Company Accounts

Issue of Shares and Forfeiture :
Some points to remember :

Section 78 : Issue of Shares at Premium :
The Companies (Amendment) Act, 1999 has substituted the word '' securities' for
the word 'share' wherever it occurs in Section 78 of the Companies Act, 1956. You
should use Securities Premium A/c in place of Share Premium A/c.
Prorata : Prorata means distribution on equitable basis or proportional basis.
Problem : (CWA stage 1 June 2000)
Kamnasib Ltd. issued 400,000 equity shares of Rs. 10 each at premium of Rs. 20 per
share. The amounts were receivable as follows:
On
Capital Premium
Total
Application
Rs.
1
9
10
Allotment
Rs.
2
8
10
Final Call
Rs.
7
3
10
10
20
30
All the members except Mr. Unfotunate paid the amounts due to allotment and call. Mr.
Unfortunate who was alloted 300 shares failed to pay call money. His shares were
forfeited after due compliance with law.
These shares were re-issued to Hopeful at a price of Rs. 25 per share.
You are asked to pass the journal entries on:
(a)forfeiture
(b)Re-issue
Also show the presentation in balance sheet before and after forfieture and after re-issue.
Solution :
Tutorial Notes :
1. Different treatments are given when the forfeited shares were issued (i) at par (ii) at a discount
and (iii) at a premium. You should revise them. In this case, the forfeited shares were issued at a
premium. You should note that if the company has already received the amount of premium, it
cannot be cancelled even if the shares are forfeited in future. Thus the amount received in securities
premium account will remain there even if the shares are forfeited. In case of forfeiture the securities
premium account will be debited only with the amount of premium NOT paid by the shareholder i.e.
Rs. 3/share for 300 shares amounting to Rs. 900.
2. The forfeiture of shares reduces the share capital. Thus the share capital should be debited by
the entire amount (paid and called) in respect of forfeited shares. In this case, amount received
equal to Rs. 3/ share (total Rs. 900) and amount called up Rs. 7/share (total Rs. 2,100) will be
debited on Share capital a/c. The Forfeited share a/c will be credited with the amount received on
account of share capital in respect of those shares.
3. Reissue of forfeited shares is not allotment of shares but only a sale. When the shares are reissued, return of the forfeited shares need not be filed by the company u/s 75(1) of the Companies
Act, 1956.
4. In actual practice, the forfeited shares are disposed off by auction. These shares can be re-issued
at any price as long as the total amount received (from the original allottee and the second
purchaser) for those shares is not less than the amount of arrear on those shares.
5. Any loss or profit on re-issue should be debited to Forfeited share a/c. The loss on re-issue should
not exceed the forfeited amount. The loss should be credited to share capital a/c while the profit on
re-issue should be credited to capital reserve a/c.
6. Whenever any Journal entries are to be passed, you should remember to give narration alongwith
the entries. The narration carries marks in the examination. The students are generally seen to
forget this important point in their replies.
7. The credit balance of Forfeited shares a/c cannot be treated as surplus or profit until these shares
are re-issued. Discount if any, will be adjusted against the credit balance of Forfeited shares a/c.
The Journal entries are as follows
Forfeiture of shares:
It is assumed here that the Securities Premium a/c was created on due basis at the time of making
final call.
Equity Share capital a/c (at Rs. 10)
Dr.
3,000
securities premium a/c (at Rs. 3)
900
To Share Final Call a/c (Rs. 10)
3,000
To Forfeited shares a/c (amount received on share capital a/c)
900
(Being forfeiture of 300 shares numbered from. to held by Unfortunate for non payment of final
call of Rs. 10, the amount received on share capital a/c on application Rs. 1 and on allotment Rs. 2
being credited to forfieted shares a/c vide Board resolution dated..............)
Reissue of Shares :
Computation of profit / loss on reissue of 300 shares:
Amount forfeited on Share capital a/c (Rs. 3)
Amount received on re-issue (Rs. 25)
Total amount received
The balance amount on 300 shares :
On share capital a/c at Rs. 10 (share capital was reduced
at the time of forfeiture)
securities premium a/c at Rs. 3 (Rs. 17 already received)
Rs.
900
7,500
8,400
3,000
900
3,900
4,500
Profit (to be transferred to Capital reserve)

Alternatively the profit on re-issue can also be calculated as follows:
Balance amount due on forfeited shares (@ Rs.10/shares for 300 shares)
Amount received on account of re-issue (@ Rs. 25/share for 300 shares)
Profit on re-issue to be transferred to capital reserve
The journal entries would be as follows :
Rs.
Bank
Dr.
7,500
Forfeited shares a/c
Dr.
900
To Share capital a/c
To securities premium a/c
To Capital reserve
Being re-issue of shares at Rs. 25/share of 300 equity shares having
distinctive numbers from . to vide Board resolution no.. ..
Dated
Problem : (CA Inter Nov.09)
Rs.
3,000
7,500
4,500
Rs.
3,000
900
4,500
Glamour Ltd. invitited applications for 15,000 shares of its equity shares of Rs. 10 each issued at
Rs. 11.50 payable as follows: (in Rs./share)
On application 1st July, 09
7.5
On allotment on 31st July, 09 (including premium)
2.0
On first and final call on 31st August, 09
2.0
Applications were received for 18,000 shares and it was decided to deal with the same as follows in
arrangement with the stock exchange authorities :
(a) To refuse allotment to an applicant for 800 shares.
(b) To give full allotment to an applicant for 2,200 shares.
(c) To allot the remaining shares prorata amongst other applicants.
(d) To utilise the surplus received on applications in part payment of dues on allotment.
An applicant to whom 40 shares were allotted, failed to pay the amount due on the first and final call
and her shares were forfeited on 31st Oct.09. These shares were re-issued on 15th Nov.09 as fully
paid at Rs. 9 per share.
Give journal entries including those relating to cash to record the above transactions.
Solution :
Read the tutorial notes of previous problem again.
Disposal of application money :
Shares Paid Rs.
Rs.
18,000
135,000
Application money received
7.5
800
6,000
Less :
Return
7.5
2,200
16,500
Less :
Full allotment
7.5
22,500
Balance to be allotted on prorata basis
112,500
Applicants for 15,000 shares (18,000 800 2,200) were allotted 12,800 shares (15,000 2,200)
on prorata basis. Let us compute the amount adjusted towards allotment, for these applicants.
It should be noted that if Premium is included in the Allotment money, the excess of application
money is first adjusted towards Securities Premium a/c and balance is adjusted towards share
capital.
To understand this properly, you should make separate computations for full allotment of 2200
shares where no money is adjusted towards allotment and for 12,800 shares where some
application money is adjusted towards allotment and Securities premium a/c.
On prorata allotment of 12,800 shares :
Shares Rs./share
Amount
15,000
7.50
112,500
Application money paid
12,800
7.50
96,000
Application money adjusted
16,500
Balance to be adjusted toward allotment money
12,800
1.5
19,200
Securities premium due on allotment
16,500
Securities premium adjusted from application money
Received
To
be called
On Allotment
Required
6,400
6,400
On 12,800 shares :
Share capital
0.5
2,700
Securities Premium
1.5 19,200 16,500
1,100
1,100
On 2,200 shares
Share capital
0.5
3,300
3,300
Securities Premium
1.5
13,500
Total money due on allotment
(Share capital : 6,400 + 1,100) and Securities Premium : (2,700 + 3,300)
On the basis of above, you can make entries as follows : (narration left to you)
Dr.
To Share Application Money a/c
Share Application Money a/c
To Bank
(refund on application money of 800 shares)
Share Application Money a/c
To Share Allotmoney a/c (2200 shares)
To Share Allotmoney a/c (12800 shares)
To Securities Premium a/c
Bank
135,000
135,000
6,000
6,000
129,000
Total
16,500
96,000
16,500
129,000
16,500
Share Allotmoney a/c
16,500
To Share Capital a/c (2200 x 7.5)
96,000
96,000
To Share Capital a/c ( 12800 x 7.5)
13,500
7,500
To Share Capital a/c (12,800 x 0.5 +2,200 x 0.5)
6,000
13,500
Bank a/c
13,500
To Share Allotmoney a/c
For the story of First and final call, following entries can be made :
Shares
Rs. Amount
15,000
Call money required
2 30,000
14,960
Call money received
2 29,920
40
80
Call money not paid
2
At this time, 40 shares will be forfeited. The share capital created upto the point of forfeiture is to be
cancelled. The securities premium received at the time of allotment is NOT to be forfeited, it will
remain in securities premium a/c. The amount received on account of share capital upto the point of
forfeiture will be credited to share forfeiture a/c.
30,000
Share First and Final Call a/c
30,000
To Equity Share Capital a/c
29,920
Bank a/c
29,920
To Share First and Final Call a/c
Cancellation of Share capital
400
Equity Share Capital a/c
80
To Share first and final call a/c
320
To Share forfeiture a/c
The amount standing towards share forfeiture a/c cannot be treated as surplus until these shares
are reissued. In the present case, the amount forfeited is Rs. 8/ per share and the shares are being
re-issued at Rs.9 per share. Thus in all the share has fetched Rs. 17/ per share against the face
value of Rs.10/share indicating that the profit on re-issue is Rs.7 per share amounting to Rs. 280 (for
40 shares) which will be credited to Capital Reserve a/c.
The entry on re-issue of forfeited shares would be as follows:
Bank a/c
360
Share Forfeiture a/c
40
To Share Capital a/c
400
Share forfeiture a/c

280
280
To Capital Reserve a/c
You must write all narration in all journal entries.
Problem : (CWA stage 1 Dec 2000) repeat June 2002
D Ltd has authorised capital of Rs. 4,00,000. The company issues 20,000 equity shares of
Rs. 10 each at a premium of Rs. 5 per share payable as:
On application
Rs. 6 (including premium Rs. 3)
On allotment
Rs. 5 (including balance premium)
Balance in two calls.
Application were received for 35,000 shares. The applicants were divided in the following
groups :
Group A
Applying for 5,000 shares alloted fully
Group B
Applying for 20,000 shares are made prorata for 15,000 shares
Group C
Applying for total 10,000 shares are refunded
Directors while making allotment adjust the excess amount received on application against allotment
money due.When second call and final calls were made shareholders holding 500 shares failed to
pay the final call money. The directors forfeited these shares. All the forfeited shares were re-issued
at Rs.9 per share. It is agreed that brokerage @3% and underwriting commission @3% will be paid
for this issue. Claims of brokers and underwriters are satisfied by issuing to them additional equity
shares of Rs.10 each at a premium of Rs. 5 per share (without any cash payment).
Show journal entries and balance sheet of the company in the books of the company
Solution :
Tutorial Notes :
1. Read the tutorial notes of previous question carefully regarding forfeited shares.
2. Application were received for 35,000 shares fetching Rs. 210,000 (Rs. 6/share). Out of this,
application money for 10,000 shares was refunded. Out of the balance 25,000 shares, 20,000
shares were allotted and application money of remaining 5,000 shares was adjusted towards
allotment money.
3. The question does not specify the amount to be called up in first call and in final call. It simply
says that balance after allotment is to be paid in two calls. 500 shares were forfeited when call
money on final call was not paid but it is not clear from the question that how much remained
unpaid. You should mention this lack of information in your answer and make suitable assumptions
in this regard. In this solution it is assumed that the balance call of Rs. 4/share was eqully divided in
First call Rs.2/share and final call of Rs. 2/share.
4. You should remember that amount paid towards securities premium a/c is never forfeited. The
forfeited amount should be equal to amount paid towards the share capital upto the point of
forfeiture.In the present case, the amount paid before forfeiture is Rs.13/share totalling Rs. 6,500.
The amount paid on share capital a/c is Rs.8/share totalling Rs. 4000 and toward securities
premium a/c is Rs. 2,500. Please remember that the Forfeited shares a/c will be credited with
Rs.4,000 and not with Rs. 6,500.
5. The forfeited shares were re-issued at Rs. 9/share. The amount due at the time of forfeiture was
Rs. 2/ share. Thus the profit out of re-issue amounts to Rs. 7/share (Rs. 9 Rs. 2) totalling Rs.
3,500 (500 x 7). The profit on re-issue is to be credited to capital reserve a/c while being debited to
share forfeited a/c.
6. In the trial balance Forfeited Shares A/c will appear on the credit side. In the balance sheet it is
shown as an addition with the paid-up share capital.
7. The brokerage and commission should be calculated on face value of share (Rs. 10 each) and
not on issue price of Rs. 15/shares.
8. Whenever any Journal entries are to be passed, you should remember to give narration alongwith
the entries. The narration carries marks in the examination. The students are generally seen to
forget this important point in their replies.
You should prepare the following working notes to support your answer.
Working Note 1:
Application money received (35,000 shares @ Rs. 6/share)
Less : Amount refunded (10,000 shares @ Rs. 6/share)
Application money available with the company
Adjustment of Application money :
To Share Allotment a/c
Working Note 2: Account of Shares Forfeited :
Amount forfeited on 500 share (at Rs. 13/share)
Adjustment of Share forfeited amount:
To Share Capital a/c ( @ Rs. 8/share)
To securities premium a/c (@ Rs. 5/share)
Working note 3: Computation of profit / loss on re-issue of forfeited shares:
Amount due on forfeited shares (@ Rs. 2/share for 500 shares
Amount received on forfeited shares (@ Rs. 7/share)
Profit on re-issue to be transferred to Capital reserve a/c
Working note 4: Allotment money due:
Allotment money due (Rs. 5/share on 20,000 shares)
Less : Adjustment from application money
Banalce to be called
The Journal entries are as follows
In the books of D Ltd.
Journal Entries
Particulars
Dr. Rs.
Bank A/c
210,000
To Share application a/c
(being the application money received on 35,000 shares @ Rs.
6/share)
Share Application a/c
60,000
To Bank a/c
(application money on 10,000 shares refunded)
120,000
Rs.
210,000
60,000
150,000
60,000
60,000
30,000
6,500
4,000
2,500
1,000
3,500
2,500
100,000
30,000
70,000
Cr. Rs.
210,000
60,000
To Share capital
To Securities premium
( application money on 20,000 shares transferred to share capital a/c
and securities premium a/c)
30,000
To share allotment a/c
(Excess application money adjusted against allotment money due)
Share allotment a/c
100,000
( amount due on allotment @ Rs. 5/share on 20,000 shares including a
premium of Rs.2/share as per Board's resolution no. Dated)
Bank A/c
70,000
To share allotmetn a/c
(balance of allotment money received in full)
Share First Call a/c
40,000
( call money due @ Rs. 2/share for 20,000 shares)
Bank A/c
40,000
To Share First call money a/c
Share final call money a/c
40,000
(final call due on 20,000 shares @ Rs. 2/share)
Bank A/c
39,000
To Share Final call money
(final call received on 19,500 shares)
Share capital a/c
5,000
To Share final call a/c
To Share forfeited a/c
(500 shares forfeited)
Bank A/c
4,500
Share forfeited a/c
500
(forfeited shares reissued @ Rs. 9/share)
Share forfeited a/c
3,500
To Capital reserve a/c
(profit on reissue transferred to capital reserve a/c)
Brokerage a/c
6,000
Commission a/c
6,000
(Brokerage @ 3% of Rs. 2 lacs and commission @ 3% of Rs. 2 lacs
being paid by shares Rs.10 with premium of Rs.5/share. 800 shares
being issued)
60,000
60,000
30,000
60,000
40,000
70,000
40,000
40,000
40,000
39,000
1,000
4,000
5,000
3,500
8,000
4,000
D Ltd.
Balance sheet as at
Rs. Assets
Fixed assets :
Liabilities
Rs.
Share Capital:
Authorised Capital :
40,000 shares of Rs. 10 each
400,000
Issued, subscribed and paid up capital
Investment
20,800 shares of Rs. 10 each
208,000
Current assets, Loans and
(800 shares being issued on consideration other
advances
than cash)
Reserve and Surplus:
Bank
303,500
Capital reserve
3,500
Securities premium
104,000 Miscellaneous expenditure :
Brokerage on issue of shares
6,000
Commission on issue of share
6,000
315,500
315,500
Problem : CWA Foundation June 2003 revised
Varieties Ltd. issued 30,000 shares of Rs. 10 at Rs. 12 per share payable Rs. 3 on application, Rs. 5
on allotment including premium, Rs. 2 on first and Rs. 2 on final call. Applications were received for
40,000 shares and the company refunded the application money of 4,000 shares and rest of the
excess application money was adjusted with allotment. All the calls were duly paid except Mr. A
holding 300 shares failed to pay the allotment and on his failure to pay 1st call his shares were
forfeited. B holding 200 shares failed to pay the 1st call and on his failure to pay final call his shares
were forfeited. C holding 100 shares failed to pay the final call. The company reissued 450 shares
(including the shares of A) at the rate of Rs. 10 per share.
Pass Journal entries in the Books of the Company.
Solution :
1. The allotment is not on pro-rata basis. This is assumed that Mr. A had applied for 300 shares and
was allotted the same number of shares. Same is the case with B and C.
2. Before the forfeiture, A had paid Rs. 900 as share application. B had paid Rs. 1,600 (Rs. 8 x 200)
i.e. Rs. 1,200 towards share capital and Rs. 400 towards share premium. C had paid Rs. 1,000
(Rs.10 x 100) i.e. Rs. 800 towards share capital and Rs. 200 towards share premium.
3. Note that C has failed to pay the final call. Question does not mention that his shares have been
forfeited. Thus share forfeiture a/c will be credited with Rs. 900 for A and Rs. 1,200 for B (amount
paid by them towards share capital). As the shares of C are not yet forfeited, share forfeiture a/c will
not be affected.
4. You have already studied in tutorial notes of previous questions that the amount paid towards
share premium is not forfeited or written off even if the shares are forfeited in future.
The solution goes as follows :
The various steps of Journal entries have been explained as follows. The explanations are given for
better understanding of the entry and these should not be treated as part of entry.
1. Bank a/c
To Share application
120,000
120,000
(being application for 40,000 shares received @ Rs. 3 per share)

2. Share application a/c
To Bank a/c
To Share allotment a/c (or Share calls in advance a/c)
120,000
90,000
12,000
18,000
( application money on 30,000 shares transferred to share capital a/c and

share allotment a/c. Amount received on 4,000 shares being refunded.)
3. Before calling for the allotment money, the corresponding share capital must be created, hence
following entry will be passed.
Share allotment a/c
150,000
To Share capital a/c (30,000 x 3)
90,000
To Share premium a/c (30,000 x 2)
60,000
4. Bank a/c
130,500
Share allotment a/c (or Share calls in advance a/c)
18,000
To Share allotment a/c
148,500
(The allotment money is received except for 300 shares of A who has failed to pay.)
5. Before calling for the first call money, the corresponding share capital must be created, hence
following entry will be passed.
Share first call a/c (Rs. 2 for 30,000 shares)
60,000
60,000
(Share capital being created for First call.)
6. Bank a/c
59,000
To Share First call a/c
59,000
(The first call money is received except for 300 shares of A and 200 shares of B
who have failed to pay.)
7. The shares of A are forfeited after he has failed to pay the allotment and first call money. The
share capital a/c and share premium a/c created against those shares will have to be cancelled.
Note that no amount has been paid by A towards share premium, hence the share premium a/c will
be debited. Any amount paid towards share premium a/c remains there even if the shares are
forfeited.
Share capital a/c (300 x Rs. 8)
2,400
Share Premium a/c (300 x Rs. 2)
600
To Share allotment a/c (300 x Rs. 5)
1,500
To First Call a/c (300 x Rs. 2)
600
To Share forfeiture a/c ( 300 x Rs. 3)
900
8. Share final call will be made for 29,700 shares (30,000 less 300 shares of A) @ of Rs. 2/share.
Before calling amount of final call, share capital must be created for final call, hence following entry
will be passed.
Share final call a/c
59,400
59,400
Amount due on final call has been received except from B for 200 shares and from C for 100 shares.
Thus out of Rs. 59,400, Rs. 600 has not been received.
Bank a/c ( Rs. 2 x 29,400 shares)
58,800
58,800
At this point shares of B are forfeited. B has paid Rs. 1,200 (200 shares @ Rs. 6/share) towards
share capital a/c which will be forfeited and will be credited to Share forfeiture a/c. B has paid Rs.
600 (200 shares @ Rs. 3/share) towards share premium a/c which will not be forfeited.
Share Capital a/c (200 x Rs.10)
2,000
400
400
To Share forfeiture a/c ( 300 x Rs. 3)
1,200
The company has issued 450 shares out of 500 forfeited shares @ Rs. 10/share. The forfeited
shares were issued earlier at Rs. 12/share including Rs. 2/share as premium. The share premium is
not being called and it will be adjusted against share forfeiture a/c. The balance left with share
forfeiture a/c is Rs. 2,100. Out of this, Rs. 900 (Rs.2/share on 450 shares) will be adjusted towards
share premium a/c and the balance of Rs. 1,200 will be transferred to Capital reserve a/c.
Bank a/c ( Rs. 10 x 450 shares)
4,500
Share forfeited a/c
600
To Share capital a/c (450 x Rs. 2)
4,500
To Share Premium a/c (300 x 2)
600
Share forfeited a/c
1,200
1,200
Problem : (CWA Inter Dec.05)
Flamingo Ltd. offered for public subscription of 5,000 equity shares of Rs. 10 each at a premium of
Rs. 2.50 per share payable as follows:
On application Rs. 2, On allotment Rs. 4.50 (including premium), On first call Rs. 4.0 and On second
call Rs. 2.0 per share.
Applications were received for 7,500 shares and allotment was made prorata to applicants of 5,000
shares, letters of regret being issued for remaining applications. Money overpaid on application by
the allottees was adjusted with allotment amount.
Rahim to whom 100 shares were allotted failed to pay the allotment money and on his failure to pay
the first call, his shares were forfeited.
Haq, the holder of 150 shares failed last two calls and his shares were forfeited after the second call
was made.
Of the shares forfeited, 200 shares were allotted as fully paid up to Karim for Rs. 8 per share paid in
cash.
Show journal entries to record the forfeiture and reissue of forfeited shares including those relating
to cash, assuming that the whole of Rahim's shares have been reissued.
Solution :
1. The journal entries are asked only for forfeiture and reissue of forfeited shares. All transactions
are not to be journalised.
2. You should calculate the forfeited amount of Rahim and Haq separately because their shares
were forfeited at different points of time.
3. It is not clear in the question that which shares were allotted to Karim. Two possible combinations
are (i) 100 shares of Rahim and 100 shares of Haq or (ii) 50 shares of Rahim and 150 shares of
Karim. The first combination of 100 shares each of Rahim and Haq is followed here.
4. Let us consider the case of Rahim first. His shares were forfeited when he failed to pay the
allotment money. He was allotted 100 shares. As the allotment was made on prorata basis at the
ratio of 7500 : 5000 or 3:2, Rahim must have applied for 150 shares paying application money of Rs.
300 (150 x 2). The excess money paid with application is Rs. 100 which was adjusted towards
allotment money.
5. At the time of forfeiture, entire amount paid towards the share capital is forfeited and transferred
to Share Forfeiture a/c. Thus for Rahim, the share capital a/c will be debited by Rs. 300 (as the
entire amount of Rs. 300 paid alongwith application was adjusted towards share capital ), and Share
Forfeiture a/c will be credited.
6. A word about the Securities Premium a/c is necessary here. Securities premium a/c may be
created on due basis or payment basis. On due basis the securities premium a/c is also credited
alongwith Share capital a/c when due money is called. On cash basis, the Securities premium a/c is
created only after receiving the actual cash. First method is followed here.
7. So in case of Rahim, the journal entries would be as follows :
At the time of allotment following entry must have been made in the books in respect of Rahim
300
To Share Capital
300
He paid Rs. 300 alongwith application and entire money was adjusted with Share capital a/c at the
time of allotment.
Allotment money due is Rs. 4.5 x 100 shares = Rs. 450. Out of this Rs. 100 was excess money with
application, hence net money due would be Rs. 350 consisting of Rs. 100 on share capital a/c and
Rs. 250 on securities premium a/c. The following entries must have been passed.
Allotment money due a/c
350
100
To Securities premium a/c
250
At this point he failed to pay the allotment money but his shares were forfeited only after he failed to
pay the first call money. He was called to pay Rs. 400 (Rs.4 x 100 shares). At the time of first call,
following entries must have been made:
Share First Call a/c
400
400
So you can see, that at the point of forfeiture the Share capital created was Rs. 800 out of which Rs.
300 was received. For forfeiture of these shares all entries must be reversed and the received
amount of Rs. 300 will be credited to Share Forfeiture a/c. Since no money was received on
Securities Premium a/c, this a/c must also be debited.
The above narration is for better understanding only. You are required to present the following entry
only as per the question :
Thus the required journal entry would be like this :
Share Capital
Securities premium a/c
800
250
To Share Forfeiture a/c

300
350
To Share First Call a/c
400
(being forfeiture of 100 shares allotted to Rahim on his failure to pay the first call money.)
Now you can consider the case of Haq. He paid the Securities premium as well. Hence in his case,
Securities premium a/c will NOT be debited as the money was received on this a/c.
On the above lines you can understand the following entries :
At the time of forfeiture of 150 shares of Haq:
1,500
Share capital
600
300
To Share Second call a/c
600
Narration is left to you.
Out of 250 shares forfeited, 200 shares were reissued to Karim at Rs. 8 per share. The face value of
share is Rs. 10. The balance of Rs.2 will be debited to Share Forfeiture a/c and NOT to Discount of
share a/c. Following is the entry :
1,600
Bank
400
2,000
Profit on reissue can now be calculated on the reissued shares. Note that there are still 50 shares
left which have not been reissued, hence profit on them cannot be calculated.
200
Forfeited amount on 50 shares not yet reissued ( 50 x 4)
900
Total forfeited amount
400
Less : Amount adjusted towards reissue
200
600
Less : Amount on forfeited shares not yet issued
300
Profit on reissue (which can be transferred to capital reserve)
Journal entry for transfer to Capital reserve of Profit on forfeited shares, is simple :
300
Share Forfeited a/c
300
Problem (CWA stage 1 Dec 01, Repeat Dec.07)
ABC Limited offered for public subscription 2,000 Equity shares of Rs. 100 each at a
premium of Rs. 20 per share on the following terms :
(a) Application money to be paid before 30th June, 2000 Rs. 40 per share.
(b) Allotment money to be paid before 20th September, 2000; Rs. 50 per share including
Rs. 20 premium.
(c) First and final call money to be paid before 31st December, 2000; Rs. 30 per share.
Application for 4,000 shares were received, the Company decided to :
(i) Allot in full 200 shares to 4 applicants who had applied for the same;
(ii) Reject the application for 1,400 shares applied for by persons supposed to be agents
of a rival company;
(iii) Allot the balance number of shares proportionately, to the remaining application, and
to apply the excess money paid towards the allotment money due.
Ravi who had applied for 100 shares and who was allotted all the shares applied for could
not pay allotment money. Ruby who was alloted 60 shares on the proportion basis could
not pay the final call. After due notices all such shares were forfeited and re-issued at a
discount of 20% of the face value of the share to Mr. Reddy.
Pass the journal entries to record the above transactions in the books of the Company.
Solution :
Tutorial Notes :
1. Let us do the computations as per the process of allotment of shares.
2. First step is application money. Application money for 4,000 shares were received @
Rs. 40/share. Thus the application money received is Rs. 160,000. Application money for
1,400 shares (Rs. 56,000) were returned. Application money adjusted towards the share
capital a/c will be Rs. 80,000 (Rs.40 x 2000 shares).
3. The balance of application money Rs. 24,000 (160,000 56,000 80,000), will be
adjusted towards allotment money. The allotment money due is Rs. 100,000 (2000 x Rs.
50) against which Rs. 24,000 has already been received with application. Ravi was alloted
100 shares has failed to pay allotment money of Rs. 5000. This shows that allotmoney
received would be Rs. 71,000 (100,000 24,000 5,000). This is your working note no.
2. Calls in arrears a/c has to be opened here and debited with Rs.5,000 not paid by Ravi.
4. The allotment money includes premium @ Rs. 20/share. Once share premium money
is received, it cannot be written back even if the shares are forfeited in future. Ruby has
failed to pay the call money (60 x Rs. 30). Thus call money received would be Rs. 60,000
less due to Ruby Rs. 1,800 and less due to Ravi Rs. 3,000. Cash received against the call
money would be Rs. 55,200. This is your working note no. 3. Calls in arrears a/c should
be debited with Rs.4,800.
5. The shares are forfeited after final call has been made. The forfeited amount would the
total amount received against share capital a/c. Ravi has paid Rs. 4,000 and Ruby has
paid Rs. 4,200 ( 60 shares x Rs.70), thus amount forfeited would be Rs.8,200. This is your
working note no.4.
6. Number of shares forfeited is 160. Share capital should be debited with Rs. 100 x 160
i.e. Rs.16,000. The money received on these shares on account of share capital would be
forfeited. Money received is (i) 100 shares @ Rs. 40 = Rs. 4,000 and (ii) 60 shares @ Rs.
70 = Rs. 4,200 totalling Rs. 8,200. The balance (16,000 8,200) of Rs. 7,800 will be
debited to calls in arrears a/c.
You can prepare the following working notes :
Disposal of application for 4,000 shares :
Application
200
1,400
2,400
4,000
Amount
received;
Disposal of Application money :
Refund
Allotment
200
0 Rejected
1,800
2,000
Rs. 160,000
56,000
Adjusted in application
Adjusted in allotment
100,000
For allotment :
Amount due
(50 x 2,000)
24,000
Amount adjusted
76,000
Balance to be called
5,000
Amount not paid by Ravi (50 x 100)
71,000
Allotment money received
For Share First and Final Call :
Amount due (30 x 2,000)
Less : Amount not paid
3,000
By Ravi (30 x 100)
1,800
By Rubi (30 x 60)
80,000
24,000 160,000
60,000
4,800
55,200
Journal Entries in the books of ABC Ltd.
Dates and narration have been left for reader.
160,000
Bank a/c
160,000
To Share Application a/c
160,000
80,000
56,000
To Bank a/c
24,000
100,000
Share Allotment a/c
60,000
40,000
71,000
Bank a/c
5,000
Calls in arrears a/c
76,000
60,000
Share First and Final Call a/c
60,000
55,200
Bank a/c
4,800
Calls in arrears a/c
60,000
To Share First and Final call a/c
16,000
Share capital a/c
2,000
Securities Premium a/c
9,800
To Calls in Arrears a/c
8,200
To Share Forfeited a/c
12,800
Bank a/c
3,200
16,000
5,000
5,000
Following sections you must memorise :
Anand kumar shrivastava
Section 77 : Restriction on buyback of shares

