Financial Accounting II 1005[1]

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Question Paper

Financial Accounting II (112) : October 2005 Answer all questions.

Marks are indicated against each question.

1. Dinakar operates a garment store in a hired premises at a rent of Rs.1,20,000 per annum. The owner of

the premises, who has recently completed her fashion-designing course, wishes to purchase the garmentstore. The details of the business of Dinakar are as under:

I. The profit for the year 2004-05 is Rs.2,30,000.

II. The capital employed by Dinakar is Rs.20,00,000.III. The value of the premises is Rs.4,00,000.

If the normal return on capital employed is 12%, the super profit is

(a) Rs.58,000 (b) Rs.62,000 (c) Rs.1,10,000(d) Rs.1,20,000 (e) Rs.1,78,000.

(2 marks)

< Answer >

2. Which of the following statements is false?

(a) Leased property reverts to the owner at the end period of the lease(b) Lessee looses the use of improvements made to property when the leased property is returned(c) The lease agreement may contain renewal option

(d) The ownership of the leased property rests with the lessor(e) Capitalization of cost of improvements of the leased asset depends on its useful life.

(1 mark)

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3. Which of the following items is not dealt with by any Accounting Standards?

(a) Patents (b) Trademarks and copyrights(c) Goodwill (d) Research and development costs (e) Royalties.

(1 mark)

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4. AS 26 does not apply to which of the following?

I. Intangible assets held by an enterprise for sale in the course of business.II. Deferred tax assets.III. Leases.IV. Goodwill arising on an amalgamation and goodwill arising on consolidation.

(a) Only (I) above (b) Both (I) and (III) above(c) Only (II) above (d) (II), (III) and (IV) above(e) All (I), (II), (III) and (IV) above.

(1 mark)

< Answer >

5. For arriving at the average past earnings whichadjustmentis not needed?

(a) Profit or loss of any isolated transaction(b) Profit or loss from non trading assets(c) Any capital profit or loss not included in the profit & loss account

(d) Any qualification made with regard to revenues or expenses in the audit report(e) Realistic depreciation not being provided for.

(1 mark)

< Answer >

6. The following is the Balance Sheet of Pioneer Ltd. as on March 31, 2005.

Balance Sheet as on March 31, 2005

Liabilities Rs. Assets Rs.

75,000 equity shares of Rs.10

each fully paid 7,50,000

Goodwill 60,000

Plant and Machinery 6,00,000

General reserve 1,00,000 Land and Building 2,50,000

Profit & loss a/c 2,30,000 Stock-in-trade 1,10,000

Bank loan (20%) 1,50,000 Sundry debtors 4,00,000

Sundry creditors2,80,000

Cash at bank 90,000

Provision for taxation 1,40,000

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Additional Information:

I. Sundry debtors include a debt of Rs.90,000 of which only Rs.60,000 is likely to be recovered. A

provision has to be made for the balance.II. The profits earned by the company after payment of tax at the rate of 40% in the last four years

were as under:

III. The dividends paid by the company for the last four years were as follows:

The value of goodwill (rounded off to nearest tens) of the company by using the capitalization methodis

(a) Rs.60,080 (b) Rs.73,080 (c) Rs.90,080(d) Rs.1,10,000 (e) No goodwill.

(3 marks)

Discount on issue of shares 50,000

Preliminary expenses 90,000

16,50,000 16,50,000

2001-2002 Rs.1,00,000

2002-2003 Rs.1,10,0002003-2004 Rs.1,30,000

2004-2005 Rs.1,40,000

2001-2002 11%2002-2003 12%2003-2004 14.5%

2004-2005 14.5%

7. If the yield rate of return of Expert Ltd. is 15.75%, normal rate of return is 9%, paid up value is Rs.10and nominal value of its equity share is Rs.20, the value of an equity share of Expert Ltd. is

(a) Rs.20.00 (b) Rs.17.50 (c) Rs.35.00 (d) Rs.5.71 (e)

Rs.11.43.

(1 mark)

< Answer >

8. On September 01, 2005, the balance in debenture redemption fund account of Rainbow Ltd. was

Rs.1,20,000. This fund was invested in the following securities:

Rs.60,000, 10% Government loan Rs.52,500Rs.37,500, 8% Debentures Rs.31,500300 Equity shares of Rs.100 each Rs.36,000

On September 01, 2005, Government loan was sold at par, 8% debentures were sold at 98% and theequity shares were sold at Rs.125 per share. The amount of profit/loss transferred from debentureredemption fund investment account to debenture redemption fund account of the company was

(a) Rs.14,250 (b) Rs.6,750 (c) Rs.1,34,250 (d) Rs.1,20,000 (e)Rs.1,05,750.

(2 marks)

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9. Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payableas follows:

On application Rs.5 (including premium)On allotment Rs.4

On final call Rs.3

Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Vijay to whom 60 shareswere allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares, failed topay call money. All these shares were forfeited after proper notice.

On forfeiture, the amount credited to share allotment account and share forfeiture account respectivelyare

(a) Rs.480; Rs.300 (b) Rs.640; Rs.Nil (c) Rs.180; Rs.940(d) Rs.400; Rs.320 (e) Rs.240; Rs.940.

(2 marks)

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10. The fair value of a share is the average of

(a) Par value and market value(b) Intrinsic value and yield value(c) Intrinsic value and par value(d) Par value and yield value(e) Market value and yield value.

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(1 mark)


(a) Shares can be issued for cash or any other consideration

(b) In the event of over subscription, excess amount has to be refunded or a pro rata allotment is to bemade

(c) SEBI guide lines are applicable not only for the first issue of shares but also to subsequent issue ofshares

(d) The first issue of shares cannot be made at a discount(e) The share application money is automatically converted to share capital.

(1 mark)

< Answer >

12. Consider the following data pertaining to Yama Limited:

Share capital:

50,000 equity shares of Rs.10 each fully paid-up.

2,000, 8% preference shares of Rs.100 each fully paid-up.Reserve and surplus Rs.30,000The average expected profit after taxation Rs.52,000Sundry creditors Rs.60,000Other external liabilities Rs.1,20,000Preliminary expenses Rs.10,00010% of the profit after tax is transferred to reserves.

The normal profit earned on the market value of equity shares (fully paid) of the similar type of

business is 12%.

The intrinsic value per equity share is

(a) Rs.14.60 (b) Rs.10.60 (c) Rs.10.40 (d) Rs.14.40 (e)Rs.18.00.

(2 marks)

< Answer >


(a) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses(b) Capital profit realized in cash can be used for payment of dividend(c) Reserves created by revaluation of fixed assets are not permitted to be capitalized

(d) Bonus issue cannot be made within 12 months of any right issue(e) Dividend is payable on the calls paid in advance by shareholders.

(1 mark)

< Answer >

14. A company invited applications for 25,000 equity shares of Rs10 each and received 30,000 applicationsalong with the application money of Rs.4 per share. Which of the following alternatives can befollowed?

I. Refund the excess applications.II. Make pro rata allotment to all the applicants, and refund the excess application money.III. Not to allot any shares to some applicants, full allotment to some of the applicants and pro rata

allotment to the rest of the applicants.

IV. Not to allot any shares to some applicants and make pro rata allotment to other applicants.V. Make pro rata allotment to all the applicants and adjust the excess money received towards call

money.

(a) Only (II) above (b) Both (I) and (IV) above

(c) All (I), (II), (III), (IV) and (V) above (d) Only (III) above(e) Both (IV) and (V) above.

(1 mark)

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15. The document inviting offers from public to subscribe for the debentures or shares or deposits of a bodycorporate is a

(a) Share certificate (b) Stock invest

(c) Fixed deposit receipt (d) Prospectus (e) Share Warrant.

(1 mark)

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16. Consider the following information pertaining to Splendid Ltd.

On September 4, 2005, the company issued 12,000 7% Debentures having a face value of Rs.100 eachat a discount of 2.5%. On September 12, the company issued 25,000, 8% Preference share of Rs.100

each. On September 29,the company redeemed 30,000, 6% Preference shares of Rs.100 each at a

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premium of 5% together with one month dividend thereon. Bank balance as on August 31, 2005 wasRs.29,25,000.

