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Model Test Paper – 2IPCC Gr. IIPaper – 5

Advanced AccountingQuestion No. 1 is compulsory

Attempt any five questions from remaining six questions.

1. (a) M/s. Ayush Ltd. began construction of a new building on 1st January,2014. It obtained ` 3 lakh special loan to finance the construction ofthe building on 1st January, 2014 at an interest rate of 12% p.a.. Thecompany’s other outstanding two non-specific loans were:

Amount Rate of Interest

` 6,00,000` 11,00,000

11% p.a.13% p.a.

The expenditure that were made on the building project were asfollows:

Amount (`)

January, 2014April, 2014July, 2014

December, 2014

3,00,0003,50,0005,50,0001,50,000

Building was completed on 31st December, 2014. Following theprinciples prescribed in AS 16 ‘Borrowing Cost’, calculate theamount of interest to be capitalized and pass one Journal Entry forcapitalizing the cost and borrowing in respect of the building.

(5 marks)Answer:1. Calculation for Average Accumulated Expenses:

(i) ` 3,00,000 × 12/12 ` 3,00,000

(ii) ` 3,50,000 × 9/12 ` 2,62,500

5.1

5.2 Solved Scanner IPCC Gr. II Paper - 5

(iii) ` 5,50,000 × 6/12 ` 2,75,000

(iv) ` 1,50,000 × 1/12 ` 12,500

` 8,50,000 Out of above, ` 3,00,000 is from specific loan and balance

` 5,50,000 is from non-specific loans.2. Calculation for Average Interest Rate:

(i) Total interest Exp.= (` 6,00,000 × 11%) + (` 11,00,000 × 13%) = 66,000 + 1,43,000 = 2,09,000(ii) Total loan amount = ` 17,00,000

(iii) Average rate =

= = 12.29%.

3. Calculation for amount to be capitalised:

Particulars Amount (`)Cost of Building (3,00,000 + 3,50,000 + 5,50,000 +1,50,000)

13,50,000

Add: Interest Cost to be capitalised = specific borrowings (` 3,00,000 × 12%)

36,000

Non specific borrowings (` 5,50,000 × 12.29%) 67,595Total amount to be capitalised for building 14,53,595

4. Journal EntryDate Particulars Dr. (`) Cr. (`)

31/12/2014 Building A/c Dr. 14,53,595To Bank A/c 14,53,595

(i.e. cost of building & borrowingcost capitalised)

Model Test Paper 5.3

1. (b) ABC Ltd. came up with public issue of 3,00,000 Equity Shares of `10 each at ̀ 15 per share. P, Q and R took underwriting of the issuein ratio of 3 : 2 : 1 with the provisions of firm underwriting of 20,000,14,000 and 10,000 shares respectively.Applications were received for 2,40,000 shares excluding firmunderwriting.The marked applications from public were received as under:P – 60,000Q – 50,000R – 60,000Compute the liability of each underwriter as regards the number ofshares to be taken up assuming that the benefit of firm underwritingis not given to individual underwriters. (4 marks)

Answer:Calculation of liability of each underwriter (in shares) assuming that thebenefit of firm underwriting is not given to individual underwriters

(Number of shares) P Q R Total

Gross LiabilityLess: Markedapplications

1,50,000 (60,000)

1,00,000(50,000)

50,000(60,000)

3,00,000(1,70,000)

(excluding firm under-writing)

Balance 90,000 50,000 (10,000) 1,30,000Less: Surplus of Rallocated to P and Q in theratio of 3:2 (6,000) (4,000) 10,000 -Balance 84,000 46,000 - 1,30,000Less: Unmarked applica-tions including fi rmunderwriting (W.N.) (57,000) (38,000) (19,000) (1,14,000)Net Liability 27,000 8,000 (19,000) 16,000


Less: Surplus of Rallocated to P and Q in theratio of 3:2

(11,400) (7,600) (19,000) -

15,600 400 - 16,000Add: Firm underwriting 20,000 14,000 10,000 44,000Total Liability 35,600 14,400 10,000 60,000

Working Note: Applications received from public Add: Shares underwritten firm (20,000 + 14,000 + 10,000)

2,40,000 shares 44,000 shares

Total applications Less: Marked applications (60,000 + 50,000 + 60,000)

2,84,000 shares (1,70,000 shares)

Unmarked applications including firm underwriting 1,14,000 shares

1. (c) Give Journal Entries in the books of Head Office to rectify or adjustthe following:(i) Goods sent to Branch ` 12,000 stolen during transit. Branch

manager refused to accept any liability.(ii) Branch paid ` 15,000 as salary to the officer of Head Office on

his visit to the branch.(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch

invoiced at ` 25,000 which was not received by Branch till 31st

March, 2012.(iv) A remittance of ` 10,000 sent by the branch on 30th March,

2012, received by the Head Office on 1st April, 2012.(v) Head Office made payment of ` 25,000 for purchase of goods

by Branch and wrongly debited its own purchase account.(5 marks)


Answer:In the books of Head Office

Journal Entries Particulars Dr.

