Guru Kripa’s Guideline Answers for May 2011 CA IPCC ...caclubindia.s3.amazonaws.com/cdn/forum/files/555789...The Average Rate of Gross Profit is 20% of Sales. 6. The Value of the

M.1

Guru Kripa’s Guideline Answers for May 2011 CA IPCC Examination

PAPER 1 – ACCOUNTING

Q.No. 1 is Compulsory. Answer any Five Questions from the remaining Six Questions Question 1(a) – Computation of Purchase Consideration – AS 14 5 Marks The Abstract of the Balance Sheet of the AXE Ltd. as at 31st March 2011, are as follows –

Liabilities ` Equity Share Capital (` 100 each) 15,00,000 12% Preference Share Capital (` 100 each) 8,00,000 13% Debentures 3,00,000 On 31st March 2011 BXE Ltd. agreed to take over AXE Ltd. on the following terms: 1. For each Preference Share in AXE Ltd., ` 10 in Cash and one 9% Preference Share of ` 100 in BXE Ltd. 2. For each Equity Share in AXE Ltd., ` 20 in Cash and one Equity Share in BXE Ltd. of ` 100 each. It was decided that the

share in BXE Ltd. will be issued at Market Price ` 140 per share. 3. Liquidation Expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of ` 10,000. Actual Expenses amounted

to ` 12,500. You are required to compute the amount of Purchase Consideration. Solution: Calculation of Purchase Consideration

Particulars Amount (`)Preference Shares: 9% preference shares of ` 100 each [8,000 shares × ` 100]

8,00,000

Equity Shares: Equity shares issued at a Premium of ` 40 per Share. ` 15,00,000 ÷ ` 100 = 15,000 Shares. 15,000 Shares issued at ` 140 per Share. Therefore Total Equity Shares [15,000 × ` 140]

21,00,000

Cash: (a) For Preference Shares: 8,000 × ` 10 (b) For Equity Shares: 15,000 × ` 20

80,000

3,00,000

Total 32,80,000

Note: Reimbursement of Liquidation Expenses will not form part of Purchase Consideration. Question 1(b) – Computation of Insurance Claim – Loss of Stock 5 Marks On 30th March, 2011 Fire occurred in the Premises of M/s Suraj Brothers. The concern had taken an Insurance Policy of ` 60,000 which was subject to the Average Clause. From the Books of Accounts, the following particulars are available relating to the period 1st January to 30th March 2011. 1. Stock as per Balance Sheet at 31st December, 2010, ` 95,600. 2. Purchases (Including Purchase of Machinery Costing ` 30,000) ` 1,70,000. 3. Wages (Including Wages ` 3,000 for Installation of Machinery) ` 50,000. 4. Sales (Including Goods Sold on Approval Basis amounting to ` 49,500) ` 2,75,000. No approval has been received in

respect of 2/3rd of the Goods Sold on Approval. 5. The Average Rate of Gross Profit is 20% of Sales. 6. The Value of the Salvaged Goods was ` 12,300. You are required to compute the amount of the Claim to be lodged to the Insurance Company.

Accounting for CA IPCC Group I

M.2

Solution: (i) Memorandum Trading Account for the period of 1st January 2011 to 30th March 2011 Particulars ` Particulars `

To Opening Stock 95,600 By Sales [2,75,000 – 33,000] 2,42,000 To Purchases [1,70,000 – 30,000] 1,40,000 By Closing Stock [Bal. Fig.] 89,000 To Wages [50,000 – 3,000] 47,000 To Gross Profit [20% on 2,42,000] 48,400

Total 3,31,000 Total 3,31,000

(ii) Statement of Claim Particulars Amount (`)

Value of Stock as on the Date of Fire 89,000Less: Stock available with the Customer – Goods Sold and Approval yet to be Received [Cost = ` 33,000 × 80 ÷ 100]

(26,400)

Stock Salvaged (12,300) Loss of Stock 50,300

(iii) Application of Average Clause Particulars Amount (`)

Stock as on the date of fire 89,000 Loss of Stock 50,300 Insurance Policy Amount 60,000

Admissible Claim [60,000 × 50,300 ÷ 89,000] 33,910 Question 1(c) – Goodwill Computation – Different Methods 5 Marks Shiv and Mohan are Partners in a Firm sharing Profits and Losses equally. On 31st March 2011, the balances of their Capital Accounts were ` 3,00,000 and ` 2,00,000 respectively. The Average Profits of the Firm are ` 1,36,000 and the Rate of Normal Profit is 20%. On 1st April, 2011 they agreed to admit Hari as a Partner for One Fourth Share. Hari will bring ` 1,00,000 as Capital. You are required to compute the value of the Goodwill of the Firm on admission of Hari, if Goodwill is to be calculated on the basis of:

1. 5 Years Purchase of Super Profit. 2. Capitalization Method. 3. 3 Years Purchase of Average Profit.

Solution: Computation of Goodwill

Particulars Amount (`)(I) Goodwill at 5 Years Purchase of Super Profit

Normal profit – Firm’s Capital Employed × Normal Rate of Return [` 5,00,000 × 20%] Super profit – Average profit – Normal Profit [` 1,36,000 – ` 1,00,000] Goodwill – Super Profits × Number of Years Purchase [` 36,000 × 5]

1,00,000 36,000

1,80,000

(II) Capitalization Method: Goodwill – (Average Profits ÷ Normal Rate of Return) – Actual Capital Employed [(` 1,36,000 ÷ 20%) – ` 5,00,000] 1,80,000

(III) 3 Years Purchase of Average Profits Goodwill – Average Profits × Number of Years Purchase [` 1,36,000 × 3] 4,08,000 Question 1(d) – Investment Accounting – AS 13 5 Marks On 1st April, 2010, Rajat has 50,000 Equity Shares of P Ltd., at a Book Value of ` 15 Per Share (Face Value ` 10 each). He provides you the further information – 1. On 20th June, 2010 he purchased another 10,000 Shares of P Ltd. at ` 16 Per Share.

Gurukripa Guideline Answers for May 2011 Examinations

M.3

2. On 1st August, 2010, P Ltd. issue one Equity Bonus Share for every Six Shares held by the Shareholders. 3. On 31st October, 2010 the Directors of P Ltd. announced a Right Issue which entitle the holders to subscribe Three Shares

for every Seven Shares at ` 15 per Share. Shareholders can transfer their Rights in full or in part. Rajat sold 1/3rd of entitlement to Umang for a Consideration of ` 2 per Share and subscribe the rest on 5th November, 2010. You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2011. Solution: Also see Q No. 5, Page 3.10 of “Ready Referencer on Accounting” for Group I IPCC Note: Sale proceeds of rights are to be credited to P&L A/c and not Investment A/c as the Ex-Rights price is not lower than the cost of acquisition. Working Notes:

Particulars Computation 1. Bonus Shares (50,000 + 10,000) ÷ 6 10,000 Shares 2. Rights Shares [(50,000 + 10,000 + 10,000) ÷ 7] × 3 30,000 Shares 3. Rights Shares Renounced 30,000 ÷ 3 10,000 Shares

Investment (Equity Shares of P Ltd.) Account Date Particulars Shares

Nos. ̀ Date Particulars Shares

Nos. `

01.04.10 To balance b/d 50,000 7,50,000 31.03.11 By balance c/d 90,000 12,10,000 20.06.10 To Bank 10,000 1,60,000 01.08.10 To Bonus (WN 1) 10,000 ⎯ 31.10.10 To Bank (Rights