After effecting the above transactions, the Bank balance as on September 30, 2005 was

(a) Rs.32,30,000 (b) Rs.33,15,000 (c) Rs.33,30,000(d) Rs.33,45,000 (e) Rs.34,30,000.

(2 marks)

17. Debenture premium cannot be used to

(a) Write off the discount on issue of shares or debentures

(b) Write off the premium on redemption of shares or debentures(c) Pay dividends

(d) Write off capital loss(e) Write off intangible asset.

(1 mark)

< Answer >

18. Drawal from Debenture Redemption Reserve is permissible only after ------------- of the debentureliability has actually been redeemed by the company

(a) 10% (b) 15% (c) 20% (d) 25% (e)5%.

(1 mark)

< Answer >

19. Viran Ltd. purchased Machinery from Indraja Company for a book value of Rs.4,00,000. Theconsideration was paid by issue of 10% debentures of Rs.100 each at a discount of 20%. The debenture

account was credited with

(a) Rs.4,00,000 (b) Rs.5,00,000 (c) Rs.3,20,000 (d) Rs.4,80,000 (e)Rs.Nil.

(1 mark)

< Answer >

20. The Balance Sheet of X Ltd. as on September 30, 2005, disclosed the following information:

On the above date, the directors redeemed all the debentures. For this purpose, they realized 10%preference shares stock at par.

The amount of profit on sale of preference shares held as investments transferred to debenture sinkingfund account is

(a) Rs.30,000 (b) Rs.10,000 (c) Rs.5,600 (d) Rs.9,200 (e)Rs.800.

(2 marks)

Particulars Rs.

7% Debentures (4000 nos. of Rs.100 each) 4,00,000Debenture sinking fund 1,70,000Debentures sinking fund investment is represented by Rs.40,000 owndebentures purchased at Rs.98 each and the remaining amount byRs.1,40,000, 10% preference shares

< Answer >

21. Lakhani Ltd. Issued 800 12% Debentures of Rs.100 each on July 1, 2003. Interest is payable onSeptember 30 and March 31, every year. The company purchased 400 of its own debentures for an

amount of Rs.38,400 on October 1, 2005 and cancelled all the above 400 debentures. The journal entrypassed on the cancellation of 400 debentures is

Rs. Rs.(a) Cash account Dr. 38,400

To Own Debentures account 38,400

(b) 12% Debentures account Dr. 40,000


(c) 12% Debentures Account Dr. 40,000


To Capital Reserve account 1,600

(d) 12% Debentures account Dr. 40,000


To Loss on cancellation of debentures 1,600

(e) 12% Debentures account Dr. 38,400

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(1 mark)

To Own Debentures account 38,400.

22. ESS Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 1999-2000. Interest

on debentures is payable half yearly on September 30 and March 31 every year. The company haspower to purchase its own 10% debentures in the open market for cancellation. The following purchaseswere made during the year 2004-05:

On July 01, 2004 400 of its own 10% debentures at the rate of Rs.96 ex-interest.On December 01, 2004 300 of its own 10% debentures at the rate of Rs.102 cum- interest.

The total amount debited to own debenture investment account was(a) Rs.70,000 (b) Rs.68,500 (c) Rs.69,000

(d) Rs.70,600 (e) Rs.71,600.

(2 marks)

< Answer >

23. The loss on resale of own debentures is transferred to

(a) Debenture holders account (b) Loss on issue of debentures account(c) Share premium account (d) Profit and Loss account(e) Profit and Loss Appropriation account.

(1 mark)

< Answer >

24. On September 01, 2005, Beta Ltd. has issued 10,000 Partly Convertible Debentures of Rs.150 each atpar. The details of payment were as follows:

On application Rs.50On allotment Rs.100

Additional information

I. On September 01, 2005, the debentures consisting of the convertible portion of Rs.50 to beconverted into 5 equity shares of Rs.10 each.

II. Non-convertible portion of Rs.100 to be redeemed on September 01, 2007 and will carry interestat 17% with effect from September 01, 2005 to be paid semi-annually.

The issue was fully subscribed and all the moneys pertaining to application and allotment were receivedby September 01, 2005.

The amount converted into equity share capital and the number of equity shares issued respectively willbe

(a) Rs.5,00,000 and 5,000 shares (b) Rs.50,000 and 5,000 shares(c) Rs.15,00,000 and 1,50,000 shares (d) Rs.5,00,000 and 50,000 shares

(e) Rs.10,00,000 and 1,00,000 shares.

(2 marks)

< Answer >

25. OCB Company offered equity shares to its existing shareholders at the rate of 1 share for every 6 shares

held by them. If the rights issue price is Rs.280 per share and the market price is Rs.315 per share, thenthe value of a rights share is

(a) Rs.35 (b) Rs.30 (c) Rs.20 (d) Rs.10 (e)Rs. 5.

(1 mark)

< Answer >

26. Consider the following data pertaining to four underwriters, Ajay, Samay, Vijay and Sujay

If total applications received are for 78,000 shares, the final liability of Vijay is

(a) 3,700 Shares (b) 1,600 Shares (c) 13,000 Shares(d) 1,800 Shares (e) 9,800 Shares.

(3 marks)

Particulars Ajay Samay Vijay SujayShares underwritten 8,000 16,000 24,000 32,000Marked applications 6,000 8,000 11,000 22,000

< Answer >

27. As per Accounting Standard 18, if two or more companies are subsidiaries of the same holdingcompany, each subsidiary is known as ___________ of the other subsidiary.

(a) Fellow subsidiary (b) Co-subsidiary (c)Subsidiary(d) Associate (e) Sub-subsidiary.

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(1 mark)

28. As per Schedule VI of the Companies Act, 1956, forfeited shares account will be

(a) Added to paid-up capital (b) Deducted from paid-up capital

(c) Shown as a capital reserve (d) Shown as a revenue reserve(e) Shown as a current liability.

(1 mark)

< Answer >

29. The following information is taken from the Profit and loss account of Aditya Limited

Managing Directors Salary Rs.60,000

Directors Fees Rs.10,000Donation to Ramakrishna mission Rs.30,000Ex-gratia payments to an employee Rs.7,000Interest on debenture

Rs.5,000

Depreciation Rs.27,500Income Tax Rs.14,000The net profit for the year (before adjustments) Rs.1,50,500

Other information:

I. Depreciation is calculated in accordance with IT provisions is Rs.24,000.II. Capital expenditure of Rs.12,000 was included in general expenses and charged to Profit and loss

Account

III. Managing director is entitled to commission of 1% of net profit after charging such commission.

After considering the above information, the commission payable to the managing director is

(a) Rs.1,755 (b) Rs.1,870 (c) Rs.1,851 (d) Rs.1,950 (e)Rs.2,000.

(2 marks)

< Answer >

30. Which of the following statements is false with regard to Segmental reporting?

(a) In the absence of any standardized norm for joint cost allocation, it is possible to opt for suitablecost allocation method to arrive at the desired segmental results

(b) If certain assets are normally utilized for more than one segment, it is difficult to earmark assetsemployed for a particular segment

(c) Segmental results may be influenced by selecting appropriate transfer pricing formulae(d) Segment Reporting is applicable to enterprises whose debt or equity securities are listed on a stock

exchange in India(e) Segment Reporting is applicable to commercial, business or industrial enterprises whose turnover

for the accounting period exceeds Rs.5 crore.

(1 mark)

< Answer >

31. The following is the balance sheet of VIBGYR Ltd. as on March 31, 2005:

The Board of Directors of the company decided to redeem the preference shares at a premium of 10%.In order to facilitate the redemption, the Board has taken the following decisions:

To sell the investments for Rs.4,00,000.

To issue sufficient equity shares at a premium of Rs.2 per share to raise the balance need of funds.

To maintain minimum bank balance of Rs.50,000.

The Board of Directors initiated the above course of action during the month of April, 2005 andredeemed all the preference shares.

The amount to be transferred to Capital Redemption Reserve is

(a) Rs.70,000 (b) Rs.5,25,000 (c) Rs.1,25,000 (d) Rs.8,00,000 (e)Rs.5,50,000.

