- Amazon Web Servicescaclubindia.s3.amazonaws.com/cdn/forum/files/30190_748192... · 01-01-2009 · Question 1 Answer any four out of the following: (a) From the following details

PAPER – 1 : FINANCIAL REPORTING

Question No. 1 is compulsory. Answer any five out of the remaining questions.

Working notes should form part of the answer.Wherever necessary, suitable assumptions may be made by the candidates.

Question 1Answer any four out of the following:(a) From the following details of an asset

(i) Find out impairment loss(ii) Treatment of impairment loss(iii) Current year depreciationParticulars of asset:

Cost of asset Rs.56 lakhsUseful life period 10 yearsSalvage value NilCurrent carrying value Rs. 27.30 lakhsUseful life remaining 3 yearsRecoverable amount Rs.12 lakhsUpward revaluation done in last year Rs.14 lakhs

(b) Rainbow Limited borrowed an amount of Rs.150 crores on 1.4.2008 for construction ofboiler plant @ 11% p.a. The plant is expected to be completed in 4 years. Since theweighted average cost of capital is 13% p.a., the accountant of Rainbow Ltd. capitalizedRs.19.50 crores for the accounting period ending on 31.3.2009. Due to surplus fund, outof Rs.150 crores, an income of Rs.3.50 crores was earned and credited to profit and lossaccount. Comment on the above treatment of accountant with reference to relevantaccounting standard.

(c) Suraj Limited wishes to obtain a machine costing Rs.30 lakhs by way of lease. Theeffective life of the machine is 14 years, but the company requires it only for the first 5years. It enters into an agreement with Ashok Ltd., for a lease rental for Rs.3 lakhs p.a.payable in arrears and the implicit rate of interest is 15%. The chief accountant of SurajLimited is not sure about the treatment of these lease rentals and seeks your advise.

(d) Omega Limited is working on different projects which are likely to be completed within 3years period. It recognizes revenue from these contracts on percentage of completionmethod for financial statements during 2006, 2007 and 2008 for Rs.11,00,000,Rs.16,00,000 and Rs.21,00,000 respectively. However, for income-tax purpose, it hasadopted the completed contract method under which it has recognized revenue ofww

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FINAL EXAMINATION : JUNE, 2009

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Rs.7,00,000, Rs.18,00,000 and Rs.23,00,000 for the years 2006, 2007 and 2008respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/liabilityfor the years 2006, 2007 and 2008.

(e) While preparing its final accounts for the year ended 31st March, 2009, a company madea provision for bad debts @ 5% of its total debtors. In the last week of February 2009, adebtor for 2 lakhs had suffered heavy loss due to earthquake. The loss was not coveredby any insurance policy. In April, 2009, the debtor became bankrupt. Can the companyprovide for full loss arising out of insolvency of debtor in the final accounts for year ended31st March, 2009? (4x5 = 20 Marks)

Answer(a) According to para 59 of AS 28 “Impairment of Assets”, an impairment loss on a revalued

asset is recognised as an expense in the statement of profit and loss. However, animpairment loss on a revalued asset is recognised directly against any revaluationsurplus for the asset to the extent that the impairment loss does not exceed the amountheld in the revaluation surplus for that same asset.

Impairment Loss and its treatment Rs.

Current carrying amount (including revaluation amount of Rs.14 lakhs) 27,30,000Less: Current recoverable amount 12,00,000Impairment Loss 15,30,000Impairment loss charged to revaluation reserve 14,00,000Impairment loss charged to profit and loss account 1,30,000

As per para 61 of AS 28, “after the recognition of an impairment loss, the depreciation(amortization) charge for the asset should be adjusted in future periods to allocate theasset’s revised carrying amount, less its residual value (if any), on a systematic basisover its remaining useful life.”In the given case, the carrying amount of the asset will be reduced to Rs.12,00,000 afterimpairment. This amount is required to be depreciated over remaining useful life of 3years (including current year). Therefore, the depreciation for the current year will beRs.4,00,000.

(b) Para 10 of AS 16 ‘Borrowing Costs’ states, “to the extent that funds are borrowedspecifically for the purpose of obtaining a qualifying asset, the amount of borrowing costseligible for capitalisation on that asset should be determined as the actual borrowingcosts incurred on that borrowing during the period less any income on the temporaryinvestment of those borrowings.” The capitalisation rate should be the weighted averageof the borrowing costs applicable to the borrowings of the enterprise that are outstandingduring the period, other than borrowings made specifically for the purpose of obtaining aqualifying asset. Hence, in the above case, treatment of accountant of Rainbow Ltd. is

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incorrect. The amount of borrowing costs capitalized for the financial year 2008-2009should be calculated as follows:

Actual interest for 2008-2009 (11% of Rs.150 crores) Rs.16.50 croresLess: Income on temporary investment from specific borrowings Rs. 3.50 croresBorrowing costs to be capitalized during year 2008-2009 Rs. 13.00 crores

(c) As per AS 19 ‘Leases’, a lease will be classified as finance lease if at the inception of thelease, the present value of minimum lease payment amounts to at least substantially allof the fair value of leased asset. In the given case, the implicit rate of interest is given at15%. The present value of minimum lease payments at 15% using PV- Annuity Factorcan be computed as follows:

Annuity Factor (Year 1 to Year 5) 3.36 (approx.)Present value of minimum lease payments (for Rs.3 lakhs each year) Rs.10.08 lakhs (approx.)

Thus, present value of minimum lease payments is Rs.10.08 lakhs and the fair value ofthe machine is Rs.30 lakhs. In a finance lease, lease term should be for the major part ofthe economic life of the asset even if title is not transferred. However, in the given case,the effective useful life of the machine is 14 years while the lease is only for five years.Therefore, lease agreement is an operating lease. Lease payments under an operatinglease should be recognized as an expense in the statement of profit and loss on astraight line basis over the lease term unless another systematic basis is morerepresentative of the time pattern of the user’s benefit.

(d) Omega LimitedCalculation of Deferred Tax Asset/Liability

Year AccountingIncome

Taxable Income Timing Difference(balance)

Deferred TaxLiability (balance)

2006 11,00,000 7,00,000 4,00,000 1,40,0002007 16,00,000 18,00,000 2,00,000 70,0002008 21,00,000 23,00,000 NIL NIL

48,00,000 48,00,000

In calculating the present value of minimum lease payments, the discount rate is the interest rateimplicit in the lease. This is calculated using the following formula:

( ) ( ) ( ) ( ) ( )54321 15.+11

+15.+11

+15.+11

+15.+11

+15.+11ww

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(e) As per para 8.2 and 13 of Accounting Standard 4 ‘Contingencies and Events occurringafter the Balance Sheet Date’, assets and liabilities should be adjusted for eventsoccurring after the date of balance sheet, that provide additional evidence to assistestimation of amounts relating to conditions existing at the Balance Sheet Date.Therefore, in the given case, full provision for bad debt amounting Rs.2 lakhs should bemade to cover the loss arising due to insolvency in the final accounts for the year ended31st March, 2009 as earthquake took place before the balance sheet date.

Question 2The Balance Sheet of Munna Ltd as on 31st March, 2009 is as follows:

Liabilities Rs. Assets Rs.Authorised and issued Share capital Goodwill 2,00,00020,000 Equity shares of Rs.100 each, fully paid 20,00,000 Plant & Machinery 18,00,00010,000, 7% Preference shares of Rs.100 each 10,00,000 Stock 3,00,000Sundry creditors 7,00,000 Debtors 7,50,000Bank overdraft 3,00,000 Cash 1,50,000

Preliminary expenses 1,00,000Profit and Loss A/c 7,00,000

40,00,000 40,00,000

Additional Information:Two years’ preference share dividend is in arrears. The company had bad time during the lasttwo years and hopes for better business in future, earning profit and paying dividend, providedthe capital base is reduced.An internal reconstruction scheme, agreed to by all concerned, is as follows:(i) Creditors agreed to forego 50% of their claim.(ii) Preference shareholders withdrew arrear dividend claim. They also agreed to lower

down their capital claim by 20% by reducing nominal value in consideration of 9%dividend effective after reconstruction, in case equity shareholder’s loss exceeded 50%on the application of the scheme.

(iii) Bank has agreed to convert overdraft into term loan to the extent required for makingcurrent ratio to 2:1.

(iv) Revalued amount for plant and machinery was accepted as Rs.15,00,000.(v) Debtors to the extent of Rs.4,00,000 were considered as good.(vi) Equity shares shall be exchanged for the same number of equity shares at a revised

denomination as required after the reconstruction.

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You are required to show the following:(a) Total loss to be borne by the equity and preference shareholders for the reconstruction.(b) Share of loss to the individual class of shareholders.(c) New structure of share capital after reconstruction.(d) Working capital of the reconstructed company, and(e) A Performa Balance Sheet after reconstruction. (16 Marks)

Answer(a) Loss to be borne by Equity and Preference Shareholders

Rs.Profit and loss account (debit balance) 7,00,000Preliminary expenses 1,00,000Goodwill 2,00,000Plant and machinery (Rs. 18,00,000 – Rs. 15,00,000) 3,00,000Debtors (Rs. 7,50,000 – Rs. 4,00,000) 3,50,000Amount to be written off 16,50,000Less: 50% of Sundry Creditors 3,50,000Total loss to be borne by the equity and preference shareholders 13,00,000

(b) Share of loss to preference shareholders and equity shareholdersTotal loss of Rs. 13,00,000 being more than 50% of equity share capital i.e. Rs.10,00,000Preference shareholders’ share of loss = 20% of Rs. 10,00,000 = Rs. 2,00,000Equity shareholders’ share of loss (Rs. 13,00,000 – Rs. 2,00,000)= Rs. 11,00,000Total loss Rs. 13,00,000

(c) New structure of share capital after reorganisation

Equity shares: Rs.20,000 equity shares of Rs. 45 each, fully paid up(Rs. 20,00,000 – Rs. 11,00,000) 9,00,000Preference shares:10,000, 9% preference shares of Rs. 80 each, fully paid up(Rs. 10,00,000 – Rs. 2,00,000) 8,00,000

17,00,000

Two years’ preference dividend (arrears) has been ignored in the computation of loss to be borne byequity and preference shareholders.ww

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(d) Working capital of the reorganized company

Current Assets: Rs. Rs.Stock 3,00,000Debtors 4,00,000Cash 1,50,000

8,50,000Less: Current liabilities:

Creditors 3,50,000Bank overdraft 75,000 4,25,000

Working capital 4,25,000

(e) Balance Sheet of Munna Ltd. (and reduced)as on 31st March, 2009

Liabilities Rs. Assets Rs.Share Capital Authorised(issued and paid up)

Fixed Assets

20,000 equity shares of Rs. 45 each 9,00,000 Plant and Machinery 15,00,00010,000, 9% preference shares of Rs. 80each

8,00,000 Current Assets

Unsecured loan Stock 3,00,000Term loan with Bank 2,25,000 Debtors 4,00,000Current liabilities Cash 1,50,000Bank overdraft 75,000Creditors 3,50,000 ________

23,50,000 23,50,000

Question 3From the following details, prepare a consolidated Balance Sheet of Sun Limited and itssubsidiaries as on 31st March, 2009:

(Rs. in Lakhs)Assets Sun Ltd. Moon Ltd. Star Ltd.Fixed assets (net) 816 312 126Investment (at cost)

Current ratio shall be 2 : 1, i.e. total current liabilities shall be 50% of Rs. 8,50,000 (i.e. Rs. 3,00,000 +4,00,000 + 1,50,000) = Rs. 4,25,000. Therefore, Bank overdraft = Rs. 75,000 (Rs. 4,25,000 lesscreditors Rs. 3,50,000).ww

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7,50,000, equity shares of Moon Ltd. 75 - -2,40,000 equity shares of Star Ltd. 24 - -4,80,000, equity shares of Star Ltd. - 60 -30,000 cumulative preference shares of Sun Ltd. - - 304,500 mortgage debentures of Sun Ltd. - - 42Current assets 1,059 369 336Profit and loss account 288 108 63

2,262 849 597LiabilitiesEquity share capital (Rs.10 each fully paid up) 180 144 1207.5% Cumulative preference share capital (Rs.100 each fully paid) 45 36 30Capital reserve (revaluation of fixed assets) 360 - -General reserve 75 45 307,500, 8% mortgage debenture bonds of Rs.1,000each

75 - -

Secured loans and advances:From banks 513 249 165Unsecured loans:From Moon Ltd. - - 36From Star Ltd. 45 - -Current liabilities and provisions:Inter-company balances 27 - -Other liabilities 942 375 216

2,262 849 597

Other information are as follows:(a) Moon Ltd. subscribed for 2,40,000 shares of Star Ltd. at par at the time of first issue and

further acquired 2,40,000 shares from the market at Rs.15 each, when the Reserve andSurplus account of Star Ltd. stood at Rs.15 lakhs.

(b) Sun Ltd. subscribed for shares of Moon Ltd. and Star Ltd. at par at the time of first issueof shares by both the companies.

(c) Current assets of Moon Ltd. and Star Ltd. includes Rs.12 lakhs and Rs.18 lakhsrespectively being current account balance against Sun Ltd. (16 Marks)

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AnswerConsolidated Balance Sheet of Sun Limited and its subsidiaries as on 31st March, 2009

Liabilities Rs. Assets Rs. Rs.Share capital Goodwill 3,00,000(18,00,000 Equity Shares ofRs.10 each) 180,00,000

Fixed assets 12,54,00,000

15,000, 7½% CumulativePreference shares of Rs. 100eachMinority interest

15,00,000132,18,750

Current assetsLess: Inter-company owing

17,64,00,00081,00,000

16,83,00,000

Reserves and surplus Less: Inter-companyCapital reserve 360,00,000 balances 27,00,000 16,56,00,000Secured loan8% Mortgage debentures 30,00,000 Profit and loss account 264,18,750Loans and advancesSecured loan from bank 927,00,000Current liabilities andprovisions 15,33,00,000

31,77,18,750 31,77,18,750

Working Notes:

(1) Shareholding Pattern In MoonLtd.

In Star Ltd.

(i) Sun Limited48

2510

2

(ii) Moon Limited 104

(iii) Minority Interest 4823

104

(2) Analysis of Profits Capital Revenue(a) Star Limited Rs. Rs.

Balance at acquisition 15,00,000Balance as per P&L A/c (63,00,000)General reserve 30,00,000Profit on debentures 3,00,000Net loss as on 31.3.09 (30,00,000)Less: Capital profit (-)15,00,000

(45,00,000) (45,00,000)ww

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Minority interest (4/10) 6,00,000 (18,00,000)Share of Moon Limited (4/10) 6,00,000 (18,00,000)Share of Sun Limited (2/10) 3,00,000 (9,00,000)

(b) Moon LimitedP&L A/c as on 31.3.09 (1,08,00,000)General Reserve 45,00,000

(63,00,000)Share of revenue loss in Star Ltd. (18,00,000)

(81,00,000)Minority Interest (23/48) (38,81,250)Sun Limited (25/48) (42,18,750)

(3) Goodwill/Capital Reserve Moon Ltd. Star Ltd.Cost of investment 75,00,000 84,00,000Less: Share capital 75,00,000 72,00,000

Capital profit 3,00,000 6,00,000Capital reserve/Goodwill (3,00,000) 6,00,000Goodwill Rs.6,00,000 less Rs.3,00,000 3,00,000

(4) Minority InterestShare capital 69,00,000 48,00,000Capital profit - 6,00,000Revenue profit (38,81,250) (18,00,000)Preference shares (36,00,000+30,00,000) - 66,00,000

30,18,750 1,02,00,000Total 1,32,18,750

(5) Profit and Loss Account – Sun Ltd.Balance as on 31.03.2009 (2,88,00,000)General reserve 75,00,000Share of Star Limited (9,00,000)Share of Moon Limited (42,18,750)

(2,64,18,750)ww

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Question 4(a) On 1.4.2008, a mutual fund scheme had 18 lakh units of face value of Rs.10 each was

outstanding. The scheme earned Rs.162 lakhs in 2008-09, out of which Rs.90 lakhs wasearned in the first half of the year. On 30.9.2008, 2 lakh units were sold at a “NAV” ofRs.70.Pass Journal entries for sale of units and distribution of dividend at the end of 2008-09.

(b) Following is the Balance Sheet of Rampal Limited as on 31st March, 2009:

Liabilities Rs. Assets Rs.1,00,000 equity shares of Rs.10 each 10,00,000 Goodwill 5,00,00010,000, 12% preference shares ofRs.100 each 10,00,000

Buildings 15,00,000

General reserve 6,00,000 Plant 10,00,000Profit and Loss account 4,00,000 Investment in 10% stock 4,80,00015% debentures 10,00,000 Stock-in-trade 6,00,000Creditors 8,00,000 Debtors 4,00,000

Cash 1,00,000Preliminary expenses 2,20,000

48,00,000 48,00,000

Additional information are given below:(a) Nominal value of investment is Rs.5,00,000 and its market value is Rs.5,20,000.(b) Following assets are revalued:

(i) Building Rs.32,00,000(ii) Plant Rs.18,00,000(iii) Stock-in-trade Rs.4,50,000(iv) Debtors Rs.3,60,000

(c) Average profit before tax of the company is Rs.12,00,000 and 12.50% of the profit istransferred to general reserve, rate of taxation being 50%.

(d) Normal dividend expected on equity shares is 8% while fair return on closing capitalemployed is 10%.

(e) Goodwill may be valued at three year’s purchase of super profits.Ascertain the value of each equity share under fair value method. (6+10= 16 Marks)

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Answer(a)

Allocation of Earnings Old UnitHolders

New UnitHolders

Total

[18 Lakh Units] [2 Lakh Units]Rs. in Lakhs Rs. in Lakhs Rs. in Lakhs

First half year (Rs.5 per unit) 90.00 Nil 90.00Second half year (Rs.3.60 per unit) 64.80 7.20 72.00

154.80 7.20 162.00Add: Equalization payment recovered - - 10.00Available for distribution 172.00Equalization Payment:- Rs.90 lakhs 18 Lakhs = Rs.5 per unit.

Old UnitHolders

New UnitHolders

Rs. Rs.Dividend distributed 8.60 8.60Less: Equilisation payment - 5.00

8.60 3.60

Journal Entries (Rs. in lakhs)30.9.2008 Bank A/c Dr. 150.00

To Unit Capital A/c 20.00To Reserves A/c 120.00To Dividend Equilisation A/c 10.00

(Being the amount received on sale of 2lakhs unit at a NAV of Rs.70/- per Unit)

31.3.2009 Dividend Equalization A/c Dr. 10.00To Revenue A/c 10.00

(Being the amount transferred to RevenueAccount)Revenue A/c Dr. 172.00

To Bank A/c 172.00(Being the amount distributed among 20lakhs unit holders @ Rs.8.60 per unit)

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(b)1. Capital Employed Rs. Rs.

