendar year 2017, prepare the accounts in the
Head Office Ledger and ascertain the Branch Profit.
Branch does not maintain any books of account, but sends weekly returns to the Head
Office.
`
Goods received from Head Office at invoice price 45,00,000
Returns to Heads Office at invoice price 90,000
Stock at Bangalore as on 1 st January, 2017 4,50,000
Sales during the year - Cash 15,00,000
- Credit 27,00,000
Sundry Debtors at Bangalore as on 1 st January, 2017 5,40,000
Cash received from Debtors 24,00,000
Discount allowed to Debtors 45,000
Bad Debts in the year 30,000
Sales returns at Bangalore Branch 60,000
Rent, Rates and Taxes at Branch 1,35,000
Salaries, Wages and Bonus at Branch 4,50,000
Office Expenses 45,000
Stock at Branch on 31 st December, 2017 at invoice price 9,00,000
(8 Marks)
Answer
(a) Departmental Trading Account in the books of M/s P
for the year ended 31 st March 2018
Particulars Department Department Particulars Department Department
X Y X Y
` ` ` `
To Opening stock 2,45,000 2,43,000 By Sales 20,02,000 20,70,000
To Purchases 13,72,000 13,41,000 By Transfers:
To Carriage inward 21,000 40,500 Purchased 1,26,000 2,25,000
goods

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

To Wages 1,89,000 1,62,000 Finished 4,55,000 5,31,000*


goods (net of
returns)
To Transfers: By Closing
stock:
Purchased goods 2,25,000 1,26,000 Purchased 84,000 1,35,000
goods
Finished goods 5,31,000 4,55,000 Finished 3,57,000 2,79,000
(net of returns) goods
To Gross profit c/d 4,41,000 8,72,500
30,24,000 32,40,000 30,24,000 32,40,000
General Profit and Loss A/c
for the year ended 31 st March, 2018
Particulars ` Particulars `
To Provision for unrealized profit By Gross profit b/d
included in closing stock
Department X (W.N. 3) 35,921 Department X 4,41,000
Department Y (W.N. 3) 15,024 Department Y 8,72,500
To Net profit 12,62,555
13,13,500 13,13,500

Working Notes:
1. Calculation of rates of gross profit margin on sales
Department X Department Y
` `
Sales 20,02,000 20,70,000
Add: Transfer of finished goods 6,12,500 6,75,000
26,14,500 27,45,000
Less: Return of finished goods (1,57,500) (1,44,000)
24,57,000 26,01,000
Gross Profit 4,41,000 8,72,500


Net transfers of finished goods by
Department X to Y = `6,12,500 – `1,57,500 = `4,55,000
Department Y to X = `6,75,000 – `1,44,000= `5,31,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 23

Gross profit margin = (4,41,000/24,57,000) x (8,72,500/26,01,000) x


100 =17.95% 100= 33.54%
2. Finished goods from other department included in the closing stock
Department X Department Y
` `
Stock of finished goods 3,57,000 2,79,000
Stock related to other department
(30% of finished goods) 1,07,100 83,700
3. Unrealized profit included in the closing stock
Department X = 33.54% of `1,07,100 = ` 35,921
Department Y = 17.95% of `83,700 = ` 15,024
(b) Bangalore Branch Stock Account
Particulars Amount Particulars Amount (`)
(`)
To Balance b/d 4,50,000 By Goods sent to branch A/c 90,000
To Goods sent to (Returns)
branch A/c 45,00,000 By Bank A/c (Cash sales) 15,00,000
To Branch debtors 60,000 By Branch debtors A/c (credit 27,00,000
A/c (Returns) sales)
To Branch By Balance c/d 9,00,000
adjustment A/c
(Surplus over
invoice price)* 1,80,000
51,90,000 51,90,000
*Alternatively, this may directly be transferred to Branch P&L A/c without routing it
through Branch Adjustment Account.
Bangalore Branch Adjustment Account
Particulars Amount Particulars Amount
(`) (`)
To Stock reserve - 20% 1,80,000 By Stock reserve - 20% of 90,000
of `9,00,000 (closing `4,50,000 (Opening
stock) stock)
To Branch profit & loss 9,72,000 By Goods sent to branch A/c 8,82,000
A/c (Gross profit) – 20% of `44,10,000
(45,00,000 – 90,000)

© The Institute of Chartered Accountants of India


24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

By Branch stock A/c 1,80,000


11,52,000 11,52,000
Branch Profit & Loss Account
Particulars Amount Particulars Amount
(`) (`)
To Branch expenses A/c 6,30,000 By Branch adjustment A/c 9,72,000
To Branch debtors A/c (Discount) 45,000 (Gross Profit)
To Branch debtors A/c (Bad 30,000
Debts)
To Net profit (transferred to Profit
& Loss A/c) 2,67,000
9,72,000 9,72,000
Branch Expenses Account
Particulars Amount Particulars Amount
(`) (`)
To Bank A/c (Rent, rates & 1,35,000 By Branch profit and loss A/c 6,30,000
taxes) (Transfer)
To Bank A/c (Salaries, 4,50,000
wages& bonus)
To Bank A/c (Office
expenses) 45,000
6,30,000 6,30,000
Branch Debtors Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 5,40,000 By Bank A/c 24,00,000
To Branch stock A/c 27,00,000 By Branch profit and loss A/c 75,000
(Bad debts and discount)
By Branch stock A/c (Sales 60,000
returns)
By Balance c/d (bal. fig.) 7,05,000
32,40,000 32,40,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 25

Goods sent to Branch Account


Particulars Amount Particulars Amount
(`) (`)
To Branch stock A/c 90,000 By Branch stock A/c 45,00,000
To Branch adjustment A/c 8,82,000
To Purchases A/c 35,28,000
45,00,000 45,00,000
Note: The solution has been given on ‘Stock and Debtors Method’. As the question is
silent on the method to be adopted, an alternate solution is also possible.
Question 7
Answer any four of the following:
(a) Shankar started a business on 1 st April, 2017 with ` 12,00,000 represented by 60,000
units of ` 20 each. During the financial year ending on 31 st March, 2018, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Shankar in the year 2017-18 if Financial Capital is
maintained at Historical cost.
(b) A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the
amount distributed to Preferential creditors and 3% on the payment made to unsecured
creditors. The assets were realized for ` 50,00,000 against which payment was made as
follows:
Liquidation ` 50,000
Secured Creditors ` 20,00,000
Preferential Creditors ` 1,50,000
The amount due to Unsecured creditors was ` 30,00,000
You are asked to calculate the total Remuneration payable to Liquidator. Calculation
shall be made to the nearest multiple of a rupee.
(c) Write short notes on the types of re-insurance contracts.
(d)
Outstanding Balance ` 12 lakhs
ECGC Cover 50%
Period for which the advance has remained More than 3 years remained
doubtful doubtful (as on 31 st March, 2018)
Value of security held (realisable value only ` 5.00 lakhs
70%)

© The Institute of Chartered Accountants of India


26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2018

You are required to calculate provisions as per applicable rules.


(e) Differentiate on ordinary partnership firm with an LLP (Limited Liability Partnership) in
respect of the following:
(1) Applicable Law
(2) Number of Partners
(3) Ownership of Assets
(4) Liability of Partners/Members (4 x 4 = 16 Marks)
Answer
(a)
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity
18,00,000 represented by cash
(`30 x 60,000 units)
Opening equity 60,000 units x `20 = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (18,00,000 – 12,00,000)
Therefore, ` 6,00,000 is the maximum amount which can be withdrawn by Shankar in the
year 2017-18 if the Financial Capital Maintenance is maintained at Historical Cost.
(b) Calculation of Total Remuneration payable to Liquidator
Amount
in `
2% on Assets realised (50,00,000 x 2%) 1,00,000
3% on payment made to Preferential creditors (1,50,000 x 3%) 4,500
3% on payment made to Unsecured creditors (Refer
W.N) 78,510
Total Remuneration payable to Liquidator 1,83,010
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses,
payment to secured creditors, preferential creditors & liquidator’s remuneration
= ` 50,00,000 – ` 50,000 – ` 20,00,000 – ` 1,50,000 – ` 1,00,000 – ` 4,500
= ` 26,95,500
Since cash balance is available for unsecured creditors, Liquidator’s remuneration on
payment to unsecured creditors = ` 26,95,500 X 3 /103= ` 78,510 (rounded off)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 27

(c) There are two types of reinsurance contracts:


1. Facultative Reinsurance: It is that type of reinsurance whereby the contract relates
to one particular risk and is expressed in a reinsurance policy. Each transaction
under Facultative Reinsurance has to be negotiated individually and each party to
the transaction has a free choice, i.e. for the ceding company to offer and the
reinsurer to accept. The main drawback of this type of insurance is the volume of
work involved and time taken to cover the risk.
2. Treaty Insurance: Under this type of reinsurance a Treaty agreement is entered
into between ceding company and the re-insurer(s) whereby the reinsurances are
within the limits of the Treaty. These limits can be monetary, geographical, section
of business, etc. Under this contract it is obligatory for the re-insurer to accept all
risks within the scope of this Treaty and it is obligatory for the ceding company to
cede risks in accordance with the terms of the Treaty.
(d) Provision required to be made as on 31.3.2018
`
Doubtful Assets (more than 3 year) 12,00,000
Less: Realizable value of security (70% of 5 Lakh) (3,50,000)
8,50,000
Less: ECGC coverage (4,25,000)
Unsecured portion 4,25,000
Provision:
for unsecured portion @100% on ` 4,25,000 4,25,000
for secured portion @ 100% on `3,50,000 3,50,000
Provision to be made in the books of the bank 7,75,000
(e) Distinction between an ordinary partnership firm and an LLP
Key Elements Partnerships LLPs
Applicable Law Indian Partnership Act 1932 The Limited Liability Partnerships
Act, 2008
Number of Minimum 2 and Maximum 20 Minimum 2 but no maximum limit
Partners (subject to 10 for banks)
Ownership of Firm cannot own any assets. The LLP as an independent entity
Assets The partners own the assets can own assets
of the firm.
Liability of Unlimited: Partners are Limited to the extent of their
Partners/ severally and jointly liable for contribution towards LLP except
Members actions of other partners and in case of intentional fraud or
the firm and their liability wrongful act of omission or
extends to personal assets. commission by a partner.

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PAPER – 5 : ADVANCED ACCOUNTING
Question No.1 is compulsory.
Candidates are also required to answer any five questions from the remaining six questions.
Working notes should form part of the respective answers.
Wherever necessary, candidates are permitted to make suitable assumptions which should be
disclosed by way of a note.
Question 1
Answer the following questions:
(a) From the following information compute Basic and Diluted Earnings Per Share (EPS) of
M/s. XYZ Limited for the year ended 31 st March, 2017 :
Net Profit for the year after tax: ` 75,00,000
Number of Equity Shares of ` 10 each outstanding: ` 10,00,000
Convertible Debentures Issued by the Company:
Particulars Nos.
8% Convertible Debentures of ` 100 each 1,00,000
Equity Shares to be issued on conversion 1,10,000
Rate of Income Tax: 30%.
(b) Legal department of XYZ Limited provides that as on 31st March 2017, there were 25 law
suits pending which have not been settled till the approval of accounts by the Board of
Directors. The possible outcome of suits are as follows:
Particulars Probability Loss (`)
In respect of Seven cases (Win) 100%
Next Twelve cases (Win) 60%
Loss (Low damages) 30% 1,50,000
Loss (High damages) 10% 2,50,000
Remaining Six cases (Win) 50%
Loss (Low damages) 35% 1,25,000
Loss (High damages) 15% 3,00,000
Outcome of each case is to be taken as a separate one. Ascertain the amount of
contingent loss to be reported in the Financial Statement.
(c) Small Limited began construction of a building on 1st April, 2016 which is expected to
cost ` 25,00,000. The construction of the building was financed through a special loan of

© The Institute of Chartered Accountants of India


2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

` 10,00,000 obtained at an interest rate of 10% per annum on 1 st April, 2016. Further,
expenditure on the building was financed through other non-specific finance
arrangements of the company. Details of non-specific finance arrangements are as
under:
Amount Rate of Interest P.a.
` 30,00,000 12%
` 20,00,000 15%
Cumulative expenses incurred on the building were as follows:
Date Amount
1st April, 2016 ` 5,00,000
1st July, 2016 ` 13,00,000
1st November, 2016 ` 20,00,000
31st January, 2017 ` 25,00,000
Construction of the building was completed on 31st March, 2017. Following the principles
specified in AS 16 'Borrowing Cost', calculate the amount of interest to be capitalized.
(d) The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Policy or not
for the year ended 31st March, 2017. Please advise him in the following situations in
accordance with the provisions of relevant Accounting Standard;
(i) Provision for doubtful debts was created @ 2% till 31st March, 2016. From the
Financial year 2016-2017, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2017, the management has introduced a formal
gratuity scheme in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a
period of 5 years. From current year, the useful life of furniture has been changed to
3 years.
(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get pension
of ` 20,000 per month. Earlier there was no such scheme of pension in the
organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in
measuring the cost of inventories. (4 x 5 Marks = 20 Marks)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 3

Answer
(a) Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares outstanding
during the year
` 75,00,000 / 10,00,000 = ` 7.50 per share
Adjusted net profit for the current year
Computation of diluted earnings per share
Weighted average number of equity shares
Adjusted net profit for the current year
`
Net profit for the current year 75,00,000
Add: Interest expense for the current year 8,00,000
Less: Tax relating to interest expense (30% of ` 8,00,000) (2,40,000)
Adjusted net profit for the current year 80,60,000
Number of equity shares resulting from conversion of debentures
= 1,10,000 Equity shares (given in the question)
Weighted average number of equity shares used to compute diluted earnings per
share
= 11,10,000 shares (10,00,000 + 1,10,000)
Diluted earnings per share
= ` 80,60,000/ 11,10,000
= ` 7.26 per share
Note:
1. Conversion of convertible debentures into Equity Share will be dilutive potential
equity shares. Hence, to compute the adjusted profit the interest paid on such
debentures will be added back as the same would not be payable in case these are
converted into equity shares.
2. The date of issue of convertible debentures is not given in the question. It has been
assumed that debentures were issued at the beginning of the year.
(b) According to AS 29 'Provisions, Contingent Liabilities and Contingent Assets', contingent
liability should be disclosed in the financial statements if following conditions are
satisfied:
(i) There is a present obligation arising out of past events but not recognized as
provision.

© The Institute of Chartered Accountants of India


4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(ii) It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also not
remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be
recognized as provision.
In this case, the probability of winning for first 7 cases is 100% and hence requirement of
providing contingent loss does not arise. The probability of winning of next 12 cases is
60% and for remaining 6 cases is 50%. In other words, probability of losing the cases is
40% and 50% respectively. According to AS 29, we make a provision if the loss is
probable. As the loss does not appear to be probable and the probability or possibility of
an outflow of resources embodying economic benefits is not remote rather there is
reasonable possibility of loss. Hence, disclosure will be made for contingent liability.
For disclosure by way of note of contingent liability, amount may be calculated as under:
Expected loss in 12 cases = [` 1,50,000 x 0.3 + ` 2,50,000 x 0.1] x 12
= [` 45,000 + ` 25,000] x 12
= ` 70,000 x 12 = ` 8,40,000
Expected loss in remaining 6 cases = [` 1,25,000 x 0.35 + ` 3,00,000 x 0.15] x 6
= [` 43,750 + ` 45,000] x 6
= ` 5,32,500
Therefore, the overall expected loss of ` 13,72,500 (` 8,40,000 + ` 5,32,500) will be
disclosed by way of contingent liability
(c) Computation of average accumulated expenses
`
` 5,00,000 x 12 / 12 = 5,00,000
(` 13,00,000 - 5,00,000) x 9 / 12 = 6,00,000
(` 20,00,000 -13,00,000) x 5 / 12 = 2,91,667
(` 25,00,000 -20,00,000) x 2 / 12 = 83,333
14,75,000
Non-specific Borrowings
Non-specific Borrowings = Average accumulated capital expenses – Specific borrowings
= ` 14,75,000 – ` 10,00,000 = ` 4,75,000

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PAPER – 5 : ADVANCED ACCOUNTING 5

Interest amount to be capitalized


`
Specific borrowings (` 10,00,000 x 10%) = 1,00,000
Non-specific borrowings (` 4,75,000 × 13.2% - refer Working = 62,700
Note)
Amount of interest to be capitalized = 1,62,700
Working Note:
Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of interest (`)
30,00,000 12% 3,60,000
20,00,000 15% 3,00,000
50,00,000 6,60,000
Weighted average rate of interest 13.2%
 6,60,000 
 ×100 
 50,00,000 
(d) (i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March,
2016. Subsequently in 2016-17, the company revised the estimates based on the
changed circumstances and wants to create 3% provision. Thus change in rate of
provision of doubtful debt is change in estimate and is not change in accounting policy.
This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees
on retirement is a transaction which is substantially different from the previous
policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and
is not a change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur
previously should not be treated as a change in an accounting policy. Hence the
introduction of new pension scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in
accounting policy.

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Question 2
R and S are partners of RS & Co. sharing the profit and losses in the ratio of 3:2 and S and M
were partners in SM & Co. sharing the profits and losses in the ratio of 4:1. On 31 st March,
2017, they decided to amalgamate their firms and form a new firm namely M/s RSM & Co.
wherein R, S, and M will share the profits and losses in the ratio of 5 : 3 : 2. The Balance
Sheets of the two firms as on 31st March, 2017 were as under:
Liabilities RS& Co. SM & Co. Assets RS& Co. SM & Co.
Capitals Fixed Assets
R 2,50,000 Building 75,000 80,000
S 1,50,000 1,75,000 Plant and Machinery 2,00,000 1,50,000
M 1,25,000 Office Equipment 30,000 15,000
Reserves 40,000 1,25,000
Sundry Creditors 60,000 2,25,000 Current Assets:
Due to SM & Co. 50,000 Stock-in-trade 1,30,000 1,25,000
Bank Overdraft 1,00,000 Sundry Debtors 1,50,000 1,75,000
Bank Balances 40,000 35,000
Cash in Hand 25,000 20,000
Due from RS & Co. 50,000
Total 6,50,000 6,50,000 Total 6,50,000 6,50,000
The amalgamation of the firms was done on the following terms:
(a) Building of both the firms were valued at ` 1.00 lac each.
(b) Plant and Machinery of RS & Co. was valued at ` 1,75,000 and of SM & Co. was at
` 1,60,000.
(c) Stock in trade of RS & Co. was to be appreciated by 10% and of SM & Co. by 15%.
(d) Goodwill of RS & Co. was valued at ` 1,50,000 and of SM & Co. at ` 1,00,000, but the
same will not appear in the books of accounts of the amalgamated firm.
(e) Provisions for doubtful debts @ 5% for debtors of both the firms have to be made.
(f) Other assets and liabilities will be taken over at their respective book value.
(g) The partners will bring necessary cash as may be required to pay the other partners to
adjust their capitals according to their profit sharing ratio.
Prepare the Balance Sheet of the Amalgamated Firm and Capital Accounts of the partners in
the books of the old Firms. (16 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 7

Answer
Balance Sheet of M/s RSM & Co. as at 31st March, 2017
Liabilities ` Assets `
Capitals: Building
(` 1,00,000 + ` 1,00,000) 2,00,000
R 4,55,250 Plant & machinery
(` 1,75,000 + ` 1,60,000) 3,35,000
S 2,73,150 Office equipment
(` 30,000+` 15,000) 45,000
M 1,82,100 9,10,500 Stock-in-trade
(` 1,43,000+` 1,43,750) 2,86,750
Sundry creditors Sundry debtors
`(60,000+2,25,000) 2,85,000 (` 1,50,000+` 1,75,000) 3,25,000
Bank overdraft 1,00,000 Less: Provision for doubtful
debts (16,250) 3,08,750
(` 7,500 + ` 8,750)
Bank balance (` 40,000+
` 35,000) 75,000
Cash in hand 45,000 ∗
12,95,500 12,95,500
In the books of RS & Co.
Partners’ Capital Accounts
Particulars R S Particulars R S
` ` ` `
To Capital A/cs – 3,67,300 2,28,200 By Balance b/d 2,50,000 1,50,000
M/s RSM & Co. By Reserve (3:2) 24,000 16,000
By Profit on
Realisation A/c
(W.N.4) 93,300 62,200
3,67,300 2,28,200 3,67,300 2,28,200


` 25,000+` 20,000+` 2,12,950 + ` 54,100 –` 2,67,050 = ` 45,000

© The Institute of Chartered Accountants of India


8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

In the books of SM Co.


Partners’ Capital Accounts
Particulars S M Particulars S M
` ` ` `
To Capital A/cs – 3,87,000 1,78,000 By Balance b/d 1,75,000 1,25,000
M/s RSM & Co. By Reserve (4:1) 1,00,000 25,000
By Profit on
Realisation 1,12,000 28,000
(W.N.5)
3,87,000 1,78,000 3,87,000 1,78,000
Working Notes:
1. Computation of purchase consideration
RS& Co. SM & Co.
` `
Assets:
Goodwill 1,50,000 1,00,000
Building 1,00,000 1,00,000
Plant & machinery 1,75,000 1,60,000
Office equipment 30,000 15,000
Stock-in-trade 1,43,000 1,43,750
Sundry debtors 1,50,000 1,75,000
Bank balance 40,000 35,000
Cash in hand 25,000 20,000
Due from RS & Co. - 50,000
(A) 8,13,000 7,98,750
Liabilities:
Creditors 60,000 2,25,000
Provision for doubtful debts 7,500 8,750
Due to SM & Co. 50,000 -
Bank overdraft 1,00,000 -
(B) 2,17,500 2,33,750
Purchase consideration (A-B) 5,95,500 5,65,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 9

2. Computation of proportionate capital


`
M/s RSM & Co. (Purchase Consideration) (` 5,95,500+ ` 5,65,000) 11,60,500
Less: Goodwill adjustment (2,50,000)
Total capital of new firm (Distributed in ratio 5:3:2) 9,10,500
R’s proportionate capital 4,55,250
S’s proportionate capital 2,73,150
M’s proportionate capital 1,82,100
3. Computation of Capital Adjustments
R S M Total
` ` ` `
Balance transferred from RS & Co. 3,67,300 2,28,200 5,95,500
Balance transferred from SM & Co. 3,87,000 1,78,000 5,65,000
3,67,300 6,15,200 1,78,000 11,60,500
Less: Goodwill written off in the
ratio of 5:3:2 (1,25,000) (75,000) (50,000) (2,50,000)
Existing capital 2,42,300 5,40,200 1,28,000 9,10,500
Proportionate capital 4,55,250 2,73,150 1,82,100 9,10,500
Amount to be brought in (paid off) 2,12,950 (2,67,050) 54,100
4. In the books of RS & Co.
Realisation Account
` `
To Building 75,000 By Creditors 60,000
To Plant & machinery 2,00,000 By Bank overdraft 1,00,000
To Office equipment 30,000 By Due to SM & Co. 50,000
To Stock-in-trade 1,30,000 By M/s RSM & Co. 5,95,500
To Sundry debtors 1,50,000 (purchase consideration)
To Bank balance 40,000 (W.N.1)
To Cash in hand 25,000
To Partners’ capital A/cs:
R 93,300
S 62,200 1,55,500
8,05,500 8,05,500

© The Institute of Chartered Accountants of India


10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

5. In the books of SM & Co.


Realisation Account
` `
To Building 80,000 By Creditors 2,25,000
To Plant & machinery 1,50,000 By M/s RSM & Co. 5,65,000
To Office equipment 15,000 (purchase consideration)
To Stock-in-trade 1,25,000 (W.N.1)
To Sundry debtors 1,75,000
To Bank balance 35,000
To Cash in hand 20,000
To Due from RS & Co. 50,000
To Partners’ capital A/cs:
S 1,12,000
M 28,000 1,40,000
7,90,000 7,90,000
Note:
1. The adjustments in the Capital Accounts of R, S and M (both for Goodwill and the
amounts paid to S by R and M) can also be shown in their Capital Accounts in the
Books of RS & Co. and SM & Co respectively. In such a case, the Capital Accounts
of the partners carried to RSM & Co will be the same amounts as shown in the
Balance Sheet of RSM & Co.
2. In the above solution, Realization accounts have been prepared in the books of RS
& Co. and SM Co. Alternatively, Revaluation Accounts can also be prepared for
giving effect of profit or loss on revaluation of assets and liabilities without closing
accounts of all assets and liabilities in the books of amalgamating firms.
Question 3
(a) You are provided with the following details in respect of ABC Limited:
(i) 10,000 equity shares of nominal value of ` 10 each (under ESOP) were issued on
31st March, 2014;
(ii) Exercise price of equity shares granted under ESOP was ` 160 per share;
(iii) Market price of share was ` 400 each on the date of the grant;
(iv) Vesting of shares was in the ratio of 30%, 60% and 100% after 1 year, 2 year and
3 year respectively from the date of grant;
(v) Vested options can be exercised up to 1 year from the date of vesting;

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PAPER – 5 : ADVANCED ACCOUNTING 11

(vi) The number of shares expired and exercised are as under:

Years ended
Particulars 31.03.2015 31.03.2016 31.03.2017
Vested Options Lapsed during the year - 200 600
Unvested Options Lapsed during the year 400 600 1,000
Options Exercised during the year 2,500 2,000

From the above details you are required to calculate:


(i) Employee Compensation Expense for the year ending 31st March, 2015,
31st March, 2016 and 31st March, 2017
(ii) Balance of Employee Stock Option Outstanding Account as on 31 st March, 2015,
31st March, 2016 and 31st March, 2017
Entries relating to ESOP lapsed and options exercised were passed at the end of the
respective financial year. (8 Marks)
(b) The following balances appeared in the books of Heaven Ltd. on 1st April, 2016:
(i) 12% Debentures ` 9,50,000;
(ii) Balance of Sinking Fund ` 8,00,000
(iii) Sinking Fund Investment ` 8,00,000 represented by 10% ` 8,50,000 Secured
Bonds of Government of India.
Annual contribution to the Sinking Fund was ` 1,50,000 made on 31st March every year.
On 31st March, 2017, balance at bank was ` 4,00,000 before receipt of interest. The
company sold the 90% face value of its investments, for redemption of debentures, at a
premium of 10% on the above date.
You are required to prepare the following accounts for the year ended on 31 st March,
2017:
(a) Debentures Account;
(b) Sinking Fund Account;
(c) Sinking Fund Investment Account;
(d) Bank Account; and
(e) Debenture Holders Account. (8 Marks)

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Answer
(a) (i) Calculation of Employee Compensation Expense for the Year ended
31st March 2015, 31st March 2016 and 31st March, 2017 (Refer Working Note)
Vesting Date Cost to be recognized in the year ending on 31st March
as on 31st March 2015 2016 2017
Grade I (30%) 6,24,000
Grade II (30%) 2,88,000 2,88,000
Grade III (40%) 2,40,000 2,40,000 2,40,000
Cost for the year 11,52,000 5,28,000 2,40,000
Cumulative cost 11,52,000 16,80,000 19,20,000
(ii) Balance of ESOP Outstanding Account as on 31st March 2015, 31st March 2016
and 31st March, 2017
Total 2015 2016 2017
ESOP outstanding A/c at the end 11,52,000 11,52,000
of 1st year
Less: Vested Options lapsed (48,000)
during year
(200 x 240)
Less: Vested Options exercised (6,00,000)
during year
(2,500 x 240)
Add: ESOP credited in the 2nd 5,28,000
year
ESOP outstanding A/c at the end 10,32,000 10,32,000
of 2nd year
Less: Vested options lapsed (1,44,000)
(600 x 240)
Less: Vested options exercised (4,80,000)
(2,000 x 240)
Add: ESOP credited in the 3rd 2,40,000
year
ESOP outstanding at the end of 6,48,000 6,48,000
3rd year

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PAPER – 5 : ADVANCED ACCOUNTING 13

Working Note:
Determination of number of options expected to vest under each group
Shares Value per Compensation
expected to Shares (`) Expense (`)
vest (400 – 160)
Grade I (10,000 shares x 30%) - 2,600 shares 240 6,24,000
(30%) 400 shares
Grade II (10,000 shares x 30%) - 2,400 shares 240 5,76,000
(30%) 600 shares
Grade III (10,000 shares x 40%) - 3,000 shares 240
(40%) 1,000 shares 7,20,000
19,20,000
Total compensation expense of ` 19,20,000, determined at the grant date, is attributed to
3 years.
Note: In the absence of estimated figures regarding lapse of unvested options, it is
assumed that actual lapses were in accordance with the estimation.
(b) 1. Debentures Account
Date Particulars ` Date Particulars `
31.3.17 To Debenture 9,50,000 1.4.16 By Balance b/d 9,50,000
holders A/c

9,50,000 9,50,000
2. Sinking Fund Account
Date Particulars ` Date Particulars `
31.3.17 To General 9,50,000 1.4.16 By Balance b/d 8,00,000
Reserve
To Capital 1,30,000 31.3.17 By Profit and Loss A/c 1,50,000
Reserve
31.3.17 By Interest on sinking
fund A/c (Interest
on 10% stock -
(` 8,50,000 x 10%) 85,000
31.3.17 By Sinking Fund
Investment A/c 45,000
10,80,000 10,80,000

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

3. Sinking Fund Investment A/c (10% Secured Bonds of Govt.)


` `
1.4.16 To Balance b/d 8,00,000 31.3.17 By Bank A/c 7,65,000
(face value `(8,50,000 x 90%
` 8,50,000) = 7,65,000)
To Sinking Fund 45,000 31.3.17 By Balance c/d 80,000
8,45,000 8,45,000

4. Bank A/c
` `
31.3.17 To Balance b/d 4,00,000 31.3.17 By 12% Debenture 10,45,000
31.3.17 To Interest on 85,000 holders A/c
Sinking fund
Investment A/c
31.3.17 To Sinking fund 31.3.17 By Balance c/d 2,05,000
Investment A/c 7,65,000
12,50,000 12,50,000

5. Debenture holders’ A/c

` `
31.3.17 To Bank A/c 10,45,000 31.3.17 By 12% Debentures 9,50,000
31.3.17 By Premium on redemption
of debentures 95,000
10,45,000 10,45,000

Note:
1. It has been considered that the sale of investments and redemption of debentures
take place on 31st March, 2017.
2. The question states that the company sold 90% face value of investments, for
redemption of debentures at a premium of 10%. It has been considered in the
above solution that the sale of investments is at par and redemption of debentures
is at premium.

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PAPER – 5 : ADVANCED ACCOUNTING 15

Question 4
The summarized balance sheet of Z Limited as on 31st March, 2017 is as under:

Liabilities Amount in `
Share Capital:
5,00,000 Equity shares of ` 10 each fully paid up 50,00,000
9%, 20,000 Preference shares of ` 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (14,60,000)
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000
Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000
Total 81,00,000
Assets:
Non-Current Assets:
Fixed Assets:
(a) Tangible Assets:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
(b) Intangible Assets:
Goodwill 10,00,000
Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Inventory 10,00,000
Discount on issue of debentures 1,00,000
Total 81,00,000

Note: Preference dividend is in arrears for last 2 years.


Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover ` 1,00,000 and
` 60,000 were also payable to Mr. Y and Mr. Z respectively as trade payable.
The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of ` 5.00 each.
(ii) The Preference shares be reduced to ` 50 each and the preference shareholders agreed
to forego their arrears of preference dividends, in consideration of which 9% preference
shares are to be converted into 10% preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including
interest on debentures. Mr. Y and Mr. Z also agreed to pay ` 1,00,000 and ` 60,000
respectively in cash and to receive new 12% debentures for the balance amount.
(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their
50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for the balance.
(vi) Capital commitments of ` 3.00 lacs were cancelled on payment of ` 15,000 as penalty.
(vii) Directors refunded ` 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid ` 15,000.
(ix) The taxation liability of the company was settled for ` 75,000 and was paid immediately.
(x) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to pass journal entries for all the above mentioned transactions
including amounts to be written off of Goodwill, Patents, Loss in Profit and Loss account
arid Discount on issue of debentures. And also prepare Bank Account and
Reconstruction A/c. (16 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 17

Answer
Journal Entries in the Books of Z Ltd.
Dr. Cr.
` `
(i) Equity Share Capital (` 10 each) A/c Dr. 50,00,000
To Equity Share Capital (` 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of
` 10 each fully paid into same number of fully paid
equity shares of ` 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (` 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 50 each) A/c 10,00,000
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of
` 100 each into same number of 10% preference
share of ` 50 each and claims of preference
dividends settled as per scheme of reconstruction.)
(iii) 10% Secured Debentures A/c Dr. 9,60,000
Trade payables A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
To Reconstruction A/c 5,78,000
(Being ` 11,56,000 due to Y (including trade
payables) cancelled and 12% debentures allotted
for the amount after waving 50% as per scheme of
reconstruction.)
(iv) 10% Secured Debentures A/c Dr. 6,40,000
Trade Payables 60,000
Interest on debentures outstanding A/c 64,000
Bank A/c 60,000

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

To 12% debentures A/c 4,42,000


To Reconstruction A/c 3,82,000
(Being ` 7,64,000 due to Z (including trade
payables) cancelled and 12% debentures allotted
for the amount after waving 50% as per scheme of
reconstruction.)
(v) Trade payables A/c Dr. 1,70,000
To Reconstruction A/c 1,70,000
(Being remaining trade payables sacrificed 50% of
their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (` 5) A/c 40,000
To Reconstruction A/c 60,000
(Being Directors' loan claim settled by issuing
12,000 equity shares of ` 5 each as per scheme of
reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for
cancellation of capital commitments of ` 3 Lakhs.)
(viii) Bank A/c Dr. 1,00,000
To Reconstruction A/c 1,00,000
(Being refund of fees by directors credited to
reconstruction A/c.)
(ix) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement
against provision for tax)

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PAPER – 5 : ADVANCED ACCOUNTING 19

(xi) Land and Building A/c Dr. 2,00,000


To Reconstruction A/c 2,00,000
(Being appreciation in value of Land & Building
recorded)
(xii) Reconstruction A/c Dr. 49,85,000
To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 14,60,000
To Discount on issue of Debentures A/c 1,00,000
To Plant and Machinery A/c 6,50,000
To Furniture & Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction,
balance of reconstruction A/c transfer to Capital
Reserve.)

Bank Account
` `
To Reconstruction (Y) 1,00,000 By Balance b/d 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 (capital commitment
(refund of earlier fees by penalty paid)
directors)
By Reconstruction A/c 15,000
(reconstruction
expenses paid)
By Provision for tax A/c 75,000
(tax paid)

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

By Balance c/d 55,000


2,60,000 2,60,000

Reconstruction Account
` `
To Bank (penalty) 15,000 By Equity Share
To Bank (reconstruction expenses) 15,000 Capital A/c 25,00,000
To Goodwill 10,00,000 By 9% Pref. Share
To Patent 5,00,000 Capital A/c 10,00,000
To P & L A/c 14,60,000 By Mr. Y (Settlement) 5,78,000
To Discount on issue of debentures 1,00,000 By Mr. Z (Settlement) 3,82,000
To P & M 6,50,000 By Trade Payables A/c 1,70,000
To Furniture and Fixtures 1,00,000 By Director’s loan 60,000
To Trade investment 50,000 By Bank 1,00,000
To Inventory 2,50,000 By Provision for tax 25,000
To Trade Receivables 1,00,000 By Land and Building 2,00,000
To Capital Reserve (bal. fig.) 7,75,000
50,15,000 50,15,000
Question 5
(a) From the following information as on 31st March, 2017 from the books of Ocean
Insurance Company Limited, which is engaged in Marine Insurance business prepare the
Revenue Account.
Particulars Direct Business Re-Insurance
(`) (`)
I Premium
Received 22,00,000 3,40,000
Receivable – 1st
April, 2016 1,20,000 21,000
31St March, 2017 1,80,000 28,000
Premium paid 2,50,000 -
Payable - 1st April, 2016 22,000
31st March, 2017 40,000
II Claims:
Paid 16,50,000 1,25,000

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PAPER – 5 : ADVANCED ACCOUNTING 21

Payable - 1st April, 2016 98,000 12,000


31st March, 2017 1,90,000 24,000
Received 1,05,000
Receivable – 1st April, 2016 - 12,000
31St March, 2017 - 10,000
III Commissions
On Insurance accepted 1,40,000 12,000
On Insurance ceded - 16,000
Other expenses and income:
Salaries - ` 2,50,000; Rent, Rates and Taxes - ` 15,000; Printing and Stationery -
` 22,000; Interest, Dividend and Rent Received (Net) - ` 1,10,000; Income tax deduction
at source - ` 24,000; Legal expenses (Inclusive of ` 15,000 in connection with the
settlement of claims)- ` 50,000;
Balance of fund as on 1st April, 2016 was ` 25,50,000 including additional reserve of
` 3,25,000. Additional Reserve has to be maintained at 5% of the net premium of the
year. (10 Marks)
(b) The following is an extract from the trial balance of Novel Bank Limited as on 31st March
2017:
Rebate on bills discounted as on 1st April 2016 ` 78,566 (Cr. bal)
Discount Received ` 1,60,572 (Cr. bal)
An analysis of bills discounted is as follows:
Amount ` Due Date
2,90,000 01 June 2017
8,75,000 08 June 2017
5,65,000 21 June 2017
8,12,000 01 July 2017
6,50,000 05 July 2017

Find out the amount of discount to be credited to Profit and Loss Account for the year
ending on 31st March, 2017 and pass the necessary journal entries. The rate of discount
shall be taken at 10% per annum. (6 Marks)

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Answer
(a) Form B – RA (Prescribed by IRDA)
Revenue Account for the year ended 31st March, 2017
(Marine Insurance Business)
Schedule Current Previous
Year Year
` `
Premiums earned (net) 1 24,33,050
Profit/(Loss) on sale/redemption of investments -
Others (to be specified) -
Interest, Dividends and Rent – Gross (Net + 1,34,000
TDS) (1,10,000 +24,000)
Total (A) 25,67,050
Claims incurred (net) 2 17,91,000
Commission 3 1,36,000
Operating expenses related to Insurance 4 3,22,000
business
Total (B) 22,49,000
Operating Profit from Marine Insurance 3,18,050
business (A-B)
Schedules forming part of Revenue Account
Current Previous
Year Year
` `
Schedule –1
Premium earned (net) (22,60,000 +3,47,000)
Total Premiums earned 26,07,000
Less: Premium on reinsurance ceded (2,68,000)
Total Premium earned (net) 23,39,000
Change in provision for unexpired risk (Required provision –
existing reserve)
[(` 23,39,000 +5% of 23,39,000 i.e. 24,55,950) – 94,050
` 25,50,000)]
Net Premium earned 24,33,050

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PAPER – 5 : ADVANCED ACCOUNTING 23

Schedule – 2
Claims incurred (net) 17,91,000
Schedule – 3
Commission paid
Direct 1,40,000
Add: Re-insurance accepted 12,000
Less: reinsurance ceded (16,000)
1,36,000
Schedule – 4
Operating expenses related to insurance business*
Employees’ remuneration and welfare benefits 2,50,000
Rent, Rates and Taxes 15,000
Printing and Stationery 22,000
Legal and Professional charges 35,000
3,22,000
*Assumed to be related with Marine insurance business.
Working Notes:
1. Total Premium Income Direct Re-insurance
` `
Received 22,00,000 3,40,000
Add: Receivable on 31st March, 2017 1,80,000 28,000
23,80,000 3,68,000
Less: Receivable on 1st April, 2016 (1,20,000) (21,000)
22,60,000 3,47,000
Total premium income ` 22,60,000 + ` 3,47,000 = ` 26,07,000
2. Premium Expense on reinsurance `
Premium Paid during the year 2,50,000
Add: Payable on 31st March, 2017 40,000
2,90,000
Less: Payable on 1st April, 2016 (22,000)
2,68,000

© The Institute of Chartered Accountants of India


24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

3. Claims Paid
Direct Business 16,50,000
Re-insurance 1,25,000
Legal Expenses 15,000
17,90,000
Less: Re-insurance claims received (1,05,000)
16,85,000
4. Claims outstanding as on 31st March, 2017
Direct 1,90,000
Re-insurance 24,000
2,14,000
Less: Recoverable from Re-insurers on 31st March, 2017 (10,000)
2,04,000
5. Claims outstanding as on 1st April, 2016
Direct 98,000
Re-insurance 12,000
1,10,000
Less: Recoverable from Re-insurers on 1st April, 2016 (12,000)
98,000
(b) The amount of rebate on bills discounted as on 31st March, 2017 the period which has
not been expired upto that day will be calculated as follows:
Discount on ` 2,90,000 for 62 days @ 10% 4,926
Discount on ` 8,75,000 for 69 days @ 10% 16,541
Discount on ` 5,65,000 for 82 days @ 10% 12,693
Discount on ` 8,12,000 for 92 days @ 10% 20,467
Discount on ` 6,50,000 for 96 days @ 10% 17,096
Total 71,723
Note: The due date of the bills discounted is included in the number of days above.
The amount of discount to be credited to the profit and loss account will be:
`
Transfer from rebate on bills discounted as on 1.4. 2016 78,566
Add: Discount received during the year 1,60,572
2,39,138

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PAPER – 5 : ADVANCED ACCOUNTING 25

Less: Rebate on bills discounted as on 31.03. 2017 (as above) (71,723)


1,67,415
Journal Entries
` `
Rebate on bills discounted A/c Dr. 78,566
To Discount on bills A/c 78,566
(Transfer of opening unexpired discount on 31.03. 2016)
Discount on bills A/c Dr. 71,723
To Rebate on bills discounted 71,723
(Unexpired discount on 31.03. 2017 taken into account)
Discount on Bills A/c Dr. 1,67,415
To P & L A/c 1,67,415
(Discount earned in the year, transferred to P&L A/c)
Question 6
(a) M & S Co. of Lucknow has a branch in Canberra, Australia. At the end of 31st March
2017, the following ledger balances have been extracted from the books of the Lucknow
office and the Canberra.
Lucknow office Canberra Branch
(` In thousand) (Aust. Dollars in thousand)
Dr. Cr. Dr. Cr.
Capital 2,000
Reserves & Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Dep. Reserves 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery Dep.
Reserves 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2016 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salary 75 45

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26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
The following information is also available:
(i) Stock as at 31st March, 2017
Lucknow ` 1,50,000
Canberra A$ 3125 (all stock are out of purchases made at Abroad)
(ii) Head Office always sent goods to the Branch at cost plus 25%
(iii) Provision is to be made for doubtful debts at 5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at
20% on written down value.
You are required to:
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A $ = ` 50
Closing rate 1 A $ = ` 53
Average rate 1 A $ = ` 51.00
For Fixed Asets 1 A $ = ` 46.00
(2) Prepare Trading and Profit and Loss Account for the year ended 31st March 2017
showing to the extent possible H.O. results and Branch results separately.
(12 Marks)
(b) Department X sells goods to Department Y at a profit of 50% on cost and to Department
Z at 20% on cost. Department Y sells goods to Department X and Z at a profit of 25%
and 15% respectively on sales. Department Z charges 30% profit on cost to Department
X and 40 profit on sale to Y.
Stocks lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000

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PAPER – 5 : ADVANCED ACCOUNTING 27

Calculate the unrealized profit of each department and also total unrealized profit.
(4 Marks)
Answer
(a) M & S Co. Ltd.
Canberra, Australia Branch Trial Balance
As on 31st March 2017

($ ‘thousands) (` ‘thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 ` 46 9,200
Plant & Machinery Dep. 130 ` 46 5,980
Reserve
Trade receivable/payable 60 30 ` 53 3,180 1,590
Stock (1.4.2016) 20 ` 50 1,000
Cash & Bank Balances 10 ` 53 530
Purchase / Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918
Commission Receipts 100 ` 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss
(bal. fig.) 208
390 390 19,063 19,063
Closing stock 3.125 53 165.625*

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28 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

Trading and Profit & Loss Account for the year ended 31st March, 2017

H.O. Branch Total H.O. Branch Total


To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent to 100 – 100.000
To Goods received Branch

from Head Office – 100.000 100.000 By Closing Stock 150 165.625 315.625
To Wages & Salaries 75 2,295.000 2,370.000
To Gross profit c/d 355 2,023.625 2,378.625
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent – 612.000 612.000 By Gross profit 355 2,023.625 2,378.625
b/d
To Office expenses 25 918.000 943.000 By Commission 256 5,100.000 5,356.000
To Provision for receipts
doubtful debts @ 14 159.000 173.000
5%
To Depreciation 460 644.000 1,104.000
(W. N.)
To Balance c/d 112 4,790.625 4,902.625
611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing 30.000 By Balance b/d 4,902.625
Partner’s Salary
To Exchange Loss 208.000 By Branch stock 4.000
reserve
To Balance c/d 4,668.625
4,906.625 4,906.625

Working Note:
Calculation of Depreciation
H.O Branch
` ‘000 ` ‘000
Building – Cost 1,000
Less: Dep. Reserve (200)
800

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PAPER – 5 : ADVANCED ACCOUNTING 29

Depreciation @ 10% (A) 80


Plant & Machinery Cost 2,500 9,200
Less: Dep. Reserve (600) (5,980)
1,900 3,220
Depreciation @ 20% (B) 380 644
Total Depreciation (A+B) 460 644
Note:
1. In the above solution, it has been assumed that the Australia branch is an integral
foreign operation of M & S Co.
2. As the closing stock of Branch does not consist any stock transferred from M& S
Co., there is no need to create closing stock reserve. But the opening branch stock
reserve has to be reversed in the P&L A/c.
(b) Calculation of unrealized profit of each department and total unrealized profit
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized Profit of:
Department X 75,000 x 50/150 = 48,000 x 20/120
25,000 = 8,000 33,000
Department Y 50,000 x .25 = 82,000 x .15 =
12,500 12,300 24,800
Department Z 52,000 x 30/130 56,000 x 40/100 =
= 12,000 22,400 34,400
92,200

Question 7
Answer any FOUR of the followings:
(a) Rahul Ltd. purchased a plant for US$ 2,00,000 on 1st January 2017, payable after 5
months. Company entered into a forward contract for five months @ ` 64.75 per dollar.
Exchange rate per dollar on 1st Jan. 2017 was ` 64.25. How will you recognize the profit
or loss on forward contract in the books of Rahul Ltd.?
(b) Briefly define the Fundamental Accounting Assumptions?
(c) Explain the nature of Limited Liability Partnership. Who can be a designated partner in a
Limited Liability Partnership?

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30 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(d) Discuss the following types of FIRE INSURANCE Policies:


(i) Average Policy;
(ii) Comprehensive Policy;
(iii) Excess Policy; and
(iv) Floating Policy.
(e) List out the criteria laid down for classification of non-corporate entities to bring them
under Level I category as per ICAI. (4 x 4 = 16 Marks)
Answer
(a) Calculation of profit or loss to be recognized in the books of Rahul Limited
`
Forward contract rate 64.75
Less: Spot rate (64.25)
Loss 0.50
Forward Contract Amount $2,00,000
Total loss due to entering into forward contract ` 1,00,000
($ 2,00,000 × ` 0.5)
Contract period is 5 months
Loss for the period 1st January, 2017 to 31st March, 2017 i.e. 3
3
months falling in the year 2016-2017 will be ` 1,00,000 × = ` 60,000
5
Balance loss of ` 40,000 (i.e. ` 1,00,000 – ` 60,000) for the month of May, 2017 will
be recognized in the financial year 2017-2018.
(b) As per the Framework on Preparation and Presentation of Financial Statements, there
are three fundamental accounting assumptions: Going Concern, Accrual Basis and
Consistency.
(a) Going Concern: Financial statements are normally prepared on the assumption
that an enterprise will continue in operation in the foreseeable future and neither
there is intention, nor there is need to materially curtail the scale of operations.
(b) Accrual Basis: Under this basis of accounting, transactions are recognized as soon
as they occur, whether cash or cash equivalent is actually received or paid. Accrual
basis ensures better matching between revenue and cost and profit/loss obtained
on this basis reflects activities of the enterprise during an accounting period, rather
than cash flows generated by it.

