Sr. No Topic Name Page No

Index Sr. No Topic Name Page No

1 Accounting for Issue of Shares 1-7

2 Redemption of Preference Shares 8-14

3 Issue & Redemption of Debenture 15-38

4 Miscellaneous Company

Accounts

39-43

5 Underwriting 44-50

6 Buy Back 51-54

7 ESOP 55-57

8 Buy Back of Shares 58-72

9 Issue in Financial Statements 73-88

10 Consolidation of Accounts 89-151

11 Valuation of Goodwill and Shares 152-182

Unique Academy CS Executive

Prof. Ashish Parikh – 8007978700 Page | 1

Chapter 1 – Accounting for Issue of Shares

Illustration:-1

Bharat Electronic Ltd issued 1,00,000 equity shares of Rs.10 each to the public at par. The details of the amount payable on the shares are as follows:

Date Call Rs. Per share

1st April, 1998 Application 2.00

1st June, 1998 Allotment 3.00

1st July, 1998 Final Call 5.00

Application monies were received on 1,20,000 shares. Excess application monies were refunded immediately. All other amounts were received excepting final call money on 1,000 shares. Pass Journal Entries (including cash/bank transactions) to record the above in the books of Bharat Electronics Ltd. Illustration:-2

The authorized capital of a company is 1,00,000 shares of Rs.10 each. On April 10, 1997, 50,000 shares are issued for subscription at a premium of Rs.2 per share. The share money is payable as follows: Rs.5 (including the premium of Rs.2) with application, Rs.3 on allotment, Rs.2 on first call, and Rs.2 on final call. The subscription list closes on May 11, 1997, and director proceed with allotment on May 18, 1997. The shares are fully subscribed and the application money (including the premium) is received in full. The allotment money is received by June 30, 1997, except as regards 500 shares. The first call and final call money is received by September 30, 1997 and December 31, 1997, respectively, barring the final call money on 200 shares which is not received. Pass necessary Journal Entries (excluding cash) and show the Cash Book. Illustration:-3

Dynamic Ltd issued 10,000 equity shares of Rs.10 each at a premium of Rs.2 per share. The amount payable as: Rs.2 on application; Rs.5 on allotment (including premium) and the rest on first and final call. Applications were received for 12,000 shares. Excess application money were refunded to applications. All monies due were received except the first and final call monies on 1,000 shares. Show the Journal and Cash Book entries in the books of Dynamic Ltd. Illustration:-4

Newcomer Ltd issued 10,000 shares of Rs.10 each at a discount of 10% payable as: On Application Rs.2; on Allotment Rs.4; and on Final Call Rs.3. All shares offered were subscribed for and money was duly received. Pass entries in the Cash Book and Journal of the company and also show the Balance Sheet of the company. Illustration:-5

On 1.1.1997, X Ltd makes an issue of 10,000 equity shares of Rs.10 each payable as follows: Rs.2 on application; Rs.3 on allotment; and Rs.5 on first and final call (3 months after allotment). Applications were received for 12,000 shares and the directors refunded the excess application money. One shareholder, who was allotted 20 shares paid first and final call with allotment money and another shareholder did not pay allotment money on his 30 shares but which he paid with first and final call. Directors have decided to



charge and allow interest, as the case may be, on calls-in-arrears and calls-in-advance respectively according to the provisions of Table –A. Show Journal Entries and Cash Book [without narration] in the books of the company. Illustration:-6

A company made an issue of 10,00 equity shares of Rs.10 each, payable as: Rs.3 on application; Rs.4 on allotment and the balance on call. 43,825 equity shares were applied for including on application for 300 shares from a person who paid for the full face value of the shares. Owing to over-subscription, allotments were scaled down as follows: Applicants for 11,825 equity shares (in respect of applications for 500 or less) received 5,750 equity shares (including the application for 300 shares who got 150 shares). Applicants for 32,000 shares (in respect of application for 500 equity shares), received 4,250 equity shares. The amounts received were first applied towards allotment and call money (after satisfying amount due on application) and any balance left was returned. You are required to show the Cash Book (without narration) and Ledger accounts to record the above transactions. Illustration:-7

A Ltd forfeited 300 equity shares of Rs.10 fully called-up, held by Mr. X for non-payment of final call @ Rs.4 each. However, he paid application money @ Rs.2 per share and allotment money @ Rs.4 per share. These shares were originally issued at par. Give Journal Entry for the forfeiture. Illustration:-8

X Ltd forfeited 200 equity shares of Rs.10 each, Rs.8 called-up for non-payment of first call money @ Rs.2 each. Application money @ Rs.2 per share and allotment money @ Rs.4 per share have already been received by the company. Give Journal Entry for the forfeiture (assume that all money due is transferred to Calls-in-Arrear Account). Illustration:-9

H.P. Ltd forfeited 200 equity shares of Rs.10 each fully called-up for non-payment of final call @ Rs.2 per share. These shares were originally issued at a discount of 10%. Application, allotment and first call money per share @ Rs.2, Rs.3 and Rs.2 respectively were received in time. Give Journal Entry for the forfeiture. Illustration:-10

X Ltd forfeited 500 equity shares of Rs.10 each fully called-up which were issued at a premium of 20%. Amount payable on shares were: on application Rs.2; on allotment Rs.5 (including premium) on First and Final Call Rs.5. Only application money was paid by shareholders in respect of these shares. Pass Journal Entries for the forfeiture. Illustration:-11

B. Ltd issued 20,000 equity shares of Rs.10 each at a premium of Rs.2 per share payable as follows: on application Rs.5; on allotment Rs.5 (including premium); on final call Rs.2. Applications were received for 24,000 shares. Letters of regret were issued to applicants for 4,000 shares and were allotted to all the other applicants. Mr. A, the holder of 150 shares, failed to pay the allotment money. On his subsequent failure to pay the call money, the shares were forfeited. Show the Journal Entries and Cash Book in the books of B. Ltd.



Illustrative Example:-

X Ltd reissued 200 equity shares of Rs.10 each @ Rs.7 per share. These shares were issued originally at a discount of 10%. Give Journal Entries for re-issue only. Illustration:-12

Give separate Journal Entries for the following:

(a) X Ltd forfeited 100 equity shares of Rs.10 each held by R Ram on 15th December, 1997 for non-payment of first call of Rs.2 per share and the final call of Rs.3 per share. These shares were re-issued to G Ram on 25th December, 1997 at a discount of Rs.3.50 per share.

(b) X Ltd forfeited 100 equity shares of Rs.10 each, issued at a premium of Rs.5 per share, held by M Ram on 15th December, 1997, for non-payment of the final call of Rs.3 per share. These shares were re-issued to Loknath on 25th December, 1997 at a discount of Rs.4 per share.

(c) X Ltd forfeited 150 equity shares of Rs.10 each issued at a premium of Rs.5 per share, held by K Ram on 15th December, 1997 for non-payment of allotment money of Rs.8 per share (including securities premium of Rs.5 per share), the first call of Rs.2 per share and the final call of Rs.3 per share. Out of these 100 equity share were re-issued to Shri Bhagwan at Rs.15 per share on 25th December, 1997.

(d) X Ltd forfeited 100 equity shares of Rs.10 each, issued at a discount of 10%, held by Raj Kumar on 15th January, 1998 for non-payment of the first call of Rs.2 per share and the final call of Rs.3 per share. Out Of these 50 equity shares were re-issued to Shri Krishnan at Rs.8 per share on 30th January, 1998 and the rest of these shares were re-issued on 10th March, 1998 to Ram Nath at Rs.7 per share.

Illustration:-13

Mr. Long who was the holder of 200 preference shares of Rs.100 each, on which Rs.75 per share has been called up could not pay his dues on Allotment and First call each at Rs.25 per share. The Directors forfeited the above shares and reissued 150 of such shares to Mr. Short at Rs.65 per share paid-up as Rs.75 per share. Give Journal Entries to record the above forfeiture and re-issue in the books of the company. Illustration:-14 X Co. Ltd invited applications for 10,000 share of Rs.10 each payable as: on application Rs.2; on allotment Rs.3; on first call Rs.3 and on final call Rs.2. Applications were received on all the shares and all of these were accepted. All moneys due were received except the final call money on 100 shares which were forfeited. All the forfeited shares were re-issued to Mr. A @ Rs.9 each full paid up. Show the Journal and Cash Book entries in the books of X Co Ltd. Illustration:-15

A Ltd., invited applications for 10,000 shares of Rs.100 each at a premium of Rs.10 per share. The amount is payable as follows: On application Rs.25, on allotment Rs.35 (including Premium), on first call Rs.25 and on final call Rs.25. The applications were received for 9,000 shares and these were accepted in full. All money due were received except the first and final call money on 200 shares, which were forfeited. Out of these shares, 100 shares were subsequently re-issued @ Rs.90 per share. You are required to pass Journal Entries for recording the above transactions including cash. Illustration:-16

X Limited made an issue of 10,000 Equity Shares of Rs.15 each payable as follows:



(i) Rs.4 per share on application; (ii) Rs.7 per share (including Rs.2 per share as premium) on allotment; and (iii) Rs.6 per share on first and final call.

Das holding 50 shares failed to pay the allotment and call monies. Pal holding 80 shares failed to pay the cal money. All these shares were forfeited and subsequently re-issued to Roy as fully paid-up at a discount of Rs.3 per share. Pass Journal Entries (including cash transactions) to record the above issue, forfeiture and re-issue of shares in the books of the company. Illustration:-17

X Co. Ltd was incorporated with an authorized share capital of 1,00,000 equity shares of Rs.10 each. The directors decided to allot 10,000 shares credited as fully paid to the promoters for their services. The company also purchased land and buildings from Y Co. Ltd for Rs.4,00,000 payable in fully paid-up shares of the company. The balances of the shares were issued to the public, which were fully subscribed and paid for. You are required to pass Journal entries and to prepare the Balance Sheet. Illustration:-18

A public company invited applications for the issue of 2,00,000 Equity Shares of Rs.10 each at a premium of Re.1 per share. The shares were payable as: Rs.2 on application; Rs.4 on allotment (including premium); Rs.3 on first cell; Rs.2 on final call. The applications were received for 2,60,000 shares. The company decided to reject 40,000 share applications and were allotted the rest proportionately. All the calls were made and an applicant holding 6,000 shares could not pay the dues on final call. Consequently, these share were forfeited and subsequently re-issued @ Rs.9 per share. Show the Journal Entries and Cash Book of the company. Illustration:-19

Pioneer Construction Company Ltd issued for public subscription 20,000 Equity Shares of Rs.10 each at par payable Rs.2 per share on Application, Rs.3 per share on Allotment and the balance in two calls of equal amount. Applications were received for 30,000 shares. The shares were allotted pro-rata to the applicants for 24,000 shares, the remaining applications being rejected. Money overpaid on application was utilized towards sums during on allotment. All money due were received except that a shareholder named Bimal to whom 1,000 shares allotted failed to pay both the calls. These shares were forfeited and subsequently re-issued to Parimal at Rs.11 per share as fully paid-up. Show the Journal Entries (including cash transactions) in the books of the company and also draw up the Balance Sheet. Illustration:-20

JHP Limited is a company with an authorized share capital of Rs.10,00,000 in equity shares of Rs.10 each, of which 6,00,000 shares had been issued and fully paid on 30th June, 1997. The company proposed to make a further issue of 1,00,000 of these rs.10 shares at a price of Rs.14 each, the arrangements for payment being:

(a) Rs.2 per share payable on application, to be received by 1st July, 1997; (b) Allotment to be made on 10th July, 1997 and a further Rs.5 per share (including the premium) to be payable; (c) The final call for the balance to be made, and the money received by 30th April, 1998. Application were received for 3,55,000 shares and were dealt with as follows: (i) Applicants for 5,000 shares received allotment in full;



(ii) Applicants for 30,000 shares received an allotment of one share for every two applied for; no money was returned to these applicants, the surplus on application being used to reduce the amount due on allotment;

(iii) Applicants for 3,20,000 shares received an allotment of one share for every four applied for; the money due on allotment was retained by the company, the excess being returned to the applicants; and

(iv) The money due on final call was received on the due date. You are required to record these transactions (including cash items) in the Journal of JHP Limited. Illustration:-21

X Co. Ltd issued 40,000 equity shares of Rs.10 each at a premium of Rs.2.50 per share. The amount was payable Rs.2 on application, Rs.4.50 on allotment (including premium) and Rs.6 on call. 96,400 share were applied for and owing to heavy over-subscription, allotment was made as follows: Applicants for 23,000 share (in respect of application for 2,000 or more shares) were allotted 10,560 shares. Applicants for 48,000 shares (in respect of application for 1,000 or more shares) were allotted 14,200 shares. Applicants for 25,400 shares were allotted 15,240 shares pro-rata. It was decided that the excess amount received on application would be utilized in payment of allotment money and the surplus, if any, would be refunded, P, to whom 300 shares were allotted on pro-rata basis, failed to pay the allotment money. Q, who was allotted 450 shares also on pro-rata basis, failed to pay the call money. Their shares were consequently forfeited after the call was made. Pass the necessary Journal Entries to record the above transactions (including cash transactions). Illustration:-22

JHP Limited is a company with an authorized share capital of Rs. 10,00,000 in equity shares of Rs. 10 each, of which 6,00,000 shares had been issued and fully paid on 30th June, 1997. The company proposed to make a further issue of 1, 00,000 of these Rs 10 shares at a price of Rs 14 each, the arrangements for payment being: Rs 2 per share payable on application, to be received by 1st Allotment to be made on 10th July, 1997 and a further Rs 5 per share (including the premium) to be payable; The final call for the balance to be made, and the money received by 30th April, 1998.

(i) Applications were received for 3,55,000 shares and were dealt with as follows: (ii) application for 5,000 shares received allotment in full; (iii) Applicants for 30,000 shares received an allotment of one share for every two applied for; no money was

returned to these applicants, the surplus on application being used to reduce the amount due on allotment; (iv) Applicants for 3,20,000 shares received an allotment of one share for every four applied for money due on

final on allotment was retained by the company, the excess being returned to the applicants; and (v) The money due on final call was received on the due date.

You are required to record these transactions (including cash items) in the Journal of JHP Limited. Illustration:-23

ABC Limited offered for public subscription 2,000 Equity shares of Rs.100/- each at a premium of Rs.20/- per share on the following terms: (a) Applications money to be paid before 30th June, 2000; Rs.40 per share. (b) Allotment money to be paid before 30th September, 2000; Rs.50 per share including Rs.20 premium. (c) First and final call money to be paid before 31st December, 2000; Rs.30 per share.



Applications for 4,000 shares were received, the Company decided to: (i) Allot in full 200 shares to 4 applicants who had applied for the same. (ii) Reject the application for 1,400 shares applied for by persons suspected to be agents of a rival company. (iii) Allot the balance number of shares proportionately, to the remaining applicants, and to apply the excess

money paid towards the allotment money dues.

Ravi who had applied for 100 shares and who was allotted all the shares applied for could not pay allotment money. Ruby who was allotted 60 shares on the proportion basis could not pay the final call. After due notices all such shares were forfeited and re-issued at a discount of 20% of the face value of the shares of Mr. Reddy. Pass the necessary journal entries to record the above transactions in the books of the Company CS (Inter) – Dec., 2001 Illustration:-24

Varieties Ltd. issued 30,000 shares of Rs.10 at Rs.12 per share payable Rs.3 on application, Rs.5 on allotment including premium, Rs.2 on first call and Rs.2 on final call. Applications were received for 40,000 shares and the Company refunded the Application money of 4,000 shares and rest of the excess Application money was adjusted with Allotment. All the calls were duly paid except Mr. A holding 300 shares failed to pay the allotment and on his failure to pay to 1st Call his shares were forfeited. B holding 200 shares failed to pay the 1st Call and on his failure to pay the final call his shares were forfeited. C holding 100 shares failed to pay the final call. The Company reissued 450 forfeited shares (including the shares of A) at the rate of Rs.10 per share. Pass Journal entries in the Books of the Company. CS (Inter) – June, 2003. Illustration:-25

PGG Limited has Authorized Capital of Rs.10,00,000. The Company issued 75,000 equity shares of Rs.10 each at a premium of Rs.4 per share payable as follows: On application Rs.7 (including Premium of Rs.2). on allotment Rs.5 (including the balance premium), and the balance in two calls of equal installments. Application received for 1,00,000 shares. The applicants were divided as follows: (a) Those who applied for 25,000 shares were allotted in full. (b) Those who applied for 60,000 shares were allotted 50,000 shares on pro rata (c) The applicants for the balance applications were refunded in full. Excess payment received on application was adjusted against allotment money. Shareholders holding 5,000 shares failed to pay when the second and final call was made. These shares were forfeited and reissued at Rs.9 per share. CS (Inter) – Dec., 2004. Illustration:-26

Redemption of Preference Shares

Following is the Summarized Balance Sheet of X Ltd.

Liabilities (Rs.) Assets (Rs.)

Paid up Share Capital 50,000 Equity Shares of Rs.10 each fully paid, 1,000, 10% Redeemable Preference Shares of Rs.100 each full called up 100,000

5,00,000

Bank Other Assets

90,000

8,10,000



Less: Calls-in-arrear @ Rs.20 each 1,000 Reserve & Surplus: Securities Premium Profit & Loss A/c General Reserve Creditor Current Liabilities:

99,000

20,000 60,000 70,000

1,51,100

9,00,000 9,00,000

The redeemable preference shares were redeemed on the following basis: (i) Further 4500 equity shares were issued at a premium of 10%; (ii) Expenses for fresh issue of shares of Rs.5000; (iii) Of the 50 preference shares, holders of 40 shares paid the call money before the date of redemption. The

balance 10 shares were forfeited for non-payment of calls before redemption. The forfeited shares were reissued as fully paid on receipt of Rs.500 before redemption;

(iv) Preference shares were redeemed at a premium of 10% and securities premium account was utilized in full for this purpose.

Show Journal Entries and Summarized Balance Sheet after redemption. CS (Inter) – Dec., 2006. Illustration:-27

Adarsh Ltd., was formed with an authorized capital of Rs.30,00,000 divided into equity shares of Rs.10/- each. The company invited applications for 2, 00,000 equity shares of Rs.10/- each at premium of 20%. The money was payable as follows: On application Rs.5/-, on allotment Rs.4/- (including premium of Rs.2/-), Rs.2/- on first call and rest on the final call. Applications were received for 2,40,000 shares and allotment was made as under: (a) To applicants for 1,00,000 shares in full; (b) To applicants for 80,000 shares – 60,00 shares were allotted; (c) To the applicants for 60,00 shares, the rest of the shares were allotted. Applicants for 1,000 shares in the (a) category and applicants for 1,200 shares falling in category (b) failed to pay the allotment monies. These shares were forfeited on their failure to pay the first call. Holders of 1,200 shares in category (c) failed to pay the first and final call and these shares were also forfeited after the final call. Of the shares forfeited 1,300 shares were re-issued @ of Rs.8/= per share as fully paid up. The re-issued shared included 1,000 shares of category (a). Journalize the above transactions and also show the Cash Books. CS (Inter) – June, 2010.



Chapter 2 – Redemption of Preference Shares

Illustration:-1

Hindustan Construction Company Ltd, had 5,000 8% Redeemable Preference Shares of Rs.100 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares of Rs.10 each fully paid up at par. You are required to pass necessary Journal Entries including cash transactions in the book of the company. Illustration:-2

M.M.C. Ltd had 10,000 10% Redeemable Preference Shares of Rs.100 each, fully paid up. The company decided to redeem these preference shares at par, by issue of sufficient number of equity share of Rs.10 each at a premium of Rs.2 per share as fully paid up. You are required to pass Journal Entries including cash transactions in the books of the company. Illustration:-3

The following are the extracts from the Balance Sheet of A. Ltd. as on 31st December, 1997. Share Capital: 40,000 Equity shares of Rs.10 each fully paid – Rs.4,00,000; 1,000 10% Redeemable Preference shares of Rs.100 each fully paid – Rs.1,00,000; Reserve & Surplus : Capital reserve – Rs.50,000; Securities premium – Rs.50,000; General Reserve – Rs.75,000; Profit and loss account – Rs.35,000. On 1st January 1998, the Board of Director decided to redeem the preference shares at par by utilization of reserve. You are required to pass necessary Journal Entries including cash transactions in the books of the company. Illustration:-4

Calcutta Limited had 3,000, 12% Redeemable Preference shares of Rs.100 each, fully paid up. The company had to redeem these shares at a premium of 10%. It was decided by the company to issue the following: (i) 25,000 Equity Shares of Rs.10 each at par. (ii) 1,000 14% Debentures of Rs.100 each. The issue was fully subscribed and all amounts were received in full. The payment was duly made. The company had sufficient profits. Show Journal Entries in the books of the company. Illustration:-6

The capital structure of a company consists of 20,000 Equity Shares of Rs.10 each fully paid up and 1,000 8% Redeemable Preference Shares of Rs.100 each fully paid up. Undistributed reserve and surplus stood as: General Reserve Rs.80,000; Profit and Loss Account Rs.10,000; Investment Allowance Reserve (out of which Rs.5000, not free for distribution as dividend) Rs.10,000; Securities Premium Rs.12,000. Cash at bank amounted to Rs.98,000. Preference Shares are to be redeemed at a premium of 10% and for the purpose of redemption; the directors are



empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserve and surplus, subject to the condition that a sum of Rs.20m000 shall be retained in general reserve and which should not be utilized. Pass Journal Entries to give effect to the above arrangements and also how the relevant items will appear in the Balance Sheet of the company after the redemption carried out. Illustration:-7

The books of S.B. Ltd showed the following balances on 31st December, 1997: 30,000 Equity Shares of Rs.10 each fully paid; 18,000 12% Redeemable Preference Shares of Rs.10 each fully paid; 4,000 10% Redeemable Preference Shares of Rs.10 each, Rs.8 paid up. Undistributed Reserve and Surplus stood as: Profit and Loss Account Rs.80,000; General Reserve Rs.1,20,000; Securities Premium Account Rs.15,000 and Capital Reserve Rs.21,000. Preference shares are redeemed on 1st January, 1998 at a premium of Rs.2 per share. The where about of the holders of 100 shares of Rs.10 each fully paid, are not known. For redemption, 3,000 equity shares of Rs.10 each are issued at a premium of 10%. At the same time, a bonus issue of equity share was made at par, two shares being issued for every five held on that date out of the Capital Redemption Reserve Account. Show the necessary Journal Entries to record the transactions. Illustration:-8

The Balance Sheet of Ananda Ltd as on 31st December, 1996 is given below:

Liabilities Rs. Assets Rs.

Authorized Capital: 10,000 Equity shares of Rs.100each 20,000 9% Redeemable preference shares of Rs.10 each Issued and Paid-up Capital: 5,000 Equity shares of Rs.100 each fully paid-up 9% Redeemable preference shares of Rs.10 each fully paid-up Profit and Loss Account Current Liabilities

10,00,000

2,00,000

12,00,000

5,00,000

2,00,000 1,60,000 1,20,000

Fixed Assets Investment Bank Balance Other Current Assets

4,00,000 2,00,000

10,000 3,70,000

9,80,000 9,80,000

On 1.1.97 the Company – (a) redeemed the Preference Shares at a premium of Rs.2 per share; (b) realized Investments at a value of Rs.1,60,000; (c) issued at a premium of Rs.40 per share, such a number of Equity shares for the purpose of aforesaid redemption as to ensure that after the compliance with the requirements of the Companies Act, 1956, in regard to redemption of Preference Shares, the Credit Balance in Profit & Loss Account would be Rs.25,000; (d) issued as bonus Equity Share at par at the rate of one share for every 20 shares held on 31st December, 1996 out of the said balance in Profit and Loss Account.



You are required to show: (a) Necessary Journal Entries to record the above transactions (including cash); and (b) The Balance Sheet as on completion of the above transactions. Illustration:-9

The following is the Balance Sheet of Srabanti Company Limited as on 31.12.1995:


Share Capital: Issued and Subscribed Capital: 5,000, 7.5% Redeemable Preference Shares of Rs.100 each 1,00,000 Equity Shares of Rs.10 each Reserve and Surplus Securities Premium Account General Reserve Profit and Loss Account Current Liabilities

5,00,000

10,00,000

1,00,000 7,50,000 2,00,000 3,50,000

Fixed Assets Land and Building Plant and Machinery Furniture and Fittings Investments, at cost (market value Rs.2,80,000) Current Assets Stock Debtors Bills Receivable Cash at Bank Cash at Hand

8,00,000 6,00,000 1,00,000 3,00,000

4,70,000 2,00,000 2,00,000

1,75,00 55,000

29,00,000 29,00,000

On 1.1.1996, it was decided to redeem the preference shares at a premium of 5%. To finance the redemption, all the investments were sold at market price. 10,000 equity shares of Rs.10 each at Rs.9 per share and 1,000, 6% debentures of Rs.100 each at par were issued. On 1.2.1996, the company made a bonus issue of 1 equity share of Rs.10 each for every 2 shares held on that date. It was also decided to use General Reserve as minimum as possible. Draft the Journal Entries including Cash Book entries to give effect to the above decisions and also prepare a Balance Sheet. Illustration:-10

X Ltd. has the following Balance Sheet as on 31.3.2005:


Share Capital: Issued, Subscribed and fully paid-up 10,000Equity shares of Rs.100 each 5,000 Preference Shares of Rs.100 each Capital Reserve Securities Premium A/c General Reserve Profit & Loss A/c Current Liabilities

10,00,000 5,00,000 1,00,000 1,00,000 2,00,000 1,00,000

10,00,000

Fixed Assets Current Assets

22,00,000 8,00,000

30,00,000 30,00,000

The Preference Shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be made to the extent it is required under the Companies Act for the purpose of this redemption. The shortfall in funds for the



purpose of the redemption after utilizing the proceeds of the fresh issue are to be met by taking a bank loan. Show Journal Entries. CS (Inter) – June 2005 Illustration:-11

Flamingo Ltd. for public subscription 5000 equity shares of Rs.10 each at a premium of Rs.2.50 per share payable as follows:

On Application Rs.2.00 per share On Allotment Rs.4.50 per share (including premium) ON First Call Rs.4.00 per share On Second Call Rs.2.00 per share

Applications were received for 7500 shares and allotment wad made pro-rata to applicants for 5000 shares, letters of regret being issued for the remaining applications. Money over paid on application by the allottees was adjusted with allotment amount. Rahim to whom 100 shares were allotted failed to pay the allotment money and on his failure to pay the first call, his shares were forfeited. Haq, the holder of 150 shares failed to pay last two calls and his shares were forfeited after the second call was made. Of the shares forfeited, 200 were allotted as fully paid up to Karim for Rs.8 per share paid in cash. Show the journal entries to record the forfeiture and reissue of forfeited shares including those relating to cash, assuming that the whole of Rahim’s shares have been re-issued. Illustration:-12

Given below is the Balance Sheet of Shamasri Ltd. as on 31.03.2005:

Liabilities Amount Rs. Amount Rs.

12% Preference Shares 5,000 Shares of Rs.100 each Less Call in arrears on 100 shares General Reserve Security Premium Current Liabilities

5,00,000.00

2,000.00

4,98,000.00 7,50,000.00

50,000.00 2,50,000.00

15,48,000.00

Assets

Fixed assets Investments Bank Cash Other Current Assets

8,00,000.00 50,000.00

2,25,000.00 1,800.00

4,71,200.00

15,48,000.00

Preference shares were due for redemption on 31st July 2005 at a premium of 10%. 50 shareholders paid the amount due on their shares and the balance shares on which call amount was not forfeited. The forfeited shares were reissued and on receiving 80% of the face value were considered fully paid. 4,000 Equity shares were issued at par face value being Rs.100/- On the due date Preference shares were duly redeemed and amount due settled.



Pass Journal entries and prepare Balance Sheet after redemption. CS (Inter) – June 2006 Illustration:-13

The summarized balance sheet of A co. Ltd. as on 30th June 2008 is as under:

Share Capital: 10% redeemable preference shares of Rs.100 each 10,00,000 Equity shares of Rs.10 each 15,00,000 12% Debentures 7,00,000 Revenue reserves 40,00,000 Total 72,00,000 Represented by Nat assets 72,00,000

The redeemable preference shares were due for redemption on 31st August 2008 and were redeemed and duly paid off. The company is permitted to redeem the debentures at any time at a premium of 10% and did so on 30th September 2008. The company was in a reasonably liquid position but to assist in providing funds for redemption of the redeemable preference shares, a rights issue of equity shares was made. 20000 equity shares were issued for cash at a premium of Rs.20 per share, Rs.12.50 payable on application on 15th July 2008 and the balance on allotment on 31st July 2008. All cash due was received on the due dates. During the three months ended 30th September 2008, the company traded at a profit of Rs.2,50,000. Required:

i. Pass journal entries (including each transactions) showing the relevant entries in respect of the above. ii. Prepare summarized balance sheet of the company as on 30th September 2008 CS (Inter) – Dec. 2008 Illustration:-14

The following is the balance sheet of Sachin Ltd. as on 31.03.2008:


Share Capital: Authorized 20,000, 10% redeemable preference shares of Rs.10 each 1,80,000 Equity Shares of Rs.10 each Issued, Subscribed and paid up capital: 20,000, 10% redeemable preference share of Rs.10 each 20,000 equity shares of Rs.10 each Reserves and Surplus: General Reserve Securities premium Profit and Loss Account Current Liabilities & Provision

2,00,000 18,00,000 20,00,000

2,00,000 2,00,000 4,00,000

2,40,000 1,40,000

37,000 23,000

Fixed Assets: Gross Block 6,00,000 Less Depreciation 2,00,000 Investments Current Assets, Loans & Advances: Inventory 50,000 Debtors 50,000 Cash & Bank balances 1,00,000 Miscellaneous Expenditure to the extent not written off

4,00,000 2,00,000

2,00,000

40,000

Total 8,40,000 8,40,000



For the year ended 31.3.2009, the company made a net profit of Rs.30,000 after providing for Rs.40,000 depreciation and writing off miscellaneous expenditure of Rs.40,000. The following additional information is available with regard to company’s operation. (1) The preference dividend for the year ended 31.3.2009 was paid before 31.3.2009. (2) Except cash & bank balances, other current assets and current liabilities on 31.3.2009, was the same as on

31.3.2008. (3) The company redeemed the preference share at a premium of 10%. (4) The company issued bonus shares in the ratio of 1 share for every two equity shares held as on 31.3.2009. (5) To meet the cash requirements of redemption, the company sold a portion of the investments, so as to leave

a minimum balance of Rs.60,000 after such redemption. (6) Investments were sold at 90% of cost as on 31.3.2009. Prepare:- (i) Necessary journal entries to record redemption and issue of shares. (ii) Cash & Bank Account. (iii) Balance Sheet as on 31.3.2009 CS (Inter) – Dec. 2009, CA (Inter) – Nov. 1996 Illustration:-15

Following is the Balance Sheet of Madox Ltd. as at 31.3.2011:

Liabilities Rs. Assets Rs. 1 lakh Equity shares (Rs. 10 each fully paid) 5,000 12% Redeemable Preference Shares (Rs. 100 each) Securities Premium Profit & Loss A/c Current Liabilities

10,00,000

5,00,000 1,00,000 5,50,000

4,80,000

Fixed Assets Current Assets Bank

12,80,000 10,20,000

3,30,000

26,30,000 26,30,000

On 1.4.2011, the company issued further 30,000 equity shares @ Rs. 10 per share at a premium of Rs. 5 per share. The amount payable was Rs. 6 on application, Rs. 7 on allotment including premium and the balance on First and Final Call. Applications were received for 45,000 shares. Application money of 5,000 shares were refunded. Pro-rata allotment was made. The excess application money were adjusted towards allotment. Mr. X holding 3,000 shares failed to pay the allotment money and his shares were forfeited after final call and thereafter, out of these shares 2,000 shares were re-issued at a discount of Rs. 3 per share. Preference shares were redeemed at a premium of 10%. Considering the above transaction, show journal entries and the Balance Sheet in the books of Madox Ltd. CS (Inter) – June 2011 (12 Marks) Illustration:-16 .

The following balances are appearing in the Books of All Xerox Ltd. On 1-4-2011:



Rs. Redeemable Preference Share Capital (Share of Rs. 10 each) 2,00,000 Calls-in-Arrear 2,000 General Reserve 1,00,000 Share Premium 5,000

The preference shares are fully called up and due for redemption at a premium of 10%. Calls-in-Arrear are in respect of final call at the rate of Rs. 4 per these shares are held by Mr. Rahul whose whereabouts are not known. The Board of Directors decided that 50% of the General Reserve is to be utilized for the purpose of redemption of redeemable preference share capital and to meet the further requirement of funds, further 14,500 numbers of equity shares of Rs.10 each were issued at a premium 20%. The redemption of preference shares were duly carried out and subsequently the company utilize the balance of Capital Redemption Reserve Account to issue equity shares at Rs. 10 each as bonus to shareholders. You are required to show necessary journal entries in the Books of All Xerox Ltd. December - 2011. (10 Marks)



Chapter 3 – Issue & Redemption of Debenture Illustration:-1

Simmons Ltd issued 10,000, 12% Debentures of Rs.100 each at par payable in full on application by 1st April, 1998.3 Application were received for 11,000 Debentures. Debentures were allotted on 7th April, 1998. Excess money were refunded on the same date. You are required to pass necessary Journal Entries (including cash transactions) in the books of the company and also show the Ledger Accounts and the Balance Sheet.

Debentures Issued at a Premium

Debentures are rarely issued at a premium. A company issues debentures at a premium when the market rate of interest is lower than the debenture interest rate. The debentures, which are issued at a premium, are issued at a higher price than their nominal value; that is, if a debenture with a nominal value of Rs.100 is issued at 10% premium, the company receives Rs.110 where the investor gets slightly less interest than stated in the debenture. For example, 12% Debenture of Rs.100 issued at a premium of 10%. The investor will get Rs.12 p.a. for his investment of 110. Therefore, the effective rate of interest on investment is (12/110 x 100) = 10.91%.

There is no restriction in the Companies Act 1956 regarding the utilization of Debenture Premium. This is different from Share Premium. It can be used to write-off: (a) Discount on issue of shares or debentures; (b) Premium on redemption of shares or debentures; (c) Capital losses. (d) Intangible assets, such as goodwill, etc. Any balance left in the Debentures Premium Account should be transferred to Capital Reserve Account.

The accounting entries would be as follows:

(a) When cash is received Bank Account Dr. [Nominal value plus premium] To Debentures Application Account (Being money received on ….. debentures @ Rs….. each including premium of Rs…. Each) (b) When excess money is refunded Debentures Application Account Dr. To Bank Account (Being refund of money on …… debentures @ Rs…. Each, as per Board’s Resolution No…… dated ….) (c) When the debentures are allotted Debentures Application Account Dr. To Debentures Account To Debentures Premium Account (Being the allotment of ……. Debentures, premium transferred to Debentures Premium Account, as per Board’s

Resolution No … dated ….) (d) When debentures premium is transferred Debentures Premium Account Dr. To Capital Reserve Account (Being the amount transferred to capital reserve)



Illustration:-2

Kapil Ltd. issued 10,000, 12% Debentures of Rs.100 each at a premium of 10% payable in full on application by 1st March, 1998. The issue was fully subscribed and debentures were allotted on 9th March 1998. Pass necessary Journal Entries (including cash transactions)

Debentures Issued at a Discount

The Companies Act does not impose any restriction on the price at which debentures can be issued. Unlike shares, there is no maximum limit for discount on issue of debenture. This is why it is very common for debentures to be issued at a discount. The debentures which are issued at a discount are issued at a lower price than nominal value, that is, if a debenture with a nominal value of Rs.100 is issued at 10% discount, the company receives Rs.90 only. This issue of debentures at a discount slightly increases the true rate of interest payable. For example, 12% Debentures of Rs.100 issued at a discount of 10%. The Company will have to pay Rs.12 for a loan of Rs.90. Therefore, the true rate of interest is (12/90 x 100) = 13.33%. A company issues debentures at a discount when the market rate of interest is higher than the debenture interest rate. Like shares, Debentures Account is credited with the nominal value. The difference between the nominal value of debentures and cash received in transferred to “Discount on Issue of Debenture Account.” In the Balance Sheet. Discount on Issue of Debentures: is shown on the Assets side under “Miscellaneous Expenditure”. In the subsequent years, Discount on Issue of Debentures is written-off proportionately by charging to the Profit and Loss Account. The accounting entries would be as follows:

(a) When cash is received Bank Account Dr. [Actual cash received] To Debentures Application Account (Being money received on ….. debentures @ Rs….. each) (b) When excess money is refunded Debentures Application Account Dr. To Bank Account (Being excess money on …… debentures refunded as per Board’s Resolution No…… dated ….) (c) When the debentures are allotted Debentures Application Account Dr. [Actual cash received] Discount on Issue of Debentures Account Dr. [Discount on debentures] To Debentures Account [Nominal value of debentures] (Being the allotment of ……. Debentures, of Rs …. Each @ Rs…. Each as per Board’s Resolution No…. dated……)

In fact, the discount on issue of debentures is considered as incremental interest expense. The true interest expense (net borrowing cost) for a particular accounting period is, therefore, the total interest payment plus the discount written-off.

Illustration :-3

X Ltd. issued 10,000 12% Debentures of Rs.100 each at a discount of 10% payable in full on application by 31st Mat 1998. Applications were received for 12,000 debentures. Debentures were allotted on 9th June 1998. Excess monies were refunded on the same date. Pass necessary Journal entries and show Ledger Accounts and the Balance Sheet after issue.



Illustration :-4

HDC Ltd. issues 10,000. 12% debentures of Rs.100 each at Rs.94 on 1st January 1998. Under the terms of issue, the debentures are redeemable at the end of 8 years from the date of the issue. Calculate the amount of discount to be written-off in each of the 8 years. Illustration :-5

HDC Ltd. issues 10,000. 12% debentures of Rs.100 each at Rs.94 on 1st January 1998. Under the terms of issue. 1/5th of the debentures are annually redeemable by drawings, the first redemption occurring on 31st December 1998. Calculate the amount of discount to be written-off in 1998 to 2002. Illustration :-6

AB Co. Ltd. issues 500, 12% debentures of Rs.100 each at Rs.98 on 1st January 1993. Under the terms of issue; (a) debentures interest is annually payable on 31st December every year; and (b) 1/5th of the Debentures are annually redeemable by drawings, the 1st redemption occurring on 31st December 1994. Calculate the amount of discount to be written-off each year and also show the Discount on Issue of Debentures Account. Illustration :-7

R Ltd. issued debentures at 94% for Rs.1,00,000 on 1st April 1993, repayable by 5 equal annual drawings of Rs.20,000 each. The company closes its accounts on calendar year basis. Indicate the amount of discount to be written-off in every accounting year, assuming that the company decides to write-off the debentures discount during the life of the debentures.

Accounting Entries at Issue, when Debentures are Redeemable: (i) At Par (ii) At a Discount (iii) At a Premium

Where debentures are to be redeemed at par or at a discount (rare in practice), no extra entry is to be made at the time of issue and allotment of debentures. For better understanding, we would like to show the entries in the following manner: Case 1: When debentures are issued at par and redeemable at par or at a discount

(a) Bank Account Dr. To Debentures Application Account

(b) Application Account Dr. To Debentures Account Case 2: When debentures are issued at a discount and redeemable at par or at a discount


(b) Debentures Application Account Dr. Discount on Issue of Debentures Account Dr. To Debentures Account



Case 3: When debentures are issued at a premium but redeemable at par or at a discount


(b) Debentures Application Account Dr. To Debentures Account To Debentures Premium Account

Where debentures are to be redeemed at a premium, an extra entry is to be made at the time of issue and allotment of debentures. This extra entry is to be passed for providing premium payable on redemption.

The accounting entries are as follows: Case 1: When debentures are issued at par but redeemable at a premium


(b) Debentures Application Account Dr. To Debentures Account

(c) Loss on Issue of Debentures Account Dr [For providing premium payable on

redemption] To Premium on Redemption of Debentures Account

Students should note that, instead of passing the separate entries above, a combined entry can be passed.

Bank Account Dr. Loss on Issue of Debentures Account Dr.

To debentures Account To Premium on Redemption of Debentures Account

“Loss on Issue of Debentures” should be treated in the same way as the “Discount on Issue of Debentures” is written-off. The balance of “Loss on Issue of Debentures Account” should be shown on the assets side of the Balance Sheet. “Premium on Redemption of Debentures” should be shown on the liabilities side of the Balance Sheet till the date or redemption of debentures. Case 2: When debentures are issued at a discount but redeemable at a premium


(b) Debentures Application Account Dr. Discount on Issue of Debentures Account Dr. To Debentures Account

(c) Loss on Issue of Debentures Account Dr. [For providing premium on redemption] To Premium on Redemption of Debentures Account



Alternatively:

Bank Account Dr. Discount on Issue of Debentures Account Dr. Loss on Issue of Debentures Account Dr.

To Debentures Account To Premium on Redemption of Debentures Account

Case 3: When debentures are issued at a premium and redeemable at a premium


(b) Debentures Application Account Dr. To Debentures Account To debentures Premium Account

(c) Loss on Issue of Debentures Account Dr. To Premium on Redemption of Debentures Account

Alternatively:

Bank Account Dr. Loss on Issue of Debentures Account Dr.

To Debentures Account To Premium on Redemption of Debentures Account To Debentures Premium Account

In this case, debentures premium can be adjusted with the loss on issue of debentures at the year – end. Illustration :-8

Show by means of Journal Entries how you will record the following issues. Also show they will appear in the respective Balance Sheets: (a) P Ltd. issues 5,000. 10% debentures of Rs.100 each at a discount of 5%. Redeemable at the end of 5 years at

par. (b) Q Ltd. issues 5,000. 11% debentures of Rs.100 each at par, redeemable at the end of 5 years at a premium of

5%. (c) R Ltd. issues 5,000. 12% debentures of Rs.100 each at a discount of 5%. Redeemable at the end of 5 years at a

premium of 5%. (d) S Ltd. issues 5,000. 13% debentures of Rs.100 each at a premium of 5% redeemable at the end of 5 years at a

premium of 5%.



Redemption of Debentures Redemption of Debentures 1. Where there is no Sinking Fund

Generally, no Sinking Fund is created where the amount of debentures to be redeemed is small. The debentures may be redeemed:

(i) By payment in a lump sum at the end of a specified period; (ii) By payment in annual installments; and (iii) By purchase in the open market. Payments in a Lump Sum at the End of a Specified Period

In this case, all debentures are redeemed at a time at the end of a specified period. The accounting entries are:

(a) When debentures are redeemed at par

(i) Debentures Account Dr. To Debenture holders Account

(ii) Debenture holders Account Dr. To Bank Account (b) When debentures are redeemed at a premium

(i) Debentures Account Dr. [Nominal value] Premium on Redemption of Debentures Account Dr. [Premium] To Debenture holders Account

(ii) Debenture holders Account Dr. To Bank Account

Redemption

There is no Sinking Fund There is Sinking Fund

By payment in a lump

sum at the end of the

specified period

By payment in annual

installments

By purchase in the

open market By conversion into

shares

(i) Immediate

cancellation

(ii) Own debenture

investments and

cancellation, when

required



Payment in Annual Installments

In this case, debentures to be redeemed are selected by lottery or drawings. The accounting entries are simple. When debentures are redeemed, Debentures Account is debited with the face value of debentures and Debenture holders Account is credited. On actual payment, Debenture holders Account is debited and Bank Account is credited. If the debentures are redeemed at a premium, the Debenture holders Account is credited with the premium and Premium on Redemption of Debentures Account is debited. Accounting Entries

(a) When debentures are redeemed at par

(i) Debentures Account Dr. [Nominal value] To Debenture holders Account [Actual amount]

(ii) Debenture holders Account Dr. [Actual amount paid] To Bank Account (b) When debentures are redeemed at a premium

(i) Debentures Account Dr. [Nominal value] Premium on Redemption of Debentures Account Dr. [Premium] To Debenture holders Account

(ii) Debenture holders Account Dr. [Actual amount paid] To Bank Account

(c) When debentures are redeemed at a discount

(i) Debentures Account Dr. [Nominal value] To debenture holders Account [Actual amount] To Profit on Redemption of debentures Account [Discount]

(ii) Debenture holders Account Dr. To Bank Account In fact, premium paid on redemption is a loss. Generally, at the time of issue of debentures, a provision is made for the premium payable on redemption by debiting “Loss on Issue of Debentures Account” and crediting “Premium on Redemption Debentures Account”. Till the date of redemption, it is shown on the liabilities side of the Balance Sheet. However, a portion of “loss on issue of debentures” is written-off every year by debiting Profit and Loss Account. Where no provision is made, Premium on Redemption of Debentures Account is closed by passing the following entry: Debenture/Share Premium Account Dr. Profit and Loss Account Dr. To Premium on Redemption of Debentures Account It should be noted that as a matter of financial prudence, an amount equal to the face value of debentures redeemed is transferred to General Reserve by debiting Profit and Loss Account (mind it, this is prudent, but not obligatory).



