SAMVIT ACADEMY IPCC MOCK EXAM Answers Advanced... · design for its product Rs 10 lakhs should be charged to Profit and Loss Account in ... Departmental Trading and Loss Account of

SAMVIT ACADEMY IPCC MOCK EXAM

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SUGGESTED ANSWERS - Group 2 Advanced Accounting (Code EST)

Disclaimer (Read carefully)

The answers given below are prepared by the faculty of Samvit Academy as per their views

and experience. The working notes, notes and assumptions, if any stated, are purely the views

of the respective faculty of Samvit Academy and students are encouraged to go through them

and apply the same in the examination as a good practice. No assurance is given that the

answer keys of the Institute of Chartered Accountants of India used for valuation are the same.

However, utmost care has been taken while designing the below suggested answers. Feedback

is welcome. For the questions, please refer to the question paper.

1.

(a) The treatment of expenditure as per AS-26 is as follows:

Research Expenditure

According to AS 26 ‘Intangible Assets’, the expenditure on research of new process

design for its product Rs 10 lakhs should be charged to Profit and Loss Account in the

year in which it is incurred. It is presumed that the entire expenditure is incurred in the

financial year 2016-17. Hence, it should be written off as an expense in this year itself.

Development Expenditure It is given that development phase expenditure amounting Rs 8 lakhs incurred upto 31st

March, 2017 meets asset recognition criteria. As per AS 26, for measurement of such

internally generated intangible asset, fair value can be estimated by discounting estimated

future net cash flows.

Savings (after tax) from implementation of new design for next 5 years Rs 2 lakhs p.a.

Company’s cost of capital 10 %

Annuity factor @ 10% for 5 years 3.7908

Present value of net cash flows (Rs 2 lakhs x 3.7908) Rs 7.582 lakhs

The cost of an internally generated intangible asset would be lower of cost value Rs 8

lakhs or present value of future net cash flows Rs 7.582 lakhs.

Hence, cost of an internally generated intangible asset will be Rs 7.582 lakhs.

The difference of Rs 0.418 lakhs (i.e. Rs 8 lakhs – Rs 7.582 lakhs) will be charged as

Impairment loss by Plymouth for the financial year 2016-17.

Amortisation

The company can amortise Rs 7.582 lakhs over a period of five years by charging Rs

1.5164 lakhs per annum as per AS-26.


(2)

(b)

(i) Determination of nature of lease

Fair value of asset Rs 7,00,000

Unguaranteed residual value Rs 70,000

Present value of residual value at the end of 4th Year = Rs 70,000 x 0.683 Rs 47,810

Present value of lease payment recoverable = Rs 7,00,000 - Rs 47,810 Rs 6,52,190

The percentage of present value of lease payment to fair value of the asset is

(Rs 6,52,190/Rs7,00,000) x 100 = 93.17%

Life of asset = 6 years

Lease period = 4 years

Since the lease term covers a substantial portion of the life of the asset (4 out of 6 years) and

the lease payments cover a substantial part of the fair value of the asset (93.17%), we can

classify this lease as a Finance Lease.

(ii) Calculation of Unearned finance income (UFI)

Annual lease payment = Rs 6,52,190 / 3.169 = Rs 2,05,803 (approx.)

Gross investment = Minimum lease payment (MLP) + Unguaranteed residual value (UGRV)

= (Rs 2,05,803 x 4) + Rs 70000

= Rs 8,23,212 + Rs 70,000

Gross Investment = Rs 8,93,212

Unearned finance income = Gross investment – PV of (MLP and UGRV)

= Rs 8,93,212 – (Rs 6,52,190 + Rs 47,810)

= Rs 1,93,212

(c)

Calculation of Weighted Average Cost of Borrowing for non-specific borrowings

Amount Rate of Interest Total Interest

Loan 1 Rs 3,00,000 12% 36,000

Loan 2 Rs 7,00,000 14% 98,000

Totals Rs 10,00,000 1,34,000

Weighted Average Cost of Borrowing = Total Interest / Total Loans

= 1,34,000/10,00,000 * 100 = 13.4% p.a


(3)