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PAPER – 5 : ADVANCED ACCOUNTING 31

(c) Consistency: It refers to the practice of using same accounting policies for similar
transactions in all accounting periods. The consistency improves comparability of
financial statements through time.
(c) Nature of Limited Liability Partnership: A limited liability partnership is a body
corporate formed and incorporated under the LLP Act, 2008 and is a legal entity separate
from that of its partners. A limited liability partnership shall have perpetual succession
and any change in the partners of a limited liability partnership shall not affect the
existence, rights or liabilities of the limited liability partnership.
Designated partners: Every limited liability partnership shall have at least two
designated partners who are individuals and at least one of them shall be a resident in
India.
In case of a limited liability partnership in which all the partners are bodies corporate or in
which one or more partners are individuals and bodies corporate, at least two individuals
who are partners of such limited liability partnership or nominees of such bodies
corporate shall act as designated partners
(d) (i) Average policy - An average policy contains the ‘average clause’ which lays down
that if the property is under-insured, i.e. insured for a sum smaller than the value of
the property, the insurer will bear only that proportion of the actual loss which the
sum assured bears to the actual value of the property at the time of loss.
(ii) Comprehensive policy - A policy which covers risks such as fire, flood, riots,
strikes, burglary etc. up to a certain specified amount is known as the
comprehensive policy.
(iii) Excess policy - Where the stocks of the insured fluctuate he may take out a policy
for the amount below which his stocks normally do not fall and another policy to
cover the maximum amount of stocks which may be reached at times. The former
type of policy is known as the First Loss Policy and the latter as the Excess Policy.
(iv) Floating policy - It is the policy which covers several types of goods lying at
different locations under one amount and for one premium. The premium normally
charged under this policy is the average of the premia that would have been paid if
each lot of the goods had been insured under specific policies for specific sums.
(e) Criteria for classification of non-corporate entities as decided by the Institute of
Chartered Accountants of India
Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on
any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on
insurance business.

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32 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017

(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.

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PAPER – 5 : ADVANCED ACCOUNTING
Question No.1 is compulsory.
Candidates are also required to answer any five questions from the remaining six questions.
Working notes should form part of the respective answers.
Wherever necessary, candidates are permitted to make suitable assumptions which should be
disclosed by way of a note.
Question 1
Answer the following questions:
(a) Fast Ltd. acquired a patent at a cost of ` 40,00,000 for a period of five years and its product
life-cycle is also five years. The company capitalized the cost and started amortising the
asset at ` 5,00,000 per annum. After two years, it was found that the product life -cycle
may continue for another 5 years from then. The net cash flows from the product during
these 5 years are expected to be ` 18,00,000, ` 23,00,000, ` 22,00,000, ` 20,00,000 and
` 17,00,000. Find out the amortization cost of the patent for each of the years.
(b) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being ` 10,00,000. The
economic life of the machine as well as the lease term is 4 years. At the end of each year,
ABC Ltd. pays ` 3,50,000. The lessee has guaranteed a residual value of ` 50,000 on
expiry of the lease to the lessor. However, XYZ Ltd. estimates that the residential value of
the machinery will be ` 35,000 only. The implicit rate of return is 16% and PV factors at
16% for year 1, year 2, year 3 and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523
respectively. You are required to calculate the value of machinery to be considered by ABC
Ltd. and the finance charges for each year.
(c) Ram Ltd. purchased machinery for ` 80 lakhs. (useful life 4 years and residual value ` 8
lakhs). Government grant received is ` 32 lakhs. Show the Journal Entry to be passed at
the time of refund of grant and the value of the fixed assets in the third year and the amount
of depreciation for remaining two years, if
(i) the grant is credited to Fixed Assets A/c.
(ii) the grant is credited to Deferred Grant A/c.
(d) The Board of Directors of M/s. New Graphics Ltd. in its Board Meeting held on 18 th April,
2017, considered and approved the Audited Financial results along with Auditors Report
for the Financial Year ended 31 st March, 2017 and recommended a dividend of ` 2 per
equity share (on 2 crore fully paid up equity shares of ` 10 each) for the year ended
31st March, 2017 and if approved by the members at the forthcoming Annual General
Meeting of the company on 18 th June, 2017, the same will be paid to all the eligible
shareholders.

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2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

Discuss on the accounting treatment and presentation of the said proposed dividend in the
annual accounts of the company for the year ended 31 st March, 2017 as per the applicable
Accounting Standard and other Statutory Requirements. (4 x 5 Marks = 20 Marks)
Answer
(a) Amortization by Fast Limited for the first two years (` 5,00,000 X 2) = ` 10,00,000.
Remaining carrying cost after two years = ` 40,00,000 - ` 10,00,000
= ` 30,00,000
Since after two years it was found that the product life cycle may continue for another 5
years, hence the remaining carrying cost will be amortized during next 5 years in the ratio
of net cash arising from the products of Fast Limited.
The amortization may be found as follows:
Year Net cash flows (`) Amortization Ratio Amortization Amount (`)
I - 0.125 5,00,000
II - 0.125 5,00,000
III 18,00,000 0.180 5,40,000
IV 23,00,000 0.230 6,90,000
V 22,00,000 0.220 6,60,000
VI 20,00,000 0.200 6,00,000
VII 17,00,000 0.170 5,10,000
Total 1,00,00,000 1.000 40,00,000
Note:
1. It has been assumed that the company has amortized the patent at ` 5,00,000 per
annum (on a systematic manner) for the first 2 years.
2. It has been considered that the patent is renewable and fast Ltd. got it renewed after
expiry of five years.
(b) As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability
at the inception of a finance lease. Such recognition should be at an amount equal to the
fair value of the leased asset at the inception of lease. However, if the fair value of the
leased asset exceeds the present value of minimum lease payment from the standpoint of
the lessee, the amount recorded as an asset and liability should be the present value of
minimum lease payments from the standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is ` 10, 00,000 and the net present value of
minimum lease payments is ` 10, 07,020 (Refer working Note). As the present value of
the machine is more than the fair value of the machine, the machine and the corresponding
liability will be recorded at value of `10,00,000.

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PAPER – 5 : ADVANCED ACCOUNTING 3

Calculation of finance charges for each year


Year Finance Payment Reduction in Outstanding
charge (`) (`) outstanding liability (`) liability (`)
1st year beginning - - - 10,00,000
End of 1 st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2 nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3 rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4 th year 53,430 3,50,000 2,96,570 37,366
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
` 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) ` 9,79 ,405
Present value of guaranteed residual value
` 50,000 x (0.5523) ` 27,615
` 10,07,020
(c) In the books of Ram Ltd.
(1) If the grant is credited to Fixed Assets Account:
1. Journal Entry (at the time of refund of grant)
In lakhs In lakhs
` `
I Fixed Assets Dr. 32
To Bank A/c 32
(Being grant refunded)
2. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ` 80 lakhs – ` 32 lakhs
= ` 48 lakhs
Depreciation for each year = (` 48 lakhs – `8 lakhs)/4 years
= ` 10 lakhs per year for first two years.
Value of the assets before refund of grant =` 48 lakhs - ` 20 lakhs
= ` 28 lakhs


The difference between this figure and guaranteed residual value ( ` 50,000) is due to rounding off.

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4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

3. Value of Fixed Assets after refund of grant


Value of Fixed Assets before refund of grant ` 28 lakhs
Add Refund of grant ` 32 lakhs
` 60 lakhs
4. Amount of depreciation for remaining two years
Value of the fixed assets after refund of grant –residual value of the assets / No.
of years
= ` 60 lakhs - ` 8 lakhs / 2
= ` 26 lakhs per annum will be charged for next two years.
(2) If the grant is credited to Deferred Grant Account:
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant
Account is allocated to Profit and Loss account usually over the periods and in the
proportions in which depreciation on related assets is charged.
Accordingly, in the first two years (` 32 lakhs /4 years) = ` 8 lakhs x 2 years =
` 16 lakhs will be credited to Profit and Loss Account and ` 16 lakhs will be the
balance of Deferred Grant Account after two years.
Therefore, on refund of grant, following entry will be passed:
` `
I Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ` 80 lakhs
Depreciation for each year = (` 80 lakhs – `8 lakhs)/4 years = ` 18 lakhs per year
Book value of fixed assets after two years = ` 80 lakhs – (` 18 lakhs x 2 years)
= ` 44 lakhs
2. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The
fixed assets will continue to be shown in the books at ` 44 lakhs.
3. Amount of depreciation for remaining two years
Depreciation will continue to be charged at ` 18 lakhs per annum for the
remaining two years.

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PAPER – 5 : ADVANCED ACCOUNTING 5

(d) As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance
Sheet Date” vide Companies (Accounting Standards) Amendments Rules, 2016 dated 30 th
March, 2016, the events which take place after the balance sheet date, are sometimes
reflected in the financial statements because of statutory requirements or because of their
special nature.
However, dividends declared after the balance sheet date but before approval of financial
statements are not recognized as a liability at the balance sheet date because no statutory
obligation exists at that time. Hence such dividends are disclosed in the notes to financial
statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends
are to be disclosed in the notes to financial statements. Accordingly, the dividend of ` 4
crores recommended by New Graphics Ltd. in its Board meeting on 18 th April, 2017 shall
not be accounted for in the books for the year 2016-17 irrespective of the fact that it
pertains to the year 2016-17 and will be paid after approval in the Annual General Meeting
of the members / shareholders.
Question 2
Ali and Beta were carrying on business, sharing profits and losses equally. The firm’s balance
sheet as at 31-12-2015 was:
Liabilities ` Assets `
Sundry Creditors 1,44,000 Stock 1,44,000
Bank Overdraft 84,000 Machinery 3,60,000
Capital A/c: Debtors 1,68,000
Joint Life Policy 21,600
Ali 3,36,000 Leasehold Premises 81,600
Beta 3,12,000 6,48,000 Profit & Loss A/c 62,400
Drawing A/c:
Ali 24,000
Beta 14,400 38,400
8,76,000 8,76,000

The business was carried on till 30-06-2016. The partners withdrew the amounts equal to half
the amount of profit made during the period of six months ended on 30-06-2016, in equal
proportion. The profit was calculated after charging depreciation at 10% p.a. on machinery and
after writing off 5% on leasehold premises. In the half year, sundry creditors were reduced by
` 24,000 and bank overdraft by ` 36,000.

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

On 30-06-2016, stock was valued at ` 1,80,000 and debtors at ` 1,44,000; the Joint Life Policy
had been surrendered for ` 21,600 before 30-06-2016 and other items remained the same as
at 31-12-2015.
On 30-06-2016, the firm sold the business to a limited company. The value of goodwill was fixed
at ` 2,40,000 and the rest of the assets were valued on the basis of the balance sheet as at
30-06-2016. The company paid the purchase consideration in equity shares of ` 10 each.
You are required to prepare:
(a) Balance Sheet of the firm as at 30-06-2016;
(b) Realisation Account; and
(c) Partners’ Capital Accounts showing the final settlement between them. (16 Marks)
Answer
(a) Balance Sheet of the Firm as at 30.6.2016
Liabilities ` ` Assets ` `
Capital Accounts: Machinery 3,60,000
Ali balance as on 1.1.2016 Less: Depreciation
2,80,800 @ 10% p.a. for 6
months (18,000) 3,42,000
Add: Profit for 6 months 28,320 Leasehold premises 81,600
3,09,120 Less: Written-off @ 5%
Less: Drawings for 6 months (14,160) 2,94,960 for 6 months (4,080) 77,520
Beta balance as on 1.1.2016 2,66,400 Stock 1,80,000
Add: Profit for 6 months 28,320 Sundry Debtors 1,44,000
2,94,720
Less: Drawings for 6 months (14,160) 2,80,560
Sundry Creditors 1,20,000
(1,44,000 – 24,000)
Bank overdraft
(84,000 – 36,000) 48,000
7,43,520 7,43,520

(b) Realization Account

Particulars ` Particulars `
To Machinery A/c 3,42,000 By Sundry Creditors A/c 1,20,000
To Leasehold Premises A/c 77,520 By Bank Overdraft A/c 48,000
To Stock A/c 1,80,000 By Purchasing Company A/c 8,15,520
(W.N.1)

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PAPER – 5 : ADVANCED ACCOUNTING 7

To Sundry Debtors A/c 1,44,000


To Ali Capital A/c 1,20,000
To Beta Capital A/c 1,20,000
9,83,520 9,83,520

(c) Partners’ Capital Accounts

Date Particulars Ali Beta Date Particulars Ali Beta


` ` ` `
1.1.16 To Profit & 31,200 31,200 1.1.16 By Balance b/d 3,36,000 3,12,000
Loss A/c
To Drawings 24,000 14,400
A/c
29.6.16 Balance c/d 2,80,800 2,66,400
3,36,000 3,12,000 3,36,000 3,12,000
30.6.16 To Drawings 14,160 14,160 30.6.16 By Balance b/d 2,80,800 2,66,400
A/c
To Shares in 4,14,960 4,00,560 30.6.16 By Profit & Loss 28,320 28,320
Purchasing Appropriation
Company A/c A/c
By Realization
A/c 1,20,000 1,20,000
4,29,120 4,14,720 4,29,120 4,14,720

Working Notes:
(1) Ascertainment of purchase consideration
` `
Assets:
Stock 1,80,000
Sundry Debtors 1,44,000
Machinery less depreciation 3,42,000
Leasehold premises less written off 77,520
7,43,520
Less: Liabilities:

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8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

Sundry Creditors 1,20,000


Bank overdraft 48,000
(1,68,000)
Closing Net Assets 5,75,520
Add: Goodwill 2,40,000
Purchase Consideration 8,15,520
(2) Ascertainment of profit for the 6 month ended 30 th June, 2016
` `
Closing Net Assets 5,75,520
Less: Opening Combined Capital
Ali – (3,36,000- 31,200-24,000) 2,80,800
Beta – (3,12,000-31,200-14,400) 2,66,400 5,47,200
Profit after adjustment of Drawings 28,320
Add: Combined drawings during the 6 month (equal to profit) 28,320
Profit for 6 months 56,640
Question 3
(a) Paper Limited comes out with a public issue of share capital on 01-01-2016 of 30,00,000
equity shares of ` 10 each at a premium of 5%. ` 2.50 is payable on application (on or
before 31-01-2016) and ` 3 on allotment (31-3-2016) including premium.
This issue was underwritten by two underwriters namely White and Black, equally, the
commission being 4% of the issue price. Each of the underwriters underwrites 60,000
shares firm. Subscriptions including firm underwriting came for 28,80,000 shares, the
distribution of forms being White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.
One of the allottees (using forms marked with name of White) for 6000 shares fails to pay
the amount due to allotment, all the other money due being received in full including any
due from the shares devolving upon the underwriters. The commission due was paid
separately.
6,000 shares of one allottee who failed to pay the allotment money were finally forfeited by
30-06-2016 and were re-allotted for payment in cash of ` 4 per share. You are required to
prepare each underwriter’s liability (in shares) in statement form and to pass necessary
journal entries to record the above events and transactions (including cash) .
(b) SMM Ltd. has the following capital structure as on 31 st March, 2017: ` in crore
Particulars Situation Situation
(i) Equity share capital (shares of ` 10 each) 1,200 1,200
(ii) Reserves:

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PAPER – 5 : ADVANCED ACCOUNTING 9

General Reserves 1,080 1,080


Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory 320 320
Reserve)
(iii) Loan Funds 3,200 6,000
The company has offered buy back price of ` 30 per equity share. You are required to
calculate maximum permissible number of equity shares that can be bought back in both
situations and also required to pass necessary Journal Entries. (8 + 8 = 16 Marks)
Answer
(a) Statement showing liability of underwriters
a Particulars Basis White Black
A. Gross Liability [No. of Shares) 1:1 15,00,000 15,00,000
B. Less: Marked Applications {Net of firm (15,00,000) (10,20,000)
underwriting}
C. Balance [A-B] - 4,80,000
D Less: Unmarked Applications 1:1 (1,20,000) (1,20,000)
E Balance [C-D] (1,20,000) 3,60,000
F Less: Firm Underwriting (60,000) (60,000)
G Balance (1,80,000) 3,00,000
H Credit for White ’s Oversubscription 1,80,000 (1,80,000)
I Net Liability - 1,20,000
J Add: Firm Underwriting 60,000 60,000
K Total Liability [No. Shares] 60,000 1,80,000
Note: In the above statement, it has been assumed that the benefit of firm underwriting is
given to individual underwriter.
Journal Entries
2016
Jan 31 Bank A/c Dr. 72,00,000
To Equity Share Application A/c 72,00,000
(Being application money received @
` 2.50 per share)
March 31 Equity Share Application A/c Dr. 72,00,000
To Equity Share Capital A/c 72,00,000

© The Institute of Chartered Accountants of India


10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

(Being the transfer of application money to


share capital on 28,80,000 shares vide
Board’s Resolution)
March 31 Equity Share Allotment A/c Dr. 86,40,000
(28,80,000 x ` 3)
To Equity Share Capital A/c 72,00,000
(28,80,000x ` 2.5)
To Securities Premium A/c 14,40,000
(28,80,000 x ` 0.5)
(Being allotment money due on 28,80,000
shares allotted to public)
Black (1,20,000 x ` 5.5) Dr. 6,60,000
To Equity Share Capital A/c 6,00,000
(1,20,000 x ` 5)
To Securities Premium A/c 60,000
(1,20,000 x ` 0.5)
(Being the application and allotted money
due on net liability of underwriter i.e.
1,20,000 shares)
March 31 Bank A/c Dr. 92,82,000
To Equity Share Allotment A/c 86,22,000
[(28,80,000 – 6,000) x ` 3]
To Black (1,20,000 x ` 5.5) 6,60,000
(Being the receipt of money due on
allotment except from the allottee for
6,000 shares)
March 31 Underwriting Commission A/c Dr. 12,60,000
To Black A/c 6,30,000
To White A/c 6,30,000
(Being commission @ 4 % on issue price
of ` 10.50 for `30 lakh shares payable to
underwriters)
March 31 Black A/c 6,30,000
White A/c 6,30,000
To Bank A/c 12,60,000
(Being commission paid to underwriters)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 11

June 30 Equity Share Capital A/c (6,000 x 5) Dr. 30,000


Securities Premium A/c (6,000 x 0.5) Dr. 3,000
To Share Allotment A/c (6,000 x 3) 18,000
To Forfeited Shares A/c (6,000 x 2.5) 15,000
(Being 6,000 shares forfeited vide Board’s
Resolution)
June 30 Bank A/c (6,000 x ` 4) Dr. 24,000
Forfeited Shares A/c Dr. 6,000
To Equity Share Capital A/c 30,000
(6,000 x ` 5)
(Being the reissue of 6,000 shares @ ` 4
as ` 5 paid up at par)
Forfeited Shares A/c (15,000 – 6,000) Dr. 9,000
To Capital Reserve A/c 9,000
(Being the transfer of profit on reissue)
(b) Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
` 3,200 crores ` 6,000 crores
Shares Outstanding Test (W.N.1) 30 30
Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be 24 Nil
bought back [least of the above]
Journal Entries for the Buy Back
(applicable only when loan fund is `3,200 crores)
` in crores
Debit Credit
(a) Equity share buyback account Dr. 720
To Bank account 720
(Being payment for buy back of 24 crores equity
shares of ` 10 each @ ` 30 per share)

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

(b) Equity share capital account Dr. 240


Premium Payable on buyback account Dr. 480
To Equity share buyback account 720
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buyback account 480
(Being Premium Payable on buyback account
charged to securities premium and general
reserve/Profit & Loss A/c)
(c) General Reserve / Profit & Loss A/c Dr. 240
To Capital redemption reserve account 240
(Being transfer of free reserves to capital redemption
reserve to the extent of nominal value of share capital
bought back out of redeemed through free reserves)
Working Notes:
1. Shares Outstanding Test
Particulars (Shares in
crores)
Number of shares outstanding 120
25% of the shares outstanding 30
2. Resources Test
Particulars
Paid up capital (` in crores) 1,200
Free reserves (` in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (` in crores) 2,880
25% of Shareholders fund (` in crores) ` 720 crores
Buy back price per share ` 30
Number of shares that can be bought back 24 crores shares
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds
post Buy Back
Particulars When loan fund is
` 3,200 crores ` 6,000 crores

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 13

(a) Loan funds (`) 3,200 6,000


(b) Minimum equity to be maintained 1,600 3,000
after buy back in the ratio of 2:1
(`) (a/2)
(c) Present equity shareholders fund 2,880 2,880
(`)
(d) Future equity shareholders fund 2,560 (2,880-320) N.A.
(`) (see W.N.4)
(e) Maximum permitted buy back of 960 Nil
Equity (`) [(d) – (b)]
(f) Maximum number of shares that 32 crore shares
can be bought back @ ` 30 per Nil
share
As per the provisions of the
Companies Act, 2013, company Qualifies Does not Qualify
4 Amount transferred to CRR and maximum equity to be bought back will be
calculated by simultaneous equation method
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back
of equity is ‘y’ Then
Equation 1 : (Present Equity- Transfer to CRR)- Minimum Equity to be maintained =
Maximum Permitted Buy Back
= (2,880 – x) – 1,600 = y
= 1280 – x =y (1)
Equation 2: Maximum Permitted Buy Back X Nominal Value Per Share/Offer Price
Per Share

=  10  = x
y
Or 3x = y (2)
 30 
by solving the above two equations we get
x= ` 320
y = ` 960
Question 4
P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital,
equal to the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets,
liabilities and undertakings of the two companies in exchange for share in PQ Ltd.

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

The Balance Sheets of P Ltd. and Q Ltd. as on 31 st March, 2017 (the date of amalgamation) are
given below:
Summarised balance sheet as at 31-03-2017
Liabilities P Ltd. ` Q Ltd. Assets P Ltd. Q Ltd.
` ` `
Equity & liabilities: Assets:
Shareholders Non-current Assets:
Fund
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. Inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade receivables 4,80,000 7,80,000
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000

The consideration was to be based on the net assets of the companies as shown in the
above Balance Sheets, but subject to an additional payment to P Ltd. for its goodwill to be
calculated as its weighted average of net profits for the three years ended 31st March,
2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were
agreed as 1, 2 and 3 respectively.
The profit had been:
2014-15 ` 3,00,000; 2015-16 ` 5,25,000 and 2016-17 ` 6,30,000.
The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion
to the agreed net assets value of these companies.
In order to raise working capital, PQ Ltd. increased its authorized capital by ` 12,00,000
and proceeded to issue 72,000 shares of ` 10 each at the same rate of premium as issued
for discharging purchase consideration to P Ltd. and Q Ltd.
You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording its journal
entries. (16 Marks)
Answer
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:
Amount of Share Capital as per balance sheet `
P Ltd. 6,00,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 15

Q Ltd. 8,40,000
14,40,000
Share of P Ltd. = ` 14,40,000 x [21,60,000/ (21,60,000 + 14,40,000)]
= ` 8,64,000 or 86,400 shares
Securities premium = ` 21,60,000 – ` 8,64,000 = ` 12,96,000
Premium per share = ` 12,96,000 / ` 86,400 = ` 15
Issued 86,400 shares @ ` 10 each at a premium of ` 15 per share
Share of Q Ltd. = ` 14,40,000 x [14,40,000/ (21,60,000 + 14,40,000)]
= ` 5,76,000 or 57,600 shares
Securities premium = ` 14,40,000 – ` 5,76,000 = ` 8,64,000
Premium per share = ` 8,64,000 / ` 57,600 = ` 15
Issued 57,600 shares @ ` 10 each at a premium of ` 15 per share
(ii) Journal Entries
In the books of PQ Ltd.
Dr. Cr.
Particulars Amount (`) Amount (`)
Business purchase account Dr. 36,00,000
To Liquidator of P Ltd. account 21,60,000
To Liquidator of Q Ltd. account 14,40,000
(Being the amount of purchase consideration
payable to liquidator of P Ltd. and Q Ltd. for
assets taken over)
Goodwill Dr. 5,40,000
Fixed assets account Dr. 7,20,000
Inventory account Dr. 3,60,000
Trade receivables account Dr. 4,80,000
Cash at bank Dr. 3,00,000
To Trade payables account 2,40,000
To Business purchase account 21,60,000
(Being assets and liabilities of P Ltd. taken over)
Fixed assets account Dr. 10,80,000
Inventory account Dr. 6,60,000
Trade receivables account Dr. 7,80,000

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

To bank overdraft account 5,40,000


To Trade payables account 5,40,000
To Business purchase account 14,40,000
(Being assets and liabilities of Q Ltd. taken over)
Liquidator of P Ltd. Account Dr. 21,60,000
To Equity share capital account 8,64,000
(86,400 x ` 10)
To Securities premium (86,400 x ` 15) 12,96,000
(Being the allotment of shares as per agreement
for discharge of purchase consideration)
Liquidator of Q Ltd. account Dr. 14,40,000
To Equity share capital account 5,76,000
(57,600 x ` 10)
To Securities premium (57,600 x ` 15) 8,64,000
(Being the allotment of shares as per agreement
for discharge of purchase consideration)
Bank A/c 18,00,000
To Equity share capital account 7,20,000
To Securities premium 10,80,000
(Equity share capital issued to raise working
capital)
Balance Sheet of PQ Ltd. on 31 st March, 2017 after amalgamation
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 21,60,000
b Reserves and Surplus 2 32,40,000
2 Current liabilities
a Short-term borrowings (Bank overdraft) 5,40,000
b Trade payables (2,40,000 + 5,40,000) 7,80,000
Total 67,20,000
Assets
1 Non-current assets

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 17

a Fixed assets
Tangible assets (7,20,000 + 10,80,000) 18,00,000
Intangible assets (goodwill) 4 5,40,000
2 Current assets
a Inventories (3,60,000 + 6,60,000) 10,20,000
b Trade receivables (4,80,000 +7,80,000) 12,60,000
c Cash and cash equivalents 3 21,00,000
Total 67,20,000
Notes to accounts
`
1 Share Capital
Authorized Share capital
2,64,000 Equity shares of `10 each 26,40,000
Issued, subscribed and paid up share capital
2,16,000 Equity shares of `10 each 21,60,000
(Out of the above 1,44,000 shares issued for non-cash
consideration under scheme of amalgamation)
2 Reserves and Surplus
Securities premium 32,40,000
(@`15 for 2,16,000 shares)
3 Cash and cash equivalents
Cash at Bank 15,60,000
4 Intangible Assets
Goodwill 5,40,000
Working Notes:
1. Calculation of goodwill
Particulars Amount Weight Weighted
amount
` `
2014-15 3,00,000 1 3,00,000
2015-16 5,25,000 2 10,50,000
2016-17 6,30,000 3 18,90,000
Total (a+b+c) 14,55,000 6 32,40,000

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

weighted Average = [Total weighted


amount /Total of weight]
[` 32,40,000/6]
Goodwill 5,40,000
2. Calculation of Net assets
P Ltd. ` Q Ltd. `
Assets
Goodwill 5,40,000
Fixed assets 7,20,000 10,80,000
Inventory 3,60,000 6,60,000
Trade receivable 4,80,000 7,80,000
Cash at bank 3,00,000
Less: Liabilities
Bank overdraft 5,40,000
Trade payables 2,40,000 5,40,000
Net assets or Purchase consideration 21,60,000 14,40,000

3. New authorized capital


= ` 14,40,000 + ` 12,00 000 = ` 26,40,000
4. Cash and Cash equivalents
`
P Ltd. Balance 3,00,000
Cash received from Fresh issue (72,000 X ` 25) 18,00,000
21,00,000 
Question 5
(a) From the following balances extracted from the books of REAL General Insurance
Company Ltd. as on 31 st March 2017, you are required to prepare Revenue Accounts in
respect of Fire and Marine Insurance Business for the year ended 31 st March, 2017.


The amount of bank overdraft of Q Ltd. amounting ` 5,40,000 has been shown separately in balance
sheet. Alternatively, the balance of cash and cash equivalent may be shown as the net amount.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 19

Particulars Fire Marine


` `
Outstanding Claim as on 1 st April, 2016 28,000 7,000
Claims Paid 1,00,000 80,000
Reserved for unexpired Risk as on 1 st April 2016 2,00,000 1,40,000
Premium Received 4,50,000 3,30,000
Agent’s Commission 40,000 20,000
Expenses of management 60,000 45,000
Re Insurance Premium –Dr. 25,000 15,000
The following additional points are also to be taken into consideration:
(1) Claims outstanding as on 31 st March 2017 were as follows:
(a) Fire Insurance - ` 10,000
(b) Marine Insurance - ` 15,000
(2) Premium outstanding as on 31 st March, 2017 were as follows:
(a) Fire Insurance - ` 30,000
(b) Marine Insurance - ` 20,000
(3) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in
respect of Fire & Marine Insurance respectively.
(4) Expenses of management due on 31 st March, 2017 were ` 10,000 for Fire Insurance
and ` 5,000 in respect of Marine Insurance.
(b) A commercial bank has the following capital funds and assets. You are required to
segregate the capital funds into Tier- I and Tier- II capitals and also find out the risk
adjusted assets and capital adequacy ratio.
Capital Funds and Assets ` In crores
Paid up share capital 1,500
Statutory Reserves 300
Securities Premium 300
Capital Reserve (of which ` 80 crores were due to revaluation of assets 180
and balance due to sale)
Assets:
Cash balance with R.B.I. 120
Claims on Banks 340
Other Investments 4,600

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

Loans & Advances:


Guaranteed by Government of India and State Governments 800
Bank Staff Advances- Fully covered by Super-annuation Benefits 100
Other loans and advances 340
Premises, Furniture & Fixtures, Other Assets 7,850
Intangible Assets 30
Off Balance Sheet Items:
Acceptance, Endorsements, Letter of Credits, Guarantees and Other 3,100
Obligations
(8 + 8 = 16 Marks)
Answer
(a) Form B – RA (Prescribed by IRDA)
Real General Insurance Co. Ltd
Revenue Account for the year ended 31st March, 2017
Fire and Marine Insurance Business
Schedule Fire Marine
Current Current Year
Year
` `
Premiums earned (net) 1 4,27,500 1,40,000
Profit / (Loss) on sale / redemption of — —
investments
Others (to be specified)
Interest, Dividends and Rent – Gross — —
Total (A) 4,27,500 1,40,000
Claims incurred (net) 2 82,000 88,000
Commission 3 40,000 20,000
Operating expenses related to Insurance 4 70,000 50,000
business
Total (B) 1,92,000 1,58,000
Profit from Fire / Marine Insurance
business (A-B) 2,35,500 (18,000)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 21

Schedules forming part of Revenue Account


Fire Marine
` `
Schedule -1
Premium earned (net)
Premium received during the year 4,50,000 3,30,000
Add: Outstanding on 31st March 2017 30,000 20,000
4,80,000 3,50,000
Less: Reinsurance premiums (25,000) (15,000)
4,55,000 3,35,000
Less: Adjustment for change in provision for (27,500) (1,95,000)
unexpired risk
4,27,500 1,40,000
Schedule – 2
Claims incurred (net)
Claims paid during the year 1,00,000 80,000
Add: Outstanding on 31 st March,2017 10,000 15,000
1,10,000 95,000
Less: Outstanding on 1 st April,2016 (28,000) (7,000)
82,000 88,000
Schedule – 3
Commission paid 40,000 20,000
Schedule – 4
Operating expenses
Expenses of Management
Expenses paid during the year 60,000 45,000
Add: Outstanding on 31 st March,2017 10,000 5,000
70,000 50,000

Working note for changes in unexpired Risk Reserve


Reserve for unexpired Risk (Fire Insurance @50%)
Opening Reserve (1) ` 2,00,000
Closing Reserve (` 4,55,000 X 50/100) (2) ` 2,27,500
Additional Transfer to Reserve (2 – 1) ` 27,500

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

Reserve for unexpired Risk (Marine Insurance @100%)


Opening Reserve (1) `1,40,000
Closing Reserve (` 3,35,000 X 100/100) (2) `3,35,000
Additional Transfer to Reserve (2 – 1) `1,95,000
(b)
` in crores ` in crores
(i) Capital funds – Tier I
Equity share capital paid up 1,500
Statutory reserve 300
Securities premium 300
Capital reserve (arising out of sale of assets)
(180-80) 100
2,200
Reduced by intangible assets (30)
2,170
Capital funds – Tier II
Capital reserve (arising out of revaluation of 80
assets)
Less: Discount to the extent of 55% (44) 36
Capital fund 2,206

` in % of ` in
crores weight crores
(ii) Risk Adjusted Assets
Funded Risk Assets
Cash balance with RBI 120 0 0
Claims on banks 340 20 68
Other investments 4,600 100 4,600
Loans and advances:
(i) Guaranteed by the government 800 0 0
(ii) Bank Staff Advances fully 100 20 20
covered by Super-Annuation
Benefits
(iii) Others 340 100 340

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 23

Premises, furniture and fixtures and


other assets 7,850 100 7,850
12,878
` in Credit
crores conversion
factor
Off-Balance Sheet items:
Acceptances, endorsements, letters
of credit, Guarantees and other 3,100 100 3,100
obligations
15,978
Capital to Risk Weighted Assets Ratio (Capital Adequacy Ratio:
Capital Fund/ (Risk Adjusted Assets +Off-Balance Sheet items) x100
(2,206/15,978) x 100 =13.81%
Question 6
(a) The following balances were extracted from the books of Beta. You are required to prepare
Departmental Trading Account and general Profit & Loss Account for the year ended
31st December, 2016:
Particulars Deptt. A Deptt. B
` `
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were ` 7,50,000 and you are also
supplied with the following information:
(i) Closing stock of Department A ` 6,00,000 including goods from Department B for
` 1,20,000 at cost to Department A.
(ii) Closing stock of Department B ` 12,00,000 including goods from Department A for
` 1,80,000 at cost to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of
` 60,000 and ` 90,000 taken from Department B and Department A respectively at
cost to transferee departments.
(iv) The gross profit is uniform from year to year.

© The Institute of Chartered Accountants of India


24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

(b) Show Adjustment journal Entry alongwith working notes in the books of head office at the
end of April, 2017 for incorporation of inter branch transactions assuming that only head
office maintains different branch account in its books:
(A) Delhi Branch:
(i) Received goods from Mumbai ` 1,40,000 and ` 60,000 from Kolkata.
(ii) Sent goods to Chennai ` 1,00,000, Kolkata ` 80,000
(iii) Bill receivable received ` 80,000 from Chennai
(iv) Acceptances sent to Mumbai ` 1,00,000, Kolkata ` 40,000
(B) Mumbai Branch (Apart from the above):
(i) Received goods from Kolkata ` 60,000, Delhi ` 80,000
(ii) Cash sent to Delhi ` 60,000, Kolkata ` 28,000
(C) Chennai Branch (Apart from the above):
(i) Received goods from Kolkata ` 1,20,000
(ii) Acceptances and cash sent to Kolkata ` 80,000, Kolkata ` 40,000 respectively.
(D) Kolkata Branch (Apart from the above):
(i) Sent goods to Chennai ` 1,40,000
(ii) Paid cash to Chennai ` 60,000
(iii) Acceptance sent to Chennai ` 60,000. (8 + 8 = 16 Marks)
Answer
(a) Departmental Trading Account for the year ended on 31 st December, 2016
Particulars A B Particulars A B
` ` ` `
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000

General profit and loss account of Beta for the year ended on 31 st December, 2016
Particulars Amount Particulars Amount
` `
To General expenses  7,50,000 By Stock reserve (opening stock)


General expenses have not been allocated to individual department and are charged to General Profit
and Loss Account.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 25

To Stock reserve Dept. A 30,000


(Closing Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
____ Dept. B 45,00,000
69,66,000 69,66,000

Working Notes:
Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock 60,000 x 50% = 30,000 90,000 X 40% = 36,000
reserve
3. Closing Stock 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000
reserve
(b) Journal entry in the books of Head Office
Date Particulars Dr. Cr.
` `
30thApril, Mumbai Branch Account Dr. 12,000
2017 Chennai Branch Account Dr. 2,80,000
To Delhi Branch Account 60,000
To Kolkata Branch Account 2,32,000
(Being adjustment entry passed by head
office in respect of inter-branch transactions
for the month of April, 2017)

Working Note:
Inter – Branch transactions
Delhi Mumbai Chennai Kolkata
` ` ` `
A. Delhi Branch
(1) Received goods 2,00,000 (Dr.) 1,40,000 (Cr.) 60,000 (Cr.)
(2) Sent goods 1,80,000 (Cr.) 1,00,000 (Dr.) 80,000 (Dr.)

© The Institute of Chartered Accountants of India


26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

(3) Received Bills 80,000 (Dr.) 80,000 (Cr.)


receivable
(4) Sent acceptance 1,40,000 (Cr.) 1,00,000 (Dr.) 40,000 (Dr.)
B. Mumbai Branch
(5) Received goods 80,000 (Cr.) 1,40,000 (Dr.) 60,000 (Cr.)
(6) Sent cash 60,000 (Dr.) 88,000 (Cr.) 28,000 (Dr.)
C. Chennai Branch
(7) Received goods 1,20,000 (Dr.) 1,20,000 (Cr.)
(8) Sent cash and 1,20,000 (Cr.) 1,20,000 (Dr.)
acceptances
D. Kolkata Branch
(9) Sent goods 1,40,000 (Dr.) 1,40,000 (Cr.)
(10) Sent cash 60,000 (Dr.) 60,000 (Cr.)
(11) Sent acceptances __________ _________ 60,000 (Dr.) 60,000 (Cr.)
60,000 (Cr.) 12,000 (Dr.) 2,80,000 (Dr.) 2,32,000 (Cr.)

Question 7
Answer any four of the following:
(a) Write short note on main elements of Financial Statements.
(b) A company had issued 30,000, 14% convertible debentures of ` 100 each on 1st April,
2014. The debentures are due for redemption on 1 st July, 2016. The terms of issue of
debentures provided that they were redeemable at a premium of 5% and also conferred
option to the debenture holders to convert 20% of their holding into equity shares (Nominal
value ` 10) at a price of ` 15 per share. Debenture holders holding 2,500 debentures did
not exercise the option. Calculate the number of equity shares to be allotted to the
debenture holders exercising the option to the maximum.
(c) State the circumstances when LLP can be wound up by the Tribunal.
(d) ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom -made
machine amounting to ` 4,00,000. As on 31 st March, 2016 before delivery of the machine,
ABC Ltd. had to change its method of production. The new method wi ll not require the
machine ordered and so it shall be scrapped after delivery. The expected scrap value is
‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
(e) M/s. Cloud Limited has gone into liquidation on 25 th June, 2016. Certain creditors could
not receive payment out of realization of assets and contributions from ‘A list’
contributories. The following are the details of certain transfers which took place during the
year ended 31 st March, 2016:

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PAPER – 5 : ADVANCED ACCOUNTING 27

Shareholders No. of shares Date of ceasing to Creditors remaining


transferred be a member unpaid and outstanding on
the date of transfer (`)

K 4,000 10-05-2015 9,000


L 3,000 22-07-2015 12,000
M 2,400 15-09-2015 13,500
N 1,600 14-12-2015 14,000
O 1,000 09-03-2016 14,200

All the shares are of ` 10 each and ` 8 per share paid up. Show the amount to be realized
from the persons listed above. Ignore remuneration of liquidator and other expenses.
(4 x 4 = 16 Marks)
Answer
(a) Elements of Financial Statements
The framework classifies items of financial statements can be classified in five broad
groups depending on their economic characteristics: Asset, Liability, Equity , Income/Gain
and Expense/Loss.

Asset Resource controlled by the enterprise as a result of past events from


which future economic benefits are expected to flow to the
enterprise
Liability Present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow of a resource
embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its
liabilities.
Income/gain Increase in economic benefits during the accounting period in the
form of inflows or enhancement of assets or decreases in liabilities
that result in increase in equity other than those relating to
contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities
that result in decrease in equity other than those relating to
distributions to equity participants.

© The Institute of Chartered Accountants of India


28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2017

(b) Calculation of number of equity shares to be allotted


Number of debentures
Total number of debentures 30,000
Less: Debenture holders who have not opted for (2,500)
conversion
Debenture holders who opted for conversion 27,500
Option for conversion 20%
Number of debentures to be converted (20% of 27,500) 5,500
Redemption value of 5,500 debentures at a premium of
5% [5,500 x (100+5)] ` 5,77,500
Equity shares of `10 each issued on conversion
[`5,77,500/ `15] 38,500 shares
(c) Under section 64 of the LLP Act, 2008, an LLP may be wound up by the Tribunal:
 If the LLP decides that it should be wound up by the Tribunal;
 If for a period of more than six months, the number of partners of the LLP is reduced
below two;
 If the LLP is unable to pay its debts;
 If the LLP has acted against the interests of the integrity and sovereignty of India, the
security of the state or public order;
 If the LLP has defaulted in the filing of the Statement of Account and Solvency with
the Registrar for five consecutive financial years;
 If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
(d) A liability is recognized when outflow of economic resources in settlement of a present
obligation can be anticipated and the value of outflow can be reliably measured. In the
given case, ABC Ltd. should recognize a liability of `4, 00,000 payable to XYZ Ltd.
When flow of economic benefit to the enterprise beyond the current accoun ting period is
considered improbable, the expenditure incurred is recognized as an expense rather than
as an asset. In the present case, flow of future economic benefit from the machine to the
enterprise is improbable. The entire amount of purchase price of the machine should be
recognized as an expense.
Hence ABC Ltd. should charge the amount of ` 4,00,000 (being loss due to change in
production method) to Profit and loss statement and record the corresponding liability
(amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st
March, 2016.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 29

(e) Statement of Liabilities of B List Contributories (amount to be realized)


Shareholder No. of Maximum
shares liability up
Division of liability as on Total
transferred to ` 2 per
share
22.07.2015 15.09.2015 14.12.2015 09.03.2016
` ` ` ` ` `
L 3,000 6,000 4,500 - - - 4,500
M 2,400 4,800 3,600 720 - - 4,320
N 1,600 3,200 2,400 480 308 - 3,188
O 1,000 2,000 1,500 300 192 8 2,000
8,000 16,000 12,000 1,500 500 8 14,008
 K transferred shares before one year preceding the date of winding up, therefore, he
cannot be held liable for any liability on liquidation.
 Liability of O has been restricted to the maximum allowable limit of ` 2,000. Therefore,
amount payable by O on 09.03.2016 is ` 8 only.
Notes:
1. L will not be responsible for further debts incurred after 22-07-2015 (from the date
when he ceases to be a member). Similarly, M&N will not be liable for the debts
incurred after the date of their transfer of shares.
2. Ratio of discharge of liability will be in the ratio of no. of shares held by B List
Contributories which is as follows:
Calculation of Ratio for discharge of Liabilities
Date Cumulative liability Increase in Ratio of no. of
liabilities shares held by
` ` L, M, N,O
22.07.2015 12,000 - 30:24:16:10
15.09.2015 13,500 1500 24:16:10
14.12.2015 14,000 500 16:10
09.03.2016 14,200 200 Only O

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PAPER – 5 : ADVANCED ACCOUNTING
Question No.1 is compulsory.
Candidates are also required to answer any five questions from the remaining six questions.
Working notes should form part of the respective answers.
Wherever necessary, candidates are permitted to make suitable assumptions which should be
disclosed by way of a note.
Question 1
Answer the following questions:
(a) “While calculating diluted EPS, effect is given to all dilutive potential equity shares that
were outstanding during the period.” Explain this statement in the light of relevant AS.
Also calculate the diluted EPS from the following information:
Net Profit for the current year (After Tax) ` 1,00,00,000
No. of Equity shares outstanding 10,00,000
No. of 10% Fully Convertible Debentures of ` 100 each 1,00,000
(Each Debenture is compulsorily & fully convertible into 10 equity
shares)
Debenture interest expense for the current year ` 5,00,000
Assume applicable Income Tax rate @ 30%
(b) M/s. Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath: (work was held up ` 50 crores
totally for a month during the year due to heavy rain which are
common in the geographic region involved)
(ii) Purchase of Equipment and Machineries ` 6 crores
(iii) Working Capital ` 4 crores
(iv) Purchase of Vehicles ` 1crore
(v) Advances for tools/cranes etc. ` 1crore
(vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year ending ` 1.6 crores
31st March, 2016
Show the treatment of Interest according to Accounting Standard by M/s. Zen Bridge
Construction Limited.
(c) While preparing its final accounts for the year ended 31 st March, 2016, a company made
provision for bad debts @ 5% of its total debtors. In the last week of February, 2016 a

© The Institute of Chartered Accountants of India


2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

debtor for ` 20 lakhs had suffered heavy loss due to an earthquake; the loss was not
covered by any insurance policy. In April, 2016 the debtor became a bankrupt. Can the
company provide for the full loss arising out of insolvency of the debtor in the final accounts
for the year ended 31 st March, 2016?
Comment with reference to relevant Accounting Standard.
(d) A Company with a turnover of ` 375 crores and an annual advertising budget of ` 3 crores
had taken up the marketing of a new product. It was estimated that the company would
have a turnover of ` 37.5 croes from the new product. The company had debited to its
Profit and Loss account the total expenditure of ` 3 crores incurred on extensive special
initial advertisement campaign for the new product.
Is the procedure adopted by the Company correct? (5 x 4 = 20 Marks)
Answer
(a) As per AS 20 ‘Earnings per Share’, the net profit or loss for the period attributable to equity
shareholders and the weighted average number of shares outstanding during the period
should be adjusted for the effects of all dilutive potential equity shares for calculation of
diluted earnings per share. Hence, “in calculating diluted earnings per share, effect is
given to all dilutive potential equity shares that were outstanding during the period.”
Adjusted net profit for the current year
Computation of diluted earnings per share=
Weighted average number of equity shares
Adjusted net profit for the current year
`
Net profit for the current year (after tax) 1,00,00,000
Add: Interest expense for the current year 5,00,000
Less: Tax relating to interest expense (30% of `5,00,000) (1,50,000)
Adjusted net profit for the current year 1,03,50,000
Weighted average number of equity shares
Number of equity shares resulting from conversion of debentures
1,00,000  100
= = 10,00,000 Equity shares
10
Weighted average number of equity shares used to compute diluted earnings per
share
= [(10,00,000 x 12) + (10,00,000 x 6)]/12 = 15,00,000 equity shares
Diluted earnings per share = ` 1,03,50,000 / 15,00,000 shares = ` 6.90 per share

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 3

Note: Interest on debentures for full year amounts to ` 10,00,000 (i.e. 10% of
` 1,00,00,000). However, interest expense amounting `5,00,000 has been given in the
question. It may be concluded that debentures have been issued at the mid of the year
and interest has been provided for 6 months.
(b) According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing
costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred.
Capitalization of borrowing costs is also not suspended when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Asset capitalized charged to
` in crores Profit & Loss
A/c ` in crores
Construction of hill road* Yes 1.25 1.6/64 x 50
Purchase of equipment and
machineries No 0.15 1.6/64 x 6
Working capital No 0.10 1.6/64 x 4
Purchase of vehicles No 0.025 1.6/64 x 1
Advance for tools, cranes etc.
No 0.025 1.6/64 x 1
Purchase of technical know-
how No 0.05 1.6/64 x 2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year
(substantial period of time), hence considered as qualifying asset.
(c) As per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’,
adjustment to assets and liabilities are required for events occurring after the balance sheet
date that provide additional information materially affecting the determination of the
amounts relating to conditions existing at the Balance Sheet date.
A debtor for ` 20,00,000 suffered heavy loss due to earthquake in the last week of
February, 2016 which was not covered by insurance. This information with its implications
was already known to the company. The fact that he became bankrupt in April, 2016 (after
the balance sheet date) is only an additional information related to the condition existing
on the balance sheet date. However, bankruptcy of debtors is an adjusting event.