Shares) (WN 2) 20,000 3,00,000

90,000 12,10,000 90,000 12,10,000

Profit & Loss A/c (abstract) To balance c/d 20,000 By Sale of Right Shares (WN 3) 20,000 20,000 20,000

Question 2 – Admission of a Partnership – Partnership Accounts 16 Marks Amit and Sumit are Partners sharing Profits and Losses in the Ratio of 3:2 Their Balance Sheet as on 31st March 2011 is given below:

Liabilities Amount (`) Assets Amount (`) Capital Accounts: Amit Sumit

1,76,000 2,54,000

Land & Building 3,20,000

Loan from Puneet 3,00,000 Investments (Market value ` 55,000) 50,000 General Reserve 30,000 Debtors 3,00,000 Employer’s Provident Fund 10,000 Less: Provision for doubtful debts (10,000) 2,90,000 Creditors 50,000 Stock 1,10,000 Cash at Bank 50,000

Total 8,20,000 Total 8,20,000

They decided to admit Puneet as a new Partner from 1st April, 2011 on the following terms – 1. Amit will give 1/3rd of his share and Sumit will give 1/4th of his share to Puneet. 2. Puneet’s Loan Account will be converted into his Capital. 3. The Goodwill of the Firm is valued at ` 3,00,000. Puneet will bring his share of Goodwill in Cash and the same was

immediately withdrawn by the Partners. 4. Land and Building was found undervalued by ` 1,00,000. 5. Stock was overvalued by ` 1,00,000. 6. Provision for Doubtful Debts will be made equal to 5% of Debtors. 7. Investments are to be valued at their Market Price.


M.4

It was decided that the Capital of the Firm after admission of New Partner would be ` 10,00,000. Capital Accounts of Partners will be readjusted on the basis of their Profit Sharing Ratio and excess or deficiency will be adjusted in Cash. You are required to prepare: (a) Revaluation A/c. (b) Partner’s Capital A/c. (c) Balance Sheet of the Firm after admission of New Partner. Solution:

Particulars Amit Sumit Puneet1. Old Ratio 3 2

Puneet’s New PSR (3/5 x 1/3) + (2/5 × 1/4)

= 3/10 2. New Ratio after Puneet’s Admission 3/5 – 1/5 2/5 – 1/10 3/10

2/5 3/10 3/10 4 3 3

(a) Revaluation Account

Particulars ` Particulars `To Land and Building 1,00,000 By Stock 60,000 To Provision for Doubtful Debts [15,000 – 10,000]

5,000

By Investments [55,000 – 50,000] 5,000

By Loss shared in 3:2 24,000 16,000 40,000

Total 1,05,000 Total 1,05,000

(b) Partner’s Capital Account Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet

To Revaluation – Loss 24,000 16,000 ––– By Balance b/d 1,76,000 2,54,000 ––– By Puneet’s Loan ––– ––– 3,00,000 To Balance c/d 4,00,000 3,00,000 3,00,000 By General Reserve

(3:2) 18,000 12,000 –––

By Employer’s PF (3:2) 6,000 4,000 ––– By Bank [W.N. 1] 60,000 30,000 ––– By Bank [W.N. 2] 1,64,000 16,000 –––

Total 4,24,000 3,16,000 3,00,000 Total 4,24,000 3,16,000 3,00,000

(c) Balance Sheet after Admission Liabilities ` Assets `

Capital Accounts: Land & Building [3,20,000 – 1,00,000] 2,20,000 Amit 4,00,000 Investments – Market Value 55,000 Sumit 3,00,000 Debtors 3,00,000 Puneet 3,00,000 Less: Provision for Doubtful Debts (15,000) 2,85,000 Stock [1,10,000 + 60,000] 1,70,000 Creditors 50,000 Cash [W.N. 3]

Total 10,50,000 Total 10,50,000 Working Notes:

1. Goodwill Adjustment Particulars Amount (`)

Goodwill – Given 3,00,000 Share of Goodwill as per New PSR (4:3:3) Amit –– 1,20,000 Sumit –– 90,000 Puneet –– 90,000 Goodwill of Puneet i.e. ` 90,000 will be shared in Sacrificing Ratio (2:1)

Goodwill of Amit 60,000 Goodwill of Sumit 30,000


M.5

2. Capital Adjustment New Capital to be ` 10,00,000

New PSR 4 3 3 Capital 4,00,000 3,00,000 3,00,000 Existing Capital 2,36,000 2,84,000 3,00,000 Deficiency brought in cash 1,64,000 16,000 NIL

3. Balance in Cash at Bank after Admission

Particulars Amount (`) Opening Balance 50,000Add: Goodwill Adjustment 90,000 Add: Capital Adjustment 1,80,000 Closing Balance 3,20,000 Question 3 – Amalgamation in the Nature of Purchase 16 Marks The Balance Sheet of Mars Limited as on 31st March 2011 was as follows:

Liabilities ` Assets ` Share capital: 1,00,000 Equity Shares of ` 10 each fully paid up

10,00,000

Fixed Assets: Land and Building

7,64,000

Reserve and surplus : Capital Reserve Contingency Reserve Profit and Loss A/c

42,000 2,70,000 2,52,000

Current Assets: Stock Sundry Debtors 1,60,000 Less: Provision for Doubtful Debts 8,000 Bills Receivable Cash at Bank

7,75,000

1,52,000

30,000 3,29,000

Current liabilities and provisions: Bills Payable Sundry Creditors Provision for Income Tax

40,000

2,26,000 2,20,000

Total 20,50,500 Total 20,50,500 On 1st April, 2011 Jupiter Limited agreed to absorb Mars Limited on the following terms and conditions: 1. Jupiter Limited will take over the Assets at the following values:

Land and Building – ` 10,80,000 Stock – ` 7,70,000 Bills Receivable – ` 30,000

2. Purchase Consideration will be settled by Jupiter Ltd as under: 4,100 fully paid 10% Preference Shares of ` 100 will be issued and the balance will be settled by issuing Equity Shares of ` 10 each at ` 8 Paid Up.

3. Liquidation Expenses are to be Reimbursed by Jupiter Ltd to the extent of ` 5,000. 4. Sundry Debtors realized ` 1,50,000. Bills Payable were settled for ` 38,000. Income Tax Authorities fixed the Taxation

Liability at ` 2,22,000 and the same was paid. 5. Creditors were finally settled with the cash remaining after meeting Liquidation Expenses amounting to ` 8,000.

You are required to

(a) Calculate the Number of Equity Shares and Preference Shares to be allotted by Jupiter Limited in discharge of Purchase Consideration.

(b) Prepare the Realization A/c, Bank Account, Equity Shareholders Account and Jupiter Limited’s Account in the Books of Mars Ltd.