Section 77A : Power of company to purchase its own shares
Section 77 AA : Transfer of cetain sum to Capital Redemption Reserve a/c. This states that where a
company purchases its own shares out of free reserves, then a sum equal to the nominal value of
the shares so purchased shall be transferred to the Capital Redemption Reserve a/c, and details of
such transfer shall be disclosed in the balance sheet.
Section 77 B : Prohibition of buy back under certain circumstances
Companies cannot purchase its own shares (i) through any subsidiary company (ii) through any
investment company (iii) through any group of investment company (iv) in case of default in
repayment of its dues (v) if the company has not complied with sections 159, 207 and 211.
Section 78 of the Companies Act 1956 states that:Securities Premium may be applied for :
(i) issue of fully paid bonus shares (ii) writing off preliminary expenses (iii) writing off discount
(commission) on shares and debentures (iv) providing for premium payable on redemption of shares
and debentures.
The securities premium a/c may be opened either at the time of call becoming due or at the time of
actual receipt of amount. You should know the journal entries of both the cases. It is considered
better if the securities premium a/c is opened at the time of actual receipt of money.
Section 79 : Issue of Shares at Discount :
Following conditions should be satisfied for issue of shares at discount:
(i) Discount can be given only on shares of existing class.
(ii) Resolution must specify the maximum discount allowed. Resolution must be passed at GM and
sanctioned by CG.
(iii) Not allowed within one year from the date of commencement of business.
(iv) Issue must be made within time limit sanctioned by the CG.
Section 79 A : Issue of Sweat Equity Shares
Section 80 : Power to issue redeemable preference shares

Section 80 A : Redemption of Irredeemable preference shares.
Section 81 : Rights Issue
If nothing is mentioned in the problem, it should be assumed that the share premium is included in the
allotment money.
Problem 1 : (CS Inter Dec.99)
G Ltd. issued 500,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as Rs. 3 on application;
Rs. 4 on allotment and Rs. 5 on first and final call.
All money duly received, pass journal entries if the securities premium is included in (i) application money (ii)
allotment money and (iii) first and final call money.
Solution :
Case 1: Securities premium is included in application money.
allotment money.
Debit bank and credit Share application a/c with the amount received.
Rs. lacs
Bank
15
To Share appl. a/c
15
Share capital must be created before making call for allotment money by the following entry:
Share Allotment a/c
20
20
The premium is included in the application money. Application money can now be converted to Share capital
and Securities Premium a/c
Share App. a/c
15
5
10
You can also make a combine entry as follows :
Share App. a/c
15
Share Allotment a/c
20
25
10
Other entries are as usual:
Bank
20
To Share allot. a/c
20
Share first and final a/c
25
25
Bank
25
To Share first and final a/c
25
Case 2: When the premium is included in the allotment money:
If share premium a/c is created at the time of allotment money becoming due, Share capital a/c will be
credited with the amount of capital and Securities premium a/c will be credited with premium.
On allotment of shares, the amount of premium will be debited to application a/c.
Debit bank and credit Share application a/c with the amount received.
Rs. lacs
Bank
15
To Share appl. a/c
15
Convert Share application a/c to Share capital a/c by the following entry:
Share App. a/c
15
15
Option 1 : The Securities premium a/c is created at the time of money being Due:
Share capital must be created before making call for allotment money by the following entry:
Share allotment a/c
20
10
10
Bank
20
20
Option 2 : The Securities premium a/c is created at the time of actual receipt of money
In this case, only Share capital is created although the money is demanded inclusive of premium.
In this case, the amount of premium is ignored when is passed for making the allotment money (or the call)
due. Thus Share allotment a/c will be debited and Share capital a/c will be credited with the amount of portion
of share capital. No entry is passed for premium becoming due.
Share allotment a/c
10
10
When the allotment money is actually received, Bank will be debited with the total amount received and Share
allotment a/c will be credited for share capital portion only and Securities Premium a/c will be credited with the
amount of premium.
Bank
20

10
10
Other entries are same as case 1.
Case 3: When the premium is included in the first and final call money:
It is same as the previous one, only share allotment a/c will be replaced by First and final call a/c.
Issue of Shares at Discount : (Section 79)
(ii) Resolution must specify the maximum discount allowed. Resolution must be passed at GM and sanctioned
by CG.
Following sections you must memorise :
Section 77 : Restriction on buyback of shares

Section 77A : Power of company to purchase its own shares
Section 77 AA : Transfer of cetain sum to Capital Redemption Reserve a/c. This states that where a
company purchases its own shares out of free reserves, then a sum equal to the nominal value of
the shares so purchased shall be transferred to the Capital Redemption Reserve a/c, and details of
such transfer shall be disclosed in the balance sheet.
Section 77 B : Prohibition of buy back under certain circumstances
Companies cannot purchase its own shares (i) through any subsidiary company (ii) through any
investment company (iii) through any group of investment company (iv) in case of default in
repayment of its dues (v) if the company has not complied with sections 159, 207 and 211.
Section 78 of the Companies Act 1956 states that:Securities Premium may be applied for :
(commission) on shares and debentures (iv) providing for premium payable on redemption of shares
and debentures.
The securities premium a/c may be opened either at the time of call becoming due or at the time of
actual receipt of amount. You should know the journal entries of both the cases. It is considered
better if the securities premium a/c is opened at the time of actual receipt of money.
Section 79 : Issue of Shares at Discount :
(ii) Resolution must specify the maximum discount allowed. Resolution must be passed at GM and
sanctioned by CG.
Section 79 A : Issue of Sweat Equity Shares
Section 80 : Power to issue redeemable preference shares

Section 80 A : Redemption of Irredeemable preference shares.
allotment money.
Section 81 : Rights Issue
Problem 1 : (CS Inter June 05 )

Find (i) Theoritical market price after the rights issue (ii) value of rights (iii) % increase in share capital (iv) % in
total funds; from the following data :
Share Capital : Rs. 100 lacs. Face value : Rs. 10/share; Market value : Rs. 40 per share
(i) 4 new shares for 5 old shares at par ; (ii) 3 new shares for 5 old shares at Rs. 15;
(iii) 2 new shares for 5 old shares at Rs. 20 and (iv) 1 new share for 5 old shares at Rs. 25.
Solution :
Computation of Theoritical Market Price
Option 1 Option 2 Option 3 Option 4
No. of old shares
5
5
5
5
Market value of old shares @ Rs. 40
200
200
200
200
Price to be paid Rs. / share
10
15
20
25
No. of rights shares
4
3
2
1
Price to be paid for rights shares
40
45
40
25
Total value of shares
240
245
240
225
Total no. of shares
9
8
7
6
Theoritical market price
26.67
30.63
34.29
37.50
Computation of value of rights
Value of rights (difference of actual market price and theoritical market price)
Actual Market price
40.00
40.00
40.00
40.00
Theoritical market price
26.67
30.63
34.29
37.50
13.33
9.38
5.71
2.50
Computation of % in Share capital
Present Capital Rs. lacs
100
100
100
100
Increase
4/5
3/5
2/5
1/5
Increase in %
80%
60%
40%
20%
Computation of % increase in Total Funds
Face value of old shares
50
50
50
50
Additional funds due to rights
4x10
3x15
2x20
1x25
Additional funds due to rights
40
45
40
25
Increase in funds
40/50
45/50
40/50
25/50
Increase in funds in %
80%
90%
80%
50%
Note : Many authors mention some formulae for above computations. Avoid all formulae and understand the
basics as explained in the above solution. You are likely to forget the formulae in the examination.
Chapter 29 : Valuation of Goodwill :
cwa inter cwa final
ca inter
ca final
4
1
0
6
11
A note on determination of capital employed for the purpose of evaluating Goodwill :
Determination of capital employed is hard not because of any computational complexity but because of
diverse opinion in respect of inclusion or exclusion of items. A wide spread view is to recognise the capital
employed as fixed assets (less depreciation) plus working capital. This may also be expressed as
aggregate of share capital, reserves and retained earnings and long term loans (less of course, the
fictitious assets like preliminary expenses, debit balance of profit and loss a/c, discount on issue of shares
etc). Non-trading assets, that is, assets acquired because of spare funds such as government securities,
bonds or other outside investments, are excluded.
One school of thought views goodwill as an advantage accruing to the shareholders of the company and as
such the amount of debentures and long-term loans should be excluded from capital employed. The
meaning of capital is funds of owener. If this stand is taken, capital employed should include only those
amounts which belong to the oweners i.e. the shareholders.
In most of the model answers supplied by ICAI, debentures and the long term loans have been excluded
from capital employed whereas in the model answers supplied by ICWAI, the debentures and long term
loans have been taken as components of capital employed in majority of instances.
The question is generally silent in this respect as to the components of capital employed. You can take your
own stand but whatever stand you take, you must invariably state your assumption.
When capital employed is computed taking only the funds belonging to shareholders, in consideration, it is
termed as equity approach. If long-term loans are also included in capital employed, it is called long-term
fund approach. Both approaches naturally lead to different values of goodwill.
Since the profits are expressed in terms of current prices, it is proper that the fixed assets and current
assets should also be valued at current prices. While doing this, the additional depreciation on revalued
assets should also be kept in mind.
Capital employed should be computed with revised value of stocks. You have to keep this revised value in
mind while computing the FMF. Students generally loose sight of this point. The take the revised value of
fixed assets while computing the capital employed but forget to take additional depreciation in computation
of FMF. You should be aware of this lacuna. Any increase or decrease in value of stocks should not only be
reflected in the computation of capital employed but also in computation of FMF.
As a prudent practice, the goodwill should be computed not on actual capital employed but on average
capital employed.
Problem 1: CWA Inter June 05
The balance sheet (summarised) of Tinkar Ltd. as on March 31, 2005 was as follows :
Liabilities
Rs. Assets
Rs.
Equity shares of Rs. 10 each fully paid
5000000 Goodwill
500,000
General Reserve
1000000 Plant & machinery
5500000
Dividend Equilisation
500,000 Investments
500,000
Share Premium
300,000 Stocks
800,000
Profit and loss a/c
200,000 Debtors
950,000
Creditors
1500000 Cash and Bank
250,000
8500000
8500000
The company's profit and loss a/c for the year ended 31 March, 2005 showed a net profit (before tax) of
Rs. 25,00,000. The profit includes interest on investment of Rs. 50,000. Goodwill is being written off Rs.
50,000 per annum.
The applicable income tax rate is 40%. It is expected that the company will be able to maintain its present
level of performance. Plant & machinery is revalued at Rs. 70,00,000. Future depreciation charge is to go
up by Rs. 100,000. Normal return on capital employed may be taken as 10%.
Compute the value of goodwill of the company based on 4 years' purchase of maintainable super profit.
The capital employed figure is to be calculated on the basis of last year end position.
Solution :
Tutorial Notes :
1. Use figures in lacs or thousands to save time and labour. It is more convenient as well.
2. Super profit is excess of actual profit over normal profit. Normal profit is given as 10% on capital
employed. The capital employed is not given, it is to be computed. Think how can you compute the capital
employed. You should compute the capital employed from the liabilities side as well as from the assets
side.You can compute normal profit as 10% of capital employed.
3. How will you calculate average profit ? How will it be adjusted for income from investments and
additional depreciation ?
3. Actual profit implies profit from trading activity. The investment is not a trading activity and its income
should be excluded while computing profit for the purpose of valuation of shares and goodwill. Average
profit is given as Rs. 25 lacs. Average profit less income from investment less taxes will give you actual
profit. Note that additional depreciation is to be provided. What will you do with goodwill of Rs.50,000
written off during the year ?
4. Once average profit is known, super profit being the difference between average profit and normal profit
becomes known. The Goodwill will be four times the super profit.
Computation of capital employed :
Capital employed will be computed on revalued figures because the maintainable profit is futuristic in
nature.
From Liability side
Rs. lacs From Assets side
Rs. lacs
Equity shares of Rs. 10 each
50 Plant & machinery
70
General Reserve
10 Stocks
8
Dividend Equilisation
5 Debtors
10
Share Premium
3 Cash and Bank
3
Profit and loss a/c
2
90
Add:Capital reserve due to revaluation
15 Less: Creditors
15
85 Capital employed
75
Less: Investment outside business
5
Less: Intangible asset Goodwill
5
Capital Employed
75
Computation of average profit and Goodwill :
Rs. lacs
Profit before tax
25.0
Less:
Additional Depreciation
1.0
Income from Investment
0.5
Add :
Goodwill written off
0.5
1.0
Adjusted profit before tax
24.0
Less : Tax @ 40%
9.6
Profit after tax
14.4
Less : Normal return
7.5
Super Profit
6.9
Goodwill (4 years' super profit)
27.6
Problem 2: (CWA Inter June 05)
The balance sheet of Bomex Ltd as at 31 March 2005 was as follows :
Liabilities
Assets
Equity shares (Rs. 10)
1000000 Goodwill
200,000
General Reserves
500,000 Equipment at cost
1800000
Profit and loss a/c

12% Debentures
Provision for depreciation on equipment
Staff Welfare fund
Proposed Dividend
Creditors
200,000 Stocks
700,000
600,000 Debtors
300,000
300,000 Cash and bank
150,000
80,000 Advertisement suspense
50,000
150,000 account
370,000
3200000
3200000
You are required to calculate the value of each share on assets basis.
The following information is available :
(1) A fair after tax return on capital employed for this type of business is 18%.
(2) Equipment is to be revalued at Rs. 16,00,000.
(3) Stocks are considered to have a net realisable value of Rs. 600,000.
(4) Goodwill in this type of business is normally valued at 3 years' super profits.
(5) Included in debtors is a balance of Rs. 20,000 which may prove irrecoverable.
(6) Profits for the last three years before interest and taxes are :
2004--05 Rs. 10,80,000
2003--04 Rs. 10,20,00
2002--03 Rs. 11,00,000
(7) Company profits are taxed at 40%.
Solution :
Tutorial Notes :
1. Use figures in Rs.'000 to reduce time and labour.
2. Compute the capital employed from both the sides of balance sheet.
3. The net value of equipment is Rs. 15.0 lacs (18.0 depreciation 3.0 lacs). Thus equipment is to be
revalued at Rs. 16.0 lacs. The increased value will demand additional depreciation to be provided on
equipment. The question is silent about this matter. You can make a mention of it in your answer and state
that depreciation on additional value has been ignored. The revaluation of equipment will have no impact
on current year profit but will be used in determination of capital employed.
4. Staff welfare fund is not a liability at all. It can be taken as part of capital employed if you are calculating
it from the liabilities side. It can be ignored if you are calculating the capital employed from assets side.
5. Debentures may be or may not be taken as part of capital employed. You must state your assumption in
this regard. In the following solution the debentures are taken as part of capital employed hence the
interest payable thereon has not been deducted from operating profit.
3. While determining the capital employed, you may wonder what to do with advertisement suspense
account. The question is silent about it. You may assume that it has no realisable value and should
therefore be ignored. Similarly the staff welfare fund is not a liability but proposed dividend is.
7. Current year profit of Rs. 10,80,000 will have to adjusted in the light of new valuations. The stock is
devalued by Rs. 40,000 while debtors are devalued by Rs. 20,000. The current year profit will be taken as
Rs. 10.20 lacs for computation of goodwill.
From Liabilities side
Rs.'000
Equity shares
1,000
General Reserve
500
Profit and loss a/c
200
12% Debentures
600
Provision for depreciation
300
Staff Welfare fund
80
Less:
Decrease in equipment
200
Decrease in stock value
40
From Assets side

Rs.'000
Equipment
1,600
Stock
660
Debtors
280
Cash at bank
150
Less : Current liabilities
2,680 Creditors
370
Dividend
150
Capital employed
2,690
520
2,170
Bad debts
20
Advertising suspense
50
Goodwill
200
Capital employed
Alternatively :
Equity shares
General Reserve
Profit and loss a/c
12% Debentures
Staff Welfare fund
Add : Increase in value of equipment
510
2,170
Rs.'000
1,000
500
200
600
80
2,380
100
2,480
Less:
Decrease in stock value
40
Bad debts
20
Advertising suspense
50
Goodwill
200
310
Capital employed
2,170
Computation of actual profit for the year 2004--05 :
Rs.'000
Profit as per profit and loss a/c (without adjustments)
1,080.0
Less :
Decrease in value of stock
40.0
Bad debts
20.0
Adjusted profit before tax
1,020.0
Average annual operating profit before interest ( debentures are treated as part of capital employed) :
(10.20 + 10.20 + 11.00) / 3
Rs. lacs
1,047.0
Less : Tax @ 40%
418.8
Profit after tax
628.2
Less : Normal return @ 18% of capital employed
390.6
Super Profit
237.6
Goodwill at 3 years profit
(237.6 x 3)
712.8
Computation of Net assets and value per share :
Rs.'000
Capital employed
2,170.00
Add : Goodwill
712.80
Less : Debentures
600.00
Net assets available to equity shareholders
2,282.80
Intrinsic value of equity share ex-dividend 2,282.80 / 100 = Rs. 22.82
Intrinsic value of equity share cum-dividend (2,282.80 + 150) / 100 = Rs. 24.32
Problem 3:(CWA Inter June 07)
From the following Balance sheet of A Ltd. as at 31st March, 2007, compute the value of Goodwill on the
basis of Super profits method assuming 3 years' purchase. Show necessary workings.
Liabilities
5000, 10% Pref. shares of Rs. 10 fully paid
25,000 equity shares of Rs.10 fully paid
Profit and loss a/c
Balance on 1.4.06
30,000
Add: Profit for 2007
170,000
Creditors
The following information is furnished to you:
Rs.
Assets
50,000 Building less depreciation
250,000 Plant & machinery less depre.
Investment @ 8% p.a.
Stock
200,000 Debtors
20,000 Cash at bank
520,000
Rs.
150,000
200,000
50,000
40,000
60,000
20,000
520,000
(i) The building is worth Rs. 300,000;

(ii) Profits for last three years have shown an increse of Rs. 30,000 annually;
(iii) In the FY 2004 05, repair charges of Rs. 30,000 stood capitalised in the building.
(iv) Investment consists of 500, 8% bonds of Rs. 100 each;
(v) Normal rate of return is 12.5%;
(vi) Taxation may be assumed at 40%.
Solution:
Tutorial Notes :
1. The pref. share capital may or may not be taken as capital employed. Let us assume that it is
represented by investment in bonds.
2. For computation of normal profit, average capital employed should be taken. The balance sheet
provides the capital employed as on the date of balance sheet. It should be reduced by average profit
during the year so as to determine the average capital employed.
3. The investment is not a business activity and is therefore not a part of capital employed. The income
from investment should be deducted from profit for the year so as to determine the trading profit during the
year.
4. The question is a simple one. If you have solved the earlier questions, you should face no difficulty in
framing the solution.
5.The profit is increasing at Rs. 30,000 annually. Profit in previous years should be Rs. 140,000 and Rs.
110,000. In the Fy 2004 -05, and expense of Rs. 30,000 was not charged to profit and loss a/c but was
wrongly capitalised. The profit for 2005 should be therefore reduced by Rs. 30,000. Average profit would be
Rs. 130,000 from which income from investment of Rs.4,000 must be deducted. Depreciation impact on
this account is ignored.
6. As the pref. shares have not been treated in capital employed, the pref. dividend should be excluded
from average profit.
Salient features of answers are:
Average profit for 2007 : (170,000 less 4,000)/2 = 83,000
Average capital employed : (300,000+200,000+40.000+60,000+20,000) (20,000+50,000) 83,000.
Average capital employed : Rs. 467,000.
Normal return: 12.50% of Rs. 467,000 = Rs. 58,375.
Average profit : Rs. 126,000. Profit after tax : Rs. 76,600.Average profit : PAT less Pref. dividend.
Goodwill = 3 x (76,600 58,375) = Rs. 39,675.
Problem 4: (CS Final Dec. 08)
Following is the balance sheet of Ramesh Ltd. as on 31st March 2008 :
Liabilities
Rs.
Assets
Rs.
10,00,000 Goodwill
5,00,000
12% Pref. shares of Rs. 100 each
10,00,000 Building
15,00,000
General Reserve
6,00,000 Plant
10,00,000
Profit and loss a/c
4,00,000 Investment in 10% stock
4,80,000
15% Debentures
10,00,000 (market value Rs. 5,20,000
Creditors
8,00,000 normal value Rs. 5,00,000
Stock
6,00,000
Debtors
4,00,000
Cash
1,00,000
Preliminary expenses
2,20,000
48,00,000
48,00,000
Additional Information :
Assets are revalued as follows :
Building : Rs. 32,00,000; Plant : Rs. 18,00,000; Stock : Rs. 4,50,000 and Debtors : Rs. 3,60,000.
Average profit before tax of the company is Rs. 12,00,000 and 12.5% of the profit is transferred to general
reserve, rate of taxation being 50%. Normal dividend expected on equity shares is 8% while fair return on
capital employed is 10%. Goodwill may be valued at 3 years' purchase of super profits.
Ascertain the value of each equity share under fair value method.
Solution :
Tutorial Notes :
1. Use figures in lacs or thousands to save time and labour. It is more convenient as well.
2. Super profit is excess of actual profit over normal profit. Normal profit is given as 10% on capital
employed. The capital employed is not given, it is to be computed. Think how can you compute the capital
employed. You should compute the capital employed from the liabilities side as well as from the assets
side.You can compute normal profit as 10% of capital employed.
3. Actual profit implies profit from trading activity. The investment is not a trading activity and its income
should be excluded while computing profit for the purpose of valuation of shares. Average profit is given as
Rs. 12 lacs. Average profit less income from investment less taxes will give you actual profit. Note that
income from investment will be 10% of its normal value and Not of balance sheet value nor of present
market value.
4. Super profit can now be calculated as excess of actual profit over normal profit. The goodwill is three
times super profit. Compute goodwill which will be used in computation of intrinsic value of shares.
5. Transfer to reserve and preference dividend will have to be removed from actual profit to compute return
to shareholders.
6. Fair value of share is average of Intrinsic value and Yield value. Yield value is very easy to calculate. The
trading profit after tax and pref. dividend is the profit available to shareholders. This is yield when
expressed as %.
7. For computation of intrinsic value, Goodwill will have to be computed. Goodwill is given in balance sheet
as Rs. 5,00,000. This should NOT be taken for valuation of shares because the question specifically asks
you to compute the goodwill as three years purchase of super profits.
8. Intrinsic value for equity shareholders is sum of Capital employed plus Goodwill plus Investment less
preference capital. Intrinsic value per share is Total intrinsic value / no. of shares.
9. You should attempt to solve this problem on the above lines and compare your solution with solution
given below.
Solution goes as follows :
12% Pref. shares of Rs. 100 each
General Reserve
Profit and loss a/c
Rs. Lacs
10.00
10.00
6.00
4.00
From Assets side

Building
Plant
Stock
30.00 Debtors
Cash
Add : Revaluation
Building
17.00
Less: Liabilities
Plant
8.00
15% Debentures
10.00
Stock
(1.50)
Creditors
8.00
Debtors
(0.40)
23.10 Capital employed
Less :
Goodwill
5.00
2.20
Investment outside business
4.80
12.00
Capital employed
41.10
Normal profit is 10% of the capital employed : 10% of Rs. 41.10 lacs i.e. Rs.4.11 lacs.
Computation of Average profit and yield value of shares
Rs. Lacs
Average profit as given
12.00
Rs. Lacs
32.00
18.00
4.50
3.60
1.00
59.10
18.00
41.10
Less : Income from investment (10% of 5,00,000)
0.50
11.50
Less tax @ 50%
5.75
Actual profit
5.75
Less transfer to reserve @ 12.50%
0.72
5.03
Less : Preference dividend
1.20
Profit for equity shareholders
3.83
No. of shares in lacs
10.00
Yield % ( Profit / No. of shares)
38.30%
Value per share when normal dividend is 8% = (38.30% x 10) / 8
Rs. 47.90
Computation of super profit and valuation of goodwill :
Actual profit
5.75
Normal profit as 10% of capital employed
4.11
Super profit
1.64
Goodwill as three years' purchase of super profits
4.92
Net assets for equity shareholders :
Capital employed
41.10
Goodwill
4.92
Investment
4.80
Less : Preference capital
(10.00)
Net assets for equity shareholders
40.82
No. of shares in lacs
1.00
Intrinsic value of shares
Rs. 40.82
Value per share as per fair value method = Average of (Intrinsic value + Yield value)
= ( Rs. 47.90 + Rs. 40.82) / 2 = Rs. 44.36
Problem 5 : (CS Inter Dec. 08)
The balance sheet of Beauty Ltd. as at 31st March, 2008 was as follows :
Liabilities
Rs. Assets
Rs.
10,00,000 Goodwill
2,00,000
General reserves
5,00,000 Equipment at cost
18,00,000
Profit and loss a/c
2,00,000 Stocks
7,00,000
12% Debentures
6,00,000 Debtors
3,00,000
Provision for depreciation on equipments
3,00,000 Cash at bank
1,50,000
Staff welfare fund
80,000 Advertisement suspense a/c
50,000
Proposed dividend
1,50,000
Sundry creditors
3,70,000
32,00,000
32,00,000
The following further information is available :
(i) For this type of business, a fair return on capital employed after tax is 18%.
(ii) Equipments are to be revalued at Rs. 16,00,000.
(iii) Stocks are considered to have a net realisable value of Rs. 6,60,000.
(iv) Goodwill in this type of business is normally valued at 3 years' super profits.
(v) Included in the debtors is a balance of Rs. 20,000 which may prove irrecoverable.
(vI) Profits for the last three years (before interest and taxed) are as follows :
Year
2007 08 : Rs. 10,80,000
2006 -- 07 Rs. 10,20,000
2005 -- 06 Rs. 11,00,000
(vii) Company profits are taxed @ 40%.
You are required to calculate :
(i) value of goodwill (ii) Value of each equity share on net asset basis.
Solution :
Tutorial notes :
1. Use figures in lacs for convenience.

2. Valuation of goodwill will require determination of super profit which is difference of average operating
profit and normal profit expected from capital employed. Super profit multiplied by 3 will give you value of
goodwill. Capital employed is to be computed. If you have solved previous question, the computation of
capital employed should present no difficulty. Please try to find capital employed from both the sides of
balance sheet as done in previous question.
3. While determining the capital employed, you may wonder what to do with advertisement suspense
account. The question is silent about it. You may assume that it has no realisable value and should
therefore be ignored. Similarly the staff welfare fund is not a liability but proposed dividend is.
4. The current year profit of Rs. 10,80,000 will have to be adjusted in the light of revalued figure of stock
(from Rs. 7,00,000 to Rs. 6,60,000) and bad debts of Rs. 20,000. This revised figure of current year profit
will be used in determining the average profit (after interest and taxes). The revaluation of equipment will
have no impact on current year profit but will be used in determination of capital employed.
5. Profits (before interest and taxes) for last three years are given. For computation of goodwill, the
average profit after interest and taxes is to be determined. From the profits given, deduct interest and taxes
which will give you average operating profit.
6. Capital employed, you have determined in step two above. Find the normal profit @ 18% of capital
employed. The average profit (after interest and taxes) is known from step three. The super profit is the
excess of average operating profit over normal profit. Super profit becomes known here, multiply it by three
(as goodwill is given as three years' purchase) and goodwill becomes known. The first part of your solution
is ready.
7. Valuation of shares on net asset basis is the same as intrinsic value of shares. Intrinsic value of shares
is (capital employed + Goodwill ) / No. of shares.
8. Frame your solution on the lines given above and compare it with the solution given below.
Working notes :
1. Determination of Capital employed :
Rs. Lacs From Assets side
Rs. Lacs
10.00 Equipment
16.00
General reserves
5.00 Stock
6.60
Profit and loss a/c
2.00 Debtors
2.80
Provision for depreciation on equipments
3.00 Cash at bank
1.50
26.90
Staff welfare fund
0.80
20.80 Less : 12% Debs.
6.00
Less :
Devaluation of equipment
2.00
Creditors
3.70
Goodwill
2.00
Proposed dividend
1.50
11.20
Devaluation of stock
0.40
Bad debts
0.20
Adv.sus. a/c having no value
0.50
5.10
Capital employed
15.70 Capital employed
15.70
2. Determination of Actual adjusted profit for 2007 - 08:
Rs. Lacs
Profit as per Profit and loss a/c
10.80
Less :
Decrease in value of stocks
0.40
Bad debts
0.20
0.60
Actual adjusted profit
10.20
3. Decrease in value of equipment is not considered for depreciation.
Answer (i) Valuation of Goodwill :
Year
Profit in Rs. Lacs
2007 -- 08
10.20
2006 -- 07
2005 -- 06
10.20
11.00
31.40
Rs. Lacs
Average profit before interest and taxes
(31.40/3)
10.47
Less : Interest on debentures @ 12% on Rs. 6.0 lacs
0.72
Profit before taxes
9.75
Less : Tax @ 40%
3.90
Profit after tax
5.85
Less : Normal profit on capital employed @ 18% on Rs. 15.70 lacs
2.83
Annual super profit
3.02
Goodwill at three years' of super profit
9.06
Answer (ii) Calculation of net assets :
Capital employed
15.70
Add : Goodwill
9.06
Net assets available to shareholders
24.76
No. of share in lacs
1.00
Intrinsic value of equity share
(24.76 / 1.00)
24.76
Problem 6: (CA Final Nov. 03)
The balance sheets of R Ltd. for the year ended on 31/03/00, 31/03/01 and 31/03/02 are as follows :
Liabilities
(in Rs.)
31/3/00
31/03/01
31/03/02
320,000 Equity shares of Rs. 10 each fully paid
3,200,000
3,200,000
3,200,000
General Reserve
2,400,000
2,800,000
3,200,000
Profit and loss a/c
280,000
320,000
480,000
Creditors
1,200,000
1,600,000
2,000,000
7,080,000
7,920,000
8,880,000
Assets :
Goodwill
2,000,000
1,600,000
1,200,000
Building and Machinery(less : Depre.)
2,800,000
3,200,000
3,200,000
Stock
2,000,000
2,400,000
2,800,000
Debtors
40,000
320,000
880,000
Banak Balance
240,000
400,000
800,000
7,080,000
7,920,000
8,880,000
Actual valuation were as under:
Building and Machinery
3,600,000
4,000,000
4,400,000
Stock
2,400,000
2,800,000
3,200,000
Net profit (including opening balance)
(after writing off goodwill and depreciation,
tax provision and transfer to G.reserve)
840,000
1,240,000
1,640,000
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 12.5%.
The balance in the General Reserve account on 1st April, 1999 was Rs. 20 lakhs.
The goodwill shown on 31/03/2000 was purchased on 1/4/1999 for Rs. 20,00,000 on which date the
balance in the Profit and loss a/c was Rs. 240,000. 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.
Solution :
Tutorial notes :
1. Read the tutorial notes of the previous problem carefully. Use figures in Rs. ' 000.
2. Goodwill has been acquired on payment basis. The cost should be included in capital employed.
3. Closing capital of a year would be opening capital of subsequent year.
4. Capital employed should always be computed with revalued figures.