Amount`

Cr.Amount

`

(i) Loss of goods due to theft during transit Dr.To Purchases account

(Being goods lost on account of theft duringtransit)*

12,00012,000

(ii) Salaries account Dr.To Branch account

(Being salary paid by the branch for H.O.employee)

15,00015,000

(iii) No entry in the books of head office for goodssent to branch not received by branch till 31st

March 2012(iv) Cash in transit account Dr.

To Branch account(Being remittance by branch not received by 31st

March, 2012)

10,00010,000

(v) Branch account Dr.To Purchases account

(Being rectification of entry for payment forgoods purchased by branch wrongly debited topurchase account)

25,00025,000

* Assumption: It is assumed that refusal of branch manager (to acceptliability of stolen goods) is accepted by the Head Office. Alternatively,Branch account will be credited on the basis of assumption that refusal ofbranch manager is not accepted by the Head Office. Note: In entry (iii) the goods in transit entry will be passed in the Books ofthe Branch.


1. (d) XYZ Ltd. had issued 30,000, 15% convertible debenture of ` 100each on 1st April 2008. The debentures are due for redemption on1st March, 2011. The terms of issue of debentures provided that theywere redeemable at a premium of 5% and also conferred option tothe debentureholders to convert 20% of their holding into equityshares (Nominal Value ` 10) at a price of ` 15 per share.Debentureholders holding 2500 debentures did not exercise theoption. Calculate the number of equity shares to be allotted to theDebenture holders exercising the option to the maximum.

(5 marks)Answer :Computation of number of equity shares allotted to bedebentureholders

Particulars No. of debentureTotal number of debentureLess : Debentureholders not opted for conversion

Option for conversionNumber of debentures for conversion

Redemption value at a premium of 5% (5,500 x ` 105)

Number of equity shares to be allotted

30,000(2,500)27,500

20%

5,500

` 5,77,500

38,500 shares

2. P, Q, R and S had been carrying on business in partnership sharingprofit & losses in the ratio of 4 : 3 : 2 : 1. They decide to dissolve thepartnership on the basis of following Balance Sheet as on 30th April,2011:


Liabilities Amount (`) Assets Amount(`)

Capital Accounts P 1,68,000Q 1,08,000

General Reserve Capital Reserve Sundry Creditors Mortgage Loan

2,76,00095,00025,00036,000

1,10,000

Land & Building Furniture & Fixtures Stock Debtors Cash in hand Capital overdrawn : R 25,000S 18,000

2,46,00065,000

1,00,00072,50015,500

43,0005,42,000 5,42,000

(i) The assets were realized as under : Land & Building 2,30,000Furniture & Fixture 42,000Stock 72,000Debtors 65,000

(ii) Expenses of dissolution amounted to ` 7,800.(iii) Further creditors of ` 18,000 had to be met.(iv) R became insolvent and nothing was realized from his private

estate.Applying the principles laid down in Garner Vs. Murray, prepare theRealisation Account, Partner’s Capital Accounts and Cash Account.

(16 marks)Answer :

Realization AccountParticulars Amount

(`)Particulars Amount

(`)To Land and buildingTo Furniture and fixturesTo StockTo DebtorsTo Cash A/c

(expenses on dissolution)To Cash A/c (creditors

` 36,000 + ` 18,000)To Cash A/c (Mortgage loan)

2,46,00065,000

1,00,00072,5007,800

54,000

1,10,000

By Sundry creditorsBy Mortgage loanBy Cash account:

Land and building 2,30,000Furniture & fixtures 42,000Stock 72,000Debtors 65,000

By Partners’ capital accounts(Loss 4 : 3 : 2 : 1)P = 40,120

36,0001,10,000

4,09,000


Q = 30,090R = 20,060S = 10,030 1,00,300

6,55,300 6,55,300Partner’s Capital Accounts

Particulars P Q R S Particulars P Q R S` ` ` ` ` ` ` `

To Balance b/dTo Realization A/c (Loss)To R’s Capital A/c (Deficiency)To Cash A/c

—40,120

12,636

2,03,364

—30,090

8,424

1,35,576

25,00020,060

—

—

18,00010,030

—

—

By Balance b/dBy General ReserveBy Capital ReserveBy Cash A/c (realization loss)By P’s Capital A/c (W.N.)By Q’s Capital A/c (W.N.)By Cash A/c (W.N.)

1,68,00038,000

10,000

40,120

1,08,00028,500

7,500

30,090

19,000

5,000

—

12,636

8,424

9,500

2,500

10,030

6,000

2,56,120 1,74,090 45,060 28.030 2,56,120 1,74,090 45,060 28.030

Cash Account

Particulars Amount(`)

Particulars Amount(`)

To Balance b/dTo Realization A/c:

Land and buildingFurniture and fixturesStockDebtors

To P, Q, S’s capital A/cs(40,120+30,090+10,030)

To S’s capital A/c

15,500

2,30,00042,00072,00065,00080,240

6,000

By Realization A/c:Expenses on dissolutionCreditors (36,000 + 18,000)Mortgage loan

By P’s capital A/cBy Q’s capital A/c

7,80054,000

1,10,0002,03,3641,35,576

5,10,740 5,10,740Working Note: As per Garner Vs. Murray rule, solvent partners have to bear the loss dueto insolvency of a partner in their capital ratio.