Solution:

A. Basic Information: Buying Company: Jupiter Ltd Selling Company: Mars Ltd

Balance Sheet Date: 31.03.2011 Amalgamation Date: 01.04.2011

Nature of Amalgamation: In the nature of Purchase (All Assets and Liabilities are not taken over)


M.6

B. Purchase Consideration: 1. Amount of Consideration:

Details `Land and Buildings 10,80,000Stock in Trade 7,70,000Bills Receivable 30,000

Total = Purchase Consideration 18,80,000

2. Discharge of Consideration: Total ` 18,80,000 In 10% Preference Share of Jupiter Ltd = 4100 Shares of ` 100 issued at Par as

Fully Paid up

In Equity Shares (balancing figure) 1,83,750 Shares of ` 10 each, issued at

Par as ` 8 Paid up ` 4,10,000 ` 14,70,000

Note: Number of Equity Shares = ` 14,70,000 ÷ Paid Up Value per Share ` 8 = 1,83,750

C. Books of Selling Company: 1. Realisation Account

Details ` Details `To Fixed Assets 7,64,000 By Jupiter Ltd – Purchase Consideration Due 18,80,000To Stock in Trade 7,75,000 By Bills Payable – Gain on Settlement 2,000To Bills Receivable 30,000 By Sundry Creditors – Gain on Settlement 10,000To Bank – Realisation Expenses 8,000 By Bank – Reimbursement of Expenses 5,000To Debtors – Loss on Settlement 2,000 To Income Tax – Loss on Settlement 2,000 To Profit on Realisation (balancing figure) 3,16,000

Total 18,97,000 Total 18,97,000

2. Bank Account Details ` Details `

To Balance b/d 3,29,000 By Bills Payable 38,000To Sundry Debtors – Collection 1,50,000 By Tax Liability 2,22,000To Realisation A/c – Reimbursement of Expenses 5,000 By Liquidation Expenses 8,000 By Sundry Creditors (balancing figure) 2,16,000

Total 4,84,000 Total 4,84,000

3. Equity Shareholders Account Details ` Details `

To Equity Shares in Jupiter Limited 14,70,000 By Equity Share Capital Account 10,00,000To 10% Preference Shares in Jupiter Limted 4,10,000 By Capital Reserve 42,000 By Contingency Reserve 2,70,000 By Profit and Loss Account 2,52,000 By Realisation Account – Profit 3,16,000

Total 18,80,000 Total 18,80,000

4. Jupiter Limited Account Details ` Details `

To Realisation A/c – Purchase Consideration Due 18,80,000 By Equity Shares in Jupiter Limited 14,70,000 By 10% Preference Shares in Jupiter Limited 4,10,000

Total 18,80,000 Total 18,80,000

5. Other Ledger Accounts (a) Sundry Debtors

Details ` Details `To Balance b/d 1,60,000 By Provision adjusted against Debtors 8,000 By Bank – Collection 1,50,000 By Realisation – Loss on Settlement (b/f) 2,000

Total 1,60,000 Total 1,60,000


M.7

(b) Bills Payable Details ` Details `

To Bank – Payment 38,000 By Balance b/d 40,000To Realisation A/c – Gain on settlement 2,000

Total 40,000 Total 40,000

(c) Provision for Income Tax / Income Tax Liability Details ` Details `

To Bank – Payment 2,22,000 By Balance b/d 2,20,000 By Realisation – Loss on Settlement 2,000

Total 2,22,000 Total 2,22,000

(d) Sundry Creditors Details ` Details `

To Bank – Payment 2,16,000 By Balance b/d 2,26,000To Realisation – Gain on Settlement 10,000

Total 2,26,000 Total 2,26,000Note: 1. Alternatively, balances in Assets and Liabilities not taken over by the Buying Company, can also be transferred to

Realisation Account, and Settlement / Realization of them recorded through Realisation Account. 2. Alternatively Reimbursement of Liquidation Expenses can be Net–Off and the Balance alone can be shown in Realisation A/c. Question 4 – Preparation of Cash Flow Statement – AS 3 16 Marks The following are the summarized Balance Sheet of Lotus Ltd as on 31st March 2010 and 2011:

Liabilities 31.03.2010 31.03.2011 Equity Share Capital (` 10 each) 10,00,000 12,50,000 Capital Reserve NIL 10,000 Profit and Loss Account 4,00,000 4,80,000 Long Term Loan from Bank 5,00,000 4,00,000 Sundry Creditors 5,00,000 4,00,000 Provision for Taxation 50,000 60,000 Total 24,50,000 26,00,000

Assets Land and Building 4,00,000 3,80,000 Machinery 7,50,000 9,20,000 Investment 1,00,000 50,000 Stock 3,00,000 2,80,000 Sundry Debtors 4,00,000 4,20,000 Cash in Hand 2,00,000 1,40,000 Cash at Bank 3,00,000 4,10,000 Total 24,50,000 26,00,000 Additional Information: 1. Depreciation Written Off on Land and Building ` 20,000. 2. The Company sold some Investment at a Profit of ` 10,00, which was Credited to Capital Reserve. 3. Income Tax provided during the year ` 55,000. 4. During the year, the Company purchased a Machinery for ` 2,25,000. They paid ` 1,25,000 in Cash and issued 10,000

Equity Shares of ` 10 each at par. Solution: 1. Computation of Net Profit before Taxation

Particulars ` Profit made during the year = Increase in P&L Account balance = 4,80,000 – 4,00,000 80,000 Add back: Provision for Taxation for the year 55,000 Net Profit before Taxation, taken to Cash Flow Statement 1,35,000


M.8

2. Provision for Taxation Account Particulars ` Particulars `

To Bank (balancing figure) 45,000 By balance b/d 50,000 To balance c/d 60,000 By Profit and Loss Account 55,000

Total 1,05,000 Total 1,05,000

3. Land and Building Account

Particulars ` Particulars `To balance b/d 4,00,000 By Depreciation 20,000 By balance c/d 3,80,000

Total 4,00,000 Total 4,00,000

4. Investments Account

Particulars ` Particulars `To balance b/d 1,00,000 By Cash (Sale) – (balancing figure) 60,000 To Capital Reserve 10,000 By balance c/d – Given 50,000

Total 1,10,000 Total 1,10,000

5. Machinery Account

Particulars ` Particulars `To Balance b/d 7,50,000 By Depreciation (balancing figure) 55,000To Bank 2,25,000 By balance c/d – Given 9,20,000

Total 9,75,000 Total 9,75,000Note: Out of the Machinery Purchased only ` 1,25,000 are for Cash.

Cash Flow Statement of Lotus Ltd. for the year ended 31st March 2011 (Using Indirect Method)

CASH FLOW FROM OPERATING ACTIVITIES ` `

Net Profit Before Taxation [W.N. 1] 1,35,000 Adjustment for: Depreciation [` 20,000 + ` 55,000] 75,000

Operating Profit before Working Capital changes 2,10,000 Adjustments for: Decrease in Inventory [` 3,00,000 – ` 2,80,000] 20,000

Increase in Sundry Debtors [` 4,20,000 – ` 4,00,000] (20,000)

Decrease in Creditors [` 5,00,000 – ` 4,00,000] (1,00,000)

Cash Generated from Operations 1,10,000 Less: Income Taxes paid [W.N. 2] (45,000) Net Cash From Operating Activities (A) 65,000CASH FLOW FROM INVESTING ACTIVITIES Purchase of Machinery [W.N. 5] (1,25,000) Proceeds from Sale of Investments [W.N. 4] 60,000 Net Cash Used in Investing Activities (B) (65,000)CASH FLOW FROM FINANCING ACTIVITIES Proceeds from Issue of Equity Shares [` 12,50,000 – ` 10,00,000 – ` 1,00,000 (Shares for Machinery)]

1,50,000

Discharge of Long Term Loan [` 5,00,000 – ` 4,00,000] (1,00,000)

Net Cash Used in Financing Activities (C) 50,000 Net Increase in Cash and Cash Equivalents (A + B + C) 50,000 Add: Cash and Cash Equivalents at the beginning of the year 5,00,000 Cash and Cash equivalents at the end of the year 5,50,000Note: Cash and Cash Equivalents include both Cash in Hand and Cash at Bank.