© The Institute of Chartered Accountants of India


4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Accordingly, full provision for bad debts amounting ` 20,00,000 should be made, to cover
the loss arising due to the insolvency of a debtor, in the final accounts for the year ended
31st March 2016. Since the company has already made 5% provision of its total debtors,
additional provision amounting ` 19,00,000 shall be made (20,00,000 x 95%).
(d) According to AS 26 ‘Intangible Assets’, “expenditure on 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 ` 3 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 `37.5 crores. Here, no intangible asset or another asset is acquired
or created that can be recognized.
Therefore, the accounting treatment by the company of debiting the entire advertising
expenditure of `3 crores to the Profit and Loss account of the year is correct.
Question 2
X, Y and Z are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance Sheet
of the firm as on 31 st March, 2016 is as below:
Liabilities ` Assets `
X’s Capital 60,000 Factory Building 96,640
Y’s Capital 40,000 Plant and Machinery 65,100
Z’s Capital 50,000 Trade Receivable 21,600
Y’s Capital 18,000 Inventories 49,560
Trade Payable 66,000 Cash at Bank 1,100
2,34,000 2,34,000

On Balance Sheet date, all the three partners have decided to dissolve their partnership. Since the
realisation of assets was protracted, they decided to distribute amounts as and when feasible and
for this purpose they appoint Z who was to get as his remuneration 1% of the value of the assets
realised other than cash at bank and 10% of the amount distributed to the partners.
Assets were realised piecemeal as under:
`
First instalment 74,600
Second instalment 69,301
Third instalment 40,000
Last instalment 28,000

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PAPER – 5 : ADVANCED ACCOUNTING 5

Dissolution expenses were provided for estimated


amount of ` 12,000
The creditors were settled finally for ` 63,600
You are required to prepare a statement showing distribution of cash amongst the partners by
"Highest Relative Capital Method". (16 Marks)
Answer
Statement showing distribution of cash amongst the partners
Trade Y’s Capitals
Payable Loan
X (` ) Y (` ) Z (` )
Balance Due 66,000 18,000 60,000 40,000 50,000
On 1st Instalment
amount with the firm 75,700
` (1100 + 74,600)
Less: Dissolution
expenses provided for (12,000)
63,700
Less: Z’s remuneration
of 1% on assets realized
(74,600 x 1%) (746)
62,954
Less: Payment made to
Trade Payables (62,954) (62,954)
Balance due Nil 3046
2nd instalment realised 69,301
Less: Z’s remuneration
of 1% on assets realized
(69,301 x 1%) (693)
68,608
Less: Payment made to
Trade Payables (646) (646)
Transferred to P& L A/c 2,400
67,962
Less: Payment for Y’s (18,000) (18,000)
loan A/c

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Amount available for


distribution to partners 49,962 nil
Less: Z’s remuneration
of 10% of the amount (4,542)
distributed to partners
(49,962 x 10/110)
Balance to be distributed
to partners on the basis 45,420
of HRCM
Less: Paid to Z (W.N.1) (2,000) (2,000)
43,420 48,000
Less: Paid to X and Z in (18,000) (10,000) - (8,000)
5:4 (W.N.1)
Balance due 25,420 50,000 40,000 40,000
Less: Paid to X, Y & Z in
5:4:4 25,420 (9,778) (7,821) (7,821)
Nil
Amount of 3rd instalment 40,000 40,222 32,179 32,179
Less: Z’s remuneration
of 1% on assets realized
(40,000 x 1%) (400)
39,600
Less: Z’s remuneration
of 10% of the amount
distributed to partners
(39,600 x 10/110) (3,600)
36,000
Less: Paid to X, Y, Z in
5:4:4 for (W.N.1) (36,000) (13,846) (11,077) (11,077)
Nil 26,376 21,102 21,102
Amount of 4th and last 28,000
instalment
Less: Z’s remuneration
of 1% on assets realized
(28,000 x 1%) (280)
27,720

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PAPER – 5 : ADVANCED ACCOUNTING 7

Less: Z’s remuneration


of 10% of the amount
distributed to partners
(27,720 x 10/110) (2,520)
25,200
Less: Paid to X, Y and Z
in 5:4:4 (25,200) (9,692) (7,754) (7,754)
Nil
Loss suffered by 16,684 13,348 13,348
partners
Working Note:
(i) ` 1100 added to the first instalment received on sale of assets represents the Cash in Bank
(ii) The amount due to Creditors at the end of the utilization of First Instalment is ` 3046.
However, since the creditors were settled for ` 63,600 only the balance `646 were paid
and the balance ` 2400 was transferred to the Profit & Loss Account.
(iii) Highest Relative Capital Basis
X Y Z
` ` `
Balance of Capital Accounts (A) 60,000 40,000 50,000
Profit sharing ratio 5 4 4
Capital Profit sharing ratio 12,000 10,000 12,500
Capital in profit sharing
ratio taking Y’s Capital as base (B) 50,000 40,000 40,000
Excess of X’s Capital and Z’s Capital (A-B) =(C) 10,000 nil 10,000
Again repeating the process
Profit sharing ratio 5 4
Capital Profit sharing ratio 2,000 2,500
Capital in profit sharing
ratio taking X’s Capital as base (D) 10,000 8,000
Excess of Z’s Capital (C-D)=(E) nil 2,000
Therefore, firstly `2,000 is to be paid to Z, then X and Z to be paid in proportion of 5:4 upto
` 18,000 to bring the capital of all partners X, Y and Z in proportion to their profit sharing
ratio. Thereafter, balance available will be paid in the profit sharing ratio 5:4:4 to all
partners viz X, Y and Z.

© The Institute of Chartered Accountants of India


8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Question 3
(a) A company had 40,000; 10 debentures of `100 each outstanding on 1 April, 2015
redeemable on 31 st March, 2016.
On that day, sinking fund was ` 37,45,000 represented by 5,000 own debentures
purchased at average price of ` 99 and 9% stocks of the face value of ` 33,00,000. The
annual instalment was ` 1,42,000. On 31 st March, 2016, the investments were realized at
` 98 and the debentures were redeemed.
Draw the following accounts for the year ending 31 st March, 2016 :
(i) 10% Debentures Account.
(ii) Debenture Redemption Sinking Fund Account (10 Marks)
(b) The following is the Summarized Balance Sheet of M/s. Vriddhi Infra Ltd. as on 31 st March,
2016:
Equity & Liabilities Amount Assets Amount
(`) (`)
Shareholders Fund
1. (a) Share Capital: 1. Non Current Assets
1,00,000 Equity Shares 10,00,000 (a) Fixed (Tangible)
of ` 10 each fully paid up Assets:
(b) Reserve & Surplus: Land & Building 21,50,000
Securities Premiums 3,00,000 Plant & Machinery 15,00,000
General Reserve 2,50,000 (b) Non- current 2,00,000
Investment
Profit & Loss Account 1,50,000
Surplus
2. Non-Current Liabilities 2. Current Assets
Long-Term Borrowings: (a) Trade Receivables 5,50,000
10% Debentures 20,00,000 (b) Inventories 1,80,000
(Secured by floating
charge on all assets)
Unsecured Loans 8,00,000 (c) Cash and Cash 40,000
Equivalents
3. Current Liability &
Provisions
Trade Payables 1,20,000
Total 46,20,000 46,20,000

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PAPER – 5 : ADVANCED ACCOUNTING 9

On 21st April, 2016 the Company announced the buy back of 25,000 of its equity shares @
` 15 per share. For this purpose, it sold all its investment for ` 2.50 lakhs.
On 25th April, 2016, the company achieved the target of buy back. On 1st May, 2016 the
company issued one fully paid up share of ` 10 each by way of bonus for every five equity
shares held by the equity shareholders.
You are requested to pass necessary Journal Entries for the above transactions.
All necessary workings should form part of your answer. (6 Marks)
Answer
(a) 10% Debentures Account
Date Particulars ` Date Particulars `
31st March, To Own debentures 5,00,000 1st
April, By Balance 40,00,000
2016 A/c 2015 b/d
To Bank A/c 35,00,000
40,00,000 40,00,000
Debenture Redemption Sinking Fund Account
Date Particulars ` Date Particulars `
31st March, To 9% Stock 1st April, By Balance b/d 37,45,000
2016 A/c (loss) 16,000 2015
(W.N.5)
To General 31st March, By Profit and
reserve 40,00,000 2016 loss A/c 1,42,000
A/c
(Bal. fig.)
To Capital 2,23,000 By Interest on
Reserve sinking fund
A/c (W.N.3) 3,47,000
By Own
debentures
A/c
(W.N.4) 5,000
42,39,000 42,39,000

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10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Working Notes:
1. Amount of stock as on 1 st April, 2015
`
Sinking fund balance as on 1 st April, 2015 37,45,000
Less: Own debentures (4,95,000)
32,50,000
2. Sales value of 9% stock
= Face value / ` per stock
= `33,00,000 / `100 = 33,000 stock
Sales value = 33,000 stock x ` 98 per stock
= ` 32,34,000
3. Interest credited to Sinking Fund
(i) Interest on 9% stock (`33,00,000 x 9%) ` 2,97,000
(ii) Interest on own debentures (5,000 Debentures x `100 x 10%) ` 50,000
` 3,47,000
4. Own Debentures Account
` `
1st April, To Balance 4,95,000 31st
March, By 10% Debentures
2015 b/d 2016 A/c 5,00,000
31st March, To Sinking
2016 fund A/c 5,000
5,00,000 5,00,000

5. 9% Stock Account
` `
1stApril, To Balance b/d 31stMarch, By Bank account
2015 (Face value 2016 (W.N.2) 32,34,000
`33,00,000)
(W.N.1) 32,50,000
By Sinking fund
(loss on sales) 16,000
32,50,000 32,50,000

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PAPER – 5 : ADVANCED ACCOUNTING 11

(b) In the books of Vriddhi Infra Ltd.


Journal Entries
Date Particulars Dr. Cr.
2016
` `
April 21 Bank A/c Dr. 2,50,000
To Investment A/c 2,00,000
To Profit on sale of investment 50,000
(Being investment sold on profit)
April 25 Equity share capital A/c Dr. 2,50,000
Securities premium A/c Dr. 1,25,000
To Equity shares buy back A/c 3,75,000
(Being the amount due to equity
shareholders on buy back)
Equity shares buy back A/c Dr. 3,75,000
 3,75,000
To Bank A/c
(Being the payment made on account of
buy back of 25,000 Equity Shares)
General Reserve A/c / P&L A/c Dr. 2,50,000
To Capital redemption reserve A/c 2,50,000
(Being amount equal to nominal value of
buy back shares from free reserves
transferred to capital redemption reserve
account as per the law)
1st May Capital redemption reserve A/c Dr. 1,50,000
To Bonus shares A/c (W.N.1) 1,50,000
(Being the utilization of capital redemption
reserve to issue bonus shares)
Bonus shares A/c Dr. 1,50,000
To Equity share capital A/c 1,50,000
(Being issue of one bonus equity share for
every five equity shares held)


It is assumed that there is bank overdraft amounting ` 85,000 [(40,000 + 2,50,000) less ` 3,75,000]

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Working Note:
 1
Amount of bonus shares = 1,00,000 - 25,000   5   10

= 15,000 x ` 10 = ` 1,50,000
Question 4
The summarized Balance Sheet of M/s. X Limited as at 31 st March, 2016 are as follows:
Equity & Liabilities Amount Assets Amount (`)
(`)
Shareholder Fund: Non-Current Assets 6,50,000
Share Capital Land & Building
50,000 equity shares of ` 10 each 5,00,000 Current Assets
fully paid
75,000; 10% Preference Shares 7,50,000 Sundry Current Assets 21,80,000
of ` 10 fully paid up
25,000 Equity Shares of ` 10 2,00,000 Debenture issue expenses 10,000
each, ` 8 per share paid up not written off
Profit & Loss Account (1,75,000)
Non-Current Liabilities:
13% Debentures 7,50,000
Mortgage Loan 3,50,000
Current Liabilities:
Bank Overdraft 1,50,000
Trade Creditors 1,90,000
Income Tax Arrears (Assessment
completed in February, 2016) 1,25,000
28,40,000 28,40,000
Mortgage loan was secured against Land and Building. Debentures were secured by a floating
charge on all assets. The company was unable to meet the payments and therefore the
Debenture Holders appointed a Receiver for the Debenture Holders. He bought the L and &
Building to auction and realized ` 8,00,000. He also took charge of Sundry Assets of value of
` 11,80,000 and realized ` 10,00,000. Bank overdraft was secured by personal guarantee of
the Directors of the company and on the Bank raising a demand, the Directors paid off the due
from their personal resources. Cost incurred by the receiver were ` 9,750 and by the Liquidator
` 15,000. The Receiver was not entitled to any remuneration but the Liquidator was to receive
2% fee on the value of assets realized by him. Preference Shareholders have not been paid

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PAPER – 5 : ADVANCED ACCOUNTING 13

Dividend for period after 31 st March, 2014 and interest for the last half year was due to
Debenture Holders. Rest of the Assets were realized at ` 7,50,000.
Prepare the Accounts to be submitted by the Receiver and Liquidator. (16 Marks)
Answer
Receiver’s Receipts and Payments Account
Receipts ` ` Payments ` `
Sundry Assets realised 10,00,000 Costs of the Receiver 9,750
Surplus received from Preferential payments:
Mortgage loan: - Income Taxes (raised - 1,25,000
Sale Proceeds of land within 12 months)
and building 8,00,000 Debentures holders:
Less: Applied to Principal amount 7,50,000
Discharge mortgage Interest for half year 48,750 7,98,750
loan (3,50,000) 4,50,000 Surplus transferred to
the Liquidator 5,16,500
14,50,000 14,50,000

Liquidator’s Final Statement of Account


Receipts ` Payments `
Surplus received from 5,16,500 Cost of Liquidation: 15,000
Receiver Remuneration to Liquidator
(7,50,0000 x 2%)
Assets Realized 7,50,000 15,000
Calls on Contributories: Unsecured Creditors:
On holder of 25,000 34,500 Trade 1,90,000
Equity Shares at the rate Directors for Bank
of ` 1.38 per share O/D cleared 1,50,000 3,40,000
Preferential Shareholders:
Capital 7,50,000
Arrears of Dividends 1,50,000 9,00,000
Equity shareholders:
Return of money to
holders of 50,000 equity
shares at 62 paise each 31,000
13,01,000 13,01,000

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Working Note:
Call from partly paid shares
Deficit before call from Equity Shares ` `
= ` (5,16,500+7,50,000) less ` (15,000+15,000+3,40,000+9,00,000) = (3,500) (3500)
Notional call on 25,000 shares @ ` 2 each 50000
Net balance after notional call (a) 46500
No. of shares deemed fully paid (b) 75000
Refund on fully paid shares 46,500/ 75,000= ` 0.62
Call on partly paid share (2 – 0.62) = ` 1.38
Question 5
(a) From the following facts drawn from the records of Honest Bank for the year ended 31 st
March, 2015, prepare the accounts as mentioned below:
(i) On 1st April, 2015  Bills for Collection were ` 28,00,000. During 2014-15, bills
received for collection were ` 2,58,00,000. Bills collected were ` 1,88,00,000. Bills
dishonoured and returned were ` 22,00,000.
Prepare Bills for Collection (Assets) Account and Bills for Collection (Liability) Account.
(ii) On 1st April, 2014, Acceptance, Endorsement etc. not yet satisfied amounted to
` 58,00,000. During the year, Acceptances, Endorsements, Guarantees etc. were
` 1,76,00,000. The Bank honoured acceptances of ` 1,00,00,000 and a client paid
` 40,00,000 against guaranteed liabilities. The Bank paid `4,00,000 which clients
failed to pay.
Prepare "Acceptances, Endorsements and Other Obligations Account" in the General
Ledger.
(iii) A loan of ` 24,00,000 advanced by the Bank on 30 th August, 2014 @ 10 per annum,
whose interest is payable half-yearly. The loan was outstanding as on 31 st March,
2015. Nothing was paid either towards Principal or Interest of this loan. The security
for the loan was 40,000 fully paid shares of ` 100 each. The shares were quoted on
the stock exchange on 30 th September, 2014 at ` 90 per share. Due to fluctuations,
the price fell to ` 50 per share in January, 2015. On 31 st March, 2015 the share price
quoted on the stock exchange was ` 96 per share.
State giving reasons, whether the loan would be classified as secured or unsecured
in the Balance Sheet of the Company as on 31 st March, 2015.


To be read as 1 st April, 2014.

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PAPER – 5 : ADVANCED ACCOUNTING 15

(iv) The following balances were taken from the Trial Balance as on 31 st March, 2015.
Dr. (`) Cr (`)
Interest & Discounts 3,92,00,000
Rebate for Bill Discounted 80,000
Bills Discounted & Purchased 16,00,000
Proportionate discounts not yet earned for Bills to mature in 2014-15 were ` 56,000.
Prepare the following Accounts:
(a) Rebate on Bills Account
(b) Interest and Discount Account. (10 Marks)
(b) From the following information given by M/s. Long Live Insurance Co. Ltd., you are required
to pass necessary Journal Entries (with narration and required working notes) relating to
Unexpired Risk Reserve. Also show "Unexpired Risk Reserve Account for 2015 -16" in
columnar form.
(i) On 31.03.15, it had reserve for unexpired risks amounting to ` 80 crores. Its
composition was as under:
(a) ` 30 crores in respect of Marine insurance business
(b) ` 40 crores in respect of Fire insurance business and
(c) ` 10 crores in respect of Miscellaneous insurance business
(ii) M/s. Long Live Insurance Co. Ltd. reserves 100 of net premium income in respect of
Marine insurance business and 50 of net premium income in respect of Fire and
Miscellaneous income policies.
(iii) During 2015-16, the following business was conducted:
` In crore
Marine Fire Miscellaneous
Premium Collect from:
Insured in respect of Policies issued 36 86 24
Other Insurance Companies in respect of
14 10 8
risks undertaken
Premium paid/payable to other insurance
20 10 15
Companies on Business ceded.
(6 Marks)


To be read as 2015-16

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Answer
(a) (i) Bills for Collection (Assets) A/c
` `
April 1, To Balance b/d 28,00,000 2014-15 By Bills for
2014 Collection
2014-15 (Liabilities) A/c 1,88,00,000
To Bills for By Bills for
Collection collection
(liabilities) A/c 2,58,00,000 (Liabilities) A/c 22,00,000
2015
Mar. 31 By Balance c/d 76,00,000
2,86,00,000 2,86,00,000
Bills for Collection (Liabilities) Account
` `
2014-15 To Bills for 1,88,00,000 Apr. 1, By Balance b/d 28,00,000
collection 2014
(Assets) A/c
To Bills for 22,00,000 2014-15 By Bills for 2,58,00,000
Collection collection
(Assets) A/c (Assets) A/c
2015
Mar. 31 To Balance c/d 76,00,000
2,86,00,000 2,86,00,000
(ii) In the General Ledger
Acceptances, Endorsement & other Obligations Account
` `
2014-15 To Constituents’ 1,00,00,000 1.4.2014 By Balance b/d 58,00,000
Liability for
Acceptance,
Endorsement, etc.
To Constituents’ 40,00,000 2014-15 By Constituents, 1,76,00,000
Liability for Liabilities for
Acceptances, Acceptances,
Endorsement etc. Endorsements,
etc.

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PAPER – 5 : ADVANCED ACCOUNTING 17

To Constituents’ Liability 4,00,000


for Acceptances,
Endorsements, etc.
(amount paid on failure
of clients)
31.3.2015 To Balance c/d 90,00,000
2,34,00,000 2,34,00,000

(iii) For classifying loans as fully secured or otherwise, the value of the security as on the
last date of the year is considered. The value of the security is ` 38,40,000 (40,000
shares x ` 96 per share) covering the loan and the interest due comfortably. Hence
it is to be treated as good and fully secured loan.
(iv) Rebate on Bills Discounted Account
` `
2014-15 To Interest and 80,000 2014
Discount A/c Apr. 1 By Balance b/d 80,000
2015 To Balance c/d 56,000 2015
Mar. 31 Mar 31 By Interest and 56000
Discount A/c
1,36,000 1,36,000
Interest & Discount Account
2015 ` 2014 `
Mar. 31 To Rebate on 56,000 Apr. 1 By Rebate on 80,000
Bills Discount A/c Bills Discount A/c
To Profit & Loss 3,92,24000 2014-15 By Bills 3,92,00,000
A/c Purchased &
Discounted/Cash
& sundries
3,92,80,000 3,92,80,000
(b) In the books of Long Live Insurance Co. Ltd.
Journal Entries
Date Particulars (` in crores)
Dr. Cr.
1.4.2015 Unexpired Risk Reserve (Fire) A/c Dr. 40.00
Unexpired Risk Reserve (Marine) A/c Dr. 30.00

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

Unexpired Risk Reserve (Miscellaneous) A/c Dr. 10.00


To Fire Revenue Account 40.00
To Marine Revenue Account 30.00
To Miscellaneous Revenue Account 10.00
(Being unexpired risk reserve brought forward
from last year)
31.3.2016 Marine Revenue A/c Dr. 30
To Unexpired Risk Reserve(Marine) A/c 30
(Being closing reserve for unexpired risk
created at 100% of net premium income for
marine)
Fire Revenue A/c Dr. 43
To Unexpired Risk Reserve(Fire) A/c 43
(Being closing reserve for unexpired risk
created at 50% of net premium income for Fire)
Miscellaneous Revenue A/c Dr. 8.5
To Unexpired Risk Reserve(Misc) A/c 8.5
(Being closing reserve for unexpired risk
created at 50% net premium income for Misc)
Unexpired Risk Reserve Account
Date Particulars Marine Fire Misc Date Particulars Marine Fire Misc
(`) (`) (`) (`) (`) (`)
1.4.2015 To Revenue A/c 30 40 10 1.4.2015 By Balance b/d 30 40 10
31.3.2016 To Balance c/d 30 43 8.5 31.3.2016 By Revenue A/c 30 43 8.5
60 83 18.5 60 83 18.5

Working Note:
Calculation of Closing balance of Reserve for Unexpired Risks
Marine Fire Misc
Premium Collected from:
a. Insured in respect of policies issued 36.00 86.00 24.00
b. Other ins co’s in respect of risks 14.00 10.00 8.00
undertaken
Total (a+b) 50.00 96.00 32.00

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PAPER – 5 : ADVANCED ACCOUNTING 19

Less Premium paid/payable to other insurance


companies on business ceded 20.00 10.00 15.00
30.00 86.00 17.00
% of creation of unexpired Risk Reserve 100% 50% 50%
Amount of Closing Unexpired Risk Reserve 30.00 43.00 8.50
Question 6
(a) M/s Shyam Udyog, a retail store, has two departments, Department X and Department Y
for each of which stock account and memorandum 'mark-up' account are kept. All the
goods supplied to each department are debited to the stock account at cost plus a 'mark -
up', which together make up the selling price of the goods and in the account the sale
proceeds of the goods are credited. The amount of 'mark-up' is credited to the
Departmental Mark-up Account. If the selling price of any goods is reduced below its
normal selling price, the reduction 'marked down' is adjusted both in the Stock Account
and the Departmental Mark-up Account. The rate of 'Mark up' for X Department is 33-1/3%
of the cost and for Y Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March, 2016 :
X Y
Department Amount Department Amount
(`) (`)
Stock as on April 1st at cost 3,15,000 5,58,000
Purchases 22,77,000 28,02,000
Sales 28,68,000 37,50,000
(1) The stock of Department X on April 1, 2015 included goods the selling price of which
had been marked down by ` 37,800. These goods were sold during the year at the
reduced prices.
(2) Certain stock of the value of ` 2,07,000 purchased from the Department X was later
in the year transferred to the Department Y and sold for ` 3,10,5000. As a result
though cost of the goods is included in the Department X the sale proceeds have
been credited to the Department Y.
(3) During the year 2015-16 to promote the goods, they were marked down as follows:
Cost (`) Marked down (`)
Department X 1,68,000 10,800
Department Y 3,00,000 60,000
All the goods marked down, were sold except of Department Y of the value of
` 1,50,000 marked down by ` 30,000.

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

(4) At the time of stock taking on 31 st March, 2016, it was discovered that cloth of
Department X of the cost of ` 11,700 was missing and it was decided that the amount
be written-off.
You are required to prepare for both the departments for the year ended 31 st March, 2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account. (8 Marks)
(b) Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem.
He despatches 30 tins of Refined Oil @ ` 1,500 per tin and 20 tins of Ghee ` 5,000 per
tin on 1st of every month. The Branch has incurred expenditure of ` 45,890 which is met
out of its collections; this is in addition to expenditure directly paid by Head Office.
Following are the other details:
Chennai H.O. Salem B.O.
Amount (`) Amount (`)
Purchases:
Refined Oil 27,50,000
Ghee 48,28,000
Direct Expenses 6,35,800
Expenses paid by H.O. 76,800
Sales:
Refined Oil 24,10,000 5,95,000
Ghee 38,40,500 14,50,000
Collection during the year (including Cash 20,15,000
Sales)
Remittance by Branch to Head Office 19,50,000

Chennai H.O.
Balance as on 01-04-2015 31-03-2016
Amount (`) Amount (`)
Stock:
Refined Oil 44,000 8,90,000
Ghee 10,65,000 15,70,000
Building 5,10,800 7,14,780
Furniture & Fixtures 88,600 79,740

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 21

Salem Brach Office


Balance as on 01-04-2015 31-03-2016
Amount (`) Amount (`)
Stock:
Refined Oil 22,500 19,500
Ghee 40,000 90,000
Sundry Debtors 1,80,000 ?
Cash in hand 25,690 ?
Furniture &Fixtures 23,800 21,420
Additional information:
(i) Addition to Building on 01-04-2015 ` 2,41,600 by H.O.
(ii) Rate of depreciation: Furniture & Fixtures @ 10% and Building @ 5% (already
adjusted in the above figure)
(iii) The Branch Manager is entitled to 10% commission on overall organisational profits
after charging such commission.
(iv) The General Manager is entitled to a salary of ` 20,000 per month.
(v) General expenses incurred by Head Office is ` 1,86,000.
You are requested to prepare Branch Account in the Head Office books and also prepare
Chena Swami’s Trading and Profit & loss Account (excluding branch transactions) for the
year ended 31 st March, 2016. (8 Marks)
Answer
(a) Department X Memorandum Stock Account
2015- ` ` 2015- ` `
16 16
To Balance b/d By Sales 28,68,000
(3,15,000 + 3,82,200 X Deptt. 2,07,000
1,05,000 –
37,800)
To Purchases 22,77,000 Mark-up 69,000 2,76,000
A/c
Markup 7,59,000 30,36,000 By Loss of 11,700
stock A/c
Mark-up 3,900 15,600
A/c

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

By Mark-up 10,800
A/c
By Balance 2,47,800
c/d
34,18,200 34,18,200

Department X Memorandum Mark-up Account


2015-16 ` 2015-16 `
To Stock A/c (transfer) 69,000 By Balance b/d
To Stock A/c (re-sale) 3,900 (1,05,000-37,800) 67,200
To Stock A/c (mark down) 10,800 By Stock A/c 7,59,000
To Profit & Loss A/c 6,80,550
To Balance (1/4 of ` 61,950
2,47,800)
8,26,200 8,26,200
Working Note:
Verification of Profit `
Sales as per books 28,68,000
Add: Mark-down (37,800+10,800) 48,600
29,16,600
Gross Profit on fixed selling price @ 25% on ` 29,16,600 7,29,150
Less: Mark down (48,600)
6,80,550
Department Y Memorandum Stock Account
2015-16 ` 2015-16 `
To Balance b/d By Sales A/c 37,50,000
To Cost 5,58,000 By Mark-up A/c 60,000
Mark-up 2,79,000 8,37,000 By Balance c/d 15,40,500
To Purchases 28,02,000
Mark-up 14,01,000 42,03,000
To X Deptt. A/c 2,07,000
Mark-up 1,03,500 3,10,500
53,50,500 53,50,500

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 23

Department Y Memorandum Mark Up Account


2015-16 ` 2015-16 `
To Stock A/c 60,000 By Balance b/d 2,79,000
To Profit & Loss A/c 12,30,000 By Stock A/c 14,01,000
(28,02,000 x 50%)
To Balance c/d: 4,93,500 By Stock A/c 1,03,500
[1/3(15,40,500+30,000)- ` 30,000]
17,83,500 17,83,500
Working Notes:
Verification of Profit `
Sales 37,50,000
Add: Mark down in goods sold 30,000
37,80,000
Gross Profit 1/3 12,60,000
Less: Mark down (30,000)
Gross profit as per books 12,30,000
(b) In the books of Mr. Chena Swami
Salem Branch Account
` `
To Balance b/d By Bank (Remittance to 19,50,000
H.O.)
Opening stock: By Balance c/d
Ghee 40,000 Closing stock:
Oil 22,500 Refined oil 19,500
Debtors 1,80,000 Ghee 90,000
Cash on hand 25,690 Debtors (W.N. 1) 2,10,000
Furniture & fittings 23,800 Cash on hand (W.N. 2) 44,800
To Goods sent to Branch A/c Furniture & fittings 21,420
Refined Oil (30x1500x12) 5,40,000
Ghee (20x5000x12) 12,00,000
To Bank (Expenses paid by 76,800
H.O.)

© The Institute of Chartered Accountants of India


24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

To Net Profit transferred


to General P & L A/c 2,26,930
23,35,720 23,35,720
Mr. Chena Swami
Trading and Profit and Loss account for the year ended 31st March, 2016
(Excluding branch transactions)
` `
To Opening Stock: By Sales:
Refined Oil 44,000 Refined Oil 24,10,000
Ghee 10,65,000 Ghee 38,40,500
To Purchases: By Closing Stock:
Refined Oil 27,50,000 Refined Oil 8,90,000
Less: Goods sent Ghee 15,70,000
to Branch (5,40,000) 22,10,000
Ghee 48,28,000
Less: Goods sent
to Branch (12,00,000) 36,28,000
To Direct Expenses 6,35,800
To Gross Profit 11,27,700
87,10,500 87,10,500
To Manager’s Salary 2,40,000 By Gross Profit 11,27,700
To General Expenses 1,86,000 By Branch Profit 2,26,930
transferred
To Depreciation
Furniture (88,600-79,740) 8,860
Building
(5,10,800+2,41,600- 37,620
7,14,780)
To Manager’s Commission @
10% (8,82,150 x10/110) 80,195
To Net profit 8,01,955
13,54,630 13,54,630

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 25

Working Notes:
(1) Debtors Account
` `
To Balance b/d 1,80,000 By Cash Collections 20,15,000
To Sales made during By Balance c/d 2,10,000
the year: (Bal. Figure)
Refined oil 5,95,000
Ghee 14,50,000
22,25,000 22,25,000
(2) Branch Cash Account
` `
To Balance b/d 25,690 By Remittance 19,50,000
To Collections 20,15,000 By Exp. 45,890
By Balance c/d (Bal. Figure) 44,800
20,40,690 20,40,690
Note:
1. Branch managers generally get commission based on the Branch profits and not on
overall organizational profits. The answer given above is on the basis of the
information given in the question and the commission of branch manager is computed
as 10% on overall organizational profits after charging such commission.
2. Since the amount of cash sales was not given specifically in the question, total
amount of cash collections during the year amounting ` 20,15,000 has been
considered as collection from Debtors in the above solution.
Question 7
Answer any four of the following:
(a) With reference to AS 11, define the following:
(i) Integral Foreign Operation.
(ii) Non-Integral Foreign Operation.
(b) M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged
infringement of Copyrights. The competitor has filed a suit in the court of law seeking
damages of ` 200 lacs.
The Directors are of the view that the claim can be successfully resisted by the Company.

© The Institute of Chartered Accountants of India


26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

How would the matter be dealt in the annual accounts of the Company in the ligh t of AS
29 ? Explain in brief giving reasons for your answer.
(c) Explain in brief, the alternative measurement bases, for determining the value at which an
element can be recognized in the Balance Sheet or Statement of Profit and Loss.
(d) Write short notes on Designated Partner in a Limited Liability Partnership and what are
their liabilities.
(e) From the following particulars of M/s. Tsunami Marine Insurance Limited for the year ending
31st March, 2016, find out the
(i) Net Premium earned
(ii) Net Claims incurred
Direct Business Re- Insurance
(`) lakhs (`) lakhs
PREMIUM:
Received 4,400 376
Receivable -01.04.2015 220 18
 189 16
Receivable -01.04.2016
Paid 305
Payable - 01.04.2015 14
Payable - 01.04.2016* 9
CLAIMS:
Paid 3,450 277
Payable - 01.04.2015 45 8
Payable - 01.04.2016* 48 6
Received 101
Receivable - 01.04.2015 20
Receivable - 01.04.2016* 19
(4 x 4 = 16 Marks)
Answer
(a) Integral Foreign Operation (IFO): It is a foreign operation, the activities of which are an
integral part of those of the reporting enterprise. The business of IFO is carried on as if it
were an extension of the reporting enterprise’s operations. Generally, IFO carries on


These dates should be read as 31.3.2016.

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PAPER – 5 : ADVANCED ACCOUNTING 27

business in a single foreign currency, i.e. of the country where it is located. For example,
sale of goods imported from the reporting enterprise and remittance of proceeds to the
reporting enterprise.
Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an Integral
Foreign Operation. The business of a NFO is carried on in a substantially independent way
by accumulating cash and other monetary items, incurring expenses, generating income
and arranging borrowing in its local currency. An NFO may also enter transactions in
foreign currencies, including transactions in the reporting currency. An example of NFO
may be production in a foreign currency out of the resources available in such country
independent of the reporting enterprise.
(b) As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should
be recognized when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will b e
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognized.
In the given situation, since, the directors of the company are of the opini on that the claim
can be successfully resisted by the company, therefore there will be no outflow of the
resources. Hence, no provision is required. The company will disclose the same as
contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed copyrights and is seeking damages of
` 200 lakhs. However, the directors are of the opinion that the claim can be successfully
resisted by the company.”
(c) The Framework for Recognition and Presentation of Financial statements recognises four
alternative measurement bases for the purpose of determining the value at which an
element can be recognized in the balance sheet or statement of profit and loss. These
bases are: (i)Historical Cost; (ii)Current cost (iii) Realisable (Settlement) Value and (iv)
Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets
are recorded at an amount of cash or cash equivalent paid or the fair value of the
asset at the time of acquisition. Liabilities are recorded at the amount of proceeds
received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are
carried out at the amount of cash or cash equivalent that would have to be paid if the

© The Institute of Chartered Accountants of India


28 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2016

same or an equivalent asset was acquired currently. Liabilities are carried at the
undiscounted amount of cash or cash equivalents that would be required to settle the
obligation currently.
3. Realisable (Settlement) Value: As per realisable value, assets are carried at the
amount of cash or cash equivalents that could currently be obtained by selling the
assets in an orderly disposal. Liabilities are carried at their settlement values; i.e. the
undiscounted amount of cash or cash equivalents paid to satisfy the liabilities in the
normal course of business.
4. Present Value: Under present value convention, assets are carried at present value
of future net cash flows generated by the concerned assets in the normal course of
business. Liabilities under this convention are carried at present value of future net
cash flows that are expected to be required to settle the liability in the normal course
of business.
(d) “Designated partner” means any partner designated as such pursuant to section 7 of the
Limited Liability Partnerships (LLPs) Act; 2008.
As per section 7 of the LLP Act, every limited Liability Partnership shall have at least 2
designated Partners who are individuls and at least one of them shall be a resident in India.
Provided that in case of Limited Liability Partnership in which all the partners are bodies
corporate or in which one or more partners are Individuals and bodies corporate, at least
2 individuals who are partners of such limited liability Partnership or Nominees of such
Bodies corporate shall act as designated partners
“Liabilities of designated partners”
As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated
partner shall be-
(a) responsible for the doing of all acts, matters and things as are required to be done by
the limited liability partnership in respect of compliance of the provisions of this Ac t
including filing of any document, return, statement and the like report pursuant to the
provisions of this Act and as may be specified in the limited liability partnership
agreement; and;
(b) liable to all penalties imposed on the limited liability partnership for any contravention
of those provisions.
(e) (i) Net Premium earned
` In lakhs
Premium from direct business received 4,400
Add: Receivable as 31.03.16 189
Less: Receivable as on 01.04.2015 (220) 4,369

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 29

Add: Premium on re-insurance accepted 376


Add: Receivable as on 31.03.16 16
Less: Receivable as on 01.04.2015 (18) 374
4,743
Less: Premium on re-insurance ceded 305
Add: Payable as on 31.03.16 9
Less: Payable as on 01.04.15 (14) (300)
Net Premium earned 4,443
(ii) Net Claims incurred
` In lakhs
Claims paid on direct business 3,450
Add: Reinsurance 277
Add: Reinsurance outstanding as 31.03.16 6
Less: Reinsurance outstanding as on 01.04.2015 (8) 275
Less: Claims Received from re-insurance 101
Add: Receivable as on 31.03.16 19
Less: Receivable as on 01.04.2015 (20) 100
3,625
Add: Outstanding direct claims at the end of the year 48
3,673
Less: Outstanding Claims at the beginning of the (45)
year
Net Claims Incurred 3,628

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PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made and disclosed by
way of note forming part of the answer.
Working Notes should form part of the respective answers.
Question 1
Answer the following questions:
(a) With reference to AS 4 "Contingencies and events occurring after the balance sheet
date", state whether the following events will be treated as contingencies, adjusting
events or non-adjusting events occurring after balance sheet date in case of a company
which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5 th April, 5 days after the year
end. However, the assets are fully insured and the books have not been approved
by the Directors.
(ii) A suit against the company's advertisement was filed by a party on 10 th April, 10
days after the year end claiming damages of ` 20 lakhs.
(iii) It sends a proposal to purchase  an immovable property for ` 30 lakhs in March.
The book value of the property is ` 20 lakhs as on year end date. However, the
deed was registered as on 15 th April.
(iv) The terms and conditions for acquisition of business of another company have been
decided by March end. But the financial resources were arranged in April and
amount invested was ` 40 lakhs.
(v) Theft of cash of ` 2 lakhs by the cashier on 31 st March but was detected the next
day after the financial statements have been approved by the Directo rs.
(b) AB Ltd. is in the process of finalizing its account for the year ended 31 st March, 2015.
The company seeks your advice on the following:
(i) The company's sale tax assessment for assessment year 2012-13 has been
completed on 14th February, 2015 with a demand of ` 5.40 crore. The company
paid the entire due under protest without prejudice to its right of appeal. The
company files its appeal before the appellate authority wherein the grounds of
appeal cover tax on additions made in the assessment order for a sum of ` 3.70
crore.


PS: The word ‘purchase’ should be read as ‘sell’.

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2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

(ii) The company has entered into a wage agreement in May 2015 whereby the labour
union has accepted a revision in wage from June 2014. The agreement provides
that the hike till May 2015 will not be paid to the employees but will be settled to
them at the time of retirement. The company agrees to deposit the arrears in
Government Bonds by September 2015.
(c) ABC Ltd. purchased fixed assets for ` 50,00,000. Government grant received towards it
is 20%. Residual value is ` 8,00,000 and useful life is 8 years. Assumed depreciation is
on the basis of Straight Line Method, asset is shown in the Balance Sheet net of grant.
After one year, grant becomes refundable to the extent of ` 7,00,000 due to non-
compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company.
(d) Power Track Ltd. purchased a plant for US$ 50,000 on 31 st October, 2015 payable after
6 months. The company entered into a forward contract for 6 months @ ` 64.25 per
Dollar. On 31st October, 2015, the exchange rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the
company for the year ended 31 st March, 2016. ( 4 × 5 = 20 Marks)
Answer
(a) According to AS 4 on ‗Contingencies and Events Occurring after the Balance Sheet
Date‘, adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the balance sheet date.
However, adjustments to assets and liabilities are not appropriate for events occurring
after the balance sheet date, if such events do not relate to conditions existing at the
balance sheet date. ―Contingencies‖ used in the Standard is restricted to conditions or
situations at the balance sheet date, the financial effect of which is to be determined by
future events which may or may not occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured.
Therefore, the event becomes immaterial and the event is non-adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date.
However, in the given case, suit was filed against the company‘s advertisement by a
party on 10 th April for amount of ` 20 lakhs. Therefore, it does not fit into the
definition of a contingency and hence is a non-adjusting event.
(iii) In the given case, proposal for deal of immovable property was sent before the
closure of the books of accounts. This is a non-adjusting event as only the
proposal was sent and no agreement was effected in the month of March i.e. before
the balance sheet date.
(iv) As the term and conditions of acquisition of business of another company had been
decided by the end of March, acquisition of business is an adjusting event

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 3

occurring after the balance sheet date. Adjustment to assets and liabilities is
required since the event affects the determination and the condition of the amount s
stated in the financial statements for the financial year ended on 31st March.
(v) Since the financial statements have been approved before detection of theft by the
cashier of ` 2,00,000, it becomes a non-adjusting event and no disclosure is
required in the report of the Approving Authority.
(b) (i) Since the company is not appealing against the addition of ` 1.70 crore (` 5.40
crore less ` 3.70 crore), therefore, the same should be provided/ expensed off in its
accounts for the year ended on 31 st March, 2015. However, the amount paid under
protest can be kept under the heading ‗Long-term Loans & Advances / Short-term
Loans and Advances‘ as the case may be alongwith disclosure as contingent
liability of ` 3.70 crore.
(ii) The arrears for the period from June, 2014 to March, 2015 are required to be
provided for in the accounts of the company for the year ended on 31 st March, 2015
assuming that negotiations for hike in wages had already started in the year 2014 -
15 i.e. before the balance sheet date though the agreement was entered in May,
2015.
(c) Journal Entries in the books of ABC Ltd. for 2 nd year
Year Particulars ` in lakhs ` in lakhs
(Dr.) (Cr.)
2ndyear Fixed Asset Account Dr. 7
To Bank Account 7
(Being government grant on asset partly
refunded which increased the cost of fixed
asset)
Depreciation Account (W.N.) Dr. 5
To Fixed Asset Account 5
(Being depreciation charged on SLM on
revised value of fixed asset prospectively)
Profit & Loss Account Dr. 5
To Depreciation Account 5
(Being depreciation transferred to Profit and
Loss Account at the end of year 2)
Working Note:
Depreciation for year 2
` in lakhs
Cost of the Asset 50

© The Institute of Chartered Accountants of India


4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Less: Government grant received (10)


40
 40  8 
Less: Depreciation for the first year   4
 8 
Book value at the end of 1 st year 36
Add: Government grant refundable in 2 nd year 7
43
 43  8 
Depreciation for the second year   5
 7 
(d) Calculation of profit or loss to be recognized in the books of Power Track Lim ited
`
Forward contract rate 64.25
Less: Spot rate (61.50)
Loss on forward contract 2.75
Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 × ` 2.75) `1,37,500
Contract period 6 months
Loss for the period 1st November, 2015 to 31st March, 2016 i.e. 5 months
5 months falling in the year 2015-2016
Hence, Loss for 5 months will be ` 1,37,500 
5
= ` 1,14,583
6

Thus, the loss amounting to ` 1,14,583 for the period is to be recognized in the year
ended 31st March, 2016.
Question 2
P and Q are partners of P & Co., sharing Profit and Losses in the ratio of 3:1 and Q and R are
partners of R & Co., sharing Profits and Losses in the ratio of 2:1. On 31 st March, 2015, they
decide to amalgamate and form a new firm M/s PQR & Co. wherein P, Q and R would be
partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on
the above date are as under:
Liabilities P & Co. R & Co. Assets P & Co. R & Co.
(`) (`) (`) (`)
Capitals: Fixed assets:
P 2,50,000 - Building 50,000 60,000

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PAPER – 5 : ADVANCED ACCOUNTING 5

Q 1,80,000 2,20,000 Plant & Machinery 1,60,000 1,70,000


R 1,20,000 Office Equipment 50,000 46,000
Reserves 60,000 1,50,000 Current assets:
Sundry Creditors 1,30,000 1,36,000 Stock-in-trade 1,20,000 1,40,000
Due to P & Co. - 1,00,000 Sundry Debtors 1,60,000 2,00,000
Bank Overdraft 80,000 - Bank Balance 40,000 1,00,000
Cash in hand 20,000 10,000
Due from R& Co. 1,00,000 -
7,00,000 7,26,000 7,00,000 7,26,000
The amalgamated firm took over the business on the following terms:
(a) Building of P & Co. was valued at ` 1,50,000.
(b) Plant & Machinery of P & Co. was valued at ` 2,75,000 and that of R & Co. at
` 2,50,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill of P & Co. was valued at ` 1,20,000 and of R & Co. at ` 60,000, but the same
will not appear in the books of PQR & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their
capitals according to the profit sharing ratio.
(f) Provisions for doubtful debts has to be carried forward at ` 15,000 in respect of debtors
of P & Co. and ` 30,000 in respect of debtors of R & Co.
You are required to prepare the Balance Sheet of new firm and capital accounts of the
partners in the books of old firms. (16 Marks)
Answer
Balance Sheet of M/s PQR & Co. as at 31st March, 2015
Liabilities ` Assets `
Capitals: Building
P 6,41,000 (1,50,000 + 60,000) 2,10,000
Q 4,27,333 Plant & machinery
(2,75,000+2,50,000) 5,25,000
R 2,13,667 12,82,000 Office equipment
Sundry creditors (50,000+46,000) 96,000
(1,30,000+1,36,000) 2,66,000 Stock-in-trade
Bank overdraft 80,000 (1,44,000+1,68,000) 3,12,000

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Sundry debtors
(1,60,000+2,00,000) 3,60,000
Less: Provision for
doubtful debts (45,000) 3,15,000
(15,000 +30,000)
Bank balance
(40,000+1,00,000) 1,40,000
Cash in hand 30,000
16,28,000 16,28,000
In the books of P & Co.
Partners’ Capital Accounts
Particulars P Q Particulars P Q
` ` ` `
To Capital A/cs – 5,53,000 2,81,000 By Balance b/d 2,50,000 1,80,000
M/s PQR & Co. By Reserve (3:1) 45,000 15,000
By Profit on
Realisation
A/c (W.N.3) 2,58,000 86,000
5,53,000 2,81,000 5,53,000 2,81,000
In the books of R & Co.
Partners’ Capital Accounts
Particulars Q R Particulars Q R
` ` ` ` `
To Capital A/cs – 4,12,000 2,16,000 By Balance b/d 2,20,000 1,20,000
M/s PQR & Co. By Reserve (2:1) 1,00,000 50,000
By Profit on
Realisation 92,000 46,000
(W.N.4)
4,12,000 2,16,000 4,12,000 2,16,000


` 20,000+ 10,000+ 1,78,000+ 27,667– 2,05,667= ` 30,000.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 7

Working Notes:
1. Computation of purchase considerations
P & Co. R & Co.
` `
Assets:
Goodwill 1,20,000 60,000
Building 1,50,000 60,000
Plant & machinery 2,75,000 2,50,000
Office equipment 50,000 46,000
Stock-in-trade 1,44,000 1,68,000
Sundry debtors 1,60,000 2,00,000
Bank balance 40,000 1,00,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 -
(A) 10,59,000 8,94,000
Liabilities:
Creditors 1,30,000 1,36,000
Provision for doubtful debts 15,000 30,000
Due to P & Co. - 1,00,000
Bank overdraft 80,000 -
(B) 2,25,000 2,66,000
Purchase consideration (A-B) 8,34,000 6,28,000

2. Computation of Capital Adjustments


P Q R Total
` ` ` `
Balance transferred from P & Co. 5,53,000 2,81,000 8,34,000
Balance transferred from R & Co. 4,12,000 2,16,000 6,28,000
5,53,000 6,93,000 2,16,000 14,62,000
Less: Goodwill written off in the
ratio of 3:2:1 (90,000) (60,000) (30,000) (1,80,000)
Existing capital 4,63,000 6,33,000 1,86,000 12,82,000
Proportionate capital (3:2:1) 6,41,000 4,27,333 2,13,667 12,82,000
Amount to be brought in (paid off) 1,78,000 (2,05,667) 27,667

© The Institute of Chartered Accountants of India


8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

3. In the books of P & Co.


Realisation Account
` `
To Building 50,000 By Creditors 1,30,000
To Plant & machinery 1,60,000 By Bank overdraft 80,000
To Office equipment 50,000 By M/s PQR & Co. 8,34,000
To Stock-in-trade 1,20,000 (purchase consideration)
To Sundry debtors 1,60,000 (W.N.1)
To Bank balance 40,000
To Cash in hand 20,000
To Due from R & Co. 1,00,000
To Partners‘ capital A/cs
P 2,58,000
Q 86,000 3,44,000
10,44,000 10,44,000
4. In the books of R & Co.
Realisation Account
` `
To Building 60,000 By Creditors 1,36,000
To Plant & machinery 1,70,000 By Due to P & Co. 1,00,000
To Office equipment 46,000 By M/s PQR & Co. 6,28,000
To Stock-in-trade 1,40,000 (purchase consideration)
To Sundry debtors 2,00,000 (W.N.1)
To Bank balance 1,00,000
To Cash in hand 10,000
To Partners‘ capital A/cs
Q 92,000
R 46,000 1,38,000
8,64,000 8,64,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 9

Question 3
(a) Following is the summarized Balance Sheet of Complicated Ltd. as on 31 st March, 2016 :
Liabilities Amount
(`)
Equity shares of ` 10 each fully paid up 12,50,000
Bonus shares 1,00,000
Share option outstanding Account 4,00,000
Revenue Reserve 15,00,000
Securities Premium 2,50,000
Profit & Loss Account 1,25,000
Capital Reserve 1,00,000
Revaluation Reserve 1,00,000
Unpaid dividends 1,00,000
12% Debentures (Secured) 18,75,000
Advance from related parties (Unsecured) 10,00,000
Current maturities of long term borrowings 16,50,000
Application money received for allotment due for refund 2,00,000
86,50,000
Fixed Assets 46,50,000
Current Assets 40,00,000
86,50,000
The Company wants to buy back 25000 equity shares of ` 10 each, on 1 st April, 2016 at
` 20 per share. Buy back of shares is duly authorised by its Articles and necessary
resolution has been passed by the Company towards this. The payment for buy back of
shares will be made by the Company out of sufficient bank balance available shown as
part of Current Assets.
Comment with your calculations, whether buy back of shares by the Company is within the
provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy
back of shares and prepare the Balance Sheet after buy back of shares. (12 Marks)
(b) Mention the ways by which Redeemable Debentures may be redeemed under the
Companies Act, 2013. (4 Marks)

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10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Answer
(a) Determination of Buy back of maximum no. of shares as per the Companies
Act, 2013
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding (`12,50,000 + `1,00,000)/ ` 10 1,35,000
25% of the shares outstanding 33,750
2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free
Reserves
Particulars
Paid up capital (`) ` 13,50,000
Free reserves (`) (15,00,000 + 2,50,000 + 1,25,000) ` 18,75,000
Shareholders‘ funds (`) ` 32,25,000
25% of Shareholders fund (`) ` 8,06,250
Buy back price per share ` 20
Number of shares that can be bought back (shares) 40,312
Actual Number of shares for buy back 25,000
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds
post Buy Back
Particulars `
(a) Loan funds (`) (18,75,000+10,00,000+16,50,000 + 48,25,000
1,00,000 + 2,00,000)
(b) Minimum equity to be maintained after buy back in the ratio 24,12,500
of 2:1 (`) (a/2)
(c) Present equity/shareholders fund (`) 32,25,000
(d) Future equity/shareholders fund (`) (see W.N.) (32,25,000
– 2,70,833) 29,54,167 
(e) Maximum permitted buy back of Equity (`) [(d) – (b)] 5,41,667


As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company should not be more than
twice the capital and its free reserves after such buy-back. Further under Section 69 (1), on buy-back of shares out of
free reserves a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption
Reserve (CRR). As per section 69 (2) utilization of CRR is restricted to fully paying up unissued shares of the Company
which are to be issued as fully paid-up bonus shares only. It means CRR is not available for distribution as dividend.
Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves, amount
transferred to CRR on buy-back has to be excluded from the present equity.