Calculation of Capital Ratio of Solvent Partners


P(`)

Q(`)

S(`)

Opening capitalAdd: General reserve

Capital reserve

1,68,00038,00010,000

1,08,00028,500

7,500

(18,000)9,5002,500

2,16,000 1,44,000 (6,000)Though S is a solvent partner yet he cannot be called upon to bear loss onaccount of insolvency of R because his capital account has a debit balance.Therefore, capital ratio of P & Q = 216 : 144 = 3 : 2Deficiency of R = ` {(25,000 + 20,060) – (19,000 + 5,000)} = ` 45,060 –` 24,000 = ` 21,060.Deficiency of R will be shared by P & Q in the capital ratio of 3 : 2 i.e.

P = ` 21,060 × 3/5 = ` 12,636Q = ` 21,060 × 2/5 = ` 8,424

3. (a) From the following Trial Balance of PQ Ltd. on 31.12.2009, prepareliquidators Final statement of account :

` ` 9% Preference share capital — 1,25,000

(1250 Pref. shares @ 100 each fully paid)Equity share capital :2,000 Equity shares @ 100 each fully paid — 2,00,0002,000 Equity shares @ 100 each ` 50 paid up — 1,00,000Plant 3,00,000 —Stock-in-trade 3,60,000 —Sundry Debtors 85,000 —Sundry Creditors — 2,21,000Bank balance 1,20,000 —Preliminary expenses 6,000 —6% Mortgage loan — 2,30,000Outstanding liabilities for expenses — 25,000Profit and Loss A/c 30,000 —

(Trading loss for the year 2009) _______ _______9,01,000 9,01,000

Following points should be kept in mind :


(i) On 21 January, 2010 the liquidator of PQ Ltd. sold plant for` 2,95,000 and stock in trade at 10% less than the book value.He realised 80% of Sundry debtors and incurred cost ofcollection of ` 1,850 (remaining debtors are to be treated asbad).

(ii) The loan mortgage was discharged on 31st January, 2010alongwith interest for 6 months. Creditors were dischargedsubject to 5% discount. Outstanding expenses paid at 20%less.

(iii) Preference share dividend is due for one year and paid withfinal payment.

(iv) Liquidation expenses incurred are ` 1,800 and liquidatorsremuneration is settled at 4% on disbursement to members,subject to minimum of ` 10,000. (8 marks)

Answer :PQ Ltd.

Liquidator’s Final Statement of AccountReceipts ` Payment `

To Assets realised :Bank PlantStockDebtors(` 68,000 ` 1,850)

1,20,0002,95,0003,24,000

66,150 8,05,150

By Liquidation expensesBy Liquidator’s remuneration

(W.N.1)By Mortgage loan

Add : Interest for 6 months

By Unsecured creditorsBy Outstanding liabilitiesBy Preference shareholders:

Preference share capital Arrears of dividend

By Equity shareholders` 50 on 2,000 fully paid shares ` 21.935 on 4,000 equity shares (W.N.2)

2,30,000

6,900

1,25,000 11,250

1,800

12,510

2,36,9002,09,950

20,000

1,36,250

1,00,000

87,740

8,05,150 8,05,150

Working Notes :1. Liquidator’s remuneration


` Available surplusLess : Liquidator’s remuneration @ 4%

3,25,250*

(12,510)

Balance to be paid to Members 3,12,7402. Disposal of amount to members

` Balance available for membersLess : Preference share capital

Less : ` 50 on 2,000 fully paid Equity shares

3,12,740(1,25,000)

1,87,740(1,00,000)

` 21,827 on 4,000 Equity shares 87,740 * Surplus available= ` 8,07,000 ` 1,800 ` 2,36,900 ` 2,09,950 ` 1,850 ` 20,000 ` 11,250 = ` 3,25,250.

3. (b) Prepare Revenue Account in proper form for the year ended31st March, 2008, from the following particulars related to KrishnaGeneral Insurance Co. for the year ended 2007-2008 :

Related to Related toDirect business Reinsurance(` ) (` )

Premiums:Amount received 30,00,000 2,40,000Receivable at the beginning 1,80,000 24,000Receivable at the end 2,40,000 36,000Amount paid ) 3,60,000Payable at the beginning ) 30,000Payable at the end ) 42,000Claims:Amount paid 18,00,000 1,80,000Payable at the beginning 60,000 12,000Payable at the end 1,20,000 18,000


Amount recovered ) 1,20,000Receivable at the beginning ) 18,000Receivable at the end ) 12,000Commission:Amount paid 72,000 10,800Amount received ) 14,400Additional information :(i) Interest, dividend and rent received 30,000

(Income-tax in respect of above) 6,000(ii) Management expenses including ` 12,000

related to legal expenses regarding claims 1,32,000(iii) Provision for Income tax existing at the beginning of the

year was ̀ 1,95,000, the Income-tax actually paid duringthe year ` 1,68,000 and the provision necessary at theyear end ` 2,07,000.