Calculation of effective interest cost to be capitalised

Date of expense Amount Type of loan used Months Rate Interest

Apr-16 1,60,000 Specific 12 11% 17,600

Aug-16 40,000 Specific 8 11% 2,933

2,30,000 Non-Specific 8 13.4% 20,547

Nov-16 4,20,000 Non-Specific 5 13.4% 23,450

Mar-17 1,50,000 Non-Specific 1 13.4% 1,675

Total interest to be capitalised 66,205

Note: It is assumed that the expenditure is made at the beginning of a month

The journal entry for capitalising the interest is as follows:

Building A/c -Dr 66,205

Interest on Loan A/c 66,205

(Being interest incurred on loan capitalised to the Building as per AS-16)

(d)

Computation of theoretical ex-rights fair value per share

(Fair value of all outstanding shares immediately prior to rights + total amount from rights)

Number of shares outstanding prior to rights + number of right shares issued

( Rs 32 * 10,00,000) ( Rs 25 * 2,00,000)

10,00,000 + 2,00,000

Theoretical ex-rights fair value per share = Rs 30.83

Computation of rights adjustment factor as per AS-20

Fair value per share prior to exercise of rights

Theoretical ex-rights value per share

= 32 / 30.83 = 1.04 (approx.)

1. Basic EPS for 2015-16 (as reported) = Rs 22,00,000 / 10,00,000 = Rs 2.2 per share

2. Adjusted (re-stated) Basic EPS to be reported in 2016-17 because of rights issue

= Rs 22,00,000 / (10,00,000*1.04) = Rs 2.12 per share


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3. Basic EPS for 2016-17 is calculated as follows

Rs 30,00,000 .

(10,00,000*1.04*4/12) + (12,00,000*8/12)

Basic EPS for 2016-17 = Rs 2.62

2.

(a) Journal Entries in the Books of DFL Ltd

On 1.6.2016

Bank A/c Dr. 2,25,00,000

To Debenture Application and Allotment A/c 2,25,00,000

(Application money received on 2,25,000 debentures at Rs 100 each)

On 1.7.2016

Debenture Application and Allotment A/c Dr. 2,25,00,000

Underwriters A/c Dr. 75,00,000

To 12% Debentures A/c 3,00,00,000

(Allotment of 2,25,000 debentures to applicants and 75,000 debentures to underwriters)

Underwriting Commission Dr. 6,00,000

To Underwriters A/c 6,00,000

(Commission payable to underwriters at 2% on Rs 3,00,00,000)

Bank A/c Dr. 69,00,000

To Underwriters A/c 69,00,000

(Amount received from underwriters in settlement of account)

On 30.09.2016

Debenture Interest A/c Dr. 9,00,000

To Bank A/c 9,00,000

(Interest paid on debentures for 3 months at 12% on Rs 3,00,00,000)


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On 01.12.2016

12% Debentures A/c Dr. 1,50,00,000

To Equity Share Capital A/c 30,00,000

To Securities Premium A/c 1,20,00,000

(Conversion of 50% of debentures into shares of Rs 50 each with a face value of Rs 10)

On 31.3.2017

Debenture Interest A/c Dr. 12,00,000

To Bank A/c 12,00,000

(Interest paid on debentures for the half year)

Profit & loss A/c Dr. 6,00,000

To Underwriting commission 6,00,000

(Being underwriting commission charged to Profit & loss A/c at the year-end)

Profit & Loss A/c Dr. 21,00,000

To Debenture Interest 21,00,000

(Being interest on debenture charged to Profit & loss A/c)

Working Note for calculation of interest:

1. Calculation of Debenture Interest for the first half year

Interest on Rs 3,00,00,000 for 3 months at 12% = Rs 9,00,000

2. Calculation of Debenture Interest for the second half year ended 31st March, 2016



Rs 12,00,000

(Since there was a redemption of debentures by conversion into equity shares on 1st Dec)

(b) Working Note:

Call from partly paid shares

Deficit before call from Equity Shares

= Rs (1,03,300+1,50,000) – Rs (3,000+3,000+68,000+1,80,000) = 700

Notional call on 5,000 shares @ Rs 2 each 10,000

Net balance after notional call (a) 9,300

No. of shares deemed fully paid (b) 15,000

Refund on fully paid shares 9,300/15,000 = Rs 0.62

Calls on partly paid share (Rs 2 — Rs 0.62) = Rs 1.38


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Receiver’s Receipts and Payments Account

Receipts

Rs Payments Rs

Sundry Assets realised

Costs of the Receiver

Surplus received from

Mortgage loan

2,00,000 Preferential payments: 1,950

Sale Proceeds of land

and building 1,60,000 Income Taxes (raised within 12 months) 25,000

Less: Applied to

discharge of mortgage

loan -70,000 90,000 Debentures holders:

Principal amount 1,50,000

Interest for half year 9,750

Surplus transferred to the Liquidator 1,03,300

Total 2,90,000 Total 2,90,000

Liquidator’s Final Statement of Account

Receipts Rs Payments Rs

Surplus received from

Receiver

1,03,300 Cost of Liquidation 3,000

Remuneration to Liquidator (1,50,000 x 2%) 3,000

Assets Realised

1,50,000 Trade Creditors 38,000

Calls on Contributories :

Directors for Bank O/D cleared 30,000

On holder of 5,000

Equity Shares

Preferential Shareholders:

at the rate of Rs 1.38 per

share

6,900 Capital 1,50,000

Arrears of Dividends 30,000

Equity shareholders:

Return of money to holders

10,000 equity shares at 62 paise each 6,200

Total 2,60,200 Total 2,60,200


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3.

(a) Journal entry in the books of Head Office

Date Particulars Dr. Cr.

30.4.2016 W.B. Branch Account 45,000

To A.P. Branch Account 5,000

To M.P. Branch Account 10,000

To U.P. Branch Account 30,000

(Being adjustment entry passed by head office in respect of inter-branch transactions

for the month of April)

Working Note for the above entry:

Inter – Branch transactions

A.P M.P. W.B. U.P.

A. A.P. Branch

(1) Received goods 55,000 (Dr.) 30,000 (Cr.) 25,000 (Cr.)

(2) Sent goods 50,000 (Cr.) 20,000 (Dr.) 30,000 (Dr.)

(3) Received Bills receivable 10,000 (Dr.) 10,000 (Cr.)

(4) Sent acceptance 30,000 (Cr.) 10,000 (Dr.) 20,000 (Dr.)

B. M.P. Branch

(5) Received goods 10,000 (Cr.) 30,000 (Dr.) 20,000 (Cr.)

(6) Sent cash 20,000 (Dr.) 30,000 (Cr.) 10,000 (Dr.)

C. W.B. Branch

(7) Received goods 40,000 (Dr.) 40,000 (Cr.)

(8) Sent cash and acceptances 25,000 (Cr.) 25,000 (Dr.)

D. U.P. Branch

(9) Sent cash 10,000( Dr.) 20,000 (Dr.) 30,000 (Cr.)

Net Summary 5,000 (Cr.) 10,000 (Cr.) 45,000 (Dr.) 30,000 (Cr.)


(8)

(b)

Departmental Trading and Loss Account of M/s Division

For the year ended 31st March, 2016

Dept A(Rs) Dept B(Rs)

Dept A(Rs) Dept B(Rs)

To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000

To Purchases 6,50,000 9,10,000 By Closing stock 1,00,000 2,00,000

To Gross profit 4,00,000 7,50,000 Total 11,00,000 17,00,000 Total 11,00,000 17,00,000

To General Expenses

(in ratio of sales) 50,000 75,000 By Gross profit b/d 4,00,000 7,50,000

To General P&L 3,50,000 6,75,000 Total 4,00,000 7,50,000 Total 4,00,000 7,50,000

General Profit and Loss Account

To Stock reserve

(closing)