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PAPER – 5 : ADVANCED ACCOUNTING 11

(f) Maximum number of shares that can be bought back @ ` 27,083


20 per share Shares
(g) Actual Buy Back Proposed Shares 25,000
Summary statement determining the maximum number of shares to be bought
back
Particulars Number of
shares
Shares Outstanding Test 33,750
Resources Test 40,312
Debt Equity Ratio Test 27,083
Maximum number of shares that can be bought back [least of 27,083
the above]
Company qualifies all tests for buy-back of shares and conclusion is that it can buy
maximum 27,083 shares on 1 st April, 2016.
However, company wants to buy-back only 25,000 equity shares @ ` 20. Therefore,
buy-back of 25,000 shares, as desired by the company is within the provisions of the
Companies Act, 2013.
Journal Entries for buy-back of shares
Debit (`) Credit (`)
(a) Equity shares buy-back account Dr. 5,00,000
To Bank account 5,00,000
(Being buy back of 25,000 equity shares of ` 10
each @ ` 20 per share)
(b) Equity share capital account Dr. 2,50,000
Securities premium account Dr. 2,50,000
To Equity shares buy-back account 5,00,000
(Being cancellation of shares bought back)
(c) Revenue reserve account Dr. 2,50,000
To Capital redemption reserve account 2,50,000
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of capital bought back through free
reserves)

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Balance Sheet of Complicated Ltd.


as on 1st April, 2016
Particulars Note Amount
No `
EQUITY AND LIABILITIES
1 Shareholders' funds
(a) Share capital 1 11,00,000
(b) Reserves and Surplus 2 22,25,000
2 Non-current liabilities
(a) Long-term borrowings 3 28,75,000
3 Current liabilities
(a) Other current liabilities 4 19,50,000
Total 81,50,000
ASSETS
1 Non-current assets
(a) Fixed assets 46,50,000
2 Current assets (40,00,000-5,00,000) 35,00,000
Total 81,50,000
Notes to Accounts
` `
1. Share Capital
Equity share capital
1,10,000 Equity shares of `10 each 11,00,000

2. Reserves and Surplus


Profit and Loss A/c 1,25,000
Revenue reserves 15,00,000
Less: Transfer to CRR (2,50,000) 12,50,000
Securities premium 2,50,000
Less: Utilization for share buy-back (2,50,000) -
Share Option Outstanding Account 4,00,000
Capital Reserve 1,00,000
Revaluation Reserve 1,00,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 13

Capital Redemption Reserve 2,50,000 22,25,000

3. Long-term borrowings
Secured
12% Debentures 18,75,000
Unsecured loans 10,00,000 28,75,000

4. Other Current Liabilities


Current maturities of long term borrowings 16,50,000
Unpaid dividend 1,00,000
Application money received for allotment due
for refund 2,00,000 19,50,000
Working Note:
Amount transferred to CRR and maximum equity to be bought back will be calculated by
simultaneous equation method.
Suppose amount transferred to CRR account is ‗x‘ and maximum permitted buy -back of
equity is ‗y‘.
Then
(` 32,25,000 – x) – ` 24,12,500 = y (1)
y 
 10  = x
 20 
Or 2x = y (2)
by solving the above equation we get x = ` 2,70,833 and y = ` 5,41,667
(b) Redemption of debentures must be done according to the terms of issue of debentures
and any deviation will be treated as a default by the company.
Redemption by paying off the debt on account of debentures issued can be done in one
of the following four methods viz:
(a) By payment in lump sum at the end of a specified period of time;
(b) By payment in annual installments;
(c) By purchasing its own debentures in the open market.
(d) By conversion into shares in full or in part depending on the terms of issue.

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Question 4
From the following particulars, prepare a Statement of Affairs and the Deficiency Account for
submission to official liquidator of Sun City Development Ltd., which went into liquidation on
31st March, 2016:
Liabilities (`) (`)
6,00,000 Equity shares of ` 10 each, ` 8 paid-up 48,00,000
6% 2,00,000 Preference shares of ` 10 each 20,00,000
Less: Calls in arrear 1,00,000 19,00,000
5% Debentures having a floating charge on the assets (interest
20,00,000
paid up to 30th September, 2015)
Mortgage on Land & Building 16,00,000
Trade Payable 53,10,000
Wage Payable 4,00,000
Secretary's Salary Payable @ ` 10,000 p.m. 60,000
Managing Director's Salary Payable @ ` 30,000 p.m. 1,20,000

Assets Estimated to produce (`) Book value(`)


Land & Building 26,00,000 24,00,000
Plant & Machinery 26,00,000 40,00,000
Tools & Equipments 80,000 4,00,000
Patents & Copyrights 6,00,000 10,00,000
Inventory 14,80,000 17,40,000
Investments in the hand of a Bank for an 34,00,000 36,00,000
Overdraft of ` 38,00,000
Trade Receivables 12,00,000 18,00,000
On 31st March, 2011 the Balance Sheet of the Company showed a General Reserve of
` 8,00,000 accompanied by a debit balance of ` 5,00,000 in the Profit & Loss Account.
In 2012, the Company made a profit of ` 8,00,000 and declared a dividend of 10% on Equity
Shares.
The Company suffered a total loss of ` 21,80,000 besides loss of stock due to fire to the tune
of ` 8,00,000 during financial years ending March 2013, 2014 and 2015. For the financial year
ended 31st March, 2016, accounts were not made.
The cost of winding-up is expected to be ` 3,00,000. (16 Marks)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 15

Answer
In the matter of the Companies Act and in the matter of Sun City Development Ltd. (in winding
up)
Statement of Affairs on 31st March, 2016, the date of winding up

Estimated realisable value


Assets `
Assets not specifically pledged (as per list A)
Trade receivables 12,00,000
Inventory 14,80,000
Plant and Machinery 26,00,000
Tools and Equipment 80,000
Patents and copyrights 6,00,000
Unpaid calls 1,00,000
60,60,000
Assets specifically pledged (as per list B)
Estimated Due to Deficiency Surplus
Realisation Secured Ranking as carried to the
Creditors Unsecured last column
Creditors
` ` ` ` `
Investments 34,00,000 38,00,000 4,00,000
Land & Building 26,00,000 16,00,000 10,00,000
60,00,000 54,00,000
Estimated surplus from assets specifically pledged 10,00,000
Estimated total assets available for preferential creditors, 70,60,000
debenture holders and unsecured creditors
Summary of Gross Assets:
Gross realisable value of -
assets specifically charged 60,00,000
others assets 60,60,000
1,20,60,000
Estimated total assets available for preferential creditors,
debenture holders, bank overdraft and unsecured
creditors brought forward 70,60,000

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Gross Liabilities Liabilities


` ` `
50,00,000 (34,00,000 Secured creditors (as per List B) to the
+16,00,000) extent to which claims are estimated to be
covered by assets specifically pledged
4,20,000* Preferential creditors as per list C 4,20,000*
Estimated balance of assets available for
Debenture holders, Bank & unsecured 66,40,000
creditors
20,50,000 (20,00,000 Debenture holders secured by a floating
+ 50,000) charge as per list D (20,50,000)
Surplus as regards debenture holders 45,90,000
Unsecured creditors as per list E
Estimated unsecured balance of claim of
creditors partly secured on
Specific assets 4,00,000
Trade payable 53,10,000
58,70,000 Outstanding expenses (40,000 + 1,60,000 58,70,000
1,20,000)
Estimated deficiency as regards creditors
being the difference between gross liabilities
- and gross assets 12,80,000
1,33,40,000
Issued & Called up Capital:
6,00,000 Equity shares or ` 10 each, `8 48,00,000
paid
6% 2,00,000 Preference shares of ` 10
each fully called 20,00,000 68,00,000
Estimated Deficiency as regards members
as per list H 80,80,000
*Note
(i) The Secretary of a Company, being an officer, is to be included within the definition of
‗employee‘ for the purpose of computing preferential creditors. The preferential creditor
for secretary‘s salary has been restricted to 4 months salary but maximum pay shall not
exceed ` 20,000 per claimant as per the requirement of the law.

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PAPER – 5 : ADVANCED ACCOUNTING 17

(ii) The above is subject to cost of winding up estimated as ` 3,00,000 and to any surplus /
deficiency on realisation of assets.
(iii) There are 6,00,000 shares unpaid @ ` 2 per share liable to be called up.
List H - Deficiency Account
A. Item contributing to Deficiency `
1. Excess of capital & liabilities over assets on 1-4-2011 NIL
2. Net dividend & bonuses during the period (4,80,000 + 1,14,000) 5,94,000
3. Net trading losses after charging depreciation, taxation, interest
on debentures, etc. during the same period
(` 21,80,000 + ` 26,26,000) 48,06,000
4. Losses other than trading losses written off or for which provision
has been made in the books during the same period - stock loss. 8,00,000
5. Estimated losses now written off or for which provision
has been made for the purpose of preparing the statement:
`
Plant and Machinery 14,00,000
Tools and equipments 3,20,000
Patents and copyrights 4,00,000
Inventories 2,60,000
Investments 2,00,000
Debtors 6,00,000 31,80,000
6. Other items contributing to deficiency NIL
93,80,000
B. Items reducing Deficiency
7. Excess of assets over capital and liabilities on 1st April, 2011
(8,00,000 – 5,00,000) 3,00,000
8. Net trading profit during the period 8,00,000
9. Profit & Incomes other than trading profit during the same period -
10. Other items - Profit expected on Land & Building (26,00,000 - 24,00,000) 2,00,000
13,00,000
Deficiency as shown by the Statement of Affairs (A) - (B) 80,80,000
Working Notes:
(1) Trial Balance to ascertain the amount of loss for the year ended 31 st March, 2016
Dr. Cr.
` `
Land & Building 24,00,000

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Plant and Machinery 40,00,000


Tools and Equipments 4,00,000
Patents and Copyrights 10,00,000
Inventories 17,40,000
Investment 36,00,000
Trade Receivables 18,00,000
Equity Capital 48,00,000
6% Preference share capital 19,00,000
5% Debentures 20,00,000
Interest Outstanding 50,000
Mortgage on Land & Building 16,00,000
Trade Creditors 53,10,000
Owing for Wages 4,00,000
Secretary‘s Salary 60,000
Managing Director‘s Salary 1,20,000
Bank Overdraft 38,00,000
Profit & Loss Account on 1.4.2015 24,74,000
1,74,14,000 2,00,40,000
Loss for the year (balancing figure) 26,26,000 -
2,00,40,000 2,00,40,000
2. Reserve & Surplus Account
` `
1.4.2011 To Profit & Loss 5,00,000 1.4.2011 By Balance 8,00,000
A/c (Transfer) b/d
31.3.2012 To Dividend- Equity 4,80,000 31.3.2012 By Profit for 8,00,000
Preference 1,14,000 the year
1.4.12 to To Profit & Loss 21,80,000 31.3.2015 By Balance 24,74,000
31.3.15 A/c (Loss) c/d
To Loss of Stock 8,00,000
40,74,000 40,74,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 19

Question 5
(a) From the following information of Wealth Bank Limited, Prepare Profit and Loss Account
for the year ended 31 st March, 2016:
Particulars ` in lakhs Particulars ` in lakhs
Interest on Cash Credit 364 Interest paid on Recurring 17
Deposits
Interest on Overdraft 150 Interest paid on Savings Bank 12
Deposits
Interest on Term Loans 308 Auditor’s Fees and 24
Allowances
Income on Investments 168 Directors’ Fees and 50
Allowance
Interest on Balance with RBI 30 Advertisement 36
Commission on remittances 15 Salaries, allowances and 248
and transfer bonus to employees
Commission on Letters of 24 Payment to Provident Fund 56
Credit
Commission on Government 16 Printing & Stationery 28
Business
Profit on Sale of Land & 5 Repairs & Maintenance 10
Building
Loss on exchange 10 Postage, courier & telephones 16
transactions
Interest paid on Fixed 25
Deposits
Other Information:
` in lakhs
Earned Collected
(i) Interest on NPA is as follows:
Cash Credit 164 80
Term Loans 90 20
Overdraft 150 50
(ii) Classification of Non-performing Advances:
Standard 60
Sub-standard-fully secured 22

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Doubtful assets-fully unsecured 40


Doubtful assets covered fully by security:
Less than 1 year 6
More than 1 year upto 3 years 3
More than 3 years 2
Loss Assets 38
(iii) Investments
Bank should not keep more than 25% of its investment as ‘held-for-maturity'
investment; the market value of its rest 75% investment is `3,95,00,000 as on
31.03.2016.
(iv) Provide 35% of the profits towards provision for taxation.
(v) Transfer 20% of the profit to Statutory Reserves.
(b) Write short notes on the following principles and terms of Insurance Business:
(i) Principle of Indemnity
(ii) Insurable Interest
(iii) Principle of UBERRIMAE FIDEI
(iv) Catastrophic Loss (10 + 6 = 16 Marks)
Answer
(a) Wealth Bank Limited
Profit and Loss Account
For the year ended 31st March, 2016
` in lakhs
Particulars Schedule Year ended
31-3-2016
I Income
Interest earned 13 766
Other income 14 50
816
II Expenditure
Interest expended 15 54
Operating expenses 16 468
Provisions and Contingencies (Refer W.N.) 158.96
680.96

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 21

III Profit/Loss
Net Profit/(Loss) for the year 135.04
Net Profit/(Loss) brought forward Nil
135.04
IV Appropriations:
Transfer to Statutory reserve (20% of the profits) 27.01
Balance carried to the balance sheet 108.03
Total 135.04
Schedule 13 - Interest Earned
Year ended 31-3-2016
(` in lakhs)
I Interest/discount on advances/bills
Interest on cash credit (364-84) 280
Interest on overdraft (150-100) 50
Interest on term loans (308-70) 238 568
II Income on investments 168
III Interest on Balance with RBI 30
766
Interest on NPA is recognized on cash basis, hence difference of accrued interest not
received have been reduced from the total accrued interest.
Schedule 14 - Other Income
Year ended 31-3-2016
(` in lakhs)
I Commission, Exchange and Brokerage:
Commission on remittances and transfer 15
Commission on letter of credit 24
Commission on Government business 16 55
II Profit on sale of Land and Building 5
III Loss on Exchange Transactions (10)
50

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Schedule 15 - Interest Expended


Year ended 31-3-2016
(` in lakhs)

I Interest on Deposits
Fixed deposits 25
Recurring deposits 17
Saving bank deposits 12 54
Schedule 16 - Operating Expenses
Year Ended 31-3-2016
(` in lakhs)
I Payment to and provision for employees
Salaries, allowances and bonus 248
Provident Fund Contribution 56 304
II Printing and Stationery 28
III Advertisement and publicity 36
IV Directors‘ fees, allowances and expenses 50
V Auditors‘ fees and expenses 24
VI Postage, telegrams, telephones etc. 16
VII Repairs and maintenance 10
468
Working Note:
Provisions and contingencies (` in lakhs)
Provision for Advances:
Standard 60 × 0.40% 0.24
Sub-standard 22 × 15% 3.3
Doubtful not covered by security 40× 100% 40
Doubtful covered by security:
Less than 1 year 6 x 25% 1.5 4.7
More than 1 year but less 3 x 40% 1.2
than 3 years 2 x 100% 2.0
More than 3 years

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 23

Loss Assets (38 × 100%) 38


86.24
Provision for tax 35% of (Total Income –
Total Expenditure)
35% of [816-(54+468+86.24)]
35% of [816 - 608.24]
35% of 207.76 72.72
158.96

Notes :
1 As per RBI norms, every banking company incorporated in India is required to
transfer at least 25% of its profit to the statutory reserve. However, in the above
solution, transfer @ 20% of current profit has been done strictly on the basis of the
information given in the question.
2. Cost of investment is missing in the question. Therefore, it is assumed that cost of
75% of the investments, other than the investments held for maturity, is same as its
market value. Hence no diminution in the value is provided for in the given solution.
(b) (i) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called
indemnifier and the insured is the indemnified. In a contract of indemnity, only those
who suffer loss are compensated to the extent of actual loss suffered by them. One
cannot make profit by insuring his risks.
(ii) Insurable interest: All cannot enter into contract of insurance. For example, A
cannot insure the life of B who is a total stranger. But if B. happens to be his wife or
his debtor or business manager, A has insurable interest i.e. vested interest and
therefore he can insure the life of B. For every type of policy insurable interest is
insisted upon. In the absence of such interest the contract will amount to a wagering
contract.
(iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive
duty to tell the whole truth in relation to the subject-matter of the contract. There is
only the negative obligation to tell nothing but the truth. In a contract of insurance,
however there is an implied condition that each party must disclose every material
fact known to him. All contracts of insurance are contracts of uberrima fidei, i.e.,
contracts of utmost good faith. This is because the assessment of the risk and the
determination of the premium by the insurer depend on the full and frank disclosure
of all material facts in the proposal form.
(iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes
severe consequences such as bankruptcy to a family, organization, or insurer.

© The Institute of Chartered Accountants of India


24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Question 6
(a) There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department
Z at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to urealised
profit on departmental sales being eliminated.
Departmental profits after charging Managers' commission, but before adjustment of
unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.
(b) M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31 st March, 2015 and the
additional information given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on April, 2014
1st 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 25

Sundry Charges 160 -


Computers 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360
Additional Information:
(a) Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth ` 4,20,000 on 31st March, 2015.
(c) The rates of exchange may be taken as follows:
- On 01.04.2014 @ ` 55 per US $
- On 31.03.2015 @ ` 60 per US $
- Average exchange rate for the year @ ` 58 per US $
- Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended
31st March, 2015 and the balance sheet as on that date of Bangalore branch as would
appear in the books of New York head office of ABC & Co. You are informed that
Bangalore branch account showed a debit balance of US $ 29845.35 on 31.3.2015 in
New York books and there were no items pending reconciliation. (8 + 8= 16 Marks)
Answer
(a) Calculation of Correct Profit
Department X Department Y Department Z
` ` `
Profit after charging managers‘ 1,80,000 1,35,000 90,000
commission
Add back : Managers‘ commission (1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)
Profit before Manager‘s commission 1,75,500 1,27,500 90,000
Less : Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager‘s
commission 1,57,950 1,14,750 81,000

© The Institute of Chartered Accountants of India


26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Working Note:
Stock lying with
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized
Profit of:
Department X 1/5×75,000=15,000 20/120×57,000=9,500 24,500
Department Y 0.15×70,000=10,500 0.20×60,000=12,000 22,500
Department Z 20/120×30,000=5,000 25/125×25,000=5,000 10,000

(b) M/s ABC & Co.


Bangalore Branch Trial Balance in (US $)
as on 31st March, 2015
Conversion Dr. Cr.
rate per US $ US $ US $
(`)
Stock on 1.4.14 55 5,454.55 –
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 –
Rent, rates and taxes 58 6,206.90 –
Sundry charges 58 2,758.62 –
Computers – 6,000.00 –
Bank balance 60 7,000.00 –
New York office A/c – – 29,845.35
59,535.01 59,535.01
Trading and Profit & Loss Account
for the year ended 31st March, 2015
US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock 7,000.00
To Wages and salaries 9,655.17 (` 4,20,000/60)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 27

By Gross Loss c/d 1,213.16


28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on computers 3,600.00
(US $ 6,000 × 0.6)
13,778.68 13,778.68
Balance Sheet of Bangalore Branch
as on 31st March, 2015
Liabilities US $ Assets US $ US $
New York Office A/c 29,845.35 Computers 6,000.00
Less: Net Loss (13,778.68) 16,066.67 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00
Bank balance 7,000.00

25,066.67 25,066.67
Question 7
Answer any four of the following:
(a) What is the distinction between an Ordinary Partnership Firm and a Limited Liability
Partnership (LLP)?
(b) With reference to AS 29 "Provisions, Contingent Liabilities and Contingent Assets",
define:
(i) A Provision
(ii) A Liability
(iii) A Contingent Asset
(iv) Present Obligation
(c) Write short note on classification of advances in case of Banking Company.
(d) Give the basis of allocation of the following common expenditure among different
departments:

© The Institute of Chartered Accountants of India


28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

(i) Insurance of Building


(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses
(vi) Labour welfare expenses
(vii) PF/ESI contributions
(viii) Carriage inward
(e) Write short note on 'Suspension of Capitalisation' in context of Accounting Standard 16.
(4 x 4= 16 Marks)

Answer
(a) Distinction between an ordinary partnership firm and a Limited Liability
Partnership (LLP)
Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership Act, Limited Liability Partnerships
1932 Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Created by Law
Agreement
4 Body Corporate Not a body corporate Yes, after registration with ROC,
it becomes a body corporate
5 Separate Legal It has no separate legal Yes, all body corporate are said
Identity identity to have a separate legal identity.
6 Perpetual Partnerships do not have It has perpetual succession and
Succession perpetual succession individual partners may come
and go
7 Number of Partners Minimum 2 and Minimum 2 but no maximum limit
Maximum 20 (subject to
10 for banks)
8 Ownership of Firm cannot own any The LLP as an independent
Assets assets. The partners entity can own assets
own the assets of the
firm
9 Liability of Liability of the partners is Liability of the partners is limited
unlimited. Partners are to the extent of their contribution

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 29

Partners/Members severally and jointly towards LLP except in case of


liable for actions of other intentional fraud or wrongful act
partners and the firm of omission or commission by a
and their liability extends partner.
to personal assets
10 Principal Agent Partners are the agents Partners are agents of the firm
Relationship of the firm and of each only and not of other partners
other
(b) (i) A Provision is a liability which can be measured only by using a substantial degree
of estimation.
(ii) A Liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
(iii) A Contingent asset is a possible asset that arises from past events the existence
of which will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise.
(iv) Present obligation - An obligation is a present obligation if, based on the evidence
available, its existence at the balance sheet date is considered probable, i.e., more
likely than not.
(c) Banks are required to classify their advances into four broad groups:
(i) Standard Assets — Standard assets are those which do not disclose any problems
and which do not carry more than normal risk attached to the business. Such an
asset is not a NPA (Non-performing asset).
(ii) Sub-standard Assets — Sub-standard asset is one which has been classified as
NPA for a period not exceeding 12 months. In other words, such an asset will have
well-defined credit weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the bank will sustain some loss, if
deficiencies are not corrected.
(iii) Doubtful Assets — A doubtful asset is one which has remained sub-standard for a
period of at least 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as sub-standard with added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently
known facts, conditions and values, highly questionable and improbable.
(iv) Loss Assets — A loss asset is one where loss has been identified by the bank or
internal or external auditors or the RBI inspectors but the amount has not been
written off, wholly or partly. In other words such assets are considered uncollectable
or if collected of such low value that their being shown as bankable assets is not
warranted even though there may be some salvage or recoverable value.

© The Institute of Chartered Accountants of India


30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

The classification of advances should be done taking into account (i) Degree of well
defined credit weakness and (ii) Extent of dependence on collateral security for the
recovery of dues.
This classification is meant for the purpose of computing the amount of provision to
be made in respect of advances.
(d)
S.No. Expenses Basis
(i) Insurance of building Floor area occupied by each department (if
given) otherwise on time basis
(ii) Discount and bad debts Sales of each department
(iii) Discount received Purchases of each department
(iv) Repairs and maintenance of Value of assets of each department
capital assets otherwise on time basis
(v) Advertisement expenses Sales of each department otherwise on time
basis or equally among departments
(vi) Labour welfare expenses Number of employees in each department
(vii). PF/ESI contributions Wages and salaries of each department
(viii) Carriage inward Purchases of each department
(e) Capitalization of borrowing costs should be suspended during extended periods in which
active development is interrupted.
Borrowing costs may be incurred during an extended period in which the activities
necessary to prepare an asset for its intended use or sale are interrupted. Such costs
are costs of holding partially completed assets and do not qualify for capitalization.
However, capitalization of borrowing costs is not normally suspended during a period
when substantial technical and administrative work is being carried out. Capitalization of
borrowing costs is also not suspended when a temporary delay is a necessary part of the
process of getting an asset ready for its intended use or sale.
For example, capitalization continues during the extended period needed for inventories
to mature or the extended period during which high water levels delay construction of a
bridge, if such high water levels are common during the construction period in the
geographic region involved.

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer.
Question 1
Answer the following questions:
(a) Explain briefly the accounting treatment needed in the following cases as per AS 11 as
on 31.3.2015.
Sundry Debtors include amount receivable from Umesh ` 5,00,000 recorded at the
prevailing exchange rate on the date of sales, transaction recorded at US $ 1= ` 58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded
at US $ 1 = ` 55.60, taking exchange rate prevailing at the date of transaction.
US $ 1 = ` 61.20 on 31.3.2015.
(b) Aksat International Limited has given a machinery on lease for 36 months, and its useful
life is 60 months. Cost & fair market value of the machinery is ` 5,00,000. The amount
will be paid in 3 equal annual installments and the lessee will return the machinery to
lessor at termination of lease. The unguaranteed residual value at the end of 3 years is
` 50,000. IRR of investment is 10% and present value of annuity factor of ` 1 due at the
end of 3 years at 10% IRR is 2.4868 and present value of ` 1 due at the end of 3rd year
at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease or
operating lease. If it is finance lease, calculate unearned finance income.
(c) Balance Sheet of Anurag Trading Co. on 31st March, 2014 is given below:
Liabilities Amount (`) Assets Amount (`)
Capital 50,000 Fixed Assets 69,000
Profit and Loss A/c 22,000 Stock in Trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Payables 18,000 Deferred Expenditure 15,000
- Bank 3,000
1,33,000 1,33,000
Additional Information:
(i) Remaining life of fixed assets is 5 years with even use. The net realizable value of
fixed assets as on 31st March, 2015 was ` 64,000.

© The Institute of Chartered Accountants of India


2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

(ii) Firm’s sales and purchases for the year 2014-15 amounted to ` 5 lacs and ` 4.50
lacs respectively.
(iii) The cost and net realizable value of the stock were ` 34,000 and ` 38,000
respectively.
(iv) General Expenses for the year 2014-15 were ` 16,500.
(v) Deferred Expenditure is normally amortised equally over 4 years starting from
F.Y. 2013-14 i.e. ` 5,000 per year.
(vi) Out of debtors worth ` 10,000, collection of ` 4,000 depends on successful re-
design of certain product already supplied to the customer.
(vii) Closing trade payable is ` 10,000, which is likely to be settled at 95%.
(viii) There is pre-payment penalty of ` 2,000 for Bank loan outstanding.
Prepare Profit & loss Account for the year ended 31st March, 2015 by assuming it is not a
Going Concern.
(d) Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of
Financial Year 2014-15 for its residential project at LIBOR + 3 %. The interest is payable
at the end of the Financial Year. At the time of availment, exchange rate was ` 56 per
US $ and the rate as on 31st March, 2015 ` 62 per US $. If Shan Builders Limited
borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have
been 10.50%. Compute Borrowing Cost and exchange difference for the year ending 31 st
March, 2015 as per applicable Accounting Standards. (Applicable LIBOR is 1%).
(5 x 4 = 20 Marks)
Answer
(a) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange
differences arising on the settlement of monetary items or on reporting an enterprise’s
monetary items at rates different from those at which they were initially recorded during
the period, or reported in previous financial statements, should be recognized as income
or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long-
term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a non-depreciable capital asset can be accumulated in
a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.
Debtors Foreign Currency `
Rate
Initial recognition US $8,547 (5,00,000/58.50) 1 US $ = ` 58.50 5,00,000
Rate on Balance sheet date 1 US $ = ` 61.20

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 3

Exchange Difference Gain US $ 8,547 X 23,077


(61.20-58.50)
Treatment: Credit Profit and Loss A/c by ` 23,077
Long term Loan
Initial recognition US $ 1,07,913.67 1 US $ = ` 55.60 60,00,000
(60,00,000/55.60)
Rate on Balance sheet date 1 US $ = ` 61.20
Exchange Difference Loss US $ 1,07,913.67 X 6,04,317
(61.20 – 55.60)
Treatment: Credit Loan A/c
And Debit FCMITD A/C or Profit and Loss A/c by
` 6,04,317
Thus Exchange Difference on Long term loan amounting ` 6,04,317 may either be
charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation
Difference Account but exchange difference on debtors amounting ` 23,077 is required
to be transferred to Profit and Loss A/c.
(b) Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3 rd year
= ` 50,000 x 0.7513
= ` 37,565
Present value of lease payments = ` 5,00,000 – ` 37,565
= ` 4,62,435
The percentage of present value of lease payments to fair value of the equipment is
(` 4,62,435/ ` 5,00,000) x 100 = 92.487%.
Since, lease payments substantially covers the major portion of the fair value; the lease
constitutes a finance lease.
Calculation of Unearned Finance Income
Annual lease payment = ` 4,62,435/ 2.4868 =` 1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed
residual value
= (` 1,85,956 × 3) + ` 50,000
= ` 5,57,868 + ` 50,000 = ` 6,07,868
Unearned finance income = Gross investment - Present value of minimum lease
payments and unguaranteed residual value
= ` 6,07,868 – ` 5,00,000 = ` 1,07,868

© The Institute of Chartered Accountants of India


4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

(c) Profit and Loss Account of Anurag Trading Co. for the year ended 31st March, 2015
(Assuming business is not a going concern)
` `
To Opening Stock 36,000 By Sales 5,00,000
To Purchases 4,50,000 By Trade payables 500
To Expenses 16,500 By Closing Stock 38,000
To Depreciation (69,000-64,000) 5,000
To Provision for doubtful debts 4,000
To Deferred expenditure 15,000
To Loan penalty 2,000
To Net Profit 10,000
5,38,500 5,38,500
(d) (i) Interest for the period 2014-15
= US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost
would be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on foreign
currency borrowings plus the exchange difference to the extent of difference
between interest on local currency borrowing and interest on foreign currency
borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted
for as per AS 16 “Borrowing Costs” and the remaining ` 26 lakhs
(60 - 34) would be considered as the exchange difference to be accounted for as
per AS 11 “The Effects of Changes in Foreign Exchange Rates”.
Question 2
Yash, Tanish and Ruchika were partners sharing Profit & Loss in ratio of 3:2:1. Balance Sheet
of the firm is as follows:

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PAPER – 5: ADVANCED ACCOUNTING 5

Liabilities Amount (`) Assets Amount (`)


Fixed Capital: Fixed Assets 45,000
- Yash 50,000 Investments 15,000
- Tanish 20,000 Current Assets:
- Ruchika 10,000 - Stock 10,000
Current Accounts: - Debtors 27,500
- Yash 6,000 - Cash & Bank 12,500
- Ruchika 4,000 Current Account:
Unsecured Loans 15,000 - Tanish 10,000
Current Liabilities 15,000 -
1,20,000 1,20,000
On 1st April, 2014 all the partners agreed to form a new company YTR Pvt. Ltd., which shall
take over the firm as going concern including goodwill, but excluding cash and bank balances.
The following matters were also agreed upon:
(i) Goodwill shall be valued at 3 years’ purchase of super profits.
(ii) Actual profit for the purpose of goodwill valuation will be ` 20,000.
(iii) The normal rate of return will be 17.50% per annum of Fixed Capital.
(iv) All other Assets and Liabilities will be taken over at book value.
(v) The purchase consideration will be paid partly in share of ` 1 each and partly in cash.
Yash and Tanish to acquire interest in new company in the ratio of 3:2 at face value.
Ruchika agreed to retire after taking her share in cash.
(vi) Realisation expenses amounted to ` 5,000.
Prepare Realisation Account, Cash and Bank Account, YTR Private Limited Account and
Capital Accounts of the partners. (16 Marks)
Answer
Realisation Account
` `
To Sundry Assets By Unsecured Loans 15,000
Fixed Assets 45,000 By Current Liabilities 15,000
Investments 15,000 By YTR Ltd. (W.N. 2) 85,500
Stock 10,000
Debtors 27,500 97,500

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

To Bank A/c (Realisation 5,000


Expenses)
To Profit on realisation
transferred to
Yash 6,500
Tanish 4,333
Ruchika 2,167 13,000
1,15,500 1,15,500
Cash and Bank Account
` `
To Balance b/d 12,500 By Realisation A/c – Expenses 5,000
To YTR(P) Ltd. 8,667 By Ruchika Capital A/c 16,167
(Balancing figure)
21,167 21,167
YTR Pvt. Ltd.
` `
To Realisation A/c 85,500 By Cash and bank A/c 8,667
By Equity Shares in YTR Pvt. Ltd. A/c 76,833
_____ (Balancing figure)
85,500 85,500
Partners’ Capital Accounts
Yash Tanish Ruchika Yash Tanish Ruchika
` ` ` ` ` `
To Current A/c - 10,000 − By Balance b/d 50,000 20,000 10,000
To Cash and bank − − 16,167 By Current A/c 6,000 − 4,000
A/c
By Realisation A/c 6,500 4,333 2,167
To Equity Shares in 46,100 30,733 − By Yash’s capital 16,400 −
YTR Ltd. (in 3:2) A/c -adjustment
To Tanish’s capital
A/c- adjustment 16,400 ______ ______ ______ ______ ______
62,500 40,733 16,167 62,500 40,733 16,167

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PAPER – 5: ADVANCED ACCOUNTING 7

Working Notes:
1. Calculation of Goodwill
`
Actual profits 20,000
Less: Normal Rate of Return @ 17.5% of fixed capital worth ` 80,000 14,000
Super Profits 6,000
Goodwill valued at 3 years’ purchase 18,000

2. Calculation of Purchase Consideration


`
Total value of assets as per Balance Sheet 1,20,000
Less: Cash and Bank Balances 12,500
Current account 10,000
97,500
Add: Goodwill 18,000
1,15,500
Less: Liabilities taken over
Unsecured Loan 15,000
Current Liabilities 15,000
Purchase Consideration 85,500
Note: In the above answer, goodwill has not been raised but has been considered for the
purpose of computation of purchase consideration.
Question 3
(a) P Ltd. granted option for 8,000 equity shares on 1st October, 2010 at ` 80 when the market
price was ` 170. The vesting period is 4½ year, 4,000 unvested options lapsed on 1st
December, 2012, 3,000 options are exercised on 30th September, 2014 ∗ and 1,000 vested
options lapsed at the end of the exercise period. Pass Journal Entries for above transactions.
(b) Saurav Flour Mills Pvt. Ltd. floated a public issue of 1,50,000 Equity Shares having face
value of ` 10 each at par. A,B & C has taken underwriting of the issue in equal share with
firm underwriting of 25,000, 20,000 & 20,000 shares respectively. Applications were
received for 1,46,000 share out of which the marked applications were as under:
A - 24,600 B - 20,000 C - 15,000


PS: This date should be read as 30th September, 2015.

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8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

Credit of unmarked applications is to be given to underwriters equally. The agreed


underwriting commission was 5%. Total amount payable on application and allotment
was ` 5 and balance in calls.
Compute the following:
(i) Liability of each underwriter (In shares as well as in amount).
(ii) Commission due to underwriters
(iii) Net Cash paid/received from underwriters
Also pass Journal Entries for above. (8 + 8 = 16 Marks)
Answer
(a) In the books of P Ltd.
Journal Entries
Date Particulars ( `) ( `)
31.3.2011 Employees compensation expenses account Dr. 80,000
To Employee stock option outstanding 80,000
account
(Being compensation expenses for 6 months
recognized in respect of the employee stock
option i.e. 8,000 options granted to employees
at a discount of ` 90 each, amortised on
1
straight line basis over 4 years [(8,000 stock
2
options x ` 90)/4.5 years] x 0.5) (W.N.1)
Profit and loss account Dr. 80,000
To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and loss
account at the year end)
31.3.2012 Employees compensation expenses account Dr. 1,60,000
To Employee stock option outstanding 1,60,000
account
(Being compensation expense recognized in
respect of the employee stock option i.e. 8,000
options granted to employees at a discount of
` 90 each, amortised on straight line basis
1
over 4 years (8,000 stock options x ` 90)/4.5
2
years) x 1 year)

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PAPER – 5: ADVANCED ACCOUNTING 9

Profit and loss account Dr. 1,60,000


To Employees compensation expenses 1,60,000
account
(Being expenses transferred to profit and loss
account at year end)
31.3.2013 Employees compensation expenses account Dr. 80,000
To Employee stock option outstanding 80,000
account
(Being compensation expense recognized in
respect of the employee stock option i.e. 4,000
options at a discount of ` 90 each, amortised
1
on straight line basis over 4 years (4,000
2
stock options x ` 90)/4.5 years)
Employee stock option outstanding account Dr. 1,20,000
(W.N.2)
To General Reserve account (W.N.2) 1,20,000
(Being excess of employees compensation
expenses transferred to general reserve
account)
Profit and loss account Dr. 80,000
To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and loss
account at year end)
31.3.2014 Employees compensation expenses account Dr. 80,000
To Employee stock option outstanding 80,000
account
(Being compensation expenses recognized in
respect of the employee stock option i.e. 4,000
options at a discount of ` 90 each, amortised
1
on straight line basis over 4 years (4,000
2
stock options x ` 90)/4.5 years)
Profit and loss account Dr. 80,000
To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and loss
account at year end)

© The Institute of Chartered Accountants of India


10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

31.3.2015 Employees compensation expenses account Dr. 80,000


To Employee stock option outstanding 80,000
account
(Being compensation expenses recognized in
respect of the employee stock option i.e. 4,000
options at a discount of `90 each, amortised
1
on straight line basis over 4 years [(4,000
2
stock options x ` 90)/4.5 years])
Profit and loss account Dr. 80,000
To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and loss
account at year end)
30.9.2015 Bank A/c (3,000 × ` 80) Dr. 2,40,000
Employee stock option outstanding Dr. 2,70,000
To Equity share capital account 30,000
(3,000 x ` 10)
To Securities premium 4,80,000
(` 170 – ` 10) x 3,000
(Being 3,000 employee stock option exercised
at an exercise price of ` 80 each)
Employee stock option outstanding account Dr. 90,000
(W.N.3)
To General reserve account (W.N.3) 90,000
(Being ESOS outstanding A/c transferred to
General Reserve A/c on lapse of 1000 vested
options at the end of the exercise period)
Working Notes:
1. Fair value = ` 170 – ` 80 = ` 90
2. At 1.12.12, 4,000 unvested option lapsed on which till date expenses recognized to
be transferred to general reserve = ` (80,000 + 1,60,000) x 4,000/8,000
= ` 1,20,000
3. Expenses charged on lapsed vested options transferred to general reserve
= 1,000 x ` 90 = ` 90,000
Note: The nominal value of share is assumed as ` 10 in the above answer.

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 11

(b) (i) Calculation of liability of each underwriter


(Number of shares)
A B C Total
Gross Liability 50,000 50,000 50,000 1,50,000
Less: Marked applications
(excluding firm underwriting) (24,600) (20,000) (15,000) (59,600)
Balance 25,400 30,000 35,000 90,400
Less: Unmarked applications
including firm underwriting (28,800) (28,800) (28,800) (86,400)
Net Liability (3,400) 1,200 6,200 4,000
Less: Surplus of A allocated to B
and C 3,400 (1,200) (2,200) -
- - 4,000 4,000
Add: Firm underwriting 25,000 20,000 20,000 65,000
Total liability in shares 25,000 20,000 24,000 69,000
Total liability in amount @ `10 2,50,000 2,00,000 2,40,000 6,90,000
(ii) Commission due = 50,000 x ` 10 x 5% = ` 25,000 each
(ii) Calculation of net cash paid/received from underwriters
A B C Total
Total liability in amount 2,50,000 2,00,000 2,40,000 6,90,000
Less: Underwriting Commission
payable @ 5% on amount
underwritten (25,000) (25,000) (25,000) (75,000)
2,25,000 1,75,000 2,15,000 6,15,000
Amount already paid @ ` 5 (1,25,000) (1,00,000) (1,00,000) (3,25,000)
Net amount paid (in `) 1,00,000 75,000 1,15,000 2,90,000

(iv) Journal Entries in the books of the company (relating to underwriting)


`
1. A Dr. 1,25,000
B Dr. 1,00,000
C Dr. 1,20,000
To Share Capital Account 3,45,000
(Being allotment of shares to underwriters)

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

2. Underwriting commission A/c Dr. 75,000


To A 25,000
To B 25,000
To C 25,000
(Being amount of underwriting commission
payable)
3. Bank A/c Dr. 2,90,000
To A 1,00,000
To B 75,000
To C 1,15,000
(Being net amount received from
underwriters for shares allotted less
underwriting commission)
Note: It has been assumed that the applications received for 1,46,000 shares already include
firm underwritten shares.
Question 4
The following is the Balance Sheet of Star Ltd. as on 31st March, 2015:
`
A. Equity & Liabilities
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of ` 100 each fully paid 9,00,000
10,000 Equity Shares of ` 100 each fully paid. 10,00,000
(b) Reserve & Surplus:
Profit & Loss Account (2,00,000)
2. Non-current liabilities:
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” 6% Debentures (Secured on Chennai Works) 3,50,000
3. Current Liabilities and Provisions:
(a) Workmen’s Compensation Fund:
Bombay Works 10,000
Chennai Works 5,000
(b) Trade Payables 1,25,000
Total 24,90,000

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PAPER – 5: ADVANCED ACCOUNTING 13

B. Assets:
Non- current Assets:
1. Tangible Assets:
Bombay Works 9,50,000
Chennai Works 7,75,000
2. Investment:
Investments for Workman’s Compensation Fund 15,000
3 Current Assets:
(a) Inventories 4,50,000
(b) Trade Receivables 2,50,000
(c) Cash at Bank 50,000
24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the scheme
were as follows:
(i) Paid up value of 8%∗ Preference Share to be reduced to ` 80, but the rate of dividend
being raised to 9%.
(ii) Paid up value of Equity Shares to be reduced to ` 10.
(iii) The directors to refund ` 50,000 of the fees previously received by them.
(iv) Debenture holders forego their interest of ` 26,000 which is included among the Sundry
Creditors.
(v) The preference shareholders agreed to waive their claims for preference share dividend,
which is in arrears for the last three years.
(vi) “B” 6% Debenture holders agreed to take over the Chennai Works at ` 4,25,000 and to
accept an allotment of 1,500 equity shares of ` 10 each at par, and upon their forming a
company called Zia Ltd. (to take over the Chennai Works) they allotted 9,000 equity
shares of ` 10 each fully paid at par to Star Ltd.
(vii) The Chennai Worksmen’s compensation fund disclosed that there were actual liabilities
of ` 1,000 only. As a consequence, the investments of the fund were realized to the
extent of the balance. Entire investments were sold at a profit of 10% on book value and
the proceeds were utilized for part payment of the creditors.
(viii) Stock was to be written off by ` 1,90,000 and a provision for doubtful debts is to be made
to the extent of ` 20,000.
(ix) Chennai works completely written off.


PS: To be read as 7%.