Illustration:-9

AB Co. Ltd. issues 500. 12% debentures of Rs.100 each at Rs.98 on 1st January 1995. Under the terms of issue: (a) Debentures Interest is annually payable on 31st December every year, and (b) 1/5th of the debentures are annually redeemable by drawings, the 1st redemption occurring on 31st December 1996. Pass necessary Journal entries for 1995, 1996 and 1997 and also show: (a) Debentures Account (b) Debenture holders Account (c) Debenture Interest Account for the relevant period assuming that: (i) The company’s accounting year ending on 31st December (ii) All the terms of debentures issue are fully complied with (iii) No sinking fund was created. Illustration:-10

XY Ltd. issued 2,00. 12% debentures of Rs.100 each at par on 1st January 1993. Debentures are repayable at 5% premium in 5 equal annual installments by lottery, the 1st redemption occurring on 31st December 1993. Show Debentures Account, Premium on Redemption of Debentures Account, Loss on Issue of Debentures Account, Debenture holders Account for all the years assuming that: (i) The company’s accounting year ending on 31st December (ii) All the terms of Debenture issue are duly complied with (iii) No sinking fund was created.

Debenture Market Price

The market price of a debenture is quoted as a percentage of its face value. A debenture selling at a market price greater than its face value is said to be selling at a premium; a debenture selling at a price below its face value is selling at a discount. Thus, a debenture quotation of 96 means the market price is 96% of face value, or at a discount; a debenture quotation of 104 means the market price is 104% of face value or at a premium. The market price of a debenture constantly fluctuates since it raises with the safety of the investment. The primary factors which determine the market price of a debenture are: (1) The relationship of the debentures interest rate to other investment opportunities; (2) The length of time until the debentures interest rate to other investment opportunities; (3) Investors’ confidence in regard to company’s strength to make all future payments of interest and principal

amounts promptly. These factors often results in a difference between the face value of a debenture and the price at which it can be purchased or sold in a stock exchange. As a debenture nears its maturity date, the market price of the debenture moves toward the maturity value. Early Extinguishment of Debentures – Purchases in the Open Market A company may redeem its debentures prior to maturity. The company may purchase its own debentures from stock market either: (i) For immediate cancellation (ii) As an investment (to be cancelled when required)

The principal reason for cancelling debentures before maturity date is to relieve the issuing company of the



obligation to make future interest payments. If the debentures are listed in the stock market, they can be easily purchased and sold. Generally, the company is interested to purchase its own debentures when the interest rate on the debentures is considerably higher than the current market interest rate. The advantage of the company is that by issuing new debentures or by arranging loan at a lower interest rate, it can use the funds to reacquire the original, higher interest debentures. When debentures are not listed on a stock exchange and issued privately, the company may negotiate a price with the debenture holders to buy back the debentures for cancellation. Purchase of debentures in the open market prior to their maturity calls for the recognition of a gain or a loss for the difference between the amount paid and the face value of debentures. When the debentures are cancelled before maturity date, it calls for the cancellation of debenture face value together with any amortized debenture discount. (i) Purchases of Debentures for Immediate Cancellation – On the Date of Interest

A Company may purchase its own debentures at any date for immediate cancellation. If the date of purchase of debentures and the date for payment of interest on debentures are the same, interest up to the date of purchase will be paid to the (old) debenture holders. The entries for purchase and cancellation of debentures will be as follows: (a) When debentures are purchases

Debentures Redemption Account Dr. [Quoted price x No. of debentures purchased] To Bank Account (b) When debentures are cancelled

(i) Debentures Account Dr. [Face value] To Debentures Redemption Account [purchase price] To Profit on cancellation of Debentures Account [profit] (ii) If there is a loss on cancellation, it is transferred to Profit and Loss Account. Profit and Loss Account Dr. [Loss] To Debentures Redemption Account (c) When profit on cancellation of debentures is transferred to Capital Reserve

Profit on Cancellation of Debenture Account Dr. To Capital Reserve Account Profit on cancellation is a capital profit, it should be transferred to capital reserve. (d) When face value of debentures is transferred to General Reserve

Profit & Loss Account Dr. To General Reserve Account Illustration:- 11

On 1st January 1997, HP Ltd. had 10,000. 12% Debentures of Rs.100 each. As per the provision of the deed, the directors acquired in the open market the following debentures for immediate cancellation; June 30, 2,000 debentures @ Rs.98: December 31, 4,000 debentures @ rs.96. Debentures interest is payable half-yearly, on 30th



June and 31st December. Pass Journal Entries (ignore interest and tax) (ii) Purchase of Debentures for Immediate Cancellation – before the Date of Payment of Interest

When debentures are purchased before the due date of interest, a problem may arise whether the quoted price includes interest upto the date of purchase or not. Price may be quoted “Ex-interest” or “Cum-interest”.

Meaning of Cum-interest and Ex-interest

‘Cum’ and ‘Ex’ are latin wods. ‘Cum’ means with and ‘Ex’ means without. The terms “Cum-interest” and “Ex-interest” relates to debentures and come up for consideration when debentures are purchased or sold. Cum-interest can be expanded as cumulative or inclusive of interest and Ex-interest can be expanded as exclusive of interest. The quotation, Cum-interest, not only covers the cost but also includes the interest accrued upto the date of purchase; when interest becomes due, it would be the right of the buyer to claim that. Conversely, the quotation, Ex-interest, only covers the cost of the debentures and the buyer is liable to pay additional amount as interest accrued up to the date of purchase of debentures. The block diagram illustrating the meaning of cum-interest and ex-interest.

In this connection, the following points are important: (i) In respect of Government securities and debentures, the price quoted is Ex-interest unless otherwise stated:

and (ii) In respect of Non-Government securities and debentures, it is Cum-interest unless otherwise stated. When debentures are purchased Cum-interest, care must be taken at the time of passing entry fo purchase of debentures. In this case, quotation price consists of cost plus accrued interest. Payment of accrued interest on debenture reacquisition is separately treated as a debit to debenture interest. Debentures Redemption Account will be debited with the cost price only and Debenture Interest Account will be debited with the accrued interest up to the date of purchase from the date of last interest paid. Bank Account will be credited with the quotation price. For calculating cost and accrued interest, the following steps should be followed:

Step 1: Calculate the period between the date of last interest paid and the date of purchase of debentures. Step 2: Calculate accrued interest by applying the following formulas:

Cum-Interest

Quotation

Price

Payment to Seller

Cost

Interest Accrued

Ex-Interest

Quotation

Price

Payment to Seller

Cost

+ Accrued Interest



purchaseddebenturesofvalueFacex12

months) (in Period x interestof Rate

Step 3: Calculate cost as follows: (Quotation price x No. of debentures purchased) less Accrued interest as calculated in Step 2 Example: On 1st April 1998, X Ltd purchased 2,000, 12% debentures of Rs.100 each @ Rs.98 (cum-interest). Debentures interest is payable half-yearly, on 30th June and 31st December. Date of closing the books of account is 31st December every year. Cost and accrued interest is to be calculated as follows:

Step 1: Calculation of period (in months) From 1.1.1998 to 31.3.1998 = 3 months. Step 2: Accrued interest = 12% x 3/12 x Rs.2,00,000 = Rs.6,000. Step 3: Cost = (Rs.98 x 2,00) Less Rs.6,000 = Rs.1,90,000. The entry for purchase will be as follows:

Debentures Redemption Account Dr. Rs.1,90,000 Debentures Interest Account Dr. Rs.6,000

To Bank Account (Rs.98 x 2,000) Rs.1,96,000 (Being purchase of 2,0000. 12% Debentures @ Rs.98 Cum-interest for cancellation) When debentures are purchased Ex-interest, the Debentures Redemption Account will be debited with quotation price (which is, in fact, nothing but the cost price) and Debenture Interest Account will be debited with accrued interest. Bank Account will be credited with the quotation price plus accrued interest. In such a situation, the entry for purchase of debentures will be as follows: Debentures Redemption Account Dr. Rs.1,90,000 Debentures Interest Account Dr. Rs.6,000

To Bank Account (Rs.98 x 2,000) Rs.2,02,000 (Being purchase of 2,0000. 12% Debentures @ Rs.98 ex-interest for cancellation) Accounting Entries

(a) When debentures are purchased Debentures Redemption Account Dr. [Cost] Debentures Interest Account Dr. [Accrued interest] To Bank Account [Total payment] (b) When debentures are cancelled

(i) Debentures Account Dr. [Face value] To Debentures Redemption Account [Cost] To Profit on Cancellation of Debentures Account [Profit] (ii) Loss on cancellation is transferred to Profit and Loss Account. Profit and Loss Account Dr. To Debentures Redemption Account



(c) When profit on cancellation of debentures is transferred to Capital Reserve

Profit on cancellation of Debentures Account Dr. To Capital Reserve Account (d) When face value of debentures is transferred to General Reserve

Profit and Loss Account Dr. To General Reserve Account Illustration:-12

On 1.3.1998, PQR Ltd. purchased its own 6% debentures, of Rs.10,000 @ Rs.96 Cum-interest and cancels immediately, interest on debentures being payable on June 30 and December 31 each year. Pass Journal Entries. Illustration:-13

On 1st January 1998, Nelco Ltd. Had outstanding in its books 1,000, 12% Debentures of Rs 100 each. The interest is payable on 30th June and 31st December every year. In accordance with the power in the deed, the directors acquired in the open market Debentures for immediate cancellation as follows: 1998 March 1 Rs 10,000 @ R 98.00 (cum-interest); 1998 Aug. 1 Rs. 20,000 @ Rs 100.25 (cum-interest); 1998 Nov. 1 Rs. 5,000 @ Rs 98.50 (ex-interest). Pass necessary Journal Entries in the books of the company, ignoring income tax. (i) Purchase of Debentures as Investment – On the Date of Interest

A company may purchase its own debentures as investment. Such debentures are kept alive. In future, it can be sold in the market again or it will be cancelled. When own debentures are purchased as investment, an account called “Investment in Own Debentures Account” or “Own Debentures Account” is debited with the quotation price and Bank Account is credited with the same amount. “Investment in Own Debentures Account” is shown on the assets side of the Balance Sheet under the heading “Investment”. Interest on own debentures of the post-purchase period is credited to Profit and Loss Account just like any other income from other investments. Debenture Interest Account is debited with the total interest (payable to outside debenture holders plus interest on own debentures held as investment.) The accounting entries will bas a follows:

(a) When debentures are purchased Investment in Own Debentures Account Dr. [Quotation price x No. of debentures

purchased] To Bank Account (Being the purchase ….. debentures @ Rs….. each as investment) (b) When interest on debentures is due and paid Debenture Interest Account Dr. [Total interest] To Bank Account [Interest paid to outside

debentureholders] To Interest on Own Debentures Account [Own Debentures] (Being the interest on debenture paid and adjusted) (c) When debentures are cancelled



Debentures Account Dr. [Face value] To Investment in Own Debentures Account [Purchase price] To Profit on Cancellation of Debentures Account [Profit] (Being the cancellation of ……. Debentures) (d) When profit on cancellation of debentures is transferred to Capital Reserve Profit on Cancellation of Debentures Account Dr. To Capital Reserve Account (Being profit on cancellation is transferred to Capital Reserve Account) (e) When face value of debentures is transferred to General Reserve Profit & Loss Account Dr. To General Reserve Account (Being the amount equal to the face value of debentures redeemed is transferred to general reserve) (f) When interest on own debentures is transferred Interest on Own Debentures Account Dr. To Profit and Loss Account (Being the interest on own debentures is transferred to Profit and Loss Account) (g) When debentures interest (paid during the year) is transferred to Profit and Loss Account Profit and Loss Account Dr. To debenture Interest Account (Being interest charged to Profit and Loss Account)

Treatment of Interest on Own Debentures

When debentures are purchased as investment, the interest of the post-purchase period is calculated and credited to “Interest on Own Debentures Account”. Debentures Interest Account is debited with the full interest (whether held by the company or outsiders). At the end of the accounting period, Profit and Loss Account is debited with the full amount of “Debenture Interest: ad credited with the :”nterest on Own Debentures”. Illustration:-14

On 1st January 1997, XY Ltd. had 5,000. 12% Debentures of Rs.100 each. The company purchased in the open market 1,000 debentures @ Rs.96 each on 30th June 1997. Debentures interest is payable half yearly, on 30th June and 31st December. The Company cancelled all the purchased debentures on 31st December 1997. Pass Journal Entries (ignore income-tax)

Purchase of Debentures as Investment – Before the Date of Payment of Interest

When debentures are purchased before the date of payment of interest, Investment in Own Debentures Account is debited with the cost (which is determined in the same manner as we do in case of purchase of debentures for immediate cancellation). Debenture Interest Account is also debited with the amount of accrued interest upto the date of purchase from the date of last payment of interest. The Bank Account is credited with the amount paid to the seller of debentures. Interest on own debentures of the post-purchase period is credited to Profit and Loss Account. Until cancellation, Investment in Own Debentures is shown in the Balance Sheet under the heading “Investment”.



Accounting Entries (a) When debentures are purchased Investment in own Debentures Account Dr. [Cost] Debentures Interest Account Dr. [Accrued interest] To Bank Account [Total payment] (b) When interest on debentures is due and paid Debentures Interest Account Dr. [Total interest – interest paid during

purchase] To Bank Account [Interest paid to outside

Debenture holders] To Interest Own Debentures Account [Own Debentures] (c) When debentures are Cancelled

(i) Debentures Account Dr. [Face value] To Investment in Own Debentures Account [Cost] To Profit and Loss on Cancellation of Debentures Account [Profit]

(ii) Loss on cancellation is debited to Profit and Loss Account Profit and Loss Account Dr. To Profit and Loss on Cancellation of Debentures Account (d) When debentures are sold without cancelling

(i) Bank Account Dr. [Sale proceeds] To Investment in Own Debentures Account [Cost] To Profit on Sale of Own Debentures Account

(ii) Loss on sale is debited to Profit and Loss Account Profit and Loss Account Dr. To Loss on Sale of Own Debentures Account (e) When profit on cancellation of debentures is transferred to Capital Reserve Profit on Cancellation of Debentures Account Dr. To Capital Reserve Account (f) When face value of debentures is transferred to General Reserve Profit and Loss Account Dr. To General Reserve Account (g) When interest on own debentures is transferred to Profit and Loss Account Interest on Own Debentures Account Dr. To Profit and Loss Account (h) When debentures interest (paid for the year) is transferred to Profit and Loss Account Profit and Loss Account Dr. To Debenture Interest Account.



Illustration:-15

A Ltd. has issued 1,000. 6% Debentures of Rs.100 each. The company on 1st March, 1997 purchased 50 of its debentures at Rs.96 each cum-interest (interest payable on 30th June and 31st December). These debentures are cancelled on 31st December, 1997, the date of year ending. Show the Journal Entries to record the above transactions. Illustration:-16

Draft Journal entries in respect of the following since March 1, 1997: In 19991 XY Ltd had issued 5,000, 7.5% Debentures of Rs.100 each. On 1st March, 1997, the company purchased 500 of its own 7.5% Debentures at Rs.47,500 cum-interest. The debentures were held as investment until 30th June, 1997 when it was decided to cancel them. Interest is payable half yearly on 30th June and 31st December and the books are closed on 30th June each year. Assume absence of sinking fund. Illustration:-17

On 1.1.1990 L.F. Industries Co. Ltd. issued 20,000, 10% Debentures of Rs.100 each at par. On 7.1.1990, application money of Rs.50 per debenture and after one month, the balance money were received. On 1.1.1992, the company purchased from open market 5,000 own debentures at Rs.102 and cancelled them. On 1.1.1993, the company redeemed 2,000 debentures at par by annual drawings. On 1.1.1994, the company purchased 8,000 own debentures from open market @ Rs.98 and held them as investment. On 1.1.1995, the company cancelled its own debentures and redeemed the remaining debentures at a premium of 5%. The balance of Profit and Loss Account on that day was Rs.1,00,000. Show all Journal Entries from issue to redemption. Illustration:-18

X Ltd. Has Rs 1,50,000. 6% Debentures on 1.1.1997. There is no sinking fund for redemption of debentures. Interest is payable on 31st December each year. On 1.4.97 Rs. 10,000 own debentures are purchased at Rs. 94 by X Ltd. And immediately cancelled. On 1.6.97 Rs. 25,000 own debentures are purchased at Rs. 95 and held as investment. On 1.10.97 Rs. 30,000 own debentures are purchased at Rs. 96 and held as investment. On 31.12.97 own debentures kept as investment are cancelled. Show Journal Entries and the relevant Ledger Accounts in the books of the company. Date of closing is 31st December.



Illustration:-19

On 1st July 1995, H.P. Ltd. Issued 2,000, 6% Debentures of Rs 100 each. The interest is payable on 30th June and 31st December every year. The company is allowed to purchase its own debentures which may be cancelled or kept or re-issued at the company’s option. The company made the following purchases by cheque in the open market. On 31st May 1996 200 Debentures @ Rs. 98 Rs 98 ex-interest. On 30th September 1997, 100 Debentures @ Rs. 97 cum-interest. The debentures, which were purchased on 31st May 1996, were cancelled on 31st December 1997. All payments were made on due dates. Pass necessary Journal Entries to record the above transactions (including receipts and payments) and also show the relevant items in the Balance Sheet as on 31st December, 1997.

Where there is Sinking Fund

A sinking fund is a fund created for the repayment of a liability or for the replacement of an asset. It is created by equal periodic installments in order to accumulate the amount of money required to repay a loan at a set date in the future. When the debentures are issued for a fixed period, their payment must be made after the expiry of that period. When the debentures are redeemed, the company requires a huge amount of money to pay-off debenture holders. If proper provisions are not made, there will be a strain on working capital and the company will face liquidity crisis, because a lot of money will go out of business. For collecting funds, a sinking fund is created voluntarily by making a charge against distributable profits. Every year, an equal amount is debited to Profit and Loss Appropriation Account and credited to Sinking Fund Account. The amount so appropriated is invested outside the business in gilt-edged securities (debiting investment and crediting cash) and allowed to accumulate at compounded interest, so as to produce the amount required to repay the debenture holders on the date of redemption. In the Balance Sheet, Sinking Fund Account is shown on the Liability side and Sinking Fund Investment Account shown on the Asset side. Other things remaining the same, balances on these two accounts should b equal. In the year of redemption, sinking fund investments will be realize and debentures holders will be paid-off. After redemption, the balance of the Sinking Fund Account is transferred to General Reserve Account. The creation of a sinking fund is a method of amortization or extinguishment of a debt (debentures) not yet matured. The establishment of a sinking fund for the redemption is a condition of issuing the debentures. It is as binding on the company as any other provision of the contract. Definition of Sinking Fund

B.G. Wickery has defined sinking fund, as under: “A sinking fund may be defined as a fund, created by a charge against or an appropriation of profits and represented by specific investments, which is brought into existence for a special purpose, such as replacement of an asset at the expiration of its life, or the redemption of debentures”. Accounting Entries for Creation of Sinking Fund

At the end of 1st Year

(a) For annual contribution (determined with the help of Sinking Fund Table) Profit and Loss Appropriation Account Dr.

To Sinking Fund Account



(b) For investing the amount set aside Sinking Fund Investment Account Dr. To Bank Account

At the end of the 2nd and subsequent years

(a) For receiving interest on sinking fund investment Bank Account Dr. To Interest on Sinking Fund Investment Account

(b) For transferring interest on sinking fund investment to sinking fund account Interest on Sinking Fund Investment Account Dr. To Sinking Fund Account Alternatively, Bank Account Dr. To Sinking Fund Account

(c) For annual contribution Profit and Loss Appropriation Account Dr. To Sinking Fund Account

(d) For investing the amount set aside plus interest received during the year Sinking Fund Investment Account Dr. (Contribution plus Interest)’ To Bank Account

At the end of the year of redemption

(a) For receiving interest on sinking fund investment Bank Account Dr. To Interest on Sinking Fund Investment Account

(b) For transferring interest on sinking fund investment to sinking fund account Interest on Sinking Fund Investment Account Dr. To Sinking Fund Account

(c) For annual contribution Profit and Loss Appropriation Account Dr. To Sinking Fund Account

At the end of the year of redemption of debenture, annual contribution and interest of that year are not invested outside. On that date all the investments are sold.

(d) For realization of sinking fund investments Bank Account Dr. To Sinking Fund Investment Account

(e) For profit on sale investment Sinking Fund Investment Account Dr. To Sinking Fund Account

(f) For loss on sale of investment Sinking Fund account Dr. To Sinking Fund Investment Account

(g) For redemption of debentures at a premium Debenture Account Dr. Premium on Redemption of Debenture Account Dr. To Debenture holders Account

(h) For payment to debenture holders Debenture holders Account Dr. To Bank Account

(i) For transferring premium on redemption of debentures Sinking Fund Account Dr.



To Premium on Redemption of Debentures Account Note: Reverse entry will be made in case of a redemption at a discount

(j) For transferring part of the sinking fund no longer required Sinking Fund Account Dr. To General Reserve Account

The students should note that frequently the expression “Debenture Redemption Fund Account” is used instead of “Sinking Fund Account”, Likewise, “Debenture Redemption Fund Investment Account” is used in place of Sinking Fund Investment Account”. These expressions are used interchangeably.

Illustration:- 20

X Ltd issued on 1st January, 1993 debentures of the face value of Rs.7,500 at par, repayable at par at the end of five years. In terms of the trust deed, a sinking fund was to be created for the purpose of accumulating sufficient funds. Investments were made yielding 5% interest received at the end of each year. All investments, including re-investments of interest received, were made at the end of the year. You ar required to show for 5 years, the – (a) Sinking Fund Account (b) Sinking Fund Investment Account. Note: Rs.2.71462 invested at the end of each year at 5 percent compounded interest will amount to Rs.15 at the end of 5 years. Illustration:- 21

The following balance appeared in the books of Y Ltd. on 1.4.1994: (i) Sinking Fund Account – Rs.50,000; (ii) Sinking Fund Investment Account – Rs.48,000; (10% Government Securities, nominal value Rs.45,000); (iii) 12% Debentures at a premium of 10%. Show Debentures Account, Sinking Fund Account and Sinking Fund Investment Account. Illustration:- 22

The following balance appeared in the books of Royco Ltd. on 1.4.1996: (1) Debenture Redemption Fund Rs.60,000 represented by investments of an equal amount (nominal value of

Rs.75,000). (2) The 12% Debentures stood at Rs.90,000. The company sold required amount of investments at 90% for redemption of Rs.30,000. Debentures at a premium of 20% on the above date. Show the (i) 12% Debentures Account (ii) Debenture Redemption Fund Account (iii) Debenture Redemption Fund Investment Account, and (iv) Debentureholders Account. Illustration:- 23

The following balance appeared in the books of P. Ltd. on 1.1.1997: 12% Debentures – Rs.4,00,000’ Sinking Fund Rs.3,00,000; Sinking Fund Investment Rs.3,00,000 )represented by 10% Rs.3,60,000 secured bonds of Government of India). Annual contribution to the Sinking Fund was Rs.64,000 made on 31st December each year. On 31.12.1997,



balance at bank was Rs.2,00,000 after receipt of interest. The company sold the investments at 80% and debentures were paid off. You are required to prepare the following accounts for the year 1997. (a) Debenture Account (b) Sinking Fund Account (c) Sinking Fund Investments Account (d) Bank Account.

Purchase in the Open Market (where there is sinking fund) for Immediate Cancellation

Sometimes a company may purchase its own debentures from stock market for immediate cancellation even when there is a sinking fund. Generally, the company is interested to purchase its own debentures when the prevailing price is advantageous to it and loss on sale of sinking fund investment, if any, is minimum. In this connection, the following points are important: (a) Any profit or loss on sale of sinking fund investment should be transferred to Sinking Fund Account. (b) The difference between the face value of debentures cancelled and their actual cost (in case of cum-interest

purchase, quotation price less accrued interest; and in case of ex-interest, quotation price) should be treated as profit or loss on cancellation of debentures. This profit on cancellation should be transferred to Capital Reserve Account as it is a capital profit.

(c) An amount equal to the face value of debentures cancelled shall be transferred to General Reserve (debiting Sinking Fund Account and crediting General Reserve Account).

Accounting Entries

(a) When debentures are purchased (cum-interest) Debentures Redemption Account Dr. [Quoted price – accrued interest x No. of debentures purchased] Debenture Interest Account Dr. [Accrued interest]

To Bank Account [Total payment]+

(b) When debentures are purchased (cum-interest) Debentures Redemption Account Dr. [Quoted price – accrued interest x No. of

debentures purchased] Debenture Interest Account Dr. [Accrued interest]

To Bank Account [Total payment]

(c) For sale of sinking fund investment Bank Account Dr. [Total proceeds] To Sinking Fund Investment Account

(d) Profit / Loss on sale of investment is transferred to Sinking Fund Account. For profit, Sinking Fund Account is credited and Sinking Fund Investment Account is debited. In case of loss, the entry is reversed.

(e) For cancellation (i) Debentures Account Dr. [Face value] To Debentures Redemption Account [Cost] To Capital Reserve / Sinking Fund Account [Profit] Or, (ii) Debentures Account Dr. [Face value] Sinking Fund Account Dr. [Loss] To Debentures Redemption Account [Cost]

(f) For transferring the face of debentures cancelled to General Reserve Account Sinking Fund Account Dr. [Face value of debentures cancelled]

To General Reserve Account



Illustration:- 24

SB Ltd. had 12% Debentures of Rs.3,00,000 outstanding of Rs.3,00,000 outstanding in its books as on 1.4.1996. It also had a balance of Rs.1,20,000 in Sinking Fund Account represented by 10% investments (face value Rs.1,50,000). On 31.12.1996, it sold investments of the face value of Rs.30,000 @ Rs.90 cum-interest and with the proceeds purchased own debentures of the face value of Rs.30,000 for immediate cancellation. The interest dates for both debentures and investments were 30th September and 31st March. Annual appropriations to Sinking Fund came to Rs.31,000. Pass Journal Entries and show necessary Ledger Accounts for the year ended 31.3.1997. Illustration:- 25

X Ltd. had 1,000, 12% Debentures of Rs.100 each outstanding on 1.1.1997. There is a Sinking Fund amounting to Rs.40,000 represented by 9% Bombay Port Trust Bonds, of the face value of Rs.50,000. Interest on debentures is payable on 30th June and 31st December every year. Interest on bonds is also receivable on the same dates. On 1.4.1997, the company purchases for cancellation 50 of its own debentures at Rs.96 each cum-interest by selling bonds of the face value of Rs.5,600. On 31.12.1997, Rs.10,000 was apportioned for the sinking fund and Bombay Port Trust were acquired for the amount plus interest on investments. The face value of the bonds purchased was Rs.15,600. Show the Ledger Accounts. Illustration:- 26

Bright Ltd. issued Rs.6,00,000 debentures during 1997 on the following terms and conditions: (i) A sinking fund to be created by yearly appropriation of profit and a similar amount to be invested outside. (ii) The company will have the right of purchase, for cancellation of debentures from the market if available

below par value. (iii) The debentures are to be redeemed on December 31, 1997 at a premium of 2%. The following balances appeared in the books of the company as on January 1, 1997. (a) On July 1, 1997 Rs.30,000 debentures were purchased for Rs.26,664 and cancelled immediately, the amount

being provided out of the sale proceeds of investment of the book value of Rs.34,800 made at Rs.33,900. (b) The income from the Sinking Fund Investment Rs.22,200 received on July 1, 1997 was not invested. (c) On December 29, 1997 Rs.4,23,000 was received on sale of the remaining Sinking Fund Investments. (d) On December 31, 1997 the remaining debentures were redeemed You are required to show for the year ending December 31, 1997. (i) The Debentures Account; (ii) The Sinking Fund Account; (iii) The Sinking Fund Investment Account; and (iv) The Debentures Redemption Account

Purchase in the Open Market (where there is sinking fund) as Investment

Sometimes, a company may purchase its own debentures as sinking fund investment. When own debentures are purchased as investment, an account called "Investment in Own Debentures Account" is debited with actual cost and Bank Account is credited with-the total payment. When own debentures are kept as investment, the interest on such debentures is to be calculated for the period. It should be credited to Sinking Fund Account and debited to Debenture Interest Account at the end of the accounting period. Any profit or loss on sale of investment should be transferred to Sinking Fund Account.



In the Balance Sheet, Debentures will be shown at its original figure and Investment in Own Debentures Account will be shown on the assets side Accounting Entries

(a) When debentures are purchased (cum-interest) Investment in Own Debentures Account Dr. (Quotation price – accrued interest) x No. of

debentures purchased] Debenture Interest Account Dr. (Total accrued interest)

To Bank Account

(b) When debentures are purchased (ex-interest) Investment in Own Debentures Account Dr. [Quotation price x No. of debentures purchased] Debenture Interest Account Dr. [Total accrued interest]

To Bank Account

(c) For sale of sinking fund investment Bank Account Dr. [Total proceeds]

To Sinking Fund Investment Account

(d) Profit/Loss on sale of investment is transferred to Sinking Fund Account. For profit, Sinking Fund Account is credited and Sinking Fund Investment Account is debited. In case of loss, the entry is reversed.

(e) For cancellation (when required)

(i) Debentures Account Dr. [Face value] To Investment in Own Debentures Account [Cost] To Sinking Fund Account [Profit]

Or, (ii) Debentures Account Dr. [Face value] Sinking Fund Account Dr. [Loss] To investment in Own Debentures Account [Cost]

No profit or loss is calculated at the time of purchase of own debentures. Only when it is cancelled, the profit or loss is calculated and transferred to Sinking Fund Account.

(f) For transferring profits on cancellation of debenture to General Reserve Account Sinking Fund Account Dr. To General Reserve Account (g) For transferring profits on cancellation of debenture to Capital Reserve Account Sinking Fund Account Dr. To Capital Reserve Account Illustration:-27

M.M. Ltd had the following among their ledger opening balances as on 1st January, 1997:

11% Debentures Account (1979 issue) Rs.50,00,000

Debentures Redemption Fund Account Rs.45,00,00

13.5% Debentures in XY Ltd. Account (face value Rs.20,00,000) Rs.19,50,000



Own Debentures Account (face value Rs.20,00,000) Rs.18,50,000

As 31st December, 1997 was the date of redemption of the 1979 Debentures, the company started buying own debentures and made the following purchases in the open market: 1.2.97, 2,000 Debentures at Rs.98 cum-interest; 1.6.97, 2,000 Debentures at Rs.99 ex-interest. Half-year interest is due on the debentures on the 30th June and 31st December in the case of both the companies. On 31st December, 1997, the debentures in XY Ltd were sold for Rs.95 each ex-interest. On that date, the outstanding debentures of M.M. Ltd were redeemed by payment and by cancellation. You are required to show the following accounts: (i) 11% Debentures Account (ii) Debentures Redemption Fund Account (iii) 13.5% Debentures in XY Ltd (iv) Own Debentures Account (Rounded off calculation to the nearest rupee)

Conversion of Debentures into Shares

Journal Entries

1. On receipt of application money Cash/Bank Account Dr. To Debenture Application Account 2. For allotment of debentures Debentures Application Account Dr. To Convertible Debenture Account 3. For conversion of the convertible debentures into equity / preference shares at par Convertible Debentures Account Dr. To Equity / Preference Share Capital Account 4. For conversion of the convertible debentures into equity / preference shares at a premium Convertible Debentures Account Dr. To Equity / Preference Share Capital Account To Security Premium Account Illustration:- 28

On 1st June Hindustan Computers Limited made a public issue of 10,000, 14% fully convertible debentures of Rs.100 each for cash at par. The entire amounts is payable on application. Allotment was made on 1st July, 1997. The entire face value of Rs.100 of each debenture would be compulsory and automatically converted into five equity shares of Rs.100 each in the company credited as fully paid-up at a premium of Rs.10 per share on the expiry of six months from the date of allotment. On 31.12.1997 half-yearly interest had accrued on debentures and paid on that date. Pass necessary Journal Entries assuming that accounting year closing on 31st December every year.



Illustration:-29

On 1.1.1996 Jamurki Ltd. issued 2,000. 15% Debentures of Rs.100 each at 6% discount. Holders of these debentures have an option to convert their holdings into 18% Preference Shares of Rs.100 each at Rs.125 at any time within 3 years. On 31.12.1993, yearly interest had accrued on the debentures and remained outstanding and a holder of 50 debentures notified his decision to exercise his option. Pass the necessary Journal Entries. Illustration:-30

Tata Press Limited made a public issue of 15% Partly Convertible Debentures (PCD) of Rs. 150 each for cash at par aggregating Rs 300 lakhs. Issue opened on 1st June, 1997; issue closed on 15th June. Allotment made on 1st July, 1997. Principal terms of PCD: 1. Entire amount is payable on application. 2. Each PCD will have a face value of Rs. 150 and shall consist of two parts

Part A : Convertible portion of Rs. 50. Part B : Non-convertible portion of Rs. 100.

3. Part A of each PCD will be automatically converted into 5 equity shares of Rs. 10 each at par on 31st December, 1997.

4. Part B of each PCD will be non-convertible. Interest on all debentures were paid up to 31st December, 1997. You are required to pass necessary Journal

Entries assuming that the accounting year closes on 31st December, every year. Illustration:-31

The following balances appeared in the books of Royco Ltd. on 1.4.2001. (a) Debenture Redemption Fund Rs.60,000 represented by investments of an equal amount (nominal value

Rs.75,000). (b) The 12% debentures stood at Rs.90,000. The compound sold required amount of investments at 90% for redemption of Rs.30,000 Debentures at a premium of 20% on the above date. Show the: (i) 12% Debenture Account. (ii) Debenture Redemption Fund Account. (iii) Debenture Redemption Fund Investments Account. (iv) Debenture holders Account. CS (Inter) – Dec., 2002. Illustration:-32

The following balances appeared in the books of P. Ltd. on 1.1.2002; 12% Debentures – Rs.4,00,000; Sinking Fund – Rs.3,00,000; Sinking Fund Investment – Rs.3,00,000 (represented by 10% Rs.3,60,000 secured bonds of Government of India). Annual contribution to the sinking Fund was Rs.64,000 made on 31 December each year. On 31.12.2002, balance



at bank was Rs.2,00,000 after receipt of interest. The company sold the investments at 80% and debentures were paid off. You are required to prepare the following accounts for the year 2002; (a) Debenture Account. (b) Sinking Fund Account. (c) Sinking Fund Investment Account. (d) Bank Account.

CS (Inter) – Dec., 2003. Illustration:-33 The following balances appeared in the books of Gomex Ltd. on 1.04.2008; (i) Debenture Redemption Fund A/c – Rs.40,000 represented by investment at cost of an equal amount (nominal

value Rs.50,000). (ii) The 12% Debentures stood at Rs.90,000. The company sold Rs.30,000 investments at Rs.90 for the purpose of Redemption of Rs.25,000 Debentures at a Premium of 2% during the year. Show (a) 12% Debentures account, (b) Debenture Redemption Fund A/c, (c) Debenture Redemption Fund investment A/c. for the year ending 31.2.2009 Ignore interest and brokerage etc. CS (Inter) – Dec., 2009.



Chapter 4 – Miscellaneous Company Accounts

1. Bonus Shares Q 1. The Balance Sheet of A Ltd. as at 31-03-1995 is as follows:

Balance Sheet as at 31-03-1995

Equity and Liabilities Rs. Shareholders Funds Authorized Share Capital 1,50.000 Equity Shares of Rs 10 each 1,500,000 Issued, Subscribed and Paid-up 80.000 Equity Shares of 7.50 each called- 600,000 up and paid-up Reserves: Capital Redemption Reserve 150,000 Plant Revaluation Reserve 20,000 Share Premium Account 150,000 Development Rebate Reserve 230,000 Investment Allowance Reserve 250,000 General Reserve 300,000 1,700,000 Non Current Assets Rs. Sundry Assets 1,700,000 1,700,000 The company wanted to issue bonus shares to its shareholders at the rate of one share for every two shares held. Necessary resolutions were passed: requisite legal requirements were complied with: (a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd. (b) Show the amended Balance Sheet. Comments Issue of bonus shares — Most candidates failed to show separately in the amended balance sheet, sources used for issue of bonus shares. Most candidates debited bank account instead of general reserve account in order to make partly paid shares fully paid up. Solution

In the Books of A Ltd. Journal Entries

Particulars Dr. Amt Cr. Amt (i) Share Final Calls A/c Dr. 2,00,000 To Share Capital A/c 2,00,000 (Being the final call of Rs.2.50 each on 80,000 equity shares made) (ii) Bank A/c Dr. 2,00,000 To Share Final Call A/c 2,00,000 (Being the amount due on final call received) (iii) General Reserves Dr. 3,00,000 Securities Premium A/c Dr. 1,00,000



To Bonus to Share holders A/c 4,00,000 (Being the appropriation made as above to facilitate issue of fully paid up bonus shares at the rate of one share for every two shares held) (iv) Bonus to shareholders A/c Dr. 4,00,000 To Equity Share Capital A/c 4,00,000 (Being the issuance of 40,000 fully paid up shares of Rs.10 each by way of bonus)

Balance Sheet (after bonus issue)

Equity and Liabilities Amount Shareholders Funds Authorised Share Capital 1,50,000 equity shares of Rs. 10 each 1,500,000 Issued and Subscribed 1,20,000 Equity Shares of Rs. 10 each fully paid 1,200,000 Of the above, 40,000 equity shares are allotted as fully paid up by way of bonus shares Reserves and Surplus Capital Redemption Reserve 150,000 Securities Premium 50,000 Development Rebate Reserve 230,000 Investment Allowance Reserve 250,000 Plant Revaluation Reserve 20,000 1,900,000 Non Current Assets Amount Sundry Assets 1,700,000 Current Assets Bank 200,000 1,900,000 Q 2. Bee Ltd. had the following Balance on 31-03-1999:

Particulars Rs. 6% Preference Shares of Rs.25 each fully paid 2,00,000 Equity Shares of Rs.100 each fully paid 10,00,000 Share Premium Account 2,00,000 Capital Redemption Reserve Account 1,00,000 General Reserve 3,00,000 Profit and Loss Account 80,000 On the date. Land and Building which stood at Rs. 5,00.000 in the books were revalued at Rs. 8.00,000. It was decided to:

(i) Consolidate the preference shares into shares of Rs. 100 each;

(ii) Subdivide the equity shares of Rs. 1 each:

(iii) Adopt the revaluation of Land and Building; and



(iv) Issue fully paid up bonus shares to equity shareholders equal to 50% of the present Equity Share Capital. revenue reserve and profit being used only if necessary for the purpose.

Q 3. Following is the extract of the Balance Sheet of Beltex Ltd. as at 31st March, 2000.

Equity and Liabilities Rs. Shareholders Funds Authorized Capital 100,000 10,000 12% Preference shares of Rs. 10 each 1,000,000 1.00,000 Equity shares of Rs 10 each 1,100,000 Issued and Subscribed capital: 80,000 8,000 12% Preference shares of Rs. 10 each fully paid 720,000 90.000 Equity shares of Rs. 10 each, Rs. 8 paid up Reserves and Surplus: General reserve 120,000 Capital reserve 75,000 Securities premium 25,000 Profit and Loss Account 200,000 Non Current Liabilities 12% Partly Convertible Debentures @ Z 100 each 500,000 On 1st April. 2000 the Company has made final call @ Rs.2 each on 90,000 equity shares. The call money was received by 20th April, 2000. Thereafter the company decided to capitalize its reserves by way of bonus at the rate of one share for every four shares held. Share premium of Rs. 25,000 includes a premium of Rs. 5,000 for shares issued to vendors pursuant to a scheme of amalgamation. Capital reserves include Rs. 40,000, being profit on sale of plant and machinery. 20% of 12% debentures are convertible into equity shares of Rs. 10 each fully paid on 1st July, 2000. Show necessary entries in the books of the company and prepare the extract of the Balance Sheet immediately after bonus issue but before conversion of debentures. Are the convertible debenture holders entitled to bonus shares? Solution

Beletex Ltd. Journal Entries 2000 Particulars Rs. Rs. April 1 Equity Share Final Cali A/c Dr. 1,80,000 To Equity Share Capital A/c 1,80,000 (Final call of Rs.2 per share on 90,000 equity shares due as per Board's Resolution dated….) April 20 Bank No Dr. 1,80,000 To Equity Shares Final Call A/c 1,80,000 (Final call money on 90,000 equity shares received) Capital Reserve A/c Dr. 40,000 Securities Premium A/c Dr. 20,000 General Reserve A/c Dr. 1,20.000 Profit and Loss A/c Dr. 45,000 To Bonus to Shareholders A/c 2,25,000 (Bonus issue @ one share for every four share held by utilizing



various reserves as per Board's resolution dated ) April 20 Bonus to Shareholders A/c, Dr. 2,25,000 To Equity Share Capital A/c 2.25,000 (Being capitalization of profit made) Q 4. A Company issued bonus shares to the shareholders — one share to holders of 10 shares. The following are the details, pass journal entries:

Particulars Rs. Equity Capital 10,000 shares of Rs. 100 each 10,00,000 Preference Capital 6,000 shares of Rs. 100 each 6,00,000 General Reserve 5,00,000

Ans. Rs. 1,00,000 to be capitalized Q 5. X Ltd. has resolved to utilise Rs. 3,00,000 out of the general reserve balance to declare bonus to the shareholders in the form of payment of final call @ 73 per share on 1,00.000 equity shares of no each. Along with this, the company further decided to utilise the balance of share premium account to issue fully paid-up bonus shares in the ratio of one equity share for every five equity shares held. Show journal entries in the books of X Ltd. Ans. Share Premium Account is utilized to the extent of Rs. 2,00,000 Q 6. The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2012:

Notes

(1) Share Capital Rs. in lakhs Authorised: 20 crore shares of Rs. 10 each 20,000 Issued and Subscribed: 10 crore Equity Shares of Rs. 10 each 10,000 2 crore 11% Cumulative Preference Shares of Rs.10 each 2.000 Total 12,000 Called and paid up 10 crore Equity Shares of Rs.10 each. Rs. 8 per share called and paid up 8,000 2 crore 11% Cumulative Preference Shares of Rs. 10 each. fully called and paid up 2,000 Total 10,000 (2) Reserves and Surplus: Capital Reserve 485 Capital Redemption Reserve 1,000 Securities Premium 2,000 General Reserve 1,040 Surplus i.e. credit balance of Profit & Loss (Appropriation) Account 273 Total 4,798 On 2nd April, 2012 the company made the final call on equity shares @ Rs. 2 per share. The entire money was received in the month of April, 2012.

On 1st June, 2012 the company decided to issue to equity shareholders bonus shares at the rate of 2



shares for every 5 shares held and for this purpose. it decided to utilize the capital reserves to the maximum possible extent.

Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company immediately after me issue of bonus snares.



Chapter 5 - Underwriting

Q 1. Newton Limited incorporated on 1st January. 1999 issued a prospectus inviting applications for 20.000 equity shares oft 10 each. The whole issue was fully underwritten by Adams, Benzamin and Clayton as follows:

Adams 10.000 Shares Benzamin 6.000 Shares Clayton 4,000 Shares

Applications were received for 16.000 shares, of which marked applications were as follows:

Adams 8,000 Shares Benzamin 2,850 Shares Clayton 4,150 Shares

You are required to find out the liabilities of individual underwrites. Solution

Statement of Understructure's Liability(number of Shares)

A B C Gross Liability 10.000 6,000 4,000 (-) marked liability 8.000 2.850 4,150 Unmarked Liability 500 300 200 Balance liability 1500 285 (350) Negative Adj (10:6) (219) (131) 350 Net liability 1281 2719 --

Q 2. i) Albert Ltd. issued 50,00,000 Equity shares of Rs. 10 each The whole issue as underwritten by A, B and C as below: (a) 15,00,000 shares (b) 25,00,000 shares

(c) 10,00.000 shares

ii) Applications were received for 48,50.000 shares of which the marked applications were as follows:

(a) 12.00,000 shares (b) 25,00.000 shares

(c) 8,50,000shares

Calculate the number of shares to be taken up by the underwriters. Q 3. Noman Ltd. issued 80,000 Equity Shares which were underwritten as follows:

Mr. A 48,000 Equity Shares Messrs B & Co. 20,000 Equity Shares Messrs C Corp. 12,000 Equity Shares

The above mentioned underwriters made application for 'firm' underwriting as follows:

Mr. A 6,400 Equity Shares Messrs B & Co. 8,000 Equity Shares Messrs C Corp. 2.400 Equity Shares

The total applications excluding 'firm' underwriting, but including marked applications were for 40.000 Equity Shares.



