CAP II Advance Accounting- June 2019

Write Short Notes

Question 20:
(a). Leases
(b). Re-Insurance
(c). Contingent Assets
(d). Non Banking Assets
(e) Accounting Estimates
(f). Components of financial statements
(g). Watch List in Loan loss provisioning
(h). Government Accounting System in Nepal
(i). Outsourcing the Accounting function to third party
(j) Compilation of accounting information for agricultural farm

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SUGGESTED ANSWERS HINT

Business Combination

Solution 1:

Journal Entries in the Books of DD Ltd.

Dr. Cr.
Amount Amount
Rs. Rs.
Business Purchase Account Dr. 1,242,500
To Liquidator of SS Ltd. 1,242,500
(For purchase consideration due)

Investments Account Dr. 192,500

Goodwill Account (Balancing figure) Dr. 100,000
Fixed Assets Account Dr. 850,000
Current Assets Account Dr. 300,000
To Sundry Creditors Account 200,000
To Business Purchase Account 1,242,500
(For assets and liabilities taken over at agreed value)

Liquidator of SS Ltd. Dr. 1,242,500

To Equity Share Capital Account (Rs. 100) 903,600
To Securities Premium Account (Rs. 37.50) 338,850
To Cash Account 50
(For purchase consideration discharged)
Goodwill Account Dr. 16,000
To Current Assets (Stock) Account 16,000
(For elimination of unrealized profit on unsold stock)
Amalgamation Adjustment Account Dr. 200,000
To Investment Allowance Reserve Account 200,000
(For incorporation of statutory reserve)

Balance Sheet of DD Ltd.

as on 32nd Ashadh 2075
Liabilities Amount Assets Amount
Rs. Rs.
Equity Share Capital: Fixed Assets (500,000 + 850,000) 1,350,000
17,036 shares of Rs. 100 each (out of Goodwill
which 9036 shares are issued in favour (6,00,000 + 1,00,000 + 16,000) 716,000
of vendor for consideration other than 1,703,600 Investments (200,000 + 192,500) 392,500
cash)
General Reserve 400,000 Current Assets
Securities Premium 338,850 (7,00,000 – 50 – 16,000) 683,950
Investment Allowance Reserve 200,000 Amalgamation Adj. Account 200,000
Sundry Creditors 700,000
3,342,450 3,342,450

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Working Notes:
1. Calculation of net asset value of shares
DD Ltd. SS Ltd.
Rs. Rs.
Goodwill 500,000 100,000
Fixed Assets 600,000 850,000
Investments 100,000 330,000*
Current Assets 400,000 300,000
1,600,000 1,580,000
Less: Sundry Creditors 500,000 200,000
Net assets 1,100,000 1,380,000
Number of shares 8,000 6,000
Value per equity share 137.50 230

Rs.
*Investments of SS Ltd. are calculated as follows:

137,500
Shares in DD Ltd. (1,000  137.50)

192,500
Market value of remaining investments (given)

330,000

2. Calculation of Purchase Consideration

Rs.
Net assets of SS Ltd. 380,000
Value of Shares of DD Ltd. 137.50
Number of shares to be issued in DD Ltd. to SS Ltd. (13,80,000  137.50) 10,036.36
Less: Shares already held by SS Ltd. 1,000
Additional shares to be issued 9,036.36

Total value of shares to be issued (9036  137.50) 1,242,450

Cash payment for fractional share (.36  137.50) 50
1,242,500

Solution 2:
Computation of Purchase Consideration
Rs.
Value of 15,000 equity shares @ Rs.80 per share = Rs.12,00,000
Shares to be issued by Y Co. Ltd. (Rs. 12,00,000/120 per share = 10,000 12,00,000
shares @ Rs.120 each)
11% Preference shareholders to be issued equivalent 11% Redeemable 5,00,000
Debentures by Y Co. Ltd.
Total Purchase Consideration 17,00,000

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Journal Entries in the books of Y Co. Ltd.