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

(x) Any balance of the Capital Reduction Account is to be applied as two-third to write off the
value of Bombay Works and one-third to Capital Reserve.
Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried
into effect. (16 Marks)
Answer
In the books of Star Ltd.
Journal Entries
Amount Amount
Particulars
` `
(i) 7% Preference share capital (` 100) Dr. 9,00,000
To 9% Preference share capital (` 80) 7,20,000
To Capital reduction A/c 1,80,000
(Being preference shares reduced to ` 80 and
also rate of dividend raised from 7% to 9%)
(ii) Equity share capital A/c (` 100 each) Dr. 10,00,000
To Equity share capital A/c (` 10 each) 1,00,000
To Capital reduction A/c 9,00,000
(Being reduction of nominal value of one share of
` 100 each to ` 10 each)
(iii) Bank A/c Dr. 50,000
To Capital reduction A/c 50,000
(Being directors refunded the fee amount)
(iv) Trade payables A/c (Interest on debentures) Dr. 26,000
To Capital reduction A/c 26,000
(Being interest forgone by the debenture
holders)
(v) No entry required
(vi) a ‘B’ 6% Debentures A/c Dr. 3,50,000
To Debentures holders A/c 3,50,000
(Being amount due to Debentures holders )
b Debentures holders A/c Dr. 4,40,000
To Chennai Works A/c 4,25,000

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 15

To Equity share capital A/c 15,000


(Being Chennai works taken over and equity
shares issued to ‘B’ 6% Debenture holders )
c Equity share of Zia ltd. A/c Dr. 90,000
To Debentures holders A/c 90,000
(Being 9,000 equity shares of Zia Ltd. issued by
Debentures holders )
(vii) a Chennai Works – Workmen Compensation Fund Dr. 4,000
To Capital reduction A/c 4,000
(Being difference due to reduced amount of actual
liability transferred to capital reduction account)
b Bank A/c Dr. 15,400
To Investment for Workmen Compensation Fund 14,000
To Capital reduction A/c 1,400
(Being investment for Workmen Compensation
Fund sold @ 10% profit)
c Trade Payables A/c Dr. 15,400
To Bank A/c 15,400
(Being part payment made to trade payables)
(viii) Capital reduction A/c Dr. 2,10,000
To Provision for Doubtful Debts A/c 20,000
To Inventory A/c 1,90,000
(Being assets revalued)
(ix) Capital reduction A/c Dr 5,50,000
To Profit & Loss A/c 2,00,000
To Tangible Assets – Chennai Works 3,50,000 ∗
(Being assets revalued and losses written off)
(x) Capital reduction A/c Dr 4,01,400
To Tangible Assets – Bombay Works 2,67,600
To Capital reserve A/c 1,33,800
(Being assets revalued and remaining amount
transferred to capital reserve account)


` 7,75,000 less ` 4,25,000

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

Question 5
(a) Prepare Revenue Account of M/s Ishan Insurance Co. engaged in marine insurance
business:
Particulars Direct Business Re-insurance
(`) (`)
I. Premium
Received 3,60,000 38,000
Receivable - 1st April, 2014 10,000 1,600
- 31st March, 2015 16,000 1,800
Premium Paid - 24,000
Premium Payable - 1st April, 2014 - 1,000
- 31st March, 2015 - 2,200
II. Claims
Paid 1,54,000 14,000
Payable - 1stApril , 2014 78,000 1,500
- 31st March, 2015 16,000 4,200
Received - 17,000
Receivable - 1st April, 2014 - 1,400
- 31st March, 2015 - 1,900
III. Commission
On insurance accepted 96,000 5,600
On insurance ceded - 8,000
Details of Other Expenses & Income is as below:
`
Establishment Expenses 30,000
Rent, rate & taxes 14,000
Printing & Stationery 1,800
Income tax paid 10,000
Income from Dividend 18,000
Legal Expenses (Inclusive of ` 1,200 in connection with settlement of claims) 2,000
Double Income Tax Refund 24,000
Bad debts 1,300
Profit on sale of furniture 700

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PAPER – 5: ADVANCED ACCOUNTING 17

Balance of fund as on 1st April, 2014 was ` 7,65,000 including Additional reserve of ` 33,000.
Additional reserve is to be created @ 5% of the net premium of the year.
(b) ABC bank Ltd. has a balance of ` 40 crores in “Rebate on bills discounted” account as
on 31st March, 2014. The Bank provides you the following information:
(i) During the financial year ending 31st March, 2015 ABC Bank Ltd. discounted bills of
exchange of ` 5,000 crores charging interest @ 14% and the average period of
discount being 146 days.
(ii) Bills of exchange of ` 500 crores were due for realization from the
acceptors/customers after 31st March, 2015. The average period of outstanding
after 31st March, 2015 being 73 days. These bills of exchange of ` 500 crores were
discounted charging interest @ 14% p.a.
You are requested to pass necessary Journal Entries in the books of ABC Bank Ltd. for
the above transactions. (12 + 4 =16 Marks)
Answer
(a) Form B – RA
Name of Insurer: M/s Ishan Co.
Revenue Account for the year ended 31st March, 2015
Schedule Current Year
`
1. Premium earned (net) 1 7,46,050
2. Interest, Dividends and Rent – Assumed Gross 18,000
Total (A) 7,64,050
1. Claims incurred (net) 2 92,400
2. Commission 3 93,600
3. Operating expenses related to Insurance business 4 46,600
Total (B) 2,32,600
Operating Profit from Marine Insurance business (A-B) 5,31,450
Schedules forming part of Revenue Account

Current Year
`
Schedule –1
Premium earned (net)
Total Premium earned 4,04,200

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

Less: Premium on reinsurance ceded (25,200)


Total Premium earned (net) 3,79,000
Adjustment for change in reserve for unexpired risk [(opening)
` 7,65,000 – (closing) ` 3,97,950(3,79,000 + 18,950)] 3,67,050
Net Premium earned 7,46,050
Schedule – 2
Claims incurred (net) 92,400
Schedule – 3
Commission paid
Direct 96,000
Add: Re-insurance accepted 5,600
Less: Re-insurance ceded (8,000)
Net Commission 93,600
Schedule – 4
Operating expenses related to insurance business
Establishment expenses 30,000
Rent, rates and taxes 14,000
Printing and stationery 1,800
Legal and professional charges ` (2,000-1,200) 800
46,600
Note: Profit on sale of furniture, Double income tax refund, bad debts and Income tax
paid have not been shown in the above revenue account assuming that these items are
not related specifically with marine business. Thus, they will be shown in the profit and
loss account of M/s Ishan Co.
Working Notes:
Direct Re-insurance
` `
1. Total Premium Income
Received 3,60,000 38,000
Add: Receivable on 31st March, 2015 16,000 1,800
3,76,000 39,800

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 19

Less: Receivable on 1st April, 2014 (10,000) (1,600)


3,66,000 38,200
Total premium income ` 3,66,000 + ` 38,200 = ` 4,04,200
2. Premium Expense on reinsurance `
Premium Paid during the year 24,000
Add: Payable on 31st March, 2015 2,200
26,200
Less: Payable on 1st April, 2014 (1,000)
25,200
3. Claims Paid
Direct Business 1,54,000
Re-insurance 14,000
Legal Expenses 1,200
1,69,200
Less: Re-insurance claims received (17,000)
1,52,200
4. Claims outstanding as on 31st March, 2015
Direct 16,000
Re-insurance 4,200
20,200
Less: Recoverable from Re-insurers on 31st March, 2015 (1,900)
18,300
5. Claims outstanding as on 1st April, 2014
Direct 78,000
Re-insurance 1,500
79,500
Less: Recoverable from Re-insurers on 1st April, 2014 (1,400)
78,100
6. Claims incurred during the year
Net Claims Paid + Claims outstanding on 31.3.2015 – Claims
outstanding on 1.4.2014 = ` 1,52,200 + ` 18,300 – ` 78,100 92,400

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

(b) In the books of ABC Bank Ltd.


Journal Entries ` in crores
Particulars Debit Credit
Rebate on bills discounted A/c Dr. 40
To Discount on bills A/c 40
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 5,000
To Discount on bills A/c 280
To Clients A/c 4,720
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 14
To Rebate on bills discounted A/c 14
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
Discount on bills A/c Dr. 306
To Profit and Loss A/c 306
(Being the amount of income for the year from discounting
of bills of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
` 5,000 crores x 14/100 x 146/365 = ` 280 crores
2. Calculation of rebate on bill discounted
` 500 crores x 14/100 x 73/365 = `14 crores
3. Income from bills discounted transferred to Profit and Loss A/c would be calculated
by preparing Discount on bills A/c.
Discount on bills A/c
` in crores
Date Particulars Amount Date Particulars Amount
31.3.2015 To Rebate on bills 14 1.4.2014 By Rebate on bills 40
discounted discounted b/d

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 21

” To Profit and Loss 2014-15 By Bills purchased


A/c (Bal. Fig.) 306 and discounted 280
320 320

Question 6
(a) Raju Industries, Kolkata has a branch in Delhi to which office goods are invoiced at cost
plus 25%. The branch sells both for cash and on credit. Branch expenses are paid direct
from head office, and branch has to remit all cash received to the Head office Bank
Account.
From the following details, relating to calendar year 2014, prepare the accounts in the
Head Office Ledger and ascertain the Branch Profit. Branch does not maintain any books
of account, but sends weekly returns to the Head Office.
Particulars Amount in `
Goods received from Head Office at Invoice Price 6,00,000
Returns to Head Office at Invoice Price 12,000
Stock at Delhi as on 1st Jan. 2014 60,000
Sales during the year - Cash 1,80,000
- Credit 3,80,000
Sundry Debtors at Delhi as on 1st Jan., 2014 72,000
Discount allowed to debtors 8,000
Bad Debts in the year 6,000
Sales returns at Delhi Branch 6,000
Rent, Rates, Taxes at Branch 16,000
Salaries, Wages, Bonus at Branch 62,000
Office Expenses 6,000
Stock at Branch on 31st December, 2014 1,20,000
(b) Sona Ltd. has three departments – P, Q and R. From the following particulars given
below, compute:
(i) The departmental results;
(ii) The value of stock as on 31st December, 2014:
Particulars P Q R
Stock as on 01.01.2014 30,000 45,000 15,000
Purchases 1,60,000 1,30,000 60,000

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22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

Actual Sales 1,88,000 1,66,000 93,000


Gross Profit on normal sales price 25% 33⅓% 40%

During the year 2014 some items were sold at discount and these discounts were
reflected in the above sales value. The details are given below:
Particulars P Q R
Sales at normal price 15,000 8,000 6,000
Sales at actual price 11,000 6,,000 4,000
(12 + 4 = 16 Marks)
Answer
(a) Delhi Branch Stock Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 60,000 By Goods sent to branch 12,000
To Goods sent to A/c (Returns)
branch A/c 6,00,000 By Bank A/c (Cash sales) 1,80,000
To Branch debtors A/c 6,000 By Branch debtors A/c 3,80,000
(Returns) (credit sales)
To Branch adjustment A/c 26,000 By Balance c/d 1,20,000
(Surplus over invoice
price)
6,92,000 6,92,000
Delhi Branch Adjustment Account
Particulars Amount Particulars Amount
(`) (`)
To Stock reserve - 20% 24,000 By Delhi Branch stock A/c 26,000
of ` 1,20,000 (Closing By Stock reserve - 20% of 12,000
stock) ` 60,000 (Opening stock)
To Branch profit & loss 1,31,600 By Goods sent to branch A/c 1,17,600
A/c – 20% of
` 5,88,000
1,55,600 1,55,600

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PAPER – 5: ADVANCED ACCOUNTING 23

Branch Expenses Account


Particulars Amount Particulars Amount
(`) (`)
To Bank A/c (Rent, rates & 16,000 By Branch profit and loss 84,000
taxes) A/c (Transfer)
To Bank A/c (Salaries & wages) 62,000
To Bank A/c (Office expenses) 6,000
84,000 84,000
Branch Debtors Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 72,000 By Bank A/c 4,32,000 ∗
To Branch stock A/c 3,80,000 By Branch profit and loss A/c 14,000
(Bad debts and discount)
By Branch stock A/c (Sales 6,000
returns)
4,52,000 4,52,000
Goods sent to Branch Account
Particulars Amount Particulars Amount
(`) (`)
To Branch stock A/c 12,000 By Branch stock A/c 6,00,000
To Branch adjustment A/c 1,17,600
To Purchases A/c 4,70,400
6,00,000 6,00,000
Branch Profit & Loss Account
Particulars Amount Particulars Amount
(`) (`)
To Branch expenses A/c 84,000 By Branch adjustment A/c 1,31,600
To Branch debtors A/c 8,000
(Discount)


In the absence of information about closing balance of Branch debtors A/c and cash received from
debtors. The closing balance of debtors is assumed as nil and balancing figure is considered as cash
received from debtors.

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24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

To Branch debtors A/c 6,000


(Bad Debts)
To Net profit (transferred to
Profit & Loss A/c) 33,600
1,31,600 1,31,600
Note: The answer has been given on the basis of Stock and Debtors Method.
(b) Calculation of Departmental Results:
P ( `) Q (`) R ( `)
Actual Sales 1,88,000 1,66,000 93,000
Add: Discount (Refer W.N.) 4,000 2,000 2,000
Normal sale 1,92,000 1,68,000 95,000
Gross profit % on normal sales 25% 33.33% 40%
Normal gross profit 48,000 56,000 38,000
Less: Discount (4,000) (2,000) (2,000)
Actual gross profit 44,000 54,000 36,000
Computation of value of stock as on 31st Dec. 2014
Departments P Q R
` ` `
Stock (on 1.1. 2014) 30,000 45,000 15,000
Add: Purchases 1,60,000 1,30,000 60,000
1,90,000 1,75,000 75,000
Add: Actual gross profit 44,000 54,000 36,000
2,34,000 2,29,000 1,11,000
Less: Actual Sales (1,88,000) (1,66,000) (93,000)
Closing stock as on 31.12.2014 (bal.fig.) 46,000 63,000 18,000
Working Note:
Calculation of discount on sales
Departments P Q R
` ` `
Sales at normal price 15,000 8,000 6,000
Less: Sales at actual price (11,000) (6,000) (4,000)
4,000 2,000 2,000

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PAPER – 5: ADVANCED ACCOUNTING 25

Question 7
Answer any four of the following:
(a) What do you mean by “Weighted average number of equity shares outstanding during the
period” and why is it required to be calculated? Compute weighted average number of
equity shares in the following case:
No. of shares
1st April, 2014 Balance of Equity Shares 5,00,000
30th June, 2014 Balance Shares issued for cash 1,00,000
15th January, 2015 Equity Shares bought back 50,000
31st March, 2015 Balance of Equity Shares 5,50,000
(b) What are the contents of “Liquidators” statement of account”?
(c) Specify the conditions when cash credit overdraft account is treated as “Out of order”?
(d) Write the LISTS which should accompany the Statement of Affairs, in case of a winding
up by Court.
(e) Pass necessary Journal Entries (with narration) in the books of branch to rectify or adjust
the following:
(i) Branch Paid ` 24,000 as salary to HO Supervisor and the amount was debited to
Salaries Account by the branch.
(ii) Head Office Expenses allocated to branch were ` 22,500, but these expenditure
were not recorded by the branch.
(iii) HO collected ` 50,000 directly from the customer on branch’s behalf.
(iv) Branch has sent remittance of ` 1,20,000 but the same has not yet been received
by HO. (4 x 4= 16 Marks)
Answer
(a) As per AS 20, “Earnings Per Share”, the weighted average number of equity shares
outstanding during the period reflects the fact that the amount of shareholders’ capital
may have varied during the period as a result of a larger or lesser number of shares
outstanding at any time.
For the purpose of calculating basic earnings per share, the number of equity shares
should be the weighted average number of equity shares outstanding during the period.

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26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

Computation of weighted average number of shares outstanding during the period


Period Weights Weighted average
Date No. of equity shares
outstanding (months) number of shares
(1) (2) (3) (4) (5) = (2) x (4)
1st April, 2014 5,00,000 (Opening) 3 months 3 /12 1,25,000
6,00,000 (after
30th June 2014 6.5months 6.5/12 3,25,000
Additional issue)
5,50,000 (after Buy
15th Jan, 2015 2.5 months 2.5/12 1,14,583
back)
31st March, 2015 5,50,000 (Balance) 0 month 0/12 -
Total 5,64,583
(b) The contents of the liquidator’s statement of account are as follows:
Receipts
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it,
if any, is entered as ‘surplus from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay
necessary amount (not exceeding the amount of uncalled capital) if creditors’
claims/claims of preference shareholders can’t be satisfied with the available
amount. Preference shareholders would be called upon to contribute (not exceeding
the amount as yet uncalled on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are
shown on the Receipts side.
(e) Receipts as per Trading Account are also included on the Receipts side.
Payments made to redeem securities and cost of execution and payments per Trading
Account are deducted from total receipts.
Payments
(a) Legal charges;
(b) Liquidator’s expenses;
(c) Debentureholders (including interest up to the date of winding up if the company is
insolvent and to the date of payment if it is solvent);
(d) Creditors:
(i) Preferential creditors (in actual practice, preferential creditors are paid before
debenture holders having a floating charge);

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PAPER – 5: ADVANCED ACCOUNTING 27

(ii) Unsecured creditors;


(e) Preferential shareholders (Arrears of dividends on cumulative preference shares
should be paid up to the date of commencement of winding up); and
(f) Equity shareholders.
(c) A cash credit/overdraft account is treated as 'out of order' if any of the following
conditions is satisfied:
(1) The outstanding balance remains continuously in excess of the sanctioned
limit/drawing power for a continuous period of 90 days prior to the Balance sheet date.
(2) Though the outstanding balance is less than the sanctioned limit/drawing power –
(i) there have been no credits for a continuous period of more than 90 days prior
to the date of balance sheet; or
(ii) credits during the aforesaid period are not enough to cover the interest debited
during the same period.
(3) if borrower fails to submit stock statement for continuous period of 6 months.
(4) Further, any amount due to the bank under any credit facility is ‘overdue’ if it is not
paid on the due date fixed by the bank.
(d) Statement of Affairs should accompany the following eight lists in case of winding up by
the court:
List A Full particulars of every description of property not specifically pledged and
included in any other list are to be set forth in this list.
List B Assets specifically pledged and creditors fully or partly secured.
List C Preferential creditors for rates, taxes, salaries, wages and otherwise.
List D List of debenture holders secured by a floating charge.
List E Unsecured creditors.
List F List of preference shareholders.
List G List of equity shareholders.
List H Deficiency or surplus account.
(e) Journal Entries in the Books of Branch
Amount Amount
Particulars
` `
(i) Head office account Dr. 24,000
To Salaries account 24,000
(Being the rectification of salary paid on behalf of H.O.)

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28 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2015

(ii) Expenses account Dr. 22,500


To Head office account 22,500
(Being the allocated expenditure by the head office
recorded in branch books)
(iii) Head office account Dr. 50,000
To Debtors account 50,000
(Being the adjustment of collection from branch
debtors)
(iv) No Entry in branch books

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The Suggested Answers hosted in the website do not constitute the basis for evaluation of the
students’ answers in the examination. The answers are prepared by the Faculty of the Board
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responsible for the correctness or otherwise of the answers published herein.

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PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer.
Question 1
(a) M/s. Shishir Ltd., a public Sector Company, provides consultancy and engineering
services to its clients. In the year 2014-15, the Government set up a commission to
decide about the pay revision. The pay will be revised with respect from 1-1-2012 based
on the recommendations of the commission. The company makes the provision of
` 1250 lakhs for pay revision in the financial year 2014-15 on the estimated basis as the
report of the commission is yet to come. As per the contracts with client on cost plus job,
the billing is done on the actual payment made to the employees and allocated to jobs
based on hours booked by these employees on each job.
The company discloses through notes to accounts:
“Salaries and benefits include the provision of ` 1250 lakhs in respect of pay revision.
The amount chargeable from reimbursable jobs will be billed as per the contract when
the actual payment is made.”
The Accountant feels that the company should also book/recognize the income by
` 1250 lakhs in Profit & Loss Account as per the terms of the contract. Otherwise, it will
be the violation of matching concept & understatement of profit.
Comment on the opinion of the Accountant with reference to relevant Accounting
Standards.
(b) M/s. Mahesh Ltd. is developing a new production process. During the Financial Year
ended 31st March, 2013, the total expenditure incurred on the process was ` 60 lacs.
The production process met the criteria for recognition as an intangible asset on 1 st
December, 2012. Expenditure incurred till this date was ` 32 lacs.
Further expenditure incurred on the process for the Financial Year ending 31st March,
2014 was ` 90 lacs. As on 31-03-2014, the recoverable account of know-how embodied
in the process is estimated to be ` 82 lacs. This includes estimates of future cash
outflows and inflows:
You are required to work out:
(i) What is the expenditure to be charged to Profit & Loss Account for the year ended
31st March, 2013 ?
(ii) What is the carrying amount of the intangible asset as on 31 st March, 2013 ?

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2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

(iii) What is the expenditure to be charged to Profit & Loss Account for the year ended
31st March, 2014 ?
(iv) What is the carrying amount of the intangible asset as on 31 st March, 2014 ?
(c) M/s. Ayush Ltd. began construction of a new building on 1 st January, 2014. It obtained
` 3 lakh special loan to finance the construction of the building on 1st January, 2014 at an
interest rate of 12% p.a. The company's other outstanding two non-specific loans were:
Amount Rate of Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
The expenditure that were made on the building project were as follows:
Amount (`)
January, 2014 3,00,000
April, 2014 3,50,000
July, 2014 5,50,000
December, 2014 1,50,000
Building was completed on 31st December, 2014. Following the principles prescribed in
AS 16 ‘Borrowing Cost’, calculate the amount of interest to be capitalized and pass one
Journal entry for capitalizing the cost and borrowing in respect of the building.
(d) M/s. A Ltd. had 8,00,000 Equity Shares outstanding on 1st April, 2013. The Company
earned a profit of ` 20,00,000 during the year 2013-14. The average fair value per share
during 2013-14 was ` 40. The Company has given Share Option to its employees of
1,00,000 Equity Shares at option price of ` 20.
Calculate Basic EPS and Diluted EPS. (4 x 5 = 20 Marks)
Answer
(a) As per AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, where some or
all of the expenditure required to settle a provision is expected to be reimbursed by
another party, the reimbursement should be recognized when, and only when, it is
virtually certain that reimbursement will be received if the enterprise settles the
obligation. The reimbursement should be treated as a separate asset. The amount
recognized for the reimbursement should not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a
contingent liability is matched by a related counter-claim or claim against a third party. In
such cases, the amount of the provision is determined after taking into account the
probable recovery under the claim if no significant uncertainty as to its measurability or
collectability exists.

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PAPER – 5 : ADVANCED ACCOUNTING 3

In this case, the provision of salary to employees of ` 1,250 lakhs will be ultimately
collected from the client, as per the terms of the contract. Therefore, the liability of
` 1,250 lakhs is matched by the counter claim from the client. Hence, the provision for
salary of employees should be matched with the reimbursable asset to be claimed from
the client. It appears that the whole amount of ` 1,250 lakhs is recoverable from client
and there is no significant uncertainty about the collection. Hence, the net charge to profit
and loss account should be nil.
The opinion of the accountant regarding recognition of income of ` 1,250 lakhs is not as
per AS 29 and also the concept of prudence will not be followed if ` 1,250 lakhs is
simultaneously recognized as income. ` 1,250 lakhs is not the revenue at present but
only reimbursement of claim for which an asset is created. However the accountant is
correct to the extent as that non- recognition of ` 1,250 lakhs as income will result in the
understatement of profit. To avoid this, in the statement of profit and loss, expense
relating to provision may be presented net of the amount recognized for reimbursement.
(b) As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending
31.03.2013
` 32 lakhs is recognized as an expense because the recognition criteria were not
met until 1st December 2012. This expenditure will not form part of the cost of the
production process recognized as an intangible asset in the balance sheet.
(ii) Carrying value of intangible asset as on 31.03.2013
At the end of financial year, on 31st March 2013, the production process will be
recognized (i.e. carrying amount) as an intangible asset at a cost of ` 28 (60-32)
lacs (expenditure incurred since the date the recognition criteria were met, i.e., from
1st December 2012).
(iii) Expenditure to be charged to Profit and Loss account for the year ended
31.03.2014
(` in lacs)
Carrying Amount as on 31.03.2013 28
Expenditure during 2013 – 2014 90
Book Value 118
Recoverable Amount (82)
Impairment loss 36
` 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2014.

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4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

(iv) Carrying value of intangible asset as on 31.03.2014


(` in lacs)
Book Value 118
Less: Impairment loss (36)
Carrying amount as on 31.03.2014 82
(c) (i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 = 3,00,000
` 3,50,000 x 9 / 12 = 2,62,500
` 5,50,000 x 6 / 12 = 2,75,000
` 1,50,000 x 1 / 12 = 12,500
13,50,000 8,50,000
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of Amount of interest
interest (`)
6,00,000 11% = 66,000
11,00,000 13% = 1,43,000
17,00,000 2,09,000
Weighted average rate of interest = 12.29%
 2,09,000 
 100 
 17,00,000 
(iii) Interest amount to be capitalized
`
Specific borrowings (` 3,00,000 x 12%) = 36,000
Non-specific borrowings
[` 5,50,000(` 8,50,000 – ` 3,00,000) x 12.29%] = 67,595
Amount of interest to be capitalized = 1,03,595


Rounded off

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PAPER – 5 : ADVANCED ACCOUNTING 5

(iv) Journal Entry


Date Particulars Dr. (`) Cr. (`)
31.12.2014 Building account (13,50,000+1,03,595) Dr. 14,53,595
To Bank account 14,53,595
(Being amount of cost of building and
borrowing cost thereon capitalized)
(d) Computation of Earnings Per Share
Earnings Shares Earnings per share
` `
Net Profit for the year 2013-14 20,00,000
Number of shares outstanding during
the year 2013-14 8,00,000
Basic Earnings Per Share 2.50
20,00,000

8,00,000
Number of shares under option 1,00,000
Number of shares that would have
been issued at fair value (Refer Note)
[1,00,000 x 20/40] (50,000)
Diluted Earnings Per Share
20,00,000
= 20,00,000 8,50,000 2.35
8,50,000

Note:
The earnings have not been increased as the total number of shares has been increased
only by the number of shares (50,000) deemed for the purpose of the computation to
have been issued for no consideration.
Question 2
X, Y and Z were in partnership sharing profits and losses 3:2:1. There was no provision in the
agreement for interest on capital or drawings.
X died on 31.3.2013 and on that date, the partners' balance were as under:
Capital Account: X - ` 60,000, Y - ` 40,000, Z - ` 20,000.
Current Account: X - ` 40,000 (Cr.), Y - `30,000 (Cr.), Z - ` 10,000 (Dr.)

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6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

By the partnership agreement, the sum due to X's estate was required to be paid within a
period of 3 years, and minimum installment of ` 30,000 each were to be paid, the first such
installment falling due immediately after death and the subsequent installments at half-yearly
intervals. Interest @ 6% p.a. was to be credited half yearly.
In ascertaining his share, goodwill (not recorded in the books) was to be valued at ` 90,000
and the assets, excluding the Joint Endowment Policy (mentioned below), were valued at
` 60,000 in excess of the book values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets.
The Joint Assurance Policy shown in the books at ` 40,000 matured on 1.4.2014, realizing
` 52,000; payments of ` 30,000 each were made to X's Executors on 1.4.2013, 30.9.2013 and
31.3.2014. Y and Z continued trading on the same terms as previously and the· net profit for the
year ending 31.3.2014 (before charging the interest due to X's estate) amounted to -- ` 52,000.
During that period, the partners' drawings were Y - ` 15,000; and Z -` 8,000.
On 1.4.2014, the partnership was dissolved and an offer to purchase the business as a going
concern for ` 1,80,000 was accepted on that day. A cheque for that sum was received on
30.6.2014.
The balance due to X's estate, including interest, was paid on 30.6.214 and on that day, Y and
Z received the sums due to them.
You are required to write-up the Partners’ Capital and Current Accounts from 1.4.2013 to
30.6.2014. Show also the account of the executors of X. (16 Marks)
Answer
Partners’ Current Accounts
Particulars X Y Z Particulars X Y Z
31.3.2013 ` ` ` 31.3.2013 ` ` `
To Balance b/d --- ---- 10,000 By Balance b/d 40,000 30,000 --
To X’s Current A/c - 30,000 15,000 By Y’s Current A/c 30,000 -- --
– goodwill – goodwill
To X’s Current A/c - 20,000 10,000 By Z’s Current A/c 15,000 - -
– Revaluation – goodwill
Profit
To X’s Capital A/c 1,21,000 - - By Y’s Current A/c 20,000 - -
– transfer – Revaluation
profit
By Z’s Current A/c 10,000
– Revaluation
profit


To be read as 1.4.2013

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PAPER – 5 : ADVANCED ACCOUNTING 7

By Joint assurance 6,000 4,000 2,000


policy
By Balance c/d 16,000 33,000
1,21,000 50,000 35,000 1,21,000 50,000 35,000
1.4.13 31.3.14
To Balance b/d 16,000 33,000 By Profit & Loss 29,136 14,568
31.3.14 Appropriation
A/c
To Drawings A/c 15,000 8,000 By Balance c/d 1,864 26,432
31,000 41,000 31,000 41,000
1.4.14 1.4.14
To Balance b/d 1,864 26,432 By Realisation A/c - 31,674 15,837
profit
To Y’s Capital A/c 29,810 --- By Z’s Capital A/c - --- 10,595
– transfer transfer
31,674 26,432 31,674 26,432

Partners’ Capital Accounts


Particulars X Y Z Particulars X Y Z
` ` ` ` ` `
31.3.13 31.3.13
To X’s Executors A/c 1,81,000 ---- --- By Balance b/d 60,000 40,000 20,000
To Balance c/d --- 40,000 20,000 By X’s Current A/c 1,21,000 -- --
1,81,000 40,000 20,000 1,81,000 40,000 20,000
31.3.14 1.4.13
To Balance c/d 40,000 20,000 By Balance b/d 40,000 20,000
40,000 20,000 40,000 20,000
1.4.14 1.4.14
To Z’s Current A/c – --- 10,595 By Balance b/d 40,000 20,000
transfer
30.6.14 1.4.14
To Bank A/c 69,810 9,405 By Y’s Current
A/c – transfer 29,810 ---
69,810 20,000 69,810 20,000

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8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

X’s Executor’s Account


Date Particulars ` Date Particulars `
31.3.13 To Bank A/c 30,000 31.3.13 By X’s Capital A/c 1,81,000
31.3.13 To Balance c/d 1,51,000
1,81,000 1,81,000
30.9.2013 To Bank A/c 30,000 1.4.2013 By Balance b/d 1,51,000
30.9.2013 To Balance c/d 1,25,530 30.9.2013 By Interest A/c 4,530
1,55,530 1,55,530
31.3.2014 To Bank A/c 30,000 1.10.13 By Balance b/d 1,25,530
To Balance c/d 99,296 31.3.14 By Interest A/c 3,766
1,29,296 1,29,296
30.6.2014 To Bank A/c 1,00,785 1.4.2014 By Balance b/d 99,296
30.6.2014 By Interest A/c 1,489
1,00,785 1,00,785

Working Notes:
(1) Adjustment in regard to Goodwill
Partners X Y Z
Share of goodwill before death (`) 45,000 30,000 15,000
Share of goodwill after death (`) - 60,000 30,000
Gain (+)/Sacrifice (-) (`) (45,000) 30,000 15,000
Cr. Dr. Dr.
(2) Adjustment in regard to revaluation of assets
Partners X Y Z
Share of profit on revaluation (`) 30,000 20,000 10,000
credited to all the partners
Debited to the continuing partners (`) - 40,000 20,000
(`) (30,000) 20,000 10,000
Cr. Dr. Dr.
(3) Ascertainment of Profit for the year ended 31.3.14
` `
Profit before charging interest on balance due to X’s executors 52,000
Less: Interest payable to X’s executors:

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PAPER – 5 : ADVANCED ACCOUNTING 9

From 1.4.13 to 30.9.13 4, 530


From 1.10.13 to 31.3.14 3,766 (8,296)
Balance of profit to be shared by Y and Z in 2:1 43,704
(4) Ascertainment of Sundry Assets as on 31.3.14
Liabilities ` Assets `
Capital Account – Y 40,000 Sundry Assets (balancing 1,31,000
Capital Account – Z 20,000 figure)
X’s Executors A/c 99,296 Partner’s Current A/c –Y 1,864
Partner’s Current A/cs Z 26,432
1,59,296 1,59,296
(5) Realisation Account
` `
To Sundry Assets A/c 1,31,000 By Bank A/c (purchase 1,80,000
To Interest A/c – X’s Executors 1,489 consideration)
To Partner’s Capital A/c – Y 31,674
To Partner’s Capital A/c –Z 15,837
1,80,000 1,80,000
(6) Bank Account
` `
To Purchase consideration 1,80,000 By X’s Executors A/c 1,00,785
By Y 69,810
By Z 9,405
1,80,000 1,80,000
Question 3
(a) Comment on adequacy of Debenture Redemption Reserve (DRR) w.r.t. following:
Debentures issued by -
(i) All India Financial Institutions regulated by Reserve Bank of India and Banking
companies.
(ii) For other Financial Institutions within the meaning given in the Companies Act.
(iii) For debentures issued by NBFCs registered with the RBI.

© The Institute of Chartered Accountants of India


10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

(iv) For debentures issued by other companies including manufacturing and


infrastructure companies. (4 Marks)
(b) M/s. Piyush Ltd. had the following among their ledger opening balances on January 1,
2014:
`
11% Debenture A/c (2002 issue) 80,00,000
Debenture Redemption Reserve A/c 70,00,000
13.5% Debenture in Sneha Ltd. A/c (Face Value ` 30,00,000) 29,00,000
Own Debentures A/c (Face Value ` 30,00,000) 27,00,000
As 31st
December, 2014 was the date of redemption of the 2002 debentures, the
company started buying own debentures and made the following purchases in the open
market :
1-2-2014 - 5000 debentures at ` 98 cum-interest
1-6-2014 - 5000 debentures at ` 99 ex-interest.
Half yearly interest is due on the debentures on 30th June and 31st December in the case
of both the companies.
On 31st December, 2014, the debentures in Sneha Ltd. were sold for ` 95 each ex-
interest. On that date, the outstanding debentures of M/s. Piyush Ltd. were redeemed by
payment and by cancellation.
Show the entries in the following ledger accounts of M/s. Piyush Ltd. during 2014 :
(i) Debenture Redemption Reserve Account,
(ii) Own Debenture Account.
The face value of a debenture was ` 100. (12 Marks)
Answer
(a)
Adequacy of Debenture Redemption
Reserve (DRR)
(i) For debentures issued by All India No DRR is required
Financial Institutions (AIFIs) regulated
by Reserve Bank of India.
(ii) For other Financial Institutions (FIs) 25% of the value of debentures
within the meaning given in the issued through public issue.
Companies Act.
No DRR is required in the case of
privately placed debentures.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 11

(iii) For debentures issued by NBFCs 25% of the value of debentures


registered with the RBI. issued through public issue.
No DRR is required in the case of
privately placed debentures.
(iv) For debentures issued by other For listed companies
companies including manufacturing 25% of the value of debentures
and infrastructure companies. issued through public issue.
Also 25% DRR is required in the case
of private placement of the value of
debentures.
For unlisted companies-
issuing debentures on private
placement basis, the DRR will be 25%
of the value of debentures.
(b) (i) Debenture Redemption Reserve Account
2014 ` 2014 `
Dec. 31 To 13.5% Deb. in Jan. 1 By Balance b/d 70,00,000
Sneha Ltd. Dec. 31 By 13.5% Deb. in
(Loss on sale of Sneha Ltd. 4,05,000
investment) 50,000 By Own Deb. A/c
To General (Interest on
Reserve(transfer) 77,67,500 own Deb.) 4,12,500
78,17,500 78,17,500

(ii) Own Debentures Account


Nominal Interest Amount Nominal Interest Amount
2014 ` ` ` 2014 ` ` `
Jan. 1 To Balance b/d 30,00,000 - 27,00,000 June 30 By Debenture
Feb. 1 To Bank 5,00,000 4,583 4,85,417 Interest A/c 2,20,000
June 1 To Bank 5,00,000 22,917 4,95,000 Dec. 31 By Debenture
Dec. 31 To Capital Interest A/c 2,20,000
Reserve
(profit on By 11% Debentures
cancellation) 3,19,583 Account- 40,00,000 40,00,000
cancellation
To. Debenture 4,12,500
Redemption
Reserve
40,00,000 4,40,000 40,00,000 40,00,000 4,40,000 40,00,000

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

Working Note :
1. 13.5% Debentures in Sneha Ltd.
Interest Amount Interest Amount
2014 ` ` 2014 ` `
Jan. 1 To Balance b/d 29,00,000 June By Bank 2,02,500
(30,00,000) 30
Dec.31 To Debenture Dec. By Bank 2,02,500
Redemption 4,05,000 31
Reserve By Bank 28,50,000
By Debenture
Redemption
Reserve
(Loss on 50,000
sale)
4,05,000 29,00,000 4,05,000 29,00,000

2. 11% Debentures Account


2014 ` 2014 `
Dec. 31 To Own Debentures A/c 40,00,000 Jan. 1 By Balance b/d 80,00,000
To Bank 40,00,000
80,00,000 80,00,000

3. Cost of debentures purchased on 1.2.2014


`
Purchase price of debentures [5,000 x 98(cum-interest)] 4,90,000
Less: Interest (4,583)
4,85,417
4. Cost of debentures purchased on 1.6. 2014
Purchase price of debentures [5,000 x 99(ex-interest)] 4,95,000
Question 4
The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on 31.03.2014 were is as
under:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
` ` ` `
Share Capital: Freehold Property 3,00,000 2,40,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 13

40,000 Equity Share Plant & Machinery 60,000 40,000


of ` 10 each, Fully paid 4,00,000 - Motor Vehicle 30,000 20,000
30,000 Equity Shares Trade Receivables 2,00,000 80,000
of ` 10 each, Fully paid - 3,00,000 Inventory 2,30,000 1,80,000
General Reserve 2,40,000 - Cash at Bank 80,000 40,000
Profit & Loss Account 50,000 50,000
Trade Payables 2,10,000 1,30,000
6% Debentures - 1,20,000
9,00,000 6,00,000 9,00,000 6,00,000
M/s. A Ltd. and M/s. B Ltd. carry on business of similar nature and they agreed to
amalgamate. A new Company, M/s. AB Ltd. is formed to take over the Assets and
Liabilities of M/s. A Ltd. and M/s. B Ltd. on the following basis:
Assets and Liabilities are to be taken at Book Value, with the following exceptions:
(a) Goodwill of M/s. A Ltd. and M/s. B Ltd. is to be valued at ` 1,40,000 and ` 40,000
respectively.
(b) Plant & Machinery of M/s. A Ltd. are to be valued at ` 1,00,000.
(c) The Debentures of M/s. B Ltd. are to be discharged, by the issue of 6% Debentures
of M/s. AB Ltd., at a premium of 5%.
You are required to:
(i) Compute the basis on which shares in M/s. AB Ltd. will be issued to Shareholders of the
existing Companies assuming nominal value of each share of M/s. AB Ltd. is ` 10.
(ii) Draw up a Balance Sheet of M/s. AB Ltd. as on 1st April, 2014, when Amalgamation is
completed.
(iii) Pass Journal entries in the Books of M/s. AB Ltd. for acquisition of M/s. A Ltd. and M/s. B
Ltd. (16 Marks)
Answer
Calculation of Purchase consideration (or basis for issue of shares of AB Ltd.)

A Ltd. BLtd.
Purchase Consideration: ` `
Goodwill 1,40,000 40,000
Freehold property 3,00,000 2,40,000
Plant and Machinery 1,00,000 40,000
Motor vehicles 30,000 20,000

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

Inventory 2,30,000 1,80,000


Trade receivables 2,00,000 80,000
Cash at Bank 80,000 40,000
10,80,000 6,40,000
Less: Liabilities:
6% Debentures (1,20,000 x 105%) - (1,26,000)
Trade payables (2,10,000) (1,30,000)
Net Assets taken over 8,70,000 3,84,000
To be satisfied by issue of shares of AB Ltd. @ ` 10 each 87,000 38,400
Balance Sheet AB Ltd. as at 1st April,2014
Particulars Note No Amount
`
EQUITY AND LIABILITIES
1 Shareholders' funds
(a) Share capital 1 12,54,000
2 Non-current liabilities
(a) Long-term borrowings 2 1,26,000
3 Current liabilities
(a) Trade payables (21,00,000+1,30,000) 3,40,000
Total 17,20,000
ASSETS
1 Non-current assets
(a) Fixed assets
i Tangible assets 3 7,30,000
ii Intangible assets 4 1,80,000
2 Current assets
(a) Inventories (2,30,000+1,80,000) 4,10,000
(b) Trade receivables (2,00,000+80,000) 2,80,000
(c) Cash and cash equivalents (80,000+40,000) 1,20,000
Total 17,20,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 15

Notes to accounts

` `
1. Share Capital
Equity share capital
1,25,400 shares of ` 10 each 12,54,000
(All the above shares are issued for consideration other than
cash)
2. Long-term borrowings
Secured
6% Debentures 1,26,000
3. Tangible assets
Freehold property
A Ltd. 3,00,000
B Ltd. 2,40,000 5,40,000
Plant and Machinery
A Ltd. 1,00,000
B Ltd. 40,000 1,40,000
Motor vehicles A Ltd.
A Ltd. 30,000
B Ltd. 20,000 50,000
7,30,000
4. Intangible assets
Goodwill
A Ltd. 1,40,000
B Ltd. 40,000 1,80,000
Journal Entries
In the books of AB Ltd.
Particulars Amount Amount
(`) (`)
Business purchase account Dr. 12,54,000
To Liquidator of A Ltd. account 8,70,000

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

To Liquidator of B Ltd. account 3,84,000


(Being the amount of purchase consideration payable to
liquidator of A Ltd. and B Ltd. for assets taken over)
Goodwill Dr. 1,40,000
Freehold property Dr. 3,00,000
Plant and Machinery Dr. 1,00,000
Motor vehicles Dr. 30,000
Trade receivables Dr. 2,00,000
Inventory Dr. 2,30,000
Cash at Bank Dr. 80,000
To Trade payables 2,10,000
To Business purchase account 8,70,000
(Being assets and liabilities of A Ltd. taken over)
Goodwill Dr. 40,000
Freehold property Dr. 2,40,000
Plant and Machinery Dr. 40,000
Motor vehicles Dr. 20,000
Trade receivables Dr. 80,000
Inventory Dr. 1,80,000
Cash at Bank Dr. 40,000
To Trade payables 1,30,000
To 6% Debentures of B Ltd. 1,26,000
To Business purchase account 3,84,000
(Being assets and liabilities of B Ltd. taken over)
6% Debentures of B Ltd. Dr. 1,26,000
To 6% debentures 1,26,000
(Being issue of 6% debentures to debenture holders of B Ltd.
Liquidator of the A Ltd. account Dr. 8,70,000
Liquidator of the B Ltd. account Dr. 3,84,000
To Equity share capital account
(Being the allotment of equity shares of ` 10 each, as per the 12,54,000
agreement for discharge of purchase consideration)

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 17

Note:
(1) It is assumed that the nominal value of debentures of B Ltd. is ` 100 each.
(2) It has been presumed that 6% Debentures of M/s B Ltd. are discharged at premium of
5% by issue of 6% Debentures of M/s AB Ltd. At par.
Question 5
(a) Following facts have been taken out from the records of M/s. Sneha Bank Ltd. in respect
of the year ending March 31, 2015:
(i) On 1-4-2014 Bills for collection were ` 10,15,000. During 2014-15 bills received for
collection amounted to ` 89,75,000, bills collected were ` 64,50,000 and bills
dishonoured and returned were ` 11,25,000.
Prepare Bills for collection (Assets) Account and bills for Collection (Liability) Account.
(ii) On 1-4-2014, Acceptance, Endorsement, etc. not yet satisfied amounted to
` 27,50,000. During the year under question, Acceptances, Endorsements,
Guarantees etc., amounted to ` 67,50,000. Bank honoured acceptances to the
extent of ` 44,50,000 and client paid of ` 15,00,000 against the guaranteed liability.
Clients failed to pay ` 4,00,000 which the Bank had to pay.
Prepare the "Acceptances, Endorsements and other obligations Account" as it
would appear in the General Ledger.
(iii) It is found from the books, that a loan of ` 50,00,000 was advanced on 30.09.2014
@ 14% p.a. Interest payable half yearly; but the loan was outstanding as on
31.3.2015 without any payment recorded in the meantime, either towards principal
or towards interest. The security for the loan was ` 1,00,000 fully paid shares of
` 100 each (the market value was ` 98 per share as per the Stock Exchange
information as on 30th September, 2014). But due to fluctuations, the price fell to·
` 45 per share in January, 2015. On 31-3-2015, the price as per Stock Exchange
rate was ` 85 per share.
State how would you classify the loan as secured/unsecured in the Balance Sheet
of the Company.
(iv) The following balances are extracted from the Trial Balance as on 31.3.2015:
Dr. (`) Cr. (`)
Interest and Discount 98,00,000
Rebate for bills discounted 45,000
Bills discounted and purchased 5,00,000
It is ascertained that the proportionate discounts not yet earned for bills to mature in
2014-15 amount to ` 24,000. Prepare ledger accounts. (12 Marks)

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

(b) From the following information of M/s. XY Bank Ltd. for the year ended 31 st March, 2014,
compute the provisions to be made in the Bank's Books for Doubtful Assets:
` in Lakhs
Doubtful Assets (More than 3 Years) 2,000
DICGS 100% Cover 200
Value of Security including DICGC Cover 1,000
(4 Marks)
Answer
(a) (i) Bills for Collection (Assets) A/c
` `
1.4.14 To Balance b/d 10,15,000 2014-15 By Bills for Collection
(Liabilities) A/c 64,50,000
2014-15 To Bills for Collection 2014-15 By Bills for collection
(liabilities) A/c 89,75,000 (Liabilities) A/c 11,25,000
31.3.15 By Balance c/d 24,15,000
99,90,000 99,90,000

Bills for Collection (Liabilities) Account


` `
2014-15 To Bills for collection 64,50,000 1.4.14 By Balance b/d 10,15,000
2014-15 To Bills for Collection 11,25,000 2014-15 By Bills for collection 89,75,000
(Assets) A/c (Assets) A/c
31.3.2015 To Balance c/d 24,15,000
99,90,000 99,90,000

(ii) In the general ledger


Acceptances, Endorsement & other Obligation Account
` `
2014-15 To Constituents’ 44,50,000 1.4.14 By Balance b/d 27,50,000
Liability
for Acceptance,
Endorsement,
etc.
To Constituents’ 15,00,000 2014-15 By Constituents, 67,50,000
Liability Liabilities for
for Acceptances, Acceptances,
Endorsement etc. Endorsements, etc.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 19

To Constituents’ 4,00,000
Liability
for Acceptances,
Endorsements,
etc.
(amount paid on
failure of clients)
31.3.15 To Balance c/d 31,50,000
95,00,000 95,00,000

(iii) For classifying loans as fully secured or otherwise, the value of the security as on
the last date of the year is considered. The value of the security is ` 85,00,000
covering the loan and the interest due comfortably. Hence, it is to be treated as
good and fully secured.
(iv) Rebate on Bills Discounted Account
` `
2014-15 To Interest and 21,000 1.4.14 By Balance b/d 45,000
Discount A/c
31.3.15 To Balance c/d 24,000
45,000 45,000
Interest & Discount Account
` `
31.3.15 To Profit & Loss A/c 98,21,000 1.4.14 By Balance b/d 98,00,000
2014-15 By Rebate on Bills 21,000
discounted A/c
98,21,000 98,21,000

(b) Computation of provision in the books of XY Bank Ltd.