(iv) The net premium Income of the company during the year2006-2007 was ` 24,00,000 on which reserve forunexpired risk @ 50% and additional reserve @ %

was created. This year, the balance to be carried forwardare 50% of net premium on reserve for unexpected riskand 5% on additional reserve. (8 marks)

Answer :FORM B-RA

Name of the Insurer : Krishna General Insurance CompanyRegistration no. and date of registration with IRDA...................

Revenue Account for the year ended 31.3.2008

Particulars Schedule Amount(`)

1.2.3.4.

Premium earned (Net)Profit/Loss on sales/Redemption of investmentOtherInterest, dividend & rent (Gross)

1)))

27,03,000))

30,000


Total (A) 27,33,0001.2.3.

Claims incurred (Net)CommissionOperating expenses related to insurancebusiness

234

19,44,00068,400

1,20,000

Total (B) 21,32,400Operating Profit/Loss from insurance business(C) = (AB)Appropriation:Transfer to Shareholders accountTransfer to Catastrophe ReserveTransfer to other reserves

6,00,600

)))

Total (D) )Schedule-1 Premium Earned (Net)

Particulars `

Premium received from direct business (W.N.1)Add: Premium on reinsurance accepted (2,40,000 +36,00024,000)

Less: Premium on reinsurance ceded (3,60,000 + 42,00030,000)Net PremiumAdjustment for charge in reserve for unexpired risk (W.N.2)Total premium earned (Net)

30,60,000

2,52,00033,12,000

3,72,00029,40,000 2,37,00027,03,000

Schedule -2 Claims Incurred (Net)Particulars `

Claims paid (Direct)Add: Legal expenses regarding claims

Add : Reinsurance Accepted

18,00,000 12,00018,12,000

1,80,00019,92,000


Less : Reinsurance ceded (1,20,000+12,00018,000)

Add :Claims outstanding at the end (1,20,000 + 18,000)

Less: Claims outstanding at the beginning (60,000 + 12,000)Total claim incurred

1,14,00018,78,000

1,38,00020,16,000 72,00019,44,000

Schedule -3 Commission

Particulars `

Commission paid DirectAdd: Re-insurance accepted

Less : Re-insurance cededNet commission

72,00010,80082,80014,40068,400

Schedule - 4 Operating Expenses related to Insurance Business

Particulars `

Expenses of management (1,32,00012,000) 1,20,0001,20,000

Working Notes :1. Calculation of premium received from direct business

Particulars `

Premium on direct businessAdd :Premium outstanding at the end

Less: Premium outstanding at the beginning

30,00,000 2,40,000

32,40,0001,80,000

30,60,000


2. Computation of change in reserve for unexpired risk

Particulars ` Reserve for unexpired risk for the year 2007-08(29, 40,000 × 50%)Add : Additional reserve for unexpired risk for the year 2007-08 (29,40,000×5%)

Less: Reserve for unexpired risk for the year 2006-07(24,00,000 × 50%)

Additional reserve for unexpired risk for the year(24,00,000 × 7.5%)

14,70,000

1,47,00016,17,000

12,00,000

1,80,0002,37,000

4. A and B are partners of AB & Co sharing Profits and Losses in the ratioof 2:1 and C and D are partners of CD & Co sharing Profits and Lossesin the ratio of 3 : 2. On 1st April 2011 they decided to amalgamate andform a new firm M/s. AD & Co wherein all the partners of the both thefirm would be partners sharing profits and losses in the ratio of 2 : 1 : 3: 2 respectively to A, B, C and D.Their balance sheets on that date were as under :

Liabilities AB & Co CD & Co Assets AB & Co CD & CoCapitals ` ` ` `A 1,50,000 Building 75,000 90,000B 1,00,000 Machinery 1,20,0001,00,000C 1,20,000 Furniture 15,000 12,000D 80,000 Stock 24,000 36,000Reserve 66,000 54,000 Debtors 65,000 78,000Creditors 52,000 35,000 Due from CDDue to AB & Co. 47,000 & Co. 47,000

Cash at Bank 18,000 15,000 Cash in hand 4,000 5,0003,68,000 3,36,000 3,68,0003,36,000

The amalgamated firm took over the business on the following terms :(a) Building was taken over at ̀ 1,00,000 and ` 1,25,000 of AB & Co. and

CD & Co respectively. And Machinery was taken over at ` 1,25,000


and ` 1,10,000 of AB & Co and CD & Co respectively.(b) Goodwill of AB & Co was worth ` 75,000 and that of CD & Co was

worth ` 50,000. Goodwill account was not to be opened in the booksof the new firm, the adjustments being recorded through capitalaccounts of the partners.

(c) Provision for doubtful debts has to be carried forward at ` 5,000 inrespect of debtors of AB & Co and ` 8,000 in respect of CD & Co.You are required to :

(i) Compute the adjustments necessary for goodwill.(ii) Pass the Journal Entries in the books of AD & Co assuming that

excess/ deficit capital (taking D's Capital as base) with referenceto share in profits are to be transferred to current accounts.