Assets:Buildings 32,00,000Plant 18,00,000Stock 4,50,000Debtors 3,60,000Cash 1,00,000

59,10,000Less: Liabilities:

Creditors 8,00,000Debentures 10,00,000 18,00,000

Capital Employed 41,10,000

2. Actual ProfitAverage Profit 12,00,000Less: Income from investment 50,000

11,50,000Less: Income Tax @ 50% 5,75,000So, Actual Profit 5,75,000

3. Profit for Equity ShareholdersActual Profit 5,75,000Less: Transfer to reserves @ 12.50% 71,875Less: Preference Dividend 1,20,000Profit available to Equity Shareholders 3,83,125

4. Normal Profit = 10% of Capital Employed = 10% of Rs.41,10,000 = Rs.4,11,0005. Super Profit = Actual profit – Normal profit

= Rs.5,75,000 – 4,11,000 = Rs.1,64,0006. Goodwill = Rs.1,64,000 × 3 = Rs.4,92,0007. Net Assets for equity shareholders = Capital Employed + Goodwill + Investment –

Preference Share Capital= Rs.(41,10,000+4,92,000+4,80,000- 10,00,000)= Rs.40,82,000w

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8. Value per Share (Intrinsic Value Method) = Rs.40,82,000 ÷ 1,00,000 = Rs.40.829. Value per Share (Yield Method)

Yield on equity shares = 100×CapitalEquityrsShareholdeEquityforofitPr

%31.38=100×000,00,10125,83,3.Rs

=

Value per Share (Yield Method) = 89.47.Rs10831.38

10. Value of equity share under Fair Value Method

2Value) Yield+Value(Intrinsic

= 247.89)+(40.82

= Rs.44.36 (approx.)

Question 5The Balance Sheet of R Ltd. for the year ended on 31st March, 2006, 2007 and 2008 are asfollows:

(Rs. in thousands)Liabilities 31.3.2006 31.3.2007 31.3.20083,20,000 equity shares of Rs.10 each, fully paid 3,200 3,200 3,200General reserve 2,400 2,800 3,200Profit and Loss account 280 320 480Creditors 1,200 1,600 2,000

7,080 7,920 8,880AssetsGoodwill 2,000 1,600 1,200Building and Machinery less, depreciation 2,800 3,200 3,200Stock 2,000 2,400 2,800Debtors 40 320 880Bank balance 240 400 800

7,080 7,920 8,880

Additional information:(a) Actual valuations were as under

Building and machinery less, depreciation 3,600 4,000 4,400Stock 2,400 2,800 3,200Net profit (including opening balance afterww

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writing off depreciation, goodwill, tax provisionand transferred to general reserve) 840 1,240 1,640

(b) Capital employed in the business at market value at the beginning of 2005-06 wasRs.73,20,000 which included the cost of goodwill. The normal annual return on averagecapital employed in the line of business engaged by R Ltd. is 12½%.

(c) The balance in the general reserve on 1st April, 2005 was Rs.20 lakhs.(d) The goodwill shown on 31.3.2006 was purchased on 1.4.2005 for Rs.20 lakhs on which

date the balance in the Profit and Loss account was Rs.2,40,000. Find out the averagecapital employed in each year.

(e) Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method).Find out the total value of the business as on 31.3.2008. (16 Marks)

Answer

1. Average Capital Employed at the end of each year31.3.2006

Rs.31.3.2007

Rs.31.3.2008

Rs.Goodwill 20,00,000 16,00,000 12,00,000Building and Machinery (Revaluation) 36,00,000 40,00,000 44,00,000Stock (Revalued) 24,00,000 28,00,000 32,00,000Debtors 40,000 3,20,000 8,80,000Bank Balance 2,40,000 4,00,000 8,00,000Total Assets 82,80,000 91,20,000 104,80,000Less: Creditors 12,00,000 16,00,000 20,00,000Closing Capital 70,80,000 75,20,000 84,80,000Add: Opening Capital 73,20,000 70,80,000 75,20,000Total 144,00,000 146,00,000 160,00,000Average Capital 72,00,000 73,00,000 80,00,000Since the goodwill has been purchased, it is taken as a part of Capital employed.

2. Total value of business Rs.Total Net Assets as on 31.3.2008 84,80,000Less: Goodwill as per Balance Sheet 12,00,000Add: Goodwill as calculated in Working Note 41,12,500

Value of Business 113,92,500

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Working Note:Valuation of Goodwill

(i) Future Maintainable Profit 31.3.2006 31.3.2007 31.3.2008Rs. Rs. Rs.

Net Profit as given 8,40,000 12,40,000 16,40,000Less: Opening Balance 2,40,000 2,80,000 3,20,000

Adjustment for Valuation ofOpening Stock - 4,00,000 4,00,000

Add: Adjustment for Valuation of closingstock 4,00,000 4,00,000 4,00,000Goodwill written off - 4,00,000 4,00,000Transferred to General Reserve 4,00,000 4,00,000 4,00,000

Future Maintainable Profit 14,00,000 17,60,000 21,20,000Less: 12.50% Normal Return on average

capital 9,00,000 9,12,500 10,00,000(ii) Super Profit 5,00,000 8,47,500 11,20,000

(iii) Average Super Profit = Rs.(5,00,000 + 8,47,500+11,20,000) ÷ 3 = Rs.8,22,500(iv) Value of Goodwill at five years’ purchase= Rs.8,22,500 × 5 = Rs.41,12,500.Question 6(a) Rajkumar Ltd. is adopting historical cost system. From the following details furnished,

prepare current cost Profit and Loss account for the year ended on 31.3.2009:Statement of Profit and Loss: (Rs.)Sales 24,00,000Cost of sales:

Opening stock 1,80,000Purchases 15,60,000Less: Closing stock 2,40,000 15,00,000Gross Profit 9,00,000Operating expenses 3,60,000Depreciation 1,20,000Interest on loan 1,80,000Provision for tax 90,000Net profit 1,50,000Dividend (proposed) 30,000Retained profit 1,20,000

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The chief finance officer of Rajkumar Ltd. furnished the additional information as below:

(a) Gearing adjustment for the year Rs.20,232(b) Cost of sales adjustment for the year Rs.37,998(c) Depreciation adjustment for the year Rs.18,000(d) Monetary working capital adjustment for the year Rs.13,500

(8 Marks)(b) From the following information of Vinod Ltd., compute the economic value added:

(i) Share capital Rs.2,000 lakhs(ii) Reserve and surplus Rs.4,000 lakhs(iii) Long-term debt Rs.400 lakhs(iv) Tax rate 30%(v) Risk free rate 9%(vi) Market rate of return 16%(vii) Interest Rs.40 lakhs(viii) Beta factor 1.05(ix) Profit before interest and tax Rs.2,000 lakhs

(8 Marks)

Answer(a) Current Cost Profit and Loss Account of Raj Kumar Ltd.

for the year ended 31.3.2009

Rs. Rs.Trading profit before interest and tax under historical costsystemGross profit less (Operating expenditure + Depreciation)Rs. 9,00,000 – (Rs. 3,60,000 + Rs.1,20,000) 4,20,000Less: Current cost adjustments

Depreciation adjustment 18,000Cost of sales adjustment 37,998Monetary working capital adjustment 13,500 69,498

Current cost operating profit 3,50,502Less: Interest on loan 1,80,000

Gearing adjustment 20,232 1,59,768Current cost profit before tax 1,90,734Less: Provision for tax 90,000ww

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Current cost profit after tax 1,00,734Less: Dividend 30,000Retained current cost profit for the year 70,734

(b) Vinod LimitedComputation of Economic Value Added

Economic Value Added Rs. in LakhsNet Operating Profit after Tax (Refer Working Note 5) 1,372.00Add: Interest on Long-term Fund (Refer Working Note 2) 28.00

1,400.00Less: Cost of Capital Rs. 6,400 lakhs × 15.77% (Refer working notes 3 and 4) 1,009.28Economic Value Added 390.72

Working Notes:

(1) Cost of Equity = Risk free Rate + Beta Factor (Market Rate – Risk Free Rate)9% + 1.05 (16 – 9) = 9% + 7.35% = 16.35%

(2) Cost of DebtInterest Rs.40 lakhsLess: Tax (30%) Rs.12 lakhsInterest after Tax Rs.28 lakhs

Cost of Debt = 10040028

= 7%

(3) Weighted Average Cost of CapitalCost of Equity Rs. 6,000 lakhs × 16.35% (W.N.1) Rs. 981 lakhsCost of Debt Rs. 400 lakhs × 7% (W.N.2) Rs. 28 lakhs

Rs. 1,009 lakhs

WACC = %77.15=100×400,6009,1

(approx.)

4. Capital Employed

Rs. in LakhsShare Capital 2,000Reserves and Surplus 4,000Long term debts 400

6,400ww

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5. Net Operating Profit after Tax

Profit before Interest and Tax 2,000Less: Interest 40

1,960Tax 30% on 1,960 Lakhs 588Net Operating Profit after Tax 1,372

Question 7Write short notes on any four from the following:(a) What are the objectives of financial reporting?(b) What do you mean by “Net asset value” (NAV) in case of mutual fund units?(c) State the treatment of the following items with reference to Indian Accounting Standards

and IFRS:(i) Discontinued operations – definition and measurement(ii) Acquired intangible assets.

(d) Non-performing asset in the context of NBFC.(e) Forward contract. (4x4 = 16 Marks)

Answer(a) The following are the objectives of financial reporting:

(i) To provide information that is useful to present and potential investors and creditorsand other users in making rational investment, credit, and similar decisions.

(ii) To provide information to help investors, creditors, and others to assess theamount, timing and uncertainty of prospective net cash inflows to the relatedenterprise.

(iii) To provide information about the economic resources of an enterprise, the claims tothose resources (obligations of the enterprise to transfer resources to other entitiesand owners’ equity), and the effects of transactions, events and circumstances thatchange resources and claims to those resources.

(iv) To provide information about an enterprise’s financial performance during a period.(v) To give information about an enterprise’s performance provided by measures of

earnings and its components.(vi) To provide information about how an enterprise obtains and spends cash, about its

borrowing and repayment of borrowing, about its capital transactions, including cashdividends and other distributions of enterprise’s resources to owners, and aboutother factors that may affect an enterprise’s liquidity or solvency.

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(vii) To provide information about how management of an enterprise has discharged itsstewardship responsibility to owners (stockholders) for the use of enterpriseresources entrusted to it.

(viii) To provide information that is useful to managers and directors in making decisionsin the interest of owners.

(b) Mutual funds sell their shares to public and redeem them at current net assets value(NAV) which is calculated as under:–

sizeUnitsliabilitieFundMutual All-holdingsFundMutualallofvaluemarketTotal

The net asset value of a mutual fund scheme is basically the per unit market value of allthe assets of the scheme. Simply stated, NAV is the value of the assets of each unit ofthe scheme. Thus, if the NAV is more than the face value (Rs. 10), it means your moneyhas appreciated and vice versa. NAV also includes dividends, interest accruals andreduction of liabilities and expenses, besides market value of investments. NAV is thevalue of net assets under a mutual fund scheme. The NAV per unit is NAV of the schemedivided by number of units outstanding. NAV of a scheme keeps on changing withchange in market value of portfolio under the scheme.

(c) Treatment under Indian Accounting Standard and IFRSIndian AccountingStandards

IFRS

(i) Discontinuingoperation - definitionand measurement

Operations and cash flowsthat can be clearlydistinguished for financialreporting and representmajor line of business orgeographical area ofoperations are discontinuedoperations.Measurement ofdiscontinued operations isbased on AS 24.

Definition of discontinuedoperations under IFRS issimilar to Indian AccountingStandards. However, it alsoincludes a subsidiaryacquired exclusively with aview to resale. Discontinuedoperations are measured atlower of carrying amount andfair value less cost to sell.

(ii) Acquired intangibleassets

If recognition criteria aresatisfied then it can becapitalized. All intangiblesare amortized over usefullife with rebuttablepresumption of notexceeding 10 years.Revaluations are notpermitted.

If recognition criteria aresatisfied then it can becapitalized. It is amortizedover useful life. Intangiblesassigned an indefinite usefullife are not amortized butreviewed at least annually forimpairment. Revaluationsare permitted in rarecircumstances.w

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(d) “NonPerforming Asset” as per NBFC Prudential Norms (RBI) directions means:(i) An asset, in respect of which, interest has remained past due for six months;(ii) A term loan inclusive of unpaid interest, when the instalment is overdue for more

than six months of which interest amount remained past due for six months;(iii) A bill which remained overdue for six months;(iv) The interest in respect of a debt or the income on receivables under the head ‘other

current assets’ in the nature of short term loans/advances that remained overdue fora period of six months;

(v) Any dues on account of sales of assets or services rendered or reimbursementexpenses made, which remained overdue for a period of six months;

(vi) The lease rental and hire purchase instalment, which has become overdue for aperiod of more than twelve months;

(vii) In respect of loans, advances and other credit facilities (including bills purchasedand discounted), the balance outstanding under the credit facilities made availableto borrower /beneficiary when anyone of the credit facilities becomes NPA.

However, an NBFC may classify each such account on the basis of record of recovery asregards hire purchase and lease transactions.

(e) A forward contract is an agreement between two parties whereby one party agrees to buyfrom, or sell to, the other party an asset at a future time for an agreed price (usuallyreferred to as the ‘contract price’). The parties to forward contracts may be individuals,corporates or financial institutions. At maturity, a forward contract is settled by deliveryof the asset by the seller to the buyer in return for payment of the contract price. Forexample, a person (X) may enter into a forward contract with another person (Y) on June15, 20x3 to buy 10 kgs. of silver at the end of 90 days at a price of Rs. 8,200 per kg. Atthe end of the 90 days, Y will deliver 10 kgs. of silver to X against payment of Rs. 82,000.If the price of silver, at the end of the 90 days, is Rs. 8,300 per kg., X would make a profitof Rs. 1,000 and Y would lose Rs. 1,000, as X could sell silver bought at Rs. 82,000 forRs. 83,000, whereas Y would have to buy silver for Rs. 83,000 and sell for Rs. 82,000.On the other hand, if the price of silver at the end of the 90 days is Rs. 7,800 per kg., Xwould lose Rs. 4,000, whereas Y would make a profit of Rs. 4,000, as X would have tosell silver bought at Rs. 82,000 for Rs. 78,000, whereas Y would buy silver for Rs.78,000, which he would sell to X at Rs. 82,000.

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PAPER – 1: FINANCIAL REPORTING Answer all questions.

Working notes should form part of the answer. Wherever necessary, suitable assumptions may be made by the candidates.

Question 1 (a) Mr. A bought a forward contract for three months of US $ 1,00,000 on 1st December at

1 US $ = Rs.47.10 when exchange rate was US $ 1 = Rs.47.02. On 31st December when he closed his books, exchange rate was US $ 1 = Rs.47.15. On 31st

(a) It is apparent from the facts given in the question that Mr. A entered into forward exchange contract for speculation purpose

January, he decided to sell the contract at Rs.47.18 per dollar. Show how the profits from contract will be recognised in the books.

(b) Sun Ltd. has entered into a sale contract of Rs.5 crores with X Ltd. during 2009-10 financial year. The profit on this transaction is Rs.1 crore. The delivery of goods to take place during the first month of 2010-11 financial year. In case of failure of Sun Ltd. to deliver within the schedule, a compensation of Rs.1.5 crores is to be paid to X Ltd. Sun Ltd. planned to manufacture the goods during the last month of 2009-10 financial year. As on balance sheet date (31.3.2010), the goods were not manufactured and it was unlikely that Sun Ltd. will be in a position to meet the contractual obligation. (i) Should Sun Ltd. provide for contingency as per AS 29? (ii) Should provision be measured as the excess of compensation to be paid over the

profit? (c) Rainbow Limited borrowed an amount of Rs.150 crores on 1.4.2009 for construction of

boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. The weighted average cost of capital is 13% p.a. The accountant of Rainbow Ltd., capitalised interest of Rs.19.50 crores for the accounting period ending on 31.3.2010. Due to surplus fund out of Rs.150 crores, an income of Rs.3.50 crores was earned and credited to profit and loss account. Comment on the above treatment of accountant with reference to relevant accounting standard.

(d) Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs.200 lakhs and Rs.400 lakhs respectively. From the third year it is expected that the timing difference would reverse each year by Rs.10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability at the end of the second year and any charge to the Profit and Loss account. (4 × 5 = 20 Marks)

Answer

∗

∗ The forward contract is sold before its due date, hence considered as speculative.

. According to paragraphs 38 and 39 of AS

Copyright -The Institute of Chartered Accountants of India

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FINAL (NEW) EXAMINATION: MAY, 2010

2

11(Revised) ‘The Effects of Changes in Foreign Exchange Rates’, gain or loss on forward exchange contracts intended for trading or speculation purpose should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate (or the forward rate last used to measure a gain or loss on that contract for an earlier period). The gain or loss so computed should be recognised in the statement of profit and loss for the period and the premium or discount on the forward exchange contract is ignored and not recognised separately. In recording such contract, at each balance sheet date, the value of the contract is marked to its current market value and the gain or loss on the contract is recognised.

Thus, the premium on contract i.e., the difference between the contract rate and the spot rate amounting Rs. 8,000 [US$ 1,00,000 x (Rs.47.10 – Rs.47.02)] will be ignored and not be recorded in the books. However, the profit on contract i.e. the difference between the sale rate and contract rate amounting Rs. 8,000 [US$ 1,00,000 x 0.08∗

(c) Para 10 of the AS 16 ‘Borrowing Cost’ states, “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”. The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding

(Rs.47.18 – Rs.47.10)] will be recognized in the books of Mr. A on 31st January.

Note: The answer has been given on the basis that Mr. A is a small and medium-sized entity and AS 30 “Financial Instruments: Recognition and Measurement” is not applicable to him.

(b) (i) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an enterprise has a present obligation, as a result of past events, that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation, a provision should be recognised. Sun Ltd. has the obligation to deliver the goods within the scheduled time as per the contract. It is probable that Sun Ltd. will fail to deliver the goods within the schedule and it is also possible to estimate the amount of compensation. Therefore, Sun Ltd. should provide for the contingency amounting Rs. 1.5 crores as per AS 29.

(ii) Provision should not be measured as the excess of compensation to be paid over the profit. The goods were not manufactured before 31st March, 2010 and no profit had accrued for the financial year 2009-2010. Therefore, provision should be made for the full amount of compensation amounting Rs.1.50 crores.