(3 marks)


Equity shares of Rs.10 each fully paid up 10,00,000 Sundry assets 19,50,00012% Redeemable preference shares ofRs.100 each fully paid up 8,00,000

Investments 4,50,000

General Reserve 4,00,000 Cash at bank 2,00,000Profit & Loss account 2,50,000Share premium 25,000

Sundry creditors 1,25,00026,00,000 26,00,000

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32. The balance sheet items of Swipe Ltd. as at March 31, 2005 have increased by the following amounts

compared with those at the end of the previous year:

Assets Rs.1,16,000Liabilities Rs.70,000Share Capital Rs.50,000.

The only change to retained earnings during the year 2004-05 was relating to a dividend payment ofRs.10,000. The net income for the year 2004-2005 amounted to

(a) Rs.14,000 (b) Rs.10,000 (c) Rs.8,000 (d) Rs.6,000 (e)

Rs.4,000.

(1 mark)

< Answer >

33. The share capital of Suhasini Ltd. consists of 5,000 equity shares of Rs.100 each. The net profit for theyear 2004-05 amounted to Rs.1,00,000 of which, the directors proposed to distribute Rs.75,000 to theshareholders as dividend. The minimum amount of profits to be transferred to reserve is

(a) Rs.Nil (b) Rs.10,000 (c) Rs.5,000 (d) Rs.7,500 (e)Rs.2,500.

(1 mark)

< Answer >

34. Brokerage on shares can be paid by the listed companies, in respect of

(a) Rights issue taken up by the existing shareholders(b) Rights issue renounced by the existing shareholders(c) Private placement of shares

(d) Applications made by institutions / banks against their underwriting commitments(e) Shares taken by directors friends.

(1 mark)

< Answer >

35. According to the Companies Act, 1956, the period to which the accounts of a company relate should notexceed

(a) 12 months (b) 15 months (c) 18 months(d) 24 months (e) 21 months.

(1 mark)

< Answer >

36. For valuation of an equity share under the yield method, information is required regarding

I. Net assets of the business. II. Number of equity shares.III. Normal rate of return. IV. Face value of the share.V. Paid-up value of the share.

(a) Both (I) and (II) above (b) Both (III) and (IV) above(c) Both (III) and (V) above (d) (I), (III) and (IV) above(e) (II), (III) and (IV) above.

(1 mark)

< Answer >

37. The authorized capital of Ace Widgets Ltd. consists of both cumulative preference shares and equityshares. Each 5% cumulative preference share has a par value Rs.100. Each equity share has a par valueRs.10. During the year April 01, 2004 to March 31, 2005, the cumulative preference share capital

balance was Rs.2,00,000 and the equity share capital balance was Rs.5,00,000.

If dividend declarations totalled Rs.8,000 and Rs.15,000 in the year 2003-04 and 2004-05 respectively,the dividends allocated to the equity share holders in the year 2004-05 were

(a) Rs.3,000 (b) Rs.5,000 (c) Rs.10,000(d) Rs.12,000 (e) Rs.15,000.

(2 marks)

< Answer >

38. As per the provisions of the Companies Act, 1956, a chartered accountant cannot be an auditor for more

than

(a) 10 companies per individual(b) 20 companies per firm of Chartered Accountants(c) 20 Public limited companies per individual(d) 30 companies having a paid-up share capital of Rs.25 lakhs or more(e) 20 companies per individual.

(1 mark)

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39. The Boards report shall include a statement showing the employees name who is in receipt ofremuneration not less than Rs.________ Per annum or Rs.______ Per month during the financial year

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(a) Rs.3 lakhs; Rs.25,000 (b) Rs.6 lakhs; Rs.50,000(c) Rs.12 lakhs; Rs.1,00,000 (d) Rs.24 lakhs; Rs.2,00,000(e) Rs.36 lakhs; Rs.3,00,000.

(1 mark)

40. Which of the following need not be stated in the Directors Report?

(a) Technology absorption(b) Financial state of affairs of the company(c) Foreign exchange earnings of the company(d) Statement of accounting policies

(e) Conservation of energy.(1 mark)

< Answer >

41. Which of the following statements is true?

(a) Par value must be separately reported in the balance sheet because it represents the market value

of the shares when it was first issued(b) Selling common shares for more than par value results in gain that is reported in the income

statement(c) Common shareholders assume a higher investment risk than long-term creditors(d) Non-convertible debentures cannot be issued by companies(e) When declared, both cash dividends and bonus shares decrease the total share holders equity.

(1 mark)

< Answer >

42. The Balance Sheet of Marvel Ltd. as on March 31, 2005 is as under:

The following assets are revalued as under:

The profit of the company for the year ended March 31, 2005 was Rs.1,15,500. The company chargesdepreciation on all its fixed assets at the rate of 10% per annum. The depreciation adjustment on therevalued assets should be made for one year. The return on capital employed is

(a) 14.33% (b) 12.89 % (c) 13.12 % (d) 10.85 % (e)14.15 %.

(3 marks)


Equity share capital 6,00,000 Land and building 4,70,000Reserves and surplus 2,10,000 Plant and machinery 2,50,00012% Debentures 1,50,000 Furniture and fixtures 2,00,000Sundry creditors 72,500 Sundry debtors 90,000Bank overdraft 32,500 Inventories 65,000Provision for taxation 45,000 Cash 35,000

11,10,000 11,10,000

Land and building Rs.5,00,000Plant and machinery Rs.2,00,000Sundry debtors Rs. 85,000

< Answer >

43. Consider the following data pertaining to Wise Ltd. as on September 30, 2005:

The asset backing of equity shares is

(a) Nil (b) 1 time (c) 2 times (d) 3 times (e) 4

times.

(2 marks)

Particulars Rs.

1,000 Equity shares of Rs.100 each 1,00,0001,000 10% Preference shares of Rs.100 each 1,00,000

500 14% Debentures of Rs.100 each 50,000Sundry creditors 65,000

Fixed assets 2,50,000Current assets 65,000

< Answer >

44. As per the Accounting Standard 20, which of the following are not potential equity shares?

(a) Share warrants (b) Convertible preference shares(c) Employee stock option plans (d) Convertible debt instruments(e) Redeemable preference shares.

(1 mark)

< Answer >

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45. Which of the following is/are a limitation(s) of a Balance Sheet?

I. It does not contain certain assets and liabilities despite its claim to be the statement of all assetsand liabilities.

II. The factors, which have a vital bearing on the earnings of the organization, are not disclosed.III. Personal judgment plays a great part in determining the figures of the balance sheet.

(a) Only (I) above (b) Only (II) above(c) Only (III) above (d) (II) and (III) above(e) All (I), (II) and (III) above.

(1 mark)

46. Under which of the following situations, is C Ltd not a subsidiary of A Ltd.?

(a) Where A Ltd. holds 60% in B Ltd. and B Ltd. holds 60% in C Ltd.(b) Where A Ltd. holds 60% in B Ltd. and B Ltd. holds 60% in C Ltd and A Ltd. also holds 10% in C

Ltd.(c) Where A Ltd. holds 60% in B Ltd. and B Ltd. holds 60% in C Ltd and A Ltd. also holds 5% in C

Ltd.(d) Where A Ltd. holds 40% in B Ltd. and B Ltd. holds 60% in C Ltd and A Ltd. also holds 12% in C

Ltd.

(e) Where A Ltd. holds 40% in B Ltd. and B Ltd. holds 90% in C Ltd and A Ltd. also holds 15% in CLtd.

(1 mark)

< Answer >


(a) A company can redeem its preference shares(b) Preference shareholders are creditors of a company(c) The part of the authorized capital which can be called up only in the event of liquidation of a

company is called reserve capital(d) Capital redemption reserve can be utilized for issuing fully paid bonus shares(e) Profit on reissue of forfeited shares is transferred to capital reserve account.

(1 mark)

< Answer >

48. H Ltd. acquired 21,000 equity shares of S Ltd. on December 31, 2004. The summarized balance sheetsof the two companies as on March 31, 2005 are given below.

The additional information is as follows :

I. On April 01, 2004, S Ltd. profit and loss account showed a debit balance of Rs. 20,000

II. On March 31, 2005, S Ltd. decided to revalue its plant and machinery at Rs. 2,00,000 and landand building at Rs.1,50,000.