By Profit from: In Dept. A (WN 1) 20,000*50% 10000 Dept. A

3,50,000

In Dept. B (WN 2) 30000*40% 12000 Dept. B

6,75,000

By Stock reserve

(opening)

In Dept. A (WN 1) 10,000*50% 5000

To Net Profit

10,14,000 In Dept. B (WN 2) 15000*40% 6000

Total 10,36,000 Total 10,36,000

Working Notes (WN) for calculation of Gross Profit % of each department

1. Stock of department A will be adjusted according to the rate applicable to department B =

GP of B /Sales of B * 100 = [(7,50,000 ÷ 15,00,000) х 100] = 50%

2. Stock of department B will be adjusted according to the rate applicable to department A =

GP of A /Sales of A * 100 = [(4,00,000 ÷ 10,00,000) х 100] = 40%


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4.

Adjustment for Goodwill

Particulars A B C D

Capital Balances (Working Note 2 and 4) 2,10,667 1,30,333 1,74,600 1,16,400

Raising Goodwill in Old Ratio

AB and Co (2:1) 50,000 25,000

CD and Co (3:2)

30,000 20,000

Write off of Goodwill (2:1:3:2) -31,250 -15,625 -46,875 -31,250

Final Capitals before adjustment 2,29,417 1,39,708 1,57,725 1,05,150

New Ratio 2 1 3 2

Per unit capital 1,14,709 1,39,708 52,575 52,575

Final Capitals taking D as base 1,05,150 52,575 1,57,725 1,05,150

(Excess)/Deficit (Current A/c) -1,24,267 -87,133 - -

Journal Entries in the books of AD and Co

Takeover of Assets and Liabilities for AB and Co

Building A/c -dr 1,00,000

Machinery A/c -dr 1,25,000

Furniture A/c -dr 15,000

Stock A/c -dr 24,000

Debtors A/c -dr 65,000

Due from CD and Co A/c -dr 47,000

Cash at Bank -dr 18,000

Cash in Hand -dr 4,000

To Creditors A/c

52,000

To Provision for DD A/c

5,000

To A's Capital A/c

2,10,667

To B's Capital A/c

1,30,333


(10)

Takeover of Assets and Liabilities of CD and Co

Building A/c -dr 1,25,000

Machinery A/c -dr 1,10,000

Furniture A/c -dr 12,000

Stock A/c -dr 36,000

Debtors A/c -dr 78,000

Cash at Bank A/c -dr 15,000

Cash in Hand A/c -dr 5,000

To Due to AB and Co

47,000

To Creditors A/c

35,000

To Provision for DD A/c

8,000

To C's Capital A/c

1,74,600

To D's Capital A/c

1,16,400

Adjustment for Goodwill

C Capital A/c -dr 16,875

D Capital A/c -dr 11,250

To A's Capital A/c

18,750

To B Capital A/c

9,375

Transfer to Current Accounts

A's Capital A/c -dr 1,24,267

B's Capital A/c -dr 87,133

To A's Current A/c

1,24,267

To B's Current A/c

87,133

Elimination of mutual owing

Due to AB and Co -dr 47,000

Due from CD and Co

47,000


(11)

Working Notes to the Solution

WN 1 - Revaluation Account (AB and Co)

Particulars Rs Particulars Rs

To Provision for DD A/c 5,000 By Building A/c 25,000

By Machinery A/c 5,000

To Partners Capital A/c

A 16,667

B 8,333

Total 30,000 Total 30,000

WN 2 - Partners Capital Accounts (AB and Co)

Particulars A B Particulars A B

To Bal c/d 2,10,667 1,30,333 By bal b/d 1,50,000 1,00,000

By Reserve A/c 44,000 22,000

By Revaluation A/c 16,667 8,333

(WN 1)

Total 2,10,667 1,30,333 Total 2,10,667 1,30,333

WN 3 - Revaluation Account (CD and Co)

Particulars Rs Particulars Rs

To Provision for DD A/c 8,000 By Building A/c 35,000

By Machinery A/c 10,000

To Partners Capital A/c

C 22,200

D 14,800

Total 45,000 Total 45,000

Balance Sheet of AD and Co (after amalgamation)