M.9

Question 5 – Not for Profit Entities – Financial Statement Preparation 16 Marks The following is the Receipt and Payment Account of Park View Club in respect of the year ended 31st March, 2011 –

Receipts ` Payments ` To Balance b/d 1,02,500 By Salaries 2,08,000 To Subscriptions: 2009–10 4,500 2010–11 2,11,000 2011–12 7,500

2,23,000

By Stationery By Rent By Telephone Expenses By Investment

40,000 60,000 10,000

1,25,000 To Profit on Sports Meet 1,55,000 By Sundry Expenses 92,500 To Income from Investments 1,00,000 By Balance c/d 45,000

Total 5,80,500 Total 5,80,500 Additional Information: 1. There are 450 Members each paying an Annual Subscription of ` 500. on 1st April 2010, Outstanding Subscription was `

5,000. 2. There was an Outstanding Telephone Bill for ` 3,500 on 31st March 2011. 3. Outstanding Sundry Expenses as on 31st March, 2010 totalled ` 7,000. 4. Stock of Stationery:

On 31st March 2010 ––– ` 5,000 On 31st March 2011 ––– ` 9,000

5. On 31st March 2010 Building stood in the books at ` 10,00,000 and it was subject to Depreciation at 5% per annum. 6. Investment on 31st March 2010 stood at ` 20,00,000. 7. On 31st March 2011, Income accrued on the Investments purchased during the year amounted to ` 3,750. Prepare an Income and Expenditure Account for the year ended 31st March 2011 and the Balance Sheet as at that date. Solution: Also See Q No.14, Page 14.26 of “Ready Referencer on Accounting” for Group I IPCC

1. Balance Sheet as on 31.03.2010 (To find Opening Balance of Capital Fund)

Liabilities ` Assets `

Capital Fund (Balancing Figure) 31,05,500 Buildings 10,00,000Outstanding Sundry Expenses as at 31.03.2010 7,000 Investments 20,00,000 Stationery Stock 5,000 Subscription Receivable 5,000 Cash in Hand 1,02,500

Total 31,12,500 Total 31,12,500

2. Income and Expenditure A/c for the year ended 31st March 2011

Particulars ` Particulars `

To Salaries 2,08,000 By Subscriptions for the Year 2,25,000To Stationery Consumed 36,000 By Income from Investments To Rent Expense 60,000 Received 1,00,000 To Telephone Expense Paid 10,000 Accrued 3,750 1,03,750

Payable 3,500 13,500 By Profit on Sports Meet 1,55,000To Sundry Expenses 85,500 To Depreciation on Building (5%× 10,00,000) 50,000 To Surplus carried to Capital Fund 30,750

Total 4,83,750 Total 4,83,750


M.10

3. Balance Sheet as on 31st March 2011 Liabilities ` Assets `

Capital Fund Opening Balance 31,05,500 Buildings (Cost 10,00,000 – Depn 50,000) 9,50,000 Add: Excess of Income over Exp. 30,750 Investments (Opg 20,00,000+ New 1,25,000) 21,25,000 31,36,250 Current Assets: (a) Stationery Stock 9,000Current Liabilities: (b) Interest Accrued on Investments 3,750(a) Outstanding Telephone Bills 3,500 (c) Subscriptions Receivable (14000 + 500) 14,500(b) Subscription received in advance 7,500 (d) Cash in Hand 45,000

Total 31,47,250 Total 31,47,250

4. Subscription Account Particulars ` Particulars `

To Balance b/d (Opening Subscription Receivable) 5,000 By Bank – Collections for – To Subscriptions for the Year (450 Mmbrs × ` 500) 2,25,000 (a) 2009–10 4,500To Balance c/d (Advance for 2011-12) 7,500 (b) 2010–11 2,11,000 (c) 2011–12 7,500 To Balance c/d – Subscriptions Receivable (d) 2009–10 (5,000 – 4,500) 500 (e) 2010–11 (2,25,000 – 2,11,000) 14,000

Total 2,37,500 Total 2,37,500

5. Stationery Account Particulars ` Particulars `

To Opening Balance 5,000 By Stationery Consumed during the year (b/f)

36,000

To Bank – Purchases during the year 40,000 By Closing Stationery Balance 9,000Total 45,000 Total 45,000

6. Expenses Payable


To Bank – Payment during the year 92,500 By Balance b/d 7,000 By Expenses for the year 85,500

Total 92,500 Total 92,500 Question 6 – Accounting from Incomplete Records – Cash Defalcation 16 Marks Mr. A runs a Business of Ready Made Garments. He closes the Books of Accounts on 31st March 2010. The Balance Sheet as on 31st March 2010 was as follows –

Liabilities ` Assets ` A’s Capital Account 4,04,000 Furniture 40,000 Creditors 82,000 Stock 2,80,000 Debtors 1,00,000 Cash in Hand 28,000 Cash at Bank 38,000

Total 4,86,000 Total 4,86,000 You are furnished with the following information: 1. His Sales, for the year ended 31st March 2011 were 20% higher than the Sales of Previous Year, out of which 20% Sales

was Cash Sales. Total Sales during the Year 2009–10 were ` 5,00,000. 2. Payments for all the Purchases were made by Cheques only. 3. Goods were Sold for Cash and Credit both. Credit Customers pay by Cheques only.


M.11

4. Depreciation on Furniture is to be charged 10% p.a. 5. Mr. A sent to the Bank the Collection of the Month at the last date of the each Month after paying Salary of ` 2,000 to the

Clerk, Office Expenses ` 1,200 and Personal Expenses ` 500. Analysis of Bank Pass Book for the year ending 31st March 2011 disclosed the following:

Particulars ` Payment to Creditors 3,00,000 Payment of Rent up to 31st march 2011 16,000 Cash Deposited into the Bank during the year 80,000 The following are the Balances on 31st March 2011:

Particulars ` Stock 1,60,000 Debtors 1,20,000 Creditors for Goods 1,46,000 On the evening of 31st March 2011, the Cashier absconded with the available Cash in the Cash Book. You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March 2011 and Balance Sheet as on that date. All the workings should form part of the answer. Solution: Also See Q No.28, Page 13.44 of “Ready Referencer on Accounting” for Group I IPCC

1. Sundry Creditors Account (to compute Credit Purchases) Particulars ` Particulars `

To Bank 3,00,000 By balance b/d 82,000 To balance c/d 1,46,000 By Purchases (balancing figure) 3,64,000

Total 4,46,500 Total 4,46,500Note: It is assumed that all Purchases are made on Credit basis only.

