Key Notes IPCC Advanced Accounting

8/9/2019 Key Notes IPCC Advanced Accounting

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PREFACE

There is no dearth of textbooks on accounting. So it may be pertinent to ask why we need another book.

This is not a book that is written as a book. This book is evolved from the notes prepared for satisfying the

needs of students. The only motivation was to explain accounting in a logical manner, whereby one could

master the methodology based on a deeper insight into the basic structure of accounting. The emphasis

here is not so much on the mechanical practice but on the conceptual understanding of the methodology.

The objective is to ensure that the study of this book enables the reader to understand accounting numbers

in a clearer and better perspective.

Various aids have been included in the book to facilitate learning and make it interesting.

Case Studies: They not only make the concept clearer, the presentation leaves a vivid visual impact,

which has good recall value.

Pictures & Clipart: Uniformity in highlighting the important points and making reading interesting.

Concept Questions:Makes your concepts very clear and strengthen the base.

Class Work: It help students to recall and test their knowledge and, going a step further, their

power to analyse and derive. Class work need students to seek out what is not

obvious from the information provided

If this approach builds confidence in the minds of students about accounting methodology & if it makes it

possible to understand & apply it logically, I believe, I have achieved my goal.


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DEDIC TION

Dedicated to Her, My Infinite Happiness,My Wife Hemlata Bhangariya

I am Feeling the tranquillity and happiness when I come to lay this book in your lap.

Say youre surprised? Say you like it? Say its just what you wanted? Because its yours

because I love you.


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CA Anand R. Bhangariya 94220 26740 www.cavidya.com 1.1

CHAPTER

NO.NAME OF THE CHAPTER PAGE NO

1 CONCEPTUAL FRAMEWORK 1.11.7

2 UNDERWRITING OF SHARES 2.12.8

3 LIQUIDATION OF COMPANIES 3.13.19

4 BANKING COMPANIES 4.14.11

5 INSURANCE COMPANIES 5.1

5.16

6 ELECTRICITY COMPANIES 6.1 6.9

8 DISSOLUTION OF PARTNERSHIP ACCOUNTS 8.18. 19

9AMALGAMATION & SALE OF FIRM TO A COMPANY 9.1

9.11

10 DEPARTMENTAL ACCOUNTS 10.110. 6

12ESOP, BUYBACK, EQUITY SHARES WITH DIFFERENTIAL

RIGHTS12.112.11


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preparation of Financial Statements in compliance with AS.

Deal with the topics not covered by AS.

Development & review of AS

Promoting harmonisation of regulations, AS and procedures.

Interpretation of financial statements.

Applicable to all general purpose financial statements prepared annually by all commercial,

industrial and business enterprises (Public or private)

Special purpose financial reports like prospectus, Tax computations are outside the scope.

Framework cantoverride Accounting Standards.

There are three fundamental accounting assumption:

1) Going Concern

2) Consistency

3) Accrual



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BalanceSheet

Profit and lossaccount

(P & L A/C)

Cash FlowStatement

Notes to

accounts

Financial position Financial

performanceCash flows Other relevant

information

In India, FS means B/s, P&L A/c, notes to Accounts & cash flow statement.

Balance sheet

Liabilities AssetsRs. Rs.

Profit and Loss A/c

Debit CreditRs. Rs.

Cash flow statement

Particulars Rs

.

Notes to accounts

m

n

n

k



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Investors

Employees

Lenders

Suppliers

Govt.agencies

Customers

Whether to buy, sell / hold investment.

Ability of organisation to survive.

Ability of organisation to pay dividend.

Stability, continuity and growth of company.

Ability to provide remuneration, retirement and other

benefits.

Interested in repayment of Interest and Loan principal.

Ability to pay the dues

Decide credit policy

They want to know because they

Regulate the functioning of business for public good. Charge excise duties and taxes.

Control the prices.

Employment

Contribution to the local economy



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Understandability Relevance Reliability Comparability

Useful to a wide

range of users in

making economic

decisions

Relevant for

decision-making

needs of users

Free from

material error

and bias and can

be depended

upon by users

Within the entity

over time and

also between

different entities

True and Fair View

Application of the

principal qualitative

characteristics & of

appropriate

accountingstandards

Primarily transactions and events are measured in terms of money.

The three elements of measurement are:

1) Identification of objects and events to be measured;

2) Selection of standard or scale to be used;

3) Evaluation of dimension of measurement standard or scale.

Money as a scale of measurement is not stable. Thus information of one year measured in money

terms may not be comparable with that of another year.



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You have purchased one Car on 01.01.2001 for Rs. 10 Lakhs HistoricalCost

Today i.e. on 01.08.2011, if you want to sell this car after 10 years, it will

fetch you Rs. 3 Lakhs.Realisable Value

Today same car is available in the market for Rs. 15 Lakhs.

Current Cost

Historical Cost Current Cost Realisable value Present Value

Present Value: As per present value, an asset is carried at the present discounted value of the

future net cash inflows that the item is expected to generate in the normal course of business.

Your dad invested Rs. 1,00,000 in Fixed deposit with Bank of Baroda for 1 year @ 10% p.a.

Present Value Future Value

1,00,000 1,10,000

10000 X 110/100

1,10,000 X 100/110



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Capital refers to net assets of a business. Since a business uses its assets for its operations, a fall in

net assets will usually mean a fall in its activity level.

It is therefore important for any business to maintain its net assets in such way, as to ensure

continued operations at least at the same level year after year.

In other words, dividends should not exceed profit after appropriate provisions for replacement of

assets consumed in operations. For this reason, the Companies Act does not permit distribution of

dividend without providing for depreciation on fixed assets.

P = (CA - CL)(OAOL)C + D

P = Profit

CA = Closing Assets

CL = Closing Liabilities

OA = Opening Assets

OL = Opening Liabilities

C = Introduction of Capital

D = Dividend / Drawings



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Definition: Underwriting is an agreement, with or without conditions,

to subscribe to the securities of a body corporate when existing

shareholders of the corporate or the public do not subscribe to the

securities offered to them.

www.cavidya.com 2.1 CA Anand R. Bhangariya 94220 26740


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Company issues

1,000 shares of Rs.

10 for Rs. 12 each. Public

Directors / Promoters

Underwriter

subscribed for

800 shares.

subscribed for

200 shares.

The underwriter is not eligible for

commission on shares taken by

the promoters, employees,

directors, their friends and

business associates.

Commission is paid on the

issue price

i.e. Rs. 12 X 800 = 9,600

The maximum amount of commission:

5% of the issue price of shares

2

% of the issue price of debentures

rate authorized by the articles

whichever is less.

Commission = 9,600 X 5%

= 480.

It may be paid in cash or in fully

paid-up shares or debentures

or a combination of all these.



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Public

Underwriter

If public do not subscribe the shares,

Underwriter will subscribe the same.Company

issue 1,00,000

shares & appointed

an underwriter.

7 Banks have underwritten 557.14 crores value

of shares TATA Steel.

The company may

enter into underwriting

arrangement with

number ofunderwriters. This

arrangement is called

Joint Underwriting.



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Company issue10000 sharesand

appointed an underwriter

HSBC will take 2,000

shares irrespective of

no. of shares appliedby public.

With condition that HSBC will take atleast 2,000 shares

Public applied for

12,000 shares.

Decided to issue10000 sharesand


HSBC will take

remaining 4,000

shares.

Public

Public applied for

6,000 shares.

Public

underwriter agrees to take up a specified

number of shares irrespective of the number

of shares subscribed for by the public.

The underwriter agrees to take up agreed

proportion of shares, not taken up by the

public.



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Company

20,000 Unmarked applications

50,000 Applications 50,000 Applications

Distributed in the ratio of gross

liability i.e. 1 : 1.