5. You should compute capital employed from the assets as well as from the liabilities sides. In
examination, however, you can compute it from either side.
6. What will you do after determination of capital employed? What is the use of capital employed in this
question ?
7. The goodwill is to be valued at 5 years super profit. Net profit after tax has been given. Do you think
some adjustments should be made in the net profit for determination of super profit? If yes, what are these
adjustments? Read the question again and compute the future maintainable profit.
8. Where will you use the figure of opening balance of profit and loss a/c on 1.4.99? The opening balance
of reserve on 1.4.99 is Rs.20.0 lakhs. Where will you use this information?
9. Value of business can be computed as total assets including goodwill less current liabilities. All assets
are to be taken at revalued figures.
The solution goes as follows:
Computation of Capital Employed :
Liabilities
(in '000 Rs.)
31/3/00
31/03/01
320,000 Equity shares of Rs. 10 each fully paid
3,200
3,200
General Reserve
2,400
2,800
Profit and loss a/c
280
320
Add: Revaluation of building and machinery
800
800
Add: Revaluation of stock
400
400
Closing capital employed
7,080
7,520
Opening capital employed
7,320
7,080
Average capital employed
7,200
7,300
Average return @ 12.5%
900
913
Computation of Capital Employed :
From assets side :
Assets :
Goodwill
2,000
1,600
Building and Machinery(revalued.)
3,600
4,000
Stock (revalued)
2,400
2,800
Debtors
40
320
Banak Balance
240
400
8,280
9,120
Creditors
1,200
1,600
Closing capital employed
7,080
7,520
Opening capital employed
7,320
7,080
Average capital employed
7,200
7,300
Determination of maintainable profit :
Net profit as given
840
1,240
Less: Opening balance
240
280
Add: Undervaluation of stock
400
400
Adjustment for valuation in opening stock
0
400
1,000
960
Add: Goodwill written off
0
400
Add: Transfer to general reserve
400
400
Net profit
1,400
1,760
Less : Normal profit as computed earlier
900
913
Super Profit
500
847
Average super profit (500 + 847 + 1120) / 3 = 822
Goodwill as 5 years purchase : Rs. 822,000 x 5 = Rs. 41,10,000
31/03/02
3,200
3,200
480
1,200
400
8,480
7,520
8,000
1,000
1,200
4,400
3,200
880
800
10,480
2,000
8,480
7,520
8,000
1,640
320
400
400
1,320
400
400
2,120
1,000
1,120
Computation of value of business :

Assets :
Goodwill
Building and Machinery(revalued.)
Stock (revalued)
Debtors
Banak Balance
Less: Creditors:
Rs.' 000
4,110
4,400
3,200
880
800
13,390
2,000
11,390

Find out the average capital employed on ND Ltd. from its balance sheet as at 31st March, 2006:
Liabilities:
Rs. Lakhs
Assets:
Rs. Lakhs
Share Capital
Fixed assets :
50.00 Land and buildings
25.00
9% Pref. shares fully paid up
10.00 Plant & machinery
80.25
Reserve and Surplus :
Furniture and fixture
5.50
General Reserve
12.00 Vehicles
5.00
Profit and loss a/c
20.00 Investments
10.00
Secured loans
Current assets
16% Debentures
5.00 Stock
6.75
16% Term loans
18.00 Debtors
4.90
Cash credit
13.30 Cash and bank
10.40
Current liabilities and Provisions:
0.50
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 a/c : Rs. 8.70 lakhs; General reserve : Rs. 6.50 lakhs.
Solution:
Tutorial Notes:
The question is silent regarding the components of capital employed. In the following computation, all
outside liabilities are excluded from capital employed.
The average capital employed should be reported. The opening capital has not been given. Closing capital
can be computed from the balance sheet figures. How can you compute the average capital?
Computation of average capital employed :
Total assets as per balance sheet
Less:
Non-trade investments
Outside liabilities :
10% Debentures
16% Term Loan
Cash Credit
Creditors
Capital Employed
Less:
Half of profit earned during the year
Rs. Lakhs
148.30
0.50
2.00
5.00
18.00
13.30
2.70
6.40
47.90
100.40
Increase in reserve balance

(12.0 6.50)
5.50
Increase in profit and loss a/c (20.0 8.70)
11.30
Proposed dividend
(10.0 + 0.90)
10.90
27.70
13.85
Average Capital Employed
86.55
The balance sheets of X Ltd. are as follows:
(Rs. Lakhs)
Liabilities
31/3/06
31/3/07 Assets:
31/3/06
31/3/07
Share capital
1,000.0
1,000.0 Fixed assets
General reserve
800.0
850.0 and Investments(non-trade)
1,600.0
1,800.0
Profit and loss a/c
120.0
175.0 Stock
550.0
600.0
Term Loans
370.0
330.0 Debtors
340.0
220.0
Creditors
70.0
90.0 Cash and Bank
92.5
100.0
22.5
25.0
Proposed dividend
200.0
250.0
2,582.5
2,720.0
2,582.5
2,720.0
Other Information :
1. Current cost of fixed assets excluding non-trade investments on 31/3/06 : Rs. 2,200 lakhs and on
31/3/07 : Rs. 2,532.8 lakhs.
2. Current cost of stock on 31/3/06 : Rs. 670.0 lakhs and on 31/3/07 : Rs. 750.0 lakhs.
3. Non-trade investments in 10% government securities Rs. 490.0 lakhs.
4. Debtors include foreign exchange debtors amounting to $ 70,000 recorded at the time of $ 1 = Rs. 17.50
but the closing exchange rate was $ 1 = Rs. 21.50.
5. Creditors include foreign exchange creditors amounting to $ = 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 a/c. This
expenditure is not likely to recur.
8. Tax rate during 2006 07 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 goodwill.
Examine the contention.
Solution :
Tutorial Notes:
1. Since the profits are expressed in terms of current prices, it is proper that the fixed assets and current
assets should also be valued at current prices for determination of goodwill.
2. Outside investments are not included in capital employed.
3. Term loans may or may not be taken in capital employed. The question is silent over it. It is assumed
that term loans are not components of capital employed. Worded differently, the equity approach is taken
for evaluation of goodwill.
4. Read points 4 and 5 of other information again. What do they suggest?
5. you are to compute goodwill. What are the methods of evaluation of goodwill? Which ones will you
apply?
6. Determination of FMF i.e. future maintainable profit is basic requirement for computation of goodwill.
How will you compute the profit after tax from the above data? The tax rate applicable is 50%. Profit before
tax can be determined.
7. In profit before tax, you are to make adjustments to arrive at FMF. Futuristic tax rate is expected to be
40%. FMF after tax provides basic ground for determination of goodwill. Find out the various adjustments
you are going to make to determine the FMF.
8. The exchange rate gains / losses should be adjusted in pre-tax profit. All non recurring items, should
also be properly adjusted. Find out the FMF. Reduce it by 40% (not 50%) to arrive at FMF after tax.
9. The capitalisation method and super profit method should be employed to arrive at goodwill.
10. Tersely speaking, this problem can be solved on the following lines. (i) find out the average capital
employed with balance sheet figures taking fixed assets and stock, at their current value. (ii) find out the
profit after tax from the above data. Adjust tax of 50% and find the pre-tax profit.(iii) Adjust the pre-tax
profit, in the light of (a) non-trading income (b) exchange rate fluctuations in debtors and creditors (c) non
recurring items of subsidy and R&D expenditure and (d) for the revaluation of stock. You must be careful
while computing exchange loss/gain on creditors/debtors.
Solve on the above lines and compare your solution with the one given below.
The solution goes as follows:
1. Average Capital Employed :
31/3/06
31/3/07 Outside liabilities
Rs. Lakhs
Current cost of fixed assets
2,200.0
2,532.8 Term Loans
370.0
330.0
Current cost of stock
670.0
750.0 Creditors
70.0
96.0
Debtors
340.0
222.8 Tax provision
22.5
25.0
Cash and Bank
92.5
100.0
Err:522
Err:522
3,302.5
3,605.6
Less: Outside liabilities
462.5
451.0
2,840.0
3,154.6
Average capital employed : (2840 + 3154.6) / 2
2,997.3
Normal profit @ 15%
449.6
2. Future Maintainable Profit:
1. The profit after tax can be determined with balance sheet figures. Can you determine? Try yourself.
Increase in general reserve
50.0
Increase in profit and loss a/c
55.0
Proposed dividend
250.0
Profit after tax
355.0
Profit before tax (tax rate 50%)
710.0
Less:
Non-trading income
49.0
Exchange loss on creditors
(21.5 16.5) x 1.20 lakh
6.0
Subsidy
120.0
Closing stock at old figures
600.0
Opening stock at new figures
670.0
1,445.0
Add:
Exchange gain on debtors
(21.5 17.5) x 0.70 lakh
2.8
R and D costs
247.0
Opening stock at old figures
550.0
Closing stock at new figures
750.0
1,550
Adjusted Pre-tax profit
814.8
Less : Tax 40%
325.9
Future Maintainable Profit
488.9
3. Valuation of Goodwill :
(1) Capitalisation Method
2. Super Profit Method
Value of FMF @ 15% (488.9 / 0.15)
3,259.2 FMF
488.9
Less: Average Capital employed
2,997.3 Normal profit
449.6
261.9 (15% of capital employed)
39.3
Under both the methods, the exists some value for goodwill. The contention of director is not correct.
Problem 9: (CA Final May 2004)
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. Lakhs Assets
Rs. Lakhs
Share capital
Goodwill
310
Authorised
7,500 Land and buildings
1,850
Issued and Subscribed: 5 crore equity
Machinery
3,760
shares of Rs. 10, each fully paid up
5,000 Furniture and fixtures
1,015
Capital Reserve
260 Patents and Trade Marks
32
General reserve
2,543 9% Non-trading Investments
600
Surplus i.e.credit balance of
Stock
873
profit and loss (appropriation) a/c
477 Debtors
614
Trade Creditors
568 Cash and bank
546
Provision for taxation (net)
22 Preliminary expenses
20
Proposed Dividend for 2002 20003
750
9,620
9,620
The profit before tax of the four years have been as follows:
Year ended 31st March
2000
2001
2002
2003
Profit before tax Rs. Lakhs
3,190
2,500
3,108
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 04, 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 - 04.
Solution :
Solve yourself. Key answers are given below.
Capital employed as on 31/3/04: (1850+3760+1015+32+873+614+546) (568+22) = 8100
FMF
2000
2001
2002
2003
Average profit
3,190
2,500
3,108
2,900
Adjustments
(100)
50
(54)
(54)
3,090
2,550
3,054
2,846
11,540
2,885
Less : Additional remuneration to directors
50
2,835
Less: Income tax @ 35%
992
FMF
1,843
Less: Normal profit @ 20% of Rs. 8100
1,620
Super profit
223
Goodwill as 3 years super profit:
669
Note: It would be more appropriate to take weighted average profit in place of simple average as shown
below:
FMF
2000
2001
2002
3,190
2,500
3,108
Adjustments
(100)
50
(54)
3,090
2,550
3,054
Weights
1
2
3
Weighted profits
3,090
5,100
9,162
Weighted average profit : 28,736 / (4+3+2+1)
2003
2,900
(54)
2,846
4
11,384
28,736
2,874
Less : Additional remuneration to directors
50
2,824
988
1,836
1,620
216
647
Less: Income tax @ 35%

FMF
Less: Normal profit @ 20% of Rs. 8100 lakhs
Super profit
Goodwill as 3 years super profit:
Both ways are correct. You can opt any one of them.
Problem 10: (CA Final May 2005)
The following balance sheet of X Ltd. is given:
Balance sheet as on 31st March, 2005
Liabilities :
Rs. Assets
Rs.
400,000
5,000 shares of Rs. 100 each fully paid 5,000,000 Goodwill
1,860,000 Land and buildings at cost
3,200,000
Bank Overdraft
2,110,000 Plant & machinery at cost
2,800,000
Creditors
510,000 Stock
3,200,000
2,120,000 Debtors considered good
2,000,000
Profit and loss appropriation a/c
11600000
11600000
In 1986 when the company commenced operation the paid up capital was same. The Loss/Profit for each
of the 5 years was :
Year
2000 01 2001 02
2002 03
2003 04
2004 05
1,170,000
Profit / (Loss)
(550,000) 982,000
1,450,000
1,700,000
Although the 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 05, the income tax rate of
45% should be taken into consideration,
10% dividend in 2001 02 and 2002 03 and 15% dividend in 2003 04 and 2004 05 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. 800,000 in place of
Rs. 600,000. The company has been able to secure a contract for supply of materials at advantageous
prices. The advantage has been valued at Rs. 400,000 per annum for the next five years.
Ascertain goodwill at 3 years purchase of super profit (for calculation of future maintainable profit weighted
average is to be taken).
Solution :
Tutorial Notes :
1. The profits are after tax profits. The FMF is to be computed on pre-tax profit. Students are generally
seen to forget to translate after tax profit into pre-tax profit.
2. Loss in the year 2000 01 of Rs. 550,000 may be ignored for computation of weighted average profit.
3. While computing the capital employed, what will you do with dividend paid ( @ 15% on Rs. 50.0 lakhs)
during the year and profit earned (Rs. 17.0 lakhs) during the year?
4. Normal return has not been given directly in the question. How will you determine it? What is the
significance of market price of the share in determining the normal return?
Future Maintainable Profit:
Year
2001 02 2002 03 2003 04 2004 05
Profit
Rs. Lakh
9.8
11.7
14.5
17.0
Weights
1
2
3
4
Weighted profits
9.8
23.4
43.5
68.0
Weighted average profit : 144. 80 / (4+3+2+1)
Weighted average pre-tax profit (14.5 / 0.60)
Less :
Increase in MD's remunerations
Add:
Advantage in cost of materials
144.8
14.5
24.2
(2.0)
4.0
26.2
Less :
Income tax @ 45%
11.8
Future Maintainable Profit
14.4
Average Capital Employed :
Goodwill will obviously, be not considered for computation of capital employed.
Assets
Rs. Lakhs
Land and buildings at cost
32.0
Plant & machinery at cost
28.0
Stock
32.0
Debtors considered good
20.0
112.0
Less :
Outside liabilities
Bank overdraft
18.6
Creditors
21.1
5.1
44.8
67.2
Add :
Dividend paid during the year @ 15%
7.5
Less :
Half of the profit earned during the year
8.5
Average Capital Employed :
66.2
Normal Profit :
Average dividend for past four years : (10+10+15+15) / 4 = 12.50%
Market price of the share
Rs. 125.0
Normal return : 12.50 / 125.0
= 10%
Valuation of Goodwill :
FMF
14.4
Less : Normal profit @ 10% on capital employed
6.6
Super Profit
7.8
Goodwill at 3 years purchase of super profit
23.4
The following is the extract of Balance sheets of Popular Ltd. :
Liabilities
31/3/04
31/3/05 Assets
31/3/04
31/3/05
Rs. Lakhs Rs. Lakhs
Rs. Lakhs Rs. Lakhs
Share capital
500
500 Fixed assets
550
650
General reserve
400
425 10% Investments
250
250
Profit and loss a/c
60
90 Stock
260
300
18% Term Loan
180
165 Debtors
170
110
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 31/3/05
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 31/3/05 included foreign debtors of $ 35,000 recorded in the books at Rs. 35 per US Dollar.
The closing exchange rate was $ 1 = Rs. 39.
(vi) Creditors on 31/3/05 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 R and D expenditure was written off to the profit and loss a/c in the current year. The
expenditure was not likely to recur.
(ix) Future maintainable profits (pre-tax) are likely to be higher by 10%.
(x) Tax rate during the 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 Company 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 results.
Industry average return was 12% on long-term funds and 15% on equity.
Solution :
Tutorial Notes:
1. The capital employed can be deternimed in two ways viz. with equity approach where only shareholders'
funds are considered and with long-term funds approach in which the long-term funds are also considered
as components of capital employed. Capital employed may also be determined as average of the capitals
employed of both years or adding back half year profits to the closing capital employed. Both will give you
different amount of capital employed. You must express your stand clearly in your answer.
2. What do you make out by the term leverage effect on goodwill ? Leverage implies existence of debt in
the capital structure. To show leverage effect on goodwill, you should determine goodwill with and without
debts and show the difference.
3. Additiona information says that rate of depreciation on fixed assets is 5%. Where do you intend to use
this information?
4. Since the profits are expressed in terms of current prices, it is proper that the fixed assets and current
assets should also be valued at current prices. While doing this, the additional depreciation on revalued
assets should also be kept in mind.
5. Fictitious assets go down from Rs. 10 lakhs to Rs. 8 lakhs, where will you use this information?
6. Capital employed should be computed with revised value of stocks. You have to keep this revised value
in mind while computing the FMF. Students generally loose sight of this point. The take the revised value of
fixed assets while computing the capital employed but forget to take additional depreciation in computation
of FMF. You should be aware of this lacuna.
1. Determination of Capital employed :
Assets
31/3/04
31/3/05
Rs. Lakhs Rs. Lakhs
1,100
1,250
286
330
125
125
170
111
46
45
1,727
1,861
180
165
35
49
11
13
226
227
1,501
1,634
Replacement cost of Fixed assets :

Current cost of stock : (130 + 130 x 1.2) and (150 + 150 x 1.2)
Trade Investments (at 50%)
Debtors [closing 110 + 35,000 x (39 35)]
Cash at Bank
Total
Less :
Outside Liabilities 18% term loan
Creditors
Provision for tax
Capital employed
Average Capital employed : ( 1,501 + 1, 634) / 2
Alternatively :
Profit after tax for 2004-05
Increase in General reserve
Increase in Profit and loss a/c
1,568
Rs. Lakhs
25
30
Proposed Dividend
Closing capital as on 31/3/05
Less : Half of actual profit for 2004-05
125
180
1,634
90
1,544
2. Future Maintainable Profit:

Profit after tax as determined above :
180
Pre-tax profit (tax rate 50%)
360
At this point you are advised to compute the FMF on your own and then see the following :
Pre-tax profit
360
Less :
Fictitious assets writen off
(10 8)
2.0
Income from non-trading investments (10% of 125)
12.5
Exchange loss on creditors
[ 60 x (39 33)]
3.6
Additional depre/ on increase in value of fixed assets
(1,250 650) x 5%
30.0
Subsidy
60.0
108
252
Add :
Exchange gain on debtors
[ 35 x ( 39 35)]
1
R and D expenditure written off
125
Stock adjustment ( 30 26)
4
130
382
Add :
Expected increase @ 10%
38
420
Less : tax @ 40%
168
FMF
252
3. Valuation of Goodwill :
Goodwill can be valued in two ways :
Capitalisation of FMF @ 15%
(252 / 15%)
1,680
Less : Average capital employed
1,568
(Closing capital employed can also be taken)
Goodwill
112
Capitalisation of Super profit :
FMF
252
Less : Normal profit @ 15% on average capital employed
235
17
Goodwill is capitalised value of super profit @ 15% (17 / 0.15)
113
Goodwill exists, contention of Arvind, is incorrect.
4. Leverage effect on Goodwill :
FMF on equity fund is determined as Rs. 252 lakhs. FMF on equity plus long-term fund will be more by the
amount of interest on long-term funds. As the FMF is computed after taking tax into consideration, tax
effect on interest must also be considered,
Interest on long-term funds (after tax) = 165 x 18% x 50% Rs. 15 lakhs
FMF on long-term approach = 252 + 15 = Rs. 267 lakhs.
Capital employed on long-term funds approach :
Equity capital employed
Add: Long-term funds (180 + 162) / 2
5. Valuation of Goodwill on Long-term funds approach:
Capitalised value of FMF @ 12% (not 15%)
Less : Average capital employed
Value of goodwill as per long-term approach
267 / 0.12
1,568
172
1,740
2,225
1,740
485
Value of goodwill as per equity approach
113
Final Accounts of Companies :

Remuneration to Managerial Personnel
The remuneration to managerial personnel is related to net profit and as calculated as some % of
net profit. Two cases may arise
1. If the company has made adequate profits : Section 198 (1) will apply. Overall remuneration
will not exceed 11% of net profit with sub limits as under :
Section 198
Max. % of net profit
1
Overall (excluding fees for attending meetings)
11% Section 198
2
If there is one MD/WTD (whole time director)
5% Section 309
3
If there are more than one managerial personnel
10% Section 309
4
Remuneration of part time directors
(a) If there is no MD / WTD
3% Section 309
(b) if there is available MD/WTD
1% Section 309
5
Manager other than MD /WTD
5% Section 387
Note : A Company can have either MD or Manager and not both. A company can have more than
one MD but not more than one manager.
2. If the company has no profits or inadequate profits : The following table will apply:
Effective Capital of the Company
Monthly salary payable shall not exceed
Rs. 75,000
1. Less than Rs. one crore
Rs. 100,000
2. More than Rs. 1 crore but less than Rs. 5 crore
Rs. 125,000
Rs. 150,000
Rs. 175,000
Rs. 200,000
6. More than Rs. 100 crore
Section 349 : Remuneration to Directors, Managers or Managing director is based on net profit
calculated as per provisions of Section 349.
As per Section 349 :
1. Credit will be given for subsidies or bounties received from CG or its representatives. It means
subsidy will be added to the gross profit.
2. Credit will not be given for
(a) profit on issue or sale of shares and debentures
(b) Profit of capital nature
(c) profit on sale of forfeited shares
(d) profit on sale immovable property or fixed assets.
Example : Original cost : Rs. 100,000; WDV : Rs. 60,000 Plant was sold for Rs. 110,000.
Answer : Rs. 10,000 (110,000 100,000) is capital profit and credit will not be given. It means Rs.
10,000 will not be included in the gross profit. Revenue profit is Rs. 40,000 (100,000 60,000), this
will be included in the net profit.
Example : Original cost : Rs. 100,000; WDV : Rs. 60,000 Plant was sold for Rs. 90,000.
Answer : There is no capital profit as the sale proceeds are less than original cost. The entire profit
of Rs. 30,000 will be treated as revenue profit and will be included in the net profit for computation of
remuneration.
Employees Stock Option Plan : ESOP : It is an option given by the company to its employees and
directors to subscribe to the shares of the company at a future date at a predetermined price.
Miscellaneous expenses and miscellaneous expenditure are different, similar to difference
between expense and expenditure. Expenses are debited to Profit and loss a/c, whereas
Expenditure represents unamortized balance to be shown on Assets side of the balance sheet.
Similarly Prepaid expenses are different from Preliminary expenses. Prepaid expense is a
current asset while Preliminary expense is a fictitious asset.
Divisible Profit : Divisible profits means profits available for distribution of dividend to shareholders.
The company is governed by the Companies Act 1956 and as such, it must compute profit in
accordance with recognised accounting standards and policies.
Sources for payment of dividend :
Dividend can be declared only after adequate provision for depreciation.
1. Current Year Profit : Provisions of section 205 must be followed.
2. Previous years Profit :
3. Aggregate Profits : Current year profit plus previous year profits.
4. Moneys provided by State / Central Govt. for this purpose.
For distribution of dividend, the company must ensure compliance with the following :
1. Depreciation : Full depreciation upto the date of declaration must be provided.
2. Past Losses : Amount of loss or amount of depreciation WEL (whichever is less) should be
provided.
3. Transfer to Reserves Section 205 provisions should be followed.
4. Dividend out of Reserves (sec. 205) : Declaration of dividend out of reserves rules 1975 must
be followed.
5. Dividend out of Guarantee Money : A company can also declare dividend out of the moneys
provided by state / central Govt. for the purpose.
6. Dividend out of Capital profits : Capital profits are included in divisible profits, provided
1. The Capital profits remain after revaluation of all assets and liabilities.
2. The Capital profit is realised in cash.
3. The Articles of Association permit such distribution.
Transfer of Profits to Reserves Rules 1975:
Proposed rate of Dividend
% of Profit to be transferred to reserves:
Upto 10%
Nil
Exceeding 10% but not exceeding 12.5%
Not less than 2.5% of current year profits
Exceeding 12.5% but not exceeding 15%
Not less than 5% of current year profits
Exceeding 15% but not exceeding 20%
Not less than 7.5% of current year profits
Exceeding 20%
Not less than 10% of current year profits
Declaration of Dividend out of Reserves Rules 1975
Following conditions must be satisfied for utilisation of reserves for distribution as dividend:
1. The rate of dividend must be 10% or the average of the rates of five preceding years, WEL
(whichever is less)
2. The amount drawn from such reserves should not exceed an amount equal to one-tenth of the
sum of its paid up capital (not authorised capital) and free reserves. The amount so drawn must first
be utilized to set off losses incurred in the current fy and only the balance can be utilized for the
declaration of dividend.
3. The balance of reserves after such draw shall not fall below 15% of its paid up capital. Capital
includes Preference and Equity shares both.
Transfers not permitted from following reserves :
Following capital profits are not permitted for declaration of dividend :
(i) Securities Premium (ii) Profit on re-issue of forfeited shares (iii) Capital Redemption Reserve (iv)
Profits made prior to incorporation (v) Profit on revaluation of reserve.
Problem : (CA Inter Nov. 98)
The trial balance of Complex Ltd. as at 31st March, 1998, shows the following items :
Particulars
Dr. Rs.
Cr. Rs.
Advance payment of Income tax
220,000
Provision for Income tax for the year ended 31.3.97
120,000
The following further information are given :
(1) Advance payment of income-tax includes Rs. 140,000 for 96 - 97.
(2) Actual tax liability for 96 - 97 amounts to Rs. 152,000 and no effect for the same has so far been
given in accounts.
(3) Provision for income - tax has to be made for 97 - 98 for Rs. 160,000.
You are required to prepare (i) Provision for income-tax account (ii) advance payment of income-tax
account (iii) Liabilities for taxation account and also show, how the relevant items will appear in profit
and loss a/c and balance sheet of the company.
Solution :
Tutorial Notes :
1. Advance payment for tax was paid Rs. 140,000. As the final accounts were not ready, the tax
liability could not be ascertained.
2. From the trial balance, final accounts are prepared. On the basis of self assessment, the
company makes the provision of Rs. 120,000 for tax. Profit and loss a/c is closed.
3. Tax liability is finally assessed as Rs. 152,000 for 96 - 97. Payment has already been made at Rs.
140,000. Rs. 12,000 now remains to be paid.
You can draw accounts in the same sequence as above.
First let us take advance payment of tax a/c. The opening balance is Rs. 220,000. In Rs. 220,000,
advance payment of Rs. 140,000 for 96 - 97 is included. The liability for 96 - 97 has been
ascertained as Rs. 152,000. Which of these figures will appear in Advance payment of Tax a/c ?
The advance payment of Rs. 140,000 will be adjusted against the liability of Rs. 152,000. The
advance payment of Rs. 140,000 will now be transferred to Provision for tax a/c. Credit Advance
payment of tax a/c and debit Provision for tax a/c. Draw the ledger of Advance payment of tax a/c.
Now you can come to Provision for tax a/c. It has an opening balance on credit side of Rs. 120,000.
Total tax liability has been ascertained as Rs. 152,000 which means an additional amount of Rs.
32,000 will have to be withdrawn from Profit and loss appropriation a/c (the profit and loss a/c for 9697 is already drawn and closed).
While drawing Provision for tax a/c, how will you enter the tax liability of Rs. 152,000 ? The tax
liability is entered in two parts (i) advance payment of tax of Rs. 140,000 and (ii) balance tax to be
paid of Rs. 12,000. The balance to be paid is termed either as tax liability a/c or as tax payable a/c.
You can now draw the Provision for tax a/c.
The provision required for 97 - 98 is Rs. 160,000. There is no balance in Provision for tax a/c as the
entire provision of Rs. 120,000 was consumed by tax liability of Rs. 150,000. The entire provision of
Rs. 160,000 will have to be drawn from profit and loss a/c of 97 - 98. Make a simple entry and draw
the Provision for tax 97 - 98 a/c.
Advance Payment of Tax a/c
To Opening balance
220,000 By Provision for Tax a/c
140,000
By Closing balance
80,000
220,000 (balancing figure)
220,000
Provision for Tax a/c (96 97)
To Advance payment of tax a/c
140,000 By Opening balance
120,000
To Tax payable a/c
12,000 By Profit and loss appropriation a/c
32,000
152,000
152,000
Liability for taxation a/c
The tax liability is the difference between Advance tax paid and Actual tax liability. The liability for
taxation arises only when actual tax liability comes out to be more than the advance payment of tax.
The liability for tax is closed by debiting Provision for taxation a/c.
When tax is finally assessed, it is debited to Income tax a/c or to Provision for income tax a/c. It is
adjusted for Advance payment of tax a/c and the remaining balance is credited to Tax liability a/c.
The following journal entry is passed:
Provision for tax a/c
152,000
To Advance payment of tax a/c

140,000
To Tax payable a/c (or tax liability a/c)
12,000
Tax payable a/c is also called Liability for tax a/c.
Tax Payable a/c
To Closing balance (bal.fig.)
12,000
By Provision for tax a/c
12,000
Tax payable is a liability and will be shown on liabilities side of balance sheet.
Advance payment of tax is a current asset.
Provision for tax a/c (97 98)
To closing balance (bal.fig.) 160,000
By Profit and loss a/c
160,000
Extract of Profit and loss a/c for the year ended 31.3.98
Profit before taxation
xxxxx
Less :
Provision for taxation for the year
160,000
Tax adjustment for the previous year
32,000 192,000
Extract of Balance sheet as at 31.3.98
Liabilities
Rs. Assets
Rs.
Current liabilities and Provisions
Current assets, Loans and Advances:
Current liabilities :
Current assets :
Liability for taxation (96 97)
12,000 Loans and Advances :
Provisions:
Advance payment of tax
80,000
Provision for income tax
160,000
Problem (CA PCC Nov. 08)
The Articles of Association of S Ltd. provide the following
1. That 20% of the profits each year shall be transferred to Reserve Fund.
2. That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
3. The balance available for distribution shall be applied
(a) in paying 14% on cumulative preference shares (b) in paying 20% dividend on equity shares
(c) One-third of the balance available as additional dividend on Preference Shares and 2/3 rd as
additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be equal to
12% on preference shares after making provisions (1), (2) and (3) mentioned above. The company
has issued 13,000, 14% Cumulative Participating Preference Shares of Rs. 100 each fully paid and
70,000 equity shares of Rs. 10 each fully paid up.
The profit for the year 2008 was Rs. 10,00,000 and balance brought forward from previous year Rs.
80,00,000. Provide Rs. 31,200 for depreciation and Rs. 80,000 for taxation before making other
appropriations. Prepare Profit and loss appropriation a/c.
Solution :
Tutorial Notes :
1. You can begin with the condition 1 which requires that 20% of the profits each year shall be
transferred to Reserve Fund. After reading further, the question mentions the profit for the year as
Rs. 10,00,000. Read the question fully and decide whether Rs. 200,000 (20% of Rs. 10,00,000)
should be kept as reserve?
2. Profit is determined after providing for depreciation and taxation. Transfer to reserve would be as
follows :
Profit for the year
Less :
Depreciation
Taxation
Profit for the year
Transfer to reserve @ 20%
1,000,000 (in Rs.)
31,200
80,000
111,200
888,800
177,760
711,040
3. Second condition says 10% of equity dividend shall be set aside for staff bonus. Dividend would
be 20% of 70,000 x Rs. 10 = Rs. 140,000. The amount of staff bonus would be Rs. 14,000 (10% of
Rs. 140,000).
Balance available after providing staff bonus :
Less :
Less :
Less :
Less :
711,040
14,000
697,040
14% on Cumulative Pref.Shares