The Marked Applications were as under:

Mr. A 8,000 Equity Shares Messrs B & Co. 10,000 Equity Shares Messrs C Corp. 4,000 Equity Shares (The underwriting contracts provide that underwriters be given credit for 'firm' applications and that credit for

unmarked applications be given in proportion to the shares underwritten) You are required to show the allocation of liability. Workings will be considered as a part of your answer. Solution

Noman Ltd. Statement showing liability of Underwriters Mr. A M/s. B&Co. C Corpn Total Gross Liability (No. of Shares) 48.000 20,000 12,000 80,000 Less : Unmarked Applications* (Ratio 48: 20:12) 10,800 4,500 2,700 18,000 37,200 15,500 9,300 62.000 Less: Marked Applications 8,000 10,000 4,000 22,000 29.200 5,500 5.300 40,000 Less: Firm undertaking 6,400 8,000 2,400 16,800 Balance to be taken under the contract 22,800 -2.500 2,900 23,200 Less: Credit for excess of B & Co. (ratio 48: 12) 2,000 2.500 500 Net Liability 20,800 - 2,400 Add: Firm Underwriting 6,400 8,000 2,400 16,800 Total Liability 27,200 8,000 4,800 40,000 Working Note

Total Applications 40,000 Shares Marked Applications 22,000 Shares Unmarked applications 18,000 Shares Q 4. Delta Ltd. issue 25,00,000 equity shares of Rs. 10 each at par. 7,00,000 shares were issued to the promoters and

the balance offered to the public was underwritten by three underwriters, P, Q & R in the ratio of 2:3:4 with firm underwriting of 50,000, 60,000 and 70,000 shares each respectively.Total subscription received 13,88,000 shares including market application and excluding firm underwriting were as

P 3,00,000 Q 3,50.000 R 4,50,000

Unmarked and surplus applications to be distributed in Gross liability ratio. Ascertain the liability of each underwriter. Q 5. Chaitanya Limited issues 40,000 shares. Issue is underwritten by A, B and C in the ratio of 5 : 3 : 2 respectively.

Unmarked applications totalled 2000 whereas marked applications are as follows:

A 16,000 B 5,700 C 3,300



Calculate the Net liability of each one of the underwriters. Q 6. A company made a public issue of 1,25,000 equity shares of Rs. 100 each, Rs. 50 payable on application. The entire

issue was underwritten by four parties; A, B, C and D in the proportion of 30% and 25%, 25% and 20% respectively. Under the terms agreed upon, a commission of 2% was payable on the amounts underwritten.

A, B, C and D also agreed on 'firm'; underwriting of 4.000. 6,000. Nil and 15,000 shares respectively. The total subscriptions, excluding firm underwriting including marked applications were for 90.000 shares. Marked

applications received were as under: (a) 24,000 (b) 12,000 (c) 20,000 (d) 24,000

Ascertain the liability of the individual underwriter and also show the journal entries that you would make in the

books of the company. All workings should form part of your answer. Solution A B C D Gross Liabilities 37,500 31,250 31,250 25,000 (-) Marked 24,000 20,000 12.000 24,000 Unmarked 3,000 25,00 25,00 2,000 Firm 4.000 6.000 — 15,000 6,500 2,750 16,750 16,000 Negative adj (6000) (5000) (5000) 16000 Balance 500 (2250) 11750 Negative (1,227) 2,250 1,023 -- A B C D Balance (727) -- 10.727 -- Negative 727 -- (727) -- Balance -- -- 10,000 -- + Firm 4,000 6,000 -- 15,000 4,000 6,000 10,000 15,000 Q 7. Libra Ltd. came up with an issue of 20,00,000 equity shares of Rs. 10 each at par 5,00,000 shares were issued to

the promoters and the balance offered to the public was underwritten by three underwriters Anand, Vijay and Ashok — equally with firm underwriting of 50,000 shares each. Subscriptions totaled 12,97,000 shares including the marked forms which were:

Anand 4,25,000 Shares Vijay 4,50,000 Shares Ashok 3,50,000 Shares

The underwriters had applied for the number of shares covered by firm underwriting. The amounts payable on application and allotment were Rs. 2.50 and Rs. 2.00 respectively. The agreed commission was 5%. Pass summary journal entries for:

(i) The allotment of shares to the underwriter; (ii) The commission due to each of them; and (iii) The net cash paid and or received.

Solution Anand Vijay Ashok Gross Liabilities 50.000 50,000 50,000 (-) Firm U/W 50,000 50,000 50,000



(-) Marked App 4,25,000 4,50,000 3.50,000 (-) Unmarked App 24,00 24,000 24,00 1,000 (24.000) 76.000 Negative Adjustment (12,000) 24,000 (12.000) (11,000) -- 64,000 Net Liability 13,000 -- 11,000 53,000 +Firm Underwriting 50,000 50.000 50,000 50.000 50.000 1.03,000

Journal Entries

Particulars Debit (Dr) Credit (Cr) (i) Anand Dr 1,25,000 Vijay Dr 1,25.000 Ashok Dr. 2,57,500 To Share Application A/C 5,07,500 (Being amount raised for U/Wr)

(ii) Share Application A/C Dr. 5,07,500

To Share Capital 5,07,500 (Being Shares Issued)

(iii) Underwriting Commission Dr. 7,50,000 To Anand 2,50,000 To Vijay (5,00,000x10x5%) 2,50,000 To Ashok 2,50,000 (Being commission charged)

(iv) Bank Dr. 7500 To Ashok 7500 (Being amount received from u/wr) (v) Anand Dr. 125000 Vijay Dr. 125000 To Bank 2,50,000 (Being amount paid to U/Wr) 2,50,00 (vi) Share Allotment A/C Dr. 4.06,000 To Share Capital NC (2.03.000x2) 4,06,000 (Being allotment raised) (vii) Bank A/C Dr. 4,06.000 To Share Allotment A/C 4,06,000 (Being allotment money received).

Q 8. Scorpio Ltd. came out with an issue of 45,00,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share. The

promoters took 20% of the issue and the balance was offered to the public. The issue was equally underwritten by A & Co: B & Co. and C & Co.

Each underwriter took firm underwriting of 1,00.000 shares each. Subscriptions for 31,00,000 equity shares was

received with marked forms for the underwriters as given below:



A & Co. 7,25,000 shares B & Co. 8.40,000 shares C & Co. 13,10,000 shares Total 28,75.000 shares The underwriters are eligible for a commission of 5% on face value of shares. The entire amount towards shares

subscription has to be paid along with application. You are required to: (a) Compute the underwriters liability (number of shares) (b) Compute the amounts payable or due to underwriters; and (c) Pass necessary Journal entries in the books of Scorpio Ltd. relating to underwriting. Solution

A B C Gross Liability 12,00,000 12,00.000 12.00.000 (-) Firm 1.00.000 1,00.000 1,00,000 (-) Married 7,25.000 8.40,000 13.10,000 (-) unmarked 75,000 75,000 75,000 (31,00.000-28,75,000) A B C Balance 3,00,000 1.85.000 (2,85,000) Negative Adj. 1,42,500 1,42.500 2.85,000 Net liability 1 .57,500 42,500 — (+) Firm 1,00,000 1.00,000 1,00,000 2.57,500 1,42,500 1,00.000 (b) Calculation of amount payable/receivable to/ from underwriters. Amt. receivable Comm. payable Net A 237,500 + 12 = 30,90,000 5% x 12,00,000 x 10 24,90,000 = 6,00,000 B 1,42,500 x 12 = 17,10,000 6,00,000 11,10,000 C 1,00,000 x 12 = 12,00.000 6.00,000 6,00,000

Journal Entries

Particulars Debit (Dr) Credit (Cr) (i) Bank A/C Dr. 3,74,00,000 To share application 3,72,00,000 (Being application money received) (ii) A Dr. 30,90,000 B Dr. 17,10,000 C Dr. 12,00,000 To Share application 60,00,000 (Being amount raised firm & net) (iii) Share application A/c Dr. 7,32,00,000 To Equity share capital 3,60,00,000 To security premium 72,00,000 (Being shares allotted)



(iv) Underwriting comm. A/c Dr. 18,00,000 To A 6,00,000 To B 6,00,000 To C 6,00,000 (Being commission charged) (v) Bank A/c Dr. 42,00,000 To A 24,50,000 To B 11,10,000 To C 6,00,000 (Being amount received) Q 9. X Ltd. Issued 10,000 shares of Rs. 100/- Each at a premium of Rs. 15 each. Ninety per cent of the issue was

underwritten by M/s. Broker and Co. at a commission of 1% on the nominal face value. Applications were received for 8,000 shares and allotment was fully made. All the moneys due from allottees were received in one installment. The accounts with Broker & Co. were settled. Show the Journal entries to record the transaction.

Solution Calculation of underwriter's Liability Books & Company

Gross Liability 9,000 (-) Marked Application 8.000 Net Liability 1,000 Q.10. A company issues 1,000 14% Debentures of Rs. 1,000 each at a premium of 20% .Sixty per of the issue was

underwritten by M/s Bulls & Bears for a commission @1.5% of the issue of debentures underwritten. Applications were received for 800 debentures which were ted and payment of these was received in full. Give journal entries.

Q.11.Sardar Limited issued to public 1,50,000 equity shares of Rs. 100 each at par. Rs. 60 per share payable along with

application and the balance on allotment. The issue was underwritten equally by Ali, Bali and Charlie for a commission of 5 percent. Applications for 1,40,000 shares received as per details below:

Underwriter Firm Application Marked Application Total Ali 5,000 40,000 45,000 Bali 5,000 46,000 51,000 Charlie 3,000 34,000 37,000 Unmarked Applications 7,000 Total 1,40,000 It was agreed to credit the unmarked applications equally to Ali and Charlie. Sardar Limited accordingly made the

allotment and received the amounts due from the public. The underwriters settled their accounts. You are required to: 1. Prepare a statement showing the liability of the underwriters and 2. Journalize the above transactions (including cash) in the books of Sardar Ltd. Solution Ali Bali Charlie Gross liabilities 50,000 50,000 50,000



(-) Firms U/W 5,000 5,000 3,000 (-) Marked App 40,000 46,000 34,000 (-) Unmarked App 3,500 -- 3,500 Net Liability 1,500 (1000) 9,500 (-)Negative Adjustment (500) 1000 (500) Net Liability 1000 -- 9,000 (+)Firm U/W 5,000 5,000 3,000 Total 6,000 5,000 12,000

Journal Entries

Particulars Debit (Dr) Credit (Cr) (i) Bank A/C Dr. 84,00,000 To Share Application A/C 84,00,000 (Being application money received) (marked =1,20,0004-unmarked = 7,000 +Firase = 13,000) x 60 (ii) A Dr 60,000 B Dr -- C Dr 5,40,000 To shares Application 6,00,000 (Being amount raised from U/W) (iii) Underwriting commission Dr. 7.50,000 To A 2,50,000 To B 2,50,000 To C 2,50,000 (Being amount charged) (iv) Bank A/c Dr 2,90,000 To C 2,90,300 (Being amount received from U/w) (v) A Dr 1,90,000 B Dr 2,50,000 To bank A/c 4,40,000 (Being amount paid to U/W) (vi) Share Application Dr 90,00,000 To Share Capital 90,00,000 (Being shares issued) (vii) Share Allotment Dr 60,00,000 To share Capital A/C 60,00.000 (Being allotment raised) (15,0,000x40) (viii) Bank NC Dr. 60,00,000 To Share allotment 60.00,000 (Being allotment a money received)



Chapter 6 - Buy Back

Q 1. Anu Ltd. furnishes you with the following balance sheet as at 31 st March, 2008: Equity and Liabilities (Rs. in crores) Shareholders Funds Share Capital: Authorised 100 Issued: 12% redeemable preference shares of 1100 each fully paid 75 (+) Equity shares of 210 each fully paid 25 100 Reserves and surplus: Capital reserve 15 (+) Securities Premium 25 (+) Revenue reserves 260 300 Current liabilities 40 440 Non Current Assets Fixed assets: cost 100 (-) Provision for depreciation 100 nil Investments at cost Market value Rs. 400 Cr.) 100 (+) Current Assets 340 440 The company redeemed preference shares on 1st April, 2008. It also bought back 50 lakh equity shares of Rs. 10

each at Rs. 50 per share. The payments for the above were made out of the huge bank balances, which appeared as a part of current assets.

You are asked to:

(i) Pass journal entries to record the above. (ii) Prepare balance sheet as at 1.4.2008

Journal entries in the books of Anu Ltd.

Particulars Debit (Dr) Credit (Cr) 1st 12% Preference share capital A/c Dr. 75 April, To Preference shareholders A/c 75 2008 (Being preference share capital account transferred to shareholders account) Preference shareholders A/c Dr. 75 To Bank A/c 75 (Being payment made to shareholders) Shares buy back A/c Dr. 25 To Bank A/c 25 (Being 50 lakhs equity shares bought back @ Rs. 50 per share)



Equity share capital A/c (50 LakhsxRs.10) Dr. 5 Securities premium A/c (50 Lakhsxt40) Dr. 20 To Shares buy back A/c 25 (Being cancellation of shares bought back) Revenue reserve A/c Dr. 80 To Capital Redemption Reserve A/c 80 (Being creation of capital redemption reserve to the extent of the face value of preference shares redeemed and equity shares bought back)

(ii) Balance sheet of Mu Ltd as at 1.4.2008

Equity and liabilities (Rs. in crores)

Shareholders Funds Share Capital: Authorised 100 Issued, subscribed and paid up: 200 lakhs equity shares of Rs. 10 each 20 Reserves and surplus: Capital reserve 15 (+) Capital redemption reserve 80 (+) Securities premium (25-20) 5 (+) Revenue reserve (260-80) 180 280 (-) Current Liabilities 40 340 Assets Fixed assets: Cost 100 (-) Provision for depreciation -100 Nil Investment at cost (Market value 1400 crores) 100 Current assets as on 31.32008 340 (-) Bank payment for redemption and buy back -100 240 340 Q 2. A Ltd. resolved to buy back 3,00,000 of its fully paid equity shares of Rs. 10 each at t 12 per share. For the

purpose of Financing, it issued 10,000 13% preference shares of 100 each at par, the total sum being payable with application. The company uses t 8,50,000 of its balance in securities premium Account apart from its adequate balance in General Reserve Account to fulfill the legal requirements regarding buy-back.

Pass journal entries for all the transaction involved in the buy - back. Solution

Journal Particulars Debit(Dr) Credit (Cr) (i) Equity share capital A/c Dr. 30,00,000 Loss on buy book Dr. 6,00,000 To Equity share holders 30,60,000



(Being capital bought back) (ii) Bank A/c Dr. 1,00,000 To 13% Preference share capital 1,00,000 (Being PSC issued) (iii) Security Premium A/c Dr. 8,50,000 General Reserve A/c Dr. 21,50,000 To CRR 30,00,000 (Being Sec. 77A Complianced) (iv) Equityshare holders A/c Dr. 30,60,000 To Bank 30,60,000 (Being Amount paid) (v) Reserves Alc Dr. 60,000 To loss on buy book 60,000 (Being loss written off) Q 3. On 31st March, 2001, following was the balance sheet of New Era Ltd.: Equity and Liabilities Rs. (in lakhs) Shareholders Funds Equity Share capital 10/- 2,400 Securities premium 350 General reserve 930 Profit & Loss account 340 Shareholders Funds Non Current Liabilities 12% Debentures 1,500 Current Liabilities Sundry creditors 750 Sundry provisions 390 6,660 Assets Rs. (in lakhs) Non Current Assets Machinery 3,600 Furniture 452 Investments 148 Current Assets Stock 1,200 Debtors 520 Bank 740 6,660 On 1st April, 2001 the Company announced the buy-back of 25% of its Equity shares @ Rs. 15 per share. For the

purpose, it sold all of its investments for Rs. 150 lakh and issued 2,00,000 14% preference shares of Rs. 100 each at par the entire amount being payable with application. The issue was fully subscribed. The Company achieved the target of the buy-back.



Later, the Company issued one fully paid up Equity Share of Rs. 10 by way of bonus share for every four Equity Shares held by the equity shareholders. Show the journal entries for all the transaction including cash transactions.

Solution

Journal Entries

Particulars Debit (Dr) Credit (Cr) 1. Equity Share Capital Dr 600 Loss on Buy-back Dr 300 To Equity Share Holder 900 (Being capital transfer to liabilities) 2. Profit & Loss A/c Dr 340 General Reserve Dr 260 To CRR 600 (Being profits blocked) 3. Banks A/c Dr 150 To Investment 148 To Profit & Loss A/c 2 (Being invest sold) 4. Bank A/c Dr 200 To Preferences Share Capital 200 (Being Preferences Share issued) 5. Equity Share Holder Dr 900 To Bank 900 (Being liabilities paid off) 6. Security Premium Dr 300 To Loss on buy-back 300 Q 4. Dee Limited furnishes the following summarized Balance Sheet as at 31st March, 2012: Equity and Liabilities Rs.'000 Rs.'000 Shareholders Funds Issued and subscribed capital: 2,50,000 Equity shares of Rs. 10 each fully paid up 25.00 (+) 2,000, 10% Preference shares of Rs. 100 each 2,00 27,00 (Issued two months back for the purpose of buy back) Reserves and surplus: (+) Capital reserve 10,00 (+) Revenue reserve 30,00 (+) Securities premium 22.00 (+) Profit and loss account 35,00 97,00 Current Liabilities 14,00 1,38,00 Non Current Assets Fixed assets 93,00 Investments 30,00 Current Assets 15,00 1,38,00 The company passed a resolution to buy back 20% of its equity capital @ Rs. 50 per share. For this purpose, it sold

all of its investment for Rs. 22,00,000. You are required to pass necessary journal entries and prepare the Balance Sheet.



Chapter 7 - ESOP

Q 1. X Ltd. offered 15.000 ESOP'S to it's employees on April 1, 2001. Exercisable on 31st March, 2004. On 1st January, 2002, 1000 options were withdrawn from employee X. On 31st March, 2003 2000 options were cancelled due to resignation of employees. Rest of the options were availed by employees on due date. Market price on 1-4-2001 for equity shares of company is Rs. 40 (face value Rs. 10). However, market price on 31-3-2004 is Rs. 80 per share. Journalize entries.

Q 2. A company grants 500 options on 1-4-1999 at Rs. 40 when the market price is Rs. 160 the vesting period is two and

a half years, the maximum exercise period is one year. Also 150 unvested options lapsed on 1-5-2001, 300 options are exercised on 30-6-2002 and 50 vested options lapsed at the end of the exercise period. Journalize.

Q 3. Bharat Ltd. grants 1,000 employees stock options on 1.4.2006 at Rs. 40, when the market price is 1160. The vesting

period is 2% years and the maximum exercise period is one year. 300 unvested options lapse on 1.5.2008. 600 options are exercised on 30.6.2009. 100 vested options lapse at the end of the exercise period.

Pass Journal Entries giving suitable narrations. Solution

Journal Entries in the Books of Bharat Ltd.

Date Particulars Dr. (Rs.) Cr.(Rs.) 31.3. Employees compensation expenses 2008 account Dr. 48,000

To Employees stock option outstanding account 48,000 (Being compensation expenses recognized in respect of the employees stock option i.e. 1.000 options granted to employees at a discount of Rs. 120 each. amortised on straight line basis over 2 ½ years) Profit and loss account Dr. 48,000 To Employees compensation expenses account 48,000 (Being expenses transferred to profit and loss account at the end of the year) 31.3. Employees stock option outstanding 2009 account (W.N.1) Dr. 12,000 To General Reserve account (W.N.1) 12,000 (Being excess of employees compensation expenses transferred to general reserve account) 30.6. Bank A/c (600 x Rs. 40) Dr. 24,000 2009 Employee stock option outstanding account (600 x Rs. 120) Dr. 72,000 To Equity share capital account (600 x Rs. 10) 6,000 To Securities premium account (600 x Rs. 150) 90,000 (Being 600 employees stock option exercised at an exercise price of Rs. 40 each)



01.10. Employee stock option outstanding account Dr. 12,000 12,000 2009 To General reserve account (Being Employees stock option outstanding A/c transferred to General Reserve A/c. an lapse of 100 options at the end of exercise of option period) Working Note On 31.3.2009, Bharat Ltd. will examine its actual forfeitures and make necessary adjustments, if any to reflect

expenses for the number of options, which have actually vested. 700 employees stock options have completed 2.5 years vesting period. the expense to be recognized during the year is in negative i.e.

Rs. No. of options actually vested (700 x Rs.120) 84,000 Less: Expenses recognized ?(48.000 + 48.000) 96,000 Excess expenses transferred to goon' reserve 12,000 Q 4. A Company has its share capital dividend into shares of 10 each. On 1st April 2010 it granted 20,000 employees'

stock options at Rs. 40, when the market price was Rs. 130. The options were to be exercised between 1st January 2011 to 15th March 2011. The employees exercised heir options for 18,000 shares only: the remaining options lapsed. The company closes its books on 31st March every year. Pass Journal entries with regard to employees' stock option.

Q 5. A company has its share capital divided into shares of Rs. 10 each. On 1-4-2010, it granted 5.000 employees

stock option at Rs. 50. when the market price was Rs. 140. The options were to be exercised between 1-12-2010 to 28-2-2011. The employees exercised their options for 4,800 shares only; the remaining options lapsed Pass the necessary Journal Entries for the year ended 31-3-2011, with regard to employee's stock option

Q.6. On 1st April, 2010. a company offered 100 shares to each of its 500 employees at Rs. 50 per share. The employees

are given a month to accept the offer. The shares issued under the plan shall be subject to lock-in on transfer for three years from the grant date. The market price of shares of the company on the grant date is 21 60 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at Rs. 56 per share.

On 30th April, 2010, 400 employees accepted the offer and paid Rs. 50 per share purchased. Nominal value of each

share is Rs. 10. Record the issue of share in the books of the company under the aforesaid plan. Q 7. Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2008 for Rs. 20, depending upon the

employees at the time of vesting of options. The market price of the share is Rs. 50. These options will vest at the end of year 1 if the earning of Choice Ltd. increases 16%, or it will vest at the end of the year 2 if the average earning of two years increases by 13%, or lastly it will vest at the end of the third year if the average earning of 3 years will increase by 10%. 5,000 unvested options lapsed on 31.3.2009. 4,000 unvested options lapsed on 31.3.2010 and finally 3,500 unvested options lapsed on 31.3.2011.

Following is the earning of Choice Ltd.: Year ended on Earning (in %) 31.3.2009 14% 31.3.2010 10% 31.3.2011 7%



850 employees exercised their vested options within a year and remaining options were unexercised at the end of the contractual life. Pass Journal entries for the above.

Q 8. Following is the Balance Sheet of M/s Competent Limited as on 31st March. 2012: Equity and Liabilities Rs. Shareholders Funds Equity Shares of Rs. 10 each fully paid 12.50,000 Revenue Reserve 15,00,000 Securities Premium 2,50.000 Profit & Loss Account 1,25,000 Non Current Liabilities 12% Debentures 18,75,000 Unsecured Loans 10,00,000 Current Liabilities 16,50,000 Total 76,50,000 Assets Rs. Non Current Assets Fixed Assets 46,50,000 Current Assets 30,00,000 Total 76,50,000 The Company wants to buy back 25.000 equity shares of Rs. 10 each, on 1st April. 2012. at Rs. 20 per share. Buy

back of shares is duly authorized by its articles and necessary resolution passed by the company towards this. The payment for buy back of shares will be made by the company out of sufficient bank balance available as a part of Current Assets.

Comment with your calculations, whether buy back of shares by company is within the provisions of the Companies

Act, 1956. If yes, pass necessary journal entries towards buy back of shares and prepare Balance Sheet after buy back of shares.

Q 9. On 1st April 2012, a company offered 100 shares to each of its 400 employees at Rs. 25 per share. The employees

are given a month to accept the shares. The shares issued under the plan shall be subject to lock-in to transfer for three years from the grant date i.e. 30th April. 2012. The market price of shares of the company on the grant date is Rs. 30 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at Rs. 28 per shares. Upto 30th April, 2012, 50% of employees accepted the offer and paid Rs. 25 per share purchased. Nominal value of each share is Rs. 10. Record the issue of shares in the books of the company under the aforesaid plan.

Q 10. ABC Ltd. came up with public issue of 3.00,000 Equity Shares of Rs. 10 each at Rs. 15 per share. P. Q and R took

underwriting of the issue in 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 firm underwriting. The market applications from public

were received as under: P 60,000 Q 50,000 R 60.000 Compute the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit

of firm underwriting is not given to individual underwriters.



Chapter 8 – Buy Back of Shares Illustration-1

ABCD Ltd. issued 4,00,000 shares of Rs. 10 each. The balance in its Securities Premium Account and General Reserve Account were Rs. 40,00,00,000 and 50,00,00,000, respectively. The company bought back 1,00,00,000 shares at a price of Rs. 30 each ad issued cheques for this purpose from its bank account. Ans.:

In the Books of Y Ltd.

Journal

Date Particulars L.F. Debit Rs. Credit Rs.

? Equity Share Capital A/c (1,00,00,000 x Rs.10) Dr. Securities Premium A/c (1,00,00,000 x Rs.20) Dr. To equity Shareholders A/c (1,00,00,000 x Rs.30) (1,00,00,000 shares were bought back @ Rs. 30 as per Special Resolution of the Board)

10,00,00,000 20,00,00,000

30,00,00,000

Equity shareholders A/c Dr. To Bank A/c (Authorised paid to Equity Shareholders A/c)

30,00,00,000 30,00,00,000

Securities Premium A/c Dr. To Capital Redemption Reserve A/c (an amount equal to the nominal share of share transferred to Capital Redemption Reserve A/c)

10,00,00,000 10,00,00,000

Illustration-2

X Ltd. issued 2,00,000 Equity shares of Rs. 10 each. It wanted to buy back 40,000 equity shares at par. It issued 8% 4,000, Preference Shares of Rs. 100 each, the proceeds being utilized for the purpose of buy-back. Expenses relating to the buy back. Expenses relating to the buy-back amounted to Rs. 25,000. Show the entries. Ans.:


Journal


? Bank A/c (4,000 x Rs. 100) Dr. To 8% Pref. Share Capital A/c (4,000, 8% Pref. Shares of Rs. 100 each issued at par as per special resolution dated…)

4,00,000

4,00,000

Equity share Capital A/c (40,000 x Rs. 10) Dr. To Equity Shareholders A/c (40,000 equity shares are bought back at par as per special resolution dated…)

4,00,000

4,00,000

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders)

4,00,000

4,00,000

Buy Bank Expenses A/c Dr. To Bank A/c (Buy Back expenses paid.)

25,00,000

25,00,000

Profit and Loss A/c Dr. To Buy Bank Expenses A/c (Bank Expense A/c transferred to Profit and Loss A/c)

25,00,000

25,00,000

Buy-back of shares (at a premium) out of fresh issues and free reserve



Illustration-3

Y Ltd. presented the following Balance Sheet as on 31.12.2007:

Balance Sheet As at …………..


Paid-up Capital Sundry Assets 14,70,000

1,00,000 Equity shares of Rs. 10 each fully paid

10,00,000

General Reserve A/c 1,00,000

Profit & Loss A/c 70,000

Securities Premium 2,00,000

Capital Reserve A/c 50,000

Other Liabilities 50,000

14,70,000 14,70,000

On 1.1.2008 the company bought back 25,000 equities shares @ Rs. 20 each. The company issued 2,000, 10% preference shares of Rs. 100 each for the purpose. Show the entries. Ans.: Working

Rs. Amount required for buy-back of 25,000 equity shares at Rs. 20 each = 25,000 x Rs. 20 = 5,00,000 Less: Out of the proceeds of 2,000, 10% Preference Shares @ Rs. 100 = 2,00,000 To be met from Securities Premium, General Receive 3,00,000 Out of Rs. 3,00,000 Rs. 50,000 are required for Capital sum for buy-back and Rs. 2,50,000 required for premium.


Journal

Date Particulars L.F. Debit Credit

?

Bank A/c Dr. To 10% Pref. Share Capital A/c (2,000, 10% Pref. Shares of Rs. 100 each issued for buy-back as per special resolution dated…)

Rs. 2,00,000

Rs.

2,00,000

Equity share Capital A/c (25,000 x Rs. 10) Dr. Securities Premium A/c Dr. General Reserve A/c Dr. To Equity Shareholders A/c (25,000 x Rs. 20) (25,000 equity shares were are bought back @ Rs. 20 per share as per special resolution dated…)

2,50,000 2,00,000 50,000

5,00,000

? Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders)

4,00,000

4,00,000

Profit and Loss A/c Dr. To Capital Redemption Reserve A/c (General Reserve transferred to Capital Redemption Reserve.)

50,000

50,000

Buy-back of shares (at a discount) out of fresh issue and free Reserve Illustration-4

Long Ltd. issued 1,00,000 equity shares of Rs. 10 each, of which 20,000 shares were bought back @ Rs.9 per share. The company issued 1,000, 8% Preference shares of Rs. 100 per share. The company had Rs. 50,000 in Securities Premium A/c and Rs. 80,000 in General Reserve A/c. Show the entries.




Journal


Bank A/c (1,000 x Rs. 100) Dr. To 8% Pref. Share Capital A/c (1,000, 8% Pref. Shares of Rs. 100 each issued for buy-back as per special resolution dated…)

1,00,000

1,00,000

Equity share Capital A/c (20,000 x Rs. 10) Dr. To Equity Shareholder A/c (20,000 x Rs. 9) Dr. Capital Reserve A/c Dr. (20,000 equity shares were are bought back at a discount of Rs.1 per share as per special resolution dated…)

2,00,000

1,80,000 20,000

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders A/c)

1,80,000

1,80,000

Securities Premium A/c Dr. General Reserve A/c Dr. To Capital Redemption Reserve A/c (An amount equal to the nominal value (Rs. 2,00,000 – 1,00,000 to be transferred to Capital Redemption Reserve.)

50,000 50,000

1,00,000

Redemption of Pref. Shares and buy-back of equity shares out of free reserve Illustration-5

Kuber Ltd. furnishes you with the following Balance Sheet as at 31st March 2008:

Particulars Rs. Rs.

Source of Funds (In crores) (In crores)

Share Capital

Authorised 100

Issue

12% Redeemable Pref. Shares of Rs. 100 each fully paid 75

Equity shares of Rs. 10 each 25 100

Reserve of Surplus

Capital Reserve 15

Add: Securities Premium 25

Add: Revenue Reserve 260 300

Funds Employed in: 400

Fixed Assets: Cost 100

Less: Provision for Depreciation 100 Nil

Investment at cost (Market Value Rs. 40 crores) 100

Current Assets 340

Less: Current Liabilities 40 300

400

The company redeemed the preference shares on 31

st April 2008. It also bought back Rs. 50 lakh equity shares of Rs.

10 each at Rs. 50 per share. The payments for the above were made out of the huge bank balances, which appeared as part of current assets. Pass journal entries to record the above and prepare the Balance Sheet.

Ans.: Workings

1. Funds required: Rs. For redemption of Preference Shares 75 crores For buy-back of equity shares (50 lakh x Rs. 50) 25 crores



Since there was no first issues the entries amount to be taken from Revenue Reserve both for the purpose of creating Capital Redemption Reserve for the purpose of redemption of Pref. Shares as well as the problem of Buy-back of equity shares.


Journal


2008 Apr.1

12% Red. Pref. Share Capital A/c Dr. To Red. Pref. Shareholders A/c (Amount payable to Red. Pref. Shareholders)

75

75

Revenue Reserve A/c Dr. To Capital Redemption Reserve A/c Capital Reserve A/c . (Capital Redemption reserve is created out of Revenue Reserve for the purchase of redemptions of Pref. shareholders.)

75

75

Red. Pref. Shareholders A/c Dr. To Bank A/c (Amount paid to Red. Pref. Shareholders)

75

75

Equity share Capital A/c (50 lakh x Rs. 10) Dr. Securities Premium A/c (50 lakh x Rs. 40) To Equity Shareholder A/c (50 lakh equity shares of Rs. 10 each were are bought back at Rs. 50 per share as per special resolution dated…)

5 20

25

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders for back.)

25 25

Revenue Reserve A/c Dr. To Capital Redemption Reserve A/c (A sum equal to nominal value of equity shares transferred to Capital Redemption Reserve out of Revenue Reserve.)

5 5

Balance Sheet As at April, 1, 2008……

(Rs. In crores)


Authorised Share Capital 100 Fixed Assets 14,70,000

Issued & paid-up Fixed Asset at Cost. 100

200 Equity Share of Rs. 10 each 20 Less: Provision for Dep. 100

Reserve and Surplus Nin

Capital Red. Reserve A/c 80 Investment (M.V. Rs. 400) 100

Securities Premium A/c (25-20) 5 Current Assets, Loans and Advances

Reserve Revenue A/c (260-80) 180 Current Assets (Rs.340 – Rs. 100) 240

Capital Reserve 15 Misc. Expenditure Nil

Secured Loans Nin

Unsecured Loan Nil

Current Liabilities & Provisions

Current Liabilities 40

340 340

Buy-back of equity shares out of fresh issue of Pref. Shares, Sale of investment, issue of Bonus Shares etc. Illustration-6

On 31st March 2008, following was the Balance Sheet of New Era Ltd.:

Balance Sheet As at 31

st March 2008


Equity Share Capital Machinery 3,600

(fully paid up shares of Rs. 10 each) 2,400 Furniture 452



Securities Premium 350 Investments 148

General Reserve 930 Stock 1,200

Profit and Loss A/c 340 Debtors 520

12% Debentures 1,500 Cash at Bank 740

Sundry Creditors 750

Sundry Provision 390

6,660 6,660

On 1

st April 2008, the company announced the buy-back of 25% of its equity shares Rs. 15 per share. For the purpose,

it sold all its investment for Rs. 150 lakhs and issued 2,00,000, 14% Pref. shares of Rs. 100 each at par-the entire amount entire amount being payable in application. The issue was fully subscribed. The company achieved the target of the buy-back. Later, the company issued one fully paid-up equity share of Rs. 10 by way of bonus share for every four equity shares held by the equity shareholders. Show Journal entries for all the transactions including cash transactions.

Ans.: Funds required for buy-back Rs. (in lakhs)

For buy-back of equity shares, 2,400 x

600

Less: Proceeds from Issue of 14% Pref. Shares 200 400


Journal


2008 Apr.1

Bank A/c Dr. To 14% Pref. Share Application A/c (Application money of 2,00,000, 14% Pref. Share of Rs. 100 each transferred to Pref. Share Capital as per special resolution dated…..)

200

200

Bank A/c Dr. To Investment A/c “ Profit and Loss A/c (Investment sold at a loss.)

150

148 2

14% Pref. Share Application A/c Dr. To 14% Pref. Share Capital A/c (Application money of 2,00,000, 14% Pref. Share of Rs. 100 each transferred to Pref. Share Capital as per Board’s resolution dated…..)

200

200

Equity share Capital A/c Dr. Securities Premium A/c Dr. To Equity Shareholder A/c (25% of the shares were bought back @ 15 per share’s as per Board’s Resolution dated)

600 300

900

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders against buy-back of shares)

900 900

General Reserve A/c Dr. To Capital Redemption Reserve A/c (A sum equal to nominal value of buy-back of shares transferred to Capital Redemption Reserve out of General Reserve)

400 400

Capital Redemption Reserve A/c Dr. Securities Premium A/c Dr. To Bonus to Shareholders A/c (Bonus shares are issued in the ratio of 1:4 as per Shareholders’ Resolution………..)

400 50

450



Bonus to Shareholders A/c Dr. To Equity Share Capital A/c Bonus shares issued in the ratio of 1:4 as per Board’s Resolution date……….)

450 450

Working No. of Bonus shares issued Shareholders offered for buy-back of Rs. 180 lakhs, as the ratio of issuing bonus is 1:4. 180 No. of bonus shares will be 45 lakh equity shares (i.e. x 1) 4 So amount of bonus will be : Rs. 45 lakh x Rs. 10 = Rs. 450 lakhs. Redemption of Preference Shares and Buy-back of Equity Share (at a premium out of free reserves). Illustration-7

Delight Ltd. furnishes the following Balance Sheet as on 31.23.2008

Balance Sheet As at 31st

March 2008


Authorised Capital 125 Fixed Assets 150

Issued and Subscribed Capital: Investments 120

13% Redeemable Preference Current Assets,

Shares of Rs. 100 each 75 Loans and Advances 295

Equity Shares of Rs. 10

(+)Each, fully paid 50 125

Reserve and Surplus

Capital Reserve 50

(+)Revenues Reserve 250 300

Current Liabilities and

Provision 140

565 565

The company purchased its own 100 lakh equity shares of Rs. 10 each at Rs. 25 per share on 1.4.2008 out of free reserves.The company also redeemed the preference shares on that date. The payments for the above were made from bank account, which formed part of current assets. Show the necessary journal entries to record the above and prepare the Balance Sheet as it would appear after the aforesaid transactions. CS (Inter) Dec. 2002-Adapted Ans.:

Funds required100 lakh equity shares @ Rs. 25 = 25 crores [includes 10 crores for capital and For redemption of Preference Share 75 crores Rs. 15 crores for premium] 100 crores


Journal


?

Bank A/c (4,000 x Rs. 100) Dr. To 8% Pref. Share Capital A/c (4,000, 8% Pref. Shares of Rs. 100 each issued at par as per special resolution dated…)

4,00,000

4,00,000

Equity share Capital A/c (40,000 x Rs. 10) Dr. To Equity Shareholders A/c (40,000 equity shares are bought back at par as per special resolution dated…)

4,00,000

4,00,000



Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders)

4,00,000

4,00,000

Buy Bank Expenses A/c Dr. To Bank A/c (Buy Back expenses paid.)

25,00,000

25,00,000

Profit and Loss A/c Dr. To Buy Bank Expenses A/c (Bank Expense A/c transferred to Profit and Loss A/c)

25,00,000

25,00,000

In the Books of Delight Ltd.

Journal

( Rs. in crores)


2008 April 1

Equity share Capital A/c Dr. Revenue Reserve A/c Dr. To Equity Shareholders A/c (100 lakh equity shares of Rs. 10 each at Rs. 25 each were bought back.)

10 15

25

13% Redeemable Preference Share Capital A/c Dr. To Redeemable Preference Shareholders A/c (Amount due on redemption of Preference Shareholders A/c.)

75

75

Equity shareholders A/c Dr. Redeemable Preference Shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders on buy-back of Equity Shares and also to Preference Shareholders on redemption of preference shares.)

25 75

100

Revenue Reserve A/c [10 + 75] Dr. To Capital Redemption’s Reserve A/c (A sum equal to the nominal value of buy-back of equity shares and for redemption of preference shares transferred.)

85

85

Balance Sheet (Post Buy-Back) As at 31

st March 2008


Authorised Capital Fixed Assets 150

Authorised: 125 Investments 120

Issued and Subscribed: Current Assets,

Eq. Sh. Of Rs. 10 each Loans and Advances [295-100] 195

Fully called up [50 – 10] 40

Reserves and Surplus:

Capital Redemption Reserve 85

Capital Reserves 50

Revenue Reserve [250-100] 150

Secured Loan

Unsecured Loan

Current Liabilities and provisions 140

465 465

Buy-back out of the proceeds of Debentures, Sale of Investment, maintaining minimum balance in General Reserve Illustration-8

The Balance Sheet of Modern Marbles Ltd. as at 31st March 2003 stood as;




March 2003


Share Capital of Rs. 10 each 50,00,000 Fixed Assets 66,00,000

General Reserve 6,50,000 Investments 18,00,000

Securities Premium 5,40,000 Stock 11,87,000

Profit and Loss A/c 3,75,000 Sundry Debtors 9,60,000

12% Debentures 25,00,000 Cash and Bank Balance 7,10,000

Term Loan 13,25,000 50,00,000

Current Liabilities & Provisions 8,67,000

1,12,57,000 1,12,57,000

The shareholders adopted the resolution on the date of the above-mentioned balance sheet to: (i) Buy-back 20% of the paid-up Capital @ Rs. 15 each; (ii) Issue 13% Debentures of Rs. 5,00,000 for Rs. 6,50,000 at a premium of 10% to finance the buy-back of shares; (iii) Maintain a balance of Rs. 3,00,000 in General Reserve Accounts; and (iv) Sell investment worth Rs. 8,00,000 for Rs. 6,50,000.

You are required to pass the necessary journal entries to record the above transactions and prepare the Balance Sheet immediately after the buy-back. CS (Inter) Dec. 2003 Ans.:

In the Books of Modern Marbles Ltd.

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.

Bank A/c Dr. Profit and Loss A/c Dr. To Investments A/c (Investment was sold at a loss.)

6,50,000 1,50,000

.

8,00,000

Bank A/c Dr. To 13% Debenture A/c Dr. “ Securities Premium A/c (13% Debenture were issued at premium of 10% for the purpose of buy-back of equity shares as per Board’s Resolution date…)

5,50,000

5,50,000 50,000

Equity share Capital A/c (1,00,000 x Rs. 10) Dr. Securities Premium A/c (1,00,000 x Rs. 5) Dr. To equity shareholders A/c (20% of the equity shares wer bought back at a premium of Rs. 5 per share as per Board’s Resolution dated…)

10,00,000 5,00,000

15,00,000

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders for buy-back of 10,00,000 sharess @ Rs. 15 per share.)

15,00,000

15,00,000

General Reserve A/c Dr. Profit and Loss A/c Dr. To Capital Redemption Reserve A/c (A sum equal to full value of shares bought back transferred to Capital Redemption Reserve Account out of General Reserve and Profit and Loss A/c.)

3,50,000 1,50,000

5,00,000


st………..


Share Capital Fixed Assets 60,00,000

Authorised: ……….. Investments 10,00,000

Issued and Paid-up Current Assets,

4,00,000 shares of Rs. 10 each Loans and Advances

Fully paid up 40,00,000 Stock 11,87,960



Reserve and Surplus: Sundry Debtors 9,60,000

General Reserves A/c 3,00,000 Cash and Bank 4,10,000

Profit and Loss A/c 75,000

Securities Premium A/c 90,000

Capital Redemption Reserve A/c 5,00,000

Secured Loan

13% Debentures 5,00,000


Unsecured Loan

Term Loan 13,25,000

Current Liabilities and provisions 8,67,000

1,01,57,000 1,01,57,000

Workings Dr. Cash and Bank A/c Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 7,10,000 By Equity Shareholders A/c 15,00,000

To Investments A/c 6,50,000 By Balance C/d 4,10,000

To 13% Debenture A/c 5,00,000

To Securities Premium A/c 50,000

19,10,000 19,10,000

Note: As a matter of prudence Securities Premium is adjusted against the premium on buy-back of share and Capital Redemption Reserve is created out of General Reserve (Rs. 6,50,000 – Rs. 3,00,000) Rs. 3,50,000 and P & L A/c Rs. 1,50,000 i.e. the balance (Rs. 5,50,000 – Rs. 3,50,000) to maintain the nominal value of share bought-back. Maximum Premissible Limit of Buy-Back of Shares The following two points are worth noting: (a) The nominal value of Equity Shares which are to be bought-back must not exceed 25% of Paid-up Shares Capital and Free Reserve, or, the amount of buy-back must be less than 25% of Paid-up Capital and Free Reserve and Securities Premium

Paid-up Capital:

Paid-up Equity Share Capital *** Paid-up Preference Share Capital ___*** *** Free Reserve: General Reserve A/c *** Profit and Loss A/c *** Dividend Equalisation Reserve *** Dividend Fluctuation Reserve *** Sinking Fund ___*** Etc. ___*** *** (b) Post Buy-back Debt-Equity Ratio: Debts Secured Debts *** Unsecured Debts ___*** ***



Paid-up Capital and Reserve (after buy-back) ***

Debt-Equity Ratio =

= Must be 2 or less.

That is , Total Debts must not be more than Twice of Paid-up Capital + Free Reserves Applying Maximum-Minimum criteria for buy-back Illustration 9

X Ltd. presented the following Balance Sheet as on 31st March 2008:

Balance Sheet As at 31

st March 2008


80,000 equity Share Capital of Rs. 10 each 8,00,000 Fixed Assets 17,00,000

General Reserves A/c 8,00,000 Investments 7,00,000

Profit and Loss A/c 2,00,000 Current Assets, 16,00,000

Securities Premium A/c 2,00,000 (Including Cash and Bank Rs.

Secured Loan 10,00,000 8,00,000)

Unsecured Loan 2,00,000

Current Liabilities 5,00,000

37,00,000 37,00,000

On 1.4.2008, the company wants to buy-back 16,000 equity shares of Rs. 10 each at Rs. 25 per share. Ascertain whether the company can do so. Show the entries and the Balance Sheet after buy-back. Ans.: Workings

The company wants to purchase 16,000 equity shares at Rs. 25 each, i.e., at a premium of Rs. 15 per share. Rs. .’. Nominal value of 16,000 share x Rs. 10 1,60,000 Add: Premium on 16,000 shares x Rs. 15 2,40,000 4,00,000

Condition 1

Buy-back of shares must not exceed 25% of paid-up and Free Reserves; which is calculated as: Rs. Paid-up Capital 8,00,000 Free Reserves: General Reserve A/c 8,00,000 Profit and Loss A/c 2,00,000 Securities Premium A/c 2,00,000 12,00,000 20,00,000

.’. Maximum amount of buy-back will be Rs. 20,000 x 25% = Rs. 5,00,000 .’. Since the company buy-back is less than this amount, so it is allowed i.e., first criterion is satisfied. Condition 2

Post Buy-back Debt-Equity Ratio must be 2 or more than that



Total Debts Rs. Secured Loans 10,00,000 Unsecured Loans 2,00,000 12,00,000

Equity (after buy-back will be) Rs. 20,00,00 – Rs. 4,00,000 = Rs. 16,00,000 Total Debt Rs. 12,00,000 .’. Debt-Equity Ratio = 0.75:1 Equity + Free Reserves Rs. 16,00,000 i.e. it is less than 2. So, second criterion is also satisfied. Since both the conditions are satisfied, as it is within the limit, the company is allowed to buy-back 16,000 shares.