Rs. Rs.
Business Purchase A/c Dr. 17,00,000
To Liquidator of X Co. Ltd. 17,00,000
(Being the amount payable to X Co. Ltd’s liquidator)
Land & Building A/c Dr. 10,00,000
Plant & Machinery A/c Dr. 7,00,000
Furniture & Fittings A/c Dr. 2,00,000
Stock in Trade A/c Dr. 3,00,000
Sundry Debtors A/c Dr. 2,00,000
Cash & Bank A/c Dr. 1,00,000
To Sundry Creditors 2,00,000
To Capital Reserve (Balancing figure) 6,00,000
To Business Purchase 17,00,000
(Being the value of assets and liabilities taken over from X Co. Ltd.)
Liquidators of X Co. Ltd. Account Dr. 17,00,000
To Equity Share Capital 10,00,000
To Securities Premium Account 2,00,000
To 11% Debentures 5,00,000
(Being purchase consideration discharged)

Internal Reconstruction
Solution 3:
Journal Entries in the Books of Hilltop Ltd.
Dr. Cr.
Rs. Rs.
(i) Equity Share Capital (Rs. 10 each) A/c Dr. 50,00,000
To Equity Share Capital (Rs. 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of Rs. 10 each
fully paid into same number of fully paid equity shares of Rs.
5 each as per scheme of reconstruction.)
(ii) 9% Preference Share Capital (Rs.100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (Rs.50 each) A/c 10,00,000

To Reconstruction A/c 10,00,000

(Being conversion of 9% preference share of Rs. 100 each
into same number of 10% preference share of Rs. 50 each
and claims of preference dividends settled as per scheme of
reconstruction.)
(iii) 10% First Debentures A/c Dr. 4,00,000
10% Second Debentures A/c Dr. 6,00,000
Trade Creditors A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 1,00,000
Bank A/c Dr. 1,00,000

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To 12% New Debentures A/c 7,00,000

To Reconstruction A/c 6,00,000
(Being Rs. 6,00,000 due to A (including creditors) cancelled
and 12% new debentures allotted for balance amount as per
scheme of reconstruction.)
(iv) 10% First Debentures A/c Dr. 2,00,000
10% Second Debentures A/c Dr. 4,00,000
Trade Creditors A/c Dr. 50,000
Interest on Debentures Outstanding A/c Dr. 60,000
To 12% New Debentures A/c 4,10,000
To Reconstruction A/c 3,00,000
(Being Rs. 3,00,000 due to B (including creditors) cancelled
and 12% new debentures allotted for balance amount as per
scheme of reconstruction.)
(v) Trade Creditors A/c Dr. 1,75,000
To Reconstruction A/c 1,75,000
(Being remaining creditors sacrificed 50% of their claim.)

(vi) Directors' Loan A/c Dr. 1,00,000

To Equity Share Capital (Rs. 5) A/c 60,000
To Reconstruction A/c 40,000
(Being Directors' loan claim settled by issuing 12,000 equity
shares of Rs. 5 each as per scheme of reconstruction.)

(vii) Reconstruction A/c Dr. 15,000

To Bank A/c 15,000
(Being payment made for cancellation of capital
commitments.)

(viii) Bank A/c Dr. 1,10,000

To Reconstruction A/c 1,10,000
(Being refund of fees by directors credited to reconstruction
A/c.)
(ix) Reconstruction A/c Dr. 10,000
To Bank A/c 10,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 80,000
To Reconstruction A/c 20,000
(Being payment of tax for 80% of liability in full settlement.)

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(xi) Reconstruction A/c Dr. 47,20,000

To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 15,00,000
To Discount on issue of Debentures A/c 1,00,000
To Land and Building A/c 2,00,000
To Plant and Machinery A/c 6,00,000
To Furniture & Fixture A/c 1,00,000
To Computers A/c 1,20,000
To Trade Investment A/c 1,00,000
To Stock A/c 3,00,000
To Debtors A/c 2,00,000
(Being writing off of losses and reduction in the value of
assets as per scheme of reconstruction.)

Cash Flow Statement

Solution 4:
Cash Flow Statement
Particulars Amount Amount
Cash Flow from Operating Activities
Net Profit before Taxation (given) 229,500
Adjustment for Depreciation (WN 2) 83,700
Debenture Interest (150,000x8%x6/12) 6,000
Provision for Doubtful Debts 9,900
Profit/gain on sale of plant (WN 1) (7,500) 92,100
Operating profit before working capital changes 321,600
Increase in Inventory (115,500)
Increase in Trade Receivables (150,000)
Increase in Trade Payables 35,400 (230,100)
Net cash flow from Operating Activities (A) 91,500
Cash Flow from Investing Activities
Purchase of Plant & Machinery (WN 3) (234,000)
Purchase of Trade Investments (141,000)
Sale of machinery 21,000
Net cash flow from Investing Activities (B) (354,000)
Cash Flow from Financing Activities
Proceeds from issue of 8% Debentures (net) 147,000
Interest paid on 8% Debentures (6,000)
Dividends paid in respect of earlier years (90,000)
Net Cash flow from Financing Activities (C) 51,000
Net Increase/(Decrease) in Cash and Cash Equivalents (A+B+C) (211,500)