Net Liability15,000 shares 25,000 shares

(-)

(-)

(-)

(-)

Issue1,00,000 shares for which they appointed underwriters with equal underwriting

Company received Marked Application for SBI 25,000, HSBC 15,000 and Unmarked 20,000

25,000 Applications

(Marked)15,000 Applications

(Marked)

10,000 Applications

(Unmarked)10,000 Applications

(Unmarked)

'Marked' applications are those

applications which bear the stamp

of anunderwriter.

Unmarked' applications are those

applications which does not bear

the stamp of anunderwriter.

1.The distinctionbetween marked

and unmarked applications

becomes immaterial when

The whole issue is subscribed

by only one underwriter.

The issue is fully subscribed

2.When there is more than one

underwriter, the unmarked

applications are divided amongst

underwriters in the ratio of their

gross liability.



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Decided to issue1,00,000 sharesand


100% issue is underwritten by

underwriter.

Decided to issue 1,00,000 shares and


80% issue is

underwritten by

underwriter

20% is treated as

having underwritten

by company

100% issue

underwritten by

Underwriter

20%

Company 80%

Underwriters

Marked applications = Total number of

applications received x percentage of

underwriting.



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Underwriters A B C

Gross liability

Less: Marked applications (excluding

firm underwriting)

Less: Unmarked applications allotted in

the ratio of gross liability

Less: Firm underwriting

Net Liability as per agreement

Statement Showing the Liability of Underwriters

[Figures - No. of shares]



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Whatever may be the reason for insolvency, all companies going into for liquidation has to undergo

following steps....

Court receives petitionfrom Creditors

Court Appoints official

liquidators

Step 1

Board of Directors upon theorder of High Court, preparesStatement of Affairs & submitsthe same to Liquidator.

Liquidator takes the custody ofproperty

Step 2

Liquidator submits"Liquidator Statement ofAccounts"

Court orders dissolution.

Step 3

Liquidator is the person

who conducts the

dissolution of the company

Liquidator Statement of Accounts provides

the details of his receipts & payments during

the liquidation process.

Prepares Statement of Affairs which provides the details like -

1) The assets of the company2) Its debts and liabilities;

3) The names of its creditors, stating separately the amount of

secured and unsecured debts;

4) The debts due to the company.



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Particulars

EstimatedRealisableValues (Rs)

Assets not specifically pledged (as per list 'A')

Balance at Bank

Cash in Hand

Marketable Securities

Bills Receivable

Trade Debtors

Loans and AdvancesUnpaid Calls

Stock-in-trade

Work-in-progress

Freehold Property, Land and Buildings . .

Leasehold Property

Plant and Machinery

Furniture, Fittings, Utensils, etcInvestments other than marketable securities

Livestock

Vehicles, etc.

Other property, viz.


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*Assets specifically pledged (as per list B')

(a) EstimatedRealisable

Value

(b) Due toSecuredCreditors

(c)DeficiencyRanking asUnsecured

(d)Surpluscarried to

lastcolumn

(Rs) (Rs) (Rs) (Rs)

Estimated surplus from assets specifically pledged

Estimated total assets available for preferential creditors, debentureholders secured by a floating charge, and unsecured creditors** (carriedforward)

Summary of Gross Assets

Rs

(d) Rs.

Gross realisable value of assets specifically pledged

Other AssetsGross Assets (Rs)

Estimated total assets available for preferential creditors,debenture holders secured by a floating charge, andunsecured creditors** (brought forward).


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Liabilities Rs

(e) (to be deducted from surplus or added to deficiency as the case maybe.)

Gross

Liabilities

Secured creditors (as per List 'B') to the extent to which claims are

estimated to be covered by assets specifically pledgedPreferential creditors (as per List 'C')

Estimated balance of assets available for Debenture holders securedby a floating charge and unsecured creditors Rs

Debenture Holders secured by a floating charge (as per List 'D')

Estimated Surplus / Deficiency as regards Debenture Holders

Unsecured Creditors (as per List 'E')

Estimated unsecured balance of claims of creditors partly secured

on specific assets, brought from preceding page(c)

Trade Accounts

Bills Payable

Outstanding Expenses

Contingent Liabilities (state nature)

Estimated Surplus / Deficiency as regards Creditors

Issued and Called-up Capital:

... preference shares of... each... called-up (as per List 'F')

... equity shares of... each... called-up (as per List G)

Estimated Surplus/Deficiency as regards Members** (as per List 'H')


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Liability in respect of bills discounted by the company is contingent, any amount expected to be

paid in respect of bills discounted should be included in List E. This applies to all contingent

liabilities. Bills payable are creditors and hence should be included in the appropriate list according to the

securities held by the holders of the bills. Generally Bills payable are unsecured and hence

included in unsecured creditors (list E).

Debentures should be assumed to have a floating chare, 3 if nothing is mentioned regarding the

security held by the debenture-holders (List D).

Unclaimed dividends should be included in unsecured creditors.

Uncalled capital should not be treated as an asset but calls in arrears should be treated as an

asset (List A).

Personal guarantees by directors are not considered as security.


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As per section 530, there are in totality 7 dues which has to be paid first in case of liquidation

which are as follows.

i. All revenues, taxes, cesses and rates due to Central Government or State Government or local

authorities. The amount should have become due and payable within 12 months before the winding

up order.

ii. Wages or salaries of an employee for four months. The wages or salary for four months must be due

within 12 months next preceding to relevant date. The amount shall not exceed such sum as may be

notified by the Central Government (presently Rs 20,000) for any one claimant.iii. Accrued holiday remuneration which has become payable to an employee or in case of his death to

any other person.

iv. All amounts due in respect of contributions payable by the company as employer under any law.

However, this is not payable if the company is being voluntarily wound up for reconstruction or

amalgamation.

v. Compensation payable under the Workmen's Compensation Act, 1923 in respect of the death or

disablement of any officer or employee of the company.

vi. All sums due to any employee from the Provident Fund, Pension Fund, Gratuity Fund or any fund for

the welfare of the employee including any contribution due to the fund, and

vii. Any expenses of investigation held in pursuance of Section 235 and 237 and appointed as payable by

the company.


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However, even within these 7 dues, company has to first settle down the dues related to the

Workmen.

However, regular Secured Creditors of the company dontfind any place in Section 530

Secured CreditorWorkman

Amount Due is Rs. 1,00,000 Amount Due is Rs. 4,00,000

1,00,000 + 4,00,000 = 5,00,000

Realisable value of security

given to Secured Creditors

Rs. 3,00,000

Question is who will get thepayment first?

Workers because they are preferential creditorsas per section 530 or Secured Creditors because

they have security???


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Secured CreditorWorkman

Amount Due is Rs. 1,00,000 Amount Due is Rs. 4,00,000

1,00,000 + 4,00,000 = 5,00,000

Realisable value of security

given to Secured CreditorsRs. 3,00,000

Realisable value of

Security

Rs. 3,00,000

3,00,000 1/5 = 60,000

3,00,000 4/5 = 2,40,000

As per Section 529 A ,Workman & Secured Creditors are

treated as Overriding Preferential Payments i.e. they

have preference over other preferential creditors.

Balance unpaid amount of workmen (1,00,000-60,000) Rs. 40,000

Short amount paid to secured creditors due to sharing of workmen Rs. 60,000

Total Rs. 1, 00,000

Overriding Preferential Payment



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The liquidator must present an account of his receipts and payments at

least twice a year as long as he is in the office to

The court

(in case of compulsory winding up)

The Registrar

(in case of voluntary winding up)

Order of Payment :-

1) Workmen's dues and claims of the secured

creditors as mentioned in Section 529A

2) Overriding preferential payments

3) Legal charges,

4) Liquidator's remuneration

5) Cost of expenses of winding up, Section 530 (6)

6) Preferential creditors, Section 530 (1)

7) Creditors secured by floating charge

8) Unsecured creditors.