(16 marks)Answer :(i) Adjustment for raising & writing off of goodwill

Particular Goodwill raised in oldprofit sharing ratio

Particular G o o d w i l lwritten offin new ratio

Difference

AB & Co. CD &Co.

Total AB & Co.

` ` ` ` `

ABCD

50,00025,000

30,00020,000

50,000 Cr.25,000 Cr.30,000 Cr.20,000 Cr.

31,250 Dr.15,625 Dr.46,875 Dr.31,250 Dr.

18,750 Cr.9,375 Cr.

16,875 Dr.11,250 Dr.

75,000 50,000 1,25,000 1,25,000

(ii) In the books of AD & Co.Journal Entries

Date Particulars Debit (`) Credit (`) April 1,2011 Building A/c Dr. 1,00,000


Machinery A/c Dr.Furniture A/c Dr.Stock A/c Dr.Debtors A/c Dr.CD & Co. A/c Dr.Cash at bank A/c Dr.Cash in hand A/c Dr.To Provision for doubtful debts A/cTo Creditors A/cTo A’s capital A/c (W.N.2a)To B’s capital A/c (W.N.2a)(Being the sundry assets andliabilities of AB & Co. taken over atthe agreed values)

1,25,00015,00024,00065,00047,00018,000

4,000 5,00052,000

2,10,6671,30,333

April1,2011

Building A/c Dr.Machinery A/c Dr.Furniture A/c Dr.Stock A/c Dr.Debtors A/c Dr.Cash at bank A/c Dr.Cash in hand A/c Dr.

To Provision for doubtful debts A/cTo Creditors A/cTo AB & Co. A/cTo C’s capital A/c (W.N.2b)To D’s capital A/c (W.N.2b)

(Being the sundry assets andliabilities of CD & Co. taken over atthe agreed values)

1,25,0001,10,000

12,00036,00078,00015,000

5,0008,000

35,00047,000

1,74,6001,16,400

C’s capital A/c Dr.D’s capital A/c Dr.

To A’s capital A/cTo B’s capital A/c Dr.

(Being adjustment in capital

16,87511,250

18,7509,375


accounts of the partners on accountof goodwill)

AB & Co. A/c Dr.To CD & Co. A/c

(Being mutual indebtedness of AB& Co. and CD & Co. cancelled)

47,00047,000

A’s capital A/c Dr.To A’s Current A/c

(Being excess amount in A’s capitalA/c transferred to A’s current A/c)(W.N.3)

1,24,2671,24,267

B’s capital A/c Dr.To B’s Current A/c

(Being excess amount in B’s capitalA/c transferred to B’s current A/c)(W.N.3)

87,13387,133

Working Notes : (1) Profit on Revaluation

AB & Co. CD & Co.

Particulars (`) (`)

Building (1,00,000 - 75,000)(1,25,000 - 90,000)

Machinery (1,25,000 - 1,20,000)(1,10,000 - 1,00,000)

Less : Provision for doubtful debts

25,000

5,000

30,000(5,000)

35,000

10,00045,000(8,000)

25,000 37,000(2) Balance of capital accounts of partners on transfer of business to

AD & Co. (a) AB & Co.


A’s Capital B’s Capital

Particulars (`) (`)

Balance as per the Balance SheetReserves in the profits and losses sharing ratioProfit on revaluation in the profits and lossessharing ratio (W.N.1)

1,50,00044,000

16,6672,10,667

1,00,00022,000

8,3331,30,333

(b) CD & Co.

C’s Capital

D’sCapital

Particulars ` `

Balance as per the Balance SheetReserves in the profits and losses sharing ratioProfit on revaluation in the profits and lossessharing ratio (W.N.1)

1,20,00032,400

22,2001,74,600

80,00021,600

14,800

1,16,400(3) Calculation of capital of each partner in the new firm

Particulars A B C D(`) (`) (`) (`)

Balance as per W.N. 2Adjustment for goodwill

2,10,66718,750

1,30,3339,375

1,74,600(16,875)

1,16,400(11,250)

Total capital ̀ 4,20,600* in the new ratio of 2:1:3:2

2,29,417

(1,05,150)

1,39,708

(52,575)

1,57,725

(1,57,725)

1,05,150

(1,05,150)

(Note) 1,24,267 87,133 — —


Transfer to CurrentAccount

Cr. Cr.

Note : *Taking D’s capital as the base which is 2/8th of total capital; totalcapital will be 1,05,150 x 8/2 i.e. ` 4,20,600.

5. (a) Following is the Balance Sheet of M/s Competent Limited as on 31st

March, 2012:Liabilities ` Assets `

Equity Shares of ` 10each fully paidRevenue ReserveSecurities PremiumProfit & Loss AccountSecured Loans:12% DebenturesUnsecured LoansCurrent Liabilities

12,50,00015,00,000

2,50,0001,25,000

18,75,00010,00,00016,50,000

Fixed AssetsCurrent Assets

46,50,00030,00,000

Total 76,50,000 Total 76,50,000The company wants to buy back 25,000 equity shares of ` 10 each, on

1st April, 2012, at ` 20 per share. Buy back of shares is duly authorized byits articles and necessary resolution passed by the company towards this.The payment for buy back of shares will be made by the company out ofsufficient bank balance available as a part of Current Assets.