182,000
(14% x 13,000 x Rs. 100)
20% Dividend on equity shares
140,000
(20% x 70,000 x Rs. 10)
Balance to be carried forward
156,000 478,000 (12% x 13,000 x Rs. 100)
Balance Available
219,040
One-third of this balance would constitute dividend on pref.shares and two-third equity dividend.
Additional dividend on pref.shares
73,013 (1/3 rd of Rs.219,040)
Additional dividend on equity shares
146,027 (2/3 rd of Rs. 219,040)
Redemption of Preference Shares :
Section 80
Redemption of Preference Shares is governed by Section 80 of the Company's Act 1956

(i) Redemption must be authorised by AOA;
(ii) Shares must be fully paid, partly paid shares must be made fully paid before redemption;
(iii) Shares will be redeemed out of profits of the company available for distribution as
dividends
OR fromwill
thebeproceeds
fresh
issue
of shares
the purpose
of redemption.
(iv) The premium
providedofout
of the
profits
or out for
of Securities
Premium
a/c before the
shares
arewill
redeemed.
(v)
Profits
be transferred first to Capital Redemption a/c with nominal value of shares to be
Methods
of Redemption :
(a) From the proceeds of fresh issue of shares;
redeemed.
(b) From the undistributed profits
(c) Combination of both
Capital redemption reserve a/c must be credited with an amount equal to amount repaid on
account
face value lessof
proceeds
of a fresh
capital made1996),
for theapurpose
of cannot
After
theof
commencement
the Company's
Actissue
1956of(Amendmend
company
redemption.
The
Capital
redemption
reserve
a/c
can
be
used
only
for
issue
of
fully
paid
issue
any
preference
share,
which
is
irredeemable
or
is
redeemable
after
the
expiry
of
abonus
The proceeds from issue of debentures cannot be utilised for the purpose.
shares,
this
a/c
cannot
be
distributed
as
dividend
period
of
twenty
years
from
the
date
of
issue.
The Companies (Amendment) Act, 1999 has substituted the word '' securities' for the
word
'share'
it occurs
in Section
78 of the Companies
Act,
1956.
You should
Section
78 of wherever
the Companies
Act 1956
states that:Securities
Premium
may
be applied
for
use
Securities
Premium
A/c
in
place
of
Share
Premium
A/c.
(commission)
and
debentures
(iv) providing
for premium
payableononredemp.
redemption
It is interestingon
to shares
note that
clause
(vi) of section
78, provides
for premium
of of
shares
and
debentures.
Pref.shares
to be
adjusted
Problem
(cwa
stage
1 Decagainst
2002) Securities Premium a/c but for redemption itself cannot be
financed
out
of
Securities
Premium
a/c.as on 31st December, 2001, inter alia includes the
The Balance sheet of M/s Raman Ltd.
Rs.
following :
50,000, 8% preference shares of Rs. 100 each, Rs. 70 paid up
35,00,000
1,00,000 equity shares of Rs. 100 each, fully paid up
1,00,00,000
Securities Premium
5,00,000
Capital Redemption Reserve
25,00,000
General Reserve
45,00,000
The Board decided to redeem the entire preference share capital at a premium of 5% on
31.03.02.
In order
to finance
the redemption,
the Company
makes aconditions
right issueofofsection
50,00080 of
The preference
shares
were redeemed
after fulfilling
the necessary
equity
shares
of
Rs.
100
each
at
Rs.
110
per
share,
Rs.
20
being
payable
on
application,
Rs.
the Companies
1956.inThe
company
decided
to make
minimum
utilisation
of general
Show
the journalAct,
entries
the books
of the
Company
andthe
prepare
the relevant
extracts
from
35
(including
premium)
on
allotment
and
the
balance
on
January
1,
2003.
The
issue
was
fully
reserve.
the
Balance
Solution
: sheet as on March 31, 2002 with the corresponding figures as on 31st Dec.2001.
subscribed and allotment made on March 1, 2002. The monies due on allotment were
Tutorial Notes :
received by March 30, 2002.
1. You must revise section 80 of Companies Act, 1956 regarding redemption of preference
shares.
Following
points
are placed
below
your
not
part ofmust
the solution.
2. No shares
can be
redeemed
unless
theyfor
are
fullyrevision.
paid, i.e.These
partlyare
paid
shares
be
made
fullycan
paidbe
before
they can
redeemed.
3.
Shares
redeemed
onlybe
out
of profits of the company which would otherwise be
available
dividend or
of proceeds
of aCapital
fresh issue
of shares
made for
the purpose
of
4.
For thefor
redemption
of out
preference
shares,
Redemption
Reserve
Account
must be
redemption.
Note
that
the
word
'proceeds'
does
not
include
the
amount
of
premium
if
shares
created
only
from
such
accounts
as
represent
divisible
profits.
The
credit
balance
of
profit
and
5. Amounts in Securities Premium Account, Forfeited Shares Account, Profit prior to
are
issued
at
a
premium.
loss
a/c,
General
Reserve,
Dividend
equalisation
Reserve
are
the
examples
of
the
balances
incorporation
account
and Capital
must
not be
transferred
to Capital
6.
If the shares
are redeemed
at a Reserve
premium,Account
as is the
present
case,
the premium
payable on
available
for
distribution
of
dividend
and
hence
for
transfer
to
Capital
Redemption
Reserve
Redemption
Reserve
Account.
redemption
must
be
provided
for
from
the
profits
of
the
company
or
from
the
Securities
7. Use of Share premium a/c has been detailed in Section 78 of the Act. It does not
say that
Account.
Premium
Account.
the
amount
received
on account of share premium can be utilised for redemption of pref.
Tutorial
Notes
:
shares.
1. Proceeds of fresh issue is to be utilised for payment to shareholders. Thus Application
money
Rs.partly
20/share
Allotment
of Rs. 25/share
(Rs. The
35 less
of be
Rs.to10)
2. Sinceofthe
paid and
shares
cannotmoney
be redeemed
(section 80),
firstpremium
entry must
can
be
utilised
for
making
payment
to
pref.
shareholders.
Note
that
the
word
'proceeds'
does
callThe
money
@ Rs.
30/share
for 50,000
useisfigures
in lacs (Rs.
or thousands
3.
amount
received
on account
of pref.shares.
premium on You
freshmust
shares
Rs. 500,000
10/share
not
include
the
amount
of
premium
if
shares
are
issued
at
a
premium.
to
time
and
labour.
on
50,000
shares).
The
to be paid
the redemption
of pref.
shares
is Rs.
250,000.
3.save
The
Pref.
shares
are premium
to be redeemed
at aon
premium
of 5%. Thus
total
amount
to be
paid to
Thus
only
Rs.
250,000
can
be
utilised
out
of
proceeds
of
share
premium
received.
The
share
The solution
goes as
pref.
shareholders
willfollows:
be Rs. 50 lacs plus Rs. 2.50 lacs. The pref. shareholders will have
to
premium
a/c
already
has
Rs.
500,000
as
credit
balance
hence
after
redemption
it
will
have
pay Rs. 15 lacs to make their shares fully paid up. This will be utilised to pay them back. The
Rs.
750,000
(500,000
+ 500,000
250,000)
credit.of share capital and Rs. 5.00 lacs on
proceeds
from
fresh issue
are Rs22.50
lacs on
on its
account
account of share premium account. Out of these, Only Rs. 25.00 lacs (Rs 22.50 + 2.50) will
be utilised to pay the pref.shareholders. The balance of Rs. 12.50 lacs will have to be
obtained from present cash and bank balance. Show these figures by way of working notes.
Working notes :
1. Amount to be paid to pref. shareholders :
Face value of shares 50,000 shares @ Rs. 100
Premium @ 5%
2. Accounts against which the redemption will be affected :
Capital redemption reserve :
Balance available on 31.12.01
Transfer from general reserve (balance available on 31.12.01 Rs. 45.0 lacs.)
3. Arrangement of cash for payment to Pref. shareholders :
Call money on pref. shares @ Rs.30/share on 50,000 shares
Proceeds of fresh issue (Rs. 20 + Rs. 25) x 50,000 shares
Proceeds of fresh share premium (to be used to pay premium on redemption)
Total cash available
Balance to be obtained from Cash and Bank Balance
Rs. lacs
50.00
2.50
52.50
25.00
27.50
52.50
15.00
22.50
2.50
40.00
12.50
52.50
4. Securities premium a/c :

Balance available as on 31.12.01
5.00
Add : Amount received @ Rs. 10 per share on 50,000 shares
5.00
Less : Premium redemption on pref. shares
(2.50)
Balance available as on 31.03.02
0.00
5. General Reserve a/c :
45.00
Less : Transfer to Capital redemption reserve
27.50
17.50
6. Capital Redemption Reserve :
Opening balance as on 31.12.01
25.00
Add : Transfer from general reserve
27.50
Closing balance as on 31.03.02
52.50
M/s Raman Ltd.
Journal Entries
Rs. Lacs Rs. Lacs
Dr.
Cr.
8% Pref. share final call A/c
15.00
To
8% Pref. share capital A/c
15.00
[being the final call made on 50,000 shares @ Rs. 30/share to make them fully paid up.]
Bank A/c
15.00
To
8% Pref. share final call A/c
15.00
[Being final call money fully received]
Bank A/c
10.00
To
Equity share application a/c
10.00
[ Being the application money received on 50,000 equity shares @ Rs. 20/share]
Equity Share application a/c
10.00
To
Equity share capital a/c
10.00
Equity share allotment a/c
17.50
To
12.50
To
Security premium a/c
5.00
[Being the amount due on 50,000 equity shares @ Rs. 35/share including premium
of Rs. 10 vide Board Resolution dated .]
8% Pref.share capital a/c
50.00
Premium of redemption of preference share capital a/c
2.50
To
Pref. shareholders a/c
52.50
[Being the transfer of amount payable to pref. shareholders a/c]
Pref. share holders a/c
52.50
To
Bank
52.50
[Being payament made to pref. shareholders]
Security Premium a/c
2.50
To
Premium on redemption of pref. share a/c
2.50
[Being premium payable on redemption transferred to security premium a/c]
General Reserve a/c
27.50
To
Capital redemption reserve a/c
27.50
[Being the amount to capital redemption reserve for the balance not covered by
proceeds of fresh issue]
Balance sheet of M/s Raman Ltd. as at 31.03.02
(after redemption of preference shares) (figures in Rs. Lacs)
Liabilities :
31.03.02
31.12.01
Share Capital :
Issued subscribed and paid up :
100,000 Equity shares of Rs. 100 each fully paid up
10.00
10.00
50,000 Equity shares of Rs. 100 each Rs. 45 called and paid u
8% 50,000 Redeemable Pref. shares of Rs. 100 each
Rs. 70 called up and redeemed on 31.3.02
Reserve and Surplus :
Security Premium a/c
General Reserve
22.50
35.00
52.5
7.50
17.50
25.00
5.00
45.00
Note : The cash and bank balance available will be reduced by Rs. 12.50 lacs after redemption.
Problem (CWA Foundation June 06)
The Balance sheet of a Company on 31.3.2006 is as follows:
Liabilities
Rs. Assets
Rs.
Share capital
Fixed assets
345,000
Pref. Shares of Rs. 100 each fully paid
65,000 Investments
18,500
Equity shares of Rs. 50 each fully paid
225,000 Bank
31,000
Profit and loss a/c
48,000
Creditors
56,500
394,500
394,500
In order to facilitate the redemption of Pref. shares at a premium of 10%, the Company decided :
(a) To sell all the investments for Rs. 15,000;

(b) to finance part of redemption from company funds, subject to, leaving a bank balance of
Rs.
12,000;
(c) to
issue minimum equity share of Rs. 50 each at a premium of Rs. 10 per share to raise
the balance
of funds
required.
You
are required
to pass
the necessary journal entries to record the above transactions and
prepare
as notes:
on completion of the above transactions.
Solutionthe
: balance sheet
Tutorial
Following abbrebiations have been extensively used here.
PSC : Preference Share Capital ; ESC : Equity Share Capital; CRR : Capital Redemption Reserve ;
1. Determine the amount payable on redemption.

71,500
2. Determine the amount to be raised through the issue of share capital.
37,500
3. Determine the number of shares to be issued.
625
4. Loss on sale of investments is Rs. 3,500, it should be debited to profit and loss a/c.
5. How much amount will be transferred to CRR a/c? Capital redemption reserve a/c must be
credited
withwill
an be
amount
equal
amount repaid
on a/c.
account
of face value
less proceeds
of isa
6.
Rs.6,250
received
onto
securities
premium
The redemption
premium
required
fresh
issue
of
capital
made
for
the
purpose
of
redemption.
Rs.
6,500.
The
balance
of
Rs.
250
will
be
debited
to
profit
and
loss
a/c.
7. You should write Securities Premium a/c and Not Share Premium a/c.
The Journal entries are as follows:
Dr.
Cr.
Bank a/c
37,500
To Share Application a/c
37,500
(Application money recd. on 625 share @ Rs. 60)
37,500
31,250
6,250
(disposal of application money)
PSC a/c
65,000
Premium on redemp. of Pref. shares a/c
6,500
To Pref. Shareholders a/c
71,500
(amount payable of pref. shareholders on redemp.)
6,250
Profit and loss a/c
250
To Premium of redemp. of pref.shares a/c
6,500
(redemp. premium written off)
Bank a/c
15,000
Profit and loss a/c (loss on sale)
3,500
To Investments
18,500
(sale of investments at a loss of Rs. 3,500)
Amount to be transferred to CRR a/c is computed as follows:
Nominal value of Pref.shares redeemed
65,000
Nominal value of Equity shares issued (premium not included)
31,250
Amount to be transferred to CRR a/c
33,750
Profit and loss a/c
33,750
To CRR a/c
33,750
(CRR created from P/l a/c for excess on nominal value over
proceeds as per section 80)
Preference Shareholders a/c
71,500
To Bank
71,500
(payment to pref.shareholders)
Working notes for determining the items of balance sheet :

1. Share Capital
Existing shares of Rs. 50
4,500
New shares issued for redemption of Rs. 50
625
Profit and loss a/c
Less:
Opening balance
Loss on sale of investments
For redemption of Pref.shares
For transfer to CRR as per section 80
Balance in profit and loss a/c to be carried to balance sheet
Bank a/c
Opening balance
Add:
Share Application
Sale of investments
Less:
Rs.
225,000
31,250
256,250
48,000
3,500
250
33,750
37,500
15,000
37,500
10,500
31,000
52,500
83,500
71,500
12,000
Payment of pref.shareholders
Closing balance
Balance sheet after redemption
Liabilities
Rs.
Assets
Rs.
Equity Share Capital
256,250
Fixed assets
345,000
CRR
33,750
Bank
12,000
Profit and loss a/c
10,500
Creditors
56,500
357,000
357,000
Problem (CWA Foundation June 02)
The following are the extracts from the Balance sheet of ABC Ltd. as on 31.12.01:(in Rs.)
40,000 equity shares of Rs. 10 each fully paid
400,000
1000, Redeemable Pref. shares of Rs. 100 each fully paid
100,000
Reserves and Surplus:
Capital reserve
50,000
Securities Premium
50,000
General Reserve
75,000
Profit and loss a/c
35,000
On 1st Jan. 2002, the BOD decided to redeem the preference shares at par by utilisation of reserve.
Pass journal entries including cash transactions in the books of the company.
Solution :
Tutorial notes :
1. Redemption is not at premium. Hence Securities premium a/c can not be utilised (read
2. Capital
Section
78reserve
again). cannot be utilised for the redemption purposes.
3. General reserve will be fully utilised for this purpose. Balance of Rs. 25,000 will be provided
4. Don't
to transfer
the nominal value of redeemed shares to CRR a/c.
by
profit forget
and loss
a/c.
The Journal entries are as follows:
General Reserve a/c
Dr.
75,000
Profit and loss a/c
Dr.
25,000
To CRR a/c
100,000
(transfer of nominal amount as per section 80 of the Act)
PSC a/c
100,000
100,000
(being amount transferred to pref.shareholders a/c)

Pref.shareholders a/c
100,000
To Bank
100,000
(payment to pref.shareholders)
Problem (CWA Foundation Dec. 02)
The capital structure of a company consists of 20,000 equity shares of Rs. 10 each fully paid
up and 1,000 8%
Redeemable
Pref.
shares
Rs. 100reserve
each fully
up. Profit and loss a/c
Undistributed
reserve
and surplus
stood
as :ofGeneral
Rs.paid
80,000;
Rs.
10,000;
Investments
Allowance
Reserve
(out
of
which
Rs.
5,000
not
for distribution
as
Preference shares are to be redeemed at a premium of 10% and for the free
purpose
of
dividend)
Rs.
10,000;
Securities
Premium
Rs.
12,000,
Cash
at
bank
amounted
to
Rs.
98,000.
redemption,
the directors
are empowered
to make
fresh
of Equity
shares
at par after
Pass
journal entries
in the books
of the company
and show
theissue
balance
sheet after
redemption.
utilising
reserve
and surplus, subject to the conditions that a sum of Rs.
Solutionthe
: undistributed
all figures
in Rs.
20,000
shall be retained
in general
reserve
and
which
shouldpremium
not be utilised.
1. The premium
on redemption
is Rs.
10,000.
The
securities
a/c is Rs. 12,000 which
2. sufficient
Face value
preference
shares to be
redeemed
100,000
is
to of
take
care of redemption
premium.
Balance of Rs. 2,000 will be carried forward
to balanceGeneral
sheet. Reserve a/c
(80,000 20,000)
60,000
Profit and loss a/c
10,000
Investments allowance reserve
(10,000 5,000)
5,000
75,000
Amount for which fresh shares are to be reissued
25,000
3. Amount to be transferred to CRR a/c
Nominal value of shares to be redeemed
100,000
Less:
Nominal value of equity shares issued
25,000
75,000
4. Sometimes Investments allowance reserve is also termed as investments fluctuations fund.
The Journal entries are as follows :

Bank a/c
25,000
To ESC a/c
25,000
(being issue of 2,500 equity shares of Rs. 10 each at par)
PSC a/c
100,000
Premium on redemp. on pref.shares a/c
10,000
To Pref.shareholders a/c
110,000
(redemption transferred to pref.shareholders a/c)
Pref. shareholders a/c
110,000
To Bank
110,000
(amount paid to pref.shareholders)
10,000
To Premium of redemp. a/c
10,000
(premium on redemption provided out of Securities Premium a/c)
General reserve a/c
60,000
Profit and loss a/c
10,000
Investments Allowance Reserve a/c
5,000
To CRR a/c
75,000
(compliance of section 80, CRR being created)
Problem : (cwa stage 1 June 2001)
Complete this problem
Rajesh Ltd. furnishes you with the following balance sheet as at 31st March, 2001:
Rs.in crores
Sources of Funds :
Share Capital
Authorised
Issued
10% Redeemable pref. shares of Rs. 100 each fully paid
Equity Shares of Rs. 10 each fully paid
Reserves and Surplus:
Capital Reserve
Share Premium
Revenue Reserves
Funds employed in
Fixed assets at cost
Less : Depreciation
Investment at cost (market value Rs. 400 crores)
Current assets
Less : Current liabilities
100
75
25
15
25
260
100
100
100
300
400
0
100
340
40
300
400
The company redeemed preference shares on 1st April, 2001. It also bought back 50 lakh
You
areshares
askedoftoRs.
: 10 each at (i)
Pass
journal
entries
to record for
thethe
above
andwere made out
equity
Rs.
50 per
share.
The payment
above
of the huge bank balances, which
as part sheet.
of current assets.
(ii) appeared
Prepare balance
Solution :
Tutorial Notes : You can revise the relevant sections of The Company's Act (Amendment)
Section 80 : Redemption of Preference Shares
1999:
Section 77A : Buy back of shares. A brief description of both sections is as follows:
Section 80 states that the redemption of redeemable preference shares can be made out of
either
the proceeds
a fresh
issue or
the profit
available
distribution.
Section
80A states
The expression
'buyofback
of shares'
means
purchasing
of for
own
shares of the
company.
that
all
preference
shares
which
are
irredeemable
shall
be
redeemed
by
the
company
on the
Sources of Funds for buy-back (Section 77A(ii) of Company's Act 1956) : A company
can
due
date
for
redemption
or
within
a
period
not
exceeding
ten
years
from
such
buy its own
shares
out of : ; or
(a)Free
reserves
(b)The securities premium account ; or
commencement, whichever is earlier.
(c)The proceeds of any shares or other specified securities.
Buy-back from whom [Section 77(A)(5)]: A company can buy its own shares from either of the
following(a)Existing
:
equity shareholders on a proportional basis;
(b)Open market;
(c)Odd lot of shareholders;
(d)Employees of the company.
Conditions of buy-back : A company can buy-back its shares or other specified securities only
if
(a)The buy-back is authorised by its Articles of Association.
(b)A special resolution is passed in the general meeting of the company authorising the buyback.
(c)The buy-back is or less than twenty five per cent of the total paid-up capital and free
reserves
of the company.
maythe
bebuy-back
noted that
in a year
buy-back
cannot
twenty
(d)The debt-equity
ratio It
after
should
not be
less than
2 : 1.exceed
Debt for
the five
percent of
its total
paid-up
capital.
purpose
shall
bebeing
secured
debt
as well
unsecured
(e)The
shares
bought-back
areas
fully
paid up. debt.
(f)If the shares or other specified securities are listed on a recognised stock exchange, then buy-back
must
comply ifwith
the regulations
by SEBI
behalf. of section 159, 207 and 211 of
(g)Further,
a company
has notmade
complied
with in
thethis
provisions
the Company's
Act 1956,
then
the company
cannotprocess
buy-back
its own
shares
securities.
The
company shall
have to
complete
the buy-back
within
a period
ofand
twelve
months
from
the
date
of
passing
the
special
resolution
or
the
resolution
passed
by
the
Board
of kind within a
The company is not allowed to issue further shares or other specified securities of similar
Directors.
A company
prohibited
of its ownof
shares
and securities
:
period
of sixismonths
fromfrom
the buy-back
date of completion
buy-back,
except where
they have been issued by
way of bonus
shares
or
in
discharge
of
subsisting
obligation.
(a)Through any subsidiary company including its own subsidiary companies.
(b)Through any investment company or group of such companies.

(c)If default is committed by the company in repayment of deposits or interest thereon, redemption of
debentures
payment
of dividend
to anyofshareholder
or207
repayment
(d)Further,orif preference
a company shares
has noton
complied
with
the provisions
section 159,
and 211ofofany
the term
loan
or
interest
thereon
to
any
financial
institution
or
bank,
then
during
the
period
of
default,
the
Company's Act 1956, then the company cannot
buy-back
securities.
Journal
Entriesits own shares and
Rs. in
lakhs
company
cannot
buy-back
its
own
shares.
For Redemption of redeemable preference shares
10% Redeemable Pref. Shares a/c
Dr.
75
To Redeemable Pref. shareholders a/c
75
(being the amount transferred to pref. shareholders a/c vide Board Resolution dtd.)
Redeemable Pref. Shareholders a/c
Dr.
75
To Bank
75
(being the payment made to redeemable pref. shareholders)
Revenue Reserve a/c
Dr.
75
To Capital redemption reserve a/c
75
(Being the amount transferred from Revenue reserve as per Board resolution dated
Forcompliance
Buy back of
: Act,)
in
of Equity
sectionShares
80 of the
Leoji leoji leo bank a/c
Dr.
5
To Bank a/c
5
(Being amount transferred to Leoji leoji leo Bank opened vide Board resolution dated..and
for buy back of equity shares along with authorisation of payment to be made by merchant
bankers.)
Problem (cwa stage 1 Dec 2000)

On 1dt Dec. 1999 Mehul Ltd. was incorporated with authorised capital of Rs. 1 crore. On 30th
2,500
Nov 2000
thecapital
following
is paid
its trial
:(Rs.'000)
Equity
share
(fully
upbalance
shares of
Rs. 10 each of which 100000 shares
Capital
200
are issued for consideration other
than reserve
cash Rs. 10,00,000)
fixed assets Cost
800
Purchase(net)
6,000
Sales (net)
7,500
Expenses
400
Depreciation
100
provision of depreciation
100
Bank- current account schedule bank
200
Interim dividend
300
Liability for interim dividend
180
Creditors for expenses
20
Creditors for goods
1,000
Prepaid expenses
50
Advance from customers
100
advance to suppliers
150
customers dues
3,200
Tax payment
400
11,600
11,600
On 30th November, 2000, the cost of unsold stock is Rs. 350,000. Customers dues are
unsecured but considered good and are due for less than six months. Provide for taxation at
35%. Directors have proposed final dividend of Rs. 200,000 and appropriation to general
reserve of Rs.250,000.
Prepare the final accounts.

Solution :
Tutorial Notes :
1. The final accounts of limited company should be presented in the format given with
Schedule
VI of
You candues
select
either
Horizontal
or Vertical form.
2.
It is stated
in Companies
the questionAct,
that1956.
'' customers
are
unsecured
but considered
good and
are
due
for
less
than
six
months.''
The
Schedule
VI
requires
that
debts
outstanding
3. According to Schedule VI (Notes to Part 1), the figures in the balance sheet may for
be a
period
exceeding
months
should
beas
disclosed
separately
in
the balance
sheet.
rounded
off
to the six
nearest
'000'
or '00'
may be
considered
convenient
or
expressed
4.
Interim
dividend
paid
and
proposed
dividend
both
are not components
of may
profitbe
and
loss a/c.
in
terms
of
decimals
or
thousands.
You
should
round
off
the
figures
to
save
time
and
labour.
In
Dividend
is appropriation
of profit
afterto
tax
and you
should
never charge
profit
and loss of
a/c
5.
Schedule
VI requires that
in regard
Sundry
debtors
particulars
to bethe
given
separately
the
original
question
the
figures
were
not
rounded
off,
but
in
solution
the
figures
are
reported
for
payment
of
whether
orofproposed.
(a)
debts considered
ininterim
respect
which
the company
is fully
secured;
andthree
(b) debts
6. Schedule
VI dividend
statesgood
that
itand
is not
necessary
to separate
the profit
and loss
a/c into
in
lacs
for
convenience.
considered
good
to
which
the
company
holds
no
security
other
than
debtor's
personal
The solution
goes as
parts
viz.(i) Trading
a/cfollows:
(ii) Profit and loss a/c and (iii) Profit and loss appropriation a/c. Only
security,
debts
or
bad.
one Profitand
and(c)
loss
a/c considered
is prepareddoubtful
in threeMehul
sections
Ltd. first section to show Gross profit, middle
section to show Net profit
and
the
bottom
section
show
Appropriation
of Profits.2000
Revenue statement for thetoyear
ended
30th November,
Sales
Cost of Sales
Purchases
Less : Closing Stock
Expenses
Depreciation
Profit before tax
Provision for tax @ 35%
Profit after tax
Less : Appropriation to
General Reserve
Interim Dividend
Proposed Dividend
Balance Carried forward
75.00
60.00
3.50
56.50
4.00
1.00
2.50
3.00
2.00
61.50
13.50
4.73
8.77
7.50
1.27
Mehul Ltd.
Balance sheet as at 30th November, 2000
Sources of Funds :
Shareholder's Fund :
Share capital
Reserves and Surplus :
Capital Reserve
General Reserve
Surplus
Funds employed in :
Fixed assets : Cost
8.00
Less : Provision for depreciation
1.00
Current assets :
Inventory
cost
Dues fromatcustomers
- unsecured but considered good for less than six
months
Balance with scheduled bank in current account
Advances recoverable in cash or in kind ( 50,000 + 150,000)
Tax payment pending assessment
Total
Rs. lacs
25.00
2.00
2.50
1.27
30.77
7.00
3.50
32.00
2.00
2.00
4.00
50.50
Less : Current liabilities and Provisions

Creditors for goods
Creditors for expenses
Advances from customers
Interim dividend
Proposed dividend
10.00
0.20
1.00
1.80
4.73
2.00
19.73
30.77
Problem : (CWA Inter Dec. 06)

Following is the summarised Balance sheet of X Ltd.:
Liabilities
Assets
50,000 equity shares of Rs. 10 fully paid up
500,000 Bank
90,000
1,000,10% Redeemable Pref. shares of Rs. 100
each fully called up
100,000
Other Assets
810,000
Less : Calls in arrears @ Rs. 20 each.
1,000
99,000
Reserve and Surplus
20,000
Profit and loss a/c
60,000
General Reserve
70,000
Creditors
151,000
900,000
900,000
The redeemable preference shares were redeemed on the following basis:
(i) Further 4,500 equity shares were issued at a premium of 10%;
(ii) Expenses for fresh issue of shares of Rs. 5,000
(iii) Of the preference shares, holders of 40 shares paid the call money before the date of
redemption.
Theshrares
balance
10 shares
wereatforfeited
for non-payment
of calls before
(iv)
Preference
were
redeemed
at premium
of 10% and Securities
premium a/c was
redemption.
The
forfeited
shares were balance
reissuedsheet
as fully
paid
on receipt of Rs. 500 before
Showutilised
journalfor
entries
and summarised
after
redemption.
fully
this
purpose.
redemption.
Solution :
Tutorial Notes:
1. You can begin to give entries alongwith the question (i) for the issue of 4,500 shares. You
Bankgive one consolidated entry for49,500
Note:
can
the entire transaction.
45,000 In journal entries, the narration part has
4,500 been left for the reader.
(being new issue of 4,500 shares at 10% premium)
Expenses for fresh issue can be journalised as :
Expenses for fresh issue
5,000
To Bank
5,000
Profit and loss a/c
5,000
To Expenses for fresh issue
5,000
Bank
800
To Calls in arrears
800
Pref. Share capital a/c
1,000
To
Calls in arrears
200
800
These forfeited shares were reissued for Rs. 500. The Pref. Share capital a/c will be credited
BankRs. 100 x 10 = Rs. 1,000. Money500
with
received is Rs. 500, the remaining amount of Rs. 500
will be debited to Share forfeiture a/c.