∗ The current market value of the forward contract on 31st December has not been given in the

question. Therefore, no gain or loss can be recognised in the books on 31st December. The profit amounting Rs. 8,000 will be recognised in the year of sale only.


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PAPER – 1: FINANCIAL REPORTING

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during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. In the given case, the amount of Rs. 150 crores was specifically borrowed for construction of boiler plant. Therefore, treatment of accountant of Rainbow Ltd. is not correct and the amount of borrowing costs to be capitalised for the financial year 2009-10 should be calculated as follows:

Rs. (in crores) Interest paid for 2009-10 (11% on Rs.150 crores) 16.50

Less: Income on temporary investment from specific borrowings 3.50 Borrowing costs to be capitalised during 2009-10 13.00

(d) As per Accounting Standards Interpretation (ASI) 5∗

“Accounting for Taxes on Income in the situations of Tax Holiday under sections 10A and 10B of the Income-tax Act, 1961 Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax in respect of timing differences which originate during the tax holiday period and reverse during the tax holiday period, should not be recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in respect of timing differences which originate during the tax holiday period but reverse after the tax holiday period should be recognised in the year in which the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of prudence as laid down in AS 22. For this purpose, the timing differences which originate first should be considered to reverse first. Out of Rs. 200 lakhs depreciation timing difference, amount of Rs. 80 lakhs (Rs. 10 lakhs x 8 years) will reverse in the tax holiday period and therefore, should not be recognised. However, for Rs. 120 lakhs (Rs. 200 lakhs – Rs. 80 lakhs), deferred tax liability will be recognised for Rs. 48 lakhs (40% of Rs. 120 lakhs) in first year. In the second year, the entire amount of timing difference of Rs. 400 lakhs will reverse only after tax holiday period and hence, will be recognised in full. Deferred tax liability amounting Rs. 160 lakhs (40% of Rs. 400 lakhs) will be created by charging it to profit and loss account and the total balance of deferred tax liability account at the end of second year will be Rs. 208 lakhs (48 lakhs + 160 lakhs).

Question 2 (a) While closing its books of account as on 31.12.2009 a non-banking finance company

(NBFC) has its advances classified as under: Rs. in lakhs

Standard assets 10,000 Sub-standard assets 1,000 Secured portion of doubtful debts

∗ This ASI has been incorporated as an explanation to para 13 of the notified AS 22.


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-Upto one year 160 -One year to three year 70 -More than three years 20 Unsecured portion of doubtful debts 90 Loss assets 30

Calculate the provision to be made against advances by NBFC as per prudential norms. (b) Comforts Ltd. granted Rs.10,00,000 loan to its employees on January 1, 2009 at a

concessional interest rate of 4% per annum. Loan is to be repaid in five equal annual instalments along with interest. Market rate of interest for such loan is 10% per annum. Following the principles of recognition and measurement as laid down in AS 30 ‘Financial Instruments : Recognition and Measurement’, record the entries for the year ended 31st

Year end

December, 2009 for the loan transaction, and also calculate the value of loan initially to be recognised and amortised cost for all the subsequent years. The present value of Re.1 receivable at the end of each year based on discount factor of 10% can be taken as:

1 0.9090

2 0.8263 3 0.7512

4 0.6829 5 0.6208

(4 + 12 = 16 Marks) Answer (a) Calculation of provision on advances as on 31.12.2009

Amount Provision Rs. in lakhs % Rs. in lakhs Standard assets 10,000 Zero Nil Sub standard assets 1,000 10% 100 Secured portion of doubtful debts Upto one year 160 20% 32 One year to three years 70 30% 21 More than three years 20 50% 10 Unsecured portion of doubtful debts 90 100% 90 Loss assets 30 100% 30 Total provision 283


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(b) (i) Journal Entries in the books of Comfort Ltd. for the year ended 31st December, 2009 (regarding loan to employees)

Dr. Amount

(Rs.)

Cr. Amount

(Rs.)

Staff loan A/c Dr. 10,00,000 To Bank A/c 10,00,000 (Being the disbursement of loans to staff)

Staff cost A/c (10,00,000 – 8,54,763) [Refer part (ii)]

Dr. 1,45,237

To Staff loan A/c 1,45,237 (Being the write off of excess of loan balance over present value thereof, in order to reflect the loan at its present value of Rs. 8,54,763)

Staff loan A/c Dr. 85,476 To Interest on staff loan A/c 85,476 (Being the charge of interest @ market rate of 10% to the loan)

Bank A/c Dr. 2,40,000 To Staff loan A/c 2,40,000 (Being the repayment of first instalment with interest for the year)

Interest on staff loan A/c Dr. 85,476 To Profit and loss A/c 85,476 (Being transfer of balance in staff loan Interest account to profit and loss account)

Profit and loss A/c Dr. 1,45,237 To Staff cost A/c 1,45,237 (Being transfer of balance in staff cost account to profit and loss account)


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(ii) Calculation of initial recognition amount of loan to employees

Cash Inflow Total P.V. factor Present

value Year end

Principal Interest @ 4%

Rs. Rs. Rs. Rs. 2009 2,00,000 40,000 2,40,000 0.9090 2,18,160 2010 2,00,000 32,000 2,32,000 0.8263 1,91,702 2011 2,00,000 24,000 2,24,000 0.7512 1,68,269 2012 2,00,000 16,000 2,16,000 0.6829 1,47,506 2013 2,00,000 8,000 2,08,000 0.6208 1,29,126

Present value or Fair value 8,54,763 (iii) Calculation of amortised cost of loan to employees

Year

Amortised cost (Opening balance)

[1]

Interest to be recognised@10%

[2]

Repayment (including interest)

[3]

Amortised Cost

(Closing balance)

[4]=[1]+ [2] – [3]

Rs. Rs. Rs. Rs. 2009 8,54,763 85,476 2,40,000 7,00,239 2010 7,00,239 70,024 2,32,000 5,38,263 2011 5,38,263 53,826 2,24,000 3,68,089 2012 3,68,089 36,809 2,16,000 1,88,898 2013 1,88,898 19,102 (Bal. fig.)∗ 2,08,000 Nil

Question 3 The draft Balance Sheet of three companies, W, H, O, as at 31.3.2010 is as under:

Rs. in thousands Assets W H O Fixed assets 697 648 349 Investments 1,60,000 shares in H 562 --- ---

∗ The difference of Rs. 212 (Rs. 19,102 - Rs. 18,890) is due to approximation in computations.


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80,000 shares in O 184 --- --- Cash at bank 101 95 80 Trade receivables 386 321 251 Inventory 495 389 287

Total 2,425 1,453 967 Liabilities Share capital (Nominal value Re.1 per share)

600 200 200

Reserves 1,050 850 478 Trade payables 375 253 189 Debentures 400 150 100

Total 2,425 1,453 967 You are given the following information: (a) W purchased the shares in H on 13.10.2005 when the balance in reserves was Rs.500

thousands. (b) The shares in O were purchased on 11.5.2005 when the balance in reserves was Rs.242

thousands. (c) The following dividend have been declared but not accounted for before the accounting

year end.

W - Rs.65 thousands H - Rs.30 thousands O - Rs.15 thousands

(d) Included in inventory figure of O is inventory valued at Rs.20 thousands which had been purchased from W at cost plus 25%.

(e) Goodwill in respect of the acquisition of H has been fully written off. (f) On 31.3.2010 H made bonus issue of one share for every share held. This had not been

accounted in the balance sheet as on 31.3.2010. (g) Included in trade payables of W is Rs.18 thousands to O, which is included in trade

receivables of O. Prepare Consolidated Balance Sheet of W as at 31.3.2010. (16 Marks)


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Answer Consolidated Balance Sheet of W and its subsidiary H

As at 31st March, 2010

(Rs. in thousands) Assets Fixed assets (697+ 648) 1,345.00 Investment in Associate (W.N.5) 184.00 (including goodwill Rs.7.20 thousand) Add: Accumulated reserves 86.80 270.80 Cash at bank (101+ 95) 196.00 Trade receivables (386+ 321) 707.00 Inventory (495+ 389) 884.00 Dividend receivable from O 6.00

Total 3,408.80 Liabilities Share capital (Nominal value Re.1 per share) 600.00 Minority Interest (W.N.3) 204.00 Reserves (W.N.4) 1,355.80 Trade payables (375+ 253) 628.00 Debentures (400+ 150) 550.00 Proposed Dividend (W.N.6) 71.00

Total 3,408.80

Working Notes: 1. Analysis of profits of H

(Rs. in thousands)

Pre acquisition profits

Post acquisition profits

Reserves on the date of acquisition 500 350 Less: Bonus issue∗ 200 300 350

∗ It is assumed that bonus issue had been made out of pre-acquisition reserves.


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Less: Dividend declared on 31.3.2010 30 300 320 Minority interest (20%) 60 64 W’s share (80%) 240 256

2. Cost of control/Goodwill

Rs. in thousands Amount paid for investment 562 Less: Paid up value of shares including bonus (80% of 400) 320 Share in pre-acquisition profits of H 240 560 Goodwill 2

3. Minority Interest

Rs. in thousands Paid up value of share including bonus issue (400 × 20%) 80 Share in pre acquisition profits of H 60 Share in post acquisition profits of H 64 204

4. Consolidated Reserves

Rs. in thousands Rs. in thousands Balance as per W’s Balance Sheet 1,050.00 Add: Share in post acquisition profits of H 256.00 Dividend from H 24.00 Share of profit from Associate O 86.80 Add: Dividend from O 6.00 92.80

1,422.80 Less: Dividend payable 65.00 Goodwill written off 2.00 67.00 1,355.80

5. Investment in Associate O as on 31.03.2010 (As per AS 23)

Rs. in thousands Amount paid for investment 184.00 Less: Paid up value of shares 80.00 Share in pre acquisition reserves (40% of 242) 96.8 176.80 Goodwill (Identified at the time of purchase) 7.20


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Initial cost 184.00 Add: Increase in equity reserves [40% of (478 – 15 – 242)] 88.40

Less: Unrealised profit ( %40)1252520 ×× ) (1.60) 86.80

Investment in Associate O as on 31.03.10 270.80 Share of profit from Associate O ( 270.80 – 184 + 6 ) 92.80

6. Proposed Dividend

Rs. in thousands W 65 Minority Interest (30 – 24) 6 71

Question 4 The following are the Balance Sheets of Cat Ltd. and Bat Ltd. as on 31.3.2010:

(Rs. in thousands) Liabilities Cat Ltd. Bat Ltd. Share capital: Equity shares of 100 each fully paid up 2,000 1,000 Reserves 800 --- 10% Debentures 500 --- Loans from Banks 250 450 Bank overdrafts --- 50 Sundry creditors 300 300 Proposed dividend 200 ---

Total 4,050 1,800 Assets Tangible assets/fixed assets 2,700 850 Investments (including investments in Bat Ltd.) 700 --- Sundry debtors 400 150 Cash at bank 250 --- Accumulated loss --- 800

Total 4,050 1,800


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Bat Ltd. has acquired the business of Cat Ltd. The following scheme of merger was approved: (i) Banks agreed to waive off the loan of Rs.60 thousands of Bat Ltd. (ii) Bat Ltd. will reduce its shares to Rs.10 per share and then consolidate 10 such shares

into one share of Rs.100 each (new share). (iii) Shareholders of Cat Ltd. will be given one share (new) of Bat Ltd. in exchange of every

share held in Cat Ltd. (iv) Proposed dividend of Cat Ltd. will be paid after merger to shareholders of Cat Ltd. (v) Sundry creditors of Bat Ltd. includes Rs.100 thousands payable to Cat Ltd. (vi) Cat Ltd. will cancel 20% holding in Bat Ltd. as investment, which was held at a cost of

Rs.250 thousands. Pass necessary entries in the books of Bat Ltd. and prepare Balance Sheet after merger.

(16 Marks) Answer Calculation of purchase consideration

One share of Bat Ltd. will be issued in exchange of every share of Cat Ltd. (i.e. 20,000 equity shares of Bat Ltd will be issued against 20,000 equity shares of Cat Ltd.)

20,000 shares Less: Shares already held (20% of 10,000) 2,000 shares converted in new equity shares

200 shares

Number of shares to be issued by Bat Ltd to shareholders of Cat Ltd. 19,800 shares Journal Entries in the books of Bat Ltd.

Date

(Rs. in thousands)

2010 Dr. Cr. March, 31 Loan from bank A/c Dr. 60 To Reconstruction A/c 60 (Being loan from bank waived off to the extent of Rs. 60

thousand)

Equity share capital A/c (Rs.100) Dr. 1,000 To Equity share capital A/c (Rs.10) 100 To Reconstruction A/c 900 (Being Equity share of Rs. 100 each reduced to Rs.10

each)


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Equity share capital A/c (Rs.10) Dr. 100 To Equity share capital A/c (Rs.100 each) 100 (Being 10 Equity shares of Rs. 10 each consolidated to

one share of Rs.100 each)

Reconstruction A/c Dr. 960 To Profit and loss A/c 800 To Capital reserve A/c 160 (Being accumulated losses set off against reconstruction

A/c and balance transferred to capital reserve account)

Business purchase A/c Dr. 1,980 To Liquidator of Cat Ltd. 1,980 (Being purchase of business of Cat Ltd.) Fixed asset A/c Dr. 2,700 Investment A/c (700 – 250) Dr. 450 Sundry debtors A/c Dr. 400 Cash at bank A/c Dr. 250 To Sundry creditors A/c 300 To Proposed dividend A/c 200 To Loans from bank A/c 250 To 10% Debenture A/c 500 To Business purchase A/c 1,980 To Reserves A/c (800 – 230) 570 (Being assets, liabilities and reserves taken over under

pooling of interest method)

Liquidator of Cat Ltd. A/c Dr. 1,980 To Equity share capital A/c 1,980 (Being payment made to liquidators of Cat Ltd. by

allotment of 19,800 new equity shares))

Sundry creditors A/c Dr. 100 To Sundry debtors A/c 100 (Being mutual owing cancelled) Proposed dividend A/c Dr. 200 To Bank A/c 200 (Being dividend paid off)


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Balance Sheet of Bat Ltd. after merger as on 31.3.2010 Liabilities Rs. in

thousands Assets Rs. in

thousands Share capital Fixed assets (2,700 + 850) 3,550 Equity shares of 100 each fully paid 2,080 Investments 450 (Out of the above, 19,800 shares have been issued for consideration other than cash)

Sundry debtors (400+150-100)

450

Capital reserve 160 Cash at bank (250 – 200) 50 General reserve 570 10% Debentures 500 Loan from bank (250 +450 -60) 640 Bank overdraft 50 Sundry creditors (300+300-100) 500 4,500 4,500 Question 5 The Balance Sheet of D Ltd. on 31st

Liabilities

March, 2009 is as under:

Rs. Assets Rs.

1,25,000 shares of Rs.100 each fully paid up

1,25,00,000

Goodwill Building

10,00,000 80,00,000

Bank overdraft Creditors

46,50,000 52,75,000

Machinery Stock

70,00,000 80,00,000

Provision for taxation Profit and loss account

12,75,000 53,00,000

Debtors (all considered good)

50,00,000

Total 2,90,00,000 2,90,00,000

In 1989, when the company started its activities the paid up capital was the same. The Profit/Loss for the last five years is as follows: 2004-2005: Loss (13,75,000), 2005-2006: Profit Rs.24,55,000, 2006-2007: Profit Rs.29,25,000, 2007-2008: Profit Rs.36,25,000, 2008-2009: Profit Rs.42,50,000. Income-tax rate so far has been 40% and the above profits have been arrived at on the basis of such tax rate. From 2008-2009, the rate of income-tax should be taken at 45%. 10% dividend in 2005-2006, 2006-2007 and 15% dividend in 2007-2008 and 2008-2009 has been paid. Market price of this share on 31st March, 2009 is Rs.125. With effect from 1st April, 2009, the Managing Directors remuneration will be Rs.20,00,000 instead of Rs.15,00,000.


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The company has secured a contract from which it can earn an additional Rs.10,00,000 per annum for the next five years. Calculate the value of goodwill at 3 years purchase of super profit. (For calculation of future maintainable profits weighted average is to be taken). (16 Marks) Answer (i) Future Maintainable Profit

Year Profit (P) Rs.

Weight (W) Products (PW) Rs.

2005-2006 24,55,000 1 24,55,000 2006-2007 29,25,000 2 58,50,000 2007-2008 36,25,000 3 1,08,75,000 2008-2009 42,50,000 4 1,70,00,000

10 3,61,80,000

Weighted average annual profit (after tax)∗10

000,80,61,3= = Rs. 36,18,000

Weighted average annual profit before tax is 36,18,000 10060

× 60,30,000

Less: Increase in Managing Director’s remuneration 5,00,000 55,30,000 Add: Contract advantage 10,00,000 65,30,000 Less: Tax @ 45% 29,38,500 Future maintainable profit 35,91,500

(ii) Average Capital Employed

Assets Rs. Building 80,00,000 Machinery 70,00,000 Stock 80,00,000 Debtors 50,00,000 2,80,00,000

∗ Loss amounting Rs.13,75,000 for the year 2004-2005 has not been considered in calculation of weighted average profit assuming that the loss was due to abnormal conditions.


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Liabilities Bank Overdraft 46,50,000 Creditors 52,75,000 Provision for taxation 12,75,000 Additional provision for taxation• 3,54,167 1,15,54,167 Capital employed at the end of the year 1,64,45,833 Add: Dividend 15% during the year 18,75,000 1,83,20,833 Less: ½ profit after tax for the year [(42,50,000-3,54,167)/2]

19,47,917

Average capital employed 1,63,72,916

(iii) Normal Profit

Average dividend for the last four years

10 10 15 154

+ + + = 12.5

Market Price of share =Rs.125

Normal rate of return∗ 12.5 100125

× = = 10%

Normal profit 10% of Rs.1,63,72,916 Rs. 16,37,292

(iv) Valuation of Goodwill

Future maintainable profit Less: Normal profit

Rs. 35,91,500 16,37,292

Super Profit 19,54,208 Goodwill at 3 years’ purchase of super profits (Rs. 19,54,208 x 3) 58,62,624

• Additional provision for taxation [5% of Rs. 70,83,333 (Rs. 42,50,000/60%) has also been created assuming that the necessary rectification is being done in the financial statements for the year 2008-2009. ∗ Normal rate of return has been computed by dividend yield method.