Working Notes:
1. Profit on sale of Plant = WDV at disposal – sale value
= (54,000-40,500) – 21,000
= 7,500

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2. Depreciation for current year = 43,200 + 40,500 = 83,700

3. Cash flow towards assets purchase = Increase in Plant & machinery at cost + cost of plant sold
= 180,000 + 54,000 = 234,000

Insurance Claim
Solution 5:

Memorandum Trading Account

(01.04.2075 to 20.10.2075)
Particulars Rs. Particulars Rs.
To Opening stock 240,000 By Sales Rs. (620,000 – 80,000) 540,000
To Purchases Rs. (280,000 + 40,000) 320,000 By Closing stock – Bal. fig. 155,000
To Gross profit – 25% of sales 135,000
695,000 695,000

Stock destroyed by fire:

Rs.
Stock on the date of fire 155,000
Less: Stock salvaged 31,000
Stock destroyed by fire 124,000

Loss of Stock
Insurance Claim   Amount of Policy
Value of Stock on the date of fire
Rs. 124,000
  Rs. 100,000  Rs. 80,000
Rs. 155,000
Working note:
Stock on 1st Shrawan, 2075 was valued at 10% lower than cost.
Hence, original cost of the stock as on 1st Shrawan, 2075 would be:
Rs. 216,000
  100  Rs. 240,000
90

Solution 6:

a. Turnover in last financial year 450,000

Add: 25% increase 112,500
Total turnover 562,500

b. Net profit = 10% of 562,500 = 56,250

c. Total Standing Expenses = 90,000+31,250=121,250
d. Gross profit = Net profit + Standing Charges = 56,250+121,250=177,500
Hence, insurance policy amount should be Rs. 177,500.

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Contract Accounting:
Solution 7:

Particulars Rs. in crore

Cost of construction of bridge incurred upto 32.3.2075 4.00
Add: estimated future cost 6.00
Total estimated cost of construction 10.00
Contract price (12 crore x 1.05) 12.60 crore

State of completion
Percentage of completion till date to total estimated cost of construction
= (4/10) X 100 = 40%

Revenue and profit to be recognized for the year ended 32.3.2075

Proportion of total contract value recognized as revenue = contract price x % of completion
= Rs. 12.60 crore x 40% = 5.04 crore

Profit for the year ended 32.3.2075 = Rs. 5.04 crore less Rs. 4 crore = 1.04 crore.

Hire Purchase Transactions

Solution 8:

In the books of Sallaghari Corporation

Hire Purchase Trading Account
for the year ended 32nd Ashadh, 2075
Dr. Cr.

Amount Amount
Rs. Rs.
To Hire Purchase Stock 50,000 By Hire Purchase Sales 25,95,000
(20  Rs. 2,500) (W.N. 2)
To Goods sold on Hire 36,00,000 By Stock Reserve 10,000
Purchase (120Rs.30,000) (Rs. 50,000  20%)
To Bad Debts (W.N. 4) 8,000 By Goods sold on Hire Purchase 7,20,000
To Loss on Repossession 12,000 (Rs. 36,00,000  20%)
Less: Instalments not yet By Hire Purchase Stock 10,50,000
due 4,000 8,000 [(650+420+ 140)  Rs.
2,500]
To Stock Reserve 2,10,000
(Rs.10,50,000  20%)
To Profit and Loss Account 4,99,000
(Transfer of Profit) ________
43,75,000 43,75,000

Issue of Shares and Debentures

Solution 9:
Books of Pokhara Co. Ltd.
Journal Entries
Bank A/c Dr. 6,000,000
To Share Application A/c 6,000,000
(Being application amount received)

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Share Application A/c Dr. 6,000,000