9) Preferential shareholders

10) Equity shareholders.



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Receipts Rs. Payments Rs.

To Cash and Bank Balances By legal charges

To Realisation of Assets (individually) By Liquidatorsremuneration

To Surplus from secured creditors % on amounts distributed

To Calls in arrears realized % on realisation

To Calls on contributories realised % on amounts paid to shareholders

By Cost of winding up

By Debenture holders creditors(having a floating charge) +outstanding interest

By Preferential

By Unsecured creditors

By Payment to contributoriesPreference shareholders +Arrear dividends

By Equity shareholders

Total Total


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Balance Sheet (Extract) of Insolvent Ltd.

Particulars Rs.

Land & Building 5,00,000Furniture 2,00,000

Stock 1,50,000

Cash in hand 25,000

Cash at bank 45,000

Loan from bank

(secured by pledge of stock) 1,00,000

a) Liquidator is entitled to remuneration @

5% of the amount of asset realised by

him.

Particulars Rs.

Nil

Land & Building

Furniture

Stock [1,50,000 1,00,000

Cash in hand

Cash at bank

5,00,000

2,00,000

50,000

[It is assumed that secured creditorsthemselves realize the asset. Hence,

liquidator is eligible for remuneration

only on surplus]

Not entitled to get any

commission on cash &

bank balance

Total 7,50,0005% remuneration 37,500

If the amount available is insufficient to pay

unsecured creditors fully, the commission

due to the liquidator is calculated as per the

following formula

Commission =

100+

.



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Liquidated on 30-09-2011

Solvent Insolvent

Insolvent Ltd.

Outstanding 12%

debenture of Rs.

5,00,000Liquidator repays debentureholders on

31-12-2011

Interest is payable upto the

date of actual payment loan

01-04-2011 to 31-12-2011

i.e. 5,00,000 X 12/100 X 9/12= 45,000

Interest is payable upto the

date of liquidation

01-04-2011 to 30-09-2011

i.e. 5,00,000 X 12/100 X 6/12= 30,000

Rule is applicable for all the

debts



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Particulars Rs.

Particulars Rs.

Particulars Rs. Particulars Rs.

Equity share capital

Preference share capital

Pref. dividend (payable) :

2008-09

2009-10

2010-11

1,00,000

1,00,000

1,00,000

10,00,000

35,00,000

50,00,000Cash

If not declared by company, treated as Arrears

If declared by company in GM, treated as Debt.

Debt

50,00,000

3,00,000

47,00,000

Cash = 50,00,000

(-) 10,00,000

40,00,000

Equity =

Preference shares =(-) 35,00,000

5,00,000

Dividend on PS (-) 3,00,000

2,00,000

Cash



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Liabilities Rs.

Share Capital, Authorised and Subscribed:

5,000 6% Preference Shares of Rs.100 each fully paid 5,00,000*2,500 Equity Shares of Rs. 100 each Rs. 75 paid up 1,87,500

7,500 Equity Shares of Rs. 100 each Rs. 60 paid up 4,50,000

Deficit = 56,750

Liabilities Rs.

Total equity capital paid up (Rs 4,50,000 + 1,87,500)Add: Deficit (Given)

Loss to be borne by 10,000 equity shareholders

Loss per share Rs 6,94,250 10,000

Amount of call for 7,500 equity shares of Rs. 100 each Rs. 60 paid (69.42 - 60)

Total Amount collected (7,500 shares x Rs. 9.425)

Amount of refund for 2,500 equity shares of Rs. 100 each Rs. 75 paid

(75 69.425)

Total amount refunded (2,500 shares x Rs. 5.575)

6,37,50056,750

6,94,250

69.425

9.425

70687.5

5.575

13937.5



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Liability Of ' B' List Of Contributors

List A List B

The 'A' list contains the names of persons

who are membersfor a period of one

year prior to the date of winding up.

The 'B' list contains the name of persons

who were members with a period of one

year prior to the date of winding up.

In case present shareholders (List A) fail to pay, money shall be called from the past shareholders (List

B) subject to certain conditions.

1) A past member holding partly paid shares who has ceased to be a member for one year or

upwards before the commencement of the winding up shall not be liable to contribute. Only

those members who have ceased to be members within one year before the commencement of

winding up may be called upon to contribute. Such contributories are called 'B' listcontributories.

2) A 'B' list contributory will be liable to pay only for those creditors or debts which were

contracted before he ceased to be member.

3) 'B' list contributory will be liable only if present member is unable to make payment.

4) Maximum amount which may be called from him will be the amount unpaid on his shares.



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A A b NPA h i i


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Nature

Term loan Overdraft / cash credit Agriculture

advances

Interest or Instalment

of principal has

remained overdue for

a period exceeding

90 days.

Mr. Sam Mr. John Mr. Ramesh Farmer

An Asset becomes NPA when it ceases to generate income.

Bill purchased and

discounted

Took loan of Rs. 25 lakhs

Due date = 31.12.2011

Bank dont receiveany amount towards

Installment till

31.3.2012

Difference of 90 days

The account has

remained out-of-

order for a period

exceeding 90 days

The bill remains

overdue for a period

exceeding 90 days.

The instalment of

principal or interest

thereon remainsoverdue-

Short Duration Crops

Two Crop Seasons

Long Duration Crops-

One Crop Seasons

Overdraft = 1,00,000

Date of withdrawal =

31-12-2011

If Mr. John do not pay

any amount in the bank

then the account is

treated as Out of

Order

Out of order for

90 days

discounted bills of

exchange

Drawee dishonoured

the bill on due date

i.e. 31-12-2011

The bill remains

overdueup to

31.3.2012

Difference of 90 days

took agriculture

advance for short

duration crop.

He does not repay

any amount for aperiod of two crop

season then it is

treated as NPA



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Standard Assets Sub-standard Assets Doubtful Assets Loss Assets

Asset which do not

pose any problems

and which do not

carry more than

normal risk

attatched to the

business. They arenot NPAs.

Assets which have

remained an NPA

for a period not

exceeding 12

months.

An asset classified

as doubtful if it

remained in the

sub-standard

category for 12

months.

Asset, where loss has

been identified by

the bank or internal

/ External Auditors

or by the RBI

Inspection.


Term Loan taken on 31stJan. 2006

Maturity on 30thJune 2006

Upto 1stOct. 2006 Term loan will be treated as NPA

From 1stOct. 2006 to 30thSept. 2007Substandard Asset

After 1stOct. 2007Doubtful Asset

Customer do not repay the loan

till 30thSept. 2006 i.e. default

continues for 90 days after

maturity.

If Auditor stamps doubtful

asset as a bad, then it is Loss

Asset.


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Particulars Rs. Rs.Balance Outstanding XXXX

Less: Realisable Value of Security XXXX

Unsecured Portion XXXX

Less: Extent of ECGC Cover

Net Unsecured Portion

XXXX

XXXXProvisioning Required:

1. For net Unsecured Portion (100% x Net Unsecured Portion)

2. For Secured Portion of Advance (Amount x Appropriate %)

XXXX

XXXX

Total Provision Required XXXX


Security

Realisable value

= 20 lakhs

Loan Rs.

70,00,000

Gives guarantee to the extent of 40%.

Particulars Rs.

Term loan

(-) Security (Building)

(-) ECGC (50,00,00 X 40%)

Unsecured portion

70,00,000

20,00,000

50,00,000

20,00,000

30,00,000


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Ram discounts bill with bank of amount Rs.