III. On February 15, 2005, H Ltd. sold to S Ltd. goods costing Rs. 20,000 for Rs. 25,000. 30% ofthese goods remained unsold with S Ltd. on March 31, 2005.

IV. Creditors of S Ltd. include Rs. 14,000 due to H Ltd. on account of these goods.

The share of holding company out of capital profits is

(a) Rs. 1,22,500 (b) Rs. 94,500 (c) Rs. 1,08,500

(d) Rs. 1,40,000 (e) Rs. 1,15,500.

(3 marks)

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

Share capital of

Rs. 10 each fullypaid

8,00,000 3,00,000 Land and

building

3,80,000 1,60,000

General reserve 2,00,000 - Plant andmachinery

4,20,000 1,00,000

Profit and loss a/c 2,00,000 80,000 Investment 2,60,000 -

Bills payable 37,000 16,000 Stocks 60,000 62,000

Sundry creditors 1,33,000 64,000 Sundrydebtors

1,53,000 68,000

Billsreceivable

41,000 28,000

Cash and bank 56,000 32,000

Preliminaryexpenses

- 10,000

13,70,000 4,60,000 13,70,000 4,60,000

< Answer >

49. Following is the balance sheets pertaining to H Ltd. and its subsidiary S Ltd., as on March 31, 2005< Answer >

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Balance sheet of H Ltd & S Ltd. as on March 31, 2005

Other details:

Reserve and P & L (Cr.) of S Ltd. stood at Rs. 25,000 and Rs. 15,000 respectively on the date of

acquisition of its 80% shares by H Ltd.

Machinery book value Rs.1,00,000 and furniture book value Rs. 20,000 of S Ltd. were revalued at

Rs. 1,50,000 and Rs. 15,000 respectively for the purpose of fixing the price of its shares andbook values of other assets remained unaffected.

The value of machinery and furniture of S Ltd. to be considered in the Consolidated Balance Sheet is

(a) Rs.1,35,000; Rs.12,750 (b) Rs.1,45,000; Rs.15,750(c) Rs.1,40,000; Rs.12,750 (d) Rs.1,50,000; Rs.17,750

(e) Rs.1,40,000; Rs.17,750.(2 marks)

Liabilities H Ltd.(Rs.)

S Ltd.(Rs.)

Assets H Ltd.(Rs.)

S Ltd.(Rs.)

Share Capital(Rs.100 each)

5,00,000 1,00,000 Machinery 3,00,000 90,000

Reserve 2,00,000 75,000 Furniture 50,000 17,000

P & L A/c 1,00,000 25,000 Other Assets 4,40,000 1,43,000

Creditors 1,50,000 50,000 Share is S Ltd. 800(Acquired on

01.04.2004)

1,60,000

9,50,000 2,50,000 9,50,000 2,50,000

50. The following information is extracted from the books of Jeet Ltd. which follows the accounting year ofOctober 1, 2004 to September 30, 2005.

On September 30, 2005, outstanding manufacturing wages stood at Rs.1,890. On the same date stockwas valued at Rs.1,24,840.

Goods worth Rs.10,000 was issued as free samples during the year.

The Gross Profit for the year ending September 30, 2005 is

(a) Rs.2,61,500 (b) Rs.2,60,000 (c) Rs.2,61,250(d) Rs.2,70,100 (e) Rs.2,80,900.

(2 marks)

Particulars (Rs.)

Opening stock (1/10/2004) 1,86,420Purchases 7,18,210Sales 11,69,900Sales returns 12,680Purchases returns 9,850Manufacturing wages 1,09,740Carriage inwards 4,910

Sundry Manufacturing Expenses 19,240

< Answer >

51. Great Tyres Ltd. issued 80,000 shares of Rs.10 each at a premium of 25% payable Rs.2 on application,Rs.4.50 (including premium) on allotment and the balance on call. Applications were received for1,92,800 shares and allotment was made as under:

Applicants for 50,800 shares were allotted 30,480 shares pro-rata



The surplus money, if any, would be refunded only after utilizing the excess received on application

towards the payment of allotment dues. The amount refunded to the applicants is

(a) Rs. Nil (b) Rs. 7,400 (c) Rs.1,92,800(d) Rs.1,34,400 (e) Rs.2,25,600.

(2 marks)

< Answer >

52. Parent Company reports net profit of Rs.5,00,000 and stockholders equity of Rs. 20,00,000. SubsidiaryCompany reports post-acquisition profit of Rs.1,00,000 and stockholders equity of Rs.5,00,000. Parentowns 80% of the Subsidiarys common stock. The consolidated financial statement will report

(a) Net profit of Rs. 6,00,000 and share capital of Rs.20,00,000(b) Net profit of Rs. 5,80,000 and share capital of Rs.20,00,000

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(c) Share Capital of Rs. 25,00,000 and net profit of Rs.5,00,000(d) Share Capital of Rs. 24,00,000 and net profit of Rs.6,00,000(e) Investments of Rs. 4,00,000 and share capital of Rs.20,00,000.

(1 mark)

53. H. Ltd. acquired 70% shares of S. Ltd. on October 1, 2004 at a price of Rs.5,00,000. The balance ofprofit and loss account of S. Ltd. is as under:

The share of capital profit of H. Ltd., at the time of consolidation, is.


(1 mark)

As on Balance

April 1, 2004 Rs. 80,000 (Debit balance)

March 31, 2005 Rs.1,60,000 (Credit balance)

< Answer >

54. Glow Ltd. acquired 1,600 equity shares of Gloom Ltd. of Rs.100 each on March 31, 2005. Thesummarized balance sheets of Glow Ltd. and Gloom Ltd. as on that day were as follows:

The Bills payable and Bills receivable shown in the consolidated Balance sheet as on March 31, 2005

respectively are(a) Rs.8,400 and Rs.15,800 (b) Rs.4,400 and Rs.11,800(c) Rs.3,400 and Rs.7,400 (d) Rs.5,400 and Rs.12,800(e) Rs. Nil (as the Bills payable is the liability of subsidiary company) and Rs.15,800.

(2 marks)

Liabilities Glow Ltd.Rs.

Gloom Ltd.Rs.

Glow Ltd.Rs.

Gloom Ltd.Rs.

Capital : Land &

Buildings 1,50,000 1,80,0005,000 equityshares of Rs.100each

5,00,000

Plant &Machinery

2,40,000 1,09,4002,000 equity

shares of Rs.100each

2,00,000

Investments in

Big Ltd. at cost

3,40,000 Capital Reserve 1,20,000 Stocks 1,20,000 36,000

General Reserve 2,40,000 Sundry Debtors 44,000 40,000Profit and LossA/c

57,200 36,000

Bills Receivable(includingRs.3,000 from

GloomLtd.)15,800

Bank Overdraft

80,000

Cash and BankBalances

14,500 8,000Bills Payable(including

Rs.4,000 toGlow Ltd.)

- 8,400

Creditors 47,100 9,000

9,24,300 3,73,400 9,24,300 3,73,400

< Answer >

55. Consider the Balance Sheets of H Ltd. and S Ltd. as on March 31, 2005:

H Ltd. has acquired the shares on the closing date of the Balance Sheet.

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

Share Capital @ Rs.10each

20,000 10,000 Shares in S. Ltd.800 Shares

7,500

Other Liabilities 10,000 5,000 Other Assets 22,500 15,000Profit and loss account 5,000 Cash 5,000

30,000 20,000 30,000 20,000

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The total of the consolidated Balance Sheet is


(2 marks)

56. Parent Ltd. acquired 4000 shares of Ward Ltd on April 01, 2004 for a price of Rs.4,50,000. The sharecapital of Ward Ltd. consists of 5,000 equity shares of Rs.100 each.

During the consolidation of accounts, it is noticed that the sundry creditors of Parent Ltd. includeRs.20,000 for goods purchased from Ward Ltd. from which the subsidiary company made a profit of 33

% on cost.

If half of the goods sold above were still in the stock of Parent Ltd. as on March 31, 2005

The unrealized profit in the Consolidated Balance Sheet as on March 31, 2005 is

(a) Rs.2,500(b) Rs.2,000(c) Rs.6,667(d) Rs. Nil since the goods are purchased from subsidiary company(e) Rs.2,667.