(` in lakhs)
Doubtful Assets (more than 3 years) 2,000
Less: Value of security (excluding DICGC cover) (800)
1,200
Less: DICGC cover (200)
Unsecured portion 1,000
Provision:
for unsecured portion @100% 1,000 lakhs
for secured portion @ 100% 800 lakhs
Total provision to be made in the books of XY Bank 1,800 lakhs

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

Question 6
(a) M/s. Sandeep having Head Office at Delhi has a Branch at Kolkata. The Head Office
does wholesale trade only at cost plus 80%. The Goods are sent to Branch at the
wholesale price viz. cost plus 80%. The Branch at Kolkata wholly engaged in retail trade
and the goods are sold at cost to Head Office plus 100%.
Following details are furnished for the year ended 31st March, 2014:
Head Office Kolkata Branch
(`) (`)
Opening Stock (As on 01.04.2013) 1,25,000 -
Purchases 21,50,000 -
Goods sent to Branch (cost to H.O. plus 80%) 7,38,000 -
Sales 23,79,600 7,30,000
Office Expenses 50,000 4,500
Selling Expenses 32,000 3,300
Staff Salary 45,000 8,000
You are required to prepare Trading and Profit & Loss Account of the Head Office and
Branch for the Year ended 31st March, 2014. (8 Marks)
(b) M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are
made by the Firm itself out of leather supplied by Leather Department at its usual selling
price. From the following figures, prepare Departmental Trading and Profit & Loss
Account for the year ended 31st March, 2014:
Finished Leather Shoes Department
Department (`)
(`)
Opening Stock (As on 01.04.2013) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department 30,00,000 -
Manufacturing Expenses - 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.2014 12,20,000 5,00,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 21

The following further information are available for necessary consideration:


(i) The stock in Shoes Department may be considered as consisting of 75% of Leather
and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 2012-13.
(iii) General expenses of the business as a whole amount to ` 8,50,000. (8 Marks)
Answer
(a) Trading and Profit and Loss A/c
For the year ended 31st March 2014
Head Branch Head Branch
office office
` ` ` `
To Opening stock 1,25,000 - By Sales 23,79,600 7,30,000
To Purchases 21,50,000 - By Goods sent
to branch 7,38,000 -
To Goods received By Closing 5,43,000 81,000
from head office - 7,38,000 stock
(W.N.1 &
2)
To Gross profit c/d 13,85,600 73,000
36,60,600 8,11,000 36,60,600 8,11,000

To Office expenses 50,000 4,500 By Gross profit 13,85,600 73,000


To Selling expenses 32,000 3,300 b/d
To Staff salaries 45,000 8,000
To Branch Stock
Reserve (W.N.3) 36,000 -
To Net Profit 12,22,600 57,200
13,85,600 73,000 13,85,600 73,000
Working Notes:
(1) Calculation of closing stock of head office: `
Opening Stock of head office 1,25,000
Goods purchased by head office 21,50,000
22,75,000

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

Less: Cost of goods sold [31,17,600 (23,79,600+ 7,38,000) x 100/180] (17,32,000)


5,43,000
(2) Calculation of closing stock of branch: `
Goods received from head office [At invoice value] 7,38,000
Less: Invoice value of goods sold [7,30,000 x 180/200] (6,57,000)
81,000
(3) Calculation of unrealized profit in branch stock:
Branch stock ` 81,000
Profit included 80% of cost
Hence, unrealized profit would be = ` 81,000 x 80/180 = ` 36,000
(b) Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2014
Particulars Finished Shoes Total Particulars Finished Shoes Total
leather (` ) (`) leather (`) (`) (`)
(`)
To Opening stock 30,20,000 4,30,000 34,50,000By Sales 1,80,00,000 45,20,000 2,25,20,000
To Purchases 1,50,00,000 2,60,000 1,52,60,000 By Transfer
to shoes -
Deptt. 30,00,000 30,00,000
To Transfer from 30,00,000 30,00,000By Closing
Leather Department stock 12,20,000 5,00,000 17,20,000
To Manufacturing 5,00,000 5,00,000
expenses
To Gross profit c/d 42,00,000 8,30,000 50,30,000
2,22,20,000 50,20,000 2,72,40,000 2,22,20,000 50,20,000 2,72,40,000
To Selling expenses 1,50,000 60,000 2,10,000By Gross 42,00,000 8,30,000 50,30,000
profit b/d
To Rent & warehousing 5,00,000 3,00,000 8,00,000
To Net profit 35,50,000 4,70,000 40,20,000
42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000

General Profit and Loss Account


Particulars Amount (`) Particulars Amount (`)
To General expenses 8,50,000 By Net profit 40,20,000
To Unrealized profit (Refer W.N.) 26,625
To General net profit (Bal.fig.) 31,43,375
40,20,000 40,20,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 23

Working Note:
Calculation of Stock Reserve
Rate of Gross Profit of Finished leather Department, for the year 2013-14
Gross Pr ofit
= x 100 = [(42,00,000)/ (1,80,00,000 + 30,00,000)] x100 = 20%
Total Sales
Closing Stock of Finished leather in Shoes Department = 75%
i.e. ` 5,00,000 x 75% = ` 3,75,000
Stock Reserve required for unrealized profit @ 20% on closing stock
` 3,75,000 x 20% = ` 75,000
Stock reserve for unrealized profit included in opening stock of Shoes dept. @ 15% i.e.
(` 4,30,000 x 75% x 15%) = ` 48,375
Additional Stock Reserve required during the year = ` 75,000 – ` 48,375 = ` 26,625
Question 7
Answer any four of the following:
(a) What are the differences between Life insurance and other forms of insurance?
(b) M/s. A Ltd. has set up its business in a designated backward area with an investment of
` 200 Lakhs. The Company is eligible for 25% subsidy and has received ` 50 Lakhs from
the Government.
Explain the treatment of the Capital Subsidy received from the Government in the Books
of the Company.
(c) A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the
amount distributed to Preferential Creditors and 3% on the payment made to Unsecured
Creditors. The assets were realized for ` 45,00,000 against which payment was made as
follows :
Liquidation expenses ` 50,000
Secured Creditors ` 15,00,000
Preferential Creditors ` 1,25,000
The amount due to Unsecured Creditors was ` 15,00,000. You are asked to calculate the
total remuneration payable to liquidator. Calculation shall be made to the nearest multiple
of a rupee.
(d) State any four situations when a lease would be classified as Finance Lease.
(e) Under what circumstances, an LLP can be wound up by the Tribunal. (4 x 4 = 16 Marks)

© The Institute of Chartered Accountants of India


24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2015

Answer
(a) Difference between Life Insurance and other forms of Insurance
Life Insurance Other forms of Insurance
1. Timing of Insurable amount is payable Reimbursement of loss or
Payment of either on the happening of liability incurred will be paid at
Claim the event (death) or at the the happening of the uncertain
maturity event only.
2. Value of Insurance can be done for The sum payable under it is
Policy any value depending upon limited to the amount of loss
the premiums the insured is actually suffered or the liability
willing to pay. incurred, notwithstanding the
amount of policy.
3. Duration of These are long term These are only for one year
Contract contracts running over the though renewable after year.
number of years.
4. Assurance Life insurance is also known Policies covering other than
by another term ‘assurance’ life are known as insurance
since the insured gets an policies.
assured sum.
5. Determination Actuaries periodically A portion of the premium is
of Liability estimate the liability under carried forward as a provision
existing policies. On that for unexpired liability and the
basis a valuation balance balance net of claims and
sheet is prepared to expenses is taken as profit or
determine the profit loss.
(b) As per para 10 of AS 12 “Accounting for Govt. Grants”, Where the government grants are of
the nature of promoters’ contribution, i.e., they are given with reference to the total investment
in an undertaking or by way of contribution towards its total capital outlay (for example,
central investment subsidy scheme) and no repayment is ordinarily expected in respect
thereof, the grants are treated as capital reserve.
Subsidy received by A Ltd. is in the nature of promoter’s contribution, since this grant is
given with reference to the total investment in an undertaking and by way of contribution
towards its total capital outlay and no repayment is ordinarily expected in respect thereof.
Therefore, this grant should be treated as capital reserve which can be neither distributed
as dividend nor considered as deferred income.
(c) Calculation of Total Remuneration payable to Liquidator
Amount in `
2% on Assets realised 45,00,000 x 2% 90,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 25

3% on payment made to Preferential creditors 1,25,000 x 3% 3,750


3% on payment made to Unsecured creditors (Refer W.N) 45,000
Total Remuneration payable to Liquidator 1,38,750
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses,
payment to secured creditors, preferential creditors & liquidator’s remuneration
= ` 45,00,000 – ` 50,000 – ` 15,00,000 – ` 1,25,000 – ` 90,000 – ` 3,750
= ` 27,31,250
Sufficient amount is available for unsecured creditors therefore Liquidator’s remuneration
on payment to unsecured creditors = 3% x ` 15,00,000 = ` 45,000
(d) Finance Lease is a lease, which transfers substantially all the risks and rewards
incidental to ownership of an asset to the lessee by the lessor but not the legal
ownership. As per AS 19, in following situations, the lease transactions would be
classified as Finance lease:
(i) The lessee will get the ownership of leased asset at the end of the lease term.
(ii) The lessee has an option to buy the leased asset at the end of the lease term at
price, which is lower than its expected fair value at the date on which option will be
exercised.
(iii) The lease term covers the major part of the life of asset even if title is not
transferred.
(iv) At the beginning of lease term, present value of minimum lease rental covers the
initial fair value.
(e) Under following circumstances, an LLP can be wound up by the Tribunal:
(i) If the LLP decides that it should be wound up by the Tribunal;
(ii) If for a period of more than six months, the number of partners of the LLP is
reduced below two;
(iii) If the LLP is unable to pay its debts;
(iv) If the LLP has acted against the interests of the integrity and sovereignty of India,
the security of the state or public order;
(v) If the LLP has defaulted in the filing of the Statement of Account and Solvency with
the Registrar for five consecutive financial years;
(vi) If the Tribunal is of the opinion that it is just and equitable that the LLP be wound
up.

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responsible for the correctness or otherwise of the answers published herein.

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PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer.
Question 1
Answer the following questions:
(a) A machine having expected useful life of 6 years, is leased for 4 years. Both the cost and
the fair value of the machinery are ` 7,00,000. The amount will be paid in 4 equal
instalments and at the termination of lease, lessor will get back the machinery. The
unguaranteed residual value at the end of the 4th year is ` 70,000. The IRR of the
investment is 10%. The present value of annuity factor of ` 1 due at the end of 4th year at
10% IRR is 3.169. The present value of ` 1 due at the end of 4th year at 10% rate of
interest is 0.683.
State with reasons whether the lease constitutes finance lease and also compute the
unearned finance income.
(b) A company is showing an intangible asset at ` 88 lakhs as on 01.04.2013. This asset
was acquired for ` 120 lakhs on 01.04.2009 and the same was available for use from
that date. The company has been following the policy of amortization of the intangible
assets over a period of 15 years on straight line basis. Comment on the accounting
treatment of the above with reference to the relevant Accounting Standard.
(c) Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6
months. The company entered into a forward contract for 6 months @ ` 62.15 per dollar.
On 30th November, 2013; the exchange rate was ` 60.75 per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for
the year ended 31st March, 2014 ?
(d) WZW Ltd. is in dispute involving allegation of infringement of patents by a competitor
company who is seeking damages of a huge sum of ` 1000 Lakhs. The directors are of
the opinion that the claim can be successfully resisted by the company. How would you
deal the same in the Annual Accounts of the company? (4 x 5 = 20 Marks)
Answer
(a) (i) Determination of nature of lease
Fair value of asset ` 7,00,000
Unguaranteed residual value ` 70,000
Present value of residual value at the end of 4th Year = ` 70,000 x 0.683 = ` 47,810

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2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Present value of lease payment recoverable = ` 7,00,000 - ` 47,810


= ` 6,52,190
The percentage of present value of lease payment to fair value of the asset is
= (` 6,52,190/`7,00,000)x100
= 93.17%
Since it substantially covers the major portion of lease payment and life of the
asset, the lease constitutes a finance lease.
(ii) Calculation of Unearned finance income
Annual lease payment = ` 6,52,190 / 3.169
= ` 2,05,803 (approx.)
Gross investment in the lease = Total minimum lease payment + unguaranteed
residual value.
= (` 2,05,803 x 4) + `70000
= ` 8,23,212 + `70,000
= ` 8,93,212
Unearned finance income = Gross investment – Present value of minimum lease
payment and unguaranteed residual value.
= ` 8,93,212 – ` 7,00,000 (` 6,52,190 + ` 47,810)
= ` 1,93,212
(b) As per AS 26 'Intangible Assets', the depreciable amount of an intangible asset should be
allocated on systematic basis over the best estimates of its useful life. There is a
rebuttable presumption that the useful life of an intangible asset will not exceed ten years
from the date when the asset is available for use.
Company has been following the policy of amortisation of the intangible asset over a
period of 15 years on straight line basis. The period of 15 years is more than the
maximum period of 10 years specified as per AS 26.
Accordingly, the company would be required to restate the carrying amount of intangible
asset as on 01.04.2013 at ` 72 lakhs i.e. ` 120 lakhs less 48 lakhs
⎛ ` 120 Lakhs ⎞
⎜ 10 years × 4 years = 48 Lakhs ⎟
⎝ ⎠
The difference of ` 16 Lakhs (` 88 lakhs – ` 72 lakhs) will be adjusted against the
opening balance of revenue reserve. The carrying amount of ` 72 lakhs will be amortised
over remaining 6 years by amortising ` 12 lakhs per year.

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PAPER – 5: ADVANCED ACCOUNTING 3

(c) Calculation of Profit or Loss to be recognised in the book of Stem Ltd.


Forward contract rate ` 62.15 per dollar
Less Spot Rate ` 60.75 per dollar
Loss ` 1.40 per dollar
Forward Contract Amount US$ 30000
Total Loss on entering into forward contract = (US$ 30,000 x ` 1.40
= ` 42,000
Contract Period 6 Months
Out of total contract period of 6 months, 4 months are falling in the financial year
2013-14. Loss for the period from 1st Dec.2013 to 31st March, 2014= (` 42,000/6) x 4 = ` 28,000.
Thus the loss amounting to ` 28,000 for the period is to be recognised in the year 2013-14.
(d) As per AS 29 'Provisions, Contingent Liabilities and Contingent Assets', a provision
should be recognised when:
(i) An enterprise has a present obligation as a result of past event;
(ii) It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(iii) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
A contingent liability is disclosed, unless the possibility of an outflow of resources
embodying economic benefits is remote. The possibility of an outflow of resources
embodying economic benefits is remote in the given situation, since the directors of
WZW Ltd. are of the opinion that the claim can be successfully resisted by the company.
Therefore, the company shall not disclose the same as contingent liability. However,
following note in this regard may be given in annual accounts:
"Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed patents and is seeking damages of ` 1,000 lakhs.
However, the directors are of the opinion that the claim can be successfully resisted by
the company".
Question 2
P and Q were carrying on business sharing profits and losses equally. The firm’s Balance
Sheet as at 31.12.2013 was:
Liabilities ` Assets `
Capital Accounts: Plant 1,60,000
P 1,50,000 Building 48,000

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4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Q 1,30,000 2,80,000 Debtors 75,000


Sundry Creditors 80,000 Stock 70,000
Bank Overdraft 45,000 Joint Life Policy 6,000
Profit & Loss A/c 30,000
Drawings Account:
P 9,000
Q 7,000 16,000
4,05,000 4,05,000
The operations of the business were carried on till 30.06.2014. P and Q both withdrew in equal
amount half the amount of profit made during the current period of six months after charging
depreciation at 10% per annum on plant and after writing off 5% on building.
During the current period of six months, creditors were reduced by ` 20,000 and bank
overdraft by ` 5,000.
The joint life policy was surrendered for ` 6,000 before 30th June 2014. Stock was valued at
` 84,000 and debtors at ` 68,000 on 30th June 2014. The other items remained the same as
at 31.12.2013.
On 30.06.2014, the firm sold its business to PQ Ltd. The value of goodwill was estimated at
` 1,30,000 and the remaining assets were valued on the basis of the balance sheet as on
30.06.2014.
PQ Ltd. paid the purchase consideration in equity shares of ` 10 each.
You are required to prepare:
(a) Balance sheet of the firm as at 30.06.2014,
(b) Realisation account,
(c) Partners' Capital Accounts showing the final settlement between them. (16 Marks)
Answer
(a) Balance sheet of the firm as at 30.06.2014
Liabilities ` Assets `
Capital Accounts Plant :
P's Capital 1,33,800 Opening Balance 1,60,000
Q's Capital 1,15,800 Less: Depreciation @ 10% 8,000 1,52,000
Creditors 60,000 Building:
Bank Overdraft 40,000 Opening Balance 48,000
Less: Written-off @ 5% 2,400 45,600

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PAPER – 5: ADVANCED ACCOUNTING 5

Debtors 68,000
Stock 84,000
Total 3,49,600 Total 3,49,600
(b) Realisation Account
Dr. Cr.
Particulars Amount Particulars Amount
To Sundry Assets: By Creditors 60,000
Plant 1,52,000 By Bank Over Draft 40,000
Building 45,600
Stock 84,000 By PQ Limited A/c 3,79,600
Debtors 68,000 (working note 2)
To Profit:
P's Capital A/c 65,000
Q's Capital A/c 65,000
Total 4,79,600 Total 4,79,600
(c) Partner's Capital Account
Date Particulars P (` ) Q (`) Date Particulars P (` ) Q (`)
01.01.14 To Profit & 15,000 15,000 1.1.14 By Balance b/d 1,50,000 1,30,000
Loss A/c
01.01.14 To Drawing A/c 9,000 7,000 30.06.14 By Profit (W. N. 1) 15,600 15,600
30.06.14 To Drawing A/c 7,800 7,800
(W. N.-1)
30.06.14 To Balance C/d 1,33,800 1,15,800
Total 1,65,600 1,45,600 Total 1,65,600 1,45,600
30.06.14 By Balance b/d 1,33,800 1,15,800
30.06.14 To Shares in 1,98,800 180,800 30.06.14 By Realisation A/c 65,000 65,000
PQ Limited (Profit)
1,98,800 1,80,800 1,98,800 1,80,800

Working Notes
(1) Ascertainment of profit for the 6 Months ended 30.06.2014
Closing Assets Amount (`)
Stock 84,000
Debtors 68,000
Plant Less Depreciation 1,52,000

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6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Building Less Written off 45,600


Total 3,49,600
Less: Closing Liabilities:
Creditors 60,000
Bank Over Draft 40,000 1,00,000
Closing Net Assets 2,49,600
Less: Opening adjusted Capital
P (`1,50,000 – `15,000 – `9,000) 1,26,000
Q (`1,30,000 – `15,000 – `7,000) 1,08,000 2,34,000
Profit Net of drawings 15,600
Actual Profit for Six Months before drawings(half of profit) = 15,600 x 2 31,200
Combined Drawing during six months (half of profit) 15,600

(2) Ascertainment of purchase consideration


`
Closing Net Assets (As above) 2,49,600
Add Goodwill 1,30,000
Total Purchase Consideration 3,79,600
Question 3
(a) X Ltd. granted 500 stock options to its employees on 1.4.2011 at ` 50 per share. The
vesting period is 2½ years and the maximum exercise period is one year. Market price on
that date is ` 140 per share. All the options were exercised on 30.06.2014. Pass journal
entries giving suitable narrations, if the face value of equity share is ` 10 per share.
(b) Venus Limited recently made a public issue in respect of which the following information
is available:
(i) No. of partly convertible debentures issued 4,00,000; face value and issue price of
` 100 per debenture.
(ii) Convertible portion per debenture - 80%, date of conversion - on expiry of 7 months
from the date of closing of issue.
(iii) Date of closure of subscription list - 01.06.2013, date of allotment - 01.07.2013,
Rate of interest on debentures - 10% p.a. payable from the date of allotment. Value
of equity share for the purpose of conversion - ` 40 (Face value ` 10)
(iv) Underwriting commission - 3%
(v) No. of debentures applied for 3,00,000

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PAPER – 5: ADVANCED ACCOUNTING 7

(vi) Interest payable on debentures - half yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended on 31st March, 2014 (including cash and bank entries). (8 + 8 = 16 Marks)
Answer
(a) Journal entries in the books of X Ltd.
Date Particulars Debit (`) Credit
(`)
31.03.12 Employees Compensation Expense A/c Dr. 18,000
To Employees Stock Option Outstanding A/c 18,000
(Being compensation expenses recognised in
respect of 500 option granted to employees at
discount of `90 each, amortised on straight
line basis over 2½ years)
Profit & Loss Account Dr. 18,000
To Employee Compensation Expense A/c 18,000
(Being compensation expense of the year
transferred to profit and loss account)
31.03.13 Employee Compensation Expense A/c Dr. 18,000
To Employees Stock Option Outstanding A/c 18,000
(Being compensation expenses recognised in
respect of 500 option granted to employees at
discount of `90 each, amortised on straight
line basis over 2½ years)
Profit & Loss Account Dr. 18,000
To Employee Compensation Expense A/c 18,000
(Being compensation expense of the year
transferred to profit and loss account)
31.03.14 Employee Compensation Expense A/c Dr. 9,000
To Employees Stock Option Outstanding A/c 9,000
(balance of compensation expenses amortised
`45000 less `36000)
Profit & Loss Account Dr. 9,000
To Employee Compensation Expense A/c 9,000
(Being compensation expense of the year
transferred to profit and loss account)

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8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

30.06.14 Bank Account (`50 x 500) Dr. 25,000


Employees Stock Option Outstanding A/c Dr. 45,000
(` 90 x 500)
To Equity Share Capital Account 5,000
To Securities Premium Account 65,000
(Being exercise of 500 stock option at a price
of ` 50 per share)
Notes:
1. Total employees compensation expenses
= 500 x (`140-`50) = `45,000
2. Employees compensation expense has been written off during 2½ years on straight
line basis as under:
Ist Year = ` 18,000 (for full year)
IInd Year = ` 18,000 (for full year)
IIIrd Year = ` 9,000 (for half year)
(b) In the books of Venus Ltd.
Journal Entries
Date Particulars Debit (`) Credit (`)
01.06.13 Bank Account Dr. 3,00,00,000
To Debenture Application A/c 3,00,00,000
(Being Application money received on
3,00,000 debentures @ `100 each)
01.07.13 Debenture Application Account Dr. 3,00,00,000
Underwriters Account Dr. 1,00,00,000
To 10% Debentures Account 4,00,00,000
(Being Allotment of 3,00,000
debentures to applicants and
1,00,000 debentures to underwriters)
Underwriting Commission Dr. 12,00,000
To Underwriters Account 12,00,000
(Being commission payable to
underwriters on 4,00,000 debentures
of `100 each @ 3%)

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PAPER – 5: ADVANCED ACCOUNTING 9

Bank Account Dr. 88,00,000


To Underwriters Account 88,00,000
(Being amount received from
underwriters on settlement of
account)
30.09.13 Debenture Interest Account Dr. 10,00,000
To Bank Account 10,00,000
(Being interest paid on debentures for
3 months from 01.07.2013 to
30.09.2013 on `4,00,00,000 @ 10%
p.a.)
31.12.13 10% Debentures Account Dr. 3,20,00,000
To Equity Share Capital Account 80,00,000
To Securities Premium Account 2,40,00,000
(Being conversion of 80% of
debentures into shares @ `40 per
share with face value of `10 each)
31.03.14 Debenture Interest Account Dr. 12,00,000
To Bank Account 12,00,000
(Being interest paid on debentures for
the half year)
Profit and Loss A/c Dr. 22,00,000
To Debenture Interest A/c 22,00,000
(Being debenture interest for the year
charged to Profit & Loss A/c)
Working note:-
Calculation of debenture interest for the half year ended 31st March, 2014
`
On ` 80,00,000 for 6 Months @ 10% p.a. 4,00,000
On ` 3,20,00,000 for 3 Months @ 10% p.a. 8,00,000
Total 12,00,000
Question 4
The Balance Sheet of X Ltd. as at 31st March, 2014 was as follows:

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10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

X Limited
Balance Sheet as at 31.03.2014
Particulars Amount `
I Equity and Liabilities
1 Shareholders Fund
Share Capital
40000 equity shares of ` 100 each fully paid 40,00,000
20000, 10% preference shares of `100 each fully paid 20,00,000
Reserve & Surplus
(a) Securities Premium Account 1,50,000
(b) Profit & Loss Account (23,00,000)
2. Non Current Liabilities
Long Term Borrowings 7% Debentures of ` 100 each 4,00,000
3. Current Liabilities
Other Current Liabilities
(a) Creditors 10,00,000
(b) Loan from Director 2,00,000
Total Liabilities 54,50,000
II Assets
1 Non Current Assets
Fixed Assets
(a) Land & Building 20,00,000
(b) Plant & Machinery 12,00,000 32,00,000
Intangible Assets
Goodwill 4,00,000
2. Current Assets
(a) Debtors 12,00,000
(b) Stock 5,00,000
(c) Cash at Bank 1,50,000 18,50,000
Total Assets 54,50,000
No Dividend on Preference Shares has been paid for last 5 Years.

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PAPER – 5: ADVANCED ACCOUNTING 11

The following scheme of reorganisation was duly approved by the Court:


(i) Each equity share to be reduced to ` 25.
(ii) Each existing Preference Share to be reduced to ` 75 and then exchanged for one new
13% Preference Share of ` 50 each and one Equity Share of ` 25 each.
(iii) Preference Shareholders have forgone their right for dividend for four years. One year's
dividend at the old rate is however, payable to them in fully paid equity shares of ` 25.
(iv) The Debenture Holders be given the option to either accept 90% of their claims in cash
or to convert their claims in full into new 13 % Preference Shares of ` 50 each issued at
par. One-fourth (in value) of the Debenture Holders accepted Preference Shares for their
claims. The rest were paid in cash.
(v) Contingent Liability of ` 2,00,000 is payable which has been created by wrong action of
one Director. He has agreed to compensate this loss out of the loan given by the Director
to the Company.
(vi) Goodwill does not have any value in the present. Decrease the value of Plant &
Machinery, Stock and Debtors by ` 3,00,000; ` 1,00,000 and ` 2,00,000 respectively.
Increase the value of Land & Building to ` 25,00,000.
(vii) 50,000 new Equity Shares of ` 25 each are to be issued at par payable in full on
application. The issue was underwritten for a commission of 4%. Shares were fully taken
up.
(viii) Total expenses incurred by the Company in connection with the Scheme excluding
underwriting Commission amounted to ` 20,000.
Pass necessary Journal Entries to record the above transactions. (16 Marks)
Answer
In the books of X Ltd.
Journal Entries
Particulars Amount (`) Amount
(`)
Equity Share Capital (` 100) A/c Dr. 40,00,000
To Equity Share Capital (` 25) A/c 10,00,000
To Capital Reduction A/c 30,00,000
(Being Equity Shares of ` 100 each reduced to ` 25
each and balance transferred to Capital Reduction a/c)
10% Preference Share Capital (` 100) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 75) A/c 15,00,000
 

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12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

To Capital Reduction A/c 5,00,000


(Being Preference Shares of ` 100 each reduced to `
75 each and balance transferred to Capital Reduction
A/c)
10% Preference Share Capital (` 75) A/c Dr. 15,00,000
To 13% Preference Share Capital (` 50) A/c 10,00,000
To Equity Share Capital A/c 5,00,000
(Being one new 13% Preference Share of ` 50 each
and one Equity Share of ` 25 each issued against 10%
Preference Share of ` 75 each)
Capital Reduction A/c Dr. 2,00,000
To Preference Share Dividend Payable A/c 2,00,000
(Being arrear of Preference Share Dividend payable for
one year)
Preference Share Dividend Payable A/c Dr. 2,00,000
To Equity Share Capital A/c (` 25) Dr. 2,00,000
(Being Equity Shares of ` 25 each issued for arrears of
Preference Share Dividend)
7% Debenture A/c Dr. 4,00,000
To Debenture Holders A/c 4,00,000
(Being balance of 7% Debentures transferred to
Debenture Holders A/c)
Debenture Holders A/c Dr. 4,00,000
To 13% Preference Share Capital A/c 1,00,000
To Bank A/c 2,70,000
To Capital Reduction A/c 30,000
(Being 25% of Debenture Holders opted to take 13%
Preference Shares at par and remaining took 90% cash
payment for their claims)
Loan from Director Dr. 2,00,000
To Provision for Contingent Liability A/c 2,00,000
(Being contingent liability of ` 2,00,000 is payable and
adjusted against loan from Director A/c)
Bank A/c Dr. 12,50,000
 

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PAPER – 5: ADVANCED ACCOUNTING 13

To Equity Share Application & Allotment A/c 12,50,000


(Being application money received on 50,000 Equity
Shares @ ` 25 each)
Equity Share Application & Allotment A/c Dr. 12,50,000
To Equity Share Capital A/c 12,50,000
(Being application money transferred to Capital A/c on
allotment)
Underwriting Commission A/c Dr. 50,000
To Bank A/c 50,000
(Being underwriting commission paid)
Land & Building A/c Dr. 5,00,000
To Capital Reduction A/c 5,00,000
(Being value of land & Building appreciated)
Expenses on Reconstruction A/c Dr. 20,000
To Bank A/c 20,000
(Being payment of expenses on reconstruction
Capital Reduction A/c Dr. 38,30,000
To Goodwill A/c 4,00,000
To Plant & Machinery A/c 3,00,000
To Stock A/c 1,00,000
To Debtors A/c 2,00,000
To Profit & Loss A/c 23,00,000
To Expenses on Reconstruction A/c 20,000
To Underwriting Commission A/c 50,000
To Capital Reserve A/c 4,60,000
(Being various losses written off and balance of Capital
Reduction A/c transferred to Capital Reserve A/c)
Question 5
(a) Metro General Insurance Company submits the following information for the year ended
31st March, 2014:

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14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Particulars Director Business Reinsurance


(`) (`)
Premium received 75,25,000 8,25,000
Premium paid - 4,90,000
Claim paid during the year 49,70,000 5,10,000
Claim payable:
1st April, 2013 6,85,000 95,000
31st March, 2014 7,38,000 70,000
Claims received - 3,95,000
Claims receivable:
1st April, 2013 - 75,000
31st March, 2014 - 1,25,000
Expenses of Management 2,90,000 -
Commission:
On Insurance accepted 1,60,000 15,000
On Insurance ceded - 18,000
The following additional information are also available:
(1) Expenses of Management include ` 45,000 Surveyor's fees and ` 55,000 Legal
expenses for settlement of claims.
(2) Reserve for unexpired risk is to be maintained @ 40%. The balance of Reserve for
unexpired risk as on 01.04.2013 was ` 28,40,000.
You are required to make the Revenue Account for the year ended 31st March, 2014.
(b) A commercial bank has the allowing capital funds and assets. Segregate the capital
funds into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted
asset ratio. State your observation on the risk weighted asset ratio.
Particulars Amount
(` in crores)
Equity Share Capital 400.000
Statutory Reserve 250.000
Capital Reserve (of which Reserve ` 18 crores were due to 86.000
revaluation of assets and the balance due to sale of capital assets)
Assets
Cash Balance with RBI 12.00

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PAPER – 5: ADVANCED ACCOUNTING 15

Balance with other Banks 20.00


Other Investments 40.00
Loans & Advances
(i) Guaranteed by Government 14.50
(ii) Others 5,465.00
Premises Furniture & Fixtures 74.00
Off Balance Sheet Items
(i) Guarantees and other obligations 700
(ii) Acceptances, endorsements and letter of credit 4,900.00
(8 + 8 = 16 Marks)
Answer
(a) Form B-RA (Prescribed by IRDA)
Metro General Insurance Company
Revenue Account for the year ended 31st March, 2014
Particulars Schedule Amount (`)
Premium earned (Net) 1 75,56,000
Interest, dividend and rent -
Other Income
Total (A) 75,56,000
Claims incurred (Net) 2 51,63,000
Commission 3 1,57,000
Operating expenses related to insurance business 4 1,90,000
Bad Debts -
Total (B) 55,10,000
Operating profit from insurance business (A-B) 20,46,000
Schedules forming part of revenue account
Schedule 1: Premium Earned (Net)
Particulars Amount (`)
Premium from direct business 75,25,000
Add: Premium on reinsurance accepted 8,25,000
Less: Premium on reinsurance ceded (4,90,000)

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16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Net Premium 78,60,000


Adjustment for change in Reserve for unexpired risk (W.N.2) (3,04,000)
Total Premium earned (net) 75,56,000
Schedule 2: Claims Incurred (Net)
Particulars Amount (`)
Claims paid direct business (W.N.1) 51,23,000
Add: Re-insurance accepted (W.N.1) 4,85,000
Less: Re-insurance ceded (W.N.1) (4,45,000)
Net Claims paid 51,63,000
Schedule 3: Commission
Particulars Amount (`)
Commission paid on direct business 1,60,000
Add: Commission on reinsurance accepted 15,000
Less: Commission on reinsurance ceded (18,000)
1,57,000
Schedule 4: Operating Expenses related to Insurance Business
Particulars Amount (`)
Expenses of management (2,90,000 – 45,000 – 55,000) 1,90,000
1,90,000
Working Notes:
1. Claims incurred
Particulars Direct Re-insurance Re-insurance
Business (`) accepted (`) Ceded (`
Paid / received 49,70,000 5,10,000 3,95,000
Add: Outstanding at the end of the year 7,38,000 70,000 1,25,000
Add: Expenses in connection with 1,00,000
settlement of claims (45,000 + 55,000)
Less: Outstanding at the beginning of (6,85,000) (95,000) (75,000)
the year
51,23,000 4,85,000 4,45,000

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 17

2. Change in Reserve for unexpired risk


Particulars Amount (`)
Opening Reserve as on 31st March, 2013 28,40,000
Less: Closing Reserve as on 31st March, 2014 (`78,60,000 x 40%) (31,44,000)
3,04,000
(b) Computation of Tier I and Tier II Capital Fund
Particulars Amount
(` in crores)
Capital Funds – Tier I
Equity Share Capital 400.00
Statutory Reserve 250.00
Capital Reserve (arising out of sale of assets) (` 86 cr – `18 cr) 68.00
718.00
Capital Fund – Tier-II
Capital Reserve (arising out of revaluation of assets) 18.00
Less: Discount to the extent of 55% (9.90) 8.10
726.10

Risk Adjusted Assets


Particulars Amount % of weight Amount
(` in crores) (` in crores)
Funded Risk Assets
Cash Balance with RBI 12.00 0 0.00
Balance with other Banks 20.00 20 4.00
Other Investments 40.00 100 40.00
Loans & Advances :
(i) Guaranteed by Government 14.50 0 0.00
(ii) Others 5,465.00 100 5,465.00
Premises Furniture & Fixture 74.00 100 74.00
Total (i) 5583.00
Off Balance Sheet Items
Guarantees and other 700.00 100 700.00
obligations

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18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Acceptances, endorsements 4,900.00 100 4,900.00


and letter of credit
Total (ii) 5,600.00
Total [(i) + (ii)] 11,183.00
Risk Weighted Assets Ratio:
Capital Fund x 100
Risk Adjusted Assets

= (726.10 / 11,183) x 100


= 6.49%
At present capital adequacy ratio as per RBI norms is 9%. Therefore, Bank has to
improve the ratio by introducing further Tier – I capital or by reducing risk adjusted
assets.
Question 6
(a) LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% profit on
sale. Branch has been instructed to send all cash daily to head office. All expenses are
paid by head office except petty expenses, which are met by the Branch. From the
following particulars, prepare branch account in the books of head office:
Particulars Amount Particulars Amount
(`) (`)
Stock as on 1st April, 2013 (Invoice 40,000 Discount allowed to debtors 300
price) Expenses paid by head
Sundry Debtors as on 1st April, 2013 25,000 office:
Cash in hand as on 1st April, 2013 1,000 Salary 4,000
Office furniture as on 1st April, 2013 4,000 Staff Welfare 750
Goods invoiced from the head office 1,80,000 Telephone Expenses 1,200
(invoice price) Other Misc. Expenses paid
Goods return to head office 6,000 by branch 700
Goods return by debtors 1,250 Stock as on 31st March, 35,000
Cash received from Debtors 65,000 2014 (at invoice price)
Cash sales 1,20,000 Depreciation to be provided 10% p.a.
Credit sales 70,000 on branch furniture
(b) Mega Ltd. has two departments, A and B. From the following particulars, prepare
departmental Trading A/c and General Profit & Loss Account for the year ended
31st March, 2014.

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PAPER – 5: ADVANCED ACCOUNTING 19

Amount (`)
Particulars
Department A Department B
Opening stock as on 01.04.2013 (at cost) 70,000 54,000
Purchases 3,92,000 2,98,000
Carriage Inward 6,000 9,000
Wages 54,000 36,000
Sales 5,72,000 4,60,000
Purchased Goods Transferred
By Department B to A 50,000
By Department A to B 36,000
Finished Goods Transferred
By Department B to A 1,50,000
By Department A to B 1,75,000
Return of Finished Goods
By Department B to A 45,000
By Department A to B 32,000
Closing Stock
Purchased Goods 24,000 30,000
Finished Goods 1,02,000 62,000
Purchased goods have been transferred mutually at their respective departmental
purchase cost and finished goods at departmental market price and that 30% of the
closing finished stock with each department represents finished goods received from the
other department. (8 + 8 = 16 Marks)
Answer
(a) In the books of Head Office - LMN
Mumbai Branch Account (At invoice price)
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d: By Stock Reserve (opening) 10,000
Stock 40,000 By Remittances
Debtors 25,000 Cash Sales 1,20,000
Cash in hand 1,000 Cash from Debtors 65,000 1,85,000
Furniture 4,000 By Goods sent to Branch 45,000

© The Institute of Chartered Accountants of India


20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

To Goods sent to branch 1,80,000 (loading)


To Goods returned by branch 1,500 By Goods returned by 6,000
(loading) branch (Returns to HO)
To Bank (Expenses paid by By Balance c/d:
Head Office) Stock 35,000
Salary 4,000 Debtors 28,450
Staff Welfare 750 Cash (`1,000-`700) 300
Telephone 1,200 5,950 Furniture (`4,000-`400) 3,600
To Stock Reserve (closing) 8,750
To Profit Transferred to 47,150
General Profit & Loss A/c

3,13,350 3,13,350
Working Note:
Debtors Account
Particulars Amount (`) Particulars Amount (`)
To Balance b/d 25,000 By Cash A/c 65,000
To Sales A/c (Credit) 70,000 By Sales Return 1,250
By Discount allowed 300
By Balance c/d 28,450
95,000 95,000
Note: It is assumed that goods returned by branch are at invoice price.
(b) Department Trading Account in the books of Mega Ltd.
for the year ended 31st March, 2014
Particulars Department Department Particulars Department Department
A B A B
(`) (`) (`) (`)
To Opening Stock 70,000 54,000 By Sales 5,72,000 4,60,000
To Purchase 3,92,000 2,98,000 By Transfer:
To Carriage Inward 6,000 9,000 Purchased 36,000 50,000
Goods
To Wages 54,000 36,000 Finished 1,30,000 1,18,000
Goods

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 21

To Transfers: By Closing Stock:


Purchased 50,000 36,000 Purchased 24,000 30,000
Goods Goods
Finished** 1,18,000 1,30,000 Finished* 1,02,000 62,000
Goods Goods
To Gross Profit c/d 1,74,000 1,57,000
8,64,000 7,20,000 8,64,000 7,20,000
* Finished goods from other department included in closing stock
Particulars Department A (`) Department B (`)
Stock of Finished Goods 1,02,000 62,000
Stock related to other department 30,600 18,600
(30% of Finished Goods)

** Net transfer of Finished Goods by


Department A to B = ` (1,75,000 – 45,000) = `1,30,000
Department B to A = ` (1,50,000 – 32,000) = `1,18,000
Profit and Loss A/c
For the year ended 31st March, 2014
Particulars Amount (`) Particulars Amount
(`)
To Provision for unrealised profit By Gross Profit b/d:
included in closing stock: Department A 1,74,000
Department A (W.N.2) 8,311 Department B 1,57,000
Department B (W.N.2) 4,611
To Net Profit 3,18,078
3,31,000 3,31,000
Working Notes
1. Calculation of ratio of gross profit margin on sales
Particulars Department A (`) Department B (`)
Sales 5,72,000 4,60,000
Add: Transfer of Finished 1,75,000 1,50,000
Goods
7,47,000 6,10,000

© The Institute of Chartered Accountants of India


22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

Less: Return of Finished (45,000) (32,000)


Goods
7,02,000 5,78,000
Gross Profit 1,74,000 1,57,000
Gross Profit margin = 1,74,000 1,57,000
x100 = 24.79% x100 = 27.16%
7,02,000 5,78,000

2. Unrealised profit included in the closing stock


Department A = 27.16% of ` 30,600 (30% of Stock of Finished Goods ` 1,02,000) =
` 8311.00
Department B = 24.79% of `18,600 (30% of Stock of Finished Goods ` 62,000) =
` 4611.00
Question 7
Answer any four of the following:
(a) Give two examples of each of the following items:
(i) Change in Accounting Policy
(ii) Change in Accounting Estimate
(iii) Extra Ordinary Items,
(iv) Prior Period Item
(b) What are the indicators of Non-Integral Foreign Operation (NFO)?
(c) In the following list of shares issued, for the purpose of calculation of weighted average
number of shares, from which date weight is to be considered:
(i) Equity Shares issued in exchange of cash,
(ii) Equity Shares issued as a result of conversion of a debt instrument,
(iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise,
(iv) Equity Shares issued for rendering of services to the enterprise,
(v) Equity Shares issued in lieu of interest and/or principal of an other financial
instrument,
(vi) Equity Shares issued as consideration for the acquisition of an asset other than in
cash.
Also define Potential Equity Share.
(d) Find out the income to be recognised by ABC Bank Ltd. for the year ended 31st March,
2014 in respect of interest on advances [` in Lakhs] as detailed below:.

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 23

Performing Asset N.P.A.


Interest Interest Interest Interest
earned received earned received
Terms Loan 280 180 170 20
Cash credits and overdrafts 1700 1630 310 48
Bills purchased and discounted 400 400 180 70
(e) State any four alternative accounting treatment of the fund received by an Electricity
Company from consumer towards capital expenditure/ service line contributions.
(4 x 4 = 16 Marks)
Answer
(a) (i) Examples of Change in Accounting Policy
(a) Change of depreciation method from WDV to SLM or vice-versa.
(b) Change in cost formula in measuring the cost of inventories
(ii) Examples of Change in Accounting Estimate:
(a) Change in estimate of provision for doubtful debts on sundry debtors
(b) Change in estimate of useful life of fixed assets.
(iii) Examples of Extra Ordinary Items
(a) Loss due to earthquakes / fire / strike
(b) Attachment of property of the enterprises by government.
(iv) Examples of Prior Period Item
(a) Applying incorrect rate of depreciation in one for more prior periods
(b) Omission to account for income or expenditure in one or more prior period.
(b) The following are the indicators of Non-Integral Foreign Operations (NFO):
(i) While the reporting enterprise may control the foreign operation, the activities of
foreign operation's are carried independently without much dependence on
reporting enterprise.
(ii) Transactions with the reporting enterprise are not a high proportion of the foreign
operation's activities.
(iii) Activities of foreign operation are mainly financed by its operations or from local
borrowings. In other words, it raises finance independently and is in no way
dependent on reporting enterprises.
(iv) Foreign operation's sales are mainly in currencies other than reporting currency.

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24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2014

(v) Day-to-day cash flow of the reporting enterprises is independent of the foreign
operation's cash flow.
(vi) Sales price of the foreign operations are not affected by the day-to-day changes in
exchange rate of the reporting currency but determined more by local competition or
local government regulations.
(vii) There is an active local sales market for the foreign operation's product, although
there may be significant amount of exports.
(viii) Costs of labour, material and other components of foreign operation's products or
services are primarily paid or settled in the local currency rather than in the
reporting currency.
(c) The following dates should be considered for consideration of weights for calculation of
weighted average number of shares in the given situations:
(i) Date of Cash receivable
(ii) Date of conversion
(iii) Date on which settlement becomes effective
(iv) When the services are rendered
(v) Date when interest ceases to accrue
(vi) Date on which the acquisition is recognised.
A Potential Equity Share is a financial instrument or other contract that entitles, or may
entitle its holder to equity shares.
(d) Interest on Performing assets to be recognised on accrual basis, but interest on Non-
Performing assets should be recognised on cash basis.
` in Lakhs
Interest on Term Loan (280+20) 300
Cash Credits and Over Drafts (1700+48) 1748
Bills Purchases and Discounted (400+70) 470
Total Interest to be recognised 2518
(e) Accounting treatment of the fund received by an Electricity Company from consumer
towards capital expenditure / service line contributions can be given as follows:
(i) Amount received from consumer towards capital/service line contributions is
accounted as liability and subsequently recognised as income over the life of the
asset;
(ii) Amount received from consumer towards capital/service line contributions is
accounted as reserves as the amount is not refundable and reported under the head

© The Institute of Chartered Accountants of India


PAPER – 5: ADVANCED ACCOUNTING 25

Reserves and Surplus without transferring any proportionate amount to the income
statement over the life of asset;
(iii) Amount received from consumer towards capital/service line contributions is
accounted as Capital Reserve as the amount is not refundable and subsequently
proportionate amount is transferred to income statement during the expected life of
asset to match against depreciation on total cost of such asset;
(iv) Amount received from consumer towards capital/service line contributions is
accounted as reduction in the cost of Non-current Asset and depreciation may be
provided on such reduced cost.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer.
Question 1
Answer the following questions:
(a) In its Final Accounts for the year ended 31st March, 2014, Z Ltd. made a provision of 3%
of its total debtors. On 10th March, 2014, a debtor of ` 5 lakhs suffered a heavy loss and
became insolvent in April 2014. The loss was not insured.
State giving reasons, if the company may provide for the full loss in its accounts for the
year ended 31st March, 2014. (5 Marks)
(b) Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2013, to be
utilized as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2014, construction of the factory building was completed and machinery was
installed and ready for it's intended use. Total interest on debentures for the financial
year ended 31.03.2014 was ` 11,00,000. During the year 2013-14, the company had
invested idle fund out of money raised from debentures in banks' fixed deposit and had
earned an interest of ` 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of
assets. (5 Marks)
(c) What do you understand by the term "Interest rate implicit on lease"?
Calculate the interest rate implicit on lease from the following details:
Annual Lease Rent ` 80,000 at the end of each year
Lease Period 5 Years
Guaranteed Residual Value ` 40,000
Unguaranteed Residual Value ` 24,000
Fair Value at the inception of the lease ` 3,20,000

© The Institute of Chartered Accountants of India


2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

Discounted rates for the first 5 years are as below:


At 10% 0.909, 0.826, 0.751, 0.683, 0621
At 14% 0.877, 0.769, 0.675, 0.592, 0.519 (5 Marks)
(d) The following information is available for AB Ltd. for the accounting year 2012-13 and
2013-14:
Net profit for `
Year 2012-13 22,00,000
Year 2013-14 30,00,000
No of shares outstanding prior to right issue 10,00,000 shares.
Right issue: One new share for each five shares outstanding i.e. 2,00,000 shares.
: Right Issue price ` 25
: Last date to exercise right 31st July, 2013
Fair value of one equity share immediately prior to exercise of rights on 31.07.2013 is
` 32.
You are required to compute:
(i) Basic earnings per share for the year 2012-13.
(ii) Restated basic earnings per share for the year 2012-13 for right issue.
(iii) Basic earnings per share for the year 2013-14. (5 Marks)
Answer
(a) According to para 8.2 of Accounting Standard 4 “Contingencies and Events Occurring
after the Balance Sheet Date”, adjustments to assets and liabilities are required for
events occurring after the balance sheet date that provide additional information
materially affecting the determination of the amounts relating to conditions existing at the
balance sheet date.
In the given case, though the debtor became insolvent after balance sheet date, yet he
had suffered heavy loss (not covered by the insurance), before the balance sheet date
and this loss was the cause of the insolvency of the debtor.
Therefore the company must make full provision for bad debts amounting ` 5 lakhs in its
final accounts for the year ended 31st March, 2014.
(b) According to para 6 of AS 16 “Borrowing Costs”, borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset should be
capitalised as part of the cost of that asset. The amount of borrowing costs eligible for
capitalisation should be determined in accordance with this Standard. Other borrowing
costs should be recognised as an expense in the period in which they are incurred.