Comment with your calculations, whether buy back of shares bycompany is within the provisions of the Companies Act, 2013. If yes,pass necessary journal entries towards buy back of shares and prepareBalance Sheet after buy back of shares. (8 marks)

Answer:Determination of buy back of maximum number of shares as per theCompanies Act, 20131. Shares Outstanding


Particulars (Shares)

Number of shares outstanding25% of the shares outstanding

1,25,00031,250

2. Resources AllocationParticulars `

Paid up capital (`)Free reserves (`) (15,00,000 + 2,50,000 + 1,25,000)Shareholders' funds (`)25% of Shareholders fund (`)Buy back price per shareNumber of shares that can be bought back (shares)

12,50,00018,75,00031,25,000

7,81,250 ` 20

39,063

3. Debt Equity RatioParticulars `

(a)

(b)

(c)(d)

(e)

Loan funds (`) (18,75,000 + 10,00,000 + 16,50,000)Minimum equity to be maintained after buy back in theratio of 2 : 1 (`)Present equity/shareholders fund (`)Maximum permitted buy back of Equity (`) [(c) - (b)]Maximum number of shares that can be bought back@ ` 20 per share (shares)

45,25,000

22,62,50031,25,000

8,62,50043,125Shares

Statement determining the maximum number of shares to be boughtback

Particulars Numberof shares


Shares Outstanding TestResources TestDebt Equity Ratio TestMaximum number of shares that can be bought back [leastof the above]

31,25039,06343,125

31,250Company qualifies all tests for buy-back of shares and came to theconclusion that it can buy maximum 31,250 shares on 1st April, 2012.Whereas company wants to buy-back only 25,000 equity shares @ ` 20.Hence, buy-back of 25,000 shares, as desired by the company is within theprovisions of the Companies Act, 2013.

Journal Entries for buy-back of sharesParticulars Debit ` Credit `

(a) Equity shares buy-back account Dr.To Bank account

(Being buy back of 25,000 equity shares of` 10 each @ ` 20 per share)

5,00,0005,00,000

(b) Equity shares capital account Dr.Securities premium account Dr.

To Equity shares buy-back account(Being cancellation of shares bought back)

2,50,0002,50,000

5,00,000

(c) Revenue reserve account Dr.To Capital redemption reserve account

(Being transfer of free reserves to CRR tothe extent of nominal value of capital boughtback through free reserves)

2,50,0002,50,000

Balance Sheet of M/s. Competent Ltd.as on 31st March, 2012

Particulars Note No. Amt. (`)Equity and Liabilities1. Shareholders’ Funds


(a) Share Capital 1 10,00,000(b) Reserves and Surplus 2 16,25,000

2. Non-Current LiabilitiesLong-term borrowings 3 8,75,000

3. Current LiabilitiesShort-term borrowings 4 10,00,000Other Current Liabilities 16,50,000

Total 71,50,000Assets1. Non-Current Assets

Fixed Assets 46,50,0002. Current Assets

(3,00,000 - 5,00,000) 25,00,000Total 71,50,000

Notes to Account

Particulars ` `

1. Share Capital

1,00,000 Equity Shares of ` 10 each 10,00,000

2. Reserves and Surplus

1. Capital Redemption Reserve 2,50,000

2. Revenue Reserve 12,50,000

3. Profit & Loss A/c 1,25,000 16,25,000

3. Long-terms borrowings

- 12% Debentures 18,75,000


4. Short-terms borrowings

- Unsecured loan 10,00,000Note : Revaluation reserve account. Securities Premium Account and Profitand Loss Account are considered as free reserves in total.

5. (b) A company made a pubic issue of 2,00,000 equity shares of ` 10each at a premium of ` 2 per share. The entire issue wasunderwritten by the underwriters L,M,N and O in the ratio of 4:3:2:1respectively with the provision of firm underwriting of 5000, 4000,2000 and 2000 shares respectively.The company received application for 1,50,000 shares (excludingfirm underwriting) from public, out of which applications for 55000,40000, 42000 and 8000 shares were marked in favour of L,M,N andO respectively.Calculate the liability of each underwriter as regards the number ofshares to be taken up assuming that the benefit of firm underwritingis not given to the individual underwriter. (8 marks)

Answer:Statement showing the liability of underwriters:

figures - No. of sharesUnderwriters L M N O

Gross Liability (4:3:2:1) 80,000 60,000 40,000 20,000

Less : Marked application 55,000 40,000 42,000 8,000

25,000 20,000 (2,000) 12,000

Less : Unmarked application (note1)

7,200 5,400 3,600 1,800

Resultant Liability or surplus 17,800 14,600 (5,600) 10,200

Less : Surplus of C allocated to M


and O in ratio of 4:3:1 2,800 2,100 5,600 700

Net Liability as per agreement 15,000 12,500 NIL 9,500

Add: Firm Liability 5,000 4,000 2,000 2,000

Total Liability 20,000 16,500 2,000 11,500Working Notes :1. Under this method, firm underwriting is treated as unmarked application

and it is divided in the ratio of gross liability (i.e. 4:3:2:1)Total unmarked application are as follows :(a) Calculation of unmarked application :