To Share Capital A/c 4,000,000
To Bank A/c 1,200,000
To Share Allotment A/c 800,000
(Being application money transferred to share capital,
refunded and excess transferred to allotment )
Share Allotment A/c Dr. 10,000,000
To Share Capital A/c 6,000,000
To Share Premium A/c 4,000,000
(Being allotment amount due)
Bank A/c Dr. 9,016,000
Calls in Arrear A/c Dr. 184,000
To Share Allotment A/c 9,200,000
(Being allotment money received except from Mr. Subash)
Share First Call A/c Dr. 6,000,000
To Share Capital A/c 6,000,000
(Being first call amount due)
Bank A/c Dr. 5,700,000
Calls in Arrear A/c Dr. 300,000
To Share First Call A/c 6,000,000
(Being first call money received except from Mr. Subash
and Mr. Dhiraj)
Share Capital A/c Dr. 320,000
Share Premium a/c Dr. 80,000
To Calls in Arrear A/c 304,000
To Share Forfeiture A/c 96,000
(Being forfeiture of shares of Mr. Subash)
Share Final Call A/c Dr. 3,920,000
To Share Capital A/c 3,920,000
(Being final call amount due)
Bank A/c Dr. 3,800,000
Calls in Arrear A/c Dr. 120,000
To Share Final Call A/c 3,920,000
(Being final call money received except from Mr. Dhiraj)
Share Capital A/c Dr. 600,000
To Calls in Arrear A/c 300,000
To Share Forfeiture A/c 300,000
(Being forfeiture of shares of Mr. Dhiraj)
Bank A/c Dr. 720,000
Share Forfeiture A/c Dr. 80,000
To Share Capital A/c 800,000
(Being re-issue of shares @ 90 to Mr. Gopal as fully paid up)
Share Forfeiture A/c Dr. 268,000
To Capital Reserve A/c 268,000
(Being forfeiture amount transferred to capital Reserve
A/c)

Working Note:
1. No. of Shares applied by Mr. Subash = (240,000/200,000) x 4,000 = 4,800
2. Amount paid my Mr. Subash at the time of application = 4,800 x 20 = 96,000

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3. Forfeiture amount available for use = full of Mr. Dhiraj (300,000) + half of Mr. Subash (96,000/2) =
348,000
4. Amount Transferred to capital reserve = 348,000 – 80,000 = 266,000

Underwriting of Shares and Debentures

Solution 10:
(a) Statement showing the underwriters’ liability (No. of shares)
Particulars A & Co. B & Co. C & Co.
Gross Liability 120,000 120,000 120,000
Less: Firm underwriting 10,000 10,000 10,000
110,000 110,000 110,000
Less: Marked applications 72,500 84,000 131,000
37,500 26,000 (21,000)
Less: Unmarked applications distributed to A &
Co. and B & Co. in equal ratio (11,250) (11,250) Nil
26,250 14,750 (21,000)
Less: Surplus of C & Co. distributed to A & Co. and
B & Co. in equal ratio (10,500) (10,500) 21,000
Net liability (excluding firm underwriting) 15,750 4,250 Nil
Add: Firm underwriting 10,000 10,000 10,000
Total liability (No. of shares) 25,750 14,250 10,000

(b) Computation of amounts payable by underwriters

Liability towards shares to be subscribed @ 120 per 3,090,000 1,710,000 1,200,000
share
Less: Commission (5% on 1.2 lakhs shares @ 100 each)
600,000 600,000 600,000
Net amount to be paid by the underwriters 2,490,000 1,110,000 600,000

(c) In the Books of Nepal Capital Ltd.

Journal Entries
Particulars Dr. Cr.
Rs. Rs.
Underwriting commission A/c Dr. 1,800,000
To A & Co. A/c 600,000
To B & Co. A/c 600,000
To C & Co. A/c 600,000
(Being underwriting commission on the shares underwritten)
A & Co. A/c Dr. 3,090,000
B & Co. A/c Dr. 1,710,000
C & Co. A/c Dr. 1,200,000
To Equity share capital A/c 5,000,000
To Share premium A/c 1,000,000
(Being shares including firm underwritten shares allotted to
underwriters)

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Bank A/c Dr. 4,200,000

To A & Co. A/c 2,490,000
To B & Co. A/c 1,110,000
To C & Co. A/c 600,000
(Being the amount received towards shares allotted to
underwriters less underwriting commission due to them)

Incomplete Records
Solution 11:
Trading and Profit and Loss Account
for the year ended 32nd Ashadh, 2075
Rs. Rs.
To Opening Stock 6,10,000 By Sales
To Purchases (W.N. 3) 84,10,000 Cash 73,80,000
To Gross profit c/d 9,30,000 Credit (W.N. 2) 19,20,000 93,00,000
(10% of 93,00,000) By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses (W.N. 6) 5,80,700 By Gross profit b/d 9,30,000
To Discount allowed 36,000 By Discount received 28,000
To Depreciation 15,000
(15% Rs. 1,00,000)
To Net Profit 3,26,300
9,58,000 9,58,000