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Question 6 (a) From the following information, determine the possible value of brand as per potential

earning model:

Rs. in lakhs (i) Profit After Tax (PAT) Rs.2,500 (ii) Tangible fixed assets Rs.10,000 (iii) Identifiable intangilble other than brand Rs.1,500 (iv) Weighted average cost of capital (%) 14% (v) Expected normal return on tangible assets

weighted average cost (14%) + normal spread 4%

18% (vi) Appropriate capitalisation factor for intangibles 25%

(b) Hero Ltd. was registered on 1st

(i)

April, 2008. It raised its capital as under:

Issued 2,00,000 equity shares at Rs.10 each Rs.20,00,000 (ii) 12.5% debentures of Rs.100 each Rs.2,00,000

This money was invested as under:

Equipments Rs.16,00,000

(useful life 10 years with nil scrap value)

Goods purchased for resale at Rs.200 per unit Rs.6,00,000

Goods purchased were entirely sold upto 31st January, 2009, for Rs.10,00,000. All the sale proceeds were collected except Rs.60,000 as on 31st

The replaced goods remained entirely in stock on 31.3.09. The replacement cost as at 31.3.09 was considered to be Rs.280 per unit. Replacement cost of equipment was Rs.20,00,000 as at 31.3.09, considering depreciation on straight line basis.

March, 2009. Goods sold were replaced at a cost of Rs.7,20,000 at the rate of Rs.240 per unit. Creditors outstanding as on 31.3.2009 was Rs.40,000.

Prepare Profit and Loss account and Balance Sheet on replacement cost (entry value) basis. (4+12= 16 Marks)

Answer (a) Calculation of Possible Value of Brand

Rs. in lakhs Profit after Tax 2,500 Less: Profit allocated to tangible assets [18% of Rs.10,000 ] 1,800 Profit allocated to intangible assets including brand 700


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17

Capitalisation factor 25%

Capitalised value of intangibles including brand [ 10025700

× ] 2,800

Less: Identifiable intangibles other than brand 1,500 Brand value 1,300

(b) Profit and Loss Account for the year ended 31.03.2009 on replacement cost basis

Rs.

Sales 10,00,000 Less: Cost of sales (Rs.240 × 3000) 7,20,000

Gross profit 2,80,000 Depreciation ( Refer Working Note 1) 1,80,000

Profit before interest and taxes (PBIT) 1,00,000 Debenture interest (12.5% of Rs. 2,00,000) 25,000

Profit before taxes (PBT) 75,000

Balance Sheet of Hero Ltd. as on 31.3.09 on replacement cost basis

Liabilities Rs. Assets Rs. Equity share capital (2,00,000 shares of Rs. 10 each) Profit and loss account

20,00,000

75,000

Equipments (20,00,000- 2,00,000) Stock (3,000 × Rs.280) Debtors

18,00,000

8,40,000 60,000

Replacement reserve (W.N.3) 6,20,000 Cash at bank (W.N. 2) 2,35,000 12.5% Debentures 2,00,000 Creditors 40,000 29,35,000 29,35,000 Working Notes: 1. Depreciation under replacement cost basis Under replacement cost basis, depreciation is calculated (on the basis of average of

historical cost and replacement cost) which can be shown as follows:

10% of [ 16,00,000 20,00,0002+ ] = 10% of Rs. 18,00,000 Rs. 1,80,000


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2. Cash at Bank on 31st March, 2009 Rs. Sale proceeds (Rs.10,00,000 – Rs.60,000) 9,40,000 Less :Payment to creditors (Rs. 7,20,000 – Rs. 40,000) 6,80,000 2,60,000 Less: Debenture interest paid 25,000 Balance as on 31st March, 2009 2,35,000

3. Replacement Reserve

Realised Gain

Unrealised Gain

Rs. Rs. Sold goods (Rs. 7,20,000 – Rs. 6,00,000) 1,20,000 Unsold goods [3,000 x (Rs. 280 – Rs. 240)] 1,20,000 Depreciation on equipments (Rs. 1,80,000 – Rs.1,60,000) 20,000 Book value of equipments [(Rs.20,00,000- Rs.2,00,000) – (Rs.16,00,000-Rs.1,60,000)] 3,60,000 1,40,000 4,80,000

Replacement Reserve = Rs. 1,40,000 +Rs. 4,80,000 = Rs. 6,20,000


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Question No. 1 is compulsory. Answer any five out of the remaining questions.

Working notes should form part of the answer.Wherever necessary, suitable assumptions may be made by the candidates.

Question 1

Answer any four out of the following:

(a) On 30.6.2007, Asmitha Ltd. incurred Rs. 2,00,000, net loss from disposal of a businesssegment. Also, on 30.7.2007, the company paid Rs. 60,000 for property taxes assessedfor the calendar year 2007. How the above transactions should be included indetermination of net income of Asmitha Ltd. for the six months interim period ended on30.9.2007.

(b) M/s XYZ Ltd. has three segments namely X, Y, Z. The total assets of the Company areRs. 10.00 crs. Segment X has Rs. 2.00 crs., segment Y has Rs. 3.00 crs. and segment Zhas Rs. 5.00 crs. Deferred tax assets included in the assets of each segments are X- Rs.0.50 crs., Y—Rs. 0.40 crs. and Z—Rs. 0.30 crs. The accountant contends that all thethree segments are reportable segments. Comment.

(c) M/s Dinesh & Company signed an agreement with workers for increase in wages withretrospective effect. The out-flow on account of arrears was for 2005-06—Rs. 10.00lakhs, for 2006-07—Rs. 12.00 lakhs and for 2007-08—Rs. 12.00 lakhs. This amount ispayable in September, 2008. The accountant wants to charge Rs. 22.00 lakhs as priorperiod charges in financial statement for 2008-09. Discuss.

(d) M/s Prima Co. Ltd. sold goods worth Rs. 50,000 to M/s Y and Company. M/s Y and Co.asked for discount of Rs. 8,000 which was agreed by M/s Prima Co. Ltd. The sale waseffected and goods were despatched. After receiving, goods worth Rs. 7,000 was founddefective, which they returned immediately. They made the payment of Rs. 35,000 to M/sPrima Co. Ltd. Accountant booked the sales for Rs. 35,000. Please discuss.

(e) Himalayas Ltd. is showing an intangible Asset at Rs. 72 lakhs as on 01.04.2007 and thatitem was required for Rs. 96 lakhs on 01.04.2004 and that item was available for usefrom that date. Himalayas Ltd. has been following the policy of amortisation of theintangible asset over a period of 12 years on straight line basis. Comment on theaccounting treatment of the above with reference to relevant accounting standard.

(4x5= 20 Marks)

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FINAL EXAMINATION : NOVEMBER, 20082

Answer

(a) According to Para 10 of AS 25 “Interim Financial Reporting”, If an enterprise preparesand presents a complete set of financial statements in its interim financial report, theform and content of those statements should conform to the requirements as applicableto annual complete set of financial statements. As on 30.9.2007, Asmitha Ltd., wouldreport the entire Rs.2,00,000 loss on the disposal of its business segment since the losswas incurred during interim period. A cost charged as an expense in an annual periodshould be allocated to Interim periods on accrual basis. Since Rs.60,000 Property Taxpayment relates to entire calendar year 2007, Rs.30,000 would be reported as anexpense for six months ended on 30th September, 2007 while remaining Rs.30,000would be reported as prepaid expenses.

(b) According to AS 17 “Segment Reporting”, segment assets do not include income taxassets. Therefore, the revised total assets are 8.8 crores [10 crores – (0.5+0.4+0.3)].Segment X holds total assets of 1.5 crores (2 crores – 0.5 crores); Segment Y holds 2.6crores (3 crores – 0.4 crores); and Segment Z holds 4.7 crores (5 crores – 0.3 crores).Thus all the three segments hold more than 10% of the total assets, all segments arereportable segments.

(c) According to AS 5(Revised) “Net Profit or Loss for the Period, Prior Period Items andChanges in Accounting Policies”, the term prior period item refers only to income orexpenses which arise in the current period as a result of errors or omission in thepreparation of the financial statements of one or more prior periods. The term does notinclude other adjustments necessitated by circumstances, which though related to priorperiods are determined in the current period. The full amount of wage arrears paid toworkers will be treated as an expense of current year and it will be charged to profit andloss account as current expenses and not as prior period expenses.

It may be mentioned that additional wages is an expense arising from the ordinaryactivities of the company. Although abnormal in amount, such an expense does notqualify as an extraordinary item. However, as per Para 12 of AS 5 (Revised), when itemsof income and expense within profit or loss from ordinary activities are of such size,nature or incidence that their disclosure is relevant to explain the performance of theenterprise for the period, the nature and amount of such items should be disclosedseparately.

(d) As per Para 4.1 of AS 9 “Revenue Recognition”, revenue is the gross inflow of cash,receivables or other consideration arising in the course of the ordinary activities of anenterprise from the sale of goods, from the rendering of services, and from the use byothers of enterprise resources yielding interest, royalties and dividends.

In the given case, M/s Prima Co. Ltd. should record the sales at gross value ofRs.50,000. Discount of Rs.8,000 in price and goods returned worth Rs.7,000 are to beww

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PAPER – 1 : FINANCIAL REPORTING 3

adjusted by suitable provisions. M/s Prime Co. Ltd. might have sent the credit note ofRs. 15,000 to M/s Y & Co. to account for these adjustments. The contention of theaccountant to book the sales for Rs.35,000 is not correct.

(e) As per Para 63 of AS 26 “Intangible Assets”, the depreciable amount of an intangibleasset should be allocated on a systematic basis over the best estimate of its useful life.There is a rebuttable presumption that the useful life of an intangible asset will notexceed ten years from the date when the asset is available for use. Amortisation shouldcommence when the asset is available for use.

Himalayas Ltd. has been following the policy of amortisation of the intangible asset overa period of 12 years on straight line basis. The period of 12 years is more than themaximum period of 10 years specified under AS 26. Accordingly, Himalayas Ltd. wouldbe required to restate the carrying amount of intangible asset as on 1.4.2007 at Rs.96lakhs less Rs. 28.8 lakhs (Rs. 9.6 lakhs × 3 years) = Rs. 67.2 lakhs. If amortisation hadbeen as per AS 26, the carrying amount would have been Rs.67.2 lakhs. The differenceof Rs. 4.8 lakhs i.e. (Rs. 72lakhs – 67.2 lakhs) would be required to be adjusted againstthe opening balance of revenue reserves. The carrying amount of Rs.67.2 lakhs wouldbe amortised over 7 (10 less 3) years in future.

Question 2

System Ltd. and HRD Ltd. decided to amalgamate as on 01.04.2008. Their Balance Sheets ason 31.03.2008 were as follows: (Rs. in ‘000)

Particulars System Ltd. HRD Ltd.Source of Funds :Equity share capital (Rs. 10 each) 150 1409% preference share capital (Rs. 100 each) 30 20Investment allowance reserve 5 2Profit and Loss Account 10 610 % Debentures 50 30Sundry Creditors 25 15Tax provision 7 4Equity Dividend Proposed 30 28Total 307 245Application of Funds :Building 60 50Plant and Machinery 80 70Investments 40 25ww

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Sundry Debtors 45 35Stock 36 40Cash and Bank 40 25Preliminary Expenses 6 ----Total 307 245

From the following information, you are to prepare the draft Balance Sheet as on 01.04.2008of a new company, Intranet Ltd., which was formed to take over the business of both thecompanies and took over all the assets and liabilities:

(i) 50 % Debentures are to be converted into Equity Shares of the New Company.

(ii) Out of the investments, 20% are non-trade investments.

(iii) Fixed Assets of Systems Ltd. were valued at 10% above cost and that of HRD Ltd. at 5%above cost.

(iv) 10 % of sundry Debtors were doubtful for both the companies. Stocks to be carried atcost.

(v) Preference shareholders were discharged by issuing equal number of 9% preferenceshares at par.

(vi) Equity shareholders of both the transferor companies are to be discharged by issuingEquity shares of Rs. 10 each of the new company at a premium of Rs. 5 per share.

Amalgamation is in the nature of purchase. (16 Marks)

AnswerM/s Intranet Ltd.

Draft Balance Sheet as at 1.4.2008

Liabilities Rs. Assets Rs.Equity share capital27,799 Equity shares of Rs.10each, fully paid up(25,133 + 2,666) (W.N.2)

2,77,990Building(Rs. 66,000+Rs. 52,500))Plant and machinery(Rs. 88,000+Rs. 73,500)

1,18,500

1,61,5009% Preference share capital(Share of Rs.100 each) (W.N.2) 50,000

Investments(Rs. 40,000+ Rs. 25,000) 65,000

Securities premium(1,25,665 + 13,330) (W.N.2) 1,38,995

Stock(Rs. 36,000+ Rs. 40,000) 76,000

Investment allowance reserve(Rs. 5,000+ Rs. 2,000) 7,000

Sundry debtors90% of (Rs.45,000+ Rs. 35,000) 72,000w

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10% Debentures(50% of Rs. 80,000)

40,000 Cash and Bank(Rs.40,000+ Rs.25,000 – Rs.15)

64,985

Sundry creditors(Rs. 25,000+ Rs. 15,000)

40,000 Amalgamation adjustmentaccount 7,000

Tax provision(Rs. 7,000+ Rs. 4,000) 11,000

5,64,985 5,64,985

Working Notes:

1. Calculation of value of equity shares issued to transferor companies

SystemLtd.

HRD Ltd.

Rs. Rs.Assets taken over:Building 66,000 52,500Plant and machinery 88,000 73,500Investments (trade and non-trade) 40,000 25,000Stock 36,000 40,000Sundry Debtors 40,500 31,500Cash & Bank 40,000 25,000

3,10,500 2,47,500Less: Liabilities:

10% Debentures 50,000 30,000Sundry Creditors 25,000 15,000Tax Provision 7,000 82,000 4,000 49,000

2,28,500 1,98,500Less: Preference Share Capital 30,000 20,000

1,98,500 1,78,5002. Number of shares issued to equity shareholders, debenture holders and preference

shareholders

System Ltd. HRD Ltd. TotalEquity shares issued @ Rs.15 pershare (including Rs.5 premium)1,98,500 divided by 15 13,233 shares1

1,78,500 divided by 15 11,900 shares 25,133 shares

1 Cash paid for fraction of shares = Rs. 1,98,500 less Rs. 1,98,495 = Rs. 5ww

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Equity share capital @ Rs.10 Rs. 1,32,330 Rs.1,19,000 Rs. 2,51,330

Securities premium @ Rs.5 Rs. 66,165 Rs. 59,500 Rs. 1,25,665 Rs.1,98,495 Rs. 1,78,500 Rs. 3,76,995

50% of Debentures are converted into equity shares @ Rs.15 per share25,000 divided by 15 1,666 shares2

15,000 divided by15 1,000 shares 2,666 sharesEquity share capital @ Rs.10 Rs. 16,660 Rs.10,000 Rs. 26,660Security premium@ Rs.5 Rs. 8,330 Rs. 5,000 Rs. 13,330

Rs. 24,990 Rs. 15,000 Rs. 39,9909% Preference share capital issued Rs. 30,000 Rs. 20,000 Rs. 50,000

Question 3

The following are the Balance Sheets of Ram Ltd.,Shyam Ltd. and Tom Ltd. as on 31.03.2008:

Rs. in’000

Particulars Ram Ltd. Shyam Ltd. Tom Ltd.LiabilitiesEquity Share Capital (Rs. 100 each) 8,000 4,000 1,600General Reserve 1,600 280 -Profit and Loss Account 1,360 960 -Current Liabilities 1,280 3,000 1,120Total 12,240 8,240 2,720AssetsInvestments :32,000, shares in Shyam Ltd. 4,800 - -4,000, shares in Tom Ltd. 200 - -12,000, shares in Tom Ltd. - 720 -Profit and Loss Account - - 640Current Assets 7,240 7,520 2,080Total 12,240 8,240 2,720

2 Cash paid for fraction of shares = Rs. 25,000 less Rs. 24,990 = Rs. 10ww

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From the following information, prepare consolidated Balance Sheet of Ram Ltd. and itssubsidiaries as on 31.03.2008 :

(i) Shyam Ltd. has advanced Rs. 8,00,000 to Tom Ltd.

(ii) Current Liabilities of Ram Ltd. includes Rs. 4,00,000 due to Tom Ltd.

(iii) Shyam Ltd. and Tom Ltd. have not paid any Dividend.

(iv) Ram Ltd. acquired its investments on 01.04.2007 from Shyam Ltd. and then amountstanding to credit of General reserve and Profit and Loss account were Rs. 2,80,000 andRs. 5,20,000 respectively.

(v) Ram Ltd. acquired investments in Tom Ltd. on 01.04.2007, when the debit balance inProfit and Loss account in books of Tom Ltd. was Rs. 4,80,000.

(vi) Shyam Ltd. acquired its investments in Tom Ltd. on 01.04.2005 and then the Debitbalance in profit and Loss account was Rs. 1,60,000.

(vii) Shyam Ltd.’s stock includes stock worth Rs. 4,80,000 which was invoiced by Ram Ltd. at20% above cost. (16 Marks)

AnswerConsolidated Balance Sheet of Ram Ltd. and its subsidiaries Shyam Ltd and Tom Ltd.

as on 31.3.2008

Liabilities Rs. in‘000

Assets Rs. in ‘000

Share Capital 8,000 Goodwill (W. N. 5) 688Minority Interest (W. N. 7) 952 Current AssetsGeneral Reserve 1,600 Ram Ltd. 7,240Profit and Loss A/c (W. N. 6) 1,496 Shyam Ltd. 7,520Current LiabilitiesRam Ltd. 1,280Shyam Ltd. 3,000Tom Ltd. 1,120

5,400Less: Mutual Owings 1,200 4,200

Tom Ltd. 2,08016,840

Less: Mutual Owings 1200 15,640

Less: Unrealised Profit 8015,560

16,248 16,248

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Working Notes:1. General Reserve and Profit and Loss Account of Shyam Ltd.

General Reserve Account of Shyam Ltd.

Rs.’000 Rs.’00031.3.08 To Balance c/d 280 1.4.07 By Balance b/d 280

Profit and Loss Account of Shyam Ltd.