Application received 1,50,000Less : Marked application 1,45,000Unmarked application by public 5,000Add : Application under firm underwriting 13,000Total unmarked application 18,000

(b) Total Allocation of sharesMarked applications 1,45,000Unmarked applications 5,000Total liability 50,000

2,00,000

6. (a) From the following information relating to X Ltd. calculate Dilutedearning per share as per AS-20:Net profit for the current year ` 2,00,00,000Number of equity shares outstanding 40,00,000Basic earning per share ` 5.00Number of 11% convertible debentures of ` 100 each 50,000Each debenture is convertible into 8 equity shares.Interest expense for the current year ` 5,50,000Tax saving relating to interest expense (30%) ` 1,65,000

(4 marks)Answer :


Adjusted Net profit for the current year= 2,00,00,000 + 5,50,000 – 1,65,000 = ` 2,03,85,000

Number of equity shares resulting from conversion of debentures= 50,000 × 8 = 4,00,000 equity sharesTotal number of equity shares

resulting from conversion of debentures= 40,00,000 + 4,00,000 = 44,00,000 shares

Diluted Earnings per share =

= ` 4.63 (Approximately).6. (b) M/s. Piyush Ltd. had the following among their ledger opening

balances on January 1, 2014: `

11% Debenture A/c (2002 issue)Debenture Redemption Reserve A/c13.5% Debenture in Sneha Ltd. A/c (Face Value` 30,00,000)Own Debentures A/c (Face Value ` 30,00,000)

80,00,00070,00,000

29,00,00027,00,000

As 31st December, 2014 was the date of redemption of the 2002debentures, the company started buying own debentures and madethe following purchases in the open market: 1-2-2014 - 5000 debentures at ` 98 cum-interest1-6-2014 - 5000 debentures at ` 99 ex-interest. Half yearly interest is due on the debentures on 30th June and 31st

December in the case of both the companies. On 31st December, 2014, the debentures in Sneha Ltd. were sold for` 95 each ex-interest. On that date, the outstanding debentures ofM/s. Piyush Ltd. were redeemed by payment and by cancellation. Show the entries in the following ledger accounts of M/s. Piyush Ltd.during 2014:(i) Debenture Redemption Reserve Account,(ii) Own Debenture Account.

The face value of a debenture was ` 100. (12 marks)Answer:

(i) Debenture Redemption Reserve Account


2014 ` 2014 `

Dec. 31 To 13.5% Deb.in Sneha Ltd.

(Loss on sale ofinvestment)

50,000Jan. 1Dec. 31

By Balance b/dBy 13.5% Deb. in

Sneha Ltd.By Own Deb. A/c

70,00,000

4,05,000

To GeneralR e s e r v e (transfer)

77,67,500(Interest on ownDeb.)

4,12,500

78,17,500 78,17,500(ii) Own Debentures Account

Nominal Interest Amount Nominal Interest Amount

2014 ` ` ` 2014 ` ` `

Jan. 1 To Balance b/d 30,00,000 _ 27,00,000 June 30 By Debenture

Feb. 1 To Bank 5,00,000 4,583 4,85,417 Interest A/c 2,20,000

42155 To Bank 5,00,000 22,917 4,95,000 Dec. 31 By Deb en t u r e Interest A/c 2,20,000

Dec. 31 To CapitalReserve(prof it oncancellation) 3,19,583

By 11% Debentures

Account - cancellation 40,00,000 40,00,000

To DebentureRedemptionReserve

4,12,500

40,00,000 4,40,000 40,00,000 40,00,000 4,40,000 40,00,000

Working Note:1. 13.5% Debentures in Sneha Ltd.

Interest Amount Interest Amount

2014 ` ` 2014 ` `

Jan. 1 To Balance b/d 29,00,000 By Bank 2,02,500

Dec. 31 By Bank 2,02500


Dec. 31 To DebentureRedemptionReserve

4,05,000 By BankBy Debenture Redemption Reserve (Loss on sale)

28,50,00050,000

4,05,000 29,00,000 4,05,000 29,00,000

2. 11% Debentures Account2014 ` 2014 `

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

To Bank 40,00,000

80,00,000 80,00,000

3. Cost of debentures purchased on 1.2.2014`

Purchase price of debentures [5,000 x 98 (cum-interest)] 4,90,000

Less: Interest -4,583

4,85,417

4. Cost of debentures purchased on 1.6. 2014 Purchase price of debentures [5,000 x 99(ex-interest)] 4,95,000

7. Answer short Notes of the following(a) What are the indicators of Non-Integral Foreign Operation(NFO)?

(4 marks)

Answer:Indicators of Non Integral Foreign Operations:


1 Autonomy While the reporting enterprise may control the foreignoperation, the activities of the foreign operation arecarried out with a significant degree of autonomyfrom those of the reporting enterprise.

2 TransactionPattern

Transactions with the reporting enterprise are not ahigh proportion of the foreign operation’s activities.