In the Books of X Ltd.

Journal


Equity share Capital A/c (16,000 x Rs. 10) Dr. Securities Premium Dr. General Reserve A/c Dr. To equity shareholders A/c (16,000 X Rs. 25) (16.000 equity shares of 10 each were bought back at Rs. 25 per share as per Board’s Resolution dated…)

1,60,000 2,00,000

40,000

.

4,00,000

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders for buy-back.)

4,00,000

4,00,000

General Reserve A/c Dr. To Capital Redemption Reserve A/c (An amount equal to the nominal value of shares bought-back transferred to Capital Redemption Reserve from General Reserves)

1,60,000

1,60,000

Note: Funds Required Rs. 16,000 Equity Shares x Rs. 10 = 1,60,000 Add: 16,000 Equity Shares x Rs. 15 (as Premium) 2,40,000 4,00,000

Out of the premium amount of Rs. 2,40,000, Rs. 2,00,000 is taken from Securities Premium Account and the Balance Rs. 40,000 to be taken from General Reserve.

Balance Sheet (Post Buy-Back) As at April 1, 2008


Share Capital Fixed Assets 14,00,000

Authorised: ……….. Investments 7,00,000

Issued and Paid-up Current Assets,

64,000 Quity shares A/c Rs. 10 each Loans and Advances

6,40,000 Sundry Debtors 12,00,000

Reserve and Surplus: (Rs. 16,00,000 – Rs. 4,00,000)

General Reserves A/c 6,00,000 Mis. Expenditures Nil

(8,00,000 – Rs. 40,000 – Rs. 1,60,000)

Profit and Loss A/c 2,00,000

Securities Premium A/c Nil

(Rs. 2,00,000 – Rs. 2,00,000)


Secured Loan 10,00,000

Unsecured Loan 2,00,000



Current Liabilities and provisions 5,00,000

33,00,000 33,00,000

Ascertaining maximum limit of buy-back. Illustration 10

Sourav Ltd. presented the following Balance Sheet on 31.3.2008.


March 2008


1,00,000 equity Share Capital of Rs. 10 each 10,00,000 Plant and Machinery 6,00,000

General Reserves 5,00,000 Land and Building 5,00,000

Profit and Loss A/c 4,00,000 Investments 4,00,000

Securities Premium A/c 1,00,000 Stock 6,00,000

12% Debentures 5,00,000 Debtors 3,00,000

Bank Loan (Unsecured) 3,00,000 Cash and Bank 7,00,000

Creditors 3,00,000

31,00,000 31,00,000

The company wants to buy-back maximum number of equity shares allowed as per the provision of the Companies Act at Rs. 24 per share. Ascertain the maximum limit that the company can buy-back and show the entries. Show also the post buy-back Balance Sheet. Ans.:

For ascertaining the maximum limit the following two conditions must be satisfied: (a) Buy-Back of shares must not exceed 25% of paid-up capital and free Reserves as:

Rs. Paid-up Capital 10,00,000 Free Reserves: General Reserve A/c 5,00,000 (+) Profit and Loss A/c 4,00,000 (+) Securities Premium A/c 1,00,000 10,00,000 20,00,000

.’. Maximum Limit @ 25% on Rs. 20,00,000 = Rs. 5,00,000 So, the nominal value of equity shares which can be bought back is 25% of Rs. 10,00,000, i.e., Rs. 2,50,000, or 25,000 shares. As per the provisions of the Companies Act, the company can buy-back equity shares to the extent of Rs. 2,50,000, which is lower than Rs. 5,00,000. (b) Post Buy-Back Debt-Equity Ratio: Total Debts Rs. 12% Debentures 5,00,000 Bank Loan 3,00,000 8,00,000

Equity (after buy-back) will be = Rs. 20,00,000 – Rs. 6,25,000 = Rs. 13,75,000

.’. Debt-Equity Ratio =

=

= 0.5818



Hence, it is within the allowable limit. .’. Fund Required

Rs. .’. Nominal value 25,000 share Rs. 10 = 2,50,000 Add: Premium on 25,000 shares @ Rs. 15 = 3,75,000 6,25,000

Out of the premium of Rs. 3,75,000; Rs. 1,00,000 to be taken from Securities Premium A/c and balance from General Reserve i.e., Rs. 2,75,00.

In the Books of Sourav Ltd.

Journal


Equity share Capital A/c (25,000 x Rs. 10) Dr. Securities Premium A/c Dr General Reserve A/c Dr. To equity shareholders A/c (25,000 Rs. 25) (25,000 equity shares were bought back at Rs. 25 per share as per special Resolution dated…)

2,50,000 1,00,000 2,75,000

.

6,25,000

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders for buy-back.)

6,25,000

6,25,000

General Reserve A/c Dr. Profit and Loss A/c Dr. To Capital Redemption Reserve A/c (A sum equal to nominal value of shares bought-back transferred to Capital Redemption Reserve Account from General Reserve and Profit and Loss A/c.)

2,25,000 25,000

2,50,000

Balance Sheet (Post Buy-Back) As at April 1, 2008


Share Capital Fixed Assets

Authorised: ……….. Plant and Machinery 6,00,000

Issued and Paid-up Land and Building 5,00,000

75,000 shares of Rs. 10 each 7,50,000 Investments 4,00,000

Reserve and Surplus: Current Assets,

General Reserves A/c Loans and Advances

(Rs. 5,00,000 – Rs. 2,75,000 – Rs. 2,25,000) Nil Stock 6,00,000

Profit and Loss A/c 3,75,000 Debtors 3,00,000

(Rs.4,00,000 – Rs. 25,000) Cash at Bank 75,000

Securities Premium A/c Nil (Rs. 7,00,000 – Rs. 6,25,000)

(Rs.1,00,000 – Rs. 1,00,000)


Secured Loan


Unsecured Loan

Bank Loan 3,00,000

Current Liabilities and provisions

Creditor 3,00,000

24,75,000 24,75,000

Ascertaining maximum permissible limit of buy-back, sale of investment, preference shares. Illustration-11

The Balance Sheet of BXT as on 31st March 2005 was:



Balance Sheet (Post Buy-Back) As at 31st

March, 2005



Equity Share of Rs. 10 each Land and Building 15.50

Fully paid-up 20.00 Plant and Machinery 9.00

Reserve and Surplus: Investments

General Reserves 7.00 Corporate Securities 4.00

Securities Premium 5.00 Current Assets

Profit and Loss A/c 8.00 Stock 7.00

Secured Loans Debtors 10.00

10% Debentures 6.00 Cash at Bank 12.00

Unsecured Loans

Term Loans 4.00


Trade Creditor 5.00

Accruals 2.50

57.50 57.50

The company has decided to buy back the maximum number of equity shares permissible under the law and completed the necessary formalities in this respect. They buy-back is to take place at price of Rs. 20 per shares. Pass necessary journal entries and prepare the post buy-back Balance Sheet.

CS – (Inter) Stage II, Dec. 2005 Ans.:

In the Books of BXT Ltd.

Journal


Equity share Capital A/c Dr. Securities Premium A/c Dr To equity shareholders A/c (Amount payable to equity shareholders for buy-back)

5,00,000 5,00,000

10,00,000

Equity shareholders A/c Dr. To Bank A/c (Amount paid to Equity Shareholders.)

10,00,000 10,00,000

Profit and Loss A/c Dr. To Capital Redemption Reserve A/c (A sum equal to nominal value of shares bought-back transferred to Capital Redemption Reserve A/c)

5,00,000 5,00,000


st March, 2005



Authorised: ……………. Land and Building 15,50,000

Issued and Paid-up Plant and Machinery 9,00,000

1,50,000 Equity shares of Investments

Rs. 10 each fully paid 15,00,000 Corporate Securities 4,00,000

Reserve and Surplus: Current Assets loans & Advance

General Reserves A/c 7,00,000 Stock 7,00,000

Securities Premium A/c Nil Debtors 10,00,000

Profit and Loss A/c 3,00,000 Cash at Bank 2,00,000

Capital Redemption Reserve A/c 5,00,000 (Rs. 12,00,000 – Rs. 10,00,000)

Secured Loans Misc. Expenditure nil


Unsecured Loans



Term Loans 4,00,000


Trade Creditor 5,00,000

Accruals 2,50,000

47,50,000 47,50,000

Workings

Conditions 1

Buy-back must not exceed 25% of paid-up capital and Free Reserves

Paid-up Capital & Free Reserve Paid-up Capital 20,00,000 General Reserve 10,00,000 Securities Premium 5,00,000 Profit and Loss A/c 5,00,000 20,00,000

.’. 25% of Rs. 40,00,000 = Rs. 10,00,000 Mamximum Limit.

Buy-back should not exceed 25% of paid-up capital in that year, i.e., Rs. 20,00,000 x 25 = Rs. 5,00,000, i.e., Buy-back

amount cannot exceed Rs. 5,00,000.

Condition 2 This is within permissible limit.

Debt-Equity Ratio

This is within permissible limit.



Chapter 9 – Issues in Financial Statements 1. Provision for Tax Q 1. The trial balance of Complex Ltd. as at 31st March, 1998, shows the following items: Particulars Dr. (Rs.) Cr. (Rs.) Advance payment of income-tax 2,20,000 Provision for income-tax for the year ended 31-3-97 1,20,000 The following further information's are given: (i) Advance payment of income-tax includes 21,40,000 for 1996-97. (ii) Actual tax liability for 1996-97 amounts to 21,52,000 and no effect for the same has so far been given in accounts. (iii) Provision for income-tax has to be made for 1997-98 for 21,60,000. You are required to prepare (a) provision for income-tax account, (b) advance payment of income-tax account, (c) liabilities for taxation account and also show, how the relevant items will appear in the profit and loss account and balance sheet of the company. Comments Most of the candidates could not approach this part of the question properly. It has been observed by the examiners that the candidates, in general, do not have knowledge of the accounting treatment of Advance Tax and Provision for Taxation.

Solution Complex Ltd.

(a) Provision for Income Tax (1997-98) Account Particulars Dr. Rs. Cr. Rs. 31.3.98 To Income-tax A/c 1,20,000 1.4.97 By Balance b/d 1,20,000 To Balance old 1,60,000 31.3.98 By Profit and Loss A/c 1,60,000 2,80,000 2,80.000 (b) Advance Payment of Income Tax Account 31.3.98 To Balance b/d 2,20,000 31.3.98 By Provision for income tax (1996-97) A/c 1,40,000 By Balance c/d 80,000 2,20,000 2,20,000 (c) Income Tax Account 31.3.98 To Advance Tax 1,40,000 31.3.98 ByProvision for Income To Balance o/d 12,000 tax A/c 1,20,000 By P&L A/c 32,000 1,52,000 1,52,000

Profit and Loss Account for the year ended 31st March, 1998 (Extracts)

Profit before Taxation (-) Taxation for the year 1,60,000 Taxation adjustment of previous year 32,000 1,92,000 Net Profit



Q 2. Prepare provision for taxation account in following cases. Assuming year ending on 31st March. 2003.

Case-I Trial Balance Dr. Cr. Provision for taxation -- 80,000 Advance tax 50,000 -- Create provision for current tax Rs. 40,000.

Case-II Trial Balance Dr. Cr. Provision for taxation -- 1,40,000 Advance tax 2,20,000 2,20,000 --- Create provision for current tax Rs. 70,000. During the year 2002-2003 income tax assessment for 1998-99 is completed at Rs. 35,000 against which provision existed Rs. 27.000 (advance tax paid for 1998-99 was 13,000) appeal was not filed with higher authorities.

Case-III Trial Balance Dr. Cr. Provision for taxation -- 2.50,000 Advance tax 1,50,000 -- Create provision for current tax Rs.1,00,000. During the year 2002-2003 income tax assessment for 1998-99 is completed at Rs. 50,000 against which amount provided was Rs. 55,000 (advance tax paid for 1998-99 was Rs. 52,000) appeal was not filed with higher authorities.

Case-IV Trial Balance Dr. Cr. Provision for taxation -- 4,50,000 Advance tax 3,00,000 --- Create provision for current tax Rs. 1,00,000. During the year 2002-2003 income tax assessment for 1998-99 is completed at Rs. 70,000 against which provision existed Rs. 50,000 (Advance tax paid for 1998-99 was 40,000). An appeal was filed with C.I.T. (appeals) against additions. Assume high probability of losing

2. Divisible Profit Q 3. Calculate amount available for dividend

Year ended 31st December (in Rs. lakhs)

No. Particulars 1996 1997 1998 Total 1. Depreciation as provided in the books 3 2 8 13 2. Depreciation chargeable under section 205 13 10 8 31 3. Profit before charging depreciation -15 -7 37 15 4. Profit after charging depreciation as in (1) -18 -9 29 2 5. profit after charging depreciation as in (2) -28 -17 29 -16 Solution Profit before Dep. Schedule II Dep. Profit 1996 -15 -13 Nil 1997 -7 -10 Nil 1998 37 -8 29



(-) Arrears of Dep. 1996 13 1997 10 23 06 Therefore profit = 6,00,000 Q 4. Calculate amount of dividend. Particulars Rs. Equity share capital (Amount called up) 10,00,000 Calls in arrears 80,000 Calls in advance 20,000 Rate of dividend 10% Solution Calculation of Dividend: = (Equity Share Capital — Calls in advance) x Rate of dividend = (10,00,000 — 80,000) x 10% = 92,000 Q 5. The Articles of Association of S Ltd. provide the following: (i) That 20% of the Profits of each year shall be transferred to Reserve fund. (ii) That an amount equal to 10% of equity dividend shall be set aside for Staff bonus. (iii) That the Balance available for distribution shall be applied. (a) In paying 14% on cumulative Preference shares. (b) In paying 20% dividend on Equity shares (c) One-third of the balance available as additional dividend on Preference shares and 2/3 as additional equity divined. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 12% on Preference shares after making provisions (i), (ii) and (iii) mentioned above. The company has issued 13,000, 14% cumulative participating preference shares of Rs.100 each fully paid and 70.000 Equity shares of Rs,10 each fully paid up. The profit for the year 2008 was 110, 00,000 and balance brought form previous year 180,000. Provide Rs.31,200 for depreciation and Rs. 80,000 for taxation before making other appropriations. Prepare Profit and Loss Appropriation A/c. Solution

Profit and Loss Account for the year ended 31st March, 2008

Particulars Rs. Particulars Rs. To Depreciation 31,200 By Profit 10,00,000 To Provision for income tax 80,000 To Net profit c/d 8,88,800 10,00,000 10,00,000 To Reserve fund 1,77,760 By Balance b/d 80,000 To Proposed preference 2,75.450 By Net profit b/d 8,88,800 dividend (1,82,000 + 93,450) To Proposed equity dividend 3,26,900 (1,40.000 + 1,86,900)



To Bonus to employees 32,690 (14,000 + 18,690) To Balance c/d 1,56,000 Total 9,68,800 Total 9,68,800 Working Note: Balance of amount available for Preference and Equity Rs. shareholders and Bonus for Employees Credit side total 968800 Less: Dr. side (177760 + 182000 + 140000 + 140000 +156000) 669760 299040 Suppose remaining balance after staff bonus is x Preference share holders will get share remaining balance =X x 1/3 = 1/3 X Equity share holders will get shares from remaining balance =Xx 2/3=2/3 X Bonus to employees = 213 X x 10/100 = 2/30 X 2/3 X + 1/3 X + 2/30 X = 299040 32 X = 8971200 X = 8971200/32 = Rs. 280350 Share of the preferences share holders = Rs. 280350 x 1/3 = Rs. 93450 Share of equity share holders = Rs. 280350 x 2/3 = Rs. 186900 Bonus to employees = Rs. 280350 x 2/30 = Rs. 18690 Q 6. The following items were extra. ted from the Balance Sheet of Xansa Ltd. as on 1st April, 2009:

Rs 13.1/2% Preference Share capital 4,00.000 Equity Share Capital fully paid up 5,00,000 Equity Share Capital 60% partly paid up 3,00,000 Securities Premium 7,00,000 15% Debentures 10,0 00 Profit before interest on debentures and before payment: of tax @ 30% is Rs 11,50,000 for the year ended 31st March, 2010. The Board of Directors of the Company proposed a dividend of 15% on equity capital and capitalization of profits for making partly paid-up shares into fully paid up. Corporate dividend tax is payable @ 15%. Pass the necessary Journal entries to incorporate the Board's recommendations and show how the items concerned would be shown on the liabilities side of the Balance Sheet of Xansa Ltd. as on 31st March, 2010. Solution

Journal Entries

Particulars Dr. Rs Cr. Rs Profit and Loss A/c Dr 1,50,000 To Debenture Interest A/c 1,50,000 (Being transfer of debenture interest to profit and loss account)



Profit and Loss A/c Dr. 3,00,000 To Provision for Taxation A/c 3,00,000 (Being provision for tax made @ 30% on 10,00,000 i.e. 11,50,000 — 1,50,000) Profit and Loss A/c Dr. 7,00,000 To Profit and Loss Appropriation A/c 7,00,000 (Being transfer of net profit to profit and loss appropriation account) Profit and Loss Appropriation A/c Dr. 54,000 To Proposed preference share dividend A/c 54,000 (Being preference share dividend payable @ 13 1/2 % on Rs 4,00,000) Profit and Loss Appropriation A/c Dr. 1,20,000 To Proposed equity share dividend A/c 1,20,000 (Being equity share dividend payable @. 15% on Rs 8,00,000) Profit and Loss Appropriation A/c Dr. 26,100 To Provision for corporate dividend tax A/c 26,100 (Being provision made for corporate dividend ax@ 15% on total dividend of Rs 1,74,000) Profit and Loss Appropriation A/c Dr. 2,00,000 To Equity Share Capital A/c 2,00,000 (Being partly paid equity shares converted to fully paid up, by capitalization of profit)

Balance Sheet (Extracts) as on 31st March, 2010

Share Capital: Rs 13%% preference share capital 4,00,000 Equity share capital fully paid up - 10,00,000 Reserves and Surplus: Securities Premium 7,00,000 Profit and Loss Appropriation Account 2,99,900 Secured Loan: 15% Debentures 10,00,000 Provisions: Corporate Income-tax 3,00,000 Proposed Dividend: Preference 54,000 (+) Equity 1,20,000 1,74,000 Corporate Dividend Tax 26,100 Note: it is assumed that debenture interest has been paid.



Q 7. (a) A company can declare and pay dividend out o distribution. Interpret the distributable profit. A company has earned profit before depreciation Rs 80 lakhs, depreciation as per books is Rs 126 lakhs and depreciation as per section 123 of the Companies Act works out to Rs 62 lakhs. Compute the maximum amount that can be paid as dividend for the relevant accounting year. (b) A joint stock company, earning adequate profits, has four part-time directors and a whale time director. What is

the maximum managerial remuneration it can pay to its— (i) Part-time directors taken together and (ii) to whole time director? What will be your Solution if the company had only part-time directors and no whole-time

director? Solution (a) Distributable profits mean profit arrived at after providing for depreciation on assets, not only for the year in which the profits are earned but also for any arrears of depreciation of the past years, calculated in the manner prescribed by Section 123 of the Companies Act, 2013. Computation of maximum amount that can be paid as Dividend:

(Rs in lakhs) Profit before depreciation 80.00 Less: Depreciation as per Section 123 62.00 Distributable profit 18.00 Therefore, maximum amount which can be paid as dividend would be Rs 18.00 lakhs. (b) A joint stock company, earning adequate profits and having part-time directors as well as whole-time directors can pay the maximum managerial remuneration to them as follows: (i) The total remuneration to part-time directors taken together should not exceed 1% of the net profit of the

company, if the is a managing or whole-time director. (ii) The total remuneration to a whole-time director should not exceed 5% of the net profits of the company.

If there are, only part-time directbrs and no managing or Whole-time director in the company, the maximum managerial remuneration paid to them should not exceed 3% of the net profits of the company.

Note.— With the approval of the Central Government, the Above limits can be exceeded.

3. Director Remunerations Q 8. The following it the draft Profit & Loss Account of the Paper Company of India Ltd. for the year ending 31st March, 1999:

Particulars Rs. Particulars Rs. Administrative, Selling Balance b/d 3,12,632 Finance Expenses 5,73,804 Balance from Trading National Defense Fund 18,800 Account 38,35,414 Directors' fees 23,484 Int. on Investment 10,964 Interest on Debentures 2,824 Transfer fees 37 Managing Directors Profit on sale of Remuneration 1,40,000 Plant: Depreciation on fixed assets 4,69,713 Amount Provision for taxation 11,40,000 Realized 40,000



General reserve 5,00,000 Written Debentures Sinking Fund 4,800 Book value 31,000 9,000 Investment Revaluation Reserve 9,800 (Cost 35,000) Balance c/d . 12,84,822 Total 41,68,047 Total 41,68,047 As an auditor you are required to comment on the managerial remuneration. Solution

Net Profit (bat c/d) 12,84,822 (+) mg. Director's remuneration 1,40,000 (+) Provision for taxation 11,40,000 (+) General reserve 5,00,000 (+) Debentures sinking fund 4,800 (+) Investment Revaluation Reserve 9,800 (+) Capital profit 5,000 (+) Op profit 3,12,632 (+) Depreciation Charged 4,69,173 (+) Depreciation as per schedule XIV (assumed) 4,69,173 27,61,790 Remuneration = 3,03,797 Q 9. The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 1999:

Particulars Rs. Particulars Rs. Administrative, Selling and distribution Balance b/d 5,72,350 expenses 8,22,542 Balance from Trading Donation to charitable funds 25,500 Account 40,25,365 Directors fees 66,750 Subsidies received from Interest on debentures 31,240 Govt. 2,32,560 Compensation for breach of contract 42,530 Int. on Investment 15,643 Managerial remuneration 2,85,350 Transfer fees 722 Depreciation on fixed assets 5,22,543 Profit on sale of Machinery: Provision for taxation 12,42,500 Amount General reserve 4,00,000 Realized 55,000 Investment Revaluation Reserve 12,500 Written Balance c/d 14,20,185 (-) Down value 30,000 25,000 Total 48,71,640 Total 48,71,640 Additional Information:

(i) Original Cost of the machinery sold was Rs 40,000.

(ii) Depreciation on fixed assets as per Schedule II of the Companies Act, 1956. was Rs 5,75,345 You are required to comment on the managerial remuneration in the following situations:

(a) There is only one whole time director:

(b) There are two whole time directors:

(c) There are two whole time directors. a part time director and a manager.



Solution Calculation of Profits u/s 349 Net profit (bat C/d) 14,20,185 (+) Mgrs remuneration 2,85,350 (+) Depreciation charged 5,22,543 (+)Provision for Taxation 12,42,500 (+) General reserve 4,00,000 (+) Investment revel reserve 12,500 (-) Opening profit 5,72,350 (-) Profit on Machinery - Capital Profit 15,000 (55,000-40,000) (-) Depreciation as per Sch (IV) 5,75,345 Book Profits 27,20,383 (a) 5% pf 27,20,383 = 1,36,019 (b) 10% = 2,72,038 (c) 11% = 2,99,242 Q 10. From the following particulars of Ganga Limited, you are required to calculate the managerial remuneration in the following situation: (i) There is only one whole time director. (ii) There are two whole time directors. (iii) There are two whole time directors, a part time director and a manager. Particulars Rs. Net profit before provision for. income-tax and managerial remuneration, but after depreciation and provision for repairs 8,70,410 Depreciation provided in the books 3,10.000 Provision for repairs of machinery during the year 25,000 Depreciation allowable under Schedule XIV 2,60,000 Actual expenditure incurred on repairs during the year 15,000 Comments Most of the candidates calculated profit under section 349 correctly but erred in applying prescribed percentage rates while computing the amount of managerial remuneration. Solution Sections 198 and 309 of the Companies Act, 1956 prescribe the maximum percentage of profit that can be paid as managerial remuneration. For this purpose, profit is to be calculated in the manner a specified in Section 349.

Calculation of Net Profit u/s 349 of the Companies Act, 1956

Particulars Rs. Rs. Net Profit before provision for income tax and managerial remuneration, but after depreciation and provision for repairs 8,70,410 Add back: Depreciation provided in the books 3.10,000 Provision for repairs of machinery 25,000 3.35,000 12,05,410 Less: Depreciation allowable under Schedule XIV 2,60,000 Add : Actual expenditure incurred on repairs 15.000 2,75,000 Profit under Section 349 9,30,410



Calculation of Managerial Remuneration (i) There is only one whole time director Managerial remuneration = 5% of ?9,30,410 = Rs.46.520.50 (ii) There are two whole time directors:— Management remuneration = 10% of 29,30,410 = 293,041 (iii) There are two whole time directors, a part time director and a manager Managerial remuneration = 11% of 29,30,410 = Rs. 1,02,345.10 (b) Interest on Performing Assets should be recognised on accrual basis, but interest on Non-performing Assets should be recognised on cash basis. Particulars Rs. in Lakh Interest on cash credit and overdrafts (1,800+70) 1,870 Interest on term loan (480+40) 520 Interest on bills purchased and discounted (700+36) 736 Total income to be recognized 3,126 Q 11. The following is the Profit and Loss A/c of S.S. Ltd. for the year ended 31st March, 1993: Particulars Rs. Particulars Rs. To Salaries and wages 15,000 By Gross Profit 4.00.000 To Repairs to fixed assets 5,000 By Profit on sale of machinery To General expenses 4,000 (cost Rs. 80,000 and WDV To compensation for breach of value Rs. 40,000) 45,000 contract 2.500 By Subsidy 10.000 To Depreciation 24.000 To Loss on sale of Investment 3.500 To Expenditure on Scientific 25.000 Research (cost of setting up a new laboratory) To Debenture Interest 7,500 To Interest on unsecured loans 1.500 To Provision for Income-tax 1,60,000 To Proposed dividends 1.00,000 To Balance cid 1.07.000 Total 4,55.000 Total 4,55,000 Calculate the overall managerial remuneration under Section 198, presuming that depreciation allowed under sec. 350 is Rs.30,000. Solution

Net Profit as per Profit & Loss 1,07,000 (+) proposed dividend 1,00,000 (+) provision & Tax 1,60,000 (+) expenses on scientific research 25,000 (+) capital profit. 5.000 (+) depreciation charges 24,000 (+) depreciation allowed u/s 350 30,000 Total 3,81,000



Q 12. Calculate the managerial remuneration from the following particulars of Astha Ltd. due to the managing director of the company at the rate of .. Also determine the excess remuneration paid. if any: Particulars Rs. Net Profit 2,00,000 Net Profit is calculated after considering the following: Depreciation 40,000 Preliminary expenses 10,000 Tax provision 3,10,000 Director's fee 8.000 Bonus 15,000 Profit on sale of fixed assets (original cost: 120,000 down written value: Rs. 11,000) 15,500 Provision for doubtful debts 9,000 Scientific research expenditure (for setting up new machinery) 20,000 Managing Director's remuneration paid 30,000 Other information: Depreciation allowable under Schedule XIV of the Companies Ac 35,000 Bonus liability as per Payment of Bonus Act. 1965 18,000 Q 13. The following extract of Balance sheet of X Ltd. was obtained:

Balance sheet (Extract) as on 31st March, 2000

Liabilities Rs. Issued and subscribed capital: 15,000, 14% preference shares of Rs.100 each fully paid 15,00,000 1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000 Share suspense account 20,00,000 Capital reserves (60% is revaluation reserve) 2,50,000 Securities premium 50,000 15% Debentures 65,00,000 Public deposits (Short Term) 3,70,000 Cash credit loan from SBI (Sum term) 4,65,000 Sundry creditors 3, 45,000 Assets: Rs. Investment in shares, debentures, etc. 75,00.000 Profit and Loss account 15,25,000 Preliminary expenses not written off 55,000 Share suspense account represents application money received on shares the allotment of which is not yet made. X Ltd. has been sustaining loss for the last few years. X Ltd. has only one whole-time director. Find out how much remuneration X Ltd. can pay to its managerial person as per the provisions of Part II of Schedule XIII. Would your answer differ if X Ltd, is an investment company? Solution Since X Ltd. is incurring losses so, managerial remuneration will be paid as per inadequacy ratio concept. Working



Note 1 a) Calculation of effective capital

PSC 15,00,000 ESC 96,00,000 C/Reserve (40% of 2,50,000) 1,00,000 S/Premium 50,000 Debentures 65,00,000 (-) Investment 75,00,000 (-) Profit/ Loss A/c 15,25,000 (-) Preliminary exp. 55,000

b) 86,70,000 < 1,00,00,000 (1st Category)

Remuneration = 75,000/ month = 9.00,000/ annum In case of Investment company Effective capital 86,70,000 (+) Investment 75,00,000 Total 1,61,70,000

Since 1,61,70,000> 1,00,00,000 (IInd Category) Remuneration =Rs. 1 ,00,000/ month = 12,00,000/ annum Q 14. What are the maximum limits of Managerial remuneration for companies le" having adequate profits?

Solution For companies having adequate profits, maximum limits of managerial remuneration in different circumstances are as under: (i) Overall (excluding fee feratnding meetings) 11% of, net profit (ii) If there is one managerial person 5% of net profit (iii) If there are more then one managerial person 10% of net profit (iv) Remuneration of part-time clrectors: (a) If there Is no managing or whole-time director 3% of net profit (b) If there is a managing or whole-time director 1% of net profit Q 15. The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration, subject to a minimum of Rs. 25,000 per month. The net profits, for this purpose, are to be taken without charging income-tax and his remuneration itself. During the year, A Ltd. made net profit of Rs. 43, 00,000 before charging Managing Director's remuneration, but after charging provision for taxation of Rs. 17,20,000. Compute remuneration payable to the Managing Director. Q 16. Calculate the maximum remuneration payable to the Managing Director based on effective capital of a non-investment company for the year, from the information given below: Particulars (Rs. in ‘000) (i) Profit for the year 3,000 (ii) Paid up Capital 18,000 (iii) Reserves & Surplus 7,200 (iv) Securities Premium 1,200 (v) Long Term Loans 6,000 (vi) Investments 3,600 (vii) Preliminary expenses not written off 3,000 (viii) Remuneration paid to the Managing Director during the year 600



Q 17. Kumar Ltd., a non-investment company has been incurring losses for the '''T` past few years. The company provides the following information for the current year:

Particulars ( Rs in Iakhs) Paid up equity share capital 120 Paid up Preference share capital 20 Reserves (including Revaluation reserve Rs 10 lakhs) 150 Securities premium 40 Long term loans 40 Deposits repayable after one year 20 Application money pending allotment 720 Accumulated losses not written off 20 Investments 180 Kumar Ltd..has only one whole-elms,director, Mr. X. You are required to calculate the amount of maximum remuneration that can be paid to him as per provision of Companies Act, if no special resolution is passed at the general meeting of the company in respect of payment of remuneration for a period not exceeding three years.

4. Financial Statement Q 18. From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st March 2014 as required by Part 1, Schedule Ill of the Companies Act. Particulars Debit (Dr) Credit (Cr) Equity Share Capital (Face value 50,00,000 of 100 each) 50,00,000 Call in Arrears 5000 Land a Building 27,50,000 Plant & Machinery 26,25.000 Furniture 2,50,000 General Reserve 10,50,000 Loan from State Financial Corporation 7,50,000 Stock: Raw Materials 2,50,000 (+) Finished Goods 10,00,000 12,50,000 Provision for Taxation 3,40,000 Sundry Debtors 10,00,000 Advances 2,13,500 Proposed Dividend 3,00,000 Profit & Loss Account 5,00,000 Cash ih Hand 1,50,000 Cash at Bank 12,35,000 Preliminary expenses 66,500 Unsecured Loan 6,05,000 Sundry Creditors (for Goods and Expenses) 10,00,000 The following additional information is also provided:

i. Preliminary expenses included Rs 25,000 Audit Feet and Rs 3,500 for out of pocket expenses paid to the Auditors. ii. 10000 Equity shares were issued for consideration other than cash. iii. Debtors of Rs 2,60,000 are due for more than 6 months.



iv. The cost of the Assets were: Building Rs 30,00,000, Plant & Machinery Rs 35,00,000 And Furniture Rs 3,12,500

v. The balance of Rs 7,50,000 in the Loan Account with State Finance Corporation is inclusive of Rs 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.

vi. Balance at Bank includes Rs 10,000 with Global Bank Ltd., which is not a Scheduled Bank. Q 19. The following is the Trial Balance of Omega Limited as on 31.3.2012: (Figures in Rs'000) Particulars Debit (Dr) Particulars Credit (Cr) Land at cost 220 Equity capital ( Share of Rs 10 Each) 300 Plant & Machinery at cost 770 10% Debenture 200 Trade Receivables 96 General Reserve 130 Inventories, (31.3.12) 86 Profit & Loss A/c 72 Bank 20 Securities Premium 40 Adjusted Purchases 320 Sales 700 Factory Expenses 60 Trade Payables 172 Administration Expenses 30 Suspense A/c 4 Selling Expenses 30 Debenture Interest 20 Interim Dividend Paid 18 Additional Information: (i) The authorized share capital of the company is 40,000 shares of Rs 10 each. (ii) The company on the advice of independent valuer wish to revalue the land' at Rs 3,60.000. (iii) Proposed final dividend 10%. (iv) Suspense account of Rs 4,000 represents cash received for the sale of some of the machinery on 1.4.11. The cost

of the machinery was 110,000 and the accumulated depreciation thereon being Rs 8,000. (v) Depreciation is to be provided on plant and machinery al: 10% on cost. • You are required to prepare Omega Limited's Balance Sheet as on 31,3.2012 and Statement of Profit and Loss for the year ended 31.3.2012 as per Schedule III. Ignore previous years' figures & taxation. Solution

Omega Limited Balance Sheet as at 31st March, 2012

Particulars Note No (Rs in 000)

1. Equity and Liabilities . Shareholders' funds (a) Share capital 1 300 (b) Reserves and Surplus 2 500 2. Non-Current liabilities (a) Long term borrowings 3 200 3.Current liabilities (a) Trade Payables 52 (b) Short-term provisions 4 30 Total 1082



Assets 1. Non-current assets (a) Fixed assets (i) Tangible assets 5 880 2. Current assets (a) Inventories 86 (b) Trade receivables 96 (c) Cash and cash equivalents 20 Total 1082

Omega Limited Statement of Profit and Loss for the year ended 31s1 March, 2012

Particulars Notes (Rs in 000) I. Revenue from operations 700 II. Other Income 6 2 III. Total Revenue 702 IV. Expenses: Purchases 320 Finance costs 7 20 Depreciation (10% of 760) 76 Other expenses 8 120 Total Expenses 536 V. Profit (Loss) for the period (I-IV) 1 166

Notes to accounts Particulars (Rs in 000) 1. Share Capital Equity share capital Authorized 40,000 shares of Rs 10 each Issued& subscribed & called up 400 30,000 shares of Rs 10 each 300 Total 300 2. Reserves and Surplus Securities Premium Account 40 Revaluation reserve 140 General reserve 130 Profit & loss Balance Opening balance 72 Add : Profit for the period 166 238 Less : Appropriations Interim Dividend (18) Less : Proposed Final Dividend (30) 190 500 3. Long term borrowing 10% Debentures 200 4. Short term provision Proposed Final Dividend 30 5. Tangible assets Land Opening balance 220 Add: Revaluation adjustment 140 Closing balance 360



Plant and Machinery Opening balance 770 Less : Disposed off 10 760 Less : Depreciation (172-8+76) 240 Closing balance 520 Total 880 6.Other Income Profit on sale of machinery: 4 Sale value of machinery 121 Less : Book value of machinery (10-8) 2 123 7. Finance costs Debenture interest 20 8. Other expenses: Factory expenses 60 Selling expenses 30 Administrative expenses 30 120 Q 20. On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after preparing its Profit and Loss Account for the year ended 31st March, 2013 : Particulars Credit Balances: Equity shares capital, fully paid shares of Rs 10 each 70,00,000 General Reserve 15,49,100 Loan from State Finance Corporation 10,50,000 Secured by hypothecation of Plant & Machinery (Repayable within one year if 2,00,000) Loans: Unsecured (Long term) 8,47,000 Sundry Creditors for goods & expenses (Payable within 6 months) 14,00,000 Profit & Loss Account 7,00,000 Provision for Taxation 3,25,500 Proposed Dividend 4,20,000 Provision for Dividend Distribution Tax 71,400 Total 1,33,0,000 Particulars Debit Balances: Calls in arrear 7,000 Land 14,00,000 Buildings 20,50,000 Plant and Machinery 36,75,000 Furniture & Fixture 3,50,000 Stocks: Finished goods 14,00,000 Raw Materials 3,50,000 Sundry Debtors 14,00,000 Advances: Short-term 2,98,900 Cash ih hand 2,10,000 Balance with banks 17,29,000 Preliminary Expenses 93,100 Patents & Trade marks 4,00,000 Total 1,33,63,000



The following additional information is also provided: i) 4,20,000 fully paid equity Shares were allotted as Consideration for land & buildings. ii) Cost of Building 28,00,000 Cost of Plant & Machinery 49,00,000 Cost of Furniture & Fixtures 4,37,500 (iii) Sundry Debtors for 3,80,000 are due for more than 6 months. (iv) The amount of Balances with Bank includes 18,000 with a bank which is not a scheduled Bank and the deposits of

3 5 With§ are for a period of 9 months. (v) Unsecured loan includes c 2,00,000 from a Bank and 1,00,000 from related parties. You are not required to give previous year figures. You are required to prepare the Balance Sheet of the Company as on 31st March, 2013 as required under Schedule Ill of the Companies Act, 2013.

5. Schedule III

Q 21. State under which head these accounts should be classified in Balance Sheet as per Schedule III of the Companies Act: (i) Share application money received in excess of issued share capital. (ii) Share option outstanding account. (iii) Unpaid matured debenture and interest accrued thereon. (iv) Uncalled liability on Shares and other partly paid investments. (v) Calls unpaid. (vi) Intangible Assets under development. (vii) Money received against, share warrant. (viii) Long term maturity of finance lease obligation.



Chapter 10 – Consolidation of Accounts

HOLDING AND SUBSIDIARY COMPANIES Holding Company: A holding company is one which acquires all or a majority of the equity shares of any other company called subsidiary company in order to have control over the s ubsidiary company. Section 4 of the Companies Act, 1956 states the circumstances, any of which must exist to constitute the relationship of holding and subsidiary companies. Section 4 provides that a company shall be deemed to be a subsidiary of another, if any of the following conditions are satisfied:- (a) That other controls the composition of its Board of Directors. (b) That other holds more than half in the nominal value of its equity share capital. (c) The first-mentioned company is a subsidiary of any company which is that other's subsidiary. Illustration

Company B is a subsidiary of Company A and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above and so on. For the purpose of clause (a) above, the control of the composition of the Board of directors of a company means that the holding company has power, at its discretion, to appoint or remove all or majority of the directors of the subsidiary company without the consent of the other persons. It should be noted that holding and subsidiary companies are incorporated companies and each is a separate legal entity. {Hungerford Investment Ltd, v. Turner Morison & Co. Ltd.] Section 4(5) provides that for the purpose of this section, the term 'company' includes body corporate. Thus, holding and subsidiary relationship can be established between an Indian Company and a Foreign Company.

ACCOUNTS OF HOLDING AND SUBSIDIARY COMPANIES The balance sheet of a holding company should have annexed to it the following documents relating to its subsidiary:-

a. A copy of the balance sheet of the subsidiary; b. A copy of its profit and loss account; c. A copy of its auditors' report; d. A copy of its directors' report; e. A statement indicating the extent of holding company's interest in the

subsidiary at the end of the last financial year; (b) where directors of the holding company are unable to obtain the necessary

information, then a statement to that effect should be annexed. The financial year of the subsidiary company may end on the same day or not as that of the holding company, but should not be earlier than six months from the day on which the holding company's financial year ends. (I.e. gap should no! be more than 6 months)

CONSOLIDATION OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT

Consolidation of Balance Sheet and Profit and Loss Account implies preparation of a single Balance Sheet and Profit and Loss Account of the holding company and its subsidiaries by aggregating all items



of assets, liabilities, incomes, expenses, etc., of the holding company and its subsidiaries. This is also known as Group Accounts. Although, the Companies Act, 1956 does not make it obligatory on the part of the holding company to prepare group accounts or consolidated accounts, it is desirable for a holding company to prepare a consolidated Balance Sheet and Profit and Loss Account in order to have a clear position. The various outside parties concerned with the holding company and its subsidiaries may also be interested in the "consolidated final accounts.

PREPARATION OF CONSOLDATED BALANCE SHEET The following are the most important points which reserve special consideration in the preparation of the consolidated Balance Sheet of the holding company and its subsidiaries . Rule 1: Cancellation of Investment and Share Capital A Consolidated Balance Sheet can be prepared by simply combining all the assets and liabilities of the holding company and its subsidiary. It will certainly balance, but it is not a Consolidated Balance Sheet. This is because the inter – company balances have first, to be eliminated. The Investment in Subsidiary Company" by the holding company should cancel out the Share Capital of the subsidiary company. Rule 2: Minority Interest Calculation When the holding company acquires all the shares of the subsidiary company, the latter company becomes a wholly owned subsidiary, when the holding company acquires more than half but less than all the shares of the subsidiary company, those shareholders who have a minority share are referred to as Minority Shareholders. The interest of the minority shareholders, known as Minority Interest must be accounted for separately in the Consolidated Balance Sheet. A minority interest is the proportion of the subsidiary company's net assets / shareholders' fund which belongs to the minority shareholders. Therefore, the value of the minority interest is the portion of the share capital and reserves at the date when the holding company acquires its controlling interest and the share of income after acquisition. Regarding minority interest, following are the points to be remembered: 1. Minority interest is not a liability but capital of the group which does not belong to the shareholders

of the holding company. 2. Minority interest is always calculated at the date of the consolidated balance

sheet - not when the holding company takes the control. Rule 3: Goodwill / Capital Reserve on Consolidation When the value of "Investment in subsidiary" in the holding company's balance sheet is more than the book value of the net assets acquired, the difference represents "Goodwill on Consolidation". In this case, Investment in subsidiary will not cancel out against the share capital of the subsidiary unless a goodwill equal to the difference of the two items is shown on the asset side of the Consolidated Balance Sheet. Conversely, if the value of "Investment in subsidiary" in the holding company's balance sheet is less than the book value of the net assets acquired, the difference represents "Capital Reserve on Consolidation". In this case, Investment in subsidiary will not cancel out against the share capital of the subsidiary unless a capital reserve equal to the difference of the two items is shown on the liability side of the Consolidated Balance Sheet. To calculate goodwill or capital reserve, the value of the net assets acquired by the holding company in the subsidiary company must be compared with the cost of the investment. This value can be ascertained by adding together proportionate share capital and reserve of the subsidiary.



Rule 4: Reserves of the Holding and Subsidiary Company While preparing, Consolidated Balance Sheet, reserves of the subsidiary company are treated just as though they were part of the share capital of the subsidiary company. Therefore, while calculating goodwill or capital reserve on consolidation and the minority interest, reserves are to be apportioned between the holding company and the minority shareholders, The reserves of the subsidiary company at the date of the acquisition form a part of goodwill/capital reserve and minority interest calculation. The reserves of the holding company, on the other hand, belong entirely to the shareholders of the holding company and as such they are shown along with the holding company's share capital in the Consolidated Balance Sheet. Rule 5: Pre- and Post-acquisition Profit of Subsidiary The profits earned by the subsidiary company before the holding company acquires its control, is known as pre-acquisition profit or capital profit. Undrawn pre-acquisition profit is taken into consolidation for calculation of goodwill or capital reserve. It is split between cost of control (goodwill / capital reserve calculation) and minority interest. The profits earned by the subsidiary company after the holding company acquires its control, is known as post-acquisition profit or revenue profit, which can be distributed as dividend. It should be noted that post-acquisition profit of a subsidiary company do not form part of the goodwill or capital reserve calculation. Minority shareholders are not concerned whether the profits are pre-acquisitron or post-acquisition. Post-acquisition profit is apportioned between holding company and minority shareholders. The share of holding company is added with its profit, while the share of the minority shareholders form a part of the calculation of minority interest. Rule 6: Cancellation of Inter-company Debts and Acceptances It is very common that member companies have business dealing not only with outsiders but also with each other. Inter-company transactions may lead to intercom any debts and acceptances. At the time of consolidation, inter-company debts and acceptances which are part of the, same group, are to be cancelled out as follows: Inter-company Debts

Inter-company debts for the sale of goods on credit owing by one company to the other company in the same group should be eliminated from sundry debtors and sundry creditors. For example, if the holding company sell goods to its subsidiary for Rs 10,000 on credit, \\ will appear as one of the sundry debtors in the Balance Sheet of holding company and as one of the sundry creditors in the Balance Sheet of the subsidiary company. It is an internal debt and is neither an external asset nor a liability of the group. While preparing Consolidated Bafane0 Sheet* sundry debtors of both the companies are to be added together. Simi larly, sundry creditors of both the companies are to be added together. From this merged balance of sundry debtors and sundry creditors, a sum of Rs 10,000 is to be deducted from both the balances. If the above adjustment is not done it will lead to an over-statement of the figures for current assets and current liabilities in the Consolidated Balance Sheet. Inter-company Bills of Exchange Bills drawn or accepted either by the holding company or its subsidiary is not an outside The item "Bills Receivable" in one company's Balance Sheet and King item "Bills Payable" in another company's Balance Sheet are to be cancelled out against each other like ordinary debts.