Rs. ’000 Rs. ’00031.3.08 To Balance c/d 960 1.4.07 By Balance b/d 520

By Profit earned duringthe year (Bal. Fig.) 440

960 960

2. Profit and Loss Account of Tom Ltd.

Rs.’000 Rs.’0001.4.05 To Balance b/d 160 31.3.06 By Balance c/d 160

160 1601.4.06 To Balance b/d 160 31.3.07 By Balance c/d 480

To Loss incurredduring the year(Bal. Fig.) 320

480 4801.4.07 To Balance b/d 480 31.3.08 By Balance c/d 640

To Loss incurredduring the year(Bal. Fig.) 160

640 640

3. Analysis of Profits of Tom Ltd.

CapitalProfits

RevenueProfits

(i) From the viewpoint of Shyam Ltd.Rs.’000 Rs’000

Debit Balance in Profit and Loss Account as on 1.4.2005 (160)Loss incurred between 1.4.2005 to 31.3.2008[(320 + 160 )– Refer W.N. 2] (480)

(160) (480)Share of Shyam Ltd.-75% [ carried forward to W. N. 4] (120) (360)ww

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(ii) From the view point of Ram Ltd.Debit Balance of Profit and Loss Account as on 1.4.07 (480)Loss during the year 2007-08 (160)

(480) (160)Share of Ram Ltd. (25%) (120) (40)

4. Analysis of Profits of Shyam Ltd. (From the viewpoint of Ram Ltd.)CapitalProfits

RevenueProfits

Rs.’000 Rs.’000General Reserve as on 1.4.07 280Profit and Loss Account Balance as on 1.4.07 520Profit earned during 2007-08 (W.N.1) 440Brought forward Shyam Ltd.’s share of loss in Tom Ltd.[W. N. 3(i)] (120) (360)Share of Shyam Ltd. in revenue loss of Tom Ltd. for the period 1.4.05 to31.3.07 [75% of (360- 40)] being treated as capital loss from view point ofRam Ltd.

(240) 240440 320

Less:Share of Minority Interest (20%) 88 64Balance taken to Ram Ltd. (80%) 352 256

5. Cost of Control Rs. ‘000

Investment by Ram Ltd. in .Shyam Ltd. 4,800Tom Ltd. 200

Investment by Shyam Ltd. inTom Ltd. 720 5720

Less: Paid up value of shares of:Shyam Ltd. 3,200Tom Ltd. (400 + 1,200) 1,600

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Capital loss of Ram Ltd. in Tom Ltd. [W.N. 3(ii)] (120)Capital Profit of Ram Ltd. in Shyam Ltd. (W.N. 4) 352 5,032

Goodwill 688Rs. ‘000

6. Consolidated Profit and Loss A/c of Ram Ltd.Profit and Loss A/c Balance 1,360Post acquisition share of loss from Tom Ltd. (40)Post acquisition share of profit from Shyam Ltd. 256

1,576

Less: Unrealised Profit on Stock ( 61 th of 480) 80

1,496

7. Minority Interest Rs.’000

Paid up value of shares in Shyam Ltd. (20% of 4,000) 800Share of Capital Profit (W.N. 4) 88Share of Revenue Profit (W.N. 4) 64

952

Question 4

(a) A Mutual Fund raised funds on 01.04.2007 by issuing 10 lakhs units @ 17.50 per unit.Out of this Fund, Rs. 160 lakhs invested in several capital market instruments. The initialexpenses amount to Rs. 9 lakhs. During June, 2007, the Fund sold certain securitiesworth Rs. 100 lakhs for Rs. 125 lakhs and it bought certain securities for Rs. 90 lakhs.The Fund Management expenses amounting to Rs. 5 lakhs per month. The dividendearned was Rs. 3 lakhs. 80% of the realised earnings were distributed among theunitholders. The market value of the portfolio was Rs. 175 lakhs. Determine Net Assetvalue (NAV) per unit as on 30.06.2007.

(b) The Balance Sheet of Gunshot Ltd. as on 31.3.2008 is given :

(Rs. in ‘000)

Liabilities Amount Fixed Assets AmountShare Capital : Fixed Assets 2,700Equity shares of Rs. 10 each 800 Non-trade Investments 300Securities Premium 100 Stock 600ww

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General Reserve 780 Sundry Debtors 360Profit and Loss Account 120 Cash and Bank 16010% Debenture 2,000Creditors 320

4,120 4,120Gunshot Ltd. buy back 16,000 shares of Rs. 20 per share. For this purpose, theCompany sold its all non-trade investments for Rs. 3,20,000. Give Journal Entries withfull narrations effecting the buy back. (8 x 2= 16 Marks)

Answer

(a) Total Funds raised by Mutual Fund = 17.5 x10 Lakhs = 175 Lakhs

(Rs. In lakhs)

Rs. Rs.

Opening Bank Balance(175-160-9) 6Add: Proceeds from sale of securities 125Add: Dividend received 3Less: 134

Cost of securities purchased 90Management expenses

(Rs. 5 lakhs x3 months)15

Realised gains distributed[80% of (Rs. 125 lakhs – Rs. 100 lakhs)]

20

Dividend distributed (80% of Rs. 3 lakhs) 2.40 127.40Closing Bank Balance 6.60Closing Market value of portfolio 175.00Closing Net Assets 181.60No. of Units (Lakh) 10.00Closing NAV = Rs. 181.60 lakhs divided by 10 lakh units = Rs.18.16

(b) Journal Entries for Buy-back of shares of Gun Shot Ltd.(i) Bank A/c Dr. 3,20,000

To Non-trade Investments 3,00,000To Profit & Loss A/c 20,000

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(ii) Shares Buy back A/c (16,000 x Rs. 20) Dr. 3,20,000To Bank A/c 3,20,000

(Being purchase of 16,000 shares @ Rs.20 per share)(iii) Equity Share Capital A/c (16,000 x Rs.10) Dr. 1,60,000

Buy-back Premium (16,000 x Rs.10) Dr. 1,60,000To Shares Buy-back A/c 3,20,000

(Being cancellation of shares bought back)(iv) Securities Premium A/c Dr. 1,00,000

General Reserve Dr. 60,000To Buy-back Premium 1,60,000

(Being adjustment of buy-back premium)(v) General Reserve Dr. 1,60,000

To Capital Redemption Reserve 1,60,000(Being the entry for transfer of General Reserve toCapital Redemption Reserve to the extent of face valueof equity shares bought back)

Question 5

Dawn Ltd. was incorporated to take over Arun Ltd., Brown Ltd. and Crown Ltd. BalanceSheets of all the three companies as on 31.03.2008 are as follows:

Rs. in ‘000

Particulars Arun Ltd. Brown Ltd. Crown Ltd.Liabilities :Equity Share Capital (Share of Rs. 10 each) 1,800 2,100 900Reserve 300 150 30010 % Debentures 600 --- 300Other Liabilities 600 450 300Total 3,300 2,700 1,800Assets :Net Tangible Block 2,400 1,800 1,500ww

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Goodwill - 150 -Other Assets 900 750 300Total 3,300 2,700 1,800

From the following information you are to:

(a) Work out the number of Equity shares and Debentures to be issued to the shareholdersof each company.

(b) Prepare the Balance Sheet of Dawn Ltd. as on 31.03.2008.

Information :

(i) Assets are to be revalued and the revalued amount of Tangible Block and other Assetsare as follows :

Tangible Block Other AssetsArun Ltd. Rs. 30,00,000 Rs. 10,50,000Brown Ltd. Rs. 15,00,000 Rs. 4,20,000Crown Ltd. Rs. 18,00,000 Rs. 2,40,000

(ii) Normal profit on capital employed is to be taken at 10%

(iii) Average amount of profit for three years before charging interest on Debentures are:

Arun Ltd. Rs. 5,40,000Brown Ltd. Rs. 4,32,000Crown Ltd. Rs. 3,12,000

(iv) Goodwill is to be calculated at three years’ purchase of average super profits for threeyears, such average is to be calculated after adjustment of 10% depreciation onIncrease/ Decrease on revaluation of Fixed Assets (Tangible Block).

(v) Capital employed being considered on the basis of net revaluation of Tangible Assets.

(vi) Equity Shares of Rs. 10 each fully paid up in Dawn Ltd. are to be distributed in the ratioof average profit after adjustment of depreciation on revaluation of Tangible Block.

(vii) 10% Debentures of Rs. 100 each fully paid up are to be issued by Dawn Ltd. for thebalance due.

(viii) The ratio of issue of Equity shares and debentures of Dawn Ltd. are to be maintained at3:1, towards the take over companies.

(ix) The amount required for preliminary expenses of Rs. 1,50,000 and for payment toexisting Debenture holders, were provided by issuing Equity shares of Rs. 10 each inDawn Ltd. (16 Marks)ww

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Answer

(a) Number of Equity shares and Debentures to be issued to the shareholders of eachcompany

Arun Ltd. Brown Ltd. Crown Ltd. Total paidby Dawn

Ltd. in 3:1

Rs. Rs. Rs. Rs.Equity shares of Rs.10/- eachin the ratio of adjusted profits(420:462:252) 20,65,000 22,71,500 12,39,000 55,75,50010% Debentures [Balance ofpurchase consideration] –Refer W.N. 2 11,90,000 1,43,500 5,25,000 18,58,500

32,55,000 24,15,000 17,64,000 74,34,000

No. of shares of Rs.10 each 2,06,500 2,27,150 1,23,900 5,57,55010% Debentures of Rs.100each in numbers

11,900 1,435 5,250 18,585

(b)Balance Sheet of Dawn Ltd.as at 31.3.2008

Liabilities Rs. Assets Rs.Share capital Goodwill 16,74,0006,62,550 equity shares of Rs.10 each,fully paid up (Including 5,57,550shares of Rs.10 each issued forconsideration other than cash)

66,25,500 Tangible Assets BlockCurrent AssetsPreliminary Expenses

63,00,00017,10,0001,50,000

18,585, 10% Debentures of Rs.100each 18,58,500Current Liabilities 13,50,000

98,34,000 98,34,000

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Working Notes:1. Computation of Goodwill

Arun Ltd. Brown Ltd. Crown Ltd. Total

Rs. Rs. Rs. Rs.

Profit 5,40,000 4,32,000 3,12,000 12,84,000

Debenture Interest (60,000) - (30,000) (90,000)

Profit after Debenture Interest 4,80,000 4,32,000 2,82,000 11,94,000

Adjustment for increase/decrease indepreciation due to revaluation (60,000) 30,000 (30,000) (60,000)

4,20,000 4,62,000 2,52,000 11,34,000

Less: Normal Profit @ 10% onCapital employed as perWorking Note 2 2,85,000 1,47,000 1,44,000 5,76,000

Super Profits 1,35,000 3,15,000 1,08,000 5,58,000

Goodwill on 3 years of super profits 4,05,000 9,45,000 3,24,000 16,74,000

2. Statement showing calculation of Capital Employed and PurchaseConsideration

Arun Ltd. Brown Ltd. Crown Ltd. Total

Rs. Rs. Rs. Rs.

Fixed Assets 30,00,000 15,00,000 18,00,000 63,00,000Current Assets 10,50,000 4,20,000 2,40,000 17,10,000

40,50,000 19,20,000 20,40,000 80,10,000Less: Debentures 6,00,000 --- 3,00,000 9,00,000

Current Liabilities 6,00,000 4,50,000 3,00,000 13,50,000Capital Employed 28,50,000 14,70,000 14,40,000 57,60,000Goodwill 4,05,000 9,45,000 3,24,000 16,74,000Purchase consideration 32,55,000 24,15,000 17,64,000 74,34,000

3. Total number of equity shares issuedEquity Shares

For purchase consideration 5,57,550preliminary expenses (Rs. 1,50,000/ Rs. 10) 15,000

payment of existing debenture holders(Rs. 6,00,000 + Rs. 3,00,000) /Rs. 10 90,000

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Question 6

(a) P Ltd. started its business on 01.04.2007, It issued one lac Equity Shares of Rs. 10 eachat par and 30,000, 9% Debentures of Rs. 50 each, both were fully subscribed. Itpurchased Plant and Machinery for worth Rs. 15 Lac and goods for trading worth Rs. 12lac @ Rs. 100 per unit. Estimated life of plant and machinery was 10 years with no scrapvalue. Goods were sold at Profit of 40% on selling price. Collection from Debtorsoutstanding as on 31.3.2008 amounted to Rs. 5 lac. Goods sold were replaced at a costof Rs. 120 per unit, the number of units being the same. Trade Creditors outstanding ason 31.3.2008 were Rs. 3 lac. The replaced goods were entirely in stock on 31.3.2008,replacement cost of goods was considered to be Rs. 140 per unit. Replacement cost ofmachine was Rs. 20 lac as on 31.3.2008. Draft Profit and Loss Account andReplacement reserve on replacement cost basis.

(b) Prepare a value added statement for the year ended on 31.3.2008 and reconciliation oftotal value added with profit before taxation, from the Profit and Loss Account of FuturesLtd. for the year ended on 31.3.2008 :

(Rs. in ‘000)Income:

Sales 24,400Other Income 508

24,908Expenditure :

Operating cost 21,250Excise duty 1,110Interest on Bank Overdraft 75Interest on 9% Debentures 1,200

23,635Profit before Depreciation 1,273

Depreciation 405Profit before tax 868Provision for tax 320Profit after tax 548Proposed Dividend 48Retained Profit 500

The following additional Information are given :

(i) Sales represents Net sales after adjusting Discounts, Returns and Sales tax.ww

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(ii) Operating cost includes Rs. 82,50,000 as wages, salaries and other benefits toEmployees.

(iii) Bank overdraft is temporary. (8x2= 16 Marks)

Answer(a) M/s P Ltd.

Profit & Loss Account for the year ended 31.03.2008

Rs.Sales 20,00,000Less: Cost of sales (Refer W.N. 1) 14,40,000Gross Profit 5,60,000Less: Depreciation (Refer W.N. 2) 1,75,000Profit before Interest 3,85,000Less: Debenture Interest (Refer W.N. 3) 1,35,000Profit after charging depreciation and interest 2,50,000

Replacement Reserve

RealisedGain

Unrealised Gain

Rs. Rs.Stock:Sold (Rs. 14,40,000 – Rs. 12,00,000) 2,40,000Unsold goods 12,000 x (Rs. 140 – Rs. 120) 2,40,000Plant & Machinery Depreciation (Rs. 1,75,000 – Rs.1,50,000) 25,000Book value of asset[(Rs.20,00,000- Rs.2,00,000) less (Rs.15,00,000-Rs.1,50,000)] 4,50,000

2,65,000 6,90,000

Replacement Reserve = Rs. 2,65,000 +Rs. 6,90,000 = Rs. 9,55,000

Working Notes:1. Sales and Cost of sales

Sale Price @ 40% profit on Selling Price = Rs. 12,00,000 x (100/60) = Rs. 20,00,000Cost of Sales = 12,000 x Rs. 120 = Rs. 14,40,000

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2. Depreciation under replacement cost basisUnder replacement cost basis, depreciation is calculated (on average basis) whichcan be shown as follows:

2000,00,20000,00,15 = 10% of Rs. 17,50,000 = Rs. 1,75,000

3. Debenture Interest30,000 x Rs. 50 x 9% = Rs. 1,35,000

(b) Value Added Statement of M/s Futures Ltd.

Rs. in ‘ 000Sales 24,400Less: Operating cost - Cost of bought in material & services(Rs. 21,250 – Rs. 8,250) 13,000Excise duty 1,110Interest on bank overdraft 75 14,185Value added by trading and manufacturing activities 10,215Add: Other income 508Total value added 10,723Application of value added %To pay Employees:Wages, salaries and other benefits 8,250 76.94To Pay Government : Corporate tax 320 2.98To pay providers of capital:Interest on 9% debentures 1,200Dividends 48 1,248 11.64To Provide for maintenance and expansion of the company:Depreciation 405Retained profit 500 905 8.44

10,723 100.00ReconciliationProfit before tax 868Depreciation 405Wages, salaries and other benefits to employees 8,250Debenture interest 1,200

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Question 7

Write short notes on any four from the following :

(a) State the treatment of the following items with reference to ‘Indian Accounting Standards’(AS) and International Financial Reporting Standards (IFRS) :

(i) Extra ordinary items(ii) Contingencies.

(b) Reversal of an Impairment Loss.

(c ) Market value Added.

(d) What are the types of Employees benefit and what is the objective of Introduction of thisStandard i.e. AS-15?

(e) What are Timing differences and Permanent differences? (4 x 4= 16 Marks)

Answer(a)

Indian Accounting Standards International Financial ReportingStandards

Extraordinary ItemsEvents or transactions, clearly distinct from theordinary activities of the entity, which are notexpected to recur frequently and regularly, aretermed as extra-ordinary items. Disclosure of thenature and amount of such item is required in theincome statement to perceive the impact of currentand future profits.

Not allowed.

ContingenciesContingent Liabilities are disclosed unless theprobability of outflows is remote.Contingent gains are neither recognised nordisclosed.

Unrecognised possible losses andpossible gains are disclosed.

(b) Reversal of an Impairment Loss

As per AS 28 on Impairment of Assets, an enterprise should assess at each balancesheet date whether there is any indication that an impairment loss recognised for anasset in prior accounting periods may no longer exist or may have decreased. If any suchindication exists, the enterprise should estimate the recoverable amount of that asset.

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In assessing whether there is any indication that an impairment loss recognised for anasset in prior accounting periods may no longer exist or may have decreased, anenterprise should consider, as a minimum, the following indications:

External sources of information(a) the asset’s market value has increased significantly during the period;(b) significant changes with a favourable effect on the enterprise have taken place

during the period, or will take place in the near future, in the technological market,economic or legal environment in which the enterprise operates or in the market towhich the asset is dedicated;

(c) market interest rates or other market rates of return on investments have decreasedduring the period, and those decreases are likely to affect the discount rate used incalculating the asset’s value in use and increase the asset’s recoverable amountmaterially.

Internal sources of information(d) significant changes with a favourable effect on the enterprise have taken place

during the period, or are expected to take place in the near future, to the extent towhich, or manner in which, the asset is used or is expected to be used. Thesechanges include capital expenditure that has been incurred during the period toimprove or enhance an asset in excess of its originally assessed standard ofperformance or a commitment to discontinue or restructure the operation to whichthe asset belongs; and

(e) evidence is available from internal reporting that indicates that the economicperformance of the asset is, or will be, better than expected.

(c) Market Value Added (MVA)

Market value added is the market value of capital employed in the firm less the bookvalue of capital employed. Market value added is calculated by summing up the paid upvalue of equity and preference share capital, Retained earnings, long term and short termdebts and subtracting this sum from the market value of equity and debt.

Market value added measures cumulatively the performance of corporate entity.

A High market value added means that the company has created substantial wealth forshare holders. On the other hand negative MVA means that the value of management’sactions and investments are less than the value of the capital contributed to the companyby the capital market or that the wealth and value has been destroyed.

