Suggested Answers (May '96 To Nov '08)

SUGGESTED ANSWERS
TO
QUESTIONS
SET AT THE
FINAL EXAMINATION
MAY, 1996 - NOVEMBER, 2008

A COMPILATION

PAPER – 1 : ADVANCED ACCOUNTING




BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
NOIDA



CONTENTS
Page No.
CHAPTER - 1 Accounting Theory 1 – 88
CHAPTER - 2 Company Accounts 89 – 224
CHAPTER - 3 Valuation 225 – 276
CHAPTER - 4 Holding Company Accounts 277 – 362
CHAPTER - 5 Financial Reporting for Financial Institutions 363 – 370
CHAPTER - 6 Developments in Accounting 371 – 414
CHAPTER - 7 Accounting for Not-For-Profit Organisations 415 – 432
CHAPTER - 8 IAS,US GAAP and Standards in India 433 – 436


1
ACCOUNTING THEORY
Topics Covered:
 Accounting Standards in India (Q. No. 1 to 37)
 Guidance Notes (Q. No. 38 to 43)



Question 1
Write short notes on the Advantages and disadvantages of setting of Accounting Standards.
(4 marks) (May, 2002) (November, 2004)
Answer
The Accounting Standards seek to describe the accounting principles, the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in companies’ economic performance. The setting of accounting standards has the following advantages:
(i) Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements.
(ii) There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) The application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country. However, it should be noted in this respect that differences in the institutions, traditions and legal systems from one country to another give rise to differences in accounting standards practised in different countries.
However, there are some disadvantages of setting of accounting standards:
(i) Alternative solutions to certain accounting problems may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become difficult.
(ii) There may be a trend towards rigidity and away from flexibility in applying the accounting standards.
(iii) Accounting standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes.
Question 2
(a) Briefly indicate the items, which are included in the expression “borrowing cost” as explained in AS 16. (6 marks) (May, 2001)
(b) Explain the difference between direct and indirect methods of reporting cash flows from operating activities with reference to Accounting Standard 3( AS 3) revised.
(8 marks)(November, 2001)
(c) Write short note on Effect of Uncertainties on Revenue Recognition.
(10 marks) (May, 1997)
Answer
(a) Borrowing costs : Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
As per para 4 of AS 16 on Borrowing Costs, borrowing costs may include :
(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
(b) amortisation of discounts or premiums relating to borrowings ;
(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
(d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and
(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
(b) As per para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash flows from operating activities using either:
(a) the direct method whereby major classes of gross cash receipts and gross cash payments are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.
The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either:
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and loss for:
(i) changes during the period in inventories and operating receivables and payables:
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, and unrealized foreign exchange gains and losses; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the operating revenues and expenses, excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables.
(c) Effect of Uncertainties on Revenue Recognition
Para 9 of AS 9 on "Revenue Recognition" deals with the effect of uncertainties on Revenue Recognition. The para states:
1. Recognition of revenue requires that revenue is measurable and at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.
2. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc. revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise, revenue only when it is reasonably certain that the ultimate collection will be made. When there is uncertainty as to ultimate collection, revenue is recognised at the, time of sale or rendering of service even , though payments are made by instalments.
3. When the uncertainty relating to collectability arises subsequent to the time of sale or rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
4. An essential criterion for the recognition of revenue is that the consideration receiv¬able for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits; the recognition of revenue is postponed.
5. When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.
Question 3
How would you deal with the following in the annual accounts of a company for the year ended¬ 31st March, 1996 ?
(a) The company has to pay delayed cotton clearing charges over and above the negotiated price for taking delayed delivery of cotton from the Suppliers' Godown. Upto 1994-95, the company has regularly included such charges in the valuation of closing stock. This being in the nature of interest the company has decided to exclude it from closing stock valuation for the year 1995-96. This would result into decrease in profit by Rs. 7.60 lakhs
. (3 marks)
(b) The company has obtained Institutional Term Loan of Rs. 580 lakhs for modernisation and renovation of its Plant & Machinery. Plant & Machinery acquired under the modernisation scheme and installation completed on 31st March, 1996 amounted to Rs. 406 lakhs, Rs. 58 lakhs has been advanced to suppliers for additional assets and the balance loan of Rs. 116 lakhs has been utilised for working capital purpose. The Accountant is on a dilemma as to how to account for the total interest of Rs. 52.20 lakhs incurred during 1995-96 on the entire Institutional Term Loan of Rs. 580 lakhs. (3 marks)
(c) Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel surcharge of Rs. 5.30 lakhs for the period October, 1990 to September, 1994 has been received and paid in February, 1995. (3 marks)
(d) The Board of Directors decided on 31.3.1996 to increase the sale price of certain items retrospectively from 1st January, 1996.
In view of this price revision with effect from 1st January, 1996, the company has to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 1996 to 31st March, 1996 and the Accountant cannot make up his mind whether to include Rs. 15 lakhs in the sales for 1995-96. (3 marks) (May, 1996)
Answer
(a) Para 29 of AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” states that a change in an accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more ap¬propriate presentation of the financial statements of an enterprise. There¬fore the change in the method of stock valuation is justified in view of the fact that the change is in line with the recommendations of AS 2 (Revised) ‘Valuation of Inventories’ and would result in more appropriate preparation of the financial statements. As per AS 2, this accounting policy adopted for valuation of inventories including the cost formulae used should be disclosed in the finan¬cial statements.
Also, appropriate disclosure of the change and the amount by which any item in the financial statements is affected by such change is necessary as per AS 1, AS 2 and AS 5. Therefore, the under mentioned note should be given in the annual accounts.
"In compliance with the Accounting Standards issued by the ICAl, delayed cotton clearing charges which are in the nature of interest have been excluded from the valuation of closing stock unlike preceding years. Had the company continued the accounting practice fol¬lowed earlier, the value of closing stock as well as profit before tax for the year would have been higher by Rs. 7.60 lakhs."
(b) As per para 6 of AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred. Borrowing costs should be expensed except where they are directly attributable to acquisition, construction or production of qualifying asset.
A qualifying asset is an asset that necessary takes a substantial period of time* to get ready for its intended use or sale.
The treatment for total interest amount of Rs. 52.20 lakhs can be given as:
Purpose Nature Interest to be charged to profit and loss account Interest to be charged to profit and loss account
Rs. in lakhs Rs. in lakhs
Modernisation and renovation of plant and machinery Qualifying asset

Advance to supplies for additional assets Qualifying asset

Working Capital Not a
qualifying asset

_____ ¬ _____

41.76 10.44

*Accounting Standards Interpretation (ASI) 1 deals with the meaning of expression ‘substantial period of time’. A substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of the facts and circumstances of the case.
** It is assumed in the above solution that the modernization and renovation of plant and machinery will take substantial period of time (i.e. more than twelve months). Regarding purchase of additional assets, the nature of additional assets has also been considered as qualifying assts. Alternatively, the plant and machinery and additional assets may be assumed to be non-qualifying assts on the basis that the renovation and installation of additional assets will not take substantial period of time. In that case, the entire amount of interest, Rs. 52.20 lakhs will be recognized as expense in the profit and loss account for year ended 31st March, 1996.
(c) The final bill having been paid in February, 1995 should have been accounted for in the annual accounts of the company for the year ended 31st March, 1995. However it seems that as a result of error or omission in the preparation of the financial statements of prior period i.e., for the year ended 31st March 1995, this material charge has arisen in the current period i.e., year ended 31st March, 1996. Therefore it should be treated as 'Prior period item' as per para 16 of AS 5. As per para 19 of AS 5 (Revised), prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss.
It may be mentioned that it is an expense arising from the ordinary course of business. Although abnormal in amount or infrequent in occurrence, such an expense does not qualify an extraordinary item as per Para 10 of AS 5 (Revised). For better understanding, the fact that power bill is accounted for at provisional rates billed by the state electricity board and final adjustment thereof is made as and when final bill is received may be mentioned as an accounting policy. '
(d) Price revision was effected during the current accounting period 1995-1996. As a result, the company stands to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 1996 to 31st March, 1996. If the company is able to assess the ultimate collection with reasonable certainty, then additional revenue arising out of the said price revision may be recognised in 1995-96 vide Para 10 of AS 9.
Question 4
Sagar Limited belongs to the engineering industry. The Chief Accountant has prepared the draft accounts for the year ended 31.03.96. You are required to advise the company on the following items from the viewpoint of finalisation of accounts, taking note of the mandatory accounting standards.
(a) An audit stock verification during the year revealed that the opening stock of the year was understated by Rs. 3 lakhs due to wrong counting.
(b) The company purchased on 01.04.95 a special purpose machinery for Rs. 25 lakhs. It received a Central Government Grant for 20% of the price. The machine has an effective life of 10 years.
(c) The company undertook a contract for building a crane for Rs. 10 lakhs. As on 31.03.96 it incurred a cost of Rs. 1.5 lakhs and expects that there will be Rs. 9 lakhs more for completing the crane. It has received so far Rs. 1 lakh as progress payment.
(d) The company received an actuarial valuation for the first time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It wants to spread the same over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs. The average remaining life of the employees is estimated to be 6 years.
(4  3 =12 Marks)(November, 1996)
Answer
(a) The wrong counting of opening stock of the current year/closing stock of the previous year must have also resulted in lowering of profits of previous year, brought forward to the current year. The adjustments are required to be made in the current year in respect of these errors in the preparation of the financial statements of the prior period and should therefore be treated as prior period adjustments as per AS 5 (Revised). Accordingly, the rectifications relating to both opening stock of the current year and profit brought forward from the previous year should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on current profit or loss can be perceived.
(b) AS 12 ‘Accounting for Government Grants’ regards two methods of presentation, of grants related to specific fixed assets, in financial statements as acceptable alternatives. Under the first method, the grant can be shown as a deduction from the gross book value of the machinery in arriving at its book value. The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge.
Under the second method, it can be treated as deferred income which should be recog¬nised in the profit and loss statement over the useful life of 10 years in the proportions in which depreciation on machinery will be charged. The deferred income pending its apportionment to profit and loss account should be disclosed in the balance sheet with a suitable description e.g., ‘Deferred government grants' to be shown after 'Reserves and Surplus' but before 'Secured Loans'.
The following should also be disclosed:
(i) the accounting policy adopted for government grants, including the methods of presentation in the financial statements;
(ii) the nature and extent of government grants recognised in the financial statement.
(c) Para 21 of AS 7 (Revised) ‘Construction Contracts’ provides that when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively with reference to the stage of completion of the contract activity at the reporting date.
As per para 32 of the standard, during the early stages of a contact it is often the case that the outcome of the contract cannot be estimated reliably. Nevertheless, it may be probable that the enterprise will recover the contract costs incurred. Therefore, contract revenue is recognized only to the extent of costs incurred that are expected to be recovered. As the outcome of the contract cannot be estimated reliably, no profit is recognised. Para 35 of the standard states that when it is probable that the total contacts costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. Thus the forseesable loss of Rs. 50,000 (expected cost Rs. 10.5 lakhs less contract revenue Rs. 10 lakhs) should be recognized as an expense in the year ended 31st March, 1996.
Also, the following disclosures should be given in the financial statements:
(a) the amount of contract revenue recognized as revenue in the period;
(b) the aggregate amount of costs incurred and loss recognized upto the reporting date;
(c) amount of advances received;
(d) amount of retentions; and
(e) gross amount due from/due to customers Amount
(d) As per AS 15 ‘Accounting for Retirement Benefits in the Financial Statements of Employers’, the surplus amount of Rs. 6 lakhs can be either credited to the profit and loss account of the current year or, alternatively, spread over a period not more than the expected remaining life of the participating employees i.e. 6 years.
This change relating to actuarial valuation for its pension scheme should be treated as a change in an accounting policy and disclosed in accordance with AS 5 (Revised).
The financial statements should disclose: (a) the method for determination of these retirement benefit costs; (b) whether the actuarial valuation was made at the end of the period or at an earlier date (also specify date); and (iii) the method by which the accrual for the period has been determined (if the same is not based on the report of the actuary).
Note: AS 15 was revised in March, 2005. According to para 92 of AS 15 (Revised 2005) ‘Employee Benefits’, actuarial gains and losses should be recognized immediately in the statement of profit and loss as income or expense. Therefore, surplus amount of Rs. 6 lakhs is required to be credited to the profit and loss statement of the current year.
Question 5
A firm of contractors obtained a contract for construction of bridges across river Revathi. The following details are available in the records kept for the year ended 31st March, 1997.
(Rs. in lakhs)
Total Contract Price 1,000
Work Certified 500
Work not Certified 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140

The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements of AS 7 (Revised) issued by your institute. (15 marks) (November, 1997)
Answer
(a) Amount of foreseeable loss (Rs in lakhs)
Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price 1,000
Total foreseeable loss to be recognized as expense 100
According to para 35 of AS 7 (Revised 2002), when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately.

(b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs (Rs in lakhs)
Work certified 500
Work not certified 105
605
This is 55% (605/1,100  100) of total costs of construction.
(c) Proportion of total contract value recognised as revenue as per para 21 of AS 7 (Revised).
55% of Rs. 1,000 lakhs = Rs. 550 lakhs
(d) Amount due from/to customers = Contract costs + Recognised profits – Recognised
losses – (Progress payments received + Progress
payments to be received)
= [605 + Nil – 100 – (400 + 140)] Rs. in lakhs
= [605 – 100 – 540] Rs. in lakhs
Amount due to customers = Rs. 35 lakhs
The amount of Rs. 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS 7 (Revised) are given below:
Rs. in lakhs
Contract revenue 550
Contract expenses 605
Recognised profits less recognized losses (100)
Progress billings (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35
Question 6
In preparing the financial statements of R Ltd. for the year ended 31st March, 1998, you come across the following information. State with reasons, how you would deal with them in the financial statements:
(a) An unquoted long term investment is carried in the books at a cost of Rs. 2 lakhs. The published accounts of the unlisted company received in May, 1998 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than Rs. 20,000.
(b) The company invested 100 lakhs in April, 1998 in the acquisition of another company doing similar business, the negotiations for which had started during the financial year.
(c) There was a major theft of stores valued at Rs. 10 lakhs in the preceding year which was detected only during current financial year (97-98). (15 marks)(May, 1998)
Answer
As it is stated in the question that financial statements for the year ended 31st March, 1998 are under preparation, the views have been given on the basis that the financial statements are yet to be completed and approved by the Board of Directors.
(a) Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Para 17 of AS 13 ‘Accounting for Investments’ states that indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. On these bases, the facts of the given case clearly suggest that the provision for diminution should be made to reduce the carrying amount of long term investment to Rs. 20,000 in the financial statements for the year ended 31st March, 1998.
(b) Para 3.2 of AS 4 (Revised) defines "Events occurring after the balance sheet date" as those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company. Accordingly, the acquisition of another company is an event occurring after the balance sheet date. However no adjustment to assets and liabilities is required as the event does not affect the determination and the condition of the amounts stated in the financial statements for the year ended 31st March, 1998. Applying para 15 which clearly states that/disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise, the investment of Rs. 100 lakhs in April, 1998 in the acquisition of another company should be disclosed in the report of the Board of Directors to enable users of financial statements to make proper evalua¬tions and decisions.
(c) Due to major theft of stores in the preceding year (1996-97) which was detected only during the current financial year (1997- 98), there was overstatement of closing stock of stores in the preceding year. This must have also resulted in the overstatement of profits of previous year, brought forward to the current year. The adjustments are required to be made in the current year as 'Prior Period Items' as per AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Accordingly, the adjustments relating to both opening stock of the current year and profit brought forward from the previous year should be separately disclosed in the statement of profit and loss together with their nature and amount in a manner that their impact on the current profit or loss can be perceived.
Note: Alternatively, it may be assumed that in the preceding year, the value of stock of stores as found out by physical verification of stocks was considered in the preparation of financial statements of the preceding year. In such a case, only the disclosure as to the theft and the resulting loss is required in the notes to the accounts for the current year i.e, year ended 31st March, 1998.

Question 7
(a) A Limited Company closed its accounting year on 30.6.98 and the accounts for that period were considered and approved by the board of directors on 20th August, 1998. The company was engaged in laying pipe line for an oil company deep beneath the earth. While doing the boring work on 1.9.1998 it had met a rocky surface for which it was estimated that there would be an extra cost to the tune of Rs. 80 lakhs. You are required to state with reasons, how the event would be dealt with in the financial statements for the year ended 30.6.98.
(b) X Co. Ltd., has obtained an Institutional Loan of Rs. 680 lakhs for modernisation and renovation of its plant & machiney, Plant & machinery acquired under the modernisation scheme and installation completed on 31.3.98 amounted to Rs. 520 lakhs, 30 lakhs has been advanced to suppliers for additional assets and the balance loan of Rs. 130 lakhs has been utilized for working capital purpose. The total interest paid for the above loan amounted to Rs. 62 lakhs during 1997-98.
You are required to state how the interest on the institutional loan is to be accounted for in the year 1997-98.
(c) Y Co. Ltd., used certain resources of X Co. Ltd. In return X Co. Ltd. received Rs. 10 lakhs and Rs. 15 lakhs as interest and royalties respective from Y Co. Ltd. during the year 1997-98.
You are required to state whether and on what basis these revenues can be recognised by X Co. Ltd.
(d) A Ltd. purchased fixed assets costing Rs. 3,000 lakhs on 1.1.98 and the same was fully financed by foreign currency loan (U.S. Dollars) payable in three annual equal instalments. Exchange rates were 1 Dollar = Rs. 40.00 and Rs. 42.50 as on 1.1.98 and 31.12.98 respectively. First instalment was paid on 31.12.98. The entire difference in foreign exchange has been capitalized.
You are required to state, how these transactions would be accounted for.
(e) A Limited Company finds that the stock sheets as on 31.3.97 had included twice an item the cost of which was Rs. 20,000.
You are asked to suggest, how the error would be dealt with in the accounts of the year ended 31.3.98 (3+ 4+3+3+3 = 16 marks)(May, 1999)
Answer
(a) Para 3.2 of AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines 'events occurring after the balance sheet date' as 'significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors in the case of a company'. The given case is discussed in the light of the above mentioned definition and requirements given in paras 13-15 of the said AS 4 (Revised).
In this case the incidence, which was expected to push up cost became evident after the date of approval of the accounts. So that was not an 'event occurring after the balance sheet date'. However, this may be mentioned in the Directors’ Report.
(b) The treatment for total interest amount of Rs. 68 lakhs can be given as follows:
Purpose Nature Interest to be capitalized Interest to be charged to profit and loss account
Rs. in lakhs Rs. in lakhs
Modernisation and renovation of plant and machinery Qualifying asset

Advance to suppliers for additional assets Qualifying asset

Working Capital Not a qualifying asset

¬_____ = 11.85
50.15 11.85
For details of para 6 of AS 16 ‘Borrowing Costs’, Qualifying asset, substantial period of time, refer Answer 3(b).
(c) As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise resources yielding interest and royalties should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.
(d) As per para 13 of AS 11 (Revised 2003) ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or expenses in the period in which they arise. Thus exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets are recognized as income or expense.
Calculation of Exchange Difference:

Exchange difference = 75 lakhs US Dollars  (42.50 – 40.00)
= Rs. 187.50 lakhs
(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting Rs. 187.50 lakhs should be charged to profit and loss account for the year.
(e) The error in the recording of closing stock of the year ended 31st March, 1997 must have also resulted in overstatement of profits of previous year, brought forward to the current year ended 31st March, 1998. Vide para 4 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, the rectifications as required in the current year are 'Prior Period Items'. Accordingly, Rs. 20,000 should be deducted from opening stock in the profit and loss account. And Rs. 20,000 should be charged as prior period adjustment in the profit and loss account for the year ended 31st March 1998 in accordance with para 15 of AS 5 (Revised) which requires that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
Question 8
(i) Advise P Co. Ltd. about the treatment of the following in the Final Statement of Accounts for the year ended 31st March, 2000.
A claim lodged with the Railways in March, 1997 for loss of goods of Rs. 2,00,000 had been passed for payment in March, 2000 for Rs. 1,50,000. No entry was passed in the books of the Company, when the claim was lodged. (3 marks) (May 1996, May, 2000)
(ii) The notes to accounts of X Ltd. for the year 1999-2000 include the following:
“Interest on bridge loan from banks and Financial Institutions and on Debentures specifically obtained for the Company’s Fertiliser Project amounting to Rs. 1,80,80,000 has been capitalized during the year, which includes approximately Rs. 1,70,33,465 capitalised in respect of the utilization of loan and debenture money for the said purpose.” Is the treatment correct? Briefly comment. (6 marks)(May, 2000)
Answer
(i) Prudence suggests non-consideration of claim as an asset in anticipation. So receipt of claims is generally recognised on cash basis. Para 9.2 of AS 9 on Revenue Recog¬nition states that where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. Para 9.5 of AS 9 states that when recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised. In this case it may be assumed that collectability of claim was not certain in the earlier periods. This is supposed from the fact that only Rs. 1,50,000 were collected against a claim of Rs. 2,00,000. So this transaction can not be taken as a Prior Period Item.
In the light of revised AS 5, it will not be treated as extraordinary item. However, para 12 of AS 5 (Revised) states that when items of income and expense within profit or loss from ordinary activities are of such size, nature, or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Accordingly, the nature and amount of this item should be disclosed separately as per para 12 of AS 5 (Revised).
(ii) The treatment done by the company is not in accordance with AS 16 ‘Borrowing Costs’. As per para 10 of AS 16, to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period. Hence, the capitalisation of borrowing costs should be restricted to the actual amount of interest expenditure i.e. Rs. 1,70,33,465. Thus, there is an excess capitalisation of Rs. 10,46,535. This has resulted in overstatement of profits by Rs. 10,46,535 and amount of fixed assets has also gone up by this amount.
Question 9
(i) T. Ltd. imported fixed assets worth Rs. 1,000 lacs on 1.4.1999, when the exchange rate was Rs. 40 per US $. The assets were fully financed by foreign currency loan repayable in five equal annual installments. As on 31.3.2000, the first installment was paid at the Exchange Rate of Rs. 42.
(ii) The company’s fixed assets stood at Rs. 3,000 lacs as on 1.4.1999. It provides depreciation at 10% per annum under the WDV method. However it noticed that about Rs. 500 lacs worth of non-imported assets acquired on 1.4.1999 will be obsolete in 2 years time. It wants to write off these assets over 2 years.
(iii) A few days after the beginning of the year, the company acquired assets for Rs. 500 lacs on which it received a government grant of 10%.
Prepare a schedule as on 31.3.2000 in respect of the above three categories of assets and support the schedule with relevant accounting standards. (8 marks) (November, 2000)

Answer
In the books of T Ltd.
Schedule of Fixed Assets as on 31st March, 2000
(Amount in Rs. lacs)
Fixed Assets Gross Block (at cost) Depreciation Net Block
As at 1.4.1999 Additions Deductions As at 31.3.2000 Up to 31.3.1999 For the year On Deductions Total upto 31.3.2000 As at 31.3.2000 As at 31.3.1999
Imported Assets – 1,000 – 1,000 – 100 – 100 900 –
Non - Imported Assets (acquired on 1.4.1999) – 500 – 500 – 250 – 250 250 –
Other Assets 3,000 450 – 3,450 – 345 – 345 3,105 3,000
Total 3,000 1,950 – 4,950 – 695 – 695 4,255 3,000

(1) As per para 13 of AS 11 (Revised 2003) ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets are recognized as income/expense in the period in which they arise.
Calculation of Exchange Difference:
Foreign currency loan =
= 25 lacs US $
Exchange difference = 25 lacs US $ × (42 – 40)
= Rs. 50 lacs (including exchange loss on payment of first instalment)
Thus, exchange loss of Rs. 50 lakhs should be recognized as expense in the profit and loss account for the year ended 31st March, 2000.
(2) It was noticed that about Rs. 500 lacs worth of non-imported assets acquired on 1.4.1999 will be obsolete in two years time. Hence, these assets have been written off at the rate of 50%.
(3) Para 14 of AS 12 on Accounting for Government Grants regards two methods of presentation of grants related to specific fixed assets in financial statements. Under the first method which has been applied in the given case, the grant is shown as a deduction from the gross value of the fixed assets in arriving at its book value. Thus, only 90% of the cost of fixed assets has been shown as addition after adjusting the grant amount.
Alternatively, the grant can be treated as a deferred income which should be recognised in the profit and loss statement over the useful life of fixed assets in the proportions in which depreciation on the assets will be charged.
Note: As regards fixed assets standing at Rs. 3,000 lacs as on 1.4.1999, in the absence of information in respect of cost and depreciation amount provided upto 31.3.1999, the entire given amount has been shown under gross block as at 1.4.1999.
Question 10
State with reference to accounting standard, how will you value the inventories in the following cases:
(i) Raw material was purchased at Rs. 100 per kilo. Price of raw material is on the decline. The finished goods in which the raw material is incorporated is expected to be sold at below cost. 10,000 kgs. of raw material is on stock at the year end. Replacement cost is Rs. 80 per kg.
(ii) In a production process, normal waste is 5% of input. 5,000 MT of input were put in process resulting in a wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste is on stock at the year end.
(iii) Per kg. of finished goods consisted of:
Material cost Rs. 100 per kg.
Direct labour cost Rs. 20 per kg.
Direct variable production overhead Rs. 10 per kg.
Fixed production charges for the year on normal capacity of one lakh kgs. is Rs. 10 lakhs. 2,000 kgs. of finished goods are on stock at the year end. (3 x 4 = 12 marks)(November, 2000)
Answer
(a) (i) As per para 24 of AS 2 (Revised) on Valuation of Inventories, materials and other supplies held for use in the production of inventories are not written down below cost if the finished product in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.
Hence, in the given case, the stock of 10,000 kgs of raw material will be valued at Rs. 80 per kg. The finished goods, if on stock, should be valued at cost or net realisable value whichever is lower.
(ii) As per para 13 of AS 2 (Revised), abnormal amounts of waste materials, labour or other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT.
The cost of 250 MT will be included in determining the cost of inventories (finished goods) at the year end. The cost of abnormal waste amounting to Rs. 50,000 (50 MT x Rs. 1,000) will be charged in the profit and loss statement.
(iii) In accordance with paras 8 and 9 of AS 2 (Revised), the costs of conversion include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities.
Thus, cost per kg. of finished goods can be computed as follows:
Rs.
Material cost 100
Direct labour cost 20
Direct variable production overhead 10
Fixed production overhead
10
¬___
140
Thus, the value of 2,000 kgs. of finished goods on stock at the year end will be Rs. 2,80,000 (2,000 kgs. x Rs. 140).
Question 11
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended 31st March, 2001 in accordance with AS 3 (Revised) using the direct method. The company does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.2001
Rs. ’000 Rs. ’000
Balance on 1.4.2000 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from Customers 2,800 Overhead expense 200
Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250
Dividend 50
Repayment of Bank Loan 300
¬_____ Balance on 31.3.2001 150
3,250 3,250
(8 marks)(November, 2001)

Answer
X Ltd.
Cash Flow Statement for the year ended 31st March, 2001
(Using the direct method)
Rs. ’000 Rs. ’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payment to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash from operating activities 250
Cash flows from investing activities
Payment for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at beginning of the period 50
Cash at end of the period 150
Question 12
Answer the following questions by quoting the relevant Accounting Standard:
(i) During the year 2001-2002, a medium size manufacturing company wrote down its inventories to net realisable value by Rs. 5,00,000. Is a separate disclosure necessary?
(ii) A Limited company has been including interest in the valuation of closing stock. In 2001-2002, the management of the company decided to follow AS 2 and accordingly interest has been excluded from the valuation of closing stock. This has resulted in a decrease in profits by Rs. 3,00,000. Is a disclosure necessary? If so, draft the same.
(iii) A company signed an agreement with the Employees Union on 1.9.2001 for revision of wages with retrospective effect from 30.9.2000. This would cost the company an additional liability of Rs. 5,00,000 per annum. Is a disclosure necessary for the amount paid in 2001-02 ?
(12 marks) (May, 2002)
Answer
(i) Although the case under consideration does not relate to extraordinary item, but the nature and amount of such item may be relevant to users of financial statements in understanding the financial position and performance of an enterprise and in making projections about financial position and performance. Para 12 of AS 5 (Revised in 1997) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies states that :
“When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.”
Circumstances which may give to separate disclosure of items of income and expense in accordance with para 12 of AS 5 include the write-down of inventories to net realisable value as well as the reversal of such write-downs.
(ii) As per AS 5 (Revised), change in accounting policy can be made for many reasons, one of these is for compliance with an accounting standard. In the instant case, the company has changed its accounting policy in order to conform with the AS 2 (Revised) on Valuation of Inventories. Therefore, a disclosure is necessary in the following lines by way of notes to the annual accounts for the year 2001-2002.
“To be in conformity with the Accounting Standard on Valuation of Inventories issued by ICAI, interest has been excluded from the valuation of closing stock unlike preceding years. Had the same principle been followed in previous years, profit for the year and its corresponding effect on the year end net assets would have been higher by Rs. 3,00,000.”
(iii) It is given that revision of wages took place on 1st September, 2001 with retrospective effect from 30.9.2000. Therefore wages payable for the half year from 1.10.2000 to 31.3.2001 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item.
Additional wages liability of Rs. 7,50,000 (for 1½ years @ Rs. 5,00,000 per annum) should be included in current year’s wages.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per Para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
Question 13
A company obtained term loan during the year ended 31st March, 2002 in an extent of Rs. 650 lakhs for modernisation and development of its factory. Buildings worth Rs. 120 lakhs were completed and Plant and Machinery worth Rs. 350 lakhs were installed by 31st March, 2002. A sum of Rs. 70 lakhs has been advanced for Assets the installation of which is expected in the following year. Rs. 110 lakhs has been utilised for Working Capital requirements. Interest paid on the loan of Rs. 650 lakhs during the year 2001 – 2002 amounted to Rs. 58.50 lakhs. How should the interest amount be treated in the Accounts of the Company?
(6 marks) (November, 2002)
Answer
The treatment for total interest amount of Rs. 58.50 lakhs can be given as follows:
Purpose Nature Interest to be capitalized Interest to be charged to profit and loss account
Rs. in lakhs Rs. in lakhs
Buildings Qualifying asset

Plant and machinery Qualifying asset

Advance to suppliers for additional assets Qualifying asset

Working capital Not a qualifying asset

¬____ ¬ ____

48.6 9.9

For details of para 6 of AS 16 ‘Borrowing Costs’, Qualifying asset, Substantial Period of Time, refer Question 3(b).
Question 14
In the context of relevant Accounting Standards, give your comments on any four of the following matters for the financial year ending on 31.3.2002.
(a) Assets and liabilities and income and expenditure items in respect of foreign branches are translated into Indian rupees at the prevailing rate of exchange at the end of the year. The resultant exchange differences in the case of profit, is carried to other Liabilities Account and the Loss, if any, is charged to revenue.
(b) Leave encashment benefit is accounted for as per “Pay-as-you-go” method.
(c) Increase in pension liability on account of wage revision in 1999 – 2000 is being provided for in 5 instalments commencing from that year. The remaining liability of Rs. 300 lakhs as re-determined in actuarial valuation will be provided for in the next 2 years.
(d) A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2002 on a research project to develop a drug to treat “AIDS”. Experts are of the view that it may take four years to establish whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed. The company wants to treat the expenditure as deferred revenue expenditure.
(e) While preparing its final accounts for the year ended 31st March, 2002 Rainbow Limited created a provision for Bad and Doubtful debts are 2% on trade debtors. A few weeks later the company found that payments from some of the major debtors were not forthcoming. Consequently the company decided to increase the provision by 10% on the debtors as on 31st March, 2002 as the accounts were still open awaiting approval of the Board of Directors. Is this to be considered as an extra-ordinary item or prior period item ? (4  4 = 16 marks) (November, 2002)
Answer
(a) The financial statements of an integral foreign operation (for example, dependent foreign branches) should be translated using the principles and procedures described in paragraphs 8 to 16 of AS 11 (Revised 2003). The individual items in the financial statements of a foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself.
Individual items in the financial statements of the foreign operation are translated at the actual rate on the date of transaction. For practical reasons, a rate that approximates the actual rate at the date of transaction is often used, for example, an average rate for a week or a month may be used for all transactions in each foreign currency during the period. The foreign currency monetary items (for example cash, receivables, payables) should be reported using the closing rate at each balance sheet date. Non-monetary items (for example, fixed assets, inventories, investments in equity shares) which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange date at the date of transaction. Thus the cost and depreciation of the tangible fixed assets is translated using the exchange rate at the date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value, translation should be done using the rate existed on the date of the valuation. The cost of inventories is translated at the exchange rates that existed when the cost of inventory was incurred and realizable value is translated applying exchange rate when realizable value is determined which is generally closing rate.
Exchange difference arising on the translation of the financial statements of integral foreign operation should be charged to profit and loss account. Exchange difference arising on the translation of the financial statement of foreign operation may have tax effect which should be dealt as per AS 22 ‘Accounting for Taxes on Income’.
Thus, the treatment by the management of translating all assets and liabilities; income and expenditure items in respect of foreign branches at the prevailing rate at the year end and also the treatment of resultant exchange difference is not in consonance with AS 11 (Revised 2003).
Note: For the purpose of translation of assets, liabilities, income and expenditure items of foreign operations, AS 11 (Revised 2003) classifies the foreign operation into two types – Integral foreign operation, Non-integral foreign operation. Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise. Non-integral foreign operation is a foreign operation that is not an integral foreign operation. The above answer has been given on the basis that the foreign branches referred in the question are integral foreign operations.
(b) As per para 12 of AS 15 on 'Accounting for Retirement Benefits in the Financial Statements of Employers', the cost of retirement benefits to an employer results from receiving services from the employees who are entitled to receive such benefits. Consequently, the cost of retirement benefits is accounted for in the period during which these services are rendered. Accounting for retirement benefit cost only when employees retire or receive benefits payments (i.e. as per pay as you go method) does not achieve the objective of allocation of those costs to the periods in which the services were rendered. Hence, the treatment of leave encashment benefit by the management is not in consonance with AS 15.
Note: AS 15 was revised in March, 2005. AS 15 (revised 2005) covers the leave encashment benefits under the category of short-term employee benefits. Accumulating short-term compensated absences (i.e. earned leaves) are those that are carried forward and can be used for future periods if the current period’s entitlement is not used in full [para 13 of AS 15(Revised)]. Earned leaves which are encashable on retirement or resignation are vesting (which entitle employees to receive cash payment for unused entitlements on leaving the enterprise) accumulating compensated absences. ‘An enterprise should measure the expected cost of accumulating compensated absences as the additional amount that the enterprise expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date’. [Para 14 of AS 15 (Revised)].
(c) Revision of wages and consequential increase in pension liability of employer is not a prior period item as it has not arisen out of errors or omissions of previous year. It is also not an extraordinary item as defined in AS 5 on Net profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. It is an expense arising out of the ordinary activity of the enterprise. Therefore, it should have been charged during the year 1999-2000, and disclosed separately.
The treatment of deferring to two years, Rs. 30 crores remaining pension liability as redetermined by actuarial valuation is also not in consonance with AS 15 relating to Accounting for Retirement Benefits in the Financial Statements of Employers. As per para 29 of AS 15, any alternations in the retirement benefit costs arising from changes in the actuarial method used or assumptions adopted should be charged or credited to the statement of profit and loss as they arise in accordance with AS 5, “Prior Period and Extraordinary Items and Changes in Accounting Policies”. Additionally, a change in the actuarial method used should be treated as a change in an accounting policy and disclosed in accordance with AS 5.
Note: AS 15 was revised in March, 2005. As per para 92 of AS 15 (Revised 2005) ‘Employee Benefits’, actuarial gains and losses should be recognized immediately in the statement of profit and loss as income or expense.
(d) As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research (or from the research phase of an internal project) should be recognized. Expenditure on research (or on the research phase of an internal project) should be recognized as an expense when it is incurred. Thus the company cannot treat the expenditure as deferred revenue expenditure. The entire amount of Rs. 33 lakhs spent on research project should be charged as an expense in the year ended 31st March, 2002.
(e) The preparation of financial statements involve making estimates which are based on the circumstances existing at the time when the financial statements are prepared. It may be necessary to revised an estimate in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate does not bring the resulting amount within the definition either of prior period item or of an extraordinary item [para 21, AS 5 (Revised)].
In the given case, Rainbow Limited created a provision for bad and doubtful debts at 2% on trade debtors while preparing its final accounts for the year ended 31st March, 2002. Subsequently, the company decided to increase the provision by 10%. As per AS 5 (Revised), this change in estimate is neither a prior period item nor an extraordinary item.
However, as per para 27 of AS 5 (Revised), a change in accounting estimate which has a material effect in the current period should be disclosed and quantified. Any change in an accounting estimate which is expected to have a material effect in later periods should also be disclosed.
Question 15
From the Books of Bharati Ltd., following informations are available as on 1.4.2001 and 1.4.2002:
(1) Equity Shares of Rs. 10 each 1,00,000
(2) Partly paid Equity Shares of Rs. 10 each Rs. 5 paid 1,00,000
(3) Options outstanding at an exercise price of Rs. 60 for one equity share Rs. 10 each. Average Fair Value of equity share during both years Rs. 75
10,000
(4) 10% convertible preference shares of Rs. 100 each. Conversion ratio 2 equity shares for each preference share
80,000
(5) 12% convertible debentures of Rs. 100. Conversion ratio 4 equity shares for each debenture
10,000
(6) 10% dividend tax is payable for the years ending 31.3.2003 and 31.3.2002.
(7) On 1.10.2002 the partly paid shares were fully paid up
(8) On 1.1.2003 the company issued 1 bonus share for 8 shares held on that date.
Net profit attributable to the equity shareholders for the years ending 31.3.2003 and 31.3.2002 were Rs. 10,00,000.
Calculate :
(i) Earnings per share for years ending 31.3.2003 and 31.3.2002.
(ii) Diluted earnings per share for years ending 31.3.2003 and 31.3.2002.
(iii) Adjusted earnings per share and diluted EPS for the year ending 31.3.2002, assuming the same information for previous year, also assume that partly paid shares are eligible for proportionate dividend only. (14 marks) (May, 2003)
Answer
(i) Earnings per share
Year ended
31.3.2003 Year ended
31.3.2002
Net profit attributable to equity shareholders Rs. 10,00,000 Rs. 10,00,000
Weighted average
number of equity shares
2,00,000
1,50,000
[(W.N. 1) – without considering bonus issue
for the year ended 31.3.2002]
Earning per share Rs. 5 Rs. 6.667
(ii) Diluted earnings per share
Options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of computation of diluted earnings per share, options will be considered first. 12% convertible debentures being second most dilutive will be considered next and thereafter convertible preference shares will be considered (as per W.N. 2).
Year ended 31.3.2003 Year ended 31.3.2002
Net profit attributable to equity shareholders
Rs. No. of equity shares Net Profit attributable per share
Rs. No. of equity shares
(without considering bonus issue) Net Profit attributable per share
Rs.
As reported (for years ended 31.3.2003 and 31.3.2002) 10,00,000 2,00,000 5 1,50,000 6.667
Options ________ 2,000 2,000
10,00,000 2,02,000 4.95 Dilutive 1,52,000 6.579 Dilutive
12% Convertible Debentures
84,000
40,000
40,000
10,84,000 2,42,000 4.48
Dilutive 1,92,000 5.646
Dilutive
10% Convertible Preference Shares
8,80,000
1,60,000
1,60,000
19,64,000 4,02,000 4.886
Anti-Dilutive 3,52,000 5.58
Dilutive

Since diluted earnings per share is increased when taking the convertible preference shares into account (Rs. 4.48 to Rs. 4.886), the convertible preference shares are anti-dilutive and are ignored in the calculation of diluted earnings per share for the year ended 31.3.2003. Therefore, diluted earnings per share for the year ended 31st March, 2003 is Rs. 4.48.
For the year ended 31st March, 2002, Options, 12% Convertible debentures and Convertible preference shares will be considered dilutive and diluted earnings per share will be taken as Rs. 5.58.

Year ended 31.3.2003 Year ended 31.3.2003
Diluted earnings per Share 4.48 5.58

(iii) Adjusted earnings per share and diluted earnings per share for the year ending 31.3.2002.
Net profit attributable to equity shareholders Rs. 10,00,000
Weighted average number of equity shares [(W.N. 1) – considering bonus issue]
1,75,000
Adjusted earnings per share Rs. 5.714


Calculation of adjusted diluted earnings per share
Net profit attributable to equity shareholders
Rs. No. of equity shares (after considering bonus issue) Net profit
attributable
per share

Rs.
As reported 10,00,000 1,75,000 5.714
Options ________ 2,000
10,00,000 1,77,000 5.65 Dilutive
12% Convertible Debentures 84,000 40,000
10,84,000 2,17,000 4.995 Dilutive
10% Convertible Preference Shares 8,80,000 1,60,000
19,64,000 3,77,000 5.21 Anti –Dilutive
Since diluted earnings per share is increased when taking the convertible preference shares into account (from Rs. 4.995 to Rs. 5.21), the convertible preference shares are anti-dilutive and are ignored in the calculation of diluted earnings per share. Therefore, adjusted diluted earnings per share for year ended 31.3.2002 is Rs. 4.995.
Adjusted diluted earnings per share Rs. 4.995
Working Notes:
1. Weighted average number of equity shares
31.3.2003
No. of Shares 31.3.2002
No. of Shares
(a) Fully paid equity shares 1,00,000 1,00,000
(b) Partly paid equity shares* 50,000
Partly paid equity shares 25,000
Fully paid equity shares 50,000
(Partly paid shares converted into fully paid up on 1.10.2002)
(c) Bonus Shares** 25,000 _______
Weighted average number of equity shares 2,00,000 1,50,000
(without considering bonus issue for year ended 31.3.2002)
Bonus Shares
Weighted average number of equity shares
(after considering bonus issue for year ended 31.3.2002) 25,000
1,75,000
*Since partly paid equity shares are entitled to participate in dividend to the extent of amount paid, 1,00,000 equity shares of Rs. 10 each, Rs. 5 paid up will be considered as 50,000 equity shares for the year ended 31st March, 2002.
On 1st October, 2002 the partly paid shares were converted into fully paid up. Thus, the weighted average equity shares (for six months ended 30th September, 2002) will be calculated as
50,000 × = 25,000 shares
Weighted average shares (for six months ended 31st March, 2003) will be calculated as
1,00,000 × = 50,000 shares
** Total number of fully paid shares on 1st January, 2003
Fully paid shares on 1st April, 2002
1,00,000
Partly paid shares being made fully paid up on 1st October, 2002 1,00,000
2,00,000
The company issued 1 bonus share for 8 shares held on 1st January, 2003.
Thus 2,00,000/8 = 25,000 bonus shares will be issued.
Bonus is an issue without consideration, thus it will be treated as if it had occured prior to the beginning of 1st April, 2001, the earliest period reported.
2. Increase in earnings attributable to equity shareholders on conversion of potential equity shares
Increase in earnings

(1) Increase in number of equity shares
(2) Earnings per incremental share
(3) = (1) ÷ (2)
Rs. Rs.
Options
Increase in earnings Nil
No. of incremental shares issued for no consideration
[10,000 × (75 – 60)/75]
2,000
Nil
Convertible Preference Shares
Increase in net profit attributable to equity shareholders as adjusted by attributable dividend tax
[(Rs. 10 × 80,000) + 10%
(Rs. 10 × 80,000)] 8,80,000
No. of incremental shares
(2 × 80,000)
1,60,000
5.50
12% Convertible Debentures

Increase in net profit
[(Rs.10,00,000 × 0.12 × (1 – 0.30)]*
84,000
No. of incremental shares
(10,000 × 4)
40,000
2.10

* Tax rate has been taken at 30% in the absence of any information in the question.
Question 16
A Ltd. acquired 25% of shares in B Ltd. as on 31.3.2002 for Rs. 3 lakhs. The Balance Sheet of
B Ltd. as on 31.3.2002 is given below:
Rs.
Share Capital 5,00,000
Reserves and Surplus 5,00,000
10,00,000
Fixed Assets 5,00,000
Investments 2,00,000
Current Assets 3,00,000
10,00,000

During the year ended 31.3.2003 the following are the additional information available:
(i) A Ltd. received dividend from B Ltd., for the year ended 31.3.2002 at 40% from the Reserves.
(ii) B Ltd., made a profit after tax of Rs. 7 lakhs for the year ended 31.3.2003.
(iii) B Ltd., declared a dividend @ 50% for the year ended 31.3.2003 on 30.4.2003.
A Ltd. is preparing Consolidated Financial Statements in accordance with AS – 21 for its various subsidiaries. Calculate:
(i) Goodwill if any on acquisition of B Ltd.’s shares.
(ii) How A Ltd., will reflect the value of investment in B Ltd., in the Consolidated Financial Statements?
(iii) How the dividend received from B Ltd. will be shown in the Consolidated Financial Statements? (6 marks)(May, 2003)
Answer
In terms of AS 23 B Ltd. will be considered as an associate company of A Ltd. as shares acquired represent to more than 20%.
(i) Calculation of Goodwill Rs.in lakhs
Cost of investment 3.00
Less: Share in the value of Equity of B.Ltd.
as at the date of investment
[25% of Rs.10 lakhs (Rs.5 lakhs + Rs. 5 lakhs)] 2.50
Goodwill 0.50
(ii) A Ltd.
Consolidated Profit and Loss Account for the year ended 31st March, 2003
Rs. in lakhs
By Share of profits in B Ltd. 1.75
By Dividend received from B Ltd. 0.50
Transfer to investment A/c 0.50 Nil

(iii) A Ltd.
Consolidated Balance Sheet as on 31.3.2003
Rs. in lakhs
Investment in B Ltd.
Share in B Ltd.'s Equity 2.50
Less: Dividend received 0.50
2.00
Share of Profit for year 2002 – 2003 1.75
3.75
Add: Goodwill 0.50 4.25

Working Notes:
1. Dividend received from B Ltd. amounting to Rs. 0.50 lakhs will be reduced from investment value in the books of A Ltd. However goodwill will not change.
2. B Ltd. made a profit of Rs. 7 lakhs for the year ended 31st March, 2003. A Ltd.’s share in the profits of Rs. 7 lakhs is Rs. 1.75 lakhs. Investment in B Ltd. will be increased by Rs. 1.75 lakhs and consolidated profit and loss account of A Ltd. will be credited with Rs. 1.75 lakhs in the consolidated financial statement of A Ltd.
3. Dividend declared on 30th April, 2003 will not be recognised in the consolidated financial statements of A Ltd.

Question 17
XYZ Ltd., has undertaken a project for expansion of capacity as per the following details:
Plan Actual
Rs. Rs.
April, 2002 2,00,000 2,00,000
May, 2002 2,00,000 3,00,000
June, 2002 10,00,000 –
July, 2002 1,00,000 –
August, 2002 2,00,000 1,00,000
September, 2002 5,00,000 7,00,000
The company pays to its bankers at the rate of 12% p.a., interest being debited on a monthly basis. During the half year company had Rs. 10 lakhs overdraft upto 31st July, surplus cash in August and again overdraft of over Rs. 10 lakhs from 1.9.2002. The company had a strike during June and hence could not continue the work during June. Work was again commenced on 1st July and all the works were completed on 30th September. Assume that expenditure were incurred on 1st day of each month. Calculate:
(i) Interest to be capitalised.
(ii) Give reasons wherever necessary.
Assume:
(a) Overdraft will be less, if there is no capital expenditure.
(b) The Board of Directors based on facts and circumstances of the case has decided that any capital expenditure taking more than 3 months as substantial period of time.
(8 marks) (May, 2003)
Answer
(a) XYZ Ltd.
Month Actual
Expenditure Interest
Capitalised Cumulative Amount
Rs. Rs. Rs.
April, 2002 2,00,000 2,000 2,02,000
May, 2002 3,00,000 5,020 5,07,020
June, 2002 – 5,070 5,12,090 Note 2
July, 2002 – 5,120 5,17,210
August, 2002 1,00,000 – 6,17,210 Note 3
September, 2002 7,00,000 10,000 13,27,210 Note 4
13,00,000 27,210 13,27,210
Note:
1. There would not have been overdraft, if there is no capital expenditure. Hence, it is a case of specific borrowing as per AS 16 on Borrowing Costs.
2. The company had a strike in June and hence could not continue the work during June. As per para 14 (c) of AS 16, the activities that are necessary to prepare the asset for its intended use or sale are in progress. The strike is not during extended period. Thus during strike period, interest need to be capitalised.
3. During August, the company did not incur any interest as there was surplus cash in August. Therefore, no amount should be capitalised during August as per para 14(b) of AS 16.
4. During September, it has been taken that actual overdraft is Rs. 10 lakhs only. Hence, only Rs. 10,000 interest has been capitalised even though actual expenditure exceeds Rs. 10 lakhs.
Alternatively, interest may be charged on total amount of (Rs. 6,17,210 + Rs. 7,00,000 = 13,17,210) for the month of September, 2002 as it is given in the question that overdraft was over Rs. 10 lakhs from 1.9.2002 and not exactly Rs. 10 lakhs. In that case, interest amount Rs. 13,172 will be capitalised for the month of September.
Question 18
Briefly explain, as per relevant Accounting Standard:
(a) TVSM company has taken a Transit Insurance Policy. Suddenly in the year 2002-2003 the percentage of accident has gone up to 7% and the company wants to recognise insurance claim as revenue in 2002-2003 in accordance with relevant Accounting Standards. Do you agree?
(b) SCL Ltd., sells agriculture products to dealers. One of the condition of sale is that interest is payable at the rate of 2% p.m., for delayed payments. Percentage of interest recovery is only 10% on such overdue outstanding due to various reasons. During the year 2002-2003 the company wants to recognise the entire interest receivable. Do you agree?
(c) ABC Ltd. was making provision for non-moving stocks based on no issues for the last 12 months upto 31.3.2002.
The company wants to provide during the year ending 31.3.2003 based on technical evaluation:
Total value of stock Rs. 100 lakhs
Provision required based on 12 months issue Rs. 3.5 lakhs
Provision required based on technical evaluation Rs. 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision?
(d) XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2002. No provision for deferred tax liability was made in accounts for the year ended 31.3.2002. While finalising the accounts for the year ended 31.3.2003, the Accountant says that the entire deferred tax liability upto 31.3.2002 and current year deferred tax liability should be routed through Profit and Loss Account as the relevant Accounting Standard has already become mandatory from 1.4.2001. Do you agree? (16 marks)(May, 2003)
Answer
(a) AS 9 on Revenue Recognition defines revenue as ‘gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the enterprise from the sale of goods, from the rendering of services and from the use by others of enterprise resources yielding interest, royalties and dividends’.
To recognise revenue AS 9 requires that revenue arises from ordinary activities and that it is measurable and there should be no uncertainty. As per para 9.2 of the Standard, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made.
In the given case, TVSM company wants to suddenly recognise Insurance claim because it has increased over the previous year. But, there are uncertainties involved in the settlement of the claim. Also, the claim does not seem to be in the course of ordinary activity of the company.
Hence, TVSM company is not advised to recognise the Insurance claim as revenue.
(b) As per para 9.2 of AS 9 on Revenue Recognition, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export incentives, interest etc, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments.
Thus, SCL Ltd. cannot recognise the interest amount unless the company actually receives it. 10% rate of recovery on overdue outstandings is also an estimate and is not certain. Hence, the company is advised to recognise interest receivable only on receipt basis.
(c) The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Accounting policy of a company may require that provision for non-moving stocks should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate can be made.
In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock from Rs.3.5 lakhs to Rs.2.5 lakhs is also not material. The disclosure can be made for such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for the year 2002-03:
“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on the year end net assets would have been higher by Rs.1 lakh.”
(d) Paragraph 33 of AS 22 on “Accounting For Taxes on Income” relates to the transitional provisions. It says, “On the first occasion that the taxes on income are accounted for in accordance with this statement, the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this statement as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets.
Further Paragraph 34 lays down, “For the purpose of determining accumulated deferred tax in the period in which this statement is applied for the first time, the opening balances of assets and liabilities for accounting purposes and for tax purposes are compared and the differences, if any, are determined. The tax effects of these differences, if any, should be recognised as deferred tax assets or liabilities, if these differences are timing differences.”
Therefore, in the case of XYZ, even though AS 22 has come into effect from 1.4.2001, the transitional provisions permit adjustment of deferred tax liability/asset upto the previous year to be adjusted from opening reserve. In other words, the deferred taxes not provided for alone can be adjusted against opening reserves.
Provision for deferred tax asset/liability for the current year should be routed through profit and loss account like normal provision.
Question 19
PQR Ltd.'s accounting year ends on 31st March. The company made a loss of Rs. 2,00,000 for the year ending 31.3.2001. For the years ending 31.3.2002 and 31.3.2003, it made profits of Rs. 1,00,000 and Rs. 1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight years and tax rate is 40%. By the end of 31.3.2001, the company feels that there will be sufficient taxable income in the future years against which carry forward loss can be set off. There is no difference between taxable income and accounting income except that the carry forward loss is allowed in the years ending 2002 and 2003 for tax purposes. Prepare a statement of Profit and Loss for the years ending 2001, 2002 and 2003.
(4 marks) (November, 2003)

Answer
Statement of Profit and Loss
31.3.2001 31.3.2002 31.3.2003
Rs. Rs. Rs.
Profit (Loss) (2,00,000) 1,00,000 1,20,000
Less: Current tax (8,000)
Deferred tax:
Tax effect of timing differences originating during the year 80,000
Tax effect of timing differences reversed/adjusted during the year

(40,000)
(40,000)
Profit (loss) after tax effect (1,20,000) 60,000 72,000
Question 20
(a) J Ltd. purchased machinery from K Ltd. on 30.09.2001. The price was Rs. 370.44 lakhs after charging 8% Sales-tax and giving a trade discount of 2% on the quoted price. Transport charges were 0.25% on the quoted price and installation charges come to 1% on the quoted price.
A loan of Rs. 300 lakhs was taken from the bank on which interest at 15% per annum was to be paid.
Expenditure incurred on the trial run was Materials Rs. 35,000, Wages Rs. 25,000 and Overheads Rs. 15,000.
Machinery was ready for use on 1.12.2001. However, it was actually put to use only on 1.5.2002. Find out the cost of the machine and suggest the accounting treatment for the expenses incurred in the interval between the dates 1.12.2001 to 1.5.2002. The entire loan amount remained unpaid on 1.5.2002.
(b) State, how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st March, 2003 with reference to Accounting Standards:
(i) The company finds that the stock sheets of 31.3.2002 did not include two pages containing details of inventory worth Rs. 14.5 lakhs.
(ii) The company had spent Rs. 45 lakhs for publicity and research expenses on one of its new consumer product, which was marketed in the accounting year 2002-2003, but proved to be a failure. (7 + 8 = 15 marks)(November, 2003)
Answer
(a) Rs. (in Lakhs) (Rs. in Lakhs)
Quoted price (refer to working note) 350.00
Less: 2% Trade Discount 7.00
343.00
Add: 8% Sales tax (8% × Rs. 343 lakhs) 27.44 370.44
Transport charges (0.25% × Rs. 350 lakhs) 0.88 (approx.)
Installation charges (1% × Rs. 350 lakhs) 3.50
Financing cost (15% on Rs.300 Lakhs) for the period 30.9.2001 to 1.12.2001
7.50
Trial Run Expenses
Material 0.35
Wages 0.25
Overheads 0.15 0.75
Total cost 383.07
Interest on loan for the period 1.12.2001 to 1.05.2002 is Rs. 300 lakhs
= Rs.18.75 lakhs
This expenditure may be charged to Profit and Loss Account or deferred for amortization between say three to five years. Assumed that no other expenses are incurred on the machine during this period.
Working Note:
Let the quoted price ‘X’
Less: Trade Discount 0.02X.
Actual Price = 0.98X.
Sale Tax @8% = 1.08 × 0.98X

(b) (i) Paragraph 4 of Accounting Standard 5 on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, defines Prior Period items as "income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods”.
Rectification of error in stock valuation is a prior period item vide Para 4 of AS 5. Rs.14.5 lakhs must be added to the opening stock of 1/4/2002. It is also necessary to show Rs. 14.5 lakhs as a prior period adjustment in the Profit and loss Account below the line. Separate disclosure of this item as a prior period item is required as per Para 15 of AS 5.

(ii) In the given case, the company spent Rs. 45 lakhs for publicity and research of a new product which was marketed but proved to be a failure. It is clear that in future there will be no related further revenue/benefit because of the failure of the product. Thus according to paras 41 to 43 of AS 26 ‘Intangible Assets’, the company should charge the total amount of Rs. 45 lakhs as an expense in the profit and loss account.
Question 21
(a) On 1st December, 2002, Vishwakarma Construction Co. Ltd. undertook a contract to construct a building for Rs. 85 lakhs. On 31st March, 2003 the company found that it had already spent Rs. 64,99,000 on the construction. Prudent estimate of additional cost for completion was Rs. 32,01,000. What amount should be charged to revenue in the final accounts for the year ended 31st March, 2003 as per provisions of Accounting Standard 7 (Revised)?
(b) While preparing its final accounts for the year ended 31st March, 2003 a company made a provision for bad debts @ 5% of its total debtors. In the last week of February, 2003 a debtor for Rs. 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2003 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2003? (5+ 5 = 10 marks)(November, 2003)
Answer
(a) Rs.
Cost incurred till 31st March, 2003 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost of construction 97,00,000
Less: Contract price 85,00,000
Total foreseeable loss 12,00,000

According to para 35 of AS 7 (Revised 2002), the amount of Rs. 12,00,000 is required to be recognized as an expense.
Contract work in progress = = 67%
Proportion of total contract value recognized as turnover as per para 21 of AS 7 (Revised) on Construction Contracts.
= 67% of Rs.85,00,000 = Rs.56,95,000.
(b) As per paras 8.2 and 13 of Accounting Standard 4 on Contingencies and Events Occurring after the Balance Sheet Date, Assets and Liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist estimation of amounts relating to conditions existing at the balance sheet date.
So full provision for bad debt amounting to Rs. 2 lakhs should be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31st March, 2003. It is because earthquake took place before the balance sheet date.
Had the earthquake taken place after 31st March, 2003, then mere disclosure required as per para 15, would have been sufficient.
Question 22
(a) At the end of the financial year ending on 31st December, 2003, a company finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors. The possible outcome as estimated by the Board is as follows:
Probability Loss (Rs.)
In respect of five cases (Win) 100% 
Next ten cases (Win) 60% 
Lose (Low damages) 30% 1,20,000
Lose (High damages) 10% 2,00,000
Remaining five cases
Win 50% 
Lose (Low damages) 30% 1,00,000
Lose (High damages) 20% 2,10,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent loss and the accounting treatment in respect thereof.
(b) Z Ltd. presents the following information for the year ending 31.03.2002 and 31.03.2003 from which you are required to calculate the Deferred Tax Asset/Liability assuming tax rate of 30% and state how the same should be dealt with as per relevant accounting standard.
31.03.2002 31.03.2003
Rs. (lakhs) Rs. (lakhs)
Depreciation as per books 4,010.10 4,023.54
Unabsorbed carry forward business loss and depreciation allowance
2,016.60
4,110.00
Disallowance under Section 43B of Income tax Act, 1961
518.35
611.45
Deferred Revenue Expenses 4.88 
Provision for Doubtful Debts 282.51 294.35
Z Ltd. had incurred a loss of Rs. 504 lakhs for the year ending 31.03.2003 before providing for Current Tax of Rs. 26.00 lakhs. (4 + 6 = 10 marks)(May, 2004)
Answer
(a) According to AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’, contingent liability should be disclosed in the financial statements if following conditions are satisfied:
(i) There is a present obligation arising out of past events but not recognized as provision.
(ii) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence, question of providing for contingent loss does not arise. The probability of winning of next ten cases is 60% and for remaining five cases is 50%. As per AS 29, we make a provision if the loss is probable. As the loss does not appear to be probable and the possibility of an outflow of resources embodying economic benefits is not remote rather there is reasonable possibility of loss, therefore disclosure by way of note should be made. For the purpose of the disclosure of contingent liability by way of note, amount may be calculated as under:
Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000
= Rs. 36,000 + Rs. 20,000
= Rs. 56,000
Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000
= Rs. 30,000 + Rs. 42,000
= Rs. 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic. Therefore, the better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000  10 + Rs. 72,000  5) as contingent liability.
(b) Rs. in lakhs Rs. in lakhs
31.3.2002 31.3.2003
Carried Forward Business Loss and Depreciation Allowance 2,016.60 4,110.00
Add: Disallowance under Section 43 B of Income Tax Act,1961
518.35
611.45
Provision for Doubtful Debts 282.51 294.35
2,817.46 5,015.80
Less: Depreciation 4,010.10 4,023.54
() 1,192.64 992.26
Less: Deferred Revenue Expenditure 4.88 

Timing Differences () 1,197.52 992.26
Deferred Tax Liability 359.26
Deferred Tax Asset 297.68

Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognized only to the extent that there is virtual certainty supported by convincing evidence that future taxable income will be available against which such deferred tax assets can be realized. The existence of unabsorbed depreciation or carry forward of losses is strong evidence that future taxable income may not be available. Deferred Tax Asset of Rs. 297.68 lakhs should not be recognized as an asset as per para 17 of AS 22 on ‘Accounting for Taxes on Income’. Deferred Tax Liability of Rs. 359.26 lakhs should be disclosed under a separate heading in the balance sheet of Z Ltd., separately from current assets and current liabilities.
Question 23
(a) X Co. Ltd. supplied the following information. You are required to compute the basic earning per share:
(Accounting year 1.1.2002 – 31.12.2002)
Net Profit : Year 2002 : Rs. 20,00,000
: Year 2003 : Rs. 30,00,000
No. of shares outstanding prior to Right Issue : 10,00,000 shares
Right Issue : One new share for each four
outstanding i.e., 2,50,000 shares.
Right Issue price – Rs. 20
Last date of exercise rights –
31.3.2003.
Fair rate of one Equity share immediately prior to exercise of rights on 31.3.2003
: Rs. 25

(b) A Ltd. Leased a machinery to B Ltd. on the following terms:
(Rs. in Lakhs)
Fair value of the machinery 20.00
Lease term 5 years
Lease Rental per annum 5.00
Guaranteed Residual value 1.00
Expected Residual value 2.00
Internal Rate of Return 15%
Depreciation is provided on straight line method @ 10% per annum. Ascertain unearned financial income and necessary entries may be passed in the books of the Lessee in the First year.
(c) The following particulars are stated in the Balance Sheet of M/s Exe Ltd. as on 31.03.2003:
(Rs. in Lakhs)
Deferred Tax Liability (Cr.) 20.00
Deferred Tax Assets (Dr.) 10.00
The following transactions were reported during the year 2003-04:
(i) Tax Rate 50%
(ii) Depreciation – As per Books 50.00
Depreciation – for Tax purposes 30.00
There were no addition to Fixed Assets during the year.
(iii) Items disallowed in 2002-03 and allowed for Tax purposes in 2003-04 10.00
(iv) Interest to Financial Institutions accounted in the Books on accrual basis, but actual payment was made on 30.09.2004
20.00
(v) Donations to Private Trusts made in 2003-04 10.00
(vi) Share issue expenses allowed under 35(D) of the I.T. Act, 1961 for the year 2003-04 (1/10th of Rs. 50.00 lakhs incurred in 1999-2000)
5.00
(vii) Repairs to Plant and Machinery Rs. 100.00 lakhs was spread over the period 2003-04 and 2004-05 equally in the books. However, the entire expenditure was allowed for Income-tax purposes.
Indicate clearly the impact of above items in terms of Deferred Tax liability/Deferred Tax Assets and the balances of Deferred Tax Liability/Deferred Tax Asset as on 31.03.2004.
(8 + 8 + 4 = 20 marks)(November, 2004)
Answer
(a) Computation of Basic Earnings Per Share
(as per paragraphs 10 and 26 of AS 20 on Earnings Per Share)
Year 2002 Year 2003
Rs. Rs.
EPS EPS for the year 2002 as originally reported
=

= (Rs. 20,00,000 / 10,00,000 shares) 2.00
EPS EPS for the year 2002 restated for rights issue
= [Rs. 20,00,000 / (10,00,000 shares  1.04)] 1.92
(approx.)
EPS EPS for the year 2003 including effects of rights issue



2.51
(approx.)
Working Notes:
1. Computation of theoretical ex-rights fair value per share



2. Computation of adjustment factor


(b) Computation of Unearned Finance Income
As per AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in the lease and (b) the present value of minimum lease payments under a finance lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.
where :
(a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the lessor and (ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum lease payments + Unguaranteed residual value
= (Total lease rent + Guaranteed residual value) +
Unguaranteed residual value
= [(Rs. 5,00,000  5 years) + Rs. 1,00,000] + Rs. 1,00,000
= Rs. 27,00,000
(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value (URV).
Year
MLP inclusive of URV Internal rate of return (Discount factor 15%) Present Value
Rs. Rs.
1 5,00,000 .8696 4,34,800
2 5,00,000 .7561 3,78,050
3 5,00,000 .6575 3,28,750
4 5,00,000 .5718 2,85,900
5 5,00,000 .4972 2,48,600
1,00,000 .4972 49,720
(guaranteed residual value) ________
17,25,820 (i)
1,00,000 .4972 49,720 (ii)
(unguaranteed residual value) ________
(i) + (ii) 17,75,540 (b)
Unearned Finance Income = (a) – (b)
= Rs. 27,00,000 – Rs. 17,75,540
= Rs. 9,24,460
Journal Entries in the books of B Ltd.
Rs. Rs.
At the inception of lease
Machinery account Dr. 17,25,820
To A Ltd.’s account 17,25,820*
(Being lease of machinery recorded at present value of MLP)
At the end of the first year of lease
Finance charges account (Refer Working Note) Dr. 2,58,873
To A Ltd.’s account 2,58,873
(Being the finance charges for first year due)
A Ltd.’s account Dr. 5 ,00,000
To Bank account 5,00,000
(Being the lease rent paid to the lessor which includes outstanding liability of Rs. 2,41,127 and finance charge of Rs. 2,58,873)
Depreciation account Dr. 1,72,582
To Machinery account 1,72,582
(Being the depreciation provided @ 10% p.a. on straight line method)
Profit and loss account Dr. 4,31,455
To Depreciation account 1,72,582
To Finance charges account 2,58,873
(Being the depreciation and finance charges transferred to profit and loss account)


Working Note:
Table showing apportionment of lease payments by B Ltd. between the finance charges and the reduction of outstanding liability.
Year Outstanding liability (opening balance) Lease rent Finance charge Reduction in outstanding liability Outstanding liability (closing balance)
Rs. Rs. Rs. Rs. Rs.
1 17,25,820 5,00,000 2,58,873 2,41,127 14,84,693
2 14,84,693 5,00,000 2,22,704 2,77,296 12,07,397
3 12,07,397 5,00,000 1,81,110 3,18,890 8,88,507
4 8,88,507 5,00,000 1,33,276 3,66,724 5,21,783
5 5,21,783 5,00,000 78,267 5,21,783 1,00,050*
8,74,230 17,25,820
* The difference between this figure and guaranteed residual value (Rs. 1,00,000) is due to approximation in computing the interest rate implicit in the lease.
(c) Impact of various items in terms of deferred tax liability/deferred tax asset.
Transactions Analysis Nature of difference Effect Amount
Difference in depreciation Generally, written down value method of depreciation is adopted under IT Act which leads to higher depreciation in earlier years of useful life of the asset in comparison to later years. Responding timing difference Reversal of DTL Rs. 20 lakhs  50% = Rs. 10 lakhs
Disallowances, as per IT Act, of earlier years Tax payable for the earlier year was higher on this account. Responding timing difference Reversal of DTA Rs. 10 lakhs  50% = Rs. 5 lakhs
Interest to financial institutions It is allowed as deduction under section 43B of the IT Act, if the payment is made before the due date of filing the return of income (i.e. 31st October, 2004). No timing difference Not applicable Not applicable
Donation to private trusts Not an allowable expenditure under IT Act.
Permanent difference Not applicable Not applicable
Share issue expenses Due to disallowance of full expenditure under IT Act, tax payable in the earlier years was higher. Responding timing difference Reversal of DTA Rs. 5 lakhs  50% = Rs. 2.5 lakhs
Repairs to plant and machinery Due to allowance of full expenditure under IT Act, tax payable of the current year will be less. Originating timing difference Increase in DTL Rs. 50 lakhs  50% = Rs. 25 lakhs
Deferred Tax Liability Account
Dr. Cr.
Rs.
in lakhs Rs.
in lakhs
31.3.2004 To Profit and Loss account
(Depreciation)
10.00 1.4.2003 By
By Balance b/d
Profit and Loss Account 20.00

25.00
To Balance c/d 35.00 (Repairs to plant) ¬____
45.00 45.00
1.4.2004 begin_of_the_skype_highlighting              00 45.00 1.4.2004      end_of_the_skype_highlighting By Balance b/d 35.00

Deferred Tax Asset Account
Dr. Cr.
Rs. in lakhs Rs. in lakhs
1.4.2003 To Balance b/d 10.00 31.3.2004 By
Profit and Loss Account:
Items disallowed in
2002-03 and allowed as per I.T. Act in
2003-04 5.00
Share issue expenses 2.50
____ By Balance c/d 2.50
10.00 10.00
1.4.2004 To Balance b/d 2.50
Question 24
(a) An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the fair value of the equipment are Rs. 3,00,000. The amount will be paid in 3 instalments and at the termination of lease lessor will get back the equipment. The unguaranteed residual value at the end of 3 years is Rs. 40,000. The (internal rate of return) IRR of the investment is 10%. The present value of annuity factor of Re. 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of Re. 1 due at the end of 3rd year at 10% rate of interest is 0.7513.
(i) State with reason whether the lease constitutes finance lease.
(ii) Calculate unearned finance income.
(b) Intelligent Corporation (ICorp.) is dealing in seasonal products. The quarterly sales pattern of the product is given below:
Quarter I II III IV
Ending 31st March 30th June 30th September 31st December
- - - -
For the First quarter ending 31st March, 2005, ICorp. gives you the following information:
Rs. crores
Sales 50
Salary and other expenses 30
Advertisement expenses (routine) 02
Administrative and selling expenses 08
While preparing interim financial report for the first quarter ‘ICorp.’ wants to defer Rs. 21 crores expenditure to third quarter on the argument that third quarter is having more sales, therefore third quarter should be debited by higher expenditure, considering the seasonal nature of business. The expenditures are uniform throughout all quarters.
Calculate the result of first quarter as per AS 25 and comment on the company’s view.
(c) Top & Top Limited has set up its business in a designated backward area which entitles the company to receive from the Government of India a subsidy of 20% of the cost of investment. Having fulfilled all the conditions under the scheme, the company on its investment of Rs. 50 crore in capital assets, received Rs. 10 crore from the Government in January, 2005 (accounting period being 2004-2005). The company wants to treat this receipt as an item of revenue and thereby reduce the losses on profit and loss account for the year ended 31st March, 2005.
Keeping in view the relevant Accounting Standard, discuss whether this action is justified or not. ( 4 + 4 + 4 = 12 marks)(May, 2005)

Answer
(a) (i) Present value of residual value = Rs. 40,000  0.7513 = Rs. 30,052
Present value of lease payments = Rs. 3,00,000 – Rs. 30,052 = Rs. 2,69,948.
The present value of lease payments being 89.98% of the fair value, i.e. being a substantial portion thereof, the lease constitutes a finance lease.
(ii) Calculation of unearned finance income
Rs.
Gross investment in the lease [(Rs.1,08,552  3) + Rs. 40,000] 3,65,656
Less: Cost of the equipment 3,00,000
Unearned finance income 65,656

Note: - In the above solution, annual lease payment has been determined on the basis that the present value of lease payments plus residual value is equal to the fair value (cost) of the asset.
(b) Result of the first quarter
ended 31st March, 2005
(Rs. in crores)
Turnover 50
Add: Other Income Nil
Total 50
Less: Change in inventories Nil
Salaries and other cost 30
Administrative and selling expenses (8 + 2) 10 40
Profit 10

As per AS 25 on Interim Financial Reporting, the income and expense should be recognised when they are earned and incurred respectively. As per para 38 of AS 25, the costs should be anticipated or deferred only when
(i) it is appropriate to anticipate that type of cost at the end of the financial year, and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the argument given by I-Corp relating to deferment of Rs. 21 crores is not tenable as expenditures are uniform through out all quarters.
(c) As per para 10 of AS 12 ‘Accounting for Government Grants’, where the government grants are of the nature of promoters’ contribution, i.e. they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income.
In the given case, the subsidy received is neither in relation to specific fixed asset nor in relation to revenue.Thus it is inappropriate to recognise government grants in the profit and loss statement, since they are not earned but represent an incentive provided by government without related costs. The correct treatment is to credit the subsidy to capital reserve. Therefore, the accounting treatment followed by the company is not proper.
Question 25
(a) Venus Ltd. has an asset, which is carried in the Balance Sheet on 31.3.2005 at Rs. 500 lakhs. As at that date the value in use is Rs. 400 lakhs and the net selling price is Rs. 375 lakhs.
From the above data:
(i) Calculate impairment loss.
(ii) Prepare journal entries for adjustment of impairment loss.
(iii) Show, how impairment loss will be shown in the Balance Sheet.
(b) Himalaya Ltd. in the past three years spent Rs. 75,00,000 to develop a Drug to treat Cancer, which was charged to Profit and Loss Account since they did not meet AS 8 criteria for capitalization. In the current year approval of the concerned Government Authority has been received. The Company wishes to capitalize Rs. 75,00,000 and disclose it as a prior period item. Is it correct? Give reason for your views.
(c) Bottom Ltd. entered into a sale deed for its immovable property before the end of the year. But registration was done with registrar subsequent to Balance Sheet date. But before finalisation, is it possible to recognise the sale and the gain at the Balance Sheet date? Give your view with reasons.
(d) ` In view of the provisions of Accounting Standard 25 on Interim Financial Reporting, on what basis will you calculate, for an interim period, the provision in respect of defined benefit schemes like pension, gratuity etc. for the employees?
(6 + 5 + 5+5 = 21Marks)(Nov.2005)
Answer
(a) (i) Recoverable amount is higher of value in use Rs. 400 lakhs and net selling price Rs. 375 lakhs.
Recoverable amount = Rs. 400 lakhs
Impairment loss = Carried Amount – Recoverable amount
= Rs. 500 lakhs – Rs. 400 lakhs = Rs. 100 lakhs.
(ii) Journal Entries
Particulars Dr. Cr.
Amount Amount
Rs. in lakhs Rs. in lakhs
(i) Impairment loss account Dr. 100
To Asset 100
(Being the entry for accounting impairment loss)
(ii) Profit and loss account Dr. 100
To Impairment loss 100
(Being the entry to transfer impairment loss to profit and loss account)

(iii) Balance Sheet of Venus Ltd. as on 31.3.2005
Rs. in lakhs
Asset less depreciation 500
Less: Impairment loss 100
400
(b) AS 8 stands withdrawn w.e.f. 1st April, 2003 i.e. the date from which AS 26 ‘Intangible Assets’ becomes mandatory. In any case, under either standard, the condition for recognition of a research and development asset has to be fulfilled when the expenditure was incurred. If the recognition conditions are not fulfilled the amount has to be charged to the profit and loss account. Once the amount is charged to the Profit and Loss account, such amount cannot be restated later as a Research and Development Asset when the condition for recognition get fulfilled. The Company therefore cannot capitalize Rs. 75,00,000 even as a prior period item.
(c) Yes, both sales and gain of Bottom Ltd. should be recognized. In accordance with AS 9 at the Balance Sheet date and what was pending was merely a formality to register the deed. It is clear that significant risk and rewards of ownership had passed before the balance sheet date. Further the registration post the balance sheet date confirms the condition of sale at the balance sheet date as per AS 4.
(d) Accounting Standard 25 suggests that provision in respect of defined benefit schemes like pension and gratuity for an interim period should be calculated based on the year-to-date basis by using the actuarially determined rates at the end of the prior financial year, adjusted for significant market fluctuations since that time and for significant curtailments, settlements or other significant one-time events.
Question 26
(a) In May, 2004 Speed Ltd. took a bank loan to be used specifically for the construction of a new factory building. The construction was completed in January, 2005 and the building was put to its use immediately thereafter. Interest on the actual amount used for construction of the building till its completion was Rs. 18 lakhs, whereas the total interest payable to the bank on the loan for the period till 31st March, 2005 amounted to Rs. 25 lakhs.
Can Rs. 25 lakhs be treated as part of the cost of factory building and thus be capitalized on the plea that the loan was specifically taken for the construction of factory building?
(b) Distinguish between “Timing differences” and “Permanent differences” referred to in AS 22 on Accounting for Taxes, giving 2 examples of each. (4 + 4 = 8Marks)( Nov. 2005)
Answer
(a) AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use are completed. Therefore, interest on the amount that has been used for the construction of the building upto the date of completion (January, 2005) i.e. Rs. 18 lakhs alone can be capitalized. It cannot be extended to Rs. 25 lakhs.
(b) Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Examples:
(i) Unabsorbed depreciation and, carry forward of losses which can be set-off against future taxable income.
(ii) Statutory dues deferred for payment under Section 43B of the Income-Tax Act.
“Permanent Differences” are the differences between taxable income and accounting income for a period that originate in one period but do not reverse subsequently.
Examples:
(i) Agricultural income.
(ii) Donations/contributions disallowed for tax purposes
Question 27
(a) Global Ltd. has initiated a lease for three years in respect of an equipment costing Rs.1,50,000 with expected useful life of 4 years. The asset would revert to Global Limited under the lease agreement. The other information available in respect of lease agreement is:
(i) The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at Rs.20,000.
(ii) The implicit rate of interest is 10%.
(iii) The annual payments have been determined in such a way that the present value of the lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Global Ltd.
(i) The annual lease payment.
(ii) The unearned finance income.
(iii) The segregation of finance income, and also,
(iv) Show how necessary items will appear in its profit and loss account and balance sheet for the various years. (8 marks)
(b) Swift Ltd. acquired a patent at a cost of Rs.80,00,000 for a period of 5 years and the product life-cycle is also 5 years. The company capitalized the cost and started amortizing the asset at Rs.10,00,000 per annum. After two years it was found that the product life-cycle may continue for another 5 years from then. The net cash flows from the product during these 5 years were expected to be Rs.36,00,000,Rs.46,00,000, Rs.44,00,000, Rs.40,00,000 and Rs.34,00,000. Find out the amortization cost of the patent for each of the years. ( 4 marks)
(c) The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:
Rs. In lakhs
Particulars M N O P Q R Total
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 -190 10 10 -10 30 -100
Segment Revenue 300 620 80 60 80 60 1,200
The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is he justified in his view? Discuss. . ( 4 marks)
( May, 2006)
Answer
(a) (i) Calculation of Annual Lease Payment
Rs.
Cost of the equipment 1,50,000
Unguaranteed Residual Value 20,000
PV of residual value for 3 years @ 10% (Rs.20,000 x 0.751) 15,020
Fair value to be recovered from Lease Payment
(Rs.1,50,000 – Rs.15,020)
1,34,980
PV Factor for 3 years @ 10% 2.487
Annual Lease Payment (Rs. 1,34,980 / PV Factor for 3 years @ 10% i.e. 2.487)
54,275