But I some of the bills are discounted, their adjustment is not possible because they are no longer an intercompany obligation. When a bill is discounted, it will have to be paid by the drawer (if not, by the drawer in case of dishonor) to the bank (outside the group). Bills discounted generally appear at the bottom of the Balance Sheet as a contingent liability. In the Consolidated Balance Sheet it will also appear as a contingent liability. Only the face value of the bills that are drawn on outsiders and subsequently discounted, will appear as a contingent liability in the Consolidated Balance Sheet as a footnote. Rule 7: Cancellation of Inter-company Loans and Advances Usually a Current Account is used to record inter-company loans and advances. When a loan is provided by either of the companies to the other, a current account will exist between the holding company and its subsidiary. For example, if the holding company makes a loan of Rs 10,000 to its subsidiary, it will appear as an asset in the Balance Sheet of the holding company and as a liability in the Balance Sheet of the subsidiary company. At the time of preparing the Consolidated Balance Sheet, these two amounts are to be cancelled out. A difficulty arises where the current accounts maintained by the holding company and its subsidiary show different figures as to the balance owed. At the time of preparing the Consolidated Balance Sheet, these two current accounts are to be reconciled if they are not in agreement by comparing the entries in the accounts. Any remaining difference is usually caused by goods-in- transit from the seller to the buyer, or cash-in-transit from the buyer to the seller. In the Consolidated Balance Sheet, the cash or goods-in-transit will appear as one of the assets and the two current accounts will cancel each other out. The general rule in these circumstances is that adjustment should be made to the holding company's balance, whichever way the goods or cash are going, because it is easier for the holding company's accountant to make the adjustment Rule 8: Adjustment of Bank Balances Bank accounts may be held by the holding company and its subsidiary at different banks. While some balances are favorable, others are overdrawn balances, they should appear in the Consolidated Balance Sheet as assets and liabilities respectively. It would be incorrect to adjust the overdraft balances against credit balances for the purpose of the Consolidated Balance Sheet. But when both the companies maintain their bank accounts at the same branch and the bank has a 'set off agreement between the holding company and its subsidiary, the usual method is to combine all bank balances and to set off overdraft against credit balances. Points to Remember:

1. The investment in a subsidiary is replaced by the underlying net assets of the subsidiary. 2. Assets and liabilities are added on a line-by-line basis to the corresponding asset and liability amounts of the

holding company. 3. 100% of each asset and liability is aggregated even if the holding company owns a controlling interest of less

than 100%. 4. The minority shareholders' interest in the net assets not owned by the holding company is shown as a

liability of the Group in the Consolidated Balance Sheet. 5. Assets are stated at their cost to the Group, rather than at their cost to any individual company. Thus, inter-

company profit arising out of stock and fixed assets transfers are removed. (They are usually referred to as unrealized profit).

6. Any inter-company debtors/creditors; bills receivable/bills payable are eliminated, so that the Consolidated Balance Sheet shows the net asset position of the group vis-a-vis third parties.

7. Degree of control depends upon holding of equity shares only.

SOME SPECIAL ADJUSTEMENTS

1) Unrealized Profit on Trading Stock

If the holding company and its subsixdiary trade with one another, the goods bought at a profit from one company may appear as unsold stock in the Balance Sheet of another, if the entire quantity is not sold. In the



Consolidated Balance Sheet, the aggregate stock of the holding company and its subsidiary is to be stated at a cost. But in this case, the cost to the buying company includes an element of profit earned by the selling company. From the viewpoint of the group, it should be ensured that no unrealized profit enters into group accounts, Therefore,, it would be wrong to account for this profit until the goods had been sold outside the group. The unrealised profit on inter-group stocks, still held, must be computed and should be cancelled out It should be deducted from the consolidated profit as well as from the aggregate stock valuation for the Consolidated Balance Sheet. The above adjustment also holds good when the subsidiary company is a wholly-owned subsidiary. 2) Unrealized Profit on Fixed Assets

A member company may transfer fixed assets or stock which becomes fixed assets of the transferee company at a profit. In this case, a similar problem arises as that seen in connection with trading stock transfer. At the time of consolidation, unrealized profit short be deducted from consolidated profit as well as aggregate value of fixed assets. 3) Revaluation of Assets

If the fixed assets of the subsidiary company are revalued at the time of acquisition of fie controlling shares of the subsidiary company by the holding company, the effect of profit or loss on revaluation should be reflected in the Consolidated Balance Sheet. The assets are to appear at their revalued figures in the Consolidated Balance Sheet. If the revaluation is upward causing an increase in the book value of an asset, the same should be treated as a pre-acquisition profit. The total revaluation profit will be apportioned and will be used in calculating goodwill/capital reserve and minority interest. The holding company's share of the revaluation profit will be taken to 'investment in subsidiary company1 which, in effect, will reduce the cost of control on value of goodwill or capital reserve. If the revaluation results in a loss, the cost of control on value of goodwill or capital reserve will be increased. If an asset is revalued, the compounding depreciation adjustment is at so to be considered. If the revaluation results in an increase, the depreciation that has already been charged seems to be undercharged and the amount of extra depreciation is treated as revenue loss. This should be deducted from the Profit and Loss Account of the subsidiary. Conversely, when there is a downward revaluation, the depreciation that has already been provided seem to be overcharged. The amount of extra depreciation is to be written-back and considered as a revenue profit. This should be added with the Profit and Loss Account of the subsidiary company. 4) Issue of Bonus Shares

Treatment of bonus shares issued by the subsidiary company will depend upon whether they are issued out of pre-acquisition profit or post-acquisition profit. If the bonus shares are issued out of pre-acquisition profit, it will not have any effect on the Consolidated Balance Sheet. This is because it will cause decrease, in the holding company's share of pre-acquisition profit and on the other hand paid-up value of the equity shares held by the holding company will be increased by the same amount Therefore, the amount of goodwill or capital reserve will be the same. The portion of the bonus shares of the minority shareholders will be added to the minority interest. If a subsidiary company issues bonus shares out of post-acquisition profit, it will have a direct effect on the Consolidated Balance Sheet. In such a situation, the holding company's share of revenue profit in the subsidiary company will be reduced and the paid-up value of the shares held by the holding company in its subsidiary will be increased because of the issue of bonus shares. This will reduce the value of goodwill or increase the value of capital reserve. The portion of the bonus shares of the minority interest will be added to the minority interest, as before.



5) Preference Shares held by the Holding Company

When preference shares are issued by a subsidiary company and are held by the holding company (whether wholly or partly), it should be treated in the same way as equity shares. If the holding company acquires the preference shares at par, the cost of investment of the holding company cancels out of the shares shown on the Balance Sheet of the subsidiary. When the preference shares are acquired al a premium or a discount, the balance is carried to goodwill or capital reserve in the Consolidated Balance Sheet. The portion of the preference shares owned by the minority shareholders are added to minority interest. 6) Debentures

The debentures of the holding company will appear in the liability side of the Consolidated Balance Sheet just like equity or preference share capital Debentures issued either by the holding company or the subsidiary and held by other should be cancelled out when they are acquired at par. When part of the debentures are held by the minority shareholders, it should appear in the liability side of the Consolidated Balance Sheet. The holding company's "investment in debentures in the subsidiary" will cancel out against the nominal value of debentures shown in the subsidiary company's Balance Sheet. If the debentures are acquired at a premium or at a discount, the difference between cost and nominal value is adjusted against goodwill or capital reserve in the Balance Sheet. 7) Inter-company Dividends

Holding company owns majority of the shares of its subsidiary. When a dividend is paid out of profit of the subsidiary company, the holding company is likely to receive a majority portion of it as a shareholder. It should be noted that such dividends may be paid out of pre-acquisition profit or post-acquisition profit. The accounting treatment in the books of the holding company will vary accordingly.

Dividend Paid Out of Pre-acquisition Profit by the Subsidiary Company

Care is needed in the treatment of any dividend received by the holding company from its subsidiary which come out of pre-acquisition profits or post acquisition profit. The dividend should be treated as a return of capital to the holding company, since ft transfers to the holding company part of the net assets in the subsidiary company that have been paid for. In this situation, the correct accounting treatment is to deduct such dividend from the cost of investment in the subsidiary for calculating goodwill or capital reserve. Point to Remember

1) If such dividend has wrongly been credited to the Profit and Loss Account of the holding company, then it should be rectified. For rectification, the amount of dividend received by the holding company out of pre-acquisition profit is to deducted from the Profit and Loss Account of the holding company as well as from the cost of investment in the shares of subsidiary. For better understanding of the accounting treatment, observe the following:

Wrong Entry Correct Entry a) Bank Account Dr. a) Ban k Account Dr. To Divided Received Account To Dividend Received Account b) Divided Received Account Dr b) Dividend Received Account Dr. To Profit and Loss Account To Investment in Shares of Subsidiary Co.

Account

2) No adjustment is required if such dividend has already been correctly treated in the books of the holding company.

Dividend Paid Out of Post-acquisition Profit by the Subsidiary Company

Dividend received by the holding company from a subsidiary out of post-acquisition profit is treated as Investment income and credited to the Profit and Loss Account of the holding company.



It should be noted that any interim dividend paid by the subsidiary company is also treated in the books of the holding company in the same manner as discussed above. 8) Proposed Dividend

When a dividend is proposed by the holding company, it will be deducted from the post-acquisition profit of the holding company (provided no proposed dividend is appearing in the Balance Sheet of the holding company) and will be shown in the Consolidated Balance Sheet as a current liability. Proposed dividend of the subsidiary will be deducted from the post-acquisition profit of the subsidiary company (provided no proposed dividend is appearing in the Balance Sheet of the subsidiary company). Holding company's share of such proposed dividend is added with the Profit and Loss Account of the holding company. Minority's share of proposed dividend cart be added with the minority interest or it can be shown as a current liabilities in the Consolidated Balance Sheet (along with the proposed dividend of the holding company, if any). Q.1. under what circumstances, a company is required to present a ‘consolidated financial statement’? CS (Inter) – Dec 2003 (4 Marks) Ans.:

A company is required to present a ‘consolidated financial statement’ if it is holding company and other is subsidiary of earlier company. Balance-sheet of holding company to include certain particulars of subsidiaries:

(1) The balance-sheet of a holding company should include copies of for subsidiary: Balance-sheet of the subsidiary Profit and loss account Report of Board of directors Report of its auditors A statement of the holding company’s interest in the subsidiary Statement as per 212 (5) and Report as per 212 (6) (2) If the financial year of holding close latter than subsidiary accounting year then gap should be for 6 months. (3) Material changes after the close of financial year of subsidiary should also be disclosed by holding company. (4) If, for any reason, the holding company is unable to obtain information on any of the matters required to be

specified, a report in writing to that effect shall be attached to the balance-sheet of the holding company. (5) The documents referred above shall be signed by the persons by whom the balance-sheet of the holding

company is required to be signed. Que. No. 2] Write a short note on: Minority interest CS (Inter) – Dec 1999 (5 Marks) Ans.:

Minority interest represents shares owned by third parties in a consolidated financial statement of holding company. Minority interest ordinarily appears on the balance sheet between liabilities and shareholders’ equity. It is calculated as follows.

Minority interest Rs.

Share capital held by outsider Share of profits - Pre acquisition - Post acquisition

xxxx

xxxx xxxx

xxxx



Que. No. 3] Issue of bonus shares by the subsidiary company does not affect the cost of control. Comment. CS (Inter) – Dec 2009 (6 Marks) Ans.:

Issue of bonus shares by the subsidiary company does not affect the cost of control. This can be discussed under following two headings: (1) Issue of bonus out of pre-acquisition profit: This will not affect cost of control because share of holding

company in pre-acquisition profit is reduced and on the other hand paid up value of the shares held by them is increased.

(2) Issue of bonus out of post-acquisition profit: This will not affect cost of control because share of holding company in post-acquisition profit is reduced and on the other hand paid up value of the shares held by them is increased.

Illustration 1

The following are the summarized Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.12.2001:

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

5,000 Equity Shares of Rs 100 each

5,00,000 - Land 1,00,000 40,000

10,000 Equity Shares of Rs 10 each

- 1,00,000 Buildings 1,00,000 50,000

profit & Loss A/c 55,000 40,000 Stock 90,000 30,000

Sundry Creditors 20,000 35,000 Sundry Debtors 40,000 30,000

Investments: 8,000 Shares of S Ltd.

1,25,000 -

Cash in hand 1,20,000 25,000

5,75,000 1,75,000 5,75,000 1,75,000

H Ltd- acquired shares in S Ltd. on 1.1.2001 when S Ltd. had Rs 25,000 in Profit and Loss Account. No dividend has been declared by S Ltd. in 2001. You are required to prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.12.2001. (UNQHM) Solution 1) Degree of Control = 8,000 Shares/10,000 Shares = 4/5th; Minority = l/5th Generally, three control charts are prepared as under:

1. Control Chart A: From the Balance Sheet of subsidiary company for calculating capital profit. Post-acquisition profit, post-acquisition reserve, minority interest, etc;

2. Control Chart B : For calculating goodwill or capital reserve; and Control Chart C : For addition of other assets and liabilities

3. Control Chart A: From the Balance Sheet of S Ltd.

Proprietary Balances Notes Total (Rs)

H Ltd's Share (4/5)

Minority Interest (1/5)

a) Capital Profit

Pre-acquisition Profit 25,000 20,000 5,000

b) Post-acquisition Profit

As per Balance Sheet 40,000

Less: Pre-acquisition Profit 25,000

15,000 12,000 3,000



c) Share Capital 1,00,000

Less: Minority Interest (1/5) 20,600 10,000

80,000

Adjusted in Control Chart B 80,000

Minority Interest 28,000

Control Chart B; Calculation of Goodwill/Capital Reserve

Cost of Investments 1,25,000

Less: Capital Profit (Chart A) 20,000

Less: Face Value of Shares held 80,000 1,00,000

Goodwill 25,000

Control Chart C : Other Assets and Liabilities

Particulars Land Buildings Stock S/Debtors Cash S/Creditors P & L A/c

H Ltd 1,00,000 1,00,000 90,000 40,000 1,20,000 20,000 55,000

S Ltd 40,000 50,000 30,000 30,000 25,000 35,000 12,000

1,40,000 1,50,000 1,20,000 70,000 1,45,000 55,000 67,000

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st December, 2001

Particulars Note No. Figures as at the end of current reporting

period

Figures as at the end of previous

reporting period

1 2 3 4

I. EQUITY AND LIABILITIES (1) Shareholders funds

(a) Share capital (b) Reserves and surplus (c) Money received against share warrants (d) Non-Controlling Interest (Minority Interest)

5,00,000 67,000

28,000

-

(2) Share application money pending allotment

- -

(3) Non-current liabilities (a) Long-term borrowings (b) Deferred tax liabilities (Net) (c) Other Long term liabilities (d) Long-term provisions

- -

(4) Current liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions

55,000

Total 6,50,000 II. ASSETS (1) Non- Current assets

(a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work in progress (iv) Intangible assets under development

2,90,000 25,000

(b) Non –current investments



(c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets (a) Current investments (b) Inventories 1,20,000 (e) Trade receivables 70,000 (d) Cash and cash equivalents 1,45,000 (e) Short-term loans and advances (f) Other current assets TOTAL 6,50,000

Illustration 2

From the two Balance Sheets of H Ltd, and S Ltd., prepare a Consolidated Balance Sheet.


Share Capital : Buildings at cost 72,000 25,000

Authorised and Issued : Plant and Machinery

Shares of Rs 10 each 1,20,000 30,000 Cost 40,000 15,000

General Reserve 25,000 6,000 Less: Depreciation 10,000 5,000

Profit & loss A/c 12,000 9,000 30,000 10,000

Creditors 15,000 5,000 Shares in S Ltd. : 2,000 shares of Rs 10 each

25,000 -

Stock 18,000 3,000

Debtors 22,000 7,000

Bank 5,000 5,000

1,72,000 50,000 1,72,000 50,000

When H Ltd acquired 2,000 shares in S Ltd , the latter company had reserves amounting to Rs. 5,000 – none of which has been distributed since then. (UNQHM)

Consolidated Balance Sheet of H Ltd. And its subsidiary S Ltd as at…………


period

Figures as at the end of previous reporting period

1 2 3 4

I. EQUITY AND LIABILITIES

(1) Shareholder’s funds

(a) Share capital 1,20,000 - (b) Reserves and surplus 43,667 - (c) Money received against share Warrants - (d) Non-Controlling Interest (Minority 15,000 - Interest)

(2) Share application money pending Allotment -

(3) Non-current liabilities (a) Long-term borrowings - (b) Deffered tax liabilities (Net) - (c) Other Long term liabilities - (d) Long-term provisions _

(4) Current liabilities



(a) Short-term borrowings - (b) Trade payables 20,000 - (c) Other current liabilities - (d) Short-term provisions -

TOTAL 1,98,667 -

II. ASSETS

(1) Non-current assets (a) Fixed assets (i) Tangible assets 1,37,000 - (ii) Intangible assets 1,667 - (iii) Capital work-in progress - - (iv) Intangible assets under - - Development (b) Non-current investments - - (c) Deferred tax assets (net) - - (d) Long term loans and advances - - (e) Other non-current assets - -

(2) Current assets (a) Current investments - - (b) Inventories 21,000 - (c) Trade receivables 29,000 - (d) Cash and cash equivalents 10,000 - (e) Short-term loans and advances - - (f) Other current assets - - Total 1,98,667

Working Notes:

1. Degree of Control = 2,000 Shares/3,000 Shares = 2/3rd; Minority = l/3rd 2. Control Chart A : From the Balance Sheet of S Ltd,


HLld/s Share (2/3)


a) Capital Profit

Pre-acquisition General Reserve 5,000

5,000 3,333 1,667


Profit as per Balance Sheet 9,000

Less: Pre-acquisition Profit Nil

9,000 6,000 3,000

c) Post-acquisition General Reserve

General Reserve as per Balance Sheet 6,000

Less: Pre-acquisition General Reserve (a) 5000

1,000 667 333

d) Share Capital 30,000

Less : Minority Interest 10000 10,000

20,000



3) Control Chart B : Calculation of Goodwill / Capital Reserve

Cost of Investment 25,000



Less: Capital Profit 3,333

Less: Face Value of Shares held 20,000 23,333

Goodwill 1,667

4) Control Chart C: Other Assets and Liabilities

Particulars Building Plant and Machinery

Stock Debtors Bank Creditors

H Ltd. 72,000 40,000 18,000 22,000 5,000 15,000

S Ltd 25,000 15,001) 3,000 7,000 5,000 5,000

- 55,000 - - - -

Less: Depreciation

- 15,000 - - - -

97,000 40,000 21,000 29,000 10,000 20,000

5) Profit and Loss Account Rs 6) General Reserve Rs

H Ltd. 12,000 HLtd. 25,000

Share from S Ltd. 6,000 Share from S Ltd. 667

18,000 25,667

Illustration 3

Following are the Balance Sheets of R Ltd, and S Ltd, as at 31.12.2001:

Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.

Share Capital : Fixed Assets 5,00,000 2,40,000

Equity Shares of Rs 10 each, fully paid up

4,00,000 1,50,000 Investments in 15,000 Equity Shares in

General Reserve 50,000 40,000 S Ltd. on 1.1.2001 2,00,000 -

Profit & Loss A/c 30,000 25,000 Current Assets (including Rs 10,000

12% Debentures 2,00,000 - stock-in-trade purchased from R Ltd.)

3,00,000 2,60,000

Current Liabilities and Provisions

3,20,000 2,85,000

10,00,000 5,00,000 10,00,000 5,00,000

Prepare a Consolidated Balance Sheet as at 31.12.2001, assuming that (a) S Ltd's General Reserve and Profit and Loss Account stood at Rs 25,000 and Rs 10,000 respectively on 1.1.2001 and, (b) R Ltd. sells goods at a profit of 25% on cost. (UNQHM)

Consolidated Balance Sheet of R Ltd. and its subsidiary S Ltd as at 31st December, 2001


period


1 2 3 4



4,00,000 1,08,000

-




- -


2,00,000 -

(4) Current liabilities (a) Short-term borrowings (b) Trade payables

- -

(c) Other current liabilities 6,05,000 -

(d) Short-term provisions - -

TOTAL 13,13,000 -

II. ASSETS

(1) Non-current assets

(a) Fixed assets

(i) Tangible assets 7,40,000 -

(ii) Intangible assets 15,000 -

(iii) Capital work-in progress - -

(iv) Intangible assets under - -

Development

(b) Non-current investments - -

(c) Deferred tax assets (net) - -

(d) Long term loans and advances - -

(e) Other non-current assets - —

(2) Current assets

(a) Current investments - -

(b) Inventories - -

(c) Trade receivables - -

(d) Cash and cash equivalents - -

(e) Short-term loans and advances - -

(f) Other current assets 5,58,000

TOTAL 13,13,000 -

Working Notes: 1) Degree of Control = 15,000 Shares/15,000 Shares = 100%; Minority Interest = NU 2) Control Chart A: From the Balance Sheet of S Ltd.


R Ltd's Share

(100%)

Minority Interest

(Nil)

a) Capital Profit

1. Pre-acquisition Profit 10,000

2. Pre-acquisition General Reserve 25,000

35,000 35,000 Nil




15.000 15,000 Nil


Reserve as per Balance Sheet 40,000

Pre-acquisition General Reserve 25,000



15,000 15,000 Nil

d) Equity Share Capital 1,50,000

Adjusted in Control Chart B 1,50,000

Minority Interest Nil

3) Control Chart B ; Calculation of Goodwin/Capital Reserve

Cost of to vestments 2,00,000


Less: Face Value of Shares held 1,50,000 1,85,000

Goodwill 15,000

4) Control Chart C: Addition of other Assets & Liabilities

Particulars Fixed Assets

Current Assets

Current Liabilities

General Reserve

Profit/Loss Account

R Ltd. 5,00,000 3,00,000 3,20,000 50,000 30,000

S Ltd. 2,40,000 260000 2,85,000 15,000 15000

- 5,60,000 - - 45,000

Less: Unrealized Profit on Stock (Note 5) - 2,000 - - 2,000

7,40,000 5,58,000 6,05,000 65,000 43,000

5) Unrealized profit on stock = 25/125 x Rs 10,000 = Rs 2,000. R Ltd. Is holding 100% equity shares of S Ltd.

Therefore, the entire amount of Rs 2,000 is to be provided for unrealized profit Illustration 4

The following are the Balance Sheets of X Ltd, and Y Ltd, as at 31.12.2001:

Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

Equity Shares of Rs 10 each

4,00,000 1,00,000 Equipment 2,50,000 95,000

Profit & Loss A/c 50,000 20,000 Investment :

External Liabilities 7,50,000 4,80,000 9,000 Equity Shares in Y Ltd on 1.1.2001

1,40,000

Current Assets 8,10,000 5,05,000

12,00,000 6,00,000 12,00,000 6,00,000

On January 1,2001, Profit and Loss Account of Y Ltd showed a credit balance of Rs. 8,000 and equipment of Y Ltd. Revalued by X Ltd at 20% above its book value of Rs 1,00,000 (but no such adjustment was effected m the books of Y Ltd.) Prepare the Consolidated Balance Sheet as at 31.12.2001 (UNQHM)


period


1 2 3 4



4,00,000 59,900

13,900

-


- -



(3) Non-current liabilities (a) Long-term borrowings (b) Deffered tax liabilities (Net) (c) Other Long term liabilities (d) Long-term provisions

12,30,000

-

(4) Current liabilities (a) Short-term borrowings (b) Trade payables

- -

(c) Other current liabilities - -

(d) Short-term provisions - -

TOTAL 17,03,800 -

II. ASSETS


(a) Fixed assets

(i) Tangible assets 3,64,000 -

(ii) Intangible assets 24,800 -

(iii) Capital work-in progress - -

(iv) Intangible assets under - -

Development

(b) Non-current investments - -

(c) Deferred tax assets (net) - -

(d) Long term loans and advances - -

(e) Other non-current assets - —

(2) Current assets

(a) Current investments - -

(b) Inventories - -

(c) Trade receivables - -

(d) Cash and cash equivalents - -

(e) Short-term loans and advances - -

(f) Other current assets 13,15,000

TOTAL 17,03,000 -

Working Notes: Degree of control = 9,000 Shares/10,000 Shares = 9/10th; Minority = 1 /10th. Control Chart A : From the Balance Sheet of Y Ltd.


X Ltd/s Share (9/10)


a) Capital Profit

L Pre-acquisition Profit 8,000

2. Revaluation Profit (Rs 1,20,000 - Rs 1,00,000) 20,000

28,000 25,200 2,800




12,000

Less: Depreciation 5 1,000

11,000 9,900 1,100

c) Share Capital 1,00,000

Less: Minority Interest (1/10) 10,000

^,000





3) Control Chart B: calculation of Goodwill/Capital Reserve



Less: Face Value of Shares held 90,000

Goodwill 24,800

4) Control Chart C; Other Assets and Liabilities

Particulars Equipment Current Assets

External Liabilities

Profit & Loss A/c

X Ltd. 2,50,000 8,10,000 7,50,000 50,000

Y Ltd. 95,000 5,05,000 4,80,000 9,900

3,45,00a

Add: Revaluation Profit 20,000

3,65,000

Less: Depreciation (Note 5) 1,000

3,64,000 13,15,000 12,30,000 59,900

5) Depreciation

On 1.1.2001, the value of equipment of Y Ltd. was Rs 1,00,000. On 31.12.2001, it has been shown in the Balance Sheet at Rs 95,000. It means that in 2001 Rs 5,000 depreciation has been charged (assuming that there was no sale of equipment). Therefore, the rate of depreciation = Rs 5,000 /Rs^,00,000 x 100 = 5%. In 2001, depreciation should have been charged on Rs 1,20,000 (on revalued figure). Therefore, the depreciation should have been Rs 6,000 (5% of Rs 1,20,000) but only Rs 5,000 depreciation has been charged. Therefore, extra depreciation to be charged = Rs 6,000 - Rs 5,000 = Rs 1,000. Illustration 5

When O Ltd. purchased 24,000 equity shares in P Ltd. on 1.1.2001, P Ltd. had Rs 22,500 in General Reserve and Rs 37,500 (Dr.) in Profit and Loss Account. From their Balance Sheets on 31.12.2001 as below, prepare a Consolidated Balance Sheet:

Liabilities O Ltd. P Ltd. Assets O Ltd. P Ltd.

Equity Share Capital 7,50,000 3,00,000 Fixed Assets 6,75,000 1,50,000

General Reserve 90,000 7,500 Current Assets 1,20,000 1,21,500

Profit & Loss Account 60,000 - Investments in P Ltd. 2,10,000 -

Sundry Creditors 1,05,000 31,500 Profit & Loss Account - 67,500

10,05,000 3,39,000 10,05,000 3,39,000

Fixed assets standing in the books of P Ltd. Rs 90,000 was considered worth Rs 75,000 on the date of purchase of control. For the purpose of determining the value of shares 20% depreciation has been written-off since acquisition. Stock of O Ltd. includes Rs 30,000 on which P Ltd. made Rs 7,500 profit: (UNQHM)



Consolidated Balance Sheet of O Ltd, and its subsidiary P Ltd as at 31st December, 2001


period


reporting period

1 2 3 4

I EQUITY AND LIABILITIES (1) Shareholders^ funds

(a) Share capital 7,50,000 (b) Reserves and surplus 1 ,14,900 (c) Money received against share Warrants - (d) Non-Controlling Interest (Minority 45,600 interest)

(2) Share application money pending Allotment


(4) Current liabilities (a) Short-term borrowings (b) Trade payables 1,36,500 (c) Other current liabilities (d) Short-term provisions

TOTAL 10,47,000

II ASSETS

(1) Non-current assets (a) Fixed assets (i) Tangible assets 8,13,000 (ii) Intangible assets (iii) Capital work-in progress (iv) Intangible assets under Development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets

2,34,000

10,47,000

Working Notes 1. Degree of control = 24,000/30,000 Shares = 4/5th; Minority - 1/5* 2. Control Chart A : From the Balance Sheet of P Ltd



Particulars Note No. Total Rs.

O Ltd’s Share (4/5)

Minority Interest

(1/5)

1 2 3 4 5

a) Capital Profit 1. Pre-acquisition Profit (37,500) 2. Pre-acquisition General Reserve 22,500 3. Revaluation Loss (Rs. 90,000 –Rs. 75,000) (15,000) (30,000) (24,000) (6,000)

b) Post acquisition Profit Profit as per Balance Sheet (67,500) Less : pre- acquisition Profit (a) (37,500) (30,000) Add: Depreciation written-back 9 3,000 (27,000) (21,000) (5,400)

c) Post – acquisition General Reserve General Reserve as per Balance Sheet 7,500 Less : Pre- acquisition General Reserve 22,500 (15,000) (12,000) (3,000)

d) Share capital 3,00,000 Less: Minority Interest (1/5) 60,000 60,000 2,40,000 Adjusted in Control Chart B 2,40,000 Minority Interest 45,600

3) Control Chart B: Calculation of Goodwill /Capital Reserve

Cost of Investment 2,10,000 Less : Capital Profit (24,000) Less : Face Value of Shares held 2,40,000 2,16,000 Capital Reserve (being negative) 6,000

4) Fixed Assets Rs. 6)General Reserve Rs. O Ltd 6,75,000 O Ltd 90,000 P Ltd 1,50,000 Share from P Ltd (12,000) 8,25,000 78,000 Less : Revaluation Loss 15,000 7) Profit and loss account

(consolidated)

8,10,000 O Ltd 60,000 Add: Depreciation written back 3,000 Share from P Ltd (21,600) 8,13,000 38,000 5) Current Assets Rs. Less : Unrealized Profit on

Stock 7,500

O Ltd 1,20,000 30,900 O Ltd 1,21,500 (8) Sundry Creditors Rs. 2,41,500 O Ltd 1,05,000 Less : Unrealized profit on Stock

7,500 P Ltd 31,500

2,34,000 1,36,500

(9) Depreciation to be added back:

Depreciation charged on Rs 90,000 @ 20% Rs. 18,000



Depreciation to be charged on Rs 75,000 @ 20% Rs. 15,000 Depreciation to be added back Rs. 3,000 Illustration 6

A Ltd. acquired 2,000 Equity Shares of Rs 100 each in B Ltd. on 31.12.2000 The summarized Balance Sheets of the two companies as on 31.12.2001 were as follows:

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Equity Share Capital : Fixed Assets 7,00,000 2,50,000

Shares of Rs 100 each 8,00,000 2,50,000 Current Assets 4,00,000 2,00,000

Reserves 3,00,000 50,000 2,000 Shares in B Ltd. at cost

3,00,000

Profit & Loss A/c 1,00,000 1,00,000

Creditors 2,00,000 50,000

14,00,000 4,50,000 14,00,000 4,50,000

B Ltd had a credit balance of Rs. 50,000 in the Reserve and Rs. 20,000 in the Profit and Loss Account when A Ltd acquired shares in B Ltd. B Ltd issued bonus shares in the ratio of one for every five shares held out of the profits earned during 2001. This is not shown in the above Balance Sheet of B Ltd. Prepare a Consolidated Balance Sheet of A Ltd and its subsidiary, as on 31,12,2001, giving all necessary workings. (UNQHM) Solution

Consolidated Balance Sheet of A Ltd. and its subsidiary B Ltd as at 31st December, 2001


period


reporting period

1 2 3 4

I. EQUITY AND LIABILITIES (1) Shareholders 's funds

(a) Share capital 8,00,000 _ (b) Reserves and surplus 4,24,000 - (c) Money received against share Warrants - - (d) Non-Controlling Interest (Minority 80,000 - Interest)

(2) Share application money pending Allotment - -

(3) Non-current liabilities (a) Long-term borrowings - - (b) Deferred tax liabilities (Net) - - (c) Other Long term liabilities - - (d) Long-term provisions -' -

(4) Current liabilities (a) Short-term borrowings - - (b) Trade payables 2,50,000 - (c) Other current liabilities - - (d) Short-term provisions - -

TOTAL 15,54,000 -

II ASSETS

-



(1) Non-current assets (a) Fixed assets (i) Tangible assets 9,50,000 - (ii) Intangible assets 4,000 : (iii) Capital work-in progress - - (iv) Intangible assets under - - Development (b) Non-current investments - - (c) Deferred tax assets (net) - - (d) Long term loans and advances - -

(e) Other non-current assets - (2) Current assets

(a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets

6,00,000

Total 15,54,000

Working Notes: Degree of control = 2,000 Shares/2,500 Shares = 4/5th; Minority = l/5th Control Chart A: From the Balance Sheet of B Ltd.

Proprietary Balances Notes Total (Rs) A ltd’s Share (4/5)

Minority Interest

(1/5)

a) Capital Profit


2. Pre-acquisition Reserve 50,000

70,000 56,000 14,000


Profit as per Balance Sheet 1,00,000

Less: Pre-acquisition Profit (a) 20,000

80,000

Less: Bonus Share 50,000

30,000 24,000 6,000

c) Post-acquisition Reserve 50,000

Reserve as per Balance Sheet

Less: Pre-acquisition Reserve 50,000

NIL NIL NIL

d) Share Capital 2,50,000

Add: Bonus Shares 50,000

3^000


2,40,000



3) Control Chart B : Calculation of Goodwill / Capital Reserve

Cost of Investment 3,00,000





Goodwill 4,000


Particulars Fixed Assets C/Assets Creditors Reserve P&LA/c

A Ltd. 7,00,000 4,00,000 2,00,000 3,00,000 1,00,000

B Ltd. 2,50,000 2,00,000 50,000 - 24,000

9,50,000 6,00,000 2,50,000 3,00,000 1,24,000

Illustration 7

From the Balance Sheets and additional information given below, Prepare a Consolidated Balance Sheet.

Liabilities H.LTD S.LTD Assets H.LTD S.LTD

Share Capital (Rs 100 each) 5,00,000 2,00,000 Fixed Assets 3,50,000 3,20,000

General Reserve 60,000 40,000 Stock 35,000 15,000

Profit & Loss A/c 30,000 10,000 Debtors 60,000 30,000

12% Debentures (Rs 100 each)

- 1,00,000 Bills Receivable 10,000 8,000

Creditors 40,000 25,000 Shares in S.LTD (1,500 Sh. @ Rs 120 each)

1,80,000 -

Bills Payable 12,000 8,000 400, 12% Debentures @ Rs 90 each

36,000 -

Proposed Dividend 40,000 20,000 Cash 11,000 30,000

6,82,000 4.03,000 6,82,000 4.03,000

Additional Information : 1. When H.. LTD. acquired the shares of S. LTD the General Reserve and Profits and Loss A/c of S. LTD showed

a balance of Rs 30,000 and Rs 4,000 (Dr.), respectively. 2. Creditoras of S.LTD include Rs 10,000 for goods supplied by H.LTD at a profit of 20% on sales. Half of the

goods wallere still in stock on 31.12.2001. 3. The bill accepted by H.LTD were all in favour of S.LTD. 4. Fixed Assets were over-valued by Rs 20,000. (UNQHM) Illustration 8

Bengal Ltd. acquired 12,000 shares of Barakar Ltd. of the full value of Rs 10 each at a price of Rs 1,70,000 on 1.4.2001. The Balance Sheets of the two companies as at 31.3.2002 were as follows.

Liabilities Bengal Ltd. Barakar Ltd.

Assets Bengal Ltd. Barakar Ltd.

Share Capital (Shares of Rs 10 each)

10,00,000 2,00,000 Goodwill 3,00,000 70,000

General Reserve(on 1.4.2001)

4,20,000 1,00,000 Land and Building 4,00,000 1,00,000

Sundry Creditors 2,40,000 92,000 Plant and Machinery 5,00,000 1,00,000

Bills Payable 80,000 60,000 Stock 2,00,000 40,500

Profit & Loss A/c (on 1.4.2001)

90,000 40,000 Debtors 3,00,000 1,34,500

Profit for the year ended 1,70,000 45,000 Investment 2,00,000 -

Bills Receivable 20,000 30,000

Cash and Bank 80,000 62,000

20,00,000 5,37,000 20,00,000 5,37,000



Additional Information : 1. Stock in the hands of Barakar LTD. includes goods purchased from Bengal LTD. at Rs 20,000 which includes

profit charged by the latter company at 25% on cost. 2. Both the companies have proposed 10% dividend for 2001-02. 3. Out of the Debtors and Bills Receivable of Bengal LTD. Rs 50,000 and 16,000 respectively represented due

from Barakar LTD. Prepare a Consolidated Balance Sheet of Bengal LTD. and its subsidiary Barakar LTD.as at 31.3.2002. (UNQHM) Illustration 9 H Ltd. purchased control of S Ltd. on 1.1.2001. The following are the Balance Sheets of H Ltd. and S Ltd. as at 31.12.2001:


Share Capital (Shares of Rs 10 each)

12,00,000 6,00,000 Land and Building! 2,20,000 2,80,000

General Reserve 1,20,000 1,00,000 Plant and Machinery 4,00,000 3,60,000

Profit & Loss A/c 2,00,000 2,00,000 45,000 Shares in S Ltd., at cost

6,75,000 -

Creditors 2,00,000 1,60,000 Stock-in-trade 90,000 40,000

Debtors 1,00,000 1,80,000

Cash at Bank 2,35,000 2,00,000

17,20,000 10,60,000 17,20,000 10,60,000

On 1.1.2001 S Ltd. had Rs 1,00,000 in General Reserve and Rs 1,20,000 (Cr.) in Profit and Loss Account to July 2001, 10% dividend was paid by S Ltd. for 2000. Dividend received from S Ltd. was credited to Profit and Loss Account by H Ltd. Debtors of S Ltd. includes Rs 25,000 due from H Ltd. Prepare Consolidated Balance Sheet as on 31st December, 2001. (UNQHM) Solution

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st December, 2001

Particulars Note No. Figures as at the end of current

reporting period


1 2 3 4

I. EQUITY AND LIABILITIES (1) Shareholders funds (a) Share capital

(b) Reserves and surplus (c) Money received against share warrants (d) Non-Controlling Interest (Minority Interest)

12,00,000 3,80,000

2,25,000


(3) Non-current liabilities (a) Long-term borrowings

(b) Deffered tax liabilities (Net) (c) Other Long term liabilities (d) Long-term provisions



(4) Current liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions

3,35,000

Total 21,40,000 II (1)

ASSETS Non-current assets (a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances Other non-current asset

12,60,000 60,000

(2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets

Total 2,140,000

Working Notes: Degree of Control = 45,000 Shares 760,000 Shares = 3/4th; Minority = l/4th Control Chart A ; From the Balance Sheet of S Ltd.

Proprietary Balances Notes Total («s) H Ltd's Share

(3/4))

Minority Interest

(1/4)

a) Capital Profit

Pre-acquisition Profit 1,20,000

Less: 10% Dividend for 2000 60,000 60,000

. Pro-acquisition General Reserve 1,00,000

1,60,000 1,20,000 40,000



Less: Pie-acquisition Profit 60,000

1,40,000 1,05,000 35,000


General Reserve as per Balance Sheet 1,00,000

Less: Pre-acquisition General Reserve 1,00,000

Nil Nil Nil


Less : Minority Interest (1/4) 1,50,000 1,50,000

4,50,000


Minority Interest 2,25,000



3) Control Chart B ; Calculation of Goodwill/Capital Reserve


Less: Capital Profit (Chart A) 1,20,000

Less: Dividend of 2000 (Note 6) 45,000


Goodwill 60,000


Particulars L&B P&M Stock Debtors Bank Creditors

H Ltd. 2,20,000 4,00,000 90,000 1,00,000 2,35,000 2,00,000

S Ltd. 2,80,000 3,60,000 40,000 1,80,000 2,00,000 1,60,000

2,80,000 3,60,000

Less: Mutual Indebtedness

- - - 25,000 - 25,000

5,00,000 7,60,000 1,30,000 2,55,000 4,35,000 3,35,000

5) Profit and Loss Account (Consolidated)

Rs 6) In July 2001 , H Ltd. received Rs 45,000 (3/4 of Rs 60,000) as dividend from S Ltd This dividend was paid from pie-acquisition profit of Rs 1,20,000. This dividend should have been credited to Investment in the shares of S Ltd. Account but wrongly il was credited to Profit and Loss Account of H Ltd. Therefore, for rectification, Rs 45,000 is to be deducted from the cost of investments as well as from Profit and Loss Account of HLtd.

H Ltd.

2,00,000

Less: Dividend of 2,000 wrongly 45,000

credited to P&L Account (Note 6)

1,55,000

Add: Share of Post-acquisition profit from S Ltd.

1,05,000

2,60,000

Illustration 10

Prepare a Consolidated Balance Sheet from the Balance Sheets of H Ltd. and S Ltd.:


Share Capital: Sundry Assets 8,000 1,200

Equity Shares of Rs 10 each 10,000 2,000 Stock 6,100 2,400


Reserve Fund 1,000 600 Bills Receivable 100 -

Creditors 2,000 1,200 150 Shares in S Ltd. (at cost) 1,500 -

Bills Payable - 300

17,000 5,300 17,000 5300

Following other additional information are also given: (i) Company S Ltd. has earned all the profits only since the above 150 shares were acquired by H Ltd. (ii) On the date of acquisition of these 150 shares by H Ltd., S Ltd. got reserves of Rs 600.



(iii) The bills payable of S Ltd. were in favour of H Ltd. which had discounted Rs 200 of them. (iv) Sundry assets of S Ltd. were under-valued by Rs 200. (v) Stock of H Ltd. include goods of Rs 500 purchased from S Ltd. at a profit of 25% of cost. (UNQHM) Solution:

Consolidated Balance Sheet of H Ltd and its subsidiary S Ltd as at 31st December, 2001


period


reporting period

1 2 3 4


(a) Share capital 10,000 (b) Reserves and surplus 6,000 (c) Money received against share warrants (d) Non-Controlling Interest (Minority 1,000 Interest)

(2) Share application money pending

allotment

(3) Non-current liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long-term provisions


(a) Short-term borrowings -

(b) Trade payables 3,400

(c) Other current liabilities -

(d) Short-term provisions -

TOTAL 20,800

II ASSETS


(a) Fixed assets

(i) Tangible assets 9,400

(ii) Intangible assets

(iii) Capital work-in progress

(iv) Intangible assets under

development

(b) Non-content investments

(c) Deferred tax assets (net)

(d) Long term loans and advances

(e) Other non-current assets

(2) Current assets

(a) Current investments

(b) Inventories 8,400

(c) Trade receivables 3,000

(d) Cash and cash equivalents

(e) Short-term loans and advances

(f) Other current assets (Stock in transit

Rs. 600 4 Cash in transit Ks. 100)

TOTAL 20,800



Working Notes : 1) Degree of Control = 150 Shares / 200 Shares = ¾ th; Minority = 1/4th 2) Control Chart A ; From the Balance Sheet of S Ltd.


HLtd's Share (3/4)


a) Capital Profit

1 . Pre-acquisition Profit Nil

2. Pre-acquisition Reserve Fund 600

3. Revaluation Profit 200

800 600 200



Less: Pre-acquisition Profit Nil

1,200 900 300

c) Post-acquisition Reserve Fund

Reserve Fund as per Balance Sheet 600

Less: Pre-acquisition Reserve Fund 600

Nil _ -

d) Share capital 2,000

Less: Minority Interest (1/4) 500 500

1,500



2) Control Chart B : Calculation of Goodwill/Capital Reserve

Cost of Investment 1,500

Less: Capital Profit 600

Less: Face Value Shares held 1,500 2,100

Capital Reserve 600


Particulars Assets Stock Debtors B/R BiH§ Payable

Creditors P&L A/c

Reserve

H Ltd. 8,000 6,100 13QO 100 - 2,000 4,000 1,000

S Ltd. 1,200 2,400 1,700 300 1,200 900 -

9,200 8,500 3,00 - - - 4,900 -

Add: Revaluation Profit

200

-

- -

- -

Less: Unrealized Profit (Note 5)

- 100 - - - - 100 -

Less: Mutual Acceptances - - - 100 100 - - -

9,400 8,400 3,000 Nil 200 3,200 4,800 1,000

4) Unrealized profit on stock = 25/125xRs 500= Rs 100. As per AS-21, entire unrealized profit on stock is to be eliminated.