3 Financing The activities of the foreign operation are financedmainly from its own operations or local borrowingsrather than from reporting enterprise.

4 Expenditurein localcurrency

Costs of labour, material and other components ofthe foreign operations products or services areprimarily paid or settled in the local currency ratherthan in the reporting currency.

5 SalesPattern

The foreign operation’s sales are mainly incurrencies other than the reporting currency.

6 Effect ofCash Flows

Cash Flows of the reporting enterprise are insulatedfrom day to day activities of the foreign operationrather than being directly affected by the activities ofthe foreign operation.

7 Prices ofProducts

Sales prices for the foreign operation’s products arenot primarily responsive on a short-term basis tochanges in exchange rates but are determined moreby local competition or Local GovernmentRegulations.

8 LocalMarket

There is an active local sales market for the foreignoperations products, although there might besignificant amounts of exports.

7. (b) When can an item qualify to be a prior period item as per AS-5?


(4 marks)Answer :Prior period item [Para 16 of AS-5 (Revised)]:When incomes or expenses arise in the current period as a result of errorsor omissions in the preparation of the financial statements of one or moreprior periods, the said incomes or expenses must be classified as priorperiod items. The errors may occur as a result of mathematical mistakes,mistakes in applying accounting policies, mis-interpretation of facts oroversight. The term does not include other adjustments necessitated by circumstances,which though related to prior periods, are determined in the current periode.g. arrears payable to workers in current period as a result of revision ofwages with retrospective effect.

7. (c) Explain the treatment of Refund of Government Grants as perAccounting Standard-12. (4 marks)

Answer :Para 11 of AS 12, “Accounting for Government Grants”, explainstreatment of government grants in following situations:

(i) When government grant is related to revenue:-(a) When deferred credit account has a balance: The amount of

government grant refundable will be adjusted againstunamortized deferred credit balance remaining in respect of thegrant. To the extent that the amount refundable exceeds anysuch deferred credit the amount is immediately charged to profitand loss account.

(b) Where no deferred credit account balance exists: The amountof Government grant refundable will be charged to profit and lossaccount.

(ii) When government grant is related to specific fixed assets:-(a) Where at the time of receipt the amount of Government grant

reduced the cost of asset: The amount of Government grantrefundable will increase the book value of the asset.

(b) Where at the time of receipt the amount of government grantwas credited to “Deferred Grant Account”: The amount of


Government grant refundable will reduce the capital reserve orunamortized balance of deferred grant account as appropriate.

(iii) When Government grant is in the nature of Promoter’scontribution:The amount of government grant refundable in part or in full on non-fulfilment of specific conditions, the relevant amount recoverable bythe Government will be reduced from capital reserve.A Government grant that becomes refundable is treated as an extra-ordinary item.

7. (d) Give four conditions to be fulfilled by a Joint Stock Company to buyback its equity Shares. (4 marks)

Answer:As per section 68 of the Companies Act, 2013 joint stock company hasto fulfill the following conditions to buy back its own equity share :1. The buy back is authorised by its articles.2. A special resolution has been passed in general meeting of the company

authorising the buy back.3. The buy back does not exceed 25% of the total paid up capital and free

reservers of the company. Provided the buy back must not exceed 25%of its total paid up equity capital in that financial year.

4. The ratio of debt owned by the company is not more than twice thecapital and its free reserves after such buy back.

7. (e) What are the differences between Life insurance and other forms ofinsurance? (4 marks)

Answer:Difference between Life Insurance & other form of Insurance:

Life Insurance Other Insurance1 Meaning It is a contract under

which, in consideration ofpremiums paid by theinsured, the insurer agreesto pay a fixed sum ofmoney either on death ofinsured or on the lapse of

It is a contract of indemnityunder which, in return forpremiums paid by theinsured, the insurerundertakes to reimbursethe insured for anyloss/liability incurred on


a specified period. happening on an uncertainevent.

2 Risk covered It covers the life risk of theinsured.

It covers all risks other thanlife risk of the insured.

3 Sum Assured Human life may be insuredof any amount dependingupon the premium theinsured is able to pay.

The sum assured or thepolicy value is limited to theamount of loss actuallysuffered or the liabilityincurred.

4 Receip t o fPolicy value

In the event of death of thePolicyholder, the nomineeof the assured would getthe policy value and if thepol icy provides forpayment of policy value atmaturity or in instalments,the insured will receive insuch a manner.

If the insured sustains lossdue to reasons specified inthe policy, he would get thecompensation i.e. the policyvalue.

5 Bonus The Policyholders areentitled to receive bonuson the premium paid bythem calculated onactuarial basis.

General insurance does notprovide for any bonus toPolicyholders.

6 Tenure There are long termcontracts and run over anumber of years. Premiummay be paid in lumpsum orduring the tenor of policy.

G e n e r a l i n s u r a n c econtracts are only for oneyear and are renewableyear after year.

7 Assurance Life insurance is actuallylife assurance, since theinsured/ his nominee getsan assured sum.

These are policies ofinsurance only, not ofassurance.

Documents

IPCC Gr. II - Sauda.com