(ii) Unearned Financial Income
Total lease payments [Rs. 54,275 x 3] 1,62,825
Add: Residual value 20,000
Gross Investments 1,82,825
Less: Present value of Investments (Rs.1,34,980 + Rs.15,020) 1,50,000
Unearned Financial Income 32,825

(iii) Segregation of Finance Income
Year Lease Rentals


Rs. Finance Charges @
10% on outstanding
amount of the year
Rs. Repayment


Rs. Outstanding Amount

Rs.
0 - - - 1,50,000
I 54,275 15,000 39,275 1,10,725
II 54,275 11,073 43,202 67,523
III 74,275 6,752 67,523 --
1,82,825 32,825 1,50,000

(iv) Profit and Loss Account ( Relevant Extracts)
Credit side Rs.
I Year By Finance Income 15,000
II year By Finance Income 11,073
III year By Finance Income 6,752
Balance Sheet ( Relevant Extracts)
Assets side Rs. Rs.
I year Lease Receivable 1,50,000
Less: Amount Received 39,275 1,10,725
II year Lease Receivable 1,10,725
Less: Received 43,202 67,523
III year :Lease Amount Receivable 67,523
Less: Amount received 47,523
Residual value 20,000 NIL
Notes to Balance Sheet
Year 1 Rs.
Minimum Lease Payments (54,275 + 54,275) 1,08,550
Residual Value 20,000
1,28,550
Unearned Finance Income(11,073+ 6,752) 17,825
Lease Receivables 1,10,725
Classification:
Not later than 1 year
Later than 1 year but not more than 5 years
Total
43,202
67,523
1,10,725
Year II:
Minimum Lease Payments 54,275
Residual Value (Estimated) 20,000
74,275
Unearned Finance Income 6,752
Lease Receivables (not later than 1year) 67,523
III Year:
Lease Receivables (including residual value) 67,523
Amount Received 67,523
NIL

(b) Swift Limited amortised Rs.10,00,000 per annum for the first two years i.e. Rs.20,00,000. The remaining carrying cost can be amortized during next 5 years on the basis of net cash flows arising from the sale of the product. The amortisation may be found as follows:
Year Net cash flows
Rs Amortization Ratio Amortization Amount
Rs.
I - 0.125 10,00,000
II - 0.125 10,00,000
III 36,00,000 0.180 10,80,000
IV 46,00,000 0.230 13,80,000
V 44,00,000 0.220 13,20,000
VI 40,00,000 0.200 12,00,000
VII 34,00,000 0.170 10,20,000
Total 2,00,00,000 1.000 80,00,000

It may be seen from above that from third year onwards, the balance of carrying amount i.e., Rs.60,00,000 has been amortized in the ratio of net cash flows arising from the product of Swift Ltd.
Note: The answer has been given on the basis that the patent is renewable and Swift Ltd. got it renewed after expiry of five years.
(c) As per para 27 of AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other segments is 10% or more of the total revenue- external and internal of all segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss,
whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75% of total enterprise revenue, additional segments should be identified as reportable segments even if they do not meet the 10% thresholds until atleast 75% of total enterprise revenue is included in reportable segments.
(a) On the basis of turnover criteria segments M and N are reportable segments.
(b) On the basis of the result criteria, segments M, N and R are reportable segments (since their results in absolute amount is 10% or more of Rs.200 lakhs).
(c) On the basis of asset criteria, all segments except R are reportable segments.
Since all the segments are covered in atleast one of the above criteria all segments have to be reported upon in accordance with Accounting Standard (AS) 17. Hence, the opinion of chief accountant is wrong.
Question 28
(a) Narmada Ltd. sold goods for Rs.90 lakhs to Ganga Ltd. during financial year ended 31-3-2006. The Managing Director of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga Ltd. at normal selling prices followed by Narmada Ltd. The Chief accountant of Narmada Ltd contends that these sales need not require a different treatment from the other sales made by the company and hence no disclosure is necessary as per the accounting standard. Is the Chief Accountant correct?
(b) Milton Ltd. is a full tax free enterprise for the first 10 years of its existence and is in the second year of its operations. Depreciation timing difference resulting in a deferred tax liability in years 1 and 2 is Rs.200 lakhs and 400 lakhs respectively. From the 3rd year onwards, it is expected that the timing difference would reverse each year by Rs.10 lakhs. Assuming tax rate @35%, find out the deferred tax liability at the end of the second year and any charge to the profit and loss account.
(c) Victory Ltd. purchased goods on credit from Lucky Ltd. for Rs.250 crores for export. The export order was cancelled. Victory Ltd. decided to sell the same goods in the local market with a price discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by Victory Ltd. Discuss whether this treatment is justified.
(d) Accountants of Poornima Ltd. show a net profit of Rs.7,20,000 for the third quarter of 2005 after incorporating the following:
(i) Bad debts of Rs.40,000 incurred during the quarter. 50% of the bad debts have been deferred to the next quarter.
(ii) Extra ordinary loss of Rs.35,000 incurred during the quarter has been fully recognized in this quarter.
(iii) Additional depreciation of Rs.45,000 resulting from the change in the method of charge of depreciation.
Ascertain the correct quarterly income. (4x4=16 Marks)(May, 2006)
Answer
(a) As per paragraph 13 of AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is able to exercise significant influence are related parties. This includes enterprises owned by directors or major shareholders of the reporting enterprise that have a member of key management in common with the reporting enterprise.
In the given case, Narmada Ltd. and Ganga Ltd are related parties and hence disclosure of transaction between them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Narmada Ltd is wrong.
(b) In the case of tax free companies, no deferred tax liability is recognized, in respect of timing differences that originate and reverse in the tax holiday period. Deferred tax liability or asset is created in respect of timing differences that originate in a tax holiday period but are expected to reverse after the tax holiday period. For this purpose, adjustments are done in accordance with the FIFO method.
Of Rs.200 lakhs, Rs.80 lakhs will reverse in the tax holiday period. Therefore, Deferred Tax Liability will be created on Rs.120 lakhs @ 35% (i.e.) Rs.42 lakhs.
In the second year, the entire Rs.400 lakhs will reverse only after the tax holiday period.
Therefore, deferred tax charge in the Profit and Loss Account will be Rs.400 x 35% = 140 lakhs and deferred tax liability in the Balance Sheet will be (42+140) = Rs.182 lakhs.
(c) Lucky Ltd. had sold goods to Victory Ltd on credit worth for Rs.250 crores and the sale was completed in all respects. Victory Ltd’s decision to sell the same in the domestic market at a discount does not affect the amount recorded as sales by Lucky Ltd. The price discount of 15% offered by Lucky Ltd. after request of Victory Ltd. was not in the nature of a discount given during the ordinary course of trade because otherwise the same would have been given at the time of sale itself. Now, as far Lucky Ltd is concerned, there appears to be an uncertainty relating to the collectability of the debt, which has arisen subsequent to the time of sale therefore, it would be appropriate to make a separate provision to reflect the uncertainty relating to collectability rather than to adjust the amount of revenue originally recorded. Therefore, such discount should be written off to the profit and loss account and not shown as deduction from the sales figure.
(d) In the above case, the quarterly income has not been correctly stated. As per AS 25 “Interim Financial Reporting”, the quarterly income should be adjusted and restated as follows:
Bad debts of Rs. 40,000 have been incurred during current quarter. Out of this, the company has deferred 50% (i.e.) Rs. 20,000 to the next quarter. Therefore, Rs. 20,000 should be deducted from Rs. 7,20,000. The treatment of extra-ordinary loss of
Rs. 35,000/- being recognized in the same quarter is correct.
Recognising additional depreciation of Rs. 45,000 in the same quarter is in tune with
AS 25 .Hence, no adjustments are required for these two items.
Poornima Ltd should report quarterly income as Rs.7,00,000 (Rs. 7,20,000–Rs. 20,000).
Question 29
(a) A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2005, when the exchange rate was Rs.43 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for the import transaction was made on 5th April, 2005 when the exchange rate was Rs.47 per US Dollar. However, on 31st March, 2005, the rate of exchange was Rs.48 per US Dollar. The company passed an entry on 31st March, 2005 adjusting the cost of raw materials consumed for the difference between Rs.47 and Rs.43 per US Dollar.
In the background of the relevant accounting standard, is the company’s accounting treatment correct? Discuss.
(b) A private limited company manufacturing fancy terry towels had valued its closing stock of inventories of finished goods at the realisable value, inclusive of profit and the export cash incentives. Firm contracts had been received and goods were packed for export, but the ownership in these goods had not been transferred to the foreign buyers.
Comment on the valuation of the stocks by the company.
(c) A company with a turnover of Rs.250 crores and an annual advertising budget of Rs.2 crore had taken up the marketing of a new product. It was estimated that the company would have a turnover of Rs. 25 crores from the new product. The company had debited to its Profit and Loss account the total expenditure of Rs.2 crore incurred on extensive special initial advertisement campaign for the new product.
Is the procedure adopted by the company correct?
(d) A company deals in petroleum products. The sale price of petrol is fixed by the government. After the Balance Sheet date, but before the finalisation of the company’s accounts, the government unexpectedly increased the price retrospectively. Can the company account for additional revenue at the close of the year? Discuss.
(e) Mohur Ltd. has equity capital of Rs.40,00,000 consisting of fully paid equity shares of Rs.10 each. The net profit for the year 2004-05 was Rs.60,00,000. It has also issued 36,000, 10% convertible debentures of Rs.50 each. Each debenture is convertible into five equity shares. The tax rate applicable is 30%. Compute the diluted earnings.
(4 Marks each)(Nov. 2006)
Answer
(a) 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, 2005 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, 2005 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.
(b) Accounting Standard 2 “Valuation of Inventories” states that inventories should be valued at lower of historical cost and net realisable value. AS 9 on “Revenue Recognition” states, “at certain stages in specific industries, such as when agricultural crops have been harvested or mineral ores have been extracted, performance may be substantially complete prior to the execution of the transaction generating revenue. In such cases, when sale is assured under forward contract or a government guarantee or when market exists and there is a negligible risk of failure to sell, the goods invoiced are often valued at Net-realisable value.”
Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into account the facts stated, the closing stock of finished goods (Fancy terry towel) should have been valued at lower of cost and net-realisable value and not at net realisable value. Further, export incentives are recorded only in the year the export sale takes place. Therefore, the policy adopted by the company for valuing its closing stock of inventories of finished goods is not correct.
(c) According to paras 55 and 56 of AS 26 ‘Intangible Assets’, “expenditure on an intangible item should be recognised as an expense when it is incurret unless it forms part of the cost of an intangible asset”.
In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the marketing of a new product which may provide future economic benefits to an enterprise by having a turnover of Rs.25 crores. Here, no intangible asset or other asset is acquired or created that can be recognised. Therefore, the accounting treatment by the company of debiting the entire advertising expenditure of Rs.2 crores to the Profit and Loss account of the year is correct.
(d) According to para 8 of AS 4 (Revised 1995), the unexpected increase in sale price of petrol by the government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet date, which requires an adjustment at the Balance Sheet date, since it does not represent a condition present at the balance sheet date. The revenue should be recognized only in the subsequent year with proper disclosures. The retrospective increase in the petrol price should not be considered as a prior period item, as per AS 5, because there was no error in the preparation of previous period’s financial statements.
(e) Interest on Debentures @ 10% for the year 36,00050

= Rs.1,80,000
Tax on interest @ 30% = Rs.54,000
Diluted Earnings (Adjusted net profit) = (60,00,000 + 1,80,000-54,000)
= Rs. 61,26,000

Question 30
(a) During the course of the last three years, a company owning and operating Helicopters lost four Helicopters. The company Accountant felt that after the crash, the maintenance provision created in respect of the respective helicopters was no longer required, and proposed to write back to the Profit and Loss account as a prior period item.
Is the Company’s proposed accounting treatment correct? Discuss.
(b) Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a flyover. As per the contract terms, ‘X’ will receive an additional Rs.2 crore if the construction of the flyover were to be finished within a period of two years of the commencement of the contract. Mr. X wants to recognize this revenue since in the past he has been able to meet similar targets very easily.
Is X correct in his proposal? Discuss.
(c) A Company is in the process of setting up a production line for manufacturing a new product. Based on trial runs conducted by the company, it was noticed that the production lines output was not of the desired quality. However, company has taken a decision to manufacture and sell the sub-standard product over the next one year due to the huge investment involved.
In the background of the relevant accounting standard, advise the company on the cut-off date for capitalization of the project cost.
(d) A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices are generally 25% above cost. Is the policy adopted by the company correct? (4+4+4+4 = 16 Marks)(May, 2007)
Answer
(a) The balance amount of maintenance provision written back to profit and loss account, no longer required due to crash of the helicopters, is not a prior period item because there was no error in the preparation of previous periods’ financial statements. The term ‘prior period items’, as defined in AS 5 (revised) “Net Profit or Loss for the Period, Prior Period Items and Changes In Accounting Policies”, refer only to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. As per paragraph 8 of AS 5, extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived. The amount so written-back (If material) should be disclosed as an extraordinary item as per AS 5.
(b) According to para 14 of AS 7 (Revised) ‘Construction Contracts’, incentive payments are additional amounts payable to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract. Incentive payments are included in contract revenue when: (i) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and (ii) the amount of the incentive payment can be measured reliably. In the given problem, the contract has not even begun and hence the contractor (Mr. X) should not recognize any revenue of this contract.
(c) As per provisions of AS 10 ‘Accounting for Fixed Assets’, expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalized as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production i.e., production intended for sale or captive consumption, is not capitalized and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period. In the present case, the company did stop production even if the output was not of the desired quality, and continued the sub-standard production due to huge investment involved in the project. Capitalization should cease at the end of the trial run, since the cut-off date would be the date when the trial run was completed.
(d) AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis that the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements. Hence, the enterprise can have its own policy for pricing inter-segment transfers and hence, inter-segment transfers may be based on cost, below cost or market price. However, whichever policy is followed, the same should be disclosed and applied consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by the company is correct if, followed consistently.
Question 31
Write short notes on:
(a) Impairment of asset and its application to inventory.
(b) Treatment of borrowing costs.
(c) Accounting for investment by a holding company in subsidiaries.
(4 marks each) (May, 2007)
(d) Concept of Materiality. (6 Marks) (Nov. 2007)
Answer
(a) The objective of AS 28 ‘Impairment of Assets’ is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Statement requires the enterprise to recognize an impairment loss. This standard should be applied in accounting for the impairment of all assets, other than (i) inventories (AS 2, Valuation of Inventories); (ii) assets arising from construction contracts (AS 7, Accounting for Construction Contracts); (iii) financial assets, including investments that are included in the scope of AS 13, Accounting for Investments; and (iv) deferred tax assets (AS 22, Accounting for Taxes on Income). AS 28 does not apply to inventories, assets arising from construction contracts, deferred tax assets or investments because other accounting standards applicable to these assets already contain specific requirements for recognizing and measuring the impairment related to these assets.
(b) According to AS 16, borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. Borrowing costs may include: (i) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; (ii) amortization of discounts or premiums relating to borrowings; (iii) amortization of ancillary costs incurred in connection with the arrangement of borrowings; (iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and (v) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset• should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred. The capitalization of borrowing costs as part of the cost of a qualifying asset should commence when the conditions specified in AS 16 are satisfied.
(c) Investments by a holding company in the shares of its subsidiary company are normally considered as long term investments. Indian holding companies show investment in subsidiary just like any other investment and generally classify it as trade investment. As per AS 13 ‘Accounting for Investments’, investments are classified as long term and current investments. A current investment is an investment that by its nature is readily realizable and is intended to be held for more than one year from the date of acquisition. A long term investment is one that is not a current one.
Costs of investment include besides acquisition charges, expenses such as brokerage, fees and duties. If an investment is acquired wholly or partly by an issue of shares or other securities, the acquisition cost is determined by taking the fair value of the shares/securities issued. If an investment were to be acquired in exchange – part or whole – for another asset, the acquisition cost of the investment is determined with reference to the value of the other asset exchanged. Dividends received out of incomes earned by a subsidiary before the acquisition of the shares by the holding company and not treated as income but treated as recovery of cost of the assets (investment made in the subsidiary). The carrying cost for current investment is the lower of cost or fair/market value whereas investment in the shares of the subsidiary (treated as long term) is carried normally at cost.
(d) Para 17 of AS 1 ‘Disclosure of Accounting Policies’, states that financial statements should disclose all material items, i.e., items the knowledge of which might influence the decisions of the user of the financial statements. Materiality depends on the size of item or error judged in the particular circumstances of its omission or misstatement. From a positive perspective, materiality has to do with the significance of an item or event to warrant attention in the accounting process. From a negative view point, materiality is critical because otherwise a great deal of time might be spent on trivial matters in the accounting process. Individual judgements are required to assess materiality, or to decide what the appropriate minimum quantitative criteria are to be set for given situations. What is material to one organisation, may not be material for another organisation.
The relevance of information is affected by its materiality. Information is material if its misstatements (i.e., omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which the information must have if it is to be useful.
Question 32
(a) Arrange and redraft the following Cash Flow Statement in proper order keeping in mind the requirements of AS 3:
Rs. (in lacs) Rs.(in lacs)
Net Profit 60,000
Add: Sale of Investments 70,000
Depreciation on Assets 11,000
Issue of Preference Shares 9,000
Loan raised 4,500
Decrease in Stock 12,000
1,66,500
Less: Purchase of Fixed Assets 65,000
Decrease in Creditors 6,000
Increase in Debtors 8,000
Exchange gain 8,000
Profit on sale of investments 12,000
Redemption of Debenture 5,700
Dividend paid 1,400
Interest paid 945 1,07,045
59,455
Add: Opening cash and cash equivalent 12,341
Closing cash and cash equivalent 71,796

(b) P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The management of R Ltd. has not disclosed its relationship with P Ltd.
How would you assess the situation from the viewpoint of AS 18 on Related Party Disclosures?
(c) Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs.7,00,000. The economic life of the machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays Rs.3,00,000. Guaranteed Residual Value (GRV) is Rs.22,000 on expiry of the lease. Implicit Rate of Return (IRR) is 15% p.a. and present value factors at 15% are 0.869, 0.756 and 0.657 at the end of first, second and third years respectively.
Calculate the value of machine to be considered by Lessee Ltd. and the interest (Finance charges) in each year. (6+4+6 = 16 Marks)(Nov. 2007)
Answer
(a) Cash Flow Statement
Cash flows from operating activities (Rs. in lacs)
Net profit 60,000
Less: Exchange gain (8,000)
Less: Profit on sale of investments (12,000)
40,000
Add: Depreciation on assets 11,000
Change in current assets and current liabilities 51,000
(-) Increase in debtors (8,000)
(+) Decrease in stock 12,000
(-) Decrease in creditors (6,000) (2,000)
Net cash from operating activities 49,000
Cash flows from investing activities
Sale of investments 70,000
Purchase of fixed assets (65,000)
Net cash from Investing activities 5,000
Cash flows from financing activities
Issue of preference shares 9,000
Loan raised 4,500
Redemption of Debentures (5,700)
Interest paid (945)
Dividend paid (1,400)
Net cash from financing activities 5,455
Net increase in cash & cash equivalents 59,455
Add: Opening cash and cash equivalents 12,341
Closing cash and cash equivalents 71,796
(b) P Ltd. has direct economic interest in R Ltd to the extent of 14%, and through Q Ltd. in which it is the majority shareholders, it has further control of 12% in R Ltd. (60% of Q Ltd’s 20%). These two taken together (14% + 12%) make the total control of 26%.
Para 10 of AS 18 ‘Related Party Disclosures’, defines related party as one that has at any time during the reporting period, the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.
Here, Control is defined as ownership directly or indirectly of more than one-half of the voting power of an enterprise; and Significant Influence is defined as participation in the financial and/or operating policy decisions of an enterprise but not control of those policies.
In the present case, control of P Ltd. in R Ltd. directly and through Q Ltd., does not go beyond 26%. However, as per para 12 of AS 18, significant influence may be exercised as an investing party (P Ltd.) holds, directly or indirectly through intermediaries 20% or more of the voting power of the R Ltd. As R Ltd. is a listed company and regularly supplies goods to P Ltd. therefore, related party disclosure, as per AS 18, is required.
(c) Value of machine will be lower of the fair value or present value (PV) of Minimum Lease Payments (MLP).
Present value (PV) of Minimum Lease Payments (MLP)
Year MLP PV at 15% PV Amount
Rs. Rs.
1 3,00,000 0.869 2,60,700
2 3,00,000 0.756 2,26,800
3 3,22,000 (considering residual value) 0.657 2,11,554
6,99,054
Since PV of MLP Rs. 6,99,054 being lower than the fair value Rs. 7,00,000, therefore, value of machine will be taken as Rs.6,99,054.
Calculation of interest (finance charges)
Year Liability Interest at 15% Principal Lease rental
Rs. Rs. Rs. Rs.
6,99,054 1,04,858 1,95,142 3,00,000
1st Less: Principal 1,95,142 (Rental – Interest)
5,03,912 75,587 2,24,413 3,00,000
2nd Less: Principal 2,24,413 (Rental – Interest)
2,79,499 41,925 2,58,075 3,00,000
3rd Less: Principal 2,58,075 (Rental – Interest)
Residual value 21,424


Question 33
X Ltd. began construction of a new building on 1st January, 2007. It obtained Rs.1 lakh special loan to finance the construction of the building on 1st January, 2007 at an interest rate of 10%. The company’s other outstanding two non-specific loans were:
Amount Rate of Interest
Rs.5,00,000 11%
Rs.9,00,000 13%
The expenditure that were made on the building project were as follows:
Rs.
January 2007 2,00,000
April 2007 2,50,000
July 2007 4,50,000
December 2007 1,20,000
Building was completed by 31st December, 2007. Following the principles prescribed in AS-16 ‘Borrowing Cost,’ calculate the amount of interest to be capitalized and pass one Journal Entry for capitalizing the cost and borrowing cost in respect of the building. (10 Marks) (May, 2008)
Answer
(i) Computation of average accumulated expenses Rs.
Rs. 2,00,000 x 12 / 12 = 2,00,000
Rs. 2,50,000 x 9 / 12 = 1,87,500
Rs. 4,50,000 x 6 / 12 = 2,25,000
Rs. 1,20,000 x 1 / 12 = 10,000
6,22,500
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (in Rs.) Rate of interest Ampount of interest (in Rs.)
5,00,000 11% = 55,000
9,00,000 13% = 1,17,000
14,00,000 1,72,000
Weighted average rate of interest ( )
= 12.285% (approx)

(iii) Interest on average accumulated expenses
Rs.
Specific borrowings (Rs. 1,00,000 X 10%) = 10,000
Non-specific borrowings (Rs. 5,22,500 X 12.285%) = 64,189
Amount of interest to be capitalized = 74,189
(iv) Total expenses to be capitalized for building
Rs.
Cost of building Rs.(2,00,000 + 2,50,000 + 4,50,000 + 1,20,000) 10,20,000
Add: Amount of interest to be capitalised 74,189
10,94,189
(v) Journal Entry
Date Particulars Dr. (Rs.) Cr. (Rs.)
31.12.2007 Building account Dr. 10,94,189
To Bank account 10,94,189
(Being amount of cost of building and borrowing cost thereon capitalized)
Question 34
(a) U.K. International Ltd. is developing a new production process. During the financial year ending 31st March, 2007, the total expenditure incurred was Rs.50 lakhs. This process met the criteria for recognition as an intangible asset on 1st December, 2006. Expenditure incurred till this date was Rs.22 lakhs. Further expenditure incurred on the process for the financial year ending 31st March, 2008 was Rs.80 lakhs. As at 31st March, 2008, the recoverable amount of know-how embodied in the process is estimated to be Rs.72 lakhs. This includes estimates of future cash outflows as well as inflows.
You are required to calculate:
(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2007 and carrying value of intangible as on that date.
(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March, 2008.
Ignore depreciation.
(b) Mini Ltd. took a factory premises on lease on 1.4.07 for Rs.2,00,000 per month. The lease is operating lease. During March, 2008, Mini Ltd. relocates its operation to a new factory building. The lease on the old factory premises continues to be live upto 31.12.2010. The lease cannot be cancelled and cannot be sub-let to another user. The auditor insists that lease rent of balance 33 months upto 31.12.2010 should be provided in the accounts for the year ending 31.3.2008. Mini Ltd. seeks your advice.
(c) A Cosmetic articles producing company provides the following information:
Cold Cream Vanishing Cream
January, 2006 – September, 2006 per month 2,00,000 2,00,000
October, 2006 – December, 2006 per month 1,00,000 3,00,000
January, 2007- March, 2007 per month 0 4,00,000
The company has enforced a gradual change in product-line on the basis of an overall plan. The Board of Directors of the company has passed a resolution in March, 2006 to this effect. The company follows calendar year as its accounting year. Should this be treated as a discontinuing operation? Give reasons in support of your answer.
(5+5+5 =15 Marks) (May, 2008)
Answer
(a) As per AS 26 ‘Intangible Assets’
(i) For the year ending 31.03.2007
(1) Carrying value of intangible as on 31.03.2007:
At the end of financial year 31st March 2007, the production process will be recognized (i.e. carrying amount) as an intangible asset at a cost of Rs. 28 lakhs (expenditure incurred since the date the recognition criteria were met, i.e., on 1st December 2006).
(2) Expenditure to be charged to Profit and Loss account:
The Rs. 22 lakhs is recognized as an expense because the recognition criteria were not met until 1st December 2007. This expenditure will not form part of the cost of the production process recognized in the balance sheet.
(ii) For the year ending 31.03.2008
(1) Expenditure to be charged to Profit and Loss account:
(Rs. in lakhs)
Carrying Amount as on 31.03.2007 28
Expenditure during 2007 – 2008 80
Total book cost 108
Recoverable Amount 72
Impairment loss 36
Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2008.
(2) Carrying value of intangible as on 31.03.2008:
(Rs. in lakhs)
Total Book Cost 108
Less: Impairment loss 36
Carrying amount as on 31.03.2008 72
(b) In accordance with AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’ and ASI 30 ‘Applicability of AS 29 to Onerous Contracts’, if an enterprise has a contract that is onerous, the present obligation under the contract should be recognized and measured as a provision. In the given case, the operating lease contract has become onerous as the economic benefit of lease contract for next 33 months up to 31.12.2010 will be nil. However, the lessee, Mini Ltd., has to pay lease rent of Rs. 66,00,000 (i.e.2,00,000 p.m. for next 33 months).
Therefore, provision on account of Rs.66,00,000 is to be provided in the accounts for the year ending 31.03.08. Hence auditor is right.
(c) In response to the market forces, business enterprises often abandon products or even product lines and reduce the size of their work-force. These actions are not in themselves discontinuing operations unless they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product line of cold creams, simultaneously increasing operation in the product line of vanishing creams. The company was not disposing of any of its components. Phasing out a product line as undertaken by the company does not meet definition criteria in paragraph 3 of AS 24, namely, disposing of substantially in its entirety a component of the enterprise. Therefore, this change over is not a discontinuing operation.
Question 35
From the following information of Beta Ltd. calculate Earning Per Share (EPS) in accordance with AS-20:
(Rs.)
Year 31.3.08 Year 31.3.07
1. Net profit before tax 3,00,000 1,00,000
2. Current tax 40,000 30,000
Tax relating to earlier years 24,000 (13,000)
Deferred tax 30,000 10,000
3. Profit after tax 2,06,000 73,000
4. Other information:
(a) Profit includes compensation from Central Government towards loss on account of earthquake in 2005 (non-taxable)
1,00,000
NIL
(b) Outstanding convertible 6% Preference shares 1,000 issued and paid on 30.9.2006. Face value Rs.100, Conversion ratio 15 equity shares for every preference share.
(c) 15% convertible debentures of Rs.1,000 each total face value Rs.1,00,000 to be converted into 10 Equity shares per debenture issued and paid on 30.6.2006.
(d) Total no. of Equity shares outstanding as on 31.3.2008, 20,000 including 10,000 bonus shares issued on 1.1.08, face value Rs.100.
Administrative and Collection costs 25,000
(8 Marks) (Nov. 2008)
Answer
(a) Calculation of Earning Per Share (EPS) of Beta Ltd.
Rs. Rs.
Year ended 31.3.08 Year ended 31.3.07
1. A Earning after extra ordinary items 2,00,000 70,000
(2,06,000 – 6,000) (73,000 – 3,000)
B. No. of Equity Shares
20,000
20,000
C. Basic Earnings Per share [A/B] 10.00 3.50

A. Earning before extra ordinary items 1,00,000 70,000
B. No. of Equity Shares 20,000 20,000
C. Basic Earnings Per share [A/B] 5.00 3.50

2. Tax Rate applicable
40,000 + 30,000/2,00,000 35%
30,000 + 10,000/1,00,000 40%
3. A. Dividend on Weighted Average Preference Shares 6,000 3,000
B. Incremental shares 15,000 7,500
C. EPS on Incremental Shares [A/B] 0.40 0.40
(dilutive) (dilutive)
4. Convertible Debentures
A. Increase in earnings
(1,00,000
9,750

6,750
B. Increase in shares 1,000 750
C. Increase in EPS [A/B] 9.75 9.00
(Anti dilutive) (Anti dilutive)
It is anti-dilutive as it increases the EPS from continuing ordinary operations (Para 39, AS 20)
Calculation of Diluted EPS Year ended 31.3.08
Rs. Year ended 31.3.07
Rs.
A. Profit from continuing ordinary activities before Preference Dividend
1,06,000
73,000
No. of ordinary equity shares 20,000 20,000
Adjustment for dilutive potential of 6% convertible pref. shares
15,000
7,500
B. Total no. of shares 35,000 27,500
C. Diluted EPS from continuing ordinary operations [A/B] 3.02 2.65
D. Profit including extra ordinary items 2,06,000 73,000
E. Adjusted No. of shares 35,000 27,500
F. Diluted EPS including extra ordinary items [D/E] 5.88 2.65



Disclosure of EPS in accordance with AS 20 in the Profit and Loss Account
Earning per share (Face value Rs.100) 31.3.08 (Rs. ) 31.3.07 (Rs.)
Basic EPS from continuing ordinary operations 5.00 3.50
Diluted EPS from continuing ordinary operations 3.02 2.65
Question 36
(a) Golden Eagle Ltd., has been successful jewellers for the past 100 years and sales are against cash only. The company diversified into apparels. A young senior executive was put in charge of Apparels business and sales increased 5 times. One of the conditions for sales that dealers can return the unsold stocks within one month of the end of season. Sales return for the year was 25% of sales. Suggest a suitable Revenue Recognition Policy with references to AS-9.
(b) Discuss the concept of Cost v/s Fair value with reference to Indian Accounting Standards.
(c) A company has a scheme for payment of settlement allowance to retiring employees. Under the scheme, retiring employees are entitled to reimbursement of certain travel expenses for class they are entitled to as per company rule and to a lump-sum payment to cover expenses on food and stay during the travel. Alternatively employees can claim a lump sum amount equal to one month pay last drawn.
The company’s contentions in this matter are:
(i) Settlement allowance does not depend upon the length of service of employee. It is restricted to employee’s eligibility under the Travel rule of the company or where option for lump-sum payment is exercised, equal to the last pay drawn.
(ii) Since it is not related to the length of service of the employees, it is accounted for on claim basis.
State whether the contentions of the company are correct as per relevant Accounting Standard. Give reasons in support of your answer. (4 marks each) (Nov. 2008)
Answer
(a) As per AS 9 “Revenue recognition”, revenue recognition is mainly concerned with the timing of recognition of revenue in statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by the agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.
In the case of the Jewellery Business the company is selling for cash and returns are negligible. Hence, revenue can be recognized on sales. On the other hand, in Apparels Industry, the dealers have a right to return the unsold goods within one month of the end of the season. In this case, the company is bearing the risk of sales return and therefore, the company should not recognize the revenue to the extent of 25% of its sales. The company may disclose suitable revenue recognition policy in its financial statements separately for both Jewellery and Apparels business.
(b) Cost vs. Fair value
Cost basis: The term cost refers to cost of purchase, costs of conversion on other costs incurred in bringing the goods to its present condition and location. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.
Fair value: Fair value of an asset is the amount at which an enterprise expects to exchange an asset between knowledgeable and willing parties in an arm’s length transaction.
Indian Accounting Standards are generally based on historical cost with a very few exceptions:
AS 2 “Valuation of Inventories” – Inventories are valued at net realizable value (NRV) if cost of inventories is more than NRV.
AS 10 “Accounting for Fixed Assets” – Items of fixed assets that have been retired from active use and are held for disposal are stated at net realizable value if their net book value is more than NRV.
AS 13 “Accounting for Investments” – Current investments are carried at lower of cost and fair value. The carrying amount of long term investments is reduced to recognise the permanent decline in value.
AS 15 “Employee Benefits” – The provision for defined benefits is made at fair value of the obligations.
AS 26 “Intangible Assets” – If an intangible asset is acquired in exchange for shares or other securities of the reporting enterprise, the asset is recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident.
AS 28 “Impairment of Assets”– Provision is made for impairment of assets.
On the other hand IFRS and US GAAPs are more towards fair value. Fair value concept requires a lot of estimation and to the extent, it is subjective in nature.
(c) The present case falls under the category of defined benefit scheme under Para 49 of AS 15 (Revised) “Employee Benefits”. The said para encompasses cases where payment promised to be made to an employee at or near retirement presents significant difficulties in the determination of periodic charge to the statement of profit and loss. The contention of the Company that the settlement allowance will be accounted for on claim basis is not correct even if company’s obligation under the scheme is uncertain and requires estimation. In estimating the obligation, assumptions may need to be made regarding future conditions and events, which are largely outside the company’s control. Thus,
(1) Settlement allowance payable by the company is a defined retirement benefit, covered by AS I5 (Revised).
(2) A provision should be made every year in the accounts for the accruing liability on account of settlement allowance. The amount of provision should be calculated according to actuarial valuation.
(3) Where, however, the amount of provision so determined is not material, the company can follow some other method of accounting for settlement allowances.
Question 37
(a) XYZ Ltd., with a turnover of Rs.35 lakhs and borrowings of Rs.10 lakhs during any time in the previous year, wants to avail the exemptions available in adoption of Accounting Standards applicable to companies for the year ended 31.3.2008. Advise the management the exemptions that are available as per Companies (AS) Rules, 2006.
If XYZ is a partnership firm is there any other exemptions additionally available.
(b) Write short note on NACAS. (8 + 4 = 12marks)(Nov. 2008)
Answer
(a) XYZ Ltd. is a small and medium sized enterprise (SME) company as per Companies (AS) Rules, 2006. The following relaxations and exemptions are available.
1. AS 3 “Cash Flow Statements” is not mandatory.
2. AS 17 “Segment Reporting” is not mandatory.
3. SMEs are exempt from some paragraphs of AS 19 “Leases”.
4. SMEs are exempt from disclosures of diluted EPS (both including and excluding extraordinary items).
5. SMEs are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereof instead of computing the value in use by present value technique under AS 28 “Impairment of Assets”.
6. SMEs are exempt from disclosure requirements of paragraphs 66 and 67of AS 29 “Provisions , Contingent Liabilities and Contingent Assets”.
7. SMEs are exempt from certain requirements of AS 15 “Employee Benefits”.
8. Accounting Standards 21, 23, 27 are not applicable to SMEs.
If XYZ is not a company, it will be treated as a level III enterprise instead of level II enterprise; XYZ Ltd. will be exempt from requirements of AS 18 “Related Party Disclosures” and AS 24 “Discontinuing Operations”.
(b) NACAS: Under Section 210 A of the Companies Act 1956, the Central Government, by notification, has constituted a committee to advise the Central Government on the formulation of accounting policies and accounting standards for adoption by companies or class of companies specified under the Act. Based on the recommendations of NACAS, the Central Government has notified AS 1 to AS 7 and AS 9 to AS 29 in Dec. 2006 in the form of Companies (Accounting Standards) Rules, 2006.
Question 38
(a) Summarise the recommendations of the Institute of Chartered Accountants of India regard¬ing accounting treatment of excise duty. (10 marks)
(b) Write a short note on accounting of income during construction period. (5 marks)
(c) Advise the company on the following item while from the view point of finalisation of accounts :
While executing a new project, the company had to pay Rs. 50 lakhs to the State Government as part of the cost of roads built by the State Government in the vicinity of the project for the purpose of carrying machinery and materials to the project site. The road so built is the property of the State Government. (3 marks) (November, 1996)
Answer
(a) As per the Guidance Note on Accounting Treatment for Excise Duty issued by the Institute, the summary of recommendations is given as below:
(i) Excise duty should be considered as a manufacturing expense and like other manufacturing expense be considered as an element of cost for inventory valuation.
(ii) Where excise duty is paid on excisable goods and such goods are subsequently utilised in the manufacturing process the duty paid on such goods becomes a manufacturing cost and must be included in the valuation of work-in-progress or finished goods arising from the subsequent processing of such goods.
(iii) Where the liability for excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made. The estimate of such liability can be made at the rates in force on the balance sheet date. If provision is not made, the liability should be quantified and the fact about the non-provision of such liability should be disclosed in the accounts.
(iv) The excise duty cannot be treated a s a period cost.
(v) If the method of accounting for excise duty or the method of inventory valuation is not in accordance with the principles explained in this guidance note, the auditor should qualify his report.
Note: The ICAI has issued a separate Guidance Note on Accounting Treatment for MODVAT which sets out principles of accounting for MODVAT (now renamed as CENVAT). The Guidance Note ‘Accounting Treatment for MODVAT/CENVAT’ is, currently under revision.
(b) The treatment and accounting of, income during the construction or pre-production period has been explained in para 8.1 of the Guidance Note on Treatment of Expenditure During Construction Period. According to it, it is possible that a new project may earn some income from miscellaneous sources during its construction or pre-production period. Such income may be earned by way of interest from the temporary investment of surplus funds prior to their utilisation for capital or other expenditure or from sale of products manufactured during the period of test runs and experimental production. Such items of income should be disclosed separately either in the profit and loss account, where this account is prepared during construction period, or in the account/statement prepared in lieu of the profit and loss account, i.e., Development Account/Incidental Expenditure During Construction Period Account/Statement on Incidental Expenditure During Con¬struction.
The treatment of such incomes for arriving at the amount of expenditure to be capitalised/deferred, has been dealt with in para 15.2. According to para 15.2, from the total of the items of indirect expenditure (mentioned in para 15.1 e.g. preliminary project expenditure, financial expenses, depreciation on fixed assets used during the period of construction etc.), would be deducted the income, if any, earned during the period of construction, provided it can be identified with the project.
Note: Currently, Guidance Note ‘Accounting Treatment of Expenditure during Construction Period’ is under revision.
(c) In this case, the capital expenditure incurred by the company would not be represented by any actual assets, since the roads would remain the property of the relevant State authorities even though a part of their cost has been defrayed by the company in order to facilitate its business.
Having regard to the nature of the expenditure and the purpose for which it is incurred, it is suggested in para 10 of Guidance Note on Treatment of Expenditure During Con¬struction Period that it would be more appropriate and realistic to classify such expendi¬ture in the balance sheet under the heading of "Capital Expenditure" rather than either, write-off the expenditure to revenue or classify the expenditure under the heading of "Mis¬cellaneous Expenditure" or "Deferred Revenue Expenditure" subject to two conditions. In the first place, the description of the specific item on the balance sheet should be such as to indicate quite clearly that the capital expenditure is not represented by any assets owned by the company. In the second place, the capital expenditure should be written off over the approximate period of its utility or over a relatively brief period not exceeding five years, whichever is less.
Question 39
A factory went into commercial production on 1st April, 1997. It uses as its raw materials product X on which excise duty of Rs. 30 per Kg. is paid and product Y on which excise duty of Rs. 20 per kg. is paid. On 31st March, 1997 it had stock of 20,000 kgs. of X and 15,000 kgs. of Y which it had purchased at an all inclusive price of Rs. 150 per kg. for X and Rs. 120 per kg. for Y. The suppliers of X and Yare to receive payment on 15th May, 1997.
During April 1997, the factory manufactured 40,000 units of the end product for which the consumption of material X was 60,000 kgs. and material Y was 45,000 kgs. The excise duty on the end product is Rs. 60 per unit. 30,000 units of the end product were dispatched, 8,000 units were kept in warehouse and balance 2,000 kgs. were kept in finished goods godown.
During the month the factory purchased 50,000 kgs. of X at Rs. 145 per kg. (inclusive of excise duty of Rs. 30 per kg.) on credit of 60 days and 50,000 kgs. of Y at Rs. 110 per kg. (inclusive of excise duty of Rs. 20 per kg.) on credit of 45 days.
The cost of "converting" the raw materials into finished product amounts to Rs. 150 per unit of end product of which Rs. 100 is "cash cost" paid immediately and Rs. 50 represents non-cash charge for depreciation. There is no work in process.
Sales are effected at Rs. 750 per unit in respect of credit transactions and at Rs. 700 per unit in respect of cash transactions. 20% of despatches were in respect of cash transactions while the balance 80% were in respect of credit transactions (one month credit).
You `are required to:
(a) (i) Calculate modvat credit available, modvat credit availed of and balance in modvat credit as on 30th April, 1997.
(ii) Show the necessary ledger accounts in respect of modvat. (3 + 2 = 5 marks)
(b) Value the inventory of:
(i) raw material
(ii) finished goods in warehouse
(iii) finished goods in finished goods godown on "first in first out" principle. (3 marks)
(c) Show the ledger accounts of customers, suppliers and bank, assuming that the necessary bank balance is available at the start of the month to meet "cash" expenses of that month. (3 marks)
(d) Calculate the working capital as on 30th April, 1997. (2 marks)
(e) State the impact" of 'modvat' on working capital requirement of the factory as on 30th April, 1997. (2 marks)
(May, 1997)
Answer
(a) (i) Excise duty paid on raw materials:
X Y Total
Kgs. @ Amount Kgs. @ Amount Amount
Rs. Rs. Rs. Rs. Rs.
Stock on 31st March, 1997
20,000
30
6,00,000
15,000
20
3,00,000
9,00,000
Purchases 50,000 30 15,00,000 50,000 20 10,00,000 25,00,000
21,00,000 13,00,000 34,00,000
Modvat credit available:
Rs. 21,00,000 + 13,00,000 = Rs. 34,00,000
Modvat credit available of:
Production = 40,000 units
Excise duty on the end product = Rs. 60 per unit
Modvat credit availed of = 40,000  60 = Rs. 24,00,000
Balance in Modvat credit 34,00,000 – 24,00,000 = Rs. 10,00,000
Note: Normally goods are removed from factory on payment of excise duty. However, in respect of certain goods, provision has been made to store the goods in warehouses without payment of duty (Rule 20 of Central Excise Rules, 2002). These provisions are also applicable to goods transferred to customs warehouse.
It is to be noted that as per para 33 of The Guidance Note on Accounting Treatment for Excise Duty, it is necessary that a provision for liability in respect of unpaid excise duty should be made in the accounts in respect of stocks lying in the factory or warehouse since the liability for excise duty arises when the manufacture of the goods is completed.
(ii) Modvat Credit Receivable Account
Dr. Cr.
1997 1997 Cr.
April 1 To Balance b/d April By Excise Duty A/c 24,00,000
X 6,00,000
Y 3,00,000
9,00,000 April 31 By Balance c/d 10,00,000
April To Suppliers A/c
X 15,00,000
Y 10,00,000
25,00,000 ¬________
34,00,000 34,00,000
Purchases Account
Dr. Cr.
1997 1997
April To Suppliers A/c April 31 By Balance c/d 1,02,50,000
X: [50,000  (145 – 30)] 57,50,000
Y: [50,000  (110 – 20)] 45,00,000 ¬_________
1,02,50,000 1,02,50,000

(b) Valuation of Inventory
(i) Raw material:
X Y
(Kgs.) (Kgs.)
Opening stock 20,000 15,000
Purchases 50,000 50,000
70,000 65,000
Consumption 60,000 45,000
Closing stock 10,000 20,000

Inventory: Rs.
X : 10,000  (145 – 30) 11,50,000
Y : 20,000  (110 – 20) 18,00,000
29,50,000
(ii) Finished goods in warehouse
Rs.
Raw material cost of 80,000 units of output
X : 12,000*  (145 – 30) 13,80,000
Y : 9,000*  (110 – 20) 8,10,000 21,90,000
Conversion cost
Cash cost : 8,000  Rs. 100 8,00,000
Non-cash : 8,000  Rs. 50 4,00,000 12,00,000
Excise duty
8,000  Rs. 60 4,80,000
38,70,000
* For 40,000 units of output,
input of X = 60,000 Kgs.
input of Y = 45,000 Kgs.
Therefore, for 8,000 units of finished goods in warehouse:
Input of X =
Input of Y =
(iii) Finished goods in finished goods godown
Rs.
Cost of 8,000 units of finished goods in warehouse 38,70,000
Cost of 2,000 units of finished goods in finished goods godown =

9,67,500
(c) Customers Account
Dr. Cr.
Rs. Rs.
To Sales A/c

1,80,00,000
By Balance c/d
1,80,00,000

1,80,00,000 1,80,00,000
Suppliers Account
Rs. Rs.
To Balance c/d 1,75,50,000 By Balance b/d
X : 20,000  Rs. 150 = 30,00,000
Y : 15,000  Rs. 120 = 18,00,000
48,00,000
By Purchases A/c 1,02,50,000
By Modvat Credit Receivable A/c
X : 50,000  30 = 15,00,000
Y : 50,000  20 = 10,00,000
¬__________ 25,00,000
1,75,50,000 1,75,50,000

Bank Account
Rs. Rs.
To Balance b/d 40,00,000 By Cash Expenses (40,000  100) 40,00,000
To Sales (cash sales) A/c
42,00,000


¬________ By Balance c/d 42,00,000


________
82,00,000 82,00,000

(d) Working Capital as on 30th April, 1997
Current Assets:
Inventory
(i) Raw materials
X 11,50,000
Y 18,00,000 29,50,000
(ii) Finished goods in warehouse 38,70,000
in finished goods godown 9,67,500 48,37,500
Customers 1,80,00,000
Bank balance 42,00,000
Modvat credit receivable 10,00,000
3,09,87,500
Less: Current Liabilities
Sundry creditors 1,75,50,000
1,34,37,500

(e) Impact of Modvat on Working Capital Requirement
Modvat has enabled
(i) dispatch on sale of 30,000 units of finished product,
(ii) removal of 10,000 units of finished product,
without payment of a single rupee in cash. Cash outlay so saved at Rs. 60 per unit is Rs. 24,00,000.
It has also ensured creation of a current asset worth Rs. 10,00,000 in Modvat Credit Receivable Account.
Thus Modvat reduces the pressure on working capital.
Question 40
Briefly explain as per relevant Guidance Notes:
(a) HSL Ltd. is manufacturing goods for local sale and exports. As on 31st March, 2003, it has the following finished stocks in the factory warehouse:
(i) Goods meant for local sale Rs. 100 lakhs (cost Rs. 75 lakhs).
(ii) Goods meant for exports Rs. 50 lakhs (cost Rs. 20 lakhs).
Excise duty is payable at the rate of 16%. The company’s Managing Director says that excise duty is payable only on clearance of goods and hence is not a cost. Please advise HSL using guidance note, if any issued on this, including valuation of stock.
(4 marks) (May, 2003)
(b) SFL Ltd. is a mutual fund. The fund values the investment on “mark to market basis”. The Accountant argues since investment are valued on the above basis there is no necessity to disclose depreciation separately in the financial statements. Do you agree?
(4 marks) (May, 2003)
(c) A company has given counter guarantees of Rs. 2.25 crores to various banks in respect of the guarantees given by the said banks in favour of Government authorities. Outstanding counter guarantees as at the end of financial year 2003-2004 were Rs. 1.95 crores. How should this information be shown in the Financial Statements of the Company. (4 marks)(May, 2004)
(d) A Company has its share capital divided into shares of Rs. 10 each. On 1st April, 2004 it granted 10,000 employees’ stock options at Rs. 40, when the market price was Rs. 130. The options were to be exercised between 16th December, 2004 and 15th March, 2005. The employees exercised their options for 9,500 shares only; the remaining options lapsed. The company closes its books on 31st March every year.
Show Journal Entries. (6 marks) Nov. 2005)
Answer
(a) Guidance Note on Accounting Treatment for Excise Duty says that excise duty is a duty on manufacture or production of excisable goods in India.
According to Central Excise Rules, 2002, excise duty should be collected at the time of removal of goods from factory premises or factory warehouse. The levy of excise duty is upon the manufacture or production, the collection part of it is shifted to the stage of removal.
Further, paragraph 23(i) of the Guidance Note makes it clear that excise duty should be considered as a manufacturing expense and like other manufacturing expenses be considered as an element of cost for inventory valuation.
Therefore, in the given case of HSL Ltd., the Managing Director’s contention that “excise duty is payable only on clearance of goods and hence is not a cost is incorrect. Excise duty on the goods meant for local sales should be provided for at the rate of 16% on the selling price, that is, Rs. 100 lakhs for valuation of stock.
Excise duty on goods meant for exports, should be provided for, since the liability for excise duty arises when the manufacture of the goods is completed. However, if it is assumed that all the conditions specified in Rule 19 of the Central Excise Rules, 2002 regarding export of excisable goods without payment of duty are fulfilled by HSL Ltd., excise duty may not be provided for.
(b) The Guidance Note on Accounting for Investments in the Financial statements of Mutual Funds provides that the investments should be marked to market on the balance sheet date. The provision for depreciation in the value of investments should be made in the books by debiting the Revenue Account. The provision so created should be shown as a deduction from the value of investments in the balance sheet. Clause 2(i) of the Eleventh Schedule provides that “where the financial statements are prepared on a mark to market basis, there need not be a separate provision for depreciation.” However keeping in view, ‘prudence’ as a factor for preparation of financial statements and correct disclosure of the amount of depreciation on investments, the guidance note recommends that the gross value of depreciation on investments should be reflected in the Revenue Account rather than the same being netted off with the appreciation in the value of other investments. In other words, depreciation/appreciation on investments should be worked out on an individual investment basis or by category of investment basis, but not on an overall basis or by category of investment.
In the given case of SFL Ltd., depreciation should be separately disclosed in the financial statements.

(c) The counter guarantee given by the company is, infact, an undertaking to perform what is, in any event, the obligation of the company itself. In any case, this is a matter which is in the control of the company itself and the mere possibility of a default by the company in the future cannot be said to involve the existence of a contingent liability on the balance sheet date.
Thus, as per ‘Guidance Note on Guarantees and Counter-Guarantees given by Companies’, no separate disclosure is required in respect of counter guarantees.
(d) Journal Entries
Particulars Dr. Cr.
Rs. Rs.
2004
April 1 Employee Compensation Expense Dr. 9,00,000
To Employee Stock Options Outstanding 9,00,000
(Being grant of 10,000 stock options to employees at Rs. 40 when market price is Rs. 130)

2005
16th Dec. to 15th March

Bank

Dr. 3,80,000
Employee stock options outstanding Dr. 8,55,000
To Equity share capital 95,000
To Securities premium 11,40,000
(Being allotment to employees of 9,500 equity shares of Rs. 10 each at a premium of Rs. 120 per share in exercise of stock options by employees)
March 16 Employee stock options outstanding Dr. 45,000
To Employee compensation expense 45,000
(Being entry for lapse of stock options for 500 shares)
March 31 Profit and Loss A/c Dr. 8,55,000
To Employee compensation expense 8,55,000
(Being transfer of employee compensation expense to profit and loss account)

Question 41
A buyer buys a stock option of New Light Company Limited on 30th August, 2006 with a strike price of Rs.150 per unit to be expired on September 30, 2006. The premium is Rs.10 per unit and the market lot is of 100. The margin to be paid is Rs.60 per unit.
Show, how the transactions will appear in the books of the seller, when:
(i) The option is settled by delivery of the Asset, and
(ii) The option is settled in cash and the Index price is Rs.160 per unit.
(8 Marks) (May, 2007)
Answer
In the Books of Seller
Dr. Cr.
Amount Amount
Rs. Rs.
At the time of inception:
30th August Equity Stock Option Margin A/c (100 x Rs.60) Dr. 6,000
To Bank A/c 6,000
(Being the initial Margin paid on option)
Bank A/c (100 x Rs.10) Dr. 1,000
To Equity Stock Option Premium A/c 1,000
(Being the premium on option collected)


At the time of final settlement:
Bank A/c Dr. 6,000
To Equity Stock Option Margin A/c 6,000
(Being margin on equity stock option received
back on exercise/expiry of option).

(i) Option is settled by delivery of asset
30th September Bank A/c Dr. 15,000
To Equity Shares of New Light Ltd A/c 15,000
(Being shares delivered on exercise of option)
Equity Stock Option Premium A/c Dr. 1,000
To Profit & Loss A/c 1,000
(Being premium on option recognized as
income)

(ii) Option is settled in cash
30th September Profit & Loss A/c [(160 – 150) x 100] Dr. 1,000
To Bank A/c 1,000
(Being difference in index price and strike
price i.e. loss on exercise of option paid in
cash)
Equity Stock Option Premium A/c Dr. 1,000
To Profit & Loss A/c 1,000
(Being premium on option recognized as income)

Question 42
ABC Ltd. grants 1,000 employees stock options on 1.4.2004 at Rs.40, when the market price is Rs.160. The vesting period is 2½ years and the maximum exercise period is one year. 300 unvested options lapse on 1.5.2006. 600 options are exercised on 30.6.2007. 100 vested options lapse at the end of the exercise period.
Pass Journal Entries giving suitable narrations. (10 Marks)(May, 2008)
Answer
Journal Entries in the Books of ABC Ltd.
Date Particulars Dr. (Rs.) Cr. (Rs.)
31.3.2005 Employees compensation expenses account Dr. 48,000
To Employees stock option
outstanding account 48,000
(Being compensation expenses recognized in respect of the employees stock option i.e. 1,000 options granted to employees at a discount of Rs. 120 each, amortised on straight line basis over 2 years)

Profit and loss account Dr. 48,000
To Employees compensation
expenses account 48,000
(Being expenses transferred to profit and loss account at the end of the year)

31.3.2006 Employees compensation expenses account Dr. 48,000
To Employees stock option
outstanding account 48,000
(Being compensation expenses recognized in respect of the employee stock option i.e. 1,000 options granted to employees at a discount of Rs. 120 each, amortised on straight line basis over 2 years)

Profit and loss account Dr. 48,000
To Employees compensation
expenses account 48,000
(Being expenses transferred to profit and loss account at the end of the year)

31.3.2007 Employees stock option outstanding account (W.N.1) Dr. 12,000
To General Reserve account (W.N.1) 12,000
(Being excess of employees compensation expenses transferred to general reserve account)
30.6.2007 Bank A/c (600 x Rs.40) Dr. 24,000
Employee stock option outstanding account (600 x Rs.120) Dr. 72,000
To Equity share capital account
(600 x Rs. 10) 6,000
To Securities premium account
(600 x Rs.150) 90,000
(Being 600 employees stock option exercised at an exercise price of Rs. 40 each)
01.10.2007 Employee stock option outstanding account Dr. 12,000
To General reserve account 12,000
(Being Employees stock option outstanding A/c transferred to General Reserve A/c, on lapse of 100 options at the end of exercise of option period)
Working Note:
On 31.3.2007, ABC Ltd. will examine its actual forfeitures and make necessary adjustments, if any to reflect expenses for the number of options, that have actually vested. 700 employees stock options have completed 2.5 years vesting period, the expense to be recognized during the year is in negative i.e.
Rs.
No. of options actually vested (700 x Rs.120) 84,000
Less: Expenses recognized Rs.(48,000 + 48,000) 96,000
Excess expenses transferred to general reserve 12,000

Question 43
How are capital expenditures not represented by any specific or tangible assets dealt in financial statements? (5 marks) (May, 2008)
Answer
Sometimes circumstances force a project to incur capital expenditure which is not represented by any specific or tangible assets. For example, a project may have to pay the cost of laying pipelines in order to facilitate the supply of its products or raw materials to or from a sea port but the port trust or other similar authorities may insist that the pipelines belong to them even though the cost thereof is paid by the company. In such a case, the capital expenditure incurred by the project for the stated purpose would not be represented by any actual assets, since the pipeline would remain the property of the relevant port trust or other similar authorities even though the whole or a part of their cost may have been defrayed by the company in order to facilitate its business. In such cases the expenditure so incurred would have to be treated in the books of account as the capital expenditure.
There seems to be no valid objection to disclose the expenditure under the general heading of “Capital Expenditure” subject to two conditions. In the first place the description of the specific items on the balance sheet should be such as to indicate quite clearly that the capital expenditure is not represented by any assets owned by the company. In the second place the capital expenditure should be written off over the approximate period of its utility or over a relatively brief period not exceeding five years whichever is less.
In fact having regard to the nature of expenditure and purpose for which it is incurred, it would be more appropriate and realistic to classify such expenditure in the balance sheet under the heading of “Capital Expenditure” rather than either, write off the expenditure to revenue or classify the expenditure under the heading of “Miscellaneous Expenditure”.


2
COMPANY ACCOUNTS
Topics Covered:
 Statutory Financial Statements (Q.Nos. 1 to 9)
 Corporate Restructuring (Q.Nos. 10 to 17)
 Accounting for Amalgamations, takeovers (Q.Nos. 18 to 37)

Question 1
What are the main limitations of financial statements? (8 marks) (May, 1998)
Answer
Limitations of Financial Statements:
(i) Financial statements provide mostly historical data: Elements of financial statements, i.e., assets, liabilities, income and expenses are measured mostly using historical cost. So in the balance sheet, most of the assets do not represent their current values. Users of accounts cannot understand the real value of the reporting entity from such balance sheet.
Under the historical cost accounting framework impliedly money capital is main¬tained - not the real value of capital. Thus the profit and loss statement does not represent real profit/loss.
Thus, under inflationary environment, traditional historical cost -based financial statement fail to reflect operating result and financial position of the reporting entity.
(ii) Financial Statements ignore substance and simply recognise form: In India, financial statements are prepared recognising legal form of the transactions and ignoring the substance. For example, when the reporting entity uses assets on finance lease basis, value of such assets are not shown in the balance sheet. So the balance sheet fails to show the assets used for revenue generation. They may mislead the users of accounts about the degree of asset-turnover of the entity.
(iii) Financial statements are essentially based on going concern assumption: AS-1 'Dis¬closure of Accounting Policies' suggests that going concern is a fundamental account¬ing assumption, a departure from which should be disclosed. In practice, the assumption has been applied universally. Even if the reporting entity has become a sick industrial undertaking and waits for BIFR judgement, still its financial statements are prepared following going concern assumption showing its assets and liabilities at historical cost which is highly illogical and totally misleading.
(iv) Financial Statements do not reflect cash flow: In India, financial statements do not include a cash flow report to explain movement of cash during the accounting period. As such, there exists a big gulf between accrual profit and operational cash flow. However, now the listed companies/entities whose annual accounts are approved by the shareholders after 31.3.1995, are required to give a cash flow statement (as prescribed by SEBI) in their Annual Report.
(v) Financial statements are over-generalised: Users of accounts are many; prominent among those are shareholders  existing and potential, employees, lenders and other suppliers, government/regulatory agencies, managers and the public at large. Every section has specific data requirement for making economic decisions. Sometimes the interests of different sections may be conflicting in nature. Financial statements cannot meet the specific data requirement of the users. These are general purpose statements.
Question 2
Briefly explain the qualitative characteristics of Financial Statements.
(8 marks) (November, 1998)
Answer
Qualitative characteristics are the attributes that make the information provided in the financial statements useful to the users. The four principal qualitative characteristics are: (i) Understandability, (ii) Relevance, (iii) Reliability and (iv) Comparability.
(i) Understandability: An essential, quality of the information provided in the financial statement is that it is readily understandable by the users. For this purpose, users are deemed to have reasonable knowledge of business and economic activities. However, information about complex matters should be included in the financial statements which is relevant to the users of accounts for their economic decision making although this may be too difficult for certain users to understand.
(ii) Relevance: To be useful, information must be relevant to the decision making needs of all the users. Information has the quality of relevance when it influences the economic decisions of users by helping them to evaluate past, present or future events or confirming, or correcting their past evaluations.
Relevance of an information is affected by its nature and materiality. In some cases, the nature of information alone is sufficient to determine its relevance. In other cases, both the nature and materiality are important:
(iii) Reliability: To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which, it either purports to represent or could reasonably be expected to represent.
Reliability of the financial statement information is dependent on faithful representation, substance over form, neutrality, prudence, and completeness. If information is to represent faithfully the transactions and other events, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely by their legal form. To be reliable, the information contained in financial statement must be neutral i.e. free from bias. Financial statements are not neutral if, by the selection or presentation of information, they influence the making of a decision or judgement in order to achieve a pre-determined result or outcome. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty. To be reliable, information in financial statements must also be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.
(iv) Comparability: Users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. An important implication of this qualitative characteristic is that users should be informed of the accounting policies employed in the preparation of the financial statements, any changes in those policies and the effects of such changes.
Question 3
(a) In order to enhance the level of disclosure by the listed companies, SEBI has amended clause 32 of the listing agreement. After amendment what disclosures are required?
(4 marks) (May, 2005)
(b) One of the important factors generally considered for awarding shields and plaques in India for ‘best presented accounts’ is that the information presented in the accounts make useful disclosures.
What are actually looked into in this regard? (5 Marks)(May, 2008)
Answer
(a) After SEBI’s amendment of Clause 32 of Listing Agreement, the following disclosures are required:
(i) In case the company has changed its name consequent upon the going in for a new line of business including software business during any period after 1st January, 1998, the company will disclose the turnover and income etc. from such new activities in the annual reports for a period of 3 years from the date of change of name of the company.
(ii) The company will give a cash flow statement prepared as per AS 3 presented under indirect method and will attach this cash flow statement to the balance sheet and the profit and loss account of the company.
(iii) The company shall mandatorily publish consolidated financial statements in the annual report in addition to the individual financial statement. The consolidated financial statement shall be audited by the statutory auditors and submitted to the stock exchange.
(iv) The company shall make disclosures in compliance with the accounting standard on “Related Party Disclosures” in the annual reports.
(b) In order to ascertain whether the nature and quality of information presented in the accounts make useful disclosures, the following features are generally looked into:
1. Statement of changes in financial position.
2. Sufficient details of revenues / expenses for financial analysis e.g. distinction between manufacturing cost, selling cost and administration cost.
3. Use of vertical form as against the conventional T form; judicious use of schedules, use of sub-totals, manner of showing comparative figures, ease of getting at figures.
4. To what extent additional financial information is provided to the readers through charts and graphs.
5. Financial highlights and ratios including earnings per share.
6. Inclusion of one or more bits of information like value added statement, break up of operations, organization chart, location of factories / branches, human resource accounting, inflation adjusted accounts, social accounts etc.
Question 4
The following information has been extracted from the books of account of Jay Ltd. as at 31st March, 1995:
Dr. Cr.
(Rs.’000) (Rs.’000)
Administration Expenses 240
Cash at Bank and on Hand 114
Cash Received on Sale of Fittings 5
Long Term Loan 35
Investments 100
Depreciation on Fixtures, Fittings, Tools and Equipment
(1st April, 1994) 130
Distribution Costs 51
Factory Closure Costs 30
Fixtures, Fittings, Tools and Equipment at Cost 340
Profit & Loss Account (at 1st April, 1994) 40
Purchase of Equipment 60
Purchases of Goods for Resale 855
Sales (net of Excise Duty) 1,500
Share Capital
(50,000 shares of Rs. 10 each fully paid)
500
Stock (at 1st April, 1994) 70
Trade Creditors 40
Trade Debtors 390 ¬_____
2,250 2,250
Additional Information:
(1) The stock at 31st March, 1995 (valued at the lower of cost or net realizable value) was estimated to be worth Rs. 1,00,000.
(2) Fixtures, fittings, tools and equipment all related to administration. Depreciation is charged at a rate of 20% per annum on cost. A full year’s depreciation is charged in the year of acquisition, but no depreciation is charged in the year of disposal.
(3) During the year to 31st March, 1995, the Company purchased equipment of Rs. 60,000. It also sold some fittings (which had originally cost Rs. 30,000) for Rs. 5,000 and for which depreciation of Rs. 15,000 had been set aside.
(4) The average Income tax for the Company is 50%. Factory closure cost is to be pesumed as an allowable expenditure for Income tax purpose.
(5) The company proposes to pay a dividend of 20% per Equity Share.
Prepare Jay Ltd.’s Profit and Loss Account for the year to 31st March, 1995 and balance Sheet as at that date in accordance with the Companies Act, 1956 in the Vertical Form along with the Notes on Accounts containing only the significant accounting policies. Details of the schedules are not required. (20 marks) (May, 1996)
Answer
Jay Ltd.
Balance Sheet as at 31st March, 1995
(Rs. in thousands)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital 500
(b) Reserves and surplus 75
575
(2) Loan funds:
(a) Secured loans 35
(b) Unsecured loans 

35
TOTAL 610
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Gross block 370
(b) Less: Depreciation 189
(c) Net block 181
(d) Capital work in progress 

181
(2) Investments 100
(3) Current assets, loans and advances:
(a) Inventories 100
(b) Sundry debtors 390
(c) Cash and bank balances 114
(d) Other current assets 
(e) Loans and advances 

604
Less: Current Liabilities and Provisions:
(a) Liabilities 40
(b) Provisions 235
275
Net current assets 329
(4) Miscellaneous expenditure 
(to the extent not written off or adjusted) ¬___
TOTAL 610
Contingent Liabilities Nil

Profit and Loss Account
for the year ended 31st March, 1995
(Rs. in thousands)
Income
Sales (Net of Excise Duty) 1,500
Increase /(Decrease) in Stocks 30
1,530
Expenditure
Purchase of Goods for Resale 855
Administration Expenses 240
Distribution costs 51
Loss on sale of asset 10
Depreciation 74
1,230
Profit before Extraordinary Items 300
Factory Closure Costs 30
Profit before taxation 270
Provision for tax 135
Net profit 135
Balance brought forward from previous year 40
Profit Available For Appropriation 175
Appropriations
Proposed Equity Dividend 100
Amount transferred to general reserve 15
115
Balance carried forward 60

NOTES ON ACCOUNTS FOR THE YEAR ENDED 31ST MARCH, 1995
Significant Accounting Policies:
(a) Basis for preparation of financial statements: The financial statements have been prepared under the historical cost convention, in accordance with the generally accepted accounting principles and the provisions of the companies Act, 1956 as adopted consistently by the company.
(b) Depreciation: Depreciation on fixed assets is provided using the straight-line method, based on the period of five years. Depreciation on additions is provided for the full year but no depreciation is provided on assets sold in the year of their disposal.
(c) Investments: Investments are valued at lower of cost or net realizable value.
(d) Inventories: Inventories are valued at the lower of historical cost or the net realizable value.
Working Notes:
(Rs. in thousands)
(1) Fixtures, Fittings, Tools and Equipment
Gross Block
As on 1.4.1994 340
Add: Additions during the year 60
400
Less: Deductions during the year 30
As on 31.3.1995 370
Depreciation
As on 1.4.1994 130
For the year (20% on 370) 74
204
Less: Deduction during the year 15
As on 31.3.1995 189
Net block as on 31.3.1995 181
(2) Provision for taxation
Profit as per profit and loss account 270
Add back: Loss on sale of asset (short term capital
loss) 10
Depreciation 74
84
354
Less: Depreciation under Income-tax Act 84
270
Provision for tax @ 50% 135
It has been assumed that depreciation calculated under Income-tax Act amounts to Rs.84,000)
(3) Provisions
(a) Provision for taxation 135
(b) Proposed dividend (20% on Rs. 5,00,000) 100
235
(4) In balance sheet, Reserves and Surplus represent general reserve Rs. 15,000 and profit and loss account Rs. 60,000.
Notes:
(1) The rate of interest on long term loan is not given in the question. Reasonable assumption may be made regarding the rate of interest and accordingly it may be accounted for.
(2) As per Companies (Transfer of Profits to Reserve) Rules, the amount to be transferred to the reserves shall not be less than 7.5% of the current profits since proposed dividend exceeds 15% but does not exceed 20% of the paid up capital. In this answer, it has been assumed that Rs. 15,000 have been transferred to General Reserve. The students may transfer any amount based on a suitable percentage not less than 7.5%.
(3) In the absence of details regarding factory closure costs, there costs are treated as extraordinary items in the above solution assuming that the factory is permanently closed. However, the factory may close for a short span of time on account of strikes, lockouts etc. and such type of factory closure costs should be treated as loss from ordinary activities. In that case also, a separate disclosure regarding the factory closure costs will be required as per para 12 of AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.’
Question 5
The following balances are extracted from the books of Raj Ltd., a real estate company, on 31st March, 1996:
Dr. Cr.
(Rs.’000)
Sales 2,760
Purchases of materials 1,218
Share capital fully paid 100
Land purchased in the year as stock 73
Leasehold premises 42
Creditors 463
Debtors 735
Directors’ salaries 39
Wages 111
Work in progress on 01.04.1995 210
Sub-contractors’ cost 894
Equipment, Fixtures and Fittings at cost on 01.04.1995
264
Stock on 01.04.1995 59
Profit and Loss Account, Credit Balance on 01.04.1995
128
Secured Loan 112
Bank Overdraft 105
Interest on Loan and Overdraft 22
Depreciation on Equipment on 01.04.1995 164
Administration Expenses 147
Office Salaries 18 ¬_____
3,832 3,832
You also obtain the following information:
(a) On 31st March, 1996, stock on hand including the land acquired during the year, is valued at Rs. 1,42,000. Work in progress at that date is valued at Rs. 1,40,000.
(b) On 1st October, 1995 the company moved to new premises. The premises are on a 12 years lease and the lease premium paid amounted to Rs. 42,000. The company used sub-contract labour of Rs. 40,000 and materials at cost of Rs. 38,000 in the refurbishment of the premises. These are to be considered as part of the cost of leasehold premises.
(c) A review of the debtors reveals specific doubtful debts of Rs. 35,000 and the directors wish to provide for these together with a general provision based on 2% of the balance.
(d) Depreciation on equipment, fixtures and fittings is provided at 15% on the written down value.
(e) Raj Ltd. sued Bright Ltd. for supplying defective materials which has been written off as valueless. The Directors are confident that Bright Ltd. will agree for a settlement of Rs. 50,000.
(f) The directors propose a dividend of 25%.
(g) Rs. 20,000 is to be provided as audit fee.
(h) The company will provide 10% of the pre tax profit as bonus to employees in the accounts before charging the bonus.
(i) Income tax to be provided at 50% of the profits.
You are required:
(i) to prepare the company’s financial statements for the year ended 31st March, 1996 as near as possible to proper form of company final accounts; and
(ii) to prepare a set of Notes to accounts including significant accounting policies.
Notes: Workings should form part of your answer.
Previous year figures can be ignored.
Figures are to be rounded off to nearest thousands.
(20 marks) (November, 1996)
Answer
Raj Ltd.
Balance Sheet as at 31st March, 1996
(Rs. in thousands)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital 100
(b) Reserves and surplus 189
289
(2) Loan funds:
(a) Secured loans 112
(b) Unsecured loans 

112
TOTAL 401
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Gross block 384
(b) Less: Depreciation 184
(c) Net block 200
(d) Capital work in progress 

200
(2) Investments 
(3) Current assets, loans and advances:
(a) Inventories 282
(b) Sundry debtors 686
(c) Cash and bank balances 
(d) Other current assets 
(e) Loans and advances 

968
Less: Current Liabilities and
Provisions:
(a) Liabilities 588
(b) Provisions 179
767
Net current assets 201
(4) Miscellaneous expenditure 
(to the extent not written off or adjusted)

TOTAL 401
Contingent Liabilities Nil

Profit and Loss Account
for the year ended 31st March, 1996
(Rs. in thousands)
INCOME
Sales 2,760
EXPENDITURE
Manufacturing Expenses 2,205
Other Expenses 297
Interest 22
Depreciation on Fixed Assets 20
2,544
Profit before Taxation 216
Provision for Tax 130
Net Profit 86
Balance brought forward from previous year 128
Profit Available for Appropriation 214
Appropriations
Proposed Equity Dividend 25
Amount transferred to General Reserve* 9 34
Balance Carried Forward 180

NOTES ON ACCOUNTS FOR THE YEAR ENDED 31ST MARCH, 1996
1. Accounting Policies: The Accounts have been prepared primarily on the historical cost convention. The significant accounting policies followed by the Company are stated below:
(a) Fixed Assets: Fixed assets are shown at cost less depreciation. Cost comprises the purchase price and other attributable expenses.
(b) Depreciation on Fixed Assets: Depreciation on equipment, fixtures and fittings has been provided on written down value method at 15% per annum. Lease-hold premises/improvements are being amortised over the lease period.
(c) Inventories: Inventories are valued at the lower of historical cost or the net realizable value.
2. Other Matters:
(a) The cost of leasehold premises includes the cost of refurbishment to the extent of Rs. 78,000 (Materials Rs. 38,000 + Labour Rs. 40,000).
(b) Bright Ltd. has been sued for supplying defective materials. Settlement of Rs. 50,000 is hopeful however it has not been recognized in the accounts as it represents contingent gain.
Working Notes:
(Rs. in thousands)
(1) Manufacturing Expenses
Stocks at Commencement:
Opening Stock 59
Opening Work-in-progress 210
269
Purchases of Materials (1,218 – 38) 1,180
Purchase of Land 73
Wages 111
Sub-contractors’ cost (894 – 40) 854
2,487
Less: Stocks at close:
Closing Stock 142
Closing Work-in-progress 140
282
2,205
(2) Other Expenses
Administration Expenses 147
Office Salaries 18
Directors’ Salaries 39
Provision for Doubtful Debts [35 + 2% of (735 – 35)] 49
Audit Fees 20
Bonus (See Working Note 3) 24
297
(3) Bonus
Sales 2,760
Less: Manufacturing Expenses 2,205
Other Expenses (excluding bonus) 273
Depreciation 20
Interest 22
2,520
Pre-tax Profit 240
Bonus (10%) 24
(4) Fixed Assets
(a) Gross block
Equipment, Fixtures and Fittings 264


Leasehold Premises (42 + 40 + 38)  120
384
(b) Depreciation
Equipment, Fixtures and Fittings
as on 1.4.1995 164
For the year [15% on (264 – 164)] 15
179
Cost of Leasehold Premises written off** 5
[(42 + 40 + 38)  1/12  1/2] ¬___
184
(5) Provision for Taxation
Profit as per Profit and Loss Account 216
Add back: Provision for doubtful debts 49
Cost of Leasehold premises written off 5
Depreciation on equipment, fixtures and fittings 15
69
285
Less: Depreciation under Income-tax Act 25
260
Provision for Tax (@ 50%) 130
(It has been assumed that depreciation calculated under Income-tax Act amounts to Rs. 25,000)
(6) Current Liabilities
(a) Sundry creditors 463
(b) Bank overdraft 105
(c) Audit fees 20
588
(7) Provisions

(a) Provision for taxation 130
(b) Proposed dividend 25
(c) Provision for bonus 24
179
Question 6
E Ltd. manufactures and sells food products. The following draft financial statements were prepared by the chief accountant for the year ended 31.3.1998 and placed before your for advice:
Profit and Loss Statement for the year ended 31.3.1998
(Figures in Rs. lakhs)
Sales and other income 3,500
Cost of goods sold including operating expenses and depreciation 2,740
Operating profit 760
Profit on sale of property 200
Interest charges 300
Profit before tax 660
Tax provision 330
Profit after tax 330
Proposed dividend 300
Profit retained 30
Add: Opening balance of profit 360
Profit carried to Balance Sheet 390
Balance Sheet as on 31.3.1998
(Figures in Rs. lakhs)
Liabilities Assets
Share Capital 3,000 Fixed Assets 5,000
General reserve 540 Less: Depreciation 1,000 4,000
Profit and loss account balance 390 Current Assets
Secured Loans 2,000 Stock 800
Current Liabilities and Provisions Debtors 1,000
Creditors 240 Royalty receivable 100
Provision for tax 330 Advance tax 200
Proposed dividend 300 870 Cash balance 550 2,650

¬____ Miscellaneous expenditure to the
extent not written off
150
6,800 6,800
You are provided with further information as follows:
(a) On 1.4.97 E Ltd. had sold some of its fixed assets for Rs.100 lakhs [written down value Rs. 250 lakhs]. These assets were revalued earlier. As on 1.4.97 the revaluation reserve corresponding to these assets stood at Rs. 200 lakhs. The profit on sale of property as shown in the profit and loss statement represented the transfer of this amount. Loss on sale of the asset was included in the cost of goods sold etc.
(b) During the year E Ltd. undertook restructuring exercise of its operations at a cost of Rs. 150 lakhs. This amount stood included in "miscellaneous expenditure to the extent not written off".
(c) Included in sales and other income is a sum of Rs. 100 lakhs representing royalty receivable for supply of know-how to a company in South-East Asia. As per agreement the amount is to be received in US Dollars. However, exchange permission was denied to the company in South-East Asia for remitting the same.