Illustration 11

The summarized Balance Sheets of P Ltd: and S Ltd, on 31st December, 2001 were as follows:

Liabilities F Ltd. S Ltd. Assets P Ltd. S Ltd.


3,000 Shares of Rs 100 each

3,00,000 - Investments in S Ltd., at cost 1,70,000 -

10,000 Shares of Rs 10 each

- 1,00,000 Stock 40,000 20,000

Capital Reserve - 55,000 Loan to P. Ltd. - 2,000

General Reserve 30,000 5,000 Bills Receivable (including Rs 200 from S Ltd.)

1,200 -

Profit & Loss A/c 38,200 18,000 Debtors and Cash Balance 27,000 20,000

Loan from S Ltd. 2,100 -

Bills Payable (including Rs 500 to P Ltd.)

- 1,700

Creditors 17,900 7,000

3,88,200 1,86,700 3,88,200 1,86,700

There is a contingent liability of Rs 1,000 for bills discounted given by way of a note to Balance Sheet of P Ltd. P Ltd. acquired 8,000 shares of Rs 10 each in S Ltd. on 31st December, 2001. You are given the following additional information: (i) S Ltd. made a bonus issue on 31st December, 2001 of one share for every two shares held, reducing capital reserve by an equivalent amount, but the transaction is not shown in the Balance Sheet. (ii).Interest receivable amounting to Rs 100 in respect of loan due by P Ltd. has not been credited in the accounts of S Ltd. (iii). The directors decided that the fixed assets of S Ltd. were over-valued and should be written-down by Rs 5,000. Prepare a Consolidated Balance Sheet of the two companies on 31st December, 2001, giving all workings. (UNQHM) Solution:

Consolidated Balance Sheet of P Ltd and its subsidiary S Ltd as at 31st December, 2001


period


reporting period

1 2 3 4


(a) Share capital 30,000 (b) Reserves and surplus 68,200 (c) Money received against share Warrants (d) Non-Controlling Interest (Minority 34,620 Interest)





(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long-term provisions


(a) Short-term borrowings -

(b) Trade payables 26,400

(c) Other current liabilities -

(d) Short-term provisions -

TOTAL 4,29,220

II ASSETS


(a) Fixed assets

(i) Tangible assets 2,89,700

(ii) Intangible assets 31,520

(iii) Capital work-in progress

(iv) Intangible assets under

development

(b) Non-content investments

(c) Deferred tax assets (net)

(d) Long term loans and advances


(2) Current assets


(b) Inventories

(c) Trade receivables 60,000

(d) Cash and cash equivalents 48,000


(f) Other current assets (Stock in transit

Rs. 600 4 Cash in transit Ks. 100)

TOTAL 4,29,220

Note: When the date of Balance Sheet and the date of acquisition are the same, all reserves and surplus appearing in the Balance Sheet will be treated as capital profit (i.e., pre- acquisition profit). Working Notes: 1. Degree of Control = 8,000 Shares/10,000 Shares= 475th; Minority = 175th 2. Control Chart A; From the Balance Sheet of S Ltd.


P Ltd's Share (4/5)


a) Capital Profit

1. Pre-acquisition Profit 5 18,100


3. Capita] Reserve 55,000

Less: Bonus Shares 50,000

4. Revaluation Loss (5,000)

23,100 18,480 4,620


profit as per Balance Sheet 18,000

Add: Accrued Interest 100



18,100

Less : Pie-acquisition Profit 18,100

Nil Nil Nil



Less: Pre-acquisition General Reserve 5,000

Nil Nil Nil


Add: Bonus Shares 50,000

1,50,000


1,20,000






Less: Face Value Shares held 1,20,000 1,38,480

Goodwill 31,250

4) Control Chart C; other Assets and Liabilities


Stock Bills Receivable Bills Payable

Debtors and cash

PLtd. 1,50,000 40,000 1,200 - 27,000

S Ltd.- 1,44,700 20,000 - 1,700 20,000

2,94,700 - - - -

Less: Revaluation Loss 5,000 - - - -

Less: Mutual Acceptance - - 200 200 -

2,89,700 60,000 1,000 1,500 47,000

5) No entry has been passed in the books of S Ltd. in respect of interest accrued Rs 100. For recording it, the entry will be : Loan to P Ltd. Account Dr. Rs 100 To Profit and Loss Account Rs 100 Therefore, the final balance of Loan to P Ltd. will be Rs 2,100 and that of Profit and Loss Account will be Rs 18,100. 6) Loan from S Ltd. Rs 2,100 and Loan to P Ltd. Rs 2,100 will be eliminated. Illustration 12

The following are the Balance Sheet of Hero Ltd and Sarin Ltd as at 31st December, 1995 :

Liabilities Hero

Ltd Rs Sarin Ltd Rs

Assets Hero

Ltd Rs Sarin Ltd Rs

Equity Share Capital of Rs 10 Each

6,00,000 4,00,000 Fixed Assets 4,80,000 6,00,000

General Reserve 2,00,000 3,00,000 Stock-in-trade l,00,0ou 2,50,000



Profit and Loss Account

2,50,000 2,00,000 Debtors 2,50,000 4,50,000

10% Debentures - 1,50,000 Cash 25,000 50,000

Creditors 3,00,000 2,50,000 Investment in Sarin Ltd:

Current Account with Hero Ltd.

- 50,000 10% Debentures (Nominal Rs 80,000)

85,000 -

Shares in Sarin Ltd (24,000 shares)

3,50,000 -

Current Account with Sarin Ltd.

80,000 -

13,50,000 13,50,000 13,50,000 13,50,000

The following further information is furnished: 1. Hero Lid acquired shares in Sarin Ltd on 1st January, 1995, when the Reserve and Profit and Loss Account

was Rs 4,00,000 and Rs 2,00,000. 2. On 1st October, 1995, Sarin Ltd issued one share for every four shares held as bonus shares at a face value

of Rs 10 each. No entry is made in the books of Hero Ltd for the receipt of these bonus shares. 3. On 31.3.1995, Sarin Ltd declared a dividend out of its pre-acquisition profits of 25% on its

then capital. Hero Lid credited the dividend received to its Profit and Loss Account. 4. A remittance of Rs 10,000 by Sarin Lid to .Hero Ltd has not yet been adjusted in the books of

Hero Ltd. 5. Creditors of Sarin Lid include Rs 1,00,000 goods supplied by Hero Ltd on which Hero Ltd

made a profit of Rs 10,000. Half of the goods still in stock of Sarin Ltd on 31.12.1995. Prepare Consolidated Balance Sheet on 31.12.1995. (UNQHM) Solution: Consolidated Balance Sheet of Hero Ltd as at 31st December, 1995


period


reporting period

1 2 .3 4

I. EQUITY AND LIABILITIES (1) Shareholders funds (a) Share capital 6,00,000 (b) Reserves and surplus 7,65,000 (c) Money received against share Warrants - (d) Non-Controlling Interest (Minority 2,25,000 Interest) (2) Share application money pending Allotment - (3) Non-current liabilities (a) Long-term borrowings 70,000 (b) Deferred tax liabilities (Net) - (c) Other Long term liabilities - (d) Long-term provisions - (4) Current liabilities (a) Short-term borrowings , (b) Trade payable^ 4,50,000



(c) Other current liabilities - (d) Short-term provisions - TOTAL 21,10,000 II ASSETS (1) Non-current assets (a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in progress (iv) Intangible assets under Development (b) Non-content investments (c) Deferred tax assets (net) (d) Long term loans and advances


(2) Current assets


(b) Inventories 3,45,000

(c) Trade receivables 6,00,000

(d) Cash and cash equivalents 85,000


(f) Other current assets

TOTAL 21,10,000

Working Notes: 1. Degree of Control = 24,000 Shares/6,000 Shares (Bonus) / 40,000 Shares = 3/4th, Minority = 1/4th 2. Control Chart A; From the Balance Sheet of S Ltd.


Hero Ltd's Share (3/4)


a) Capital profit

1. Pre-acquisition Profit 2,00,000

Less: Dividend paid (25% of Rs 3,20,000) 80,000 1,20,000

2. Pre-acquisition General Reserve 4,00,000

Less: Bonus Shares (8,000 x Rs 10) 80,000 3,20,000

4,40,000 3,30,000 1,10,000



Less : Pre-acquisition profit 1,20,000

80,000 60,000 20,000

c) Post-acquisition General Reserve 3,00,000

General Reserve as per Balance Sheet

Less: Pre-acquisition General Reserve 3,20,000

(20,000) (15,000) (5,000)


Less: Minority Interest 1,00,000 1,00,000

3,00,000





3) Control Chart B: Calculation of Goodwill/ Capital Reserve

Cost of Investments :

In Equity Shares 3,50,000

In Debentures 85,000 4,35,000

Less: capital Profit (Chart A) 3,30,000

1,05,000

Less: Dividend from Pre-acquisition Profit 60,000

45,000

Less: Face Value of Shares held 3,00,000

Less: Face Value of Debentures held 80,000 3,80,000

Capital Reserve (being negative) (3,35,000)


Particulars Fixed Assets Stock Debtors Cash Creditors

Hero Ltd. 4,80,000 1,00,000 2,50,000 25,000 3,00,000

Satin Ltd. 6,00,000 2,50,000 4,50,000 50,000 2,50,000

10,80,000 3,50,000 7,00,000 75,000 5,50,000

Less: Mutual Indebtedness - 1,00,000 1,00,000

Less : Unrealized Profit (Note 7) 5,000 - -

3,45,000 6,00,000 4,50,000


Rs 6) General Reserve Rs

Hero Ltd. 2,50,000 Hero Ltd. 2,00,000

Share from Sarin Ltd (Chart A)

60,000 Less: Share from Sarin Ltd (Chart A) (15,000)

I 3,10,000 1.85.000

Less: Pre-acquisition Profit wrongly credited to P/L A/c

60,000 Half of the goods still in stock. Therefore unrealized profit on stock will be = 1/2 of Rs 10,000 = Rs 5,000. As per AS-21 entire unrealized profit on stock is to be eliminated.

2,50,000

Less: Unrealized Profit on Stock (Note 7)

5,000

2,45,000

Illustration 13

The Balance Sheets of H Ltd. and its subsidiary S Ltd. as at 31st March, 2002 were as under:

Liabilities H Ltd.Rs S Ltd.Rs Assets HLtd.Rs IS Ltd.Rs

Share Capital : Land and Buildings 6,00,000

Equity Shares of Rs 10 each, fully paid

20,00,000 5,00,000 Plant and Machinery 20,00,000

General Reserve 3,00,000 1,00,000 Furniture and Fixtures

90,000 1,00,000

Profit & Loss A/c : 30,000 shares in S Ltd., at cost

6,50,000

Balance on 1.4.2001 4,00,000 2,00,000 Stock 4,00,000 7,50,000

Profit for the year ended 5,00,000 2,50,000 Debtors 1,00,000 2,80,000



31.3.2002

Bills Payable 1,50,000 Cash in Hand 10,000 15,000

Creditors 3,00,000 3,00,000 Cash at Dena Bank 1 ,05,000

Canara Bank - Overdraft 2,00,000 Bills Receivable - 1,00,000

38,50,000 13,50,000 38,50,000 13,50,000

All the 30,000 shares in S Ltd. were acquired held by S Ltd. are all accepted by H Ltd. Included in Debtors of S Ltd. is a sum of Rs 60,000 owing by H Ltd. in respect of goods supplied by S Ltd. You are required to prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. As at 31 st March, 2002. Give all your working notes clearly. (UNQHM) Solution:

Consolidated Balance Sheet of Hero Ltd and its subsidiary S Ltd as at 31st March 2001


period


reporting period 1 2 .3 4


(a) Share capital 20,00,000 (b) Reserves and surplus 12,75,000

(c) Money received against share warrants (d) Non-Controlling Interest (Minority 4,20,000 Interest)



(4) Current liabilities (a) Short-term borrowings 2,00,000 (b) Trade payable 5,90,000 (c) Other current liabilities (d) Short-term provisions

TOTAL 44,85,000 II ASSETS

(1) Non-current assets (a) Fixed assets (i) Tangible assets (ii) Intangible assets 27,90,000 (iii) Capital work-in progress 95,000 (iv) Intangible assets under development (b) Non-cunent investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets



(a) Current investments (b) Inventories 11,50,000 (c) Trade receivables 3,20,000 (d) Cash and cash equivalents 1,30,000 (e) Short-term loans and advances (f) Other current assets

TOTAL 44,85,000

Working Notes: 1. Degree of Control = 30,000 Shares/50,000 Shares = 3/5th, Minority = 2/5th 2. Control Chart A; From the Balance Sheet of S Ltd.


H Ltd's Share (3/5)


a) capital Profit

1 . Pre-acquisition Profit 7 3,25,000


4,25,000 2,55,000 1,70,000


1/2 of the profit earned during 2001-02

1,25,000 75,000 50,000



Less: Pre-acquisition General Reserve

1,00,000 - -

Nil Nil Nil

d) Share capital 5,00,000

Less : Minority Interest (2/5) 2,00,000 2,00,000

3,00,000





Less: Capital Profit 2,55,000


Goodwill 95,000


Particulars Land and Building

Plant and Machinery

Furniture and

Fixtures Stock Debtors

Bills Receivable

s

Bills Payable

Creditors

H. Ltd. 6,00,000 20,00,000 90,000 4,00,000 1,00,00 0 - 1,50,00

0 3,00,00 0

S. Ltd. - - 1,00,00 0 7,50,000 2,80,00 0 1,00,000 - 3,00,00 0

. . - . 3,80,00 1,00,000 1,50,00 6,00,00

Less:

Mutual



Indebted - - - 60,000 - - 60,000

Ness

Less :

Mutual Accept

- - - - - 1,00,000 1,00,00 -

Nee

6,00,000 20,00,000 1,90,000 11,50,00 0 3,20,00 0 Nil 50,000 5,40,00 0


Rs 6) General Reserve Rs

H Ltd (Rs. 4,00,000 + Rs. 5,00,000) 9,00,000 H Ltd 3,00,000

Share of Post – acquisition Profit from S Ltd. (Chart A)

75,000 Share from S Ltd Nil

9,75,000 3,00,000

7) Pre-acquisition profit = Rs 2,00,000 (1.4.2001) + 1/2 or Rs 2,50,000 (profit earned during the

year 2001-ti2) = Rs 2,00,000 h- Rs 1,25,000 = Rs 3,25,000. 8) Bank Account may be held by the holding company and its subsidiary at different banks.

When some balances are favorable and other have overdrawn balances, they should appear in the Consolidated Balance Sheet as assets and liabilities respectively. It would be incorrect to adjust the overdraft balances against credit balances (Rule 8).

Illustration 14

The following are the Balance Sheets of H Ltd, and its subsidiary S Ltd, as at 31st March, 2002 :

Liabilities HLtd.

Rs SLtd.

Rs Assets

HLtd. Rs

SLtd. Rs

Fully paid Equity Shares of Rs 10 each

6,00,000 2,00,000 Machinery 3,90,000 1,35,000

General Reserve 3,40,000 80,000 Furniture 80,000 40,000

Profit & Loss A/c 1,00,000 60,000 80% Shares in S Ltd., at cost

3,40,000 -

Creditors 70,000 35,000 Stock 1,80,000 1,20,000

Debtors 50,000 30,000

Cash at Bank 70,000 50,000

11,10,000 3,75,000 11,10,000 3,75,000

The following additional information is provided to you : 1. Profit and Loss Account of S Ltd. stood at Rs 30,000 on 1.4.2001, whereas General Reserve has remained

unchanged since that date.

2. H Ltd. acquired 80% shares in S Ltd. on 1.10.2001 for Rs 3,40,000 as mentioned above.

3. Included in Debtors of S Ltd. is a sum of Rs 10,000 due from H Ltd. for goods sold at a profit of 25% on cost price. Till 31.3.2002, only one-half of the goods had been sold while the remaining goods were lying in the godown of H Ltd. as on that date.

You are required to prepare Consolidated Balance Sheet as at 31st March, 2002. Show all calculations clearly. (UNQHM)



Solution Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March, 2002


period




(a) Share capital 6,00,000 (b) Reserves and surplus 4,51,000 (c) Money received against share warrants (d) Non-Controlling Interest (Minority 68,000 Interest)



(4) Current liabilities (a) Short-term borrowings 95,000 (b) Trade payable (c) Other current liabilities (d) Short-term provisions

TOTAL 12,14,000

II ASSETS (1) Non-current assets

(a) Fixed assets (i) Tangible assets 6,45,000 (ii) Intangible assets 80,000 (iii) Capital work-in progress (iv) Intangible assets under development (b) Non-cunent investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets (a) Current investments

(b) Inventories 2,99,000 (c) Trade receivables 70,000 (d) Cash and cash equivalents 1,20,000 (e) Short-term loans and advances (f) Other current assets

TOTAL 12,14,000

Working Notes: 1. Degree of Control = 80 or 4/5th, Minority = 1/5th 2. Control Chart A; From the Balance Sheet of S Ltd.



Proprietary Balances Notes Total (Rs) HLtd's

Share (4/5) Minority Interest

(1/5)

a) Capital Profit



1,25,000 1,00,000 25,000




15,000 12,000 3,000



Less: Pre-acquisition General Reserve 80,000 - -

Nil Nil Nil


Less: Minority Interest (20%) 40,000 40,000

1,60,000







Goodwill 80,000


Machinery Furniture Stock Debtors Bank Creditors

H. Ltd. 3,90,000 80,000 1,80,000 1 50,000 70,000 70,000

S. Ltd. 1,35,000 40,000 1,20,000 30,000 ^0,000 35,000

- - 3,00,000 80,000 - 1,05,000

Less: Mutual Indebtedness

- - - 10,000 - 10,000

Less: Unrealised Profit (Note 8)

- - 1,000 - - -

5,25,000 1,20,000 2,99,000 70,000 1,20,000 95,000

5) Dr. Profit and Loss Account of S Ltd, for the year ended Balance 2002 Cr.

To Balance c/d 60,000 By Balance from last year 30,000

By Profit during the year (Balancing figure) 30,000

60,000 60,000

Therefore, Profit up to 30.9.2001, if accrued evenly amounted to Rs 15,000 (1/2 of Rs 30,000) and Profit as on 30.9.2001 will be : Profit on 1.4.2001 Rs 30,000 (+)Proportionate Profit up to 30.9.2001 Rs 15,000 Rs45,000



6) Profit and Loss Account (Consolidated) Rs 7) General Reserve Rs

H Ltd. 1,00,000 H Ltd. 3,40,000

Share of Post-acquisition Profit from S Ltd. (Chart A) 12,000 Share from S Ltd. Nil

1,12,000

Less: Unrealized Profit on Stock (Note 8) 1,000

1,11,000 3,40,000

8) Calculation or Unrealized Profit on Unsold Stock S Ltd. sold goods to H Ltd. for Rs 10,000 at a profit of 25% on cost. S Ltd. made a profit of Rs 2,000 (257125 x Rs 10,000). Half of the goods is unsold. So, unrealized profit = 1/2 of Rs 2,000 = Rs 1,000. As per AS-21 entire unrealized profit on stock is to be eliminated. Illustration 15

The Balance Sheets of Had Ltd, and its subsidiary Suri Ltd, as at 31st March, 2002 are as follows

Liabilities Hari Ltd.Rs Suri Ltd.Rs Assets Hari Ltd.Rs Suri Ltd.Rs

Share Capital : Plant and Machinery 4,80,000 90,000

Equity Shares of Rs 10 each fully paid

4,00,000 1,00,000 Furniture 15,000 27,000

General Reserve (1.4.2001)

2,80,000 34,000 Investments 2,00,000 -

Profit & Loss A/c 1,70,000 42,000 Stock 95,000 42,000

Creditors 70,000 33,QQQ Debtors 60,000 32,000

Cash at Bank 70,000 20,000

9,20,000 2,11,000 9,20,000 2,11,000

The following information is also given to you: (i) Hari Ltd. acquired 8,000 equity shares in Suri Ltd. as at 1st July, 2001 at a cost of Rs 2,00,000. (ii) Stock of Hari Ltd. includes Rs 6,000 relating to stock purchased from Suri Ltd. Which follows the practice of

charging 25% extra on the cost for determining the sale price, (iii) Creditors of Hari Ltd. include Rs 10,000 on account of purchases from Suri Ltd. (iv) Profit and Loss Account of Hari Ltd. includes dividend @ 10% for the year 2001-02 received from Suri Ltd.,

which declared and paid it after 1st July, 2002. (v) Balance in Suri Ltd.'s Profit and Loss Account on 1st April, 2001 was Rs 26,000. Dividend @ 10% for the year

2000-01 was declared out of this balance after 1st July, 2001. (vi).Profits during the year 2001-02 have been earned on uniform basis throughout the year. Prepare a Consolidated Balance Sheet of Hari Ltd. and its subsidiary Suri Ltd. as at 31st March, 2002. Submit all your working notes neatly. (UNQHM) Solution: Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March, 2002


period




(a) Share capital 4,00,000 (b) Reserves and surplus 4,56,400 (c) Money received against share warrants



(d) Non-Controlling Interest (Minority 35,200 Interest)



(4) Current liabilities (a) Short-term borrowings (b) Trade payable 95,000 (c) Other current liabilities (d) Short-term provisions

TOTAL 9,89,600


(a) Fixed assets (i) Tangible assets 6,12,000 (ii) Intangible assets 66,8000 (iii) Capital work-in progress (iv) Intangible assets under development (b) Non-content investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets (a) Current investments (b) Inventories 1,35,800 (c) Trade receivables 82,000 (d) Cash and cash equivalents 90,000 (e) Short-term loans and advances (f) Other current assets

TOTAL 9,89,600

Working Notes:

1. Degree of Control = 80 or 4/5th, Minority = 1/5th 2. Control Chart A; From the Balance Sheet of S Ltd.

Proprietary Balances Notes Total(Rs) Hari Ltd's

Shares (4/5)


a) Capital Profit

1 . Pre-acquisition Profit 7 32,500

Less: Dividend for 2000-01 10,000

22,500


56,500 45,200 11,300






19,500 15,000 3,900


General Reserve as per Balance Sheet

34,000


34,000

Nil Nil Nil


Less: Minority Interest (1/5) 20,000 .20,000

80,000



3) Control Chart C : Other Assets and Liabilities



Less: Dividend for 2000-01 (4/5m of Rs 10,000) 8,000


Goodwill 66,800


Particulars Plant and

Machinery Furniture Stock Debtors

Cash at Bank

Creditors

Had 4,80,000 15,000 95,000 60,000 70,000 70,000

Suri 90,000 27,000 42,000 32,000 20,000 35,000

- - 1,37,000 92,000 - 1,05,000

Less: Mutual Indebtedness - - - 10,000 - 10,000

Less: Unrealized Profit on Stock (Note 8)

- - 1,200 - - -

5,70,000 42,000 1,35,800 82,000 90,000 95,000


Hari Ltd. 1,70,000 Hari Ltd 2,80,000

Less: Dividend for 2000-01 8,000 Share from Suri Ltd. Nil

1,62,000

Share of Post-acquisition Profit from Suri Ltd. (Chart A) 15,600 -

1,77,600

Less: Unrealized Profit on Stock (Note 8) 1,200

1,76,400

7) Dr. Profit and Loss Account of Suri Ltd, for the year ended 31st March, 2002

To Dividend® 10% 10,000 By Balance from last year 26,000

To Balance c/d 42,000 By Profit during the year (Balancing Figure) 26,000

52,000 52,000

So, profit upto 30.6.2001, amounted to Rs 6,500 (1/4 of Rs 26,000 Le. for 3 months) and the profit as on 30.6.2001 will be:



Profit on 1.4.2001 Rs 26,000 (+) Proportionate Profit upto 30,6,2001 Rs. 6,500 Rs. 32,500 (8) Calculation of Unrealized Profit on Unsold Stock

Suri Ltd. sold goods to Hari Ltd. for Rs 6,000 at a profit of 25% on cost. Suri Ltd. made a profit of Rs 1,200 (25/^25 x Rs 6,000). As per AS-21 entire unrealized profit on stock is to be eliminated. Illustration 16 The following are the Balance Sheets of M Ltd. and N Ltd. as at 31.12.2001 :

Liabilities MLtd.

Rs NLtd.

Rs Assets

MLtd. Rs

NLtd. Rs

Equity Shares of Rs 10 each, fully paid

3,00,000 2,00,000 Fixed Assets 6,00,000 3,40,000

capital Redemption Reserve

1,20,000 - Investment in 15,000 Equity Shares in

General Reserve 1,00,000 30,000 N Ltd. on 30.6.2001 2,00,000

Profit & Loss A/c (before any appropriation)

60,000 40,000 Debentures of N Ltd. at par

50,000

Debentures 2,00,000 1,00,000 Debentures of M Ltd. at par

- 60,000

Outstanding Interest on Debentures

30,000 15,000 Other Assets 1,50,000 1,00,000

(for one year)

Other Liabilities 1,90,000 1,15,000

10,00,000 5,00,000 10,00,000 5,00,000

Prepare the Consolidated Balance Sheet as at 31,12,2001 assuming that N Ltd has earned uniformly in 2001 and its Profit and Loss Account showed a debit balance of Rs 20,000 on 1.1.2001. Show the workings also. Solution Consolidated Balance Sheet of M Ltd, and its subsidiary N Ltd as at 31 December, 2001 (UNQHM) Solution:

Consolidated Balance Sheet of M Ltd. and its subsidiary N Ltd as at 31st December 2001


period




(a) Share capital 30,00,000 (b) Reserves and surplus 3,02,500 (c) Money received against share Warrants (d) Non-Controlling Interest (Minority Interest) 67,500


(3) Non-current liabilities (a) Long-term borrowings (b) Deferred tax liabilities (Net) 1,90,000



(c) Other Long term liabilities (d) Long-term provisions

(4) Current liabilities (a) Short-term borrowings (b) Trade payable (c) Other current liabilities 3,33,500 (d) Short-term provisions

TOTAL 11,93,500

II

ASSETS

(1) Non-current assets (a) Fixed assets (i) Tangible assets 9,40,000 (ii) Intangible assets 20,000 (iii) Capital work-in progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets 2,33,500

TOTAL 9,89,600

It is assumed that both the companies have credited their respective share of interest on Debentures to Profit and Loss Account. Other assets include accrued interest on Debentures of Rs 16,500 (Rs 9,000 +Rs 7,500). On the other hand, if it is assumed that the accrued interest has not been adjusted, then the following adjustment entry is to be passed: Accrued Interest on Debenture Account Dr. Rs.16,500 To Profit and Loss Account Rs. 16,500 Working Notes:

1. Degree of Control = = 15,000 Share / 20,000 Shares = 3/4th, Minority = 1/4th 2. Control Chart A; From the Balance Sheet of S Ltd.

Proprietary Balances Notes Total (Rs) M Ltd's Share (3/4) Minority Interest(1/4)

a) Capital Profit


2. Pre-acquisition General Reserve

30,000

40,000 30,000 10,000






30,000 22,500 7,500




30,000

Nit Nil Nil



1,50,000






Less: Face Value, of Shares held 1,50,000 1,80,000

Goodwill 20,000

4) Control Chart 0 Assets and Liabilities


Other Assets

Other Liabilities

Outstanding Interest on Debentures

Debentures

M Ltd. 6,00,000 1,50,000 1,90,000 30,000 2,00,000

N Ltd. 3,40,000 1,00,000 1,15,000 15,000 1,00,000

2,50,000 45.000 9,00,000

Less: Held within the Group

1,10,000

Less : Accrued Interest on Debentures

1 6,500

16,500

9,40,000 2,33,500 3,05,000 28,500 1,90,000

Rs 9,000 + Rs 7,500 = Rs 16,500.

Profit and Loss Account of N Ltd. Dr. Cr.

Date Particulars Rs Date Particulars Rs

1.1.2001 To Balance b/d 20,000 31.12.2001 By Net Profit (2001) 60,000

31.12.2001 To Balance c/d 40,000

60,000 60,000

(6) Pre-acquisition Profit = Opening balance of Rs 20,000 (Dr.) + 1/2 of Rs 60,000= Rs 20,000 (Dr.) + Rs 30,000= RslO,000(Cr.)

Tutorial Note: Shares were acquired on 30.6.2001. So. 1/2 of the profit of 2001 will be treated as pre-acquisition profit.

(7) Profit and Loss Account (Consolidated) Rs (8) General Reserve Rs

MLtd. 60,000 MLtd. 1,00,000



Share of Post-acquisition Profit from N Ltd. (Chart A) 22,500 Share from N Ltd. Nil

82,500 1,00,000

Note: Inter-cancellation of Debentures has been made on the lines of general practice and commercial expediency. However, it must be appreciated that Debenture is a statutory liability on the part of the issuing company and for investing company it is an asset, transferable any time for value. Therefore, such cancellation, froip legal point of view, is not a sound practice. Illustration 17

On 1st July, 2001 Maharaja Ltd. acquired 8,000 shares of Rs 10 each of Praja Ltd. at Rs 1,00,000. Their respective Balance Sheets on 31.12.2001 were as follows:

Liabilities Maharaja

Ltd.Rs Praja Ltd.Rs

Assets Maharaja.

Ltd.Rs Praja Ltd.Rs

Share Capital Fixed Assets 1,00,000 1,00,000

... shares of Rs 10 each 2,00,000 1,00,000 Investments 1,00,000 -

Reserve 30,000 40,000 Stock 50,000 40,000


Creditors 25,000 15,000 cash at Bank 5,000 10,000

Bills Payable (Accepted - all are in favour of Maharaja Ltd.)

- 5,000 Bills Receivable (Received from Praja Ltd.)

5,000 -

3,25,000 2,20,000 3,25,000 2,20,000

Additional information: a) At the time of acquiring shares, Praja Ltd. had Rs 15,000 in Reserve and on 1.1.2001 Praja Ltd. had Rs 20,000

in Profit and Loss Account . b) Praja Ltd. paid 10% dividend in July for the year 2000 and Maharaja Ltd. credited the share of dividend to

their Profit and Loss Account. c) On the date of acquisition of shares, Fixed Assets of Praja Ltd. stood at Rs 1,20,000 on

1.1.2001 these were revalued at Rs 1,40,000. Stock of Praja Ltd. includes Rs 12,000 on which Maharaja Ltd. made a profit of 25% on sales.

Proposed Dividend of both the companies for 2001 is 10%. Prepare a Consolidated Balance Sheet as on 31st December, 2001. (UNQHM) Solution : Consolidated Balance Sheet of M Ltd. and its subsidiary N Ltd as at 31st December 2001


period


reporting period 1 2 3 4


(a) Share capital 2,00,000 (b) Reserves and surplus 1,79,666 (c) Money received against share Warrants (d) Non-Controlling Interest (Minority 45,667 Interest)





(4) Current liabilities (a) Short-term borrowings

(b) Trade payable 40,000 (c) Other current liabilities (d) Short-term provisions

TOTAL 4,65,333


(a) Fixed assets (i) Tangible assets 2,28,333 (ii) Intangible assets (iii) Capital work-in progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets

(2) Current assets (a) Current investments (b) Inventories 87,000 (c) Trade receivables 1,35,000 (d) Cash and cash equivalents 15,000 (e) Short-term loans and advances (f) Other current assets

TOTAL 4,65,333

Working Notes: 1. Degree of Control = = 8,000 Share / 10,000 Shares = 4/5th ; Minority = 1/5th 2. Control Chart A; From the Balance Sheet of S Ltd.


Maharaja Ltd's Share


a) Capital profit


2. Pre-acquisition Reserve 15,000

3. Revaluation Profit 8 30,000

92,500 74,000 18,500




12,500

Less: Additional Depreciation

9 1,667

.

10,883

Less: Proposed Dividend 10,000 8,000 2,000



833 666 167

; c) Post-acquisition Reserve

Reserve as per Balance Sheet 1 40,000

Less: Pre-acquisition Reserve

15,000

25,000 20,000 5,000



80,000


Minority Interest` 45,667




Less: Dividend for 2000 (4/5 of Rs 10,000) 8,000


Capital Reserve 62,000



Stock Debtors Cash at

Bank Creditors

Bills Receivable

Bills Payable

Maharaja Ltd. 1,00,000 50,000 65,000 5,000 25,000 5,000

Praja Ltd. 1,00,000 40,000 70,000 10,000 15,000 - 5,000

2,00,000 90,000 - - - -

Add: Revaluation Profit (Note 8)

30,000 - - - - - -

230,000 - - - - - -

Less: Additional Depreciation (Note 9)

1,667 - - - - - -

-. - - - -

Less: Unrealised Profit (Note 10)

- 3,000 - ; - - -

Less: Mutual Acceptance

- - - - - 5,000 5,000

2,28,333 87,000 1,35,000 15,000 40,000 Nil NO


Maharaja Ltd. 70,000 Maharaja Ltd. 30,000

Less: Dividend for 2000 8,000 Add: Share of post-acquisition reserve

20,000

Add: Share of proposed dividend from jpraja Ltd.

8,000

Add: Share of post-acquisition profit from Rap Ltd,

666

Less: Unrealised profit on unsold goods 3,000

67,666 50,000



7) Dr. Profit and Loss Account of Praja Ltd. for the year ended 31st December, 2001 Cr

To General Reserve (Rs 40,000- Rs 15,000) 25,000 By Balance from last year 20,000

To Dividend @ 10% 10,000 By Profit during the year (Balancing Figure)

75,000

To Balance c/d 60,000

95,000 95,000

Therefore, profit upto 30.6.2001, if accrued evenly, amounted to R.37,500 (1/2 of Rs 75,000) and profit as on 30.6.2001 will be : Profit on 1.1.2001 Rs 20.000 Less: Dividend for 2000 Rs 10,000 10,000 Proportionate profit upto 30.6.2001 37,500 Rs.47,500 Entire accretion to General Reserve may be taken as current profit as the transfer was made on the date of account, i.e., 31.12.2001. Therefore, current profit will be Rs 37,500 - Rs 25,000 = Rs 12,500 which is same as : Profit and Loss Account

As per Balance Sheet Rs 60,000 Less: Pre-aequisition profit Rs 47,500 Post-acquisition profit Rs 12,500

(8) Value of fixed assets on 31.12.2001 was Rs 1,00,000. It was standing in the books at Rs 1,20,000 on 1.1.2001. Therefore, total depreciation charged in 2001 = Rs 20,000. Rate of depreciation = Rs 20,000 / Rs 1,20,000 x 100 = 16.67%. The effective book value on 30.6.2001 was Rs 1,20,000 - Rs 10,000 (depreciation for 6 months @ 16.67% on Rs 1,20,000) = Rs 1,10,000. It was revalued at Rs 1,40,000. Therefore, revaluation profit = Rs 1,40,000 - Rs 1,10,000 = Rs 30,000. (9) Calculation of Additional Depreciation on Fixed Assets From 30.6.2001 to 31.12.2001, depreciation is to be provided @ 16.67% on Rs 1,40,000. So, depreciation of that period will be Rs 11,667 (16.67% on Rs 1,40,000 for 6 months). However, depreciation has already been provided for this period Rs 10,000 (1/2 of Rs 20,000). Therefore, additional depreciation = Rs 1,667. (10) Unrealised Profit on Unsold Stock Total unrealised profit = 25% of Rs 12,000 = Rs 3,000. As per AS-21 entire unrealised profit on stock is to be eliminated. Illustration 18

The following are the Balance Sheets of H Ltd, and S Ltd, as on 31s* March, 2002 ;

Liabilities HLtd.(Rs) SLtd.(Rs) Assets HLtd.(Rs) SLtd. (Rs)

Share Capital: Fixed Assets 5,00,000 4,00,000

Equity Capital of Rs 100 each, fully paid-up

10,00,000 8,00,000 Investment in S Ltd.

5,00,000 -

General Reserve 1 2,00,000 2,00,000 Current Assets 8,00,000 11,00,000

Profit & Loss A/c 4,00,000 3,00,000

Current Liabilities 2,00,000 2,00,000

18,00,000 15,00,000 18,00,000 15,00,000



The following further information is furnished: (IX) H Lid. acquired 3,000 shares in S Ltd. on 1st April. 2001 when the reserve and surplus of S Lid. were as under a) General reserve Rs 5,00,000. b) Profit and Loss Account (credit balance) Rs 2,00,000. (ii) On 1st October, 2001, S Ltd issued three fully paid-up shares fof every five shares held, as bonus shares out

of pre-acquisition general reserve. No entry is made in the books of H Ltd. for the receipt of these bonus shares.

(iii) On 30th June, 2001, S Ltd. declared 20% dividend out of pre-acquisition profits and H Ltd. credited the receipt of dividend to its Profit and Loss Account.

(iv) S Ltd. owed H Ltd. on 31st March, 2002 Rs 1,00,000 for purchase of stock from H Ltd. The entire stock is held by S Ltd. on 31st March. 2002. H Ltd. made a profit of 25% on cost.

(v) H Ltd. transferred for cash payment a machine to S Ltd. for Rs 80,000. The book value of machine to H Ltd. was Rs 60,000.

Prepare a Consolidated Balance Sheet as at 31st March, 2002. Adjustment for depreciation on machine transferred by H Ltd. to S Ltd. is to be ignored. (UNQHM) Solution:

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March 2002


period




(a) Share capital 10,00,000 (b) Reserves and surplus 8,40,000 (c) Money received against share warrants (d) Non-Controlling Interest (Minority 5,20,000 Interest)



(4) Current liabilities (a) Short-term borrowings (b) Trade payable (c) Other current liabilities 3,00,000 (d) Short-term provisions

TOTAL 26,60,000


(a) Fixed assets (i) Tangible assets 8,80,000 (ii) Intangible assets (iii) Capital work-in progress (iv) Intangible assets under development



(b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets


TOTAL 26,60,000

Working Notes:

1. Degree of Control = 3,000 Share + 1,8000 Bonus Shares / 8,000 Shares = 3/5th , Minority = 2/5th 2. Control Chart A; From the Balance Sheet of S Ltd.

Proprietary Balances Notes Total (Ks) H Ltd's Share (3/5)


a) Capital Profit

1 . Pre-acquisition Profit 2,00,000

Less: Dividend 1,00,000 1 1,00,000


Less: Bonus Shares 3,00,000 2,00,000

3,00,000 1,80,000 1,20,000



Less: Pre-acquisition Profit 1,00,000

2,00,000 1,20,000 80,000



Less: Pre-aequisition General Reserve

2,00,000

' Nil Nil Nil


Less: Minority Interest (2/5) 3,20,000 3,20,000

4,80,000



3) Control Chart B: Calculation of Goodwill/Capital Reserve



Less: Dividend for 2000 (315 of Rs 1,00,000) 60,000


Capital Reserve 2,20,000





Current Assets

Current Liabilities

General Reserve

H Ltd. 5,00,000 8,00,000 2,00,000 2,00,000

S Ltd. 4,00,000 11,00,000 2,00,000 -

9,00,000 19,00,000 4,00,000 -

Less: Unrealised Profit out of transfer - (Rs 80,000 - Rs 60,000)

20,000 - - -

Less: Unrealised Profit on Stock (Note 6)

- 20,000 - -

- 18,80,000 - •

Less: Mutual Indebtedness - 1,00,000 1,00,000 -

8,80,000 17,80,000 3,00,000 2,00,000


H Ltd. 4,00,000

Less: Dividend from pre-a cquisition profit 60,000

3,40,000

Less: Unrealised profit on Machinery sold 20,000

3,20,000

Add: Shares of post-acquisition profit from S Ltd. (Chart A) 1,20,000

4,40,000

Less: Unrealised profit on stock 20,000

4,20,000

6) Unrealised Profit on Stock Unsold H Ltd. made a profit of 25% on cost, i.e., 20% on Sales. Therefore, total profit = 20% of Rs 1,00,000 = Rs

20,000. 7) After issue of 3 bonus shares for every 5 shares held, the share capital is Rs 8,00,000.

Therefore, the share capital before bonus issue was Rs 5,00,000 (Rs 8,00,000 / 8 x 5).Therefore, 20% dividend which was declared on 30th June 2001 will be calculated on share capital of Rs 5,00,000. Total equity dividend will be Rs 1,00,000 (20 / 100 x Rs 5,00,000).

Illustration 19

Balance Sheets as on 31st March, 2002

Liabilities H Ltd.

Rs S Ltd. Rs Assets

H Ltd. Rs

S Ltd. Rs


6% Preference Shares of Rs 10 each

1,60,000

15,000 Equity Shares in S Ltd.

3,30,000

Equity Shares of Rs 10 each 6,00,000 2,00,000 1,200 Preference Shares in S Ltd.

1,20,000

General Reserve 1,00,000 80,000 1,000, 6% Debentures in S Ltd. 10,000

Profit & Loss A/c 2,00,000 90,000 Current Assets 2,94,000 2,87,000

6% Debentures of Rs 10 each

- 40,000

Proposed Dividend:

On Equity Shares 60,000 20,000



On Preference Shares - 9,600

Debenture Interest accrued

- 2,400

Sundry Creditors 2,94,000 1,25,000

12,54,000 7,27,000 12,54,000 7,27,000

Other information is as under: (i) The general reserve of S Ltd. as on 31.3.2001 was Rs 80,000. (ii) H Ltd. acquired the shares in S Ltd. on 31.3.2001. (iii) The Balance of Profit and Loss Account of S Ltd is made up as follows: Rs. Balance as on 31.3.2001 56,000 Net profit for the year ended 31.3.2002 63,000 1,19,600 Less : Provision for proposed dividend 29,600 90,000 (iv) The balance of Profit and Loss Account of S Ltd. as on 31.3,2001 is after providing for preference dividend of

Rs 9,600 and proposed equity dividend of Rs 10,000 both of which were subsequently paid and credited to Profit and Loss Account of H Ltd.

(v) No entries have been made in the books of H Ltd. for debentures interest due from or proposed dividend of S Ltd. for the year ended on 31.3.2002.

(vi). The balance of Profit and Loss Account of S Ltd. as on 31.3,2001 is after providing for preference dividend of Rs 9,600 and proposed equity dividend of Rs 10,000 both of which were subsequently paid and credited to Profit and Loss Account of H Ltd.

(vii).No entries have been made in the books of H Ltd. for debentures interest due from or proposed dividend of S Ltd. for the year ended on 31.3.2002.

(viii) S Ltd has issued folly paid bonus shares of Rs 40,000 on 31.3.2002 among the existing shareholders by

drawing upon the general reserve. The transaction has not been given effect to in the books of S Ltd. You are required to prepare the Consolidated Balance Sheet of H Ltd. with its subsidiary S Ltd. as on 31st March, 2002. (UNQHM) Solution

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March 2002


period




(a) Share capital 6,00,000 (b) Reserves and surplus 3,93,000 (c) Money received against share warrants (d) Non-Controlling Interest (Minority 1,39,900 Interest)





(a) Long-term borrowings 30,000 (b) Deffered tax liabilities (Net) (c) Other Long term liabilities (d) Long-term provisions

(4) Current liabilities (a) Short-term borrowings (b) Trade payable 4,19,000 (c) Other current liabilities 1,800 (d) Short-term provisions

TOTAL 15,84,300


(a) Fixed assets (i) Tangible assets 9,40,000 (ii) Intangible assets 63,300 (iii) Capital work-in progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets


TOTAL 15,84,300

Working Notes: 1. Degree of Control = 15,000 Shares / 20,000 Shares = 3/4th, Minority = 1/4th 2. Control Chart A; From the Balance Sheet of S Ltd.


H Ltd's Share (3/4)

Minority Interest d/4)

a) Capital Profit



-

Less: Bonus Shares 40,000 40,000

96,000 72,000 24,000




34>000 25,500 8,500

e) Post-acquisition General Reserve



80,000

Nil NO NO



d) Share Capital

Equity (Rs 2,00,000 + Rs 40,000) 2,40,000

Preference 1,60,000

4,00,000

Less : Minority Interest (Rs 60,000 + Rs 40,000)

1,00,000 1,00,000

3,00,000


e) Proposed Dividend 29,600 22,200 7,400



Cost of Investments (Rs 3,30,000 + Rs 1,20,000) 4,50,000


Less: Dividend for 2000-01 (Rs 7,500 + Rs 7,200) 14,700

Less: Face Value of Shares held 3,00,000

Goodwill 63,300


Particulars Other Fixed Assets Current Assets Sundry Creditors

HLtd. 5,00,000 2,94,000 2,94,000

SLtd. 4,40,000 2,87,000 1,25,000

9,40,000 5,81,000 4,19,000


HLtd. 2,00,000

Add: Debenture Interest 600

Add: Share of Post-acquisition Profit from S Ltd. (Chart A) 25,500

Add: Proposed Dividend [Chart A (e)] 22,200

2,48,300

Less: Dividend for 2000-01 14,700

2,33,600

Illustration 20

Following are the balance sheets of Asha Ltd and Bipasha Ltd as on 31st March, 2008.

LIABILITIES ASHA LTD (Rs.) BIPASHA LTD(Rs.)