Liabilities Rs Assets

Rs

Capital Accounts

Fixed Assets

A 1,05,150 Building 2,25,000

B 52,575 Machinery 2,35,000

C 1,57,725 Furniture 27,000

D 1,05,150

Current Accounts

Current Assets

A 1,24,267 Stock 60,000

B 87,133 Debtors 1,43,000

Less: Provision (13,000) 1,30,000

Creditors 87,000 Cash 9,000

Bank 33,000

Total 7,19,000 Total 7,19,000


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WN 4 - Partners Capital Accounts (CD and Co)

Particulars C D Particulars C D

By bal b/d 1,20,000 80,000

To Bal c/d 1,74,600 1,16,400 By Reserve A/c 32,400 21,600

By Revaluation A/c 22,200 14,800

(WN 3)

Total 1,74,600 1,16,400 Total 1,74,600 1,16,400

5.

(a) Well-to-do Bank Ltd. Profit and Loss Account for the year ended 31st March, 2016

Schedule No. (Rs. in 000's)

Income: Interest and Discount (8,860 – 30) 13 8,830

Other income 14 250

Total (A) 9,080

Expenditure: Interest expenses 15 2,720

Operating expenses 16 2,662

Provision and Contingencies 2,004

Total (B) 7,386

Net Profit/Loss for the year (A-B) 1,694

Computation of Provision

Assets Value % of provision Provision (Rs. in 000's)

Standard Assets 5,000 0.40 20.00

Sub-standard Assets 1,120 10 112.00

(assumed to be secured)

Doubtful Assets

100% unsecured 200 100 200.00

Secured:

Less than 1 year 50 20 10.00

1 to 3 years 300 30 90.00

More than 3 years 300 100 300.00

Loss Assets 200 100 200.00

Total Provision 932.00


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(b) Schedule 1 – Premium Earned (Net)

Particulars Amount

Premiums from Direct Business Written 75,25,000

Add: Premium on Re–Insurance accepted 8,25,000

Less: Premium on Re–Insurance Ceded (4,90,000)

Total Premium Earned (Net) 78,60,000

Less: Adjustment for change in Unexpired Risk Reserve (Note) (3,04,000)

Total Premium Earned (Net) 75,56,000

Note: Adjustment for Changes in Reserve for Unexpired Risks is computed as under

Particulars Reserve

Closing Balance required 40% of 78,60,000 31,44,000

Less: Opening Balance available 28,40,000

Amt to be transferred to Reserve for the year 3,04,000

Schedule 2 – Claims Paid (Net)

Claims Paid Direct

( Paid 49,70,000+ Due at end 7,38,000 (–) Due at beginning 6,85,000) 50,23,000

Add: Claims on Re–Insurance accepted

(Paid 5,10,000 + Due at end 70,000 (–) Due at beginning 95,000) 4,85,000

Less: Claims on Re–Insurance Ceded

(Paid 3,95,000 + Due at end 1,25,000 (–) Due at beginning 75,000) (4,45,000)

Add: Surveyor’s Fees 45,000

Add: Legal Expenses 55,000

Total Claims Incurred 51,63,000

6. In the books of Kanak Ltd (Internal Reconstruction)

1 Equity Share Capital (Rs 100) -dr

45,00,000

To Equity Share Capital (Rs 10)

45,00,000

2 Equity Share Capital (Rs 10) -dr

22,50,000

To Capital Reduction A/c

22,50,000

3 Capital Reduction A/c

-dr

40,500

To Bank A/c

40,500


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4 Bank A/c (2400*98)

-dr

2,35,200

To Capital Reduction

4,800

To Own Debentures A/c (2400*96)

2,30,400

5 12% Debentures A/c

-dr

3,60,000


14,400

To Own Debentures A/c

3,45,600

6 12% Debentures A/c

-dr

8,40,000

Capital Reduction A/c

-dr

60,000

To Machinery A/c

9,00,000

7 Creditors A/c

-dr

1,95,000


1,95,000

8 Capital Reduction A/c

-dr

45,000

To Bank A/c

45,000

9 Capital Reduction A/c (WN 1)

-dr

23,18,700

To Debtors

1,83,000

To Stock

99,000

To P&L

12,33,000

To Goodwill

60,000

To discount on issue of debentures

6,000

To Capital Reserve (Balance)