(2 marks)

13

< Answer >

57. Multiple Ltd. acquired 2,000 shares in Single Ltd. for a price of Rs.2,50,000. On the date of

acquisition, Single Ltd. had the following balances on the liabilities side of Balance Sheet:

Authorised, issued and subscribed share capital of Rs.100 each Rs.3,00,000

General Reserve Rs. 90,000

Profit and Loss Account (pre-acquisition) Rs. 60,000

Sundry Creditors Rs. 50,000

Post acquisition profit Rs. 30,000

The cost of control shown in the Consolidated Balance Sheet is

(a) Rs.20,000 (capital reserve) (b) Rs.2,00,000 (goodwill)(c) Rs.1,00,000 (capital reserve) (d) Rs.50,000 (capital reserve)(e) Rs.50,000 (goodwill).

(2 marks)

< Answer >

58. Consolidated Balance Sheet is the

(a) Comparative Balance sheet of two or more firms(b) Balance Sheet of the holding company and its subsidiary(c) Balance sheet along with relevant statements consolidated(d) Balance Sheet of two or more affiliates(e) Balance Sheet having a group of items compiled together.

(1 mark)

< Answer >


(a) In additive approach all the items that create value are added up to give the sum of valueadded

(b) Value added statement forms part of social responsibility reporting(c) Value added is used in measuring national income(d) Value added is different from conversion cost

(e) Value added statement can replace the profit and loss account.

(1 mark)

< Answer >


(a) EVA is a residual income(b) EVA is obtained by subtracting the cost of capital from operating profit(c) EVA is after tax operating profit(d) EVA requires deduction of cost of capital alone(e) EVA maximizes shareholder value.

(1 mark)

< Answer >

61. Which of the following items should not appear under the heading unsecured loans in the balance

sheet of a limited company?

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(a) Sinking funds(b) Loans and advances from subsidiaries(c) Short term loans and advances from banks(d) Loans and advances from others(e) Fixed deposits.

(1 mark)

62. Which of the following statements is false with regard to Brand Valuation?

(a) Brand is a companys most valuable asset(b) The value of a brand is equal to the present value of future earnings of that brand

(c) Brand valuation is a tool that quantifies the economic value of a brand(d) Earnings valuation method is a single stage process involving the determination of the futureearnings attributable to the brand

(e) Cost method states the brand value at its cost to the company.

(1 mark)

< Answer >

63. Which of the following statements is false with regard to Market Value Added?

(a) MVA is the difference between market value of invested capital and book value of investedcapital

(b) MVA is a measure of shareholder value(c) When MVA is positive it means value is being created for shareholders(d) When MVA is negative it means shareholders value is being destroyed(e) MVA is not equal to the present value of all future EVA.

(1 mark)

< Answer >

64. Shown below are selected data from income statement of AB Ltd.

Considering the above data the value added by manufacturing activity is


(1 mark)

Particulars Rs.

Sales 1,00,000

Other income 12,000

Operating expenses 60,000

Excise duty 5,000

< Answer >

65. When shares are forfeited, the share capital account is debited with______ and the share forfeitureaccount is credited with_________

(a) Paid-up capital of shares forfeited; Called up capital of shares forfeited(b) Called up capital of shares forfeited; Calls in arrear of shares forfeited(c) Called up capital of shares forfeited; Amount received on shares forfeited(d) Calls in arrears of shares forfeited; Amount received on shares forfeited(e) Uncalled capital of shares forfeited; Calls in arrear of shares forfeited.

(1 mark)

< Answer >

66. Which of the following is false regarding general instructions for preparation of balance sheet of acompany

(a) Dividends declared by subsidiary company after the date of balance sheet should be included inthe balance sheet

(b) Particulars of any redeemed debentures which the company has power to reissue should be given(c) All investments must be classified into trade and other investments and the names of the company

in which such investments have been made should also be disclosed(d) Depreciation written-off should be allocated under the different assets head and deducted in

arriving at the value of fixed assets(e) In case of subsidiary company, the number of shares held by the holding company must be

separately stated.

(1 mark)

< Answer >

67. On April 01, 2004, Libra Ltd. issued 10,000 12% Debentures of Rs.100 each at a discount of 5% andthe debenture issue was subscribed in full. All the moneys due on the issue were received in full.Interest is payable yearly on March 31. The company has the practice of deducting tax at the rate of10%. The journal entry passed for payment of interest on March 31, 2005 was

(a) Debenture interest a/c. Dr. Rs.1,20,000

< Answer >

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To Debenture holders a/c. Rs.1,08,000

To Tax deducted at source a/c. Rs. 12,000

(b) Debenture interest a/c. Dr. Rs.1,20,000


(c) Debenture interest a/c. Dr. Rs.1,08,000


(d) Profit and Loss a/c. Dr. Rs.1,20,000


To Tax deducted at source a/c. Rs. 12,000(e) Debenture interest a/c. Dr. Rs.1,20,000

To Bank a/c. Rs.1,20,000.

(2 marks)

68. With regard to auditors responsibilities, it is true that the

(a) Accuracy of the financial statements is the responsibility of the auditors(b) GAAP requires most publicly traded companies to file audited financial statements(c) Audited financial statements may not include estimates(d) Auditors provide an opinion on whether the financial statements are prepared in accordance with

GAAP (Generally Accepted Accounting Principles)(e) Auditors guarantee the financial soundness of the company.

(1 mark)

< Answer >

69. Under which of the following circumstances, is a special resolution not required to appoint an auditor ofa company?

(a) Where 27% of equity share capital is held by a State Government(b) Where 30% of preference share capital is held by a public financial institution(c) Where 49% of equity share capital is held by the Central Government

(d) Where 78% of debentures and 20% of equity share capital is held by a nationalized bank(e) Where 25% of equity share capital is held by a nationalized bank.

(1 mark)

< Answer >

70. Madhuban Ltd has redeemed its 12% preference shares of Rs. 2,00,000 at a premium of 4% . To meetthe redemption it has issued Rs. 1,98,084 worth of shares of Rs. 20 each at a premium of 5%. Thebalance outstanding to the credit of share premium account after adjusting premium on redemption ofpreference shares is

(a) Rs.Nil (b) Rs.1,904 (c) Rs.1,432 (d) Rs.8,000 (e)Rs.9,904.

(1 mark)

< Answer >

71. Capital Reserves are created out of

(a) Balance in Profit and loss Account (b) Capital Profits(c) Revenue Profits (d) Provisions (e) Unclaimed dividends.

(1 mark)

< Answer >

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Suggested Answers

Financial Accounting II (112) : October 2005

1. Answer : (b)

Reason :

Profit for the year 2004-05 2,30,000

Add: Rent (not relevant if the owner of the premises operates thebusiness)

1,20,000

Adjusted maintainable profits 3,50,000

Capital employed by Dinakar 20,00,000Add: Value of premises 4,00,000

Total capital employed 24,00,000Normal profit (12% of Rs.24,00,000) 2,88,000Super profits (Rs.3,50,000 Rs.2,88,000) 62,000

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2. Answer : (e)

Reason : Capitalization of cost of improvements on leased assets depends on terms of lease agreement andnot on its useful life.

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3. Answer : (b)

Reason : Trade marks and copyrights are not dealt with by accounting standards

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4. Answer : (e)

Reason : AS26 does not apply to all of them. Leases that fall within the scope of AS19 and goodwillcovered by AS14 and AS21, Deferred tax assets by AS 22 and Intangible assets held by anenterprise for sale in the course of business by AS2 and AS7.

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5. Answer : (c)

Reason : For arriving at the average past earnings, no adjustment is needed for any capital profit or loss orreceipt or expense not included in the profit & loss account. They need to be excluded if they areincluded.

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6. Answer : (b)

Reason :

Pioneer Ltd. Computation of net tangible assets

Computation of average maintainable profit:

Average profit after tax

=

= = Rs.1,20,000

Average dividend paid

= = = 13%

= Normal rate of dividend

Particulars Rs. Rs.Plant & machinery 6,00,000Land & building 2,50,000Stock in trade 1,10,000Sundry debtors 4,00,000Cash at bank 90,000

14,50,000Less: Liabilities:

Bank loan (20%) 1,50,000Sundry creditors 2,80,000

Provision fortaxation

1,40,000

Provision for baddebts

30,000 6,00,000

Net tangible assets 8,50,000

4

000,40,1.Rs000,30,1.Rs000,10,1.Rs000,00,1.Rs +++

4

000,80,4.Rs

11% 12% 14.5% 14.5%

4

+ + +

4

%52

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= x 100

= = Rs.9,23,077 9,23,080

Goodwill = Total value of the business Net tangible assets

= Rs.9,23,080 8,50,000 = Rs.73,080

Average maintainable profit

Normal rate of return

Rs.1, 20,000

13%

7. Answer : (b)

Reason : Value of equity share =

= (15.75/9) x 10 = 17.50.