10,000 for 3 months @ 5% on 01.03.2011

Discount of Rs. 125 10,000 3

5% is Income for Bank

which they credited to its Revenue Account.

As per

accrual

concept

Mr. Ram

1stMarch 2011 31th

May 201131stMarch 2011

Discount of Rs. 41.67

(125 3)

Discount of Rs. 83.33

(125 3)

F. Y.2010-2011 F. Y.2011-2012

This unearned discount of Rs.83 which belongs to next F.Y. is

called as Rebate on Bill Discounted.


Rebate on bills

discounted refers to

theunearned

discount on those bills

that will mature after

the date of closing of

accounts or that

portion of the discount

which relates to the

period falling afterthe close of the year.

Unearned interest = bill value

X discount rate X (No. of daysto maturity on balance sheet

date / 365 days)


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No Particulars L.F. Debit Credit

1.For discounting of bill by customer and recording the discount

income:

Bill Discounted A/c Dr.

To Customers A/c (at Present Value)

To Discount on Bills A/c (Balancing figure=Income of the Bank)

2. For transfer of unearned discount to Rebate on Bills Discounted:

Discount on Bill A/c Dr.

To Rebate on Bills Discounted A/c (at Unearned Discount)

3.For transfer of Opening Balance of unearned interest to Interest

and Discount for the year:

Rebate on Bills Discounted A/c Dr.To Discount on Bills A/c


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=

+


Mr. Ram Mr. Mohan

banks are required to

maintain capital adequacy

ratio of 9%.

1,000 X 9% = Rs. 90

Ti I i l i i l d dil il bl h i f i i


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TierI capital is permanent capital and are readily available at the time of crisis.

TierII capitalis less permanent and are less readily available.

Computation of TierI Capital Rs. Rs.

Paid up Equity Share Capital50 crore shares of Rs. 10 each XXX

Add: (i) Statutory Reserve XXX

(ii) Share Premium XXX

(iii) Other free reserves XXX

(iv) Capital Reserve arising out of surplus from sale of assets XXX XXX

XXX

Less: (i) Equity Investment in Subsidiaries XXX

(ii) Intangible Assets XXX

(iii) Current and brought forward losses XXX XXX

XXX


Any deferred revenue expenditure related to Voluntary Retirement Scheme (VRS) would not be

deducted from TierI capital

Computation of TierII Capital Rs. Rs.

(ii) Cumulative perpetual preference shares XXX

(iii) Revaluation reserve at a discount of 55% XXX

(iv) Contingency and Loss Reserves XXX

XXX

TierII capital is limited to maximum of 100% of TierI capital.

C i f Off B l Sh I


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No Asset % Weight to Book Value

I Cash and Balance with RBI 0

II Balances with banks

Money at call and short notice

0

0

III

Investmentsa. Government and other approved securities

b. Others

0

100

IV Advances

Bills purchased and discounted and other credit facilities

a. Claims guaranteed by Government of India

b. Claims guaranteed by State of Government

c. Claims on Public sector undertakings

d. Others

0

0

100

100

V Fixed Assets (net of depreciation) 100

VI Other Assets

a. Advance income tax, TDS, Interest accrued on Government

securities and interest accrued on balance with RBI

b. Others

0

100

Acceptances, Endorsements, Other obligations, etc.

a. Guaranteed by Central / State Government

b. Others

0

100

Computation of Off Balance Sheet Items

Computation of Risk Weighted Assets


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Covers the risk on

account of

Fire Flood

Theft

Covers the risk on

account of

Accidental Death Death on account

of disease

CA Anand R. Bhangariya 94220 26740 www.cavidya.com

Insurance cover on property.

Insurable value determinable.

Policy cant be cancelled.

Claims is payable by insurance company in

the event of loss suffered by insured due

to a specialised cause.

Insurance cover on life of human

Insurable value determined by policy

holder.

Policy can be terminated.

Claims is payable either on death or on

expiry of stipulated period in the policy.

5.2


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Insurance policy

Term of policy

Sum Insured

The period for which an insurance policy is taken

is known as Term of the Policy.

The document which

contains all the term

& conditions of

insurance & risk

covered.

Businessman

AgentInsurance Company

Insurance contract


Premium

Premiumis thepayment made by

the insured as

considerationfor

the grant of the

insurance.

The contract in which insurance company

undertakes to indemnify the insuredon the

happening of certain event in considerationof a specified amount.

The amount for which the insurance policy is takenis called as Sum Insured

Agents Balance: It has a Credit balance. It also include the premium collected by

them from the policyholders. It has a Debit balance.


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Businessman LIC

Taken insurance on his life.

Term of policy = 10 years

Claim is payable in

case of

DeathMaturity of

policy

OR

Car

Taken insurance on vehicle.

Term of policy 1 yr.

(Every year needs renewal)

Claim arises only when the loss occurs or

the liability arises.


The surrender value under an Insurance Policy is the value of the insured is eligible to receive on closure or


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Mr. X

1-1-2011 31-12-202031-12-2015

Mr. X taken Insurance policy of Rs. 10 Lakhs for 10 years on 1-1-2011

LIC

Premium paid

for 5 years

Could not pay

premium decided to

discontinuethe

policy. The amount paid on discontinue of

the policy is called Surrender value.


The surrender value under an Insurance Policy is the value of the insured is eligible to receive on closure or

surrender of a life insurance before its claim falls due.

Could not pay

premium but

decided to continue

the policy.

Paid Up Value = Sum Assured x

(No. of Premium Paid Total

Number of Premium Payable)

Paid Up Value = 10,00,000 5

= 5,00,000.

Paid up policy is the policy converted in case the insured is unable to continue paying premiums on his life

policy, and discontinues the payment.

5.5


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Mr. X Mr. Y


LIC

Taken Life Insurance policy Rs. 10 Lakhs each.

Company earned profit of Rs. 2.5 Crores.

On Maturity

Mr. X Mr. Y

Policy Amount 10,00,000 10,00,000Share in profit 10,000

Bonus is the share of policy holders in the surplus balance in Life Fund.

With profit policy:-Under this policy, a policy holder is entitled to participate in profits of life insurance

company in addition to fixed sum payable on maturity.

Without profit policy:-Under this policy the insured is not entitled to share profit of life insurancecompany. The insured receives only fixed sum of money on maturity. The premium on this policy is

comparatively less than in the case of with profit policies.

The bonus can be distributed either in cash or by reduction in the future premium or may be distributed

upon maturity of the policy.

5.6


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1-1-2011 31-12-203031-12-2025

Mr. X has taken policy of 15 years on 1-1-2011.

15 Premiums

On attaining the age of 45, insurance company will

pay fixed annual payment to Mr. X till death.

Death

Fixed annualpayment (Annuity)


Mr. XLIC

Insurance Company guarantees to pay money regularly as long as one lives, in consideration of

lump sum money received from the insured.

The payment of annuity depends upon the age of annuitant and the prevailing rate of interest.

The annual (or regular) payment is called annuity and the lump sum money received is called

"Consideration for annuities granted".

Annuity paid represents an expenditure of the life insurance business and consideration received

for annuities is an item of income.

5.7


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Bajaj Allianz GeneralInsurance Company

Insured

From Bajaj

Allianz point

of view,

Insurance isCeded.

From TATA

AIG point of

view,

Insurance isAccepted.


Insured approachesBajaj Allianz forInsurance Cover

Bajaj Allianz contactsTATA AIG to cover

itself against largerrisk.

First Insured will paypremium to Bajaj

Allianz

Bajaj Allianz willtransfer the premium

to TATA AIG for riskundertaken

TATA AIG will paycommission to BajajAllianz for business

received

On the happening ofuncertain event

covered under policy

Bajaj Allianz will paythe claims to the

insured.