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 3

Also para 10 of AS 16 “Borrowing Costs” states that to the extent that funds are borrowed
specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs
eligible for capitalisation on that asset should be determined as the actual borrowing
costs incurred on that borrowing during the period less any income on the temporary
investment of those borrowings.
Thus, eligible borrowing cost
= ` 11,00,000 – ` 2,00,000
= ` 9,00,000
Sr. Particulars Nature of assets Interest to be Interest to be
No. Capitalized (`) charged to Profit
& Loss Account
(`)
i Construction of Qualifying Asset* 9,00,000x40/100 NIL
factory building = ` 3,60,000
ii Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
iii Working Capital Not a Qualifying NIL 9,00,000x25/100
Asset = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
(c) As per para 3 of AS 19 ‘ Leases’ the interest rate implicit in the lease is the discount rate
that, at the inception of the lease, causes the aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of the
lessor; and
(b) any unguaranteed residual value accruing to the lessor,
to be equal to the fair value of the leased asset.
Present value at discount rate of 10%
Year Lease Payments (`) Disc. Factor (10%) Present Value (`)
1 80,000 0.909 72,720
2 80,000 0.826 66,080
3 80,000 0.751 60,080
4 80,000 0.683 54,640
5 80,000 0.621 49,680

© The Institute of Chartered Accountants of India


4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

5 40,000 0.621 24,840


5 24,000 0.621 14,904
Total 3,42,944
Present value at discount rate of 14%
Year Lease Payments (`) Disc. Factor (10%) Present Value (`)
1 80,000 0.877 70,160
2 80,000 0.769 61,520
3 80,000 0.675 54,000
4 80,000 0.592 47,360
5 80,000 0.519 41,520
5 40,000 0.519 20,760
5 24,000 0.519 12,456
Total 3,07,776
14% − 10%
Interest Rate Implicit on Lease = 10% + × (3,42,944 − 3,20,000 )
3,42,944 − 3,07,776
= 10% + 2.609% = 12.609% or say 12.61%
(d) Computation of Basic Earnings per Share
Year Year
2012-13 2013-14
(` ) (` )
(i) EPS for the year 2012-13 as originally reported
= Net profit for the year attributable to equity share
holder / weighted average number of equity shares
outstanding during the year
` 22,00,000 2.20
10,00,000 shares
(ii) EPS for the year 2012-13 restated for the right issue
` 22,00,000 2.12
10,00,000 shares x 1.04
(iii) EPS for the year 2013-14 (including effect of right issue)
` 30,00,000 2.62
(10,00,000 x 1.04 x 4/12) + (12,00,000 x 8/12)

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PAPER – 5 : ADVANCED ACCOUNTING 5

Working Notes:
1. Computation of theoretical ex-rights fair value per share =
Fair value of all outstanding shares immediately prior to exercise of rights+total amount received from exercise
Number of shares outstanding prior to exercise + number of shares issued in the exercise

(` 32 x 10,00,000) + ( ` 25 x 2,00,000)
10,00,000 + 2,00,000
= ` 30.83
2. Computation of adjustment factor
Fair value per share prior to exercise of rights
Theoretical ex-rights value per share

` 32
=
` 30.83
= 1.04 (approx.)
Question 2
The partners P, Q & R have called you to assist them in winding up the affairs of their
partnership on 31.12.2013. Their balance sheet as on that date is given below:
Liabilities Amount ` Assets Amount `
Capital Accounts: Land & Building 50,000
P 65,000 Plant & Machinery 46,000
Q 50,500 Furniture & Fixture 10,000
R 32,000 Stock 14,500
Sundry Creditors 16,000 Debtors 14,000
Cash at Bank 9,000
Loan P 13,000
Loan Q 7,000
Total 1,63,500 Total 1,63,500
(a) The partners share profit and losses in the ratio of 4:3:2.
(b) Cash is distributed to the partners at the end of each month.
(c) A summary of liquidation transactions are as follows:

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

January 2014
• ` 9,000 - collected from debtors; balance is uncollectable.
• ` 8,000 - received from the sale of entire furniture
• ` 1,000 - Liquidation expenses paid.
• ` 6,000 - Cash retained in the business at the end of month
February 2014
• ` 1,000 - Liquidation expenses paid.
• As part payment of his capital, R accepted a machinery for ` 9,000 (book value ` 3,500)
• ` 2,000 - Cash retained in the business at the end of month
March 2014
• ` 38,000 - received on the sale of remaining plant and machinery.
• ` 10,000 - received from the sale of entire stock.
• ` 1,700 - Liquidation expenses paid.
• ` 41,000 - Received on sale of land & building.
• No Cash is retained in the business.
You are required to prepare a schedule of cash payments amongst the partners by "Higher
Relative Capital Method". (16 Marks)
Answer
Cash Creditors Capitals
Particulars
` ` P (` ) Q (` ) R (`)
Balance due after loan 16,000 52,000 43,500 32,000
January
Balance available 9,000
Realization less expenses and cash 10,000
retained
Amount available and paid 19,000 (16,000) - - 3,000
Balance due - - 52,000 43,500 29,000
February
Opening Balance 6,000
Expenses paid and cash carried forward 3,000
Available for distribution 3,000
Cash paid to Q and Machinery given to R - 3,000 9,000
Balance due - 52,000 40,500 20,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 7

March
Opening Balance 2,000
Amount realized less expenses 87,300
Amount paid to partners 89,300 41,689 32,767 14,844
Loss 10,311 7,733 5,156
Working Note:
(i) Highest Relative Capital Basis
P (` ) Q (` ) R (`)
Scheme of payment for January 2014
Balance of Capital Accounts 65,000 50,500 32,000
Less: Loans (13,000) (7,000) -
(A) 52,000 43,500 32,000
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 14,500 16,000
Capital in profit sharing ratio, taking P’s capital as base 52,000 39,000 26,000
(B)
Excess of R’s capital and Q’s Capital (A – B) (i) 4,500 6,000
Profit Sharing Ratio 3 2
Capital / Profit sharing Ratio 1,500 3,000
Capital in profit sharing ratio, taking Q’s capital as base (ii) 4,500 3,000
Excess of R’s Capital over Q’s capital (i – ii) 3,000
(ii) Scheme of distribution of available cash for March:
P (` ) Q (` ) R (`)
Balance of Capital Accounts end of February (A) 52,000 40,500 20,000
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 13,500 10,000
Capital in profit sharing ratio, taking R’s capital as 40,000 30,000 20,000
base (B) (i)
Excess of P’s Capital and Q’s Capital (A – B) (i) 12,000 10,500
Profit Sharing Ratio 4 3
Capital / Profit sharing Ratio 3,000 3,500
Capital in profit sharing ratio taking P’s capital as base (ii) 12,000 9,000
Excess of Q’s Capital over P’s Capital (i – ii) - 1,500
Payment ` 1500 (C) (1,500)
Balance of Excess Capital 12,000 9,000
(i –C)

© The Institute of Chartered Accountants of India


8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

Payment ` 21000 (D) (12,000) (9,000)


Balance due (A – C – D) 40,000 30,000 20,000
Balance cash Payment (` 89,300 – ` 22,500) = (29,689) (22,267) (14,844)
` 66,800 (E)
Total Payment (` 89,000) (C + D +E) (iii) 41,689 32,767 14,844
Loss (A – iii) 10,311 7,733 5,156
Question 3
(a) ZED Ltd. had 25,000, 10% Debentures of ` 100 each outstanding as on 1st April, 2013,
redeemable on 31st March, 2014. On 1st April, 2013, Sinking Fund was ` 24 lakhs
represented by 3,000 own Debentures purchased at the average price of ` 98 and 8%
Stocks of face value of ` 22 lakhs. The annual installment towards Sinking Fund was
` 90,000.
On 31st March, 2014, the investments were realized at ` 97 and the Debentures were
redeemed.
Draw the following Accounts for the year ended 31st March, 2014:
(i) 10% Debenture Account,
(ii) Debenture Redemption Sinking Fund Account,
(iii) Show the necessary working notes. (8 Marks)
(b) A company made a public issue of 2,00,000 equity shares of ` 10 each at a premium of
` 2 per share. The entire issue was underwritten by the underwriters L, M, N and O in the
ratio of 4:3:2:1 respectively with the provision of firm underwriting of 5,000, 4,000, 2,000
and 2,000 shares respectively.
The company received application for 1,50,000 shares (excluding firm underwriting) from
public, out of which applications for 55,000, 40,000, 42,000 and 8,000 shares were
marked in favour of L, M, N and O respectively.
Calculate the liability of each underwriter as regards the number of shares to be taken up
assuming that the benefit of underwriting is not given to the individual underwriter.
(8 Marks)
Answer
(a) 10% Debentures Account
Date Particulars ` Date Particulars `
31.03.14 To Own Debentures 3,00,000 01.04.13 By Balance b/d 25,00,000
To Bank 22,00,000
25,00,000 25,00,000

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PAPER – 5 : ADVANCED ACCOUNTING 9

Debenture Redemption Sinking Fund Account


Date Particulars ` Date Particulars `
31.03.14 To General 27,30,000 01.04.13 By Balance b/d 24,00,000
Reserve
(See Note) 31.03.14 By Profit & Loss a/c 90,000
31.03.14 By Interest on Sinking 2,06,000
Fund (W.N. 3)
31.03.14 By Own Debentures 6,000
(W.N. 4)
31.03.14 By 8% Stock (Profit) 28,000
(W.N. 5)
27,30,000 27,30,000
Working Notes:
1. Stock as on 1st April, 2013
`
Sinking Fund Balance as on 1st April, 2013 24,00,000
Less: Own Debentures 2,94,000
8% Stock 21,06,000
2. Sale Value of 8% Stock
Number of Stock = ` 22 lakhs / ` 100 = 22,000 no.
Sale Value = 22,000 X ` 97 = ` 21,34,000
3. Interest credited to Sinking Fund Account
`
Interest on 8% Stock (` 22 Lakh x 8 / 100) 1,76,000
Interest on own Debentures (3,000 x ` 100 x 10 / 100) 30,000
2,06,000
4. Own Debentures Account
Date Particuars ` Date Particuars `
01.04.13 To Balance b/d 2,94,000 31.03.14 By 10% Debentures 3,00,000
31.03.14 To Sinking Fund A/c 6,000
3,00,000 3,00,000

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10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

5. 8% Stock Account
Date Particuars ` Date Particuars `
01.04.13 To Balance b/d 21,06,000 31.03.14 By Bank A/c 21,34,000
(W.N. 2)
31.03.14 To Sinking Fund A/c 28,000
(Profit)
21,34,000 21,34,000
Note: Since the balance of Debenture Redemption Sinking Fund Account is more than
the nominal value of debentures redeemed, the amount equal to the amount of
debentures redeemed may be transferred to General Reserve Account i.e. ` 25,00,000
and excess of fund i.e. ` 2,30,000 may be transferred to Capital Reserve Account on the
assumption that it is a capital profit received on the appreciation in the value of
investment or settlement of liability for a lesser amount that was usually payable.
(b) Calculation of liability of each underwriter assuming that the benefit of firm
underwriting is not given to individual underwriter
No. of shares
Particulars
L M N O Total
Gross underwriting 80,000 60,000 40,000 20,000 2,00,000
Less: Marked Application (55,000) (40,000) (42,000) (8,000) (1,45,000)
(excluding firm underwriting)
Balance 25,000 20,000 (2,000) 12,000 55,000
Less: Surplus of N allotted to L, (1,000) (750) 2,000 (250) -
M & O in the ratio of 4:3:1
Balance 24,000 19,250 - 11,750 55,000
Less: Unmarked application (7,200) (5,400) (3,600) (1,800) (18,000)
including firm underwriting(WN)
Net Liability 16,800 13,850 (3,600) 9,950 37,000
Less: Surplus of N allotted to L, (1,800) (1,350) 3,600 (450) -
M & O in the ratio of 4:3:1
Balance 15,000 12,500 - 9,500 37,000
Add: Firm Underwriting 5,000 4,000 2,000 2,000 13,000
Net Liability 20,000 16,500 2,000 11,500 50,000
Working Note:
Particulars No. of shares
Application received from public 1,50,000
Add: Firm underwriting 13,000

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PAPER – 5 : ADVANCED ACCOUNTING 11

Total Applications 1,63,000


Less: Marked application (1,45,000)
Unmarked application including firm underwriting 18,000
Question 4
P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both
the companies decided to amalgamate and a new company PQ Ltd. is to be formed with an
Authorized Capital of ` 10,00,000 divided into 1,00,000 equity shares of ` 10 each. The
Balance Sheet of the companies as on 31.03.2014 were as under:
P Limited
Balance Sheet as at 31.03.2014
Particulars Amount (`)
I. Equity and Liabilities
1. Shareholder’s Fund
(a) Share Capital 1,40,000
(b) Reserves & Surplus
Profit & Loss A/c 30,000
2. Non Current Liabilities
8 % Secured Debentures 1,10,000
3. Current Liabilities
Trade Payable 54,000
Total 3,34,000
II. Assets
1. Non-current Assets
(a) Fixed Assets
Building at cost less Depreciation 1,00,000
Plant & Machinery at cost less Depreciation 25,000
2. Current Assets
(a) Inventories 1,35,000
(b) Trade Receivables 44,000
(c) Cash at bank 30,000
Total 3,34,000
Q Limited
Balance Sheet as at 31.03.2014
Particulars Amount (`)
I. Equity and Liabilities
1. Shareholder’s Fund

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12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

(a) Share Capital 2,50,000


(b) Reserves & Surplus
General Reserve 1,20,000
Profit & Loss A/c 35,000
2. Current Liabilities
Trade Payables 1,40,000
Total 5,45,000
II. Assets
1. Non-current assets
(a) Fixed Assets
Building at cost less depreciation 1,90,000
Plant & Machinery at cost less depreciation 80,000
Furniture & Fixture at cost less depreciation 25,000
2. Current Assets
(a) Inventories 50,000
(b) Trade Receivables 1,42,000
(c) Cash at bank 58,000
Total 5,45,000
The assets and liabilities of the existing companies are to be transferred at book value with the
exception of some items detailed below:
(i) Goodwill of P Ltd. was worth ` 50,000 and of Q Ltd. was worth ` 1,50,000.
(ii) Furniture & Fixture of Q Ltd. was valued at ` 35,000.
(iii) The debtors of P Ltd. are realized fully and bank balance of P Ltd. are to be retained by
the liquidator and the sundry creditors are to be paid out of the proceeds thereof.
(iv) The debentures of P Ltd. are to be discharged by issue of 8% debentures of PQ Ltd. at a
premium of 10%.
You are required to:
(i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders
of the existing companies.
(ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of
amalgamation,
(iii) Write up journal entries including bank entries for closing the books of P Ltd. (16 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 13

Answer
Calculation of Purchase Consideration
P Ltd. (`) Q Ltd. (`)
Assets taken over:
Goodwill 50,000 1,50,000
Building 1,00,000 1,90,000
Plant & Machinery 25,000 80,000
Furniture & Fixtures - 35,000
Inventories 1,35,000 50,000
Trade Receivables - 1,42,000
Cash at Bank - 58,000
3,10,000 7,05,000
Less :Liabilities taken over
8% Debentures (1,21,000) -
Trade Payables - (1,40,000)
Net Assets taken over 1,89,000 5,65,000
To be satisfied by issue of shares of PQ Ltd. of ` 10 each at par 18,900 56,500
PQ Limited
Balance Sheet as at 1st April, 2014
Particulars Note Amount (`)
No.
I. Equity and Liabilities
(1) Shareholder’s Funds
(a) Share Capital 1 7,54,000
(b) Reserve & Surplus 2 11,000
(2) Non-current Liabilities
(a) Long term borrowings 3 1,10,000
(3) Current Liabilities
(a) Trade Payables 1,40,000
Total 10,15,000
II. Assets
(1) Non-current assets
(a) Fixed Assets
Tangible 4 4,30,000
Intangible 5 2,00,000

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14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

(2) Current Assets


a) Inventories 1,85,000
b) Trade Receivables 1,42,000
c) Cash at Bank 58,000
Total 10,15,000
Notes to Accounts:
`
1 Share Capital
Authorized
1,00,000 shares of ` 10 each 10,00,000
Issued, Subscribed and Paid up
75,400 shares of ` 10 each 7,54,000
(All the above shares are allotted as fully paid up pursuant to scheme of
amalgamation without payments being received in cash)
2 Reserve & Surplus
Securities Premium Account 11,000
3 Long term borrowings -
8 % Debentures 1,10,000
4 Tangible Fixed Assets
Building
P Ltd. 1,00,000
Q Ltd. 1,90,000 2,90,000
Plant & Machinery
P Ltd. 25,000
Q Ltd. 80,000 1,05,000
Furniture & Fixture
Q Ltd. 35,000
4,30,000
5 Intangible Asset
Goodwill
P Ltd. 50,000
Q. Ltd. 1,50,000 2,00,000
Working Note:
Computation of Securities Premium
Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 10% premium.

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PAPER – 5 : ADVANCED ACCOUNTING 15

Securities Premium = ` 1,10,000 x 10% = ` 11,000.


In the books of P Ltd. (Journal Entries)
` `
1 Realization Account Dr. 3,04,000
To Building 1,00,000
To Plant & Machinery 25,000
To Inventories 1,35,000
To Trade Receivables 44,000
(Being all assets except cash transferred to Realization
Account)
2 8% Debentures Account Dr. 1,10,000
Trade Payables Dr. 54,000
To Realization Account 1,64,000
(Being all liabilities transferred to Realization Account)
3 Equity Share Capital Dr. 1,40,000
Profit & Loss Account Dr. 30,000
To Equity Shareholder’s Account 1,70,000
(Being Equity transferred to Equity Shareholders’
Account)
4 PQ Ltd Dr. 1,89,000
To Realization Account 1,89,000
(Being Purchase consideration due)
5 Bank Account Dr. 44,000
To Realization Account 44,000
(Being Cash received from trade receivables in full)
6 Realization Account Dr. 54,000
To Bank Account 54,000
(Being payment made to Trade Payables)
7 Shares in PQ Ltd. Dr. 1,89,000
To PQ Ltd. 1,89,000
(Being purchase consideration received in the form of
Equity Shares of PQ Ltd.)
8 Realization Account (balancing figure) Dr. 39,000
To Equity Shareholders’ Account 39,000
(Being profit on realization transferred to Equity
Shareholders’ Account)
 

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16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

9 Equity Shareholders’ Account Dr. 2,09,000


To Shares in PQ Ltd. 1,89,000
To Bank Account 20,000
(Being final payment made to shareholders)
Question 5
(a) Jay Electricity Company keeps accounts under the Double Accounts System. It decides
to replace its old Plant with a new Plant. The Plant when installed in 2004 cost the
company ` 75 lakhs, the components of materials, labour and overheads being in the
ratio of 4 : 4 : 2. It is ascertained that the cost of materials has gone up by 250% and the
cost of the labour has gone up by 200%. The proportion of material, labour and
overheads has changed to 5 : 4 : 4.
The cost of the new plant is ` 250 lakhs. In addition, goods worth ` 38 lakhs have been
used in the construction of the new Plant. The old Plant was sold as scrap for ` 15 lakhs.
You are required to calculate:
(i) The amount to be capitalized,
(ii) The amount to be charged to Revenue.
Necessary Ledger Accounts are to be drawn as working notes. (8 Marks)
(b) From the following information of XYZ Marine Insurance Ltd. for the year ending
31st March, 2014, find out the
(i) Net Premium earned
(ii) Net Claims Incurred
Particulars Direct Business (`) Re-insurance (`)
Premium Received 92,00,000 7,86,000
Premium Receivable as on 01.04.2013 4,59,000 37,000
Premium Receivable as on 31.03.2014 3,94,000 33,000
Premium Paid 6,36,000
Premium Payable as on 01.04.2013 28,000
Premium payable as on 31.03.2014 20,000
Claims Paid 73,00,000 5,80,000
Claims payable as on 01.04.2013 94,000 16,000
Claims payable as on 31.03.2014 1,01,000 12,000
Claims received 2,10,000
Claims receivable as on 01.04.2013 42,000
Claims receivable as on 31.03.2014 39,000
(8 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 17

Answer 5
(a) Jay Electricity Company
Old Ratio Cost of Old Plant % increase Current Cost New Ratio
(` in lakhs) (` in lakhs)
Materials 4 30 250% 75 5
Labour 4 30 200% 60 4
Overheads 2 15 60 4
75 195
Amount to be Capitalized
` in lakhs
Cost of New Plant 250
Add: Cost of Materials used 38
288
Less: Estimated Current Cost of Replacing the Plant (195)
Amount to be Capitalized 93
Amount to be charged to Revenue
` in lakhs
Estimated Current Cost of Replacement 195
Less: Cash Sales of Scrap (15)
Less: Materials used∗ (38)
Amount to be Charged to Revenue 142
Working Notes:
Plant Account (` in lakhs)
Amount Amount
To Balance b/d 75 By Balance c/d 168
To Bank A/c (250-195) 55
To Replacement A/c 38
168 168
Replacement Account (` in lakhs)
Amount Amount
To Bank A/c 195 By Bank A/c 15
                                                            

It is assumed that materials worth ` 38 lakhs, used in the construction of the new plant, are taken out from
the old plant.

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18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

By Plant A/c 38
By Revenue A/c 142
195 195
Note: It is pertinent to note that the Electricity Act, 2003 does not deal with Replacement
Accounting based on ‘Double Accounting System’.
(b) In the books of XYZ Marine Insurance Ltd.
Amount (`)
(I) Net Premium earned
Premium from Direct Business received 92,00,000
Add: Receivable as on 31.03.2014 3,94,000
Less: Receivable as on 01.04.2013 (4,59,000)
Sub Total (A) 91,35,000
Premium on reinsurance accepted 7,86,000
Add: Receivable as on 31.03.2014 33,000
Less: Receivable as on 01.04.2013 (37,000)
Sub Total (B) 7,82,000
Premium on reinsurance Ceded 6,36,000
Add: Payable as on 31.03.2014 20,000
Less: Payable as on 01.04.2013 (28,000)
Sub Total (C) 6,28,000
Premium Earned (A+B-C) 92,89,000
(II) Net Claims Incurred
Claims paid on direct business 73,00,000
Add: Outstanding as on 31.03.2014 1,01,000
Less: Outstanding as on 01.04.2013 (94,000)
Sub Total (A) 73,07,000
Reinsurance claims 5,80,000
Add: Outstanding as on 31.03.2014 12,000
Less: Outstanding as on 01.04.2013 (16,000)
Sub Total (B) 5,76,000
Claims received from reinsurance 2,10,000
Add: Outstanding as on 31.03.2014 39,000
Less: Outstanding as on 01.04.2013 (42,000)
Sub Total (C) 2,07,000
Net Claim Incurred (A+B-C) 76,76,000

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PAPER – 5 : ADVANCED ACCOUNTING 19

Question 6
(a) Pass necessary Journal entries in the books of an independent Branch of a Company,
wherever required, to rectify or adjust the following:
(i) Income of ` 2,800 allocated to the Branch by Head Office but not recorded in the
Branch books.
(ii) Provision for doubtful debts, whose accounts are kept by the Head Office, not
provided earlier for ` 1,000.
(iii) Branch paid ` 3,000 as salary to a Head Office Manager, but the amount paid has
been debited by the Branch to Salaries Account.
(iv) Branch incurred travelling expenses of ` 5,000 on behalf of other Branches, but not
recorded in the books of Branch.
(v) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on
the date of reconciliation of Accounts.
(vi) Head Office allocates ` 75,000 to the Branch as Head Office expenses, which has
not yet been recorded by the Branch.
(vii) Head Office collected ` 30,000 directly from a Branch Customer. The intimation of
the fact has been received by the Branch only now.
(viii) Goods dispatched by the Head office amounting to ` 10,000, but not received by
the Branch till date of reconciliation. The Goods have been received subsequently.
(8 Marks)
(b) Department P sells goods to Department S at a profit of 25% on cost and to Department
Q at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and
30% on sales respectively. Department Q sells goods to P and S at 20% and 10% profit
on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to
unrealized profit on departmental sales being eliminated. Departmental profits after
charging Manager's commission, but before adjustment of unrealized profits are as
below:
`
Department P 90,000
Department S 60,000
Department Q 45,000

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20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

Stock lying at different Departments at the end of the year are as below:
Figures in `
DEPARTMENTS
P S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 -
Find out correct Departmental Profits after charging Managers' Commission. (8 Marks)
Answer
(a) Books of Branch
Journal Entries
Amount
in `
Dr. Cr.
(i) Head Office Account Dr. 2,800
To Income Account A/c 2,800
(Being the income allocated by the Head office not
recorded earlier, now recorded)
(ii) Provision for Doubtful Debts A/c Dr. 1,000
To Head Office Account 1,000
(Being the provision for doubtful debts not provided earlier,
now provided for)
(iii) Head Office Account Dr. 3,000
To Salaries Account 3,000
(Being rectification of salary paid on behalf of Head Office)
(iv) Head Office Account Dr. 5,000
To Cash Account 5,000
(Being expenditure incurred on account of other branch,
now recorded in books)
(v) No entry in Branch Books is required.
(vi) Expenses Account Dr. 75,000
To Head Office Account 75,000
(Being allocated expenses of Head Office recorded)
(vii) Head Office Account Dr. 30,000
To Debtors Account 30,000
(Being adjustment entry for collection from Branch Debtors
directly by Head Office)

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PAPER – 5 : ADVANCED ACCOUNTING 21

(viii) Goods –in- transit Account Dr. 10,000


To Head Office Account 10,000
(Being goods sent by Head Office still in-transit)
(b) Calculation of correct Departmental Profits
Department P Department S Department Q
(` ) (` ) (` )
Profit after charging Manager’s 90,000 60,000 45,000
Commission
Add: Manager’s Commission (1/9) 10,000 6,667 5,000
1,00,000 66,667 50,000
Less: Unrealised profit on Stock (WN) (5,426) (21,000) (2,727)
Profit Before Manager’s Commission 94,574 45,667 47,273
Less: Manager’s Commission 10% (9,457) (4,567) (4,727)
Correct Profit after Manager’s 85,117 41,100 42,546
Commission
Working Notes:
Department P Department S Department Q Total
(` ) (` ) (` ) (` )
Unrealized Profit of:
Department P - 25/125X18,000 15/115X14,000 5,426
=3,600 =1,826
Department S 20/100X48,000 - 30/100X38,000 21,000
=9,600 =11,400
Department Q 20/120X12,000 10/110X8,000 2,727
=2,000 =727
Question 7
Answer any four of the following:
(a) A loan account remains out of order as on the date of Balance Sheet of a Bank. The
account has been classified as doubtful assets (up to 3 years). Detail of the account is:
Outstanding ` 7,24,000
ECGC Cover 30% of outstanding (Subject to
maximum of ` 1,50,000)
Value of security
As per valuation on the date of grant of loan 2,25,000
As per realizable value as on date of Balance Sheet 1,75,000
Compute the necessary provision to be made by bank as per applicable rate.

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22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

(b) State under which head these accounts should be classified in Balance Sheet, as per
Schedule VI of the Companies Act:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Long term maturity of finance lease obligation.
(c) Explain in brief the treatment of Refund of Government Grants in line with AS 12 in the
following three situations:
(i) When Government Grant is related to revenue,
(ii) When Government Grant is related to specific fixed assets,
(iii) When Government Grant is in the nature of Promoter's contribution.
(d) W paid a premium to other partners of the firm at the time of his admission to the firm,
with a condition that the will not be dissolved before expiry of five years. The firm is
dissolved after three years. W claims refund of premium.
(i) List the criteria for the calculation of the amount of refund.
(ii) Also list any two conditions when no claim in this respect will arise.
(e) Give four conditions to be fulfilled by a Joint Stock Company to buy back its equity Shares.
(4x 4 = 16 Marks)
Answer
(a) Computation of provision to be made by a Bank
`
Outstanding Value of Doubtful Asset (up to 3 years) 7,24,000
Less :Value of security (excluding ECGC cover) (` 1,75,000)
Sub Total ` 5,49,000
Less :ECGC Cover (subject to ` 1,50,000 maximum) (` 1,50,000)
Unsecured Portion ` 3,99,000
Provision:
For unsecured portion @ 100% of ` 3,99,000 ` 3,99,000
For secured portion @ 40% of ` 1,75,000 ` 70,000
Total Provision ` 4,69,000

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PAPER – 5 : ADVANCED ACCOUNTING 23

(b) Classification of following accounts for the presentation in Schedule VI to the


Companies Act, 1956
Sl. Accounts Head
No.
(i) Share application money received in excess of Other Current Liabilities
issued share capital
(ii) Share option outstanding account Reserve & Surplus
(iii) Unpaid matured debenture and interest Other Current Liabilities
accrued thereon
(iv) Uncalled liability on shares and other partly Contingent Liabilities and
paid investments commitments-commitments to
the extent not provided for
(v) Calls unpaid Share Capital
(vi) Intangible Assets under development Fixed Assets
(vii) Money received against share warrant Shareholders' Fund
(viii) Long term maturity of finance lease obligation Long Term Borrowings
(c) As per AS 12, refund of Government Grant is treated in the following manner:
(a) When Government Grant is related to Revenue:
(i) The amount of refund is first adjusted against any unamortized deferred credit
balance still remaining in respect of the Grant
(ii) Any excess refund over such deferred credit balance or where no deferred
credit exists, is immediately charged to Profit & Loss Account.
(b) When Government Grant is related to specific Fixed Asset:
(i) The amount of refund will increase the Book Value of the Asset, if at the time
of receipt of Grant, the cost of asset was reduced by the amount of Grant.
(ii) If at the time of receipt, the Grant amount was credited to Deferred Grant
Account, then the amount of refund will first reduce the unamortized balance of
Deferred Grant Account, any excess refund will reduce the Capital Reserve.
(c) When the Government Grant is in the nature of Promoter’s Contribution:
Capital Reserve will be reduced by the amount of refund.
(d) If the firm is dissolved before the term expires, as is the case, W being a partner who has
paid premium on admission will have to be repaid / refunded
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,

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24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014

(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence.
No claim for refund will arise if:
(i) The firm is dissolved due to death of a partner,
(ii) If the dissolution of the firm is basically because of misconduct of W,
(iii) If the dissolution is through an agreement and such agreement does not have a
stipulation for refund of premium.
(e) As per section 77A of the Companies Act, 1956, a joint stock company has to fulfill the
following conditions to buy back its own equity shares:
1. Buy back is authorized by its articles.
2. A special resolution has been passed in general meeting of the shareholders of the
company, authorizing the buy back.
3. The buyback does not exceed 25% of the total paid up capital and free reserves of
the company.
4. All the shares proposed for buyback are fully paid up.
5. The ratio of the debts owed by the Company is not more than twice the capital and
its free reserves after such buyback.
6. The buyback of listed shares is in accordance with the regulation of SEBI.
7. The buy back is made out of free reserves (which includes securities premium) or
out of the proceeds of a fresh issue of any shares or other specified securities.
8. The buy back is completed within 12 months of the passing of the special resolution
or resolution passed by the Board.
9. Before making such buy back, a listed company has to file with the Registrar of the
Companies and SEBI a declaration of solvency in the prescribed form.
Note: All important conditions have been given in the above answer. However, any four
conditions may be given in the answer as required in the question.

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PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer.
Question 1
Answer the following questions:
(a) State with reasons, how the following events would be dealt with in the financial
statements of Pradeep Ltd. for the year ended 31 st March, 2013:
(i) An agreement to sell a land for ` 30 lakh to another company was entered into on
1st March, 2013. The value of land is shown at ` 20 lakh in the Balance Sheet as
on 31st March, 2012. However, the Sale Deed was registered on15th April, 2013.
(ii) The negotiation with another company for acquisition of its business was started on
2nd February, 2013. Pradeep Ltd. invested ` 40 lakh on 12th April, 2013.
(b) Cost of a machine acquired on 01.04.2009 was ` 5,00,000. The machine is expected to
realize ` 50,000 at the end of its working life of 10 years. Straight-line depreciation of
` 45,000 per year has been charged upto 2011-2012. For and from 2012-13, the
company switched over to 15% p.a. reducing balance method of depreciation in respect
of the machine. The new rate of depreciation is based on revised useful life of 15 years.
The new rate shall apply with retrospective effect from 01.04.2009. State how would you
deal with the above in the annual accounts of the Company for the year ended 31 st
March, 2013 in the light of AS 5.
(c) Beekay Ltd. purchased fixed assets costing ` 5,000 lakh on 01.04.2012 payable in
foreign currency (US$) on 05.04.2013. Exchange rate of 1 US$ = ` 50.00 and ` 54.98 as
on 01.04.2012 and 31.03.2013 respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three
annual equal instalments. First instalment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2013.
(d) (i) Vasudha Ltd. provides following information:
Raw Material stock holding period : 3.5 months
Work-in-progress holding period : 1 month
Finished goods holding period : 4.5 months
Debtors collection period : 6 months

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2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

You are required to compute the operating cycle of Vasudha Ltd. What would
happen if the trade payables of the company are paid in 14 months-whether these
should be classified as current or non-current liability?
(ii) The management of Kshitij Ltd. contends that the work in progress is not valued
since it is difficult to ascertain the same in view of the multiple processes involved.
They opine that the value of opening and closing work in progress would be more or
less the same. Accordingly, the management had not separately disclosed the work
in progress in its financial statements. Comment in line with Revised Schedule VI.
(4 x 5 = 20 Marks)
Answer
(a) (i) According to AS 4 “Contingencies and Events Occurring after the Balance Sheet
Date”, assets and liabilities should be adjusted for events occurring after the
balance sheet date that provide additional evidence to assist the estimation of
amounts relating to conditions existing at the balance sheet date.
In the given case, sale of immovable property was carried out before the closure of
the books of accounts. This is clearly an event occurring after the balance sheet
date but agreement to sell was effected on 1st March, 2013 i.e. before the balance
sheet date. Registration of the sale deed on 15 th April, 2013, simply provides
additional information relating to the conditions existing at the balance sheet date.
Therefore, adjustment to assets for sale of land is necessary in the financial
statements of Pradeep Ltd. for the year ended 31 st March, 2013.
(ii) AS 4 (Revised) defines "Events occurring after the balance sheet date" as those
significant events, both favorable and unfavorable, that occur between the balance
sheet date and the date on which the financial statements are approved by the
Board of Directors in the case of a company. Accordingly, the acquisition of another
company is an event occurring after the balance sheet date. However, no
adjustment to assets and liabilities is required as the event does not affect the
determination and the condition of the amounts stated in the financial statements for
the year ended 31st March, 2013.
Applying provisions of the standard which clearly state that/disclosure should be
made in the report of the approving authority of those events occurring after the
balance sheet date that represent material changes and commitments affecting the
financial position of the enterprise, the investment of ` 40 lakhs in April, 2013 in the
acquisition of another company should be disclosed in the report of the Board of
Directors to enable users of financial statements to make proper evaluations and
decisions.
(b) WDV of asset at the end of year 2011-12= ` 5,00,000 – ` 45,000 x 3 = ` 3,65,000
WDV of asset at the end of year 2011-12 (by reducing balance method)

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PAPER – 5 : ADVANCED ACCOUNTING 3

= ` 5,00,000 (1 – 0.15)3 = ` 3,07,062.50


Depreciation to be charged in year 2012-13
= (` 3,65,000 – ` 3,07,062.50) + 15% of ` 3,07,062.50
` 57,937.50 + 46,059.38 = ` 1,03,997 (approx.)
As per AS 5 ‘Net profit or loss for the period, Prior Period Items and Changes in
Accounting Policies’ the revision of remaining useful life is change in accounting
estimate, and adoption of reducing balance method of depreciation instead of the
straight-line method is change in accounting policy. Since it is difficult to segregate
impact of these two changes, the entire amount of difference between depreciation at old
rate and depreciation charged in 2012-13 (` 1,03,997- ` 45,000 = ` 58,997) is regarded
as an effect of change in accounting estimate as per provisions of the standard. The
effect of this change in accounting estimate should be properly disclosed in the financial
statements of the company for the year ended 31st March, 2013.
(c) As per AS 11 (Revised) ‘The Effects of Changes in Foreign Exchange Rates’, exchange
differences arising on the settlement of monetary items or on reporting an enterprise’s
monetary items at rates different from those at which they were initially recorded during
the period, or reported in previous financial statements, should be recognised as income
or as an expense in the period in which they arise. However, Ministry of Corporate Affairs
has recently amended AS 11 through a notification. As per the notification, exchange
difference arising on reporting of long-term foreign currency monetary items at rates
different from those at which they were initially recorded during the period, or reported in
previous financial statements, in so far as they relate to requisition of depreciable capital
asset, can be added to or deducted from cost of asset. The MCA has given an option for
the enterprises to capitalize the exchange differences arising on reporting of long term
foreign currency monetary items till 31st March, 2020. Thus the company can capitalize
the exchange differences arising due to long term loans linked with the acquisition of
fixed assets.
Transaction 1: Calculation of exchange difference on fixed assets
5,000
Foreign Exchange Liability = = US $ 100 lakhs
50
Exchange Difference = US $ 100 lakhs x (` 54.98 – ` 50) = ` 498 lakhs.
Loss due to exchange difference amounting ` 498 lakhs will be capitalised and added in
the carrying value of fixed assets. Depreciation on the unamortised amount will be
provided in the remaining years
Transaction 2: Soft loan exchange difference (US $ 1 lakh i.e ` 50 lakhs)
Value of loan 31.3.13 → US $ 1 lakh x 54.98 = ` 54,98,000

© The Institute of Chartered Accountants of India


4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

AS 11 also provides that in case of liability designated as long-term foreign currency


monetary item ∗, the exchange difference is to be accumulated in the Foreign Currency
Monetary Item Translation Difference (FCMITD) and should be written off over the useful
life of such long-term liability, by recognition as income or expenses in each of such
periods.
Exchange difference between reporting currency (INR) and foreign currency (USD) as on
31.03.2013 = US$1.00 lakh X ` (54.98 – 50) = ` 4.98 lakh.
Loan account is to be increased to 54.98 Iakh and FCMITD account is to be debited by
4.98 lakh. Since loan is repayable in 3 equal annual instalments, ` 4.98 lakh/3 = ` 1.66
lakh is to be charged in Profit and Loss Account for the year ended 31st March, 2013 and
balance in FCMITD A/c ` (4.98 lakh – 1.66 lakh) = ` 3.32 lakh is to be shown on the
'Equity & Liabilities' side of the Balance Sheet as a negative figure under the head
'Reserve and Surplus' as a separate line item.
Note: The above answer is given on the basis that the company has availed the
option under para 46A of AS 11
(d) (i) According to Schedule VI “An operating cycle is the time between the acquisition of
assets for processing and their realization in cash or cash equivalents”.
Therefore, operating cycle of Vasudha Ltd. will be computed as:
Raw material stock holding period + Work-in-progress holding period + Finished
goods holding period + Debtors collection period
=3.5 + 1 + 4.5 + 6= 15 months
A Liability shall be classified as current when it is expected to be settled in the
Company’s normal operating cycle.
Since the operating cycle of Vasudha Ltd. is 15 months, trade payables expected to
be paid in 14 months should be treated as a current liability.
(ii) Revised schedule VI does not require WIP to be disclosed in the Statement of Profit
and Loss, thus amounts for which WIP have been completed at the beginning and
at the end of the accounting period may not be disclosed. Therefore, the non-
disclosure in the financial statements by the company may not amount to violation
of Revised Schedule VI if the differences between opening and closing WIP are not
material.
Question 2
Avi and Bishnu are partners of Abhay & Co. sharing profit and losses in the ratio 3 : 1 and
Bishnu and Joe are partners of Bijoy & Co. sharing profit and losses in the ratio 2 : 1. On


Asset or liability which is expressed in foreign currency and has a term of 12 months or more at the
time of origination of the asset or liability.

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PAPER – 5 : ADVANCED ACCOUNTING 5

31st March, 2013, they decided to amalgamate and form a new firm M/s Abeejay & Co.,
wherein Avi, Bishnu and Joe would be partners sharing profit and losses in the ratio 3 : 2 : 1.
The Balance Sheets of the two firms on 31st March, 2013 were as under:
Liabilities Abhay & Bijoy & Assets Abhay & Bijoy &
Co. Co. Co. Co.
` ` ` `
Capitals: Building 3,50,000 2,80,000
Avi 5,31,000 Plant & Machinery 2,00,000 1,50,000
Bishnu 2,00,0003,97,000 Vehicles - 90,000
Joe 2,00,000 Furniture - 10,000
Reserves 12,000 9,000 Office Equipments 38,000 45,000
Sundry Creditors 1,20,000 89,000 Stock in trade 65,000 70,000
Bank O/D 90,000 - Sundry Debtors 1,00,000 90,000
Due to R & Co. - 1,00,000 Bank Balances 80,000 60,000
Cash in hand 20,000 -
Due from R & Co. 1,00,000 -
9,53,000 7,95,000 9,53,000 7,95,000
The amalgamated firm M/s Abeejay & Co. took over the business on the following terms:
(a) Goodwill of Abhay & co. was worth ` 42,000 and that of Bijoy & Co. ` 30,000. Goodwill
account was not to be opened in the books of the new firm, the adjustments being
recorded through capital accounts of the partners.
(b) The following assets were valued as below:
Abhay & Co. Bijoy & Co.
(`) (`)
Building 4,00,000 3,00,000
Plant & Machinery 2,50,000 2,00,000
Vehicles - 98,000
Furniture - 11,000
Office Equipments 39,000 50,000
Stock in trade 70,000 80,000
(c) Provision for doubtful debt was carried forward at ` 4,000 in respect of Debtors of Abhay &
co. and ` 3,000 in respect of Debtors of Bijoy & Co.
(d) Partners of new firm brought necessary cash to pay other partners to adjust their capitals
according to the profit sharing ratio.

© The Institute of Chartered Accountants of India


6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

You are required to:


(i) Prepare the Balance Sheet of the new firm as on 31st March, 2013.
(ii) Prepare Capital Accounts of the partners in the books of old firms. (16 Marks)
Answer
Balance Sheet of M/s Abeejay & Co. as at 31st March, 2013

Liabilities ` Assets `
Capitals: Building 7,00,000
Avi 7,71,000 (` 4,00,000 + ` 3,00,000)
Bishnu 5,14,000 Plant & machinery
Joe 2,57,000 15,42,000 (` 2,50,000+` 2,00,000) 4,50,000
Sundry creditors Office equipment
(1,20,000+89,000) 2,09,000 (` 39,000+` 50,000) 89,000
Bank overdraft 90,000 Vehicle 98,000
Furniture 11,000
Stock-in-trade
(` 70,000+` 80,000) 1,50,000
Sundry debtors
(` 1,00,000+` 90,000) 1,90,000
Less: Provision for doubtful
debts (` 4,000+` 3,000) (7,000) 1,83,000
Bank balance
(` 80,000+` 60,000) 1,40,000
Cash in hand 20,000 ∗
18,41,000 18,41,000
Partners’ Capital Accounts in the books of Abhay & Co.
Particulars Avi Bishnu Particulars Avi Bishnu
` ` ` `
To Capital A/cs – 6,48,000 2,39,000 By Balance b/d 5,31,000 2,00,000
M/s Abeejay & Co. By Reserve (3:1) 9,000 3,000
By Profit on Realisation 1,08,000 36,000
A/c (W.N.4)
6,48,000 2,39,000 6,48,000 2,39,000


` 20,000+` 1,59,000+` 25,667 –` 184,667 = ` 20,000.

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PAPER – 5 : ADVANCED ACCOUNTING 7

Partners’ Capital Accounts in the books of Bijoy & Co.


Particulars Bishnu Joe Particulars Bishnu Joe
` ` ` `
To Capital A/cs – 4,83,667 2,43,333 By Balance b/d 3,97,000 2,00,000
M/s Abjeey & By Reserve (2:1) 6,000 3,000
Co. By Profit on Realisation
(W.N.5) 80,667 40,333
4,83,667 2,43,333 4,83,667 2,43,333
Working Notes:
1. Computation of purchase considerations
Abhay & Co. Bijoy& Co.
` `
Assets:
Goodwill 42,000 30,000
Building 4,00,000 3,00,000
Vehicle - 98,000
Furniture - 11,000
Plant & machinery 2,50,000 2,00,000
Office equipment 39,000 50,000
Stock-in-trade 70,000 80,000
Sundry debtors 1,00,000 90,000
Bank balance 80,000 60,000
Cash in hand 20,000 -
Due from R & Co. 1,00,000 -
(A) 11,01,000 9,19,000
Liabilities:
Creditors 1,20,000 89,000
Provision for doubtful debts 4,000 3,000
Due to R & Co. - 1,00,000
Bank overdraft 90,000 -
(B) 2,14,000 1,92,000
Purchase consideration (A-B) 8,87,000 7,27,000

© The Institute of Chartered Accountants of India


8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

2. Computation of proportionate capitals


`
M/s Abeejay & Co. (Purchase Consideration) (` 8,87,000+ ` 7,27,000) 16,14,000
Less: Goodwill adjustment (72,000)
Total capital of new firm (Distributed in ratio 3:2:1) 15,42,000
Avi’s proportionate capital 7,71,000
Bishnu’s proportionate capital 5,14,000
Joe’s proportionate capital 2,57,000
3. Computation of Capital Adjustments
Avi Bishnu Joe Total
` ` ` `
Balance transferred from Abhay & Co. 6,48,000 2,39,000 8,87,000
Balance transferred from Bijoy & Co. 4,83,667 2,43,333 7,27,000
6,48,000 7,22,667 2,43,333 16,14,000
Less: Goodwill written off in the ratio of
3:2:1 (36,000) (24,000) (12,000) (72,000)
Existing capital 6,12,000 6,98,667 2,31,333 15,42,000
Proportionate capital 7,71,000 5,14,000 2,57,000 15,42,000
Amount to be brought in (paid off) 1,59,000 (1,84,667) 25,667
4. Realisation Account in the books of Abhay & Co.
` `
To Building 3,50,000 By Creditors 1,20,000
To Plant & machinery 2,00,000 By Bank overdraft 90,000
To Office equipment 38,000 By M/s Abeejay & Co. 8,87,000
To Stock-in-trade 65,000 (purchase consideration)
To Sundry debtors 1,00,000 (W.N.1)
To Bank balance 80,000
To Cash in hand 20,000
To Due from R & Co. 1,00,000
To Partners’ capital A/cs:
Avi 1,08,000
Bishnu 36,000 1,44,000
10,97,000 10,97,000

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PAPER – 5 : ADVANCED ACCOUNTING 9

5. Realisation Account in the books of Bijoy & Co.


` `
To Building 2,80,000 By Creditors 89,000
To Plant & machinery 1,50,000 By Due to R & Co. 1,00,000
To Office equipment 45,000 By M/s Abjeejay & Co. 7,27,000
To Vehicle 90,000 (purchase consideration)
To Furniture 10,000 (W.N.1)
To Stock-in-trade 70,000
To Sundry debtors 90,000
To Bank balance 60,000
To Partners’ capital A/cs :
Bishnu 80,667
Joe 40,333 1,21,000
9,16,000 9,16,000
Note: The above answer has been given on the basis that Realization account is prepared
while closing the books of Old firms and New firm takes over the business of both old firms.
Question 3
(a) M Limited recently made a public issue of debentures. The following information is
available in respect of the issue:
(i) 3,00,000 partly convertible debentures of face value and issue price of ` 100 per
debenture were issued;
(ii) Conversion of 50% of each debenture is to be done on expiry of 6 months from date
of close of issue;
(iii) Date of closure of subscription list is 1st June, 2012. Date of allotment is 1st July,
2012;
(iv) Interest on debenture at the rate of 12% is payable from date of allotment;
(v) Equity share of ` 10 each are issued at ` 50 per share for the purpose of
conversion;
(vi) Underwriting commission is 2%;
(vii) 2,25,000 debentures were applied for;
(viii) Interest on debentures is payable half yearly on 30th September and 31st March.
Give Journal entries for all transactions relating to the above, including cash and bank
entries for the year ended 31st March, 2013. (8 Marks)

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10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

(b) The summarized Balance Sheet of Entyce Ltd. as on 31st March, 2013 read as under:
Liabilities `
Share Capital: 4,00,000 equity shares of ` 10 each fully paid up 40,00,000
General Reserve 50,00,000
Debenture Redemption Reserve 35,00,000
12% Convertible Debentures : 80,000 Debentures of ` 100 each 80,00,000
Other Loans 45,00,000
Current Liabilities and Provisions 90,00,000
3,40,00,000
Assets:
Fixed Assets (at cost less depreciation) 1,50,00,000
Debenture Redemption Reserve Investments 30,00,000
Cash and Bank Balances 40,00,000
Other Current Assets 1,20,00,000
3,40,00,000

The debentures are due for redemption on 1st April, 2013. The terms of issue of
debentures provided that they were redeemable at a premium 5% and also conferred
option to the debentureholders to convert 25% of their holding into equity shares at a
predetermined price of ` 11.90 per share and the balance payment in cash.
Assuming that:
(i) Except for debentureholders holding 12,000 debentures in aggregate, rest of them
exercised the option for maximum conversion,
(ii) The investments realized ` 32,00,000 on sale,
(iii) All the transactions were taken place on 1st April, 2013 without any lag, and
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
Redraft the Balance Sheet of Entyce Ltd. as on 01.04.2013 after giving effect to the
redemption. Show your calculations in respect of the number of equity shares to be
allotted and the cash payment necessary. (8 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 11

Answer
(a) Journal Entries
Date Particulars Amount Dr. Amount Cr.
` `
1.6.2012 Bank A/c Dr. 2,25,00,000
To Debenture Application and 2,25,00,000
Allotment A/c
(Application money received on 2,25,000
debentures @ ` 100 each)
1.7.2012 Debenture Application and Allotment A/c Dr. 2,25,00,000
Underwriters’ A/c Dr. 75,00,000
To 12% Debentures A/c 3,00,00,000
(Allotment of 2,25,000 debentures to
applicants and 75,000 debentures to
underwriters)
Underwriting Commission Dr. 6,00,000
To Underwriters’ A/c 6,00,000
(Commission payable to underwriters @
2% on ` 3,00,00,000)
Bank A/c Dr. 69,00,000
To Underwriters’ A/c 69,00,000
(Amount received from underwriters in
settlement of account)
30.09.2012 Debenture Interest A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Interest paid on debentures for 3 months
@ 12% on ` 3,00,00,000)
01.12.2012 12% Debentures A/c Dr. 1,50,00,000
To Equity Share Capital A/c 30,00,000
To Securities Premium A/c 1,20,00,000
(Conversion of 50% of debentures into
shares of ` 50 each with a face value of
` 10)

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12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

31.3.2013 Debenture Interest A/c Dr. 12,00,000


To Bank A/c 12,00,000
(Interest paid on debentures for the half
year)
31.03.2013 Profit & loss A/c Dr. 6,00,000
To Underwriting commission 6,00,000
(Being underwriting commission charged
to Profit & loss A/c at the year end)
31.03.2013 Profit & Loss A/c Dr. 21,00,000
To Debenture Interest 21,00,000
(Being interest on debenture 12,00,000 +
9,00,000 charged to Profit & loss A/c at
the year end)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2013
Interest on `1,50,00,000 for 6 months @ 12% = ` 9,00,000
Interest on ` 1,50,00,000 for 2 months @ 12% = ` 3,00,000
`12,00,000
(b) Entyce Limited
Balance Sheet as on 01.04.2013
Figures as at the
Particulars Note No end of current
reporting period
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 55,00,000
(b) Reserves and Surplus 2 85,85,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 45,00,000
(3) Current Liabilities
(a) Short-term provisions 90,00,000
Total 2,75,85,000
II. Assets
(1) Non-current assets
(a) Fixed assets