Capital ( Rs10 per share) 10,00,000 8,00,000

Profit and Loss Account 4,00,000 2,00,000

Loan from Asha Ltd ---- 80,000

Bills Payable 80,000 60,000

14,80,000 11,40,000

Assets

Machinery 3,00,000 2,80,000

Furniture 50,000 20,000

Debtors 2,50,000 8,00,000

Loan to Bipasha Ltd 80,000 ----



Shares in Bipasha Ltd 7,00,000 ----

Bills Receivable 1,00,000 40,000

14,80,000 11,40,000

Asha Ltd purchased 75% shares of Bipasha Ltd for Rs. 7,00,000 on 31st March 2008. Bills Payable of Bipasha Ltd include bills of Rs. 20,000 accepted in favour of Asha Ltd. Prepare a Consolidated Balance sheet. Dec. 2008 (UNQHM) Illustration 21

Following are the abridged Balance Sheets of Harry Ltd and Say Ltd, as on 31st March 2009.

Liabilities Harry Ltd (Rs) Say Ltd (Rs)

Equity share capital ( Rs.100 each) 10,00,000 4,00,000

General Reserve 1,00,000 1,70,000

Profit and Loss account 1,60,000 1,30,000

Current Liabilities 4,40,000 2,00,000

17,00000 10,00000

Assets

Fixed Assets 4,80,000 250,000

Investment of shares in say ltd 5,00,000 -


17,00000 10,00000

Additional Information : 1. On 1st July 2008, Hary Ltd acquired 3,000 shares in Say Ltd.The reserves and surplus position of Say Ltd as

on 1st April 2008 was as under : General Reserve Rs. 2,50,000 Profit and Loss a/c (Cr) Rs. 120,000 2. On 1st October, 2008, Say Ltd issued one equity share for every four shares held as bonus shares out of

general reserve. No entry has been made in the books of Say Ltd for the issue of bonus shares. 3. On 30th September 2008, Say Ltd, declared a dividend out of pre-acquisition profits @ 25% on Rs. 4,00,000,

it’s Capital on that date. Hary Ltd credited the dividend to it’s profit and loss account. 4. Say ltd, owed Hary Ltd, Rs. 50,000 for the purchase of stock from Hary Ltd. The entire stock is held by say ltd

on 31st March 2009. Hary Ltd made a profit of 25% on cost. Prepare a Consolidated Balance Sheet of Hary Ltd and it’s subsidiary Say Ltd as on 31st March 2009. June 2009 (UNQHM) Illustration 22

Following are the Balance Sheets of H Ltd and S Ltd as on 31st March 2009.

LIABILITIES H Ltd (Rs) S Ltd (Rs)

Share Capital (shares of Rs.100 each) 5,00,000 2,00,000

General Reserve as on 1st April 2008 1,00,000 60,000

Profit and Loss Account 1,40,000 90,000

Bills Payable 40,000

Creditors 80,000 50,000

8,20,000 4,40,000

Assets

Goodwill 40,000 30,000



Other Fixed Assets 3,60,000 2,20,000

1,500 shares in S Ltd at cost 2,40,000 -

Stock 1,00,000 90,000

Debtors 20,000 75000

Cash at Bank 60,000 25,000

8,20,000 4,40,000

The Profit and Loss account of S LTD showed a balance of Rs. 50,000 on 1st April 2008. A dividend of 15% was paid on 15th October 2008 for the year 2007-08. The dividend was credited by H Ltd to it’s profit and loss account. H ltd acquired shares on 1st October 2008. The Bills Payable of S Ltd were all issued in favour of H Ltd and the same were got discounted by H ltd. included in the Creditors of S ltd are Rs. 20,000 for goods supplied by H ltd. The Stock of S ltd includes goods to the value of Rs. 8,000 which were supplied by H ltd at a profit of 33.33% on cost. Prepare a Consolidated Balance Sheet of H ltd and S ltd as on 31st March 2009. June 2010 (UNQHM) Illustration 23

On 1st October 2009 PODDAR Ltd acquired 12,000 equity shares of BHANSALI Ltd of the face value of Rs 10 each at a price of Rs.1,70,000. The Balance Sheets of two Companies as on 31st March 2010 are as follows.

LIABILITIES PODDAR LTD Rs BHANSALI LTD Rs

Equity shares of Rs.10 each 10,00000 2,00,000

General Reserve ( 1st April 2009) 4,20,000 1,00,000

Profit and Loss account (1st April 2009) 90,000 40,000

Profit for the year 1,70,000 45,000

Creditors 2,40,000 92,000


20,00000 5,37,000

Assets

Goodwill 3,00,000 70,000

Land and Building 4,00,000 1,00,000

Plant and Machinery 5,00,000 1,00,000

Stock 2,00,000 40,500

Debtors 3,00.000 1,34,500

Investments 2,00,000 -

Bills Receivable 20,000 30,000

Bank 60,000 50,000

Cash 20,000 12,000

20,00000 5,37,000

Out of the debtors and Bills Receivable of Poddar ltd Rs.50,000 and Rs.16,000 respectively represented those due from Bhansali Ltd..The stock in the hands of Bhansali Ltd includes goods purchased from Poddar Ltd at Rs. 20,000 which includes profit charged by the latter company @ 25% at cost. Prepare Consolidated Balance Sheet as on 31st March 2010 and also show your workings. Dec 2010 (UNQHM) Illustration 24

Following are the Balance Sheets of H Ltd and S Ltd as at 31st December 2010.

LIABILITIES H LTD (Rs) S LTD (Rs)

Equity shares of Rs.100 each fully paid 5,00,000 2,00,000



General Reserve 1,00,000

Profit and Loss account 80,000

14 % Debentures 1,00,000

Creditors 75,000 45,000

7,55,000 3,45,000

Assets :

Fixed Assets 3,50,000 1,50,000

Stock 90,000 40,000

Debtors 60,000 30,000

14 % Debentures in S Ltd (at par) 60,000

Equity Shares in S Ltd @ Rs. 80 per share 1,20,000

Bank 75,000 25,000

Profit and Loss Account 1,00,000

7,55,000 3,45,000

H Ltd acquired 1,500 shares in S Ltd on 1st May 2010. The profit and Loss account of S Ltd showed a debit balance of Rs. 1,50,000 on 1st January 2010. During March 2010, goods costing Rs.6,000 were destroyed by fire, against which the insurance company paid only Rs.2,000 to S ltd. Creditors of S ltd include Rs. 20,000 for goods supplied by H ltd on which H ltd made a profit of RS. 2,000. Half of the goods were sold out of this. An item of plant (included in Fixed Assets) of S Ltd had book value of Rs. 15,000. It was to be revalued at Rs. 20,000 on 1st January 2010 ( ignore depreciation). Prepare a Consolidated Balance Sheet as on 31st December 2010. June 2011 (UNQHM) Illustration 25

The Balance Sheets of H Ltd and it’s subsidiary S Ltd as on 31st March 2011 are as follows.


Equity shares of Rs. 100 each 30,00000 15,00000

General Reserve (1st April 2010) 8,00,000 4,00,000

Profit and Loss account 1st April 2010 2,00,000 2,50,000

Net Profit for the year 6,00,000 4,00,000

15% Debentures 10,00000 -

Creditors 4,00,000 2,70,000


Assets :

Premises 14,00000 9,00,000

Machinery 12,00000 7,00,000

Investment in shares of S ltd 17,00000 -

Inventories 7,00,000 4,50,000

Debtors 5,00,000 4,20,000

Bills Receivable 1,80,000 80,000

Cash And Bank 3,80,000 2,00,000

Misc. Expenditure ---- 1,00,000

The following is the additional information : 1. H Ltd acquired 12,000 equity shares in S ltd on 1st April 2010. 2. Bills Receivable of H ltd, include Rs.30,000 accepted by S ltd. 3. Accounts receivable of H ltd include RS. 1,00,000 due from S ltd. 4. Inventories of S Ltd include goods purchased from H ltd for Rs 1,25,000 which were invoiced by H ltd at a

profit of 25% on cost.



5. Both H Ltd and S Ltd have proposed 10% dividend for the year 2010-11, but no effect has been given in the Balance Sheet.

Prepare a Consolidated Balance Sheet giving proper working notes. Dec 2011 (UNQHM) Illustration 26

Following are the Balance Sheets of H ltd and it’s subsidiary S Ltd as on 31st March 2012.

EQUITY AND LIABILITIES H LTD (Rs) S LTD (Rs)

Fully paid-up equity shares of Rs. 10 each 6,00,000 2,00,000

General Reserve 3,40,000 80,000

Profit and Loss ( Surplus) 1,00,000 60,000

Trade Payables 70,000 35,000

ASSETS :

Machinery 3,90,000 1,35,000

Furniture 80,000 40,000

Investments (80% shares in S Ltd at cost) 3,40,000

Stock 1,80,000 1,20,000

Trade Receivables 50,000 30,000

Cash at Bank 70,000 50,000

11,10,000 3,75,000

The following additional information is provided : 1. Surplus in the Profit and loss statement of S Ltd stood at Rs. 30,000 on 1st April 2011, whereas general

reserve has remained unchanged since that date. 2. H Ltd acquired 80% shares in S Ltd on 1st October 2011 for Rs. 3,40,000 as mentioned above. 3. A sum of Rs.10,000 due from H Ltd for goods sold at a profit of 25% on cost price is included in trade

receivables of S Ltd. Till 31st March 2012, only half of the goods had been sold while the remaining goods were lying in the godowns of H ltd as on that date.

You are required to prepare the consolidated Balance sheet as on 31st March 2012. Show all Calculations Dec 2012 (UNQHM) Illustration 27

The following are the Balance Sheets of H Ltd and it’s subsidiary S Ltd as on 31st March 2012.

EQUITY AND LIABILITIES H LTD (Rs) S LTD (Rs)

Shareholder’s funds :

Share Capital

Shares of Rs.100 each fully paid 5,00,000 2,00,000

Reserves and Surplus :

General Reserve 1,00,000

Profit and Loss account 80,000 (-) 1,00,000

Non-current Liabilities


Current Liabilities :

Trade payables 75,000 45,000

7,55,000 2,45,000

ASSETS :

Non-Current Assets :

Fixed Assets 3,50,000 1,50,000



Non-Current Investments :

6% Debentures in S ltd (acquired at cost) 60,000

1,500 shares in S Ltd at Rs each 1,20,000

CURRENT ASSETS

Inventories 90,000 40,000

Trade receivables 60,000 30,000

Cash 75,000 25,000

7,55,000 2,45,000

H ltd acquired the shares on 1st August 2011.The Profit and loss account of S ltd showed a debit balance of Rs.1,50,000 on 1st April 2011. During June 2011, goods of S ltd costing Rs.6,000 were destroyed by fire against which insurer paid only Rs. 2,000. Trade payables of S ltd include Rs.20,000 for goods supplied by H ltd on which H ltd made a profit of Rs 2,000. Half of the goods were still in stock on 31st March 2012. June 2013 (UNQHM) Illustration 28

H ltd acquired 4,000 shares on 30th June 2012 in S ltd. H ltd received 10% dividend for the year 2011 and it is credited in profit and loss account of H Ltd. Following are the Balance Sheets of H ltd and S ltd as on 31st December 2012.

H LTD (Rs) S LTD (Rs)

1. EQUITY AND LIABILITIES

Share Capital

Equity share capital of RS. 10 each 60,000 50,000

Reserves and Surplus

General reserve (1.1.2012) 12,000 10,000

Profit/ Loss as on 1.1.2012 4,000 8,000

Profit for the year ended 31.12.2012 30,000 20,000

Current Liabilities

Trade payables 10,000 8,000

TOTAL 1,16,000 96,000

Assets

Non-current assets

Fixed assets 44,000 60,000

Investments

Investments in S ltd 52,000

Current Assets 20,0000 36,000

TOTAL 1,16,000 96,000

You are required to prepare consolidated Balance sheet for H ltd and S ltd as on 31st December 2012 from the above information. Dec 2013 (UNQHM) Illustration 29

The Balance sheets of Chanderma ltd and it’s subsidiary Tara ltd as on 31st March 2014 are as follows.

EQUITY AND LIABILITIES CHANDERMA LTD (Rs)

( Rs) TARA LTD (Rs)

1. Shareholder’s funds

a. Share capital–authorised, issued, subscribed and paid-up:

10,00000



Preference share capital

Equity share capital of Rs.100 each as fully paid-up:

50,00000 60,00000 15,00000 15,00000

b. Reserve and Surplus:

General Reserve 34,00000 60,000

Surplus 36,00000 70,00000 10,80,000 11,40,000

2. Current Liabilities:

a. Trade payables 10,00000 4,41,500

10,00000 2,41,500 6,83,000

1,40,00000 33,23,000

2. ASSETS

1. Non-current assets:

(a.) Fixed Assets :

Properties 37,60,000 4,00,000

Plant and machines 14,00000 87,20,000 9,13,000 20,13,000

(b) Long-term investment:

12,000 shares of Tara Ltd on 1st April ,2013.

18,00000

2. Current Assets:

(a) Inventories 13,60,000 5,06,000

(b) Trade receivables and cash 21,20,000 34,80,000 8,04,000 13,10,000

1,40,00000 33,23,000

The other information are : 1. Surplus of Chanderma Ltd includes dividend of 10% received from Tara Ltd

2. On 1st April, 2013, surplus of Tara Ltd, stood at Rs. 7,75,000and general reserve at Rs. 30,000. Chanderma revalued plant and machinery of Tara Ltd at the time of purchase of shares by Rs.2,00,000 more than it’s book value.

3. Inventory of Chanderma Ltd, includes Rs. 80,000 of inventory at cost purchased from Tara Ltd. Further, trade receivables of Tara ltd include Rs.2,40,000 for the sale to Chanderma Ltd on which Tara Ltd makes a profit of Rs. 60,000.

4. Tara Ltd made a bonus issue during the year out of pre-acquisition profits for Rs. 6,00,000. This is not recorded in the books.

Prepare a Consolidated Balance Sheet. June 2014 (UNQHM) Illustration 30

Prepare a Consolidated Balance Sheet from the following balance sheets of H Ltd and S Ltd.

H LTD S LTD

1. EQUITY AND LIABILITIES

1. Shareholder’s funds

a. Share Capital

Equity shares of Rs.10 10,000 2,000

b. Reserves and surplus

Reserve fund 1,000 600

Surplus 4,000 1,200

2. Current Liabilities

a. Trade payables 2,000 1,200



b. Other current liabilities (Bills payable) ___ 300

TOTAL 17,000 5,300

2. ASSETS

1. Non-current Assets

a. Sundry assets 8,000 1,200

b. Investments (1,50,000 equity shares in S Ltd at cost) 1,500 ___

2. Current Assets

a. Inventories 6,100 2,400

b. Trade receivables 1,300 1,700

c. Other current assets (Bills receivable) 100 ____

TOTAL 17,000 5,300

Following additional information is also given : 1. S Ltd bas earned all the profits only since the above 1,50,000 shares were acquired by H ltd. 2. On the date of acquisition of these 1,50,000 shares by H Ltd, S ltd had balance in the reserve fund of Rs.

6,00,000. 3. The bills payable of S ltd were in favour of H ltd which had discounted Rs. 2,00,000 of them. 4. Sundry assets of S ltd were undervalued by Rs. 2,00,000. Stock of H ltd includes goods of Rs. 5,00,000

purchased from S ltd on which S ltd made a profit of 25% on cost. June 2015 (UNQHM) Illustration 31

Jai Ltd acquired 15,000 shares in Hind ltd for Rs.1,55,000 on 1st July 2004. The Balance sheet of the two companies as on 31st March 2005 were as follows.

LIABILITIES JAI LTD HIND LTD

Equity shares of Rs. 10 each, fully paid up 9,00,000 2,50,000

General Reserves 1,60,000 40,000

Profit and loss account 80,000 25,000

Bills payable 40,000 20,000

Creditors 50,000 30,000

12,30,000 3,65,000

Assets :

Machinery 7,00,000 1,50,000

Furniture 1,00,000 70,000

Investments 1,55,000 ___

Stock 1,00,000 50,000

Debtors 60,000 35,000

Cash at Bank 90,000 40,000

Bills receivable 25,000 20,000

12,30,000 3,65,000

Additional Information : 1. General reserve appearing in the balance sheet of Hind Ltd remained unchanged since 31st March 2004. 2. Profit earned by Hind Ltd for the year ended 31st March 2005, amounted to Rs. 20,000 3. On 1st February 2005, Jai ltd sold to Hind Ltd goods costing Rs. 8,000 for Rs. 10,000. There was no unsold

stock with Hind ltd on 31st March 2005. However, creditors of Hind ltd include Rs. 4,000 due to Jai ltd on account of these goods.

4. Out of Hind ltd’s acceptance, Rs. 7,000 were those which were accepted in favour of Jai ltd. You are required to draw a consolidated Balance sheet as on 31st March 2005. June 2006 (UNQHM)



Illustration 32

The following are the balance sheets of Snow Ltd and White ltd as at 31st March 2006.

LIABILITIES SNOW LTD (Rs)

WHITE LTD (Rs)

Share Capital of Rs.10 each 14,00000 2,00,000


Profit and Loss account 2,00,000 60,000

Sundry creditors 1,80,000 1,00,000

Bills payable 20,000 30,000

Liabilities for expenses 10,000 30,000

ASSETS

Land and building 6,00,000 2,00,000

Plant and Machinery 5,60,000 1,00,000

14,000 shares in White ltd 2,00,000 ---

Stock 1,40,000 1,00,000

Sundry Debtors 3,00,000 40,000

Bills Receivable 20,000 ---

Cash and Bank Balances 90,000 40,000

The additional information is as under : 1. All the bills receivable of Snow Ltd including those discounted accepted by White ltd 2. At the time of acquisition of shares on 1st July 2005 by Snow Ltd in White Ltd, the general reserve was Rs.

40,000 and Rs.10,000 credit in profit and loss account as on 1st April 2005. 3. The stock of White Ltd includes Rs. 40,000 purchased from Snow Ltd, which has made 25% profit on cost. 4. White Ltd had declared and paid dividend equivalent to 20% for the period ended 31st march 2005 and

Snow Ltd had credited to it’s profit and loss account. You are required to prepare a Consolidated Balance Sheet as on 31st March 2006. Dec 2006 (UNQHM) Illustration 33

The Balance Sheets of H ltd and S ltd as on 31st March 2006 are given below

LIABILITIES H Ltd (Rs) S ltd (Rs)

Share Capital of Rs.10 each, fully paid 5,00,000 2,00,000


Profit and Loss account 60,000 35,000

Creditors 80,000 60,000

7,40,000 3,45,000

Assets :

Fixed Assets 3,00,000 1,00,000

60% shares in S ltd at cost 1,62,400 -----


Preliminary expenses ---- 6,000

7,40,000 3,45,000

H ltd acquired the shares on 1st April 2005 and on that date, the general reserve and profit and loss account of S Ltd showed balances of Rs. 40,000 and Rs. 8,000 respectively. No part of preliminary expenses was written off during the year 31st March 2006. Prepare a Consolidated Balance Sheet of H ltd and it’s subsidiary S ltd as on 31st March, 2006. June 2007 (UNQHM)



Illustration 34

Following are the Balance Sheets of H Ltd and S Ltd as at 31st March 2007.


Equity Share Capital :

Shares of Rs. 10 each fully paid 6,00,000 2,00,000



Creditors 70,000 35,000

11,10,000 3,75,000

ASSETS

Plant and machinery 3,90,000 1,35,000

Furniture 80,000 40,000

80% shares in S ltd (at cost) 3,40,000 ----

Stock 1,80,000 1,20,000

Debtors 50,000 30,000

Cash at Bank 70,000 50,000

11,10,000 3,75,000

Additional Information : 1. Profit and Loss account of S Ltd stood at Rs. 30,000 on 1st April 2006, whereas general reserve stood at Rs.

80,000 even on this date. 2. H ltd acquired 80% shares in S Ltd on 1st October 2006. 3. S Ltd’s plant and Machinery which stood at Rs. 1,50,000 on 1st April 2006, was considered worth Rs 1,80,000

as on 1st October 2006. This figure is to be considered while consolidating the balance sheets. You are required to prepare a Consolidated Balance Sheet as on 31st March 2007. June 2008 (UNQHM) Illustration 35

The following are the Balance Sheets of X ltd and it’s subsidiary Y ltd as on 31st March ,2011.

LIABILITIES X LTD (Rs) Y LTD (Rs) ASSETS X LTD (Rs) Y LTD(Rs)

Equity shares of Rs. 10 each

4,00,000 1,00,000` Equipments 2,50,000 95,000

Profit and loss account 50,000 20,000 Investment (9,000 equity shares on Y ltd on 1st April 2010)

1,40,000

External liabilities 7,50,000 4,80,000 Other Assets 8,10,000 5,05,000

12,00000 6,00,000 12,00000 6,00,000

On Ist April 2010, profit and loss account of Y ltd showed a credit balance of Rs. 8,000 and equipments of Y ltd were revalued by X ltd at 20% above it’s book value of Rs. 1,00,000 (but no such adjustment affected in the books of Y Ltd). Prepare a Consolidated Balance sheet as on 31st March 2011. June 2012 (UNQHM) Illustration 36

The Balance Sheets of H Ltd and it’s subsidiary S Ltd as 31st March 2014 are given below

H LTD (Rs) Rs S LTD Rs. Rs.

Equity and Liabilities

1 Shareholder’s funds



a. Share Capital (authorized , issued, subscribed and paid-up capital)

15,00000 3,00,000

Equity shares of Rs. 10 each fully called and paid-up.

b. Reserves and Surplus

General reserve 6,00,000

2,25,000

Surplus 3,00,000 9,00,000 75,000 3,00,000

2 Current Liabilities

Trade payables 4,50,000 1,50,000

TOTAL 28,50,000 7,50,000

2. ASSETS

1. Non-current assets

a. Fixed assets

1. Machinery 9,00,000 2,70,000

2. Furniture 1,50,000 51,000

3. Other Assets 13,20,000 23,70,000 4,29,000

b. Long –term investment (2,400 shares at Rs. 200 each in S ltd at cost.

4,80,000

TOTAL 28,50,000 7,50,000

Other relevant information : 1. Balance in general reserve and statement of profit and loss (Cr) of S ltd stood at RS. 75,000 and 45,000

respectively on the date of acquisition of it’s 80% shares by H ltd. 2. Machinery ( Book value Rs. 3,00,000) and furniture (book value Rs. 60,000) of S Ltd were revalued at Rs.

4,50,000 and Rs. 45,000 respectively for the purpose of fixing the price of it’s shares. Book value of other assets remaining unchanged. These values are to be considered for consolidation purpose.

From the above balance sheets and additional information, prepare a consolidated Balance Sheet as at that date. Dec 2014 (UNQHM) Illustration 37

From the following Balance sheets of Exe ltd and Wye Ltd as on 31st March, 2007, work out----- 1. Net amount due to minority interest, and 2. Cost of Control.

LIABILITIES EXE Ltd (Rs) WYE Ltd(Rs)

Share Capital :

Shares of Rs. 100 each 15,00000 5,00,000

General Reserve 1,50,000 1,00,000


Creditors 1,87,500 1,20,000

20,37,500 7,95,000

ASSETS

Sundry Assets 14,77,500 7,95,000

4.000 shares of Rs. 100 each 5,60,000 --------

20,37,500 7,95,000

The assets of Wye Ltd included equipments worth Rs. 1,50,000 which was revalued at Rs. 1,25,000. The investments of Exe Ltd were in shares of Wye Ltd and the same were acquired on 31st March, 2007. Dec 2007 (UNQHM)



Chapter 11 – Valuation OF Goodwill and Shares

Goodwill Goodwill may be described as the aggregate of those intangible attributes of a business which contribute to its superior earning capacity over a normal return on investment. It may arise from such attributes of a business as good reception, a favourable location, the ability and skill of its employees and management, nature of its products, etc. From a different angle, goodwill may be viewed as a more or less permanent impression created in the minds of the customers of a particular organization who continue to patronize that organization despite the high price of its product which enables the organization to earn super-profits. So, goodwill is the outcome of an impression created in the mind of each customer. It can exist only among competitive businesses.

Lord Lindley defines goodwill as follows: "The term goodwill can hardly be said to have any precise significance. It is generally used to denote the benefit arising from connection and reputation and its value is what can be got for the change of being able to keep that connection and improve it. Upon the sale of an established business its goodwill has a marketable value, whether the business is that of a professional man or of any other person. But it is plain that goodwill has no meaning except in connection with a continuing business, and the value of the goodwill of any business to a purchaser depends in some cases entirely, and in all very much, on the absence of competition on the part of those by whom the business has been previously carried on".

According to Wilson, "Goodwill has been very ably divided into three types – cat, dog and rat – in view of the peculiar habits of these three animals. The cat tends to stick to the abode, cat goodwill is therefore that which will adhere to the business which is being transferred and is the most valuable. The dog follows his master, dog goodwill is difficult to transfer and is correspondingly less valuable. The rat is a migrant, rat goodwill is practically valuless, as it represents those customers who have no specialities either to the business or its properties and who may be here today and gone tomorrow. Summed up, cat goodwill is adherent; dog personal and rat fugitive. Adherent goodwill is only valuable as attaching to the business; personal goodwill is unsaleable, fugitive goodwill is only valuable in that as one fugitive goes another may arrive."

Following are other definitions : "Goodwill is nothing more than the probability that the old customers will resort to the old place" (Lord Eldon). "The value of business connections, the value of the probability that present customers will continue to buy in spite of the allurements of competing dealers" (Hatfield). "The element of an established business which makes the business as a going concern worth more than its book value, that is, its net worth as shown by the books" (Walton). "It is the influence that the proprietor or his organization has upon the purchasing public through which he is enabled to attract and retain patronage" (Wildman).

Distinguishing Features of Goodwill Goodwill is different from any other type of assets since it is the earning power of the business. Following are the factors distinguishing goodwill from most other assets : (a) It represents a non-physical value over and above the physical assets. (b) It cannot have an existence separate from the business and, therefore, cannot be realized separately. (c) It is difficult to place a cost on goodwill as the value may fluctuate from day-to-day as a result of internal and

external circumstances, i.e., changing fortunes of the company's business. (d) The amount or value of the goodwill and the assessment of its actual existence is highly dependent on the subjective

judgment of the valuer.



Elements of Goodwill R.H. Nelson suggests that goodwill generally consists of the following elements: (a) Customer lists; (b) Organization costs; (c) Developmental costs; (d) Trademarks, trade names and brands; (e) Secret processes and formulae; (f) Patents; (g) Copyrights; (h) Licenses; (i) Franchises; and (j) Superior earning power.

Types of Goodwill Goodwill is generally of two types: (a) Purchased Goodwill; and (b) Non-purchased or Inherent Goodwill. (a) Purchased Goodwill Purchased Goodwill arises when one business buys another and the purchase consideration paid is more than the value of the net tangible assets received. It can never exist in a new business except by purchase. It is the accepted practice to recognize only the purchased goodwill in the accounting system. Therefore, goodwill should enter into the books of account of a business only in connection with a valuation ascribed to it in the acquisition price of a business. Following are the important features of purchased goodwill: (i) It arises on an acquisition. (ii) It is demonstrated by a purchase transaction. (iii) Price paid for goodwill depends upon the purchaser's expectation of future profits. (iv) It is recognized in financial statements. (b) Non-purchased or Inherent Goodwill Non-purchased or inherent goodwill is referred to as internally generated goodwill and it arises when a business may over the years generate its own goodwill. Following are the features of non-purchased goodwill : (i) It is internally generated. (ii) A cost cannot be placed on these types of goodwill. (iii) Valuation depends on subjective judgment of the valuer. (iv) It is not demonstrated by a purchase consideration. (v) It is never recognized in financial statements. Factors to be taken into consideration in valuing goodwill:

1 Superior management team. 1 Market dominance

2 Outstanding sales manager or organization. 2 Economies of scale (production, advertising, distribution, research, management).

3 Weakness in the management of a competitor. 3 Cost savings (employing technology, transaction costs, co-ordinating activities, stockholding savings).

4 Effective advertising. 4 Cost of financing (reduction in cost of borrowing and lender's risk).

5 Secret or patented manufacturing process. 5 Fiscal advantages (tax losses, investment credits,



government incentives).

6 Good labour relation. 6 Strong liquid resources.

7 Outstanding credit rating. 7 Preliminary expense savings.

8 Top flight training programme for employees. 8 Ability to guarantee supplies.

9 Good public "image". 9 Ability to guarantee market.

10 Unfavourable developments in operation of a competitor.

10 Investors' collective evaluation of political, economic or social position.

11 Favourable association with another company. 11 Opinions of acquirer's directors as to future policy of acquirer.

12 Strategic location. 12 Cost of acquisiton

13 Discovery of talents or resources.

14 Favourable tax conditions.

15 Favourable government regulations.

16 Favourable attitudes of customers.

17 Excellent reputation of quality and reliability of products.

18 Number of outlets for products.

19 Number of service locations for products.

20 Favourable agency agreements.

21 Established list of customers.

22 Established licence to trade.

23 Experienced work-force

24 Good relations with suppliers

25 Superior pension fund resources

Source: ASC discussion paper – Appendix 2

Positive and Negative Goodwill Since goodwill is the difference between the value of a business as a whole and the fair value of its separate net assets, goodwill can be both positive and negative. Non-purchased goodwill exists in all businesses. Positive goodwill arises when the value of the business as a whole is more than the fair value of the separate net assets. If the real worth of the business is less than the sum of the fair values of the separate net assets, it represents negative goodwill.

Accounting for Goodwill Following are the methods of accounting for goodwill: (a) Carry it as an asset and write it off over a period of years through the Profit and Loss Account. (b) Eliminate it against reserves immediately. (c) Retain it as an asset with no write-off unless a permanent reduction in value becomes evident. (d) Write it off against profits immediately. (e) Show it as a deduction from shareholders' funds which may be amortized or carried forward indefinitely. SSAP 22 requires that non-purchased goodwill should not be shown in financial statements. Purchased goodwill should normally be eliminated from the accounts immediately on acquisition or may be amortized over its useful economic life.

Valuation of Non-purchased Goodwill Goodwill is an significant asset, but subject to the suspicion of arbitrations since its valuation depends on assumptions made by the valuer. Methods to be adopted in valuing goodwill will depend upon the circumstances of each particular case. Therefore, the figure computed as goodwill cannot be an exact one.



There are several ways by which an accountant can compute goodwill. The valuation of goodwill is often based on the customs of the trade and generally calculated as number of years' purchase of average profits or super profits. Here, we will outline some of the various methods available: (1) Average Profit Method This method takes into account the average profits for the last few years and fixes the value of the goodwill as to many years' purchase of this amount. Under this method, at first, average profit is calculated on the basis of the past few years' profits. At the time of calculating average profit, precaution must be taken in respect of any abnormal items of profit or loss which may affect future profit. It should be mentioned that average profit may be based on simple average or weighted average. After calculating average profit, it is multiplied by a number (3 or 4, i.e., three or four years), as agreed. The product will be the value of the goodwill. The main disadvantage of this method of valuing goodwill is that any trend in the level of profitability is not reflected in the valuation of goodwill. If the simple average is used, i.e., each year's profits are given the same weightage, no discrimination is made between a business that has rising profits and one that has falling profits. To overcome this, it is necessary to give more weightage to the profits of recent years. If the weighted average profits are taken for the last four years, the last year should be given a weightage of 4, the previous year a weightage of 3, the prior to that a weight of 2 and so on. To obtain the weighted average profit, the profit of the year must be multiplied by its weightage and the grand total should be divided by the aggregate number of weights. Since goodwill figures rely on a series of estimates and assumptions, different weightings would produce different end results. Illustration 1 .

A Ltd. agreed to purchase business of a sole trader. For that purpose, goodwill is to be valued at 3 year's purchase of the average profits of last 5 years. Profits for these years are: 1997 – Rs 40,000; 1998 – Rs 45,000; 1999 – Rs 36,000; 2000 – Rs. 46,000;2001 – Rs 50,000. Solution

Average Profit =

Goodwill = 3 years' purchase of average profit of last 5 years = Rs 43,400 x 3 = Rs 1,30,200. Illustration 2

X Ltd. proposed to purchase the business carried on by Mr. A. Goodwill for this purpose is agreed to be valued at 3 years' purchase of the weighted average profits of the past four years. The appropriate weights to be used are : 1998 – 1: 1999 – 2: 2000 – 3; 2001 – 4. Profits for these year are : 1998 – Rs 20,200; 1999 – Rs 24,800; 2000 – Rs 20,000 and 2001 – Rs 30,000. On a scrutiny of the accounts, the following matters are revealed: (a) On 1st September, 2000 a major repair was made in respect of the plant incurring Rs. 6,000 which amount was charged to revenue. The said sum is agreed to be capitalized for Goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method; (b) The closing stock for the year 1999 was overvalued by Rs. 2,400; and (c) To cover management cost an annual charge of Rs 4,800 should be made for the purpose of goodwill valuation. You are required to compute the value of goodwill of the firm.



Solution Before calculating goodwill, it is necessary to compute actual profit on the basis of information given.

Calculation of Adjusted Profit

Particulars 1998 (Rs) 1999 (Rs) 2000 (Rs) 2001 (Rs)

Profit (as given) Less : Management cost

20,200 4,800

24,800 4,800

20,000 4,800

30,000 4,800

Less: Overvaluation of closing stock Add: Overvaluation of opening stock (Note 1)

15,400 - -

20,000 2,400

-

15,200 -

2,400

25,200 - -

Add: Capitalization of repairs

15,400 -

17,600 -

17,600 6,000

25,200 -

Less: Depreciation

15,400 -

17,600 -

23,600 200

25,200 580

15,400 17,600 23,400 24,620

Calculation of Average Profit

Year Profit (Rs) Weights Products (Rs)

1998 1999 2000 2001

15,400 17,600 23,400 24,620

1 2 3 4

15,400 35,200 70,200 98,480

10 2,19,280

Weighted Average Profit = Rs 2,19,280 / 10 = Rs. 21,928. Goodwill = 3 years, purchase of weighted average profit = Rs. 21,928 x 3 = Rs. 65,784. Note: (1) Closing stock of 1999 becomes the opening stock of 2000 (2) Depreciation of 2000 = 10% of Rs. 6,000 for 4 months = Rs. 200. 2001 = 10% of (Rs 6,000 - 200) = Rs 580.

Super Profit Method

Super profit is the excess of actual profit over the normal profit of an enterprise. A common method of valuation of goodwill is the super-profit method. A business unit may possess some advantages which enable it to make extra profits over and above the amount that would be earned if the capital of the business was invested elsewhere with similar risks. These extra profits, generally expressed as super profits, can be valued, and goodwill is the value of the few years' purchase of super profit. Therefore, under this method, super profits are taken as the basis for calculating goodwill in place of average profit. Like the previous method, this value is also computed by applying a traditional rule acceptable in the trade, e.g., three or four years' purchase of super profit. For calculating goodwill, the following steps are as follows: Step 1 Calculate capital employed (it is the total of shareholder's equity plus long term debt or fixed assets plus net current assets). Step 2 Calculate normal return by multiplying capital employed with normal rate of return. Step 3 Calculate average maintainable profit of the business. Step 4 Calculate the difference between the average maintainable profit and normal return as calculated above. This



difference is called super profit (if it is positive). Step 5 Multiply that super profit by the number of year's purchase. the product is the value of the goodwill. Illustration 3

The following particulars are available in respect of the business carried on by Sucharan. (i) Capital employed – Rs. 50,000 (ii) Trading profit (after tax) : 1998 – Rs 12,200; 1999 – Rs 15,000; 2000 – Rs 2,000 (Loss); and 2001 – Rs 21,000. (iii) Market rate of interest on investment – 8%. (iv) Rate of risk return on capital invested in business – 2%. (v) Remuneration from alternative employment of the proprietor (if not engaged in business) Rs 3,600 p.a. You are required to compute the value of goodwill on the basis of 3 years purchase of super profits of the business calculated on the average profit of the last four years. Solution (1) Calculation of Average Profits (2) Calculation of Super Profits

Particulars Rs Particulars Rs

1998 1999 2000 2001 Average Profits = Rs 46,200 /4

12,200 15,000 (2,000) 21,000

Average Profits Less: Remuneration Average Trading Profits Less: Normal Profit @ 10% on Rs 50,000 Super Profits

`11,550 3,600

7,950 5,000

46,200 2,950

11,550

Goodwill = 3 year's purchase of super profits = Rs 2,950 x 3 = Rs 8,850. Illustration 4

From the following information calculate the value of goodwill : (a) Average capital employed Rs 12,00,000. (b) Company declares 15% dividend on the shares of Rs 20 each fully paid, which is quoted in the market at Rs 25. (c) Net trading profit of the firm (after tax) for the past 3 years : Rs 2,15,200; Rs 1,81,400; Rs 2,25,000. You are required to compute the value of goodwill on the basis of 5 years purchase of super profits of the business calculated on the average profit of the last three years. Solution (1) Calculation of Average Profits (2) Calculation of Super Profits


1st Year 2nd Year 3rd Year Average Profits = Rs 6,21,600 / 3

2,15,200 1,81,400 2,25,000

Average Trading Profits Less: Normal Profit @ 12% on Rs 12,00,000 (Note 2) Super Profits

2,07,200 1,44,000

63,200

6,21,600

2,07,200



Goodwill = 5 year's purchase of super profits = Rs 63,200 x 5 = Rs 3,16,000. Working Notes : (1) Dividend per share = 15% of Rs 20 = Rs 3.

(2) Rate of return on capital =

Illustration 5

Following is the Balance Sheet of Navin Traders as on 31.3.2002:

Liabilities Rs Assets Rs

Creditors Capital Reserve

1,52,160 6,56,000 1,60,000

Fixed Assets Current Assets Investments in shares

3,60,000 4,88,160 1,20,000

9,68,160 9,68,160

The following net profits were earned which included a fixed income on investment of Rs. 8,000 per year. Year ended 31 March : 1999 Rs 1,28,000; 2000 : Rs 1,44,000; 2001 : Rs 1,72,000;2002 : Rs 1,80,000. Standard rate of return on capital employed in this type of business is 8%. Calculate the value of goodwill of the above business at three years purchase of the average super profits for the four years assuming (i) that each years profit is immediately withdrawn in full by the proprietor and (ii) the weight to be assigned to the profits for the purpose of averaging are :

Year : 1999 2000 2001 2002 Weight : 1 1.5 2 2.5 Ignore Income tax.

Solution

(1) Calculating of Trading Profit

Particulars 1999 (Rs) 2000 (Rs) 2001 (Rs) 2002 (Rs)

Profit Less : Income on Investment Trading Profits

1,28,000 8,000

1,44,000 8,000

1,72,000 8,000

1,80,000 8,000

1,20,000 1,36,000 1,64,000 1,72,000

(2) Calculation of Weighted Average Profit

Particulars 1999 (Rs) 2000 (Rs) 2001 (Rs) 2002 (Rs) Total (Rs)

Trading Profits Weight Product

1,20,000 1

1,20,000

1,36,000 1.5

2,04,000

1,64,000 2

3,28,000

1,72,000 2.5

4,30,000

5,92,000 7

10,82,000

Weighted Average Profit = Rs 10,82,000 / 7 = Rs 1,54,571

(3) Calculation of Capital Employed (4) Calculation of Super Profits


Fixed Assets Current Assets Less % Creditors

3,60,000 4,88,160

Weighted Average Profits Less: Normal Profit @ 8% on Rs 6,96,000 Super Profits

1,54,571 55,680

8,48,160 1,52,160

98,891

6,96,000



Goodwill = 3 years' purchase of super profits = 3 x Rs 98,891 = Rs 2,96,673. Illustration 6

Negotiation is going on for transfer of X Ltd. on the basis of the Balance Sheet and the additional information as given below:

Balance Sheet of X Ltd. as on 31st March, 2002


Share Capital (Rs 10 fully paid-up shares) Capital Reserve

10,00,000 4,00,00

3,00,000

Goodwill Land and Building Plant and Machinery Investments Stock Debtors Cash and Bank

1,00,000 3,00,000 8,00,000 1,00,000 2,00,000 1,50,000

50,000

17,00,000 17,00,000

Profit before tax for 2001-02 amounted to Rs. 6,00,000 including Rs 10,000 as interest on investment. However, an additional amount of Rs 50,000 p.a. shall be required to be spent for smooth running of the business. Market values of Land and Buildings and Plant and Machinery are estimated at Rs. 9,00,000 and Rs. 10,00,000 respectively. In order to match the above figures further depreciation to the extent of Rs 40,000 should be taken into consideration. Income tax rate may be taken at 50%. Return on capital at the rate of 20% before tax be considered normal for this business at the present stage. For the purpose of determining the rate of return, profit for this year after the aforesaid adjustments may be taken as expected average profit. Similarly, average trading capital employed is also be considered on the basis of the position in this year. It has been agreed that four years' purchase of super profit shall be taken as the value of goodwill for the purpose of the deal. You are required to calculate the value of goodwill of the company. Solution

(1) Calculation of Capital Employed (2) Computation of Avg. Maintainable Trading Profit

Particulars Rs Particulars Rs Rs

Land and Buildings (Market value) Plant and Machinery (Market value) Stock Debtors Cash and Bank Less Sundry Creditors

9,00,000 10,00,000

2,00,000 1,50,000

50,000

Net Profit before Tax Less: Additional Depreciation (given) Less: Additional recurring expenses (given) Less: Interest on Investment (Non-operating profit) Less: Provision for Tax @ 50% Profit after Tax

40,000 50,000 10,000

6,00,000

1,00,000

5,00,000 2,50,000 23,00,000

3,00,000

2,50,000

20,00,000

(3) Calculation of Average Capital Employed (4) Calculation of Super Profits


Closing capital employed [as per above (1)] Less : ½ of average maintainable trading profit

20,00,000

Profit after tax (Trading) Less: 10% of Average Capital employed Super Profits

2,50,000 1,87,500

62,500



after tax (Note 2) 1,25,000

18,75,000

Goodwill = 4 years' purchase of super profit = Rs 62,500 x4 = Rs 2,50,000. Working Notes: (1) For the purpose of computation of capital employed, investment should not be taken into consideration. Similarly, income from such investment should not be included in the average maintainable profit. (2) For calculating average capital employed, ½ of average maintainable profit after tax is to be deducted from the closing capital employed. Illustration 7

From the following information, prepare statements showing : (i) Capital employed; (ii) Average capital employed; (iii) Goodwill on the basis of 5 years' purchase of the average super profit:

Balance Sheet of Z Ltd. as on 31.12.2001


20,000 Equity Shares of Rs 10 each 1,00, 9% Preference shares of Rs 100 each Reserve and Provision : (Provision for taxation Rs 20,000) 10% Debentures Creditors

2,00,000 1,00,000

2,00,000

90,000 60,000

Goodwill Fixed Assets Investments : 6% Govt. Loan Current Assets Share Selling Commission Discount on issue of Debentures

30,000 3,50,000

45,000 2,00,000

10,000 15,000

6,50,000 6,50,000

The current market value of the plant included in fixed assets is Rs 15,000 more. The average profit of the company (after deductions for interest on debentures and govt. taxes) is Rs 68,000. Expected rate of return is 10%. Solution


Fixed Assets : Rs (3,50,000 + 15,000) Current Assets Less: Liabilities Creditors 60,000 Provision for taxation 20,000 Closing Capital Employed

3,65,000 2,00,000

Closing Capital Employed Less: ½ of Adjusted Average Trading Profit after tax (Note 1) (1/2 of Rs 71,150) Average Capital Employed

4,85,000

35,575 5,65,000

80,000

4,49,425

4,85,000

(c) Value of Goodwill = 5 years' purchase average super profit = 5 x Rs 26,207 (Note 2) = Rs 1,31,035; say – Rs 1,31,000. Working Notes: (1) Calculation of Adjusted Average Trading Profit after Tax

Particulars Total (Rs)

Average Annual Profit after tax Less : Interest on investment after tax shield : Rs (45,000 x 6/100 x 50/100), assuming rate of tax 50%

68,000 1,350



Add: Interest on Debenture after tax shield : Rs (90,000 x 10/100 x 50/100)

66,650 4,500

71,150

(2) Calculation of Average Super Profit


Adjusted Average Trading Profit after tax Less : Normal return on Average capital employed (10% on Rs 4,49,425) Super Profits

71,150 44,943

26,207

Tutorial Notes: (1) At the time of calculating capital employed, investment in 6% Government loan should not be taken into

consideration. (2) Debenture should be treated as a part of capital employed. Therefore, it should not be deducted from the total

assets. (3) For calculating adjusted trading profit, interest on investment (after tax) should be deducted from average annual

profit (because, investment has not been considered while calculating capital employed). (4) All fictitious assets (e.g. share selling commission and discount on issue of debentures) should not be taken in the

computation of capital employed. (5) Goodwill appearing in the Balance Sheet is not purchased goodwill. Therefore, it has not been taken into

consideration for calculating capital employed. (3) Capitalization of Average Profit Method Under this method, the business unit is valued by applying the following formula:

Total value of the firm =

x 100

After calculating the value of the firm in the above manner, the net assets of the business unit is deducted from this and the balance is the value of the goodwill. Illustration 8

Ascertain the value of goodwill of Shoenischit Limited carrying on business from the following :

Balance Sheet as at 30th June, 2002


Paid-up Capital – 2,500 shares of Rs 100 each full paid Bank Overdraft Sundry Creditors Provision for Taxation Profit & Loss Appropriation Account

25,00,000 4,80,000 8,05,000 4,25,000 6,00,000

Goodwill at cost Land and Building at cost Plant and Machinery at cost less depreciation Stock-in-trade Book debts less provision for bad debts

2,50,000 11,00,000 10,00,000

15,00,000

9,60,000

48,10,000 48,10,000

The company started operations in 1997 with a paid-up capital as aforestated of Rs 25,00,000. Profits earned before providing for taxation have been as follows: Year ended 30 June : 1998 : Rs 6,00,000; 1999 : Rs 7,50,000; 2000 : Rs 8,50,000; 2001 : Rs 9,50,000: 2002 : Rs 8,50,000. Income tax @ 50% has been payable on these profits. Dividends have been distributed from the profits of the first three years @ 10% and from those of the next two years @ 15% of the paid-up capital.