TATA AIG will repaythe amount of claim

to Bajaj Allianz

5.8


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Particulars Rs.

Total claims paid on direct business (Including all incidental expenses incurred

in settlement of claims)

Add: Claims on reinsurance accepted

Claims o/s at the end of the year

Less: Claims paid on reinsurance ceded

Claims o/s paid for last year

Transfer to revenue a/c

Claims Less Reinsurance:



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Mr. X

Mr. X insured his Car on 1-1-2011 for a period

of 1 year.

Policy is taken for one year.i.e. Risk is for one year

1-1-2011 31-12-201131-3-2011

financial year ends On 31-3-2011 company has to make provision for

unexpired risk for the next financial year.

Marine Hull Insurance100% of Net Premium

Fire, Marine Cargo and Miscellaneous Business50% of Net Premium

This is the voluntary reserve and

company will decide its percentage

on net premium.

If company feels that reserves is not sufficient to meet

claims to the date of closing of the financial year, they

may build up additional reserves for unexpired risks.



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Form Financial Statement Schedule

No. Name

B - RA Revenue A/c 1 Premiums earnednet

2 Claims Incurred (Net)3 Commission

4 Operating Expenses related to Insurance Business

B - PL Profit and Loss A/c - -

B - BS Balance Sheet 5 Share Capital

6 Reserves and Surplus

7 Borrowings

8 Investments

9 Loans

10 Fixed Assets

11 Cash and Bank Balances

12 Advances and Other Assets

13 Current Liabilities

14 Provisions

15 Miscellaneous Expenditure

5.12


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This represents the excess of revenue receipts over revenue expenditure relating to life insurance

business.

The fund is available to meet the aggregate liability on all policies outstanding.

Revenue account is prepared every year to ascertain the balance of life insurance fund at the end ofthe year.

Closing Balance of Life Insurance Fund:

Particulars Amount

Opening balance

Add : Revenue Income

Less : Revenue Expenses

Closing balance



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a) The balance in the life assurance fund can not be taken as the profit made by the life insurance

business.

b) For the purpose of ascertaining the profit insurance company has to calculate its net liability on all

outstanding policies.

c) For calculating net liability, the actuaries calculate the present value of liability on all the policies in forceas well as present value of future premium to be received on policies in force.

d) The excess of the present value of future liability over the present value of future premium is called the

net liability.

e) If the life insurance fund is more than the net liability, the difference represents the profit.

f) On the other hand, the excess of net liability over the life assurance fund represents the loss for the

inter-valuation period.

g) 95 % of the profit of life business must be distributed to the policy holders by way of "Bonus ", on withprofit policies and the remaining 5 % has to the utilised for such purpose as the Government may

determine.

h) The profit or loss to the life insurance business is ascertained by preparing a statement called "Valuation

Balance Sheet.


Valuation Balance Sheet As on

Particulars Amount Particulars Amount

XXX XXX

XXX XXX

XXX XXX

To Net Liability as per Actuarial

Valuation

To Surplus (Net Profit)

By Life Assurance Fund as per

Balance Sheet

By Deficiency (Net Loss)

Total Total

5.14


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Particulars Rs.

XXX

XXXXXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Profit as per Valuation Balance Sheet

Add: Interim Bonus paid

Less: Loss on sale of Investments

Less: Provision for taxation

Profit made during the Year

Add: Balance Brought Forward

Total Profit

Less: Transfer to Fund

Available for Distribution

Distribution to Shareholders (@ 5%)

Distribution to Policyholders (@ 95%)

Less: Interim Bonus paid

Amount due to policyholders



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Form Financial Statement Schedule

No. Name

A - RA Revenue A/c 1 Premiums earnednet

2 Commission3 Operating Expenses related to Insurance Business

4 Benefits Paid (Net)

A - PL Profit and Loss A/c - -

A - BS Balance Sheet 5 Share Capital

6 Reserves and Surplus

7 Borrowings

8 Investments

9 Loans

10 Fixed Assets

11 Cash and Bank Balances

12 Advances and Other Assets

13 Current Liabilities

14 Provisions

15 Miscellaneous Expenditure

5.16


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Double Account System is a special method of presenting the Final accounts rather than a special

system of keeping accounts. The main objective of this system is to disclose how much capital has

been raised and how much capital has been utilised in the acquisition of assets.


Amount spent for Extension as well as

Repairs jointly

Particulars Rs.

Amount equal to the present cost of

replacement of the old asset

XXX

LessSale proceeds of scrap of the old

aset

XXX

LessValue of materials of old asset

used in rebuilding the new asset

XXX

Charged to Revenue XXX

Particulars Rs.

Total cost of replacement XXX

AddValue of materials of old asset used

in rebuilding the new assetXXX

Less present cost of replacement of the

old assetXXX

Capitalised XXX


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1. For Cash Expenses incurred

New Main A/c Dr.Replacement A/c Dr.

To Bank A/c

2. For use of old materials in new construction

New Main A/c Dr.

To Replacement A/c

3. For sale of old materials

Bank A/c Dr.

To Replacement A/c

4. For closing replacement account

Revenue A/c Dr.

To Replacement A/c


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1. Contingency Reserve:

A sum equal to not less than 1/4 % and not more 1/2 % of the original cost of fixed assets must be

transferred from the Revenue Account to Contigency Reserve until it equals 5 % of the original cost of

fixed assets. The amount of the reserve is required to be kept invested in trust securities.

The balance in reserve can be utilised with the approval of the State Government for the followingpurposes:

a) To meet expenses or loss of profits arising out of accidents, strikes or circumstances beyond the

control of the management;

b) To meet expenses on replacement or removal of plant or works other than the expenses necessary

for normal maintenance or renewal; and

c) to pay compensation payable under law for which no other provision has been made.

2. Consumer Rebate reserve: This reserve is used for reduction in rates or otherwise return to the

consumers.

3. Tariffs and Dividend control reserve: This can be utilised whenever the clear profit is less than the

reasonable return. This is like Dividend Equalisation Reserve.

4. General Reserve:

a) Section 67 of the Act, lays down that after interest and depreciation have been provided, a

contribution to general reserve shall be made at the rate not exceeding 1/2% of the original cost

of the fixed assets until the total of such reserve come to 8 % of the original cost of the Assets.

b) This applies only to the Electricity Boards though there is nothing to stop electricity companies

from building up reserves.



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The Electricity (Supply) Act, 1948 provides that an electricity company can not charge any rates as they

like.

They are entitled to charge such rates which gives them a reasonable return.

They must so adjust the rate that the amount of clear profit in any year does not exceed thereasonable return by more than 20%.


1) Objective:

The law seeks to prevent an Electricity Company from earning very high profit,. For the purpose,concept of Reasonable Return has been propounded. Reasonable Return is the normal which a

Electricity Company can e expected to earn.

2) Standard Rate:

Standard Rate is determined for the purpose of determining yield on the Capital Base in

computation of Reasonable Return. Standard Rate = Reserve Bank of India Rate + 2%

3) Computation of Reasonable Return


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a) The original cost of fixed assets available for use and necessary for the purpose of the

undertaking less contribution, if any, made by the consumers for construction of service

lines.

b) The cost of intangible assets.

c) The original cost of works in progress.

d) The amount of investments made compulsorily against Contingency Reserve;

e) The monthly average of stores, materials, supplies and cash and bank balances. [Monthly

average of Current Assets, excluding amount due from Consumer].