(d) There are four types of employee benefits according to AS 15 (Revised 2005). They are:(a) short-term employee benefits, such as wages, salaries and social security

contributions (e.g., contribution to an insurance company by an employer to pay forww

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medical care of its employees), paid annual leave, profit-sharing and bonuses (ifpayable within twelve months of the end of the period) and non-monetary benefits(such as medical care, housing, cars and free or subsidised goods or services) forcurrent employees;

(b) post-employment benefits such as gratuity, pension, other retirement benefits, post-employment life insurance and post-employment medical care;

(c) other long-term employee benefits, including long-service leave or sabbatical leave,jubilee or other long-service benefits, long-term disability benefits and, if they arenot payable wholly within twelve months after the end of the period, profit-sharing,bonuses and deferred compensation; and

(d) termination benefits.Because each category identified in (a) to (d) above has different characteristics, thisStatement establishes separate requirements for each category.

The objective of AS 15 is to prescribe the accounting and disclosure for employeebenefits. The statement requires an enterprise to recognise:(a) a liability when an employee has provided service in exchange for employee

benefits to be paid in the future; and(b) an expense when the enterprise consumes the economic benefit arising from

service provided by an employee in exchange for employee benefits.

(e) Timing and Permanent Differences

AS 22 states that timing differences are those differences between taxable income andaccounting income for a period that originate in one period and are capable of reversal inone or more subsequent periods. Unabsorbed depreciation and carry forward of losseswhich can be set off against future taxable income are also considered as timingdifferences and result in deferred tax assets subject to consideration of prudence i.e.,deferred tax assets should be recognised and carried forward only to the extent thatthere is a reasonable certainty that sufficient future taxable income will be availableagainst which such deferred tax assets can be realised.

Permanent differences are the differences between taxable income and accountingincome for a period that originate in one period and do not reverse subsequently. Forinstance, if for the purpose of computing taxable income, the tax laws allow only a part ofan item of expenditure, the disallowed amount would result in a permanent difference.

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PAPER – 1 : FINANCIAL REPORTINGAnswer all questions.

Working notes should form part of the answer.Wherever necessary, suitable assumption(s) should be made by the candidates.

Question 1(a) The following data apply to ‘X’ Ltd. defined benefit pension plan for the year ended 31.03.09,

calculate the actual return on plan assets :

- Benefits paid 2,00,000- Employer contribution 2,80,000- Fair market value of plan assets on 31.03.09 11,40,000- Fair market value of plan assets as on 31.03.08 8,00,000

(b) U.S.A Ltd. purchased raw material @ Rs. 400 per kg. Company does not sell raw material butuses in production of finished goods. The finished goods in which raw material is used areexpected to be sold at below cost. At the end of the accounting year, company is having10,000 kg of raw material in stock. As the company never sells the raw material, it does notknow the selling price of raw material and hence can not calculate the realizable value of theraw material for valuation of inventories at the end of the year. However replacement cost ofraw material is Rs. 300 per kg. How will you value the inventory of raw material?

(c) Moon Ltd. entered into agreement with Sun Ltd. for sale of goods of Rs.8 lakhs at a profit of20 % on cost. The sale transaction took place on 1st February, 2009. On the same day SunLtd. entered into another agreement with Moon Ltd. to resell the same goods at Rs. 10.80lakhs on 1st August, 2009. State the treatment of this transaction in the financial statements ofMoon Ltd. as on 31.03.09. The pre-determined re-selling price covers the holding cost of SunLtd. Give the Journal Entries as on 31.03.09 in the books of Moon Ltd.

(d) XY Ltd. was making provisions for non-moving stocks based on no issues for the last 12months upto 31.03.08. Based on technical evaluation the company wants to make provisionsduring the year 31.03.09.Total value of stock --- Rs. 150 lakhs.Provisions required based on 12 months issue Rs. 4.0 lakhs.Provisions required based on technical evaluation Rs. 3.20 lakhs.Does this amount to change in accounting policy ? Can the company change the method ofprovision?

(5x4=20 Marks)

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FINAL (NEW) EXAMINATION: NOVEMBER, 2009

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Answer(a) Rs.

Fair value of plan assets on 31.3.08 8,00,000Add: Employer contribution 2,80,000Less:Benefits paid 2,00,000

(A) 8,80,000Fair market value of plan assets at 31.3.09 (B) 11,40,000Actual return on plan assets (B-A) 2,60,000

(b) As per Para 24 of AS 2 (Revised) “Valuation of Inventories”, materials and other suppliesheld for use in the production of inventories are not written down below cost if thefinished products in which they will be incorporated are expected to be sold at or abovecost. However, when there has been a decline in the price of materials and it is estimatedthat the cost of the finished products will exceed net realizable value, the materials arewritten down to net realizable value. In such circumstances, the replacement cost of thematerials may be the best available measure of their net realizable value. Therefore, inthis case, USA Ltd. will value the stock of raw material at Rs. 30,00,000 (10,000 Kg. @Rs.300 per kg.).

(c) In the given case, Moon Ltd. concurrently agreed to repurchase the same goods fromSun Ltd. on 1st Feb., 2009. Also the re-selling price is pre-determined and coverspurchasing and holding costs of Sun Ltd. Hence, the transaction between Moon Ltd. andSun Ltd. on 1st Feb., 2009 should be accounted for as financing rather than sale. Theresulting cash flow of Rs.9.60 lakhs received by Moon Ltd., cannot be considered asrevenue as per AS 9 “Revenue Recognition”.

Journal Entries in the books of Moon Ltd.Rs. in lakhs

1.02.09 Bank Account Dr. 9.60To Advance from Sun Ltd. 9.60

(Being advance received from Sun Ltd amounting[Rs.8 lakhs + 20% of Rs. 8 lakhs= 9.60 lakhs]under sale and re-purchase agreement)

31.03.09 Financing Charges Account Dr. 0.40To Sun Ltd. 0.40

(Financing charges for 2 months at Rs.1.20lakhs [10.80 – 9.60] i.e. 1.2 lakhs x 2/6 )

31.03.09 Profit and Loss Account Dr. 0.40To Financing Charges Account 0.40

(Being amount of finance charges transferred toP& L Account)

The balance of Sun Ltd. account will be disclosed as an advance under the heading liabilities in the balancesheet of Moon Ltd. as on 31st March, 2009.ww

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(d) The decision of making provision for non-moving stocks on the basis of technical evaluationdoes not amount to change in accounting policy as per AS 5 “Net Profit or Loss for thePeriod, Prior Period Items and Changes in Accounting Policies”. The method of estimatingthe amount of provision may be changed, in case, a more prudent estimate can be made byadopting the changed method.In the given case, considering the total value of stocks, the change in the amount of requiredprovision of non-moving stocks from Rs.4.0 lakhs to Rs.3.20 lakhs is also not material. Thedisclosure can be made for such change by way of notes to the accounts in the financialstatements of XY Ltd. for the year ending on 31.03.09, in the following manner:“The company has provided for non-moving stocks on the basis of technical evaluation unlikepreceding years. Had the same method been followed as in the previous year, the profit forthe year and the corresponding effect on the year end, the net assets would have been higherby Rs.0.80 lakhs”.

Question 2The following are the Balance Sheets of H Ltd. and S Ltd. as at 31.03.09:

Rs. in lakhsH Ltd. S Ltd. H Ltd. S Ltd.

Rs. Rs. Rs. Rs.Share capital Fixed assets 60 18Share of Rs.10 each 50 10 Investment in S Ltd. (60,000 shares) 6 -General reserve 50 20 Debtors 35 5Profit and Loss 20 15 Inventories 30 25Secured loan 20 3 Cash at Bank 39 2Current liabilities 30 2

170 50 170 50H Ltd. holds 60% of the paid up capital of S Ltd. and balance is held by a foreign company.The foreign company agreed with H Ltd. as under:(i) The shares held by the foreign company will be sold to H Ltd. at Rs. 50 above than

nominal value of per share.(ii) The actual cost per share to the Foreign Company was Rs. 11, gain accruing to Foreign

Company is taxable @ 20 % . The tax payable will be deducted from the sale proceedsand paid to Government by H Ltd. 50% of the consideration (after payment of tax) will beremitted to Foreign Company by H Ltd. and also any cash for fractional shares allotted.

(iii) For the Balance of consideration H Ltd. would issue its shares at their intrinsic value.It was also decided that H Ltd. would also absorb S Ltd. simultaneously by writing downthe fixed assets of S Ltd. by 10 %. The Balance Sheet figure included a sum of Rs. 1lakh due by S Ltd. to H Ltd, included stock of Rs. 1.5 lakhs purchased from S Ltd. whosold them at cost plus 20 %.ww

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Pass Journal entries in the books of H Ltd. to record the above arrangement on 31.03.09and prepare the Balance Sheet of H Ltd. after absorption of S Ltd. Workings should formpart of your answer. (16 Marks)

AnswerJournal Entries in the books of H Ltd.

Rs. Rs.1. Business Purchase A/c Dr. 24,00,000

To Foreign Company 24,00,000(Being business purchased)

2. Fixed Assets A/c Dr. 16,20,000Debtors A/c Dr. 5,00,000Inventories A/c Dr. 25,00,000Cash at Bank A/c Dr. 2,00,000

To Current Liabilities A/c 2,00,000To Secured Loan A/c 3,00,000To Investment in S Ltd. A/c 6,00,000To Business Purchase A/c 24,00,000To Capital Reserve A/c (B.F.) 13,20,000

(Being various assets and liabilities taken over)3. Profit and Loss A/c 25,000

To Inventories A/c 25,000(Being elimination of unrealised profit)

4. Current Liabilities A/c Dr. 1,00,000To Debtors A/c 1,00,000

(Being elimination of mutual owings)5. Foreign Company Dr. 24,00,000

To Tax Payable A/c 3,92,000To Bank A/c(Rs.10,04,000 + Rs.20) 10,04,020

To Equity Share Capital A/c 3,34,660To Securities Premium A/c 6,69,320

(Being payment made to foreign company)

It is assumed that payment of fractional shares has also been routed through Bank A/c along with 50% paymentremitted to Foreign Company.ww

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6. Tax Payable A/c Dr. 3,92,000To Bank A/c 3,92,000

(Being tax paid to Government)

Balance Sheet of H Ltd. (After Absorption)

Liabilities Rs. Assets Rs.5,34,466 Shares of Rs.10 each 53,34,660 Fixed Assets 76,20,000(out of above, 33,466 shares issuedfor consideration other than cash)

(60,00,000+16,20,000)

General ReserveProfit & Loss (20,00,000– 25,000)Capital ReserveSecurities Premium

50,00,00019,75,00013,20,0006,69,320

Sundry Debtors(35,00,000 – 1,00,000+5,00,000)

39,00,000

Secured Loan (20,00,000+3,00,000)Current Liabilities

23,00,000 Inventories (30,00,000-25,000+25,00,000)

54,75,000

(30,00,000+2,00,000-1,00,000) 31,00,000 Cash at Bank 27,03,980

________(39,00,000+2,00,000–10,04,020-3,92,000) ________

196,98,980 196,98,980

Working Notes:1. Amount payable to foreign company

Price per share of S Ltd.= Rs.50 + Rs.10 (Nominal value) = Rs.60

Value of 40% shares held by foreign company = 10,00,000x 40%x1060 = Rs. 24,00,000

Capital gain = Rs.24,00,000 – (4,00,000 x1011 ) = Rs.19,60,000

Tax on capital gain = Rs.19,60,000 × 20% = Rs.3,92,000Amount payable to Foreign Company after tax = Rs.24,00,000–Rs.3,92,000= Rs.20,08,00050% of Rs.20,08,000 = Rs.10,04,000 to be remitted to foreign company.

2. Intrinsic value of shares of H Ltd. and balance payment to foreign company

Rs. Rs.Total assets (Excluding Investment in S Ltd.) 1,64,00,000Add: Investment in S Ltd. (60,000 shares × Rs.60) 36,00,000

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Secured Loan 20,00,000Current Liability 30,00,000 50,00,000

1,50,00,000No. of equity shares 5,00,000Intrinsic value per share Rs.30Number of shares to be issued for payment of 50% balance amount

shares466,3330

000,04,10.Rs

Cash for fractional shares = Rs.10,04,000 – (33,466 x Rs.30) = Rs.20Question 3P Ltd. owns 80% of S and 40% of J and 40% of A. J is jointly controlled entity and A is anassociate. Balance Sheet of four companies as on 31.03.09 are:

P Ltd. S J A(Rs. in lakhs)

Investment in S 800 - - -Investment in J 600 - - -Investment in A 600 - - -Fixed assets 1000 800 1400 1000Current assets 2200 3300 3250 3650Total 5200 4100 4650 4650Liabilities:Share capital Re. 1Equity share 1000 400 800 800Retained earnings 4000 3400 3600 3600Creditors 200 300 250 250Total 5200 4100 4650 4650

P Ltd. acquired shares in ‘S’ many years ago when ‘S’ retained earnings were Rs. 520 lakhs. P Ltd.acquired its shares in ‘J’ at the beginning of the year when ‘J’ retained earnings were Rs. 400lakhs. P Ltd. acquired its shares in ‘A’ on 01.04.08 when ‘A’ retained earnings were Rs. 400 lakhs.The balance of goodwill relating to S had been written off three years ago. The value of goodwill in‘J’ remains unchanged.Prepare the Consolidated Balance Sheet of P Ltd. as on 31.03.09 as per AS 21, 23, and 27.

(16 Marks)

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AnswerConsolidated Balance Sheet of P Ltd.

Liabilities Rs. in lakhs Assets Rs. in lakhsShare Capital 1,000 Goodwill (W.N.1) 120Retained Earnings(W.N.2) 8,800 Fixed Assets

[1,000 + 800 + 560 (1400 x 40%)]2,360

Creditors (200+ 300 + 40% of 250) 600 Current Assets[2,200+3,300+1,300(3,250x 40%)]

6,800

Minority Interest (W.N.3) 760 Investment in Associates (W.N.4) 1,88011,160 11,160

Working Notes:1. Computation of Goodwill S (subsidiary)

Rs. in lakhsCost of investment 800Less:Paid up value of shares acquired 320

Share in pre- acquisition profits of S Ltd. (520 × 80%) 416 736Goodwill 64 J (Jointly Controlled Entity)

Rs. in lakhsCost of Investment 600Less:Paid up value of shares acquired (40% of 800) 320

Share in pre-acquisition profits (40% of 400) 160 480Goodwill 120Note:Jointly controlled entity ‘J’ to be consolidated on proportionate basis i.e. 40% as per AS 27Associate A (AS 23)

Rs. in lakhsCost of investment 600Less:Paid up value of shares acquired (800 x 40%) 320

Share in pre-acquisition profits (400 x 40%) 160 480Goodwill 120

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Goodwill shown in the Consolidated Balance Sheet

Rs. in lakhsGoodwill of ‘J’ 120Goodwill of ‘S’ 64Less:Goodwill written off of ‘S’ 64Goodwill 120

2. Consolidated Retained Earnings

Rs. in lakhsP Ltd. 4,000Share in post acquisition profits of S - 80% (3,400 – 520) 2,304Share in post acquisition profits of J - 40% (3,600 – 400) 1,280Share in post acquisition profits of A - 40% (3,600 – 400) 1,280Less:Goodwill written off (64)

8,800

3. Minority Interest ‘S’

Rs. in lakhs80Share Capital (20% of 400)

Share in Retained Earnings (20% of 3,400) 680760

4. Investment in Associates

Rs. in lakhsCost of Investments (including goodwill Rs. 120 lakhs) 600Share of post acquisition profits 1,280Carrying amount of Investment (including goodwill Rs. 120 lakhs) 1,880

Question 4(a) On 1 April, 2008 Delta Ltd. issued Rs.30,00,000, 6 % convertible debentures of face value of

Rs. 100 per debenture at par. The debentures are redeemable at a premium of 10% on31.03.12 or these may be converted into ordinary shares at the option of the holder, theinterest rate for equivalent debentures without conversion rights would have been 10%.Being compound financial instrument, you are required to separate equity and debt portion ason 01.04.08.The present value of Re. 1 receivable at the end of the end of each year based on discountrates of 6% and 10% can be taken as:

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6% 10%End of year 1 0.94 0.91

2 0.89 0.833 0.84 0.75

4 0.79 0.68(b) When general price index was 100, Standard Ltd. purchased fixed assets of Rs. 2 crore and it

had also permanent working capital of Rs.80 lakhs. The entire amount required for purchaseof fixed assets and permanent working capital was financed by way of 12 % redeemableshare capital. Standard Ltd. wants to maintain its physical capital.On 31.03.09, the company had reserves of Rs. 3.50 crores. The general price index on thatwas 200. The written down value of fixed assets was Rs. 20 lakhs and they were sold for 3crores. The proceeds were utilized for redemption of shares. On the same day (31.03.09), thecompany purchased new factory for Rs. 20 crores. The ratio of permanent working capital tocost of assets to be maintained at 0.4 : 1.

The company raised the additional funds required for the purpose by issue of equity shares.(A) Calculate the amount of equity capital raised.(B) Show the Balance Sheet as on 01.04.09. (8+8 = 16 Marks)

Answer(a) Computation of Equity and Debt Component of Convertible Debentures as on 1.4.08

Rs.Present value of the principal repayable after four years[30,00,000 × 1.10 × 0.68 (10% Discount factor)] 22,44,000Present value of Interest [1,80,000 x 3.17 (4 years cumulative 10% discount factor)] 5,70,600Value of debt component 28,14,600Value of equity component 1,85,400Proceeds of the issue 30,00,000

(b)Amount of equity capital raised Rs. in croresAmount required for purchase of new factory 20.00Permanent working capital requirement at 40% 8.00

28.00Less: Existing working capital (W.N. 3) 6.30Fresh equity capital raised 21.70

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Balance Sheet of Standard Ltd. as on 1st April, 2009(Rs. in crores)

Liabilities Rs. Assets Rs.Share Capital 21.70 Fixed Assets 20.00Reserves and Surplus (Bal. figure) 6.30 Working Capital 8.00

28.00 28.00Working Notes:

(Rs. in crores)1. Preference share capital on 31st March, 2009

Fixed assets 2.00Working capital 0.80Financed by 12% Redeemable preference share capital 2.80

To maintain physical capital, the company needs to evaluate the financial capital on 31st

March, 2009 which is required to maintain the existing operating capability of thephysical assets. On the basis of price index data available, it can be worked out asfollows:

Rs. 2.80 crore100200

= Rs. 5.60 crores

2. Working capital on 31st March, 2009(before sale of fixed assets and redemption of preference shares)Preference share capital 2.80Reserves 3.50

6.30Less: Written down value of fixed assets 0.20Working capital 6.10As the physical capital on the basis of price index is Rs. 5.6 crores which is less than theactual working capital on 31st March, 09, therefore, physical capital is maintained.

