CA Intermediate (Nov.

2019)
GROUP II – PAPER 5
ADVANCED ACCOUNTING
(Series – 2)
Batch : ALL Date:
Time Allowed: - 3 Hours Maximum Marks: 100

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
Working notes should from part of the answer.

1(a) A Company with a turnover of ` 375 crores and an annual advertising budget of ` 3 5
crores had taken up the marketing of a new product. It was estimated that the
company would have a turnover of ` 37.5 crores from the new product. The
company had debited to its Profit and Loss account the total expenditure of ` 3
crores incurred on extensive special initial advertisement campaign for the new
product.
Is the procedure adopted by the Company correct?

(b) Uday Constructions undertake to construct a bridge for the Government of 5

Uttar Pradesh. The construction commenced during the financial year ending
31.03.2016 and is likely to be completed by the next financial year. The
contract is for a fixed price of ` 12 crores with an escalation clause. The
costs to complete the whole contract are estimated at ` 9.50 crores of
rupees. You are·given the following information for the year ended
31.03.2016:
Cost incurred upto 31.03.2016 ` 4 crores.
Cost estimated to complete the contract ` 6 crores
Escalation in cost by 5% and accordingly the contract price· is increased by 5%.
You are required to ascertain the state of completion and state the revenue and
profit to be recognized for the year as per AS 7.

(c) M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding 5
alleged infringement of Copyrights. The competitor has filed a suit in the court of
law seeking damages of `200 lakhs.
The Directors are of the view that the claim can be successfully resisted by the
Company.
How would the matter be dealt in the annual accounts of the Company in the light
of AS 29? You are required to explain in brief giving reasons for your answer.

(D) The following information is available for AB Ltd. for the accounting year 2012-13 5
and 2013-14:

Page 1 of 10
 Net profit for `
Year 2012-13 22,00,000
Year 2013-14 30,00,000

No of shares outstanding prior to right issue 10,00,000 shares.

Right issue: One new share for each five shares outstanding i.e. 2,00,000 shares.
: Right Issue price ` 25
: Last date to exercise right 31st July, 2013
Fair value of one equity share immediately prior to exercise of rights on 31.07.2013
is ` 32.
You are required to compute:
(i) Basic earnings per share for the year 2012-13.
(ii) Restated basic earnings per share for the year 2012-13 for right issue.
(iii) Basic earnings per share for the year 2013-14.

2(a) Given below is the Balance Sheet of OM Limited as on 31.3.2016: 10

Liabilities ` Assets `
Share Capital: Fixed Assets:
14%, 1,60,000 cumulative Land 1,60,000
preference shares of `100 Buildings 6,40,000
16,00,000
each fully paid up 32,000
equity shares of `100 each, Plant and Machinery 21,60,000

`60 per share paid up 19,20,000 Patents 1,60,000

Reserves and Surplus NIL Investments NIL
Secured Loans: Current Assets:
14% debentures 9,20,000 Inventory at cost 4,00,000
(Having a floating charge on Sundry debtors 9,20,000
all assets)
Interest accrued on above 1,28,800 Cash at bank 2,40,000
debentures Profit and Loss A/c 9,60,000
(Also having a floating
charge as above)

Loan on mortgage of land 6,00,000

and building
Unsecured Loan NIL
Current liabilities:
Trade payables 4,71,200
56,40,000 56,40,000

On 31.3.2016 the company went into voluntary liquidation. The dividend on 14%
preference shares was in arrears for one year. Sundry creditors include
preferential creditors amounting to `1,20,000.
The assets realized the following sums:
Land `3,20,000;
Buildings `8,00,000;
Plant and machinery `20,00,000;
Patent `2,00,000;

Page 2 of 10
 Inventory `6,40,000;
Sundry debtors `8,00,000.
The expenses of liquidation amounted to `1,17,736. The liquidator is entitled to a
commission of 2% on all assets realized (except cash at bank) and 2% on amounts
among unsecured creditors other than preferential creditors. All payments were
made on 30th June, 2016. Interest on mortgage loan shall be ignored at the time of
payment.
Prepare the liquidator’s final statement of account.