500
To Preference Share capital a/c
1,000
The balance in forfeiture a/c can now be transferred to Capital reserve a/c.
300
300
The Securities premium a/c has credit balance of Rs. 20,000 + Rs. 4,500 = Rs. 24,500. The
question
says that
the securities
premium
fully utilised
for the purpose
of redemption.
The Securities
premium
a/c can be
utiliseda/c
forwas
the payment
of premium
on redemption
only
It does
not
mean thereserve
entire amount
Rs.
24,500with
canan
beamount
utilised equal
for redemption
i.e.
for Rs.
10,000.
Capital
redemption
a/c mustofbe
credited
to amountpurpose.
repaid on
The
Faceofvalue
of Pref.shares
to be of
redeemed
100,000 of
account
face value
less proceeds
a fresh issue of capital made for the purpose
redemption.
Thevalue
Capital
redemption
a/cthe
canpurpose
be used only for issue of45,000
fully paid bonus
Less : Nominal
of fresh
shares reserve
issued for
shares,
this
a/c
cannot
be
distributed
as
dividend
Amount for which Capital Redemption Reserve must be created.
55,000
General reserve may be utilised for this purpose followed by profit and loss a/c. In this case,
Securities
10,000
the
generalpremium
reserve a/c
is enough for CRR a/c, hence no need to take any amount
from profit and
loss a/c. To Premium on redemption of Pref. Share capital a/c
10,000
100,000
Premium on redemption of Pref. Share capital a/c
10,000
To Pref.Shareholders a/c
110,000
Pref. Shareholders a/c
110,000
To Bank
110,000
General Reserve a/c
55,000
To Capital Redemption Reserve
55,000
For drawing Balance sheet after redemption, you should compute various figures in working
notes :
(after redemption)
Balance sheet of X Ltd. as at
Liabilities
Rs. Assets
Rs.
54,500 equity shares of Rs. 10 fully paid up
545,000 Bank
25,800
Reserve and Surplus
Other Assets
810,000
Capital Reserve
300
14,500
Profit and loss a/c
55,000
General Reserve
15,000
55,000
Creditors
151,000
835,800
Err:522
Bank
(90,000 + 49,500 5,000 + 800 + 500 110,000)
Securities premium : (20,000 + 4,500 10,000)
Issue and Redemption of Debentures :

Purchase of Own Debentures in Open Market :
Suppose a company has issued 8% debentures of for Rs. 10,00,000, interest being payable on 31st March and
30th September. Suppose the debentures are available at Rs. 96 in open market. On 1st August 2003, the
company purchases Rs. 50,000 debentures (face value) at Rs. 96.
Interest accrued on debentures from 1.4.03 to 31.7.03 (4 months) : Rs. 50,000 x 8% x 4/12 = Rs. 1,333
Principal amount @ Rs. 96 : Rs. 50,000 x 96/100 = Rs. 48,000.
Thus the company will pay Rs. 49,133 ( 48,000 + 1,333) for purchase of debentures.
The journal entry will be :
Rs.
Rs.
Own Debentures a/c
Dr.
48,000
Interest a/c
Dr.
1,333
To Bank
49,333
Problem (cwa stage 1 Dec 2002)

Complex Ltd. issued debentures at 94% for Rs. 100,000 on 1st April 1996, repayable by five equal and annual
drawings of Rs. 20,000 each.
The company closes its account on calender year basis.
You are required to indicate the amount of discount to be written off every accounting year, assuming that
Company decides to write off the debentures discount during the life of debentures.
Solution :
Tutorial Notes
1. The company had issued the debentures at discount of 6% i.e. Rs. 6,000. The question is to proportionately
distribute the discount over five years. Naturally it cannot be distributed equally because the debentures are
being paid annually @ Rs. 20,000.
2. The company pays the annual instalment on March. 31 every year.. The payment would be as follows :
Date
31.03.96
31.03.97 31.03.98 31.03.99
31.03.00
Payment Rs.
20,000
20,000 20,000 20,000
20,000
Balance Rs.
80,000
60,000 40,000 20,000
0
Since the company closes its books on Dec.31 every year. The utilisation statement of debentures would be as
follows :
Year ended on:
31.12.96
Amount used
Rs. 100,000 for 9 months
31.12.97

31.12.98
31.12.99


900,000 Rs. Months
Annual equivalent Rs.

75,000 for 12 months
300,000 Rs. Months

720,000 Rs. Months
1020000 Rs. Months
240,000 Rs. Months

540,000 Rs. Months
780,000 Rs. Months
180,000 Rs. Months

360,000 Rs. Months
540,000 Rs. Month 45,000 for 12 months
31.12.00

120,000 Rs. Months

180,000 Rs. Months
300,000 Rs. Months
31.12.01
60,000 Rs. Months
5,000 for 12 months
The discount of Rs. 6,000 to be distributed over 5 years in the ratio 75:85:65:45:25:5
Year ended
31.12.96 31.12.97 31.12.98 31.12.99 31.12.00 31.12.01
Discount to be charged
1,500
1,700
1,300
900
500
100
6,000
Problem : (cwa foundation, Dec. 2002)
The following balances appeared in the books of Royco Ltd. on 01.04.2001:
(i) Debentures Redemption Fund Rs. 60,000 represented by investments of an equal amount (nominal value Rs.
75,000).
(ii) The 12% debentures stood at Rs. 90,000.
The company sold required amount of investments at 90% for redemption of Rs. 30,000 Debentures at a
premium of 20% on the above date.
Show the :
1
12% Debentures account
2
Debenture Redemption Fund Account
3
Debenture Redemption Fund Investments Account
4
Debenture-holders Account.
Solution:
Tutorial Notes :
1. The opening balance of 12% Debentures is Rs. 90,000. The redeemed debentures are of Rs. 30,000, thus the
closing balance must be Rs. 60,000. This is your 12% debentures account.
2. Redemption of debentures of Rs. 30,000 is to be made at 20% premium. Thus an amount of Rs. 36,000 would
be required to pay the debenture-holders. This amount will be obtained by selling the investments at 90% value.
Thus investments of nominal value of Rs. 40,000 must be sold to fetch Rs. 36,000 (90% of Rs. 40,000).
3. The cost of investments of nominal value of Rs. 40,000 should now be determined. The cost of investments of
Rs. 75,000 is Rs. 60,000. On this basis the cost of investments sold would be Rs. 40,000 x (60/75) i.e. Rs. Rs.
32,000. The profit on sale of investments would be Rs. 4,000 (36,000 32,000). This profit will be debited to
Debenture Redemption Fund Investment A/c and will be credited to Debenture Redemption Fund A/c.
4. The Balance of debenture redemption fund will be Rs. 28,000 (60,000 32,000).
The various accounts are shown below :
In the books of the Royco Ltd.
12% Debentures A/c
Date
Particulars
Rs.
Date Particulars
Rs.
1.4.01
To debenture holder a/c
30,000
1.4.01 By Opening bal.
90,000
To Closing balance
60,000
31.3.02
1.4.01
To Premium on redemption
of debenture a/c
To Closing balance
Debenture Redemption Fund A/c

1.4.01 By Opening balance
6,000
By Deb.Redemp.
58,000
Fund Investments
a/c
64,000
Debenture Redemption Fund Investments a/c

To Opening balance
60,000
1.4.01 By Bank a/c
60,000
4,000
64,000
36,000
To Debenture Redem. Fund

a/c
1.4.01
To Bank
4,000 31.3.02 By Closing balance

64,000
Debenture holders a/c
36,000 31.3.02 By 12% Debenture a/c
31.3.02 By Premium on Redm. of Deb.
Working notes :
The amount payable to debenture holders
Investments required to be sold for this amount
The cost of Investments to be sold
Sale proceeds of Investments
Profit on sale of investments
120% of Rs. 30,000

(36,000 / 0.90)
(40,000 x 60/75)
28,000
64,000
30,000
6,000
Rs.
36,000
40,000
32,000
36,000
4,000
Bonus Shares :
Some points to remember :
1. Bonus shares are free of cost shares issued to existing shareholders . The bonus issue
shall be made out of free reserves built out of the profits and / or out of Securities Premium a/c
collected in cash only.
2. Reserve created out of revaluation of fixed assets are not allowed to be used for issuing
bonus shares. In other words, the revaluation reserves are not capitalised.
3. Capital redemption reserve can be used for issuing bonus shares.
4. The bonus issue is not made unless the partly paid shares are made fully paid.
5. Proportional shares should be kept reserved for convertible part of FCDs and PCDs on
same terms.
6. The company has not defaulted in payment of interest or principal in respect of fixed
deposits, debentures etc. It has made all the statutory dues fully and timely.
7. The company must implement the proposal within 6 months from the date of such approval.
The company shall not have option of changing the decision.
8.The AOA shall contain a provision for capitalisation of reserves. If not, the company should
pass a resolution in GM for making such provision.
9. After issue of bonus shares, if the share capital exceeds the authorised capital, a resolution
shall be passed in the GM for increasing the authorised capital.
10. Bonus shares can be issued only after the expiry of 12 months from the date of public
issue or rights issue.
Problem : (CA Inter May 2000)
Following is the extract of Balance sheet of Beltex Ltd. as at 31st March, 2000
Rs.
10,000 12% Preference Shares of Rs. 10 each
100,000
100,000 Equity Shares of Rs. 10 each
1,000,000
Issued and Subscribed Capital :
8,000 12% Preference Shares of Rs. 10 each fully paid
80,000
90,000 Equity Shares of Rs. 10 each, Rs. 8 paid up
720,000
General Reserve
120,000
Capital Reserve
75,000
Securities Premium
25,000
Profit and loss a/c
200,000
Secured Loan :
12% Partly Convertible Debentures @ Rs. 100 each.
500,000
On 1st April, 2000 the company has made final call @ Rs. 2 each on 90,000 equity shares.
The call money was received by 20th April, 2000. Thereafter the company decided to
capitalise its reserves by way of bonus at the rate of one share for every four shares held.
Share premium of Rs. 25,000 includes a premium of Rs. 5,000 for shares issued to vendors
pursuant to a scheme of amalgamation. Capital reserves include Rs. 40,000 being profit on
sale of plant and machinery. 20% of 12% debentures are convertible into equity shares of Rs.
10 each fully paid up on 1st July, 2000.
Show necessary entries in the books of the company and prepare the extract of balance sheet
immediately after bonus issue but before conversion of debentures. Are the convertible
debentureholders entitled to bonus shares ?
Solution :
Tutorial Notes :
1. Capital Reserve realised in cash can be utilised for issue of fully paid bonus shares.
2. Share Premium collected in cash can be utilised for issue of bonus shares. In this case, Rs.
5,000 of Securities premium a/c has not been collected in cash hence not eligible for issue of
bonus shares. Only Rs. 20,000 (25,000 5,000) can be utilised for issue of bonus shares.
3. At the time of issue of bonus shares, the convertible portion of PCDs should also be taken
into account. Proportion number of shares should be kept for converted shares. 20% of PCDs
will be converted to shares of Rs. 10 each fully paid. The number of converted shares would
be ( 20% of Rs. 500,000) / Rs. 10 = 10,000 shares. The bonus is one share for every four
held. Bonus shares to PCD holders would be 10,000 / 4 = 2,500 shares.
4. The authorised share capital should not be exceeded after the issue of bonus shares. If it is
so, the company should pass a resolution in its general meeting to raise the authorised
capital.
5. In this case, the authorised share capital is 100,000 equity shares of Rs. 10 each. 90,000
shares are already issued. The bonus to existing shareholders is 90,000 / 4 = 22,500 shares
and to PCDs holder 2,500 shares totalling 25,000 bonus shares. The share capital after bonus
shares is 115,000 shares which is more than authorised shares of 100,000. It is assumed that
the company has completed all the statutory requirements in this regard. It may also be noted
here that the shares to PCDs holders are not being issued at the moment but are being kept
reserved for them for issue at the time of conversion of PCDs into shares.
The following are Journal entries :

At the time of sanction of issue of bonus shares :
Profit and loss a/c
Other Reserves
Dr.
Bonus to Shareholders a/c
On issue of bonus shares
Bonus to shareholders a/c
Dr.
Share Capital a/c
April 1, 2000
Equity share Final Call a/c
180,000
180,000
(final call of Rs. 2/share on 90,000 shares due as per Board's resolution dated..)
April 20, 2000
Bank
180,000
To Equity Share Final Call a/c
180,000
(call money on 90,000 shares, received in full)
Capital Reserve a/c
Dr.
40,000
Dr.
20,000
General Reserve a/c
Dr.
120,000
Profit and loss a/c
Dr.
45,000
To Bonus to shareholders a/c

225,000
(bonus shares @ 1 share for four held by utilising various reserved as per
Board's resolution dated )
Bonus to shareholders a/c
225,000
To Equity share capital a/c
225,000
Extract of Balance sheet (after the bonus issue)
Rs.
10,000 12% Preference Shares of Rs. 10 each
100,000
1,250,000
Issued and Subscribed Capital :
8,000 12% Preference Shares of Rs. 10 each fully paid
80,000
1,125,000
(Out of the above, 22,500 shares were issued as bonus)
Capital Reserve
35,000
Securities Premium
5,000
Profit and loss a/c
155,000
Secured Loan :
12% Partly Convertible Debentures @ Rs. 100 each.
500,000
Internal Reconstruction :
Problem (cwa inter June 03)
Following is the balance sheet of Y LTd
Liabilities
Share Capital
Issued and paid up 250,000 shares Rs.10 each as
Rs.8 paid up
100,000 (10%) Pref.shares of Rs. 10 each fully paid
up.
Reserve and Surplus
General reserve
Profit and loss a/c
Current liabilities
Creditors
Workman's profit sharing fund
Rs.
2000000
1000000
600,000
800,000
Assets
Fixed assets
Goodwill
Building
Plant & machinery
Current assets
Stock
Debtors
Bank
Misce. Exp.
Preliminary exp.
Rs.
800,000
700,000
1300000
700,000
900,000
660,000
400,000
40,000
300,000
5100000
5100000
X Ltd. decided to absorb the business of Y ltd. at the respective book value of assets and trade liabilities
except Building which was valued at Rs. 12,00,000 and Plant & machinery at Rs. 10,00,000.
The purchase consideration was payable as follows :
(a) Assumption of trade liabilities;
(b) Payment of liquidation expenses Rs. 5,000 and workman's profit sharing fund at 10% premium;
(c) Issue of equity shares of Rs. 10 each fully paid at Rs. 11 per share for every pref. share and every equity
share of Y ltd. and a payment of Rs. 4 per equity share in cash.
Calculate the purchase consideration, show necessary ledger accounts in the books of Y ltd. and Journal
entries of X Ltd.
Solution :
Tutorial Notes :
You must revise the following before attempting to solve the above problem. These should not be treated as
part of answer in the examination.
1. AS -- 14 deals with the accounting problems relating to amalgamation. According to AS -- 14, there are two
types of amalgamation (i) amalgamation in the nature of merger and (ii) amalgamation in the nature of
purchase.
2. AS -- 14 defines Purchase consideration as '' the aggregate of the shares and other securities issued and
the payment made in the form of cash or other assets by the transferee (amalgamating) company to the
shareholders of transferor (amalgamated) company.''
3. Points to Remember regarding purchase consideration :
3.1 Only payment of shareholders is to be taken into consideration.
3.2 Consideration for debenture holders will NOT be included in the purchase consideration.
3.3 Liquidation expenses or payment for cost of absorption are NOT included in purchase consideration.
In the instant case, the description of consideration to be paid to various parties has already been defined.
Consideration means the amount payable to the liquidator of the transferor company and does not include the
amount of liabilities taken over by the transferee company.
As given in the question, the consideration is to be utilised or payable in the following manner :
1. Payment of liquidation expenses of Rs. 5,000;
2. Payment for Workman's profit sharing fund of Rs. 300,000 at a premium of 10%. This amounts to Rs.
330,000;
3. Payment of Rs. 4/share for 250,000 shares amounting to Rs. 10,00,000;
4. Payment Rs. 11/ pref. share in the form equity shares for 100,000 pref. shareholders amounting to Rs.
11,00,000;
5. Payment of Rs. 11/ equity share in the form of equity shares for 250,000 shares amounting to Rs.
27,50,000.
It should be remembered here that the mode of discharge of consideration by the transferor (amalgamated)
company and the purpose for which the transferor company uses the consideration received do not affect the
amount of consideration.
The calculation for Purchase consideration goes as follows :
1. Cash for liquidation expenses
2. Cash for payment of Workman's profit sharing fund
3. Cash on 250,000 shares @ Rs. 4/ share
4. Equity shares for Pref. shareholders (100,000 x Rs. 11)
5. Equity shares for Equity shareholders (250,000 x Rs. 11)
5,000
330,000
1,000,000
1,100,000
2,750,000
5,185,000
Thus the liquidator of Y ltd will be given by X ltd. the following :

Rs. 13,35,000 from bank a/c, Rs. 35,00,000 on equity share capital a/c and Rs. 350,000 on Share Premium
a/c totaling Rs. 51,85,000.
Accounting entries in the books of transferor company i.e.Y ltd.
Step 1: Open realisation a/c and transfer all assets and liabilities to this account (excluding the fictitious a/c
which will be transferred to shareholders a/c). Credit this account by debiting the transferee company i.e. X ltd
by the amount of purchase consideration. Compute the profit or loss on realisation.
Following points may be noted in this regard:
1. For this entry, agreed valuations are absolutely immaterial. The assets and liabilities are transferred to this
a/c as per their balance sheet values.
2. Fictitious assets such as preliminary expenses, discount on issue of shares and debentures, debit balance
of profit and loss a/c etc. are not transferred to Realisation a/c because these have no realisable values.
These accounts are transferred to shareholders' account.
3. Goodwill, trademarks, patents etc are also transferred to Realisation account.
4. Items in the nature of provisions are transferred to Realisation a/c.
5. Items in the nature of Reserves are NOT transferred to Realisation a/c, they are transferred to
Shareholders' a/c.
6. If any account is closed at more are less than the balance sheet values, the difference is transferred to this
account. For example in the present case the pref. shareholders are paid Rs. 100,000 more than the amount
due to them, this excess amount will be debited to Realisation a/c. Same is the case with Workman's profit
sharing fund.
In the books of Y ltd.
figures in '000
Realisation a/c
To
Goodwill
800 By Creditors
400
Building
700 By X Ltd.
5,185
Plant & machinery
1,300
Stock
700
Debtors
900
Bank
660
Workman's fund
30
Bank expenses
5
Pref.shareholders
100
Profit (bal. fig.)
390
5,585
5,585
Note : Since the liquidation expenses are borne by Y ltd. (transferor company), the amount is debited to
Realisation a/c.
Step 2 : Open Shareholders a/c and transfer to this, the share capital, reserves and all other fictitious
accounts. The profit or loss from the Realisation a/c and Shares and cash as received from the transferee
company are also transferred to this account.
Equity Shareholders a/c

To
40 By Equity share capital
2,000
Bank
1,000 By General reserve
600
Equity shares in X Ltd
2,750 By Profit and loss a/c
800
By Profit on realisation
390
3,790
3,790
Note : There are no balancing figure in this account. Here you can check whether the previous calculations
are okay.
Step 3: Prepare other ledger accounts.
X Ltd. a/c
To
Realisation a/c
5,185 By Bank
1,335
By Equity shares in X ltd.
3,850
5,185
5,185
Bank A/c
To
X Ltd
1,335 By Realisation (exp)
5
By Workman fund
330
By Equity shareholders a/c
1,000
1,335
1,335
Note : This bank account is different from the Bank a/c which is closed in Realisation a/c. This Bank a/c is
meant for liquidation purposes only.
Preference Shareholders a/c
1,100 By Pref. share capital
1,000
By Realisation a/c
100
1,100
1,100
Equity Shares in X Ltd.
To
X Ltd
3,850 By Pref. shareholders
1,100
By Equity shareholders a/c
2,750
3,850
3,850
Opening Journal Entries of X Ltd.
In the books of transferee company X ltd. the assets and liabilities will be recorded at their agreed values. Any
excess or deficit over the purchase consideration will be adjusted in Capital reserve or Goodwill a/c as the
case may be.
To
Equity shares in X Ltd
Building a/c
Plant & machinery a/c
Stock a/c
Debtors a/c
Bank a/c
Goodwill a/c (bal. fig.)
Dr.
Dr.
Dr.
Dr.
Dr.
Dr.
Rs. Lacs
1,200
1,000
700
900
660
1,125
To Creditors
To Liquidator of Y Ltd.
Liquidator of Y Ltd.
To Bank
To Equity Share capital
To Share Premium
Student should write the narration himself.
Rs. Lacs
400
5,185
5,185
1,335
3,500
350
Problem (cwa inter Dec 04)

The summarized balance sheets of three companies as on 31st March, 2004 are as follows :
P Ltd.
Q Ltd.
R Ltd.
Rs. Lacs Rs. Lacs Rs. Lacs
90.0
15.0
25.0
Share Premium
Profit and loss a/c
Long term Loan
Proposed Dividends
Sundry creditors
18.0
20.0
5.0
20.0
15.0
13.5
16.5
10.0
5.0
173.0
30.0
50.0
Land and buildings
60.0
5.0
Plant & machinery
50.0
10.0
5.0
Stock
35.0
5.0
10.0
Debtors
20.0
5.0
15.0
Bank
8.0
10.0
15.0
173.0
30.0
50.0
P Ltd.takes over R. ltd. by buying all the assets. The purchase consideration is 6,00,000 equity shares at a
premium of 10%. The creditors of R. Ltd. will be taken over by P. Ltd. The assets of R. Ltd. are valued at :
(fig. in Rs.)
Land and buildings
10,00,000
Plant & machinery
300,000
Stock
700,000
Debtors
12,50,000
P Ltd. takes over Q Ltd. by exchanging with the shareholders of Q Ltd. two shares in P Ltd. at a premium of
10% for every share they hold.
a) State the nature of the two types of acquisitions involved here :
b) Give journal entries to record the acquisitions in the books of P ltd.
c) Close the books of R Ltd. and
d) Prepare the post acquisition balance sheet of P Ltd.
Solution :
a) In the first case. P ltd. takes over the assets and liabilities of R ltd and R ltd ceases to exist.
In the second case, Q Ltd. still exists but as a cent percent subsidiary or wholly owned subsidiary of
P ltd.This is a case of amalgamation in the nature of purchase.
b) Journal entries to record the acquisitions in the books of P ltd.
Tutorial notes :
1. The assets of R Ltd. bought by P Ltd. will be recorded in the books of P Ltd. as per the values accepted by
P ltd at the time of taking over. The values appearing in the books of R ltd. which is being taken over have no
relevance at all as far as recording in the books of P ltd is considered.
2. The sequence of entries is generally like this: 1. the liquidator is credited with business purchase a/c. 2. the
assets and liabilities taken over are recorded as per the values accepted by the purchasing company. The
business purchase a/c is credited and the difference is accounted as goodwill or capital reserve as the case
may be. 3. the liquidator is debited with the shares, debenture or cash as a discharge for purchase
consideration.
3. The share capital should be recorded at face value of shares irrespective of the values of shares whether
at premium or at discount. The discount or premium should always be recorded in a separate account.
In the books of P Ltd.(relating to R ltd.)
The journal entries are as follows :
J1:
Business purchase a/c
To Liquidator of R Ltd. a/c
(being the purchase consideration for the take over of R ltd.)
J2:
Land and buildings
Dr.
1000000
Plant & machinery
Dr.
300,000
Stock
Dr.
700,000
Debtors
Dr.
1250000
Bank a/c
Dr.
1500000
Goodwill
(bal. fig.) Dr.
2350000
(Note here that the balance sheet values of R ltd are not at all relevant here. The values accepted by P ltd will
be recorded here because this is journal of P ltd.)
To
6600000
To
Creditors a/c
500,000
(assets and liabilities of R Ltd. taken over)
J 3:
Liquidator of R ltd. a/c
6600000
To
6000000
To
Share premium a/c
600,000
(purchase consideration discharged in the form shares at 10% premium)
In the books of P Ltd.(relating to Q ltd.)
The journal entries are as follows :
Investment in Q Ltd. a/c
Dr.
3300000
To
3000000
To
Share Premium a/c
300,000
c) Closing entries in the books of R Ltd.
All the assets and liabilities shown in the balance sheet will be closed as per their balance sheet values. The
purchase consideration received by R ltd. is Rs. 66.0 lacs. Total assets are of Rs. 50.0 lacs and creditors are
Rs. 5.0 lacs. The profit on realisation would be Rs.21.0 lacs which will go to Shareholder's a/c.
Initially P ltd. will be debited by purchase consideration of Rs. 66.0 lacs. Finally the shareholder's a/c will be
debited and P ltd. will be credited by purchase consideration.
The creditors of R Ltd. are assumed by P ltd. hence balance sheet of P ltd will include these creditors as well.
Realisation A/c
(fig.in '000 Rs.)
500 By P ltd.
6,600
500 By Creditors
500
1,000
1,500
1,500
2,100
7,100
7,100
The share capital a/c, profit and loss a/c will be closed by debiting these accounts and crediting the
shareholder's a/c. The shareholders a/c will be debited to P ltd with the amount of purchase consideration.
You can now check whether all the ledger accounts appearing the balance sheet of R ltd. are closed or not.
To
Plant & machinery

Land and buildings
Stock
Debtors
Bank
Profit
Shareholder's a/c
(fig. in '000)
To
P ltd. a/c
6,600 By Share capital a/c
2,500
(600,000 shares of Rs. 10 with
By Profit and loss a/c
2,000
a premium of 10%)
By Realisation a/c
2,100
6,600
6,600
d) Post balance sheet of P ltd.
This is the case of amalgamation in the nature of purchase, hence the accounting needs to be done as per
the Purchase method.
You should revise your knowledge on purchase method as per the following :
Under purchase method :
1. The assets and liabilities of the transferor company (Q ltd. in this case) are to be recorded at their existing
carrying amount or alternatively, the consideration should be allocated to individual assets and liabilities on
the basis of fair value at the date of amalgamation while preparing the financial statements of the transferee
company (P ltd. in this case).
2. The identity of the reserves of the transferor company (Q ltd.) other than the statutory reserves, is not
preserved. The identity of the statutory reserves is preserved in the same form and is recorded in the books
of the transferee company by a corresponding debit to Amalgamation adjustment a/c. (Note : This is not
applicable in the instant case.)
3. Excess or shortfall of the consideration over the value of net assets acquired should be credited / debited
as Capital reserve / Goodwill, as the case may be.
The post balance sheet may be prepared after following computation. This is for better understanding only.
Liabilities
Share Capital
Share Premium
Profit and loss a/c
Long term Loan
Proposed dividend
Sundry Creditors
Original For Q ltd.