(d) E Ltd. purchased fixed assets costing Rs. 1,825 lakhs on 1.4.97 and the same was fully financed by foreign currency loan [i.e. US Dollars] repayable in five equal instalments annually. [Exchange rate at the time of purchase was 1 US Dollar = Rs. 36.50]. As on 31.3.98 the first instalment was paid when 1 US Dollar fetched Rs. 41.50. The entire loss on exchange was included in cost of goods sold etc. E Ltd. normally provides depreciation on fixed assets at 20% on WDV basis.
(e) Dividend at 10% on paid up equity capital is to be maintained as in prior years.
You are required to redraft the financial statements of E Ltd. for the year ended 31.3.98 in accordance with relevant provisions of accounting standards. Journal entries (wherever applicable) in respect of the information given are to be shown. Schedules previous year 's figures and cash flow statement are not required. (20 marks) (November, 1998)
Answer
1. As per para 14.4 and para 32 of AS 10 on Accounting for Fixed Assets, on disposal or a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value is normally charged or credited to the profit and loss statement except that to the extent such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve.
Accordingly, the following journal entries are to be passed.
(Rs. in lakhs)
Profit on Sale of Property Dr. 200
To Loss on Sale of Fixed Assets 150
To General Reserve 50
[Alternatively, these entries can be passed through Revaluation Reserve Account. That is, 'Profit on Sale of Property' can be credited first to Revaluation Reserve Account and then, this Reserve will be debited with loss on sale of fixed assets (included in 'Cost of Goods Sold etc.') and the balance will be transferred to General Reserve.]
2. As per para 12 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
Accordingly, the entire restructuring cost Rs. 150 lakhs requires separate disclosure in the statement of profit and loss instead of deferring and showing it under miscellaneous expenditure.
3. According to para 9.2 of AS 9 on Revenue Recognition, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases. It may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made.
Thus 'Sales and other income' should be reduced by Rs. 100 lakhs with equivalent credit to Royalty Receivable Account.
Alternatively, the students may apply para 9.3 of AS 9, after making reasonable assumption as to the timing of the uncertainty. According to para 9.3, when the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
4. As per para 13 of AS 11 (Revised 2003) ‘The Effects of Changes in Foreign Exchange Rates’, exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets are recognized as incomes/expenses in the period in which they arise.
Calculation of Exchange loss:

Exchange loss = 50 lakhs US dollars  (41.50 – 36.50) = Rs. 250 lakhs
(including exchange loss on payment of first instalment)
Thus exchange loss of Rs. 250 lakhs should be recognized as expense in the profit and loss account for the year ended 31st March, 1998.
E Ltd.
Balance Sheet as at 31st March, 1998
(Rs. in lakhs)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital 3,000
(b) Reserves and surplus
General Reserve 590
Profit and Loss Account 240 830 3,830
(2) Loan funds:
(a) Secured loans 2,000
(b) Unsecured loans 
2,000
TOTAL 5,830
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Gross block 5,000
(b) Less: Depreciation 1,000
(c) Net block 4,000
(d) Capital work in progress 
4,000
(2) Investments 
(3) Current assets, loans and advances:
(a) Inventories 800
(b) Sundry debtors 1,000
(c) Cash balance 550
(d) Other current assets 
(e) Loans and advances (Advance tax) 200
2,550
Less: Current Liabilities and Provisions:
(a) Liabilities 240
(b) Provisions
Provision for Taxation 180
Proposed Dividend 300 480
720
Net current assets 1,830
(4) Miscellaneous expenditure 
(to the extent not written off or adjusted) ¬_____
TOTAL 5,830
Profit and Loss Account
for the year ended 31st March, 1998
(Rs. in lakhs)
Sales and other income (3,500 – 100) 3,400
Cost of goods sold including operating expenses and depreciation (2,340)
(2,740 – 150 – 250)
Restructuring cost (150)
Interest charges (300)
Foreign exchange loss (250)
Profit before taxation 360
Provision for tax (@ 50%) (180)
Net Profit 180
Balance brought forward from previous year 360
Profit Available for Appropriation 540
Proposed Dividend (300)
Balance Carried Forward 240
Current year profit after tax is only Rs. 180 lakhs as against the proposed dividend of Rs. 300 lakhs. Hence, in order to ensure sufficient compliance with section 205 of the Companies Act, 1956, past profits are utilized to make up the shotfall (assuming that there are no arrears of depreciation).
Note on Accounts: The royalty receivable in US Dollars for supply of know-how to a company in South-East Asia amounting to Rs. 100 lakhs has not been recognized as exchange permission has been denied to the company in South-East Asia for remitting the same.
Notes:
1. In the absence of any information regarding interest on foreign currency loan taken for financing purchase of fixed assets, no provision has been made for interest liability.
2. Deferred tax for the timing difference arising due to treatment of exchange loss on repayment of principal portion of the foreign currency loan is to be accounted for in accordance with AS 22 ‘Accounting for Taxes on Income’. In the above solution, the exchange loss on repayment of principal amount has been charged to profit and loss account. However, as per Section 43 A of the Income Tax Act, such exchange loss is required to be capitalized and depreciation is to be provided for. In the absence of information regarding nature of fixed asset, the rate of depreciation under Income Tax Act cannot be determined. Hence, the effect of AS 22 has not been disclosed in the redrafted financial statements.
3. Schedule VI to the Companies Act, 1956, provides that the exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets should be adjusted in the carrying amount of respective fixed assets. The revised AS 11 (2003), however, does not require the adjustment of exchange differences in the carrying amount of fixed assets, and such exchange differences are required to be recognized in the statement of profit and loss since it is felt that this treatment is conceptually preferable to that required in Schedule VI.
The above answer has been given according to revised AS 11 (2003).
4. It has been assumed that restructuring costs are of revenue nature and thus are allowed for tax purposes.
Question 7
On 1st November, 1998 Yash Ltd. was incorporated with an authorized capital of Rs. 1,000 crores. It issued to its promoters equity capital of Rs. 50 crores which was paid for in full. On that day it purchased the running business of Vijay Ltd. for Rs. 200 crores and allotted at par equity capital of Rs. 200 crores in discharge of the consideration. The net assets taken over from Vijay Ltd. were valued as follows: Fixed Assets Rs. 150 crores, Inventory Rs. 10 crores, Customers’ dues Rs. 70 crores and Creditors Rs. 30 crores.

Yash Ltd. carried on business and the following information is furnished to you:
(a) Summary of cash/bank transactions (for year ended 31st October, 1999).
(Rs. in crores)
Equity capital raised:
Promoters (as shown above) 50
Others 250 300
Collections from customers 4,000
Sale proceeds of fixed assets (cost Rs.18 crores) 20
4,320
Payments to suppliers 2,000
Payments to employees 700
Payment for expenses 500 3,200
Investments in Upkar Ltd. 100
Payments to suppliers of fixed assets:
Instalment due 600
Interest 50 650
Tax payment 270
Dividend 50
Closing cash/bank balance 50
4,320
(b) On 31st October, 1999 Yash Ltd.’s assets and liabilities were:
(Rs. in crores)
Inventory at cost 15
Customers’ dues 400
Prepaid expenses 10
Advances to suppliers 40
Amounts due to suppliers of goods 260
Amounts due to suppliers of fixed assets 750
Outstanding expenses 30
(c) Depreciation for the year under:
(i) Companies Act, 1956 Rs. 180 crores
(ii) Income tax Act, 1961 Rs. 200 crores
(d) Provide for tax at 38.5% of “total income”. There are no disallowables for the purpose of income taxation. Provision for tax is to be rounded off.
Yash Ltd. asks you to prepare:
(i) Revenue statement for the year ended 31st October, 1999 and
(ii) Balance Sheet as on 31st October, 1999 from the above information.
(20 marks)(November, 1999)
Answer
Yash Ltd.
Balance Sheet as at 31st October, 1999
Schedule (Rs. in crores)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 500
(b) Reserves and surplus 387
887
(2) Loan funds 750
TOTAL 1,637
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Gross block 1,482
(b) Less: Depreciation 180
(c) Net block 1,302
(2) Investments in Upkar Ltd. 100
(3) Current assets, loans and advances:
(a) Inventories 15
(b) Sundry debtors 400
(c) Cash and bank balances 50
(d) Loans and advances:
Advances to suppliers 40
Prepaid expenses 10
Tax payment 270
785
Less: Current liabilities and provisions:
(a) Creditors for
Goods 260
Expenses 30
290
(b) Provision for taxation 260
550
Net current assets 235
TOTAL 1,637


Schedule to Balance Sheet
(Rs. in crores)
A. Share Capital:
Authorised: 1,000
Issued and paid-up:
50 crores equity shares of Rs. 10 each fully paid up 500
Of the above shares, 20 crores equity shares
have been issued for consideration other
than cash, on take over of business of Vijay Ltd.
Profit and Loss Account
for the year ended 31st October, 1999
(Rs. in crores)
Sales 4,330
Expenditure:
Stock taken over from Vijay Ltd. 10
Purchases 2,190
2,200
Closing stock 15
Inventory consumed/sold 2,185
Employee cost 700
Expenses 520
(3,405)
Profit before interest, depreciation and tax 925
Interest (50)
Profit after interest but before depreciation 875
Depreciation (180)
Profit after depreciation 695
Profit on sale of fixed assets 2
Profit before tax 697
Provision for tax (260)
Net profit 437
Dividend (50)
Balance carried forward 387
Working Notes:
(Rs. in crores)
(1) Net assets of Vijay Ltd. taken over:
Fixed Assets 150
Inventory 10
Customers’ dues 70
230
Less: Creditors 30
200
Purchase consideration: 20 crores equity shares of Rs. 10 each.
(2) Customers’ Account
Rs. Rs.
To Business Purchase A/c 70 By Bank A/c 4,000
To Sales A/c (Balancing figure) 4,330 By Balance c/d 400
4,400 4,400
Suppliers’ (Goods) Account
Rs. Rs.
To Bank A/c (2,000 – 40) 1,960 By Business Purchase A/c 30
To Balance c/d 260 By Purchases A/c 2,190
¬_____ (Balancing figure) ¬_____
2,220 2,220
Suppliers’ (Fixed Assets) Account
Rs. Rs.
To Bank A/c 650 By Fixed Assets A/c 1,350
To Balance c/d (Loan funds) 750 (Balancing figure)
¬_____ By Interest A/c 50
1,400 1,400
Fixed Assets Account
Rs. Rs.
To Business Purchase A/c 150 By Bank A/c 20
To Profit and Loss A/c 2 By Balance c/d 1,482
To Suppliers’ A/c 1,350 ¬_____
1,502 1,502
Expenses Account
Rs. Rs.
To Bank A/c 500 By Profit and Loss A/c 520
To Balance c/d (Outstanding expenses) 30 (Balancing figure)
By Balance c/d
¬___ (Prepaid expenses) 10
530 530
(3) Calculation of tax provision: Rs.
Profit before depreciation 875
Less: Depreciation under Income Tax Act 200
Total income under Income Tax Act 675
Tax due thereon @ 38.5% (rounded off) 260
As sale proceeds of fixed assets are reduced from the appropriate “block of assets” for income tax purpose, and depreciation under Income Tax Act is given in the question, no adjustment for profit on sale of fixed assets Rs. 2 crores needs to be made for tax purposes.
Notes:
(1) Students may provide for corporate dividend tax @ 12.5% i.e., for Rs. 6.25 crores.
(2) The par value of an equity share has been taken as Rs. 10.
Question 8
Marks Limited manufactures a special type of Computer. The company has a software division for developing programs with respect to specialised areas such as Medical Imaging, Process Control and Information System.
Following is the draft of Profit and Loss Account prepared by the Chief Accountant for the year ended 31st March, 2000
Figures in Lakhs
Rs. Rs.
Sales : Hardware division 1,200
Software division 800 2,000
Opening stock of finished goods 90
Raw materials consumed 400
Direct labour — Hardware division 250
— Software division 150
Variable production overheads — Hardware division 150
— Software division 50
Fixed Production Overheads [including interest and depreciation]
— Hardware division 290
— Software division 100
Closing stock of finished goods (180) 1,300
Gross Profit 700
Administration Expenses 50
Selling and distribution expenses 150 200
Profit before tax 500
Tax at 40% 200
Profit after tax 300
Add: Balance of profit b/f 200
Profit carried forward 500
The following further informations are given :
(a) 10 employees, who were working in a software division were made redundant on account of abandoning a particular software program and each of them were paid a compensation of Rs. 5 lakhs on the average. This cost is included in direct labour.
(b) The fixed production overheads of Hardware division included interest of Rs. 50 lakhs and depreciation of Rs. 50 lakhs. Further this sum of Rs. 50 lakhs included an additional depreciation of Rs. 10 lakhs on a special machinery used in the manufacturer of computer parts for better display purposes.
(c) During the year, the Software division supplied a special program for a foreign firm on a consideration of Rs. 100 lakhs. It was found on June 1st, 2000 that the foreign firm has become bankrupt. The company had received an advance of Rs. 50 lakhs in the year ended 31st March, 2000 from the foreign firm.
(d) The Software division was involved in a special program on hospital information system. The company so far incurred a sum of Rs. 20 lakhs as salaries and Rs. 10 lakhs as overheads, which were included in direct labour and fixed production overheads respectively. Management feels that a further Rs. 50 lakhs will be required to complete the program, so that it can be effectively marketed.
(e) Included in Fixed production overheads of Hardware division is a sum of Rs. 50 lakhs being the cost of prototype computers manufactured by the company. These are not to be sold, but to be kept back for demonstrating the medical imaging software program.
(f) The company manufactured 550 computers during the year. It has a policy of valuing finished stock of goods at a standard cost of Rs. 1.8 lakhs per computer.
(i) Redraft the Profit and Loss Account for the year ended 31st March, 2000 with reference to relevant Accounting Standards issued by the institute. (15 marks)
(ii) Compute the value of Closing Stock of finished goods. (5 marks) (May, 2001)

Answer
(i) Marks Limited
Profit and Loss Account
for the year ended 31st March, 2000
(Rs. in lakhs)
Sales— Hardware division 1200
— Software division 800 2000
Opening stock of finished goods 90
Raw materials consumed 400
Direct labour — Hardware division 250
— Software division 80
Variable production overheads — Hardware division 150
— Software division 50
Fixed Production Overheads
— Hardware division 140
— Software division 90
Closing stock of finished goods (180)
Cost of prototype computers written off 10
Administration Expenses 50
Selling and distribution expenses 150
Provision for bad debts 50
Redundancy payment 50
Depreciation (including additional depreciation of Rs. 10 lakhs) 50
Interest 50 (1480)
Profit before tax 520
Provision for tax (40%) (208)
Profit after tax 312
Add : Balance of profit b/f 200
Surplus carried to balance sheet 512

Comments :
(a) Compensation : The compensation on account of redundancy Rs. 50 lakhs should be disclosed separately as per para 12 of AS-5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
(b) Interest and Depreciation : Interest of Rs. 50 lakhs cannot be treated as production overheads. It will be disclosed separately in the profit and loss account as per the requirements of Part II of schedule VI to the Companies Act. Similarly depreciation is also to be disclosed separately.
(c) Sales to foreign firm : This is an event occurring after the balance sheet date and the accounts are only at draft stage. In accordance with para 13 of AS-4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date, adjustments to assets and liabilities are required. Hence the sum of Rs. 50 lakhs (Rs. 100 lakhs – advance of Rs. 50 lakhs) should be provided for by way of provision for bad debts.
(d) Special program on hospital information system: From the information given in the question, it may be inferred that the cost of Rs. 30 lakhs (Rs. 20 lakhs direct labour and Rs. 10 lakhs production overheads) is development cost. The entire expenditure has been deferred to the subsequent years on the basis of presumption that the company can demonstrate all of the following conditions (as specified in para 44 of AS 26 ‘Intangible Assets’):
(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;
(e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
(f) its ability to measure the expenditure attributable to the intangible asset during its development reliably.
(e) Cost of prototype computers : An accounting policy in necessary regarding the writing off of the cost of these prototype computers as per AS-1 on Disclosure of Accounting Policies. Hence assuming that expenditure is to be written off over a period of five years, the amount to be treated as expense of the year is Rs. 10 lakhs.
Note : Students may assume any appropriate number of years for the purpose of writing off)
(ii) As per AS-2 (Revised) on Valuation of Inventories, finished stock of goods should be valued on the basis of absorption costing. In this case finished stock has been valued at a standard cost of Rs. 1.8 lakhs per computer which incidentally synchronises with the value computed on the basis of absorption costing as under :
(Rs. in lakhs)
Materials 400
Labour 250
Variable production overheads 150
Fixed production Overheads 290
Less : Interest 50
Cost of prototype computers 50 100 190
Total cost 990
Number of computers produced 550
(assumed to be normal production)
Cost per computer 990/550 = Rs. 1.8 lakhs.
Note : For the purpose of tax computation, Rs. 520 lakhs have been taken as taxable profits.
Question 9
On 30th September, 1999 Beta Enterprises Ltd. was incorporated with an Authorised Capital of Rs. 50 lakhs. Its first accounts were closed on 31st March, 2000 by which time it had become a listed company with an issued subscribed and paid up Capital of Rs. 40 lakhs in 4,00,000 Equity Shares of Rs. 10 each.
The company started off with two lines of business namely ‘Engineering Division’ and ‘Chemicals Division’, with equal asset base with effect from 1st April, 2000. The ‘Ceramics Division’ was added by the company on 1st April, 2001. The following data is gathered from the books of account of Beta Enterprises Ltd. :
Trial Balance as on 31st March, 2002
(Rupees in 000’s)
Dr. Cr.
Engineering Division sales – 6,000
Cost of Engineering Division sales 2,600 –
Chemicals Division sales – 8,000
Cost of sales of Chemicals Division 4,300 –
Ceramics Division Sales – 1,500
Cost of sales of Ceramics Division 900 –
Administration costs 2,000 –
Distribution costs 1,500 –
Dividend-Interim 1,200 –
Fixed Assets at cost 9,000 –
Depreciation on Fixed Assets – 1,500
Stock on 31st March, 2002 400 –
Trade Debtors 440 –
Cash at Bank 160 –
Trade Creditors – 500
Equity Share Capital in shares of Rs. 10 each – 4,000
Retained Profits –
1,000
22,500 22,500
Additional Information:
(a) Administration costs should be split between the Divisions in the ratio of 5 : 3 : 2.
(b) Distribution costs should be spread over the Divisions in the ratio of 3 : 1 : 1.
(c) Directors have proposed a Final Dividend of Rs. 8 lakhs.
(d) Some of the users of Ceramics Division are unhappy with the product and have lodged claims against the company for damages of Rs. 7.5 lakhs. The claim is hotly contested by the company on legal advice.
(e) Fixed Assets worth Rs. 30 lakhs were added in the Ceramics Division on 1.4.2001.
(f) Fixed Assets are written off over a period of 10 years on straight line basis in the books. However for Income tax purposes depreciation at 20% on written down value of the assets is allowed by Tax Authorities.
(g) Income tax rate may be assumed at 35%.
(h) During the year Engineering Division has sold to Alpha Ltd. goods having a sales value of Rs. 25 lakhs. Mr. Gamma, the Managing Director of Beta Enterprises Ltd. owns 100% of the issued Equity Shares of Alpha Ltd. The sales made to Alpha Ltd. were at normal selling price of Beta Enterprises Ltd.
You are required to prepare Profit and Loss Account for the year ended 31st March, 2002 and the Balance Sheet as at the date. Your answer should include notes and disclosures as per Accounting Standards. (20 marks)(November, 2002)
Answer
Beta Enterprises Ltd.
Profit and Loss Account for the year ending 31st March, 2002
Rs. '000
Sales 15,500
Cost of Sales (7,800)
7,700
Distribution costs (1,500)
Administration costs (2,000)
Profit before tax 4,200
Provision for tax 1,239
Deferred tax (35% of Rs. 660) 231 (1,470)
Profit after tax 2,730
Dividends (Rs. 1,200 + Rs. 800) (2,000)
Profit for the year 730
Retained profit brought forward (Rs. 1,000 – Rs. 210) 790
Retained Profit carried forward 1,520

Beta Enterprises Ltd.
Balance Sheet as at 31st March, 2002
Liabilities Amount Assets Amount
Rs.'000 Rs.'000 Rs.'000
Share Capital Fixed Assets
Issued and subscribed Gross block 9,000
4,00,000 shares of Rs.10 each, fully paid up 4,000 Less: Depreciation 1,500 7,500
Reserves and Surplus Current Assets, Loans and Advances
Retained profits 1,520 (a) Current assets
Deferred Tax Liability 441 Stock 400
Current liabilities and Provisions Debtors 440
(a) Current liabilities Cash at bank 160 1,000
Creditors 500 (b) Loans and Advances NIL
(b) Provisions
Provision for tax 1,239
Proposed dividend 800 ¬_____
8,500 8,500

Notes to Accounts:
1. Segmental Disclosures (Business Segments)
(Figures in Rs. 000’s)
Engineering Division Chemical Division Ceramics division Total
Sales 6,000 8,000 1,500 15,500
Cost of Sales 2,600 4,300 900 7,800
Administration Cost (5:3:2) 1,000 600 400 2,000
Distribution Cost (3:1:1) 900 300 300 1,500
Profit/Loss 1,500 2,800 (100) 4,200
6,000 8,000 1,500 15,500
Original cost of Assets (Equal Capital Base) 3,000 3,000 3,000 9,000
Depreciation @ 10% p.a.
For the year ended 31.3.2001
300
300
NIL
600
For the year ended 31.3.2002 300 300 300 900

Note: Ceramics division is a reportable segment as per assets criteria.
2. Tax computation
(Rs. in 000’s)
Profit before tax for the year ended 31.3.2002 4,200
Add: Depreciation provided in the books (300 + 300 + 300) 900
5,100
Less: Depreciation as per Income Tax Act (480 + 480 + 600) 1,560
Taxable Income 3,540
Tax at 35% 1,239

3. Deferred Tax liability (as per AS 22 on Accounting for Taxes on Income)
Rs.'000
Opening Timing Difference on 1.4.2001
WDV of fixed assets as per books 5,400
WDV of fixed assets as per Income Tax Act 4,800
Difference 600
Deferred Tax Liability @ 35% on 600 210
This has been adjusted against opening balance of retained profits.
Current year (ended 31st March, 2002) Rs.'000
Depreciation as per Books 900
Depreciation as per Income Tax Act (480 + 480 + 600) 1,560
Difference 660
Deferred Tax Liability @ 35% on 660 (to be carried forward) 231
4. Contingent Liabilities not provided: Company is contesting claim for damages for Rs. 7,50,000 and as such the same is not acknowledged as debts.
5. Related Party Disclosure: Para 3 of AS 18 lists out related party relationships. It includes individuals owning, directly or indirectly, an interest in voting power of reporting enterprise which gives them control or significant influence over the enterprises, and relatives of any such individual. In the instant case, Mr. Gamma as a managing director controls operating and financial actions of Beta Enterprise Ltd. He is also owning 100% share Capital of Alpha Ltd. thereby exercising control over it. Hence, Alpha Ltd. is a related party as per para 3 of AS 18.
Disclosure to be made:
Name of the related party
and nature of relationship Alpha Ltd. common director
Nature of the transaction Sale of goods at normal commercial terms
Volume of the transaction Sales to Alpha Ltd. worth Rs. 25 lakhs.
Question 10
The following is the Balance Sheet of Diverse Ltd. having an authorised capital of Rs. 1,000 Crores as on 31st March, 1997:
(Rs. in crores) Rs. Rs.
Sources of funds:
Shareholders’ funds:
Share capital
Equity shares of Rs. 10 each fully paid in cash 250
Reserves and surplus (Revenue) 750 1,000
Loan funds:
Secured against: (a) Fixed assets Rs. 300 Cr.
(b) Working capital Rs. 100 Cr. 400
Unsecured: 600 1,000
2,000
Employment of funds:
Fixed assets:
Gross block 800
Less: Depreciation 200 600
Investments at cost (Market value Rs. 1,000 Cr.) 400
Net current assets:
Current assets 3,000
Less: Current liabilities 2,000 1,000
2,000
Capital commitments : Rs. 700 crores.
The company consists of 2 divisions:
(i) Established division whose gross block was Rs. 200 crores and net block was Rs. 30 crores; current assets were Rs. 1,500 crores and working capital was Rs. 1,200 crores; the entire amount being financed by shareholders’ funds.
(ii) New project division to which the remaining fixed assets, current assets and current liabilities related.
The following scheme of reconstruction was agreed upon:
(a) Two new companies Sunrise Ltd. and Khajana Ltd. are to be formed. The authorised capital of Sunrise Ltd. is to be Rs. 1,000 crores. The authorised capital of Khajana Ltd. is to be Rs. 500 crores.
(b) Khajana Ltd. is to take over investments at Rs. 800 crores and unsecured loans at balance sheet value. It is to allot equity shares of Rs. 10 each at par to the members of Diverse Ltd. in satisfaction of the amount due under the arrangement.
(c) Sunrise Ltd. is to take over the fixed assets and net working capital of the new project division along with the secured loans and obligation for capital commitments for which Diverse Ltd. is to continue to stand guarantee at book values. It is to allot one crore equity shares of Rs. 10 each as consideration to Diverse Ltd. Sunrise Ltd. made an issue of unsecured convertible debentures of Rs. 500 crores carrying interest at 15% per annum and having a right to convert into equity shares of Rs. 10 each at par on 31.3.2002. This issue was made to the members of Sunrise Ltd. as a right who grabbed the opportunity and subscribed in full.
(d) Diverse Ltd. is to guarantee all liabilities transferred to the 2 companies.
(e) Diverse Ltd. is to make a bonus issue of equity shares in the ratio of one equity share for every equity share held by making use of the revenue reserves.
Assume that the above scheme was duly approved by the Honourable High Court and that there are no other transactions. Ignore taxation.
You are asked to:
(i) Pass journal entries in the books of Diverse Ltd., and
(ii) Prepare the balance sheets of the three companies giving all the information required by the Companies Act, 1956 in the manner so required to the extent of available information. (20 marks) (May, 1997)


Answer
Journal of Diverse Ltd.
(Rs. in crores)
Dr. Cr.
1 Khajana Ltd. A/c Dr. 800
To Investments A/c 400
To Members A/c 400
(Being transfer of investments at agreed
value of Rs. 800 crores under the scheme of
reconstruction approved by the high court)

2 Unsecured loans A/c Dr. 600
To Khajana Ltd. 600
(Being unsecured loans taken over by Khajana
Ltd. under the scheme of reconstruction
approved by the honourable high court)

3 Members A/c Dr. 200
To Khajana Ltd. 200
(Being allotment by Khajana Ltd. of 20 crore
equity shares of Rs. 10 each to the members
of the company in the ratio of 4 equity
shares of Khajana Ltd. for every 5 equity
shares held in the company)

4 Members A/c Dr. 200
To Capital reserve 200
(Being balance in Members A/c transferred
to capital reserve)

5 Sunrise Ltd. A/c Dr. 10
Provision for depreciation A/c Dr. 30
Secured loans against fixed assets A/c Dr. 300
Secured loans against working capital A/c Dr. 100
Current liabilities A/c Dr. 1,700
To Fixed assets A/c 600
To Current assets A/c 1,500
To Capital reserve A/c 40
(Being assets and liabilities of new project
division transferred to Sunrise Ltd.
along with capital commitments of Rs. 700
crores, the difference between consideration
and the book values at which transferred
assets and liabilities appeared being
credited to capital reserve)

6 Equity shares of Sunrise Ltd. Dr. 10
To Sunrise Ltd. 10
(Being the receipt of one crore equity
shares of Rs. 10 each from Sunrise Ltd. in
full discharge of consideration on transfer
of assets and liabilities of the new project
division)

7 Investment in debentures A/c Dr. 500
To Bank A/c 500
(Being issue of unsecured convertible
debentures by Sunrise Ltd., subscribed in full)

8 Revenue reserves A/c Dr. 250
To Equity share capital A/c 250
(Being allotment of 25 crores equity
shares of Rs. 10 each as fully paid bonus
shares to the members of the company by
using revenue reserves in the ratio of one
equity share for every equity share held)

Diverse Ltd.
Balance Sheet after the scheme of arrangement
Schedule (Rs. in crores)
No.
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 500
(b) Reserves and surplus B 740
1,240
(2) Loan funds:
(a) Secured against:
Fixed assets –
Working capital –
(b) Unsecured – –
TOTAL 1,240
II APPLICATION OF FUNDS
(1) Fixed assets: C
(a) Gross block 200
(b) Less: Depreciation 170
(c) Net block 30
(2) Investments D 10
(3) Current assets 1,500
Less: Current liabilities 300
Net current assets 1,200
TOTAL 1,240
1. Capital commitments Nil
2. Contingent Liability
Guarantee given in respect of:
Capital commitments by Sunrise Ltd. 700
Liabilities transferred to Sunrise Ltd. 2,100
Liabilities transferred to Khajana Ltd. 600

Schedules to Accounts
(Rs. in crores)
A Share capital:
Authorised:
100 crores Equity Shares of Rs. 10 each 1,000
Issued, Subscribed and Paid-up:
50 crores Equity Shares of Rs. 10
each fully paid-up 500
Of the above shares, 25 crores fully paid
Equity Shares of Rs. 10 each have been
issued as bonus shares by capitalisation
of revenue reserves.
B Reserves and Surplus:
Capital Reserve on transfer of :
Investments to Khajana Ltd. 200
Business of new project division to Sunrise Ltd. 40
240
Revenue Reserves:
As per last balance sheet 750
Less: Used for issue of fully
paid bonus shares 250
500
740
C Fixed assets:
Gross block:
As per last balance sheet 800
Less: Transfer to Sunrise Ltd. 600
200
Provision for depreciation:
As per last balance sheet 200
Less: In respect of assets
transferred to Sunrise Ltd. 30
170
30
D Investments (at cost):
In wholly owned subsidiary Sunrise Ltd.
(a) 1 crore equity shares of Rs. 10 each 10
(b) 15% unsecured convertible debentures 500
510
Balance Sheet of Sunrise Ltd. after the scheme of arrangement
Schedule No. (Rs. in crores)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 10
(b) Reserves and surplus – 10
(2) Loan funds :
(a) Secured loans B 400
(b) Unsecured loans C 500
900
TOTAL 910
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Goodwill 40
(b) Other fixed assets 570
610
(2) Investments –
(3) Current assets :
(a) Bank balance 500
(b) Others 1,500
2,000
Less: Current liabilities 1,700
300
TOTAL 910
1. Capital commitments
2. Guarantee given by Diverse Ltd.
in respect of:
Capital commitments 700
Liabilities 2,100
2,800


Schedules to Accounts
(Rs. in crores)
A Share Capital
Authorised
100 crores Equity Shares of Rs. 10 each 1,000
Issued, Subscribed and Paid-up
1 crore Equity Shares of Rs. 10
each fully paid-up 10
All the above shares have been issued for
consideration other than cash, on takeover
of new project division from Diverse Ltd.
All the above shares are held by the holding
company Diverse Ltd.
B Secured Loans
(a) Against fixed assets 300
(b) Against working capital 100
400
C Unsecured Loans
15% Unsecured convertible Debentures 500
(Convertible into equity shares of
Rs. 10 each at par on 31.3.2002)
Balance Sheet of Khajana Ltd. after the scheme of arrangement
Schedule No. (Rs. in crores)
SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 200
(b) Reserves and surplus –
200
(2) Loan funds:
(a) Secured loans –
(b) Unsecured loans 600
600
TOTAL 800
APPLICATION OF FUNDS
Investments 800
TOTAL 800
Guarantee given by Diverse Ltd.
in respect of unsecured loans 600
Schedule to Accounts
(Rs. in crores )
A Share Capital
Authorised
50 crores Equity Shares of Rs. 10 each 500
Issued, Subscribed and Paid-up
20 crores Equity Shares of Rs. 10 200
each fully paid-up
All the above shares have been issued to
members of Diverse Ltd. for consideration
other than cash, on acquisition of investments
and taking over of liability for unsecured
loans from Diverse Ltd.
Working Notes :
(Rs. in crores)
1. Established New Project Total
division division
Fixed assets:
Gross block 200 600 800
Less: Depreciation 170 30 200
30 570 600
Current assets 1,500 1,500 3,000
Less: Current liabilities 300 1,700 2,000
Employment of funds 1,200 (200) 1,000
2. Guarantee by Diverse Ltd. against:
(a) (i) Capital commitments 700
(ii) Liabilities transferred to Sunrise Ltd.
Secured loans against fixed assets 300
Secured loans against working capital 100
Current liabilities 1,700
2,100
(b) Liabilities transferred to Khajana Ltd. 600
Question 11
Ksha Ltd. and Yaa Ltd. are two companies. On 31st March, 1999 their Balance Sheets were as under:
(Rs. in crores)
Ksha Ltd. Yaa Ltd.
Rs. Rs. Rs. Rs.
Sources of funds:
Share Capital:
Authorised: 500 500
Issued: Equity shares of Rs. 10 each fully paid up 300 200
Reserves and surplus:
Capital reserves 40 20
Revenue reserves 700 425
Surplus 10 750 5 450
Owners’ funds 1,050 650
Loan funds 250 350
1,300 1,000
Fund employed in:
Fixed assets:
Cost 1,000 700
Less: Depreciation 400 600 300 400
Net current assets:
Current assets 2,000 1,500
Less: Current liabilities 1,300 700 900 600
1,300 1,000

Ksha Ltd. has 2 divisions very profitable division A and loss making division B. Yaa Ltd. similarly has 2 divisions very profitable division B and loss making division A.
The two companies decided to reorganize. Necessary approvals from creditors and members and sanction by High Court have been obtained to the following scheme:
1. Division B of Ksha Ltd. which has fixed assets costing Rs. 400 crores (written down value Rs. 160 crores), Current assets Rs. 900 crores, Current liabilities Rs. 750 crores and loan funds of Rs. 200 crores is to be transferred at Rs. 125 crores to Yaa Ltd.
2. Division A of Yaa Ltd. which has fixed assets costing Rs. 500 crores (depreciation Rs. 200 crores), Current assets Rs. 800 crores, Current liabilities Rs. 700 crores, and loan funds Rs. 250 crores is to be transferred at Rs. 140 crores to Ksha Ltd.
3. The difference in the two considerations is to be treated as loan carrying interest at 15% per annum.
4. The directors of each of the companies revalued the fixed assets taken over as follows:
(i) Division of A of Yaa Ltd. taken over: Rs. 325 crores.
(ii) Division B of Ksha Ltd. taken over: Rs. 200 crores.
All the other assets and liabilities are recorded at the balance sheet values.
(a) The directors of both the companies ask you to prepare the balance sheets after reconstruction (showing the corresponding figures before reconstruction).
(b) Master Richie Rich, who owns 50,000 equity shares of Ksha Ltd. and 30,000 equity shares of Yaa Ltd. wants to know whether he has gained or lost in terms of net asset value of equity shares on the above reorganizations. (16 + 4 = 20 marks)(May, 1999)
Answer
Ksha Ltd.
Balance Sheet as at 31st March, 1999
(Rs. in crores)
Schedule After reconstruction Before reconstruction
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 300 300
(b) Reserves and surplus B 800 1,100 750 1,050
(2) Loan funds C 315 250
TOTAL 1,415 1,300
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Gross block 925 1,000
(b) Less: Depreciation 160 400
(c) Net block 765 600
(2) Investments  
(3) Current assets 1,900 2,000
Less: Current liabilities 1,250 1,300
Net current assets 650 700
TOTAL 1,415 1,300

Schedules to Balance Sheet
(Rs. in crores)
After reconstruction Before reconstruction
A. Share Capital
Authorised:
50 crores equity shares of Rs. 10 each 500 500
Issued and subscribed:
30 crores equity shares of Rs. 10 each fully paid up 300 300
B. Reserves and surplus
Capital reserves 40 40
Add: Capital profit on reconstruction 50 

90 40
Revenue reserves 700 700
Surplus 10 10
800 750
C. Loan funds
Yaa Ltd. (Interest @ 15% p.a.) 15 
Others 300 250
315 250
Yaa Ltd.
Balance Sheet as at 31st March, 1999
(Rs. in crores)
Schedule After reconstruction Before reconstruction
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 200 200
(b) Reserves and surplus B 465 665 450 650
(2) Loan funds (others) 300 350
TOTAL 965 1,000
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Gross block 400 700
(b) Less: Depreciation 100 300
(c) Net block 300 400
(2) Investments  
(3) Current assets, loans and advances
(a) Current assets 1,600 1,500
(b) Loan to Ksha Ltd. 15 

1,615 1,500
Less: Current liabilities 950 900
Net current assets 665 600
TOTAL 965 1,000
Schedules to Balance Sheet
(Rs. in crores)
After reconstruction Before reconstruction
A. Share Capital
Authorised:
50 crores equity shares of Rs. 10 each 500 500
Issued and subscribed:
20 crores equity shares of Rs. 10 each fully paid up 200 200
B. Reserves and surplus
Capital reserves 20 20
Add: Capital profit on reconstruction 15 

35 20
Revenue reserves 425 425
Surplus 5 5
465 450

(b) Net asset value of Master Riche Rich’s holdings
Pre-reorganisation Post-reorganisation Change (Gain)
Rs. Rs. Rs.
Net asset value of one equity share:
(Refer to working notes)
Ksha Ltd. 35.00 36.67 1.67
Yaa Ltd. 32.50 33.25 0.75
Net asset value of equity shares owned by Master Riche Rich
Ksha Ltd. (50,000 shares) 17,50,000 18,33,500 83,500
Yaa Ltd. (30,000 shares) 9,75,000 9,97,500 22,500
27,25,000 28,31,000 1,06,000
Master Riche Rich has gained in terms of net asset value of his holdings as indicated in the last column.
Working Notes:
(1) Ksha Ltd.
(i) Amounts (Rs. in crores)
Pre-reorganisation figures Sale of division B Purchase of division A of Yaa Ltd. Post-reorganisation figures
(a) (b) (c) (d) = (a) – (b) + (c)
Fixed assets:
Cost 1,000 400 325 925
Depreciation (400) (240) 
(160)
Written down value (I) 600 160 325 765
Current assets 2,000 900 800 1,900
Current liabilities (1,300) (750) (700) (1,250)
Net current assets (II) 700 150 100 650
Funds employed [(I) + (II)] 1,300 310 425 1,415
Loan funds:
Others (III) (250) (200) (250) (300)
Yaa Ltd. (balance payable on transfers of divisions i.e.
140 – 125) (IV)

¬_____

¬____

¬___

(15)
Net worth ( I + II – III – IV) 1,050 110 175 1,100

(ii) Sale of division B (Rs. in crores)
Transfer price 125
Cost of the division (160 + 150 – 200) 110
Capital Profit 15

(iii) Purchase of division A of Yaa Ltd. (Rs. in crores)
Agreed value of assets less liabilities taken over (325 + 100 – 250) 175
Less: Transfer price 140
Capital Profit 35


(iv) (Rs. in
crores)
Pre-reorganisation net worth 1,050
Add: Capital profit on
Sale 15
Acquisition 35 50
Post-reorganisation net worth 1,100
No. of equity shares 30 crores
Net asset value of equity share: Rs.
Pre-reorganisation 1,050/30 = 35.00
Post-reorganisation 1,100/30 = 36.67 (Rounded off)
(2) Yaa Ltd.
(i) Amounts (Rs. in crores)
Pre-reorganisation figures Sale of division A Purchase of division B of Ksha Ltd. Post-reorganisation figures
(a) (b) (c) (d) = (a) – (b) + (c)
Fixed assets:
Cost 700 500 200 400
Depreciation (300) (200) 
(100)
Written down value (I) 400 300 200 300
Current assets 1,500 800 900 1,600
Current liabilities (900) (700) (750) (950)
Net current assets (II) 600 100 150 650
Funds employed [(I) + (II)] 1,000 400 350 950
Loan funds–others (III) (350) (250) (200) (300)
650 150 150 650
Ksha Ltd. (balance on account of transfers of divisions) (IV)
¬____

¬____

¬____

15
Net worth ( I + II – III + IV) 650 150 150 665

(ii) Purchase of division B of Ksha Ltd. Sale of division A
Value of assets less liabilities 150 150
(Value to Yaa Ltd.) (200 + 900 – 750 – 200) (300 + 800 – 700 – 250)
Less: Transfer Price 125 140
Capital Profit 25 (10)
(iii) Pre-reorganisation net worth 650
Add: Capital profit on acquisition
25
Sale (10) 15
Post-reorganisation net worth 665
No. of equity shares 20 crores
Net asset value of equity share: Rs.
Pre-reorganisation 650/20 = 32.50
Post-reorganisation 665/20 = 33.25
Question 12
Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The Balance Sheet as at 31st October, 1999 was as under:
Maxi Mini Total
division division
Rs. Rs. Rs.
(in crores)
Fixed assets:
Cost 600 300 900
Depreciation 500 100 600
W.D.V. 100 200 300
Net current assets:
Current assets 400 300 700
Less: Current liabilities 100 100 200
300 200 500
TOTAL 400 400 800
Financed by :
Loan funds – 100 100
(secured by a charge on fixed assets)
Own funds:
Equity capital 50
(fully paid up Rs. 10 shares)
Reserves and surplus 650
? ? 700
TOTAL 400 400 800
It is decided to form a new company Mini Ltd. to take over the assets and liabilities of Mini division.

Accordingly Mini Ltd. was incorporated to take over at Balance Sheet figures the assets and liabilities of that division. Mini Ltd. is to allot 5 crores equity shares of Rs. 10 each in the company to the members of Maxi Mini Ltd. in full settlement of the consideration. The members of Maxi Mini Ltd. are therefore to become members of Mini Ltd. as well without having to make any further investment.
(a) You are asked to pass journal entries in relation to the above in the books of Maxi Mini Ltd. and Mini Ltd. Also show the Balance Sheets of the 2 companies as on the morning of 1st November, 1999, showing corresponding previous year’s figures.
(b) The directors of the 2 companies ask you to find out the net asset value of equity shares pre and post demerger.
(c) Comment on the impact of demerger on “shareholders wealth”.
(16 marks) (November, 1999)
Answer
Journal of Maxi Mini Ltd.
(Rs. in crores)
Dr. Cr.
Rs. Rs.
Current liabilities A/c Dr. 100
Loan fund (secured) A/c Dr. 100
Provision for depreciation A/c Dr. 100
Loss on reconstruction (Balancing figure) Dr. 300
To Fixed assets A/c 300
To Current assets A/c 300
(Being the assets and liabilities of Mini division
taken out of the books on transfer of the division
to Mini Ltd., the consideration being allotment to
the members of the company of one equity share
of Rs. 10 each of that company at par for every
share held in the company vide scheme of
reorganisation.)
Note : Any other alternatives set of entires, with the same net effect on various accounts, may be given by the students.
Journal of Mini Ltd.
(Rs. in crores)
Dr. Cr.
Rs. Rs.
Fixed assets (300-100) A/c Dr. 200
Current assets A/c Dr. 300

To Current liabilities A/c 100
To Secured loan funds A/c 100
To Equity share capital A/c 50
To Capital reserve 250
(Being the assets and liabilities of Mini division
of Maxi Mini Ltd. taken over and allotment of
5 crores equity shares of Rs. 10 each at par as
fully paid up to the members of Maxi Mini Ltd.)
Maxi Mini Ltd.
Balance Sheet as at 1st November, 1999
(Rs. in crores)
Schedule After Before
reconstruction reconstruction
I. SOURCES OF FUNDS
(1) Shareholder’s funds :
(a) Capital 50 50
(b) Reserves and Surplus A 350 650
400 700
(2) Loan funds :
Secured loans – 100
TOTAL 400 800
II. APPLICATION OF FUNDS
(1) Fixed assets :
(a) Gross block 600 900
(b) Less: Depreciation 500 600
(c) Net block 100 300
(2) Investments – –
(3) Current assets 400 700
Less: Current liabilities 100 200
Net current assets 300 500
TOTAL 400 800
Schedule to Balance Sheet
After Before
reconstruction reconstruction
A. Reserves and Surplus 650 650
Less: Loss on reconstruction 300 –
350 650
Note to Accounts : Consequent on reconstruction of the company and transfer of Mini division to newly incorporated company Mini Ltd., the members of the company have been allotted 5 crores equity shares of Rs. 10 each at par of Mini Ltd.
Mini Ltd.
Balance Sheet as at 1 November, 1999
(Rs. in crores)
Schedule
I. SOURCES OF FUNDS
(1) Shareholder’s funds :
(a) Capital A 50
(b) Reserves and Surplus 250
300
(2) Loan funds :
Secured loans 100
TOTAL 400
II. APPLICATION OF FUNDS
(1) Fixed assets 200
(2) Investments –
(3) Current assets 300
Less: Current liabilities 100
Net current assets 200
TOTAL 400
Schedules to Balance Sheet
(Rs. in crores)
A. Share Capital :
Issued and paid up :
5 crores Equity shares of
Rs. 10 each fully paid up 50
All the above shares have been issued for
consideration other than cash, to the members
of Maxi Mini Ltd., on take over of Mini division
from Maxi Mini Ltd.
(b) Net asset value of an equity share
Pre-demerger Post-demerger
Maxi Mini Ltd. : Rs. 700 crores Rs. 400 crores
5 crores 5 crores
= Rs. 140 = Rs. 80
Mini Ltd.: Rs. 300 crores
5 crores
= Rs. 60
(c) Demerger into two companies has had no impact on “net asset value” of shareholding. Pre-demerger, it was Rs. 140 per share. After demerger, it is Rs. 80 plus Rs. 60 i.e. Rs. 140 per original share.
It is only yield valuation that is expected to change because of separate focussing on two distinct businesses whereby profitability is likely to improve on account of demerger.
Question 13
Kuber Ltd. furnishes you with the following Balance Sheet as at 31st March, 2000:
(Rs. in crores)
Sources of funds:
Share Capital:
Authorised 100
Issued:
12% redeemable preference shares of Rs. 100 each fully paid
75
Equity shares of Rs. 10 each fully paid 25 100
Reserves and surplus:
Capital reserve 15
Share premium 25
Revenue reserves 260 300
400
Funds employed in:
Fixed assets: Cost 100
Less: Provision for depreciation 100 nil
Investment at cost (market value Rs. 400 Cr.) 100
Current assets 340
Less: Current liabilities 40
300
400
The company redeemed preference shares on 1st April, 2000. It also bought back 50 lakh equity shares of Rs. 10 each at Rs. 50 per share. The payments for the above were made out of the huge bank balances, which appeared as part of current assets.
You are asked to :
(i) Pass journal entries to record the above.
(ii) Prepare balance sheet.
(iii) Value equity share on net asset basis. (10 marks) (May, 2000)

Answer
(a) Journal of Kuber Ltd.
(Rs. in crores)
Dr. Cr.
Rs. Rs.
Redeemable preference share capital Dr. 75
To Bank 75
(Being redemption of 12% preference shares pursuant to capital re-organisation)
Revenue reserves Dr. 75
To Capital redemption reserve 75
(Being amount equal to par value of preference shares redeemed out of profits, transferred to capital redemption reserve)
Equity share capital Dr. 5
Revenue reserves Dr. 20
To Bank 25
(Being buyback of 50 lakhs equity shares of Rs. 10 each from the members at a price of Rs. 50 per share, premium paid out of revenue reserves)
Revenue reserves Dr. 5
To Capital redemption reserve 5
(Being transfer to capital redemption reserve, as required by Section 77AA, on buyback out of reserves)
Kuber Ltd.
Balance Sheet (after reconstruction)
(Rs. In crores)
Schedule
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 20
(b) Reserves and surplus B 280
300
(2) Loan funds 

TOTAL 300

II APPLICATION OF FUNDS
(1) Fixed assets
(a) Gross block 100
(b) Less: Depreciation 100
(c) Net block 
(2) Investments (market value : Rs. 400 crores) 100
(3) Current assets 240
Less: Current liabilities 40
Net current assets 200
TOTAL 300
Schedules to Balance Sheet
(Rs. in crores)
A. Share Capital
Authorised: 100
Issued, Subscribed and Paid up
200 lakhs equity shares of Rs. 10 each fully paid up 20
20
50 lakhs Equity Shares of Rs. 10 each have been bought back out of reserves at Rs. 50 per share
12% 75 lakhs Redeemable Preference Shares of Rs. 100 each fully paid up, have been redeemed on 1st April, 2000
B. Reserves and surplus
(1) Capital reserve 15
(2) Capital Redemption Reserve
As per last account 
Add: Transfer from Revenue Reserves 80 80
(3) Share (Securities) Premium 25
(4) Revenue Reserves
As per last account 260
Less: Transfer to Capital Redemption Reserve 80
180
Less: Premium paid on buyback 20 160
280
Net asset value of an equity share
(Rs. in crores)
Investments (at market value) 400
Net current assets 200
Net assets available to equity shareholders 600
No. of equity shares = 2 crores
Value of an equity share = Rs. 300

Note: As regards treatment of profit (loss) on buyback, there is no authoritative pronoun¬cement as to whether the difference between the nominal value and the amount paid should be treated as capital or revenue in nature. In the given case, the debit has been given to revenue reserves.
Also, in the absence of any other information, it has been assumed that shares have been bought back out of free reserves.
Question 14
Enterprise Ltd. has 2 divisions A and B.
Division A has been making constant profits while division B has been invariably suffering losses.
On 31st March, 2000 the divisionwise Balance Sheet was:
(Rs. in crores)
A B Total
Fixed assets cost 250 500 750
Depreciation 225 400 625
25 100 125
Current assets 200 500 700
Less: Current liabilities 25 400 425
175 100 275
200 200 400
Financed by:
Loan funds  300 300
Capital: Equity Rs. 10 each 25  25
Surplus 175 (100) 75
200 200 400
Division B along with its assets and liabilities was sold for Rs. 25 crores to Turnaround Ltd. a new company, who allotted 1 crore equity shares of Rs. 10 each at a premium of Rs. 15 per share to the members of Enterprise Ltd. in full settlement of the consideration, in proportion to their shareholding in the company.
(a) Assuming that there are no other transactions, you are asked to:
(i) Pass journal entries in the books of Enterprise Ltd.
(ii) Prepare the Balance Sheet of Enterprise Ltd. after the entries in (i).
(iii) Prepare the Balance Sheet of Turnaround Ltd.
(b) Shri Rustom, who holds 5,000 equity shares of Enterprise Ltd. wants to be explained the impact on net asset value of his investments as a result of the above reconstruction.
(10 + 6 = 16 marks)(May, 2000)
Answer
(a) (i) Journal of Enterprise Ltd.
(Rs. in crores)
Dr. Cr.
(1) Turnaround Ltd. Dr. 25
Loan Funds Dr. 300
Current Liabilities Dr. 400
Provision for Depreciation Dr. 400
To Fixed Assets 500
To Current Assets 500
To Capital Reserve 125
(Being division B along with its
assets and liabilities sold to
Turnaround Ltd. for Rs. 25 crores)
(2) Capital Reserve Dr. 25
To Turnaround Ltd. 25
(Being allotment of 1 crore equity
shares of Rs. 10 each at a premium
of Rs. 15 per share to the members
of Enterprise Ltd. in full settlement
of the consideration)

Notes :
(1) Any other alternative set of entries, with the same net effect on various accounts, may be given by the students.
(2) Profit on sale of division may, alternatively, be credited to Profit and Loss Account instead of Capital Reserve, in accordance with the requirements of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and changes in Accounting Policies.

(ii) Enterprise Ltd.
Balance Sheet after reconstruction
(Rs. in crores)
Schedule
I. SOURCES OF FUNDS
(1) Shareholders’ funds
(a) Capital 25
(b) Reserves and surplus A 175
200
(2) Loan funds –
TOTAL 200
II. APPLICATION OF FUNDS
(1) Fixed assets
(a) Gross block 250
(b) Less: Depreciation 225
(c) Net block 25
(2) Investments –
(3) Current assets 200
Less: Current liabilities 25
Net current assets 175
TOTAL 200
Schedule to Balance Sheet
(Rs.in crores)
A Reserves and Surplus 75
Add: Capital Reserve on reconstruction 100
175
Note to Accounts : Consequent on transfer of Division B to newly incorporated company Turnaround Ltd., the members of the company have been allotted 1 crore equity shares of Rs. 10 each at a premium of Rs. 15 per share of Turnaround Ltd., in full settlement of the considertion in proportion to their shareholding in the company.
(iii) Balance Sheet of Turnaround Ltd.
(Rs. in crores)
Schedule
I. SOURCES OF FUNDS
(1) Shareholders’ funds
(a) Capital A 10
(b) Reserves and surplus 15 25
(2) Loan funds 300
TOTAL 325
II. APPLICATION OF FUNDS
(1) Fixed assets B 225
(2) Investments –
(3) Current assets 500
Less: Current liabilities 400
Net current assets 100
TOTAL 325
Schedules to Balance Sheet
(Rs.in crores)
A. Share Capital:
Issued and Paid-up:
1 crore Equity shares of
Rs. 10 each fully paid up 10
All the above shares have been issued
for consideration other than cash, to the
members of Enterprise Ltd on take over
of Division B from Enterprise Ltd.
(at a premium of Rs.15 crores)
B. Fixed Assets:
Goodwill 125
Other fixed assets 100
225
(b) Net Asset Value of Shri Rustom’s Investments

Pre-reconstruction
Enterprise Ltd. Post-reconstruction
Enterprise Ltd. Turnaround Ltd.
Net worth (Rs. in crores) 100 200 25
No. of equity shares (in crores) 2.5 2.5 1
Net asset value of one equity share (Rs.) 40 80 25
No. of equity shares held by Rustom 5,000 5,000 2,000


Net asset value of Rustom’s holdings (Rs.) 2,00,000 4,00,000 50,000
Thus, Rustom has gained Rs. 2,50,000 (4,00,000 + 50,000 – 2,00,000) in terms of net asset value of his holdings as a result of the above reconstruction.
Question 15
The summarized Balance Sheets of A Ltd. and its subsidiary B Ltd. as on 31.3.2001 are as follows:
A Ltd. B Ltd.
Rs. Rs.
Shares of Rs. 10 each 1,00,00,000 20,00,000
Reserves and Surplus 1,40,00,000 60,00,000
Secured Loans 40,00,000 
Current Liabilities 60,00,000 20,00,000
3,40,00,000 1,00,00,000
Fixed Assets 1,20,00,000 35,00,000
Investment in B Ltd. 7,40,000 
Sundry Debtors 70,00,000 10,00,000
Inventories 60,00,000 50,00,000
Cash and Bank 82,60,000 5,00,000
3,40,00,000 1,00,00,000
A Ltd. holds 76% of the paid up capital of B Ltd. The balance shares in B Ltd. are held by a Foreign Collaborating company. A memorandum of understanding has been entered into with the foreign company providing for the following:
(a) The shares held by the foreign company will be sold to A Ltd. The price per share will be calculated by capitalizing the yield at 16%. Yield, for this purpose, would mean 40% of the average of pre-tax profits for the last 3 years, which were Rs. 35 lakhs. Rs. 44 lakhs and Rs. 65 lakhs.
(b) The actual cost of shares to the foreign company was Rs. 2,40,000 only. The profit that would accrue to them would be taxable at an average rate of 30%. The tax payable be deducted from the proceeds and A Ltd. will pay it to the Government.
(c) Out of the net consideration, 50% would be remitted to the foreign company immediately and the balance will be an unsecured loan repayable after one year. It was also decided that A Ltd. would absorb B Ltd. simultaneously by writing down the Fixed Assets of B Ltd. by 5%. The Balance Sheet figures included a sum of Rs. 1,50,000 due by B Ltd. to A Ltd.
The entire arrangement was approved by all concerned for giving effect to on 1.4.2001.
You are required to show the Balance Sheet of A Ltd. as it would appear after the arrangement is put through on 1.4.2001. (16 marks)(November, 2001)
Answer
Balance Sheet of A Ltd.
as at 1st April, 2001
(Rs. in lakhs)
Liabilities Amount Assets Amount
Share Capital 100.00 Fixed Assets 153.25
(Shares of Rs. 10 each) Sundry Debtors 78.50
Reserves and Surplus 140.00 (Less: Mutual Indebtedness)
Capital Reserve 42.05 Inventories 110.00
Secured Loans 40.00 Cash and Bank 69.24
Unsecured Loans 10.44
Current Liabilities 78.50
(Less: Mutual Indebtedness) ______ ¬______
410.99 410.99
Working Notes:
1. Yield of B Ltd.:
2. Price per share of B Ltd.:
Capitalised value of yield of B Ltd.:
Number of shares = 2,00,000
Price per share = Rs. 60
3. Purchase consideration for 24% of share capital of B Ltd.:

4. Discharge of Purchase Consideration:
(i) As Tax : (28.80 – 2.40) 
(ii) 50% of (28.80 – 7.92 i.e. Rs. 20.88 lakhs) = Rs. 10.44 lakhs (to be remitted immediately)
(iii) Balance 50% = Rs. 10.44 lakhs (to be retained as unsecured loan)
5. Goodwill /Capital Reserve to A Ltd.: (Rs. in lakhs)
Total Assets as per Balance sheet of B Ltd. 100.00
Less: 5% Reduction in the value of Fixed Assets 1.75
98.25
Less: Current Liabilities 20.00
78.25
Less: Purchase Consideration 28.80
49.45
Less: Investment in B Ltd. as per Balance sheet of A Ltd. 7.40
Capital Reserve 42.05

6. Cash and bank balance of A Ltd. after acquisition of shares: (Rs. in lakhs)
Opening Balance 82.60
Cash and Bank Balance of B Ltd. 5.00
87.60
Less: Remittance to the foreign collaborating company 10.44
TDS paid 7.92 18.36
69.24
Question 16
The Balance Sheet of Z Ltd. as at 31st March, 2003 is given below. In it, the respective shares of the company’s two divisions namely S Division and W Division in the various assets and liabilities have also been shown.
(All amounts in crores of Rupees)
S Division W Division Total
Fixed Assets:
Cost 875 249
Less: Depreciation 360 81
Written-down value 515 168 683
Investments 97
Net Current assets:
Current Assets 445 585
Less: Current Liabilities 270 93
175 492 667
1,447
Financed by:
Loan funds 15 417
Own funds:
Equity share capital: shares of Rs. 10 each 345
Reserves and surplus 685
1,447
Loan funds included, inter alia, Bank Loans of Rs. 15 crore specifically taken for W Division and Debentures of the paid up value of Rs. 125 crore redeemable at any time between 1st October, 2002 and 30th September, 2003.
On 1st April, 2003 the company sold all of its investments for Rs. 102 crore and redeemed all the debentures at par, the cash transactions being recorded in the Bank Account pertaining to S Division.
Then a new company named Y Ltd. was incorporated with an authorized capital of Rs. 900 crore divided into shares of Rs. 10 each. All the assets and liabilities pertaining to W Division were transferred to the newly formed company; Y Ltd. allotting to Z Ltd.’s shareholders its two fully paid equity shares of Rs. 10 each at par for every fully paid equity share of Rs. 10 each held in Z Ltd. as discharge of consideration for the division taken over.
Y Ltd. recorded in its books the fixed assets at Rs. 218 crore and all other assets and liabilities at the same values at which they appeared in the books of Z Ltd.
You are required to:
(i) Show the journal entries in the books of Z Ltd.

(ii) Prepare Z Ltd.’s Balance Sheet immediately after the demerger and the initial Balance Sheet of Y Ltd. (Schedules in both cases need not be prepared).
(iii) Calculate the intrinsic value of one share of Z Ltd. immediately before the demerger and immediately after the demerger; and
(iv) Calculate the gain, if any, per share to the shareholders of Z Ltd. arising out of the demerger. (20 marks)(May, 2004)
Answer
(i) In Z Ltd.’s Books
Journal Entries
(Rs. in crores)
Dr. Cr.
Amount Amount
Rs. Rs.
Bank Account (Current Assets) Dr. 102
To Investments 97
To Profit and Loss Account (Reserves and Surplus) 5
(Sale of investments at a profit of Rs. 5 crore)
Debentures (Loan Funds) Dr. 125
To Bank Account (Current Assets) 125
(Redemption of debentures at par)
Current Liabilities Dr. 93
Bank Loan (Loan Funds) Dr. 15
Provision for Depreciation Dr. 81
Reserves and Surplus (Loss on Demerger) Dr. 645
To Fixed Assets 249
To Current Assets 585
(Assets and liabilities pertaining to W Division taken out of the books on transfer of the division to Y Ltd.)
(ii) (a) Z Ltd.’s Balance Sheet after demerger
Rs. in crores Rs. in crores
Fixed Assets
Gross Block 875
Less: Depreciation 360 515
Net Current Assets
Current Assets 422
Less: Current Liabilities 270 152
667
Financed by
Shareholders’ Funds
Equity Share Capital 345
Reserves and Surplus 45 390
Loan Funds 277
667
Working Notes:
Rs. in crores Rs. in crores
1. Reserves and Surplus
Balance as on 31st March, 2003 685
Add: Profit on sale of investments 5
690
Less: Loss on demerger 645
Balance shown in balance sheet after demerger 45
2. Loan Funds
Balance as on 31st March, 2003 417
Less: Bank Loan transferred to Y Ltd. 15
Debentures redeemed 125 140
Balance shown in balance sheet after demerger 277
3. Current Assets
Balance as on 31st March, 2003 445
Add: Cash received from sale of investments 102
547
Less: Cash paid to redeem debentures 125
Balance shown in balance sheet after demerger 422
(b) Initial Balance Sheet of Y Ltd.
Rs. in crores Rs. in crores
Fixed Assets 218
Net Current Assets
Current Assets 585
Less: Current Liabilities 93 492
710
Financed by
Shareholders’ funds:
Capital (Issued for acquisition of business) 690
Capital Reserve 5
Loan Funds 15
710
(iii) Calculation of intrinsic value of one share of Z Ltd.
Rs. in crores
Before demerger
Fixed Assets 683
Net current assets Rs.(667 + 102 – 125) 644
1,327
Less: Loan funds Rs.(417 – 125) 292
1,035
Intrinsic Value per share = Rs. = Rs.30 per share

After demerger
Fixed Assets 515
Net Current Assets Rs.(175 + 102 – 125) 152
667
Less: Loan funds 277
390

Intrinsic Value of one share = Rs. = Rs. 11.30 per share
(iv) Gain per share to Shareholders:
After demerger, for every share in Z Ltd. the shareholder holds 2 shares in Y Ltd.
Rs.
Value of one share in Z Ltd. 11.30
Value of two shares in Y Ltd. (Rs. 10  2) 20.00
31.30
Less: Value of one share before demerger 30.00
Gain per share 1.30
The gain per share amounting Rs. 1.30 is due to appreciation in the value of fixed assets by Y Ltd.

Question 17
Travels & Tours Ltd. has two divisions – ‘Inland’ and ‘International’. The Balance Sheet as at 31st December, 2004 was as under:
Inlan International Total
(Rs. crores) (Rs. crores) (Rs. crores)
Fixed Assets:
Cost 600 600 1,200
Depreciation 500 200 700
W.D.V. (written down value) 100 400 500
Net Current Assets:
Current assets 400 300 700
Less: Current liabilities 200 200 400
200 100 300
Tota 300 500 800
Financed by:
Loan funds:

(Secured by a charge on fixed assets)  100 100
Own Funds:
Equity capital (fully paid up Rs. 10 shares) 50
Reserves and surplus ¬____ ¬____ 650
? ? 700
Tota 300 500 800
It is decided to form a new company ‘IT Ltd.’ for international tourism to take over the assets and liabilities of international division.
Accordingly ‘IT Ltd.’ was formed to takeover at Balance Sheet figures the assets and liabilities of international division. ‘IT Ltd.’ is to allot 5 crore equity shares of Rs. 10 each in the company to the members of ‘Travels & Tours Ltd.’ in full settlement of the consideration. The members of ‘Travels & Tours Ltd.’ are therefore to become members of ‘IT Ltd.’ as well without having to make any further investment.
(a) You are asked to pass journal entries in relation to the above in the books of ‘Travels & Tours Ltd.’ and also in ‘IT Ltd.’. Also show the Balance Sheets of both the companies as on 1st January, 2005 showing corresponding figures, before the reconstruction also.
(b) The directors of both the companies ask you to find out the net asset value of equity shares pre and post-demerger.
(c) Comment on the impact of demerger on “shareholders wealth”.
(16 marks)(May,2005))

Answer
(a) Journal of Travels & Tours Ltd.
(Rs. in crores)
Particulars Dr. Cr.
Rs. Rs.
Current liabilities account Dr. 200
Loan fund (secured) account Dr. 100
Provision for depreciation account Dr. 200
Loss on reconstruction account (Balancing figure) Dr. 400
To Fixed assets account 600
To Current assets account 300
(Being the assets and liabilities of International division taken out of the books on transfer of the division to IT Ltd.; the consideration being allotment to the members of the company of one equity share of Rs. 10 each of that company at par for every share held in the company vide scheme of reorganisation)
Journal of IT Ltd.
(Rs. in crores)
Dr. Cr.
Rs. Rs.
Fixed assets account (600 – 200) Dr. 400
Current assets account Dr. 300
To Current liabilities account 200
To Loan funds (secured) account 100
To Equity share capital account 50
To Capital reserve account 350
(Being the assets and liabilities of International division of Travels & Tours Ltd. taken over by IT Ltd. and allotment of 5 crore equity shares of Rs. 10 each at par as fully paid up to the members of Travels & Tours Ltd.)

Travels & Tours Ltd.
Balance Sheet as on 1st January, 2005
(Rs. in crores)
After reconstruction Before reconstruction
I. SOURCES OF FUNDS
(1) Shareholders’ Funds
(a) Capital 50 50
(b) Reserves and Surplus (Schedule A) 250 650
300 700
(2) Loans Funds
Secured Loans 
100
Total 300 800
II. APPLICATION OF FUNDS
(1) Fixed Assets
(a) Gross Block 600 1,200
(b) Less: Depreciation 500 700
(c) Net block 100 500
(2) Investments  
(3) Current Assets 400 700
Less: Current liabilities 200 400
Net current assets 200 300
Total 300 800

Schedule to Balance Sheet
(Rs. in crores)
After reconstruction Before reconstruction
A. Reserves and surplus 650 650
Less: Loss on reconstruction 400 

250 650
Note to Accounts: Consequent to reconstruction of the company and transfer of international division of Travels & Tours Ltd. to newly incorporated Company IT Ltd., the members of the company have been allotted 5 crore equity shares of Rs. 10 each at par of ‘IT Ltd.’
IT Ltd.
Balance Sheet as on January 1, 2005
(Rs. in crores)
I. SOURCES OF FUNDS
(1) Shareholder’s Funds
(a) Capital (Schedule A) 50
(b) Reserves and Surplus 350 400
(2) Loans Funds
Secured Loans 100
Total 500
II. APPLICATION OF FUNDS
(1) Fixed Assets 400
(2) Investments 
(3) Current Assets 300
Less: Current Liabilities 200
Net current assets 100
Total 500
Schedule to Balance Sheet
(Rs. in crores)
A. Share Capital:
Issued and paid up capital:
5 crore equity shares of Rs. 10 each fully paid up 50
(All the above equity shares have been issued for consideration other than cash to the members of Travels and Tours Ltd. on takeover of International division.)
(b) Net Asset Value of an equity share
Pre-Demerger Post-Demerger
Travels & Tours Ltd.


= Rs. 140 = Rs. 60
IT Ltd.