3. Working capital as on 31st March, 2009(after sale of fixed assets and redemption of preference shares)Working capital before sale of fixed assets and redemption 6.10Add: Sale proceeds of fixed assets 3.00

9.10Less: Redemption of preference shares 2.80Working capital available after sale of fixed assets and redemption of pref. shares 6.30

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Question 5(a) A Mutual Fund raised 100 lakh on April 1, 2009 by issue of 10 lakh units of Rs. 10 per unit.

The fund invested in several capital market instruments to build a portfolio of Rs. 90 lakhs.The initial expenses amounted to Rs. 7 lakh. During April, 2009, the fund sold certainsecurities of cost Rs. 38 lakhs for Rs. 40 lakhs and purchased certain other securities for Rs.28.20 lakhs. The fund management expenses for the month amounted to Rs. 4.50 lakhs ofwhich Rs. 0.25 lakh was in arrears. The dividend earned was Rs. 1.20 lakhs. 75% of therealized earnings were distributed. The market value of the portfolio on 30.04.2009 was Rs.101.90 lakh.Determine NAV per unit.

(b) From the following details, compute according to Lev and Schwartz (1971) model, the totalvalue of human resources of the employee groups skilled and unskilled.

Skilled Unskilled(i) Annual average earning of an employee till the

retirement age Rs.50,000 Rs.30,000(ii) Age of retirement 65 years 62 years(iii) Discount rate 15% 15%(iv) No. of employees in the group 20 25(v) Average age 62 years 60 years

(8+8 = 16 Marks)Answer(a)

Rs. in lakhs Rs. in lakhsOpening bank balance [(100- 90-7)Rs. lakhs] 3.00Add: Proceeds from sale of securities 40.00

Dividend received 1.20 44.20Less:Cost of securities 28.20Fund management expenses[(4.50–0.25) Rs. lakhs] 4.25Capital gains distributed[75% of (40.00 – 38.00) Rs. lakhs] 1.50Dividends distributed (75% of Rs. 1.20 lakhs) 0.90 (34.85)Closing bank balance 9.35Closing market value of portfolio 101.90

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Less:Arrears of expenses 0.25Closing net assets 111.00Number of units 10,00,000Closing Net Assets Value (NAV) Rs. 11.10

(b) According to Lev and Schwartz, the value of human capital embodied in a person of age is the present value of his remaining future earnings from employment. Their valuationmodel for a discrete income stream is given by the following formula:

V =

t

t tr

tI)1()(

Where,V = the human capital value of a person years old.I(t) = the person’s annual earnings up to retirement.r = a discount rate specific to the person.t = retirement age.Value of skilled employees:

= )().(,

6265150+100050

- + )64-65()63-65( )15.01(000,50

)15.01(000,50

Rs. 32,875.81 + Rs. 37,807.18 + Rs.43,478.26 = Rs.1, 14,161.25Total value of skilled employees is Rs.1, 14,161.25 × 20 = Rs.22,83,225.

Value of unskilled employees

)6162()6062( )15.01(000,30

)15.01(000,30

=)15.01(

000,30)15.01(

000,302

= 22,684.31 + 26,086.96 = 48,771.27Total value of the unskilled employees = Rs. 48,771.27× 25 = Rs.12,19,282

Total value of human resources (skilled and unskilled) = Rs.22,83,225 + Rs.12,19,282= Rs.35,02,507.

Question 6(a) Capital adequacy ratio for Non-Banking Financial Companies (NBFC)(b) Treatment of refund of Government grants.(c) Give four examples of activities that do not necessarily satisfy criterion (a) of paragraph 3 ofww

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AS 24, but that might do so in combination with other circumstances.(d) From the following information compute diluted earnings per share.

Net profit for the year 2008 Rs.12,00,000Weighted average number of equity shares outstanding during year 2008 5,00,000 sharesAverage fair value of one equity share during the year 2008 Rs.20

Weighted average number of shares under option during the year 2008 1,00,000 sharesExercise price per share under option during the year 2008 Rs.15

(4x4= 16 Marks)Answer(a) Non-Banking Financial Companies (NBFC) are required to maintain adequate capital. Every

NBFC shall maintain a minimum capital ratio consisting of Tier I1 and Tier II2 capital whichshall not be less than 12% of its aggregate risk-weighted assets. The total of Tier II capital , atany point of time , shall not exceed 100% of Tier I capital. Capital adequacy is calculated asunder:

100AssetsAdjustedRisk

CapitalIITierITier

(b) As per Para 11 of AS 12 “ Accounting for Government Grants”, government grant thatbecomes refundable should be treated as an extraordinary item. The amount refundablein respect of a government grant related to revenue is applied first against anyunamortized deferred credit remaining in respect of the grant. To the extent that theamount refundable exceeds any such deferred credit, or where no deferred credit exists,the amount is charged immediately to profit and loss statement. The amount refundablein respect of a government grant related to a specific fixed asset is recorded byincreasing the book value of the asset or by reducing the capital reserve or the deferredincome balance, as appropriate, by the amount refundable. In the first alternative, i.e.,where the book value of the asset is increased, depreciation on the revised book value isprovided prospectively over the residual useful life of the asset. Where a grant which isin the nature of promoters’ contribution becomes refundable, in part or in full, to thegovernment on non-fulfillment of some specified conditions, the relevant amountrecoverable by the government is reduced from the capital reserve.

(c) Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination ofdiscontinuing operations. According to Paragraph 9 of AS 24, examples of activities that

1 “Tier-I Capital" means owned fund as reduced by investment in shares of other NBFCs and in shares, debenture,bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits withsubsidiaries and companies in the same group exceeding, in aggregate, 10% of the owned fund.2 “Tier-II capital" includes (i) Preference shares, (ii) Revaluation reserves at discounted rate of 55%, (iii) Generalprovisions and loss reserves to the extent these are not attributable to actual diminution in value or identifiablepotential loss in any specific asset and are available to meet unexpected losses, to the extent of one and onefourth percent of risk weighted assets, (iv) hybrid debt capital instruments, (v) subordinated debt.ww

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do not necessarily satisfy criterion (a) of paragraph 3, but that might do so in combinationwith other circumstances, include:(i) Gradual or evolutionary phasing out of a product line or class of service;(ii) Discontinuing, even if relatively abruptly, several products within an ongoing line of

business;(iii) Shifting of some production or marketing activities for a particular line of business

from one location to another; and(iv) Closing of a facility to achieve productivity improvements or other cost savings.An example in relation to consolidated financial statements is selling a subsidiary whoseactivities are similar to those of the parent or other subsidiaries.

(d) Computation of diluted earnings per share

Earnings Shares Earning pershare

(Rs.) (Rs.)Net profit for the year 2008 12,00,000Weighted average number of equity shares outstandingduring the year 2008 5,00,000Basic earnings per share (12,00,0000/5,00,000) 2.40Weighted average number of shares under option 1,00,000Number of shares that would have been issued at fairvalue (1,00,000 × 15.00)/20.00) * (75,000) ___Diluted earnings per share (12,00,0000/5,25,000) 12,00,000 5,25,000 2.29

*The earnings have not been increased as the total number of shares has been increasedonly by the number of shares (25,000) deemed for the purpose of computation to have beenissued for no consideration (Para 37(b) of AS 20).

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PAPER – 1: FINANCIAL REPORTING Question No. 1 is compulsory.

Attempt any five questions from the remaining six Questions. Working notes should form part of the answer.

Wherever necessary, suitable assumptions may be made by the candidates.

Question 1 (a) Night Ltd. sells beer to customers; some of the customers consume the beer in the bars

run by Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company takes possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for these empty bottles which are sold by the company by calling for tenders. Keeping this in view: (i) Decide whether the stock of empty bottles is an asset of the company; (ii) If so, whether the stock of empty bottles existing as on the date of Balance Sheet is

to be considered as inventories of the company and valued as per AS-2 or to be treated as scrap and shown at realizable value with corresponding credit to ‘Other Income’?

(b) AS-4 prescribes that 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 amount relating to conditions existing at the Balance sheet date-generally called adjusting events. “Proposed Dividend” is shown and adjusted in the Balance Sheet even if it is not an adjusting event as per AS-4 because it is proposed by the Board of Directors of the company after the Balance sheet date.

Keeping this in view, is it not violation of AS-4 to show proposed dividends as current liabilities and provisions? Comment.

(c) Bright Ltd. acquired 30% of East India Ltd. Shares for ` 2,00,000 on 01-06-09. By such an acquisition Bright can exercise significant influence over East India Ltd. During the financial year ending on 31-03-09 East India earned profits ` 80,000 and declared a dividend of ` 50,000 on 12-08-2009. East India reported earnings of ` 3,00,000 for the financial year ending on 31-03-10 and declared dividends of ` 60,000 on 12-06-2010.

Calculate the carrying amount of investment in: (i) Separate financial statements of Bright Ltd. as on 31-03-10; (ii) Consolidated financial statements of Bright Ltd.; as on 31-03-10; (iii) What will be the carrying amount as on 30-06-2010 in consolidated financial

statements? (d) An asset does not meet the requirements of environment laws which have been recently

enacted. The asset has to be destroyed as per the law. The asset is carried in the

© The Institute of Chartered Accountants of India

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FINAL (NEW) EXAMINATION : NOVEMBER, 2010

2

Balance Sheet at the year end at ` 6,00,000. The estimated cost of destroying the asset is ` 70,000. How is the asset to be accounted for ? (4 ´ 5 = 20 Marks)

Answer

(a) (i) Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called assets. Night Ltd. sells these empty bottles by calling tenders. It means further benefits are accrued on its sale. Therefore, empty bottles are assets for the company.

(ii) As per AS 2 “Valuation of Inventories”, inventories are assets held for sale in the ordinary course of business. Stock of empty bottles existing on the Balance Sheet date is the inventory and Night Ltd. has detailed controlled recording and accounting procedure which duly signify its materiality. Hence stock of empty bottles cannot be considered as scrap and should be valued as inventory in accordance with AS 2.

(b) As per para 8 of AS 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. Accordingly, proposed dividend is not an adjusting event. However, para 14 of the standard states that dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted in the financial statements. Schedule VI of the Companies Act 1956 also prescribes that proposed dividend should be shown under the heading ‘Current Liabilities and Provisions’ in the balance sheet. Therefore, showing proposed dividends as ‘current liability and provision’ by adjusting it in the Balance Sheet is not in violation of AS 4.

(c) (i) Carrying amount of investment in Separate Financial Statement of Bright Ltd. as on 31.03.10

` Amount paid for investment in Associate (on 1.06.2009) 2,00,000 Less: Pre-acquisition dividend (`50,000 x 30%) 15,000 Carrying amount as on 31.3.2010 as per AS 13 1,85,000

(ii) Carrying amount of investment in Consolidated Financial Statements* of Bright Ltd. as on 31.3.2010 as per AS 23

* It is assumed that Bright Ltd. has a subsidiary company and it is preparing Consolidated Financial Statements.


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` Carrying amount as per separate financial statements 1,85,000 Add: Proportionate share of profit of investee as per equity method (30% of `3,00,000)

90,000

Carrying amount as on 31.3.2010 2,75,000 (iii) Carrying amount of investment in Consolidated Financial Statement of Bright

Ltd. as on 30.6.2010 as per AS 23

` Carrying amount as on 31.3.2010 2,75,000 Less: Dividend received (` 60,000 x 30%) 18,000 Carrying amount as on 30.6.2010 2,57,000

(d) As per AS 28 “Impairment of Assets”, impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount, where, recoverable amount is the higher of an asset’s net selling price* and its value in use·. In the given case, recoverable amount will be nil [higher of value in use (nil) and net selling price (`70,000)]. Thus impairment loss will be calculated as ` 6,00,000 [carrying amount (`6,00,000) – recoverable amount (nil)]. Therefore, asset is to be fully impaired and impairment loss of ` 6,00,000 has to be recognized as an expense immediately in the statement of Profit and Loss as per para 58 of AS 28.

Question 2 Softex Ltd. announced a Stock Appreciation Right (SAR) on 01-04-07 for each of its employees. The scheme gives the employees the right to claim cash payment equivalent to an excess of market price of company shares on exercise date over the exercise price of ` 125 per share in respect of 100 shares, subject to a condition of continuous employment of 3 years. The SAR is exercisable after 31-03-2010 but before 30-06-10.

The fair value of SAR was ` 21 in 2007-08, ` 23 in 2008-09 and ` 24 in 2009-10. In 2007-08 the company estimated that 2% of its employees shall leave the company annually. This was revised to 3% in 2008-09. Actually 15 employees left the company in 2007-08, 10 left in 2008-

* Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. In the given case, Net Selling Price = Selling price – Cost of disposal = Nil – `70,000 = ` (70,000) · Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. In the given case, value in use is nill.


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09 and 8 left in 2009-10. The SAR therefore actually vested in 492 employees on 30-06-2010; when SAR was exercised the intrinsic value was ` 25 per share. Show the provision of SAR account by fair value method. Is this provision a liability or equity? (16 Marks)

Answer Provision of SARs Account in the books of Softex Ltd.

Year 2007-08 ` Year 2007-08 ` To Balance c/d 3,45,891 By Employees’ Compensation A/c 3,45,891 3,45,891 3,45,891 Year 2008-09 Year 2008-09 To Balance c/d 7,35,785 By Balance b/d 3,45,891 By Employees’ Compensation A/c 3,89,894 7,35,785 7,35,785 Year 2009-10 Year 2009-10 To Balance c/d 11,80,800 By Balance b/d 7,35,785 By Employees’ Compensation A/c 4,45,015 11,80,800 11,80,800 To Bank A/c 12,30,000 By Balance b/d 11,80,800 By Employees’ Compensation A/c 49,200 12,30,000 12,30,000 The Provision for Stock Appreciation Rights (SARs) is a liability. SARs are settled through cash payment equivalent to an excess of market price of company’s shares over the exercise price on exercise date. Working Notes: Year 2007-08 Number of employees to whom SARs were announced (492+15+10+8) = 525 employees Number of SARs expected to vest = (525 x 0.98 x 0.98 x0.98) x 100 = 49,413* SARs. Fair value of SARs = 49,413 SARs ´ ` 21 = ` 10,37,673 Vesting period = 3 years Value of SARs recognised as expense in year 2007 – 08 = ` 10,37,673 / 3 years = ` 3,45,891

*SARs expected to vest in years 2007-08 and 2008-09 can also be worked out by rounding off the number of employees.


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Year 2008-09 Number of SARs expected to vest

= [(525-15) ´ 0.97 ´ 0.97)] ´ 100 = 47,986 SARs Fair value of SARs = 47,986 SARs ´ ` 23 = ` 11,03,678 Vesting period = 3 years Number of years expired = 2 years Cumulative value of SARs to be recognized as expense

= ` 11,03,678/3 ´ 2 = ` 7,35,785 Value of SARs recognized as expense in year 2008 – 09

= ` 7,35,785–` 3,45,891= ` 3,89,894 Year 2009-10 Fair value of SARs = ` 24 SARs actually vested = 492 employees ´ 100 = 49,200 SARs Fair value = 49,200 SARs ´ ` 24 = ` 11,80,800 Cumulative value of SARs to be recognized = ` 11,80,800 Value of SARs to be recognized as an expense in = ` 11,80,800 –` 7,35,785 = ` 4,45,015 Year 2010 – 11 Cash payment of SARs = 49,200 SARs ´ ` 25 = ` 12,30,000 Value of SARs to be recognized as an expense in 2010 – 11

= ` 12,30,000 –` 11,80,800 = ` 49,200 Question 3 Air Ltd., a listed company, entered into an expansion programme on 1st October, 2009. On that date the company purchased from Bag Ltd. its investments in two Private Limited Companies. The purchase was of (a) the entire share capital of Cold Ltd. and (b) 50% of the share capital of Dry Ltd. Both the investments were previously owned by Bag Ltd. After acquisition by Air Limited, Dry Ltd. was to be run by Air Ltd. and Bag Ltd. as a jointly controlled entity.


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Air Ltd. makes its financial statements upto 30th September each year. The terms of acquisition were: Cold Ltd. The total consideration was based on price earnings ratio (P/E) of 12 applied to the reported profit of ` 20 lakhs of Cold Ltd. for the year 30 September, 2009. The consideration was settled by Air Ltd. issuing 8% debentures for ` 140 lakhs (at par) and the balance by a new issue of ` 1 equity shares, based on its market value of ` 2.50 each. Dry Ltd. The market value of Dry Ltd. on first October, 2009 was mutually agreed as ` 375 lakhs. Air Ltd. satisfied its share of 50% of this amount by issuing 75 lakhs ` 1 equity shares (market value` 2.50 Each) to Bag Ltd. Air Ltd. has not recorded in its books the acquisition of the above investments or the discharge of the consideration. The summarized statements of financial position of the three entities at 30th September, 2010 are:

` in thousands Air Ltd. Cold Ltd. Dry Ltd. Assets Tangible Assets 34,260 27,000 21,060 Inventories 9,640 7,200 18,640 Debtors 11,200 5,060 4,620 Cash - 3,410 40 55,100 42,670 44,360 Liabilities Equity capital: ` 1 Each 10,000 20,000 25,000 Retained earnings 20,800 15,000 4,500 Trade and other payables 17,120 5,270 14,100 Overdraft 1,540 - - Provision for taxes 5,640 2,400 760 55,100 42,670 44,360 The following information is relevant. (a) The book values of the net assets of Cold Ltd. and Dry Ltd. on the date of acquisition

were considered to be a reasonable approximation to their fair values. (b) The current profits of Cold Ltd. and Dry Ltd. for the year ended 30th September, 2010

were ` 80 lakhs and ` 20 lakhs respectively. No dividends were paid by any of the companies during the year.


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(c) Dry Ltd., the jointly controlled entity, is to be accounted for using proportional consolidation, in accordance with AS-27 “Interests in joint venture”.

(d) Goodwill in respect of the acquisition of Dry Ltd. has been impaired by ` 10 lakhs at 30th September, 2010. Gain on acquisition, if any, will be separately accounted.

Prepare the consolidated Balance Sheet of Air Ltd. and its subsidiaries as at 30th September, 2010. (16 Marks) Answer

Consolidated Balance Sheet of Air Ltd. with its Subsidiary Cold Ltd. and Jointly controlled Dry Ltd.

as on 30th September, 2010 ` in

thousands Liabilities Assets Equity Capital (10,000 + 4,000 +7,500)

21,500 Tangible Assets (34,260+27,000+10,530)

71,790

(Out of the above 11,500 thousand shares have been issued for consideration other than cash)

Goodwill (W.N.6)

4,000

Retained Earnings (W.N.4) 28,800 Inventories (9,640 + 7,200 + 9,320)

26,160

Capital Reserve (W.N.5) 3,000 Debtors (11,200+5,060+2,310)

18,570

Securities Premium 17,250 Cash (3,410 + 20)

3,430

8% Debentures 14,000 Trade and other payables (17,120 + 5,270 + 7,050)

29,440

Overdraft 1,540 Provision for taxes (5,640 + 2,400 + 380)

8,420

1,23,950 1,23,950 Working Notes: 1. Purchase consideration paid to Cold Ltd.