90.0
30.0
18.0
3.0
20.0
0.0
15.0
0.0
13.5
0.0
16.5
0.0
173.0
33.0
Original
For Q ltd.
60.0
0.0
50.0
0.0
For R ltd.
60.0
6.0
0.0
0.0
0.0
5.0
71.0
For R ltd.
10.0
3.0
Total
180.0
27.0
20.0
15.0
13.5
21.5
277.0
Assets
Total
Land and buildings
70.0
Plant & machinery
53.0
Investments in Q ltd.
33.0
Stock
35.0
0.0
7.0
42.0
Debtors
20.0
0.0
12.5
32.5
Bank
8.0
15.0
23.0
173.0
0.0
47.5
253.5
Goodwill
23.5
Balance sheet of P Ltd. (after the acquisition)
Liabilities :
Rs. Lacs Assets
Rs. Lacs
Share Capital
Goodwill
23.5
Equity share capital
70.0
Share Premium
53.0
Profit and loss a/c
20.0 Investment in Q ltd.
33.0
Long Term Loan
15.0 Stock
42.0
Proposed Dividend
13.5 Debtors
32.5
Sundry Creditors
21.5 Bank
23.0
277.0
277.0
Additional knowledge : Section 212 of the Company's Act 1956 requires that a holding company shall attach
to its balance sheet the following documents:
1. A copy of the balance sheet of the subsidiary;
2. A copy of the profit and loss a/c of the subsidiary;
3. A copy of the BOD report and Auditor's report;
4. A statement of holding company's interest.
Problem : (cwa inter June 05)
On the eve of proposed absorption of A Ltd. by B Ltd., following summarised details are given :
A Ltd.
B Ltd.
Net Assets
Rs.
33,30,000
41,25,000
Number of equity shares of Rs. 200 each
9,000
15,000
Reserves
Rs.
15,30,000
11,25,000
Terms of proposed absorption are as follows :
The holders of every three shares of A Ltd. were to receive four shares in B Ltd. plus as much cash as is
necessary to adjust the rights of shareholders of both the companies in accordance with intrinsic value of their
respective shares.
You are required to :
(a) Compute the purchase consideration ;
(b) Present the projected balance sheet of B Ltd. as if the proposed absorption is put through.
Solution :
Tutorial notes :
1. Can you find out orally the intrinsic value of each share of both the companies ?
2. What is the significance of reserves of A Ltd. ?
3. Intrinsic value per share is 33,30,000 / 9,000 = Rs. 370 for A ltd. and 41,25,000 / 15,000 = Rs. 275 for B ltd.
4. Holders of 3 shares of A ltd. (value Rs. 370 x 3 = Rs. 1110) are to receive 4 shares of B ltd. (value Rs. 275
x 4 = Rs. 1100). The rights of shareholders of A ltd. is less by Rs. 10 per three shares which has to be paid in
cash. Calculate the amount of cash payment to shareholders of A ltd.
5. The purchase consideration is to be paid in terms of shares @ Rs. 275/share. The face value of share is
given as Rs. 200 each. Thus the premium per share is Rs. 75 which should be shown separately in Share
premium account. The share capital to be issued would be Rs. 24,00,000 (Rs. 200 x 12,000) and the share
premium account would be Rs. 900,000 (Rs.75 x 12,000). Why 12,000? Just think and find out.
6. As the intrinsic value of shares of A ltd. has been calculated on net assets, there is no significance of
reserves of A ltd.
7. For every 3 shares of A ltd., B ltd. is to issue 4 shares. You can easily calculate the number of shares to be
issued to shareholders of A ltd. as 9000 x 4/3 = 12,000 shares. Intrinsic value of shares of B ltd. is Rs. 275 as
calculated earlier. Thus value of shares issued is Rs. 275 x 12,000 = Rs. 33,00,000. The net assets of A ltd. is
Rs. 33,30,000. Thus cash to be paid is Rs. 30,000.
8. The total assets taken over by B ltd. would be Rs. 33,00,000 and not Rs. 33,30,000. Why?
9. Prepare your solution on the lines supplied above, and compare it with the one furnished below:
Computation of intrinsic value of shares of A ltd. and B ltd.:
A Ltd.
B Ltd.
Net assets
Rs.
33,30,000
41,25,000
No. of shares
no.
9,000
15,000
Value per shares
Rs.
370
275
Value of 3 shares
Rs.
1,110
Value of 4 shares
Rs.
1,100
Difference of Rs. 10 (1110 1000) for every 3 shares of A ltd. is to be paid in cash.
Amount of cash payment = Rs. 10 x (9000 / 3) = Rs. 30,000.
No. of shares to be issue : ( 9000 / 3) x 4 = 12,000 shares of Rs. 275.
Share Capital : 12,000 x Rs. 200 = Rs. 24,00,000
Share Premium : 12,000 x Rs. 75 = Rs. 9,00,000
Projected Balance sheet of B Ltd.
Liabilities
Rs. Lacs Assets
Rs. Lacs
Share capital
Net Assets
Authorised, Issued, Subscribed,
(41.25 + 33.30 less
27,000 shares of Rs. 200 each, fully paid up
54.00 cash paid 0.30)
74.25
(of these 12,000 shares issued for consideration
other than cash)
Share Premium
9.00
Other Reserves
11.25
74.25
74.25
Problem : (cwa final June 00)
ABC Ltd. decided to reorganise itself following a period of adverse trading conditions. The summarised
Balance sheet of the company at 31st March, 2000 was as follows:
Rs. Lacs
Rs. Lacs
12% Cumul. Pref.shares of Rs.10 each
42.0 Goodwill
3.0
120.0 Patents and franchises
2.6
Share Premium account
80.2
14% Debentures
6.2
Interest payable on debentures
13.4 Investments
16.0
Loan from directors
4.8 Stocks
62.0
Creditors
16.8 Debtors
42.0
Bank Overdraft
10.0 Deferred Charges

1.0
Profit and loss a/c
47.0
260.0
260.0
Pref. dividend is in arrears for three years. The authorised share capital is 6,00,000, 12% cumulative
preference shares of Rs. 10 each and 12,00,000 equity shares of Rs. 10 each.
The following reconstruction scheme was formulated and duty approved:
1. The existing equity shares were to be converted into fully paid up equity shares of Rs. 2 each. The equity
shareholders were to accept a consequent reduction in their value of holdings. They further agree to
subscribe to a new issue of equity shares on the basis of 2 for 3 at a price of Rs.3.5 per share.
2. The preference shareholders were to forego their right to arrear dividends. The existing 420,000 preference
shares were to be exchanged for a new issue of 210,000, 14% cumulative preference shares of Rs. 10 each
and Rs. 21,00,000 in equity shares of Rs.2 each.
3. The debenture holders were to accept 250,000 equity shares of Rs. 2 each in settlement of their arrear
interest and the interest rate on debentures was to be enhanced to 15%. The debenture holders were also to
accept further 15% debentures of Rs. 800,000 at Rs. 90 per Rs.100.
4. Half of the director's loan was to be cancelled. The balance was to be settled by the issue of 48,000 equity
shares of Rs. 2 each.
5. Investments were to be sold at the current market value of Rs. 10,00,000.
6. The bank overdraft was to be repaid in full.
7.An amount of Rs. 10,00,000 was to be paid immediately to creditors. The balance amount would have to be
paid in quarterly installments.
8. All intangibles, deferred charges and the debit balance to the profit and loss a/c were to be written off.
9. Liability for damages unrecorded in books was to be settled for Rs. 8,80,000. A sum of Rs. 1,50,000 was to
be recorded in this connection from the insurance company.
10 The existing share premium account was to be utilised in full.
11. Tangible fixed assets were to be revalued as :
Land and buildings : Rs. 88,00,000 and Plant & machinery : Rs. 5,00,000
12. Stocks were to be written down by Rs. 42,00,000.
13. Debtors account was to be adjusted for an uncontrollable debt of Rs. 4,50,000.
It is expected that under the new arrangements the company will be able to earn a return of Rs. 25,00,000
per annum before interest and taxes. The company will not attract any tax liability for the next five years.
(a) show the journal entries necessary to record the above scheme.
(b) prepare the summarised Balance sheet of the company immediately after reconstruction.
(c) show how the anticipated profit will be distributed after the reconstruction.
Solution :
Additional knowledge :
1. Reconstruction is the process of reorganizing the affairs of a company. Reconstruction can be divided into
two parts (a) Internal reconstruction and (b) external reconstruction.
2. In internal reconstruction the company does not go into liquidation process but involves reorganization and
reduction of share capital. This problem is a case of such internal reconstruction.
3. In external reconstruction, existing company is liquidated and a new company is formed to take over the
business. In other words we can say that it is the conversion of shareholders of the existing company into
shareholders of the new company.
4. In order to effect Share capital reduction all the formalities must be completed in accordance with Sections
100 to 104 of Company's Act 1956.
5. At the time of preparing Balance sheet after reconstruction, the following matters should be taken care of :
5.1 If the Court orders, the words ' and reduced ' should be added after the name of company for certain
period.
5.2 In respect of fixed assets, the amount written off under a scheme of reconstruction must be shown for five
years.
Tutorial notes:
1. You can begin to solve from any where you like. However, it is suggested that you should go along with the
scheme as given. You should take each point of scheme and present the required solution.
2. Let us take first point. The existing equity share capital of shares of Rs. 10 is to be converted to Rs. 2
shares. The existing share capital will be debited and new capital will be credited. The balance of Rs. 8 per
share will be credited to Capital reconstruction account. This account is of the nature of revaluation or
realisation account.You should now write the first journal entry.
3. The existing 12 lakhs shareholders subscribe 2 shares for 3 shares at Rs. 3.50 per share. The amount
received must be Rs. 28.0 lacs [(12/3) x 2 x 3.5]. You can write the journal entry, remember that Rs. 1.5 per
share is the premium and should be credited to share premium account.
4. Next point is reconstruction of pref. share capital. Old and new amount are same, hence the capital
reconstruction a/c will not be required. Write the journal entry.
5. Interest payable to debholders is Rs. 13.4 lacs which is to be settled by 250,000 equity shares of Rs. 2.
The balance of Rs. 8.4 lacs will be credited to capital reduction a/c. This will close the item of interest payable.
Write the entry.
6. Read the point 3 again. Can you write the journal entries of this point?
7. Existing dholders are to accept 15% debentures in place of 14% debentures. Debit 14% debentures with
Rs. 48.0 lakhs and credit 15% debentures with the same amount.
8. 15% debentures of value Rs. 800,000 are to be further issued at a discount of Rs. 10. Thus 8000
debentures will be issued at Rs. 90 bringing in cash of Rs. 720,000. How will you record the discount of Rs.
10? Will you write it as discount on issue of debentures or will you write something else? Think.
9. Point 4 is easy. Half of loan i.e. Rs. 240,000 will be credited to capital reduction a/c. Half will be settled by
48,000 shares of Rs. 2 each amounting to Rs. 96,000. What about the balance amount of Rs. 144,000
(240,000 96,000) ? Think.
10. Investments have book value of Rs. 16.0 lacs. It is sold for Rs. 10.0 lakhs. The balance will be debited to
capital reduction a/c.
11. Close the other entries as per the scheme. Pay bank overdraft and creditors. All fictitious assets be
debited to capital reduction a/c. Settle the liability of damage by paying cash of Rs. 880,000. Insurance
receivable is Rs. 150,000 and the rest of damage will be debited to capital reduction a/c.
12. The share premium a/c is to be utilised in full as mentioned in the question. Can you say how can this be
utilised?
13. The gains and losses out of revaluation of various items of balance sheet are to be transferred to capital
reconstruction a/c. Read the point carefully and compute the losses on plant & machinery, stocks and debtors
a/c. You are likely to commit mistakes here. Compute the gain on Land a/c.
14. Compute the net gains or losses in capital reconstruction a/c and close it by opening capital reserve a/c or
goodwill a/c.
15. Use figures in lacs to save time and labour.
Write your journal entries on the lines given above compare them with the ones given below.
In the books of ABC Ltd.
Rs. Lacs Rs. Lacs
Journal Entries
Dr.
Cr.
Equity Share capital a/c
120.0
To Equity share capital (Rs. 2) a/c
24.0
To Capital reconstruction a/c
96.0
(cancellation of share capital of face value Rs. 10 and reissue of Rs. 2 shares.
Balance transferred to c.rec. a/c)
Cash a/c
28.0
16.0
To Share Premium a/c
12.0
(Issue of new equity shares to the existing sholders on the basis of 2 for 3 at a
premium of Rs. 1.5/share)
12% Cumul. Pref.shares capital a/c
42.0
To 14% Cum.Pref.share capital a/c

21.0
21.0
(exchange of 12% cum.pref.shares with 14% cum.pref.share and Rs. 2 equity shares)
Interest payable on debentures
13.4
5.0
8.4
(unpaid debenture interest adjusted)
14% Debentures a/c
48.0
To 15% Debentures a/c
48.0
(conversion of 14% debentures to 15%)
Cash a/c
7.2
Capital reconstruction a/c
0.8
8.0
(issue of fresh debentures at a discount of 10%)
Note : You must notice here that discount on issue of debentures has not been debited to discount on issue of
debentures a/c but is debited to capital reconstruction a/c because the issue is made in connection with
reconstruction scheme.
Loan from directors a/c
4.8
2.40
0.96
1.44
(loan from directors is partly cancelled, balance being satisfied by issue of fresh equity shares)
Cash a/c
10.0
6.0
To Investments a/c
16.0
(sale of investments)
Bank Overdraft a/c
10.0
To Cash a/c
10.0
(Payment of overdraft)
Creditors a/c
10.0
To Cash a/c
10.0
(Payment to creditors)
53.6
To Goodwill a/c
3.0
To Patent a/c
2.6
To Profit and loss a/c
47.0
To Deferred charges a/c
1.0
(fictitious and intangible assets transfd to capital recon. a/c)
Share Premium a/c
5.0
5.0
(Share premium a/c being utilised)
Liability for damages a/c
8.8
To Cash a/c
8.8
(settlement for liability for damages)
Insurance claim receivable a/c
1.5
7.3
To Liability for damages a/c
8.8
(adjustment for liability for damages)
47.7
To
Plant & machinery a/c
1.2
Stocks a/c
42.0
Debtors a/c
4.5
(revaluation losses adjusted)
Land and buildings a/c
7.8

7.8
(revaluation gain adjusted)
You should now compute the final amount of Capital reconstruction a/c. You should show it by way of working
note.
Debit side of Capital recon. a/c
(0.8 + 6.0 + 53.6 + 47.7 + 7.3) =115.4
Credit side of Capital recon. a/c
(96.0 + 2.4 + 8.4 + 5.0 + 7.8) = 119.6
4.2
4.2
(b) After drawing the journal you are also required to prepare the Balance sheet after reconstruction.
You should seek the various figures from the journal, after going through the journal you find the following
liabilities and assets:
Liabilities
Rs. Lacs Assets
Rs. Lacs
To 14% Cum.Pref.share capital a/c
88.0
5.0
16.0 Stocks (62 42)
20.0
21.0 Debtors (42 - 4.5)
37.5
5.0 Insurance claims receivable
1.5
0.96
66.96
12.0
1.44
13.44
48.0
8.0
4.2
To Creditors (16.8 - 10.0)
6.8
Total
168.4
152.0
Difference
16.4
The difference must be cash and bank a/c. You should draw cash a/c as working note. Present balance sheet
in proper format as given below:
ABC Ltd.
Balance sheet of ABC Ltd. (and reduced) as on March 31, 2000
Liabilities
Rs. Lacs Assets
Rs. Lacs
Share Capital
Land and buildings
88.00
Authorised
Plant & machinery
5.00
14% Cum.Pref. shares of Rs. 10 each
60.00 Stocks (62 42)
20.00
60.0 lacs Equity shares of Rs. 2 each
120.00 Debtors (42 - 4.5)
37.50
Issued and Subscribed
Insurance claims receivable
1.50
2.10 lacs 14% Cum.Pref.shares Rs.10
21.00 Cash and Bank
16.44
33.48 lac equity shares of Rs. 2 each
66.96
(13.48 lac equity shares issued for consideration
other than cash)
Share Premium a/c
13.44
Capital Reserve a/c
4.24
15% Debentures
56.00
Creditors
6.80
168.44
168.44
(c) Distribution of anticipated profit :
It is the easiest part. You should do it on your own and then see the solution below:
Rs. Lacs
Anticipated profit before interest and taxes
25.0
Less : Debenture interest 15% of Rs. 56.0 lacs
8.4
Profit before tax
16.6
Less : Tax (tax free company for five years)
0.0
Profit after tax

16.6
Less : Preference dividend 14% of Rs. 21.0 lacs
2.9
Profit available for equity shareholders
13.7
Less ; Dividend say 10%
6.7
Retained profit
6.0
Problem : (CA PCC Nov. 08)
The balance sheet of R Ltd. at 31st March, 2008 was as follows :
Liabilities
Rs. Assets
Share Capital : Authorised
1,400,000 Intangibles
Issued : 64,000 8% cumulative preference shares of
Freehold premises at cost
Rs. 10 each, fully paid
640,000 Plant and equipment at cost
64,000 equity shares of Rs. 10 each, Rs. 7.50 paid
480,000 less depreciation
Loans from directors
60,000 Investments in Q Ltd. at cost
Creditors
440,000 Stocks
Bank Overdraft
208,000 Debtors
Deferred Revenue Expd.
Profit and loss a/c
1,828,000
Rs.
68,000
140,000
240,000
324,000
248,000
320,000
48,000
440,000
1,828,000
Note ; The arrear of Preference dividends amounts to Rs. 51,200.

A scheme of reconstruction was duly approved with effect from 1 April, 2008 under the conditions stated
below:
(a) The unpaid amount on the equity shares would be called up.
(b) The preference shareholders would forego their arrear dividends. In addition, they would accept a
reduction of Rs. 2.5 per share. The dividend rate would be enhanced to 10%.
(c) The equity shareholders would accept a reduction of Rs. 7.5 per share.
(d) R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the share capital of that company. Q Ltd. is
not a quoted company. The average net profit (after tax) of the company is Rs. 250,000. The shares would be
valued based on 12% capitalised rate.
(e) A bad debt provision at 2% would be created.
(f) The other assets would be valued as under :
Intangibles : Rs. 48,000 ; Plant : Rs. 140,000 ; Freehold premises : Rs. 380,000 ; Stock : Rs. 250,000.
(g) The profits and loss a/c debit balance and balance standing to the debit of the deferred revenue
expenditure account would be eliminated.
(h) The Directors would have to take equity shares at the new face value of Rs. 2.5 per share in settlement of
their loan.
(i) The equity shareholders, including the directors, who would receive equity shares in settlement of their
loans, would take up two new equity shares for every one held.
(j) The Preference shareholders would take up one new preference share for every four held.
(k) The Authorized share capital would be restated to Rs. 14,00,000.
(l) The new face value of the shares, preference and equity will be maintained at their reduced levels.
You are required to prepare (a) necessary ledger accounts to give effect to the above and; (b) The balance
sheet of the company after reconstruction.
Solution :
Tutorial notes ;
1. You are asked to prepare the ledger a/c. You can go along with the scheme of reconstruction itself.
2. The first point says that the unpaid amount on equity shares is called up. Open Bank a/c and Equity share
capital a/c. Debit bank a/c and credit ESC a/c with Rs. 160,000 (64,000 x Rs. 2.5)
3. Forgoing of arrear of pref. dividend will not be recorded anywhere.
4. 8% Pref. share capital stands at Rs. 640,000. It is to be reduced by Rs. 2.5 per share. The reduction will be
credited to Reconstruction a/c. There is no other adjustment in pref. share capital. You should draw the ledger
of 8% pref. share capital before you proceed further. As per question, 8% pref. share capital a/c is to be
closed and 10% pref. share capital a/c is to be opened. Can you close the 8% pref. share capital a/c ?
5. You can now open the 10% pref. share capital a/c. They would take up one pref. share for every 4 held.
They would take up 16,000 shares of Rs. 10 each. Can you draw the a/c now? Total pref. share capital would
be 64,000 + 16,000 = 80,000 shares of Rs. 7.50 each.
6. Same treatment as above can be given to equity share capital a/c for reduction of Rs. 7.5 per share. This
reduction of amount of Rs. 480,000 (64,000 x Rs. 7.5) would be credited to reconstruction a/c. You have
already opened reconstruction a/c. Credit it with Rs. 480,000 and debit the equity share capital a/c.
7. The investment in shares of Q Ltd. is to be valued. Read the point (d) again. Can you determine the value
of these 21,600 shares ? What will you do with the value so determined ? How this value is related to
reconstruction a/c ?
The value can be easily determined by capitalizing the profit of Rs. 250,000 @ 12%. The value will be Rs.
20,83,333 (250,000 / 0.12). The investment held is 15% of total value. The value of investment would Rs.
312,500 (15% of Rs. 20,83,333).
8. Provision for bad debts is required to be created as 2%. Debtors are Rs. 320,000, provision to be created
would be Rs. 6,400. Where will it be recorded ? How will it appear in the balance sheet after reconstruction?
9. You can make a comparative statement of valuation of other assets as per balance sheet and as per
reconstruction scheme. What will you do with the difference ?
Particulars
Balance sheet values
New values
Increase/decrease
Intangibles
68,000
48,000
(20,000) decrease
(100,000) decrease
Plant
240,000
140,000
Freehold premises
140,000
380,000
240,000 Increase
Stocks
248,000
250,000
2,000 Increase
Increase in values will be credited to Reconstruction a/c and vice versa.
10. The profit and loss a/c debit balance and deferred revenue expense would be eliminated. How can you
eliminate them?
11. Loans from directors would be satisfied by shares of Rs. 2.5 each. Shares required would be 60,000 / 2.5
= 24,000 shares.
12. Total number of shares (including those issued to directors in settlement of their loans) is 64,000 + 24,000
= 88,000. Scheme says that the shareholders would receive 2 shares for every one share held. The new
shares would be 2 x 88,000 = 176,000. Total shares would thus be 88,000 + 176,000 = 264,000. The share
capital would Rs. 660,000 (264,000 x Rs. 2.5)
13. The new equity shares would fetch Rs. 440,000 ( Rs. 2.5 x 176,000). Equity share capital a/c will be
credited and Bank a/c will be debited.
14. It is difficult to decide which ledger is to be opened first. Let us open Bank a/c and Equity Share Capital
a/c as per first adjustment.
15. After reading the above tutorial notes, it should not be hard to draw the various accounts. It is advised that
you should draw all those accounts and only after doing that you should see the following.
To
Reconstruction a/c
Closing balance

Rs. By
480,000 Opening balance
660,000 Bank a/c (64,000 x Rs. 2.5)
Loan from directors a/c
Bank a/c (176,000 x 2.5)
1,140,000
There is no balancing figure in the account. Correctness is verified.

Bank a/c
Rs.
480,000
160,000
60,000
440,000
1,140,000
To
Pref. share capital a/c (16,000 x Rs. 7.5)
Rs. By
160,000 Opening balance (given)
440,000 Closing balance
120,000
720,000
Valuation of Investment in Q Ltd. :

No. of shares held in Q limited (15% of total shares)
Value of Q limited @ 12% capitalization of profit of Rs. 250,000 (250,000 / 0.12)
Value of investment in Q limited (as 15%), 15% of Rs. 2083,333
Cost of investment (given)
Loss on valuation of investment ( to be debited to reconstruction a/c)
8% Preference Share Capital a/c
To
Rs. By
Reconstruction a/c (64,000 x 2.5)
160,000 Opening balance (given)
10% Pref. share capital a/c
480,000
640,000
10% Preference Share Capital a/c
To
Rs. By
Closing balance
600,000 8% Pref.share capital a/c
Bank a/c (16,000 x 7.5)
600,000
Reconstruction a/c
To
Rs. By
Investment in Q Ltd a/c
11,500 8% Pref.SC a/c
Provision for bad debts
6,400 ESC a/c
Intangibles a/c
20,000 Stock a/c
Plant a/c
100,000 Freehold premises a/c
Deferred Revenue Expdt.a/c
48,000
Profit and loss a/c
440,000
Capital Reserve a/c (bal. figure)
256,100
882,000
Liabilities
Authorised Capital
140,000 Equity shares of Rs. 10 each
Equity share capital
268,000 shares of Rs. 2.5 fully paid up
(of these 24,000 shares were issued for
consideration other than cash)
10% Pref.Share capital a/c
Capital reserve
Creditors
Balance sheet of R Ltd. (and reduced)

Rs.'000 Assets
Intangibles
Freehold Premises
Plant
660.0 Investment
Stock
Debtors
320.0
600.0 Less : Provisions
6.4
256.1 Bank
440.0
1,956.1
Rs.
208,000
512,000
720,000
Rs.
21,600
2,083,333
312,500
324,000
11,500
Rs.
640,000
640,000
Rs.
480,000
120,000
600,000
Rs.
160,000
480,000
2,000
240,000
882,000
Rs.'000
48.0
380.0
140.0
312.5
250.0
313.6
512.0
1,956.1
Chapter : Company Accounts

Some salient features for Final accounts of Public Limited Companies
Schedule VI (Section 211) prescribes the form of balance sheet and states that:
The balance sheet of a company shall be either in horizontal form or in vertical form
A Horizontal Form
Balance sheet of
As at
Liabilities
Assets
Figures to the
Figures for the
Figures to the
previous year Rs.
current year Rs.
previous year Rs.
Share Capital
Authorised: Shares of Rs
Issued
Reserves and Surplus
Secured Loans
Unsecured Loans
Fixed assets
Investments
Current assets, Loans and advances

Miscellaneous Expenditure
B Vertical Form
Balance sheet of
As at
Schedule no.
Figures for
Current
I. Sources of Funds :
year
(1) Shareholder's Funds
(i) Capital
(ii) Reserves and Surplus
(2) Loan Funds
(i) Secured Loans
(ii) Unsecured Loans
II. Application of Funds :
(1) Fixed assets :
(i) Gross Block
(ii) Less : Depreciation
(iii) Net Block
(iv) Capital work-in-progress
(2) Investments :
(3) Current assets and advances
(a) Inventories
(b) Sundry debtors
(c) Cash and Bank balances
(d) Other current assets
(e) Loans and advances
Less :
(a) Liabilities
(b) Provisions
Previous
year
Figures for the

current year Rs.
(4)
(a) Miscellaneous expenditure to the extent not written off or adjusted

(b) Profit and loss a/c
Problem : (cwa inter-1, june 2002) (repeat dec.06 inter-II)
From the following particulars furnished by Printex Ltd. prepare the Balance sheet as at 31st March, 2002 as
required by Part I, Schedule VI of the Companies Act. Give notes at the foot of the Balance sheet as may be
found necessary.
Dr. Rs.
Share capital (face value of Rs. 100)
Land
Building
Plant and machinery
Furniture
Calls in arrears
General Reserve
Loan from state financial corporation
Stock :
Finished goods
200,000
Raw materials
50,000
Sundry Creditors (for goods and services)
Loans (unsecured)
Cash at bank
Cash balances
Profit and loss a/c
Proposed Dividend
Advances
Sundry Debtors
Provision for Taxation
Cr. Rs.
1000000
200,000
350,000
525,000
50,000
1,000
210,000
150,000
250,000
200,000
121,000
13,300
247,000
30,000
100,000
60,000
42,700
200,000
68,000
1909000
1909000
The following additional information is also provided :

(a) Miscellaneous expenses included Rs. 5,000 audit fees and Rs. 700 for out of pocket expenses paid to
auditors.
(b) 2000 equity shares were issued for consideration other than cash.
(c) Debtors of Rs. 52,000 are due for more than six months.
(d) The cost of assets :
Building
Rs. 400,000
Plant and machinery
Rs. 700,000
Furniture
Rs.
62,500
(e) The balance of Rs. 1,50,000 in the loan account with State Finance Corporation is inclusive of Rs. 7,500 for
interest accrued but not due. The loan is secured by hypothecation of the Plant and machinery.
(f) Balance at Bank includes Rs. 2,000 with Simplex Bank Ltd., which is not a scheduled Bank.
(g) Bills receivable for Rs. 2,75,000 maturing on 30th June, 2002 have been discounted.
(h) The company had contract for the erection of machinery at Rs. 2,50,000 which still is incomplete.
Solution :
Tutorial Notes :
1. You are supposed to remember the schedules. Please revise them before you go any further.
2. You are also advised to go through the schedule VI of Company's act from the Study Materials or from any
standard book on accounting.
3. No provision is made for capital expenditure due for next year. The contract for the erection of machinery is
capital expenditure in nature and therefore will not appear in the balance sheet, but a note to this effect showing
this as contingent liability will have to be given at the foot of Balance sheet.
4. Additional information has reference to Miscellaneous expenses and balance sheet does not have any item of
miscellaneous expenses. The balance sheet has preliminary expenses as one item which can be treated as
miscellaneous expenses.
5.The assets and liabilities should be shown side by side. It is for convenience that they are shown vertically.
6. The discounted bills receivables should be mentioned in notes to accounts at the foot of balance sheet. Same
is the case with audit fees and expenses paid to auditors which are included in miscellaneous expenses.
7. In this problem, almost no calculations are involved. You are to present the given figures in the prescribed
format. The format is all that materials here. Remember the proper format.
Solution :
PRINTEX LTD.
Balance sheet as at 31st March, 2002
(drawn as per Part-I Schedule VI, Section 211 of the Company's Act)
Liabilities :
Rs.
Rs.
Authorised : Equity Shares of Rs. . each
Issued and Subscribed 10,000 equity shares of Rs. 100 each fully called up
1000000
( of the above, 200 equity shares of Rs. 100 each have been issued for consideration other
than cash.)
Less : Calls in arrears
1,000 999,000
General Reserve
210,000
Profit and loss a/c
100,000
Secured Loans
Loans from SFI (secured by hypothecation of Plant and machinery)
142,500
Unsecured Loans
Unsecured Loans
121,000
A. Current liabilities :
Sundry Creditors for goods and expenses
200,000
Interest accrued but not due (SFC)
7,500
B. Provisions
68,000
Proposed Dividend
60,000
1908000
Assets :
Land
Building
Less : Depreciation
Plant and machinery
Less : Depreciation
Furniture
Less : Depreciation
Investment
200,000
400,000
50,000 350,000
700,000
175,000 525,000
62,500
12,500 50,000
0
Current assets, Loans and Advances