= Rs. 80
(c) Demerger into two companies has no impact on ‘net asset value’ of shareholding. Pre-demerger, it was Rs. 140 per share. After demerger, it is Rs. 60 + Rs. 80 = Rs. 140 per original share.
It is only the yield valuation that is expected to change because of separate focussing on two distinct businesses whereby profitability is likely to improve on account of de-merger.
Question 18
A Ltd. and B Ltd. were amalgamated on and from 1st April, 1995. A new company C Ltd. was formed to take over the business of the existing companies. The Balance Sheets of A Ltd. and B Ltd. as on 31st March, 1995 are given below:
(Rs. in lakhs)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share Capital Fixed Assets
Equity Shares of Rs. 100 each 800 750 Land and Building 550 400
12% Preference shares of
Rs.100 each
300
200 Plant and Machinery 350 250
Reserves and Surplus Investments 150 50
Revaluation Reserve
General Reserve 150
170 100
150 Current Assets, Loans and Advances
Investment Allowance Reserve 50 50 Stock 350 250
Profit and Loss Account 50 30 Sundry Debtors 250 300
Secured Loans Bills Receivable 50 50
10% Debentures (Rs. 100 each) 60 30 Cash and Bank 300 200
Current Liabilities and provisions
Sundry Creditors 270 120
Bills Payable 150 70 ¬_____ ¬_____
2,000 1,500 2,000 1,500
Additional Information:
(1) 10% Debentureholders of A Ltd. and B Ltd. are discharged by C Ltd. issuing such number of its 15% Debentures of Rs. 100 each so as to maintain the same amount of interest.
(2) Preference shareholders of the two companies are issued equivalent number of 15% preference shares of C Ltd. at a price of Rs. 150 per share (face value of Rs. 100).
(3) C Ltd. will issue 5 equity shares for each equity share of A Ltd. and 4 equity shares for each equity share of B Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10 per share.
(4) Investment allowance reserve is to be maintained for 4 more years.
Prepare the Balance Sheet of C Ltd. as on 1st April, 1995 after the amalgamation has been carried out on the basis of Amalgamation in the nature of purchase.
(15 marks) (May, 1996)
Answer
Balance Sheet of C Ltd.
as at 1st April, 1995
(Rs. In lakhs)
Liabilities Amount Assets Amount
SHARE CAPITAL FIXED ASSETS
70,00,000 Equity shares of Rs.10 each
700 Goodwill
Land and Building 20
950
5,00,000 Preference shares of

Rs. 100 each (all the above shares are allotted as fully
paid-up pursuant to contracts without payment being
received in cash) 500 Plant and Machinery
INVESTMENTS
CURRENT ASSETS, LOANS AND ADVANCES 600
200

RESERVES AND SURPLUS A Current Assets
Securities Premium Account 1,650 Stock 600
Investment Allowance Reserve 100 Sundry debtors 550
SECURED LOANS Cash and Bank 500
15% Debentures 60 B Loans and Advances
UNSECURED LOANS  Bills Receivable 100
CURRENT LIABILITIES AND PROVISIONS MISCELLANEOUS EXPENDITURE
(to the extent not written off or adjusted)
A Current Liabilities Acceptances
220 Amalgamation Adjustment Account 100
Sundry Creditors 390
B Provisions 
¬_____
3,620 3,620
Working Notes:
(Rs. in lakhs)
A Ltd. B Ltd.
(1) Computation of Purchase consideration
(a) Preference shareholders:


450



300
(b) Equity shareholders:


1,200


¬_____
900
Amount of Purchase Consideration 1,650 1,200
(2) Net Assets Taken Over
Assets taken over:
Land and Building 550 400
Plant and Machinery 350 250
Investments 150 50
Stock 350 250
Sundry Debtors 250 300
Bills receivable 50 50
Cash and bank 300 200
2,000 1,500
Less: Liabilities taken over:
Debentures 40 20
Sundry Creditors 270 120
Bills payable 150 70
460 210
Net assets taken over 1,540 1,290
Purchase consideration 1,650 1,200
Goodwill 110 ¬_____
Capital reserve 90
Note:
Since Investment Allowance Reserve is to be maintained for 4 more years, it is carried forward by a corresponding debit to Amalgamation Adjustment Account in accordance with AS-14.
Question 19
The Balance Sheets of Big Ltd. and Small Ltd. as on 31.03.1995 were as follows:
Balance Sheet as on 31.03.1995
Big Ltd. Small Ltd. Big Ltd. Small Ltd.
(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital (Rs. 10) 8,00,000 3,00,000 Building 2,00,000 1,00,000
10% Preference Share Capital (Rs. 100)

2,00,000 Machinery
Furniture 5,00,000
1,00,000 3,00,000
60,000
General reserve 3,00,000 1,00,000 Investment:
Profit and Loss Account 2,00,000 1,00,000 6,000 shares of Small Ltd.
60,000

Creditors 2,00,000 3,00,000 Stock 1,50,000 1,90,000
Debtors 3,50,000 2,50,000

Cash and Bank
90,000
70,000
¬
________
¬________ Preliminary Expenses 50,000
30,000
15,00,000 10,00,000 15,00,000 10,00,000

Big Ltd. has taken over the entire undertaking of Small Ltd. on 30.09.1995, on which date the position of current assets except Cash and Bank balances and Current Liabilities were as under:
Big Ltd. Small Ltd.
(Rs.) (Rs.)
Stock 1,20,000 1,50,000
Debtors 3,80,000 2,50,000
Creditors 1,80,000 2,10,000
Profits earned for the half year ended on 30.09.1995 after charging depreciation at 5% on building, 15% on machinery and 10% on furniture, are:
Big Ltd. Rs. 1,02,500
Small Ltd. Rs. 54,000

On 30.08.1995 both Companies have declared 15% dividend for 1994-1995.
Goodwill of Small Ltd. has been valued at Rs. 50,000 and other Fixed assets at 10% above their book values on 31.03.1995. Preference shareholders of Small Ltd. are to be allotted 10% Preference Shares of Big Ltd. and equity shareholders of Small Ltd. are to receive requisite number of equity shares of Big Ltd. valued at Rs. 15 per share in satisfaction of their claims.
Show the Balance Sheet of Big Ltd. as of 30.09.1995 assuming absorption is through by that date. (15 marks)(November, 1996)



Answer
Balance Sheet of Big Ltd.
as at 30th September, 1995
Liabilities Amount Assets Amount
(Rs.) (Rs.)
SHARE CAPITAL FIXED ASSETS
1,09,600 Equity shares of Rs.10 each
10,96,000 Building
Less: Depreciation 2,00,000
5,000
10% Preference shares
(Of the above shares, 29,600 equity shares and all preference shares are allotted as fully paid-up for consideration other than cash) 2,00,000
Add: Taken over
Machinery
Less: Depreciation
1,95,000
1,07,500
5,00,000
37,500
4,62,500
3,02,500
RESERVES AND SURPLUS Add: Taken over 3,07,500
Capital Reserve 1,000 7,70,000
Securities Premium Account 1,48,000 Furniture 1,00,000
General Reserve 3,00,000 Less: Depreciation 5,000
Profit and Loss Account 1,91,500 95,000
SECURED LOANS  Add: Taken over 63,000
UNSECURED LOANS  1,58,000
CURRENT LIABILITIES AND PROVISIONS INVESTMENTS

Sundry Creditors
3,90,000 CURRENT ASSETS, LOANS AND ADVANCES
Current Assets
Stock 2,70,000
Sundry Debtors 6,30,000
Cash and Bank 1,46,000
MISCELLANEOUS EXPENDITURE
(to the extent not written off or adjusted)
¬________ Preliminary Expenses 50,000
23,26,500 23,26,500
Working Notes:
1. Ascertainment of Cash and Bank Balances as on 30th September, 1995
Balance Sheets as at 30th September, 1995
Liabilities Big Ltd. Small Ltd. Assets Big Ltd. Small Ltd.
(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 8,00,000 3,00,000 Building** 1,95,000 97,500
10% Preference Share Capital

2,00,000 Machinery** 4,62,500 2,77,500
General reserve 3,00,000 1,00,000 Furniture** 95,000 57,000
Profit and Loss Account* 1,91,500 89,000 Investment 60,000 
Creditors 1,80,000 2,10,000 Stock 1,20,000 1,50,000
Debtors 3,80,000 2,50,000
Cash and Bank 1,09,000 37,000
(Balancing figure)
________ ________ Preliminary Expenses 50,000 30,000
14,71,500 8,99,000 14,71,500 8,99,000
*Balance of Profit and Loss Account on 30th September, 1995.
Big Ltd. Small Ltd.
(Rs.) (Rs.)
Net profit (for the first half) 1,02,500 54,000
Balance brought forward 2,00,000 1,00,000
3,02,500 1,54,000
Less: Dividend on Equity Share Capital Paid 1,20,000 45,000
1,82,500 1,09,000
Less: Dividend on Preference Share Capital Paid 
20,000
1,82,500 89,000
Add: Dividend received

9,000


1,91,500 89,000
**Fixed Assets on 30th September, 1995 (Before absorption)
Big Ltd. Small Ltd.
(Rs.) (Rs.)
(1) Building
As on 1.4.1995 2,00,000 1,00,000
Less: Depreciation (5% p.a.) 5,000 2,500
1,95,000 97,500
(2)
Machinery
As on 1.4.1995 5,00,000 3,00,000
Less: Depreciation (15% p.a.) 37,500 22,500
4,62,500 2,77,500
(3) Furniture
As on 1.4.1995 1,00,000 60,000
Less: Depreciation (10% p.a.) 5,000 3,000
95,000 57,000
2. Calculation of Shares Allotted
Assets taken over: Rs.
Goodwill 50,000
Building 1,00,000
Add: 10% 10,000
1,10,000
Less: Depreciation 2,500
1,07,500
Machinery 3,00,000
Add: 10% 30,000
3,30,000
Less: Depreciation 22,500
3,07,500
Furniture 60,000
Add: 10% 6,000
66,000
Less: Depreciation 3,000
63,000
Stock 1,50,000
Debtors 2,50,000
Cash and Bank 37,000
9,65,000
Less: Liabilities taken over:
Creditors 2,10,000
Net assets taken over 7,55,000
Less: Allotment of 10% Preference Shares
to preference shareholders of Small Ltd.
2,00,000
5,55,000


Less: Belonging to Big Ltd.***

1,11,000
¬
_______
Payable to other Equity Shareholders 4,44,000
Number of equity shares of Rs. 10 each to
be Issued (valued at Rs. 15 each)

= 29,600

[*** 6,000 shares out of 30,000 shares of Small Ltd. are already with Big Ltd.]
3. Ascertainment of Goodwill / Capital Reserve
Rs.
(A) Net Assets taken over 7,55,000
(B) Preference shares allotted 2,00,000
Payable to other equity shareholders 4,44,000
Cost of investments 60,000
7,04,000
(C) Capital Reserve [(A) – (B)] 51,000
(D) Goodwill taken over 50,000
(E) Final figure of Capital Reserve [(C) – (D)] 1,000
Question 20
The following are the Balance Sheets of Big Ltd. and Small Ltd. for the year ending on 31st March, 1998. (Figures in crores of rupees):
Big Ltd. Small Ltd.
Equity share capital – in equity shares of Rs. 10 each 50 40
Preference share capital – in 10% preference shares
of Rs. 100 each

60
Reserves and Surplus 200 150
250 250
Loans – Secured 100 100
Total funds 350 350
Applied for: Fixed assets at cost less depreciation 150 150
Current assets less current liabilities 200 200
350 350
The present worth of fixed assets of Big Ltd. is Rs. 200 crores and that of Small Ltd. is Rs. 429 crores. Goodwill of Big Ltd. is Rs. 40 crores and of Small Ltd. is 75 crores.
Small Ltd. absorbs Big Ltd. by issuing equity shares at par in such a way that intrinsic net worth is maintained.
Goodwill account is not to appear in the books. Fixed assets are to appear at old figures.
(a) Show the Balance Sheet after absorption.
(b) Draft a statement of valuation of shares on intrinsic value basis and prove the accuracy of your workings. (15 marks) (May, 1998)
Answer
(a) Small Ltd.
Balance Sheet as at 1st April, 1998
Schedule No. (Rs. in crores)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 125
(b) Reserves and surplus B 375
500
(2) Loan funds:
Secured loans C 200
TOTAL 700
II APPLICATION OF FUNDS
(1) Fixed assets:
Net block D 300
(2) Investments _
(3) Net current assets E 400
TOTAL 700
(Rs. in Crores)
Schedules to Accounts:
A Share Capital:
6.5 crores equity shares of Rs. 10 each
(of the above shares, 2.5 crores equity shares are allotted as fully paid-up for consideration other than cash) 65
60 lakhs 10% Preference shares of Rs. 100 each 60
125
B Reserves and Surplus:
As per last Balance Sheet 150
Capital Reserve 225
375
C Secured Loans:
As per last Balance Sheet 100
Taken over on absorption of Big Ltd. 100
200
D Fixed Assets:
As per last Balance Sheet 150
Taken over on absorption of Big Ltd. 150
300
E Net Current Assets:
As per last Balance Sheet 200
Taken over on absorption of Big Ltd. 200
400
(b) Valuation of shares on intrinsic value basis
(i) Big Ltd. Small Ltd.
(Rs. in crores)
Equity share capital 50 40
Reserves and Surplus 200 150
250 190
Goodwill agreed upon 40 75
Increase in the value of fixed assets
(Present worth less book value) 50 279
340 544
(ii) Big Ltd. Small Ltd.
Number of Equity shares 5 crores 4 crores
Intrinsic value per equity share Rs. 68 Rs. 136

(iii) Ratio of intrinsic value of shares in
the two companies 1 : 2
Since the shares are to be issued at par, the number of equity shares of Rs. 10 each to be issued to maintain the intrinsic net worth = 5 crores /2 = 2.5 crores
(iv) Statement to prove the accuracy of workings
(Rs. in crores)
(1) Equity share capital (after absorption) 65
Reserves and Surplus (after absorption) 375
440
Add: Unrecorded value of goodwill (40 + 75) 115
Add: Unrecorded incremental value of fixed
assets (50 + 279)
329
884
(2) Number of equity shares 6.5 crores
(3) Intrinsic value of an equity share (884/6.5) Rs. 136
Working Note:
Calculation of Capital Reserve on Absorption
(Rs. in crores)
Fixed Assets taken over 150
Net current assets taken over 200
350
Less: Secured loans taken over 100
Net Assets taken over 250
Less: Purchase consideration 25
225
Question 21
Given below is the Balance Sheet of H Ltd. as on 31.3.1997:
(Figures in Rs. lakhs)
Equity share capital 4.00 Block assets less depreciation to date 6.00
(in equity shares of Rs. 10 each) Stock and debtors 5.30
10% preference share capital 3.00 Cash and bank 0.70
General reserve 1.00
Profit and loss account 1.00
Creditors 3.00 ¬_____
12.00 12.00
M Ltd. another existing company holds 25% of equity share capital of H Ltd. purchased at Rs. 10 per share.
It was agreed that M Ltd. should take over the entire undertaking of H Ltd. on 30.09.1997 on which date the position of current assets (except cash and bank balances) and creditors was as follows:
Stock and debtors 4 lakhs
Creditors 2 lakhs
Profits earned for half year ended 30.09.1997 by H Ltd. was Rs. 70,500 after charging depreciation of Rs. 32,500 on block assets. H Ltd. declared 10% dividend for 1996-97 on 30.08.1997 and the same was paid within a week.
Goodwill of H Ltd. was valued at Rs. 80,000 and block assets were valued at 10% over their book value as on 31.3.1997 for purposes of take over. Preference shareholders of H Ltd. will be allotted 10% preference shares of Rs. 10 each by M Ltd. Equity shareholders of H Ltd. will receive requisite number of equity shares of Rs. 10 each from M Ltd. valued at Rs. 10 per share.
(a) Compute the purchase consideration.
(b) Explain, how the capital reserve or goodwill, if any, will appear in the Balance Sheet of M Ltd. after absorption. (15 marks)(November, 1998)
Answer
(a) Calculation of Purchase Consideration (for net assets of H Ltd. taken over)
Assets taken over: Rs.
Goodwill as agreed 80,000
Block Assets at 10% over their book value as on 31.3.1997 6,60,000
(agreed value for purposes of take over)
Stock and Debtors 4,00,000
Cash and Bank (See Working Note) 1,33,000
12,73,000
Less: Liabilities taken over:
Creditors 2,00,000
10,73,000
Calculation of Shares Allotted: Rs.
Net Assets taken over 10,73,000
Less: Allotment of 10% preference shares to preference
shareholders of H Ltd.
3,00,000
7,73,000
Less: Belonging to M Ltd. (1/4  7,73,000) 1,93,250
Payable to other equity shareholders 5,79,750

Number of equity shares of Rs. 10 each to be issued (valued at Rs. 10 each) = 57,975
Calculation of Capital Reserve: Rs.
Net Assets taken over 10,73,000
Less: Preference shares to be allotted 3,00,000
Equity shares to be allotted 5,79,750
Cost of investments 1,00,000 9,79,750
Capital Reserve 93,250
Alternatively, Capital Reserve may be computed as follows:
Value of investments in H Ltd. 1,93,250
Less: Cost of investments 1,00,000
93,250
(b) Balance Sheet of M Ltd. as at 30th September, 1997
(Extract) Rs.
Capital Reserve 93,250
Less: Goodwill 80,000 13,250

Working Note:
Ascertainment of Cash and Bank Balances as on 30th September, 1997:
Balance Sheet as at 30th September, 1997
Rs. Rs.
Equity Share Capital 4,00,000 Block Assets 6,00,000
10% Preference Share Capital 3,00,000 Less: Depreciation 32,500 5,67,500
General Reserve 1,00,000 Stock and Debtors 4,00,000
Profit and Loss Account: Cash and Bank 1,33,000
Balance brought forward 1,00,000 (Balancing figure)
Add: Profit for the first half 70,500
1,70,500
Less: Dividend on preference
share capital paid 30,000
Dividend on
equity share
capital paid 40,000 70,000

1,00,500
Creditors 2,00,000 ¬____________
11,00,500 11,00,500
Question 22
AB Ltd. and MB Ltd. decide to amalgamate and to form a new company AM Ltd. The following are their balance sheets as at 31.3.1998:
Liabilities AB Ltd. MB Ltd. Assets AB Ltd. MB Ltd.
Share Capital Fixed Assets 7,50,000 2,00,000
(Rs. 100) each 10,00,000 6,00,000 Investments:
General Reserve 1,00,000 50,000 1,500 Shares in MB 3,50,000 
Investment Allowance
Reserve 40,000
30,000 4,000 Shares in AB  5,00,000
12% Debentures Current Assets 4,00,000 1,00,000
(Rs. 100 each) 3,00,000 1,00,000
Sundry Creditors 60,000 20,000 ¬________ ¬_______
15,00,000 8,00,000 15,00,000 8,00,000
Calculate the amount of purchase consideration for AB Ltd. and MB Ltd. and draw up the balance sheet of AM Ltd. after considering the following:
(a) Assume amalgamation is in the nature of purchase.
(b) Fixed assets of AB Ltd. are to be reduced by Rs. 50,000 and that of MB Ltd. are to be taken at Rs. 3,00,000.
(c) 12% debentureholders of AB Ltd. and MB Ltd. are discharged by AM Ltd. by issuing such number of its 15% debentures of Rs. 100 each so as to maintain the same amount of interest.
(d) Shares of AM Ltd. are of Rs. 100 each.
Also show, how the investment allowance reserve will be treated in the Financial Statement assuming the Reserve will be maintained for 3 years. (16 marks)(May, 1999)
Answer
Calculation of Purchase consideration
(i) Value of Net Assets of AB Ltd. and MB Ltd. as on 31st March, 1998
AB Ltd. MB Ltd.
Rs. Rs.
Assets taken over:
Fixed Assets 7,00,000 3,00,000
Current Assets 4,00,000 11,00,000 1,00,000 4,00,000
Less: Liabilities taken over:
Debentures 2,40,000* 80,000**
Sundry Creditors 60,000 3,00,000 20,000 1,00,000
8,00,000 3,00,000
*
**
(ii) Value of Shares of AB Ltd. and MB Ltd.
The value of shares of AB Ltd. is Rs. 8,00,000 plus 1/4 of the value of the shares of MB Ltd.
Similarly, the value of shares of MB Ltd. is Rs. 3,00,000 plus 2/5 of the value of shares of AB Ltd.
Let a denote the value of shares of AB Ltd. and m denote the value of shares of MB Ltd. then
a = 8,00,000 + 1/4 m ; and
M = 3,00,000 + 2/5 a.

Substituting the value of m,
a = 8,00,000 + 1/4 (3,00,000 + 2/5 a)
a = 8,00,000 + 75,000 + 1/10 a
9/10 a = 8,75,000
a = 9,72,222
m = 3,00,000 + 2/5 (9,72,222)
m = 6,88,889
(iii) Amount of Purchase Consideration
AB Ltd. MB Ltd.
Rs. Rs.
Total value of shares (as determined above) 9,72,222 6,88,889
Less: Internal investments:
2/5 for shares held by MB Ltd. 3,88,889
1/4 for shares held by AB Ltd. ¬_______ 1,72,222
Amount due to outsiders 5,83,333 5,16,667
Purchase Consideration will be satisfied by AM Ltd. as follows:
AB Ltd. MB Ltd.
Rs. Rs.
In shares (of Rs. 100 each) 5,83,300 5,16,600
In cash 33 67

(iv) Net Amount of Goodwill/Capital Reserve
Rs. Rs.
Total Purchase Consideration
AB Ltd. 5,83,333
MB Ltd. 5,16,667 11,00,000
Less: Net Assets taken over
AB Ltd. 8,00,000
MB Ltd. 3,00,000 11,00,000
Nil
(Alternatively, the calculations may be made separately for both the companies)

Balance Sheet of AM Ltd.
as at 31st March, 1998
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital 10,999 shares of Rs. 100 each 10,99,900 Goodwill 
(All the above shares are allotted as fully paid-up for consideration other than cash) Fixed Assets
Investments 10,00,000

Investment Allowance Reserve 70,000 Current Assets 4,99,900
15% Debentures 3,20,000 (5,00,000 – 33 – 67)
Sundry Creditors 80,000 Miscellaneous Expenditure
(to the extent not written off or adjusted):

________ Amalgamation Adjustment Account
70,000
15,69,900 15,69,900

Treatment of Investment Allowance Reserve
According to para 39 (read with para 18) of AS 14 on Accounting for Amalgamations, where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee company are to complied with, the statutory reserves of the transferor company should be recorded in the financial statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g., ‘Amalgamation Adjustment Account) which should be disclosed as a part of ‘miscellaneous expenditure’ or other similar category in the balance sheet. When the identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed.
Question 23
The summarised Balance Sheets of R Ltd. and P Ltd. for the year ending on 31.3.2000 are as under:
R Ltd. P Ltd. R Ltd. P Ltd.
Rs. Rs. Rs. Rs.
Equity share Capital (in shares of Rs. 10 each)

24,00,000

12,00,000 Fixed Assets
Current Assets 55,00,000

25,00,000 27,00,000

23,00,000
8% Preference Share Capital (in shares of Rs. 10 each)

8,00,000

–
10% Preference Share Capital (in shares of Rs. 10 each)

–

4,00,000

Reserves
30,00,000
24,00,000
Current Liabilities 18,00,000 10,00,000 ________ _______
80,00,000 50,00,000 80,00,000 50,00,000
The following information is provided:
R Ltd. P Ltd.
Rs. Rs.
(1) (a) Profit before tax 10,64,000 4,80,000
(b) Taxation 4,00,000 2,00,000
(c) Preference dividend 64,000 40,000
(d) Equity dividend 2,88,000 1,92,000
(2) The equity shares of both the companies are quoted in the market. Both the companies are carrying on similar manufacturing operations.
(3) R Ltd. proposes to absorb P Ltd. as on 31.3.2000. The terms of absorption are as under:
(a) Preference shareholders of P Ltd. will receive 8% preference shares of R Ltd. sufficient to increase the income of preference shareholders of P Ltd. by 10%.
(b) The equity shareholders of P Ltd. will receive equity shares of R Ltd. on the following basis:
(i) The equity shares of P Ltd. will be valued by applying to the earnings per share of P Ltd. 75% of price earnings ratio of R Ltd. based on the results of 1999–2000 of both the companies.
(ii) The market price of equity shares of R Ltd. is Rs. 40 per share.
(iii) The number of shares to be issued to the equity shareholders of P Ltd. will be based on the above market value.
(iv) In addition to equity shares, 8% preference shares of R Ltd. will be issued to the equity shareholders of P Ltd. to make up for the loss in income arising from the above exchange of shares based on the dividends for the year 1999–2000.
(4) The assets and liabilities of P Ltd. as on 31.3.2000 are revalued by professional valuer as under:
Increased by
Rs. Decreased by
Rs.
Fixed Assets 1,00,000 –
Current Assets – 2,00,000
Current Liabilities – 40,000


(5) For the next two years, no increase in the rate of equity dividend is expected.
You are required to:
(i) Set out in detail the purchase consideration. (10 marks)
(ii) Give the Balance Sheet as on 31.3.2000 after absorption. (6 marks)
Note: Journal entries are not required. (November, 2000)
Answer
(i) Computation of Purchase Consideration
Rs.
(a) Preference Shareholders
Current income of preference shareholders of P Ltd. 40,000
Add: 10% increase thereof 4,000
44,000
Preference shares to be issued


5,50,000
(b) Equity Shareholders
(1) Issue of Equity Shares
P/E ratio in R Ltd.
Rs.
Profit before tax 10,64,000
Less: Tax 4,00,000
6,64,000
Less: Preference dividend 64,000
Profit available for equity shareholders 6,00,000
Earnings per share (EPS) = = Rs. 2.50
Price earnings ratio (P/E) = = Rs. 16
EPS of P Ltd:
Rs.
Profit before tax 4,80,000
Less: Tax 2,00,000
Profit after tax 2,80,000
Less: Preference dividend 40,000
Profit available for equity shareholders 2,40,000
EPS = = Rs. 2
Valuation of equity shares of P Ltd:
= 1,20,000 shares × (Rs. 2 × 16 × 0.75 i.e. Rs. 24)
= Rs. 28,80,000
Number of equity shares to be issued:
= = 72,000
Rs.
Equity Share Capital 7,20,000
Share (Securities) Premium 21,60,000
28,80,000
(2) Issue of Preference Shares Rs.
Current equity dividend 1,92,000
Less: Expected equity dividend from R Ltd.
(Rs. 7,20,000 × 2,88,000/24,00,000)
86,400
Loss in income 1,05,600
8% Preference Shares to be issued = = Rs. 13,20,000

Total Purchase Consideration: Rs.
Preference shares to be issued 5,50,000
13,20,000 18,70,000
Equity shares to be issued (at premium) 28,80,000
47,50,000
(ii) R Ltd.
Balance Sheet as at 31st March, 2000
(after absorption)
Schedule No. Rs.
I. SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 57,90,000
(b) Reserves and Surplus B 51,60,000 1,09,50,000
(2) Loan funds --
Total 1,09,50,000
II. APPLICATION OF FUNDS
(1) Fixed assets:
Net block C 91,10,000
(2) Investments –
(3) Net Current assets D 18,40,000
Total 1,09,50,000

Schedules to Balance Sheet
Rs.
A. Share Capital:
3,12,000 Equity Shares of Rs. 10 each (of the above shares, 72,000 equity shares are allotted as fully paid up for consideration other than cash) 31,20,000
2,67,000 8% Preference Shares of Rs. 10 each (of the above, 1,87,000 are allotted as fully paid up for consideration other than cash)
26,70,000
57,90,000
B. Reserves and Surplus:
As per last Balance Sheet 30,00,000
Share (Securities) Premium 21,60,000
51,60,000
C. Fixed Assets:
As per last Balance Sheet 55,00,000
Taken over on absorption of P Ltd. 28,00,000
83,00,000
Goodwill 8,10,000
91,10,000
D. Net Current Assets:
As per last Balance Sheet 7,00,000
Taken over on absorption of P Ltd. 11,40,000
18,40,000

Working Note:
Calculation of Goodwill on Absorption
Rs.
Purchase consideration 47,50,000
Fixed assets taken over 28,00,000
Current assets taken over 21,00,000
49,00,000
Less: Current liabilities 9,60,000
Net assets taken over 39,40,000
Goodwill 8,10,000

Question 24
Alpha Limited and Beta Limited were amalgamated on and from 1st April, 2001. A new Company Gamma Limited was formed to takeover the business of the existing companies. The Balance Sheets of Alpha Limited and Beta Limited as on 31st March, 2001 are given below :
(Rs. in Lakhs)
Liabilities Alpha Beta Assets Alpha Beta
Limited Limited Limited Limited
Share Capital Fixed Assets 1,200 1,000
Equity shares of Current
Rs. 100 each 1,000 800 Assets, Loans
15% Preference shares and Advances 880 565
of Rs. 100 each 400 300
Reserve & Surplus
Revaluation Reserve 100 80
General Reserve 200 150
P & L Account 80 60
Secured Loan
12% Debentures of
Rs. 100 each 96 80
Current Liabilities &
Provisions 204 95 ____
2,080 1,565 2,080 1,565
Other informations :
(1) 12% Debenture holders of Alpha Limited and Beta Limited are discharged by Gamma Limited by issuing adequate number of 16% Debentures of Rs. 100 each to ensure that they continue to receive the same amount of interest.
(2) Preference shareholders of Alpha Limited and Beta Limited have received same number of 15% Preference shares of Rs. 100 each of Gamma Limited.
(3) Gamma Limited has issued 1.5 equity shares for each equity share of Alpha Limited and 1 equity share for each equity share of Beta Limited. The face value of shares issued by Gamma Limited is Rs. 100 each.
Required :
Prepare the Balance Sheet of Gamma Limited as on 1st April, 2001 after the amalgamation has been carried out using the 'pooling of interest method'.
(8 marks)(May, 2001)

Answer
Balance Sheet of Gamma Limited
As at 1st April, 2000
(Rs. in lakhs)
Liabilities Amount Assets Amount
Equity shares of Rs. 100 each 2,300 Fixed assets 2,200
15% Preference shares of Rs. 100 each 700 Current assets, loans —
Revaluation reserve 180 and advances 1,445
General revenue —
Profit and loss account 34
16% Debentures of Rs. 100 each 132
Current liabilities and provisions 299
3,645 3,645
Working Notes :
(i) Purchase consideration (Rs. in lakhs)
Alpha Ltd. Beta Ltd. Total
Equity shares 1,500 800 2,300
Preference shares 400 300 700
1,900 1,100 3,000
Amount of share
capital of transferor companies 1,400 1,100 2,500
Difference 500 Nil 500
(ii) Amount of debentures issued 12/16 × 96 = 72 12/16 × 80 = 60 132
Amount of debentures of
transferor companies 96 80 176
Difference (24) (20) (44)
The total difference of Rs. (in lakhs) 456 has been adjusted in the balance sheet of Gamma Ltd. against reserves as below :
Combined Adjusted Balance
Amount Amount Sheet Amount
General reserve 350 350 Nil
Profit and loss account 140 106 34
490 456 34

Question 25
The Balance Sheets of O Ltd. and P Ltd. as on 31st March, 2000 are as under:
(Rs. in lakhs)
Liabilities O P Assets O P
Rs. Rs. Rs. Rs.
Equity Shares of Rs.10 each 25.00 50.00 Fixed Assets 110.00 50.00
Reserves 131.00 29.25 Investments 16.25 25.00
12% Debentures 11.00 5.50 Current Assets 40.25 3.25
Creditors 8.00
_____ 2.75
_____ Miscellaneous Expenditure 8.50
_____ 9.25
_____
175.00 87.50 175.00 87.50

Investments of O Ltd. represent 1,25,000 shares of P Ltd. Investments of P Ltd. are considered worth Rs. 30 lakhs.
P Ltd. is taken over by O Ltd. on the basis of the intrinsic value of shares in their respective books of account.
Prepare a statement showing the number of shares to be allotted by O Ltd. to P Ltd. and the Balance Sheet of O Ltd. after absorption of P Ltd. (16 marks) (November, 2001)
Answer
Balance sheet of O Ltd.
(after absorption)
(Rs. in lakhs)
Liabilities Amount Assets (Amount)
SHARE CAPITAL FIXED ASSETS
3,43,750 Equity Shares of Rs. 10 each 34.375 Fixed Assets 110.000
(Of the above shares, 93,750 equity shares are allotted as fully paid-up for consideration other than cash) Add: Taken over
INVESTMENTS 50.000
160.000
30.000
RESERVES AND SURPLUS CURRENT ASSETS,
As per last Balance Sheet
Capital Reserve
Securities Premium 131.00
2.500
46.875

180.375 LOANS AND ADVANCES
Current Assets

40.250
SECURED LOANS Add: Taken over 3.250 43.500
12% Debentures 11.000 MISCELLANEOUS EXPENDITURE
8.500

Add: Taken over 5.500 16.500
CURRENT LIABILITIES AND PROVISIONS
Creditors 8.000
Add: Taken over 2.750 10.750 ¬_____
242.000 242.000
Working Notes:
(a) (i) Calculation of Net Assets (Rs. in lakhs)
O Ltd. P Ltd.
Fixed Assets 110.00 50.00
Investments 18.75* 30.00
Current Assets 40.25 3.25
169.00 83.25
12% Debentures 11.00 5.50
Creditors 8.00 2.75
19.00 8.25
Net Assets 150.00 75.00

O Ltd. P Ltd.
(ii) Number of equity shares 2.50 lakhs 5.00 lakhs
Intrinsic Value Rs. 60.00 Rs. 15.00
* 1.25 lakhs shares  Rs. 15
(b) Calculation of Shares Allotted (Rs. in lakhs)
Net assets taken over 75.00
Less: Belonging to O Ltd.



18.75

Payable to other equity shareholders 56.25
Number of equity shares of Rs. 10 each to be issued =

= 93,750 shares (valued at Rs. 60 each)
Credit to share capital Rs. 9,37,500
Credit to securities premium Rs. 46,87,500


Question 26
A Ltd. agreed to take over B Ltd. as on 1st October, 2001. No Balance Sheet of B was prepared on that date:
Balance Sheets of A and B as at 31st March, 2001 were as follows:
A B A B
Rs. Rs. Rs. Rs.
Share Capital : In
equity shares of Rs.
10 each fully paid up

15,00,000

10,00,000 Fixed Assets
Current Assets:
Stock 12,50,000

2,37,500 8,75,000

1,87,500
Reserves and Surplus: Debtors 3,90,000 2,56,000
Reserve 4,15,000 2,56,000 Bank 2,93,750 1,50,000
Profit and Loss 1,87,500 1,50,000 Miscellaneous
Creditors 93,750 75,000 Expenditure:

¬________
¬________ Preliminary
Expenses
25,000
12,500
21,96,250 14,81,000 21,96,250 14,81,000
Additional information available:
(i) For the six months period from 1st April, 2001, A made a profit of Rs. 4,20,000 after writing off depreciation at 10% per annum on its fixed assets.
(ii) For the same period, B made a net profit of Rs. 2,04,000 after writing off depreciation at 10% p.a. on its fixed assets.
(iii) Both the companies paid on 1st August, 2001, equity dividends of 15%. Tax at 10% on such payments was also paid by each of them.
(iv) Goodwill of B was valued at Rs. 1,20,000 on the date of take-over; stock of B, subject to an abnormal item of Rs. 7,500 to be fully written off, would be appreciated by 25% for purpose of take-over:
(v) A to issue to B’s shareholders fully paid equity shares of Rs. 10 each, on the basis of the comparative intrinsic values of the shares on the take-over date.
Draft the Balance Sheet of A after absorption of B. All workings are to form part of your answer. (16 marks)(May, 2002)
Answer
Balance Sheet of A Ltd. (after absorption of B Ltd.)
Liabilities Rs. Assets Rs. Rs.
Share Capital Fixed Assets
2,56,000 Equity Shares of Rs. 10 each fully paid (1,06,000 shares allotted as fully paid without payment being received in cash)

25,60,000 Goodwill
Other Fixed Assets
(12,50,000 + 8,75,000)
Less: Depreciation
21,25,000

1,06,250 1,20,000


20,18,750
Reserves and Surplus
Securities Premium
5,30,000 Current Assets, Loans and Advances
Reserves
Profit and Loss Account 4,15,000
3,60,000 Stock
(2,37,500 + 2,25,000)
4,62,500
Current Liabilities
Creditors
1,68,750 Debtors
(3,90,000 + 2,56,000)
6,46,000
Bank Balance
(5,28,750 + 2,32,750)
7,61,500
Miscellaneous Expenditure
________ Preliminary Expenses 25,000
40,33,750 40,33,750
Working Notes:
(1) Bank Balance on 1.10.2001
A Ltd. B Ltd.
Rs. Rs.
Bank Balance as on 31.3.2001 2,93,750 1,50,000
Add: Net Profit 4,20,000 2,04,000
Depreciation 62,500 43,750
7,76,250 3,97,750
Less: Dividend 2,25,000 1,50,000
5,51,250 2,47,750
Less: Dividend Tax 22,500 15,000
Bank Balance as on 1.10.2001 5,28,750 2,32,750
(2) Profit and Loss Account as on 1.10.2001
A Ltd. B Ltd.
Rs. Rs.
Balance as on 31.3.2001 1,87,500 1,50,000
Add: 6 months’ profit 4,20,000 2,04,000
6,07,500 3,54,000
Less: Dividend 2,25,000 1,50,000
Dividend tax 22,500 15,000
3,60,000 1,89,000
(3) Balance Sheets of A Ltd. and B Ltd.
as on 1st October, 2001 (before absorption)
A Ltd. B Ltd. A Ltd. B Ltd.
Rs. Rs. Rs. Rs.
Share Capital 15,00,000 10,00,000 Fixed Assets 12,50,000 8,75,000
Reserves 4,15,000 2,56,000 Less: Depreciation (62,500) (43,750)
Profit and Loss 3,60,000 1,89,000 Net Fixed Assets 11,87,500 8,31,250
Creditors* 93,750 75,000 Current Assets
Stock* 2,37,500 1,87,500
Debtors* 3,90,000 2,56,000
Bank 5,28,750 2,32,750
Miscellaneous Expenditure

¬________
¬________ Preliminary Expenses
25,000
12,500
23,68,750 15,20,000 23,68,750 15,20,000
*It is assumed that these amounts as on 1st October, 2001 are same in the absence of any other information.
(4) Purchase consideration
A Ltd. B Ltd.
Rs. Rs.
Goodwill – 1,20,000
Fixed Assets 11,87,500 8,31,250
Stock 2,37,500 2,25,000
Debtors 3,90,000 2,56,000
Bank Balance 5,28,750 2,32,750
23,43,750 16,65,000
Less: Creditors 93,750 75,000
Net Assets 22,50,000 15,90,000
Number of Shares 1,50,000 1,00,000
Intrinsic value 15.00 15.90
Purchase consideration Rs. 15,90,000 in the form of Share capital Rs. 10,60,000 and securities premium Rs. 5,30,000.

Question 27
The following are the Balance Sheets of A Ltd. and B Ltd. as on 31st December, 2001 :
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Rs. Rs. Rs. Rs.
Share Capital Fixed Assets 7,00,000 2,50,000
Equity Shares of Rs. 10 each
6,00,000
3,00,000 Investment:
10% Pref. Shares of Rs. 100 each
Reserves and Surplus
2,00,000
3,00,000
1,00,000
2,00,000 6,000 Shares of B Ltd.
5,000 Shares of A Ltd. 80,000
 
80,000
Secured Loans: Current Assets:
12% Debentures 2,00,000 1,50,000 Stock 2,40,000 3,20,000
Current Liabilities: Debtors 3,60,000 1,90,000
Sundry Creditors 2,20,000 1,25,000 Bills Receivable 60,000 20,000
Bills Payable 30,000 25,000 Cash at Bank 1,10,000 40,000
15,50,000 9,00,000 15,50,000 9,00,000
Fixed Assets of both the companies are to be revalued at 15% above book value. Stock in Trade and Debtors are taken over at 5% lesser than their book value. Both the companies are to pay 10% Equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following terms:
(i) 8 Equity Shares of Rs. 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
(ii) 10% Preference Shareholders of B Ltd. will be paid at 10% discount by issue of 10% Preference Shares of Rs. 100 each at par in A Ltd.
(iii) 12% Debentureholders of B Ltd. are to be paid at 8% premium by 12% Debentures in A Ltd. issued at a discount of 10%.
(iv) Rs. 30,000 is to be paid by A Ltd. to B Ltd. for Liquidation expenses. Sundry Creditors of B Ltd. include Rs. 10,000 due to A Ltd.
Prepare :
(a) Absorption entries in the books of A Ltd.
(b) Statement of consideration payable by A Ltd. (16 marks)(November, 2002)
Answer
(a) Absorption Entries in the Books of A Ltd.
Dr. Cr.
Rs. Rs.
Fixed Assets Dr. 1,05,000
To Revaluation Reserve
(Revaluation of fixed assets at 15% above book value) 1,05,000
Bank Account Dr. 6,000
To Reserves and Surplus
(Dividend received from B Ltd. on 6,000 shares) 6,000
Reserve and Surplus Dr. 60,000
To Equity Dividend
(Declaration of equity dividend @ 10%) 60,000
Equity Dividend Dr. 60,000
To Bank Account
(Payment of equity dividend) 60,000
Business Purchase Account Dr. 3,60,000
To Liquidator of B Ltd.
(Consideration payable for the
business taken over from B Ltd.) 3,60,000
Fixed Assets (115% Rs. 2,50,000) Dr. 2,87,500
Stock (90% Rs. 3,20,000) Dr. 3,04,000
Debtors Dr. 1,90,000
Bills Receivable Dr. 20,000
Cash at Bank Dr. 15,000
(Rs. 40,000 – Rs. 30,000 dividend paid
+ Rs. 5,000 dividend received)
To Provision for Bad Debts
(5% of Rs.1,90,000) 9,500
To Sundry Creditors 1,25,000
To 12% Debentures in B Ltd. 1,62,000
To Bills Payable 25,000
To Business Purchase Account 3,90,000
To Investments in B Ltd. 80,000
To Capital Reserve (Balancing figure) 25,000
(Incorporation of various assets and liabilities taken over from B Ltd. at agreed values and cancellation of investment in B Ltd. account, profit being credited to capital reserve)
Liquidator of B Ltd. Dr. 3,60,000
To Equity Share Capital
To 10% Preference Share Capital
Discharge of consideration for B Ltd.’s business) 2,70,000
90,000



Capital Reserve
Dr. 30,000
To Bank Account
(Payment of liquidation expenses) 30,000
12% Debentures in B Ltd. (Rs. 1,50,000 × 108%)
Discount on Issue of Debentures Dr. 1,62,000
Dr. 18,000
To 12% Debentures
(Allotment of 12% Debentures to debenture holders at a discount of 10% to discharge the liability on B Ltd. debentures) 1,80,000

Sundry Creditors Dr. 10,000
To Sundry Debtors
(Cancellation of mutual owing) 10,000

(b) Statement of Consideration payable by A Ltd.
For equity shares held by outsiders
Shares held by them 30,000 – 6,000 = 24,000
Shares to be allotted 24,000  8 = 32,000
6
as 5,000 shares are already will B Ltd; i.e. A Ltd. will now issue only 27,000 shares of Rs. 10 each i.e 2,70,000 Rs. (i).
For 10% preference shares, to be paid at 10% discount
Rs. 1,00,000  90 90,000 (ii)
100
Consideration amount [(i) + (ii) ] 3,60,000
Note: It has been assumed that dividend on equity shares have been paid by both the companies.
Question 28
The following are the Balance Sheets of RS Ltd. and XY Ltd. as on 31.3.2002:
Rs. in ’000s
Liabilities RS Ltd. XY Ltd. Assets RS Ltd. XY Ltd.
Rs. Rs. Rs. Rs.
Share Capital:
Equity Shares of Rs. 100 each fully paid up
2,000
1,000 Fixed Assets net of
depreciation
Investments
2,700
700
850
–
Reserves and Surplus 800 – Sundry Debtors 400 150
10% Debentures 500 – Cash and Bank 250 –
Loan from Financial
Institutions
250
400 Profit and Loss Account – 800
Bank Overdraft – 100
Sundry Creditors 300 300
Proposed Dividend 200
____ ____
Total 4,050 1,800 Total 4,050 1,800
It was decided that XY Ltd. will acquire the business of RS Ltd. for enjoying the benefit of carry forward of business loss. After acquisition, XY Ltd. will be renamed as XYZ Ltd. The following scheme has been approved for the merger:
(i) XY Ltd. will reduce its shares to Rs. 10 and then consolidate 10 such shares into one share of Rs. 100 each (New Share).
(ii) Financial institutions agreed to waive 15% of the loan of XY Ltd.
(iii) Shareholders of RS Ltd. will be given one new share of XY Ltd. in exchange of every share held in RS Ltd.
(iv) RS Ltd. will cancel 20% holding of XY Ltd. Investments were held at Rs. 250 thousands.
(v) After merger the proposed dividend of RS Ltd. will be paid to the shareholders of RS Ltd.
(vi) Authorised Capital of XY Ltd. will be raised accordingly to carry out the scheme.
(vii) Sundry creditors of XY Ltd. includes payable to RS Ltd. Rs. 1,00,000.
Pass the necessary entries to implement the scheme in the books of RS Ltd. and XY Ltd. and prepare a Balance Sheet of XYZ Ltd. (16 marks)(May, 2003)
Answer
Journal Entries in the books of RS Ltd.
(Rs. ‘000)
Dr. Cr.
Rs. Rs.
10% Debentures Account Dr. 500
Loan from Financial Institutions Account Dr. 250
Sundry Creditors Account Dr. 300
Proposed Dividend Account Dr. 200
Realisation Account Dr. 2,800
To Fixed Assets Account 2,700
To Investments Account 700
To Sundry Debtors Account 400
To Cash and Bank Account 250
(Transfer of assets and liabilities to realisation account)

Share Capital Account
Reserve and Surplus Account
To Equity Shareholders Account
(Transfer of share capital, reserve and surplus to
shareholders account) Dr. 2,000
Dr. 800

2,800

Equity Shareholders Account Dr. 250
To Realisation Account 250
(Cancellation of 20% holding of XY Ltd. held as investments)

Shares in XYZ Ltd. Dr. 2,000
To Realisation Account 2,000
(Issue of shares by XYZ Ltd. in the ratio of 1 : 1)

Equity Shareholders Account Dr. 550
To Realisation Account 550
(Transfer of loss on realisation)

Equity Shareholders Account Dr. 2,000
To Shares in XYZ Ltd. 2,000
(Distribution of Shares of XYZ Ltd. among the shareholders)

Journal Entries in the books of XY Ltd.
(Rs. ‘000)
Dr. Cr.
Rs. Rs.
Equity Share Capital (Face value – Rs. 100) Account Dr. 1,000
To Equity Share Capital (Face value – Rs. 10) Account 100
To Reconstruction Account 900
(Face value of equity shares of Rs. 100 each reduced to Rs. 10 each)

Equity Share Capital (Face value – Rs. 10 each) Account Dr. 100
To Equity Share Capital Account
(Face value – Rs. 100 each) 100
(Consolidation of 10,000 equity shares of Rs. 10 each to 1,000 equity shares of Rs. 100 each)

Loan from Financial Institutions Account Dr. 60
To Reconstruction Account 60
(Waiver of 15%of loan by financial institutions)

Reconstruction Account (900 + 60) Dr. 960
To Profit and Loss Account 800
To Capital Reserve 160
(Utilisation of Reconstruction account balance to write off the Profit and Loss Account)

Proposed Dividend Account Dr. 200
To Bank Account 200
(Payment of Proposed dividend to shareholders of RS Ltd.)

Fixed Assets Account Dr. 2,700
Other Investments Account Dr. 450
Sundry Debtors Account Dr. 400
Cash and Bank Account Dr. 250
To Reserves Account 570
To 10% Debentures Account 500
To Loan from Financial Institutions Account 250
To Sundry Creditors Account 300
To Proposed Dividend Account 200
To Business Purchase Account 1,980
(Incorporation of various assets and liabilities acquired from RS Ltd. after cancellation of investment held by RS Ltd. in XY Ltd., profit on acquisition credited to Reserves Account)

Business Purchase Account Dr. 1,980
To Liquidator of RS Ltd. 1,980
(Consideration Payable on business acquired from RS Ltd.)

Liquidator of RS Ltd. Dr. 1,980
To Equity Share Capital of XYZ Ltd. 1,980
(Discharge of purchase consideration in the form of equity shares of XYZ Ltd.)

Sundry Creditors Account Dr. 100
To Sundry Debtors Account 100
(Cancellation of intercompany owings)




Balance Sheet of XYZ Ltd.
as on 31st March, 2002 (immediately after acquisition)
(Rs. in 000’s)
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets net of depreciation 3,550
20,800 Equity Shares @ Rs. 100
each (1,980 + 20 + 80)
2,080 Investments
Sundry Debtors 450
450
Capital Reserve 160
General Reserve 570
10% Debentures 500
Loan from financial institutions 590
Bank Overdraft (100 – 250 + 200) 50
Sundry Creditors 500 ____
4,450 4,450
Working Notes: Rs.
1. Original Share Capital of XY Ltd.
10,000 Equity Shares of Rs. 100 each
10,00,000
Share Capital of XY Ltd. after Reduction
10,000 Equity Shares of Rs. 10 each
1,00,000
2. Share Capital of XY Ltd. after Reconsolidation
1,000 Equity Shares of Rs. 100 each
1,00,000
3. Reduced value of holdings of RS Ltd. in XY Ltd.
RS Ltd. was holding 20% of XY Ltd., that is,
2,000 Equity Shares of Rs. 100 each
which has now reduced to 200 Equity Shares of Rs. 100 each
2,00,000
20,000
4. Calculation of Purchase Consideration
Equity Share Capital of RS Ltd. 20,000 Equity Shares of Rs. 100 each
20,00,000
Exchange Ratio = 1 : 1
No. of Equity Shares to be given 20,000
Less: No. of Equity Shares already held by RS Ltd. 200
19,800
Purchase consideration
19,800 Equity Shares of Rs. 100 each 19,80,000
5. Aggregate Reserves in the new company on acquisition
Reserves of RS Ltd. acquired
8,00,000
Less: Loss on investments held by RS Ltd.
Value of investments cancelled 2,50,000
Less: Reduced value of shares of XY Ltd. 20,000 2,30,000
Amount of Reserves to be carried to Balance Sheet 5,70,000
6. Share Capital in Combined Balance Sheet of XYZ Ltd.
Holding of RS Ltd. (200 Equity Shares @ Rs. 100 each)
20,000
Other Existing Shares (800 Equity Shares of Rs. 100 each) 80,000
Given as Purchase Consideration (19,800 equity shares @ Rs.100 each) 19,80,000
20,80,000
7. It has been assumed that the bank overdraft and cash balance can be netted of.

Alternative Solution:
The candidates may pass a journal entry in the books of XY Ltd. for cancellation of shares held by RS Ltd.
In that case the first three entries in books of XY Ltd. will remain the same, further:-
(Rs. ‘000)
Dr. Cr.
Rs. Rs.
Equity Share Capital Account Dr. 20
To Reconstruction Account 20
___________________________________
Equity Share Capital (Rs.10) Account Dr. 80
To Equity Share Capital Account (Rs.100) 80
___________________________________
Reconstruction Account Dr. 980
To Profit and Loss Account 800
To Capital Reserve 180
___________________________________
Fixed Assets Account Dr. 2,700
Other Investments Account Dr. 450
Sundry Debtors Account Dr. 400
Cash and Bank Account Dr. 250
To Reserves Account 550
To 10% Debentures Account 500
To Loan from Financial Institutions Account 250
To Sundry Creditors Account 300
To Proposed Dividend Account 200
To Business Purchase Account 2,000
___________________________________
Business Purchase Account Dr. 2,000
To Liquidator of RS Ltd. 2,000
___________________________________
Liquidator of RS Ltd. Dr. 2,000
To Equity Shares (Rs.10 each) 2,000
___________________________________
Note: In the Balance Sheet, capital reserve will go up by Rs.20,000 and general reserve will come down by Rs. 20,000.
Question 29
The following are the Balance Sheets of C Ltd. and D Ltd. on 31st March, 2003:
Balance Sheets
Liabilities C Ltd. D Ltd. Assets C Ltd. D Ltd.
Rs. Rs. Rs. Rs.
Equity Shares of Rs. 100 each fully paid
45,00,000
15,00,000 Fixed Assets
Investments 30,00,000 1,50,000
General Reserve 4,00,000 3,00,000 3,000 shares in D Ltd. 4,50,000 ─
Profit and Loss A/c 7,34,000 30,000 9,000 Shares in C Ltd. ─ 15,00,000
14% Debentures ─ 9,00,000 Debtors 8,70,000 4,50,000
Current Liabilities 6,00,000 2,70,000 Stock 14,40,000 6,30,000
¬________ ¬_______ Bank Balance 4,74,000 2,70,000
62,34,000 30,00,000 62,34,000 30,00,000

Stock of C Ltd. includes goods worth Rs. 3,00,000 purchased from D Ltd., which made a profit of 20% on selling price. As on 31.3.2003, C Ltd. owes to D Ltd. Rs. 1,20,000. C Ltd. absorbs D Ltd. on the basis of the intrinsic value of the shares of both companies as on 31st March, 2003. Before absorption C Ltd. has declared a dividend of 12%. Dividend tax is 10%.
Show the Balance Sheet of C Ltd. after the absorption of D Ltd. and the working for the number of shares issued. (16 marks)(November, 2003)
Answer
(a) (i) Computation of Net Assets excluding Inter-Company Investments.
C Ltd D Ltd
Rs. Rs.
A Total Assets
Tangible Assets 57,84,000 15,00,000

Dividend Receivable - 1,08,000
57,84,000 16,08,000
B. External Liabilities
Current Liabilities 6,00,000 2,70,000
Proposed Dividend 5,40,000 -
Dividend Tax 54,000 -
14% Debentures - 9,00,000
11,94,000 11,70,000
C. Net Assets (A – B) 45,90,000 4,38,000

(ii) Intrinsic value of equity shares.
Assume ‘a’ is the intrinsic value (net assets including inter company investments) of equity shares of C Ltd and ‘b’ is the intrinsic value of equity shares of D Ltd.
a = Rs.45,90,000 +  b (1)
b = Rs. 4,38,000 +  a (2)
or b = Rs.4,38,000 + (45,90,000 +  b)
or b = Rs.4,38,000 + 9,18,000 +
or  b = Rs.13,56,000
or b =  25 = Rs 14,12,500
Putting the value of b in equation (1) we get,
a = Rs.45,90,000 +  14,12,500
= Rs. 48,72,500
Intrinsic value of share of C Ltd. =
= Rs. 108.278 approximately
Intrinsic value of share of D Ltd = = Rs.94.167 approximately.

(iii) Calculation of Purchase consideration
Value of shares held by outside shareholders in D Ltd :
= Rs 11,30,000
Shares to be issued by C Ltd on the basis of intrinsic
value of shares = Rs.11,30,000 x 45,000
48,72,500 10,436.12
Less: Shares held by D Ltd 9,000.00
Number of shares to be issued 1,436.12
Total purchase price for outside shareholders Rs.
Additional shares in C Ltd. (1,436 x Rs.108.278) 1,55,487*
Cash for fractional shares (0.12 x Rs. 108.278) 13*
Value of 3000 shares held by C Ltd 2,82,500
4,38,000
(iv) General Reserve (C Ltd) Rs.
As per Balance sheet 4,00,000
Less: Reduction in value of shares held in
D Ltd (Rs. 4,50,000 - 2,82,500) 1,67,500
2,32,500
(v) Bank Balance C Ltd. D Ltd.
Rs. Rs.
As per Balance Sheet 4,74,000 2,70,000
Add: Dividend received ______ 1,08,000
4,74,000 3,78,000
Less: Dividend 5,40,000
Dividend tax 54,000
Cash for fractional shares 13 5,94,013 –
(1,20,013) 3,78,000
= Rs. 2,57,987.
Balance Sheet of C Ltd (after absorption of D Ltd)
Liabilities Rs. Assets Rs.
Share Capital :
Issued and Subscribed
46,436 shares of Rs.100 each fully paid (1436 shares allotted to vendors for consideration other than cash)
Reserves and Surplus:
General Reserve
Profit and Loss Account
(Rs.7,34,000 – Rs.5,40,000 – Rs.54,000)
Securities Premium
(Rs.1,55,487 – Rs.1,43,600)
Secured Loans:
14% Debentures
Current Liabilities and Provisions:
Current Liabilities Rs. 8,70,000
Less: Inter-Co. dues Rs. 1,20,000



46,43,600

2,32,500

1,40,000

11,887

9,00,000

7,50,000
66,77,987 Goodwill
Other Fixed Assets
Current Assets, Loans and Advances:
Stock Rs. 20,70,000
Less: Unrealised
Profit (Goodwill) Rs.60,000**
Bank Balance
Debtors Rs.13,20,000
Less: Inter Co. dues Rs.1,20,000 60,000
31,50,000




20,10,000
2,57,987

12,00,000







________
66,77,987
* Appropriate figures have been considered
**Alternatively this sum can also be adjusted against the balance in the Profit and Loss Account.
Question 30
ABC Ltd. was incorporated on 1.5.2003 to take over the business of DEF and Co. from 1.1.2003. The Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2003 is as under:
Profit and Loss Account
Rs. Rs.
To Rent and Taxes 90,000 By By Gross Profit 10,64,000
To Salaries including Manager’s salary of Rs. 85,000
3,31,000 By Interest on Investments 36,000
To Carriage Outwards 14,000
To Printing and Stationery 18,000
To Interest on Debentures 25,000
To Sales Commission 30,800
To Bad Debts (related to sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on Sale of Investments 11,200
To Net Profit 3,90,000 _______
11,00,000 11,00,000
Prepare a Statement showing allocation of pre-incorporation and post-incorporation profits after considering the following informations:
(i) G.P. ratio was constant throughout the year.
(ii) Sales for January and October were 1½ times the average monthly sales while sales for December were twice the average monthly sales.
(iii) Bad Debts are shown after adjusting a recovery of Rs. 7,000 of Bad Debt for a sale made in July, 2000.
(iv) Manager’s salary was increased by Rs. 2,000 p.m. from 1.5.2003.
(v) All investments were sold in April, 2003. (12 marks)(May, 2004)
Answer
Pre-incorporation period is for four months, from 1st January, 2003 to 30th April, 2003. 8 months’ period (from 1st May, 2003 to 31st December, 2003) is post-incorporation period.
Profit and Loss Account
for the year ended 31st December, 2003
Pre-Inc Post –Inc Pre-Inc Post inc
Rs. Rs. Rs. Rs.
To Rent and Taxes 30,000 60,000 By Gross Profit 3,42,000 7,22,000
To Salaries
Manager’s Salary
Other Salaries
23,000
82,000
62,000
1,64,000 By

By Interest on Investments
Bad Debts Recovery
36,000
7,000


To Printing and Stationery 6,000 12,000
To Audit fees 15,000 30,000
To Carriage Outwards 4,500 9,500
To Sales Commission 9,900 20,900
To Bad Debts
(91,000 + 7,000) 31,500 66,500
To Interest on Debentures  25,000
To Underwriting Commission  26,000
To Preliminary Expenses  28,000
To Loss on sale of investments 11,200 
To Net Profit 1,71,900* 2,18,100 _______ _______
3,85,000 7,22,000 3,85,000 7,22,000

*Pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
(i) Calculation of ratio of Sales
Let average monthly sales be x.
Thus Sales from January to April are 4½ x and sales from May to December are 9½ x.
Sales are in the ratio of 9/2x : 19/2x or 9 : 19.
(ii) Gross profit, carriage outwards, sales commission and bad debts written off have been allocated in pre and post incorporation periods in the ratio of Sales i.e. 9 : 19.
(iii) Rent, salaries, printing and stationery, audit fees are allocated on time basis.
(iv) Interest on debentures, underwriting commission and preliminary expenses are allocated in post incorporation period.
(v) Interest on investments, loss on sale of investments and bad debt recovery are allocated in pre-incorporation period.
Question 31
The Balance Sheet of Munna Ltd. on 31st March, 2005 is as under:
Liabilities Rs. Assets Rs.
Authorised, issued equity share capital Goodwill 2,00,000
20,000 shares of Rs. 100 each 20,00,000 Plant and machinery 18,00,000
10,000 preference shares (7%) of Stock 3,00,000
Rs. 100 each 10,00,000 Debtors 7,50,000
Sundry creditors 7,00,000 Preliminary expenses 1,00,000
Bank overdraft 3,00,000 Cash 1,50,000
¬________ Profit and loss account 7,00,000
40,00,000 40,00,000
Two years’ preference dividends are in arrears. The company had bad time during the last two years and hopes for better business in future, earning profit and paying dividend provided the capital base is reduced.
An internal reconstruction scheme as follows was agreed to by all concerned:
(i) Creditors agreed to forego 50% of the claim.
(ii) Preference shareholders withdrew arrear dividend claim. They also agreed to lower their capital claim by 20% by reducing nominal value in consideration of 9% dividend effective after reorganization in case equity shareholders’ loss exceed 50% on the application of the scheme.
(iii) Bank agreed to convert overdraft into term loan to the extent required for making current ratio equal to 2 : 1.
(iv) Revalued figure for plant and machinery was accepted as Rs. 15,00,000.
(v) Debtors to the extent of Rs. 4,00,000 were considered good.
(vi) Equity shares shall be exchanged for the same number of equity shares at a revised denomination as required after the reorganisation.
Show:
(a) Total loss to be borne by the equity and preference shareholders for the reorganization;
(b) Share of loss to the individual classes of shareholders;
(c) New structure of share capital after reorganization;
(d) Working capital of the reorganized Company; and
(e) A proforma balance sheet after reorganization. (16 marks)(May, 2005)
Answer
(a) Loss to be borne by Equity and Preference Shareholders
Rs.
Profit and loss account (debit balance) 7,00,000
Preliminary expenses 1,00,000
Goodwill 2,00,000
Plant and machinery (Rs. 18,00,000 – Rs. 15,00,000) 3,00,000
Debtors (Rs. 7,50,000 – Rs. 4,00,000) 3,50,000
Amount to be written off 16,50,000
Less: 50% of sundry creditors 3,50,000
Total loss to be borne by the equity and preference shareholders 13,00,000

(b) Share of loss to preference shareholders and equity shareholders
Total loss of Rs. 13,00,000 being more than 50% of equity share capital i.e. Rs.10,00,000.
Preference shareholders’ share of loss = 20% of Rs. 10,00,000 = Rs. 2,00,000
Equity shareholders’ share of loss (Rs. 13,00,000 – Rs. 2,00,000) = Rs. 11,00,000
Total loss Rs. 13,00,000

(c) New structure of share capital after reorganisation
Equity shares: Rs.
20,000 equity shares of Rs. 45 each, fully paid up
(Rs. 20,00,000 – Rs. 11,00,000)
9,00,000
Preference shares:
10,000, 9% preference shares of Rs. 80 each, fully paid up
(Rs. 10,00,000 – Rs. 2,00,000)
8,00,000
17,00,000
(d) Working capital of the reorganized company
Current Assets: Rs. Rs.
Stock 3,00,000
Debtors 4,00,000
Cash 1,50,000
8,50,000
Less: Current liabilities:
Creditors 3,50,000
Bank overdraft  75,000 4,25,000
Working capital 4,25,000
(e) Balance Sheet of Munna Ltd. (and reduced)
as on 31st March, 2005
Liabilities Rs. Assets Rs.
Share Capital Authorised
(issued and paid up) Fixed Assets
20,000 equity shares of Rs. 45 each 9,00,000 Plant and Machinery 15,00,000
10,000, 9% preference shares of Rs. 80 each 8,00,000 Current Assets
Unsecured loan Stock 3,00,000
Term loan with Bank 2,25,000 Debtors 4,00,000
Current liabilities Cash 1,50,000
Bank overdraft 75,000
Creditors 3,50,000 ¬________
23,50,000 23,50,000
Question 32
The following are the Balance Sheets of Big Ltd. and Small Ltd. as at 31.3.06:
(Rs. In lakhs)
Big Ltd. Small Ltd. Big Ltd. Small Ltd.
Rs. Rs. Rs. Rs.
Share Capital 40 15 Sundry Assets
(including cost of shares) 56 20
Profit & Loss A/c 7.5 -- Goodwill 4 5
Sundry Creditors 12.5 12.5 Profit and Loss A/c -- 2.5
60.0 27.5 60.0 27.5
Additional Information:
(i) The two companies agree to amalgamate and form a new company, Medium Ltd.
(ii) Big Ltd. holds 10,000 shares in Small Ltd. acquired at a cost of Rs.2,50,000 and Small Ltd. holds 5,000 shares in Big Ltd. acquired at a cost of Rs.7,00,000.
(iii) The shares of Big Ltd. are of Rs.100 and are fully paid and the shares of Small Ltd. are of Rs.50 each on which Rs.30 has been paid-up.
(iv) It is agreed that the goodwill of Big Ltd. would be valued at Rs.1,50,000 and that of Small Ltd. at Rs.2,50,000.
(v) The shares which each company holds in the other are to be valued at book value having regard to the goodwill valuation decided as given in (iv).
(vi) The new shares are to be of a nominal value of Rs.50 each credited as Rs.25 paid.
You are required to:
(i) Prepare the Balance Sheet of Medium Ltd., as at 31st March, 2006 after giving effect to the above transactions; and
(ii) Prepare a statement showing the shareholdings in the new company attributable to the shareholders of the merged companies. (16 Marks) (May, 2006)
Answer
(i) Balance Sheet of Medium Ltd. as on 31st March, 2006
Liabilities Rs. Assets Rs.
1,82,000 shares of Rs.50/- each, Rs.25 paid up [Issued for consideration other than cash]

45,50,000 Goodwill (Rs.1,50,000+Rs.2,50,000)
Sundry Assets 4,00,000

Sundry Creditors 25,00,000 (Rs. 53,50,000+ Rs.13,00,000) 66,50,000
70,50,000 70,50,000
(ii) Statement of Shareholding in Medium Ltd.
Big Ltd.
Rs. Small Ltd.
Rs.
Total value of Assets 44,20,513 8,52,564
Less: Pertaining to shares held by the other company 5,52,564 1,70,513
38,67,949 6,82,051
Rounded off to
Shares of new company (at Rs. 25 per share) 38,67,950
1,54,718 6,82,050
27,282
Total purchase consideration to be paid to Big Ltd and Small Ltd. (Rs.38,67,950 + Rs.6,82,050)
Rs. 45,50,000
Number of shares in Big Ltd. (40,00,000/100)
Number of shares in Small Ltd. (15,00,000/30)
Holding of Small Ltd. in Big Ltd. (5,000/40,000)
Holding of Big Ltd. in Small Ltd. (10,000/50,000)
Number of shares held by outsiders in Big Ltd. (40,000 – 5,000) = 40,000 shares
50,000 shares
1/8
1/5
35,000
Number of shares held by outsiders in Small Ltd. (50,000 – 10,000) 40,000
Workings Note:
Calculation of Book Value of Shares
Big Ltd Small Ltd.
Rs. Rs.
Goodwill 1,50,000 2,50,000
Sundry Assets other than shares in other company
(56,00,000 – 2,50,000)
(20,00,000 – 7,00,000) 53,50,000
13,00,000
55,00,000 15,50,000
Less: Sundry Creditors 12,50,000 12,50,000
42,50,000 3,00,000
If “x” is the Book Value of Assets of Big Ltd and “y” of Small Ltd.
x = 42,50,000 +
y = 3,00,000 +
x = 42,50,000 +
= 42,50,000 + 60,000 +
= 43,10,000
x =
x = 44,20,513 (approx.)
y = 3,00,000 +
= 3,00,000 + 5,52,564
= Rs. 8,52,564 (approx.)
Book Value of one share of Big Ltd. =
Book Value of one share of Small Ltd. =
Question 33
The summarized Balance sheets of X Ltd. and its subsidiary Y Ltd. as at 31.3.2005 were as follows:
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
Rs. Rs. Rs. Rs.
Share capital 50,00,000 10,00,000 Fixed assets 60,00,000 18,00,000
(Share of Rs.10 each) Investment in Y Ltd. (60,000 shares)

6,00,000

---
General reserves 50,00,000 20,00,000 Sundry debtors 35,00,000 5,00,000

Profit and Loss account
20,00,000
15,00,000
Inventories
30,00,000
25,00,000
Secured loan 20,00,000 2,50,000 Cash and bank 39,00,000 2,00,000
Current liabilities 30,00,000 2,50,000
1,70,00,000 50,00,000 1,70,00,000 50,00,000
X Ltd. holds 60% of the paid-up capital of Y Ltd. and the balance is held by a foreign company.
A memorandum of understanding has been entered into with the foreign company by X Ltd. to the following effect:
(i) The shares held by the foreign company will be sold to X Ltd. at a price per share to be calculated by capitalizing the yield at 15%. Yield, for this purpose, would mean 50% of the average of pre-tax profits for the last 3 years, which were Rs.12 lakhs, 18 lakhs and 24 lakhs respectively. (Average tax rate was 40%).
(ii) The actual cost of shares to the foreign company was Rs.4,40,000 only. Gains accruing to the foreign company are taxable at 20%. The tax payable will be deducted from the sale proceeds and paid to government by X. 50% of the consideration (after payment of tax) will be remitted to the foreign company by X Ltd. and also any cash for fractional shares allotted.
(iii) For the balance of consideration, X Ltd. would issue its shares at their intrinsic value.
It was also decided that X Ltd. would absorb Y Ltd. Simultaneously by writing down the Fixed assets of Y Ltd. by 10%. The Balance Sheet figures included a sum of Rs.1,00,000 due by Y Ltd. to X Ltd. and stock of X Ltd. included stock of Rs.1,50,000 purchased from Y Ltd., who sold them at cost plus 20%.
The entire arrangement was approved and put through by all concern effective from 1.4.2005.
You are required to indicate how the above arrangements will be recorded in the books of X Ltd. and also prepare a Balance Sheet after absorption of Y Ltd. Workings should form part of your answer. (16 Marks)(Nov. 2006)
Answer
X Ltd.
Balance Sheet as at 1st April, 2005
Liabilities Amount (Rs.) Assets Amount (Rs.)
Share Capital:
Shares 5,00,000 Fixed Assets 78,00,000
Shares issued in lieu of purchase consideration

33,466 Less :Revaluation loss
1,80,000
76,20,000
(Shares of Rs.10 each)
5,33,466
53,34,660 Sundry Debtors
(35,00,000+5,00,000)
40,00,000
General Reserve 50,00,000 Less: Mutual Debts 1,00,000 39,00,000
Capital Reserve 13,20,000
Profit and Loss Account
20,00,000 Inventories
(30,00,000+25,00,000)
55,00,000
Less: unrealized profit on stock
25,000
19,75,000
Securities Premium (33,46620)
6,69,320 Less: Unrealised profit on stock
25,000
54,75,000
Secured Loans (20,00,000 + 2,50,000)


22,50,000 Cash at Bank 27,03,980
Current Liabilities
(30,00,000 + 2,50,000)
32,50,000
Less: Mutual Debts 1,00,000 31,50,000

1,96,98,980 1,96,98,980
Working Notes:-
(1) Yield of Y Ltd.
Average of Pre Tax Profit = 
Yield =
(2) Price per share of Y Ltd:-
Capitaised value of yield of Y Ltd. =
No. of shares = 1,00,000
Price per share = Rs.60 per share
(3) Purchase consideration for 40% of share capital of Y Ltd.
= 1,00,000 x 60 x Rs.24,00,000
(4) Calculation of intrinsic value of shares of X Ltd. Rs.
Total Assets excluding Investments in Y Ltd. 1,64,00,000
Value of Investment 60,000  60 36,00,000
2,00,00,000
Less: Outside Liabilities:
Secured Loan 20,00,000
Current Liabilities 30,00,000 50,00,000
Net Assets 1,50,00,000


Intrinsic value per share =
= Rs.30 per share
(5) Discharge of purchase consideration by X Ltd.
Equity share capital Cash Total
Rs. Rs. Rs.
(i) Payment of Tax (24 - 4.40) x =
--- 3,92,000 3,92,000
(ii) Issue of shares to foreign company
[50% of (24 – 3.92) = 10.04 lakhs
No. of shares issued by X Ltd. = 33,466.6666 shares

Value of shares capital = 33,466  30 = 10,03,980 --- 10,03,980
(iii) Cash Payment [50% of (24 – 3.92) = 10.04 lakhs --- 10,04,000 10,04,000
(iv) Cash for fractional shares = 0.6666 30 --- 20 20
Total 10,03,980 13,96,020 24,00,000
(6) Calculation for Goodwill/Capital Reserve to X Ltd.
Rs.
Total of Assets as per Balance Sheet of Y Ltd. 50,00,000
Less: 10% Reduction in the value of Fixed Assets

1,80,0000
48,20,000
Less: Secured Loan 2,50,000
Current Liabilities 2,50,000 5,00,000
Net Assets 43,20,000
Less: Purchase consideration (outside shareholders) 24,00,000
19,20,000
Less: Investment in Y Ltd. as per Balance Sheet of X Ltd. 6,00,000
Capital Reserve 13,20,000
(7) Cash and Bank Balance of X Ltd. after acquisition of shares
Rs.
Opening Balance (X Ltd.) 39,00,000
Cash and Bank Balance of Y Ltd. 2,00,000
41,00,000
Less: Remittance to the foreign company 10,04,020
30,95,980
Less: T.D.S. paid to Government 3,92,000
27,03,980
(8) Unrealised profit included in stock of X Ltd. = 1,50,000 x

Question 34
The following are the Balance sheets (as at 31.3.2006) of A Ltd. and B Ltd.:
Liabilities A Ltd. B. Ltd. Assets A Ltd. B. Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Fixed Assets 50,00,000 30,00,000
Equity Shares of Rs.10 each 36,00,000 18,00,000 Investments
Current Assets 5,00,000 5,00,000
10% Preference shares of Rs.100 each 12,00,000 - Stock
Debtors
Bills receivable 18,00,000
15,00,000
50,000 12,00,000
12,00,000
10,000
12% Preference shares of Rs.100 each - 6,00,000 Cash at Bank 1,50,000 90,000
Reserve and Surplus:
Statutory Reserve 1,00,000 1,00,000
General Reserve 25,00,000 17,00,000
Secured Loan
15% Debentures 5,00,000 -
12% Debentures - 5,00,000
Current Liabilities
Sundry creditors 10,80,000 12,80,000
Bills payable 20,000 20,000
90,00,000 60,00,000 90,00,000 60,00,000

Contingent liabilities for bills receivable discounted Rs.20,000.
(A) The following additional information is provided to you:
A Ltd. B Ltd.
Rs. Rs.
Profit before Interest and Tax 14,75,000 7,80,000
Rate of Income-tax 40% 40%
Preference dividend 1,20,000 72,000
Equity dividend 3,60,000 2,70,000
Balance profit transferred to Reserve account.

(B) The equity shares of both the companies are quoted on the Mumbai Stock Exchange. Both the companies are carrying on similar manufacturing operations.
(C) A Ltd proposes to absorb business of B Ltd. as on 31.3.2006. The agreed terms for absorption are:
(i) 12% Preference shareholders of B Ltd. will receive 10% Preference shares of A Ltd. sufficient to increase their present income by 20%.
(ii) The Equity shareholders of B Ltd. will receive equity shares of A Ltd. on the following terms:
(a) The Equity shares of B Ltd. will be valued by applying to the earnings per share of B Ltd. 60 per cent of price earnings ratio of A Ltd. based on the results of 2005-06 of both the Companies.
(b) The market price of Equity shares of A Ltd. is Rs.40 per share.
(c) The number of shares to be issued to Equity shareholders of B Ltd. will be based on the 80% of market price.
(d) In addition to Equity shares, 10% Preference shares of A Ltd. will be issued to the equity shareholders of B Ltd. to make up for the loss in income arising from the above exchange of shares based on the dividends for the year 2005-2006.
(iii) 12% Debentureholders of B Ltd. are to be paid at 8% premium by 15% debentures in A Ltd. issued at a discount of 10%.
(iv) Rs.16,000 is to be paid by A Ltd. to B Ltd. for liquidation expenses. Sundry Creditors of B Ltd. include Rs.20,000 due to A Ltd. Bills receivable discounted by A Ltd. were all accepted by B Ltd.
(v) Fixed assets of both the companies are to be revalued at 20% above book value. Stock in trade is taken over at 10%; less than their book value.
(vi) Statutory reserve has to be maintained for two more years.
(vii) For the next two years no increase in the rate of equity dividend is anticipated.
(viii) Liquidation expense is to be considered as part of purchase consideration.
You are required to:
(i) Find out the purchase consideration.
(ii) Give journal entries in the books of A Ltd.
(iii) Give the Balance Sheet as at 31.3.2006 after absorption. (16 Marks)(May, 2007)
Answer
(i) Computation of Purchase Consideration Rs.

For Preference Shareholders
Present Income of Preference Shareholders of B Ltd. 72,000
Add : Required 20% increase 14,400
86,400
10% Preference Shares to be issued of Rs. 8,64,000 (86,400/10x 100)

For Equity Shareholders
Valuation of Equity Shares of B Ltd. =
Number of shares x Value of one share (i.e. EPS of B Ltd. x P/E ratio of A Ltd. x 60/100)
= 1,80,000 x (Rs.2 x 20x =1,80,000 x 24 = Rs.43,20,000

Issue of Equity Shares
No. of Equity Shares to be issued at 80% of Market Price i.e.
80% of Rs.40 = Rs.32
1,35,000 shares

Equity Share Capital = 1,35,000 x Rs.10 = Rs.13,50,000
Securities Premium = 1,35,000 x Rs. 22 = Rs.29,70,000
Rs.43,20,000
Issue of Preference Shares Rs.
Present Equity Dividend 2,70,000
Less: Expected Equity Dividend from A Ltd.
(13,50,000 x
1,35,000
Loss in income 1,35,000
10% Preference Shares to be issued of Rs. 13,50,000 (1,35,000/10x 100)
Purchase Consideration
Preference Shares Capital [Rs.8,64,000 + Rs.13,50,000] 22,14,000
Equity Share Capital (1,35,000 shares of Rs.10 each at
Rs.32 per share) 43,20,000
Liquidation Expenses (in cash) 16,000
65,50,000

(ii) Journal Entries in the Books of A Ltd.
Particulars Dr.( Rs). Cr. (Rs.)
1. Fixed Assets A/c Dr. 10,00,000
To Revaluation Reserve 10,00,000
(Being Revaluation of Fixed assets at 20% above book value)
2. Business Purchase A/c Dr. 65,50,000
To Liquidator of B Ltd. 65,50,000
(Being purchase consideration payable for the business taken over from B Ltd.
3. Fixed Assets A/c Dr. 36,00,000
Investment A/c Dr. 5,00,000
Stock A/c Dr. 10,80,000
Debtors A/c Dr. 12,00,000
Bills Receivable A/c Dr. 10,000
Cash at Bank A/c Dr. 90,000
Goodwill A/c (Balancing figure) Dr. 19,10,000
To 12% Debentures in B Ltd. 5,40,000
To Creditors 12,80,000
To Bills Payable 20,000
To Business Purchase A/c 65,50,000
(Being incorporation of different assets and liabilities of B Ltd. taken over at agreed values and balance debited to goodwill account)
4. Liquidator of B Ltd. Dr. 65,50,000
To Equity Share Capital A/c 13,50,000
To Securities Premium A/c 29,70,000
To Preference Share Capital A/c 22,14,000
To Bank A/c 16,000
(Being discharge of consideration for B Ltd’s business)
5. 12% Debentures in B Ltd. Dr. 5,40,000
Discount on issue of Debentures Dr. 60,000
To 15% Debentures 6,00,000
(Being allotment of 15% Debentures to debenture holders at a discount of 10% to discharge liability of B Ltd. debentures)
6. Sundry Creditors A/c Dr. 20,000
To Sundry Debtors A/c 20,000
(Being cancellation of Mutual owing)
7. Amalgamation Adjustment A/c Dr. 1,00,000
To Statutory Reserve A/c 1,00,000
(Being statutory reserve account is maintained under statutory requirements)
8. Securities Premium A/c Dr. 60,000
To Discount on issue of Debentures A/c 60,000
(Being discount on issue of Debentures written off out of securities premium)

(iii) Balance Sheet of A Ltd (after absorption of B Ltd.)
as on 31.3.2006
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital: Fixed Assets:
4,95,000 Equity Shares of 49,50,000 Goodwill 19,10,000
Rs. 10 each fully paid (1,35,000 shares have been allotted as fully paid up for consideration other than cash)
10% Preference Shares of Rs.100 each fully paid




34,14,000 Other Fixed Assets (60,00,000+36,00,000)
Investment
(5,00,000+5,00,000)
Current Assets:Stock
(18,00,000+10,80,000) 96,00,000


10,00,000

28,80,000
Reserve & Surplus: Debtors
Statutory Reserve
Revaluation Reserve
General Reserve 2,00,000
10,00,000
25,00,000 (15,00,000+12,00,000-20,000)
Bills Receivable 26,80,000

60,000
Securities Premium
Secured Loan: 29,10,000
(50,000+10,000)
Cash at Bank
2,24,000
15% Debentures
(5,00,000 + 6,00,000)
Current Liabilities and 11,00,000 (1,50,000 + 90,000-16,000)
Amalgamation Adjustment
A/c

1,00,000
Provisions: Creditors
(10,80,000+12,80,000-20,000) 23,40,000
Bills Payable
(20,000 + 20,000)
40,000

1,84,54,000 1,84,54,000

Note: No footnote will appear for contingent liability as it has been converted into actual liability after absorption of B Ltd.