Earnings per share for the year 30th September, 2009

= 20,00,0002,00,00,000

= ` 0.10 per share


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Market price per share = ` 0.10 x 12 (i.e. P/E ratio) = ` 1.20 per share

Purchase consideration = ` 1.20 x 2,00,00,000 shares= ` 2,40,00,000

Purchase consideration to be paid as under: 8% Debentures ` 1,40,00,000 Equity Shares (40,00,000 shares of ` 2.50 each) ` 1,00,00,000 ` 2,40,00,000 Purchase consideration paid to Cold Ltd. will be ` 24,000 thousands. 2. Consideration paid to Dry Ltd. ` in thousands Total market value (as given) 37,500 50% Shares acquired by Air Ltd.(75,00,000 shares @ ` 2.50 each) 18,750 3. Analysis of retained earnings of Cold Ltd. as on 30.9.2010 ` in thousands Retained earnings given in balance sheet on 30.9.10 15,000 Less: Current profits for the year ended 30.9.10(Post acquisition) 8,000 Pre acquisition retained earnings 7,000 Air Ltd. has 100% share in pre and post acquisition profits of Cold Ltd. 4. Retained Earnings in the Consolidated Balance Sheet

` in thousands Balance in Air Ltd. balance sheet 20,800 Add: Share in post acquisition profits of Cold Ltd. 8,000 Add: Share in post acquisition profits of Dry Ltd. (joint venture) 1,000 29,800 Less: Goodwill (written off) 1,000 28,800

5. Capital Reserve ` in thousands Amount Paid 24,000 Less: Paid up value of shares 20,000 Pre-acquisition profit 7,000 27,000 Capital Reserve 3,000


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6. Goodwill ` in thousands Amount paid for shares of Dry Ltd (` 37,500 x 50%) 18,750 Less: Paid up value of shares (` 25,000x 50%) 12,500 Pre-acquisition profit (` 2,500 x 50%) 1,250 Goodwill 5,000 Less: Impairment (Written off) 1,000 4,000 Question 4 The following are the Balance Sheets of X Ltd. and Y Ltd. as on 31st December, 2009.

Amount in ` X Ltd. Y Ltd. Assets Fixed Assets 7,00,000 2,50,000 Stock 2,40,000 3,20,000 Debtors 3,60,000 1,90,000 Bills Receivable 60,000 20,000 Cash at Bank 1,10,000 40,000 Investments in : 6000 shares of Y Ltd. 80,000 5000 shares of X Ltd. 80,000 15,50,000 9,00,000 Liabilities Share Capital: Equity shares of ` 10 Each 6,00,000 3,00,000 10% preference shares of ` 10 each 2,00,000 1,00,000 Reserve and Surplus 3,00,000 2,00,000 12% Debentures 2,00,000 1,50,000 Sundry Creditors 2,20,000 1,25,000 Bills payable 30,000 25,000 15,50,000 9,00,000 Fixed assets of both the companies are to be revalued at 15% above book values and stock and debtors are to be taken over at 5% less than their book values. Both the companies are to pay 10% equity dividends, preference dividends having been paid already.


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After the above transactions are given effect to, X Ltd. will absorb Y Ltd. on the following terms: (i) 8 equity shares of ` 10 each will be issued by X Ltd. at par against 6 shares of Y Ltd. (ii) 10% preference shares of Y Ltd. will be paid off at 10% discount by issue of 10%

preference shares of ` 100 each of X Ltd. at par. (iii) 12% Debentureholders of Y Ltd. are to be paid off at a 8% premium by 12% debentures

in X Ltd. issued at a discount of 10%. (iv) ` 30,000 to be paid by X Ltd. to Y Ltd. for liquidation expenses. (v) Sundry creditors of Y Ltd. include ` 10,000 due to X Ltd. Prepare: (a) A statement of purchase consideration payable by X Ltd. (b) A Balance Sheet of X Ltd. after its absorption of Y Ltd. (16 Marks) Answer (a) Statement of Purchase Consideration payable by X Ltd.

(i) 8 Equity Shares of X Ltd. for every 6 Equity Shares of Y Ltd.

30,000 shares x =68 40,000 shares

Less: 1/5 already held by X Ltd. of Y Ltd. 8,000 shares 32,000 shares Less: 5,000 Shares of X Ltd. with Y Ltd. 5,000 shares 27,000 Shares 27,000 equity shares at ` 10 ` 2,70,000

(ii) Payment of 10% Preference Shares at 10% discount by issue of 10% Preference Shares of X Ltd. of ` 100 each

(1,00,000 x 90100

) ` 90,000

` 3,60,000*

*Reimbursement of liquidation expenses by X Ltd. to Y Ltd. has not been considered as part of purchase consideration. Alternatively, this can be included in computation of purchase consideration.


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(b) Balance Sheet of X Ltd. after its absorption of Y Ltd.

Liabilities ` Assets ` Share Capital Fixed Assets

(8,05,000 +2,87,500) 10,92,500

87,000 Equity Shares of ` 10 each 8,70,000 Stock (2,40,000 + 3,04,000)

5,44,000

(Out of the above, 27,000 equity shares have been issued for consideration other than cash)

Debtors (3,60,000 + 1,80,500 – 10,000)

5,30,500

10% Preference shares of ` 10 each 2,00,000 Bills Receivable (60,000 + 20,000)

80,000

10% Preference shares of ` 100 each

90,000

Reserves and Surplus Cash at Bank(W.N. 3) 41,000 Revaluation Reserve (15% of 7,00,000)

1,05,000 Discount on Issue of Debentures

18,000

Capital Reserve (W. N.1) 25,000 [1,50,000 x 108% x (10/90)]

Other Reserves (W.N.4) 2,46,000 12% Debentures

1,62,0002,00,00090%

é ùæ ö+ ç ÷ê úè øë û

3,80,000

Sundry Creditors (2,20,000+1,25,000 – 10,000)

3,35,000

Bills Payable (30,000 + 25,000) 55,000 23,06,000 23,06,000

Working Notes: 1. Calculation of Capital Reserve

Net Assets taken over from Y Ltd. ` Fixed Assets ( )2,50,000 115%´ 2,87,500

Stock (3,20,000 x 95%) 3,04,000 Debtors (1,90,000 x 95%) 1,80,500 Bills Receivable 20,000 Cash at Bank 15,000 Total Assets (A) 8,07,000


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Less: Liabilities taken over Debentures (1,50,000 x 108%) 1,62,000 Sundry Creditors 1,25,000 Bills Payable 25,000 Total Liabilities (B) 3,12,000 Net Asset taken over (A – B) 4,95,000 Less: Investment cancelled 80,000 4,15,000 Purchase Consideration 3,60,000* Capital Reserve 55,000 Less: Liquidation expenses reimbursed to Y Ltd. 30,000*

25,000 2. Cash taken over from Y Ltd.

` Cash balance given in Balance Sheet of Y Ltd. 40,000 Add: Dividend received from X Ltd. 5,000 45,000 Less :Dividend paid 30,000 15,000

3. Cash balance in Balance Sheet (after absorption) ` Cash balance given in Balance Sheet of X Ltd. 1,10,000 Add: Cash taken over from Y Ltd. 15,000 1,25,000 Less: Dividend paid 60,000 Expenses on liquidation 30,000 90,000

35,000 Add: Dividend from Y Ltd. 6,000 41,000

* Reimbursement of liquidation expenses by X Ltd. to Y Ltd. has not been considered as part of purchase consideration. If these expenses are included in computation of purchase consideration, then `30,000 will not be deducted.


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4. Other Reserves in the Balance Sheet (after absorption)

` Reserves given in the Balance Sheet of X Ltd. 3,00,000 Dividend from Y Ltd. 6,000 3,06,000 Less: Dividend declared 60,000 2,46,000

Question 5 (a) From the following information, calculate the value of a share if you want to

(i) buy a small lot of shares; (ii) buy a controlling interest in the company.

Year Profit Capital Employed Dividend (`) (`) % 2007 55,00,000 3,43,75,000 12 2008 1,60,00,000 8,00,00,000 15 2009 2,20,00,000 10,00,00,000 18 2010 2,50,00,000 10,00,00,000 20

The market expectation is 12%. (b) On February 1, 2009, Future Ltd. entered into a contract with Son Ltd. to receive the fair

value of 1000 Future Ltd.’s own equity shares outstanding as on 31-01-2010 in exchange for payment of ` 1,04,000 in cash i.e., ` 104 per share. The contract will be settled in net cash on 31.01.2010.

The fair value of this forward contract on the different dates were: (i) Fair value of forward on 01-02-2009 Nil (ii) Fair value of forward on 31-12-2009 ` 6,300 (iii) Fair value of forward on 31-01-2010 ` 2,000

Presuming that Future Ltd. closes its books on 31st December each year, pass entries: (i) If net settled is in cash (ii) If net is settled by Son Ltd. by delivering shares of Future Ltd. (8 + 8 = 16 Marks)

Answer (a) (i) Buying a small lot of shares If the purpose of valuation is to provide data base to aid a decision of buying a small

(non-controlling) position of the equity of a company, dividend yield method is most


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appropriate. Dividend rate is rising continuously, weighted average will be more appropriate for calculation of average dividend. Year Rate of dividend Weight Product 2007 12 1 12 2008 15 2 30 2009 18 3 54 2010 20 4 80

10 176

Average dividend = 17610

= 17.6%

Value of share on the basis of dividend for buying a small lot of shares will be

Average dividend rate 100Market expectation rate

´ = 17.6 10012

´ = ` 146.67 per share.

(ii) Buying a controlling interest in the company If the purpose of valuation is to provide data base to aid a decision of buying

controlling interest in the company, total profit will be relevant to determine the value of shares as the shareholders have capacity to influence the decision of distribution of profit. As the profit is rising, weighted average will be more appropriate for calculation of average profit/yield. Year Yield %

(Profit/Capital employed) x100

Weight Product

2007 16 1 16 2008 20 2 40 2009 22 3 66 2010 25 4 100

10 222

Average yield = 22210

= 22.2%

If controlling interest in the company is being taken over, then the value per share

will be = Average yield rate 100Market expectation rate

´ = 22.2 10012

´ = ` 185 per share.

(b) If net is settled in cash (i) 1.2.2009

No entry is required because fair value of derivative is zero and no cash is paid or received.


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` ` (ii) 31.12.2009

Forward Contract (Asset) A/c Dr. 6,300 To Profit and Loss A/c 6,300 (Gain recorded due to increase in fair value of the forward contract)

(iii) 31.01.2010 Profit and Loss A/c Dr. 4,300 To Forward Contract (Asset) A/c 4,300 (Loss recorded due to decrease in fair value of the forward contract)

(iv) Cash A/c Dr. 2,000 To Forward Contract (Asset) A/c 2,000 (Being forward contract settled in cash)

If net is settled by delivery of shares First three entries will be same. Entry no. (iv)will change as under: Equity A/c Dr. 2,000 To Forward Contract (Asset) A/c 2,000 (Being forward contract settled by delivery of shares)

Question 6 (a) On 1st April, 2008 Sigma Ltd. issued 6% Convertible debentures of face value of ` 100

per debenture at par. The debentures are redeemable at a premium of 10% on 31-03-2012 or these may be converted into ordinary shares at the option of the holder, the interest rate for equivalent debentures without conversion rights would have been 10%. Being a compound financial instrument, you are required to separate equity and debt portions as on 01-04-2008. Equity portion is `1,85,400. Find out the debt portion (Debenture amount). The present value of `1 receivable at the end of each year based on discount rates of 6% and 10% can be taken as:

End of year 6% 10% 1 0.94 0.91 2 0.89 0.83 3 0.84 0.75 4 0.79 0.68


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(b) (i) What is the meaning of ‘valuation of liabilities’? (ii) State the purpose of valuation of liabilities in financial accounting and reporting. (iii) How is liability determined in the case of a finance lease? (8+ 8 = 16 Marks)

Answer (a) Assume that total proceeds of the issue is = ` M Hence, interest payable every year = 6% of ` M =.06M Present value of interest (10% discount factor)=0.06M x cumulative discount factor of 4

years = 0.06M x 3.17 = 0.1902M. Present value of the principal repayable after four years [1.10 M x 0.68(10% discount

factor)]= 0.748 M Total present value of debentures (value of debt component)

=0.1902M+0.748M=0.9382M Hence, amount of equity = M –0.9382M = ` 1,85,400

0.0618M = ` 1,85,400 M = 1,85,400/0.0618=`30,00,000

Therefore, total proceeds of the issue is ` 30,00,000 Debt portion (Debenture amount) = ` 30,00,000 – ` 1,85,400 = ` 28,14,600.

(b) (i) Valuation of liabilities is the measurement of liabilities in monetary terms. It may be measured at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business or required to settle the obligation currently in the normal course of business. It may also be carried at the present value of the future net cash flows that are expected to be required to settle the liabilities in the normal course of business.

(ii) Proper valuation of liabilities is required to ensure true and fair financial position of the business entity. In other words, all matters which affect the financial position of the business have to be disclosed. Under or over valuation of liabilities may not only affect the operating results and financial position of the current period but will also affect the operating results and financial position for the next accounting periods.

(iii) In case of financial lease, the lessee should recognize a liability equal to the fair value of the leased asset at the inception of the lease. As per AS 19, “Leases”, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the stand point of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease, if this is practicable to determine, if not, the lessee’s incremental borrowing rate should be used.


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Question 7 Answer any four of the following: (a) M/s TS Ltd. has entered into a contract by which it has the option to sell its specified

asset to NB Ltd. for `100 lakhs after 3 years whereas the current market price is ` 150 lakhs. Company always settles account by delivery. What type of option is this? Is it a financial instrument? Explain with reference to the relevant accounting standard.

(b) Assam Ltd. purchased an oil well for $ 100 million. It estimates that the well contains 250 million barrels of oil. The oil well has no salvage value. If the company extracts and sells 10,000 barrels of oil during the first year, how much depletion expense should be recognized as per IFRS 6?

(c) X Ltd. sold its building to Mini Ltd. for ` 60 lakhs on 30.09-2009 and gave possession of the property to Mini Ltd. However, documentation and legal formalities are pending. Due to this, the company has not recorded the sale and has shown the amount received as an advance. The book value of the building is ` 25 lakhs as on 31st March, 2010. Do you agree with this treatment? If you do not agree, explain the reasons with reference to the accounting standard.

(d) Southern Tower Ltd. purchased a plant from M/s. Tatamaco Ltd. on 30-09-2008 with a quoted price of ` 180 lakhs. Tatamaco offer 3 months credit with a condition that discount of 1.25% will be allowed if the payment were made within one month. VAT is 12.5% on the quoted price. Company incurred 2% on transportation costs and 3% on erection costs of the quoted price. Preoperative cost amount to `1.50 lakhs. To finance the purchase of the machinery, company took a term bank loan of `125 lakhs at an interest rate of 14.50% per annum. The machine was ready for use on 31-12-2008; however, it was put to use only on 01-04-2009. (i) Find out the original cost. (ii) Suggest the accounting treatment for the cost incurred during the period between

the date the machine was ready for use and the actual date the machine was put to use.

(e) S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as under:

Lease term = 4 years Fair value at inception of lease = ` 20,00,000 Lease rent = ` 6,25,000 p.a. at the end of year Guaranteed residual value = ` 1,25,000 Expected residual value = ` 3,75,000 Implicit interest rate = 15%


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Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively.

Calculate the value of the lease liability as per AS-19. (4 ´ 4 =16 Marks) Answer (a) As per AS 31 “Financial Instruments: Presentation”, a financial instrument is any contract

that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. In the given case, M/s TS Ltd. has entered into a contract with NB Ltd. and company settles its account by delivery, and does not give rise to any financial asset or financial liability. Hence there is no option. Since, the above transaction does not give rise to a financial asset of one entity and a financial liability or equity instrument of another entity; this is not a financial instrument. It is only a financial contract.

(b) As per IFRS 6 “Exploration for and Evaluation of Mineral Resources”, depletion rate and depletion expense can be computed as: Depletion rate = Current period production/Total barrels of production

= 10,000 barrels/250,000,000 barrels = 0.00004

Depletion expense for the first year = Purchase price x Depletion rate = $100,000,000 x 0.00004 = $ 4,000. (c) Principles of prudence, substance over form and materiality should be looked into, to

ensure true and fair consideration in a transaction. In the given case, the economic reality and substance of the transaction is that the rights and beneficial interest in the property has been transferred although legal title has not been transferred. Hence, X Ltd. should record the sale and recognize the profit of ` 35 lakhs in its financial statements for the year ended 31st March, 2010; value of building should be removed from the balance sheet. Therefore the treatment given by the company is not correct.

(d) (i) Original cost of the machine

Particulars ` in lakhs ` in lakhs Quoted price 180.00 Less: Discount @1.25% 2.25 177.75 Add: VAT @12.5% 22.50 Transportation @ 2% 3.60 Erection cost @ 3% 5.40 Pre-operative cost 1.50


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Finance cost (14.5% on ` 125 lakhs for the period 01.10.08 to 31.12.08)

4.53

Total 215.28 (ii) Cost incurred during the period between the date the machine was ready for

use and the actual date the machine was put to use Finance cost amounting ` 4.53 lakhs (14.50% on ` 125 lakhs for the period

01.01.2009 to 31.03.2009) will be charged to profit and loss account as per AS 16 “Borrowing Costs”.

(e) According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an amount equal to the fair value of the leased asset at the inception of the finance lease. However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease. Present value of minimum lease payments will be calculated as follows:

Year Minimum Lease Payment `

Internal rate of return (Discount rate @5%)

Present value `

1 6,25,000 0.8696 5,43,500 2 6,25,000 0.7561 4,72,563 3 6,25,000 0.6575 4,10,937 4 7,50,000* 0.5718 4,28,850 Total 26,25,000 18,55,850 Present value of minimum lease payments ` 18,55,850 is less than fair value at the inception of lease i.e. ` 20,00,000, therefore, the lease liability should be recognized at ` 18,55,850 as per AS 19.

* Minimum Lease Payment of 4th year includes guaranteed residual value amounting ` 1,25,000.


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