A. Current assets
Stock of Finished goods
Raw materials
Sundry Debtors
a) Debts outstanding for a period exceeding 6 months
b) Other Debts
Less : Provisions
Cash balance on hand
Bank Balance
i) with scheduled bank
ii) with others
B. Loans & Advances
Advances
Miscellaneous expenditure (to the extent not written off)
200,000
50,000 250,000
52,000
148,000
0 200,000
30,000
245,000
2,000 247,000
42,700
13,300
1908000
Contingent Liability : Estimated amount of contract remaining to be executed on Capital account and not
provided for Rs. 250,000.
Notes :
1. The bills receivables maturing on June 30, 2002 amounting to Rs. 275,000 have been discounted on ..
2. Preliminary expenses include :
Audit fees
Rs. 5,000
Out of pocket expenses paid to auditors
Rs. 700
Problem : (cwa foundation, Dec. 2002)
X Ltd. was registered with an authorised Capital of Rs. 10,00,000 divided into shares of Rs. 10 each, of which
40,000 shares had been issued and fully paid.
The following is the Trial balance extracted on 31st March 2002 :
Dr. Rs. Cr. Rs.
Stock (1.4.2004)
186,420
Returns
12,680
9,850
Sundry manufacturing expenses
19,240
18% Bank Loan (secured)
50,000
Office salaries and expenses
17,870
Director's Remuneration
26,250
Freehold premises
164,210
Furniture
5,000
Debtors and Creditors
105,400
62,220
Cash at bank
96,860
Profit and loss a/c on 1.4.2001
38,640
Share capital
400,000
Purchases and Sales
718,210 1169900
Manufacturing wages
109,740
Carriage inwards
4,910
Interest on Bank loan
4,500
Auditor's Fees
8,600
6,000
Plant and machinery
128,400
Loose Tools
12,500
Cash in hand
19,530
Advance payment of Tax
84,290
1730610
1730610
You are required to prepare Profit and loss a/c for the year ended 31st March 2002 and a Balance sheet as at
that date after taking into consideration the following adjustments :
(i) On 31st March 2002, outstanding manufacturing wages and outstanding office salaries stood at Rs. 1,890 and
Rs. 1,200 respectively. On the same date stock was valued at Rs. 1,24,840 and loose tools at Rs. 10,000.
(ii) Provide for interest on bank loan for 6 months.
(iii) Depreciation on Plant and machinery is to be provided @ 15% while on office furniture it is to be @ 10%.
(iv) Write-off one third of balance of preliminary expenditure.
(v) Make a provision for income tax @ 50%.
(vi) The directors recommended dividend @ 15% for the year ending 31st March 2002 after a transfer of 5% of
total profits to general reserve.
Solution :
Tutorial Notes :
1. You should open two formats on two different pages, one for trading and profit and loss a/c, and the other for
balance sheet. You should take each item of trial balance, see the adjustments and place the figure in the
respective formats.
2. First item is Opening stock of Rs. 186,420. This belongs to the debit side of trading a/c, you can place it there.
Opening stock is followed by Purchases so you look for purchases as Rs. 718,210 and write this below opening
stock. You can see returns as next item. The purchase returns of Rs. 9,850 should be placed below and
deducted from purchases. This automatically takes you to the figures of Sales and Sales returns. No
adjustments are required in these figures. You place the figures of Sales and Sales returns on credit side of the
trading a/c. The final figure of Sales less returns is now available on credit side of trading a/c.
3. Next item of manufacturing expenses has no adjustments. Place it below purchases on trading a/c. You can
scan the trial balance to seek other items belonging to trading a/c. You find manufacturing wages and carriage
inwards and you place these two items below manufacturing expenses. Outstanding wages should be added to
manufacturing wages and at the same time outstanding wages should go to liability side of balance sheet. In
adjustments you find closing stock as Rs. 124,840, you place it below net sales and also write this on assets side
of Balance sheet at suitable place.. Your trading a/c is now complete and you can compute the gross profit and
place it on credit side of profit and loss a/c.
4. Next in the list is 18% Bank Loan. Write the amount of loan on liability side, the adjustments say that interest
@ 18% on loan is outstanding for six months. You place this figure of Rs. 4,500 below the loan amount on
balance sheet. You also write the interest as expense on p/l a/c. Interest paid and interest outstanding should be
agreegated and total amount be shown as expense.
5. Directors remuneration is an expense, and you should debit the profit and loss a/c by Rs. 26,250. You can
also write here that the remuneration payable to the directors of a company, shall be determined by Section 309
and Section 198 of the Companies Act, 1956, and it is assumed that those provisions have been followed in toto.
6. Next is freehold premises. You take this to asset side of balance sheet as no adjustments except depreciation
are required. You see that question is silent about depreciation on freehold premises, so you also remain silent
about it. You can however, add a note that depreciation on freehold premises has been ignored.
7. The item of furniture of Rs. 5,000 should go to assets side of balance sheet. The depreciation @ 10% should
be debited to profit and loss a/c and at the same time this should also be written on balance sheet and net figure
of Rs. 4,500 should be written on balance. You can here give similar treatment to Plant and machinery. The
balance sheet should show the original cost of asset, total depreciation upto date and the net cost of asset.
8. Debtors and creditors have no adjustments and should therefore go straight to balance sheet. The balance
sheet should show the debts outstanding for more than six months separately, you can write a note at the foot of
balance sheet in this regard.
9. The next item is Opening balance of profit and loss a/c on 1.04.01. You should be careful about this entry.
You should NOT place it as an opening entry of profit and loss a/c because the tax has already been paid on it.
This amount will be opening balance of Profit and loss appropriation a/c and will be followed by profit after tax of
the current year, if any.
10. No adjustments in share capital are mentioned. This will go to balance sheet straight away. The format of
schedule VI requires Authorised, Issued, Subscribed and Paid up capital to be disclosed and you are expected to
adhere to that prescribed format.
11. You also find that no amount of carriage outward is mentioned in the trial balance. You can make a note
stating that the amount of purchase returns is inclusive of carriage outwards.
12. The auditors' fees is an expense and should be charged to profit and loss a/c.
13. Preliminary expenses should be written off to the extent of one-third of Rs. 6,000. Charge profit and loss a/c
with Rs.2,000 and place the balance item on the bottom of assets side on balance sheet. The original figure of
Rs. 6,000 less written-off Rs. 2,000 should be disclosed there.
14. Loose tools represent expense and should be charged to profit and loss a/c. The adjustments show the
closing loose tools as Rs. 10,000. You should charge the profit and loss a/c with Rs. 2,500 (12,500 10,000).
15. Cash in hand and advance payment of tax will go to the assets side of balance sheet. No adjustments are
required in these items.
16. The cash at bank should be shown on two banks i) with scheduled bank and ii) with others.
Please solve the problem on the guidelines supplied above and compare your solution with the solution provided
below :
Answer 1: Trading and Profit and loss a/c of X Ltd. for the year ended 31.03.2002
In the books of X Company Ltd.
Trading and Profit and loss a/c for the period ended 31.3.02
Particulars
By Sales
Less : Returns
By Closing stock
Rs.
Rs.
1169900
12,680
1157220
124,840
1282060
Particulars
To Opening stock as on 01.04.01
To Purchases
Less : Returns
To Wages
Add : Outstanding wages
To Mfg. expeneses
To Carriage inward
Total of Debit side
Rs.
Rs.
186,420
718,210
9,850 708,360
109,740
1,890 111,630
19,240
4,910
1030560
To Gross profit
251,500
1282060
By Gross profit
To Interest on Bank Loan
4,500
Add : Outstanding
4,500
Office salaries and expenses
17,870
Add : Outstanding
1,200
Auditors' Fees
Directors' Remuneration
Provision for depreciation :
Furniture
500
(10% of Rs. 5,000)
Plant and machinery
19,260
(15% of Rs. 128,400)
Loose tools
Opening balance
Less : Closing balance
Preliminary expenses written off (one-third of Rs. 6,000)
Total of debit side
To Net profit before tax
251,500
9,000
19,070
8,600
26,250
19,760
12,500
10,500
2,500
2,000
4,500
247,000
251,500
164,320
123,500
82,160
To Net profit before tax

Less : Provision for income tax @ 50%
To Net profit after tax
Profit and loss appropriation A/c
To Proposed divi. (15% of Rs.400,000)
60,000 By Opening balance 38,640
To General Reserve (5% of NPAT)
4,108 By Net profit after ta 82,160
To Closing balance
56,692
120,800
120,800
Notes :
1. It has been assumed that directors' remuneration is in accordance with section 309 and section 198 of the
Companies Act, 1956.(This is important note. Please take a notice of this.)
2. Carriage ourwards in included in purchase returns.
3. Depreciation on Freehold premises has been ignored.
4. Depreciation on plant and machinery @ 15% of Rs. 128,400 i.e. Rs. 19,260.
5. One-third of preliminary expenses of Rs. 6,000 i.e. Rs. 2,000 has been written-off.
Answer 2: Balance sheet as at 31.03.2002. Please see the format carefully. The format carries marks in the
examination.
In the books of X Company Ltd.
Balance Sheet of X Company Ltd. as at 31.03.2002
Liabilities
Rs. Assets
Rs.
Rs.
Share Capital
Fixed assets
Authorised
Freehold Premises
164,210
Issued, Subscribed and Paid up
400,000 Plant and machinery
128,400
Less : Provision for Dep.
19,260 109,140
General Reserve
4,108 Furniture
5,000
Profit and loss a/c
56,692 Less : Provision for Dep.
500
4,500
Secured Loans
18% Bank Loan
50,000 Investments
0
Unsecured Loans
0 Current assets, Loans and Advances:
Current assets :
Creditors
Outstanding Mfg. Wages
Outstanding office salaries
Interest on Bank Loan
Provisions
Provision for Taxation
Provision for Dividend
62,220
1,890
1,200
4,500
Loose Tools
10,000
Stock
124,840
Debtors
Outstanding for more than six months
Others
82,160 Less : Provisions
105,400
60,000 Cash at bank
i) With Scheduled Bank
ii) With Others
96,860
Cash in hand
19,530
Loans and Advances
Advance payment of taxes
84,290
Miscellaneous Expenditure
4,000
(Preliminary expenses Rs. 6,000 4,000)
722,770
722,770
Problem : cwa foundation June 2004 revised
Golden spoon Ltd. issued 5,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows
:
On application : Rs.7/share (including premium); On allotment : Rs. 3/share and On : First and final call : Rs.
2/share.
The company has received 6,000 applications for 5,000 equity shares. The allotment was made on prorata.
Excess application money was utilised towards dues on allotment.
Mr. Y who held 200 shares, failed to pay allotment money and first and final call. These shares were forfeited.
The company reissued 150 shares out of 200 shares forfeited shares to Mr. K as fully paid for Rs. 8/share.
Required :
Pass Journal entries in the Books of the Company.
Solution :
Tutorial Notes :
1. 'Pro-rata allotment ' means allotment in proportion of shares applied for. For example in the present case the
company receives application for 6,000 shares against the offer of 5,000 shares. The allotment is on prorata
basis therefore applicants of 6,000 shares will be allotted 5,000 shares i.e. in the ratio of 6:5. Any applicant who
has applied for 6 shares will be allotted 5 shares. Worded differently, shareholder having 500 shares must have
applied for 600 shares and paid the application money for 600 shares.
2. The allotment is on prorata basis. Thus Mr. Y holding 200 shares must have applied for 240 (200 x 6000/5000)
shares paying Rs. 1,680 (240 x Rs. 7) along with application.
3. The excess money paid by him is Rs. 280 (40 x Rs. 7), which will be adjusted towards allotment money. The
allotment due on his account stands at Rs. 600 (200 x Rs. 3) out of which the company has already Rs. 280 as
adjustment of application money. Thus he has failed to pay the balance amount of Rs. 320.
4. The total allotment money due is Rs. 15,000 (5000 x Rs. 3). The money to be transferred from application
money is Rs. 7,000 (1000 x Rs. 7). Thus the money called from shareholders would be Rs. 8,000 out of which
Mr. Y has failed to pay Rs. 320. The money received by company must be Rs. 7,680 (8,000 320).
5. The amount forfeited will be the total amount paid except the amount paid towards share premium a/c. The
total amount paid by Mr. Y is Rs. 1,680 out of which Rs. 400 is towards share premium which will not be
forfeited.The share forfeiture a/c will be credited by Rs.1,280.
6. The company issued 150 shares as fully paid at Rs. 8 per share. What will be the loss per share (i) Rs. 4 per
share because these shares were earlier issued at a premium of Rs. 2 or (ii) Rs. 2 per share as per face value of
share. Since the share capital created against these shares will be at face value, the loss will be computed
against the face value. This loss of Rs. 300 (150 x 2) will be debited to share forfeiture account.
7. You must show all the above calculations by way of working notes which carry marks in the examination,
The Journal entries in the books of Golden Spoon Ltd.
The naration has been left to reader. The word share has been used in place of 'equity
share'.
1
Bank a/c
Dr. 42,000
To Share application a/c
42,000
2
Share application a/c
Dr. 35,000
25,000
To Share premium a/c
10,000
3
Share allotment a/c
Dr. 15,000
15,000
4
Bank a/c
Dr.
7,680
Share application a/c
7,000
14,680
5
Share first and final call a/c
Dr. 10,000
10,000
6
Bank a/c
Dr.
9,600
9,600
7
Share capital a/c
Dr.
2,000
400
320
To Forfeited shares a/c
1,280
8
Bank a/c
Dr.
1,200
300
1,500
9
Dr.
980
980
Problem : cwa foundation Dec. 2004.
PGG Limited has authorised capital of Rs. 10,00,000. The company issued 75,000 equity shares of Rs. 10 each
at a premium of Rs. 4 per share payable as follows :
On application : Rs. 7 (including premium of Rs. 2), on allotment : Rs. 5 (including the balance premium), and
the balance in two calls in equal instalements.
Applications were received for 100,000 shares. The applicants were divided as follows:
(a) Those who applied for 25,000 shares were allotted in full.
(b) Those who applied for 60,000 shares were allotted 50,000 shares on prorata.
(c) The applicants for the balance applications were refunded in full.
Excess payment received on application was adjusted against allotment money.
Shareholders holding 5000 shares failed to pay when the second and final call was made. These shares were
forfeited and reissued at Rs. 9/share.
Solution :
Tutorial Notes :
1. Amount to be credited to share forfeiture a/c can easily be computed. The shareholders have paid Rs.
13/share (Rs..9 towards share capital a/c and Rs. 4 towards share premium a/c) at the time of forfeiture. The
amount paid towards share capital will be forfeited i.e. Rs. 9 x 5,000 shares = Rs. 45,000.
2. You have already solved some questions of this type. You should solve this one on your own and compare
your solution with the one given below. In journal entries the naration carries marks and you should be particular
about writing the naration of every journal entry.
Working notes :
1
3
4
Application money received

(100,000 x Rs. 7)
Refunded (15,000 x Rs. 7)
Adjusted towards Share capital a/c (75,000 x Rs. 5)
Adjusted towards Share premium a/c (75,000 x Rs. 2)
Adjusted towards Share allotment a/c
Rs.
700,000
105,000
375,000
150,000
70,000
375,000
Allotment money due (75,000 x Rs. 5)
70,000
Adjustment from application money
305,000
Balance to called from shareholders
225,000
Adjustment towards share capital a/c (75,000 x Rs. 3)
150,000
Adjustment towards share premium (75,000 x Rs. 2)
Share forfeiture a/c will be credited with the amount paid towards share capital up
to the point of forfeiture i.e. Rs. 9 x 5,000 shares = Rs. 45,000.
The forfeited shares were reissued at Rs. 9/share.
Amount received on account of reissue
Amount received on account of forfeiture
Total amount received
Less Face value of the shares
Profit to be transferred to Capital reserve
In the books of PGG Limited
Journal Entries
Particulars
Rs.
Bank a/c
Dr.
700,000
To Share application money a/c
( Being application money received on 100,000 shares @ Rs. 7/share)
Share application money a/c
Dr.
105,000
To Bank a/c
(excess application money on 15,000 shares being refunded)
Dr.
525,000
(Application money transferred to share capital a/c and share premium a/c)
Dr.
70,000
( Excess allotment money transferred to share allotment a/c)
Share allotment a/c
( allotment money due)
Bank a/c
305,000
45,000
45,000
90,000
50,000
40,000
Rs.
700,000
105,000
375,000
150,000
70,000

305,000
Share first call a/c
75,000
75,000
(first call money due)
Bank a/c
75,000
Share first call a/c
75,000
(First call money received)
Share second call a/c
75,000
Share capital a/c
75,000
(second call money due)
Bank a/c
70,000
70,000
(second call money received except on 5,000 shares)
Share capital a/c
50,000
To Share second call a/c
5,000
To Share forfeiture a/c
45,000
(Share capital a/c reduced on forfeiture of shares for non payment of final call)
Bank a/c
45,000
5,000
50,000
(forfeited share reissue at Rs. 9/share)
40,000
40,000
(transfer to capital reserve a/c)
Problem : cwa foundation June 2005
X Ltd. has the following Balance sheet as on 31.3.2005
Liabilities
Rs. Assets
Rs.
Share capital a/c
Fixed assets
22,00,000
8,00,000
Issued, subscribed and fully paid up 10,000 Equity 10,00,000 Current assets
shares of Rs. 100 each
5,000 Pref. Shares of Rs. 100 each
5,00,000
Capital Reserve
1,00,000
1,00,000
General Reserve
2,00,000
Profit and loss a/c
1,00,000
Current liabilities
10,00,000
30,00,000
30,00,000
The Preference Shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be made to the
extent it is required under the Companies Act for the purpose of this redemption. The shortfall in funds for the
purpose of the redemption after utilising the proceeds of the fresh issue are to be met by taking a bank loan.
Show Journal entries.
Solution :
Tutorial Notes :
You must revise the following before attempting to solve this question :
1. Section 78(2) of the Company's Act 1956 provides that
The Securities Premium account may, not withstanding anything in subsection (1) of Section 78, be applied by
the company :
(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus
shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or
debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any
debentures of the company.
You must revise the following regarding the redemption of preference shares.
1. You must revise section 80 of Companies Act, 1956 regarding redemption of preference shares. Following
points are placed below for your revision. These are not part of the solution.
2. No shares can be redeemed unless they are fully paid, i.e. partly paid shares must be made fully paid before
they can be redeemed.
3. Shares can be redeemed only out of profits of the company which would otherwise be available for dividend or
out of proceeds of a fresh issue of shares made for the purpose of redemption. Note that the word 'proceeds'
does not include the amount of premium if shares are issued at a premium.
4. For the redemption of preference shares, Capital Redemption Reserve Account must be created only from
such accounts as represent divisible profits. The credit balance of profit and loss a/c, General Reserve, Dividend
equalisation Reserve are the examples of the balances available for distribution of dividend and hence for
transfer to Capital Redemption Reserve Account.
5. Amounts in Securities Premium Account, Forfeited Shares Account, Profit prior to incorporation account and
Capital Reserve Account must not be transferred to Capital Redemption Reserve Account.
6. If the shares are redeemed at a premium, as is the present case, the premium payable on redemption must
be provided for from the profits of the company or from the Securities Premium Account.
7. Use of Share premium a/c has been detailed in Section 78 of the Act. It does not say that the amount received
on account of share premium can be utilised for redemption of pref. shares but it says the such amount can be
used for paying premium on redemption of pref. shares.
Tutorial Notes regarding solution of this problem :
1. Amount required for redemption of preference shares
Amount required for redemption on face value of pref. shares
Add : Amount required for premium to be paid on redemption
Amount which can be transferred from the Securities premium a/c
Amount which can be transferred from the Profit and loss a/c
Amount which can be transferred from General Reserve
Amount required from fresh issue of shares
Balance amount required to be raised from Loan
Arrangement of cash for redemption would be as follows:
From fresh issue of shares :(2,000 equity shares of Rs. 100 each)
From Share Premium a/c
From Loan from Bank
(date and folio column omitted)
Particulars
Bank a/c
Rs. Lacs
5.0
0.5
5.5
0.5
1.0
2.0
3.5
2.0
3.0
Rs. 2.0 lacs

Rs. 0.5 lacs
Rs. 3.0 lacs
Dr.
Rs.
200,000
Cr.
Rs.
To Equity Share capital a/c

200,000
( being the issue of 2,000 equity shares of Rs. 100 each, for redemption of the
pref. shares as per Board resolution no. .. Dated.)
General Reserve
200,000
Profit and loss a/c
100,000
To Capital redemption reserve a/c

300,000
(being the amount transferred to Capital redem. Reserve a/c)
Share premium a/c
50,000
To Premium on Redemption of pref. shares a/c
50,000
500,000
Premium on Redemption of Pref. Shares a/c
50,000
550,000
(being the amount payable on redemption of pref. shares transferred to pref.
shareholders a/c)
Bank a/c
300,000
To Bank loan a/c
300,000
Pref. Shareholders a/c
550,000
To Bank a/c
550,000
( being the amount paid off to pref. shareholders )
Problem : cwa foundation Dec. 2005
Flamingo Ltd. offered for public subscription 5,000 equity shares of Rs. 10 each at a
premium of Rs. 2.50 per share payable as follows:
On Application : Rs. 2.0 per share;
On allotment : Rs. 4.50 per share including premium
On First Call : Rs. 4.0 per share and On Second Call : Rs. 2.0 per share.
Application were received for 7,500 shares and allotment was made pro-rata to applicants for 5,000 shares,
letters of regret being issued for the remaining applications. Money over paid on application by the allottees was
adjusted with allotment amount.
Rahim to whom 100 shares were allotted failed to pay last the allotment money and on his failure to pay the first
call, his shares were forfeited.
Haq, the holder of 150 shares failed to pay last two calls his shares were forfeited after the second call was
made.
Of the shares forfeited, 200 were allotted as fully paid up to karim for Rs. 8 per share paid in cash.
Show the journal entries to record the forfeiture and reissue of forfeited shares including those relating to cash,
assuming that the whole of the Rahim's share have been re-issued.
Solution :
Revisional Tutorial Notes :
You should revise the following points relating to re-issue of shares. This should not be treated as part of
solution.
1. When the shares are reissued, return of the forfeited shares need not be filed under section 75(1) of the
Companies Act 1956.
2. It is obligatory on the part of the company, to dispose off the forfeited shares. In practice forfeited shares are
disposed off by auction. These shares can be re-issued at any price so long as the total amount received (from
the original allottee and the second purchaser) for those shares is not less than the amount in arrear on those
shares.
3. Loss on re-issue should not exceed the forfeited amount.
4. The forfeited amount on shares not yet issued should be shown in the balance sheet as an addition to the
share capital.
5. When only a portion of the forfeited shares are re-issued, then the profit made on reissue of such shares must
be transferred to Capital Reserve.
6. When the shares are re-issued at a loss, such loss is to be debited to ' Forfeited shares account'.
7. If the shares are re-issued at a price which is more than the face value of the shares, the excess amount will
be credited to Securities Premium Account.
8. If the re-issued amount and forfeited amount (taken together) exceeds the face value of the shares re-issued,
it is not necessary to transfer amount to Securities Premium account.
Tutorial Notes regarding solution of this problem :
1. Rahim failed to pay the allotment money. Thus he has not paid any amount towards share premium because
allotment money was inclusive of share premium. Since he is allotted 100 shares on pro-rata basis, he must
have applied for 150 shares and must have paid Rs. 300 alongwith the application. The amount of Rs. 300 will
be forfeited and will be credited to Forfeited Shares account.
2. Rahim's shares were forfeited after the first call. Thus entries regarding his shares upto the point of First call
must be cancelled. Share capital created upto the point of forfeiture is Rs. 8 /share (application : Rs. 2,
allotment : Rs. 2 and First call : Rs. 4). The forfeiture will reduce the share capital to the extent of Rs. 800 (100 x
Rs.8). The Share premium created of Rs. 250 (100 x Rs. 2.50) will have to be debited because of forfeiture. The
credit will be on account of Share allotment a/c, Share First call a/c and Share forfeiture a/c. Can you compute
the amount against these accounts ?
3. Rahim paid Rs. 300 alongwith application out of which Rs. 200 was adjusted towards application money and
balance of Rs. 100 was adjusted towards allotment money. He was called to pay Rs. 350 on allotment (Rs. 450
due less Rs. 100 already paid with application). Thus at forfeiture, the share allotment a/c will be credited with
Rs. 350 (and NOT with Rs. 450).
4. On the same logic, you can write the journal entries for the forfeiture of 150 shares of Haq who failed to pay
the first call and whose shares were forfeited after the second call. The share capital and the share premium
created up to the point of forfeiture of Haq's 150 shares will have to be cancelled. Can you determine the amount
forfeited on Haq's account ?
5. The amount of Rs. 200 in respect of 50 shares of Haq yet reissued, will remain in the Forfeited Shares
Account.
Working notes :
1. Rahim must have applied for 150 shares to be allotted 100 shares on prorata basis:
Amount paid towards application money
(150 shares @ Rs. 2/share)
Amount adjusted towards allotment ( 100 shares @ Rs. 2)
Amount due on allotment ( 100 x Rs. 4.50 less Rs. 100)
2. Amount forfeited on a/c 150 shares of Haq (Rs. 2 + Rs. 2) x 150 shares
3. Re-issue of 200 forfeited shares to Karim at Rs. 8 per share
Amount paid by Rahim (100 shares reallotted)
Amount paid by Haq (100 shares reallotted)
Amount paid by Karim @ Rs. 8/share x 200 shares
Total amount received on account of re-issued shares
Face value of shares
Profit on re-issue of shares
Alternatively :
Paid by Rahim on 100 shares (reallotted)
Paid by Haq on 100 shares (reallotted)
Discount allowed to Karim
Profit on shares re-issued
Rs.
300
200
350
600
300
400
1600
2,300
2,000
300
Rs.
300
400
700
400
300

Share capital a/c
Dr.
800
Share premium a/c
Dr.
250
(being the forfeiture of 100 held by Rahim for non payment of allotment money
and first call money)
Share capital a/c
1,500
To Share second call a/c
being the forfeiture of 150 shares held by Haq for non-payment of first call and
second of Rs. 4 and Rs. 2 respectively. Money paid on application and allotment
of Rs. 4 per share forfeited.
Bank a/c
1,600
400
(being the amount received against allotment of 200 shares as fully paid at Rs.
8/share)
300
(being the profit on re-issue of 200 forfeited shares transferred to Capital reserve,
assuming that the whole of Rahim's shares have been re-issued)
350
400
300
600
300
600
2,000
300
Problem : (CWA Inter adapted)

The trial balance of ABC as on 31.3.05 is as follows (extract):
(in Rs.)
Dr. Rs.
Cr. Rs.
Advance income tax 2000 01
110,000
Advance income tax 2001 02
115,000
Provision for income tax 2000 01
100,000
Adjustments :
1. The income tax assessment of 2000 01 completed during the year showed gross tax demand of Rs.
120,000 but on effect has been given for this in the account.
2. Provision for income tax is to be made for 105,000 for 2001 02.
Show journal entries and relevant extract in the Final accounts.
Solution :
Tutorial Notes :
To be completed from Hanif and Mukherjee
During the accounting year, the company pays advance tax as the liability is not known exactly during the year.
Following entry is passed at the time of advance payment:
Advance income tax a/c
To Bank a/c
At the close of the year, the trial balance is prepared and this item appears in the debit side.
Now the company would compute its taxable income in accordance with the provisions of Income tax act. After
determining the taxability (based on self assessment), the company prepares the final accounts and makes in it,
a provision by the following entry :
Amalgamation
Problem : (cwa inter june 04)
The summarised balance sheets of X Ltd. and Y Ltd. as on 31st March 2004 were as follows :
X Ltd.
Y Ltd.
Rs.
Rs.
Fully paid up equity shares of Rs. 10 each
10,00,000
6,00,000
Share premium a/c
2,00,000
--General Reserve
3,00,000
2,50,000
Profit and loss a/c
1,80,000
1,60,000
10% Debentures
5,00,000
--Secured Loan
--3,00,000
Sundry Creditors
2,60,000
1,70,000
24,40,000
14,80,000
Land and Buildings
9,00,000
4,50,000
Plant and Machinery
5,00,000
3,80,000
Investment (5000 shares in Y Ltd.)
80,000
--Stock
5,20,000
3,50,000
Debtors
4,10,000
2,60,000
Bank
30,000
40,000
24,40,000
14,80,000
The companies agree on a scheme of amalgamation on the following terms :
(a) A new co. XY Ltd. is to be formed.
(b) XY Ltd. to take over all assets and liabilities of the existing companies.
(c) For the purpose of amalgamation, the shares of the existing companies are to be valued as under :
X Ltd.
Rs. 18 per share
Y Ltd.
Rs. 20 per share
(d) A contingent liability of X Ltd. of Rs. 60,000 is to be treated as real liability.
(e) The shareholders of X Ltd. and Y Ltd. are to be paid by issuing sufficient number of shares in XY
Ltd. at par.
(f) The shares in XY Ltd. are to be of Rs. 10 each.
Required :
(i) Show the computation of the number of shares XY Ltd. will issue to the shareholders of the existing
companies.
(ii) Pass the journal entries to close the books of X Ltd. and
(iii) Prepare the opening balance sheet of XY Ltd.
(Ignore liquidation and formation expenses.)
Solution :
General Tutorial Notes :
You must revise the following before attempting to solve the above problem. These should not be
treated as part of answer in the examination.
1. AS -- 14 deals with the accounting problems relating to amalgamation. According to AS -- 14, there
are two types of amalgamation (i) amalgamation in the nature of merger and (ii) amalgamation in the
nature of purchase.
2. AS -- 14 defines Purchase consideration as '' the aggregate of the shares and other securities issued
and the payment made in the form of cash or other assets by the transferee (amalgamating) company
to the shareholders of transferor (amalgamated) company.''
3. Points to Remember regarding purchase consideration :
3.1 Only payment of shareholders is to be taken into consideration.
3.2 Consideration for debentureholders will NOT be included in the purchase consideration.
3.3 Liquidation expenses or payment for cost of absorption are NOT included in purchase
consideration.
Tutorial Notes relating to problem :
1. 5,000 shares of Y Ltd. are held by X Ltd. These shares are assets for X ltd. As all the assets and
liabilities are taken over by XY Ltd., it will pay Rs. 20 per shares for 55,000 shares of Y Ltd. and NOT
for 60,000 shares. You should understand this properly.
2. You should compute the purchase consideration first. Rs. 18 per share is to be paid to the
shareholders of X Ltd. Total amount to be paid is Rs. 18.0 lacs. Thus XY ltd. will issue 180,000 shares
of face value of Rs. 10 each, to X ltd. Likewise it will pay Rs. 20/ shares for 55,000 shares of Y ltd in the
form of 110,000 shares of face value of Rs. 10 amounting to Rs. 11.0 lacs.
You can now compute the purchase consideration as follows :
X Ltd.
Y Ltd.
Existing shares
100,000
60,000
Less : Held by X Ltd.
5,000
55,000
Agreed value per share in Rs.
18
20
Total value in Rs. lacs
18.0
11.0
No. of shares to be issued (Rs. 10)
180,000
110,000
Journal entries in the books of X Ltd.:
A contingent liability of Rs. 60,000 is to be taken as real liability, it implies that profit and loss a/c is to be
debited and creditors to be credited. Thus profit and loss a/c will reduce to Rs. 120,000 from Rs.
180,000 and creditors will increase to Rs. 320,000 from Rs. 240,000.
For journalising the entries for the closure of X Ltd. Open a realisation a/c and transfer all assets and
liabilities (excluding fictitous assets) to this a/c and also credit this a/c with the purchase consideration.
Calculate profit and loss due to realisation.
The profit or loss so computed will be transferred to shareholders' a/c.
You can directly compute the profit on realisation as the difference between the net assets and
purchase consideration. The net assets = 900+500+80+520+410+30 -- 500 -- 260 --60 = Rs.16,20,000.
The purchase consideration is Rs. 18.0 lacs hence the profit on realisation is Rs.180,000.
Realisation a/c
Rs.'000
Rs.'000
Land and Buildings
900 10% Debentures a/c
500
Plant and Machinery
500 Creditors a/c
320
Investment
80 XY Ltd.
1,800
Stock
520
Debtors
410
Bank
30
Net profit
180
2,620
2,620
You can easily make journal entries of above ledger.
The profit on realisation will now be transferred shareholders a/c. Shareholders are the actual owners
of the company. They will also receive the shares issued by XY Ltd. as purchase consideration.
While transferring differenct assets to Realisation account, following points should be kept in mind:
1. For this purpose agreed valuations are absolutely immaterial.
2. Intangible assets like patents, trademarks and goodwill etc. are transferred to the realisation a/c at
their balance sheet values.
3. The fictitous assets like, discount on issue of shares and debentures, debit balance of profit and loss
a/c, preliminary expenses etc. are Not transferred to realisation account.
4. If the Pref. Shareholders are paid more or less than the amount due to them as per Balance sheet,
the difference should be transferred to Realisation a/c.
While transferring differenct liabilities to Realisation account, following points should be kept in mind:
1. Items in the nature of ' Provisions' are to be transferred to Realisation a/c but those in the nature of
'Reserves' should Not be transferred to Realisation a/c. All 'Reserves' should be transferred to
Shareholders a/c. The funds are reserves and not provisions, thus all funds should be transferred to
Shareholders a/c.
You should learn the following Journal entries properly :
Journal entries in the books of X Ltd.:
fig.' Rs.'000
Realisation a/c
2,440
To Land and buildings
900
To Plant and machinery
500
To Stock
520
To Debtors
410
To Investment
80
To Bank
30
Profit and loss a/c
60
To Creditors
60
(contingent liability treated as real liability)
10% Debentures
500
Creditors a/c
320
To Realisation
820
(Being liabilities transferred to realisation a/c)
XY Ltd. a/c
1,800
To Realisation
1,800
(being the purchase consideration received)
Share Capital a/c
1,000
Share Premium a/c
200
General Reserve
300
Plant and Machinery a/c
120
Realisation a/c
180
To Shareholders a/c
1,800
(being transfer of ledger balances)
Shareholders a/c
1,800
To Shares in XY Ltd
1,800
(being closure of shareholders a/c)
In the books of XY Ltd.
X Ltd.
Y Ltd.
XY Ltd.
Rs.
Rs.
10% Debentures
500
--500
Secured Loan
--300
300
Sundry Creditors
320
170
490
Land and Buildings
900
450
1,350
Plant and Machinery
500
380
880
Stock
520
350
870
Debtors
410
260
670
Bank
30
40
70
XY Ltd. Opening Balance sheet as at
Liabilities
Rs.'000 Assets
Rs.'000
Equity shares of Rs. 10 each issued
2,900 Goodwill
350
for consideration other than cash
Land and buildings
1,350
10% Debentures
500 Plant and machinery
880
Secured Loan
300 Stock
870
Creditors
490 Debtors
Bank
4,190
670
70
4,190
Problem : cwa inter june 06