Working Notes:
1. Calculation of EPS & P/E ratio
A Ltd.
Rs. B Ltd.
Rs.
Profit before Interest and Tax 14,75,000 7,80,000
Less: Interest on debentures 75,000 60,000
Profit before tax 14,00,000 7,20,000
Less: Tax @ 40% 5,60,000 2,88,000
8,40,000 4,32,000
Less: Preference Dividend 1,20,000 72,000
Earnings available for equity shareholders 7,20,000 3,60,000
Number of shares 3,60,000 shares 1,80,000 shares
EPS (Earnings/ No. of shares) 2 2
Market Price Rs.40 Not given
P/E ratio 40/2 = 20 N.A.
2. Computation of Goodwill/Capital Reserve on absorption:
Rs.
Purchase Consideration 65,50,000
Fixed Assets taken over 30,00,000
Add: Increase by 20% 6,00,000 36,00,000
Investments 5,00,000
Current Assets:
Stock 12,00,000
Less: Reduction in value by 10% 1,20,000
10,80,000
Debtors 12,00,000
B/R 10,000
Cash at Bank 90,000 23,80,000
64,80,000
Less: Outside Liabilities:
12% Debentures at premium 5,40,000
Sundry Creditors 12,80,000
Bills Payable 20,000 18,40,000 46,40,000
Goodwill 19,10,000
Question 35
The Balance Sheets of Strong Ltd. and Weak Ltd. as on 31.03.2007 is as below:
Balance Sheet as on 31.03.2007
Liabilities Strong Ltd. Weak Ltd. Assets Strong Ltd. Weak Ltd.
Rs. Rs. Rs. Rs.
Equity Share Capital (Rs.100 each)
50,00,000
30,00,000 Fixed Assets other than Goodwill
30,00,000
20,00,000
Reserve 4,00,000 2,00,000 Stock 8,00,000 6,00,000
P/L A/c 6,00,000 4,00,000 Debtors 14,00,000 9,00,000
Creditors 5,00,000 3,00,000 Cash & Bank 12,00,000 3,50,000


Preliminary Expenses
1,00,000
50,000
65,00,000 39,00,000 65,00,000 39,00,000
Strong Ltd. takes over Weak Ltd. on 01.07.07. No Balance Sheet of Weak Ltd. is available as on that date. It is however estimated that Weak Ltd. earns estimated profit of Rs.2,00,000 after charging proportionate depreciation @ 10% p.a. on fixed assets, during April-June, 2007.
Estimated profit of Strong Ltd. during these 3 months is Rs.4,00,000 after charging proportionate depreciation @ 10% p.a. on fixed assets.
Both the companies have declared and paid 10% dividend within this 3 months’ period. Goodwill of Weak Ltd. is valued at Rs.2,00,000 and Fixed Assets are valued at Rs.1,00,000 above the estimated book value. Purchase consideration is to be satisfied by Strong Ltd. by shares at par. Ignore Income-tax.
You are required to calculate the following:
(i) No. of shares to be issued by Strong Ltd. to Weak Ltd. against purchase consideration;
(ii) Net Current Assets of Strong Ltd. and Weak Ltd. as on 01.07.2007;
(iii) P/L A/c balance of the Strong Ltd. as on 01.07.2007;
(iv) Fixed Assets as on 01.07.2007;
(v) Balance Sheet of Strong Ltd. as on 01.07.2007 after take over of Weak Ltd.
(16 Marks) (Nov. 2007)

Answer
(i) Number of shares to be issued by Strong Ltd. to Weak Ltd. against purchase consideration
Weak Ltd. Rs. Rs.
Goodwill 2,00,000
Fixed Assets 20,00,000
Less: Depreciation 50,000
19,50,000
Add: Appreciation 1,00,000 20,50,000
Stock 6,00,000
Debtors 9,00,000
Cash and Bank balances 3,50,000
Add: Profit after depreciation 2,00,000
Add: Depreciation (non-cash) 50,000 2,50,000

Less: Dividend (3,00,000) 3,00,000
40,50,000
Less: Creditors 3,00,000
Purchase Consideration 37,50,000
(ii) Calculation of Net Current Assets as on 01.07.2007
Strong Ltd. Weak Ltd.
Rs. Rs.
Current assets:
Stock 8,00,000 6,00,000
Debtors 14,00,000 9,00,000
Cash and Bank 12,00,000 3,50,000
Less: Dividend (5,00,000) (3,00,000)
Add: Profit before
depreciation
4,75,000
11,75,000
2,50,000
3,00,000
33,75,000 18,00,000
Less: Creditors 5,00,000 3,00,000
28,75,000 15,00,000
(iii) Profit and Loss Account balance of Strong Ltd. as on 1.07.2007
Rs.
P & L A/c balance as on 31.03.2007 6,00,000
Less: Dividend paid 5,00,000
1,00,000
Add: Estimated profit for 3 months after charging depreciation 4,00,000
5,00,000
(iv) Fixed Assets as on 01.07.2007
Fixed Assets of Strong Ltd. as on 31.03.2007 30,00,000
Less: Depreciation for 3 months 75,000
29,25,000
Fixed assets taken over of Weak Ltd. as on 31.03.2007 20,00,000
Less: Proportionate depreciation for 3 months on fixed assets 50,000
19,50,000
Add: Appreciation above the estimated book value 1,00,000 20,50,000
49,75,000
(v) Balance Sheet of Strong Ltd. as on 01.07.2007 (after Take Over)
Liabilities Rs. Assets Rs.
Equity Share capital:
87500 (50,000+ 37,500) shares of Rs.100 each

87,50,000 Goodwill
Fixed assets
[as computed in (iv)] 2,00,000
49,75,000
Reserves 4,00,000 Stock 14,00,000
Profit and Loss Account
[as computed in (iii)] 5,00,000 (8,00,000 + 6,00,000)
Debtors
23,00,000
Creditors
(5,00,000 + 3,00,000) 8,00,000 (14,00,000 + 9,00,000)
Cash and Bank
(11,75,000+ 3,00,000) 14,75,000
Preliminary expenses 1,00,000
1,04,50,000 1,04,50,000


Question 36
T. Ltd. and V. Ltd. propose to amalgamate. Their balance sheets as at 31st March, 2008 were as follows:
Liabilities T. Ltd. V. Ltd. Assets T. Ltd. V. Ltd.
Rs. Rs. Rs. Rs.
Share capital: Fixed assets
Equity shares of Rs.10 each 15,00,000 6,00,000 Less: Depreciation 12,00,000 3,00,000
General reserve 6,00,000 60,000 Investments (face value of Rs.3 lakhs, 6% tax free G.P. notes)


3,00,000


-
Profit & Loss A/c 3,00,000 90,000 Stock 6,00,000 3,90,000
Creditors 3,00,000 1,50,000 Debtors 5,10,000 1,80,000


Cash and bank balances
90,000
30,000
27,00,000 9,00,000 27,00,000 9,00,000
Their net profits (after taxation) were as follows:
Year T. Ltd. V. Ltd.
2005-06 3,90,000 1,35,000
2006-07 3,75,000 1,20,000
2007-08 4,50,000 1,68,000
Normal trading profit may be considered as 15% on closing capital invested. Goodwill may be taken as 4 years’ purchase of average super profits. The stock of T. Ltd. and V. Ltd. are to be taken at Rs.6,12,000 and Rs.4,26,000 respectively for the purpose of amalgamation. W. Ltd. is formed for the purpose of amalgamation of two companies.
(a) Suggest a scheme of capitalization of W. Ltd. and ratio of exchange of shares; and
(b) Draft the opening balance sheet of W. Ltd. (16 Marks) (May, 2008)£

Answer
(a) Scheme of capitalization of W. Ltd. and ratio of exchange of shares
Computation of Net Assets of amalgamating companies
T. Ltd. V. Ltd.
Rs. Rs.
Goodwill (W.N.2) 3,19,200 1,21,200
Fixed Assets 12,00,000 3,00,000
6% investments (Non-trade) 3,00,000 -
Stock 6,12,000 4,26,000
Debtors 5,10,000 1,80,000
Cash and Bank Balances 90,000 30,000
30,31,200 10,57,200
Less: Creditors 3,00,000 1,50,000
Net Assets 27,31,200 9,07,200
No. of Equity shares 1,50,000 60,000
Intrinsic value of a share Rs. 18.208 Rs. 15.12
No of shares to be issued by W. Ltd to
T. Ltd 1,50,000 x 18.208/10 2,73,120 shares
V. Ltd 60,000 x 15.12/10 90,720 shares
In total 2,73,120 + 90,720 i.e. 3,63,840 shares will be issued by W. Ltd.
Ratio of exchange of shares will be as follows:
1. Holders of 1,50,000 equity shares of T Ltd. will get 2,73,120 shares in W. Ltd.
2. Similarly, holders of 60,000 equity shares of V Ltd. will get 90,720 shares in W. Ltd.
(b) Opening Balance Sheet of W. Ltd.
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
3,63,840 Equity shares of Rs. 10 each 36,38,400 Goodwill (W.N.2)
(3,19,200 + 1,21,200)
4,40,400
(Issued for consideration other than cash, pursuant to scheme of amalgamation) Other fixed Assets
(12,00,000+ 3,00,000) 15,00,000
Current Liabilities: Investments in 6% Tax free G.P. Notes
3,00,000
Creditors 4,50,000 Current Assets:
Stock (6,12,000 + 4,26,000) 10,38,000
Debtors
(5,10,000 + 1,80,000) 6,90,000

Cash and bank balance
(90,000 + 30,000)
1,20,000
40,88,400 40,88,400
Working Notes:
1. Calculation of closing trading capital employed on the basis of net assets
T. Ltd. V. Ltd.
Rs. Rs.
Fixed Assets 12,00,000 3,00,000
Stock 6,12,000 4,26,000
Debtors 5,10,000 1,80,000
Cash and Bank Balances 90,000 30,000
24,12,000 9,36,000
Less: Creditors 3,00,000 1,50,000
Net Assets 21,12,000 7,86,000

2. Calculation of value of goodwill
(i) Average Trading Profit T. Ltd. V. Ltd.
Rs. Rs.
2005-06 3,90,000 1,35,000
2006-07 3,75,000 1,20,000
2007-08 4,50,000 1,68,000
Profit after tax 12,15,000 4,23,000
Profit before tax (40%) 20,25,000 7,05,000
Add : Under valuation of closing stock 12,000 36,000
20,37,000 7,41,000
Average of 3 years’ profit before tax 6,79,000 2,47,000
Less:Income from non-trade investments (3,00,000 x 6%)
18,000
-
Average profit before tax 6,61,000 2,47,000
Less: 40% tax 2,64,400 98,800
Average profit after tax 3,96,600 1,48,200

(ii) Super Profits
Average trading profit 3,96,600 1,48,200
Less: Normal Profit
T. Ltd. Rs. 21,12,000 x 15% 3,16,800
V. Ltd Rs. 7,86,000 x 15% 1,17,900
79,800 30,300

(iii) Value of goodwill at 4 years’ purchase of super profits
3,19,200
1,21,200
Question 37
The following are the Balance Sheets of Andrew Ltd. and Barry Ltd., as at 31.12.2007:
Andrew Ltd.
(in Rs.’000s)
Liabilities Assets
Share capital Fixed assets 3,400
3,00,000 Equity shares of Rs.10 each 3,000 Stock (pledged with secured loan creditors) 18,400
10,000 Preference shares of Rs.100 each 1,000 Other Current assets
Profit and Loss account 3,600
16,600
General reserve 400
Secured loans (secured against pledge of stocks) 16,000
Unsecured loans 8,600
Current liabilities 13,000
42,000 42,000

Barry Ltd.
(in Rs.’000s)
Liabilities Assets
Share capital Fixed assets 6,800
1,00,000 Equity shares of Rs.10 each 1,000 Current assets 9,600
General reserve 2,800
Secured loans 8,000
Current liabilities 4,600
16,400 16,400

Both the companies go into liquidation and Charlie Ltd., is formed to take over their businesses. The following information is given:
(a) All Current assets of two companies, except pledged stock are taken over by Charlie Ltd. The realisable value of all Current assets are 80% of book values in case of Andrew Ltd. and 70% for Barry Ltd. Fixed assets are taken over at book value.
(b) The break up of Current liabilities is as follows:
Andrew Ltd. Barry Ltd.
Rs. Rs.
Statutory liabilities (including Rs.22 lakh in case of Andrew Ltd. in case of a claim not having been admitted shown as contingent liability)

72,00,000

10,00,000
Liability to employees 30,00,000 18,00,000
The balance of Current liability is miscellaneous creditors.
(c) Secured loans include Rs.16,00,000 accrued interest in case of Barry Ltd.
(d) 2,00,000 equity shares of Rs.10 each are allotted by Charlie Ltd. at par against cash payment of entire face value to the shareholders of Andrew Ltd. and Barry Ltd. in the ratio of shares held by them in Andrew Ltd. and Barry Ltd.
(e) Preference shareholders are issued Equity shares worth Rs.2,00,000 in lieu of present holdings.
(f) Secured loan creditors agree to continue the balance amount of their loans to Charlie Ltd. after adjusting value of pledged security in case of Andrew Ltd. and after waiving 50% of interest due in the case of Barry Ltd.
(g) Unsecured loans are taken over by Charlie Ltd. at 25% of Loan amounts.
(h) Employees are issued fully paid Equity shares in Charlie Ltd. in full settlement of their dues.
(i) Statutory liabilities are taken over by Charlie Ltd. at full values and miscellaneous creditors are taken over at 80% of the book value.
Show the opening Balance Sheet of Charlie Ltd. Workings should be part of the answer.
(16 Marks) (Nov. 2008)
Answer
Balance sheet of Charlie Ltd. as at 31st December, 2007
(in Rs. ‘ooos)
Liabilities Rs. Assets Rs.
Share Capital Goodwill (W.N.4) 9,470
Authorised Other Fixed Assets
(3,400 + 6,800)
10,200
Shares of Rs.10 each Current Assets(2,880 + 6,720) 9,600
Issued, subscribed & Paid up: Cash at Bank 2,000
7,00,000 equity shares of Rs.10 each, fully paid up (W.N. 5) 7,000
(of the above 5,00,0000 shares have been issued for consideration other than cash)
Secured loans (1,280 + 7,200) 8,480
Unsecured Loans (25% of 8,600) 2,150
Current Liabilities
(7,200 + 1,000 + 4,000 +1,440))
13,640
31,270 31,270
Working Notes:
1. Value of miscellaneous creditors taken over by Charlie Ltd. (in Rs. ‘ooos)
Andrew Ltd. Barry Ltd.
Rs. Rs.
Given in balance sheet 13,000 4,600
Less: Statutory liabilities
Liability to employees 5,000
3,000 1,000
1,800
Miscellaneous creditors 5,000 1,800
80% thereof 4,000 1,440

2. Value of total liabilities taken over by Charlie Ltd.
Andrew Ltd. Barry Ltd.
Rs. Rs. Rs. Rs.
Current liabilities
Statutory liabilities 7,200 1,000
Liability to employees 3,000 1,800
Miscellaneous creditors (W.N.1) 4,000 14,200 1,440 4,240
Secured loans
Given in Balance sheet 16,000 8,000
Interest waived - 800 7,200
Value of Stock
(80% of Rs.184 lakhs) 14,720
1,280
Unsecured Loans
(25% of Rs. 86 lakhs)
2,150

-
17,630 11,440
3. Assets taken over by Charlie Ltd.
Andrew Ltd.
Rs. Barry Ltd.
Rs.
Fixed Assets (Assumed on book value basis) 3,400 6,800
Current Assets 80% and 70% respectively of book value 2,880 6,720
6,280 13,520
4. Goodwill / Capital Reserve on amalgamation
Liabilities taken over (W.N. 2) 17,630 11,440
Equity shares to be issued to Preference Shareholders 200 -
A 17,830 11,440
Less: total assets taken over (W.N. 3) B 6,280 13,520
A-B 11,550 (2,080)
Goodwill Capital Reserve
Net Goodwill 9,470


5. Equity shares issued by Charlie Ltd.

(i)
For Cash Number
200000
For consideration other than cash
(ii) In Discharge of Liabilities to Employees 4,80,000
(iii) To Preference shareholders 20,000 5,00,000
7,00,000
Value of shares Rs.10x 7,00,000= Rs. 70 Lakhs


NOTE































3
VALUATION
Topics covered:
 Valuation of Business (Q. No. 1, 2)
 Valuation of Goodwill (Q. Nos. 3 to 8 )
 Valuation of Shares (Q. Nos. 9 to 20)

Question 1
The Balance Sheets of R Ltd. for the years ended on 31.3.2000, 31.3.2001 and 31.3.2002 are as follows:
31.3.2000 31.3.2001 31.3.2002
Liabilities Rs. Rs. Rs.
3,20,000 Equity Shares of Rs. 10 each fully paid
32,00,000
32,00,000
32,00,000
General Reserve 24,00,000 28,00,000 32,00,000
Profit and Loss Account 2,80,000 3,20,000 4,80,000
Creditors 12,00,000 16,00,000 20,00,000
70,80,000 79,20,000 88,80,000

31.3.2000 31.3.2001 31.3.2002
Assets Rs. Rs. Rs.
Goodwill 20,00,000 16,00,000 12,00,000
Building and Machinery
(Less: Depreciation)
28,00,000
32,00,000
32,00,000
Stock 20,00,000 24,00,000 28,00,000
Debtors 40,000 3,20,000 8,80,000
Bank Balance 2,40,000 4,00,000 8,00,000
70,80,000 79,20,000 88,80,000
Actual valuation were as under:
31.3.2000 31.3.2001 31.3.2002
Rs. Rs. Rs.
Building and Machinery 36,00,000 40,00,000 44,00,000
Stock 24,00,000 28,00,000 32,00,000
Net Profit (including opening balance) after writing off depreciation and goodwill, tax provision and transfer to General Reserve


8,40,000


12,40,000


16,40,000

Capital employed in the business at market values at the beginning of 1999–2000 was Rs. 73,20,000, which included the cost of goodwill. The normal annual return on Average Capital employed in the line of business engaged by R Ltd. is 12½%.
The balance in the General Reserve account on 1st April, 1999 was Rs. 20 lakhs.
The goodwill shown on 31.3.2000 was purchased on 1.4.1999 for Rs. 20,00,000 on which date the balance in the Profit and Loss Account was Rs. 2,40,000. Find out the average capital employed each year.
Goodwill is to be valued at 5 years purchase of super profits (Simple average method). Also find out the total value of the business as on 31.3.2002. (16 marks) (November, 2003)
Answer
Note:
1. Since goodwill has been paid for, it is taken as part of capital employed. Capital employed at the end of each year is shown below.
2. Assumed that the building and machinery figure as revalued is after considering depreciation.
31.3.2000 31.3.2001 31.3.2002
Rs. Rs. Rs.
Goodwill 20,00,000 16,00,000 12,00,000
Building and Machinery (revalued) 36,00,000 40,00,000 44,00,000
Stock (revalued) 24,00,000 28,00,000 32,00,000
Debtors 40,000 3,20,000 8,80,000
Bank Balance 2,40,000 4,00,000 8,00,000
Total Assets 82,80,000 91,20,000 1,04,80,000
Less: Creditors 12,00,000 16,00,000 20,00,000
Closing Capital 70,80,000 75,20,000 84,80,000
Opening Capital 73,20,000 70,80,000 75,20,000
1,44,00,000 1,46,00,000 1,60,00,000
Average Capital 72,00,000 73,00,000 80,00,000
Maintainable profit has to be found out after making adjustments as given below:
31.3.2000 31.3.2001 31.3.2002
Rs. Rs. Rs.
Net Profit as given 8,40,000 12,40,000 16,40,000
Less: Opening Balance 2,40,000 2,80,000 3,20,000
6,00,000 9,60,000 13,20,000
Add: Under valuation of closing stock 4,00,000 4,00,000 4,00,000
10,00,000 13,60,000 17,20,000
Less: Adjustment for valuation in opening stock
________
4,00,000
4,00,000
10,00,000 9,60,000 13,20,000
Add: Goodwill written-off
________ 4,00,000 4,00,000
10,00,000 13,60,000 17,20,000
Add: Transfer to Reserves 4,00,000 4,00,000 4,00,000
14,00,000 17,60,000 21,20,000
Less: 12½% Normal Return 9,00,000 9,12,500 10,00,000
Super Profit 5,00,000 8,47,500 11,20,000
Average super profits = (Rs.5,00,000 + Rs.8,47,500 + Rs.11,20,000) / 3
= 24,67,500 / 3 = Rs 8,22,500
Goodwill = 5 years purchase = Rs. 8,22,500 × 5 = Rs. 41,12,500.
Rs.
Total Net Assets (31/3/2002) 84,80,000
Less: Goodwill 12,00,000
72,80,000
Add: Goodwill 41,12,500
Value of Business 1,13,92,500
Question 2
Find out the average capital employed of ND Ltd. from its Balance sheet as at 31st March, 2006:
Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)
Share Capital: Fixed Assets:
Equity shares of Rs.10 each 50.00 Land and buildings 25.00
9% Pref. shares fully paid up 10.00 Plant and machinery 80.25
Reserve and Surplus: Furniture and fixture 5.50
General reserve 12.00 Vehicles 5.00
Profit and Loss 20.00 Investments 10.00
Secured loans: Current Assets:
16% debentures 5.00 Stock 6.75
16% Term loan 18.00 Sundry Debtors 4.90
Cash credit 13.30 Cash and bank 10.40
Current Liabilities and Provisions: Preliminary expenses 0.50
Sundry creditors 2.70
Provision for taxation 6.40
Proposed dividend on:
Equity shares 10.00
Preference shares 0.90
148.30 148.30
Non-trade investments were 20% of the total investments.
Balances as on 1.4.2005 to the following accounts were:
Profit and Loss account Rs.8.70 lakhs, General reserve Rs.6.50 lakhs.
(8 Marks)(November 2006)
Answer
Computation of Average Capital employed
(Rs. in Lakhs)
Total Assets as per Balance Sheet 148.30
Less: Preliminary Expenses 0.50
Non-trade investments (20% of Rs. 10 lakhs) 2.00 2.50
145.80
Less: Outside Liabilities:
16% Debentures 5.00
16% Term Loan 18.00
Cash Credit 13.30
Sundry Creditors 2.70
Provision for Taxation 6.40 45.40
Capital Employed as on 31.03.2006 100.40
Less: ½ of profit earned:
Increase in reserve balance 5.50
Increase in Profit & Loss A/c 11.30
Proposed Dividend 10.90
27.70 X 50 % 13.85
Average capital employed 86.55
Question 3
The Balance Sheets of X Ltd. are as follows:
(Rs. in lakhs)
Liabilities As at 31.3.1996 As at 31.3.1997
Share Capital 1,000.0 1,000.0
General Reserve 800.0 850.0
Profit and Loss Account 120.0 175.0
Term Loans 370.0 330.0
Sundry Creditors 70.0 90.0
Provision for Tax 22.5 25.0
Proposed Dividend 200.0 250.0
2,582.5 2,720.0
Assets
Fixed Assets and Investments (Non-trade) 1,600.0 1,800.0
Stock 550.0 600.0
Debtors 340.0 220.0
Cash and Bank 92.5 100.0
2,582.5 2,720.0
Other Information:
1. Current cost of fixed assets excluding non-trade investments on 31.3.1996 Rs. 2,200 lakhs and on 31.3.1997 Rs. 2,532.8 lakhs.
2. Current cost of stock on 31.3.1996 Rs. 670 lakhs and on 31.3.1997 Rs. 750 lakhs.
3. Non-trade investments in 10% government securities Rs. 490 lakhs.
4. Debtors include foreign exchange debtors amounting to $ 70,000 recorded at the rate of $ 1 = Rs. 17.50 but the closing exchange rate was $ 1 = Rs. 21.50.
5. Creditors include foreign exchange creditors amounting to $ 1,20,000 recorded at the rate of $ 1 = Rs. 16.50 but the closing exchange rate was $ 1 = Rs. 21.50.
6. Profit included Rs. 120 lakhs being government subsidy which is not likely to recur.
7. Rs. 247 lakhs being the last instalment of R and D cost were written off the profit and loss account. This expenditure is not likely to recur.
8. Tax rate during 1996-97 was 50% effective future tax rate is estimated at 40%.
9. Normal rate of return is expected at 15%.
Based on the information furnished, Mr. Iral, a director contends that the company does not have any goodwill. Examine his contention. (20 marks)(November, 1997)
Answer
(Rs. in lakhs)
(1) Average Capital employed
As at 31.3.1996 As at 31.3.1997
Current cost of fixed assets other than non trade investments 2,200.0 2,532.8
Current cost of stock 670.0 750.0
Debtors 340.0 222.8
Cash and Bank 92.5 100.0
3,302.5 3,605.6
Less: Outside Liabilities:
Term loans 370.0 330.0
Sundry creditors 70.0 96.0
Tax provision 22.5 25.0
462.5 451.0
Capital Employed 2,840.0 3,154.6
Average Capital Employed at current value =
2,997.3
(2) Future maintainable profit
Increase in General Reserve 50
Increase in Profit and Loss Account 55
Proposed Dividend 250
Profit after tax 355
Pre-tax profit =

710.00
Less: Non-trading income 49.00
Exchange loss on creditors [1.2 lakhs  (21.5 – 16.5)] 6.00
Subsidy 120.00
175.00
535.00
Add: Exchange gain on debtors [0.7 lakhs  (21.5 – 17.5)] 2.80
R & D costs 247.00
Stock adjustment 30.00
279.80
Adjusted pre-tax profit 814.80
Less: Tax @ 40% 325.92
Future maintainable profit 488.88

Valuation of Goodwill
(Rs. in lakhs)
(1) Capitalisation Method
Capitalised value of future maintainable profit

3,259.20
Less: Average Capital Employed 2,997.30
Goodwill 261.90
(2) Super Profit Method
Future Maintainable Profit 488.88
Normal Profit @ 15% on average capital employed 449.60
Goodwill 39.28
Under capitalisation method, the amount of goodwill is larger than the amount of goodwill computed under super profit method. In either case, the existence of Goodwill cannot be doubted. The director’s view cannot, therefore, be upheld.
Working Notes:
(Rs. in lakhs)
(1) Stock adjustment
Difference between current cost and historical cost of closing stock 150.00
Difference between current cost and historical cost of opening stock 120.00
30.00
(2) Debtors’ adjustment
Value of foreign exchange debtors at the closing exchange rate ($ 70,000  21.5) 15.05
Value of foreign exchange debtors at the original exchange rate ($ 70,000  17.5) 12.25
2.80

(3) Creditors’ adjustment
Foreign exchange creditors at the closing exchange rate ($ 1,20,000  21.5) 25.80
Foreign exchange creditors at the original exchange rate ($ 1,20,000  16.5) 19.80
6.00
Question 4
Briefly discuss methods of valuation of intangible assets. (4 marks)(May, 2005)
Answer
Valuation of intangible assets is a complex exercise, as the non-physical form of intangible assets pose the difficulty of identifying the future economic benefits that the enterprise can expect to derive from them. There are three main approaches for valuing intangible assets:
(1) Cost approach: In cost approach, historical expenditure incurred in developing the asset is aggregated. Cost is measured by purchase price, where the asset has been acquired recently.
(2) Market value approach: In comparable market value approach, intangible assets are valued with reference to transactions involving similar assets that have cropped up recently in similar markets. This approach is possible when there is an active market in which arm’s length transactions have occurred recently involving comparable intangible assets and adequate information of terms of transactions is available.
(3) Economic value approach: This approach is based on the cash flows or earnings attributable to those assets and the capitalization thereof, at an appropriate discount rate or multiple. Some of the key parameters used in this approach are projected revenues, projected earnings, discount rate, rate of return etc. The information required can be derived from either internal sources, external sources or both. Under this approach, the valuer has to identify cash flows or earnings directly associated with the intangible assets like the cash flows arising from the exploitation of a patent or copyright, licensing of an intangible asset etc. This approach can be put to practice only if cash flows arising from the intangible assets are identifiable from the management accounts and budgets, forecasts or plans of the company. In most situations of valuation of intangible assets, the economic based approach is used, because of the uniqueness of intangible assets and the lack of comparable market data for the use of market value approach.
Question 5
On the basis of the following information, calculate the value of goodwill of Gee Ltd. at three years’ purchase of super profits, if any, earned by the company in the previous four completed accounting years.
Balance Sheet of Gee Ltd. as at 31st March, 2004
Liabilities Rs. in lakhs Assets Rs. in lakhs
Share Capital: Goodwill 310
Authorised 7,500 Land and Buildings 1,850
Issued and Subscribed Machinery 3,760
5 crore equity shares of Rs. 10 each, fully paid up
5,000 Furniture and Fixtures
Patents and Trade Marks 1,015
32
Capital Reserve 260 9% Non-trading Investments 600
General Reserve 2,543 Stock 873
Surplus i.e. credit balance of Profit and Loss (appropriation) A/c
477 Debtors
Cash in hand and at Bank 614
546
Trade Creditors 568 Preliminary Expenses 20
Provision for Taxation (net) 22
Proposed Dividend for 2002-2003 750 _____
9,620 9,620
The profits before tax of the four years have been as follows:
Year ended 31st March Profit before tax in lakhs of Rupees
2000 3,190
2001 2,500
2002 3,108
2003 2,900
The rate of income tax for the accounting year 1999-2000 was 40%. Thereafter it has been 38% for all the years so far. But for the accounting year 2003-2004 it will be 35%.
In the accounting year 1999-2000, the company earned an extraordinary income of Rs. 1 crore due to a special foreign contract. In August, 2000 there was an earthquake due to which the company lost property worth Rs. 50 lakhs and the insurance policy did not cover the loss due to earthquake or riots.
9% Non-trading investments appearing in the above mentioned Balance Sheet were purchased at par by the company on 1st April, 2001.
The normal rate of return for the industry in which the company is engaged is 20%. Also note that the company’s shareholders, in their general meeting have passed a resolution sanctioning the directors an additional remuneration of Rs. 50 lakhs every year beginning from the accounting year 2003-2004. (16 marks)(May, 2004)
Answer
(1) Capital employed as on 31st March, 2004
Refer to ‘Note’)
Rs. in lakhs
Land and Buildings 1,850
Machinery 3,760
Furniture and Fixtures 1,015
Patents and Trade Marks 32
Stock 873
Debtors 614
Cash in hand and at Bank 546
8,690
Less: Trade creditors 568
Provision for taxation (net) 22 590
8,100
(2) Future maintainable profit
(Amounts in lakhs of rupees)
1999-2000 2000-2001 2001-2002 2002-2003
Rs. Rs. Rs. Rs.
Profit before tax 3,190 2,500 3,108 2,900
Less: Extra-ordinary income due to foreign contract
100
Add: Loss due to earthquake 50
Less: Income from non-trading
investments

3,090

2,550
54
3,054
54
2,846
As there is no trend, simple average profits will be considered for calculation of goodwill.
Total adjusted trading profits for the last four years = Rs. (3,090 + 2,550 + 3,054 + 2,846) = Rs. 11,540 lakhs
Rs. in lakhs
Average trading profit before tax =

2,885
Less: Additional remuneration to directors 50
Less: Income tax @ 35%(approx.) 992 (Approx)
1,843
(3) Valuation of goodwill on super profits basis
Future maintainable profits 1,843
Less: Normal profits (20% of Rs. 8,100 lakhs) 1,620
Super Profits 223
Goodwill at 3 years’ purchase of super profits = 3 x Rs. 223 lakhs = Rs. 669 lakhs
Note:
In the above solution, goodwill has been calculated on the basis of closing capital employed (i.e. on 31st March, 2004). Goodwill should be calculated on the basis of ‘average capital employed’ and not ‘actual capital employed’ as no trend is being observed in the previous years’ profits. The average capital employed cannot be calculated in the absence of details about profits for the year ended 31st March, 2004. Since the current year’s profit has not been given in the question, goodwill has been calculated on the basis of capital employed as on 31st March, 2004.
Question 6
The following Balance Sheet of X Ltd. is given:
X Ltd.
Balance Sheet as on 31st March, 2005
Liabilities Rs. Assets Rs.
5,000 shares of Rs. 100 each fully paid 50,00,000 Goodwill
Land and building at cost 4,00,000
32,00,000
Bank overdraft 18,60,000 Plant and machinery at cost 28,00,000
Creditors 21,10,000 Stock 32,00,000
Provision for taxation 5,10,000 Debtors considered good 20,00,000
Profit and Loss Appropriation A/c 21,20,000
1,16,00,000 1,16,00,000
In 1986 when the company commenced operation the paid up capital was same. The Loss/Profit for each of the last 5 years was – years 2000-2001 – Loss (Rs. 5,50,000); 2001-2002 Rs. 9,82,000; 2002-2003 Rs. 11,70,000; 2003-2004 Rs. 14,50,000; 2004-2005 Rs. 17,00,000;
Although income-tax has so far been paid @ 40% and the above profits have been arrived at on the basis of such tax rate, it has been decided that with effect from the year 2004-2005 the Income-tax rate of 45% should be taken into consideration. 10% dividend in 2001-2002 and 2002-2003 and 15% dividend in 2003-2004 and 2004-2005 have been paid. Market price of shares of the company on 31st March, 2005 is Rs. 125. With effect from 1st April, 2005 Managing Director’s remuneration has been approved by the Government to be Rs. 8,00,000 in place of Rs. 6,00,000. The company has been able to secure a contract for supply of materials at advantageous prices. The advantage has been valued at Rs. 4,00,000 per annum for the next five years.
Ascertain goodwill at 3 year’s purchase of super profit (for calculation of future maintainable profit weighted average is to be taken). (16 marks)(May, 2005)
Answer
(i) Future Maintainable Profit
Year Profit (P) Weight (W) Product (PW)
Rs. Rs.
2001-2002 9,82,000 1 9,82,000
2002-2003 11,70,000 2 23,40,000
2003-2004 14,50,000 3 43,50,000
2004-2005 17,00,000 4 68,00,000
10 1,44,72,000

Weighted average annual profit (after tax) =

14,47,200
Weighted average annual profit before tax

24,12,000
Less: Increase in Managing Director’s remuneration 2,00,000
22,12,000
Add: Saving in cost of materials 4,00,000
26,12,000
Less: Taxation @ 45% 11,75,400
Future maintainable profit 14,36,600
(ii) Average Capital Employed
Rs. Rs.
Assets:
Land and Buildings 32,00,000
Plant and Machinery 28,00,000
Stock 32,00,000
Sundry Debtors 20,00,000
1,12,00,000
Less: Outside liabilities:
Bank overdraft 18,60,000
Creditors 21,10,000
Provision for taxation 5,10,000 44,80,000
Capital employed at the end of the year 67,20,000
Add: Dividend @ 15% paid during the year 7,50,000
74,70,000
Less: Half of the profit (after tax) for the year i.e.
Rs. 17,00,000  ½
8,50,000
Average capital employed 66,20,000
(iii) Normal Profit
Average dividend for the last 4 years = 12.5%
Market price of share Rs. 125
Normal rate of return =
Normal profit (10% of Rs. 66,20,000) = Rs. 6,62,000
(iv) Valuation of goodwill
Rs.
Future maintainable profit 14,36,600
Less: Normal profit 6,62,000
Super profit 7,74,600
Goodwill at 3 years’ purchase of super profits (Rs. 7,74,600  3) 23,23,800
Question 7
The following is the extract from the Balance Sheets of Popular Ltd.:
Liabilities As at 31.3.2004 Rs. in lakhs As at 31.3.2005 Rs. in
lakhs Assets As at 31.3.2004 Rs. in lakhs As at 31.3.2005 Rs. in lakhs
Share capital 500 500 Fixed assets 550 650
General reserve 400 425 10% investment 250 250
Profit and Loss account
60
90 Stock 260 300
18% term loan 180 165 Debtors 170 110
Sundry creditors 35 45 Cash at bank 46 45
Provision for tax 11 13 Fictitious assets 10 8
Proposed dividend 100 125
1,286 1,363 1,286 1,363
Additional information:
(i) Replacement values of Fixed assets were Rs.1,100 lakhs on 31.3.04 and Rs.1,250 lakhs on 31.3.2005 respectively.
(ii) Rate of depreciation adopted on Fixed assets was 5% p.a.
(iii) 50% of the stock is to be valued at 120% of its book value.
(iv) 50% of investments were trade investments.
(v) Debtors on 31st March, 2005 included foreign debtors of $35,000 recorded in the books at Rs.35 per U.S. Dollar. The closing exchange rate was $ 1= Rs.39.
(vi) Creditors on 31st March, 2005 included foreign creditors of $60,000 recorded in the books at $ 1 = Rs.33. The closing exchange rate was $ 1 = Rs.39.
(vii) Profits for the year 2004-05 included Rs.60 lakhs of government subsidy which was not likely to recur.
(viii) Rs.125 lakhs of Research and Development expenditure was written off to the Profit and Loss Account in the current year. This expenditure was not likely to recur.
(ix) Future maintainable profits (pre-tax) are likely to be higher by 10%.
(x) Tax rate during 2004-05 was 50%, effective future tax rate will be 40%.
(xi) Normal rate of return expected is 15%.
One of the directors of the company Arvind, fears that the company does not enjoy a goodwill in the prevalent market circumstances.
Critically examine this and establish whether Popular Co. has or has not any goodwill.
If your answers were positive on the existence of goodwill, show the leverage effect it has on the company’s result.
Industry average return was 12% on long-term funds and 15% on equity funds.
(16 Marks)(November 2006)

Answer
1. Calculation of Capital employed (CE) Rs. in lakhs
As on 31.3.04 As on 31.3.05
Replacement Cost of Fixed Assets 1100.00 1250.00
Trade Investment (50%) 125.00 125.00
Current cost of stock
130 + 130 
286.00
150 + 150 
330.00
Debtors 170.00 111.40
Cash-at-Bank 46.00 45.00
Total (A) 1727.00 1861.40
Less: Outside Liabilities
18% term loan 180.00 165.00
Sundry creditors 35.00 48.60
Provision for tax 11.00 13.00
Total (B) 226.00 226.60
Capital employed (A-B) 1501.00 1634.80
Average Capital employed at current value =
= Lakhs

2. Future Maintainable Profit
Rs. in Lakhs
Increase in General Reserve 25
Increase in Profit and Loss Account 30
Proposed Dividends 125
Profit After Tax 180
Pre-Tax Profit =

360
Less: Fictitious Assets written off (10  8) 2.00
Non-Trading investment income (10% of Rs.125) 12.50
Subsidy 60.00
Exchange Loss on creditors [0.6 lakhs  (39-33)] 3.60
Additional Depreciation on increase in value of Fixed
Assets (current year) (1250 – 650 = i.e.,


30.00

108.10
251.90
Add: Exchange Gain on Debtors
[0.35 lakhs  (39-35)] 1.40
Research and development expenses written off 125.00
Stock Adjustment (30-26) 4.00 130.40
382.30
Add: Expected increase of 10% 38.23
Future Maintainable Profit before Tax 420.53
Less: Tax @ 40% (40% of Rs.420.53) 168.21
Future Maintainable Profit 252.32
3. Valuation of Goodwill Rs. in lakhs
(i) According to Capitalisation of Future Maintainable Profit Method
Capitalised value of Future Maintainable Profit
=
1,682.13
Less: Average capital employed 1567.90
Value of Goodwill 114.23
Or
(ii) According to Capitalisation of Super Profit Method Rs. In lakhs
Future Maintainable Profit 252.32
Less: Normal Profit @ 15% on average capital employed
(1567.90 15%)
235.19
Super Profit 17.13
Capitalised value of super profit i.e. Goodwill
114..2
Goodwill exists, hence director’s fear is not valid.
Leverage Effect on Goodwill Rs. in lakhs
Future Maintainable Profit on equity fund 252.32
Future Maintainable Profit on Long-term Trading Capital employed
Future Maintainable Profit After Tax 252.32
Add: Interest on Long-term Loan (Term Loan)
(After considering Tax) 165 18% = 29.7
14.85 267.17
Average capital employed (Equity approach) 1567.90
Add: 18% Term Loan (180+165)/2 172.50
Average capital employed (Long-term Fund approach) 1740.40

Value of Goodwill
(A) Equity Approach
Capitalised value of Future Maintainable Profit = =
1682.13
Less: Average capital employed 1567.90
Value of Goodwill 114.23
(B) Long-Term Fund Approach
Capitalised value of Future Maintainable Profit =
2226.42
Less: Average capital employed 1740.40
Value of Goodwill 486.02
Comments on Leverage effect of Goodwill:
Adverse Leverage effect on goodwill is 371.79 lakhs (i.e., Rs.486.02-114.23). In other words, Leverage Ratio of Popular Ltd. is low as compared to industry for which its goodwill value has been reduced when calculated with reference to equity fund as compared to the value arrived at with reference to long term fund.
Working Notes:
(1) Stock adjustment Rs. in lakhs
(i) Excess current cost of closing stock over its Historical cost (330 – 300) 30.00
(ii) Excess current cost of opening stock over its Historical cost (286-260) 26.00
(iii) Difference [(i– ii)] 4.00


(2) Debtors’ adjustment
(i) Value of foreign exchange debtors at the closing exchange rate ($35,00039) 13.65
(ii) Value of foreign exchange debtors at the original exchange rate ($35,00035) 12.25
(iii) Difference [(i) – (ii)] 1.40
(3) Creditors’ adjustment
(i) Value of foreign exchange creditors at the closing exchange rate ($60,00039) 23.40
(ii) Value of foreign exchange creditors at the original exchange rate($60,00033) 19.80
(iii) Difference [(i) – (ii)] 3.60
Question 8
The Balance Sheet of Domestic Ltd. as on 31st March, 2007 is as under:
(All figures are in lacs)
Liabilities Rs. Assets Rs.
Equity Shares Rs.10 each
Reserves (including provision for taxation of Rs.300 lacs) 3,000

1,000 Goodwill
Premises and Land at
cost 744

400
5% Debentures 2,000 Plant and Machinery 3,000
Secured Loans 200 Motor Vehicles 40
Sundry Creditors 300 (purchased on 1.10.06)
Profit & Loss A/c Raw materials at cost 920
Balance from previous B/S Rs.32 Work-in-progress at cost 130
Profit for the year (After taxation)
Rs.1,100
1,132 Finished Goods at cost
Book Debts 180
400
Investment (meant for replacement of Plant and Machinery)

1,600
Cash at Bank and Cash in hand 192
Discount on Debentures 10

Underwriting Commission
16
7,632 7,632

The resale value of Premises and Land is Rs.1,200 lacs and that of Plant and Machinery is Rs.2,400 lacs. Depreciation @ 20% is applicable to Motor Vehicles. Applicable depreciation on Premises and Land is 2%, and that on Plant and Machinery is 10%. Market value of the Investments is Rs.1,500 lacs. 10% of book debts is bad. In a similar company the market value of equity shares of the same denomination is Rs.25 per share and in such company dividend is consistently paid during last 5 years @ 20%. Contrary to this, Domestic Ltd. is having a marked upward or downward trend in the case of dividend payment.
Past 5 years’ profits of the company were as under:
2001-02 Rs.67 lacs
2002-03 (-) Rs.1,305 lacs (loss)
2003-04 Rs.469 lacs
2004-05 Rs.546 lacs
2005-06 Rs.405 lacs
The unusual negative profitability of the company during 2002-03 was due to the lock out in the major manufacturing unit of the company which happened in the beginning of the second quarter of the year 2001-02 and continued till the last quarter of 2002-03.
Value the Goodwill of the Company on the basis of 4 years’ purchase of the Super Profit. (Necessary assumption for adjustment of the Company’s inconsistency in regard to the dividend payment, may be made by the examinee). (12 Marks) (Nov. 07)
Answer
1. Calculation of capital employed
Present value of assets: Rs. (in lacs)
Premises and land 1,200
Plant and machinery 2,400
Motor vehicles (book value less depreciation for ½ year) 36
Raw materials 920
Work-in-progress 130
Finished goods 180
Book debts (400 x 90%) 360
Investments 1,500
Cash at bank and in hand 192
6,918
Less: Liabilities:
Provision for taxation 300
5% Debentures 2,000
Secured loans 200
Sundry creditors 300 2,800
Total capital employed on 31.3.07 4,118
2. Profit available for shareholders for the year 2006-07
Profit for the year as per Balance Sheet 1,100
Less: Depreciation to be considered
Premises and land 24
Plant & machinery 240*
Motor vehicles 4 268
832
Less: Bad debts 40
Profit for the year 2006-07 792
3. Average capital employed
Total capital employed 4118
Less: ½ of profit for the current year [Refer point 2] 396
Average capital employed 3722

Rs. (in lacs)
4. Average profit to determine Future Maintainable Profits
Profit for the year 2006-07 792
Profit for the year 2005-06 405
Profit for the year 2004-05 546
Profit for the year 2003-04 469
2212 / 4 553
5. Calculation of General Expectation:
Domestic Ltd. pays Rs.2 as dividend (20%) for each share of Rs.10.
Market value of equity shares of the same denomination is Rs.25 which fetches dividend of 20%.
Therefore, share of Rs.10 (Face value of shares of Domestic Ltd.) is expected to fetch (20/25)x10 = 8% return.
Since Domestic Ltd. is not having a stable record in payment of dividend, in its case the expectation may be assumed to be slightly higher, say 10%.
6. Calculation of super profit Rs. (in lacs)
Future maintainable profit [See point 4] 553
Normal profit (10% of average capital employed as computed in point 3) 372.2
Super Profit 180.8
7. Valuation of Goodwill
Goodwill at 4 years’ purchase of Super Profit
723.20
Notes:
(1) It is evident from the Balance Sheet that depreciation was not charged to Profit & Loss Account.
(2) It is assumed that provision for taxation already made is sufficient.
(3) While considering past profits for determining average profit, the years 2001-02 and 2002-03 have been left out, as during these years normal business was hampered.
Question 9
Write short Note on capital market information-P/E ratio, yield ratio and market value/book value of shares. (9 marks) (November, 1997)
Answer
Capital market information-P/E ratio, yield ratio and market value/book value of shares: Frequently share prices data are punched with the accounting data to generate new set of information. These are (i) Price-Earning Ratio, (ii) Yield Ratio, (iii) Market Value/Book Value per share.

(Sometimes it is also calculated with reference to closing share price)

It indicates the pay back period to the investors or prospective investors. The P/E ratio can be interpreted on a comparison with the industry P/E. A low P/E in comparison to the Industry can indicate that there are prospects for growth in share price and hence could be an indicator to buy/hold the shares. A high P/E ratio in comparison to the Industry can be an indicator to sell the shares.


This ratio indicates return on investment; this may be on average investment or closing investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is the indicator of true return in which share capital is taken at its market value.

This ratio indicates market response of the shareholders' investment. Undoubtedly, higher the ratio, better is the shareholders' position in terms of return and capital gains.
Question 10
Yogesh Ltd. showed the following performance over 5 years ended 31st March, 1997:
Ended 31st March *Net profit before tax Prior period adjustment Remarks
Rs. Rs.
1993 4,00,000 () 1,00,000 Relating to 1991-92
1994 3,50,000 () 2,50,000 Relating equally to 1991-92 and 1992-93
1995 6,50,000 (+) 1,50,000 Relating to 1993-94
1996 5,50,000 () 1,75,000 Relating to 1993-94
1997 6,00,000 () 1,00,000 Relating to 1993-94
(+) 25,000 Relating to 1995-96
*Net profit before tax is after debiting or crediting the figures of loss () or Gains (+) mentioned under the columns for prior period adjustments.
The net worth of the business as per the balance sheet of 31st March, 1992 is Rs. 6,00,000 backed by 10,000 fully paid equity shares of Rs. 10 each. Reserves and surplus constitute the balance net worth. Yogesh Ltd. has not declared any dividend till date.
You are asked to value equity shares on:
(a) Yield basis as on 31.3.1997 : Assuming:
(i) 40% rate of tax
(ii) anticipated after tax yield of 20%.
(iii) differential weightage of 1 to 5 being given for the five years starting on 1.4.1992 for the actual profits of the respective years.
(b) Net asset basis as per corrected balance sheets for each of the six years ended 31.3.1997.
Looking to the performance of the company over the 5 years period, would you invest in the company? (15 marks) (May, 1997)
Answer
(a) Valuation of Shares on Yield basis
as on 31st March, 1997
Year ended 31st March Profits Adjustments Revised Tax After tax Weight Weighted
as given Increase Decrease Profits Provision Profits profits
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
1993 4,00,000 1,00,000 1,25,000 3,75,000 1,50,000 2,25,000 1 2,25,000
1994 3,50,000 2,50,000 1,00,000 4,75,000 1,90,000 2,85,000 2 5,70,000
1,50,000 1,75,000
1995 6,50,000 Nil 1,50,000 5,00,000 2,00,000 3,00,000 3 9,00,000
1996 5,50,000 1,75,000 Nil 7,50,000 3,00,000 4,50,000 4 18,00,000
25,000
1997 6,00,000 1,00,000 25,000 6,75,000 2,70,000 4,05,000 5 20,25,000
15 55,20,000
Weighted average profit (after tax) =
Value of business =
Value of equity share =
(b) Valuation of Shares on Net Asset Basis
(i) Revised Net worth as on 31st March, 1992 Rs. Rs.
Net worth 6,00,000
Less: Adjustments since made during
1992-93 1,00,000
1993-94 1,25,000
2,25,000
Less: Relief from tax @ 40% 90,000
1,35,000
4,65,000
(ii) Net asset value (No. of shares = 10,000)
As on 31st March Rs. Rs.
1992: Revised net worth 4,65,000
Value per share 46.50
1993: Revised net worth as on 31.3.1992 4,65,000
Add: After tax revised profits of 1992-93 2,25,000
Net worth as on 31.3.1993 6,90,000
Value per share 69.00
1994: Revised net worth as on 31.3.1993 6,90,000
Add: After tax revised profits of 1993-94 2,85,000
Net worth as on 31.3.1994 9,75,000
Value per share 97.50
1995: Revised net worth as on 31.3.1994 9,75,000
Add: After tax revised profits of 1994-95 3,00,000
Net worth as on 31.3.1995 12,75,000
Value per share 127.50
1996: Revised net worth as on 31.3.1995 12,75,000
Add: After tax revised profits of 1995-96 4,50,000
Net worth as on 31.3.1996 17,25,000
Value per share 172.50
1997: Revised net worth as on 31.3.1996 17,25,000
Add: After tax revised profits of 1996-97 4,05,000
Net worth as on 31.3.1997 21,30,000
Value per share 213.00

Performance Appraisal
Revised net worth as on 31st March Profit during the year ended 31st March Return on net worth
Rs. Rs. %
1992 4,65,000 1993 2,25,000 48.39
1993 6,90,000 1994 2,85,000 41.30
1994 9,75,000 1995 3,00,000 30.77
1995 12,75,000 1996 4,50,000 35.29
1996 17,25,000 1997 4,05,000 23.48
The company’s return has fallen from 48.39% to 23.48%. This may be perhaps due to the fact that the company has been ploughing back its profits without having adequate reinvestment opportunities. Unless the company has profitable investment opportunities, it may not be advisable to invest in the company.
Note: Return on net worth may also be calculated on the basis of average net worth during the relevant year.
Question 11
Capital structure of Lot Ltd. as at 31.3.1998 as under:
(Rs. in lakhs)
Equity share capital 10
10% preference share capital 5
15% debentures 8
Reserves 4
Lot Ltd. earns a profits of Rs. 5 lakhs annually on an average before deduction of interest on debentures and income tax which works out to 40%.
Normal return on equity shares of companies similarly placed is 12% provided:
(a) Profit after tax covers fixed interest and fixed dividends at least 3 times.
(b) Capital gearing ratio is .75.
(c) Yield on share is calculated at 50% of profits distributed and at 5% on undistributed profits.
Lot Ltd. has been regularly paying equity dividend of 10%.
Compute the value per equity share of the company. (15 marks)(November, 1998)
Answer
(i) Profit for calculation of interest and fixed dividend coverage: Rs.
Average profit of the Company (before interest and taxation) 5,00,000
Less: Debenture interest (15% on Rs. 8,00,000) 1,20,000
3,80,000
Less: Tax @ 40% 1,52,000
Profit after interest and taxation 2,28,000
Add back: Debenture interest 1,20,000
Profit before interest but after tax 3,48,000
(ii) Calculation of interest and fixed dividend coverage: Rs.
Fixed interest and fixed dividend:
Debenture interest 1,20,000
Preference dividend 50,000
1,70,000
Fixed interest and fixed dividend coverage =
Interest and fixed dividend coverage 2.05 times is less than the prescribed three times.
(iii) Capital gearing ratio:
Equity share capital + reserves = Rs. 10,00,000 + Rs. 4,00,000
= Rs. 14,00,000
Preference share capital + debentures = Rs. 5,00,000 + Rs. 8,00,000
= Rs. 13,00,000
Capital Gearing Ratio =
Ratio 0.93 is more than the prescribed ratio of 0.75.
(iv) Yield on equity shares: Rs.
Average profit after interest and tax 2,28,000
Less: Preference Dividend 50,000
Equity Dividend (10% on Rs. 10,00,000) 1,00,000 1,50,000
Undistributed profit 78,000
50% of distributed profit (50% of Rs. 1,00,000) 50,000
5% of undistributed profit (5% of Rs. 78,000) 3,900
53,900
Yield on equity shares =
(v) Expected yield of equity shares:
%
Normal return 12.00
Add: For low coverage of fixed interest and fixed dividends (2.05 < 3) 0.50*
Add: For high capital gearing ratio (0.93 > 0.75) 0.50**
13.00
(vi) Value per equity share:

Notes: * When interest and fixed dividend coverage is low, riskiness of equity investors is high. So they should claim additional risk premium over and above the normal rate of return. Here, the additional risk premium is assumed to be 0.50%. Students may make any other reasonable assumption.
** Similarly, higher the ratio of fixed interest and dividend bearing capital to equity share capital plus reserves, higher is the risk and so higher should be risk premium. Here also the additional risk premium has been taken as 0.50%. The students may make any other reasonable assumption.
*** Paid up value of a share has been taken as Rs. 100.
Question 12
The Balance Sheet of RNR Limited as on 31.12.1999 is as follows :
Liabilities (Rupees Assets (Rupees
in Lakhs) in Lakhs)
1,00,000 equity shares of Goodwill 5
Rs. 10 each fully paid 10 Fixed assets 15
1,00,000 equity shares of Other tangible assets 5
Rs. 6 each, fully paid up 6 Intangible assets (market value) 3
Reserves and Surplus 4 Miscellaneous expenditure to
Liabilities 10 the extent not written off 2
30 30
Fixed assets are worth Rs. 24 lakhs. Other Tangible assets are revalued at Rs. 3 lakhs. The company is expected to settle the disputed bonus claim of Rs. 1 lakh not provided for in the accounts. Goodwill appearing in the Balance Sheet is purchased goodwill. It is considered reasonable to increase the value of goodwill by an amount equal to average of the book value and a valuation made at 3 years’ purchase of average super-profit for the last 4 years.
After tax, profits and dividend rates were as follows :
Year PAT Dividend %
(Rs. in Lakhs)
1996 3.0 11%
1997 3.5 12%
1998 4.0 13%
1999 4.1 14%
Normal expectation in the industry to which the company belongs is 10%.
Akbar holds 20,000 equity shares of Rs. 10 each fully paid and 10,000 equity shares of
Rs. 6 each, fully paid up. He wants to sell away his holdings.
(i) Determine the break-up value and market value of both kinds of shares. (6 marks)
(ii) What should be the fair value of shares, if controlling interest is being sold ?
(10 marks) (May 2001)
Answer
(i) Break up value of Re. 1 of share capital =
= Rs. 1.81
Break up value of Rs. 10 paid up share = 1.81 × 10 = Rs. 18.10
Break up value of Rs. 6 paid up share = 1.81 × 6 = Rs. 10.86
Market value of shares :
Average dividend = = 12.5%
Market value of Rs. 10 paid up share = × 10 = Rs. 12.50
Market value of Rs. 6 paid up share = × 6 = Rs. 7.50
(ii) Break up value of share will remain as before even if the controlling interest is being sold. But the market value of shares will be different as the controlling interest would enable the declaration of dividend upto the limit of disposable profit.
× 100 = × 100 = 21.25%
Market value of shares :
For Rs. 10 paid up share = × 10 = Rs. 21.25
For Rs. 6 paid up share = × 6 = Rs. 12.75
Fair value of shares =
Fair value of Rs. 10 paid up share = = Rs. 19.68
Fair value of Rs. 6 paid up share = = Rs. 11.81
* (Transfer to reserves has been ignored)
Working Notes:
(Rs. in lakhs)
(a) Calculation of average capital employed
Fixed assets 24.00
Other tangible assets 3.00
Intangible assets 3.00 30.00
Less : Liabilities 10
Bonus 1 11.00
19.00
Less : ½ of profits [½ (4.1 – Bonus 1.0)] 1.55
Average capital employed 17.45
(b) Calculation of super profit
Average profit = ¼ ( 3 + 3.5 + 4 + 4.1 – Bonus 1.0 )
= ¼ × 13.6 3.400
Less : Normal profit = 10 % of Rs. 17.45 lakhs 1.745
Super profit 1.655
(c) Calculation of goodwill
3 Years’ purchase of average super-profit = 3 × 1.655 = Rs. 4.965 lakhs
Increase in value of goodwill = ½ (book value + 3 years’ super profit)
= ½ (5 + 4.965)
= Rs. 4.9825 lakhs
Net assets as revalued including
book value of goodwill 24.00
Add : Increase in goodwill (rounded-off) 4.98
Net assets available for shareholders 28.98
Note : In the above solution, tax effect of disputed bonus and corporate dividend tax have been ignored.

Question 13
Following are the information of two companies for the year ended 31st March, 2002 :
Particulars Company A Company B
Equity Shares of Rs. 10 each 8,00,000 10,00,000
10% Pref. Shares of Rs. 10 each 6,00,000 4,00,000
Profit after tax 3,00,000 3,00,000
Assume the Market expectation is 18% and 80% of the Profits are distributed.
(i) What is the rate you would pay to the Equity Shares of each Company ?
(a) If you are buying a small lot.
(b) If you are buying controlling interest shares.
(ii) If you plan to invest only in preference shares which company’s preference shares would you prefer ?
(iii) Would your rates be different for buying small lot, if the company ‘A’ retains 30% and company ‘B’ 10% of the profits? (12 marks) (November, 2002)
Answer
(i) (a) Buying a small lot of equity shares: If the purpose of valuation is to provide data base to aid a decision of buying a small (non-controlling) position of the equity of the companies, dividend capitalisation method is most appropriate. Under this method, value of equity share is given by:

Company A : Rs. = Rs. 13.33
Company B : Rs. = Rs. 11.56
(b) Buying controlling interest equity shares
If the purpose of valuation is to provide data base to aid a decision of buying controlling interest in the company, EPS capitalisation method is most appropriate. Under this method, value of equity is given by:

Company A : Rs. = Rs. 16.67
Company B : Rs. = Rs. 14.44
(ii) Preference Dividend coverage ratios of both companies are to be compared to make such decision.
Preference dividend coverage ratio is given by:

Company A :
Company B :
If we are planning to invest only in preference shares, we would prefer shares of B Company as there is more coverage for preference dividend.
(iii) Yes, the rates will be different for buying a small lot of equity shares, if the company ‘A’ retains 30% and company ‘B’ 10% of profits.
The new rates will be calculated as follows:
Company A : Rs. = Rs. 11.67
Company B : Rs. = Rs. 13.00
Working Notes:
1. Computation of earning per share and dividend per share (companies distribute 80% of profits)
Company A Company B
Profit before tax 3,00,000 3,00,000
Less: Preference dividend 60,000 40,000
Earnings available to equity shareholders (A) 2,40,000 2,60,000
Number of Equity Shares (B) 80,000 1,00,000
Earning per share (A/B) 3.0 2.60
Retained earnings 20% 48,000 52,000
Dividend declared 80% (C) 1,92,000 2,08,000
Dividend per share (C/B) 2.40 2.08
2. Computation of dividend per share (Company A retains 30% and Company B 10% of profits)
Earnings available for Equity Shareholders 2,40,000 2,60,000
Number of Equity Shares 80,000 1,00,000
Retained Earnings 72,000 26,000
Dividend Distribution 1,68,000 2,34,000
Dividend per share 2.10 2.34

Question 14
The following is the Balance Sheet of N Ltd. as on 31st March, 2002:
Balance Sheet
Liabilities Rs. Assets Rs.
4,00,000 Equity shares of Rs. 10
each fully paid
40,00,000 Goodwill
Building 4,00,000
24,00,000
13.5% Redeemable preference shares
of Rs. 100 each fully paid
20,00,000 Machinery
Furniture 22,00,000
10,00,000
General Reserve 16,00,000 Vehicles 18,00,000
Profit and Loss Account 3,20,000 Investments 16,00,000
Bank Loan (Secured against fixed assets) 12,00,000 Stock 11,00,000
Bills Payable 6,00,000 Debtors 18,00,000
Creditors 31,00,000 Bank Balance 3,20,000
_________ Preliminary Expenses 2,00,000
1,28,20,000 1,28,20,000
Further information:
(i) Return on capital employed is 20% in similar businesses.
(ii) Fixed assets are worth 30% more than book value. Stock is overvalued by Rs. 1,00,000, Debtors are to be reduced by Rs. 20,000. Trade investments, which constitute 10% of the total investments are to be valued at 10% below cost.
(iii) Trade investments were purchased on 1.4.2001. 50% of non-Trade Investments were purchased on 1.4.2000 and the rest on 1.4.1999. Non-Trade Investments yielded 15% return on cost.
(iv) In 1999-2000 new machinery costing Rs. 2,00,000 was purchased, but wrongly charged to revenue. This amount should be adjusted taking depreciation at 10% on reducing value method.
(v) In 2000-2001 furniture with a book value of Rs. 1,00,000 was sold for Rs. 60,000.
(vi) For calculating goodwill two years purchase of super profits based on simple average profits of last four years are to be considered. Profits of last four years are as under:
1998-1999 Rs. 16,00,000, 1999-2000 Rs. 18,00,000, 2000-2001 Rs. 21,00,000, 2001-2002 Rs. 22,00,000.
(vii) Additional depreciation provision at the rate of 10% on the additional value of Plant and Machinery alone may be considered for arriving at average profit.
Find out the intrinsic value of the equity share. Income-tax and Dividend tax are not to be considered. (16 marks)(May 2003)
Answer
Calculation of intrinsic value of equity shares of N Ltd.
1. Calculation of Goodwill
(i) Capital employed
Fixed Assets Rs. Rs.
Building 24,00,000
Machinery (Rs. 22,00,000 + Rs. 1,45,800) 23,45,800
Furniture 10,00,000
Vehicles 18,00,000
75,45,800
Add: 30% increase 22,63,740
98,09,540
Trade investments (Rs.16,00,000 × 10% × 90%) 1,44,000
Debtors (Rs. 18,00,000 – Rs. 20,000) 17,80,000
Stock (Rs. 11,00,000 – Rs. 1,00,000) 10,00,000
Bank balance 3,20,000 1,30,53,540
Less: Outside liabilities
Bank Loan 12,00,000
Bills payable 6,00,000
Creditors 31,00,000 49,00,000
Capital employed 81,53,540
(ii) Future maintainable profit
Calculation of average profit
1998-99 1999-2000 2000-2001 2001-2002
Rs. Rs. Rs. Rs.
Profit given 16,00,000 18,00,000 21,00,000 22,00,000
Add: Capital expenditure of machinery charged to revenue
2,00,000
Loss on sale of furniture _______ ________ 40,000 ________
16,00,000 20,00,000 21,40,000 22,00,000

Less: Depreciation on machinery 20,000 18,000 16,200
Income from non- trade investments
1,08,000
2,16,000
2,16,000
Reduction in value of stock
1,00,000
Bad debts ________ ________ ________ 20,000
Adjusted profit 16,00,000 18,72,000 19,06,000 18,47,800

Rs.
Total adjusted profit for four years (1998-1999 to 2001-2002) 72,25,800
Average profit (Rs. 72,25,800/4) 18,06,450
Less: Depreciation at 10% on additional value of machinery
(22,00,000 + 1,45,800) × 30/100 i.e. Rs. 7,03,740
70,374
Adjusted average profit 17,36,076
(iii) Normal Profit
20% on capital employed i.e. 20% on Rs. 81,53,540 Rs.16,30,708
(iv) Super profit
Expected profit – normal profit
Rs. 17,36,076 – Rs. 16,30,708 = Rs. 1,05,368
(v) Goodwill
2 years’ purchase of super profit
Rs. 1,05,368 × 2 = Rs. 2,10,736
2. Net assets available to equity shareholders
Rs. Rs.
Goodwill as calculated in 1(v) above 2,10,736
Sundry fixed assets 98,09,540
Trade and Non-trade investments 15,84,000
Debtors 17,80,000
Stock 10,00,000
Bank balance 3,20,000
1,47,04,276
Less: Outside liabilities
Bank loan 12,00,000
Bills payable 6,00,000
Creditors 31,00,000 49,00,000
Preference share capital 20,00,000
Net assets for equity shareholders 78,04,276


3. Valuation of equity shares
Value of equity share =
=
= Rs. 19.51
Note:
1. Depreciation on the overall increased value of assets (worth 30% more than book value) has not been considered. Depreciation on the additional value of only plant and machinery has been considered taking depreciation at 10% on reducing value method while calculating average adjusted profit.
2. Loss on sale of furniture has been taken as non-recurring or extraordinary item.
3. It has been assumed that preference dividend has been paid till date.
Question 15
The Capital Structure of M/s XYZ Ltd., on 31st March, 2003 was as follows:
Rs.
Equity Capital 18,000 Shares of Rs. 100 each 18,00,000
12% Preference Capital 5,000 Shares of Rs. 100 each 5,00,000
12% Secured Debentures 5,00,000
Reserves 5,00,000
Profit earned before Interest and Taxes during the year 7,20,000
Tax Rate 40%
Generally the return on equity shares of this type of Industry is 15%.
Subject to:
(a) The profit after tax covers Fixed Interest and Fixed Dividends at least 4 times.
(b) The Debt Equity ratio is at least 2;
(c) Yield on shares is calculated at 60% of distributed profits and 10% of undistributed profits;
The Company has been paying regularly an Equity dividend of 15%.
The risk premium for Dividends is generally assumed at 1%.
Find out the value of Equity shares of the Company. (16 marks)(November, 2004)


Answer
Calculation of profit after tax (PAT) Rs.
Profit before interest & tax (PBIT) 7,20,000
Less: Debenture interest (Rs. 5,00,000  12/100) 60,000
Profit before tax (PBT) 6,60,000
Less: Tax @ 40% 2,64,000
Profit after tax (PAT) 3,96,000
Less: Preference dividend

60,000
Equity dividend

2,70,000
3,30,000

Retained earnings (undistributed profit) 66,000

Calculation of Interest and Fixed Dividend Coverage
=


Calculation of Debt Equity Ratio



Debt Equity Ratio =
The ratio is less than the prescribed ratio.
Calculation of Yield on Equity Shares
Yield on equity shares is calculated at 60% of distributed profits and 10% of undistributed profits:
60% of distributed profits (60% of Rs. 2,70,000) 1,62,000
10% of undistributed profits (10% of Rs. 66,000) 6,600
1,68,600
Yields on equity shares =
=
= 9.37%
Calculation of Expected Yield on Equity Shares
Normal return expected
15%
Add: Risk premium for low interest and fixed dividend coverage (3.8 < 4) 1%*
Risk for debt equity ratio not required Nil**
16%

Value of an Equity Share
=

=

For
* When interest and fixed dividend coverage is lower than the prescribed norm, the riskiness of equity investors is high. They should claim additional risk premium over and above the normal rate of return. Hence, the additional risk premium of 1% has been added.
** The debt equity ratio is lower than the prescribed ratio, that means outside funds (Debts) are lower as compared to shareholders’ funds. Therefore, the risk is less for equity shareholders. Therefore, no risk premium is required to be added in this case.
Question 16
The following abridged Balance Sheet as at 31st March, 2005 pertains to Glorious Ltd.
Liabilities Rs. in lakhs Assets Rs. in lakhs
Share Capital: Goodwill, at cost 420
180 lakh Equity shares of Rs. 10 each, fully paid up
1,800 Other Fixed Assets
Current Assets 11,166
2,910
90 lakh Equity shares of Rs. 10 each, Rs. 8 paid up
720 Loans and Advances
Miscellaneous Expenditure 933
171
150 lakh Equity shares of Rs. 5 each, fully paid-up
750
Reserves and Surplus 5,628
Secured Loans 4,500
Current Liabilities 1,242
Provisions 960 ¬______
15,600 15,600
You are required to calculate the following for each one of the three categories of equity shares appearing in the above mentioned Balance Sheet:
(i) Intrinsic value on the basis of book values of Assets and Liabilities including goodwill;
(ii) Value per share on the basis of dividend yield.
Normal rate of dividend in the concerned industry is 15%, whereas Glorious Ltd. has been paying 20% dividend for the last four years and is expected to maintain it in the next few years; and
(iii) Value per share on the basis of EPS.
For the year ended 31st March, 2005 the company has earned Rs. 1,371 lakh as profit after tax, which can be considered to be normal for the company. Average EPS for a fully paid share of Rs. 10 of a Company in the same industry is Rs. 2.
(16 Marks) (November. 2005)
Answer
(i) Intrinsic value on the basis of book values Rs. in lakhs Rs. in lakhs
Goodwill 420
Other Fixed Assets 11,166
Current Assets 2,910
Loans and Advances 933
15,429
Less: Secured loans 4,500
Current liabilities 1,242
Provisions 960 6,702
8,727
Add: Notional call on 90 lakhs equity shares @ Rs. 2 per share
180
8,907
Equivalent number of equity shares of Rs. 10 each.
Rs. in lakhs
Fully paid shares of Rs. 10 each 180
Partly-paid shares after notional call 90
Fully paid shares of Rs. 5 each,

75
345
Value per equivalent share of Rs. 10 each =
Hence, intrinsic values of each equity share are as follows:
Value of fully paid share of Rs. 10 = Rs. 25.82 per equity share.
Value of share of Rs. 10, Rs. 8 paid-up = Rs. 25.82 – Rs. 2 = Rs. 23.82 per equity share.
Value of fully paid share of Rs. 5 = per equity share.
(ii) Valuation on dividend yield basis:
Value of fully paid share of Rs. 10 =
Value of share of Rs. 10, Rs. 8 paid-up =
Value of fully paid share of Rs. 5 =
(iii) Valuation on the basis of EPS:
Profit after tax = Rs. 1,371 lakhs
Total share capital = Rs. (1,800 + 720 + 750) lakhs = Rs. 3,270 lakhs
Earning per rupee of share capital =
Earning per fully paid share of Rs. 10 = Re. 0.419  10 = Rs. 4.19
Earning per share of Rs. 10 each, Rs. 8 paid-up = Re. 0.419  8 = Rs. 3.35
Earning per share of Rs. 5, fully paid-up = Re. 0.419  5 = Rs. 2.10
Value of fully paid share of Rs. 10 =
Value of share of Rs. 10, Rs. 8 paid-up =
Value of fully paid share of Rs. 5 =
Question 17
The directors of a public limited company are considering the acquisition of the entire share capital of an existing company X Ltd engaged in a line of business suited to them. The directors feel that acquisition of X will not create any further risk to their business interest.
The following is the Balance Sheet of X Ltd., as at 31st December, 2005:
Liabilities Rs. Assets Rs.
Share Capital: Fixed assets 6,00,000
4,000 equity shares of Rs.100 each fully paid-up
4,00,000 Current assets:
Stock
2,00,000
General reserve 3,00,000 Sundry debtors 3,40,000
Bank overdraft 2,40,000 Cash and bank balances 1,00,000
Sundry creditors 3,00,000

12,40,000 12,40,000

X’s financial records for the past five years were as under:
2005
Rs. 2004
Rs. 2003
Rs. 2002
Rs. 2001
Rs.
Profits 80,000 74,000 70,000 60,000 62,000
Extra ordinary item(s) 3,500 4,000 (6,000) (8,000) 1,000
83,500 78,000 64,000 52,000 61,000
Dividends 48,000 40,000 40,000 32,000 32,000
35,500 38,000 24,000 20,000 29,000

Additional information:
(i) There were no changes in the issued capital of X during this period.
(ii) The estimated values of X Ltd.’s assets on 31.12.2005 are:

Replacement cost
Rs. Realisable value
Rs.
Fixed assets 8,00,000 5,40,000
Stock 3,00,000 3,20,000
(iii) It is anticipated that 1% of the debtors may prove to be difficult to be realized.
(iv) The cost of capital to the acquiring company is 10%.
(v) The current return of an investment of the acquiring company is 10%. Quoted companies with similar businesses and activities as X have a P/E ratio approximating to 8, although these companies tend to be larger than X.
Required:
Estimate the value of the total equity capital of X Ltd., on 31.12.2005 using each of the following bases:
(a) Balance sheet value
(b) Replacement cost
(c) Realisable value
(d) Gordon’s dividend growth model
(e) P/E ratio model. (16 Marks)( May, 2006)
Answer
Rs. Rs.
(a) Balance Sheet Value
Capital 4,00,000
Reserve 3,00,000 7,00,000
(b) Replacement cost value
Capital 4,00,000
Reserve 3,00,000
Appreciation:
Fixed assets 2,00,000
Stock 1,00,000 3,00,000 10,00,000

(c) Realizable value
Capital
4,00,000
Reserve 3,00,000
Appreciation in stock 1,20,000
Depreciation in fixed assets (60,000)
Book debts (Bad) (3,400) 7,56,600

(d) Gordon’s dividend growth model
The formula to be used is P=

Where
P Price of share
E Earning per share
b retention ratio
k cost of capital
br growth rate
r rate of return on investment.

Profits retained: Rs.35,500 + 38,000 + 24,000+ 20,000 + 29,000 = Rs. 1,46,500
Profits earned: Rs.83,500 + 78,000 + 64,000+ 52,000+61,000 = Rs. 3,38,500
Retention ratio:
Return on investment for the year 2005 = x 100
=
Growth rate = Return on investment x retention ratio
= 11.14 x 0.43 = 4.79 %
Average profits =
Market value =
(e) P/E ratio model
Comparable quoted companies have a P/E ratio of 8. X Ltd. is prima facie small company.
If a P/E ratio of 6 is adopted, the valuation will be 80,000 x 6 = Rs.4,80,000
If a P/E ratio of 7 were to be adopted, the valuation will be 80,000 x 7 = Rs.5,60,000

Question 18
P Limited is considering the acquisition of R Limited. The financial data at the time of acquisition being:
P Limited R Limited
Net profit after tax (Rs. in lakhs) 60 12
Number of shares (lakhs) 12 5
Earning per share (Rs.) 5 2.40
Market price per share (Rs.) 150 48
Price earning ratio 30 20
It is expected that the net profit after tax of the two companies would continue to be Rs.72 lakhs even after the amalgamation.
Explain the effect on EPS of the merged company under each of the following situations:
(i) P Ltd. offers to pay Rs.60 per share to the shareholders of R Ltd.
(ii) P Ltd. offers to pay Rs.78 per share to the shareholders of R Ltd.
The amount in both cases is to be paid in the form of shares of P Ltd.
(10 marks) (November 2006)
Answer
(i) In this case, P Ltd. offers to pay Rs.60 per share.
The share exchange ratio would be
It means, P Ltd. would give 0.4 shares for every one share of R Ltd. In other words, P Ltd. would give 2 shares for 5 shares of R Ltd.
The total number of shares to be issued by P Ltd. to R Ltd.
= 5,00,000  0.4 = 2,00,000 shares
or
5,00,000  = 2,00,000 shares
Total number of shares of P Ltd. after acquisition of R Ltd.
= 12,00,000 + 2,00,000 = 14,00,000 shares
Calculation of E.P.S. of the amalgamated company
=
=
After amalgamation, The EPS of P Ltd., will improve from Rs.5 to Rs.5.14 whereas EPS of former shareholders of R Ltd would reduce from present 2.40 per share to 5.14  0.4 = Rs.2.056 per share after merger.
(ii) In this case, P Ltd. offers Rs.78 per share to the shareholders of R Ltd.
The Exchange Ratio would be = 0.52 shares of P Ltd. for each share of R Ltd. In other words, P Ltd would give 52 shares for per 100 shares of R Ltd.
P Ltd would issue 5,00,000  0.52 = 2,60,000 shares to shareholders of R Ltd.
E.P.S. of the Merged Company =
After Merger, there is a dilution in the E.P.S., of P Ltd. from 5 to 4.93.
After Merger E.P.S. of former shareholders of R Ltd.
= 4.93  0.52 = 2.56
There is a gain of Re. 0.16 in E.P.S. of merged company in comparison to E.P.S. of R Ltd. of Rs.2.40 before merger.
Comments:
Initial increase in and decrease in earnings per share are possible in both cases of Merger. Generally, the dilution in E.P.S. will occur wherever the Price Earnings ratio of acquired company calculated on the basis of price paid exceed the P/E ratio of acquired company and vice-versa.
In Situation (i) - The price offered by P Ltd. per share of R Ltd. is Rs.60 and E.P.S. of R Ltd. is 2.4, which would become the earnings of P Ltd. after merger.
Price Earning (P/E) Ratio of P Ltd. after merger = . It is lower than the P/E Ratio of P Ltd. before merger i.e., 30, the E.P.S. of P Ltd. after merger increases to Rs.5.14.
In Situation (ii) - The price earnings (P/E) ratio offered for Merger is which is higher than P/E Ratio of P Ltd. before Merger. Hence, the E.P.S. of P Ltd after merger would get diluted.