7,37,700


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WN 1- Calculation of capital reduction balance before final adjustments in entry 9

Particulars Rs

Equity Share Capital cancelled 22,50,000

Less: Preference Dividend paid (40,500)

Add: Own Debentures sold 4,800

Add: Own Debentures cancelled 14,400

Less: Loss on transfer of machinery to debenture holders (60,000)

Add: Profit on cancellation of creditors 1,95,000

Less: Payment of penalty (45,000)

Balance before final adjustments in entry 9 23,18,700

In the Books of Kanak Ltd (Amalgamation in the nature of Merger)

1 Business Purchase A/c

-dr

39,60,000

To Liquidator of Ronak Ltd

39,60,000

2 Fixed Assets A/c

-dr

22,80,000

Debtors A/c

-dr

13,20,000

Stock A/c

-dr

20,40,000

Cash at Bank A/c

-dr

3,90,000

To Business Purchase A/c

39,60,000

To Creditors A/c

6,75,000

To Debenture Holders A/c

6,00,000

To P&L

45,000

To General Reserve (510000+240000)

7,50,000

3 Debenture Holders A/c

-dr

6,00,000

To 12% Debentures

6,00,000

4 Liquidator of Ronak Ltd

-dr

39,60,000

To 9% P. Share Capital

9,60,000

To Equity Share Capital

30,00,000


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Net Assets Taken Over of Ronak Ltd

Since all assets and liabilities have been taken over at Book Values, it can be accounted as an

amalgamation in the nature of Merger and therefore, the net assets taken over = share capital

Equity Share Capital + Preference Share Capital = Rs 30,00,000 + Rs 12,00,000 = Rs 42,00,000

Purchase Consideration issued to shareholders of Ronak Ltd

Equity share capital issued 30,000 x 50/5 x 10 = Rs 30,00,000

9% Preference share capital 12,000 x 4/5 x 100 = Rs 9,60,000

Total = Rs 39,60,000

Since Purchase Consideration is lesser than the Net Assets taken over, there is Capital Reserve of

Rs 42,00,000 - 39,60,000 = Rs 2,40,000

The same will be added to General Reserve on takeover. Hence final general reserve on takeover

is Rs 5,10,000 + 2,40,000 = Rs 7,50,000

Balance Sheet of Kanak Ltd (and Reduced) - Pooling of Interest

Liabilities Schedule Rs

Shareholder funds

A. Share Capital

1 77,10,000

B. Reserves and Surplus 2 20,72,700

Non Current Liability 3 12,00,000

Current Liability

4 17,25,000

Total

1,27,07,700

Assets Schedule Rs

Non Current Asset

5 58,80,000

Current Asset

6 68,27,700

Total

1,27,07,700

Schedule 1 - Share Capital

Equity Share Capital

Rs

5,25,000 shares of Rs 10 fully paid up

52,50,000

(Of the above, 2,25,000 shares have been issued in a scheme

of internal reconstruction and 3,00,000 shares have been

issued in a scheme of amalgamation)

Preference Share Capital

24,600 9% Preference shares of Rs 100 each fully paid up 24,60,000

(Of the above, 9,600 shares have been issued in a scheme of

amalgamation)

Total Share Capital

77,10,000


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Schedule 2 - Reserves and Surplus

Profit & Loss Account

45,000

Capital Reserve 12,77,700

General Reserve

7,50,000

Total Reserves and Surplus

20,72,700

Schedule 3 - Non Current Liability

12% Debentures

12,00,000

Total Non Current Liabilities

12,00,000

Schedule 4 - Current Liability

Sundry Creditors

17,25,000

Total Current Liabilities

17,25,000

Schedule 5 - Non Current Asset

Other fixed assets

58,80,000

Total Non Current Asset

58,80,000

Schedule 6 - Current Assets

Stock

31,20,000

Debtors

30,90,000

Cash at Bank

6,17,700

Total Non Current Asset

68,27,700

7.