Less:i. Depreciation on tangible assets and amounts written off from intangible assets.

ii. Loans advanced by the Board;

iii. Loans from approved institutions

iv. Debentures

v. Security deposits of consumers held in cash

vi. The amount standing to the credit of the Tariff and Dividends Control Reservevii. The amount set apart for the Development Reserve and

viii. Balance in consumer Rebate/ Benefit Reserve.



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1) Meaning: Clear Profit is the difference between the amount of income and the sum of

expenditure including specific appropriations. It is the net Profit of the Company.

2) Computation of Clear Profit:

Particulars Rs Particulars Rs

To Losses brought forward from

previous year

By Net Profit after usual working

charges and interest.

To Income Tax

To Intangible asset written off

To Contribution to Contingency Reserve

To Arrears of Depreciation

To Development Reserve

To Other appropriations permitted by:

State Government.

To Balance beingCLEAR PROFIT

Total Total



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Disposal of Surplus

20% of Reasonable Return Balance (D)

Consumer Rebate Reserve

Electricity Company (A) Least of thefollowing:

1/3rd of 20% of Reasonable Return

5% of reasonable return

Balance

(B) = 50% of Balance

50% Transfer to Tariff and

Dividend Control Reserve

(C) = 50% of Balance

50% Transfer to Consumer

Control Rebate Reserve


Surplusis the difference between the Clear Profit and the Reasonable Return.


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Dissolution of Partnership Dissolution of Firm

Change in existing relationship between the

partners.

Firm continues its business as before

It may take place in following ways.

a) Change in existing PSR among partners

b) Admission of new partnerc) Retirement of a Partner.

d) Death of a Partner

e) Insolvency of a Partner

f) Completion of the venture if partnership is

formed for that

g) Expiry of the period of partnership, if it is

for the specific period of the time.

According to Section 39 of the

partnership Act 1932, the dissolution of

partnership between all the partners of a

firm is called the Dissolution of The Firm.

That means the Act recognises the

difference in the breaking of relationshipbetween all the partners of a firm and

between some of the partners;

Death of Partner



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Prepare BalanceSheet of the firm ason date ofdissolution.

Non cash assets areconverted into cash

Profit or loss on sale ofassets is transferred toRealisation account.

Balance in Realisationaccount is transferred toCapital account.

Available cash isdistributed to creditors& partners.

Last StepFirst Step

Second Step

Object of Realisation Account

Whatever may be the reason for dissolving the partnership, the accounts have to be closed. A

special account called Realisation Account is used to record the closing transactions, showing net

gain or loss that has resulted from the realisation of assets & settlement of liabilities.



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(a) Transfer of recorded Assets to Realisation A/c

Realisation A/c (With the total) Dr.

To Sundry Assets A/c (With their individual book values)

(b) Transfer of Liabilities, Provisions to Realisation A/c

Liabilities A/c (With their individual book figures) Dr.

Provision for Doubtful Debt A/c Dr.

Provision for Depreciation A/c Dr.

To Realisation A/c (with the total)

(c) Realisation all Assets (whether recorded or unrecorded)

1. When assets are sold for cash

Cash/ Bank A/c Dr.

To Realisation A/c

2. Assets are taken away by partner

Partners Capital A/c Dr.

To Realisation A/c



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3. Assets are given away to any of the creditors towards the

full/partial payment of his dues.

No Journal Entry may be passed

(d) Discharge of outsiders Liabilities (whether recorded or

unrecorded)

1. When Liabilities are discharged in cash

Realisation A/c Dr.

To Cash / Bank A/c

2. Partner agreeing to discharge a liability

Realisation A/c Dr.

To Respective Partners Capital A/c

(e) Payment of Realisation Expenses

1. When expenses are paid in cash

Realisation A/c Dr.

To Cash / Bank A/c



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2. When expenses are paid by partner

Realisation A/c Dr.

To Partners Capital A/c

3. When any of the partners agrees to do dissolution work for

an agreed remuneration

Realisation A/c Dr.

To Concerned PartnersCapital A/c

4. When expenses are paid by a partner who has to bear such

expenses

No Entry

5. When exps. are paid by the firm on behalf of a partner who

has to bear such expenses

Concerned Partners Capital A/c Dr.

To Cash/ Bank A/c



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(f) Transfer of Profit in PSR on Realisation

Realisation A/c Dr.

To All Partners Capital A/cs

(g) Transfer of Loss in PSR on Realisation Dr.

All Partners capital A/cs

To Realisation A/c

(h) Payment of Partner Loan/ Advances

Partners Loan/ Advance A/c Dr.

To Capital A/c (Only to the extent of Dr. Balance in capital A/c)

To Cash A/c (with the Balance)

(i) Transfer of Accumulated Profit in PSR

Profit & Loss A/c Dr.

General Reserve A/c Dr.

To All PartnersCapital A/c



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(j) Transfer of Accumulated Losses in PSR

All PartnersCapital A/c Dr.

To Profit & Loss A/c

To Deferred Revenue Expenditure A/c

(k) Transfer of the Balance in Current Account(s)

1. In case of debit balance in a Current Account of a partner

Concerned PartnersCapital A/c Dr.To concerned PartnersCurrent A/c

2. In case of credit balance in a Current Account of a Partner

Concerned PartnersCurrent A/c Dr.

To concerned PartnersCapital A/c



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(l) Payment to/by a Partner

1. In case of payment by a partner having a debit balance in

his Capital A/cCash /Bank A/c Dr.

To Concerned PartnersCapital A/c

2. Payment to a partner having a credit balance in his Capital

A/c

Concerned partnersCapital A/c Dr.

To Cash/ Bank A/c



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The treatment of goodwill in case of dissolution of a firm may be summarized as follows:

No. Particulars If Goodwill is Already

appearing in the Books

If Goodwill is not Appearing in

the Books

(a) On Transfer to Realisation A/c Dr. The question of transfer

Realisation A/c To Goodwill A/c does not arise at all

(b) On sale for cash Cash/ Bank A/c Dr. Cash/Bank A/c

To Realisation A/c To Realisation A/c

(c) On being taken over Concerned Partners Capital A/c

Dr.

Concerned Partners Capital A/c

Dr.

By any of the partners To Realisation A/c To Realisation A/c



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Particulars Rs.

Debtors 3,50,000

Less: Provision for bad debts 50,000

3,00,000

Trial Balance

Realisation A/c

Debtors 3,00,000

Realisation A/c

Debtors 3,50,000 Provision 50,000

1) An Asset against which a provision or reserve has been created, should be transferred at its

gross figure and not at its net figure e.g. Debtors

2) Provision/Reserve against an asset is a separate account and thus, it should be transferred toRealisation Account separately like other liabilities, e.g. Provision for Doubtful Debts A/c,

Machinery Replacement Reserve



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Particulars Rs.

Creditors 5,00,000

Provision for discount on creditors 1,00,000

Trial Balance

Realisation A/c

Creditors 4,00,000

(5,00,0001,00,000)

Realisation A/c

Provis. 1,00,000 Creditors 5,00,000

1) Provision /Reserve against a liability is a separate account and thus, it should be transferred to

Realisation A/c separately like other assets, e.g. Provisions for Discount on Creditors.

2) A liability against which a provision or reserve has been created, should be transferred at its

gross figure and not at its net figure, e.g., Creditors.



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Particulars Rs.

Bank balance 2,00,000

Trial Balance

Realisation A/c

Bank 2,00,000Cash & bank is never realized but same is

distributed in its present form.



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Particulars Rs.