(b) M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2015: 10

` in ‘000 ` in ‘000
Equity & Liabilities
Share Capital:
Authorized Capital: 10,000
Issued and Subscribed Capital:
6,00,000 Equity Shares of `10 each fully paid up 6,000
40,000 9% Preference Shares of 100 each 4,000 10,000
Reserve and Surplus:
Capital Reserve 20
Revenue Reserve 8,000
Securities Premium 1,000
Profit and Loss Account 3,600 12,620
Non-Current Liabilities – 10% Debentures 500
Current Liabilities and Provisions 380
23,500
Assets
Fixed Assets : Cost 6,000
Less: Provision for Depreciation 500 5,500
Non – Current Investments at cost 10,000
Current assets, loans and advances (including
cash and bank Balances) 8,000
23,500

The company passed a resolution to buy back 10% of its equity capital @ ` 15 per
share. For this purpose, it sold its investments of ` 60 lakhs for ` 50 lakhs. The

Page 3 of 10
 company also redeemed all preference shares at par on 1st April, 2015.
You are required to pass necessary Journal entries and prepare the Balance Sheet
on 01.04.2015.

3(a) Paper Limited comes out with a public issue of share capital on 01-01-2017 of 10
30,00,000 equity shares of ` 10 each at a premium of 5%. ` 2.50 is payable
on application (on or before 31-01-2017) and ` 3 on allotment (31-3-2017)
including premium.
This issue was underwritten by two underwriters namely White and Black,
equally, the commission being 4% of the issue price. Each of the
underwriters underwrites 60,000 shares firm. Subscriptions including firm
underwriting came for 28,80,000 shares, the distribution of forms being
White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.
One of the allottees (using forms marked with name of White) for 6 ,000 shares
fails to pay the amount due to allotment, all the other money due being
received in full including any due from the shares devolving upon the
underwriters. The commission due was paid separately.
6,000 shares of one allottee who failed to pay the allotment money were finally
for feited by 30-06-2017 and were re-allotted for payment in cash of ` 4 per
share. You are required to prepare each underwriter’s liability (in shares) in
statement form assuming that benefit of firm underwriting is given to
individual underwriter and to pass necessary journal entries to record the
above events and transactions (including cash).

(b) The summarized balance sheet of Z Limited as on 31st March, 2017 is as under: 10

Liabilities Amount in `
Share Capital:
5,00,000 Equity shares of ` 10 each fully paid up 50,00,000
9%, 20,000 Preference shares of ` 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (14,60,000)
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000

Page 4 of 10
 Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000
Total 81,00,000
Assets:
Non-Current Assets:
Fixed Assets:
(a) Tangible Assets:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
(b) Intangible Assets:
Goodwill 10,00,000
Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000
Inventory 10,00,000
Discount on issue of debentures 1,00,000
Total 81,00,000

Note: Preference dividend is in arrears for last 2 years.

Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover
` 1,00,000 and ` 60,000 were also payable to Mr. Y and Mr. Z respectively as trade
payable.
The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of ` 5.00
each.
(ii) The Preference shares be reduced to ` 50 each and the preference
shareholders agreed to forego their arrears of preference dividends, in
consideration of which 9% preference shares are to be converted into 10%
preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt
including interest on debentures. Mr. Y and Mr. Z also agreed to pay `
1,00,000 and ` 60,000 respectively in cash and to receive new 12%
debentures for the balance amount.
(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to
forgo their 50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for
the balance.
(vi) Capital commitments of ` 3.00 lacs were cancelled on payment of ` 15,000
as penalty.
(vii) Directors refunded ` 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid ` 15,000.
(ix) The taxation liability of the company was settled for ` 75,000 and was paid
immediately.
(x) The Assets were revalued as under:

Page 5 of 10
 Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to pass journal entries for all the above-mentioned
transactions including amounts to be written off of Goodwill, Patents, Loss in
Profit and Loss account arid Discount on issue of debentures. And also, prepare
Bank Account and Reconstruction Account.

4(a) Find out Leverage effect on Goodwill in the following case: 5

(i)
(i) Current cost of capital employed ` 10,40,000
(ii) Profit earned after current cost adjustments ` 1,72,000
(iii) 10% long term loan ` 4,50,000
(iv) Normal rate of return:
On equity capital employed 15.6%
On long-term capital employed 13.5%

(a) Find out the average capital employed of ND Ltd. from its summarized Balance 5
(ii) Sheet as at 31st March, 2017:
Liabilities (` in lakhs) Assets (` in lakhs)
Share Capital: Fixed Assets:
Equity shares of ` 10 each 50.00 Land and buildings 25.00
9% Preference shares fully 10.00 Plant and machinery 80.25
paid up
Reserve and Surplus: Furniture and fixture 5.50
General reserve 12.00 Vehicles 5.00
Profit and Loss 30.40 Investments 10.00
Secured loans: Inventory 6.75
16% Debentures 5.00 Trade Receivables 4.90
16% Term loan 18.00 Cash and bank 10.40
Cash credit 13.30
Trade Payables 2.70
Provision for taxation 6.40
147.80 147.80
Non-trade investments were 20% of the total investments.
Balances as on 1.4.2016 to the following accounts were:
Profit and Loss account ` 8.20 lakhs, General reserve ` 6.50 lakhs.