(a) As per AS 4, events occurring after the balance sheet date but before the date of approval of

financial statements by the approving authority which

(i) Provide evidence to a condition which existed on the Balance Sheet date; or

(ii) Which affect the going concern of the enterprise

must be adjusted for in the previous year.

In the given case, Raj Ltd. was sued by a competitor for infringement of a trademark during the

year 2015-16 for which the provision was also made by it to the extent of Rs 10 lakh on

31/3/2016. The decision of the Court on 18th May, 2016, will be treated as an adjusting event

because it provides evidence to a condition existing on 31st March 2016.

Therefore, Raj Ltd. should adjust the provision upward by Rs. 4 lakhs on 31st March 2016 to

reflect the correct amount as per the order of the Court.

(b)

(i) If it is certain at the inception of lease itself that the option will be exercised by the lessee, it

can be considered as a Finance Lease.


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(ii) The lease will be classified as a finance lease, since a substantial portion of the life of the

asset is covered by the lease term.

(iii) Since the asset is of a special nature and is procured only for the use of lessee, it is better to

classify it as a finance lease.

(iv) The lease is a finance lease if X = Y, or where X substantially equals Y. In any other case, it

is an Operating Lease.

(c) As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary

items denominated in a foreign currency should be reported using the closing rate at each

balance sheet date. The effect of exchange difference should be taken into profit and loss

account.

Sundry creditors is a monetary item, hence should be valued at the closing rate i.e, Rs.48 at 31st

March, 2016 irrespective of the payment for the same subsequently at lower rate in the next

financial year.

The difference of Rs.5 (48-43) per US dollar should be shown as an exchange loss in the profit

and loss account for the year ended 31st March, 2016 and is not to be adjusted against the cost of

raw- materials. In the subsequent year, the company would record an exchange gain of Re.1 per

US dollar, i.e., the difference between Rs.48 and Rs.47 per Us dollar.

Hence, the accounting treatment adopted by the company is incorrect as per AS-11 (revised).

(d) (i) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called

indemnifier and the insured is the indemnified. In a contract of indemnity, only those who suffer

loss are compensated to the extent of actual loss suffered by them. One cannot make profit by

insuring his risks.

(ii) Insurable interest: All cannot enter into contract of insurance. For example, A cannot insure

the life of B who is a total stranger. But if B. happens to be his wife or his debtor or business

manager, A has insurable interest i.e. vested interest and therefore he can insure the life of B. For

every type of policy insurable interest is insisted upon. In the absence of such interest the

contract will amount to a wagering contract.

(iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive

duty to tell the whole truth in relation to the subject-matter of the contract. There is only the

negative obligation to tell nothing but the truth. In a contract of insurance, however there is an

implied condition that each party must disclose every material fact known to him. All contracts

of insurance are contracts of uberrima fidei, i.e., contracts of utmost good faith. This is because

the assessment of the risk and the determination of the premium by the insurer depend on the full

and frank disclosure of all material facts in the proposal form.

(iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes severe

consequences such as bankruptcy to a family, organization, or insurer.


(19)

(e)

Computation of Risk Weighted Assets

Particulars (%) Weight Rs Crores Rs Crores

Cash Balance with RBI 0 12.00 0

Balance with Other Banks 20 20.00 4.00

Other Investments 100 40.00 40.00

Loans and Advances:

(i) Guaranteed by the Government 0 14.50 0

(ii) Others 100 5,465.00 5,465.00

Premises, Furniture and Fixtures 100 74.00 74.00

Off–Balance Sheet Items:

(i) Guarantees and other Obligations 100 700.00 700.00

(ii) Acceptance, Endorsements and LoC 100 4,900.00 4,900.00

Total 11,183.00

Capital to Risk–Weighted Assets Ratio (CRAR)

= Capital Fund × 100 = 726.1*100 = 6.49%

Risk Adjusted Assets 11,183

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