2. Computation of Total Sales Particulars `

Previous Year’s Sales 5,00,000 Add: 20% on above 1,00,000 Current Year’s Sales Cash Sales at 20% of Total Sales – 1,20,000 Credit Sales at 80% of Total Sales – 4,80,000 (balancing figure)

6,00,000

3. Sundry Debtors Account (to compute Credit Sales)


To balance b/d 1,00,000 By Bank (balancing figure) 4,60,000To Credit Sales 4,80,000 By balance c/d 1,20,000

Total 5,80,000 Total 5,80,000

4. Bank Account (to compute Closing Balance at Bank) Receipts ` Payments `

To balance b/d 38,000 By Creditors 3,00,000 To Debtors 4,60,000 By Rent 16,000 To Cash 80,000 By balance c/d (balancing figure) 2,62,000

Total 5,78,000 Total 5,78,000

5. A’s Capital Account Receipts ` Payments `

To Drawings 6,000 By balance b/d 4,04,000 To balance c/d (balancing figure) 3,98,000

Total 4,04,000 Total 4,04,000


M.12

6. Statement showing the amount of cash defalcated by the Cashier

Particulars ` `

Cash balance at the beginning of the year 28,000 Add: Cash Sales 1,20,000 1,48,000 Less: Salary to Clerk (` 2,000 × 12) 24,000

Office Expenses (` 1,200 × 12) 14,400

Drawings (` 500 × 12) 6,000 Deposit into Bank 80,000 (1,24,400) Cash Balance as on 31st March, 2011 (Defalcated by Cashier) 23,600

7. Trading and Profit and Loss A/c for the Year ended 31st March, 2011


To Opening Stock 2,80,000 By Sales: To Purchases 3,64,000 Cash 1,20,000 To Gross Profit c/d (balancing figure) 1,16,000 Credit 4,80,000 6,00,000 By Closing Stock 1,60,000

Total 7,60,000 Total 7,60,000To Salaries to Clerk 24,000 By Gross Profit b/d 1,16,000 To Office Expenses 14,400 To Depreciation on Furniture (` 40,000 × 10%) 4,000 To Rent 16,000 To Loss of Cash by Theft 23,600 To Net Profit – balancing figure 34,000

Total 1,16,000 Total 1,16,000

8. Balance Sheet of Dhandapani as on 31st March

Liabilities ` Assets `

Capital: Opening Balance 3,98,000 Furniture 40,000 Less: Depreciation (4,000)

36,000

Add: Profit 34,000 Stock 1,60,000 4,32,000 Debtors 1,20,000 Liabilities for Goods – Creditors 1,46,000 Bank 2,62,000

Total 5,78,000 Total 5,78,000Note: Amount defalcated by the Cashier has been written off in the P&L A/c. Alternatively, it may be treated as recoverable from him and shown on the Assets Side of the Balance Sheet. Profits will increase accordingly. Question 7(a) – Average Due Date 4 Marks A and B are Partners in a Firm and share Profits and Losses equally. A has withdrawn the following sum during the half year ending 30th June 2010 –

Date ` January 15 5,000 February 10 4,000

April 5 8,000 May 20 10,000 June 18 9,000

Interest on Drawings is charged at 10% per annum. Find out the Average Due Date and calculate the Interest on Drawings to be charged on 30th June 2010.


M.13

Solution: Date No. of days from the Due Date Amount (`) Product (`)

January 15th ––– 5,000 ––– February 10th 26 4,000 1,04,000

April 5th 80 8,000 6,40,000 May 20th 125 10,000 12,50,000 June 18th 154 9,000 13,86,000

36,000 33,80,000

Average Due Date = Base Date + AmountofTotal

ProductofTotal

= 15.01.2010 + 36,000

33,80,000

= 15.01.2010 + 94 days Average Due Date = 19.04.2010

Calculation of Interest on Drawings Particulars `

From 15.01.2010 to 19.04.2010 i.e. 94 days. Therefore Interest [` 36,000 × 10% × 94/365] 927 Question 7(b) – Cost or NRV – AS 2 4 Marks Best Ltd deals in Five Products – P, Q, R, S and T which are neither similar nor interchangeable. At the time of closing of its Accounts for the year ending 31st March 2011, the Historical Cost and Net Realizable Value of the Items of the Closing Stock are determined as follows –

Items Historical Cost (`) Net Realizable Value (`) P 5,70,000 4,75,000 Q 9,80,000 10,32,000 R 3,16,000 2,89,000 S 4,25,000 4,25,000 T 1,60,000 2,15,000

What will be the Value of Closing Stock for the year ending 31st March 2011 as per AS–2 “Valuation of Inventories”? Solution: Principle: Inventory to be valued at Cost or Net Realizable Value whichever is Lower.

Items Historical Cost NRV Valuation = least of (2) or (3) P 5,70,000 4,75,000 4,75,000 Q 9,80,000 10,32,000 9,80,000 R 3,16,000 2,89,000 2,89,000 S 4,25,000 4,25,000 4,25,000 T 1,60,000 2,15,000 1,60,000 23,29,000

Question 7(c) – Goodwill Adjustment on Admission and Retirement – Partnership Accounts 4 Marks X, Y and Z are Partners Sharing Profits and Losses in the Ratio of 4:3:2 respectively. On 31st March 2011 Y retires and X and Z decide to share Profits and Losses in the Ratio of 5:3. Then immediately W is admitted for 3/10th share in Profits, 2/3rd of which was given by X and rest was taken by W from Z. Goodwill of the Firm is valued at ` 2,16,000. W brings required amount of Goodwill. Give necessary Journal Entries to adjust Goodwill on Retirement of Y and admission of W if they do not want to raise Goodwill in the Books of Accounts.


M.14

Solution: Particulars X Y Z

3. Old Ratio 4 3 2 4. New Ratio 5 – 3 5. Gaining Ratio 5/8 – 4/9

= 13/72 – 3/8 – 2/9

= 11/72 Y’s share in Goodwill [2,16,000 × 3/9] 72,000

Particulars Debit (`) Credit (`)

On Retirement X’s Capital A/c Dr 39,000 Z’s Capital A/c Dr 33,000 To Y’s Capital A/c 72,000 (Being Adjustment of Y’s Goodwill in the Firm in the Gaining Ratio)

On Admission W’s Capital A/c Dr 64,800 To X’s Capital A/c 43,200 To Z’s Capital A/c 21,600 (Being Adjustment of W’s Admission in the Sacrificing Ratio)

Question 7(d) – Accounting in e–Environment 4 Marks “In Business today, the Accounts which were earlier maintained in a Manual Form, are replaced with Computerized Accounting Accounts.” Explain the significance of Computerized Accounting System in modern time. Solution:

Refer “READY REFERENCER ON ACCOUNTING” for Group I IPCC – Page 15.1, Question No. 2, Point A Question 7(e) – Preparation of Debtors Account – Self Balancing Ledgers 4 Marks On 1st October 2010, the Debit Balances of Debtors Account is ` 77,500 in the Books of M/s Zee Limited. Transactions during the 6 months ended on 31st March 2011 were as follows –

Particulars ` Total Sales (including Cash Sales ` 14,000) 84,000 Payment received from Debtors in Cash 38,000 Bills Receivable received 26,000 Discount Allowed to Customers for prompt payment 1,000 Goods Rejected and Returned back by the Customer 2,550 Bad Debts Recovered (Written Off in 2009) 900 Interest Debited for Delay in Payment 1,250 Out of the Bills Received, Bills of ` 8,500 were Dishonoured on Due Dates and Noting Charges paid ` 250. Bills of ` 5,000 were Endorsed to the Suppliers. You are required to Prepare a Debtors Account for the period ending 31st March 2011 in the General Ledger of M/s Zee Ltd. Solution:

Debtors Account for 6 months ending on 31st March, 2011 Particulars ` Particulars `

To balance b/d 77,500 By Cash 38,000 To Credit Sales (` 84,000 – ` 14,000) 70,000 By Bills Receivable 26,000 To Bills Receivable (Dishonoured) 8,500 By Discount Allowed 1,000 To Noting Charges 250 By Sales Returns 2,550 By Balance c/d 88,700

Total 1,56,250 Total 1,56,250Following transactions are not recorded in Debtors Account: 1. Bad Debts recovered. 2. Interest Debited for delay in payment. 3. Bills Endorsed to Suppliers.