Question 19
The following is the Balance Sheet (as at 31st December, 2006) of Sun Ltd.:
Liabilities Assets
Rs. Rs.
Share Capital: Fixed Assets:
80,000 Equity shares of Rs.10 each fully paid up 8,00,000 Goodwill 1,00,000
50,000 Equity shares of Rs.10 each Rs.8 paid up 4,00,000 Plant and Machinery 8,00,000
36,000 Equity shares of Rs.5 each fully paid up 1,80,000 Land and Building 10,00,000
30,000 Equity shares of Rs.5 each Rs.4 paid-up 1,20,000 Furniture and Fixtures 1,00,000
3,000 10% Preference shares of Rs.100 each fully paid 3,00,000 Vehicles 2,00,000
Reserve and Surplus: Investments 3,00,000
General reserve 1,40,000 Current Assets:
Profit and Loss account 2,10,000 Stock 2,10,000
Secured Loan: 12% Debenture 2,00,000 Debtors 1,95,000
Unsecured Loan: 15% Term loan 1,50,000 Prepaid Expenses 40,000
Deposits 1,00,000 Advances 45,000
Current Liabilities: Cash and Bank balance 2,00,000
Bank Loan 50,000 Preliminary Expenses 10,000
Creditors 1,50,000
Outstanding expenses 20,000
Provision for tax 2,00,000
Proposed Dividend:
Equity 1,50,000
Preference 30,000
32,00,000 32,00,000
Additional Information:
(1) In 2004 a new machinery costing Rs.50,000 was purchased, but wrongly charged to revenue (no rectification has yet been made for the same).
(2) Stock is overvalued by Rs.10,000 in 2005. Debtors are to be reduced by Rs.5,000 in 2006, some old furniture (Book value Rs.10,000) was disposed of for Rs.6,000.
(3) Fixed assets are worth 5 per cent more than their actual book value. Depreciation on appreciated value of Fixed assets except machinery is not to be considered for valuation of goodwill.
(4) Of the investment 20 per cent is trading and the balance is non-trading. All trade investments are to be valued at 20 per cent below cost. Trade investment were purchased on 1st January, 2006. 50 percent of the non-trade investments were acquired on 1st January, 2005 and the rest on 1st January, 2004. A uniform rate of dividend of 10 percent is earned on all investments.
(5) Expected increase in expenditure without commensurate increase in selling price is Rs.20,000.
(6) Research and Development expenses anticipated in future Rs.30,000 per annum.
(7) In a similar business a normal return on capital employed is 10%.
(8) Profit (after tax) are as follows:
In 2004 – Rs.2,10,000, in 2005 – Rs.1,90,000 and in 2006 – Rs.2,00,000.
(9) Current income tax rate is 50%, expected income tax rate will be 40%.
From the above, ascertain the ex-dividend and cum-dividend intrinsic value for different categories of Equity shares. For this purpose goodwill may be taken as 3 years purchase of super profits. Depreciation is charged on machinery @ 10% on reducing system.
(16 Marks) (May, 2007)
Answer
Computation of Value of Shares:
Rs.
Value of Net Assets (As computed for Goodwill) 21,02,073
Value of Goodwill [Refer W.N.3] 11,406
Non-trade investments 2,40,000
. 23,53,479
Less: Preference Share Capital 3,00,000
Proposed Dividend of Preference shares 30,000
Proposed Dividend of Equity shares 1,50,000 4,80,000
Net Assets available for Equity Shareholders 18,73,479


Computation of Number of Equivalent Equity Shares:
Equity shares No. of Equivalent Shares
80,000 shares+ 50,000 shares = 1,30,000 shares of Rs.10 each 1,30,000

1,30,000
36,000 shares+ 30,000 shares = 66,000 shares of Rs.5 each 66,000

33,000
Total Equivalent Equity Shares of Rs.10 each 1,63,000
Calculation of Ex-Dividend intrinsic value of different categories of Equity Shares of Sun Ltd.
Net Assets available to deemed fully paid-up Equity Shareholders
= Net Assets as computed above + Notional Cash from partly paid-up shares
=Rs.18,73,479 + (50,000 x 2 + 30,000x1)
= Rs.18,73,479 + 1,00,000 + 30,000 = Rs.20,03,479
Computation of Ex-Dividend value per Equity Share
(i) Value of Rs.10 fully paid Equity Share = = Rs.12.29 per share (approx.)
(ii) Value of Rs.8 paid-up Equity Share = 12.29 - 2 = Rs.10.29 per share (approx.)
(iii) Value of Rs.5 fully paid-up Equity Share = 12.29 x = Rs.6.15 per share (approx.)
(iv) Value of Rs.4 paid-up Equity Share = 6.15 – 1 = Rs.5.15 per share (approx.)
Calculation of Cum-Dividend intrinsic value of different categories of Equity Shares of Sun Ltd.
Value of Net Assets (including proposed dividend on equity shares) =Rs.18,73,479 + 1,50,000
= Rs.20,23,479
Net assets (including dividend) available to deemed fully paid-up Equity Shareholders
= Net Assets as computed above + Notional Cash from partly paid-up shares
=Rs.20,23,479 + (50,000 x 2 + 30,000x1)
= Rs.20,23,479 + 1,00,000 + 30,000 = Rs.21,53,479
Computation of Cum-Dividend value per share*
(i) Value of Rs.10 fully paid Equity Share = = Rs.13.21 per share (approx.)
(ii) Value of Rs.8 paid-up Equity Share = 13.21 – 2 = Rs.11.21 per share (approx.)
(iii) Value of Rs.5 fully paid-up Equity Share = 13.21 x = Rs.6.605 per share (approx.)
(iv) Value of Rs.4 paid-up Equity Share = 6.605 – 1 = Rs.5.605 per share (approx.)
Working Notes:
1. Calculation of Average Capital Employed
Rs.
Fixed Assets:
Plant and Machinery (including Rs.36,450 for a Machine charged in 2004) 8,36,450
Land and Building 10,00,000
Furniture & Fixtures (1,00,000-4,000) 96,000
Vehicles 2,00,000
21,32,450
Add: Appreciation @ 5% 1,06,623
22,39,073
Trade Investment (3,00,000 x ) x

48,000
Current Assets:
Stock 2,10,000
Debtors (1,95,000-5,000) 1,90,000
Prepaid Expenses 40,000
Advances 45,000
Cash & Bank Balance 2,00,000
29,72,073
Less: Outside Liabilities:
12% Debentures 2,00,000
15% Term Loan 1,50,000
Deposits 1,00,000
Bank Loan 50,000
Creditors 1,50,000
Outstanding Expenses 20,000
Provision for Tax 2,00,000 8,70,000
Capital employed at the end of the year i.e. Net Assets 21,02,073
Less: of the current year’s Accounting Profit after Tax:

Profit before Tax 3,80,950
Less: Tax 40% of Rs.3,80,950 1,52,380
2,28,570
50% of Rs.2,28,570 1,14,285
Average capital employed 19,87,788
2. Future Maintainable Profits
Statement of Average Profit
Particulars 2004 2005 2006
Rs. Rs. Rs.
Profit after Tax 2,10,000 1,90,000 2,00,000
Profit before Tax (PAT x
4,20,000 3,80,000 4,00,000
Add: Capital expenditure charged to revenue 50,000 - -
Less: Depreciation of the Machinery (5,000) (4,500) (4,050)
Dividend on Non-Trade Investments (12,000) (24,000) (24,000)
Over-valuation of closing stock - (10,000) -
Add: Overvaluation of opening stock - - 10,000
Add: Loss on sale of furniture - - -
(Presumed to be extra ordinary items) - - 4,000
Less: Provision for debtors (5,000)
4,53,000 3,41,500 3,80,950
Total profit for the three years 11,75,450
Average Profit =
3,91,817
Less: Depreciation @ 10% on increase in the value of machinery
8,36,450 x
4,182
Expected increase in expenditure 20,000
Annual R & D Expenses anticipated in future 30,000 54,182
Future Maintainable profit before tax 3,37,635
Less: Tax @ 40% of Rs.3,37,635 1,35,054
Future Maintainable Profit After Tax 2,02,581

3. Computation of Goodwill Rs.
Future Maintainable Profit After Tax 2,02,581
Less: Normal Profit (10% of Rs.19,87,788) 1,98,779
Super Profit 3,802
Value of Goodwill = Super Profit x No. of years’ purchase
= Rs.3,802 x 3 11,406
Question 20
From the following data, compute the ‘Net Assets’ value of each category of equity shares of Smith Ltd.:
Shareholders funds
10,000 ‘A’ Equity shares of Rs.100 each, fully paid
10,000 ‘B’ Equity shares of Rs.100 each, Rs.80 paid
10,000 ‘C’ Equity shares of Rs.100 each, Rs.50 paid
Retained Earnings Rs.9,00,000
(6 Marks)(May, 2008)
Answer
(i) Computation of Net assets
Worth of net assets is equal to shareholders’ fund, i.e.
Rs.
Paid up value of ‘A’ equity shares 10,000 x Rs.100 10,00,000
Paid up value of ‘B’ equity shares 10,000 x Rs. 80 8,00,000
Paid up value of ‘C’ equity shares 10,000 x Rs. 50 5,00,000
Retained earnings 9,00,000
Net assets 32,00,000
(ii) Net asset value of equity share of Rs.100 paid up
Notional calls of Rs. 20 and Rs.50 per share on ‘B’ and ‘C’ equity shares respectively will make all the 30,000 equity shares fully paid up at Rs. 100 each. In that case,
Rs.
Net assets 32,00,000
Add: Notional calls (10,000 x Rs.20 + 10,000 x Rs.50) 7,00,000
39,00,000
Value of each equity share of Rs.100 fully paid up = Rs. 39,00,000 / 30,000=Rs.130
(iii) Net asset values of each category of equity shares Rs.
Value of ‘A’ equity shares of Rs. 100 fully paid up 130
Value of ‘B’ equity shares of Rs. 100 each, out of which Rs. 80 paid up (130-20) 110
Value of ‘C’ Equity shares of Rs.100 each, out of which Rs. 50 paid up
(130-50) 80
Alternatively value of an equity share may also be calculated as follows:
Total paid-up capital Rs.
‘A’ equity shares (10,000XRs.100) 10,00,000
‘B’ equity shares (10,000XRs. 80) 8,00,000
‘C’ equity shares (10,000XRs. 50) 5,00,000
23,00,000
Retained earnings 9,00,000
Net assets value of all shares 32,00,000

Value per rupee of paid up capital = =


= Rs.1.391
Therefore,
Net assets value of Rs. 100 paid up share Rs.1.391 x 100 Rs.139.10
Net assets value of Rs. 80 paid up share Rs.1.391 x 80 Rs.111.28
Net assets value of Rs. 50 paid up share Rs.1.391 x 50 Rs.69.55


NOTE































4
HOLDING COMPANY ACCOUNTS
Topics covered:
 Problems on consolidation of final accounts of a holding company having one subsidiary
 Chain Holding
Question 1
Following are the draft Balance Sheets of two companies A Ltd. and B Ltd. as at 31.03.1996:
(Rs. in lakhs)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share Capital Fixed Assets 5.00 1.50
(Rs. 100 each) 6.00 3.00 Investment:
Profits: 2,400 Shares in B Ltd. 3.00 
Capital Profit 0.80 0.85 1,200 Shares in A Ltd.  2.00
Reserve Profit 3.20 0.29 Current Assets:
Creditors 1.50 0.81 Debtors 2.00 0.80
Stock 0.40 0.30
¬_____ ____ Cash and Bank 1.10 0.35
11.50 4.95 11.50 4.95

The following adjustments were not yet made:
1. Stock worth Rs. 5,000 in B Ltd. was found to be obsolete with no value.
2. A Ltd. acquires an asset costing Rs. 50,000 on 31.3.1996. No effect has been given for both the purchase and payment.
3. During the year A Ltd. sold an asset for Rs. 60,000 (original cost Rs. 40,000). The profit was included in the revenue profit.
4. Debtors of A Ltd. included a sum of Rs. 50,000 owed by B Ltd.
You are required to prepare the consolidated Balance Sheet of both the companies as on 31.3.1996 after giving effect to the above adjustments. (15 marks)(November, 1996)
Answer
Consolidated Balance Sheet of A Ltd. and its subsidiary B Ltd.
as at 31st March, 1996
(Rs. in thousands)
Liabilities Amount Assets Amount
Share Capital Fixed Assets
(less:1,200 shares held by B Ltd.) 480 A Ltd. 550
Minority Interest 105 B Ltd. 150
Capital profit 60 700
Revenue Profit 304 Cost of Control 40
Creditors Current Assets:
A Ltd. 150 Stock
B Ltd. 81 A Ltd. 40
231 B Ltd. 25
Less: Mutual indebtedness 50 181 65
Debtors
A Ltd. 200
B Ltd. 80
280
Less: Mutual
indebtedness
50
230
Cash and Bank
A Ltd. 110
Less: Payment for
asset
50
60
B Ltd. 35
¬____ 95
1,130 1,130

Working Notes:
(1) Adjustment of Revenue and Capital Profits:
(Rs. in lakhs)
A Ltd. B Ltd.
Revenue profits 3.20 0.29
Less: Stock written off  0.05
Less: Transfer to capital profit 0.20 
(Profit on sale of asset) ¬____ ¬____
3.00 0.24
Capital profits 0.80 0.85
Add: Transfer from revenue profit 0.20 

1.00 0.85
(2) Calculation of Minority Interest in Revenue Profits
Let A = Revenue profits of A Ltd., and
B = Revenue profit of B Ltd.
A = 3,00,000 + (4/5)  B
B = 24,000 + (1/5)  A
B = 24,000 + (1/5)  [3,00,000 + (4/5)  B]
B = 24,000 + 60,000 + (4/25)  B
B = 84,000 + (4/25)  B
(21/25)  B = 84,000
B = Rs. 1,00,000
Minority interest in revenue profits is 1/5 of Rs. 1,00,000 or Rs. 20,000. Total revenue profits being Rs. 3,24,000 for A Ltd. and B Ltd. together, Rs. 3,04,000 remains for the group.
(3) Calculation of Minority Interest in Capital Profits
Let A = Capital profits of A Ltd., and
B = Capital profits of B Ltd.
A = 1,00,000 + (4/5) B
B = 85,000 + (1/5)  A
B = 85,000 + (1/5)  [1,00,000 + (4/5)  B]
B = 85,000 + 20,000 + (4/25)  B
B = 1,05,000 + (4/25)  B
(21/25)  B = 1,05,000
B = Rs. 1,25,000
Minority interest (1/5) would be Rs. 25,000. Shares of A Ltd. will be Rs. 1,00,000. Capital profits of A Ltd. = 1,85,000 – 1,25,000 = Rs. 60,000.
(4) Total Minority Interest
Rs.
Shares held by outsiders 60,000
Revenue profit 20,000
Capital profit 25,000
Minority Interest 1,05,000
(5) Cost of control
Rs.
Amount paid by both companies 5,00,000
Less: Face value of shares in B Ltd. 2,40,000
Face value of shares in A Ltd. 1,20,000
Capital profits 1,00,000
4,60,000
Cost of control 40,000
Note:
In adjustment no. 3 given in the question, the period (whether pre-acquisition or post-acquisition) in which the sale of asset took place, is not specified. The answer has been given on the basis of assumption that the asset was sold in the pre-acquisition period and accordingly the profit on sale has been treated as capital profit.
Question 2
War Ltd. purchased on 31st March, 1997, 48,000 shares in Peace Ltd. at 50% premium over face value by issue of 8% debentures at 20% premium. The balance sheets of War and Peace Ltd. as on 31.3.1997, the date of purchase were as under:
Liabilities War Ltd. Peace Ltd. Assets War Ltd. Peace Ltd.
Rs. Rs. Rs. Rs.
Share Capital (Rs. 10) 10,50,000 6,00,000 Fixed assets 6,50,000 2,00,000
General reserve 1,20,000 40,000 Stock in trade 3,00,000 1,80,000
Profit and loss account 80,000  Sundry debtors 3,20,000 2,00,000
Sundry Creditors 1,00,000 60,000 Cash in hand 60,000 30,000
Preliminary expenses
20,000
10,000

¬________
_______ Profit and loss account


80,000
13,50,000 7,00,000 13,50,000 7,00,000

Particulars of War Ltd:
(i) Profit made: Rs.
1997-1998 1,60,000
1998-1999 2,00,000
(ii) The above profit was made after charging depreciation of Rs. 60,000 and Rs. 40,000 respectively.
(iii) Out of profit shown above every year Rs. 20,000 had been transferred to general reserve.
(iv) 10% dividend had been paid in both the years.
(v) It has been decided to write down investment to face value of shares in 10 years and to provide for share of loss to subsidiary.
Particulars of Peace Ltd.:
The company incurred losses of Rs. 40,000 and Rs. 60,000 in 1997-1998 and 1998-1999 after charging depreciation of 10% p.a. of the book value as on 1.4.1997.
Prepare consolidated balance sheet as at 31.3.1999 of War Ltd., and its subsidiary.
(16 marks)(November, 1999)
Answer
Consolidated Balance Sheet of War Ltd. and its subsidiary Peace Ltd.
as at 31st March, 1999
Liabilities Rs. Assets Rs.
Share Capital: Goodwill 2,32,000
Issued and Subscribed: Fixed Assets:
1,05,000 shares of Rs. 10 each War Ltd. 5,50,000
Fully paid up 10,50,000 Peace Ltd. 1,60,000 7,10,000
Minority Interest 90,000 Net Current Assets:
Capital Reserve 1,20,000 War Ltd. 8,30,000
General Reserve 1,60,000 Peace Ltd. 2,90,000 11,20,000
Profit and Loss Account 62,000 Preliminary Expenses 20,000
8% Debentures 6,00,000 ¬________
20,82,000 20,82,000

Working Notes:
(1) Investment in Peace Ltd. (48,000 shares)
Rs.
Face value of shares 4,80,000
Premium (50%) over face value 2,40,000
Cost of investment 7,20,000

Acquired by issue of debentures at 20% premium:
Rs.
8% Debentures 6,00,000
(Nominal value = 7,20,000/120  100)
Debenture premium 1,20,000
7,20,000
Writing down of investment
1997-1998 : 1/10  2,40,000 (24,000)
1998-1999 : 1/10  2,40,000 (24,000)
Investment as on 31.3.1999 6,72,000
(2) Balance of Profit and Loss Account on 31st March, 1999
War Ltd. Peace Ltd.
Rs. Rs.
Balance as on 31.3.1997 80,000 (80,000)
Profit/(Loss)
For 1997-1998 1,60,000 (40,000)
For 1998-1999 2,00,000 (60,000)
Investment written off
1997-1998 (24,000)
1998-1999 (24,000)
Provision for share of loss in subsidiary
1997-1998: 4/5  40,000 (32,000)
1998-1999: 4/5  60,000 (48,000)
Transfer to General Reserve
1997-1998 (20,000)
1998-1999 (20,000)
Dividend
1997-1998 (1,05,000)
1998-1999 (1,05,000) ¬_________
62,000 (1,80,000)
(In the absence of information, taxation has not been considered).
(3) Balance Sheets as at 31st March, 1999
Liabilities War Ltd. Peace Ltd. Assets War Ltd. Peace Ltd.
Rs. Rs. Rs. Rs.
Share Capital 10,50,000 6,00,000 Fixed assets* 5,50,000 1,60,000
Capital reserve 1,20,000  Investment 6,72,000
(Debenture premium)
General reserve

1,60,000

40,000 Less: Provision for
loss in subsidiary


80,000


5,92,000



Profit and loss account
62,000
 Net current assets
8,30,000
2,90,000
8% Debentures 6,00,000  (Balancing figure)
Preliminary expenses
20,000
10,000

¬________
_______ Profit and loss account


1,80,000
19,92,000 6,40,000 19,92,000 6,40,000

*Fixed Assets on 31st March, 1999
War Ltd. Peace Ltd.
Rs. Rs.
Fixed assets on 31.3.1997 6,50,000 2,00,000
Less: Depreciation
1997-1998 (60,000) (20,000)
1998-1999 (40,000) (20,000)
5,50,000 1,60,000

Note: In the absence of information about the movement in individual current assets and current liabilities, balance sheets on 31.3.1999 have been prepared on the basis of net current assets.
(4) Computations for Consolidation
(a) Analysis of Profits/(Losses) of Peace Ltd.
Capital Profit Revenue Profit
Rs. Rs.
General Reserve on 31.3.1997 40,000 
Profit and Loss Account on 31.3.1997 (80,000)
Profit/(Loss) for the years 1997-1998 and 1998-1999 ¬_______ (1,00,000)
(40,000) (1,00,000)
Minority Interest (1/5) (8,000) (20,000)
Share of War Ltd. (4/5) (32,000) (80,000)
(b) Minority Interest
Rs.
Share Capital 1,20,000
Capital profits/(losses) (8,000)
Revenue profits/(losses) (20,000)
Preliminary expenses (1/5  10,000) (2,000)
90,000
(c) Cost of Control
Rs.
Investment in Peace Ltd. 6,72,000
Less: Paid up value of investment 4,80,000
Capital profit/(losses) (32,000)
Preliminary expenses (4/5  10,000) (8,000) 4,40,000
Goodwill 2,32,000


(d) Profit and Loss Account  War Ltd.
Rs.
Balance 62,000
Less: Share of loss in Peace Ltd. 80,000
(18,000)
Add: Provision for loss in subsidiary 80,000
62,000
Question 3
The Balance Sheets of Sun Ltd. and Moon Ltd. as on 31.3.2000 are given below:
Sun Ltd.
(Rs.) Moon Ltd.
(Rs.) Assets Sun Ltd.
(Rs. Moon Ltd.
(Rs.)
Share Capital (Rs. 10) 1,20,000 1,00,000 Fixed Assets 44,000 84,000
General Reserve
Profit and Loss Account
Bills Payable 20,000
12,000
2,000 36,000
20,000
5,000 Investment in Moon Ltd. 8,000 Shares @ Rs. 11
88,000

Sundry Creditors 4,000 7,000 Sundry Debtors 6,000 15,000
Contingent Liability of Sun Ltd.: Bills Discounted not yet matured Rs.2,500





Bills Receivable
Stock in Trade
Cash at Bank 4,000
10,000
6,000
¬_______ 16,000
40,000
13,000
¬_______
1,58,000 1,68,000 1,58,000 1,68,000
Shares were purchased on 1.4.1997. When the shares were purchased General Reserve and Profit and Loss Account of Moon Ltd. stood at Rs. 30,000 and Rs. 16,000 respectively. Dividends have been paid @ 10% every year after acquisition of shares, first dividend being paid out of pre-acquisition profits. No dividend has been proposed for 1999-2000 as yet and no provision need be made in consolidated Balance Sheet. Sun Ltd. has credited all dividends received to Profit and Loss Account.
On 31.3.2000, Bonus shares has been declared by Moon Ltd. @ 1 fully paid share for 5 held, but no effect has been given to that in the above accounts. The Bonus was declared out of profits earned prior to 1.4.1997 from General Reserve.
When the shares were purchased, agreed valuations of Fixed Assets of Moon Ltd. was Rs. 1,08,000 although no effect has been given thereto in accounts.
Depreciation has been charged @ 10% p.a. on the book value as on 1.4.1997, (on straight line method), there being no addition or sale since then.
Out of Current Profits, Rs. 2,000 has been transferred to general reserve every year. Bills receivable of Sun Ltd. include Rs. 2,000 bills accepted by Moon Ltd. and bills discounted by Sun Ltd., but not yet matured include Rs. 1,500 accepted by Moon Ltd. Sundry creditors of Sun Ltd. include Rs. 2,000 due to Moon Ltd. whereas Sundry Debtors of Moon Ltd. include Rs. 4,000 due from Sun Ltd. It is found that Sun Ltd. has remitted a cheque of Rs. 2,000, which has not yet been received by Moon Ltd.
Prepare consolidated Balance Sheet as at 31.3.2000 of Sun Ltd. and its Subsidiary.
(20 marks)(May, 2000)
Answer
Consolidated Balance Sheet of Sun Ltd.
and its Subsidiary Moon Ltd.
As at 31st March, 2000
Rs. Rs.
Liabilities Amount Assets Amount
Share Capital (Rs.10)
Minority Interest
Capital Reserve 1,20,000
29,520
19,200 Fixed Assets
Sun Ltd.
Moon Ltd.
44,000



General Reserve 24,800 (84,000-12,000+3,600) 75,600 1,19,600
Profit and Loss Account 18,080 Stock in Trade
Bills Payable Sun Ltd. 10,000
Sun Ltd. 2,000 Moon Ltd. 40,000 50,000
Moon Ltd. 5,000 Sundry Debtors
7,000 Sun Ltd. 6,000
Less: Mutual indebtedness
2,000
5,000 Moon Ltd.
(15,000 – 2,000,Cheque
Sundry Creditors in transit) 13,000
Sun Ltd.
Moon Ltd. 4,000
7,000
Less: Mutual 19,000
11,000 indebtedness 2,000 17,000
Less: Mutual indebtedness
2,000
9,000 Cash at Bank
Sun Ltd.
6,000
Moon Ltd. 13,000 19,000
Remittance in transit 2,000
Bills Receivable
Sun Ltd. 4,000
Moon Ltd. 16,000
20,000

_______ Less: Mutual indebtedness
2,000
18,000
2,25,600 2,25,600
Contingent Liability
Bills discounted not yet matured Rs. 1,000
Working Notes:
(1) Analysis of Profit of Moon Ltd.
Capital
Profits
Rs. Revenue
Reserve
Rs. Revenue
Profits
Rs.
General reserve on 1.4.97 30,000
Less: Bonus issue 20,000 10,000
Increase in reserve (Annual transfer of Rs. 2,000 for 3 years) (36,000 – 30,000)
6,000
Profit and loss account on 1.4.97 16,000
Less: Dividend for 1997-98 10,000 6,000
Increase in profit
(20,000–6,000)
Loss on revaluation

(12,000) 14000
[84,000 × 100/70 i.e. 1,20,000) –1,08,000]
Additional depreciation written back 3,600
(12,000 × 10/100 × 3) _____ _____ _____
4,000 6,000 17,600
Sun Ltd.’s share (80%) 3,200 4,800 14,080
Minority’s share (20%) 800 1,200 3,520
(2) Minority Interest Rs.
Share capital (including bonus shares)
(20,000+20,000x1/5) 24,000
Capital profits 800
Revenue reserve 1,200
Revenue profits 3,520
29,520
(3) Cost of Control
Investment in Moon Ltd. 88,000
Less: Dividend of capital profits 8,000 80,000
Less: Face value of investment (including
bonus shares) (80,000 + 80,000 × 1/5)
96,000
Capital profits 3,200 99,200
Capital Reserve 19,200

(4) General Reserve – Sun Ltd. Balance 20,000
Add: Share in Moon Ltd. 4,800
24,800
(5) Profit and Loss Account – Sun Ltd. Balance 12,000
Less: Dividend Credited to investment 8,000
4,000
Add: Share in Moon Ltd. 14,080
18,080
Note: As regards bills receivable of Sun Ltd., the students may, alternatively, assume that out of bills of Sun Ltd. accepted by Moon Ltd. Rs. 2,000, Rs. 1,500 have been discounted. In such case, only Rs. 500 will be deducted as mutual indebtedness from bills receivable and bills payable in the balance sheet instead of Rs. 2,000.
Question 4
The Balance Sheets of Bat Ltd. and Ball Ltd. as on 31.3.2000 are as follows:
Bat Ltd. Ball Ltd. Bat Ltd. Ball Ltd.
Rs. Rs. Rs. Rs.
Share Capital
(Shares of Rs. 10 each)
1,60,000
2,00,000 Investments
Shares in Ball Ltd.
1,96,000

Profit and Loss account 50,000 60,000 Debtors  1,20,000
Creditors  16,000 Stock  80,000
Cash at Bank  70,000
¬_______ ¬_______ Cash in hand 14,000 6,000
2,10,000 2,76,000 2,10,000 2,76,000

Particulars of Bat Ltd.:
(1) This company was formed on 1.4.1999.
(2) It acquired the shares of Ball Ltd. as under:

Date of Acquisition No. of Shares Cost
Rs.
1.4.1999 8,000 1,10,000
31.7.1999 6,000 86,000

(3) The shares purchased on 31.7.1999 are ex-dividend and ex-bonus from existing holders.
(4) On 31.7.1999 dividend at 10% was received from Ball Ltd. and was credited to Profit and Loss Account.
(5) On 31.7.1999 it received bonus shares from Ball Ltd. in the ratio of one share on every four shares held.
(6) Bat Ltd. incurred an expenditure of Rs. 500 per month on behalf of Ball Ltd. and this was debited to the Profit and Loss Account of Bat Ltd., but nothing has been done in the books of Ball Ltd.
(7) The balance in the Profit and Loss Account as on 31.3.2000 included Rs. 36,000 being the net profit made during the year.
(8) Dividend proposed for 1999-2000 at 10% was not provided for as yet.
Particulars of Ball Ltd.:
(1) The balance in the Profit and Loss Account as on 31.3.2000 is after the issue of bonus shares made on 31.7.1999.
(2) The net profit made during the year is Rs. 24,000 including Rs. 6,000 received from insurance company in settlement of the claim towards loss of stock by fire on 30.06.1999 (Cost Rs. 10,800 included in opening stock).
(3) Dividend proposed for 1999-2000 at 10% was not provided for in the accounts.
Prepare the Consolidated Balance Sheet of Bat Ltd. as on 31.3.2000.
(16 marks)(November, 2000)
Answer
Consolidated Balance Sheet of Bat Ltd. and its subsidiary Ball Ltd.
as at 31st March, 2000
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital
(Shares of Rs. 10 each)
Minority Interest
1,60,000
50,800 Stock
Debtors
Cash at Bank 80,000
1,20,000
70,000
Capital Reserve 3,040 Cash in hand 20,000
Profit and Loss Account 44,160
Creditors 16,000
Proposed Dividend 16,000 ¬_______
2,90,000 2,90,000
Working Notes:
(1) Analysis of profits of Ball Ltd. Capital Profits Revenue Profits
Rs. Rs.
Profit and Loss Account on 1.4.1999
(60,000 – 24,000)
36,000
Profit for the year 24,000
Add back: Loss by fire 4,800
28,800
Less: Expenses not considered 6,000
22,800
Pre-acquisition profits =

7,600
Less: Loss in pre-acquisition period = 4,800 2,800
Post-acquisition profits



¬______
15,200
¬_____
38,800 15,200
Bat Ltd.’s share (80%*) 31,040 12,160
Minority’s share (20%) 7,760 3,040




(2) Minority interest Rs.
Share capital 40,000
Capital profits 7,760
Revenue profits 3,040
50,800
(3) Cost of control Rs.
Face value of investments 1,60,000
Capital profits 31,040 1,91,040

Investment in Ball Ltd. 1,96,000
Less: Pre-acquisition dividend 8,000 (1,88,000)
Capital Reserve 3,040
(4) Profit and Loss Account – Bat Ltd. Rs.
Balance 50,000
Less: Pre-acquisition dividend wrongly credited 8,000
42,000
Less: Proposed dividend 16,000
26,000
Add: Expenses of Ball Ltd. written back 6,000
Add: Share in Ball Ltd. 12,160
44,160


Question 5
The summarised Balance Sheets of A Ltd. and B Limited are as follows:
Balance Sheets as at 31st December, 2000
A Ltd. B Ltd.
Sources of Funds: Rs. Rs.
Share Capital in equity shares of Rs. 10 each 2,00,000 50,000
Reserves 20,000 5,000
Profit and Loss Account as on 1st January, 2000 30,000 10,000
Profit for the year 8,000 8,000
Add: Dividends from B Ltd. 4,000 
Less: Dividends paid  (5,000)
Creditors 30,000 20,000
Total 2,92,000 88,000
Application of Funds:
Fixed Assets 2,00,000 80,000
Current Assets 32,000 8,000
Shares in B Ltd. at cost – 3,000 shares 60,000 

Total 2,92,000 88,000
A Limited had acquired 4,000 shares in B Ltd. at Rs. 20 each on 1st January, 2000 and sold 1,000 of them at the same price on 1st October, 2000. The sale is cum dividend. An interim dividend of 10% was paid by B Limited on 1st July, 2000.
Draft the consolidated Balance Sheet as at 31st December, 2000.
(16 marks)(November, 2001)
Answer
Consolidated Balance Sheet
of A Limited and its subsidiary B Limited
as at 31st December, 2000
Liabilities Rs. Assets Rs.
Share Capital in equity shares of Rs. 10 each 2,00,000 Goodwill 21,000
Minority Interest 27,200 Fixed Assets 2,80,000
Reserves 20,000 Current Assets 40,000
Profit and Loss Account 43,800
Creditors 50,000 ¬_______
3,41,000 3,41,000
Working Notes:
(1) Analysis of Profits of B Ltd. Capital Profits Revenue Profits
Rs. Rs.
Reserves 5,000
Profit and loss account on 1.1.2000 10,000
Profit for the year (8,000 – 5,000) ¬______ 3,000
15,000 3,000
A Ltd.’s share (60%) 9,000 1,800
Minority’s share (40%) 6,000 1,200
(2) Minority Interest:
Share capital 20,000
Capital profit 6,000
Revenue profits 1,200
27,200
(3) Cost of control:
Investment in B Ltd. 60,000
Less: Face value of investment 30,000
Capital profits 9,000 39,000
Goodwill 21,000
(4) Profit and Loss Account – A Ltd.
Balance as on 1st January, 2000 30,000
Profit for the year 8,000
38,000
Add: Dividends from B Ltd. 4,000
42,000
Add: Profit / (loss) on sale of shares 

42,000
Add: Share in B Ltd. 1,800
43,800


Question 6
On 31st March, 2002, the Balance Sheets of H Ltd. and S Ltd. stood as follows:
H Ltd. S Ltd.
(Rs. in 000’s)
Liabilities
Equity Share (Capital – Authorised) 5,000 3,000
Issued and subscribed in Equity Shares of Rs. 10 each full paid 4,000 2,400
General Reserve 928 690
Profit and Loss Account 1,305 810
Bills Payable 124 80
Sundry Creditors 487 427
Provision for Taxation 220 180
Other Provisions 65 17
7,129 4,604
Assets:
Plant and Machinery 2,541 2,450
Furniture and Fittings 615 298
Investment in the Equity Shares of S Ltd. 1,500 
Stock 983 786
Debtors 700 683
Bills Receivables 120 95
Cash and Bank Balances 410 102
Sundry Advances 260 190
7,129 4,604
Following Additional Information is available :
(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2001 at which date the following balances stood in the books of S Ltd.
General Reserve Rs. 1,500 thousand; Profit and Loss Account Rs. 633 thousand.
(b) On 14th July, 2001 S Ltd. declared a dividend of 20% out of pre-acquisition profits and paid corporate dividend tax (including surcharge) at 11%. H Ltd. credited the dividend received to its Profit and Loss Account.
(c) On 1st November, 2001 S Ltd. issued a 3 fully paid Equity Shares of Rs. 10 each, for every 5 shares held as bonus shares out of pre-acquisition General Reserve.
(d) On 31st March, 2002, the Stock of S Ltd. included goods purchased for Rs. 50 thousand from H Ltd., which had made a profit of 25% on Cost.
Prepare a consolidated Balance Sheet as on 31st March, 2002.
(16 marks)(November, 2002)
Answer
Consolidated Balance Sheet of H Ltd. with its subsidiary
S Ltd. as on 31st March, 2002
Liabilities Rs. in 000’s Assets Rs. in 000’s
Share Capital
Authorised

5,000 Fixed Assets
Plant and Machinery
Issued, Subscribed and Paid up H Ltd. 2,541
4 lakh equity shares of Rs. 10 each, fully paid

4,000 S Ltd.
Furniture and fittings 2,450 4,991
Minority Interest (Note 6) 1,560 H Ltd. 615
Reserves and Surplus S Ltd. 298 913
Capital Reserve (Note 5)
General Reserve (928 + 54) 660
982 Current assets, Loans and Advances
Profit and Loss Account: (A) Current Assets
H Ltd.
Add: Share in S Ltd. 1,305
306 Stock H Ltd.
S Ltd. 983
786

Less: Dividend wrongly credited

Less: Unrealised profit 1,611
180
1,431
10


1,421
Less: Unrealised profit (50x1/5)
Debtors H Ltd.
S Ltd. 1,769
10
700
683
1,759

1,383
Current Liabilities and Provisions Cash and Bank Balances
(a) Current Liabilities
Bills payable H Ltd.
S Ltd.
Sundry Creditors H Ltd.
S Ltd.
124
80
487
427

204

914 H Ltd.
S Ltd.
(B) Loans and Advances
Bills Receivables
H Ltd. 410
102


120
512
(b) Provisions
Provision for Taxation
S Ltd.
Sundry Advances 95 215
H Ltd.
S Ltd. 220
180
400 H Ltd.
S Ltd. 260
190
450
Other Provisions H Ltd.
S Ltd. 65
17
82
¬_____
10,223 10,223
Working Notes:
1. S Ltd. General Reserve
(Rs. in 000) (Rs. in 000)
To Bonus to equity shareholders
900 By
By Balance b/d
Profit and Loss A/c 1,500
To Balance c/d 690 (Balancing figure) 90
1,590 1,590

2. S Ltd. Profit and Loss Account
(Rs. in 000) (Rs. in 000)
To General Reserve 90 By Balance b/d 633
To Dividend paid on 14.7.2001


300 By Net Profit for the year (Balancing figure)
600*
To Corporate Dividend Tax
(11% of Rs. 300) 33
To Balance c/d 810 ____
1,233 1,233

* Out of Rs. 6,00,000 profit for the year, Rs. 90,000 has been transferred to reserves by S Ltd.
3. Distribution of Revenue Profits Rs. in ’000
Revenue Profit as above 600
Share of H Ltd.
60% of (General Reserve Rs. 54 + Profit and Loss Account Rs. 306) 360
Share of Minority shareholders (Rs. 600 – Rs. 360) 240

4. Computation of Capital Profits Rs. in ’000 Rs. in ’000
General Reserve on the date of acquisition 1,500
Less: Bonus issue of shares 900
600
Profit and Loss Account balance on the date of acquisition
633
Less: Dividends paid 300
Corporate tax paid 33
333
300
900
Share of H Ltd. 540
Share of Minority shareholders 360

5. Computation of capital Reserve
60% of share capital of S Ltd. 1,440
Add: Share of H Ltd. in the capital profits as in working note No. (4)
540
1,980
Less: Investments in S Ltd. 1,500
Less: Dividends received out of pre-
acquisition profits Rs. 300  60
100
180
1,320
660
6. Calculation of Minority Interest
40% of share capital of S Ltd. 960
Add: Share of Revenue Profits (Note 3) 240
Share of Capital Profits (Note 4) 360
1,560
Question 7
On 31st March, 1996, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs. 12,00,000. The Balance Sheet of Q Ltd. on that date was as under:
Liabilities Rs. Assets Rs.
1,50,000 equity shares of Rs. 10
each fully paid
15,00,000 Fixed Assets
Current Assets 10,50,000
6,45,000
Pre-incorporation profits 30,000
Profit and Loss Account 60,000
Creditors 1,05,000 _______
16,95,000 16,95,000

On 31st March, 2002 the Balance Sheets of two companies were as follows:
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
Rs. Rs. Rs. Rs.
Equity shares of Rs. 10 each fully paid (before bonus issue)

45,00,000

15,00,000 Fixed Assets
1,05,000 equity
shares in 79,20,000 23,10,000
Securities Premium 9,00,000 – Q Ltd. at cost 12,00,000 –
Pre-incorporation profits – 30,000 Current Assets 44,10,000 17,55,000
General Reserve 60,00,000 19,05,000
Profit and Loss Account 15,75,000 4,20,000
Creditors 5,55,000 2,10,000 _________ ________
1,35,30,000 40,65,000 1,35,30,000 40,65,000

Directors of Q Ltd. made bonus issue on 31.3.2002 in the ratio of one equity share of Rs. 10 each fully paid for every two equity shares held on that date.
Calculate as on 31st March, 2002 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss Account in each of the following cases:
(i) Before issue of bonus shares.
(ii) Immediately after issue of bonus shares.
It may be assumed that bonus shares were issued out of post-acquisition profits by using General Reserve.
Prepare a Consolidated Balance Sheet after the bonus issue.
(10 marks)(May, 2003)
Answer
(i) Before issue of bonus shares
(i) Cost of control/capital reserve Rs. Rs.
Investment in Q Ltd. 12,00,000
Less: Face value of investments 10,50,000
Capital profits (W.N.) 63,000 11,13,000
Cost of control 87,000
(ii) Minority Interest Rs.
Share Capital 4,50,000
Capital profits (W.N.) 27,000
Revenue profits (W.N.) 6,79,500
11,56,500
(iii) Consolidated profit and loss account – P Ltd. Rs.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd.(W.N.) 15,85,500
31,60,500
(ii) Immediately after issue of bonus shares
(i) Cost of control/capital reserve Rs. Rs.
Face value of investments 15,75,000
(Rs. 10,50,000 + 5,25,000)
Capital Profits (W.N.) 63,000 16,38,000
Less: Investment in Q Ltd. 12,00,000
Capital reserve 4,38,000
(ii) Minority Interest Rs.
Share Capital (Rs. 4,50,000 + 2,25,000) 6,75,000
Capital Profits (W.N.) 27,000
Revenue Profits (W.N.) 4,54,500
11,56,500
(iii) Consolidated Profit and Loss Account – P td. Rs.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 10,60,500
26,35,500
Consolidated Balance Sheet of P Ltd. and its subsidiary Q Ltd.
as on 31st March, 2002
Liabilities Rs. Assets Rs.
Share Capital Fixed Assets 1,02,30,000
(Shares of Rs. 10 each) 45,00,000 Current Assets 61,65,000
Securities Premium 9,00,000
Capital Reserve 4,38,000
General Reserve 60,00,000
Profit and Loss Account 26,35,500
Creditors 7,65,000
Minority Interest 11,56,500
1,63,95,000 1,63,95,000

Working Note:
Analysis of Profits of Q Ltd.
Capital Profits Revenue Profits
(Before and after issue of bonus shares)
Rs. Before Bonus Issue
Rs. After
Bonus Issue
Rs.
Pre-incorporation profits 30,000
Profit and loss account on 31.3.1996 60,000
90,000
General reserve* 19,05,000 19,05,000
Less: Bonus shares 7,50,000
11,55,000
Profit for period of 1st April, 1997 to 31st March,2002 (Rs. 4,20,000 – Rs. 60,000)
3,60,000
3,60,000
22,65,000 15,15,000
P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
Minority’s share (30%) 27,000 6,79,500 4,54,500

*Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account.
Question 8
On 31st March, 2004 the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
H Ltd. S Ltd.
Liabilities Rs. in lakhs Rs. in lakhs
Share Capital:
Authorised 15,000 6,000
Issued and Subscribed:
Equity Shares of Rs. 10 each, fully paid up 12,000 4,800
General Reserve 2,784 1,380
Profit and Loss Account 2,715 1,620
Bills Payable 372 160
Sundry Creditors 1,461 854
Provision for Taxation 855 394
Proposed Dividend 1,200 

21,387 9,208

H Ltd. S Ltd.
Assets Rs. in lakhs Rs. in lakhs
Land and Buildings 2,718 
Plant and Machinery 4,905 4,900
Furniture and Fittings 1,845 586
Investments in shares in S Ltd. 3,000 
Stock 3,949 1,956
Debtors 2,600 1,363
Cash and Bank Balances 1,490 204
Bills Receivable 360 199
Sundry Advances 520 

21,387 9,208

The following information is also provided to you:
(a) H Ltd. purchased 180 lakh shares in S Ltd. on 1st April, 2003 when the balances to General Reserve and Profit and Loss Account of S Ltd. stood at Rs. 3,000 lakh and 1,200 lakh respectively.
(b) On 4th July, 2003 S Ltd. declared a dividend @ 20% for the year ended 31st March, 2003. H Ltd. credited the dividend received by it to its Profit and Loss Account.
(c) On 1st January, 2004 S Ltd. issued 3 fully paid-up shares for every 5 shares held as bonus shares out of balances to its general reserve as on 31st March, 2003.
(d) On 31st March, 2004 all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H Ltd. But on that date, H Ltd. held only Rs. 45 lakh of these acceptances in hand, the rest having been endorsed in favour of its creditors.
(e) On 31st March, 2004 S Ltd.’s stock included goods which it had purchased for Rs. 100 lakh from H Ltd. which made a profit @ 25% on cost.
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 2004 bearing in mind the requirements of AS 21. (16 marks)(May, 2004)
Answer
Consolidated Balance Sheet of H Ltd.
and its subsidiary S Ltd. as on 31st March, 2004
Liabilities Rs. in lakhs Rs. in lakhs Assets Rs. in lakhs Rs. in lakhs
Share Capital Fixed Assets
Authorised 15,000 Land and Buildings
Issued and Subscribed: H Ltd. 2,718
Equity shares of Rs. 10 each, fully paid up
12,000 Plant and Machinery
Minority Interest (Note 6) 3,120 H Ltd. 4,905
S Ltd. 4,900 9,805
Reserves and Surplus Furniture and Fittings
Capital Reserve (Note 5) 1,320 H Ltd. 1,845
General Reserve (2,784 + 108) 2,892 S Ltd. 586 2,431
Profit and Loss Account:
H Ltd.
Less: Dividend wrongly credited 360 2,715 Current Assets, Loans and Advances
Unrealised Profit 20 380 Current Assets
2,335 Stock
Add: Share in S Ltd.’s H Ltd. 3,949
Revenue profits 612 2,947 S Ltd. 1,956
5,905
Current Liabilities
and Provisions Less: Unrealised profit
20
5,885
Current Liabilities Debtors
Bills Payable H Ltd. 2,600
H Ltd. 372 S Ltd. 1,363 3,963
S Ltd. 160 Cash and Bank Balances
532 H Ltd. 1,490
Less: Mutual owing 45 487 S Ltd. 204 1,694
Loans and Advances
Sundry Creditors Bills Receivable
H Ltd. 1,461 H Ltd. 360
S Ltd. 854 2,315 S Ltd. 199
Provisions 559
Provision for Taxation Less: Mutual Owing 45 514
H Ltd. 855 Sundry Advances
S Ltd. 394 1,249 H Ltd. 520
Proposed Dividend
H Ltd. 1,200 _____
27,530 27,530
Working Notes:
1. S Ltd.’s General Reserve
Rs. in lakhs Rs. in lakhs
To Bonus to Equity Shareholders 1,800 By Balance b/d 3,000
To Balance c/d 1,380 By Profit and Loss A/c 180
____ (Balancing figure)
3,180 3,180
2. S Ltd.’s Profit and Loss Account
Rs. in lakhs Rs. in lakhs
To General Reserve 180 By Balance b/d 1,200
To Dividend paid (20% on Rs.3,000 lakhs) 600 By Net Profit for the year* 1,200
To Balance c/d 1,620 (Balancing figure)
2,400 2,400

*Out of Rs. 1,200 lakhs profit for the year, Rs. 180 lakhs has been transferred to reserves.
3. Distribution of Revenue profits
Rs. in lakhs
Revenue profits (W. N. 2) 1,200
Less: Share of H Ltd. 60%
(General Reserve Rs. 108 + Profit and Loss Account Rs. 612) 720

Share of Minority Shareholders (40%) 480
4. Calculation of Capital Profits
Rs. in lakhs
General Reserve on the date of acquisition less bonus shares
(Rs. 3,000 – Rs. 1,800)
1,200
Profit and loss account on the date of acquisition less dividend paid
(Rs. 1,200 – Rs. 600) 600

1,800
H Ltd.’s share = 60% of Rs. 1,800 lakhs = Rs. 1,080 lakhs
Minority interest = Rs. 1,800 – Rs. 1,080 = Rs. 720 lakhs
5. Calculation of capital reserve
Rs. in lakhs
Paid up value of shares held (60% of Rs.4,800) 2,880
Add: Share in capital profits 1,080
3,960
Less: Cost of shares less dividend received (Rs. 3,000 – Rs. 360) 2,640
Capital reserve 1,320
6. Calculation of Minority Interest
Rs. in lakhs
40% of share capital (40% of Rs. 4,800) 1,920
Add: Share in revenue profits 480
Share in capital profits 720
3,120
7. Unrealised profit in respect of stock
Rs. 100 lakhs
Question 9
The following are the summarised Balance Sheets of PD Co. Ltd. and SD Co. Ltd. as on 31.3.2004.
Liabilities PD Co. Ltd. SD Co. Ltd.
Rs. Rs.
Share Capital:
Authorised 70,00,000 30,00,000
Issued and Subscribed Capital
Equity shares of Rs. 10 each fully paid 50,00,000 20,00,000
Capital Reserve 5,00,000 3,10,000
Revenue Reserve 8,50,000 75,000
Profit and Loss Account 4,00,000 2,80,000
Sundry Creditors 2,50,000 2,25,000
Bills Payable 1,00,000 10,000
71,00,000 29,00,000

Assets PD Co. Ltd. SD Co. Ltd.
Rs. Rs.
Land and Buildings 20,00,000 15,20,000
Plant and Machinery 20,00,000 8,00,000
Furniture 5,00,000 1,60,000
Investments 16,10,000 
Stock 3,40,000 1,00,000
Sundry Debtors 3,60,000 2,00,000
Bills Receivable 50,000 40,000
Bank 2,40,000 80,000
71,00,000 29,00,000

PD Ltd. acquired 80% shares of SD Ltd. on 30.09.2003 at a cost of Rs. 18,10,000. On 1.10.2003 SD Ltd. declared and paid dividend on Equity Shares. PD Ltd. appropriately adjusted its share of dividend in Investment Account.
On 1.4.2003, the Capital Reserve and Profit and Loss Account stood in the books of SD Ltd. at Rs. 50,000 and Rs. 2,75,000 respectively.
Land and Buildings standing in the books of SD Ltd. at Rs. 16,00,000 on 1.4.2003, revalued at Rs.20,00,000 on 1.10.1993. Furniture, which stood in the books at Rs. 2,00,000 on 1.4.2003 revalued at Rs.1,50,000 on 1.10.2003. In both the cases the effects have not yet been given in the books.
SD Ltd. bought an item of machinery from PD Ltd. on hire-purchase basis. The following are the balances in respect of this machinery in the books on 31.03.2004:
Rs.
Instalment due 20,000
Instalment not due 8,000
Hire-purchase stock reserve 1,600

The above items stood included under appropriate heads in Balance Sheet.
Prepare a Consolidated Balance Sheet of PD Ltd. and its subsidiary SD Ltd. as at 31.03.2004, complying with the requirements of AS 21. (16 marks) (November, 2004)
Answer
Consolidated Balance Sheet of PD Co. Ltd. with its subsidiary
SD Co. Ltd. as on 31st March, 2004
Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital Fixed Assets
Authorised 70,00,000 Land and buildings
Issued and subscribed PD Ltd. 20,00,000
Equity shares of Rs. 10 each, fully paid up
50,00,000 SD Ltd. (W.N. 2)
Plant and machinery 19,50,000 39,50,000
Minority interest (W.N. 5) 6,14,000 PD Ltd. 20,00,000
Reserves and surplus:
Capital reserve (W.N. 8)
12,18,000 SD Ltd. 8,00,000
28,00,000
Revenue reserve (W.N. 9) 8,80,000 Less: Unrealised profit
Profit and loss account 4,92,400 on hire purchase
(W.N. 10)
Current liabilities and provisions transaction
Furniture
PD Ltd. 5,600

5,00,000 27,94,400
Current liabilities SD Ltd. (W.N. 2) 1,35,000 6,35,000
Sundry creditors
PD Ltd.
2,50,000 Current assets, loans and advances
SD Ltd. 2,25,000 Current assets
4,75,000 Stock
Less: Mutual hire purchase indebtedness
Bills payable
28,000
4,47,000 PD Ltd.
SD Ltd. 3,40,000
1,00,000
4,40,000
PD Ltd.
SD Ltd. 1,00,000
10,000
1,10,000 Less: Hire purchase instalment not due
8,000
4,32,000
Sundry debtors
PD Ltd. 3,60,000
SD Ltd. 2,00,000
5,60,000
Less: Hire purchase
Instalment due 20,000 5,40,000
Loans and advances
Bills receivable
PD Ltd. 50,000
SD Ltd. 40,000 90,000
Cash and Bank Balances:
Bank
PD Ltd. 2,40,000
¬________ SD Ltd. 80,000 3,20,000
87,61,400 87,61,400
Working Notes:
1. Analysis of reserves and profits of SD Co. Ltd. as on 31.03.2004.
Pre-acquisition profit upto 30.09.2003 Post-acquisition profits
(1.10.2003 – 31.3.2004)
(Capital profits) Capital reserve Revenue reserve Profit and loss account
Capital reserve as on 31.3.2004 3,10,000
Less: Balance as on 1.4.2003 50,000 50,000
Created during the year 2,60,000 1,30,000 1,30,000
Revenue reserve as on 31.3.2004
75,000
Less: balance as on 1.4.2003 

Created during the year 75,000 37,500 37,500
Profit and loss account as on 31.3.2004
2,80,000
Add: Dividend paid on 1.10.2003 2,50,000
(out of pre-acquisition profits) ¬_______
5,30,000
Less: balance as on 1.4.2003 2,75,000
Earned during the year 2,55,000 1,27,500 1,27,500
Profit as on 1.4.2003 2,75,000
Less: Dividend paid
[(Rs.18,10,000 –
Rs.16,10,000)  5/4]
2,50,000
Balance of pre-acquisition profit as on 31.3.2004 ¬______
25,000
25,000
Revaluation reserves as on 1.10.2003:
Profit on land and buildings (W.N. 2)
4,40,000
Loss on furniture (W.N. 2) (30,000)
Difference in depreciation (for 6 months) due to revaluation:
Short depreciation on land and building (W.N. 3)
(10,000)
Excess depreciation on furniture (W.N. 3)
______
¬_____
_____
5,000
Total 7,80,000 1,30,000 37,500 1,22,500
Minority Interest (20%) 1,56,000 26,000 7,500 24,500
Share of PD Co. Ltd. (80%) 6,24,000 1,04,000 30,000 98,000

2. Profit or loss on revaluation of assets in the books of SD Ltd. and their book values as on 31.3.2004
Rs.
Land and buildings
Book value as on 1.4.2003 16,00,000
Depreciation at 5% p.a. [(80,000  100)/16,00,000] for 6 months 40,000
15,60,000
Revalued on 1.10.2003 20,00,000
Profit on revaluation 4,40,000

Value as per balance sheet on 31.3.2004 15,20,000
Add: Profit on revaluation 4,40,000
19,60,000
Less: Short Depreciation (W.N. 3) 10,000
Value as on 31.3.2004 19,50,000
Furniture
Book value as on 1.4.2003 2,00,000
Less: Depreciation @ 20% p.a. [(40,000  100)/2,00,000] for 6 months 20,000
1,80,000
Revalued on 1.10.2003 1,50,000
Loss on revaluation 30,000

Value as per balance sheet on 31.3.2004 1,60,000
Less: Loss on revaluation 30,000
1,30,000
Add: Excess depreciation written back (W.N. 3) 5,000
Value as on 31.3.2004 1,35,000

3. Calculation of short/excess depreciation
Building Furniture
Revalued figure as on 1.10.2003 20,00,000 1,50,000
Rate of depreciation 5% p.a. 20% p.a.
Depreciation for 6 months on revalued figure
(1.10.2003 to 31.3.2004)
50,000
15,000
Depreciation already provided 40,000 20,000
Difference [(short)/excess] (10,000) 5,000

4. Calculation of cost of control
Rs.
Share capital in SD Ltd. 16,00,000
Add: Capital profit 6,24,000
22,24,000
Less: Cost of Investments 16,10,000
Capital Reserve 6,14,000

5. Calculation of minority interest
Rs. Rs.
Share capital 4,00,000
Capital (pre-acquisition) profits 1,56,000
Revenue (post-acquisition) profits:
Capital Reserve 26,000
Revenue reserve 7,500
Profit and loss 24,500 58,000
6,14,000
6. Stock reserve (plant and machinery)
Percentage of profit on hire purchase transaction

20% on Rs. 20,000 = Rs. 4,000
Total unrealised profit = Rs. 4,000 + Rs. 1,600 = Rs. 5,600
7. Elimination of mutual indebtedness
Elimination of mutual indebtedness in respect of sale of machinery on hire purchase basis will be made as under in the Consolidated Balance Sheet.
Creditors Debtors Stock Plant and machinery
Rs. Rs. Rs. Rs.
Total (PD Ltd. and SD Ltd.) 4,75,000 5,60,000 4,40,000 28,00,000
Less: Instalment due 20,000 20,000  
Less: Instalment not due 8,000  8,000 
Less: Profit on plant purchased by SD Ltd. from PD Ltd. on hire purchase










5,600

4, 47,000 5,40,000 4,32,000 27,94,400
For consolidated balance sheet purpose, the unrealised profits will be eliminated by deducting Rs. 5,600 from Plant & Machinery and from profit and loss account.
8. Consolidated capital reserve as on 31.3.2004
Rs.
Capital reserve of PD Ltd. as on 31.3.2004 5,00,000
Add: Share in post acquisition capital reserve of SD Ltd. (W.N. 1) 1,04,000
Add: Cost of control (W.N. 4) 6,14,000
12,18,000
9. Consolidated revenue reserve as on 31.3.2004
Rs.
Revenue reserve of PD Ltd. as on 31.3.2004 8,50,000
Add: Share in post acquisition revenue reserve of SD Ltd. (W.N. 1) 30,000
8,80,000
10. Consolidated profit and loss account as on 31.3.2004
Rs.
Profit and loss account balance of PD Ltd. as on 31.3.2004 4,00,000
Add: Share in post acquisition profit and loss account of SD Ltd. (W.N. 1) 98,000
Less: Unrealised profit on hire purchase (5,600)
4,92,400

Note: In the question, the balance of capital reserve and profit and loss account of SD Ltd., as on 1.4.2003 only has been given and not of revenue reserve. Hence, it has been assumed in the above solution that the revenue reserve is created during the year from current year’s profits.
Question 10
The Balance Sheets of Football Ltd. and its subsidiary Hockey Ltd. as on 31st March, 2005 are as under:
Liabilities Football Ltd. Hockey Ltd. Assets Football Ltd. Hockey Ltd.
Rs. Rs. Rs. Rs.
Equity shares of Rs. 10 48,00,000 20,00,000 Goodwill 4,50,000 3,00,000
each
10% Preference shares of Rs. 10 each

7,00,000

3,80,000 Plant and machinery
Motor vehicles
12,00,000
9,50,000
5,00,000
7,50,000
General reserve 5,50,000 4,20,000 Furniture and
Profit and loss account 10,00,000 6,00,000 fittings 6,50,000 4,00,000
Bank overdraft 1,20,000 70,000 Investments 26,00,000 4,50,000
Sundry creditors 4,30,000 4,80,000 Stock 4,50,000 7,20,000
Bills payable  1,60,000 Cash at bank 2,25,000 2,10,000
¬ Debtors 9,30,000 7,80,000
________ ________ Bills receivable 1,45,000 

76,00,000 41,10,000 76,00,000 41,10,000

Details of acquisition of shares by Football Ltd. are as under:
Nature of shares No. of shares acquired Date of acquisition Cost of acquisition
Rs.
Preference shares 14,250 1.4.2002 3,10,000
Equity shares 80,000 1.4.2003 9,50,000
Equity shares 70,000 1.4.2004 8,00,000


Other information:
(i) On 1.4.2004 profit and loss account and general reserve of Hockey Ltd. had credit balances of Rs. 3,00,000 and Rs. 2,00,000 respectively.
(ii) Dividend @ 10% was paid by Hockey Ltd. for the year 2003-2004 out of its profit and loss account balance as on 1.4.2004. Football Ltd. credited its share of dividend to its profit and loss account.
(iii) Hockey Ltd. allotted bonus shares out of general reserve at the rate of 1 share for every 10 shares held. Accounting thereof has not yet been made.
(iv) Bills receivable of Football Ltd. were drawn upon Hockey Ltd.
(v) During the year 2004-2005 Football Ltd. purchased goods from Hockey Ltd. for Rs. 1,00,000 at a sale price of Rs. 1,20,000. 40% of these goods remained unsold at close of the year.
(vi) On 1.4.2004 motor vehicles of Hockey Ltd. were overvalued by Rs. 1,00,000. Applicable depreciation rate is 20%.
(vii) Dividends recommended for the year 2004-2005 in the holding and the subsidiary companies are 15% and 10% respectively.
Prepare consolidated Balance Sheet as on 31st March, 2005. (16 marks)(May,2005)
Answer
Consolidated Balance Sheet of Football Ltd.
and its subsidiary Hockey Ltd.
as on 31st March, 2005
Amount Amount
Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital Fixed Assets
Authorised, Issued and paid up capital  Goodwill
4,80,000 equity shares of Rs. 10 Football Ltd. 4,50,000
each
70,000 10% preference shares of Rs. 48,00,000 Hockey Ltd. 3,00,000
7,50,000
10 each
Minority Interest (W.N . 3) 7,00,000
9,86,750 Add: Goodwill on
consolidation (W.N. 2)
1,97,500
9,47,500
Reserves and Surplus
General reserve (W.N. 5)
7,15,000 Plant and Machinery
Football Ltd.
12,00,000
Profit and loss account (W.N. 4) 5,07,750 Hockey Ltd. 5,00,000 17,00,000
Current Liabilities and Provisions Motor Vehicles
Bank Overdraft
Football Ltd.
1,20,000 Football Ltd.
Hockey Ltd. 9,50,000
Hockey Ltd. 70,000 1,90,000 (7,50,000 – 1,00,000 +
20,000)
6,70,000
16,20,000
Sundry Creditors Furniture & Fittings
Football Ltd. 4,30,000 Football Ltd. 6,50,000
Hockey Ltd. 4,80,000 9,10,000 Hockey Ltd. 4,00,000 10,50,000
Bills payable Investments
Hockey Ltd. 1,60,000 Football Ltd.
Less: Mutual debt 1,45,000 15,000 (26,00,000 – 20,60,000) 5,40,000
Proposed Dividend Hockey Ltd. 4,50,000 9,90,000
Equity 7,20,000 Current assets, loans
Preference 70,000 7,90,000 and advances
Current assets
Stock
Football Ltd. 4,50,000
Hockey Ltd. 7,20,000
11,70,000
Less: Unrealised profit 8,000 11,62,000
Debtors
Football Ltd. 9,30,000
Hockey Ltd. 7,80,000 17,10,000
Cash at Bank
Football Ltd. 2,25,000
Hockey Ltd. 2,10,000 4,35,000
Loans and advances
Bills receivable
Football Ltd. 1,45,000
¬________ Less: Mutual Debt 1,45,000 Nil
96,14,500 96,14,500
Working Notes:
(1) Analysis of Profits of Hockey Ltd. Capital Profits Revenue Reserve Revenue Profit
Rs. Rs. Rs. Rs.
(a) General Reserve as on 1.4.2004 2,00,000
Less: Bonus issue (1/10 of Rs. 20,00,000) 2,00,000  
(b) Addition to General Reserve during 2004-2005
(Rs. 4,20,000  Rs. 2,00,000)

2,20,000
(c) Profit and Loss Account balance as on 1.4.2004
3,00,000
Less: Dividend paid for the year 2003-2004 2,00,000 1,00,000
(d) Profit for the year 2004-2005
(Rs. 6,00,000 – Rs. 1,00,000)
5,00,000
(e) Adjustment for over valuation of motor vehicles (1,00,000)
(f) Adjustment of revenue profit due to overcharged depreciation (20% on Rs. 1,00,000)
20,000
(g) Preference dividend for the year 2004-2005
@ 10%


(38,000)

2,20,000 4,82,000
Football Ltd.’s share (3/4) 1,65,000 3,61,500
Minority Interest (1/4) 55,000 1,20,500
2,20,000 4,82,000
(2) Cost of Control Rs. Rs.
Cost of investments in Hockey Ltd. 20,60,000
Less: Paid up value of equity shares (including
bonus shares)
[80,000 + 70,000 + (10% of 1,50,000)]  Rs. 10
16,50,000
Paid-up value of preference shares 1,42,500
Pre-acquisition dividend 70,000 18,62,500
Cost of control/Goodwill 1,97,500
(3) Minority Interest
Equity share capital
[Rs. 5,00,000 + Rs. 50,000 (Bonus)]
5,50,000
Preference share capital
(Rs. 3,80,000  Rs. 1,42,500)
2,37,500
Share of revenue reserve 55,000
Share of revenue profit 1,20,500
Proposed preference dividend 23,750
9,86,750
(4) Profit and Loss Account – Football Ltd.
Balance 10,00,000
Share in profit of Hockey Ltd. 3,61,500
Share in proposed preference dividend of
Hockey Ltd.
14,250
13,75,750
Less: Pre-acquisition dividend credited to profit and
loss account
70,000
Unrealised profit on stock (40% of Rs.20,000) 8,000
Proposed equity dividend 7,20,000
Proposed preference dividend 70,000 8,68,000
5,07,750
(5) General reserve – Football Ltd.
Balance 5,50,000
Add: Share in Hockey Ltd. 1,65,000
7,15,000
Note: No information has been given in the question regarding date of bonus issue by Hockey. It is also not mentioned whether the bonus shares are issued from pre-acquisition general reserve or post-acquisition general reserve. The above solution is given on the basis that Hockey Ltd. allotted bonus shares out of pre-acquisition general reserve.
Question 11
The Balance Sheet of Golden and Silver Limited as on 31.3.2006 are given below:
Liabilities Golden
Ltd. (Rs.) Silver Ltd.(Rs.) Assets Golden Ltd. (Rs.) Silver
Ltd. (Rs.)
Equity share capital
2,40,000
2,40,000 Fixed assets 88,000 1,68,000
General reserve 40,000 32,000 Investment 1,80,000 10,000
Profit and Loss account
24,000
39,000 Sundry debtors 12,000 30,000
Bills payable 4,000 10,000 Bills receivable 8,000 32,000
Sundry creditors 8,000 15,000 Stock in trade 20,000 80,000
Cash at bank 8,000 16,000
3,16,000 3,36,000 3,16,000 3,36,000
Note: Contingent liability of Golden Ltd.: Bills discounted not yet matured at Rs.5,000.
Additional information:
(i) On 1.10.2003, Golden Ltd. acquired 16,000 shares of Rs.10 each at the rate of Rs.11 per share.
(ii) Balances to General reserve and Profit and Loss account of Silver Ltd. stood on 1.4.2003 at Rs.60,000 and Rs.32,000 respectively.
(iii) Dividends have been paid @ 10% for each of the years 2003-04 and 2004-05. Dividend for the year 2003-04 was paid out of the pre-acquisition profits. No dividend has been proposed for the year 2005-06 as yet and no provision need to be made in consolidated Balance Sheet. Golden Ltd. has credited all dividends received to profit and Loss account.
(iv) On 1.3.2006, bonus shares were issued by Silver Ltd. at the rate of one fully paid share for every five held and effect has been given to that in the above accounts. The bonus was declared from general reserves from out of profits earned prior to 1.4.2003.
(v) On 1.10.2003, Fixed assets was revalued at Rs.2,16,000, but no adjustment had been made in the books.
(vi) Depreciation had been charged @ 10% p.a. on the book value as on 1.4.2003 (on straight line method), there being no addition or sale since then.
(vii) Out of Current profits Rs.4,000 have been transferred to General reserve every year.
(viii) Bills receivable of Golden Ltd. include Rs.4,000 bills accepted by Silver Ltd. Bills discounted by Golden Ltd., but not yet matured include Rs.3,000 accepted by Silver Ltd.
(ix) Sundry creditors of Golden Ltd. include Rs.4,000 due to Silver Ltd. Sundry debtors of Silver Ltd. include Rs.8,000 due from Golden Ltd.
(x) It is found that Golden Ltd. has remitted a cheque of Rs.4,000, which has not yet been received by Silver Ltd.
Prepare consolidated Balance Sheet as at 31.3.2006 of Golden Ltd. and its Subsidiary.
(16 Marks) (Nov. 2006)
Answer
Golden Ltd and its Subsidiary Silver Ltd.
Consolidated Balance Sheet
as on 31st March, 2006
Liabilities Amount
Rs. Assets Amount
Rs.
Share capital 2,40,000 Fixed Assets 88,000
(24,000 shares of Rs.10 each) (1,68,000-12,000+3,000) 1,59,000 2,47,000
Minority Interests 60,400
Capital Reserve
General Reserve 53,200
48,000 Investment (4,000*+10,000) 14,000
Consolidated P&L Account
28,400 Debtors (12,000+30,000-4,000)
38,000
Bills Payable 14,000 Less: Mutual Debts 4,000 34,000
Less: Mutual indebtedness 4,000 10,000 Bills Receivable
Less: Mutual Debts 40,000
4,000
36,000
Sundry creditors
Less: Mutual 23,000 Stock (20,000+80,000)
Remittance in Transit 1,00,000
4,000
indebtedness 4,000 19,000
Cash at Bank (8,000+16,000)
24,000
4,59,000 4,59,000
Note: Contingent Liability of Bills discounted not yet matured for payment Rs.2,000.
Working Notes:-
(i) Interest of Golden Ltd in Silver Ltd. Rs.
Share capital of Silver Ltd. on 31.3.2006 2,40,000
Less: Issue of Bonus Shares

40,000
Share capital before Bonus issue 2,00,000
No. of Equity Shares before Bonus issue
20,000
No. of shares held by Golden Ltd. 16,000
Interest of Golden Ltd. in Silver Ltd
80%
Minority shareholders’ Interest 20%
(ii) Analysis of Profit of Silver Ltd.
Capital Profit Revenue Reserve Revenue Profit
Rs. Rs. Rs. Rs.
General Reserve on 31.3.2006 (After Bonus issue)
32,000
Add: Bonus issue 40,000
Balance (before bonus issue) 72,000
General Reserve on 1.4.2003 60,000
Less: Bonus issue 40,000 20,000
Increase in General Reserve (Transfer of Rs.4000 p.a. for 3 years)
(72,000 – 60,000) 12,000 2,000 10,000
Profit and Loss Account
Increase in Profit after Dividend
39,000 – 12,000 = 27,000* 4,500 22,500
Additional depreciation written back due to revaluation of fixed assets






3,000



26,500 10,000 25,500
Share of Golden Ltd. (80%) 21,200 8,000 20,400
Share of Minority Shareholders (20%) 5,300 2,000 5,100
26,500 10,000 25,500


(iii) Loss on Revaluation has been calculated as follows:
Rs.
Value of Assets on 1.4.2003 (1,68,000 ´ )
2,40,000
Less : Depreciation for 6 months (2,40,000´ )
12,000
Valuation of Assets on 1.10.2003 2,28,000
Less: Re-valued value of Assets 2,16,000
Loss on Revaluation 12,000
(iv) Cost of Control
Rs.
Cost of Investment in Silver Ltd. 1,76,000
Less: Dividend out of capital profit 16,000
Less: Paid up value of investment (including Bonus Shares)
(1,60,000 + 1,60,000x )
1,92,000
Less: Capital Profit 21,200 2,29,200
Capital Reserve 53,200
(v) Minority Interest
Paid-up share capital (Including Bonus Shares)


48,000
Add: Share in Capital Profit 5,300
Share in Revenue Reserve 2,000
Share in Revenue Profit 5,100 12,400
60,400

(vi) General Reserve
Balance in Golden Ltd. 40,000
Add: Share in Silver Ltd. 8,000
48,000
(vii) Consolidated Profit and Loss Account
Balance in Golden Ltd. 24,000
Less:Dividend credited out of Pre-acquisition Profit (Capital Profit)
16,000
8,000
Add: Share in Profit of Silver Ltd. 20,400
28,400
Question 12
X Ltd. purchases its raw materials from Y Ltd. and sells goods to Z Ltd. In order to ensure regular supply of raw materials and patronage for finished goods, X Ltd. through its wholly owned subsidiary, X Investments Ltd. acquires on 31st December, 1996, 51% of equity capital of Y Ltd. for Rs. 15 crores and 76% of equity capital of Z Ltd. for Rs.30 crores. X Investments Ltd. was floated by X Ltd. in 1990 from which date it was wholly owned by X Ltd.
The following are the Balance Sheets of the four companies as on 31st December, 1996:
X Ltd. X Investments Ltd. Y Ltd. Z Ltd.
(Rs. in crores) Rs. Rs. Rs. Rs.
Share Capital:
Equity (Fully paid) Rs. 10 each 25 5 10 15
Reserves and Surplus 75 100 20 25 15 25 20 35
Loan Funds:
Secured 15  5 20
Unsecured 10 25 50 50 10 15 15 35
Total Sources 125 75 40 70
Fixed Assets:
Cost 60  15 30
Less: Depreciation 35 25 
 7 8 17 13
Investments at cost in fully paid Equity Shares of:
X Investments Ltd. 5   
Y Ltd.  15  
Z Ltd.  30  
Other Companies
(Market Value Rs. 116 Cr.)  29  
Net Current Assets:
Current Assets 105 1 96 200
Current Liabilities 10 95  1 64 32 143 57
125 75 40 70
There are no intercompany transactions outstanding between the companies.
You are asked to prepare consolidated balance sheet as at 31st December, 1996 in vertical form. Also comment on the group balance sheet with the help of various ratios. Show your workings. (15 marks)(May, 1997)
Answer
Consolidated Balance Sheet of X Ltd. and its subsidiaries
X Investments Ltd., Y Ltd. and Z Ltd.
as at 31st December, 1996
(Rs. in crores)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital 25.00
(b) Reserves and surplus 95.00
120.00
(2) Minority interest in:
(a) Y Ltd. 12.25
(b) Z Ltd. 8.40

20.65
(3) Loan funds:
(a) Secured loans 40.00
(b) Unsecured loans 85.00

125.00
TOTAL 265.65
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Goodwill on consolidation of:
Y Ltd. 2.25
Z Ltd. 3.40
5.65
(b) Others:
Gross block 105.00
Less: Depreciation 59.00
46.00
51.65
(2) Investments at cost 29.00
(in equity shares of other companies – Market value Rs. 116 crores)
(3) Current assets 402.00
Less: Current liabilities 217.00
Net current assets 185.00
TOTAL 265.65

Ratios:
1. (a)


45.17% of total funds are financed out of proprietors' funds.
(b)

47.05% of total funds are borrowed from lenders.
(c) Minority interest in subsidiaries
Y Ltd.

Z Ltd.

Combined

Minority shareholders of subsidiaries have financed 7.78% of total funds.

Note: Current liabilities have been excluded from total group funds so as to compute ratios to judge long-term position of the group as a whole.

2. Fixed assets: Total net assets =

Fixed assets account for 19.44% of total funds deployed.

3. Investments : Total net assets =

Investments account for 10.92% of total funds deployed.

4. Net current assets: Total net assets =

Net current assets account for 69.64% of total funds deployed.