Solution Computation of Net Tangible Assets Computation of Average Maintainable Profit


Tangible Assets : Land and Buildings Plant and Machinery Stock-in-trade Book debts less provision [A] Liabilities: Bank Overdraft Sundry Creditors Provision for Taxation [B] Net Tangible Assets [A - B]

11,00,000 10,00,000 15,00,000

9,60,000

30th June, 1998 30th June, 1999 30th June, 2000 30th June, 2001 30th June, 2002 Average Profit = Rs 40,00,000 / 5 Less: provision for tax : 50% Profit after Tax

6,00,000 7,50,000 8,50,000 9,50,000 8,50,000

45,60,000 40,00,000

4,80,000 8,05,000 4,25,000

8,00,000 4,00,000

4,00,000

17,10,000

28,50,000

Average dividend paid = [(10 % x 3) + (15% x 2)] / 5 = 12%.

Total value of the business =

x 100 =

x 100 = Rs 33,33,333

Goodwill = Total value of the business Less Net Tangible Assets = Rs 33,33,333 – Rs 28,50,000 = Rs 4,83,333. (4) Capitalization of Super Profit Method Under this method, goodwill is calculated by capitalizing super profits at agreed rate. The goodwill is calculated directly by applying the following formula :

Good will =

Where p = Adjusted forecast maintainable profit; r = Normal rate of return; c = Capital employed; and m = Capitalization ratio. Illustration 9

The net profit of the business after tax, for the past five years are : Rs 2,00,000; Rs 2,12,500; Rs 2,30,000; Rs 2,62,500; and Rs 2,95,000. The capital employed in the business is Rs 20,00,000. The normal rate of return expected in this type of business is 10%. It is expected that the company will be able to maintain its super profit for the next 5 years. Calculate the value of goodwill on the basis of capitalization of super profit method. Solution

Average Maintainable Profit =

= Rs 12,00,000 / 5 = Rs 2,40,000

Goodwill =



where, P = Average maintainable profit = Rs 2,40,000 r = Normal rate of return = 10% c = Capital employed = Rs 20,00,000 m = Capitalization ratio = 10% (5) Annuity Method An annuity is a series of equal periodic payments occuring at equal intervals of time. Under this method, goodwill is calculated by taking the average super profit as the value of an annuity over a certain number of years. The present value of the above annuity, discounted at the given rate of interest (normal rate of return) is the value of the goodwill. If the value of annuity is not given, the following formula can be applied for valuing goodwill :

V =

[

]

Where, V = value of the goodwill; a = average super profit; i = rate of interest per annum; n = number of years. Illustration 10

The net profit of a company after providing for taxation for the past five years are : Rs 40,000; Rs 50,000; Rs 70,000 and Rs 80,000. The net tangible assets in the business is Rs 4,00,000 on which the normal rate of return is expected to be 10%. It is also expected that the company will be able to maintain its super profits for next five years. Calculate the value of goodwill of the business on the basis of an annuity of super profits, taking the present value of an annuity of one rupee for five years at 10% interest is Rs 3.78. Solution Calculation of Average Profits Calculation of Super Profits


1st Year 2nd Year 3rd Year 4th Year 5th Year Total Profit Average Profits = Rs 2,70,000 / 5 = Rs 54,000

40,000 50,000 30,000 70,000 80,000

Average Profits Less: Normal return on capital employed (10% of Rs 4,00,000) Super Profits

54,000

40,000

14,000

2,70,000

Goodwill = Super Profit x Value of an annuity Goodwill = Rs 14,000 x 3.78 = Rs 52,920. The following important points are to be noted in determining the profits upon the basis of which goodwill is to be valued: (a) From the total profit, income from investments are to be excluded. This is because, the capital value of these

investments are not to be considered while calculating the capital employed. The return from investments are not trading incomes and will not normally be that expected from the use of other assets.

(b) The changes for depreciation can cause a change in the amount of net profits. If excessive depreciation is charged, it should be added back. On the other hand, where depreciation charges are inadequate, a further charge should be made. Therefore, the charges for depreciation should be properly reviewed.

(c) Income from any assets not generally used in the business should be excluded from profits as also the value of the asset from the capital employed.



(d) Abnormal profits and losses, arising from abnormal circumstances, should be eliminated from the profits of the years in which they occurred.

(e) Excessive remuneration, i.e, above normal or fair remuneration paid to the owners or directors should be written-back by the amount it exceeds over fair remuneration.

(f) Abnormal expenditure on advertisements in a particular accounting should be properly adjusted. It should be allocated in such a fashion that each year is charged with the average normal expenditure on advertisement.

Valuation of Purchased Goodwill The method of valuation of purchased goodwill compares the value of the net tangible and identifiable intangible assets with the bargained purchase price of the business which is acquired. The difference is the value of the goodwill. Therefore, purchased goodwill is the residual or the excess of the cost over the fair value of the identifiable net assets acquired. Valuation of Shares A share represents an interest in a company. There are a number of ways in which the shares of a company may be valued. It can be valued either as an entitlement to a share of future profits, or as an interest in the net assets that comprise the company. Therefore, the choice of method of valuation is often governed by the reasons for the investment. The majority of shareholders of a company are interested in dividends. On the other hand, a majority of shareholders may be interested in the realisable value of the company's net assets since they can liquidate a company. There may be instances where a company's shares are not quoted on any stock exchange. The ability to place realistic valuations on such investments is of great importance.

Need for Valuation (1) When two or more companies amalgamate or one company absorbs another company, it is necessary to from a fair

and equitable basis of valuation for transferring the shares. The prices quoted in the stock exchange, if any, do not properly indicate the actual value of the shares. For formulating amalgamation and absorption schemes, a fresh valuation method should be taken up.

(2) When a company has decided to undergo a process of reconstruction, to protect the rights of the dissenting shareholders, a fresh valuation of shares should be taken up. The dissenting shareholders should be paid as per the valuation of shares in respect of their holdings.

(3) When preference shares or debentures are converted into equity shares, a fresh valuation method should be adopted for equity shares to calculate exchange ratio. It is necessary to ascertain the number of equity shares required to be issued (based on the new valuation) for debentures as preference shares.

(4) Shares are often pledged as security for raising loans. In such cases, fresh valuation of shares is necessary to know the real worth of shares on the basis of which loan is to be provided.

(5) When one company acquires majority of the shares of another company, It is necessary to value such shares. (6) The survivor of a deceased person, who gets some shares of a company made by the will, may require the valuation

of such shares, which are not quoted in the stock exchange, for estate duty purposes. (7) Under a scheme of nationalization, when the share of a company are taken over by the Government, it is necessary

to value the shares for reasonable compensation to the holders. (8) When a partnership firm is dissolved and the firm is having some investment in shares, it is necessary to value those

shares for proper distribution among the partners. Factors Affecting Valuation of Shares (1) The nature of the company's business. (2) Percentage of dividend declared on the shares. (3) The demand and supply of shares. (4) The income yielding capacity of the company. (5) The availability of sufficient assets over liabilities. (6) General economic conditions, e.g., availability of raw materials, possibility of new competitions. (7) Financial, political and other factors affecting the business.



(8) The fact that there is no free market for unquoted shares. Methods of Valuation There are two widely applied methods for the valuation of shares : (a) The Assets Backing Method; and (b) the Yield Valuation Method. There are also circumstances where one method of valuation would not be suitable. In such circumstances, a number of alternative methods may be used as a broad framework in which to agree on a valuation.

Asset Backing Method This method is also known as Asset-Valuation Method or Intrinsic Value Method. Under this method, the share's value is simply the net assets, or equity, divided by the number of shares. The value of a share is first determined by ascertaining the value of net assets of a company and then dividing them by the number of shares. Therefore, it is necessary to estimate the worth of the assets and liabilities. In ascertaining the amount of net assets, the value of goodwill as well as the value of any contingent assets should also be taken into consideration. The following points are important and should be borne in mind for estimating the net assets : (1) The fixed assets of the company should be revalued at their net realisable value. (2) Inventory should be taken at current market prices. (3) Investments should also be taken at current market prices. These can be taken at cost if the fall in the market value

is believed to be temporary. (4) Other current assets like Bills Payable or Sundry Debtors should be valued at their expected net realisable value. (5) All fictitious assets appearing in the Balance Sheet are to be eliminated. (6) Goodwill may be valued on the basis of super profits. (7) All unrecorded assets and liabilities are to be taken into consideration. From the aggregate value of the assets, all external liabilities are to be deducted to arrive at the net assets figure. The external liabilities include Sundry Creditors, Bills Payable, Loan, Debentures, etc. The net assets of a company, as ascertained above, will be the basis of valuation of shares, and would be apportioned in the following manner : (1) If the preference shareholders have priority to dividend as well as to capital on a winding-up, they will be valued at

par if they expect the same rate of dividend as specified in the shares. But if the required rate of return is more than the specified rate, they are to be valued above par to cover both capital and dividend.

(2) After deducting the value of preference shares, as calculated above, from the net assets, the balance will be divided by the number of equity shares. The resultant figure will be the value of each equity share. The Assets Backing Method is generally applied under the following circumstances :

(1) For formulating schemes of amalgamation; (2) For acquiring majority of the shares and controlling the company; (3) When there is a liquidation. Illustration 11

The Balance Sheet as at 31st March, 2002 showed the following position:


Share Capital : 20,000 equity shares of Rs 100 each General Reserve Profit and Loss Account Current Liabilities : Bank Overdraft Creditors

20,00,000

6,00,000 3,50,000

3,00,000 4,00,000

Debtors Stock-in-hand Plant Factory Premises

5,00,000 15,00,000 10,00,000 11,50,000



Provision for Taxation 5,00,000

41,50,000 41,50,000

Additional information : (i) Net profits of the company for the last five years before providing for taxation were as follows: Rs 4,10,000; Rs 6,40,000; Rs 7,00,000; Rs 8,50,000; Rs 9,00,000. (ii) Managerial remuneration of Rs 60,000 has been charged for each year. (iii) The market value of the assets were as follows: Stock – Rs 15,50,000; Plant – Rs 10,40,000; Factory premises – Rs

12,83,000. (iv) Taxation may be considered at 50%. (v) Goodwill should be valued at 5 years' purchase of super profits. (vi) Normal rate of return – 10% p.a. On the basis of the above information, find out the intrinsic value of shares. Indicate assumptions, if any, clearly. Solution (1) Calculation of Capital Employed

Net Assets Basis Net worth Basis

Assets Debtors Stock in hand Plant Factory Premises Less: Outside Liabilities : Bank Overdraft Creditors Provision for Taxation Capital Employed

Rs Rs Equity Share Capital General Reserve Profit and Loss Account Add: Revaluation Profit : Stock Rs (15,50,000 – 15,00,000) Plant Rs (10,40,000 – 10,00,000) Factory Premises (12,83,000-11,50,000) Capital Employed

Rs Rs

5,00,000 15,50,000 10,40,000

12,83,000

43,73,000

12,00,000

20,00,000 6,00,000 3,50,000

29,50,000 2,23,000

50,000 40,000 1,33,000

3,00,000 4,00,000 5,00,000 31,73,000

31,73,000

(2) Calculation of Super Profit


Average maintainable trading profit (Rs 4,10,000 + Rs 6,40,000 + Rs 7,00,000 + Rs 8,50,000 + Rs 9,00,000)/5 Add : Back managerial remuneration Less: Managerial remuneration (maximum 11% allowable under Companies Act, 1956) Profit before Tax Less: Tax 50% Profit after Tax Less: Normal return – 10% on Capital Employed Super Profit

7,00,000 60,000

7,60,000 83,600

6,76,400 3,38,200

3,38,200 3,17,300

20,900

(3) Valuation of Shares under Intrinsic Value Method


Net assets as in (1) above Goodwill as in (3) above

31,73,000 1,04,500

32,77,500



Number of Shares Value per share (Rs 32,77,500 / 20,000)

20,000

1,63,875

Assumption: No depreciation has been charged on increased value of different assets.

Yield Valuation Method This method is also known as Market Value Method. The word 'yield' means a rate of return relating cash invested to cash received (or expected to be received). Yield may be 'Earning yield' or 'Dividend yield'. They are as under: (i) Earning Yield A company cannot grow and can never be in a position to increase its dividends, if it distributes all of its profits as dividends. There are also legal restrictions by the Companies Act for distribution of profits as dividends. Therefore, a shareholder will have interest both in the retained profits as well as distributed profits. Under this method, shares are valued on the basis of the earnings expected by using an average of recent years as the best indicator of what future earnings of the company will be. Under this method, value of each share is calculated by applying the following formula :

Value Per Share =

x Face Value of Share

*Expected Rate of Earnings (ERE) =

x 100

While fixing the normal rate of return, the degree of risk involved and the current rate of interest of gilt-edged securities should also be taken into consideration. Illustration 12

From the following information of P. Merchandise Co. Ltd., compute the value of its equity shares by (capitalization of) earning method.

Balance Sheet as on 31st December, 2001


Share Capital : Equity shares of Rs 10 each, fully paid Reserve and Surplus 12% Debentures (since 1996) Other Liabilities

2,50,000 1,00,000 2,50,000 2,25,000

Fixed Assets Current Assets Preliminary Expenses

5,00,000 3,00,000

25,000

8,25,000 8,25,000

Year ending 31st December

Particulars 1997 (Rs) 1998 (Rs) 1999 (Rs) 2000 (Rs) 2001 (Rs)

Sales Operating costs Interest on Loan from Bank

6,00,000 3,45,000

25,000

7,00,000 3,95,000

25,000

8,00,000 4,45,000

25,000

5,00,000 2,95,000

25,000

9,00,000 4,95,000

25,000

Assume rate of taxation at 60% and the rate of normal earnings at 12 ½ %. Also show the working Solution Calculation of Average Profit


Sales Less: Operating Cost

6,00,000 3,45,000

7,00,000 3,95,000

8,00,000 4,45,000

5,00,000 2,95,000

9,00,000 4,95,000



Profit before Interest and tax (PBIT) Less: Interest on bank loan Less: Interest on Debentures Profit before tax (PBT) Less : Tax @ 60% Profit after tax (PAT)

2,55,000 25,000 30,000

3,05,000 25,000 30,000

3,55,000 25,000 30,000

2,05,000 25,000 30,000

4,05,000 25,000 30,000

2,00,000 1,20,000

2,50,000 1,50,000

3,00,000 1,80,000

1,50,000 90,000

3,50,000 2,10,000

80,000 1,00,000 1,20,000 60,000 1,40,000

Average Profit =

= Rs 1,00,000 ; Expected Rate of Earnings on Capital =

x 100 = 40%

Normal rate of return = 12.5% (given)

Value Per Share =

x Face Value of Share =

x Rs 10 = Rs 32

Illustration 13

From the following Balance Sheet of J. Adams Co. Ltd. as on 31.12.2001, compute the value of its equity shares by capitalization of earnings method :


Share Capital: Equity Shares of Rs 10 each Reserve and Surplus 10% Debentures (Issued at par on 1.1.1997, redeemable at par on or before 2006) Current Liabilities

5,00,000 1,50,000

3,00,000 2,50,000

Fixed Assets at cost, less depreciation Current Assets Preliminary Expenses

6,00,000 5,75,000

25,000

12,00,000 12,00,000

Particulars 31.12.1997 31.12.1998 31.12.1999 31.12.2000 31.12.2001

Sales Expenses Interest on Loan Interest on Debentures

Rs Rs Rs Rs

9,00,000 3,50,000

20,000 30,000

11,00,000 5,80,000

40,000 30,000

14,00,000 6,00,000

50,000 30,000

8,00,000 3,10,000

60,000 30,000

16,00,000 8,00,00 20,000 30,000

It is the usual practice of the company to transfer Rs 30,000 every year to General Reserve. Assume rate of taxation at 50% and the rate of normal earning at 12.5%. Also show the workings. Solution Calculation of Average Profit


Sales Less: Expenses Profit before Interest and tax (PBIT) Less: Interest on loan Less: Interest on Debentures Profit before tax (PBT) Less : Tax @ 50% Profit after tax (PAT)

9,00,000 3,50,000

11,00,000 5,80,000

14,00,000 6,00,000

8,00,000 3,10,000

16,00,000 8,00,000

5,50,000 20,000 30,000

5,20,000 40,000 30,000

8,00,000 50,000 30,000

4,90,000 60,000 30,000

8,00,000 20,000 30,000

5,00,000 2,50,000

4,50,000 2,25,000

7,20,000 3,60,000

4,00,000 2,00,000

7,50,000 3,75,000

2,50,000 2,25,000 3,60,000 2,00,000 3,75,000

Average Profit =

= Rs 2,82,000



Expected Rate of Earnings =

x 100 = 56.4% Normal Rate of Return = 12.5% (given).

Value Per Share =

x Face Value of Share =

x Rs 10 = Rs 45.12

Alternatively, Capitalized value of the business based on earnings = Rs 2,82,000 / 12.5% = Rs 22,56,000.

Value Per Share =

=

= Rs 45.12

Tutorial Note : Amount transferred to reserve Rs 30,000 should not be taken into consideration for calculation of value of shares under this method. (ii) Dividend Yield There may be circumstances where the shareholder has little or no influence over dividend policy. In such cases, it may be more appropriate to value the shares based on dividends than earnings. The following matters must be taken into consideration while making an estimate of the expected future profits available for equity share dividends: (1) The average past profits of the company require an adjustment, if necessary, should any special factor(s) cause the

future profits to differ from the past. (2) Adequate provision should be made for depreciation, taxation and other liabilities. (3) The amount of profits to be set aside for preference share dividend. In connection with the valuation of shares on the yield basis, the following points may be given due consideration:

(1) Depending on the circumstances, the average rate of return is generally taken for three to five years. (2) During a period of time, if the profits fluctuate violently, it is better to eliminate abnormal periods, where the profits

earned are too high or too low. (3) The rate of dividend is dependent on the liquid position of the company. If the liquidity position of the company is

not satisfactory, it will not be in a position to declare adequate rate of dividend though the company earned adequate rate of earnings.

(4) Under this method, shares are valued on the basis of the expected dividends. The following formula is adopted for valuation of shares :

Value Per Share =

x Paid-up Value of Share

Illustration 14

From the following information, calculate the value of an equity share: (i) The paid-up share capital of a company consists of 1,000, 15% Preference Shares of Rs 100 each and 20,000 Equity

Shares of Rs 10 each (ii) The average annual profits of the company, after providing for depreciation and taxation amounted to Rs 75,000. It

is considered necessary to transfer Rs 10,000 to General Reserve before declaring any dividend. (iii) The normal return expected by investors on equity shares from the type of business carried on by the company is

10% Solution Calculation of Expected Rate of Dividend



Particulars Rs

Profit after tax Less: Transferred to General Reserve Less: Preference dividend @ 15% on Rs 1,00,000 Profit available to Equity Shareholders

75,000 10,000

Value Per Share =

x Paid-up

Value

=

x Rs 10 = Rs 25

65,000

15,000

50,000

*Expected Rate of Dividend =

x 100 =

x 100 = 25%

Illustration 15

From the following information relating to a company, calculate the value of its equity shares. Issued equity share capital – 10,000 shares of Rs 10 each; Paid-up equity share capital – Rs 8 per share. 6% Preference share capital – 1,00,000 shares of Rs each fully paid; Annual transfers to general reserve – 20%. Rate of tax – 50%; Expected profits before tax – Rs 2,00,000. Normal rate of return – 20%.

Particulars Rs

Expected Profits (before tax) Less: Income tax @ 50% Profit after tax Less: Transferred to General Reserve @ 20% Less: Preference Dividend : 6% on Rs 10,00,000 Profits available to Equity Shareholders

2,00,000 1,00,000

Value Per Share =

x Paid-up

Value

=

x Rs 8 = Rs 10

1,00,000 20,000

80,000

60,000

20,000

*Expected Rate of Dividend =

x 100 =

x 100 = 25%

Valuation of Goodwill....Practical Questions...... Illustration No. 1

The balance sheet of manufacturing Co. Ltd. disclosed the following financial position as at 31st March, 1996:


Paid up capital: 30,000 shares of (Rs. 10 each, fully paid) Capital reserve Sundry creditors Provisions for taxation Profit & loss account

3,00,000 20,000 71,000 55,000 66,000

Goodwill at cost Land & buildings at cost (less depreciation) Plant & machinery at cost (less depreciation) Stock at cost Book debts Less: Provision for bad debts Cash at Bank

98,000 3,000

30,000 1,75,000

90,000

1,15,000

95,000

7,000

5,12,000 5,12,000



You are asked to value the goodwill of the Manufacturing Co. Ltd. on the basis of 5 year’s purchase of super profits, for which purpose the following information is supplied: (1) Adequate provision has been made in the accounts for income tax and depreciation. (2) The rate of income-tax may be taken at 50%. (3) The average rate of dividend declared by the company for the past five years was 15%. (4) The reasonable return on capital invested in the class of business done by the company in 12%. Illustration No. 2

The following is the balance sheet of N Ltd. as on 31st March 2012:


Equity share capital (paid of Rs. 10 each) Profit & loss account General reserve 10% Debenture Sundry creditors Bills payable Outstanding expenses

5,00,000

1,00,000 60,000

1,30,000 50,000 35,000 12,000

Land & Building Plant & Machinery Furniture Trading investments at cost Non trading investments Stock Debtors Cash at bank

2,00,000 2,81,500

47,000 40,000

1,20,000 75,000

1,05,000 18,500

8,87,000 8,87,000

Additional information: (1) Standard rate of return on capital employed in this type of business is 8%. (2) Profits & weight to be considered for last 4 years are as follows:

Year Weight Rs.

2007-2008 2008-2009 2009-2010 2010-2011

1 1.5

2 2.5

1,28,000 1,44,000 1,72,000 1,80,000

(3) Above net profit included a fixed income on non-trading investment of Rs. 8,000 per year. (4) At the end of year 2008-2009 closing stock was overvalued by Rs. 25,000. Calculate goodwill on weighted average super profit basis at 2 years purchase. Ignore taxation. Illustration No. 3

The net profits after tax of Z Ltd. for the past 5 years are as follows:

Year 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Profit 2,56,000 2,64,000 3,76,000 4,86,000 5,30,500

The capital employed in the business will be Rs. 16, 00,000. Reasonable rate of return of return of 15% is expected. Calculate the value of the goodwill of the business on the basis of: (1) Average profit method at 2 years purchase. (2) Weighted average profit method at 2 years purchase assuming weight to be 1, 2,3,4,5. (3) Super-profits basis at 4 years purchase. Super profit to be calculated on the basis of average profit.



(4) Annuity method on super-profits basis, taking the present value of an annuity of Rs. 1 for the 4 years at 15% as Rs. 2.855.

(5) Capitalization of future maintainable profit. (6) Capitalization of super profit method (Capitalization rate 15%) Illustration No. 4

The net profits of a company after providing for taxation for the past five years are Rs. 78,000, Rs. 82,000, Rs. 88,000, Rs. 93,000 and Rs. 99,000. The capital employed in the business is Rs. will be able 8, 00,000 on which a reasonable rate of return of return of 10% is expected. It is expected that the company to maintain its super profits for the next five years. (1) Calculate the value of the goodwill of the business on the basis of an annuity of super-profits, taking the present

value of an annuity of one rupee for the five years at 10% interest as Rs. 3.78. (2) How would your answer differ if the goodwill is valued by capitalizing the excess of the annual average profits over

the reasonable return on capital employed on the basis of the same return of 10%? Illustration No. 5

X Ltd. proposed to purchase the business carried on by B and Co. Goodwill for this purpose is agreed to be valued at three years purchase of the weighted average profits for the past four years. The appropriate weights and profits for the past four years are as under:

Year Weight Profit (Rs. in Lakhs)

1997-1998 1998-1999 1999-2000 2000-2001

1 2 3 4

110 115 145 180

On scrutiny of the accounts, the following information is gathered: (1) On 1st December, 1999, major repairs were carried out on building incurring Rs. 30 lakh which were charged to

revenue. The above mentioned sum was agreed to be capitalized for goodwill calculation subject to adjustment of depreciation @ 10% p.a. under written down value method.

(2) The closing stock for the year 1999-2000 was undervalued by Rs. 10 lakh. (3) To cover management cost, an annual charge of Rs. 20 lakh is to be considered for the purpose of valuation

goodwill.

Compute the value of goodwill of the firm. Illustration No. 6

M Ltd. Proposed to purchase the business carried on by N Ltd. Goodwill for this purpose is agreed to be valued at three year’s purchase of the weighted average profits of the past four years. The appropriate weights to be used and profit for the years are as under:

Year Weight Profit (Rs.)

1995-1996 1996-1997 1997-1998 1998-1999

1 2 3

4

1,01,000 1,24,000 1,00,000 1,50,000

The books of account were closed every year on 31st March. On a scrutiny of the accounts, the following matters are revealed: (1) On 1st December, 1997, major repairs were carried out in respect of the plant, spending Rs. 30,000 which was charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject to adjustment of depreciation @ 10% p.a. on reducing balance method.



(2) The closing stock on 31st March, 1997 was overvalued by Rs. 12,000. (3) To cover management cost, as annual charge of Rs. 24,000 should be made for the purposes of valuation of goodwill. Compute the value of goodwill of the business. Illustration No. 7

The net profit of a business after providing for taxation, for the past five years is: Rs. 40,000, Rs. 42,500, Rs. 46,000, and Rs. 52,500 & Rs. 59,000. The capital employed in the business is Rs. 4, 00,000. The normal rate of return expected in this type of business is 10%. It is expected that the company will be able to maintain its super profit for the next 5 years. Calculate the value of goodwill on the basis of:

(1) Five year’s purchase of super profits (2) Annuity method, taking the present value of annuity of Rs. 1 for five years at 10% as 3.78 (3) Capitalization of super profits. Illustration No. 8 Precision Ltd. proposed to purchase the business carried on by Fasteners Pvt. Ltd. The goodwill for this purpose is agreed to be valued at five years' purchase of the weighted average profit for the past four years (use appropriate weights). Profits for the past four years are as follows:

Year Profit Weight

1999-2000 2000-2001 2001-2002 2002-2003

2,52,500 3,10,000 2,50,000 3,50,000

1 2 3 4

On scrutiny of the books of account, the following matters were revealed: (i) On 1st December, 2001, a major repair was made in respect of the plant incurring Rs. 75,000 which was charged to

revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation @ 10% on reducing balance method.

(ii) The closing stock for the year 2000-2001 was overvalued by Rs. 30,000. (iii) To cover management costs, an annual charge of Rs. 60,000 should be made for the purpose of valuation of

goodwill. You are required to compute the value of goodwill. Illustration No. 9

Following is the balance sheet of Danny Ltd. as on 31st March, 2005:

Liabilities Rs.

3,000, 6% Preference shares of Rs. 100 each, fully paid-up 1,30,000 Equity shares of Rs. 10 each, fully paid-up Profit and loss account 8% Debentures Sundry creditors

3,00,000 13,00,000

9,00,000 6,00,000 4,78,500

35,78,500

Assets Goodwill Free-hold property Plant and machinery less depreciation Stock Debtors (net)

1,00,000 7,50,000 7,00,000 7,40,000 7,98,500



Cash and bank balances 4,90,000

35,78,500

The following are additional information: (i) The profit after tax for the three financial years 2002-2003, 2003-2004 and 2004-2005, after charging debenture

interest, was Rs. 4, 41,000, Rs. 6, 45,000 and Rs. 4, 80,000 respectively. (ii) The normal rate of return is 10% on the net assets attributed. (iii) The value of freehold property is to be ascertained on the basis of 8% return. The current rental value is Rs. 1,

00,800. (iv) The rate of tax applicable is 40%. (v) 10% of profits for the financial year 2003-2004 referred to above arose from a transaction of non-recurring nature. (vi) A provision of Rs. 31,500 on sundry debtors was made in the financial year 2004-2005 which is no longer required;

profit for the year 2004-2005 is to be adjusted for this item. (vii) A claim of Rs. 16,500 against the company is to be provided and adjusted against profit for the financial year

ended on 31st March, 2005. (viii) Goodwill may be calculated at 3 times adjusted average profits of the 3 years. (ix) Capital employed may be taken as on 31st March, 2005. You are required to ascertain the value of goodwill of the company. Illustration No. 10

The average net profit before adjustment(s) is Rs. 5, 14,000. The profit includes interest at 8% on non-trading investments. The cost of these investments is Rs. 1, 98,200 while the face value is Rs. 2, 00,000. Expenses amounting to Rs. 7,000 per annum are likely to be discontinued in future. The provision for income-tax is made at 30%. The normal rate of return may be taken at 10%. The average capital employed in the business (including investments) is Rs. 18, 98,200. Assuming four years purchase of super-profits, what is the value of goodwill? Illustration No. 11

Abridged balance sheet of Rama Ltd. as on 31st March, 2009 is as follows:

Liabilities Rs.

Share capital Reserves and surplus Bank overdraft Creditors Provision for taxation Proposed dividend

6,00,000 50,000 10,000 60,000

1,10,000 60,000

8,90,000

Assets Fixed assets Current assets

3,70,000 5,20,000

8,90,000

Additional information: (1) The net profits of the company after deducting working expenses but before providing for taxation were as under:

Year 2006–2007 2007–2008 2008–2009

Rs. 3,18,000 3,40,000 3,12,000



(2) On 31st March, 2009, fixed assets were at Rs. 4, 50,000. Sundry debtors on the same date included Rs. 10,000 which is irrecoverable.

(3) Having regard to the type of business, a 10% return on average capital employed is considered as reasonable. Ascertain the value of goodwill on the basis of three years purchase of annual super profits. Also calculate goodwill by capitalisation of average maintainable profits. Depreciation on fixed assets is charged @ 10% per annum and the rate of tax is 30%.

Valuation of Shares.....Practical Qustions.... Illustration No. 1

Capital Structure of NS Ltd. is as follows:

Types of capital Rs.

5,00,000 Equity shares of Rs. 10 each fully paid up 5,00,000 Equity shares of Rs. 10 each, Rs. 8 paid up 5,00,000 Equity shares of Rs. 10 each, Rs. 6 paid up 12% Debenture 20,000, 9% Preference shares of Rs. 100 each

50,00,000 40,00,000 30,00,000 10,00,000 20,00,000

Additional information: Expected profit per year before interest & tax Rate of tax Transfer to general reserve every year Normal rate of dividend

Rs. 61,20,000 40%

10% of profit 15%

Ascertain the value of equity shares on yield basis on the basis on above information. Illustration No. 2

Given below is the balance sheet of Modern Wools Ltd. as at 31st March 1993:


Share capital: Authorised & issued: 6,000 shares of Rs. 100 each, fully paid-up Profit and loss account Bank overdraft Creditors Provision for taxation Provision for dividends

6,00,000 40,000 10,000 80,000

1,00,000 60,000

Land & buildings Plant & machinery Stock Sundry debtors

2,70,000 1,00,000 3,60,000 1,60,000

8,90,000 8,90,000

The net profits of the company after deducting usual working expenses but before providing for taxation were as under:

Year Rs.

1992-1993 1991-1992 1990-1991 1989-1990 1988-1989

2,00,000 2,20,000 1,80,000 2,20,000 1,70,000

On 31st March, 1993, land & building was revalued at Rs. 2, 80,000 and plant & machinery at Rs. 1, 20,000 and sundry debtors on the same date include Rs. 4,000 as irrecoverable.



Having regard to nature of the business, 10% return on net tangible capital invested is considered reasonable. Land & building and plant & machinery are subject to depreciation of 5% & 15% respectively. You are required to value the company's share ex-dividend. Valuation of goodwill may be based on 5 years, purchase of annual super profits. (Tax rate is to be assumed at 50%). Illustration No. 3

The profit of a company, limited by shares, for the year ended 31st March, 1995 were Rs. 60,00,000. After setting apart amounts for interest on borrowings, taxation and other provisions, the net surplus available to shareholders is estimated at Rs. 15, 00,000. The company’s capital base consisted of: (1) 1,00,000 equity shares of Rs. 100 each, Rs. 50 per share paid up; and (2) 25,000 12% cumulative redeemable preference shares of Rs. 100 each fully paid up. Enquires in the stock market reveal that shares of companies engaged in similar business and declaring a dividend of 15% on equity shares are quoted at a premium of 10%. What do you expect the market value of the company’s shares to be, basing your working on the yield method? Illustration No. 4

From the following particulars, calculate the value of an equity share: 2,000, 9% Preference shares of Rs. 100 each 50,000 Equity shares of Rs. 10 each, Rs. 8 Per share paid up Expected profit per year before tax Rate of tax Transfer to general reserve every year Normal rate of earning

Rs. 2,00,000 Rs. 4,00,000 Rs. 2,18,000

40% 20% of profit

15% Illustration No. 5

On 31st March, 1997 the balance sheet of a joint stock company disclosed the following position:


Share Capital: 40,000 equity shares of Rs. 10 each, fully paid General reserve Profit and loss account 10% Debentures Current liabilities

4,00,000 90,000 20,000

1,00,000 1,30,000

Goodwill Other fixed assets Current assets

40,000 5,00,000 2,00,000

7,40,000 7,40,000

Additional information: (1) On 31st March, 1997 the goodwill of the company was valued at Rs. 50,000 while other fixed assets were valued at

Rs. 3, 50,000. (2) The net profit earned by the company amounted to Rs. 51,600 for 1994-1995; Rs. 52,000 for 1995-1996; and Rs.

51,650 for 1996-1997. (3) Every year an amount equal to 20% of the profit earned was transferred to general reserve- this being considered

reasonable in the industry in which the company is engaged. (4) A return of 10% on the investment is considered fair in the industry. Compute the value of the company’s share by the yield method.

Illustration No. 6

From the following particulars, calculate the fair value of an equity share assuming that out of the total assets, those



amounting to Rs. 41,00,000 are fictitious: (1) Share capital: - 5, 50,000 10% Preference shares of Rs. 100 each, fully paid-up. - 55, 00,000 Equity shares of Rs. 10 each, fully paid-up. (2) Liability to outsiders: Rs.75,00,000 (3) Reserves and surplus: Rs. 45,00,000 (4) The average normal profit after taxation earned every year by the company during the last five year, Rs. 85, 05,000. (5) The normal profit earned on the market value of fully paid equity shares of similar companies is 12%. Illustration No. 7

BALANCE SHEET of DIAMOND LTD. As on 31st March, 2001:

Liabilities Rs. (in Lakhs) Assets Rs. (in Lakhs)

Share Capital: Fully paid up shares of Rs. 100 each General reserve Profit and loss account Sundry creditors Provision for income-tax

200 40 32

128 60

Land and building Plant and machinery Patent and trade marks Stock Sundry debtors Bank balance Preliminary expenses

110 130

20 48 88 52 12

460 460

The expert valuer valued the land and building at Rs. 240 lakh, goodwill at Rs. 160 lakh and plant and machinery at Rs. 120 lakh. Out of the total debtors, it is found that debtors for Rs. 8 lakh are bad. The profits of the company have been as follows:

For the year 1998-1999 Rs. 92 Lakh For the year 1999-2000 Rs. 88 Lakh For the year 2000-2001 Rs. 96 Lakh

The company follows the practice of transferring 25% of profits to general reserve. Similar type of companies earn at 10% of the value of their shares. Plant and machinery and land and building have been depreciated at 15% and 10% respectively. Ascertain the value of shares of the company under:

(1) Intrinsic value method (2) Yield value method and (3) Fair value method Illustration No. 8

On 31st March, 2006, the balance sheet of Himalaya Ltd. disclosed the following position:

Liabilities Rs.

Subscribed share capital of Rs. 10 each, fully paid General reserve Profit and loss account 14% Debentures Current liabilities

4,00,000 1,90,000 1,20,000 1,00,000 1,30,000

9,40,000

Assets Goodwill

40,000



Other fixed assets Current assets

5,00,000 4,00,000

9,40,000

On the above mentioned date, the tangible fixed assets were independently valued at Rs. 3, 50,000 and goodwill at Rs. 50,000. The net profits for three years were: 2003-2004: Rs. 1,03,200, 2004-2005: Rs. 1,04,000 and 2005-2006: Rs. 1,03,300 of which 20% was transferred to general reserve, this proportion being considered reasonable in the industry in which the company is engaged and where a fair return on investment may be taken at 18%. Ignore taxation. Compute the value of the company’s share by: (i) Net assets method and (ii) Yield method Illustration No. 9

The capital structure of Hertz Ltd. is as follows:

Rs.

14% Preference shares of Rs. 10 each Equity shares of Rs. 10 each Reserves and surplus 10% Debentures 11% Loans from banks/financial institutions

20,00,000 32,00,000 16,00,000 24,00,000 28,00,000

The average annual profit before payment of tax and interest is Rs. 24, 00,000. The income-tax rate is assumed to be @ 40%. Price-earnings ratio is 9. Illustration No. 10

The balance sheet of Super Sound Ltd. as at 31st March, 2005 is given below:


Share capital: 9,000 Equity shares of Rs. 100 each, fully paid-up Profit and loss account Bank overdraft Creditors Provision for taxation Provision for dividends

9,00,000 75,000 15,000 90,000

1,65,000 90,000

Buildings Machinery Sundry debtors Stock Bank

2,25,000 3,30,000 2,40,000 4,50,000

90,000

13,35,000 13,35,000

The net profits of the company after deducting usual working expenses but before providing for taxation were as under:

Year Rs.

2002-2003 2003-2004 2004-2005

3,00,000 3,60,000 3,30,000

On 31st March, 2005, building was revalued at Rs. 3, 00,000; machinery at Rs. 3, 75,000 and sundry debtors on the same date include Rs. 10,000 as irrecoverable. Having regard to nature of the business, 10% return on net tangible capital invested is considered reasonable.



You are required to value the company's share ex-dividend. Valuation of goodwill may be based on 3 years, purchase of annual super profits. Rate of depreciation on buildings is 2% and on machinery is 10%. The income-tax rate is to be assumed at 35%. All workings should form part of your answer.

No. of shares 9,000 Illustration No. 11

The subscribed share capital of a company consists of 10,000, 14% preference shares of Rs. 100 each and 2,00,000 equity shares of Rs. 10 each. All the shares are fully paid-up. The average annual profit of the company after providing depreciation but before taxation is Rs. 25, 00,000. It is considered necessary to transfer Rs. 1, 25,000 to general reserve before declaring any dividend. Rate of taxation is 50%. [No answer is provide in answer sheet] The normal return expected by investors on equity shares from the type of business carried on by the company is 20%. From the above information, calculate the following: (i) Amount available for equity dividend (ii) Rate of dividend and (iii) Value of an equity share

Particular Rs.

Profit before tax (-) Tax Profit after tax (-) Transfer to general reserve (-) Preference Share capital (10, 00,000 x 14%) Profit available for equity shareholder

25,00,000 (12,50,000)

12,50,000 (1,25,000) (1,40,000)

9,85,000

Expected rate of dividend = Profit available to equity shareholder

x 100 Equity share capital

Expected rate of dividend = 9,85,000

x 100 = 49.25% 20,00,000

Yield value per share = Expected rate

x Paid up value per share Normal rate

Yield value per share = 49.25

x 10 = 24.63 20

Illustration No. 12

The balance sheet of Beauty Ltd. as at 31st March, 2008 was as follows:

Liabilities Rs.

Equity shares of Rs. 10 each General reserves Profit and loss account 12% Debentures Provision for depreciation on equipments Staff welfare fund Proposed dividend Sundry creditors

10,00,000 5,00,000 2,00,000 6,00,000 3,00,000

80,000 1,50,000 3,70,000

32,00,000

Assets



Goodwill Equipments (at cost) Stocks Debtors Cash at bank Advertisement suspense account

2,00,000 18,00,000

7,00,000 3,00,000 1,50,000

50,000

32,00,000

The following further information is available: (i) For this type of business, a fair return on capital employed after tax is 18%. (ii) Equipments are to be revalued at Rs. 16, 00,000. (iii) Stocks are considered to have a net realisable value of Rs. 6, 60,000. (iv) Goodwill in this type of business is normally valued at 3 years’ super profits. (v) Included in the debtors is a balance of Rs. 20,000 which may prove irrecoverable. (vi) Profits for the last three years (before interest and taxes) are as follows:

Year 2007 – 2008 2006 – 2007 2005 – 2006

Rs. 10,80,000 10,20,000 11,00,000

(vii) Company profits are taxed @ 40%. You are required to calculate the (1) Value of goodwill and (2) Value of each equity share on net asset basis. Illustration No. 13

On the basis of the following information, calculate the value of equity share: 5,000, 6% Preference shares of Rs. 100 each, fully paid 30,000 Equity shares of Rs. 10 each, fully paid Total tangible assets (other than goodwill) Total outside liabilities Average net profit after tax

Rs. 5,00,000 3,00,000 9,49,000

95,000 62,560

Expected normal yield for equity shares is 7% of capital employed. Goodwill is to be taken at 5 years' purchase of super profits, if any. Illustration No. 14

On the basis of following information, compute the value of an equity share and a preference share of both Chelsi Ltd. and Nensi Ltd. (i) When only a few shares are sold and (ii) When controlling shares are to be sold

Chelsi Ltd. (Rs.)

Nensi Ltd. (Rs.)

Profit after tax 12% Preference share capital (shares of Rs. 100 each) Equity share capital (shares of Rs. 10 each)

10,00,000 10,00,000 50,00,000

10,00,000 20,00,000 40,00,000

Market expectation for both companies is 15% & 80% profit is distributed.



Illustration No.15

The following particulars of Jag Ana Ltd. are available: (i) Share capital: - 10,000 Equity shares of Rs. 10 each fully paid - 1,000 12% Preference shares of Rs. 100 each fully paid (ii) Reserves and surplus: Rs. 15,000 (iii) External liabilities:

Creditors: Rs. 12,000 Bills payable: Rs. 6,000

(iv) The average normal profits (after taxation) earned each year by the company: Rs. 28,500. (v) Assets of the company include one fictitious item of Rs. 800. (vi) The fair or normal rate of return in respect of the equity shares of this type of company is ascertained at 10%. Calculate the value of each equity share by using: (1) Assets backing method (2) Yield method (3) Fair value method Illustration No. 16

Balance sheet of Diamond Ltd. as at 30th June, 2009 is given below:

Liabilities Rs.

Share capital: 40,000 Shares of Rs. 10 each General reserve Profit and loss account Sundry creditors Income-tax reserve

4,00,000 80,000 64,000

2,56,000 1,20,000

9,20,000

Assets Land and buildings Plant and machinery Patents and trade marks Preliminary expenses Stock Debtors Bank balance

2,20,000 2,60,000

40,000 24,000 96,000

1,76,000 1,04,000

9,20,000

The expert valuer valued the land and buildings at Rs. 4, 80,000, goodwill at Rs. 3, 20,000 and plant and machinery at Rs. 2, 40,000. Out of the total debtors, it is found that debtors of Rs. 16,000 are bad. The profits of the company have been as follows: 31st March, 2007: Rs. 1, 84,000 31st March, 2008: Rs. 1, 76,000 31st March, 2009: Rs. 1, 92,000 The company follows the practice of transferring 25% of profits to general reserve. Similar type of companies earn at 10% of the value of their shares. Plant and machinery, and land and buildings have been depreciated at 15% and 10% respectively. Ascertain the value of shares of the company by using: (i) Intrinsic value method (ii) Yield value method and (iii) Fair value method



Illustration No. 17

Following are the information of two companies for the year ended 31st March, 2010:

Particulars Company A Rs. Company B Rs.

Equity shares of Rs. 10 each 10% Preference shares of Rs. 10 each Profit after tax

8,00,000 6,00,000 3,00,000

10,00,000 4,00,000 3,00,000

Assuming that the market expectation is 18% and 80% of the profits are distributed, what is the price per share you would pay for the equity shares of each company (i) If you are buying a small lot and (ii) If you are buying controlling interest shares?

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