Assets Realised 1,00,000

Loan from Relatives of the partners 30,000

Creditors 20,000

Partners Loan 40,000

Trial Balance

Realisation A/c

To Bank


Realisation A/c

By Bank 1,00,000

Creditors 20,000

Loan frm. Rel. 30,000

By Bank 1,00,000 To Bank


Creditors 20,000

Loan frm. Rel. 30,000At par

Loan from relative of partner = external liability = at par with the creditors

Loan from partner = payment is made after paying creditors, but before repayment of capital



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When all Partners are

Solvent

Different Ways of Dissolution

Not all but some of the

partners are solvent

When all partners are

Insolvent

When all partners solvent, before balancing capital account of partners, the loan from any

partner is to be paid first. And if any partner has taken any loan from firm, he has to bring

necessary cash in to the business.


) A h i f di l i f hi fi h i l f h


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a) At the time of dissolution of a partnership firm, the capital account of a partner may show a

debit balance after his share of any profit or loss on realisation has been included in his account.

But if he cannot make good the whole or part of a deficiency, then what should be done?

b) This deficiency must be shared by all the solvent partners.

In their profit sharing ratio (like

any business loss)

Ratio to share deficiency by

Solvent partners

In the ratio of their last agreed capitals.

(This issue was upheld in the case of

Garner Vs. Murray.)

No. Case Meaning of Last Agreed Capital

a) In Case of Fixed Capitals Last Agreed Capital means the Fixed Capital (given in the Balance

Sheet) without any adjustment.

b) In Case of FluctuatingCapitals

Last Agreed Capital Means the Capital after making adjustmentsfor past accumulated reserves, profits or losses, drawings,

interest on capitals, interest on drawings, remuneration to a

partner etc. to the date of dissolution but before making

adjustment for profit or loss on realisation.



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When all the partners are insolvent and the the assets of the firm are inadequate to meet thefirms liabilities, the firm is said to be insolvent.

In case of insolvency of firm, the creditors ofthe firm cannot be paid in full. The availablecash with the firm is first used to payrealisation expenses

The balance amount is paid to creditorsproportionately. Any balance remainingunpaid to them represent their sacrifice onaccount of insolvency of partners.

In order to close the acounts of firm, Realisation account is prepared in the usual manner.

However if loss on realisation is to bedetermined before considering the amountultimately paid to creditors, the creditors arenot transferred to Realisation account.

if loss on realisation is to be determined afterconsidering the amount ultimately paid tocreditors, the creditors are transferred toRealisation account.


1 Till ll th ti l ti t di l ti (i ti f l f t ) b d


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1. Till now, all the questions relating to dissolution (ireespective of solvency of partners) are based

on the assumptions that all the assets are reallised & all the liabilities are setteled together

before the partners are paid off.

2. In actual practice, it may not be possible to realise all assets on the date of dissolution and paythe liabilities on that date. Assets are realised and cash collected gradually.

3. Cash available is applied in following order:

a) Realisation expenses

b) Outside Creditors

c) Partners Loan

d) Provision for Contingent Liability

e) Partners Capital.



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Capital of the partners are

in PSR

Distribution of Cash

Distribution of cash in

PSR

Capital of the partners are

not in PSR

Proportionate

Capital Method

Maximum loss

Method



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Amalgamating Firms


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Sun Associates Moon Associates

Decides to amalgamate and to form new partnership firm

Sun Moon Associates

Separate existence of Sun Associates and Moon Associates comes

to an end & a new firm Sun Moon Associates is formed.

Under amalgamation, two or more firms transfer their business to a new firm which isformed to take over such businesses.

Usually all the assets and liabilities are revalued in order to ascertain the true position as

on the date of amalgamation.


N P i l L F D bi C di


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1 For Goodwill

the value of the goodwill will be ascertained in case of each firm

and amount will be credited to partners capital account in old PSR

Good will A/c Dr.

To partners capital A/c

2. For Reserves and other undistributed profits



To All Partners Capital A/c

3. For increase in value of assets or decrease in value of

liabilities

Assets /Liabilities A/c Dr.

To P & L Adjustment A/c

4. For decrease in value of assets or increase in value of

liabilities

P & L Adjustment A/c Dr.

To Assets /Liabilities A/c



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5. For profit on Revaluation

P & L Adjustment A/c Dr.

To partners capital A/c(For loss on revaluation entry will be reversed)

6. For an Assets taken over by a partner


To Asset A/c

7. For an Liabilities taken over by a partner

Liabilities A/c Dr.

To Respective Partners Capital A/c

8. For an Assets & Liabilities taken over by new firm

New Firm A/c Dr.

Liabilities Taken Over A/c Dr.

To Assets Taken Over A/c



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9. Assets/Liabilities no taken over the new firm will be either sold

away or paid off and any profit or loss on such selling or payment

will be transferred to Partners capital A/c in ratio of their capitals.

10. Transfer of partners Capital A/c


To New Firm A/c



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1. For an Assets & Liabilities taken over

Assets taken over A/c Dr.


To Liabilities taken over

2. For any further contribution towards capital by the partners

Bank A/c Dr.


3. For any capital withdrawn by the partners


To Bank A/c



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Sometimes the business of the Partnership Firm may be sold to a limited company.

Procedure regarding closing of the books of account of Partnership firm is the same

as in case of dissolution of a firm.

Tom & Jerry Associates

Sold its business to a

Disney Ltd.

Existence of Tom & Jerry Associates comes

to an end

i.e. nothing but dissolution

We are going to follow same accounting treatment that we have followed in

Dissolution of Firm



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Disney Ltd. Tom & Jerry Associates

Will pay Purchase Consideration to

For Assets & Liabilities taken over by it.

Purchase Consideration

When Lump sumfigure is given When Lump sumfigure is not given

PC = Lump Sum Figure

For Eg. The company took over

the firms business for a total

consideration of Rs. 1,05,000

Payment Method Net Asset Method


To arrive at Purchase consideration all payments made by the company to the firm are added


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To arrive at Purchase consideration all payments made by the company to the firm are added

together. It is done as under :

Particulars Rs.

Cash PaidIssue price of Equity shares

Issue price of Preference shares

XXXXXX

XXX

Issue price of Debentures XXX

Total payment being the amount of Purchase consideration XXX

Example :- The purchase consideration was to be satisfied by a cash payment of Rs. 56,000, the

allotment of 8,000 equity shares of Rs. 10 each at 10% discount and the allotment of 2,000, 12%

preference shares of Rs. 10 each.

Solution :-

Particulars Rs.

Bank

Equity shares (8,000 X 9)

Preference shares (2,000 X 10)

56,000

72,000

20,000

Total payment being the amount of Purchase consideration 1,48,000


The value of net assets taken over by the company is the amount payable It is computed as follows


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The value of net assets taken over by the company is the amount payable. It is computed as follows

Particulars Rs.

Agreed value of the Individual Assets taken over

Less : Agreed value of Individual Liabilities taken over

Value of Net Assets Taken Over (Purchasing Consideration)

XXX

XXX

XXX


l h d l f d b l f h f f ll


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Example : The agreed value of assets and Liabilities of partnership firm is as follows :

Land and Building Rs. 3,00,000; Plant Rs. 1,50,000; Sundry Debtors Rs. 47,500; Stock Rs.

1,40,000; Bills receivable50,000; Sundry CreditorsRs. 38,000 and Bills Payable80,000.

Solution :-

Particulars Rs.

Land and Building 3,00,000

Plants 1,50,000

Sundry Debtors 47,500

Stock 1,40,000Bills Receivable 50,000

Cash 1,00,000

Less : 38,000Sundry Creditors

80,000Bills Payable

6,69,500Total (Purchase consideration)



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Separate set of books are

kept for each department

All the departments are kept

together in columnar form

This method of

Acconting is

employed when

the size of the

organisation isvery large or As

per the law.

Each department

is regarded as a

separate unit and

Accounts are kept

independently.