Yieldrateof return x Paid-up value of equityshareNormalrate of return

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8. Answer : (a)

Reason : Debenture redemption fund investment account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d. By Bank:10% Government loan 52,500 10% Government loan 60,0008% Debentures 31,500 8% Debentures 36,750Equity shares 36,000 Equity shares 37,500

To Debenture redemption

fund a/c.

14,250

1,34,250 1,34,250

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9. Answer : (c)

Reason : The journal entry is

Share capital account (160 x 10) Dr. Rs.1,600

To Share allotment account (60 x 3) Rs.180

To Share final call account (160 x 3) Rs.480

To Share forfeiture account (240 + 100 x 7) Rs.940

(Forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid onlyRs.7 per share.)

Shares allotted = 60

Share applied = = 72 x 5 = Rs.360.

Share application money = 60 x 5 = Rs.300

Balance amount = Rs.360 - Rs.300 = Rs.60

Amount to be paid on allotment = Rs.4 x 60 = Rs.240

Balance amount = Rs.240 Rs.60 = Rs.180

[Amount to be paid on allotment = Rs.4 Re.1 (240/60 3)]

6,00060 725,000

=

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10. Answer : (b)

Reason : The fair value of the share is the average of the value obtained by the net asset method and theyield method.

Fair value =

Intrinsic value Yield value

2

+

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11. Answer : (e)

Reason : The share application money is converted into share capital only after the board of directorsapproves the allotment of shares. Till such time, it is treated as a liability.

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12. Answer : (c)

Reason : Intrinsic Value of Shares Yama Ltd.

Particulars (Rs.)

50,000 equity shares @ Rs.10 each 5,00,0002,000, 8% preference shares @ Rs.100 each 2,00,000Reserves and surplus 30,000External liabilities 1,20,000Sundry creditors 60,000

Total liabilities 9,10,000

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Intrinsic value of shares =

= = Rs.10.40.

Particulars (Rs.)

Total assets 9,10,000Less : Fictitious assets (10,000)

(preliminary expenses)Sundry creditors (60,000)

Extenral liabilities (1,20,000)Preference shares (2,00,000)

Net assets available for equity shareholders 5,20,000

Net assetsavailabefor equity shareholders

Numberof equity shares

Rs.5, 20,000

50,000

13. Answer : (e)

Reason : Dividend is not payable on the calls in advance paid by the shareholders. It is payable on theoutstanding balance of called up shares minus calls in arrear amount. Capital redemption reserve

cannot be used for writing off miscellaneous expenses and losses. Capital profit realized in cashcan be used for payment of dividend. Reserves created by revaluation of fixed assets are notpermitted to be capitalized. Bonus issue cannot be made within 12 months of any right issue.Hence, (e) is the answer.

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14. Answer : (c)

Reason : The company can follow all the options without restricting itself to anyone.

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15. Answer : (d)

Reason : A prospectus (d) means any document described or issued as a prospectus and includes anynotice, circular, advertisement or other document inviting deposits from the public or invitingoffers from the public for the subscription or purchase of shares or debentures of a body corporateis the correct answer. Total capital of a company is divided into units of small denominationswhich are called as shares. Share certificate (a) is an ownership security. Stock invest (b) is aninstrument which can be used by an applicant to tender money for share or debentures applied for.Fixed deposit receipt (c) is the acknowledgement of deposit of a certain sum of money repayable

after a fixed tenure as per the contract and share warrant (e) is a financial instrument that gives theholder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e) are not correct.

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16. Answer : (e)

Reason : Balance as on August 31, 2005 Rs.29,25,000Issue of debenture 12,000 Rs.12,00,000

Less: discount Rs. 30,000 Rs.11,70,000

Issue of preference shares 25,000 Rs.25,00,000

Total available cash Rs.65,95,000

Less: Redemption of 30,000

6% preference shares Rs.30,00,000

Premium on redemption @ 5% Rs. 1,50,000

Dividend for one month @ 6% Rs. 15,000 Rs.31,65,000

Balance as on 30th September 2005 Rs.34,30,000

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17. Answer : (c)

Reason : Debenture premium account cannot be used to pay dividends. Hence option (c) is the correct

answer. The other options are not the correct answers as Debenture premium account can be usedto write off the discount on issue of shares or debentures (a), write off the premium on redemptionof shares or debentures (b), write off capital loss (d) and write off intangible asset (e).

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18. Answer : (a)

Reason : Drawal from Debenture Redemption Reserve is permissible only after 10% of the debentureliability has actually been redeemed by the company.

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19. Answer : (b)

Reason : Sometimes the companies may go for issue of debentures towards consideration for purchase offixed asset. In such cases, the debentures may be issued at par / at discount / at premium. In thepresent case, the journal entry will be:

For purchase of Land and Building:

i. Machinery a/c. Dr. Rs.4,00,000

To Indraja & Company a/c. Rs.4,00,000

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For issue of debentures at discount of 20%

ii. Indraja & Company a/c. Dr. Rs.4,00,000

Discount on issue of debentures Dr. Rs.1,00,000

To 10% Debentures a/c. Rs.5,00,000

(Issue of 5,000 debentures of face value Rs.100 each at a discount of 20%)

Thus 10% debentures are figured at Rs.5,00,000.

20. Answer : (d)

Reason : Profit on sale of investment is arrived at as under :

Paarticulars Rs.Total amount available for investment 1,70,000Less: Amount used in purchasing own debentures Rs.40,000 at Rs.98 39,200

Amount invested in 10% Rs.1,40,000 stock, i.e. cost price of stock 1,30,800Sale price of 10% preference shares 1,40,000

Profit on sale of preference shares 9,200

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21. Answer : (c)

Reason : When debentures are purchased as investment, a separate Own Debentures account is opened.The Investment account (Own debentures) will be debited by the actual amount paid irrespectiveof the nominal value of debentures purchased. The profit or loss on cancellation will betransferred to the Capital Reserve. Hence option (c) is the correct entry.

12%Deebentures Account Dr. Rs.40,000.00

To Own Debentures Account Rs.38,400.00

To Capital Reserve Account Rs.1600.00

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22. Answer : (b)

Reason :

Amount debited to own debenture investment account is Rs.68,500.

01.07.2004

400 Rs.96 ex. Interest Rs.38,400

01.12.2004

300 Rs.102 cum. Interest = Rs.30,600 Rs.500

(Interest for 2 months 30,000 =

Rs.500)

2 10

12 100

Rs.30,100

Rs.68,500

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23. Answer : (d)

Reason : The loss on resale of own debentures represents a revenue nature and is transferred to (d) Profitand Loss account.

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24. Answer : (d)

Reason : 17% PCDs a/c Dr. Rs.5,00,000

To Equity Share Capital Rs,5,00,000

(Being the conversion into PCD of 10,000 Rs.50 of 50,000 shares at the rate of 5 equity sharesfor Rs.50)

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25. Answer : (e)

Reason : Value of right = (Rs.315 Rs.280) = = Rs.5

61

1

+

35.Rs

7

1

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26. Answer : (b)

Reason :

Particulars Ajay Samay Vijay Sujay Total

Shares underwritten 8,000 16,000 24,000 32,000 80,000Less: unmarkedapplications(in the ratio 1:2:3:4)

3,100 6,200 9,300 12,400 31,000

4,900 9,800 14,700 19,600 49,000Less: Markedapplications

6,000 8,000 11,000 22,000 47,000

(1,100) 1,800 3,700 (2,400) 2,000Less: Surplus of Sujay

and Ajays share(in the ration 2:3) 1,100 1,400 2,100 2,400 Nil

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Final liability Nil 400 1,600 Nil 2,000

27. Answer : (a)

Reason : As per accounting standard 18, if two or more companies are subsidiaries of the same holdingcompany, each subsidiary is known as Fellow subsidiary.