The summarised balance sheets A Ltd. and B Ltd. as at 31st March,05 were as under:
A Ltd.
B Ltd.
Rs.
Rs.
Fully paid equity shares of Rs. 10 each
###
###
Share Premium a/c
400,000
General reserve
600,000
500,000
Profit and loss a/c
360,000
320,000
10% Debentures
###
Secured Loan
-600,000
Creditors
520,000
340,000
###
###
Land and buildings
###
900,000
Plant & machinery
###
760,000
Investments (10,000 shares in B Ltd.
160,000
-Stock
###
700,000
Debtors
820,000
520,000
Bank
60,000
80,000
###
###
The companies agree on a scheme of amalgamation on the following terms ;
(a) A new Co. AB Ltd. is to be formed.
(b) AB Ltd. to take over all assets and liabilities of the existing companies.
(c) For the purpose of amalgamation, the shares of the existing companies are to be valued as under:
A Ltd. : Rs. 18 per share and B Ltd. : Rs. 20 per share.
(d) A contingent liability of A Ltd. of Rs. 120,000 is to be treated as real liability.
(e) The shareholders of A Ltd. and B Ltd. are to be paid by issuing sufficient number of shares of AB
Ltd. at par.
(f) The shares of AB Ltd. are to of Rs. 10 each.
Required :
(i) Show the computation of the number of shares AB ltd. will issue to the shareholders of the existing
companies.
(ii) Pass the journal entries to close the books of A Ltd. and
(iii) Prepare the opening balance sheet of AB Ltd.
(Ignore liquidation and formation expenses.)
Solution :
This problem is same as the previous problem. You should solve it on your own.
Problem : (cwa inter dec.06)
The following were the balance sheets of Bimal Ltd. And Robin Ltd. as at 31st March 2006:
Liabilities
Bimal Ltd.
Robin Ltd.
Rs. Lacs
Rs. Lacs
Equity Share capital fully paid shares of Rs. 10 each
15,000
6,000
Securities Premium
3,000
---Foreign project reserve
---310
General reserve
9,500
3,200
Profit and loss a/c
2,870
825
12% Debentures
---1,000
Bills payable
120
----
Sundry Creditors
Sundry Provisions
1,080
463
1,830
702
33,400
12,500
Assets
Bimal Ltd.
Robin Ltd.
Rs. Lacs
Rs. Lacs
Land and Buildings
6,000
--Plant and machinery
14,000
5,000
Furnitures
2,304
1,700
Stocks
7,862
4,041
Debtors
2,120
1,020
Cash at bank
1,114
609
Bills receivable
--80
Cost of issue of debentures
--50
33,400
12,500
All the bills receivable held by Robin Ltd. Were Bimal Ltd's acceptances.
On 1st April 2006 Bimal Ltd took Robin Ltd. In an amalgamation in the nature of merger. It was agreed
that in discharge of consideration for the business, Bimal Ltd. Would allot three fully paid shares of Rs.
10 each at par for every two shares held in Robin Ltd. It was also agreed that 12% debentures in Robin
Ltd. would be converted into 13% debentures in Bimal Ltd. of the same amount and denomination.
Expenses of amalgamation amounting to Rs. 1.0 lakh were borne by Bimal Ltd.
1. Pass journal entries in the books of Bimal Ltd.
2. Prepare Bimal Ltd's Balance sheet immediately after the merger.
Solution :
General Tutorial Notes :
You must revise the following before attempting to solve the above problem. These should not be
treated as part of answer in the examination.
AS -- 14 recognises two types of amalgamation : (a) amalgamation in the nature of merger and (b)
amalgamation in the nature of purchase
An amalgamation is in the nature of merger if all of the following conditions are satisfied :
(i) All the assets and liabilities of transferor company are taken over by the transferee company.
Transferee company means purchasing company or the amalgamating company.
(ii) The shareholders holding at least 90% or more of the equity shares of the transferor (amalgamated)
company become the equity shareholders of the transferee company.
(iii) Consideration for the amalgamation is paid in equity shares by the transferee company to the
shareholders of tramsferor company (except fractional shares which can be paid in cash).
(iv) Business of the transferor company is intended to be continued by the transferee company.
(v) No adjustment is made in the book values of the assets and liabilities of the transferor company by
way of revaluation or otherwise, except to ensure the uniformity of the accounting policies. For
example, if transferor company follows SLM for depreciation while transferee co. follows WDVM, the
transferee company can adjust the book value of fixed assets of transferor company in the books of
transferee company only for the difference of the depreciation between the two methods. Such
adjustment in the book value of fixed assets will not be treated as revaluation.
It must be noted here that the difference between the amount recorded as share capital issued plus any
additional consideration in the form of cash or other assets on one hand and the amount of share
capital of the transferor (amalgamated) company on the other hand is adjusted in reserves.
An amalgamation is in the nature of purchase if any of the conditions regarding amalgamation in the
nature of merger is not satisfied.
Points to Remember regarding purchase consideration :
Only payment of shareholders is to be taken into consideration.
Consideration for debentureholders will NOT be included in the purchase consideration.

Liquidation expenses or payment for cost of absorption are NOT included in purchase consideration.
This is a very easy question. No calculations are involved.
Working Notes :
1. Computation of purchase consideration :
The purchase consideration is in the form of three equity shares of Bimal Ltd. for every two equity
shares held in Robin Ltd.
Purchase consideration : Rs. 6,000 lacs x 3/2 = Rs. 9,000 lacs.
2. Adjustment in reserves :
The share capital of Robin Ltd. is Rs. 6,000 lacs and the purchase consideration is Rs. 9,000 lacs. The
excess of Rs. 3,000 lacs will be adjusted in the reserves of Robin Ltd.
3.Treatment of fictitious assets : The question is silent regarding the treatment of fictitous asset of cost
of issue of debentures hence it has been adjusted against the credit balance of profit and loss a/c of
Robin Ltd.
4. As all the bills receivable of Robin Ltd. are bills payable for Bimal Ltd., they are in the form of mutual
owings hence eliminated in the final balance sheet after merger.
In the books of Bimal Ltd.
Rs. Lacs
Dr.
9,000
To Liquidator of Robin Ltd.
9,000
(being business of Robin Ltd. taken over for
consideration as per agreement)
Plant and machinery
Dr.
5,000
Furnitures
Dr.
1,700
Stocks
Dr.
4,041
Debtors
Dr.
1,020
Cash at bank
Dr.
609
Bills receivable
Dr.
80
12,450
To Foreign project reserve
310
To General reserve
(3200 -- 3000)
200
To Profit and loss a/c
(825 --50)
775
To 12% Debentures
1,000
To Creditors
463
To Provisions
702
To Business purchase
9,000
12,450
(Being assets and liabilities taken over from Robin Ltd.)
Liquidator of Robin Ltd. a/c
Dr.
9,000
9,000
(discharge of purchase consideration in the form of equity shares)
General reserve a/c
Dr.
1
To Bank a/c
1
(Liquidation expenses paid by Bimal Ltd.)
12% Debentures a/c
1,000
1,000
(12% debentures discharged by issue of 13% debentures)
Bills payable a/c
80
To Bills receivable a/c
80
(Cancellation of mutual owing on account of bills)
For preparation and presentation of balance sheet after merger, you must revise the disclosure
requirements as follows (this is for your revision and does not form part of the answer in the
examination)
Disclosures :
For all amalgamations, the following disclosures should be made in the first financial statements
following the amalgamation :
(a) names and general nature of business of the amalgamating companies;
(b) effective dale of amalgamation for accounting purposes;
(c) the method of accounting used to reflect the amalgamation;
(d) particulars of the scheme sanctioned under the law.
For amalgamation under pooling of interest method (amalgamation in the nature of merger), the
following additional disclosures should be made in the first financial statements following the
amalgamation;
(a) description and number of shares issued, together with the percentage of each company's equity
shares exchanged to effect the amalgamation.
(b) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof.
Balance sheet
Liabilities :
Rs. Lacs
Share Capital
Authorised, issued and subscribed:
24 crores equity shares of Rs. 10 each, fully paid up
(of the above shares, 9 crores shares have been issued for
consideration other than cash)
24,000
Share Premium
3,000
General Reserve
310
Foreign project reserve
9,699
Profit and loss a/c
3,645
Secured Loan
13% Debentures
1,000
Current liabilities and provisions
Bills payable
40
Creditors
1,543
Sundry Provisions
2,532
45,769
Assets :
Fixed assets
Land and buildings
6,000
Plant & machinery
19,000
Furniture etc.
4,004
Current assets, Loans and Advances:
Stock
11,903
Debtors
3,140
Cash at Bank
1,722
Loans and Advances
0
45,769
Problem : (ca pcc nov. 99, cwa inter june 07)
The following are the balance sheets of Good Ltd. and Bad Ltd. as on 31.3.07
Good Ltd.
Bad Ltd.
Rs. Crores
Sources of Funds
Share Capital Authorised
Issued and fully paid up equity shares of Rs. 10
Shareholders Fund
Unsecured loan from Good Ltd.
Funds employed in:
Fixed assets at cost
Less: Depreciation
Written down value
Investment at cost
30 lacs equity shares of Rs. 10 each of Bad Ltd.
Long term loan to Bad Ltd.
Current assets
Rs. Crores
25
12
88
100
5
10
10
25
80
60
20
40
34
6
3
10
0
0
200
(133)
134
67
(115)
19
100
25
On that day Good Ltd. absorbed Bad Ltd. The members of Bad ltd. are to get one equity share of Good
Ltd. issued at a premium of Rs. 2 per share for every five equity share held by them in Bad Ltd. The
necessary approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the above.
Solution :
Tutorial Notes:
1. You can begin with the books of either companies. In either case you will have to calculate the
purchase consideration to be paid to shareholders of Bad ltd. Can you calculate the purchase
consideration?
2. Let us first take journal entries of Bad ltd. For journalising the entries for the closure of Bad Ltd.
Open a realisation a/c and transfer all assets and liabilities (excluding fictitous assets) to this a/c and
also credit this a/c with the purchase consideration. Calculate profit and loss due to realisation.
3. The profit or loss so computed will be transferred to shareholders' a/c.
4. All books of B ltd. are to be closed. Thus the written down value of the fixed assets will NOT be
transferred to realisation a/c. The realisation a/c will be debited with the fixed assets at cost and will be
credited with depreciation accumulated. This entry will close the books of fixed assets and depreciation.
In the opening entries of Good ltd., the fixed assets will be recorded at its value of Rs. 6.0 crores.
Similar is the case with current assets. The net current assets have been given as Rs. 19 crores but
the realisation a/c will NOT be debited with this amount, Instead, it will be debited with total amount of
Rs. 134 crores and simultaneously credited with current liabilities of Rs. 115 crores. You must take a
serious note of this entry.
5. The absorbing company i.e. Good Ltd. already has 30 lacs shares of absorbed company i.e. Bad
Ltd. The total number of shares in Bad Ltd is 50 lacs (500 / 10). This is amalgamation in the nature of
merger. The AS-14 should be followed.
Steps to solve this problem may be something like the one supplied below:
1. Compute the purchase consideration. For every five shares of Bad ltd., Good ltd will issue one equity
share of Rs. 10 at a premium of Rs. 2. Bad Ltd. has 50 lacs shareholders. Thus 10 lacs shares of Rs.
12 each amouting to Rs. 120 lacs will be purchase consideration. Show it as your first working note.
2. To compute the profit or loss on realisation, you need to prepare Realisation a/c. Compute the profit
or loss on realisation, and transfer this to Shareholders a/c. Don't forget to credit the realisation a/c with
purchase consideration. Prepare your realisation a/c and compare it with the one given below. Can you
compute the profit or loss on realisation without preparing any a/c? Think over it before you read any
further. The Balance sheet shows the net worth of the company as Rs. 15.0 crores [( 5+10) or (6+19
10)]. The consideration being paid is Rs. 1.20 crores thus the loss on realisation would be Rs. 13.80
crores.
Realisation A/c
40.0
134.0
Rs. Crores
By Provision for depreciation
By Current liabilities
By Loan from G ltd.
By Purchase consideration
34.0
115.0
10.0
1.2
174.0
160.2
By Shareholders (loss)
13.8
174.0
174.0
The loss to B ltd. will be a gain for Good ltd. Thus Good ltd. will have a capital reserve of this amount in
its balance sheet.
3. You must now close the Share capital a/c and Reserve a/c by debiting these to Shareholders a/c.
To Fixed assets
To Current assets
4. Good ltd. holds 60% of Bad ltd. The purchase consideration is Rs. 1.2 crore. Out of this, 60% i.e. Rs.
0.72 crore will go back to equity shareholders of Good ltd. and the balance of Rs. 0.48 crore will bo to
other shareholders of Bad ltd. Think how can you record this transaciton in the books of Bad ltd.
Prepare Journal entries in the books of Bad Ltd. and compare them with the entries furnished below.
Note that whenever journal entries are asked, entries should be supported by narration.
Journal Entries in the books of Bad Ltd(Rs. In crores)
Dr.
174.0
Realisation a/c
40.0
To Fixed assets a/c
134.0
To Current assets a/c
(being the assets taken over by Good Ltd. transferred to Realisation a/c)
Dr.
34.0
Provision for depreciation a/c
Dr.
115.0
Current liabilities a/c
Dr.
10.0
Loan from G ltd. a/c
159.0
To Realisation a/c
(transfer of liabilities and provisions to R a/c)
Dr.
1.2
G Ltd. a/c
1.2
To R a/c
(purchase consideration credited to R a/c)
Dr.
13.8
Equity shareholders a/c
13.8
To R a/c
(loss on realisation transferred to equity shareholders a/c)
Dr.
5.0
Dr.
10.0
Reserve and Surplus a/c
15.0
To Equity shareholders a/c
Dr.
0.72
Equity shareholders a/c (G ltd.)
0.72
To G ltd. a/c
(60% of consideration due from G ltd is adjusted against the amount due to G ltd.)
Dr.
0.48
Equity shares of G ltd. a/c
0.48
To G ltd.
(receipt of 4 lacs shares of Rs. 10 each at a premium of Rs. 2
for outside shareholders of B ltd.)
For journal Entries in the books of Good Ltd.
Tutorial Notes :
1. G ltd already has an investment of Rs. 3.0 crores in B ltd. which it is going to absorb. From the
above it is clear, that G ltd. is paying Rs.1.2 crores as purchase consideration out of which it will adjust
Rs. 0.72 crores as 60% because it has 60% shares of B ltd. Thus there is Loss of Rs. 2.28 crores to G
ltd. in this investment. Overall the Profit to G ltd. is Rs.13.8 crores as computed earlier.
2. You must be careful to create Share premium a/c separately, whenever the shares are issued at
premium. Rs. 0.48 crores to be allotted in the form of shares to outside shareholders of B ltd. You
should credit Rs. 0.40 crores to Share Capital a/c and Rs.0.08 crore to Share Premium a/c.
3. As the G ltd. is absorbing B ltd., The mutual owings like the investment in B ltd. a/c and the Loan to
Bad ltd. a/c will be closed.
Rs. In crores
Dr.
1.20
To Liquidator of Bad Ltd.
1.20
(amount of purchase consideration)
Fixed assets a/c
Dr.
6.00
Current assets a/c
Dr.
134.00
To Current liabilities a/c
115.00
To Loan a/c
10.00
To Business purchase a/c
1.20
13.80
(assets and liabilities are taken over, the difference is
transferred to capital reserve)
Liquidator of Bad Ltd. a/c
Dr.
0.72
Capital reserve a/c
Dr.
2.28
To Investment in B ltd. a/c
3.00
(investment a/c closed and loss transferred to capital reserve)
Liquidator of Bad Ltd. a/c
Dr.
0.48
0.40
To Security Premium a/c
0.08
(allotment to outside shareholders of B ltd at a premium of Rs. 2)
Loan from G ltd. a/c
Dr.
10.00
To Loan to B ltd. a/c
10.00
(cancellation of mutual accounts)
Problem (ca pcc may 04)
Super express ltd. and Fast express were in competing business. They decided to form a new
company named SuperFast express Ltd. The balance sheets of both the companies were as under:
Balance sheet of Super express as at 31.12.99
Liabilities
Rs. Assets
Rs.
20,000 equity shares of Rs. 100 each
### Buildings
###
Providend Fund
100,000 Machinery
400,000
Sundry Creditors
60,000 Stock
300,000
Insurance Reserve
100,000 Sundry debtors
240,000
Cash at Bank
220,000
Cash in hand
100,000
###
###
Balance sheet of Fast express as at 31.12.99
Liabilities
Rs. Assets
Rs.
### Goodwill
100,000
Employees profit sharing fund
60,000 Buildings
600,000
Sundry Creditors
40,000 Machinery
500,000
Reserve account
100,000 Debtors
40,000
Surplus
100,000 Stock
40,000
Cash at Bank
10,000
Cash in hand
10,000
###
###
The assets and liabilities of both the companies were taken over by the new company at their book
values. The companies were allotted shares of Rs. 100 each in lieu of purchase consideration.
Prepare opening balance sheet of Super Fast Express Ltd.
Solution:
Tutorial Notes :
This is a very easy question. You should find no difficulty in solving it.
1. You are to decide whether this is amalgamation in the nature of merger or purchase. The question is
silent about this and It has not been mentioned whether the amalgamation is in the nature of merger or
purchase. What you are supposed to do?
2. If it is full marks question, you must go for both the options. First you should assume that this is
amalgamation in the nature of merger and employ the pooling of interest method to prepare the
balance sheet. Then you should assume the other option of amalgamation in the nature of purchase
and go for purchase method. In case if the question is of less marks say 6 or 8 marks, you can go for
any one of the two options.
3. For better understanding, let us prepare the balance sheet as per both the options. At this stage you
are advised to go through the difference between two methods viz. Pooling of interest method and
Purchase method. It is the easiest, to prepare balance sheet as per pooling of interest method. You can
do it without any complex calculation.
4. How will you determine the purchase consideration? For Super Express Ltd., the provident fund is a
fund meant for employees and has to be utilised for specific purpose if the company goes into
liquidation. Thus this will not be considered for computing the purchase consideration.
5. Please compute the purchase consideration for Super Ltd. In purchase method, the purchase
consideration is paid on the basis of net assets of the companies. Compute the net assets of both the
companies from both the sides viz. Liabilities side and Assets side.
6. For Fast Ltd. the employees profit sharing fund will not be considered in calculating the net worth
(and consequently the purchase consideration) as this fund will be utilised for employees only. You
should compute the purchase consideration of the Fast ltd. on net assets basis.
7. For amalgamation in the nature of merger, you have just to combine the two balance sheets as no
adjustments are required as per the question. See how these two balance sheets can be combined:
Amalgamation in the nature of merger:
Balance sheet of Super express as at 31.12.99
Liabilities
Rs. Lacs Assets
Rs. Lacs
20.0 Buildings
10.0
Providend Fund
1.0 Machinery
4.0
Sundry Creditors
0.6 Stock
3.0
Insurance Reserve
1.0 Sundry debtors
2.4
Cash at Bank
2.2
Cash in hand
1.0
22.6
22.6
Balance sheet of Fast express as at 31.12.99
Liabilities
Rs. Lacs Assets
Rs. Lacs
10.0 Goodwill
1.0
0.6 Buildings
6.0
Sundry Creditors
0.4 Machinery
5.0
Reserve account
1.0 Debtors
0.4
Surplus
1.0 Stock
0.4
Cash at Bank
0.1
Cash in hand
0.1
13.0
13.0
Balance sheet of Superfast Express Ltd.

Liabilities
Rs. Lacs Assets
Rs. Lacs
Share Capital
30.0 Goodwill
1.0
Insurance Reserve
1.0 Buildings
16.0
Reserve account
1.0 Machinery
9.0
Surplus
1.0 Stock
3.4
Creditors
1.0 Debtors
2.8
Provident Fund
1.0 Cash at Bank
2.3
0.6 Cash in hand
1.1
35.6
35.6
Balance sheet for amalgamation in the nature of merger is over, now let us see the amalgamation in
the nature of purchase.
Amalgamation in the nature of purchase:
Calculation of Purchase Consideration of Super Express Ltd.
Rs. Lacs
Share Capital
20.00 Buildings
10.00
Insurance Reserve
1.00 Machinery
4.00
Stock
3.00
Sundry debtors
2.40
Cash at Bank
2.20
Cash in hand
1.00
22.60
Less:
Provident Fund
1.00
Creditors
0.60
1.60
21.00
21.00
Calculation of Purchase Consideration of Fast Express Ltd.
Rs. Lacs
Share Capital
10.00 Buildings
6.00
Reserve a/c
1.00 Machinery
5.00
Surplus
1.00 Debtors
0.40
Less : Goodwill
1.00 Stock
0.40
Cash at Bank
0.10
Cash in hand
0.10
12.00
Less:
Creditors
0.40
Employee's fund
0.60
1.00
11.00
11.00
Total purchase consideration is Rs. 32.0 lacs which will be satisfied by equity shares of Rs. 100 each.
Thus in this method 32,000 equity shares of Rs. 100 each will constitute the share capital.
As the purchase consideration is just equal to net assets, there will be no goodwill or capital reserve in
the final balance sheet. In fact, no reserves will appear in the final balance sheet of Superfast express
ltd.
Balance sheet of Superfast Express Ltd.
Liabilities
Rs. Lacs Assets
Rs. Lacs
Share Capital
Buildings
16.0
32.0 Machinery
9.0
Creditors
1.0 Stock
3.4
Provident Fund
1.0 Debtors
2.8
0.6 Cash at Bank

Cash in hand
34.6
2.3
1.1
34.6
Consolidated Balance sheet :

Problem (cwa inter june 2000)
The following summarised Balance sheets of X Ltd. and its subsidiaries Y Ltd. and Z Ltd. have been prepared at
X Ltd.
Y Ltd.
Z Ltd.
Share Capital :
Rs. Lacs Rs. Lacs Rs. Lacs
30.0
20.0
2.0
28.0
16.0
1.2
Profit and loss a/c
15.0
8.0
2.0
Secured Loan
5.0
2.0
Unsecured Loan
12.0
14.0
2.8
Sundry Creditors
90.0
60.0
8.0
Fixed assets :
Land and buildings at cost less depreciation
Plant & machinery at cost less depreciation
Investments
Current assets
Stocks
Debtors
Cash and Bank
10.0
14.0
34.0
8.0
22.0
2.2
2.0
1.0
0.5
12.0
16.0
4.0
90.0
14.0
12.0
1.8
60.0
2.5
1.8
0.3
8.0
Rs. Lacs
Additional Information:
(1) Particulars of investments are as follows :
33.6
X Ltd.
Investments in 160,000 shares in Y Ltd.
0.4
Investments in 5,000 shares in Z Ltd.
2.2
Y Ltd.
Investments in 12,000 shares in Z Ltd.
0.5
Z Ltd.
Investment in Growth Sector Bonds (FV : Rs. 50,000)
(2) The acquisition of investments took place in the manner indicated below:
Balance in Profit and loss a/c
Date
Y Ltd.
Z Ltd.
X Ltd.
14.0
1.00
160,000 shares in Y Ltd.
1st April 1999
0.20
5,000 shares in Z Ltd.
1st April 1997
Y Ltd.
0.72
12,000 shares in Z Ltd.
1st April 1998
(3) X Ltd. has proposed 15% dividend for the accounting period ended on March 31,2000. This amount is
included
in debtors
sundry creditors.
(4)
Sundry
of Y Ltd. include Rs. 30,000 representing sum due from X Ltd. Sundry creditors of X Ltd.
Prepare a consolidated Balance sheet of X Ltd. and its subsidiaries as at March 31,2000.
Solution :
You can straight away prepare most of Consolidated Balance sheet of X Ltd. by simply adding up the assets
Consolidated Balance sheet of X Ltd. as at 31 March, 2000
Rs. Lacs
Liabilities
Rs. Lacs Assets
30.0 Goodwill
?
?
Land
and
buildings
(10+8+2)
20.00
Profit and loss a/c
? Plant & machinery (14+22+1)
37.00
Capital Reserve
25.0
Investment
in
bonds
0.50
Secured Loan (15+8+2)
7.0
Stocks
(12+14+2.5)
28.50
Unsecured Loan (5+2)
28.8
Debtors (16+12+1.75)
29.8
Creditors (12+14+2.8)
4.5
Less: Intercompany debt
0.3
29.45
Less: Proposed dividend
Cash
in
transit
(15% of Rs. 30.0 lacs)
0.2
24.1 Cash (4+1.8+0.25)
6.05
4.5
Proposed Dividend
?
Minority Interest
To fill the various blanks you have to prepare working notes. Following guidelines will be helpful.
1. On the date of consolidation, X Ltd. has 80% control on Y, it also has 25% control on Z. On the same date Y
2. Minority interest in Y is 20% as X has 80% control. As Y holds 60% shares in Z, the MI of Y will hold 20% of
Solution goes as follows :
X in Y
80% (2) Minority Interest X in Y
20%
(1) Controlling interest :
X in Z (direct)
25%
X in Z (15% + 20% of 60%)
27%
X in Z (indirect
48%
(3) Pre-acquisition (capital) profit
X's share in Y
80% of Rs. 14.0 lakhs
X's share in Z direct
25% of Rs. 20,000
indirect
48% of Rs. 1.0 lakh
(4)_Post acquisition (revenue) profit :
X's share in Y
80% of Rs. 2.0 lakhs
X's share in Z direct
25% of Rs. 1.0 lakh
indirect
48% of Rs. 20,000
Rs. 11.20 lakhs

Rs. 5,000
Rs. 48,000
160,000
25,000
9,600
Profit and loss a/c of X ltd.

Consolidated profit
(5) Computation of cost of control :
Y Ltd.
Cost of investment
X in Y (80%)
X in Z (direct 25%)
X in Z (indirect 80%)
Net cost of investment

Less : Pre-acquisition profit (wn 3)
Goodwill
(6) Minority Interest :
Share capital
Profit and loss a/c
Z Ltd.
Total
0.40
1.76
2.16
33.60
0.40
1.76
35.76
0.50
0.96
1.46
0.70
0.53
0.17
17.46
17.46
18.30
11.73
6.57
33.60
33.60
Less : Nominal value of shares held
X in Y (80%)
X in Z (direct 25%)
X in Z (indirect 80%)
34,600
194,600
28,00,000
29,94,600
16.00
16.00
17.60
11.20
6.40
4.00
0.54
4.54
3.20
0.32
3.52
7.20
0.86
8.06
Less: Share of cost of investment in Z Ltd.
0.44
0.44
6.76
0.86
7.62
Consolidated Balance sheet of X Ltd. as at 31 March, 2000
Liabilities
Rs. Lacs Assets
30.00 Goodwill
29.95 Land and buildings (10+8+2)
Profit and loss a/c
0.00 Plant & machinery (14+22+1)
Capital Reserve
25.00 Investment in bonds
Secured Loan (15+8+2)
7.00 Stocks (12+14+2.5)
Unsecured Loan (5+2)
28.8
Debtors (16+12+1.75)
Creditors (12+14+2.8)
4.5
Less: Proposed dividend
Cash in transit
(15% of Rs. 30.0 lacs)
0.2
24.10 Cash (4+1.8+0.25)
Rs. Lacs
6.57
20.00
37.00
0.50
28.50
29.8
0.3
29.45
0.10
6.05
Proposed Dividend
Minority Interest
4.50
7.62
128.17
128.17

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Issue of Shares and Forfeiture :

Some points to remember :

Profit (to be transferred to Capital reserve)

Share forfeiture a/c

(being application for 40,000 shares received @ Rs. 3 per share)

( application money on 30,000 shares transferred to share capital a/c and

To Share Forfeiture a/c

Following sections you must memorise :

Anand kumar shrivastava

Section 77 : Restriction on buyback of shares

Anand kumar shrivastava

Section 80 : Power to issue redeemable preference shares

To Share allotment a/c

Following sections you must memorise :

Anand kumar shrivastava

Section 77 : Restriction on buyback of shares

Anand kumar shrivastava

Section 80 : Power to issue redeemable preference shares

Section 81 : Rights Issue

Problem 1 : (CS Inter June 05 )

Chapter 29 : Valuation of Goodwill :

cwa inter cwa final

Profit and loss a/c

From Assets side

(i) The building is worth Rs. 300,000;

From Assets side

Less : Income from investment (10% of 5,00,000)

1. Use figures in lacs for convenience.

4. Capital employed should always be computed with revalued figures.

Computation of value of business :

Problem 7: (CA Final Nov. 06)

Increase in reserve balance

Balance sheet of Gee Ltd. as at 31st March, 2004

Less : Additional remuneration to directors

Less: Income tax @ 35%

Replacement cost of Fixed assets :

2. Future Maintainable Profit:

Value of goodwill as per equity approach

Final Accounts of Companies :

Provision for Income tax for the year ended 31.3.97

To Advance payment of tax a/c

1,000,000 (in Rs.)

14% on Cumulative Pref.Shares

Redemption of Preference Shares :

Redemption of Preference Shares is governed by Section 80 of the Company's Act 1956

4. Securities premium a/c :

(a) To sell all the investments for Rs. 15,000;

1. Determine the amount payable on redemption.

Working notes for determining the items of balance sheet :

(being amount transferred to pref.shareholders a/c)

The Journal entries are as follows :

(b)Through any investment company or group of such companies.

Problem (cwa stage 1 Dec 2000)

Prepare the final accounts.

Less : Current liabilities and Provisions

Problem : (CWA Inter Dec. 06)

Share Forfeiture a/c

Issue and Redemption of Debentures :

Problem (cwa stage 1 Dec 2002)

Rs. 100,000 for 3 months

Rs. 80,000 for 3 months

Rs. 60,000 for 3 months

900,000 Rs. Months

Annual equivalent Rs.