At the year end the

trading results of all

the departments are

combined to get the

trading results of the

organisation as a

whole

A departmentdoes not maintain

a full double-entry

book-keeping

system of its own.

The central Accounts departmentgenerally maintains columnar

Purchase and Sales Day Book to

distinguish between the purchases

and sales of different departments.


Allocation of direct expenses to each department is easy.


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But in case of common expenses like Rent, Electricity, Insurance allocation of these expenses is

difficult.

SI. Expenses Basis

1. (a) Travelling salesman's salary and commission

(b) Selling expenses

(d) Discount allowed

(e) Freight outwards

(f) Provision for discounts on debtors

(g) Sales manager's salary and other benefits

(c) After-sales service

Sales of each department (Excluding

inter-departmental transfers)

2. (a) Rent, rates and taxes

(b) Air conditioning expenses

(c) Heating

Area or value of floor space

3. Lighting Light points4. Insurance on Stock

5. Insurance on Building

6. Insurance on Plant & Machinery

Average stock carried

Area

Value of Plant & Machinery

Direct wages7. Group insurance premium


SI Expenses Basis


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SI. Expenses Basis8. Power H.P. or H.P. x Hours worked

9. (a) Depreciation

(b) Repairs and renewalsValue of assets in each department

10. (a) Canteen expenses

(b) Workman Compensation Insurance

(c) Labour welfare expenses

Number of employees

11. Works manager's salary Time spent in each department

12. Carriage inwards Purchases of each department13. Expenses directly related to a particular

departmentCharged to respective department.


Some material has been transferred from grocery section to


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Some material has been transferred from grocery section to

Fruits & Vegetables section.

Grocery Section Fruits & Vegetables

Section

Cost is Rs. 100.00 But transfer is

made at Rs. 125.00

i.e. it includes profit element of Grocery

Section @25% on cost

At the end of FY, Fruits & Vegetable section will value its closing stock at its cost price i.e. Rs.125.00 which is transfer price of Grocery section

Rs. 25 is unrealised profit which is equal to profit of grocery section. it is necessary to provide for

unrealised profit on stock held out of inter departmental transfer.

=


No Particulars L F Debit Credit


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Accounting entry:


1. For Unrealised profit on stock

Profit and Loss Account Dr.

To Stock Reserve Account

2.At the beginning of the next year reverse entry will be

passed.

Stock Reserve Account Dr.

To Profit and Loss Account

Balance Sheet

Liabilities Amount Assets Amount

Current Assets

Closing Stock

Less: Stock Reserve



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Definition :- The Companies (Amendment) Act 2000 has inserted a new

clause (15A) in section 2 of the Companies Act, 1956, which states that

Employee Stock Option means the option given to the whole time directors,

officers or employees of a company, which gives such directors, officers or

employees the benefit or right to purchase or subscribe at a future date , thesecurities offered by the company at a pre determined price


Proposal contains

1) Mr. Joy should work with the


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XYZ Co.Mr. Joy

(Director)Company put the proposal inMeeting to offer ESOP Mr. Joy

for approval.

company at least 5 years.

2) Mr. Joy should be able to grab

the Indonesia Project.

3) Mr. Joy should achieve his yearlytargets, as decided.

Grant Date

Grant

Vesting

Conditions

Mr. Joy is required to achieve

these conditions within a time

span of 6 years. i.e.(15.09.201115.09.2017)

15.09.201115.09.2018

Vesting Period

Expected Life

of an OptionExercise

Price

Exercise

Period

CA Anand R. Bhangariya 94220 26740

www.cavidya.com 12.2

S M J hi th diti i i


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Say, Mr. Joy achieves the conditions given in

proposal on 01.09.2017

Company offered Mr. Joy shares @ Rs.

150 but actual price of the shares in

the market at the time of exercise of

option is Rs. 100

Mr. Joy will not

exercise the option

If market price of the share at the time

of exercise of option is Rs. 500.

Will apply for the

shares

Its employees right to purchase the shares or not but its the obligation of the

company to sell the shares whatever may be the price of share.



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Ethical LtdOn 01.01.2011, gives offer to its

To purchase 1,000 shares each at future date between 01.01.2014 - 01.01.2015

at a predetermined price of Rs. 200 subject to fulfillment of conditions on or

before 01.01.2014.

On 01.01.2015, market price of

the shares is Rs. 500

i.e. market price is generally

lower than exercise price.

If employees want, they are free

to dispose of the shares subject to

lock-in-period if any.

Employees




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1.

In respect of options granted during any accounting period, the

accounting value of the options shall be treated as another form

of employee compensation in the financial statement of the

company.The accounting value of the option = Number of options granted

* (Market PriceExercise Price)

Employee Compensation Expenses A/c Dr.

To Employee Stock Options Outstanding A/c

2. Stock option exercised by employees during exercise period

Bank A/c Dr.

Employee Stock Options Outstanding A/c Dr.

To Equity Share Capital A/c

To Securities Premium A/c

3. Stock option lapsed on expiry of exercise period

Employee Stock Options Outstanding A/c Dr.

To General Reserve A/c



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4. Transfer of balance in Employee Compensation

Expenses A/c Dr.


To Employee Compensation Expenses A/c

Magical Ltd.

(Listed Co.)

As a part of public offer, Company gives offer to Mr. Roy to purchase 1,000 shares at a price

of Rs.200 immediately whose market price is Rs. 350 now to retain him in a company.

Decides to issue the shares to the

public at large on 01.01.2011.

Mr. Roy can subscribe to the shares of the company, if & only if he is ready to

work in a organisation for a period of 5 years. (i.e. Lock in Period)

Mr. Roy



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Company offers performance bonus to Ms. Rozy, that is

linked to the performance of the company.

Shares of the company are trading at Rs.250 on 01.01.2011

After 5 years, i.e. on 01.01.2016, Value of

share becomes Rs. 900.

Now instead of giving her shares, Company

will pay her appreciation in the value of

shares of the company

Empire Ltd. Ms. Rozy

i.e. Company will pay her (Rs. 900 Rs.

250) i.e. Rs. 650 per share.

If the value of Share becomes Rs. 100 on

01.01.2016, then option cant be exercised.



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Equity Settled

Types of ESOP for Accounting Purpose

Cash Settled

Employee share based

payment plans with cash

alternative

Under this plan,

employees receives the

shares.

Under this plans, the

employees receive cash

based on the price of

enterprises shares.

Under these plans, either the

enterprise or the employee has

a choice of whether the

enterprise settles the payment

in cash or by issue of shares.

CA Anand R. Bhangariya

94220 26740www.cavidya.com 12.8


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A. Fresh issue of shares

1. Application money received

Bank A/c Dr.

To Share application & allotment A/c

2. Allotment of sharesShare application & allotment A/c Dr.

Discount on issue of shares A/c Dr.

To Equity Share Capital

To Securities Premium A/c



B. Transfer of profits to Capital Redemption Reserve A/c


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p p p /

(to the extent of nominal value of shares purchased)



Other Reserves A/c Dr.

To Capital Redemption Reserve A/c

C. Amount due under Buy back

Equity Share Capital A/c Dr.

Securities Premium A/c Dr.

Divisible Profit A/c Dr.

To Equity Shareholders A/c

D. Payment of amount due

Equity Shareholders A/c Dr.

To Bank A/c


1) The Companies Amendment Act, 2000 has allowed companies to issue equity shares with


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) p , p q y

disproportionate rights.

2) The share capital of company limited by shares shall be only of two kinds, namely :

a) Preference Share capital

b) Equity share Capital

i. With voting rights ; or

ii. With differential rights as to dividend, voting or otherwise in accordance with such

rules and subject to such conditions as may be prescribed.

Documents

Key Notes IPCC Advanced Accounting