Balance Sheet as at 32nd Ashadh, 2075

Liabilities Amount Assets Amount
Rs. Rs.
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Depreciation 15,000 85,000
Less : Drawing 2,40,000 Stock 6,50,000
10,000 Trade Debtors 1,52,000
Add : Net profit 3,26,300 3,36,300 Bills receivable 75,000
Bills payable 1,40,000 Unexpired insurance 2,000
Trade creditors 6,10,000 Cash in hand & at bank 1,27,300
Outstanding expenses 5,000
10,91,300 10,91,300
Working Notes :
1. Bills Receivable Account
Rs. Rs.
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors 3,70,000 By Trade creditors 15,000
(Bills endorsed)
By Balance c/d 75,000
4,30,000 4,30,000

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2. Trade Debtors Account

Rs. Rs.
To Balance b/d 1,48,000 By Cash/Bank 15,10,000
To Credit sales 19,20,000 By Discount allowed 36,000
(Balancing figure) By Bills receivable 3,70,000
By Balance c/d 1,52,000
20,68,000 20,68,000

3. Memorandum Trading Account

Rs. Rs.
To Opening stock 6,10,000 By Sales 93,00,000
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000
99,50,000 99,50,000
4. Bills Payable Account
Rs. Rs.
To Cash/Bank 8,15,000 By Balance b/d 1,25,000
To Balance c/d 1,40,000 By Creditors (balancing figure) 8,30,000
9,55,000 9,55,000
5. Trade Creditors Account
Rs. Rs.
To Cash/Bank 75,07,000 By Balance b/d 5,80,000
To Discount received 28,000 By Purchases (as calculated 84,10,000
To Bills receivable 15,000 in W.N. 3)
To Bills payable 8,30,000
To Balance c/d (balancing figure) 6,10,000
89,90,000 89,90,000
6. Computation of sundry expenses to be charged to Profit & Loss A/c
Rs.
Sundry expenses paid (as per cash book) 6,20,700
Add : Prepaid expenses as on 31–3–2074 2,000
6,22,700
Less : Outstanding expenses as on 31–3–2074 45,000
5,77,700
Add : Outstanding expenses as on 32–3–2075 5,000
5,82,700
Less : Prepaid expenses as on 32–3–2075 (Insurance paid till Kartik, 2075) 2,000
5,80,700

Ratio Analysis
Solution 12:
A. Application of Ratios for computing missing figures

1. Sales Since GP Ratio and NP Ratio are 40% and 10% of Sales respectively, Other
Expenses debited to P&L Account= 40% - 10% = 30% of Sales.

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Since Other Expenses + Depreciation debited in P&L A/c = Rs. 25 Lakhs + Rs. 5
Lakhs = Rs. 30 Lakhs, Sales = 30÷ 30% = Rs. 100 Lakhs
2. Gross Profit = 40% of Sales = Rs. 40Lakhs
3. Net Profit = 10% of Sales = Rs. 10 Lakhs
4. Credit Sales Cash Sales to Credit Sales = 16:9.
Hence, Credit Sales = Total Sales × 9/25= 100x9/25 Rs. 36 Lakhs

5. Debtors = Credit Sales × 2 months / 12 months = Rs. 36×2/12= Rs. 6 Lakhs

6. Average Stock = COGS× 2 months ÷ 12 months = (Sales – GP) × 2/12= 60×2/12 = Rs. 10 Lakhs
7 Closing Stock Average Stock = (Opening Stock + Closing Stock) ÷ 2= 10 Lakhs.
Opening Stock = Closing Stock – 4 Lakhs.
On substituting,
(Closing Stock - 4 + Closing Stock) ÷ 2 = 10;
Hence, Closing Stock = Rs.12 Lakhs
Therefore Opening Stock = 12 – 4 = Rs. 8 Lakhs

8. Purchases COGS = Opening Stock + Purchase – Closing Stock .

Since COGS = Sales – GP = 100 – 40 = 60, Opening and Closing Stock are known, on
Substitution, Purchase will be the bal. figure = Rs. 64 Lakhs
9. Creditors = Credit Purchase ×1.5 months ÷12 months
= 64 × 1.5 / 12 = Rs. 8 Lakhs
10. Current Assets Current Ratio = 2.5; Current Assets(CA) ÷Current Liabilities( CL) = 2.5;
Hence, CA= 2.5 CL. Since CL= Creditors = Rs.8 Lakhs,
On substitution, CA = 2.5×8 Lakhs = Rs. 20 Lakhs