5. Current ratio=
= 1.85 : 1
Current assets are 1.85 times the current liabilities.
Working Notes:
(A) X Investments Ltd.
(Rs. in crores)
(1) Analysis of Profits and Share Capital:
Capital Profit Revenue Profit Share Capital
(i) Y Ltd. 15.00  10.00
Minority Interest (49%) 7.35 
4.90
Share of X Investments Ltd. 7.65 
5.10
(ii) Z Ltd. 20.00  15.00
Minority Interest (24%) 4.80 
3.60
Share of X Investments Ltd. 15.20 
11.40
(2) Cost of Control: Y Ltd. Z Ltd.
Cost of investments 15.00 30.00
Less: Paid up value of shares 5.10 11.40
Capital profits 7.65 15.20
12.75 26.60
Goodwill on consolidation 2.25 3.40
(3) Minority interest Y Ltd. Z Ltd.
Share Capital 4.90 3.60
Capital Profits 7.35 4.80
Revenue Profits 


12.25 8.40

(4) Group Balance Sheet of X Investments Ltd. and its subsidiaries
Y Ltd. and Z Ltd.
as at 31st December, 1996
(Rs. in crores)
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital 5.00
(b) Reserves and surplus 20.00
25.00
(2) Minority interest in:
(a) Y Ltd. 12.25
(b) Z Ltd. 8.40

20.65
(3) Loan funds:
(a) Secured loans 25.00
(b) Unsecured loans 75.00

100.00
TOTAL 145.65
II APPLICATION OF FUNDS
(1) Fixed assets:
(a) Goodwill on consolidation of:
Y Ltd. 2.25
Z Ltd. 3.40
5.65
(b) Others:
Gross block 45.00
Less: Depreciation 24.00
21.00
26.65
(2) Investments at cost 29.00
(Market value Rs. 116 crores)
(3) Current assets 297.00
Less: Current liabilities 207.00
Net current assets 90.00
TOTAL 145.65

(B) X Ltd.
(i) Analysis of Profits of X Investments Ltd.:
Capital Profit Revenue Profit
Reserves and Surplus  20
Minority Interest  
(X Investments Ltd. being wholly owned subsidiary of X Ltd.)
(ii) Minority Interest in X Investments Ltd.  
(iii) Cost of Control:
Cost of investments in X Investments Ltd. 5
Less: Paid-up value of shares held in X Investments Ltd. by X Ltd.
5
Capital Profit 
5
Cost of Control 

Question 13
From the following Balance Sheets of a group of companies and the other information provided, draw up the consolidated Balance Sheet as on 31.3.1998. Figures given are in Rupees Lakhs:
Balance Sheets as on 31.3.1998
X Y Z X Y Z
Shares capital (in shares of Rs. 10 each)
300
200
100 Fixed Assets less depreciation 130 150 100
Reserves 50 40 30 Cost of investment in Y Ltd. 180  
Profit and loss balance 60 50 40 Cost of investment in Z Ltd. 40  
Bills payables 10  5 Cost of investment in Z Ltd.  80 
Creditors 30 10 10 Stock 50 20 20
Y Ltd. balance   15 Debtors 70 10 20
Z Ltd. balance 50   Bills receivables  10 20
Z Ltd. balance  10 
X Ltd. balance   30
¬___ ¬___ ¬___ Cash and bank balance 30 20 10
500 300 200 500 300 200
• X Ltd. holds 1,60,000 shares and 30,000 shares respectively in Y Ltd. and Z Ltd.; Y Ltd. holds 60,000 shares in Z Ltd. These investments were made on 1.7.1997 on which date the provision was as follows:
Y Ltd. Z Ltd.
Reserves 20 10
Profit and loss account 30 16

• In December, 1997 Y Ltd. invoiced goods to X Ltd. for Rs. 40 lakhs at cost plus 25%. The closing stock of X Ltd. includes such goods valued at Rs. 5 lakhs.
• Z Ltd. sold to Y Ltd. an equipment costing Rs. 24 lakhs at a profit of 25% on selling price on 1.1.1998. Depreciation at 10% per annum was provided by Y Ltd. on this equipment.
• Bills payables of Z Ltd. represent acceptances given to Y Ltd. out of which Y Ltd. had discounted bills worth Rs. 3 lakhs.
• Debtors of X Ltd. Include Rs. 5 lakhs being the amount due from Y Ltd.
• X Ltd. proposes dividend at 10%. (20 marks)(May 1998)
Answer
Consolidated Balance Sheet of X Ltd.
and its subsidiaries Y Ltd. and Z Ltd.
as at 31st March, 1998
(Rs. in lakhs)
Liabilities Amount Assets Amount
Share capital 300.00 Fixed Assets
Minority Interest X Ltd. 130.00
Y Ltd. 63.08 Y Ltd. 150.00
Z Ltd. 16.22 79.30 Z Ltd. 100.00
Capital Reserve 13.40 380.00
Less: Unrealised profit 7.80 372.20
Other Reserves 81.60 Stock
Profit and Loss Account 56.90 X Ltd. 50.00
Bills Payables Y Ltd. 20.00
X Ltd. 10.00 Z Ltd. 20.00
Y Ltd. 5.00 90.00
15.00 Less: Unrealised profit 1.00 89.00
Less: Mutual indebtedness
2.00
13.00 Debtors
X Ltd. 70.00
Creditors Y Ltd. 10.00
X Ltd. 30.00 Z Ltd. 20.00
Y Ltd. 10.00 100.00
Z Ltd. 10.00 Less: Mutual indebtedness
5.00
95.00
50.00 Cash and Bank Balances 60.00
Less: Mutual indebtedness
5.00
45.00 Bills Receivables
Y Ltd.
10.00
Current Account Balances Z Ltd. 20.00
30.00
X Ltd. 50.00 Less: Mutual indebtedness
2.00
28.00
Z Ltd. 15.00
65.00
Less: Mutual indebtedness (10+ 30)
40.00
25.00
Proposed Dividend 30.00 ¬______
644.20 644.20
Working Notes:
(Rs. in lakhs)
(1) Analysis of Profits of Z Ltd. Capital Profit Revenue Reserve Revenue profit
Reserves on 1.7.1997 10.00
Profit and Loss A/c on 1.7.1997 16.00
Increase in Reserves 20.00
Increase in Profit ¬_____ ¬_____ 24.00
26.00 20.00 24.00
Less: Minority Interest (10%) 2.60 2.00 2.40
23.40 18.00 21.60
Share of X Ltd. 7.80 6.00 7.20
Share of Y Ltd. 15.60 12.00 14.40

(2) Analysis of Profits of Y Ltd.
Reserves on 1.7.1997 20.00
Profit and Loss A/c on 1.7.1997 30.00
Increase in Reserves 20.00
Increase in Profit ¬_____ ¬_____ 20.00
50.00 20.00 20.00
Share in Z Ltd. ¬_____ 12.00 14.40
50.00 32.00 34.40
Less: Minority Interest (20%) 10.00 6.40 6.88
Share of X Ltd. 40.00 25.60 27.52
(3) Cost of Control
Investments in Y Ltd. 180.00
Investments in Z Ltd. 120.00
300.00
Less: Paid up value of investments
in Y Ltd. 160.00
in Z Ltd. 90.00 250.00
Capital Profit
in Y Ltd. 40.00
in Z Ltd. 23.40 63.40 313.40
Capital Reserve 13.40
(4) Minority Interest Y Ltd. Z Ltd.
Share Capital 40.00 10.00
Capital Profit 10.00 2.60
Revenue Reserves 6.40 2.00
Revenue Profits 6.88 2.40
63.28 17.00
Less: Unrealised profit on stock (20% of 1) .20
Unrealised profit on equipment (10% of 7.8) ¬_____ .78
63.08 16.22
(5) Unrealised Profit on equipment sale
Cost 24.00
Profit 8.00
Selling Price 32.00
Unrealised profit = 8 – 8 = 8.00 – 0.20 = 7.80

(6) Profit and Loss Account – X Ltd.
Balance 60.00
Less: Proposed Dividend 30.00
30.00
Share in Y Ltd. 27.52
Share in Z Ltd. 7.20
64.72
Less: Unrealised profit on equipment (90% of 7.8) 7.02
57.70
Less: Unrealised profit on stock

.80

56.90
(7) Reserves – X Ltd.
X Ltd. 50.00
Share in Y Ltd. 25.60
Share in Z Ltd. 6.00
81.60
Question 14
Following are the Balance Sheets of Mumbai Limited, Delhi Limited, Amritsar Limited and Kanpur Limited as at 31st December, 2000 :
Liabilities Mumbai Delhi Amritsar Kanpur
Ltd. Ltd. Ltd. Ltd.
Share Capital (Rs. 100 face value) 50,00,000 40,00,000 20,00,000 60,00,000
General Reserve 20,00,000 4,00,000 2,50,000 10,00,000
Profit & Loss Account 10,00,000 4,00,000 2,50,000 3,20,000
Sundry Creditors 3,00,000 1,00,000 50,000 80,000
83,00,000 49,00,000 25,50,000 74,00,000
Assets
Investments :
30,000 shares in Delhi Ltd. 35,00,000 — — —
10,000 shares in Amritsar Ltd 11,00,000 — — —
5,000 shares in Amritsar Ltd. — 5,00,000 — —
Shares in Kanpur Ltd. @ Rs. 120 36,00,000 18,00,000 6,00,000 —
Fixed Assets — 20,00,000 15,00,000 70,00,000
Current Assets 1,00,000 6,00,000 4,50,000 4,00,000
83,00,000 49,00,000 25,50,000 74,00,000

Balance in General Reserve Account and Profit & Loss Account, when shares were purchased in different companies were :

Mumbai Delhi Amritsar Kanpur
Ltd. Ltd. Ltd. Ltd.
General Reserve Account 10,00,000 2,00,000 1,00,000 6,00,000
Profit & Loss Account 6,00,000 2,00,000 50,000 60,000
Required :
Prepare the consolidated Balance Sheet of the group as at 31st December, 2000 (Calculations may be rounded off to the nearest rupee). (16 marks) (May, 2001)
Answer
Consolidated Balance Sheet of Mumbai Ltd. and
its subsidiaries Delhi Ltd., Amritsar Ltd. and Kanpur Ltd.
As at 31st December, 2000
Liabilities Rs. Assets Rs.
Share Capital 50,00,000.00 Goodwill 6,37,500.00
(Fully paid shares of Rs. 100 each) Fixed Assets 105,00,000.00
Minority Interest 31,25,312.50 Current Assets 15,50,000.00
General Reserve 25,51,041.67
Profit and Loss Account 14,81,145.83
Sundry Creditors 5,30,000.00
1,26,87,500.00 1,26,87,500.00

Working Notes :
(i) Analysis of profits of Kanpur Ltd.
Capital Revenue Revenue
Profit Reserve Profit
Rs. Rs. Rs.
General Reserve on the date
of purchase of shares 6,00,000.00
Profit and Loss A/c on the date of
purchase of shares 60,000.00
Increase in General Reserve 4,00,000.00
Increase in profit 2,60,000.00
6,60,000.00 4,00,000.00 2,60,000.00
Less : Minority Interest (1/6) 1,10,000.00 66,666.67 43,333.33
5,50,000.00 3,33,333.33 2,16,666.67
Share of Mumbai Ltd. (1/2) 3,30,000.00 2,00,000.00 1,30,000.00
Share of Delhi Ltd. (1/4) 1,65,000.00 1,00,000.00 65,000.00
Share of Amritsar Ltd. (1/12) 55,000.00 33,333.33 21,666.67

(ii) Analysis of profits of Amritsar Ltd.
Capital Revenue Revenue
Profit Reserve Profit
Rs. Rs. Rs.
General Reserve on the date
of purchase of shares 1,00,000.00
Profit and Loss A/c on the date of
purchase of shares 50,000.00
Increase in General Reserve 1,50,000.00
Increase in Profit and Loss A/c 2,00,000.00
Share in Kanpur Ltd. 33,333.33 21,666.67
1,50,000.00 1,83,333.33 2,21,666.67
Less : Minority Interest (1/4) 37,500.00 45,833.33 55,416.67
1,12,500.00 1,37,500.00 1,66,250.00

Share of Mumbai Ltd. (1/2) 75,000 91,666.67 1,10,833.33
Share of Delhi Ltd. (1/4) 37,500 45,833.33 55,416.67
(iii) Analysis of profits of Delhi Ltd.
Capital Revenue Revenue
Profit Reserve Profit
Rs. Rs. Rs.
General Reserve on the date
of purchase of shares 2,00,000.00
Profit and Loss A/c on the date of
purchase of shares 2,00,000.00
Increase in General Reserve 2,00,000.00
Increase in Profit and Loss A/c 2,00,000.00
Share in Kanpur Ltd. 1,00,000.00 65,000.00
Share in Amritsar Ltd. 45,833.33 55,416.67
4,00,000.00 3,45,833.33 3,20,416.67
Less : Minority Interest (1/4) 1,00,000.00 86,458.33 80,104.17
Share of Mumbai Ltd. (3/4) 3,00,000.00 2,59,375.00 2,40,312.50
(iv) Cost of control
Investments in Rs.
Delhi Ltd. 35,00,000
Amritsar Ltd. 16,00,000
Kanpur Ltd. 60,00,000
1,11,00,000
Paid up value of investments in
Delhi Ltd. 30,00,000
Amritsar Ltd. 15,00,000
Kanpur Ltd. 50,00,000
Capital profits in (95,00,000)
Delhi Ltd. 3,00,000
Amritsar Ltd. 1,12,500
Kanpur Ltd. 5,50,000 (9,62,500)
Goodwill 6,37,500

(v) Minority interest
Share Capital :
Delhi Ltd. (1/4) 10,00,000.00
Amritsar Ltd. (1/4) 5,00,000.00
Kanpur Ltd (1/6) 10,00,000.00 25,00,000.00

Share in profits & reserves
(Pre and Post-Acquisitions)
Delhi Ltd. 2,66,562.50
Amritsar Ltd. 1,38,750.00
Kanpur Ltd. 2,20,000.00 6,25,312.50
31,25,312.50
(vi) General Reserve — Mumbai Ltd.
Balance as on 31.12.2000 (given) 20,00,000.00
Share in
Delhi Ltd. 2,59,375.00
Amritsar Ltd. 91,666.67
Kanpur Ltd. 2,00,000.00
25,51,041.67
(vii) Profit and Loss Account — Mumbai Ltd.
Balance as on 31.12.2000 (given) 10,00,000.00
Share in
Delhi Ltd. 2,40,312.50
Amritsar Ltd. 1,10,833.33
Kanpur Ltd. 1,30,000.00
14,81,145.83


Question 15
A Limited is a holding company and B Limited and C Limited are subsidiaries of A Limited. Their Balance Sheets as on 31.12.2000 are given below:
A Ltd. B Ltd. C Ltd. A Ltd. B Ltd. C Ltd.
Rs. Rs. Rs. Rs. Rs. Rs.
Share Capital 1,00,000 1,00,000 60,000 Fixed Assets 20,000 60,000 43,000
Reserves 48,000 10,000 9,000 Investments
Profit & Loss Account
16,000
12,000
9,000 Shares in B Ltd. 95,000
C Ltd. Balance 3,000 Shares in C Ltd. 13,000 53,000
Sundry Creditors 7,000 5,000 Stock in Trade 12,000
A Ltd. Balance 7,000 B Ltd. Balance 8,000
Sundry Debtors 26,000 21,000 32,000
¬_______ ¬_______ _____ A Ltd. Balance ¬_______ _______ 3,000
1,74,000 1,34,000 78,000 1,74,000 1,34,000 78,000

The following particulars are given:
(i) The Share Capital of all companies is divided into shares of Rs. 10 each.
(ii) A Ltd. held 8,000 shares of B Ltd. and 1,000 shares of C Ltd.
(iii) B Ltd. held 4,000 shares of C Ltd.
(iv) All these investments were made on 30.6.2000.
(v) On 31.12.1999, the position was as shown below:
B Ltd. C Ltd.
Rs. Rs.
Reserve 8,000 7,500
Profit & Loss Account 4,000 3,000
Sundry Creditors 5,000 1,000
Fixed Assets 60,000 43,000
Stock in Trade 4,000 35,500
Sundry Debtors 48,000 33,000

(vi) 10% dividend is proposed by each company.
(vii) The whole of stock in trade of B Ltd. as on 30.6.2000 (Rs. 4,000) was later sold to A Ltd. for Rs. 4,400 and remained unsold by A Ltd. as on 31.12.2000.
(viii) Cash-in-transit from B Ltd. to A Ltd. was Rs. 1,000 as at the close of business.
You are required to prepare the Consolidated Balance Sheet of the group as on 31.12.2000. (16 marks)(May, 2002)

Answer
Consolidated Balance Sheet of A Ltd.
and its subsidiaries B Ltd. and C Ltd.
as on 31st December, 2000
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital 1,00,000 Goodwill 5,525
Minority Interest 37,820 Fixed Assets 1,23,000
Reserves 49,325 Stock in Trade 12,000
Profit & Loss Account 10,980 Less: Provision for
Sundry Creditors
Proposed Dividend 12,000
10,000 unrealised profit
Sundry Debtors 400 11,600
79,000

¬_______ Cash in Transit
(8,000  7,000)
1,000
2,20,125 2,20,125

Working Notes:
(1) Position on 30.06.2000
Reserves Profit and Loss Account
B Ltd. Rs. Rs.
Balance on 31.12.2000 10,000 12,000
Less: Balance on 31.12.1999 8,000 4,000
Increase during the year 2,000 8,000
Estimated increase for half year 1,000 4,000
Balance on 30.06.2000 9,000 (8,000 + 1,000) 8,000 (4,000 + 4,000)
C Ltd.
Balance on 31.12.2000 9,000 9,000
Balance on 31.12.1999 7,500 3,000
Increase during the year 1,500 6,000
Estimated increase for half year 750 3,000
Balance on 30.06.2000 8,250 (7,500 + 750) 6,000 (3,000 + 3,000)
(2) Analysis of Profits of C Ltd.
Capital Profit Revenue Reserve Revenue profit
Rs. Rs. Rs.
Reserves on 30.6.2000 8,250
Profit and Loss A/c on 30.6.2000 6,000
Increase in reserves 750
Increase in profit ¬______ ¬_____ 3,000
14,250 750 3,000
Less: Minority interest (1/6) 2,375 125 500
11,875 625 2,500
Share of A Ltd. (1/6) 2,375 125 500
Share of B Ltd. (4/6) 9,500 500 2,000

(3) Analysis of Profits of B Ltd.
Capital Profit Revenue Reserve Revenue profit
Rs. Rs. Rs.
Reserves on 30.6.2000 9,000
Profit and Loss A/c on 30.6.2000 8,000
Increase in reserves 1,000
Increase in profit 4,000
Share in C Ltd. ¬_____ ¬500 2,000
17,000 1,500 6,000
Less: Minority interest (2/10) 3,400 300 1,200
Share of A Ltd. (8/10) 13,600 1,200 4,800

(4) Cost of control
Rs. Rs.
Investments in
B Ltd. 95,000
C Ltd. 66,000
1,61,000
Paid up value of investments in
B Ltd. 80,000
C Ltd. 50,000
(1,30,000)
Capital profits in
B Ltd. 13,600
C Ltd. 11,875
(25,475)
Goodwill 5,525
(5) Minority Interest Rs. Rs.
Share Capital:
B Ltd. 20,000
C Ltd. 10,000 30,000
Share in profits and reserves
(Pre and Post-Acquisitions)
B Ltd. 4,900
C Ltd. 3,000 7,900
37,900
Less: Provision for unrealized profit
(20% of Rs. 400)
80
37,820

(6) Reserves – A Ltd. Rs.
Balance as on 31.12.2000 (given) 48,000
Share in
B Ltd. 1,200
C Ltd. 125
49,325
(7) Profit and Loss Account – A Ltd. Rs.
Balance as on 31.12.2000 (given) 16,000
Share in
B Ltd. 4,800
C Ltd. 500
21,300
Less: Proposed dividend (10% of Rs. 1,00,000) 10,000
Provision for unrealised profit on stock 320
80% of (Rs. 4,400 – Rs. 4,000) ______
10,980

Note: The above solution has been done by direct method. Alternatively, students may follow indirect method. In indirect method, the share in pre-acquisition profits of B Ltd. in C Ltd. amounting Rs. 9,500 will be included as capital profit while analysing the profits of B Ltd. and will not be considered for the purpose of cost of control. Thus, in this case, the amounts of goodwill and minority interest will increase by Rs. 1,900 (2/10 of Rs. 9,500). Goodwill and minority interest will be shown at Rs. 7,425 and Rs. 39,720 respectively in the consolidated balance sheet. Therefore, the total of the assets and liabilities side of the consolidated balance sheet will be Rs. 2,22,025.

Question 16
On 31st March, 2004 Bee Ltd. became the holding company of Cee Ltd. and Dee Ltd. by acquiring 450 lakhs fully paid shares in Cee Ltd. for Rs. 6,750 lakhs and 240 lakhs fully paid shares in Dee Ltd. for Rs. 2,160 lakhs. On that date, Cee Ltd. showed a balance of Rs. 2,550 lakhs in General Reserve and a credit balance of Rs. 900 lakhs in Profit and Loss Account. On the same date, Dee Ltd. showed a debit balance of Rs. 360 lakhs in Profit and Loss Account. While its Preliminary Expenses Account showed a balance of Rs. 30 lakhs.
After one year, on 31st March, 2005 the Balance Sheets of three companies stood as follows:
(All amounts in lakhs of Rupees)
Liabilities Bee Ltd. Cee Ltd. Dee Ltd.
Fully paid equity shares of Rs. 10 each 27,000 7,500 3,000
General Reserve 33,000 3,150 
Profit and Loss Account 9,000 1,200 750
15 lakh fully paid 9.5%
Debentures of Rs. 100 each   1,500
Loan from Cee Ltd.   75
Bills Payable   150
Sundry Creditors 14,100 2,700 930
83,100 14,550 6,405
(All amounts in lakhs of Rupees)
Assets Bee Ltd. Cee Ltd. Dee Ltd.
Machinery 39,000 7,500 2,100
Furniture and Fixtures 6,000 1,500 600
Investments:
450 lakhs shares in Cee Ltd. 6,750  
240 lakhs shares in Dee Ltd. 2,160  
3 lakhs debentures in Dee Ltd. 294  
Stocks 16,500 3,000 1,500
Sundry Debtors 9,000 1,350 1,290
Cash and Bank balances 3,201 1,050 900
Loan to Dee Ltd.  90 
Bills Receivable 195 60 
Preliminary Expenses 

15
83,100 14,550 6,405
The following points relating to the above mentioned Balance Sheets are to be noted:
(i) All the bills payable appearing in Dee Ltd.’s Balance Sheet were accepted in favour of Cee Ltd. out of which bills amounting to Rs. 75 lakhs were endorsed by Cee Ltd. in favour of Bee Ltd. and bills amounting to Rs. 45 lakhs had been discounted by Cee Ltd. with its bank.
(ii) On 29th March, 2005 Dee Ltd. remitted Rs. 15 lakhs by means of a cheque to Cee Ltd. to return part of the loan; Cee Ltd. received the cheque only after 31st March, 2005.
(iii) Stocks with Cee Ltd. includes goods purchased from Bee Ltd. for Rs. 200 lakhs. Bee Ltd. invoiced the goods at cost plus 25%.
(iv) In August, 2004 Cee Ltd. declared and distributed dividend @ 10% for the year ended 31st March, 2004. Bee Ltd. credited the dividend received to its Profit and Loss Account.
You are required to prepare a Consolidated Balance Sheet of Bee Ltd. and its subsidiaries Cee Ltd. and Dee Ltd. as at 31st March, 2005. (16 Marks) (Nov. 2005)
Answer
Consolidated Balance Sheet of Bee Ltd. and
its subsidiaries Cee Ltd. and Dee Ltd.
as at 31st March, 2005
Liabilities Rs. in lakhs Assets Rs. in lakhs
Share Capital Fixed Assets
Authorised ? Goodwill (W.N. 3) 246
Issued and subscribed Machinery 48,600
Fully paid equity shares of Rs. 10 each
27,000 Furniture and Fixtures
8,100
Minority interest (W.N. 2) 5,487 Current Assets, Loans
and Advances:
Reserves and Surplus (A) Current Assets
General Reserve (W.N. 4) 33,360 Stock 21,000
Profit and Loss A/c (W.N. 4) 10,040 Less: Unrealised profit 40 20,960
Secured Loans Sundry debtors 11,640
Debentures 1,200 Cash and bank balances 5,151
Current Liabilities Cash in transit 15
Acceptances 150 (B) Loan and Advances
Less: Mutual owing 105 45 Bills receivable 255
Sundry creditors 17,730 Less: Mutual owing (W.N.5) 105 150
94,862 94,862

Working Notes:
(1) Calculation of pre and post acquisition profits of subsidiaries:
Rs. in lakhs
Post-acquisition
Pre-acquisition capital profit General Reserve Profit/Loss A/c
Cee Ltd.
General Reserve (Cr.) 2,550 600
Profit and Loss A/c (Cr.) 900
() Dividend 750 150 ¬___ 1,050
2,700 600 1,050
Holding (60%) 1,620 360 630
Subsidiary (40%) 1,080 240 420

Rs. in lakhs
Post-acquisition
Pre-acquisition capital profit Preliminary expenses Profit / Loss A/c
Dee Ltd.
Profit and Loss A/c (Cr.) (360) 1,110
Preliminary expenses (Dr.) (30) 15 _____
() Dividend (390) 15 1,110
Holding (80%) (312) 12 888
Subsidiary (20%) (78) 3 222

(2) Minority Interest (Rs. in lakhs)
Cee Ltd.
Share capital 3,000
Capital profit 1,080
Revenue General Reserve 240
Profit/Loss 420 1,740 4,740



Dee Ltd.
Share capital 600
Capital profit (78)
Revenue profit (Cr.) 222
Add: Preliminary expenses written off 3 225 147 747
5,487

(3) Cost of Control (Rs. in lakhs)
Cee Ltd.
Investment 6,750
Less: Dividend received and wrongly
credited to Profit and Loss
450
6,300
Less: Paid-up share capital (60%) 4,500
Capital profit 1,620 6,120 180

Dee Ltd.
Investment in Shares 2,160
in debentures 294 2,454
Less: Paid-up share capital (80%) 2,400
Nominal value of debentures 300
Capital profit (312) 2,388 66
Goodwill 246

(4) Consolidated General Reserve and Profit and Loss Account
General Reserve Profit and Loss A/c
Bee Ltd. 33,000 9,000
Less: Wrong dividend credited 
450
33,000 8,550
Cee Ltd. 360 630
Dee Ltd. (888 + 12) 
900
33,360 10,080
Less: Unrealised profit on stock 
40
33,360 10,040

(5) Mutual owing regarding bills = Rs. (150 – 45) lakhs = Rs. 105 lakhs.
(6) Unrealised profit =
(7) Amount of dividend wrongly credited to Profit and Loss A/c = 60% of Rs. 750 lakhs
= Rs. 450 lakhs.
Question 17
The following are the Balance Sheets of Arun Ltd., Brown Ltd. and Crown Ltd. as at 31.12.2005:
Liabilities: Arun Ltd. Brown Ltd. Crown Ltd.
Rs. Rs. Rs.
Share Capital (Shares of Rs.100 each) 6,00,000 4,00,000 2,40,000
Reserves 80,000 40,000 30,000
Profit and Loss Account 2,00,000 1,20,000 1,00,000
Sundry Creditors 80,000 1,00,000 60,000
Arun Ltd. --
40,000 32,000
Total 9,60,000 7,00,000 4,62,000

Assets:
Arun Ltd. Brown Ltd. Crown Ltd.
Rs. Rs. Rs.
Goodwill 80,000 60,000 40,000
Fixed Assets 2,80,000 2,00,000 2,40,000
Shares in:
Brown Ltd. (3,000 Shares) 3,60,000 -- --
Crown Ltd. (400 Shares) 60,000 -- --
Crown Ltd. (1,400 Shares) -- 2,08,000 --
Due from: Brown Ltd. 48,000 -- --
Crown Ltd. 32,000 -- --
Current Assets 1,00,000 2,32,000 1,82,000
Total 9,60,000 7,00,000 4,62,000

(i) All shares were acquired on 1.7.2005.
(ii) On 1.1.2005 the balances to the various accounts were as under:
Particulars Arun Ltd. Brown Ltd. Crown Ltd.
Rs. Rs. Rs.
Reserves 40,000 40,000 20,000
Profit and Loss account 20,000 (Dr.) 20,000 12,000
(iii) During 2005, Profits accrued evenly.
(iv) In August, 2005, each company paid interim dividend of 10%. Arun Ltd. and Brown Ltd. have credited their profit and loss account with the dividends received.
(v) During 2005, Crown Ltd. sold an equipment costing Rs.40,000 to Brown Ltd. for Rs.48,000 and Brown Ltd. in turn sold the same to Arun Ltd. for Rs.52,000.
Prepare the consolidated Balance Sheet as at 31.12.2005 of Arun Ltd. and its subsidiaries.
(20 Marks) May, 2006)
Answer
Consolidated Balance Sheet of Arun Ltd. and its subsidiaries
as on 31.12.2005
Liabilities Rs. Assets Rs.
Share Capital (Shares of Rs. 100 each) 6,00,000 Goodwill ( W. N. 5) 1,81,000
Minority Interest (W. N. 4) 2,33,729 Fixed Assets 7,08,000
Reserves (W. N. 8) 83,021 Current Assets 5,14,000
Profit & Loss A/c (W. N. 8) 2,54,250 Cash in Transit (W. N. 7) 8,000
Sundry Creditors 2,40,000
14,11,000 14,11,000

Working Notes
1. Shareholding Pattern
In Brown Ltd.: Number of Shares %age of Holding
Arun Ltd. 3,000 75%
Minority Interest 1,000 25%
In Crown Ltd.:
Arun Ltd. 400 16.667%
Brown Ltd. 1,400 58.333%
Minority Interest 600 25%
2. Analysis of apportionment of profit in Crown Ltd.
(a) Calculation of Unrealized Profit in Equipment
Crown Ltd sold equipment to Brown Ltd. at a profit of Rs. 8,000 and this would be apportioned to
Rs.
Arun Ltd. 1,333
Brown Ltd. 4,667
Minority Interest 2,000
8,000
Brown Ltd sold the equipment to Arun Ltd. at a profit of Rs. 4,000. This would be apportioned to:
Rs.
Arun Ltd. 3,000
Minority Interest 1,000
4,000
The above amounts are to be deducted from the respective share of profits.
(b) Reserves
Rs.
Closing balance 30,000
Opening balance 20,000 Capital Profit
Current year Appropriation 10,000
Apportionment of Profit from 1.1.2005 to 30.6.2005 5,000 Capital Profit
Apportionment of Profit from 1.7.2005 to 31.12.2005 5,000 Revenue Reserve
(c) Profit and Loss Account
Closing balance 1,00,000
Opening balance 12,000 Capital Profit
Current year profits before interim dividend 1,12,000
Apportionment of Profit from 1.1.2005 to 30.6.2005 56,000
Less: Interim Dividend 24,000
32,000 Capital Profit
From 1.7.2005 to 31.12.2005 56,000 Revenue Profit

(d) Apportionment of profits of Crown Ltd.
Pre-Acquisition Post Acquisition
Capital Profit
Rs. Revenue Reserve
Rs. Revenue Profit
Rs.
Reserves 25,000 5,000 --
Profit & Loss Account 44,000 -- 56,000
69,000 5,000 56,000
Arun Ltd [16.667%] 11,500 833 9,333
Brown Ltd. [58.333%] 40,250 2,917 32,667
Minority Interest [25%] 17,250 1,250 14,000
3. Analysis of Profit of Brown Ltd
(a) Reserves
Rs.
Closing balance 40,000
Opening balance 40,000 (Capital Profit)
Current year Appropriation Nil
(b) Profit and Loss Account
Rs.
Closing balance 1,20,000
Opening balance (Dr.) 20,000
Current year Appropriation after interim dividend 1,40,000
Interim Dividend 40,000
Profit before Interim Dividend 1,80,000
Less: Dividend from Crown Ltd. 14,000
1,66,000
Apportionment of Profit from 1.1.2005 to 30.6.2005 83,000
Less: Interim Dividend 40,000
Capital profit 43,000
Apportionment of Profit from 1.7.2005 to 31.12.2005 (Revenue profit) 83,000

(c) Apportionment of Profit of Brown Ltd.
Pre-Acquisition Post-Acquisition
Capital Profit

Rs. Revenue
Reserve
Rs. Revenue
Profit
Rs.
Reserves 40,000 -- --
Profit & Loss Account
(Opening balance (-) 20,000+43,000)
23,000
83,000
Less: Unrealised Profit of Equipment
from Crown Ltd. (4,667)
Share of Post-Acquisition Profit of Crown Ltd. -- 2,917 32,667
63,000 2,917 1,11,000
Arun Ltd. 75% 47,250 2,188 83,250
Minority Interest 25% 15,750 729 27,750
4. Minority Interest
Brown Ltd.
Rs. Crown Ltd.
Rs.
Share Capital 1,00,000 60,000
Capital Profit 15,750 17,250
Revenue: Reserves 729 1,250
Profit & Loss Account 27,750 14,000
Unrealised Profit on Equipment (1,000) (2,000)
1,43,229 90,500
Total Minority Interest: Rs.1,43,229+ Rs.90,500 = Rs.2,33,729
5. Cost of Control
Arun Ltd. in Brown Ltd.
Rs. Arun Ltd. in Crown Ltd.
Rs. Brown Ltd in Crown Ltd.
Rs.
Amount Invested 3,60,000 60,000 2,08,000
Less: Pre-acquisition dividend 30,000 4,000 14,000
Adjusted Cost of Investment (A) 3,30,000 56,000 1,94,000
Share capital 3,00,000 40,000 1,40,000
Capital Profit 47,250 11,500 40,250
(B) 3,47,250 51,500 1,80,250
Capital Reserve/Goodwill (A)-(B) (17,250) 4,500 13,750
Net Goodwill Rs.1,000
Goodwill on Consolidation Rs. (80,000+ 60,000+40,000+1,000) = Rs.1,81,000
6. Dividend declared
Brown Ltd.
Rs. Crown Ltd.
Rs.
Dividend declared 40,000 24,000
Share of: Arun Ltd. 30,000 4,000
Brown Ltd. 14,000
Minority 10,000 6,000
7. Inter-Company Transactions
(a) Owings
Dr. Cr. Cr.
Arun Ltd.
Rs. Brown Ltd.
Rs. Crown Ltd.
Rs.
Balance in books 80,000 40,000 32,000
Less: Inter- co. owings 72,000 40,000 32,000
Cash-in-transit 8,000 NIL NIL
(b) Fixed Assets
Rs.
Total Fixed Assets 7,20,000
Less: Unrealised Profit on sale of equipment 12,000
Amount to be taken to consolidated Balance Sheet 7,08,000
8. Reserves and Profit and Loss Account balances in the Consolidated Balance Sheet
Reserves
Rs. Profit and Loss A/c
Rs.
Balance in Books 80,000 2,00,000
Add: Shares of Post Acquisition Profits:
From Brown Ltd. 2,188 83,250
From Crown Ltd 833 9,333
Less: Pre-Acquisition dividend:
From Brown Ltd. (30,000)
From Crown Ltd (4,000)
Less: Unrealised Profit on Equipment:
From Brown Ltd. (3,000)
From Crown Ltd. (1,333)
83,021 2,54,250



Question 18
The following information has been extracted from the Books of ‘X’ Limited group (as at 31st December, 2006):
X Ltd. Y Ltd. Z Ltd. X Ltd. Y Ltd. Z Ltd.
Rs. Rs. Rs. Rs. Rs. Rs.
Share capital Fixed Assets Less
(Fully paid equity shares of Rs.10 each)

8,00,000

6,00,000

4,00,000 Depreciation
Investment at Cost
Current 4,20,000

6,30,000
3,76,000

4,00,000
5,22,000

---
Profit and Loss Account 2,10,000 1,90,000 1,28,000 Assets 1,20,000 60,000 40,000
Dividend received:
From Y Ltd. in 2005 60,000
From Y Ltd. in 2006 60,000
From Z Ltd. in 2006 36,000
Current Liabilities
40,000
10,000
34,000



11,70,000 8,36,000 5,62,000 11,70,000 8,36,000 5,62,000
All the companies pay dividends of 12 percent of paid-up share capital in March following the end of the accounting year. The receiving companies account for the dividends in their books when they are received.
‘X’ Limited acquired 50,000 equity shares of Y Ltd. on 31st December, 2004.
’Y’ Limited acquired 30,000 equity shares of Z Ltd. on 31st December, 2005.
The detailed information of Profit and Loss Accounts is as follows:
X Ltd. Y Ltd. Z Ltd.
Rs. Rs. Rs.
Balance of Profit and Loss Account on 31st December, 2004 after dividends of 12% in respect of calendar year 2004, but excluding dividends received

86,000

78,000

60,000
Net profit earned in 2005 1,20,000 84,000 56,000
2,06,000 1,62,000 1,16,000
Less – Dividends of 12% (paid in 2006) 96,000 72,000 48,000
1,10,000 90,000 68,000
Net profit earned in 2006 (Before taking into account proposed dividends of 12% in respect of calendar year 2006)

1,00,000

1,00,000

60,000
2,10,000 1,90,000 1,28,000
Taking into account the transactions from 2004 to 2006 and ignoring taxation, you are required to prepare:
(i) The Consolidated Balance Sheet of X Limited group as at 31st December, 2006.
(ii) The Consolidated Profit and Loss Account for the year ending 31st December, 2006.
(iii) Cost of control.
(iv) Minority shareholders interest. (16 Marks)(May, 2007)
Answer
(i) Consolidated Balance Sheet of X Ltd. and its subsidiaries Y Ltd. and Z Ltd.
as on 31st December, 2006
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
80,000 Equity shares of Rs.10 each fully paid 8,00,000 Goodwill [Refer (iii)] 18,000
Minority Interest [Refer (iv)]
Reserves and Surplus: 2,47,167 Other Fixed Assets less depreciation 13,18,000
Profit and Loss Account [Refer (ii)] 3,04,833 Current Assets, Loans and Advances:
Current Liabilities and Provision: Current Assets 2,20,000
Current Liabilities 84,000
Proposed Dividend:
X Ltd. 96,000
Minority Interest [Refer (iv)] 24,000
15,56,000 15,56,000

(ii) Consolidated Profit and Loss Account
for the year ending 31st December, 2006 (in Rs.)
Particulars X Ltd. Y Ltd. Z Ltd. Adjust-
ments Total Particulars X Ltd. Y Ltd. Z Ltd. Adjust
ments Total
To Dividend (paid for 2005) 96,000 72,000 48,000 96,000 1,20,000 By Balance b/d 2,06,000 1,62,000 1,16,000 - 4,84,000
To Minority Interest - 39,167 32,000 - 71,167 By Dividend received in 2005 (for 2004) 60,000 - - - 60,000
To Capital Reserve (Cost of Control) - 65,000 51,000 - 1,16,000 By Dividend received in 2006 (for 2005) 60,000 36,000 - 96,000 -
To Investments Accounts By Profit for the year 1,00,000 1,00,000 60,000 - 2,60,000
(Dividend received out of capital profit) 60,000* 36,000* - - 96,000
To Proposed Dividend 96,000 - - - 96,000
To Balance c/d 1,74,000 85,833 45,000 - - 3,04,833
4,26,000 2,98,000 1,76,000 96,000 8,04,000 4,26,000 2,98,000 1,76,000 96,000 8,04,000
Notes:*
(1) X Ltd. receives from Y Ltd., dividend amounting to Rs.60,000 for the year 2004 in the year 2005 for shares acquired in 2004. It is a capital profit, therefore it has been transferred to cost of control to reduce the cost of investment.
(2) Y Ltd. receives a dividend of Rs.36,000 from Z Ltd. for the year 2005 in the year 2006. The shares were acquired by Y Ltd on 31st December, 2005. The entire amount is therefore, a capital profit and hence transferred to cost of control to reduce the cost of investment.
(iii) Cost of Control:
Rs. Rs.
Cost of Investment in Y Ltd. on 31st December 2004 6,30,000
Less: Dividend of the year 2004 received in 2005 out
of Pre-acquisition profit
60,000
5,70,000
Cost of Investment in Z Ltd. 4,00,000
Less: Dividend of the year 2005 received in 2006 out
of Pre-acquisition Profit
36,000
3,64,000
9,34,000
Less: Paid up value of shares in Y Ltd. 5,00,000
Paid up value of shares in Z Ltd. 3,00,000
Capital Profits in Y Ltd. (Refer W.N. 2) 65,000
Capital Profits in Z Ltd. (Refer W.N. 2) 51,000 9,16,000
Goodwill 18,000
(iv) Minority shareholders’ interest: Y Ltd.
Rs. Z Ltd.
Rs.
Share Capital (Y Ltd. – 1/6 and Z Ltd. – 1/4) 1,00,000 1,00,000
Capital Profits (Refer W.N. 2) 13,000 17,000
Revenue Profits (Refer W.N. 2) 26,167 15,000
1,39,167 1,32,000
Total (1,39,167 + 1,32,000) 2,71,167
Less: Minority shareholders’ share of proposed dividend
(shown separately in the Balance Sheet)
(
24,000
Balance 2,47,167
Working Notes:
1. Shareholding Pattern Number of shares share of holding
In Y Ltd.
X Ltd. 50,000 5/6
Minority Interest 10,000 1/6
In Z Ltd.
Y Ltd. 30,000 3/4
Minority Interest 10,000 1/4

2. Analysis of Profits Pre -acquisition Post - acquisition
Capital Profit Revenue Profit
Z Ltd. Rs Rs.
Balance on 31st December, 2005 after dividend for 2005 (1,16,000 – 48,000) 68,000 -
Profit for the year ending 31st December, 2006 before proposed dividends for 2006
-
60,000
68,000 60,000
Share of Y Ltd. (3/4) 51,000 45,000
Minority Interest (1/4) 17,000 15,000
Y Ltd.
Balance on 31st December, 2004 78,000 -
Profit for the year 2005 after payment of dividend for 2005 (84,000 – 72,000) - 12,000
Profit for the year 2006 (before payment of dividend of the year 2006) - 1,00,000
Revenue Profit from Z Ltd. - 45,000
78,000 1,57,000
Share of X Ltd. (5/6) 65,000 1,30,833
Share of Minority Shareholders’ Interest (1/6) 13,000 26,167

Note: This problem has been solved by following ‘direct approach’.
Question 19
The draft Balance Sheets of 3 Companies as at 31st March, 2007 are as below:
(In Rs.000’s)
Liabilities Morning Ltd. Evening Ltd. Night Ltd.
Share Capital – shares of Rs.100 each 40,000 20,000 10,000
Reserves 1,800 1,000 900
P/L A/c (1.4.06) 1,500 2,000 800
Profit for 2006-07 7,000 3,800 1,800
Loan from Morning Ltd.  5,000 -
Creditors 2,500 1,000 1,400
52,800 32,800 14,900
Assets
Investments:
1,60,000 shares in Evening 18,000  
75,000 shares in Night 8,000  
Loan to Evening Ltd. 5,000  
Sundry assets 21,800 32,800 14,900
52,800 32,800 14,900


Following additional information is also available:
(a) Dividend is proposed by each company at 10%.
(b) Stock transferred by Night Ltd. to Evening Ltd. fully paid for was Rs.8 lacs on which the former made a Profit of Rs.3 lacs. On 31st March, 2007, this was in the inventory of the latter.
(c) Loan referred to is against 8% interest. Neither Morning Ltd. nor Evening Ltd. has considered the interest.
(d) Reserves as on 1.4.2006 of Evening Ltd. and Night Ltd. were Rs.8,00,000 and Rs.7,50,000 respectively.
(e) Cash-in-transit from Evening Ltd. to Morning Ltd. was Rs.1,00,000 as on 31.3.2007.
(f) The shares of the subsidiaries were all acquired by Morning Ltd. on 1st April, 2006.
Prepare consolidated Balance Sheet as on 31st March, 2007. Workings should be part of the answer. (16 Marks) (Nov., 2007)
Answer
Consolidated Balance Sheet of Morning Ltd. with its subsidiaries Evening Ltd. and Night Ltd.
As on 31st March, 2007
(Rs. in thousand)
Liabilities Rs. Rs. Rs. Assets Rs. Rs. Rs.
Share Capital 40,000 Sundry Assets
Minority Interest Morning Ltd. 21,800
Evening Ltd. 4,880 Evening Ltd. 32,800
Night Ltd. 3,125 8,005 Less: Unrealized
profit
300
32,500
Capital Reserve [Refer Note 5] 902.5 Night Ltd. 14,900 69,200
General Reserve
Morning Ltd.
Evening Ltd. 1,800
160

Night Ltd. 112.5 2,072.5
Profit & Loss A/c
Balance on 1.04.06
1,500
Profit during 06-07 7,000
Add: Interest on
Loan
400
8,900
Less: Proposed
dividend
4,000
4,900
Add: P& L Account
of Evening Ltd.
2,720
Add: P& L Account
of Night Ltd
1,050
8,670
Creditors
Morning Ltd. 2,500
Evening Ltd. 1,000
Night Ltd 1,400 4,900

Proposed Dividend
Morning Ltd. 4,000
Evening Ltd. (Minority) 400
Night Ltd. (Minority) 250 4,650
69,200 69,200
Workings Notes:
A. Morning Ltd.’s holding in Evening Ltd. is 1,60,000 shares out of 2,00,000 shares, i.e., 4/5th or 80%; Minority holding 1/5th or 20%.
B. Morning Ltd.’s holding in Night Ltd. is 75,000 shares out of 1,00,000 shares, i.e., 3/4th or 75%; Minority holding 1/4th or 25%.
Analysis of Reserves and Profits of Subsidiary Companies
Evening Ltd. (Rs.’000) Night Ltd Rs.(‘000) Minority interest in Evening Ltd. (1/5) Rs.(‘000) Minority interest in Night Ltd. (1/4) Rs.(‘000)
1. Capital Reserve (pre-acquisition reserves and profits)
Reserves on 1.04.2006 800 750
Profit on 1.04.2006 2,000 800
2,800 1,550
Less: Minority interest 560 387.5 560 387.5
2,240 1,162.5
2. General Reserve
Reserves as per Balance Sheet 1,000 900
Less: Capital Reserve [See Note A] 800 750
200 150
Less: Minority interest 40 37.5 40 37.5
160 112.5
3. Profit and Loss Account
Profit for the year as per Balance Sheet 3,800 1,800
Less: Interest on Loan (5,000 x 8%) 400
3,400

Less: Minority Interest 680 450 680 450
2,720 1,350
Less: Unrealised profit on stock transfer 300
2,720 1,050
4. Share Capital
As per Balance sheet 20,000 10,000
Less: Minority interest 4,000 2,500 4,000 2,500
Transferred for computation of Goodwill/Capital Reserve
16,000
7,500
5,280
3,375
Less: Proposed dividend shown separately 400 250
Transferred to Consolidated Balance Sheet 4,880 3,125
5. Computation of Cost of Control i.e. Goodwill / Capital Reserve on consolidation
(Rs. In thousand)
Evening Ltd. Night Ltd.
Cost of Investments 18,000 8,000
Less: Paid up value of shares [Refer Note 4] 16,000 7,500
2,000 500
Less: Capital Reserve [Refer Note 1] 2,240 1,162.5
-240 -662.5
Total Capital Reserve (Rs.240 + Rs.662.5) 902.5
Question 20
Astha Ltd. acquired 80% of both classes of shares in Birat Ltd. on 1.4.2007. The draft Balance Sheets of two companies on 31st March, 2008 were as follows:
(Rs. in 000’s)
Liabilities Astha Ltd. Birat Ltd. Assets Astha Ltd. Birat
Ltd.
Share Capital:
Equity shares of Rs.10 each, full paid up 3,000 600 Plant & machinery 2,060 600
14% Preference shares of Rs.100 each, fully paid up - 400 Furniture & fixtures 600 540
General reserve 1,900 40 Investments
in equity shares of
Birat Ltd.

1,920

-
Profit and loss account 1,600 720 in preference shares
of Birat Ltd.
320
-
Creditors 300 320 Stock 680 404
Debtors 560 316
Cash at bank 660 220
6,800 2,080 6,800 2,080
Note:
Contingent liability – Astha Ltd.: Claim for damages lodged by a contractor against the company pending in a law-suit – Rs.1,55,000.
Additional Information:
(i) General reserve balance of Birat Ltd. was the same as on 1.4.2007.
(ii) The balance in Profit and Loss A/c of Birat Ltd. on 1.4.2007 was Rs.3,20,000, out of which dividend of 16% p.a. on the Equity capital of Rs.6,00,000 was paid for the year 2006-07.
(iii) The dividend in respect of preference shares of Birat Ltd. for the year 2007-08 was still payable as on 31.3.2008.
(iv) Astha Ltd. credited its Profit and Loss A/c for the dividend received by it from Birat Ltd. for the year 2006-07.
(v) Sundry creditors of Astha Ltd. included an amount of Rs.1,20,000 for purchases from Birat Ltd., on which the later company made a loss of Rs.10,000.
(vi) Half of the above goods were still with the closing stock of Astha Ltd. as at 31.3.2008.
(vii) At the time of acquisition by Astha Ltd., while determining the price to be paid for the shares in Birat Ltd. it was considered that the value of plant and machinery was to be increased by 25% and that of furniture and fixtures reduced to 80%. There was no transaction of purchase or sale of these assets during the year. The directors wish to give effect to these revaluations in the consolidated balance sheet.
(viii) The directors of Astha Ltd. are of opinion that disclosure of its contingent liability will seriously prejudice the company’s position in dispute with the contractor.
Prepare consolidated balance sheet as at 31st March, 2008, assuming the rate of depreciation charged as 25% p.a. and 10% p.a. on plant and machinery and furniture and fixtures respectively. Workings should be part of the answer. (16 Marks)(May, 2008)
Answer
Consolidated Balance Sheet of Astha Ltd. and its subsidiary Birat Ltd.
as at 31st March 2008
(Rs. in ‘000s)
Liabilities Amount Assets Amount
Share capital: Goodwill (W.N.5) 1,088.0
3,00,000 Equity shares of Plant and machinery
Rs. 10 each fully paid up 3,000.0 Astha Ltd. 2,060.0
Minority interest (W.N.4) 360.4 Birat Ltd. (W.N.7) 750.0 2,810.0
General reserves 1,900.0 Furniture and fixtures
Profit and loss A/c (W.N.6) 1,894.6 Astha Ltd. 600.0
Creditors Birat Ltd. (W.N. 8) 432.0 1,032.0
Astha Ltd. 300.0 Stock
Birat Ltd. 320.0 Astha Ltd. 680.0
620.0 Birat Ltd. 404.0
Less: Mutual owings 120.0 500.0 1,084.0
Add: Unrealised loss 5.0 1,089.0
Debtors
Astha Ltd. 560.0
Birat Ltd. 316.0
876.0
Less: Mutual owings 120.0 756.0
Cash at Bank
Astha Ltd. 660.0
Birat Ltd. 220.0 880.0
7,655.0 7,655.0
Contingent liability: Claim against damages lodged by a contractor against Astha Ltd. is pending in a law suit Rs. 155 thousands (W.N. 9).
Working Notes:
1. Calculation of capital profits (pre-acquisition) (Rs. in ‘000s)
General reserve balance as on 1-04-2007 40.0
Profit and loss account balance as on 1-04-2007 320.0
Less: Dividend at 16% p.a. on Rs. 6,00,000 for the year 2006-07 96.0 224.0
264.0
Add: Profit on revaluation of plant and machinery (W.N.7) 200.0
464.0
Less: Loss on revaluation of furniture and fixtures (W.N.8) 120.0
344.0
Share of Astha Ltd. (80%) 275.2
Share of Minority Interest (20%) 68.8
2. Calculation of revenue profits (post-acquisition) (Rs. in ‘000s)
Profits during the year 2007-08 (720.0 – 224.0) 496.0
Less: Preference dividend for the year 2007-08 @ 14% on Rs.4,00,000 56.0
440.0
Less: Under charging of depreciation on plant and machinery due to
upward revaluation (Rs.2,00,000 x 25%)
50.0
390.0
Add: Overcharging of depreciation on furniture and fixtures due to
downward revaluation (Rs.1,20,000 x 10%)
12.0
402.0
Share of Astha Ltd. (80%) 321.6
Share of Minority Interest (20%) 80.4

3. Calculation of dividend on preference shares of Birat Ltd. (Rs. in ‘000s)
Dividend on preference shares (Rs. 4,00,000 x 14%) 56.0
Share of Astha Ltd. (80%) 44.8
Share of Minority Interest (20%) 11.2
56.0


4. Calculation of Minority Interest (Rs. in ‘000s)
Equity share capital (20%) 120.0
Preference share capital (20%) 80.0
Share of capital profits (W.N. 1) 68.8
Share of Revenue profit (W.N.2) 80.4
Share of preference dividend (W.N.3) 11.2
360.4

5. Calculation of Cost of Control - Goodwill (Rs. in ‘000s)
Investment by Astha Ltd. in
Equity shares of Birat Ltd. 1,920.0
Less: Dividend received for 2006-07 (600 x 80% 16%) 76.8 1,843.2
Preference shares 320.0
2,163.2
Less: Paid up value of
Equity shares (80%) 480.0
Preference shares (80%) 320.0
Share in Capital Profit (W.N. 1) 275.2 1,075.2
Goodwill 1,088.0


6. Calculation of Consolidated Profit and Loss A/c (Rs. in ‘000s)
Balance in Profit and loss A/c of Astha Ltd. as on 1-04-2007 1,600.0
Add: Revenue profit from Birat Ltd (W.N. 2) 321.6
Preference dividend of Birat Ltd. (W.N. 3) 44.8
Share of unrealised loss on stock (Rs. 10,000 x 50%) 5.0
1,971.4
Less: Dividend wrongly credited 76.8
1,894.6

7. Value of Plant and Machinery of Birat Ltd. (Rs. in ‘000s)
Value as on 1.04.07 ( 600 x 100/75) 800.0
Add: Appreciation on revaluation (25%) 200.0
Revalued figure 1,000.00
Less: Depreciation
Already charged (800-600) 200.0
Due to upward revaluation (200 x 25%) 50.0 (250.0)
750.0

8.
Value of Furniture and Fixtures of Birat Ltd. (Rs. in ‘000s)
Value as on 1.4.2007 (540 x 100/90) 600.00
Less: Diminution on revaluation (20%) (120.00)
Revalued Figure 480.0
Less: Depreciation already charged (600 - 540) 60.0
Less: Depreciation written back due to downward revaluation
(120 x 10%) (12.0) (48.0)
432.0
9. Contingent liability:
As per para 68 of AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, “unless the possibility of any outflow in settlement is remote, an enterprise should disclose contingent liability at the balance sheet date along with a brief description of the nature of such contingent liability.” Therefore, it would not be correct to ignore the contingent liability.
Question 21
The Balance Sheets of three companies Angle Ltd., Bolt Ltd., and Canopy Ltd., as at 31st December, 2007 are given below:
Liabilities Angle Ltd. Bolt Ltd. Canopy Ltd.
Rs. Rs. Rs.
Share capital
(Equity shares of Rs.100 each) 15,00,000 10,00,000 6,00,000
Reserves 2,00,000 1,25,000 75,000
Profit and Loss A/c 5,00,000 2,75,000 2,50,000
Sundry creditors 2,00,000 2,50,000 1,00,000
Bills payable - - 50,000
Angle Ltd. - 1,00,000 80,000
24,00,000 17,50,000 11,55,000
Goodwill 2,50,000 5,80,000 4,50,000
Plant and Machinery 4,00,000 2,50,000 3,25,000
Furniture and Fittings 2,00,000 1,50,000 1,40,000
Shares in-
Bolt Ltd. (7,500 shares) 9,00,000 - -
Canopy Ltd. (1,000 shares) 1,50,000
Canopy Ltd. (3,500 shares) - 5,20,000 -
Stock in trade 1,00,000 1,50,000 1,60,000
Sundry debtors 1,40,000 70,000 70,000
Bills receivable 50,000 20,000 -
Due from-
Bolt Ltd. 1,20,000 - -
Canopy Ltd. 80,000 - -
Cash in hand 10,000 10,000 10,000
Total 24,00,000 17,50,000 11,55,000

(a) All shares were acquired on 1st July, 2006.
(b) On 1st January, 2006, the balances were:
Angle Ltd. Bolt Ltd. Canopy Ltd.
Rs. Rs. Rs.
Reserves 1,00,000 1,00,000 50,000
Profit and Loss account 50,000 (50,000)Dr. 30,000
Profit during 2006 were earned evenly over the year 3,00,000 2,50,000 1,00,000

(c) Each company declared a dividend of 10% in the year 2007 on its shares out of Profits for the year 2006; Angle Ltd. and Bolt Ltd. have credited their Profit and Loss account with the dividends received.
(d) The increase in reserves in case of Angle Ltd., Bolt Ltd., and Canopy Ltd., was effected in the year 2006.
(e) All the bills payable appearing in Canopy Ltd.’s Balance Sheet were accepted in favour of Bolt Ltd., out of which bills amounting Rs.30,000 were endorsed by Bolt Ltd., in favour of Angle Ltd.
(f) Stock with Bolt Ltd. includes goods purchased from Angle Ltd., for Rs.18,000. Angle Ltd., invoiced the goods at cost plus 20%.
Prepare consolidated Balance Sheet of the group as at 31st December, 2007. Working should be part of the answer. Ignore taxation including dividend distribution tax, disclose minority interest as per AS 21 . (20 Marks)

Answer
Consolidated Balance Sheet of Angle Ltd. and its subsidiaries
Bolt Ltd and Canopy Ltd
as at 31st December, 2007
Liabilities Rs. Assets Rs.
Share Capital
(Equity shares of Rs.100 each)
Minority Interest (W.N. 6)
Bolt Ltd.
Canopy Ltd.



3,97,396
2,31,250 15,00,000




6,28,646 Goodwill
Angle Ltd. 2,50,000
Bolt Ltd. 5,80,000
Canopy Ltd. 4,50,000
Add: Cost of control(W.N.7)


12,80,000

1,55,833




14,35,833
Reserves (2,00,000+14,844+2,083) 2,16,927 Plant & Machinery
Angle Ltd.
4,00,000
Profit and Loss Account (W.N.4) 7,62,260 Bolt Ltd.
Canopy Ltd. 2,50,000
3,25,000
9,75,000
Sundry Creditors Furniture & Fittings
Angle Ltd. 2,00,000
Bolt Ltd. 2,50,000
Canopy Ltd. 1,00,000 5,50,000 Angle Ltd.
Bolt Ltd.
Canopy Ltd. 2,00,000
1,50,000
1,40,000

4,90,000
Bills Payable 50,000 Stock-in-Trade
Less: Mutually held 50,000 Nil Angle Ltd. 1,00,000
Bolt Ltd. 1,50,000
Canopy Ltd. 1,60,000
4,10,000
Less: Provision for unrealised Profit
3,000
4,07,000
Sundry Debtors
Angle Ltd. 1,40,000
Bolt Ltd. 70,000
Canopy Ltd. 70,000 2,80,000
Bills Receivable
Angle Ltd. 50,000
Bolt Ltd. 20,000
70,000
Less: Mutually held 50,000 20,000
Cash-in-hand
Angle Ltd. 10,000
Bolt Ltd. 10,000
Canopy Ltd. 10,000 30,000



Cash-in-Transit / Dues from Bolt Ltd. (W.N. 8)


20,000
36,57,833 36,57,833
Disclosure of Minority Interest in accordance with AS 21
Amount of Equity attributable to minorities on the date of Investment ie. 1.7.2006
Bolt Ltd Canopy Ltd.
Share capital 2,50,000 1,50,000
Share in Capital Reserve as on 1.1.06 25,000 12,500
Share in Capital Profits as on 1.1.06 (12,500) 7,500
Share in Capital Profits for the period1.1.06 to 30.6.06 31,250 12,500
2,93,750 1,82,500
Total amount of Equity attributable to minorities 4,76,250
Disclosure in accordance with AS 21
Minority Interest as on 31.12.2007
Amount of equity as on the date of Investment ie. 1.7.2006 4,76,250
Add: Movement in equity and proportionate share of Profit less dividend from the date of Investment upto 31.12.07
1,52,396
6,28,646
Working Notes:
1. Ascertainment of Profits for the year 2007
Angle Ltd. Bolt Ltd. Canopy Ltd.
Rs. Rs. Rs.
Balance as on 1st January, 2006 50,000 (50,000) 30,000
Add: Profits earned during 2006 3,00,000 2,50,000 1,00,000
3,50,000 2,00,000 1,30,000
Less: Dividend Declared 1,50,000 1,00,000 60,000
2,00,000 1,00,000 70,000
Less: Transfer to Reserve 1,00,000 25,000 25,000
1,00,000 75,000 45,000
Profit for the year 2007 (Balancing Figure) 4,00,000 2,00,000 2,05,000
Balance as on 31st December, 2007 5,00,000 2,75,000 2,50,000
2. Undistributed profits for the year 2006
Bold Ltd. Canopy Ltd.
Rs. Rs.
Profits for the year 2006 2,50,000 1,00,000
Less: Dividends declared 1,00,000 60,000
1,50,000 40,000
Less: Transfer to Reserves 25,000 25,000
1,25,000 15,000
3. Analysis of Profits
Capital Profits Revenue Reserve Revenue Profits
Rs. Rs. Rs.
Canopy Ltd.
Reserves as on 1st January, 2006 50,000
Transfer to Reserve in the year 2006 [(75,000-50,000)/2] 12,500 12,500
Profit & Loss Account
Balance as on 1st January, 2006 30,000
Profit for 2006 remaining undistributed
[(1,00,000-25,000-60,000)/2]
7,500
7,500
Profit for the year 2007 (2,50,000-30,000-15,000) 2,05,000
(A) 1,00,000 12,500 2,12,500
Minority Interest [ ¼ th of (A) ] 25,000 3,125 53,125
75,000 9,375 1,59,375
Share of Angle Ltd. [ th of (A)]
16,667 2,083 35,417
Share of Bolt Ltd. 58,333 7,292 1,23,958
Bolt Ltd.
Reserves as on 1st January, 2006 1,00,000
Transfer to Reserves 2006 [(1,25,000-1,00,000)/2] 12,500 12,500
Profit & Loss Account - Balance (Dr.) as on 1st January, 2006 (50,000)
Undistributed Profits for 2006 [(2,50,000-25,000-1,00,000)/2] 62,500 62,500
Share in profits of Canopy Ltd. 58,333 7,292 1,23,958
Profit for the year, 2007 (2,75,000+50,000-1,25,000) 2,00,000
(B) 1,83,333 19,792 3,86,458
Less: Minority Interest [¼ th of (B)] 45,833 4,948 96,615
Share of Angle Ltd. 1,37,500 14,844 2,89,843
4. Consolidated Profit and Loss Account of Angle Ltd.
Rs.
Profit & Loss Account balance as on 31.12.2007 5,00,000
Add: Share in revenue profits of Canopy Ltd. 35,417
Share in revenue profits of Bolt Ltd. 2,89,843
Less: Pre-acquisition dividend 8,25,260
Angle Ltd. ½ (Rs. 75,000 +Rs. 10,000) 42,500
Bolt Ltd. (½ of Rs. 35,000) 17,500 60,000
7,65,260
Less: Unrealised Profit in Closing Stock (20/120 × 18,000) 3,000
7,62,260
5. Consolidated Reserves of Angle Ltd.
Rs.
Reserves as on 31.12.2007 2,00,000
Add: Share in revenue reserves of Canopy Ltd. 2,083
Add: Share in revenue reserves of Bolt Ltd. 14,844
2,16,927
6. Minority Interest
Bolt Ltd. Canopy Ltd.
Rs. Rs.
Share Capital 2,50,000 1,50,000
Share of Capital Profits 45,833 25,000
Share of Revenue Reserves 4,948 3,125
Share of Revenue Profits 96,615 53,125
Total 3,97,396 2,31,250
Grand total 6,28,646
7. Cost of Control/Goodwill
Rs. Rs.
Cost of investments (9,00,000+1,50,000+5,20,000) 15,70,000
Less: Dividend Attributable to Pre-Acquisition Profits for 6 months i.e. [(75,000+45,000)/2]
60,000
15,10,000
Less: Face value of Shares
Bolt Ltd. 7,50,000
Canopy Ltd. 4,50,000
Capital Profits
Bolt Ltd. 1,37,500
Canopy Ltd. 16,667 13,54,167
Goodwill 1,55,833
8 Cash in Transit /Dues from Bolt Ltd.
Rs. Rs.
(i) Due to Angle Ltd.
From Bolt Ltd. 1,20,000
From Canopy Ltd. 80,000 2,00,000
(ii) Due by Angle Ltd.
To Bolt Ltd. 1,00,000
To Canopy Ltd. 80,000 1,80,000
20,000


5
FINANCIAL REPORTING FOR FINANCIAL INSTITUTIONS
Topics covered:
 Non Bank Finance Companies (Q. Nos. 1 to 3)
 Merchant Bankers (Q. No. 4,5)
 Stock Brokers (Q. No. 6)

Question 1
Write short notes on:
(a) Earning value (equity share). (5 marks)(November, 2003)
(b) “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions.
(4 marks)(November, 2004)
Answer
(a) Earning value means the value of an equity share calculated by taking the average profits after tax as reduced by preference dividend and adjustments for extraordinary and non-recurring items of the immediately three preceding years and further divided by the number of equity shares and capitalised at the following rate:
Predominantly manufacturing company 8%
Predominantly trading company 10%
Any other company including NBFC 12%
Earning value is zero in a loss making company.
(b) “NonPerforming Asset” as per NBFC Prudential Norms (RBI) directions means:
(i) An asset, in respect of which, interest has remained past due for six months;
(ii) A term loan inclusive of unpaid interest, when the instalment is overdue for more than six months of which interest amount remained past due for six months;
(iii) A bill which remained overdue for six months;
(iv) The interest in respect of a debt or the income on receivables under the head ‘other current assets’ in the nature of short term loans/advances that remained overdue for a period of six months;
(v) Any dues on account of sales of assets or services rendered or reimbursement expenses made, which remained overdue for a period of six months;
(vi) The lease rental and hire purchase instalment, which has become overdue for a period of more than twelve months;
(vii) In respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities made available to borrower /beneficiary when anyone of the credit facilities becomes NPA.
However, an NBFC may classify each such account on the basis of record of recovery as regards hire purchase and lease transactions.

Question 2
While closing its books of account on 31st March, 2005 a Non-Banking Finance Company has its advances classified as follows:
Rs.in lakhs
Standard assets 16,800
Sub-standard assets 1,340
Secured positions of doubtful debts:
 upto one year 320
 one year to three years 90
 more than three years 30
Unsecured portions of doubtful debts 97
Loss assets 48
Calculate the amount of provision, which must be made against the Advances.
(8 Marks)( Nov. 2005)
Answer
(a) Calculation of provision required on advances as on 31st March, 2005:
Amount
Rs. in lakhs Percentage of provision Provision
Rs. in lakhs
Standard assets 16,800 NIL NIL
Sub-standard assets 1,340 10 134
Secured portions of doubtful debts-
-upto one year 320 20 64
- one year to three years 90 30 27
-more than three years 30 50 15
Unsecured portions of doubtful debts 97 100 97
Loss assets 48 100 48
385
Question 3
Anischit Finance Ltd. is a non-banking finance company. It makes available to you the costs and market price of various investments held by it as on 31.3.2008:
(Figures in Rs. Lakhs)
Cost Market Price
Scripts:
A. Equity Shares-
A 60.00 61.20
B 31.50 24.00
C 60.00 36.00
D 60.00 120.00
E 90.00 105.00
F 75.00 90.00
G 30.00 6.00
B. Mutual funds-
MF-1 39.00 24.00
MF-2 30.00 21.00
MF-3 6.00 9.00
C. Government securities-
GV-1 60.00 66.00
GV-2 75.00 72.00
(i) Can the company adjust depreciation of a particular item of investment within a category?
(ii) What should be the value of investments as on 31.3.2008?
(iii) Is it possible to off-set depreciation in investment in mutual funds against appreciation of the value of investment in equity shares and government securities?
( 6 Marks) (Nov. 2008)
Answer
(i) Quoted current investments for each category shall be valued at cost or market value, whichever is lower. For this purpose, the investments in each category shall be considered scrip-wise and the cost and market value aggregated for all investments in each category. If the aggregate market value for the category is less than the aggregate cost for that category, the net depreciation shall be provided for or charged to the profit and loss account. If the aggregate market value for the category exceeds the aggregate cost for the category, the net appreciation shall be ignored. Therefore, depreciation of a particular item of investments can be adjusted within the same category of investments.
(ii) Value of Investments as on 31.3.2008
Type of Investment Valuation Principle Value
Rs.in lakhs
Equity Shares (Aggregated) Lower of cost or market Value 406.50
Mutual Funds NAV (Market value, assumed) 54.00
Government securities Cost 135.00
595.50
As per para 14 of AS 13 “Accounting for Investments”, the carrying amount for current investments is the lower of cost and market price. Sometimes, the concern of an enterprise may be with the value of a category of related current investments and not with each individual investment, and accordingly, the investments may be computed at the lower of cost and market value computed categorywise.
(iii) Inter category adjustments of appreciation and depreciation in values of investments cannot be done. It is not possible to offset depreciation in investment in mutual funds against appreciation of the value of investments in equity shares and Government securities.
Question4
For what purposes inspection of records and documents of Merchant Banker is ordered by SEBI? ( 4 marks)(November, 2002)
Answer
SEBI has the right to appoint one or more persons as inspecting authority to undertake inspection of the books of account, records and documents of the merchant banker for any of the following purposes:
(i) To see that books of account are being maintained in the required manner;
(ii) To ensure that provisions of SEBI Act, rules and regulations are complied with;
(iii) To investigate into complaints received from investors, other merchant bankers, or any other person on any matter having a bearing on the activities of merchant banker;
(iv) To investigate suo moto in the interest of securities business or investors’ interest into the affairs of merchant bankers.
Question 5
Write short note on Capital adequacy requirements of merchant bankers.
(4 Marks) (May, 2007)
Answer
Capital adequacy requirements have been specified by SEBI under the SEBI (Merchant Bankers) Registration, 1992.
Registration 7 specifies that the requirement of capital adequacy shall not be less than the net worth of the person making the application for grant of registration.
The specified net worth in this connection will be computed as under:
Minimum requirement
Category I: Merchant bankers who carry on activity of the issue management, which will inter alia, consist of preparation of prospectus and other information relating to the issue, determining the financial structure, tie-up of financiers and final allotment and refund of subscriptions and act as advisor, consultant, manager, underwriter, portfolio manager etc.




Rs. 5 crores
Category II – Merchant bankers who act as advisor, consultant, co-manager, underwriter, portfolio manager
Rs.50 lakhs
Category III – Merchant bankers who act as underwriter, adviser, consultant to the issue.
Rs.20 lakhs
Category IV – Merchant bankers who act only as an advisor or consultant to the issue.
Nil
For the purposes of the regulation, a merchant banker has been defined as any person engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities is as manager, consultant, advisory or rendering corporate advising more in relation to issue management.
Question 6
Write short note on Books of account required to be maintained by a Stock Broker.
(4 marks) (May, 2003)(Nov. 2007)
Answer
Every stock broker is required to maintain the following books of account and records as per Rule 15 of the Securities Contracts (Regulation) Rules, 1957 and Regulation 17 of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992:
(a) Register of transactions (Sauda book)/Daily transaction list;
(b) Clients ledger;
(c) General ledger;
(d) Journals;
(e) Cash book;
(f) Bank Pass Book;
(g) Documents register/Inward-outward register showing full particulars of shares and securities received and delivered;
(h) Members’ contract book showing details of all contracts entered into by him with other members of the stock exchange or counterfoils or duplicates of memos of confirmation issued to such other members;
(i) Counterfoils or duplicates of contract notes issued to clients;
(j) Written consent of clients in respect of contracts entered into as principals;
(k) Margin deposit book;
(l) Register of accounts of sub-brokers;

(m) An agreement with a sub-broker specifying the scope of authority and responsibilities of the stock broker and such sub-brokers.
In addition to the above statutory requirements, stock brokers are also required to maintain scripwise clientwise list in respect of scripts of specified group, client upla statement, duplicate copies of self-certificates submitted on monthly basis, copies of margin statements downloaded by the stock exchange, copies of valan balance sheet (Form 31), details of spot delivery transactions, client data base and broker client agreement, copy of registration certificate of each sub-broker issued by SEBI, copies of the power of attorney/board resolution authorising directors and employees and copies of pool account statements.

NOTE































6
DEVELOPMENTS IN ACCOUNTING
Topics covered:
 Value Added Statement (Q. Nos. 1 to 9)
 Economic Valued Added Statement (Q. Nos. 10, 11)
 Corporate Social Reporting (Q. Nos. 12 to 15)
 Human Resource Accounting (Q. Nos. 16 to 21)
 Segment Reporting (Q. Nos. 22 to 24)
 Accounting for Financial Instruments (Q. Nos. 25 to 27)
 Environmental Accounting (Q. No. 28)

Question 1
From the following Profit and Loss Account of Kalyani Ltd., prepare a Gross Value Added Statement. Show also the reconciliation between Gross Value Added and Profit before Taxation.
Profit and Loss Account for the year ended 31st March, 1995
Income Notes Amount
(Rs. in lakhs) (Rs. in lakhs)
Sales 206.42
Other Income 10.20
216.62
Expenditure
Production and Operational Expenses 1 166.57
Administration Expenses 2 6.12
Interest and Other Charges 3 8.00
Depreciation 5.69 186.38
Profit before Taxes 30.24
Provision for taxes 3.00
27.24
Investment Allowance Reserve Written Back 0.46
Balance as per Last Balance Sheet 1.35
29.05
Transferred to:
General Reserve 24.30
Proposed Dividend 3.00 27.30
Surplus Carried to Balance Sheet 1.75
29.05
Notes:
(1) Production and Operational Expenses (Rs. in lakhs)
Increase in Stock 30.50
Consumption of Raw Materials 80.57
Consumption of Stores+ 5.30
Salaries, Wages, Bonus and Other Benefits 12.80
Cess and Local Taxes 3.20
Other Manufacturing Expenses 34.20
166.57
(2) Administration expenses include inter-alia Audit fees of Rs. 1 lakh, Salaries and commission to directors Rs. 2.20 lakhs and Provision for doubtful debts Rs. 2.50 lakhs.
(3) Interest and Other Charges: (Rs. in lakhs)
On Fixed Loans from Financial Institutions 3.90
Debentures 1.80
On Working Capital Loans from Bank 2.30
8.00
(15 marks) (May, 1996)
Answer
Kalyani Ltd.
Value Added Statement
for the year ended 31st March, 1995
Rs. in lakhs Rs. in lakhs %
Sales 206.42
Less: Cost of bought in material and services:
Production and operational expenses 150.57
Administration expenses 3.92
Interest on working capital loans 2.30 156.79
Value Added by manufacturing and trading activities 49.63
Add: Other income 10.20
Total Value Added 59.83

Application of Value Added:
To Pay Employees:
Salaries, Wages, Bonus and other benefits 12.80 21.39
To Pay Directors:
Salaries and Commission 2.20 3.68
To Pay Government:
Cess and Local Taxes 3.20
Income Tax 3.00
6.20 10.36
To Pay Providers of Capital:
Interest on Debentures 1.80
Interest on Fixed Loans 3.90
Dividend 3.00
8.70 14.54
To Provide for maintenance and Expansion of the company:
Depreciation 5.69
General Reserve (24.30 – 0.46) 23.84
Retained profit (1.75 – 1.35) 0.40
29.93 50.03
59.83 100.00

Reconciliation Between Total Value Added and Profit Before Taxation:
(Rs. in lakhs) (Rs. in lakhs)
Profit before tax 30.24
Add back:
Depreciation 5.69
Salaries, Wages, Bonus and other benefits 12.80
Directors’ Remuneration 2.20
Cess and Local Taxes 3.20
Interest on Debentures 1.80
Interest on Fixed Loans 3.90 29.59
Total Value Added 59.83
Question 2
From the following Profit & Loss Account of Brightex Co. Ltd., prepare a gross value added statement for the year ended 31.12.1998:
Show also the reconciliation between gross value added and profit before taxation.
Profit and Loss Account for the year ended 31.12.1998
Notes (Rs.’000) (Rs.’000)
Income :
Sales 6,240
Other Income 55
6,295
Expenditure:
Production and operational expenses 1 4,320
Administration expenses (Factory) 2 180
Interest & Other charges 3 624
Depreciation 16 5,140
Profit before tax 1,155
Provision for tax 55
1,100
Balance as per last Balance Sheet 60
1,160
Transferred to fixed assets replacement reserve 400
Dividend paid 160 560
Surplus carried to Balance Sheet 600
Notes:
1. Production & Operation expenses :
Consumption of raw materials 3,210
Consumption of stores 40
Local tax 8
Salaries to administrative staff 620
Other manufacturing expenses 442
4,320
2. Administration expenses include salaries and commission to directors 5
3. Interest on other charges include :
(a) Interest on bank overdraft (Overdraft is of temporary nature) 109
(b) Fixed loan from I.C.I.C.I. 51
(c) Working capital loan from I.F.C.I. 20

(d) Excise duties amount to one-tenth of total value added by manufacturing and trading
activities. (16 marks)(May, 1999)
Answer
Brightex Co. Ltd
Value Added Statement
For the year ended 31st December, 1998
Rs. In Rs. In %
Thousands thousands
Sales 6,240
Less: Cost of bought in material and services:
Production and operational expenses
(4,320  8  620) 3,692
Administration expenses (180  5) 175
Interest on bank overdraft 109
Interest on working capital loan 20
Excise duties (Refer to working note) 180
Other/miscellaneous charges(444  180) 264 4,440
Value added by manufacturing and trading activities 1,800
Add: Other income 55
Total Value Added 1,855
Application of Value Added:
To pay Employees :
Salaries to Administrative staff 620 33.42
To pay Directors:
Salaries and Commission 5 0.27
To Pay Government :
Local Tax 8
Income Tax 55 63 3.40
To Pay Providers of Capital :
Interest on Fixed Loan 51
Dividend 160 211 11.37
To provide For Maintenance and Expansion of the Company :
Depreciation 16
Fixed Assets Replacement Reserve 400
Retained Profit (600 - 60) 540 956 51.54
1,855 100.00

Reconciliation Between Total Value Added and Profit Before Taxation:
Rs. In Rs. In
Thousands thousands
Profit before Tax 1,155
Add back:
Depreciation 16
Salaries to Administrative Staff 620
Director's Remuneration 5
Interest on Fixed Loan 51
Local Tax 8 700
Total Value Added 1,855

Working Note :
Calculation of Excise Duty
Rs. In housands
Interest and other charges 624
Less : Interest on bank overdraft 109
Interest on loan from ICICI 51
Interest on loan from IFCI 20 180
Excise duties and other/miscellaneous charges 444

Assuming that these miscellaneous charges have to be taken for arriving at Value Added
(in the first part of Value Added Statement), the excise duty will be computed as follows.
Let excise duty be x; thus miscellaneous/ other charges = 444 -x
Thus x = 1/10 x [ 6,240 -{3692+ 175+109+20+x+(444-x)}]
= 1/10 x [6240 - 4440] = 180
Other/ miscellaneous charges = 444 - 180 = 264
The above solution is given accordingly.
However, if other/miscellaneous charges are taken as any type of application of Value Added.
(i.e, to be taken in the application part), then excise duty (x) will be computed as follows:
x = 1/10 x [ 6240 - (3692+175+109+20+x)]
x = 1/10 x [2244 -x]
11x = 2244
x = 204
And thus total value added will be 2040 + 55 (other income) = 2095
And accordingly, application part will be prepared, taking miscellaneous charges.
Rs('000) 240 [i.e, 444 - 204] as the application of value added.
Question 3
From the following Profit and Loss Account of X Limited, prepare Gross Value Added Statement and show the reconciliation between Gross Value Added and Profit before taxation:
Profit and Loss Account for the year ended 31st March, 2002
Income (Rs. in lakhs) (Rs. in lakhs)
Sales 800
Other Income 50
850
Expenditure
Production and Operational Expenses 600
Administrative Expenses 30
Interest and Other Charges 30
Depreciation 20 680
Profit before taxes 170
Provision for taxes 30
140
Balance as per last Balance Sheet 10
150
Transferred to:
General Reserve 80
Proposed Dividend 20
Surplus carried to Balance Sheet 50
150
Break-up of some of the Expenditure is as follows:
Production and Operational Expenses:
Consumption of Raw Materials and Stores 320
Salaries, Wages and Bonus 60
Cess and Local Taxes 20
Other Manufacturing Expenses 200
600
Administrative Expenses:
Audit Fee 6
Salaries and Commission to Directors 8
Provision for Doubtful Debts 6
Other Expenses 10
30
Interest and other Charges:
On Working Capital Loans from Bank 10
On Fixed Loans from ICICI 15
On Debentures 5
30

(16 marks)(May, 2002)

Answer
X Limited
Gross Value Added Statement
for the year ended 31st March, 2002
Rs. in lakhs Rs. in lakhs
Sales
Less: Cost of bought in material or services: 800
Production and Operational Expenses (320 + 200) 520
Administrative Expenses (6 + 6 +10) 22
Interest on working capital loans 10 552
Value added by manufacturing and trading activities 248
Add: Other Income 50
Total Value Added 298

Application of Value Added:
To Pay Employees:
Salaries, Wages and Bonus

60 %
20.14
To Pay Directors:
Salaries and Commission

8
2.68
To Pay Government:
Cess and Local taxes
Income Tax
20
30

50

16.78
To Pay Providers of Capital:
Interest on Debentures
Interest on Fixed Loans
Dividend
5
15
20


40


13.42
To Provide for Maintenance and Expansion of the Company: Depreciation
General Reserve
Retained Profit (50 – 10)

20
80
40



140



46.98
298 100.00

Reconciliation between Gross Value Added and Profit before Taxation
Rs. in lakhs Rs. in lakhs
Profit before tax 170
Add back:
Depreciation 20
Salaries, Wages and Bonus 60
Directors’ Remuneration 8
Cess and Local Taxes 20
Interest on Debentures 5
Interest on Fixed Loans 15 128
Total Value Added 298
Question 4
On the basis of the following income statement pertaining to Brite Ltd., you are required to prepare:
(a) Gross value added statement; and
(b) Statement showing reconciliation of gross value added with Profit Before Taxation.
Profit and Loss Account of Brite Ltd. for the year ended 31st March, 2003
Rs. in thousands Rs. in thousands
Income
Sales less returns 15,27,956
Dividends and interest 130
Miscellaneous income 474
(A) 15,28,560
Expenditure
Production and operational expenses:
Decreases in inventory of finished goods 26,054
Consumption of raw materials 7,40,821
Power and lighting 1,20,030
Wages, salaries and bonus 3,81,760
Staff welfare expenses 26,240
Excise duty 14,540
Other manufacturing expenses 32,565 13,42,010

Administrative expenses:
Directors' remuneration 7,810
Other administrative expenses 32,640 40,450

Interest on:
9% Mortgage debentures 14,400
Long-term loan from financial institution 10,000
Bank overdraft 100 24,500
Depreciation on fixed assets 50,600
(B) 14,57,560
Profit before Taxation, (A) ─ (B) 71,000
Provision for Income-tax @ 35.875% 25,470
Profit after Taxation 45,530
Balance of account as per last Balance Sheet 6,300
51,830
Transferred to:
General reserve 40% of Rs. 45,530 18,212
Proposed dividend @ 22% 22,000
Tax on distributed profits @ 12.81% 2,818 43,030
Surplus carried to Balance Sheet 8,800
(15 marks)(November, 2003)
Answer
Brite Ltd.
Value Added Statement for the year ended 31st March, 2003
Rs. in thousands Rs. in thousands
Sales less returns 15,27,956
Less: Cost of bought in materials and services, as per
working note
Administrative expenses
Interest on bank overdraft
9,19,470
32,640
100


9,52,210
Value added by manufacturing and trading activites 5,75,746
Add: Dividends and interest 130
Miscellaneous income 474
Total value added 5,76,350
Application of valued added
Rs. in thousands Rs. in thousands %
To pay Employees:
Wages, salaries and bonus
3,81,760
Staff welfare expenses 26,240 4,08,000 70.79
To pay Directors:
Directors' remuneration

7,810
1.36
To pay Government:
Excise duty 14,540
Income tax 25,470
Tax on distributed profits 2,818 42,828 7.43
To pay providers of capital:
Interest on 9% debentures 14,400
Interest on long-term loan from financial institution 10,000
Dividend to shareholders 22,000 46,400 8.05
To provide for maintenance and expansion of the
company:
Depreciation on Fixed assets 50,600
Transfer to General reserve
Retained profit, Rs.(8,800-6,300)(in 000’s) 18,212
2,500
71,312
12.37
5,76,350 100.00
Statement showing reconciliation of Total value added with Profit before taxation
Rs. in thousands Rs. in thousands
Profit Before Taxation 71,000
Add back:
Wages, salaries and bonus 3,81,760
Staff welfare expenses 26,240
Excise duty 14,540
Directors' remuneration 7,810
Interest on 9% mortgage debentures 14,400
Interest on long-term loan from financial institution 10,000
Depreciation on fixed assets 50,600 5,05,350
Total Value Added 5,76,350
Working Note:
Calculation of cost of bought in materials and services:
Rs. in thousands
Decrease in inventory of finished goods 26,054
Consumption of raw materials 7,40,821
Power and lighting 1,20,030
Other manufacturing expenses 32,565
9,19,470
Question 5
The following is the Profit and Loss Account of Galaxy Ltd. for the year ended 31.03.2004. Prepare a Gross Value Added Statement of Galaxy Ltd. and show also the reconciliation between Gross Value Added and Profit before taxation.
Profit and Loss Account for the year ended 31.03.2004
Notes Amount
(Rs. in lakhs)
Income:
Sales  890
Other Income  55
945
Expenditure:
Production and operational expenses (a) 641 
Administration expenses (Factory) (b) 33 
Interest (c) 29 
Depreciation 17 720
Profit before taxes  225
Provision for taxes (d)  30
Profit after tax  195
Balance as per last Balance Sheet  10
205
Transferred to General Reserve 45 
Dividend paid 95 
140 
Surplus carried to Balance Sheet 65 
205 
Notes:
(a) Production and Operational expenses Rs. in lakhs
Consumption of raw materials 293
Consumption of stores 59
Salaries, Wages, Gratuities etc. (Admn.) 82
Cess and Local taxes 98
Other manufacturing expenses 109
641
(b) Administration expenses include salaries, commission to Directors Rs.9.00 lakhs Provision for doubtful debts Rs. 6.30 lakhs.
Rs. in lakhs
(c) Interest on loan from ICICI Bank for working capital 9
Interest on loan from ICICI Bank for fixed loan 10
Interest on loan from IFCI for fixed loan 8
Interest on Debentures 2
29
(d) The charges for taxation include a transfer of Rs. 3.00 lakhs to the credit of Deferred Tax Account.
(e) Cess and Local taxes include Excise Duty, which is equal to 10% of cost of bought-in material. (16 marks)(November, 2004)
Answer
Galaxy Ltd.
Gross Value Added Statement for the year ended 31st March, 2004
Rs. in lakhs Rs. in lakhs
Sales 890
Less: Cost of bought in materials and services:
Production and operational expenses (293 + 59 + 109) 461
Administration expenses (33 – 9) 24
Interest on working capital loan 9
Excise duty (Refer working note) 55 549
Value added by manufacturing and trading activities 341
Add: Other income 55
Total value added 396
Application of Value Added
%
To Employees
Salaries, wages, gratuities etc.
82
20.71%
To Directors
Salaries and commission
9
2.27%
To Government
Cess and local taxes (98 – 55)
43
Income tax 27 70 17.68%
To Providers of capital
Interest on debentures
2
Interest on fixed loan 18
Dividends 95 115 29.04%
To Provide for maintenance and expansion of the company
Depreciation
17
General reserve 45
Deferred tax 3
Retained profits (65 – 10) 55 120 30.30%
396 100%
Statement showing reconciliation of Gross Value Added with Profits before taxation
Rs. in lakhs
Profits before taxes 225
Add:
Depreciation 17
Directors’ remuneration 9
Salaries, wages & gratuities etc. 82
Cess and local taxes 43
Interest on debentures 2
Interest on fixed loan 18 171
Total value added 396
Working Note:
Calculation of Excise Duty
Say cost of bought in materials and services is ‘x’
Excise Duty is 10% of x = x/10
x = 461 + 24 + 9 + x/10
x = 494 + x/10 = 549 (approx.)
Excise Duty = 549 – 494 = Rs. 55