M.15

Guru Kripa’s Guideline Answers for May 2011 CA PCC Examination

PAPER 1 – ADVANCED ACCOUNTING [Questions Relevant to Group I – IPCC]

Question 1(c) – Revenue Recognition – AS 9 5 Marks Moon Limited sold Goods worth ` 6,50,000 to M/s. Star and Company. M/s. Star and Company asked for Trade Discount of ` 53,000 which was agreed by Moon Limited. The sales were effected and Goods were dispatched. After receiving, goods worth ` 67,000 was found defective, which was returned immediately by M/s. Star and Company. It made the payment of ` 5,30,000 to Moon Limited. Accountant of the company booked the sales for ` 5,30,000. Discuss the Accounting Treatment given by the accountant with reference to Accounting Standard 9. Solution: 1. Sales should be recognized net of trade discount (i.e. ` 6,50,000 – ` 53,000 = ` 5,97,000) as soon as it is made.

2. Sales returns of ` 67,000 should be recognized separately when returned by the customer.

3. Hence, the treatment given by the accountant i.e. booking sales at ` 5,30,000 is incorrect.

Question 2 – Take Over – Debtors and Creditors Suspense A/c 16 Marks XYZ Limited was incorporated for taking over the business of Y from 1st April, 2010. The following is the Balance Sheet of Y as on 31st March, 2010.

Liabilities ` Assets ` Capital 10,08,000 Land and Building 16,00,000 Loans 12,00,000 Plant and Machinery 2,80,000 Creditors 7,12,000 Furniture 2,00,000 Sundry Debtors 8,40,000

Total 29,20,000 Total 29,20,000 The Company takes over the Business with Fixed Assets and Loans on the following terms :

(a) The Fixed Assets should be Depreciated @ 10%. (b) The value of Goodwill is estimated at ` 8,00,000. The Company realised ` 8,00,000 from Sundry Debtors as the agent of the vendor in full settlement and discharged all the Trade Creditors by paying ` 6,80,000 for a Commission of 3% on the amount collected and 2% on the amount paid. (Commission is treated as Pre-Incorporation Profit) The Lenders accepted 10% Preference Shares of ` 100 each in discharge of their Loan. After Realization of Debts and Discharge of the Liabilities, the total amount due to the vendor was settled by payment of ` 54,400 in Cash and the balance in Shares of fully paid Equity Shares of ` 10 each. You are required to: 1. Compute Purchase Consideration 2. Pass Journal Entries in the books of XYZ Limited after taking over the business of Y. 3. Prepare the Balance Sheet of the company as on 1st April, 2010. Solution:

1. Computation of Purchase Consideration Particulars ` `

Goodwill (agreed value) 8,00,000 Land and Building (` 16,00,000 – 10%) 14,40,000 Plant and Machinery (` 2,80,000 – 10%) 2,52,000 Furniture (` 2,00,000 – 10%) 1,80,000 Total Assets taken over 26,72,000Less: Liabilities taken over Loans 12,00,000 Net Assets = Purchase Consideration 14,72,000


M.16

2. Journal Entries in the Books of XYZ Ltd. after taking over the business of Y S.No. Particulars Dr. Cr.

1. Business Purchase A/c Dr. 14,72,000 To Y A/c 14,72,000 (Purchase Consideration payable on takeover of business of Y)

2. Goodwill A/c Dr. 8,00,000 Land and Building A/c Dr. 14,40,000 Plant and Machinery A/c Dr. 2,52,000 Furniture A/c Dr. 1,80,000 To Loan A/c 12,00,000 To Business Purchase A/c 14,72,000 (Assets and Liabilities of Y taken over)

3. Y Debtor A/c Dr. 8,40,000 To Y Debtor Suspense A/c 8,40,000 (Y firms’ debtor not taken over)

4. Y Creditor Suspense A/c Dr. 7,12,000 To Creditor A/c 7,12,000 (Y firms’ creditor not taken over)

5. Bank A/c Dr. 8,00,000 To Y Debtor A/c 8,00,000

(Amount collected from Y firms’ Debtors)

6. Y Creditor A/c Dr. 6,80,000 To Bank A/c 6,80,000 (Amount paid to Y firms’ Creditors)

7. Y Debtors Suspense A/c Dr. 40,000 To Y Debtors A/c 40,000 (Reversal of Y firms’ Debtor not realized)

8. Y Creditors A/c Dr. 32,000 To Y Creditors Suspense A/c 32,000 (Reversal of Y firms’ Creditor not settled)

9. Loan A/c Dr. 12,00,000 To 10% Preference Share Capital A/c 12,00,000 (Discharge of loan by issue of 12,000, 10% Preference Shares of ` 100 each

fully paid)

10. Y A/c Dr. 14,72,000 Y Debtors Suspense A/c Dr. 8,00,000 To Cash A/c 54,400 To Equity Share Capital A/c (WN1) 15,00,000 To Y Creditors Suspense A/c 6,80,000 To Capital Reserve A/c (WN2) 37,600 (Settlement of Purchase Consideration, debtors realized, creditors settled and

commission transferred to Capital Reserve)

Working Notes:

1. Computation of Amount Payable to Y Particulars ` `

Purchase Consideration 14,72,000 Amount collected from debtors less commission 8,00,000 less 3% 7,76,000 Amount Payable 22,48,000Less: Amount paid to creditors plus commission 6,80,000 plus 2% (6,93,600)

Net Amount Payable 15,54,400Less: Payment in Cash (54,400) Balance to be paid in Equity Shares of ` 10 each fully paid 15,00,000 No. of Equity Shares 10

000,00,15`

` 1,50,000 Shares


M.17

2. Commission to be transferred to Capital Reserve for acting as agent in realizing debtors and settling creditors On amount collected from debtors = 3% × ` 8,00,000 = ` 24,000 On amount paid to creditors = 2% × ` 6,80,000 = ` 13,600 ` 37,600

3. Balance Sheet of XYZ Ltd. as at 01.04.2010 Liabilities ` Assets `

Authorized Share Capital: Fixed Assets _____Equity Shares of ` 10 each --- Goodwill 8,00,000 ____10% Preference Shares of ` 100 each --- Land and building 14,40,000 Issued, Subscribed & Paid Up: Plant and Machinery 2,52,000 1,50,000 Equity Shares of ` 10 each fully paid 15,00,000 Furniture 1,80,000 (All the shares are issued as purchase consideration on take over of business of Y)

Current Assets:

12,000, 10% Preference Shares of ` 100 each fully paid

12,00,000

Cash and Bank Balance (` 8,00,000 – ` 6,80,00 – ` 54,400)

65,600

(All the shares are issued in discharge of loan) Reserves & Surplus: Capital Reserve 37,600

Total 27,37,600 Total 27,37,600 Question 3 – Financial Statements – Loss of Cash, Debtors, Creditors, Sales A/c 16 Marks The following is the Balance Sheet of M/s. Neel and Company as on 31st March, 2009:

Liabilities ` Assets ` Capital 1,92,000 Building 1,30,000 Loan 60,000 Furniture 20,000 Creditors 1,24,000 Motor car (for business) 36,000 Stock 80,000 Debtors 68,000 Cash in Hand 8,000 Cash at Bank 34,000 3,76,000 3,76,000

1. A riot occurred on the night of 31st March, 2010 in which all books and records were lost. The cashier had

absconded with the available cash. The following information is available. 2. The sales for the year ended 31st March, 2010 were 20% higher than the Previous Year's Sales. Firm always

sells the goods at cost plus 25%. 20% of the Total Sales for the year ended 31st March, 2010 were for Cash. There were no Cash Purchases.