(b) Fire Insurance division of Magic Insurance Company provides the following 5
information. You are required to show the amount of claim as it would appear in
the Revenue Account for the year ended 31st March, 2012.

Page 6 of 10
 Direct
Business Re-insurance
` `
Claim paid during the year 35,30,000 8,20,000
Claim received 3,20,000
Claim payable
1st April, 2011 8,23,000 58,000
31st March, 2012 8,75,000 87,000
Claim Receivable:
1st April, 2011 – 85,000
31st March, 2012 – 1,42,000
Expenses of Management 3,45,000
(Including ` 38,000 Surveyor’s fee and
` 42,000 Legal expenses for settlement of
claims)

(c) A Mutual Fund raised 100 lakh on April 1, 2017 by issue of 10 lakh units of Rs. 10 5
per unit. The fund invested in several capital market instruments to build a
portfolio of Rs. 90 lakhs. The initial expenses amounted to Rs. 5 lakh. During April,
2017, the fund sold certain securities of cost Rs. 38 lakhs for Rs. 40 lakhs and
purchased certain other securities for Rs. 28.20 lakhs. The fund management
expenses for the month amounted to Rs. 4.50 lakhs of which Rs. 0.35 lakh was in
arrears. The dividend earned was Rs. 1.20 lakhs. 75% of the realized earnings were
distributed. The market value of the portfolio on 30.04.2017 was Rs. 112 lakh.
Determine NAV per unit.
5(a) Hari Ltd. and Narayan Ltd. are to be amalgamated into Hari Narayan Ltd. The new 10
company is to take over all the assets and liabilities of the amalgamating
companies.
Assets and Liabilities of Hari Ltd. are to be taken over at book values in exchange of
shares in Hari Narayan Ltd. Three shares in the new company are to be issued at a
premium of 20% for every two shares of Hari Ltd.

The approved scheme for Narayan Ltd. is as follows:

1. 10% Preference shareholders are to be allowed two 15% Preference shares of
` 100 each in Hari Narayan Ltd. for three Preference shares held in Narayan
Ltd.
2. The Debentures of Narayan Ltd. are to be paid off at 5% discount by the issue
of debentures of Hari Narayan Ltd. at par.
3. The Equity shareholders of Narayan Ltd. are to be allowed as many shares at
par in Hari Narayan Ltd. as will cover the balance on their account and for this
purpose, plant and machinery is to be valued less by 15% and obsolete stock
forming 10% of the overall stock value is to be treated as worthless.
The summarised Balance Sheets of the two companies prior to amalgamation are
as follows:

Page 7 of 10
 Liabilities Hari Ltd. Narayan Assets Hari Ltd. Narayan
Ltd. Ltd.
` ` ` `
Equity Shares
0f ` 10 each 6,40,000 12,50,000 Plant and Machinery 12,80,000 20,00,000

10% Preference 7,50,000 Trade receivables 1,52,000 1,25,000

Shares of ` 100 -
each
General Reserves 8,80,000 - Inventory 1,00,000 1,50,000
Secured - 5,00,000 Cash and Bank 1,08,000 1,00,000
Debentures Balance
Trade payables 1,20,000 2,25,000 Profit and Loss
Account - 3,50,000
16,40,000 27,25,000 16,40,000 27,25,000
You are required to show the Journal Entries and the Balance Sheet of the
amalgamated company immediately after amalgamation.