Question 6
On the basis of the following Profit and Loss Account of Zed Limited and the supplementary information provided thereafter, prepare Gross Value Added Statement of the company for the year ended 31st March, 2005. Also prepare another statement showing reconciliation of Gross Value Added with Profit before Taxation.
Profit and Loss Account of Zed Limited for the year ended 31st March, 2005.
Amount Amount
(Rs. in lakhs) (Rs. in lakhs)
Income
Sales 5,010
Other Income 130
5,140
Expenditure
Production and Operational Expenses 3,550
Administrative Expenses 185
Interest 235
Depreciation 370 4,340
Profit before Taxation 800
Provision for Taxation 280
Profit after Taxation 520
Credit Balance as per last Balance Sheet 40
560
Appropriations
Transfer to General Reserve 100
Preference Dividend (Interim) paid 50
Proposed Preference Dividend (Final) 50
Proposed Equity Dividend 300
Balance carried to Balance Sheet 60
560
Supplementary Information
Production and Operational Expenses consist of:
Raw Materials and Stores consumed 1,900
Wages, Salaries and Bonus 610
Local Taxes including Cess 220
Other Manufacturing Expenses 820
3,550
Administrative Expenses consist of:
Salaries and Commission to Directors 60
Audit Fee 24
Provision for Bad and Doubtful Debts 20
Other Administrative Expenses 81
185
Interest is on:
Loan from Bank for Working Capital 35
Debentures 200
235
(12 marks) November, 2005)
Answer
Gross Value Added Statement of Zed Ltd.
for the year ended 31st March, 2005
Rs. in lakhs Rs. in lakhs
Sales 5,010
Less: Cost of raw materials, stores and other services consumed 2,720
Administrative expenses 125
Interest on loan from bank for working capital 35 2,880
Value added by manufacturing and trading activities 2,130
Add: Other income 130
Total value added 2,260

Application of Value Added
Rs.in lakhs Rs. in lakhs %
To pay employees
Wages, salaries and bonus 610 26.99
To pay directors
Salaries and commission to Directors 60 2.66
To pay Government
Local taxes including cess 220
Income tax 280 500 22.12
To pay providers of capital
Interest on debentures 200
Preference dividend 100
Equity dividend 300 600 26.55
To provide for the maintenance and expansion of the company:
Depreciation 370
Transfer to general reserve 100
Retained profit Rs.(60 – 40) lakhs 20 490 21.68
2,260 100

Statement showing Reconciliation between
Gross Value Added with Profit before Taxation
Rs. in lakhs Rs. in lakhs
Profit before taxation 800
Add back:
Wages, salaries and bonus 610
Salaries and commission to Directors 60
Local taxes including cess 220
Interest on debentures 200
Depreciation 370 1,460
Gross Value Added 2,260
Question 7
Value Added Ltd. furnishes the following Profit and Loss A/c:
Profit and Loss A/c for the year ended 31st March, 2007
Income Notes Rs.(‘000)
Turnover 1 29,872
Other Income 1,042
30,914
Expenditure
Operating expenses 2 26,741
Interest on 8% Debenture 987
Interest on Cash Credit 3 151
Excise duty 1,952
29,831
Profit before depreciation 1,083
Less: Depreciation 342
Profit before tax 741
Provision for tax 4 376
Profit after tax 365
Less: Transfer to Fixed Assets Replacement Reserve 65
300
Less: Dividend paid 125
Retained Profit 175
Notes:
(1) Turnover is based on invoice value and net of sales tax.
(2) Salaries, wages and other employee benefits amounting to Rs.14,761 (‘000) are included in operating expenses.
(3) Cash Credit represents a temporary source of finance. It has not been considered as a part of capital.
(4) Transfer of Rs.54 (‘000) to the credit of deferred tax account is included in provision for tax.
Prepare value added statement for the year ended 31st March, 2007 and reconcile total value added with profit before taxation. (8 Marks) (Nov. 2007)
Answer
Value Added Ltd.
Value Added Statement for the year ended 31st March, 2007
Rs.(‘000) Rs.(‘000) %
Turnover 29,872
Less: Cost of bought in materials and services:
Operating expenses (26,741 –14,761) 11,980
Excise duty 1,952
Interest on Cash Credit 151 14,083
Value added by manufacturing and trading activities 15,789
Add: Other income 1,042
Total value added 16,831
Application of value added:
To Pay to employees:
Salaries, wages and other employee benefits 14,761 87.70
To Pay to Government:
Corporation tax (376 – 54) 322 1.91
To Pay to providers of capital:
Interest on 8% Debentures 987
Dividends 125 1,112 6.61
To Provide for maintenance and expansion of the company:
Depreciation 342
Fixed Assets Replacement Reserve 65
Deferred Tax Account 54
Retained Profit 175 636 3.78
16,831 100
Note: Deferred tax account could alternatively be shown as an item ‘To pay to government’.
Reconciliation between total value added and profit before taxation
Rs.(‘000) Rs.(‘000)
Profit before tax 741
Add back: Depreciation 342
Wages, salaries and other benefits 14,761
Debenture interest 987 16,090
Total Value Added 16,831
Question 8
From the following Profit and Loss account of New Mode Reporting Ltd., prepare a gross value added statement for the year ended 31st December, 2007. Show also the reconciliation between GVA and Profit before taxation:
Profit and Loss Account
Rs.’000s Rs.’000s
Income
Sales 12,480
Other income 110 12,590
Expenditure
Production and Operational expenditure 8,640
Administrative expenses 360
Interest and other charges 1,248
Depreciation 32 10,280
Profit before tax 2,310
Less: Provision for tax 110
Profit after tax 2,200
Add: balance as per last Balance Sheet 120
2,320
Less: Transfer to Fixed assets replacement Reserve 800
Dividend paid 320 1,120
Surplus carried to Balance Sheet 1,200

Additional information:
(i) Production and Operational expenses consists of
Rs.
Consumption of Raw materials 64,20,000
Consumption of Stores 80,000
Local tax 16,000
Salaries to Administrative staff 12,40,000
Other Manufacturing expenses 8,84,000

(ii) Administrative expenses include salaries and commission to directors – Rs.10,000
(iii) Interest and other charges include-
Rs.
(a) Interest on bank overdraft
(overdraft is of temporary nature) 2,18,000
(b) Fixed loan from SIDBI 1,02,000
(c) Working capital loan from IFCI 40,000
(d) Excise duties ?
(iv) Excise duties amount to one-tenth of total value added by manufacturing and trading activities.
(10 Marks (Nov. 2008)

Answer
(a) New Mode Reporting Ltd.
Value Added Statement
for the year ended 31st December, 2007
(Figures in Rs.’000)
Sales 12,480
Less: Cost of Materials and Services:
Production and Operational Expenses (8,640 – 16-1,240) 7,384
Administrative Expenses (360 – 10) 350
Interest on Bank Overdraft 218
Interest on Working Capital Loan 40
Excise Duties (Refer to working note) 360
Other/miscellaneous charges (888 – 360) 528 8,880
Value added by manufacturing and trading activities 3,600
Add: Other Income 110
Gross value added from operations 3,710
Application of Gross Value Added
Rs. in ‘000 Rs.in’000 %
To Pay Employees:
Salaries to Administrative Staff 1240 33.42
To Pay Directors:
Salaries and Commission 10 0.27
To Pay Government:
Local Taxes 16
Income Tax 110 126 3.40
To Pay Providers of Capital:
Interest on Fixed Loan 102
Dividend 320 422 11.37
To Provide for maintenance and expansion of the company:
depreciation

32
Fixed Assets Replacement Reserve 800
Retained Profit (1200 – 120) 1080 1912 51.54
3,710 100.00



Reconciliation between Gross Value added and Profit Before Taxation
Rs.in’000
Profit before Tax 2,310
Add Back: Depreciation 32
Salaries to Administrative Staff 1240
Directors’ Salaries and Commission 10
Interest on Fixed Loan 102
Local Tax 16 1400
Total value added 3710
Working Note:
Calculation of excise duty Rs.’000 Rs.’000
Interest and other charges 1,248
Less: Interest on bank overdraft 218
Interest on SIDBI loan 102
Interest on IFCI loan 40 360
Excise duty and other charges 888
Assuming that these other /miscellaneous charges will be deducted for arriving at the value added, the excise duty will be calculated as follows:-
Let Excise Duties be denoted by - E
Then, other charges = 888 - E
Excise duty are of value added

Hence E = [12,480 – {7,384+ 350+218 + 40+E + (888 – E)}]

= [12,480 – 8,880]

= × 3,600= 360

Other/miscellaneous charge 888 – 360 = Rs.528
The above solution has been given accordingly.
Alternatively, if other/miscellaneous charges are considered as application of value added (i.e., not deducted for deriving the value added), calculation of Excise Duties (E) will be as follows:
E = [12,480 – (7,384 + 350 + 218+40+E)]

E = × (4,488 - E)

11E = 4,488
E = Rs.408
And thus other/miscellaneous charges will be Rs.888 – 408 = Rs.480
Gross Value added in this case will be Rs. 4,080 + 110 (Other income) = Rs.4,190
And accordingly, application part will be prepared after taking other/miscellaneous charges.
Question 9
What are the advantages of preparation of Value Added (VA) statements?
(6 marks) (May, 2008)
Answer
Various advantages of preparation of Value Added (VA) Statements are as under:
1. Reporting on VA improves the attitude of employees towards their employing companies. This is because the VA statement reflects a broader view of the company’s objectives and responsibilities.
2. VA statement makes it easier for the company to introduce a productivity linked bonus scheme for employees based on VA. The employees may be given productivity bonus on the basis of VA / Payroll Ratio.
3. VA based ratios (e.g. VA / Payroll, taxation / VA, VA / Sales etc.) are useful diagnostic and predictive tools. Trends in VA ratios, comparisons with other companies and international comparisons may be useful.
4. VA provides a very good measure of the size and importance of a company. To use sales figure or capital employed figures as a basis for company’s rankings can cause distortion. This is because sales may be inflated by large bought-in expenses or a capital-intensive company with a few employees may appear to be more important than a highly skilled labour–intensive company.
5. VA statement links a company’s financial accounts to national income. A company’s VA indicates the company’s contribution to national income.
6. VA statement is built on the basic conceptual foundations which are currently accepted in balance sheets and income statements. Concepts such as going concern, matching, consistency and substance over form are equally applicable to VA statement.
Question 10
(a) Explain the concept of ‘Economic value added’ (EVA for short) and its uses.
(6 marks)(November, 2002)
(b) What is economic value added and how is it calculated? Discuss.
(4 marks)(November, 2003)


Answer
(a) Economic Value Added (EVA) for short, is primarily a benchmark to measure earnings efficiency. Though the term "Economic Profit" was very much there since the inception of "Economics", Stern Stewart & Co., of USA has got a registered Trade Mark for this by the name "EVA", an acronym for Economic Value Added.
EVA as a residual income measure of financial performance, is simply the operating profit after tax less a charge for the capital, equity as well as debt, used in the business. EVA includes both profit and loss as well as balance sheet efficiency as well as the ROCE, or ROE.
In addition, EVA is a management tool to focus managers on the impact of their decisions in increasing shareholders’ wealth. These include both strategic decisions such as what investments to make, which businesses to exit, what financing structure is optimal; as well as operational decisions involving trade-offs between profit and asset efficiency such as whether to make in house or outsource, repair or replace a piece of equipment, whether to make short or long production runs etc.
Most importantly the real key to increasing shareholder wealth is to integrate the EVA framework in four key areas; to measure business performance; to guide managerial decision making; to align managerial incentives with shareholders' interests; and to improve the financial and business literacy throughout the organisation.
To better align managers interests with Shareholders – the EVA framework needs to be holistically applied in an integrated approach – simply measuring EVAs is not enough it must also become the basis of key management decisions as well as be linked to senior management's variable compensation.
(b) Economic Value Added (EVA) is primarily a benchmark to measure earnings efficiency. EVA as a residual income measure of financial performance is simply the operating profit after tax less a charge for the capital employed, equity as well as debt, used in the business.
Mathematically EVA= OPBT  Tax  (TCE × COC)
Where:
OPBT = Opening Profit Before Tax
TCE = Total Capital Employed
COC = Cost of Control
Because EVA includes both profit and loss as well as balance sheet efficiency as well as the opportunity cost of investor capital - it is better linked to changes in shareholders wealth and is superior to traditional financial measures such as PAT or percentage of return measures such as ROCE or ROE.
EVA, additionally, is a tool for management to focus on the impact of their decisions in increasing shareholders wealth. These include both strategic decisions such as what investments to make, which business to exit, what financing structure is optimal; as well as operational decisions involving trade-offs between profit and asset efficiency such as whether to make inhouse or outsource, repair or replace an equipment, whether to make short or long production runs etc.
Most importantly the real key to increasing shareholders wealth is to integrate EVA framework in four key areas, viz., to measure business performance, to guide managerial decision making, to align managerial incentives with the shareholders' interests and to improve the financial and business literacy throughout the organisation.
To better align managers interests with shareholders' - the EVA framework needs to be holistically applied in an integrated approach - simply measuring EVA is not enough; it must also become the basis of key management decisions as well as be linked to senior management's variable compensation.
However, EVA as a strategic tool has the following limitations:
1. Not easy to use; too complicated for small businesses.
2. Recommends inexpensive debts in order to reduce the cost of capital.
3. A passive tool, measures past performance.
Question 11
The following information is available of a concern; calculate E.V.A.:
Debt capital 12% Rs. 2,000 crores
Equity capital Rs. 500 crores
Reserve and surplus Rs. 7,500 crores
Capital employed Rs. 10,000 crores
Risk-free rate 9%
Beta factor 1.05
Market rate of return 19%
Equity (market) risk premium 10%
Operating profit after tax Rs.2,100 crores
Tax rate 30%
(4 marks)(Nov. 2006)
Answer
E.V.A. = NOPAT – COCE
NOPAT = Net Operating Profit after Tax
COCE = Cost of Capital Employed
COCE = Weighted Average Cost Of Capital  Average Capital Employed
= WACC  Capital Employed
Debt Capital Rs.2,000 crores
Equity capital 500 + 7,500 = Rs.8,000 crores
Capital employed = 2,000+8,000 = Rs.10,000 crores
Debt to capital employed =

Equity to Capital employed =

Debt cost before Tax 12%
Less: Tax (30% of 12%) 3.6%
Debt cost after Tax 8.4%
According to Capital Asset Pricing Model (CAPM)
Cost of Equity Capital = Risk Free Rate + Beta  Equity Risk Premium
Or
= Risk Free Rate + Beta (Market Rate – Risk Free Rate)
= 9 + 1.05  (19-9)
= 9 + 1.05  10 = 19.5%
WACC = Equity to CE x Cost of Equity capital + Debt to CE x Cost of debt
= 0.8 19.5% + 0.20 8.40%
= 15.60% + 1.68% = 17.28%
COCE = WACC  Capital employed
= 17.28%  10,000 crores = 1728 crores
E.V.A. = NOPAT – COCE
= Rs. 2,100 – Rs. 1,728 = Rs. 372 crores
Question 12
(a) “The content of corporate social report is essentially based on social objectives.” Discuss.
(7 marks)(November, 1998)
(b) Enumerate the major heads identified for corporate social reporting purposes.
(8 marks)(November, 1999)
(c) Write short note on Corporate Social Reporting. (4 marks)(May, 2003)

Answer
(a) The content of Corporate Social Report is essentially based on the social objectives. Brummet identified five areas wherein social objectives can be traced out, namely, Net Income Contribution, Human Resource Contribution, Public Contribution, Environmental Contribution and Product or Service Contribution.
In view of the social objectives, the importance of earning objective is not understated, rather attainment of social objectives is dependent on earning objective. A sick business entity becomes liability to the society and sustains social costs instead of generating social benefits.
Human Resource Contribution is the indicator of the impact of organisational activities (viz. pay and allowances, perks and incentives, recruitment, training and development, placement, promotion and transfer, welfare measure, etc.) on people of the organisation. Public Contribution is the indicator of general philanthropy in the cultural and social welfare programmes and contribution to national exchequer by way of tax and duties. . .
Industrial activity is supposed to consume irreplaceable resources and produces solid wastes. By this process it pollutes air and water, causes noise and spoils the environment. These are termed as negative social effects. The corporate social objective is the abatement of such negative effect. It is covered by environmental contribution.
Lastly, the Product or Service Contribution covers the qualitative aspects of the organisation's product or service. It includes quality guarantee, redressal of customers' grievances, honest exposure in advertisement etc.
Although Brummet covered wide range of objectives, still these are not essentially exhaustive. Social objectives are determined by socio-economic conditions of a country. It is difficult to set universal list of social objectives to be pursued by the corporate sector. For example, in India, regional imbalance, unemployment, reservation for weaker sections of the population, scarcity of foreign exchange, energy deficit, population pressure and illiteracy are some of the widely accepted socio-economic problems. And obviously the general expectation is that the corporate sector will positively contribute to such socio-economic problems. Since the socio-economic problems of a country change over time or the priority attached to a problem shifts. Brummet's over simplified set of contributions should be suitably moulded to fit in the perspective of socio-economic problems of a country.
(b) Considering the major socio-economic problems of the country, eight major heads may be identified for Social Reporting purposes:
I. Employment Opportunities.
II. Foreign Exchange Transactions
III. Energy Conservation.
IV. Research and Development.
V. Contribution to Government Exchequer.
VI. Social Projects
VII. Environmental Control.
VIII. Consumerism.
I. Creation of employment opportunities during the year may be classified into opportunities in India and opportunities abroad. In India employment may be created either by expansion/diversification in backward or other areas. However, employment protection by absorption of sick units may also be treated as employment opportunities. Moreover, the corporate enterprise may create new openings abroad by adopting foreign projects. In all such cases, quantitative information needs to be disclosed giving break-up of SC/ST persons, physically handicapped persons, women and other workers appointed during the year. Tax advantage or subsidy received for establishing industrial units in backward areas or absorption of sick units should be disclosed properly. If the corporate enterprise follows human resource accounting system, it may show human assets created during the year and costs incurred for such purpose.
II. In view of the scanty foreign exchange reserve, it is desirable to disclose foreign exchange transactions in details. Foreign exchange inflows occur by exports or earnings from foreign projects. Also saving in foreign exchange is equivalent to foreign exchange inflows. An enterprise can save foreign exchange by import substitution and replacement of foreign technology/technician. Foreign exchange outflows are caused by purchase of' raw materials/spares, plant and machinery capital repayment, payment of dividend and interest. It is desirable to report inflows and outflows for each currency separately and a summary statement in Indian currency. Any tax advantage/export subsidy received for foreign exchange ernings should be disclosed as an item of social cost.
III. Energy purchased/generated and energy consumed per unit of standard product are to be reported along with consumption norm of the industry. Energy Audit Reports prepared by BICP may be followed for industry norms wherever applicable. Positive/negative variation in energy consumption should be reported along with reasons therefor.
IV. Recurring/non-recurring cost incurred for research and development is to be reported along with results. If possible, effect of research and development activities may be quantified in terms of cost saved/profit added. Any tax advantage/subsidy received is to be reported as social cost incurred along with the generation of social benefits from research and development.
V. Contribution to Government exchequer by way of sales tax, income tax, excise, custom and other duties needs to be reported as an item of social benefits.
VI. Contribution to social projects may be further classified into direct involvement of corporate enterprise and donations to different organisations. Social projects like construction of road, establishment of school, college, research institute, hospital, stadium, etc. may be earmarked alongwith the categories of beneficiaries and cost involved.
In case of donation to any organisation, the nature of the organisation may be stated along with the tax advantage received by way of such donations.
(Contribution of the corporate enterprise for development of sports and games, cultural matters and self-employment programmes may be reported as creation of social benefit).
VII. Negative social effect caused by the corporate enterprise may be quantified stating use of irreplaceable resources and nature of pollution caused. Action taken and cost involved for pollution control should be reported as an item of social benefit.
VIII. Failures in terms of complaints received against improper quality, poor service etc. may be reported under social costs. Action taken and cost involved for undertaking quality control and customers' service should be reported under social benefits.
(c) Corporate Social Reporting is the information communique with respect to discharge of social responsibilities of corporate entity. The transition in accounting function from historical cost based profitability accounting to social responsibility accounting is a good fit to the present-day data requirement of the “Users of accounts”.
The content of Corporate Social Report is essentially based on the social objectives, namely Net Income Contribution, Human Resource Contribution, Public Contribution, Environmental Contribution and Product or Service Contribution.
Considering the major socio-economic problems of the country, eight major heads can be identified for social reporting purpose:
(i) Employment Opportunities;
(ii) Foreign Exchange Transactions;
(iii) Energy Conservation;
(iv) Research and Development;
(v) Contribution to Government Exchequer;
(vi) Social Projects;
(vii) Environmental Control;
(viii) Consumerism.
Initially, it is difficult to express social costs incurred by a corporate enterprise and social benefits generated in money terms. Until suitable methologies are available for conversion of social cost-benefit in money terms, it is desirable to begin with descriptive social report. Further research is necessary in this area either to improve heads of corporate social reporting in the context of dynamic socio-economic environment.
Question 13
From the following information taken from the books of F Ltd. relating to staff and community benefits, prepare a statement classifying the various items under the appropriate heads, required under Corporate Social Reporting.
Rs.
Environmental Improvements 20,10,000
Medical facilities 45,00,000
Training Programmes 10,25,000
Generation of Job Opportunities 60,75,000
Municipal Taxes 10,70,000
Increase in cost of living in the vicinity due to a thermal power station
16,55,000
Concessional transport, water supply 11,25,000
Extra work put in by staff and officers for drought relief 18,50,000
Leave encashment and leave travel benefits 52,00,000
Educational facilities for children of staff members 21,60,000
Subsidised canteen facilities 14,40,000
Generation of business 25,00,000
(6 marks)(May, 2004)
Answer
F Ltd.
Statement relating to staff and community benefits
I. Social Benefits and Cost to Staff Rs.
A. Social Benefits to Staff
1. Medical facilities 45,00,000
2. Training programmes 10,25,000
3. Concessional transport, water supply 11,25,000
4. Leave encashment and leave travel benefits 52,00,000
5. Educational facilities for children of staff members 21,60,000
6. Subsidised canteen facilities 14,40,000
Total 1,54,50,000
B. Social Costs to Staff
Extra work put in by staff and officers for drought relief 18,50,000
Net Social Benefits to Staff (A – B) 1,36,00,000

II. Social Benefits and Cost to Community
A. Social Benefits to Community
1. Environmental improvements 20,10,000
2. Generation of job opportunities 60,75,000
3. Municipal taxes 10,70,000
4. Generation of business 25,00,000
Total 1,16,55,000
B. Social Costs to Community
Increase in cost of living in the vicinity due to a thermal power station
16,55,000
Net Social Benefits to Community (A – B) 1,00,00,000
Question 14
After the HAVOC caused by TSUNAMI, a group of companies undertakes during the period from January, 2005 to March, 2005 various commercial activities, having granted considerable subsidy, along the related coast line. The management intends to highlight the results of such activities while publishing financial statements for the year 2004-2005. What is the scope? (4 marks)(May,2005)
Answer
Corporate social reporting is information communique with respect to discharge of social responsibilities of corporate entity. Through ‘Corporate Social Report’ the corporate enterprises disclose the manner in which they are discharging their social responsibilities. More specifically, it is addressed to the public or society at large, although it can be squarely used by other user groups also.
In the given case, the group of companies has positively contributed to the social cause and the commercial activities undertaken by them come under the purview of corporate social reporting. Normally, such information is not required to be given mandatorily in the financial report due to the lack of any generally accepted standard of social responsibility for business entities. However, everyone agrees that all business entities should be socially responsible but how the individual entity weighs its priorities of social responsibility depends on the personal choice or preference of the group of persons in the management of an enterprise.
The group of companies (referred in the question) can voluntarily highlight the results of various commercial activities, undertaken by them along the related coast line through a ‘note to accounts’ while publishing financial statements for the year ended 2004-2005. Infact bringing out the results of such Tsunami relief activities in the Tsunami affected areas may imbibe a sense of social responsibility among other entities through ‘Corporate Social Report’.
Question 15
From the following information of Steel India Ltd. for the year ended 31st March, 2008, prepare their Social Balance Sheet as on that date:
- A specialist has valued their human assets at Rs.828 lakhs.
- Their investments were classified as:
(Rs. in lakhs)
Residential Hospital School Welfare
Buildings 17.00 1.00 1.40 0.80
Equipments 2.80 1.00 1.00 -
- Water, electricity and gas supply systems totalled Rs.1 lakh.
- Their Net owned funds were Rs.26 lakhs. (6 Marks) (May, 2008)


Answer
Social Balance Sheet of Steel India Ltd.
as at 31.03.2008
(Rs. in lakhs)
Liabilities:
Organization Equity 26.00
Social Equity (Contribution by staff) 828.00
Total 854.00
Assets:
Social Capital Investment:
(a) Buildings
(i) Residential 17.00
(ii) Hospital 1.00
(iii) School 1.40
(iv) Welfare 0.80 20.20
(b) Equipments
(i) Residential 2.80
(ii) Hospital 1.00
(iii) School 1.00 4.80
(c) Water, Electricity and Gas supply systems 1.00
Human assets (as valued by the specialist) 828.00
Total 854.00

Question 16
Write short notes on:
(a) Jaggi and Lau model on valuation on group basis of Human Resources.
(4 marks)(May, 2003)
(b) Opportunity cost (HRA). (5 marks)(November, 2003)
(c) Human Resouce Accounting. (5 marks) (Nov. 2007)
Answer
(a) According to Jaggi and Lau Model, proper valuation of human resources is not possible unless the contributions of individuals as a group are taken into consideration. A group refers to homogeneous employees whether working in the same department or division of the organisation or not. An individual’s expected service tenure in the organisation is difficult to predict but on a group basis it is relatively easy to estimate the percentage of people in a group likely to leave the organisation in future. This model attempted to calculate the present value of all existing employees in each rank. Such present value is measured with the help of the following steps:
(i) Ascertain the number of employees in each rank.
(ii) Estimate the probability that an employee will be in his rank within the organisation or terminated/promoted in the next period. This probability will be estimated for a specified time period.
(iii) Ascertain the economic value of an employee in a specified rank during each time period.
(iv) The present value of existing employees in each rank is obtained by multiplying the above three factors and applying an appropriate discount rate.
Jaggi and Lau simplified the process of measuring the value of human resources by considering a group of employees as valuation base. But in the process, they ignored the exceptional qualities of certain skilled employees. The performance of a group may be seriously affected in the event of exit of a single individual.
(b) Opportunity Cost: It is one of the Economic value models used for measurement and valuation of Human assets. As per this model, opportunity cost is the value of an employee in his alternative use. This opportunity cost is used as a basis for estimating the value of Human resources. Opportunity cost value may be established by competitive bidding within the firm so that in effect, Managers must bid for any scarce employee. A Human asset will have a value only if it is a scarce resource, that is, when its employment in one division denies it to another division. This method excludes employees of the type of which can be readily hired from outside the firm. Also, it is in very rare cases that managers would like to bid for an employee.
(c) Human Resource Accounting (HRA) is an attempt to identify, quantify and report investments made in human resources of an organization. Leading public sector units like OIL, BHEL, NTPC and SAIL etc. have started reporting human resources in their annual reports as additional information. Although human beings are considered as the prime mover for achieving productivity, and are placed above technology, equipment and money, the conventional accounting practice does not assign significance to the human resource. Human resources are not thus recognized as ‘assets’ in the Balance Sheet. While investments in human resources are not considered as assets and not amortised over the economic service life, the result is that the income and expenditure statement comprising current revenue and expenditure gives a distorted picture of the real affairs of the organization.
Accountants have been severely criticized by the Behavioural Scientists for their failure to value human resources, as this has come out as a handicap for effective management.
Human resource accounting provides scope for planning and decision making in relation to proper manpower planning. Also, such accounting can bring out the effect of various new rules, procedures and incentives relating to work force, and in turn, can act as an eye opener for modifications of existing statutes and laws.
Question 17
Briefly describe the method of valuation of human resources as suggested by Jaggi and Lau. Also point out the special merit and demerit of this method. (8 marks) ( May, 2006)
Answer
Jaggi and Lau suggested a model for valuation of human resources. According to them, proper valuation of human resources is not possible unless the contributions of individuals as a group are taken into consideration. A group refers to homogeneous employees whether working in the same department or division of the organization or not. An individual’s expected service tenure in an organization is difficult to predict, but on a group basis, it is relatively easy to estimate the percentage of people in a group likely to leave the organization in future. This model attempts to calculate the present value of all existing employees in each rank. Such present value is measured with the help of the following steps:
(i) Ascertain the number of employees in each rank.
(ii) Estimate the probability that an employee will be in his rank within the organization on terminated/promoted in the next period. This probability will be estimated for a specified time-period.
(iii) Ascertain the economic value of an employee in a specified rank during each time period.
(iv) The present value of existing employees in each rank is obtained by multiplying the above three factors and applying an appropriate discount rate.
Jaggi and Lau tried to simplify the process of measuring the value of human resources by considering a group of employees as basis of valuation. But in the process they ignored the exceptional qualities of certain skilled employees. The performance of a group may be seriously affected in the event of exit of a single individual.
Merit
Jaggi and Lau model approached the valuation of human resources on the basis of grouping of employees. Under this method, calculations get simplified and the chances of errors get reduced.
Demerit
This model ignores individual skills of the employees. The varied skills of the employees is not recognized in the valuation process under Jaggi and Lau model.
Question 18
Briefly describe the progress made by India so far in the field of human resource accounting. (4 marks)(May, 2004)

Answer
Human resource accounting can be defined as the process of identifying, measuring and communicating information about human resources in financial statements in order to facilitate effective management. Human resource accounting is a recent phenomenon in India. Leading public sector units like OIL, BHEL, NTPC, MMTC and SAIL etc. have started reporting Human Resources in their annual reports as additional information. The Indian Companies basically adopted the model of human resource valuation as advocated by Lev and Schwartz (1971). Indian Companies focused their attention on the present value of employee earning as a measure of their human capital. However the Indian Companies have suitably modified the Lev and Schwartz model to suit their individual circumstances.
Question 19
Give an account of the growing scope of human capital reporting. (4 marks)(May, 2005)
Answer
Of late there is a growing trend of shift from the traditional focus on financial reporting of quantifiable resources (which can be measured in monetary terms) to a more comprehensive approach of reporting under which human resources are also considered as measurable assets. Having followed the methods of accounting of fixed assets, one can take into account the employee-related costs like cost of recruitment, training and orientation of employees, for the purpose of capitalization and then the appropriate portion thereof can be amortised each year over the estimated years of effect of such costs.
The relevance of human resource information lies in the fact that it concerns organizational changes in the firm’s human resources. The ratio of human to non-human capital indicates the degree of labour intensity of an organization. Comparison of the specific values of human capital based on the organisation’s scales of wages and salaries with the general industry standards, can be a good source of information to the management. There is no standard human capital reporting format as employment reporting is relatively a new form of reporting. Usually, the report inter alia contains data pertaining to employee numbers, employment and training policies, collective bargaining arrangements, industrial disputes, pension and pay arrangement and disabled employee numbers.
Human capital reporting provides scope for planning and decision-making in relation to proper manpower planning. Also, such reporting can bring out the effect of various rules, procedures and incentives relating to work force, and in turn, can act as an eye opener for modifications of existing statutes, laws and the like.
Question 20
Why Human Resources Asset is not recognised in the Balance sheet?
(4 marks) (Nov. 2008)
Answer
Although human beings are considered as the prime mover for achieving productivity, and are placed above technology, equipment and money, the conventional accounting practice does not assign significance to the human resources. Human resources are not recognized in balance sheet as there are no measurement criteria for recognition of human resources. Human resource accounting is at developing stage and no accounting principles have been established for valuation of human assets. Costs incurred on human resources are recognised as expenses in profit and loss account. Leading public sector units like OIL, BHEL, NTPC and SAIL etc. have started reporting human resources in their annual reports as additional information.
Question 21
A company has a capital base of Rs.1 crore and has earned profits to the tune of Rs.11 lakhs. The Return on Investment (ROI) of the particular industry to which the company belongs is 12.5%. If the services of a particular executive are acquired by the company, it is expected that the profits will increase by Rs.2.5 lakhs over and above the target profit.
Determine the amount of maximum bid price for that particular executive and the maximum salary that could be offered to him. (6 marks) November 2006)
Answer
(b) Capital Base = Rs.1,00,00,000
Actual Profit = Rs. 11,00,000
Target Profit @ 12.5% = Rs. 12,50,000
Expected Profit on employing the particular executive
= Rs.12,50,000 + 2,50,000 = Rs.15,00,000
Additional Profit = Expected Profit – Actual Profit
= 15,00,000 – 11,00,000 = Rs.4,00,000
Maximum bid price =
=
Maximum salary that can be offered = 12.5% of Rs.32,00,000 i.e., 4,00,000
Maximum salary can be offered to that particular executive upto the amount of additional profit i.e., Rs.4,00,000.
Question 22
State the possible objections to segmental reporting. (7 marks)(May, 1998)
Answer
Objections to segmental reporting: The possible objections to segmental reporting can be enumerated as below:
(i) It is generally felt that segmental revenues and expenses are not distinguishable objectively in many cases. Revenues of a weak product line may be derived only because of the existence of a strong product line. Also many joint costs are only separable arbitrarily.
(ii) Much of segmental results depend on the inter-departmental transfer pricings which are not always logically established.
(iii) Various segments of an enterprise may use common resources which makes it difficult to arrive at a segment wise performance ratio.
(iv) Since the users are in no position to know the proper base for cost allocation, the segment results would be less than meaningful.
(v) The last objection consists of the competitive implications to the firm. Some academics contend that company secrets will be disclosed while others referred to the competitive hardship suffered by some firms if segmented data is required. Suppose that Company X, a small company, has a segment identical to one in Company Y, a huge conglomerate. Company X would have to disclose the segment while Company Y would not because the segment is not considered material to Y's operations.
However, considering the problems of joint cost allocation, often it is suggested to follow a contribution margin approach for reporting segmental results. By this only identifiable costs are deducted from segment revenues and gross segment margins may only be indi¬cated. But for all practical purposes, this becomes a useless exercise when proportion of identifiable cost is insignificant.
Question 23
M Ltd. Group has three divisions A, B and C. Details of their turnover, results and net assets are given below:
Rs. (‘000)
Division A
Sales to B 3,050
Other Sales (Home) 60
Export Sales 4,090
7,200
Division B
Sales to C 30
Export Sales to Europe 200
230
Division C
Export Sales to America 180


Divisions
Head Office
Rs. (‘000) A
Rs(‘000) B
Rs.(‘000) C
Rs.(‘000)
Operating Profit or Loss before tax 160 20 (8)
Re-allocated cost from Head Office 48 24 24
Interest cost 4 5 1
Fixed assets 50 200 40 120
Net current assets 48 120 40 90
Long-term liabilities 38 20 10 120
Prepare a Segmental Report for publication in M Ltd. Group. (8 marks)(November, 2000)
Answer
M Ltd.
Segmental Report
Rs. ('000)
Divisions Inter segment Consolidated
Total
A B C Eliminations
Segment Revenue
Sales:
Domestic 60 – – – 60
Export 4,090 200 180 –
4,470
External Sales 4,150 200 180 – 4,530
Inter-segment Sales 3,050 30 –
3,080 –

Total Revenue 7,200 230 180 3,080 4,530
Segment result (given) 160 20 (8) 172
Head office expenses (96)
Operating profit 76
Interest expense (10)
Profit before tax 66
Other information
Fixed assets 200 40 120 360
Net current assets 120 40 90 250
Segment assets 320 80 210 610
Unallocated corporate assets
98
Segment liabilities 20 10 120 150
Unallocated corporate liabilities
38
Sales Revenue by Geographical Market
(Rs.’000)
Home Sales Export Sales (by division A) Export to Europe Export to America Consolidated Total
External Sales 60 4,090 200 180 4,530
Question 24
Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the company’s three divisions and the head office:
Rs.(’000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
Bright Bar Division
Sales to Fitting Division 45
Export Sales to Rwanda 300
345
Fitting Division
Export Sales to Maldives 270

Particulars Head Office

Rs. (‘000) Forging Shop Division
Rs. (‘000) Bright Bar Division
Rs. (‘000) Fitting Division
Rs. (‘000)
Pre-tax operating result 240 30 (12)
Head office cost reallocated
72
36
36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180

Answer
Diversifiers Ltd.
Segmental Report

(Rs.’000)
Particulars Divisions
Forging shop Bright Bar Fitting Inter Segment Eliminations Consolidated Total
Segment revenue
Sales:
Domestic 90    90
Export 6,135
300
270

6,705

External Sales 6,225 300 270  6,795
Inter-segment sales 4,575
45

4,620


Total revenue 10,800 345 270 4,620 6,795
Segment result (given) 240 30 (12) 258
Head office expenses (144)
Operating profit 114
Interest expense (16)
Profit before tax 98
Information in relation to assets and liabilities:
Fixed assets 300 60 180  540
Net current assets 180 60 135 
375
Segment assets 480 120 315 
915
Unallocated corporate assets
(75 + 72)




147
Total assets 1,062
Segment liabilities 30 15 180  225
Unallocated corporate liabilities 57
Total liabilities 282

Sales Revenue by Geographical Market
(Rs.’000)
Home Sales Export Sales (by forging shop division) Export to Rwanda Export to Maldives Consolidated Total
External sales 90 6,135 300 270 6,795


Question 25
(a) What are derivatives and what are its characteristics? (5 marks)(November, 2003)
(b) Explain currency options related to foreign exchange. (4 marks)(May, 2004)
(c) Write short note on Interest Rate Swaps. (4 marks) (May, 2007)
Answer
(a) Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index or reference rate), in a contracted manner. The underlying asset can be equity, forex, commodity or any other asset. For example, farmers may wish to sell their harvest of wheat at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of the derivative is driven by the spot price of wheat which is the “underlying asset”.
Derivative financial instruments can either be on the balance-sheet or off the balance sheet and include options contract, interest rate swaps, interest rate flows, interest rate collars, forward contracts, futures etc. A derivative instrument is therefore a financial instrument or other contract with the following three characteristics:
(a) It has one or more underlying and one or more notional amounts or payments provisions or both. These terms determine the amount of settlement or settlements and in some cases, whether or not settlement is required;
(b) It requires no initial net investment or an initial net investment that is smaller than what is required for similar responses to changes in market factors.
(c ) Its terms require or permit net settlement; it can readily be settled net by means outside the contract or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.
Accounting for foreign exchange derivatives is guided by AS 11 (Revised 2003). The ICAI has also issued a Guidance Note dealing with the accounting procedures to be adopted while accounting for Equity Index Options and Equity Stock Options.
(b) Currency Options give the client the right, but not the obligation, to buy/sell a specific amount of currency at a specific price on a specific date. Currency options provide a tool for hedging foreign exchange risk arising out of the firm’s operations. Currency options enable the business house to remove downside risk without limiting the upride potential. Options can be put option or call option. A put option is a contract that specifies the currency that the holder has the right to sell. A call option is a contract that specifies the currency that the holder has the right to buy.
(c) Interest rate swap can be defined as a financial contract between two parties (called counter parties) to exchange on a particular date in the future, one series of cash flows (fixed interest) for another series of cash flows (variable or floating interest) in the same currency on the same principal (an agreed amount called notional principal) for an agreed period of time. The contract will specify the interest rates, the benchmark rate to be followed, the notional principal amount for the transaction, etc. Interest rates are of two types, fixed interest rates and floating rates which vary according to changes in a standard benchmark interest rate. An investor holding a security which pays a floating interest rate is exposed to interest rate risk. The investor can manage this risk by entering into an interest rate swap.
Question 26
Mr. Investor buys a stock option of ABC Co. Ltd. in July, 2003 with a strike price on 30.07.2003 of Rs. 250 to be expired on 30.08.2004. The premium is Rs. 20 per unit and the market lot is 100. The margin to be paid is Rs. 120 per unit.
Show the accounting treatment in the books of Buyer when:
(i) the option is settled by delivery of the asset, and
(ii) the option is settled in cash and the index price is Rs. 260 per unit.
(12 marks)(November, 2004)
Answer
Accounting entries in the books of buyer
2003 At the time of inception Rs. Rs.
July Stock option premium account Dr. 2,000
To Bank account 2,000
(Being premium paid to buy a stock option)

Deposit for margin money account Dr. 12,000
To Bank account 12,000
(Being margin money paid on stock option)
At the time of settlement
August (i) Option is settled by delivery of the asset
Shares of ABC Ltd. account Dr. 25,000
To Deposit for margin money account 12,000
To Bank account 13,000
(Being option exercised and shares acquired, Rs. 12,000 margin money adjusted and the balance amount was paid)
Profit and loss account Dr. 2,000
To Stock option premium account 2,000
(Being the premium transferred to profit and loss account on exercise of option)
(ii) Option is settled in cash
Profit and loss account Dr. 2,000
To Stock option premium account 2,000
(Being the premium transferred to profit and loss account)
Bank account (Rs. 100  10) Dr. 1,000
To Profit and loss account 1,000
(Being profit on exercise of option)
Bank account Dr. 12,000
To Deposit for margin money account 12,000
(Being margin on equity stock option received back on exercise of option)
Question 27
On 24th January, 2006 Chinnaswamy of Chennai sold goods to Watson of Washington, U.S.A. for an invoice price of $40,000 when the spot market rate was Rs.44.20 per US $. Payment was to be received after three months on 24th April, 2006. To mitigate the risk of loss from decline in the exchange-rate on the date of receipt of payment, Chinnnaswamy immediately acquired a forward contract to sell on 24th April, 2006 US $ 40,000 @ Rs.43.70. Chinnaswamy closed his books of account on 31st March, 2006 when the spot rate was Rs.43.20 per US $. On 24th April, 2006, the date of receipt of money by Chinnaswamy, the spot rate was Rs.42.70 per US $.
Pass journal entries in the books of Chinnaswamy to record the effect of all the above mentioned effects. (8 Marks)( May, 2006)
Answer
Journal Entries in the books of Chinnaswamy
2006 Rs. Rs.
Jan. 24 Watson Dr. 17,68,000
To Sales Account 17,68,000
(Credit sales made to Watson of Washington, USA for $40,000 recorded at spot market rate of Rs.44.20 per US $)
” ” Forward (Rs.) Contract Receivable Account Dr. 17,48,000
Deferred Discount Account Dr. 20,000
To Forward ($) Contract Payable 17,68,000
(Forward contract acquired to sell on 24th April, 2006 US $40,000 @ Rs.43.70)
March 31 Exchange Loss Account Dr. 40,000
To Watson 40,000
(Record of exchange loss @ Re.1 per $ due to market rate becoming Rs.43.20 per US $ rather than Rs.44.20 per US $)
” ” Forward ($) Contract Payable Dr. 40,000
To Exchange Gain Account
(Decrease in liability on forward contract due to fall in exchange rate) 40,000
” ” Discount Account Dr. 14,667
To Deferred Discount Account
(Record of proportionate discount expense for 66 days out of 90 days) 14,667

April 24 Bank Account Dr. 17,08,000
Exchange Loss Account Dr. 20,000
To Watson 17,28,000
(Receipt of $40,000 from Watson, USA customer @ Rs.42.70 per US $; exchange loss being Rs.20,000)
” “ Forward ($) Contract Payable Account Dr. 17,28,000
To Exchange Gain Account 20,000
To Bank Account 17,08,000
(Settlement of forward contract by payment of $40,000)
” ” Bank Account Dr. 17,48,000
” ” To Forward (Rs.) Contract Receivable 17,48,000
(Receipt of cash in settlement of forward contract receivable)
” ” Discount Account Dr. 5,333
To Deferred Discount Account 5,333
(Recording of discount expense for 24 days:
Rs.20,000  )

Question 28
Write a short notes on:
(a) Accounting issues involved in Environmental Accounting.
(6 marks)(May, 2003)(May, 2007)
(b) Environmental Accounting. (4 marks)(Nov.2004)(Nov. 2005)
Answer
(a) Major accounting issues involved in environmental accounting can be explained as follows:
(i) Distinction between environmental expenditure and normal business expenditure: Many new machines may incorporate state-of-the-art environmental technology and accordingly, a portion of such capital costs and also the running and maintenance expenditure may be treated as environment related expenditure. It is necessary to frame guidelines indicating whether the reporting entity should properly allocate the capital and revenue expenditures between environmental expenditure and normal business expenditure.
(ii) Capitalisation of environmental expenditures vis-a-vis expensing them during the current accounting period: Environmental protection costs relating to prior periods and current period are generally very high and if expensed in one year as and when a reporting entity is recoursed to and/or persuaded to follow environmental accounting, the adverse impact in EPS is a major concern. Accordingly many Western Corporations prefer to capitalise environment costs instead of immediate expensing and adopt an amortisation policy extending upto 10 years. Although this accounting practice has no theoretical support and rather contradicts the well established accounting concept of “prudence”, it is considered as a practical solution to off-load burden of accumulated environmental costs without abruptly disturbing the cash flows attributable to the lenders, Government and finally to the shareholders. However, recognition of environmental costs should not necessarily be restricted to the expenses accrued in view of the applicable environmental laws. It should be guided by ethical consideration.
(iii) Recognition of environment related contingent liabilities: Environmental contingent liabilities are a matter of increasing concern throughout the world. Recognising a liability of hazardous waste remediation frequently depends on the ability to estimate remediation costs reasonably.
In fact, identification and measurement of contingent liabilities are highly debatable accounting aspects. The United Nations Conference on Environment and Development (UNCTAD) papers raise the basic question why environmental contingencies should not be merged with other business contingencies. There is an urgent need for tightening the reporting rules on contingencies incorporating specific requirements for disclosure of environmental contingencies along with other contingencies.
(b) The term ‘environment’ includes everything in all its manifest forms, on the earth, beneath the earth and above the earth. A business enterprise takes support of social and ecological system in order to maximize wealth. Economic activity, social welfare and a diverse environment, all are linked and ultimately depend on each other. The functioning of an enterprise may have some favourable and some adverse effects on the environment. Hence, it is felt that there is a need for maintaining accounts of the effects of activities of business entity on the environment. Environmental accounting can be defined as a system (methodology) for measuring environmental performance and communicating the results of these measurements to users. It helps in presenting the utilization of natural resources by an enterprise, the costs incurred to use them and the income earned therefrom in a transparent manner. Environmental accounting, entirely a new concept, is a faithful attempt to identify the resources exhausted and the costs rendered reciprocally to the enterprise by a business corporation. Thus environmental accounting stands for recording and documenting environmental performance to facilitate effectiveness of environmental management system with reference to compliance, safety and quality control. It provides a data base for taking corrective steps and future action for developing organisation’s environmental strategy and for identifying environmentally based opportunities for gaining an edge over one’s competitors. If proper environmental accounting system is established, the enterprise will be able to anticipate environmental damage and therefore can prevent it from happening.
Of course environmental accounting is still in an early stage of evolution and it is being groomed under the voluntary leadership of a variety of enterprises around the world. Recognising the importance of protecting and preserving the environment, a number of laws have been enacted throughout the world.
7
ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATIONS
Topics covered:
 Fund Based Accounting (Q. No. 1)
 Special Features of Accounting for Educational Institutions
(Q. Nos. 2 to 9)
 Special Features of Accounting for Hospitals and Other Health Organisations (Q. No. 10,11)
 Special Features of Accounting for Other Not-For-Profit Organisations (Q. No. 12)

Question 1
Explain the concept of fund theory and fund based accounting. (4 marks)(November, 2000)
Answer
Fund theory and fund based accounting: Although, the profit motive is the driving force for any business entity, there are certain organisations which are run without profit motive. Such organisations may be governmental institutions or any non-profit institutions like colleges, universities, charitable hospitals etc. The accounting for these not-for profit entities is primarily based on the fund theory. The fund theory is based on the equation  Assets = Restrictions on assets. Assets represent prospective services to the fund and liabilities represent restrictions against the assets of the fund. For example, in case of a university, the most commonly used specific funds are endowment funds, development funds etc. Each of these funds has its specific assets restricted for particular purposes. Under the fund theory, the balance sheet is considered an 'inventory statement' of assets and those restrictions applicable to the assets. Revenues represent an increase in assets into the fund that are completely free of equity restrictions other than the final restriction imposed by the residual equity. The residual equity represents a final restriction on the assets and establishes the equality of assets and equities. Expenses represent the release of services for designated purposes specified in the objective of the fund. Thus, the fund theory calls for fund based accounting rather than entity based accounting.
A fund may be defined as an accounting entity "with a self balancing set of accounts regarding cash and/or other resources together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations". Thus, every fund is aimed at fulfilling some purpose and the services embodied in the assets are the primary means to achieve that purpose. Fund based accounting essentially involves preparation of financial statements fundwise and consolidation of those statements to represent the financial results/position of the organisation as a whole.
Question 2
What are, the special features of accounting for Educational Institutions? (7 marks)(May,1996)
Answer
Special Features of Accounting for Educational Institutions: An educational institution is generally not run for profit. Its, administrators, as custodians of public funds, are accountable of their proper expenditure for educational purpose. The marked difference between commercial accounting and that for educational institutions is that the former places emphasis on proper ascertainment of profits, while the latter is more generally concerned with exercising control over expenditure so as to conform to the stipulated norms and to the academic objectives of the institution to which it relates.
In the case of institutions like colleges and universities, separate ledgers are maintained for each fund. Funds may be broadly classified into two categories - Revenue Funds and Specific Funds. Revenue Funds may be further classified as Unrestricted Fund and Restricted Fund. Specific Funds are Endowment Funds, Annuity and Life Income Funds, Development Funds etc. Separate balance sheet is prepared for each fund and a statement of activity (popularly known, as Income and Expenditure Account) is prepared for only revenue funds- both restricted and unrestricted. Finally, each individual balance sheet is consolidated to get a general balance sheet of the institution as a whole.
Revenue Funds- Restricted and Unrestricted: Revenue funds essentially record normal revenue transactions. However, the use of revenue fund may be restricted or unrestricted. In the case of restricted funds, income is recognised to the extent of expenditure incurred. The accounting basis of the unrestricted fund is the accrual method as used for commercial entities.
There may be transfers out of revenue funds to specific funds and vice-versa. Some transfers are mandatory and some are non-mandatory.
Both mandatory and non-mandatory transfers are reported separately in the financial statements of the revenue funds.
Specific Funds: Specific funds are earmarked for well defined purposes. Contributions and transfers arc directly credited to respective fund balances. Expendable resources are transferred to revenue funds except for capital outlay and debt retirement which are accounted for in development or asset fund and loan fund respectively. For the specific funds no statement of income is prepared. However a statement is prepared showing the movements in fund balances. The features of certain important specific funds are dis¬cussed below.
(a) Endowment Funds: Incomes from these funds usually are transferred to another fund where it may be expended. Interest revenue out of such fund is accrued at the end of accounting year. The fund is usually invested in some securities and such invest¬ment is valued at cost price. If the income out of such investment is available for unrestricted purposes it is recognised in the unrestricted fund. On the other hand if the income is to be used for some specific purpose it is transferred to that specific fund. The only time, the investment income is recognised in the endowment fund is when the terms of agreement specify that the income must be added to the endow¬ment principal. .
(b) Loan Funds: Loan funds account for resources that may be loaned to faculty or staff. No revenue or expense accounts are used in the loan fund. All transactions affecting fund balance are recorded directly to fund balance. Interest on loan is credited to the fund balance on accrual basis. Investment income is also accrued. Administra¬tion and collection costs relating to granting and recovery of loans are directly charged to this fund. Any bad debt or provision for doubtful loans are also charged to this fund.
(c) Annuity and Life Income Funds: These funds account for resources that are given to a not for profit organisation provided that the organisation agrees to make periodic payments to a designated recipient. In the case of annuity funds, the amount of periodic payment is fixed whereas payments vary with the amount of income earned in the case of life income funds.
(d) Development Funds: These funds are utilised for developmental purposes like ac¬quisition of building and equipments, major repairs to fixed assets etc. Separate fund may be maintained for each developmental activity. Alternatively a combined development fund may be maintained to account for all acquisitions and/or construc¬tion of fixed assets. Any expenditure incurred for the purpose of construction or acquisition of building, laboratory etc. are met out of this fund and the asset is recognised in the general balance sheet. Consequently that portion of the fund which has been utilised for the acquisition or construction of the asset should be transferred to unrestricted fund. Depreciation on these fixed assets should be shown as part of operating expenses of unrestricted revenue fund.
To sum up the following statements are to be prepared to get a consolidated picture the organisation as a whole:
(a) Income and Expenditure Account for revenue funds.
(b) Statement showing changes in fund balances.
(c) Balance Sheet of individual funds.
(d) General Balance Sheet.
Question 3
(a) How would you describe ‘Development Funds’ maintained by Not-for-profit Organisations? (6 marks)(May, 2002)
(b) Write short note on Annuity and life income funds. (5marks)(November, 2003)
(c) What do you mean by restricted funds and unrestricted funds as found in the books of account of not-for-profit organizations? (4 marks) (May, 2004)
(d) Distinguish between mandatory transfers and non-mandatory transfers made by a college in its books of account. (4 marks)(May, 2004)
Answer
(a) Development Funds are utilised for developmental purposes like acquisition of buildings and equipments, major repairs to fixed assets etc. Separate fund may be maintained for each development activity. Alternatively, a combined development fund may be maintained to account for each acquisition and/or construction of fixed assets. The major sources of receipts for this fund are government or private grants/gifts (restricted to acquisition of fixed properties), income and gains of investments of unutilised fund (if any), transfers from other funds. Any expenditure incurred for the purpose of construction or acquisition of building, laboratory etc. is met out of this fund and the asset is recognised in the general balance sheet. Consequently that portion of the fund which has been utilised for the acquisition or construction of the asset should be transferred to unrestricted fund. So long as the asset is not fully acquired or constructed, the proportionate fund cannot be transferred to unrestricted fund. Depreciation can be charged, on fixed assets only after its completion or acquisition. Such depreciation should be shown as part of operating expenses of unrestricted revenue fund.
(b) The annuity and life income funds account for resources that are given to a non profit organisation provided that the organisation agrees to make periodic payment to a stated person. In case of annuity funds the agreement stipulates that periodic payments are made to a certain person for a specified amount for a specified period of time. Life income funds distribute their income to the individuals as long as they live. When the beneficiary dies, the funds become the property of the organisation and are used as specified in the gift agreement.
Annuity funds pay a fixed amount periodically whereas life income fund payments vary with the amount of income earned.
(c) In a not-for-profit organization, revenue funds are received to meet operating expenses but the use of revenue funds may be restricted or unrestricted. Restricted funds account for resources whose use, by the not-for-profit organization, is restricted by the donor. For example, a grant may be received by a university from the Government for the specific purpose of research on cancer. This grant will constitute a restricted fund. The unrestricted funds account for resources that may be expended to carry out the primary purposes of the institution (e.g. instructions, research, maintenance etc.) and are not restricted to specific purposes. However, the not-for-profit organization may convert part of the unrestricted fund into a restricted fund by earmarking a certain sum for a specified purpose.
(d) The terms mandatory and non-mandatory transfers are unique to college and universities accounting and reporting. Mandatory transfers are transfers out of the revenue funds to other funds resulting from binding legal agreements or grant agreements. Non-mandatory transfers are discretionary transfers specified by the governing board for a variety of purposes such as new additions to building, repairs and replacement of plant etc. Non-mandatory transfers may also be made from specific funds to the revenue funds. Both mandatory and non-mandatory transfers are reported separately in the financial statements of the revenue funds. Also the governing board may designate unrestricted revenue fund resources for specific purposes in future periods. These board–designated funds are internal designations similar to appropriations of retained earnings for a commercial entity.
Question 4
Henri Management institute furnishes you the following information in respect of Development Fund for the year 2001-2002:
Rs. in lakhs
Government grants received for construction of Buildings 50
Private grants for acquisition of Land 30
Transfer from unrestricted fund for purchase of Furniture 10
Income from fixed deposits (Fixed deposit for one year – Rs. 40 lakhs) 2
Cost of Land 10
Advance payment made for acquisition of further Land 5
Furniture purchased 1
Payment made to contractors for construction of Buildings 12
Prepare a statement of changes in balances of Development Fund for the year 2001-2002 and a Balance Sheet for the Development Fund as on 31st March, 2002.
(10 marks)(May, 2002)
Answer
Statement of Changes Development Fund
Receipts Rs. in lakhs Rs. in lakhs
Government Grants 50
Private Grants 30
Income from Fixed Deposits 2
Transfer from unrestricted fund 10 92
Deductions/Transfers
Cost of land acquired 10
Furniture purchased 1 11
81

Balance Sheet – Development Fund
as on 31st March, 2002
Liabilities Amount Assets Amount
Rs. in lakhs Rs. in lakhs
Fund Balance 81 Capital work in progress 12
Advance payment for Land 5
Fixed Deposits 40
__ Bank Balance (See Working Note) 24
81 81
Working Note:
Bank Balance as on 31st March, 2002
Bank Account Rs. in lakhs
Rs. Rs.
To Government Grants 50 By Fixed Deposits 40
To Private Grants 30 By Cost of Land 10
To Interest from Fixed Deposits 2 By Advance payment for Land 5
To Transfer from Unrestricted Fund 10 By Payments to Contractors 12
By Furniture 1
__ By Balance c/d 24
92 92
Note: In the general balance sheet, Land (Rs. 10,00,000) and Furniture (Rs. 1,00,000) will be shown as assets and the unrestricted fund balance will increase by Rs. 11,00,000 as transfer from development fund.
Question 5
A University receives two grants ─ one from the Ministry of Human Resources to be used for Aids Research. This grant is for Rs. 45,00,000, which includes Rs. 3,00,000 to cover indirect expenses incurred in administering the grant. The second grant of Rs. 35,00,000 received from a reputed Trust is to be used to set up a centre to conduct seminars on Aids related matters from time to time. During the year, it also received Rs. 5,00,000 worth of equipment donated by a well wisher to be used for Aids research. During the year 2001-2002, the University spent Rs. 32,25,000 of the government grant and incurred Rs. 3,00,000 overhead expenses. Rs. 28,00,000 were spent from the grant received from the Trust.
Show the necessary Journal Entries. (5 marks)(November, 2003)
Answer
Journal Entries
Dr. Cr
Rs. Rs.
(i) Bank A/c Dr. 80,00,000
To Revenue Fund (Restricted) A/c
(To record grants received from the Government Department and Private organisation) 80,00,000
(ii) Expenses A/c Dr. 60,25,000
To Bank A/c
(To account for Rs.32,25,000 spent from out of Government grant and Rs.28,00,000 from out of Private grant) 60,25,000
(iii) Equipment A/c Dr. 5,00,000
To Restricted Revenue Fund A/c
(To record the receipt of donation of assets from a well wisher) 5,00,000
(iv) Revenue Fund (Restricted) A/c Dr. 60,25,000
To Income (Govt. grant) A/c 32,25,000
To Income (Private grant) A/c
(To recognise revenue) 28,00,000
(v) Revenue Fund (Restricted ) A/c Dr. 3,00,000
To Bank A/c
(To account for overhead expenses incurred) 3,00,000
Note: Actually, the expenses are incurred in unrestricted revenue fund and reimbursed to the above.
Question 6
From the following details of Loan Fund of Kanpur Institute of Technology for the year 2003-2004, you are required to prepare a statement showing changes in the Loan Fund Balance :
Rs.
Fund balance as on 1.4.2003 25,00,000
Grants from the Government and Society 12,00,000
Grants from Revenue Fund 50,000
Other transfer from Unrestricted Fund 70,000
Investment income 60,000
Interest on Loan 40,000
Refund to Granters 25,000
Bad Debts written off 15,000
Administration and collection costs 25,000
(4 marks)(November, 2004)
Answer
Kanpur Institute of Technology
Statement of changes – Loan funds
Rs.
Balance as on 1st April, 2003 25,00,000
Additions during the year 2003-2004:
Grants from government and society 12,00,000
Investment income 60,000
Interest on loan 40,000
Grants from revenue fund 50,000
Other transfer from unrestricted funds 70,000 14,20,000
Deductions during the year 2003-04:
Refund to granters 25,000
Bad debts written off 15,000
Administration and collection costs 25,000 (65,000)
Balance as on 31st March, 2004 38,55,000
Question 7
The Institute for Global Management Research maintains a combined Development Fund in respect of which the following information is available for the year ended 31st March, 2005:
Rs.
Govt. Grants received for acquisition of land 60,00,000
Private Grants received for construction of buildings 30,00,000
Foreign Private Grant for purchase of computing equipment USD 5,00,000
Transfer from unrestricted fund for purchase of furniture 10,00,000
Cost of Assets so far acquired:
Land 59,00,000
Buildings in progress (payments to Contractors) 15,00,000
Furniture 3,00,000
The USD grant has been received into a bank account in USA on 29.3.2005 and is expected to be utilized therefrom for purchases to be made abroad. The rate of exchange on 31.3.2005 is 1 USD = Rs. 44.
You are required to prepare
 A Statement showing changes in the Development Fund for the year; and
 Balance Sheet of the Development Fund as at 31.3.2005. ( 8 Marks)(Nov. 2005)
Answer
The Institute for Global Management Research
Statement of Changes in Development Fund
Rs. Rs.
Receipts
Government grants 60,00,000
Private grants 30,00,000
Foreign private grant (in USD 5,00,000) 2,20,00,000
Transfer from unrestricted fund 10,00,000 3,20,00,000
Deductions/Transfers
Cost of land acquired 59,00,000
Furniture purchased 3,00,000 62,00,000
Balance as at 31.3.2005 2,58,00,000

Development Fund
Balance Sheet as at 31.3.2005
Liabilities Rs. Assets Rs.
Fund Balance 2,58,00,000 Buildings in progress 15,00,000
Bank balances
in India 23,00,000
¬__________ outside India 2,20,00,000 2,43,00,000
2,58,00,000 2,58,00,000

Bank A/c (in India)
Rs. Rs.
To Government grant 60,00,000 By Land 59,00,000
To Private grant 30,00,000 By Furniture 3,00,000
To Transfer 10,00,000 By Payments to contractors for buildings 15,00,000
_________ By Balance c/d 23,00,000
1,00,00,000 1,00,00,000
Question 8
Indian Engineering and Technological Institute, an autonomous body furnishes the following information:
On 1.4.2006, unutilised restricted government grant (capital) balance is Rs.40,00,000; unutilised unrestricted government grant (revenue) balance is Rs.9,00,000; Institute’s own corpus fund is Rs.25,00,000. Besides, a private endowment fund of Rs.18,50,000 is there on that date. The entire endowment fund is in fixed deposit with a bank fetching interest of 9.5% p.a. half-yearly transferred on 30th September and 31st March to a current account meant for scholarship and awards. The said current account has a debit balance of Rs.1,37,500. Apart from this, total cash and bank balance as on 1.4.06 is Rs.85,00,000.
Following transactions took place during the year 2006-07:
(1) Salary paid out of own fund is Rs.65,00,000.
(2) Salary to the research associates of a Government sponsored research scheme is Rs.4,00,000 paid out of unrestricted government grant.
(3) Cost of renovation of the administrative building borne out of the Institute’s own fund is Rs.4,75,000. The renovation work was completed on 21st November, 2006 which was also the date of payment. Book value of the building was Rs.38,00,000 on 1.4.06. The rate of depreciation is 5% p.a. calculated at full year’s rate if the asset exists for a period exceeding 6 months, and at half-year’s rate in other cases. The same principle is followed by the Institute in all cases of depreciation.
(4) Tuition fees were received Rs.85,00,000.
(5) Scholarships and awards of Rs.1,43,000 were given on 9th December, 2006.
(6) A laboratory building was under construction for the last two years. Balance of capital work-in-progress on 1.4.06 was Rs.28,00,000. The work has been completed on 25th May, 2006. Final payment was made earlier on 29.4.2006. Total expenditure comes to Rs.37,00,000. Rate of depreciation on the laboratory building is 5%. The entire expenditure will be spent from the restricted government (capital) Grant on certain conditions attached by the government. The Institute follows the principles of AS 12 in the case of use of revenue and capital grant. Since certain conditionality will apply over a period of time, it is decided that deferred income method will be followed.
Show the following Ledger accounts:
(i) Restricted Government Grant (capital) A/c.
(ii) Unrestricted Government Grant (revenue) A/c.
(iii) Current A/c of Endowment and Scholarship.
(iv) Cash and Bank A/c. (8 Marks) (Nov. 2007)
Answer
(a) Restricted Government Grant (Capital) Account
Dr. Cr.
Rs. Rs.
31.3.07 To Income and Expenditure A/c - Grant against laboratory building 37,00,000 1.4.06 By Balance b/d 40,00,000
(recognized to the extent of amount spent)
To Balance c/d 3,00,000
40,00,000 40,00,000
1.4.07 By Balance b/d 3,00,000
Unrestricted Government Grant (Revenue) Account

31.3.07
To
Income & Expenditure A/c (salary paid to research associates) Rs.
4,00,000

1.4.06
By
Balance b/d Rs.
9,00,000
To Balance c/d 5,00,000
9,00,000 9,00,000
1.4.07 By Balance b/d 5,00,000
Current Account of Endowment and Scholarship
Rs. Rs.
1.4.06 To Balance b/d 1,37,500 9.12.06 By Scholarship & awards 1,43,000
30.9.06 To Interest on fixed deposit
(9.5% of Rs.18,50,000 for 6 months)
87,875 31.3.07 By Balance c/d 1,70,250
31.3.07 To Interest on fixed deposit (9.5% of Rs.18,50,000 for 6 months)

87,875


3,13,250 3,13,250
1.4.07 To Balance b/d 1,70,250

Cash and Bank Account
Rs. Rs.
1.4.06 To Balance b/d 85,00,000 29.4.06 By Capital WIP (37,00,000 –28,00,000) 9,00,000
31.3.07 To Tuition fee 85,00,000 21.11.06 By Administrative Building A/c 4,75,000
31.3.07 By Salary 65,00,000
31.3.07 By Salary to research associates
4,00,000
31.3.07 By Balance c/d 87,25,000
1,70,00,000 1,70,00,000
1.4.07 To Balance b/d 87,25,000

Question 9
From the following details in respect of loan funds of Excellent School of Management for 2007-08, prepare a statement showing changes in fund balance during the year:
Rs.
Fund balance at the end of the year 30,30,000
Loan fund matching grant from revenues funds 30,000
Private and Government grants 11,00,000
Other transfers from unrestricted revenue funds 1,50,000
Interest on loans 60,000
Investment income 35,000
Loan cancellations and write offs 15,000
Refunded to grantors 60,000
Administrative and Collection costs 25,000
(8 Marks) (Nov. 2008)
Answer
Excellent School of Management
Statement of Changes - Loan Funds
Rs.
(i) Fund Balance at the beginning of the year
(Balancing Figure – Refer Working Note) 17,55,000
(ii) Additions during 2007-08
Private and Government Grants 11,00,000
Interest on loans 60,000
Investment Income 35,000
11,95,000

(iii) Deductions during 2007-08
Loan cancellations and write offs 15,000
Refunded to Grantors 60,000
Administrative and Collection Costs 25,000
1,00,000
(iv) Transfer from other funds during 2007-08
Loan fund Matching Grant 30,000
Other transfers from unrestricted Revenue Funds 1,50,000
1,80,000
(v) Net Additions [(ii)- (iii)+ (iv)] 12,75,000
(vi) Fund Balance at the end of the year 30,30,000
Working Note:
Fund Balance at the end of the year 30,30,000
Less: Net Additions 12,75,000
Fund Balance at the beginning of the year 17,55,000

Question 10
Devine Public Health Hospital runs only an intensive care unit. For this purpose, it has hired a building at a rent of Rs. 10,000 per month. The unit has undertaken to bear the cost of repairs and maintenance charges.
The unit consisted of 50 beds and 5 more beds can be safely accommodated, when the situation demands at a charge of Rs. 5 per bed per day.
During the year 1998-99, it revealed that only for 120 days in the year, the unit had full capacity of 50 patients per day and for another 80 days, it had on an average 40 beds only occupied per day. The total hire charges for the extra beds incurred for the whole year amount to Rs. 4,000.
Expert doctors from outstation were engaged and the fees were paid on the basis of the number of patients attended and time spent by them and on an average, it worked out to Rs. 20,000 per month in 1998-99. The other expenses for the year were as under:
Permanent staff
4 Supervisors, each at a salary of Rs. 500 per month
8 Nurses, each at a salary of Rs. 300 per month
4 Ward boys, each at a salary of Rs. 150 per month
Repairs and maintenance Rs. 7,200
Cost of food supplied to patients Rs. 88,000
Laundry charges Rs. 56,000
Medicine supplied Rs. 70,000
Cost of Oxygen X-Ray other than directly borne for treatment of patienets
Rs. 1,08,000
Janitor and other services for them Rs. 25,000
Administration charges allotted to the unit Rs. 99,100
The unit has recovered an overall amount of Rs. 100 per day on an average from each patient. The cost of Janitor and other services is variable as it is related to number of patient-days.
Prepare a Revenue Statement for the year 1998-99 and indicate the profit per patient day made by the unit.
Pass Journal entries for the next year, if the unit receives (a) donated medicines and medicinal supplies of Rs. 25,000 and (b) medicine expenses of Rs. 85,000 for the year includes Rs. 5,000 donated supplies. (10 marks) (May, 2000)

Answer
Devine Public Health Hospital – intensive care unit
Revenue Statement
for the year ended on 31st March, 1999
Rs. Rs.
Income received (Rs. 100  10,000 patient – days) 10,00,000
Variable costs
Cost of food 88,000
Laundry charges 56,000
Cost of medicines 70,000
Cost of Janitor & other services 25,000
Doctors’ fees (Rs. 20,000  12) 2,40,000
Hire charges for extra beds 4,000
4,83,000
Fixed costs
Salaries [{(4  500) + (8  300) + (4  150)}  12] 60,000
Rent (Rs. 10,000  12) 1,20,000
Repairs and Maintenance charges 7,200
Administration charges 99,100
Cost of Oxygen and X-ray etc. 1,08,000
3,94,300
Profit 1,22,700
Number of patient – days in 1998-99
50 beds  120 days 6,000
40 beds  80 days 3,200
Extra bed – days (Rs. 4,000/5) 800
Total patient – days 10,000
Profit per patient – day




Journal Entries
Dr. Cr.
Rs. Rs.
Inventories Dr. 25,000
To Operating revenue 25,000
(Being donated medicines and medicinal supplies received)
Operating Expenses (Medicines) Dr. 85,000
To Inventories 5,000
To Bank 80,000
(Being medicine expenses including donated supplies recorded)

Question 11
Sky Hospital – a non-profit seeking entity receives medicines worth Rs.5,00,000 by way of donations from a donor. During the year its issues of all medicines totals Rs.16,00,000. The closing inventory of donated medicines is Rs.1,00,000. Show relevant summary Journal Entries in the books of the Hospital in respect of the above.
(5 Marks)(May, 2008)
Answer
Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)
Inventory of Medicines (Donated) A/c Dr. 5,00,000
To Operating Revenue A/c 5,00,000
(Being receipt of donated medicines during the year)
Operating Expenses – Medicines A/c Dr. 16,00,000
To Inventory of Medicines A/c (Donated) 4,00,000
To Inventory of Medicines (Purchased) 12,00,000
(Being consumption / issue of medicines during the year)
Question 12
Write short Note on Special features of accounting for non-profit entities (other than Hospitals and Educational Institutions). (6 marks) (November, 1997)
Answer
Special Features of Accounting for Not-For-Profit Entities' (other than Hospitals and Educational Institutions): Other not-for-profit organisations (other than Hospitals and Educa¬tional Institutions) include Civic organisations, Cultural organisations, Labour unions, Political parties, Religious associations etc. For these organisations, fund based accounting is used. These mainly use four types of fund: Operating-Fund (restricted and unrestricted), Develop¬ment Fund, Endowment Fund and Life Membership Fund. For the operating funds, the accrual basis of accounting is used to recognise revenue and expenses. While the unrestricted operating fund accounts for all unrestricted resources received and expenses incurred for the primary purpose of the organisation, the restricted operating fund accounts for resources received from donors with restrictions imposed on their use. Development Funds are utilised for developmental purposes like acquisition of building and equipments, major repairs to fixed assets etc. These fixed assets are shown in the balance sheet of development fund. The major sources of receipts for this fund are government or private grants/gifts (restricted to acquisition of fixed properties), income and gains of investments of unutilised fund (if any), transfers from other funds.
Membership fees, the main source of revenue, are directly taken to unrestricted operating fund However, life time contribution is directly credited to life membership fund which is simultaneously invested in outside securities. Income from such investment is credited to unrestricted operating fund. When a life member expires or his membership is terminated for some reasons, the proportionate fund balance is transferred from life membership fund to unrestricted operating fund. As regards contributions and transfers, they are directly credited to endowment fund.
The financial statements prepared by these organisations include balance sheets (fundwise), statement of activities and statement of cash flows (fundwise). The primary operating statement is the statement of activity which accounts for revenue and expenses and the resultant surplus or deficit.

NOTE






























8
IASS, US GAAPS AND STANDARDS IN INDIA
Topic covered:
 Comparative position of basic concepts of IASs, USGAAPs and ASs in India (Q. No. 1)


Question 1
Write short note on some key differences between IAS, US GAAP and Indian AS with respect to
(i) Fixed Assets
(ii) Changes in Accounting Policy and Prior period items. (4 marks)(November, 2004)
Answer
IAS US GAAPs Indian AS
(i) Fixed
Assets Fixed assets are carried at historical cost. Revaluation of fixed assets is allowed but the capitalisation of exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets is not permitted. Fixed assets are carried at historical cost. Only downward revaluation is permit-ed for impairment. Exchange fluctua tions on loans taken for purchase of fixed assets are expensed when incurred. Fixed assets are usually carried at historical cost, revaluations of Fixed Assets are permitted in AS 10. AS 28 permits impairment of assets if specified conditions are satisfied. AS 11 (Revised 2003) requires that exchange differences arising on repayment of liabilities incurred for acquiring fixed assets should be recognized in the statement of profit and loss.
(ii) Changes in
Accounting
Policy and
Prior
period
items. Prior period items are accounted by restating to prior years and making adjustments to retained profits. The effect of change in accounting policies is disclosed separately in the profit and loss statement. Prior period items are accounted by restating to prior years and adjust-ments to retained profits. Changes in accounting policies are not accounted by restating prior years but the effect of such changes is separately disclosed in the Profit and Loss statement in the same manner as in IAS. As per AS 5, changes in accounting policies and prior period items are reported on prospective basis, if material, beginning with the year of change. Unlike in US GAAPs and IAS, AS 5 requires the restatement of comparatives to account for accounting errors, the adjustment is required to be made in the current year with disclosures of the prior period amounts.



Question 2
Briefly explain any two of the following terms:
(i) IFRS
(ii) Convergence of Accounting Standards with IFRS. (2x4= 8 Marks)(Nov. 2008)
Answer
(i) IFRS: The term IFRS refers to the International Financial Reporting Standards issued by International Accounting Standard Board (IASB). It also encompasses the International Accounting Standards (IAS) issued by the International Accounting Standard Committee (IASC). Interpretations of IASs and IFRSs are developed by the International Financial Reporting Interpretations Committee (IFRIC). IFRIC is the new name for the Standing Interpretations Committee (SIC) approved by the IASC Foundation Trustees in March 2002. IFRS includes these interpretations also.
(ii) Convergence of Accounting Standards with IFRS: In general, convergence of Accounting Standards (AS) with International Financial Reporting Standards (IFRS) means to achieve harmony with IFRS. The term convergence can be considered as “to design and maintain national accounting standards in a way that financial statements prepared in accordance with rational AS are in convergence with IFRS”. IAS I require financial statements to comply with all requirements of IFRS. This does not mean that IFRS should be adopted word by word. The local standard setters can add disclosure requirements or can remove some requirements which do not create non compliance with IFRS. Thus, convergence with IFRS means adoption of IFRS with exceptions wherever necessary.

NOTE