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PAPER – 5 : ADVANCED ACCOUNTING 13

(i) Tangible assets 1,50,00,000


(2) Current assets
(a) Cash and cash equivalents 5,85,000
(b) Other current assets 1,20,00,000
Total 2,75,85,000
Notes to Accounts
`
1 Share Capital
5,50,000 Equity Shares of ` 10 each 55,00,000
2 Reserve and Surplus
General Reserve 50,00,000
Add: Debenture Redemption Reserve transfer 35,00,000
85,00,000
Add: Profit on sale of investments 2,00,000
87,00,000
Less: Premium on redemption of debentures (80,000 x ` 5) (4,00,000) 83,00,000
Securities Premium Account (1,50,000 x ` 1.9) 2,85,000
85,85,000
Working Notes:
(i) Calculation of number of shares to be allotted
Total number of debentures 80,000
Less : Number of debentures not opting for conversion 12,000
68,000
25% of 68,000 17,000
Redemption value of 17,000 debentures ` 17,85,000
Number of Equity Shares to be allotted:
17,85,000
= = 1,50,000 shares of ` 10 each.
11.90
(ii) Calculation of cash to be paid
Number of debentures 80,000
Less: number of debentures to be converted into equity shares 17,000
63,000

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14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

Redemption value of 63,000 debentures (63,000 × ` 105) ` 66,15,000


(iii) Cash and Bank Balance `
Balance before redemption 40,00,000
Add : Proceeds of investments sold 32,00,000
72,00,000
Less : Cash paid to debenture holders (66,15,000)
5,85,000
Question 4
The summarized Balance Sheet of Vasant Ltd. as on 31 st March, 2013, being the date of
voluntary winding up is as under:
Liabilities Amount Assets Amount
` `
Share Capital: Land & Building 1,30,000
Issued: 10% Pref. Shares of ` 10 each 1,50,000 Sundry Current Assets 4,36,000
10,000 Equity Shares of ` 10 each, fully 1,00,000 Profit and Loss Account 35,000
paid up Debenture issue expenses
5,000 Equity Shares of ` 10 each, ` 8 per 40,000 not written off 2,000
share paid up
13% Debentures 1,50,000
Mortgage Loan 70,000
Bank overdraft 30,000
Trade Creditors 38,000
Income Tax Arrears (assessment concluded 25,000
in February, 2013)
6,03,000 6,03,000
Mortgage loan was secured against Land & Building. Debentures were secured by a floating
charge on all assets. The company was unable to meet the payments and therefore the
debentureholders appointed a Receiver for the debentureholders. He brought the Land &
Buildings to auction and realized ` 1,60,000. He also took charge of Sundry Assets of value of
` 2,36,000 and realized ` 2,00,000. The Bank overdraft was secured by personal guarantee of
the directors of the company and on the Bank raising a demand, the Directors paid off the due
from their personal resources. Costs incurred by the Receiver were ` 1,950 and by the
Liquidator ` 3,000. The receiver was not entitled to any remuneration but the Liquidator was to
receive 2% fee on the value of assets realized by him. Preference Shareholders have not
been paid dividend for period after 31st March, 2011 and interest for the last half year was due
to the Debentureholders. Rest of the assets were realized at ` 1,50,000.
Prepare the accounts to be submitted by the receiver and Liquidator. (16 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 15

Answer
Receiver’s Receipts and Payments Account
Receipts ` ` Payments ` `
Sundry Assets realised 2,00,000 Costs of the Receiver 1,950
Surplus received from Preferential payments:
Mortgage loan : - Income Taxes (raised - 25,000
Sale Proceeds of land within 12 months)
and building 1,60,000 Debentures holders:
Less: Applied to Principal amount 1,50,000
discharge of Interest for half year 9,750 1,59,750
mortgage loan (70,000) 90,000 Surplus transferred to the 1,03,300
Liquidator
2,90,000 2,90,000
Liquidator’s Final Statement of Account
Receipts ` Payments `
Surplus received from 1,03,300 Cost of Liquidation 3,000
Receiver Remuneration to Liquidator
Assets Realised 1,50,000 (1,50,000 x 2%) 3,000
Calls on Contributories : Unsecured Creditors :
On holder of 5,000 Equity 6,900 Trade 38,000
Shares at the rate of Directors for Bank O/D
` 1.38 per share cleared 30,000 68,000
Preferential Shareholders:
Capital 1,50,000
Arrears of Dividends 30,000 1,80,000
Equity shareholders:
Return of money to holders
of 10,000 equity shares at
62 paise each 6,200
2,60,200 2,60,200
Working Note:
Call from partly paid shares
Deficit before call from Equity Shares
= `(1,03,300+1,50,000) – `(3,000+3,000+68,000+1,80,000) = ` 700
Notional call on 5,000 shares @ ` 2 each 10,000

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

Net balance after notional call (a) 9,300


No. of shares deemed fully paid (b) 15,000
9,300
Refund on fully paid shares = ` 0.62
15,000
Calls on partly paid share (` 2 — ` 0.62) = ` 1.38
Question 5
Following information has been provided in respect of Watson Power Generation Project:
1. Date of commercial operation/work completed date : 1st April, 1995
2. Capital Cost at the beginning of the year 2010-11 : ` 135.39 Crore
3. Useful Life : 35 years
4. Details of allowed capital expenditure, details of actual repayment of loan and weighted
average rate of interest on loan is as follows:
2010-11 2011-12 2012-13
(` in Crore) (` in Crore) (` in Crore)
Additional Capital Expenditure
1.63 0.98 0.52
(allowed above)
Repayment of Loan during the
0.96 0.87 0.68
year (net)
Weighted Average Rate of
7.35% 7.48% 7.50%
Interest on Loan
Value of Land 0.00 0.00 0.00
5. Depreciation recovered upto 2008-09 = ` 49.05 Crore
6. Depreciation recovered in 2009-10 = ` 3.26 Crore
7. Cumulative Repayment of Loan upto 2009-10 = ` 14,00 Crore
From the above information, calculate the following as per the Central Electricity Commission
(Terms and Conditions of Tariff) Regulations, 2009:
(a) Average Capital Cost;
(b) Return on Equity;
(c) Interest on Loans;
(d) Depreciation. (16 Marks)

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PAPER – 5 : ADVANCED ACCOUNTING 17

Answer
(a) Average capital cost
Capital Cost (` in crores)
2010-11 2011-12 2012-13
` ` `
Opening capital cost (A) 135.39 137.02 138
Additional capital expenditure (allowed above) (B) 1.63 0.98 0.52
Closing Capital cost (A)+(B) 137.02 138 138.52
Average Capital cost 136.21 137.51 138.26

(b) Return on equity


Debt-Equity ratio
Debt-Equity ratio for the purpose of return on equity for the period 2010-13 is 70:30
2010-11 2011-12 2012-13
` ` `
Opening Capital cost (A) 135.39 137.02 138
Equity-Opening considered now [(A) x 0.30] = 40.617 41.106 41.4
(B)
Additional allowable capital expenditure (C) 1.63 0.98 0.52
Addition of Equity due to admitted additional 0.489 0.294 0.156
capital expenditure [(C) x 0.30]=(D)
Equity-Closing ((B)+(D))=(E) 41.106 41.4 41.556
Average equity [(B)+(E)]/2 = (F) 40.861 41.253 41.478
Return on Equity @ 14% of (F) 5.720 5.775 5.807
(c) Interest on loan
2010-11 2011-12 2012-13
` ` `
Opening Capital cost (A) 135.39 137.02 138
Gross Opening loan -considered at 70% of (A)=(B) 94.773 95.914 96.6
Cumulative Repayment of Loan upto previous year (C) 14 14.96 15.83
Net Loan Opening (B)-(C)=(D) 80.773 80.954 80.77
Additional capital expenditure (allowed above) (E) 1.63 0.98 0.52

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18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

Addition of loan due to approved additional capital 1.141 0.686 0.364


expenditure- considered at 70% of (E)=(F)
Repayment of loan during the year (net)(G) 0.96 0.87 0.68
Net Loan Closing [(D)+(F)-(G)=(H)] 80.954 80.77 80.454
Average Loan{(D)+(H)/2]=I 80.864 80.862 80.612
Weighted Average Rate of Interest on Loan (J) 7.35% 7.48% 7.50%
Interest on Loan(I) x (J) 5.944 6.048 6.046
(d) Depreciation
Name of the Power Station : Wastan Power Generation Project
Date of commercial operation /Work Completed Date 1/4/95
Beginning of Current year 1/4/10
Useful life 35 Years
Remaining Useful Life 20 Years

(Figures in ` crores)
S.N. 2010-11 2011-12 2012-13
Capital cost at beginning of the year 135.39 137.02 138
Additional capitalisation during the year 1.63 0.98 0.52
Closing capital cost 137.02 138 138.52
1 Average capital cost 136.205 137.51 138.26
2 Less: Value of Land 0.000 0.000 0.000
3 Capital cost for depreciation (1-2) 136.205 137.51 138.26
Depreciable value (90% of 3) 122.585 123.759 124.434
5 Depreciation recovered up to 2008-09 49.05
6 Depreciation recovered in 2009-10 3.26
7 Depreciation recovered upto previous year 52.31 55.824 59.400
8 Balance depreciation to be recovered (4-7) 70.27 67.936 65.035
9 Balance useful life of 35 years 20 19 18
10 Yearly depreciation from 2010-11 (8/9) 3.514 3.576 3.613
11 Depreciation recovered upto the year
(7+10) 55.824 59.400 63.013

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PAPER – 5 : ADVANCED ACCOUNTING 19

Question 6
(a) Martis Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark-up) to
give the normal selling price. The mark-up is credited to a memorandum departmental
'Mark-up account', any reduction in selling prices (mark-down) will require adjustment in
the stock account and in mark-up account. The mark up for Department A for the last
three years has been 25%. Figures relevant to Department A for the year ended 31 st
March, 2013 were as follows:
Opening stock as on 1st April, 2012, at cost ` 65,000
Purchase at cost ` 2,00,000
Sales ` 3,00,000
It is further ascertained that :
(1) Shortage of stock found in the year ending 31.03.2013, costing ` 1,000 were written off.
(2) Opening stock on 01.04.12 including goods costing ` 6,000 had been sold during
the year and bad been marked down in the selling price by ` 600. The remaining
stock had been sold during the year.
(3) Goods purchased during the year were marked down by ` 1,200 from a cost of
` 15,000. Marked-down stock costing ` 5,000 remained unsold on 31.03.13.
(4) The departmental closing stock is to be valued at cost subject to adjustment for
mark-up and mark-down.
You are required to prepare :
(i) A Departmental Trading Account for Department A for the year ended 31st March,
2013 in the books of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year. (12 Marks)
(b) From the following information of STP Bank Ltd. pertaining to the financial year 2012-13,
compute the provisions to be made in the Profit and Loss Account:
` in lakh
Assets
Standard 30,000
Sub-standard 20,000
Doubtful:
For one year (secured) 8,000
For two years and three years (secured) 2,500
For more than three years (secured by mortgage of

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20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

Plant & Machinery ` 500 lakh) 2,000


Loss Assets 1,700
(4 Marks)

Answer
(i) Department Trading Account
For the year ending on 31.03.2013
In the books of Head Office
Particulars ` Particulars `
To Opening Stock 65,000 By Sales 3,00,000
To Purchases 2,00,000 By Shortage 1,000
To Gross Profit c/d 58,880 By Closing Stock 22,880
3,23,880 3,23,880
(ii) Memorandum stock account (for Department A) (at selling price)
Particulars ` Particulars `
To Balance b/d 81,250 By Profit & Loss A/c 1,000
(` 65,000+25% of ` 65,000) (Cost of Shortage)
To Purchases 2,50,000 By Memorandum Departmental 250
(` 2,00,000 + 25% of Mark up A/c (Load on Shortage)
` 2,00,000) (` 1,000 x 25%)
By Memorandum Departmental 1,200
Mark-up A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 3,00,000
By Memorandum Departmental 600
Mark-up A/c
(Mark Down on Opening Stock)
By Balance c/d 28,200
3,31,250 3,31,250
(iii) Memorandum Departmental Mark-up Account
Particulars ` Particulars `
To Memorandum Departmental 250 By Balance b/d 16,250
Stock A/c (` 81,250 x 25/125)

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PAPER – 5 : ADVANCED ACCOUNTING 21

(` 1,000 × 25/100)
To Memorandum Departmental 1200 By Memorandum Departmental 50,000
Stock A/c Stock A/c(2,50,000 x 25/125)
To Memorandum Departmental 600
Stock A/c
To Gross Profit transferred to 58,880
Profit & Loss A/c
To Balance c/d [(` 28,200 +
400*) x 25/125 - 400] 5,320
66,250 66,250
*[` 1,200 ×5,000/15,000] = 400
Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 3,00,000
B Add: Mark-down in opening stock (given) 600
C Add: mark-down in sales out of current Purchases
(` 1,200 x 10,000 /15,000) 800
D Value of sales if there was no mark-down (A+B+C) 3,01,400
E Less: Gross Profit (25/125 of ` 3,01,400) subject to Mark Down
(` 600 + ` 800) (60,280)
F Cost of sales (D-E) 2,41,120
(ii) Calculation of Closing Stock
`
A Opening Stock 65,000
B Add: Purchases 2,00,000
C Less: Cost of Sales (2,41,120)
D Less: Shortage (1,000)
E Closing Stock (A+B-C-D) 22,880
(b) Calculation of amount of provision to be made in the Profit and Loss Account
Classification of Assets Amount of % age of Amount of
Advances provision provision

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22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

(` in lakhs) % (` in lakhs)
Standard assets 30,000 0.40 120
Sub-standard assets * 20,000 15 3,000
Doubtful assets:
For one year (secured) 8,000 25 2,000
For two to three years (secured) 2,500 40 1,000
For more than three years: unsecured 1,500 100 1,500
secured 500 100 500
Loss Assets 1,700 100 1,700
Total provision required 9,820
*Considered as fully secured
Question 7
Answer any four of the following:
(a) Classify the following into either operating or finance lease:
(i) Lessee has option to purchase the asset at lower than fair value, at the end of lease
term;
(ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired
at the end of the lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of
special nature and has been procured only for use of the lessee;
(iv) Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of the asset
is "Y".
(b) Plymouth Ltd. is engaged in research on a new process design for its product. It had
incurred ` 10 lakh on research during first 5 months of the financial year 2012-13. The
development of the process began on 1st September, 2012 and upto 31st March, 2013, a
sum of ` 8 lakh was incurred as Development Phase Expenditure, which meets assets
recognition criteria.
From 1st April, 2013, the Company has implemented the new process design and it is
likely that this will result in after tax saving of ` 2 lakh per annum for next five years.
The cost of capital is 10%. The present value of annuity factor of ` 1 for 5 years @ 10%
is 3.7908.
Decide the treatment of Research and Development Cost of the project as per AS 26.
(c) State the basis on which the following common expenses, the benefit of which is shared
by all the departments is distributed among the departments:

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PAPER – 5 : ADVANCED ACCOUNTING 23

(i) Rent, rates and taxes, insurance of building;


(ii) Selling expenses such as discount, bad debts, selling commission and other such
selling expenses;
(iii) Carriage Inward;
(iv) Depreciation;
(v) Interest on loan;
(vi) Profit or loss on sale of investment;
(vii) Wages;
(viii) Lighting and Heating Expenses.
(d) Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a
specific project at an interest rate of 6% per annum, payable annually. On the day of
taking loan, the exchange rate between currencies was ` 48 per 1 US$. The exchange
rate at the closing of the financial year was ` 50 per 1 US$. The corresponding amount
could have been borrowed by the company in Indian Rupee at an interest rate of 11 %
per annum. Determine the treatment of borrowing cost in the books of accounts.
(e) Explain in short, the following principles and term of insurance business:
(i) Principle of Indemnity;
(ii) Insurable interest;
(iii) Principle of “UBERRIMAE FIDEI”.
(iv) Catastrophic Loss (4 x 4 = 16 Marks)
Answer
(a) (i) If it becomes certain at the inception of lease itself that the option will be exercised
by the lessee, it is a Finance Lease*.
(ii) The lease will be classified as a finance lease, since a substantial portion of the life
of the asset is covered by the lease term.
(iii) Since the asset is procured only for the use of lessee, it is a finance lease.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
(b) Research Expenditure – According to AS 26 ‘Intangible Assets’, the expenditure on
research of new process design for its product ` 10 lakhs should be charged to Profit and
Loss Account in the year in which it is incurred. It is presumed that the entire expenditure
is incurred in the financial year 2012-13. Hence, it should be written off as an expense in
that year itself.
Cost of internally generated intangible asset – it is given that development phase
expenditure amounting ` 8 lakhs incurred upto 31st March, 2013 meets asset recognition

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24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

criteria. As per AS 26, for measurement of such internally generated intangible asset, fair
value can be estimated by discounting estimated future net cash flows.
Savings (after tax) from implementation of new design for next 5 years ` 2 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (` 2 lakhs x 3.7908) ` 7.582 lakhs
The cost of an internally generated intangible asset would be lower of cost value ` 8
lakhs or present value of future net cash flows ` 7.582 lakhs.
Hence, cost of an internally generated intangible asset will be ` 7.582 lakhs.
The difference of ` 0.418 lakhs (i.e. ` 8 lakhs – ` 7.582 lakhs) will be amortized by
Plymouth for the financial year 2012-13.
Amortisation - The company can amortise ` 7.582 lakhs over a period of five years by
charging ` 1.5164 lakhs per annum from the financial year 2013-2014 onwards.
(c) Allocation of Expenses
S.No. Expenses Basis
1. Rent, rates and taxes, repairs, Floor area occupied by each department
insurance of building (if given) other wise on time basis
2. Selling expenses, e.g., discount, Sales of each department
bad debts, selling commission, and
other such selling expenses
3. Carriage inward Purchases of each department
4. Depreciation Value of assets of each department
otherwise on time basis
5 Interest on loan Utilisation of loan amount in each
department (if can be identified),
otherwise in combined P& L A/c
6 Profit & loss on sale of investment Value of investments sold in each
department (if value can be identified),
otherwise in combined P& L A/c
7 Wages Time devoted to each department
8. Lighting and Heating expenses Consumption of energy by each
(eg. energy expenses) department
(d) The following computations would be made to determine the amount of borrowing costs
for the purpose of AS 16 ‘ Borrowing Costs’:
Interest for the period = US $ 20,000 × ` 50 per US $ × 6% = ` 60,000.
Increase in the liability towards the principal amount

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PAPER – 5 : ADVANCED ACCOUNTING 25

= US$ 20,000 × ` (50-48) = ` 40,000. (A)


Interest that would have resulted if the loan was taken in Indian Currency
= US $ 20,000 × 48 × 11% = ` 1,05,600
Difference between interest on local currency borrowing and foreign currency borrowing
= ` 1,05,600 – ` 60,000 = ` 45,600 (B)
In the above case, ` 40,000 (A) is less than ` 45,600 (B), therefore the entire exchange
difference of ` 40,000 would be considered as borrowing costs. The total borrowing cost
would be ` 100000 (` 60000+ ` 40000)
(e) (i) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called
indemnifier and the insured is the indemnified. In a contract of indemnity, only those
who suffer loss are compensated to the extent of actual loss suffered by them. One
cannot make profit by insuring his risks.
(ii) Insurable interest: All and sundry cannot enter into contracts of insurance. For
example, A cannot insure the life of B who is a total stranger. But if B. happens to
be his wife or his debtor or business manager, A has insurable interest i.e. vested
interest and therefore he can insure the life of B. For every type of policy insurable
interest is insisted upon. In the absence of such interest the contract will amount to
a wagering contract.
(iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive
duty to tell the whole truth in relation to the subject-matter of the contract. There is
only the negative obligation to tell nothing but the truth. In a contract of insurance,
however there is an implied condition that each party must disclose every material
fact known to him. All contracts of insurance are contracts of uberrima fidei, i.e.,
contracts of utmost good faith. This is because the assessment of the risk and the
determination of the premium by the insurer depend on the full and frank disclosure
of all material facts in the proposal form.
(iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes
severe consequences such as bankruptcy to a family, organization, or insurer.

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DISCLAIMER
The Suggested Answers hosted in the website do not constitute the basis for evaluation of the
students’ answers in the examination. The answers are prepared by the Faculty of the Board
of Studies with a view to assist the students in their education. While due care is taken in
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the attention of the Director of Studies. The Council of the Institute is not in anyway
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PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer.
Question 1
Answer the following questions:
(a) Net profit for the year 2012 : ` 24,00,000
Weighted average number of equity shares outstanding during the year 2012: 10,00,000
Average Fair value of one equity share during the year 2012 : ` 25.00
Weighted average number of shares under option during the year 2012: 2,00,000
Exercise price for shares under option during the year 2012 : ` 20.00
Compute Basic and diluted earnings per share.
(b) Closing Stock for the year ending on 31st March, 2013 is ` 1,50,000 which includes stock
damaged in a fire in 2011-12. On 31st March, 2012, the estimated net realizable value of
the damaged stock was ` 12,000. The revised estimate of net realizable value of
damaged stock included in closing stock at 2012-13 is ` 4,000. Find the value of closing
stock to be shown in Profit and Loss Account for the year 2012-13, using provisions of
Accounting Standard 5.
(c) An engineering goods company provides after sales warranty for 2 years to its
customers. Based on past experience, the company has been following policy for
making provision for warranties on the invoice amount, on the remaining balance
warranty period:
Less than 1 year : 2% provision
More than 1 year : 3% provision
The company has raised invoices as under:
Invoice Date Amount
`
19th January, 2011 40,000
29th January, 2012 25,000
15th October, 2012 90,000
Calculate the provision to be made for warranty under Accounting Standard 29 as at
31st March, 2012 and 31st March, 2013. Also compute amount to be debited to Profit and
Loss Account for the year ended 31st March, 2013.

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2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

(d) An enterprise acquired patent right for ` 400 lakhs. The product life cycle has been
estimated to be 5 years and the amortization was decided in the ratio of estimated future
cash flows which are as under:
Year Estimated Future Cash Flows
(` in lakhs)
1 200
2 200
3 200
4 100
5 100
After 3rd year, it was ascertained that the patent would have an estimated balance future
life of 3 years and the estimated cash flow after 5th year is expected to be ` 50 lakhs.
Determine the amortization under Accounting Standard 26. (4 x 5 = 20 Marks)
Answer
(a) Computation of earnings per share
Earnings Shares Earnings
(`) per share
Net profit for the year 2012 24,00,000
Weighted average number of shares outstanding 10,00,000
during the year 2012
Basic earnings per share ` 2.40
Number of shares under option 2,00,000
Number of shares that would have been issued at -* (1,60,000)
fair value: (2,00,000 x 20.00)/25.00
Diluted earnings per share 24,00,000 10,40,000 ` 2.31
*The earnings have not been increased as the total number of shares has been increased
only by the number of shares (40,000) deemed for the purpose of computation to have
been issued for no consideration.
(b) The fall in estimated net realisable value of damaged stock ` 8,000 is the effect of
change in accounting estimate. As per para 25 of AS 5 ‘Net Profit or Loss the Period,
Prior Period Items and Changes in Accounting Policies’, the effect of a change in
accounting estimate should be classified using the same classification in the statement of
profit and loss as was used previously for the estimate. It is presumed that the loss by
fire in the year ended 31.3.2012, i.e. difference of cost and NRV was shown in the profit
and loss account as an extra-ordinary item. Therefore, in the year 2012-13, revision in

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PAPER – 5 : ADVANCED ACCOUNTING 3

accounting estimate should also be classified as extra-ordinary item in the profit and loss
account and closing stock should be shown excluding the value of damaged stock.
Value of closing stock for the year 2012-13 will be as follows:
`
Closing Stock (including damaged goods) 1,50,000
Less: Revised value of damaged goods (4,000)
Closing stock (excluding damaged goods) 1,46,000
(c) Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities
and Contingent Assets’
As at 31st March, 2012 = ` 40,000 x .02 + ` 25,000 x .03
= ` 800 + ` 750
= ` 1,550
As at 31st March, 2013 = ` 25,000 x .02 + ` 90,000 x .03
= ` 500 + ` 2,700 = ` 3,200
Amount debited to Profit and Loss Account for year ended 31st March, 2013

`
Balance of provision required as on 31.03.2013 3,200
Less: Opening Balance as on 1.4.2012 (1,550)
Amount debited to profit and loss account 1,650

Note: No provision will be made on 31st March, 2013 in respect of sales amounting ` 40,000
made on 19th January, 2011 as the warranty period of 2 years has already expired.
(d) Amortization of cost of patent as per AS 26
Year Estimated future cash flow Amortization Ratio Amortized Amount
(` in lakhs) (` in lakhs)
1 200 .25 100
2 200 .25 100
3 200 .25 100
4 100 .40 (Revised) 40
5 100 .40 (Revised) 40
6 50 .20 (Revised) 20
400

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4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

In the first three years, the patent cost will be amortised in the ratio of estimated future
cash flows i.e. (200: 200: 200: 100: 100).
The unamortized amount of the patent after third year will be ` 100 (400-300) which will be
amortised in the ratio of revised estimated future cash flows (100:100:50) in the fourth, fifth
and sixth year.
Question 2
The following is the Balance Sheet of M/s. P and Q as on 31 st March, 2012:
Liabilities ` Assets `
Capital Accounts: Machinery 54,000
P 50,000 Furniture 5,000
Q 30,000 Investment 50,000
Reserves 20,000 Stock 20,000
Loan Account of Q 15,000 Debtors 21,000
Creditors 40,000 Cash 5,000
1,55,000 1,55,000
It was agreed that Mr. R is to be admitted for a fourth share in the future profits from 1st April,
2012. He is required to contribute cash towards goodwill and ` 15,000 towards capital.
The following further information is furnished:
(a) P & Q share the profits in the ratio 3 : 2.
(b) P was receiving salary of ` 750 p.m. from the very inception of the firm in 2005 in
addition to share of profit.
(c) The future profit ratio between P, Q & R will be 2:1:1. P will not get any salary after the
admission of R.
(d) It was agreed that the value of goodwill of the firm shall appear in the books of the firm.
The goodwill of the firm shall be determined on the basis of 3 years’ purchase of the
average profits from business of the last 5 years. The particulars of the profits are as
under:
Year ended Profit/(Loss) `
31st March, 2008 25,000
31st March, 2009 12,500
31st March, 2010 (2,500)
31st March, 2011 35,000
31st March, 2012 30,000

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PAPER – 5 : ADVANCED ACCOUNTING 5

The above Profits and Losses are after charging the Salary of P. The Profit of the year
ended 31st March, 2008 included an extraneous profit of ` 40,000 and the loss for the
year ended 31st March, 2010 was on account of loss by strike to the extent of ` 20,000.
(e) The cash trading profit for the year ended 31st March, 2013 was ` 50,000 before
depreciation.
(f) The partners had drawn each ` 1,000 p.m. as drawings.
(g) The value of other assets and liabilities as on 31st March, 2013 were as under:
`
Machinery (before depreciation) 60,000
Furniture (before depreciation) 10,000
Investment 50,000
Stock 15,000
Debtors 30,000
Creditors 20,000
(h) Provide depreciation @ 10% on Machinery and @ 5% on Furniture on the Closing
Balance and interest is accumulated @ 6% on Q’s loan. The loan alongwith interest
would be repaid within next 12 months.
(i) Investments are held from inception of the firm and interest is received @ 10% p.a.
(j) The partners applied for conversion of the firm into a Private Limited Company.
Certificate was received on 1st April, 2013. They decided to convert Capital A/cs of the
partners into share capital in the ratio of 2:1:1 on the basis of a total Capital as on
31st March, 2013. If necessary, partners have to subscribe to fresh capital or withdraw.
Prepare the Profit and Loss Account of the firm for the year ended 31 st March, 2013 and the
Balance Sheet of the Company on 1st April, 2013. (16 Marks)
Answer
M/s P, Q and R
Profit and Loss Account for the year ending on 31st March, 2013
` `
To Depreciation on Machinery 6,000 By Trading Profit 50,000
To Depreciation on furniture 500 By Interest on Investment 5,000
To Interest on Q’s loan 900
To Net Profit to :
P’s Capital A/c 23,800

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6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

Q’s Capital A/c 11,900


R’s Capital A/c 11,900 47,600
55,000 55,000
Balance Sheet of the PQR Pvt. Ltd. as on 1st April, 2013
Notes No. `
I Equity and Liabilities
Shareholders’ funds
Share capital 1,41,600
Current liabilities
Short term borrowings 1 15,900
Trade payables 20,000
Total 1,77,500
II Assets
Non-current assets
Fixed assets
Tangible assets 2 63,500
Non-current investments 50,000
Current assets
Inventories 15,000
Trade receivables 30,000
Cash and cash equivalents 19,000
Total 1,77,500
Notes to Accounts
`
1. Short term borrowings
Loan from Q 15,900
2. Tangible assets
Machinery 54,000
Furniture 9,500 63,500
Working Notes:
1. Calculation of goodwill
2007-08 2008-09 2009-10 2010-11 2011-12
` ` ` ` `
Profits/(Loss) 25,000 12,500 (2,500) 35,000 30,000

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PAPER – 5 : ADVANCED ACCOUNTING 7

Adjustment for extraneous profit


of 2007-08 and abnormal loss of
2009-10 (40,000) - 20,000 — —
(15,000) 12,500 17,500 35,000 30,000
Add: Salary of P (750 x12) 9,000 9,000 9,000 9,000 9,000
(6,000) 21,500 26,500 44,000 39,000
Less: Interest on non-trading
investment* (5,000) (5,000) (5,000) (5,000) (5,000)
(11,000) 16,500 21,500 39,000 34,000
Total Profit from 2008-09 to 2011-12 1,11,000
Less : Loss for 2007-08 (11,000)
1,00,000
Average Profit 20,000
Goodwill equal to 3 years’ purchase 60,000
Contribution from R for ¼ share 15,000
* Investments are assumed to be non-trading investments.
2. Calculation of sacrificing ratio of Partners P and Q on admission of R
Old share New share Sacrificing share Gaining share
P 3/5 1/2 3 1 6−5 1
− = =
5 2 10 10
Q 2/5 1/4 2 1 8−5 3
− = =
5 4 20 20
R 1/4 1/4

3. Goodwill adjustment entry ∗ through Partners’ capital accounts (in their sacrificing
ratio of 2:3)
` `
R’ s capital A/c Dr. 15,000
To P’s capital A/c 6,000

*As per AS 26 “Intangible Assets”, only purchased goodwill should appear in the books. Therefore, goodwill
though required to be shown in the books as per the requirement of the question, has been adjusted through
capital accounts of the partners in line with the provisions of AS 26.

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8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

To Q’ s capital A/c 9,000


(R’s share in goodwill adjusted through P and Q)
4. Partners’ Capital Accounts
P Q R P Q R
` ` ` ` ` `
To Drawings 12,000 12,000 12,000 By Balance 50,000 30,000 —
(1,000 x 12) b/d
To P 6,000 By General 12,000 8,000 —
Reserve
To Q 9,000 By R 6,000 9,000 —
To Balance c/d 79,800 46,900 14,900 By Bank — — 30,000
(15,000 +
15,000)
By Profit & 23,800 11,900 11,900
Loss A/c
91,800 58,900 41,900 91,800 58,900 41,900
5. Balance Sheet of the firm as on 31st March, 2013
Liabilities ` ` Assets ` `
P’s Capital 79,800 Machinery 60,000
Q’s Capital 46,900 Less : Depreciation (6,000) 54,000
R’s Capital 14,900 1,41,600 Furniture 10,000
Less : Depreciation (500) 9,500
Q’s Loan 15,000 Investments 50,000
Add : Interest due 900 15,900 Stock-in-trade 15,000
Creditors 20,000 Debtors 30,000
Cash (W.N.6) 19,000
1,77,500 1,77,500
6. Cash balance as on 31.3.2013
` `
Cash trading profit 50,000
Add: Investment Interest 5,000
Add: Decrease in Stock Balance 5,000
60,000

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PAPER – 5 : ADVANCED ACCOUNTING 9

Less: Increase in Debtors 9,000


Less: Decrease in Creditors 20,000 (29,000)
31,000
Add: Opening cash balance 5,000
Add: Cash brought in by R 30,000 35,000
66,000
Less: Drawings (12,000 +12,000 +12,000) 36,000
Less: Additions to Machine (60,000 - 54,000) 6,000
Furniture (10,000 - 5,000) 5,000 (47,000)
Closing cash balance 19,000
7. Distribution of shares – Conversion into Company
`
Capital : P 79,800
Q 46,900
R 14,900
Share Capital 1,41,600
Distribution of shares : P (1/2) 70,800
Q (1/4) 35,400
R (1/4) 35,400
P and Q should withdraw capital of ` 9,000 (` 79,800 – ` 70,800) and `11,500 (` 46,900 –
` 35,400) respectively and R should subscribe shares of ` 20,500 (`35,400 – ` 14,900).
Question 3
(a) A company issued 1,50,000 shares of ` 10 each at a premium of ` 10. The entire issue
was underwritten as follows:
X – 90000 shares (Firm underwriting 12000 shares)
Y – 37500 shares (Firm underwriting 4500 shares)
Z – 22500 shares (Firm underwriting 15000 shares)
Total subscriptions received by the company (excluding firm underwriting and marked
applications) were 22500 shares.
The marked applications (excluding firm underwriting) were as follows:
X – 15000 shares
Y – 30000 shares
Z – 7500 shares

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10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

Commission payable to underwriters is at 5% of the issue price. The underwriting


contract provides that credit for unmarked applications be given to the underwriters in
proportion to the shares underwritten and benefit of firm underwriting is to be given to
individual underwriters.
(i) Determine the liability of each underwriter (number of shares);
(ii) Compute the amounts payable or due from underwriters; and
(iii) Pass Journal Entries in the books of the company relating to underwriting. (12 Marks)
(b) Arihant Limited has its share capital divided into equity shares of ` 10 each. On
1-10-2012, it granted 20,000 employees’ stock option at ` 50 per share, when the market
price was ` 120 per share. The options were to be exercised between 10 th December,
2012 and 31st March, 2013. The employees exercised their options for 16,000 shares
only and the remaining options lapsed. The company closes its books on 31 st March
every year. Show Journal Entries (with narration) as would appear in the books of the
company upto 31st March, 2013. (4 Marks)
Answer
(a) (i) Computation of total liability of underwriters in shares
(In shares)
X Y Z Total
Gross liability 90,000 37,500 22,500 1,50,000
Less: Marked applications (excluding
firm underwriting) (15,000) (30,000) (7,500) (52,500)
75,000 7,500 15,000 97,500
Less: Unmarked applications in the ratio
of gross liabilities of 12:5:3 (excluding
firm underwriting) (13,500) (5,625) (3,375) (22,500)
61,500 1,875 11,625 75,000
Less : Firm underwriting (12,000) (4,500) (15,000) (31,500)
49,500 (2,625) (3,375) 43,500
Less: Surplus of Y and Z adjusted in X’s
balance (2,625+3,375) (6,000) 2,625 3,375
Net liability 43,500 - - 43,500
Add: Firm underwriting 12,000 4,500 15,000 31,500
Total liability 55,500 4,500 15,000 75,000

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PAPER – 5 : ADVANCED ACCOUNTING 11

(ii) Calculation of amount payable to or due from underwriters


X Y Z Total
Total Liability in shares 55,500 4,500 15,000 75,000
Amount receivable @ ` 20 from 11,10,000 90,000 3,00,000 15,00,000
underwriter (in `)
Less: Underwriting Commission (90,000) (37,500) (22,500) (1,50,000)
payable @ 5% of ` 20 (in `)
Net amount receivable (in `) 10,20,000 52,500 2,77,500 13,50,000
(iii) Journal Entries in the books of the company (relating to underwriting)
` `
1. X Dr. 11,10,000
Y Dr. 90,000
Z Dr. 3,00,000
To Share Capital A/c 7,50,000
To Securities Premium A/c 7,50,000
(Being allotment of shares to underwriters)
2. Underwriting commission A/c Dr. 1,50,000
To X 90,000
To Y 37,500
To Z 22,500
(Being amount of underwriting commission payable)
3. Bank A/c Dr. 13,50,000
To X 10,20,000
To Y 52,500
To Z 2,77,500
(Being net amount received by underwriters for
shares allotted less underwriting commission)
(b) Journal Entries in the books of Arihant Ltd.
` `
10.12.12 Bank A/c (16,000 x 50) Dr. 8,00,000
to Employee compensation expense A/c (16,000 x 70) Dr. 11,20,000
31.3.13 To Equity share capital A/c (16,000 x 10) 1,60,000

© The Institute of Chartered Accountants of India


12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

To Securities premium A/c (16,000 x 110) 17,60,000


(Being shares issued to the employees against the
options vested to them in pursuance of Employee Stock
Option Plan)
31.3.13 Profit and Loss A/c Dr. 11,20,000
To Employee compensation expense A/c 11,20,000
(Being transfer of employee compensation expenses to
Profit and Loss Account)
Question 4
The summarized Balance Sheet of Bad Luck Ltd. as on 31st March, 2013 was as follows:
Note Amount Amount
` `
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 7,50,000
(b) Reserves and Surplus 2 (10,00,000) (2,50,000)
2. Non-current Liabilities
(a) Long Term borrowings 3 5,00,000
3. Current Liabilities
(a) Short Term Borrowings 4 5,00,000
(b) Trade Payables 2,50,000 7,50,000
Total 10,00,000

B. Assets
1. Non-current assets
(a) Fixed Assets
(i) Tangible assets 5 5,50,000
(ii) Intangible assets 6 1,50,000 7,00,000
2. Current Assets
(a) Inventories 1,50,000
(b) Trade Receivables 1,25,000
(c) Deferred revenue expenditure 25,000 3,00,000
Total 10,00,000

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PAPER – 5 : ADVANCED ACCOUNTING 13

Notes to Accounts
Amount Amount
` `
1. Share Capital
Authorised, issued & fully paid
5,000 equity shares of ` 100 each 5,00,000
2,500 8% preference shares of ` 100 each 2,50,000 7,50,000
2. Reserves and Surplus
Profit and Loss Account (10,00,000)
3. Long Term borrowings
8% Debentures 5,00,000
4. Short Term Borrowings
Loan from Directors 3,00,000
Bank overdraft 2,00,000 5,00,000
5. Tangible Assets
Freehold property 4,00,000
Plant 1,50,000 5,50,000
6. Intangible Assets
Goodwill 1,00,000
Trademark 50,000 1,50,000
The following scheme of internal reconstruction was framed, approved by the Court, all the
concerned parties and implemented:
(i) The preference shares to be written down to ` 25 each and the equity shares to ` 20
each. Each class of shares then to be converted into shares of ` 100 each.
(ii) The debenture holders to take over freehold property (book value ` 2,00,000) at a
valuation of ` 2,50,000 in part repayment of their holdings. Remaining freehold property
to be revalued at ` 6,00,000.
(iii) Loan from directors to be waived off in full.
(iv) Stock of ` 50,000 to be written off, ` 12,500 to be provided for bad debts.
(v) Profit and Loss account balance, Trademark, goodwill and deferred revenue expenditure
to be written off.
Pass Journal Entries for all the above mentioned transactions. Also Prepare Capital Reduction
account and company’s Balance Sheet immediately after reconstruction. (16 Marks)

© The Institute of Chartered Accountants of India


14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

Answer
Journal entries in the books of Bad Luck Ltd.
Particulars Debit(`) Credit(`)
i 8% Preference Share Capital A/c (` 100 each) Dr. 2,50,000
To 8% Preference Share Capital A/c (` 25 each) 62,500
To Capital Reduction A/c 1,87,500
(Being the preference shares of ` 100 each reduced to ` 25
each as per the approved scheme)
ii Equity Share Capital A/c (` 100 each) Dr. 5,00,000
To Equity Share Capital A/c (` 20 each) 1,00,000
To Capital Reduction A/c 4,00,000
(Being the equity shares of ` 100 each reduced to
` 20 each)
iii Preference Share Capital A/c (` 25) Dr. 62,500
To Preference Share Capital A/c (` 100) 62,500
(Being conversion of 2500 shares of ` 25 each to 625
shares of ` 100 each)
iv Equity Share Capital A/c (` 20) Dr. 1,00,000
To Equity Share Capital A/c (`100) 1,00,000
(Being conversion of 5,000 shares of ` 20 each to 1000 shares
of ` 100 each)
v Freehold Property Dr. 50,000
To Capital Reduction A/c 50,000
(Being value of freehold property appreciated)
vi 8% Debentures A/c Dr. 2,50,000
To Freehold Property 2,50,000
(Being claim of Debenture holders settled in part by transfer
of freehold property)
vii Freehold Property Dr. 4,00,000
To Capital Reduction A/c 4,00,000
(Being appreciation in the value of freehold property)
viii Director’s Loan A/c Dr. 3,00,000
To Capital Reduction A/c 3,00,000
(Being director’s loan waived in full)
ix Capital Reduction A/c Dr. 13,37,500
To Deferred Revenue Expenditure 25,000
To Profit and Loss A/c 10,00,000
To Provision of Doubtful Debts A/c 12,500

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PAPER – 5 : ADVANCED ACCOUNTING 15

To Inventories 50,000
To Goodwill A/c 1,00,000
To Trademark 50,000
To Capital Reserve A/c 1,00,000
(Being certain value of various assets (tangible & intangible),
profit and loss account debit balance written off and balance
transferred to capital reserve account as per the scheme)

(b) Capital Reduction Account


(`) (`)
To Provision for Doubtful Debts 12,500 By Preference Share Capital 1,87,500
To Inventories 50,000 By Equity Share Capital 4,00,000
To Profit & Loss A/c 10,00,000 By Freehold Property 4,50,000
To Trademark 50,000 (50,000 + 4,00,000)
To Goodwill 1,00,000 By Director’s Loan 3,00,000
To Deferred Revenue 25,000
Expenditure
To Capital Reserve 1,00,000
13,37,500 13,37,500
Balance Sheet of Bad Luck Ltd. (And Reduced)
As on 31st March 2013
Particulars Note No. `
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,62,500
(b) Reserves and Surplus 2 1,00,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 2,50,000
(3) Current Liabilities
(a) Short Term borrowings 4 2,00,000
(b) Trade payable 2,50,000
9,62,500
II. Assets
(1) Non-current assets
(a) Fixed assets

© The Institute of Chartered Accountants of India


16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

Tangible assets 5 7,50,000


(2) Current assets
(a) Inventories 1,00,000
(b) Trade receivables 6 1,12,500
Total 9,62,500
Notes to Accounts

`
1. Share Capital
Authorised, issued and fully paid up
1,000 Equity shares of `100 each fully paid-up 1,00,000
625, 8% Preference Share of ` 100 each 62,500
1,62,500
2. Reserve and Surplus
Capital Reserve 1,00,000
3. Long Term Borrowings
8% Debentures ` (5,00,000-2,50,000) 2,50,000
4. Short-Terms Borrowings
Bank Overdraft 2,00,000
5. Tangible assets
Freehold Property 6,00,000
Plant 1,50,000
7,50,000
6. Trade Receivables
Trade Receivables 1,25,000
Less: Provision for doubtful debts (12,500)
1,12,500
Question 5
(a) From the following information as on 31st March, 2013 of Bachao Insurance Co. Ltd.
engaged in fire insurance business, prepare the Revenue Account, reserving 40% of the
net premiums for unexpired risks and an additional reserve of ` 3,50,000:
Amount
Particulars
`
Reserve for unexpired risk on 31st March, 2012 7,50,000
Additional reserve on 31st March, 2012 1,50,000
Claims paid 9,60,000

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PAPER – 5 : ADVANCED ACCOUNTING 17

Estimated liability in respect of outstanding claims on 31st March, 2012 97,500


Estimated liability in respect of outstanding claims on 31st March, 2013 1,35,000
Expenses of management (including ` 45,000 in connection with
4,20,000
claims)
Re-insurance premium paid 1,12,500
Re-insurance recoveries 30,000
Premiums 16,80,000
Interest and dividend 75,000
Profit on sale of investments 15,000
Commission 1,75,000
(8 Marks)
(b) The following information is available in the books of X Bank Limited as on 31st March, 2013:
`
Bills discounted 1,37,05,000
Rebate on bills discounted (as on 1-4-2012) 2,21,600
Discount received 10,56,650
Details of bills discounted are as follows:
Value of Bills (`) Due Date Rate of Discount
18,25,000 05-06-2013 12%
50,00,000 12-06-2013 12%
28,20,000 25-06-2013 14%
40,60,000 06-07-2013 16%
Calculate the rebate on bills discounted as on 31-3-2013 and give necessary Journal
Entries in the books of X Bank Ltd. as on 31st March, 2013. (8 Marks)
Answer
(a) FORM B– RA
Name of the Insurer: Bachao Insurance Company Limited
Registration No. and Date of registration with IRDA: ……………………..
Revenue Account for the year ended 31st March, 2013
Particulars Schedule Amount (`)
Premium earned (net) 1 14,90,500
Profit on sale of investment 15,000
Others –
Interest and dividend (gross) 75,000
Total (A) 15,80,500

© The Institute of Chartered Accountants of India


18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2013

Claims incurred (Net) 2 10,12,500


Commission 3 1,75,000
Operating expenses related to insurance 4 3,75,000
Total (B) 15,62,500
Operating profit from insurance business (A) – (B) 18,000
Schedule –1 Premium earned (net)
`
Premium received 16,80,000
Less: Premium on reinsurance ceded (1,12,500)
Net Premium 15,67,500
Less:Adjustment for change in Reserve for Unexpired risk (as per W.N.) (77,000)
Total premium earned 14,90,500
Schedule -2 Claims incurred (net)
`
Claims paid 9,60,000
Add: Expenses regarding claims 45,000
10,05,000
Less: Re-insurance recoveries (30,000)
9,75,000
Add: Claims outstanding as on 31st March, 2013 1,35,000
11,10,000
Less: Claims outstanding as on 31st March, 2012 (97,500)
10,12,500
Schedule -3 Commission
`
Commission paid 1,75,000
Schedule-4 Operating expenses related to Insurance Business
`
Expenses of management (`4,20,000 – `45,000) 3,75,000
Working Note:
Calculation for change in Reserve for Unexpired risk:
`
Reserve for Unexpired Risk as on 31st March, 2013 6,27,000
Additional Reserve as on 31st March, 2013 3,50,000 9,77,000

© The Institute of Chartered Accountants of India


PAPER – 5 : ADVANCED ACCOUNTING 19

Less: Reserve for Unexpired Risk as on 31st March, 2012 7,50,000


Additional Reserve as on 31st March, 2012 1,50,000 (9,00,000)
77,000
Note: Interest and dividends are shown at gross value in Revenue account. It is assumed
that amount of interest and dividend given in the question is before TDS.
(b) Calculation of Rebate on bills discounted
Due date Unexpired portion from Rate of Rebate on bills
S.No. Amount (`)
(year 2013) 31st March, 2013 discount discounted (`)
(i) 18,25,000 June 5 66 days 12% 39,600
(ii) 50,00,000 June 12 73 days 12% 1,20,000
(iii) 28,20,000 June 25 86 days 14% 93,021
(iv) 40,60,000 July 6 97 days 16% 1,72,633
1,37,05,000 4,25,254
Journal Entries in the books of X Bank Ltd.
Particulars Dr. (`) Cr. (`)
(1) Rebate on bills discounted A/c Dr. 2,21,600
To Discount on bills A/c 2,21,600
(Being the transfer of opening balance of rebate on
bills discounted account to discount on bills account)
(2) Discount on bills A/c Dr. 4,25,254
To Rebate on bills discounted A/c 4,25,254
(Being the unexpired portion of discount in respect
of the discounted bills of exchange carried forward
to next year)
(3) Discount on bills A/c Dr. 8,52,996
To Profit and Loss A/c 8,52,996
(Being the amount of income for the year transferred
from Discount on bills A/c to Profit and Loss A/c)
Working Note:
Amount of discount to be credited to the Profit and Loss Account
`
Transfer from Rebate on bills discounted A/c as on 31st
March, 2012 2,21,600
Add: Discount received during the year ended 31st March, 2013 10,56,650
12,78,250
Less: Rebate on bills discounted as on 31st March, 2013 (4,25,254)
Discount credited to Profit and Loss Account 8,52,996

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20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2