(b) Consider the following summarized balance sheets of subsidiary Neel Ltd.: 10
2015 2016 2015 2016
Rs. Rs. Rs. Rs.
Share-Capital Fixed Assets
Issued & subscribed Cost 1,60,000 1,60,000
2,500 equity shares Less: Accumulated
of Rs. 100 each 2,50,000 2,50,000 depreciation (24,000) (48,000)
Reserves & Surplus 1,36,000 1,12,000
Revenue reserves 1,43,000 3,57,000 Investments at
Current Liabilities & cost
Current Assets: — 2,00,000
Provisions:
Trade Payables 2,45,000 2,47,000 Inventory 2,98,500 3,71,000
Bank overdraft — 85,000 Trade Receivables 2,97,000 4,45,500
Provision for taxation 1,55,000 2,15,000 Prepaid Expenses 36,000 24,000
Cash at Bank 25,500 1,500
7,93,000 11,54,000 7,93,000 11,54,000

Also consider the following information:

(i) Neel Ltd. is a subsidiary of Sky Ltd. Both the companies follow calendar year
as the accounting year.
(ii) Sky Ltd. values inventory on LIFO basis while Neel Ltd. used FIFO basis. To
bring Neel Ltd.’s values in line with those of Sky Ltd. its value of inventory is
required to be reduced by Rs. 6,000 at the end of 2015 and Rs. 17,000 at the
end of 2016.
(iii) Neel Ltd. deducts 1% from Trade Receivables as a general provision against
doubtful debts.
(iv) Prepaid expenses in Neel Ltd. include advertising expenditure carried
forward of Rs. 30,000 in 2015 and Rs. 15,000 in 2016, being part of initial
advertising expenditure of Rs. 45,000 in 2015 which is being written off over

Page 8 of 10
 three years. Similar amount of advertising expenditure of Sky Ltd. has been
fully written off in 2015.
You are required to restate the balance sheet of Neel Ltd. as on 31st December, 2016
after considering the above information, for the purpose of consolidation. Make the
necessary restatement which is necessary to make the accounting policies adopted
by Sky Ltd. and Neel Ltd. uniform.

Attempt Any Four

6(a) A consumer goods producer has changed the product line as follows: 5

Dish washing Bar Clothes washing Bar

(Per month) (Per month)
January 2016 - September 2016 2,00,000 2,00,000
October 2016 - December 2016 1,00,000 3,00,000
January 2017 - March 2017 Nil 4,00,000

The company has enforced a gradual enforcement of change in product line on the
basis of an overall plan. The Board of Directors has passed a resolution in March
2016 to this effect. The company follows calendar year as its accounting year. You are
required to examine whether it should it be treated as discontinuing operation as per
AS 24?

(b) The following facts have been taken out from the records of City Bank Ltd. as 5
on 31st March, 2017:
` `
Rebate on bill discounted (not due on March 31st, 2016) 91,600
Discount received 4,05,000
Bill discounted 24,50,000

Page 9 of 10
 An analysis of the bills discounted is as follows:
Amount Due date Rate of discount
` 2017
(i) 7,50,000 April 8 12%
(ii) 3,00,000 May 5 14%
(iii) 4,40,000 June 12 14%
(iv) 9,60,000 July 15 15%
You are required to:-
(i) Calculate Rebate on Bill Discounted as on 31st March, 2017.
(ii) The amount of discount to be credited to the profit and loss account.

(c) Kanika Ltd. provides you the following information: 5

No. of employees 2,500

No. of option to be granted to each employee 500
Vesting period 4 years
No. of employees not expected to fulfill the vesting
conditions other than market conditions
1st Year 20%
2nd Year 15%
3rd Year 10%
4th Year 10%
Fair value of the option per share `5
Exercise Price `50
Exercise Period 3 years
Face value of each share `10

At the end of third year it has been re-estimated that all vesting conditions have
been fulfilled and no other further conditions are required for options to vest and
600 employees exercise their option at the end of 4th year, 800 employees exercise
their option at the end of 5th year and 100 employees exercise their option at the
end of 6th year. Rights of 30 employees expired unexercised at the end of the 6 th
year.
You are required to pass necessary journal entries for first 3 years.

(d) Explain “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions. 5

(e) A company went into liquidation whose creditors are ` 36,000 includes ` 6,000 5
on account of wages of 15 men at ` 100 per month for 4 months immediately
before the date of winding up; ` 9,000 being the salaries of 5 employees at ` 300
per month for the previous 6 months, Rent for godown for the last six months
amounting to ` 3,000; Income-tax deducted out of salaries of employees ` 1,000
and Directors fee ` 500; in addition it is estimated that the company would have
to pay ` 5,000 as compensation to an employee for injuries suffered by him,
which was contingent liability not accepted by the company and not included in
above said creditors figure. Find the amount of Preferential Creditors.

Page 10 of 10