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28. Answer : (a)

Reason : The shares forfeited account should be added to the paid-up capital according to Schedule VI ofthe Companies Act, 1956. However, once the shares forfeited are re-issued, the balance in theshares forfeited account which pertains to the re-issued shares will be transferred to capitalreserve account.

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29. Answer : (c)Reason : Net profit as per profit and loss account 1,50,500

Add: Income tax 14,000

Depreciation (Rs.27,500 Rs.24,000) 3,500

Ex-gratia payments 7,000

Capital expenditure 12,000 36,500

1,87,000

Commission payable :1% on net profit after charging commission

= Rs.1,87,000 x = Rs.1,851

1

101

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30. Answer : (e)

Reason : AS-17 is applicable to commercial, business or Industrial enterprises whose turnover for theaccounting period exceeds Rs.50 crore and not 5 crore as given in option (e).

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31. Answer : (b)

Reason : VIBGYRLtd.

Workings:

Note 1 Bank Account

Amount transferred to capital redemption reserve account.

Where redemption of preference shares in effected without corresponding issue of shares it impliesthat it is made out of distributed profits, the gap created to the extent is transferred the CapitalRedemption Reserve

Rs. Rs.To Balance 2,00,000 By Preference share

holders

(Rs.8,00,000 Rs.1.10)

8,80,000

To Investments Account 4,00,000

To Equity shares By Balance account. 50,000

27,500 shares Rs.10

Rs.2,75,000Premium of Rs.2 per share Rs.55,000

3,30,000

9,30,000 9,30,000

Face value of preference shares Rs.8,00,000

Less: Face value of shares 27,500 10 (funds available by way

of fresh equity issue)

Rs.2,75,000

Rs.5,25,000

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32. Answer : (d)

Reason :

Particulars Rs. Rs.

Assets increased by 1,16,000Add: Dividend paid during the year 10,000

1,26,000Less: Liabilities increased by 70,000

Share capital increased by 50,000 1,20,000Net income for the year 6,000

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33. Answer : (c)

Reason : Dividend proposed is 15% of paid-up capital i.e. Where the proposed dividend

exceeds 12.5% but does not exceed 15% of paid-up capital, the amount to be transferred to the

75,000100

5,00,000

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reserves shall not be less than 5% of the current profits. Hence the minimum amount to be transferred toreserves is 1,00,000 5% = Rs.5,000

34. Answer : (c)

Reason : Brokerage will not be allowed in respect of promoters quota, including the amounts taken up bythe directors, their friends and the employees, in respect of the rights issues taken up or renouncedby the existing shareholders and when applications are made by the institutions or banks againsttheir underwriting commitments. However, brokerage can be paid by the listed companies on

private placement at a maximum rate of 0.5 percent Thus, the correct answer is (c).

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35. Answer : (b)

Reason : According to the Companies Act, 1956, the period to which the accounts of a company relate

should not exceed 15 months.

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36. Answer : (c)

Reason : The formula to calculate the value of share under yield method is

Hence the normal rate of return and paid-up value of share is required. The net assets of thebusiness and number of equity shares are required to calculate the value of share under intrinsicvalue method. Thus the answer is (c).

Expected rate of returnPaid-up value of share

Normal rate of return

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37. Answer : (a)

Reason : Since the annual preferred dividend preference is Rs.10,000 [i.e., (Rs.2,00,000 Rs.100 per share)Rs.5 per share], and the issue is cumulative, 2003-04 dividends in arrear were Rs.2,000 (i.e.,

Rs.10,000 - Rs.8,000). Accordingly, the cumulative preference class of shares was entitled to thefirst Rs.12,000 of dividend declared in 2004-05. This leaves Rs.3,000 to allocate to the equityclass of shares. Thus, alternative (a) is the correct answer.

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38. Answer : (e)

Reason : As per the provisions of the Companies Act, 1956, a chartered accountant cannot be an auditor

for more than 20 companies per individual.

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39. Answer : (b)

Reason : Boards report shall also include a statement showing the employees name who is in receipt ofremuneration not less than Rs.6,00,000 per annum or Rs.50,000 per month during the financialyear.

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40. Answer : (d)

Reason : Statement of accounting policies need notbe stated in the Directors Report. It is to be stated in

Auditors Report.

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41. Answer : (c)

Reason : The statement in alternative (c) is the correct answer as stockholders have no guarantee that thecorporation will earn income, their investments are riskier. Creditors receive an agreed rate ofinterest. Par value must be separately reported in the balance sheet because it represents themarket value of the stock when it was first issued is a false statement par value has nothing to dowith the market value of the stock and alternative (a) is not the correct answer. The statement in

alternative (b) Selling common shares for more than par value results in gain reported in theincome statement is false because the amount paid above par is credited to securities premiumand not net income. A company neither earns a profit nor incurs a loss when it sells stock to, orbuys its stock from, it's own stockholders. The statement in alternative (d) is false because Non-convertible debentures can be issued by companies. The statement in alternative (e) is falsebecause Cash dividends decrease stockholders' equity because the shareholder is receiving adistribution of the company's assets in the form of cash, whereas bonus issue does not decrease

stockholders' equity because the shareholder receives no assets. Thus, alternative (c) is thecorrect answer.

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42. Answer : (a)

Reason :

Particulars Rs.

Land and building 5,00,000Plant and machinery 2,00,000Furniture and fixtures 2,00,000Sundry debtors 85,000Inventories 65,000Cash 35,000

10,85,000

Less:12% Debentures 1,50,000

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Return on capital employed = Rs.1,12,500 / Rs.7,85,000 x100= 14.33%

Sundry creditors 72,500Bank overdraft 32,500Provision for taxation 45,000 3,00,000

Capital employed 7,85,000

Particulars Rs.

Profit for the year 2003-2004 1,15,500

Less: Depreciation on land and building 3,000

Add: Depreciation on plant andmachinery

5,000

Less: Bad debts 5,000Profit 1,12,500

43. Answer : (b)

Reason : Asset backing per equity share =

= Rs.2,50,000 + Rs.65,000 (Rs.65,000+ Rs.50,000+ Rs.1,00,000)

= Rs.3,15,000 Rs.2,15,000= Rs.1,00,000 = = 1 time

Net assets available for equity shareholders

Equity share capital

Rs.1, 00,000

Rs.1, 00,000

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44. Answer : (e)

Reason : As per the Accounting Standard 20, the following are potential equity shares (a) Share warrants(b) Convertible preference shares (c) Employee stock option plans (d) Convertible debtinstruments. Thus, alternative (e), Redeemable preference shares are not potential equity shares.

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45. Answer : (e)

Reason : Though the balance sheet is claimed to be the statement of all assets and liabilities, still it doesnot contain certain assets and liabilities. For example, the efficient management force is a humanasset available to the organization. Though efforts are being made to quantify and present thehuman resources, most of the balance sheets do not present the same. Also dissatisfied labor forceis a liability to the organization. The factors, which have a vital bearing on the earnings of theorganization such as changes in the managerial personnel, cessation of agreements, loss ofmarkets, are not disclosed. Personal judgment plays a great part in determining the figures for thebalance sheet. Example: provision for depreciation, stock valuation, provision for bad debts aremore based on the personal judgment and is therefore not free from bias. Hence the answer is (e).

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46. Answer : (d)

Reason : In this case A Ltd. ultimately holds only 36% in C (12% on its own and 24% through B). FurtherB is also not a subsidiary of A.

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47. Answer : (b)

Reason : Preference share holders are not the creditors of the company. The other statements are true.

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48. Answer : (b)

Reason : i. Shares of H Company = x 100 = 70%

Shares of Company = 30%

ii. Calculation of Capital Profit Rs.