3. On 1st April, 2009, the stock level was raised to ` 1,20,000 and stock was maintained at this new level all

throughout the year. 4. Collections from Debtors amounted to ` 5,60,000 of which ` 1,40,000 was received in cash. Business

Expenses amounted to ` 80,000 of which ` 20,000 was outstanding on 31st March, 2010 and ` 24,000 was paid by cheque.

5. Analysis of the Pass Book revealed the following for the year ended 31-3-2010 : Payment to Creditors ` 5,50,000 Personal Drawing ` 30,000 Cash Deposited into Bank ` 2,86,000 Cash Withdrawn from Bank ` 48,000


M.18

6. Gross Profit as per last year’s audited account was ` 1,20,000. 7. Provide Depreciation on Building and Furniture at 5% and Motor Car at 20%. 8. The amount Defalcated by the Cashier may be treated as recoverable from him. You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2010 and the Balance Sheet as on date. Solution:

Also See Q No.29, Page 13.46 of “Ready Referencer on Accounting” for Group I IPCC

1. Computation of Total Sales Particulars `

Previous Year’s Sales = saleson%GP

YeareviousProfGP =

%20000,20,1`

(GP is 25% On Cost = 20% On Sales) 6,00,000

Add: 20% on above 1,20,000 Current Year’s Sales Cash Sales at 20% of Total Sales – 1,44,000 Credit Sales at 80% of Total Sales – 5,76,000 (balancing figure)

7,20,000

2. Sundry Debtors Account


To balance b/d 68,000 By Cash 1,40,000 To Credit Sales 5,76,000 By Bank (` 5,60,000 – ` 1,40,000) 4,20,000 By balance c/d (balancing figure) 84,000

Total 6,44,000 Total 6,44,000

3. Sundry Creditors Account Particulars ` Particulars `

To Bank 5,50,000 By balance b/d 1,24,000 To balance c/d (balancing figure) 1,90,000 By Purchases (from trading A/c) 6,16,000

Total 7,40,000 Total 7,40,000

4. Cash and Bank Account (to compute Closing Balance at Bank and Cash defalcated) Receipts Cash (`) Bank (`) Payments Cash (`) Bank (`)

To balance b/d 8,000 34,000 By Business Expenses 36,000 24,000 To Debtors 1,40,000 4,20,000 (` 60,000 – ` 24,000) To Cash (contra) 2,86,000 By Creditors 5,50,000 To Bank (contra) 48,000 By Capital – Drawings 30,000 To Sales – Cash 1,44,000 By Bank (contra) 2,86,000 By Cash (contra) 48,000 By Cash Recoverable

(balancing figure) 18,000

By balance c/d (balancing figure)

88,000

Total 3,40,000 7,40,000 Total 3,40,000 7,40,000

5. A’s Capital Account Particulars ` Particulars `

To Drawings 30,000 By balance b/d 1,92,000 To balance c/d (balancing figure) 1,62,000

Total 1,92,000 Total 1,92,000


M.19

6. Trading and Profit and Loss A/c for the Year ended 31st March, 2010 Particulars ` Particulars `

To Opening Stock 80,000 By Sales:

To Purchases (balancing figure) 6,16,000 Cash 1,44,000

To Gross Profit c/d (7,20,000 × 20%) 1,44,000 Credit 5,76,000 7,20,000

By Closing Stock 1,20,000

Total 8,40,000 Total 8,40,000

To Business Expenses: By Gross Profit b/d 1,44,000

Paid (bal. fig.) 60,000

Outstanding 20,000 80,000

To Depreciation:

On Building (1,30,000 × 5%) 6,500

On Furniture (20,000 × 5%) 1,000

On Motor Car (36,000 × 20%) 7,200 14,700

To Net Profit (balancing figure) 49,300

Total 1,44,000 Total 1,44,000

7. Balance Sheet of M/s. Neel and Company as on 31st March, 2010 Liabilities ` Assets `

Capital: Opening Balance Add: Profit

1,62,000 49,300

Building 1,30,000 Less: Depreciation (6,500)

1,23,500

2,11,300 Furniture 20,000 Less: Depreciation (1,000) 19,000 Loan 60,000 Motor Car 36,000 Less: Depreciation (7,200) 28,800 Creditors for Goods 1,90,000 Outstanding Business Expenses 20,000 Stock 1,20,000 Debtors 84,000 Bank 88,000 Cash Recoverable 18,000

Total 4,81,300 Total 4,81,300 Question 4(b) – Preparation of Account Current – Method of Products 8 Marks From the following transactions, draw up an Account Current by means of product up to 31st December, 2010 to be rendered by X to Y and give the amount of Interest charging @ 8% Per Annum.

Date 2010 Particulars Amount (` in ‘ 000) July 01 Balance owing by Y 600 July 15 Goods sold to Y 900 Aug 21 Goods bought fro Y 700 Aug 23 Cash received from Y 450 Oct 23 Y accepted X’s bill at 3 months 300 Nov 01 Goods bought from Y 950 Dec 31 Accepted a bill drawn by Y at 3 months (due date of bill is on Sunday) 400

On 31st December, 2010, X and Y settled their Account after considering the Interest Factor. Show the Cash Amount received or paid by X on that date.


M.20

Solution: Also See Q No.4, Page 2.17 of “Ready Referencer on Accounting” for Group I IPCC

Y is in Account Current with X

(Interest from Due date to December 31, 2010 at 8%) Amount (` in ‘000) Date Particulars Due ` Days Product Date Particulars Due ` Days Product

1-Jul To bal b/d 1-Jul 600 184 1,10,400 21-Aug By Purchases 21-Aug 700 132 92,400 15-Jul To Sales 15-Jul 900 169 1,52,100 23-Aug By Cash 23-Aug 450 130 58,500 3-Dec To B/P 5-Mar 400 64 (25,600) 23-Oct By B/R 25-Jan 300 25 (7,500)

31-Dec To Interest 8 1-Nov By Purchases 1-Nov 950 60 57,000 31-Dec To Cash

(Bal. Fig.) 492

By Bal. of Prdt 36,500

Total 2,400 2,36,900 Total 2,400 2,36,900

Interest = 36,500 × 8% × 3651

Note: 1. Since January 26th is a public holiday, previous day is taken as due date for Bills Receivable. 2. Since it is given that the due date falls on sunday, previous day is taken as due date for Bills Payable. Question 5(b) – Preparation of Cash Flow Statement – AS 3 16 Marks From the following information, prepare Cash Flow Statement of Amex Limited for the year ended 31st March, 2010 by using Indirect Method:

Balance Sheets as on: 31-3-2009 (`) 31-3-2010 (`) Liabilities Share Capital 5,00,000 6,00,000 Reserves 1,50,000 1,80,000 Profit and Loss Account 40,000 65,000 Debentures 3,00,000 2,50,000 Creditors for Goods 1,70,000 1,60,000 Provision for Income Tax 60,000 80,000 12,20,000 13,35,000 Assets Gross Block 10,00,000 11,20,000 Less : Depreciation 3,70,000 4,60,000 Net Block 6,30,000 6,60,000 Stock in Trade 2,40,000 3,70,000 Book Debts 2,50,000 2,30,000 Cash in Hand and at Bank 80,000 60,000 Misc. Expenditure Discount on Issue of Shares 10,000 7,500 Preliminary Expenses 10,000 7,500

Total 12,20,000 13,35,000

Profit and Loss Appropriation Account for the year ended 31st March, 2010

Particulars Debit (`) Particulars Credit (`) To Transfer to Reserves 30,000 By Balance b/d 40,000 To Interim Dividend paid 80,000 By Net Profit for current year 1,35,000 To Balance carried to Balance Sheet 65,000

Total 1,75,000 Total 1,75,000


M.21

Solution: 1. Computation of Net Profit before Taxation

Particulars ` Net Profit for the year (given) 1,35,000 Add back: Provision for Taxation for the year 80,000 Net Profit before Taxation, taken to Cash Flow Statement 2,15,000

2. Provision for Taxation Account Particulars ` Particulars `

To Bank 60,000 By balance b/d – Given 60,000 To balance c/d 80,000 By Profit & Loss Account – (balancing figure) 80,000

Total 1,40,000 Total 1,40,000

3. Asset Account (Gross)

Particulars ` Particulars `To balance b/d 10,00,000 To Bank – Purchase – (balancing figure) 1,20,000 By balance c/d – Given 11,20,000

Total 11,20,000 Total 11,20,000

4. Provision for Depreciation Account

Particulars ` Particulars ` By balance b/d 3,70,000 To balance c/d – Given 4,60,000 By Profit & Loss Account – (balancing figure) 90,000

Total 9,75,000 Total 9,75,000

Cash Flow Statement of Amex Ltd. for the year ended 31st March 2010 (Using Indirect Method)

CASH FLOW FROM OPERATING ACTIVITIES ` `

Net Profit Before Taxation [W.N. 1] 2,15,000 Adjustment for: Depreciation [W.N. 4] 90,000 Preliminary Expenses written off [` 10,000 – ` 7,500] 2,500

Discount on issue of shares written off [` 10,000 – ` 7,500] 2,500

Operating Profit before Working Capital changes 3,10,000 Adjustments for: Increase in Stock [` 3,70,000 – ` 2,40,000] (1,30,000)

Decrease in Book Debts [` 2,50,000 – ` 2,30,000] 20,000

Decrease in Creditors [` 1,70,000 – ` 1,60,000] (10,000)

Cash Generated from Operations 1,90,000 Less: Income Taxes paid [W.N. 2] (60,000) Net Cash From Operating Activities (A) 1,30,000CASH FLOW FROM INVESTING ACTIVITIES Purchase of Asset [W.N. 3] (1,20,000) Net Cash Used in Investing Activities (B) (1,20,000)CASH FLOW FROM FINANCING ACTIVITIES Proceeds from Issue of Equity Shares [` 6,00,000 – ` 5,00,000] 1,00,000

Redemption of Debentures [` 5,00,000 – ` 4,00,000] (50,000) Interim Dividend Paid (80,000) Net Cash Used in Financing Activities (C) (30,000) Net Decrease in Cash and Cash Equivalents (A + B + C) (20,000) Add: Cash and Cash Equivalents at the beginning of the year 80,000 Cash and Cash equivalents at the end of the year 60,000Note: Cash and Cash Equivalents include both Cash in Hand and Cash at Bank.


M.22

Question 7(c)(i) – Investment Accounting – AS 13 2 Marks In preparing the Financial Statements of Lotus Limited for the year ended 31st March, 2010 you come across the following information. State with reason, how you would deal with it in the Financial Statements? An unquoted long term investment is carried in the books at a cost of ` 5 Lakhs. The published accounts of the unlisted company received in May 2010 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than ` 50,000. Solution: 1. Investments classified as Long Term Investments should be carried in the Financial Statements at Cost. 2. Provision for reduction in the value of a long–term investment shall be made, only if it is permanent. Such recognition

of a decline in the value of the investments is made for each investment individually. 3. The indicators of the value of an investment are obtained by reference to factors like – (a) its market value, (b) the

investee’s assets and results, and (c) the expected cash flows from the investment. 4. The facts of the given case clearly indicate that the decline in the value of the long–term investment is not temporary.

Hence, a provision for diminution should be made to reduce the carrying amount of long term investment to ` 50,000/– in the Financial Statements for the year ended 31st March, 2010.

5. The published accounts of the Unlisted Company provide further evidence as to the conditions persisting at the Balance Sheet date. Hence, this is an “Adjusting Event” under AS – 4.

6. The amount of reduction ` 4,50,000 (i.e. ` 5,00,000 – ` 50,000) should be charged in the P&L A/c for the year. AS – 13 requires disclosure of changes in the carrying amounts of long–term investments.

Question 7(d) – Accounting in e–Environment 4 Marks Enumerate the advantages of Computerized Accounting. Solution:

Refer “READY REFERENCER ON ACCOUNTING” for Group I IPCC – Page 15.1, Question No. 2, Point A

Question 7(e) – Construction Contracts – AS 7 4 Marks On 31st October, 2009, Bharat Construction Co. Ltd. undertook a Contract to construct a Flyover for ` 215 Crores. On 31st March, 2010 Company found that its Work Certified for ` 100 Crores and Work to be Certified for ` 35 Crores. Prudent estimates of additional Cost for Completion was ` 90 Crores. What amount should be charged to Revenue in the Financial Accounts for the year ended 31st March, 2010 as per Provisions of Accounting Standard 7 (Revised) Solution:

Calculation of Expected Loss (` in Crores) Contract Amount

1. Contract Price (given) 215.00 2. Cost incurred till date (Work Certified + Work to be Certified) 135.00 3. Further Costs to be incurred to complete the Contract 90.00 4. Total Contract Costs (2) + (3) 225.00 5. Expected Loss on Contract (1) – (4) (10.00) 6. Percentage of Completion based on Costs (2) ÷ (4) 60% 7. Contract Revenue recognised (1) × (6) 129.00 8. Contract Costs recognised (as per 2) 135.00 9. Contract Profit / (Loss) (7) – (8) (6.00)

10. Expected Loss to be recognised (as per 5) 10.00 11. Additional Provision required (9) – (10) 4.00


M.23

Students’ Notes


M.24

Students’ Notes

Documents

Guru Kripa’s Guideline Answers for May 2011 CA IPCC ...caclubindia.s3.amazonaws.com/cdn/forum/files/555789...The Average Rate of Gross Profit is 20% of Sales. 6. The Value of the