Loss as on 1.4.2004 20,000Profit as on 31.3.2005 80,000

Total profit for the year 1,00,000

Profit up to December 31, 2004 = Rs.1,00,000 x 9/12 75,000

Profit for the subsequent 3 months = Rs.1,00,000 x 3/12 25,000

Current years profit till December 31, 2004 75,000

Appreciation in the value of Plant & Machinery 1,00,000

Less: decrease in value of land & bldg. 10,000 1,65,000

Less Preliminary Expenses 10,000

Profit & Loss a/c(Dr.) as on April1, 2004 Rs.20,000 30,000

Total capital profit 1,35,000

H Company = 70% of Rs.1,35,000 = Rs.94,500

21000

30000

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49. Answer : (a)

Reason : Fixed Assets of S Ltd. Rs. Rs.

Machinery and Furniture Machinery Furniture

Values as given on 30-9-2005 90,000 17,000

Adjustment due to revaluation + 50,000 - 5,000

Adjustment due to depreciation :

Machinery 50,000 x 10/100 - 5,000 + 750

Furniture 5,000 x 15/100 (saving) 1,35,000 12,750

Rate of Depreciation has been ascertained as follows:Book value at the time of acquiring shares 1,00,000 20,000

Less: Book value on September 30, 2005 90,000 17,000

Depreciation Provided 10,000 3,000

Therefore, rate of depreciation Rs.10,000/Rs.1,00,000 100 = 10% and

Rs.3,000/ Rs.20,000 Rs.100 = 15%.

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50. Answer : (a)

Reason :

Dr. Profit and loss A/c. for the period ended September 30, 2005 Cr.

Particulars Rs.Amount

(Rs.)Particulars Rs.

Amount(Rs.)

To Opening stock(1/4/2003) 1,86,420 By Sales 11,69,900

Less: Returns 12,680 11,57,220

To Purchases 7,18,210 By free samples 10,000

Less: Returns 9,850 7,08,360By Closingstock

1,24,840

To Wages 1,09,740

+ Outstanding 1,890 1,11,630

To Carriage inward 4,910

To SundryManufacturing expenses 19,240

To Gross Profit 2,61,500

12,92,060 12,92,060

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51. Answer : (b)

Reason :

Hence the amount of refund is Rs.7,400

Sharesapplied

Sharesallotted

Applicationmoney

received

Rs.

Applicationmoney due

Rs.

Excessmoney

Rs.

Allotmentmoney due(includingpremium)

Rs.

Surplus /(deficit)

Rs.

(1) (2) (3)=(1)Rs.2 (4)=(2) Rs.2 (5)=(3) (4) (6)=(2)

Rs.4.5

(7) = (5) (6)

50,800 30,480 1,01,600 60,960 40,640 1,37,160 (96,520)96,000 28,400 1,92,000 56,800 1,35,200 1,27,800 7,400

46,000 21,120 92,000 42,240 49,760 95,040 (45,280)

1,92,800 80,000 3,85,600 1,60,000 2,25,600 3,60,000

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52. Answer : (b)

Reason : The consolidated balance sheet shows Rs.5,80,000 against profit and loss account being the profitof parent company of Rs.5,00,000 and 80% share in the post acquisition profit of subsidiarycompany of Rs.1,00,000. Thus, Rs.5,80,000 and share capital of parent company is Rs.20,00,000.Alternative (b) is the correct answer.

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53. Answer : (a)

Reason : Pre acquisition profit up to October 1, 2004

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Share of loss as on 31.3.2004 = Rs.80,000 70% = Rs.56,000

Profit from April 1, 2004 to September 30, 2004 (i.e., for 6 months)

Profit = (Rs.80,000 + Rs.1,60,000) 70% = Rs.84,000

Net share of H Ltd. in capital profits = Rs.84,000 Rs.56,000 = Rs.28,000

2

1

54. Answer : (d)

Reason : In the consolidated Balance sheet, only mutual indebtedness is to be eliminated

Particulars Rs. Particulars Rs.

Bills payable 8,400 Bill receivable 15,800

Less Bills mutually 3,000 Less : Bills mutuallydrawn and accepted.

3,000

Drawn and accepted 5,400 12,800

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55. Answer : (d)

Reason : The minority interest shown in the consolidated Balance Sheet is (800/1,000) = (4/5) HoldingCompany Minority Interest = (10,000 x 1/5) = Rs.2,000.

Share of profit of subsidiary company (1/5 x Rs.5,000) = Rs.1,000

Minority Interest = Rs.3,000

Consolidated Balance Sheet

Capital Reserve : Rs.

Cost of acquisition 7,500

Less : Face value 8,000

Less: Share in profit and loss account = Rs 5,000 =

4

5 4,000

Capital Reserve 4,500


Share capital @ Rs. 10 each 20,000 Other assets 37,500Cash 5,000

Capital Reserve 4,500Monitory interest 3,000Other liabilities 15,000

42,500 42,500

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56. Answer : (a)

Reason : Half of the stock remained unsold = Rs.20,000/2 = Rs.10,000

Profit percentage =

Unrealised profit share = Rs.10,000 = Rs.2,500

Rs.5, 000 1

RS.20, 000 4=

1

4

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57. Answer : (d)

Reason : Multiple Ltd. acquired to 2,000 shares in Single Ltd. for a price of Rs.2,50,000. :

Degree of control: 2,000/3000 = 2/3 rd share

Cost of Investments Rs.2,50,000

Less :Share capital (face value) Rs.3,00,000 x 2/3 = Rs.2,00,000Share in capital profits Rs.90,000 + Rs.60,000

= Rs.1,50,000 x 2/3 = Rs.1,00,000

Rs.3,00,000

Cost of control (capital reserve) Rs. 50,000.

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58. Answer : (b)

Reason : It is the consolidated balance sheet of the holding company along with its subsidiary.

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59. Answer : (e)

Reason : Value added statement is supplementary to profit and loss account and it is mandatory for acompany to prepare profit and loss account. It is not a replacement.

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60. Answer : (d)

Reason : EVA requires deduction of full cost of capital i.e. cost of debt and cost of equity.

61. Answer : (a)

Reason : Sinking fund is created out of profit. It is the part of profit. It should be listed under the headingReserves and Surplus and not under unsecured loans. The items stated under (b), (c), (d) and(e) are unsecured loans.

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62. Answer : (d)

Reason : Earnings valuation of brand valuation is a two stage process involving (i) determining the futureearnings attributable to brand and (ii)applying an appropriate multiplier to determine its present

value.

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63. Answer : (e)

Reason : MVA is equal to the present value of all future EVA.

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64. Answer : (c)

Reason : Value added = Sales - Operating expenses Excise duty

Rs.1,00,000 Rs.60,000 Rs.5,000 = 35,000.

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65. Answer : (c)

Reason : Since on due basis, the share capital account to the extent called up is already credited, the samecalled up capital on the forfeited shares should be reversed by a debit entry. The amount whichhas been received on the shares forfeited, should be credited to share forfeiture account.

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66. Answer : (a)

Reason : Dividends declared by subsidiary company after the date of balance sheet should not be includedunless they are in respect of a period which closed on or before the date of the balance sheet.Except that all the other statements are true regarding the preparation of balance sheet. Hence, (a)is the answer.

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67. Answer : (a)

Reason : Debenture interest a/c. Dr. Rs.1,20,000


To Tax deducted at source a/c. Rs. 12,000

Amount of debenture interest for one year 10,000 x Rs.100 x 12% = Rs.1,20,000 and tax at therate of 10%, of it will be 1,20,000 x 10% = Rs.12,000.

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68. Answer : (d)

Reason : In regard to managers' and auditors' responsibilities, it is true that the auditors provide an opinion

on whether the financial statements are prepared in accordance with GAAP (Generally AcceptedAccounting Principles).

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69. Answer : (d)

Reason : Where 78% of debentures and 20% of equity share capital is held by a nationalized bank (d) acompany need not pass a special resolution to appoint an auditor of the company. In case of thesituations stated in other alternatives where 27% of equity share capital is held by a StateGovernment (a) where 30% of preference share capital is held by a public financial institution &where 49% of equity is held by the Central Government. (c) a special resolution is required toappoint an auditor. (d) is the correct answer.

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70. Answer : (c)

Reason : Premium on issue of shares Rs.1,98,084 /21=9432 20=188640 5% =9,432

Premium on redemption of preference share Rs.2,00,000 x 4% = 8,000Share premium outstanding = 1,432

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71. Answer : (b)

Reason : Capital Reserves are created out of capital profit.

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Documents

Financial Accounting II 1005[1]