11. Fixed Assets = Depreciation ÷ Deprn. Rate = Rs.5 Lakhs ÷20%=Rs.25Lakhs

12. Net Block = Gross Block – Depreciation = Rs. 25 Lakhs – Rs. 5 Lakhs = Rs. 20 Lakhs
13. Cap. Employed = Fixed Assets + Net Working Capital =20+ (20-8) =Rs.32 Lakhs
14. Debentures Capital Employed= Debt. +Equity= Debentures+(Capital + R & S)= Rs. 32 Lakhs,
of which P&L = Rs. 10 Lakhs.
Hence, Debentures + Share Capital = Rs. 22 Lakhs.
Since Debentures to Share Capital = 10%, Debentures
= Rs. 22× 10/ 110 = Rs. 2 Lakhs

1. Trading and Profit and Loss Account for the year ended 32nd Ashadh
Particulars Rs. Lakhs Particulars Rs. Lakhs
To Opening Stock 8 By Sales 100
To Purchases 64 By Closing Stock 12
To Gross Profit c/d 40
Total 112 Total 112

2. Balance Sheet as on 32nd Ashadh

Liabilities Rs. Lakhs Assets Rs. Lakhs
Equity Share Capital 20 Fixed Assets 20
Profit and Loss Account 10 Current Assets
Debentures 2 Debtors 6
Creditors 8 Stock 12
Cash – bal. figure 2

Total 40 Total 40

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Profit or Loss Pre and Post Incorporation

Solution 13:

Statement showing calculation of profits for pre and post incorporation periods
For the year ended 31.3.2072 (15 months)
Particulars Total Ratio Pre Post
Gross Profit 14,040,000 1:8 1,560,000 12,480,000
Less: Salaries 2,340,000 1:12 180,000 2,160,000
Depreciation 360,000 1:4 72,000 288,000
Advertisement 1,404,000 1:8 156,000 1,248,000
Discount 2,340,000 1:8 260,000 2,080,000
Managing Director’s Salary 180,000 Post - 180,000
Office/showroom rent 1,440,000 Actual 180,000 1,260,000
Miscellaneous office expenses 240,000 1:4 48,000 192,000
Interest paid 1,902,000 Actual 702,000 1,200,000
Goodwill (loss) 38,000 -
Net Profit - 3,872,000

Working note:
Particulars Pre Post
1. calculation of time ratio = 1:4 1st Baisakh to 31.3.2071 1.4.2071 to 31.3.2072
3 months 12 months
2. Calculation of sales ratio = 1:8 3x1 = 3 12 x 2 = 24
3. Calculation of staff salary ratio = 3x1 = 3 12 x 3 = 36
1:12
4. calculation of interest 234,00,000 x 12% for 3 100,00,000 x 12% for 1 year
months Rs. 1200,000
Rs. 702,000
5. Calculation of Rent
(i) additional rent 60,000x9 = 540,000
(ii) regular rent = (1440,000-540000) 900,0000X3/15 = 180,000 900,0000X12/15 = 720,000
= 900,000
Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000

Liquidator’s Final Statement

Solution 14:
Liquidator’s Final Statement
Receipts Rs. Rs. Payments Rs. Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised:
Sundry Debtors 160,000 Liquidator’s remuneration (W.N. 1) 30,400
Stock 120,000 Debenture holders:
Plant & Machinery 360,000 640,000 10% debentures 200,000
Surplus from Land & Interest accrued (W.N.2) 15,000 215,000
Buildings: Preferential creditors 30.000
Amount realised 340,000 Unsecured creditors 370,000
Less: Secured Preference shareholders:

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Creditors 100,000 240,000 10% Preference Share

Capital 200,000
Arrear dividend 40,000 240,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
940,000 940,000
Working Notes:
(1) Liquidator’s remuneration Rs.
3% on Assets realised (3% of Rs. 980,000) 29,400
2% of the amounts distributed among Equity Shareholders
(2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.2073 10,000
Interest accrued upto the date of payment
(upto 31st Ashwin, 2073) 5,000
15,000
(3) Amount payable to Equity Shareholders
Equity Share Capital 510,000
Less: Surplus available for Equity Shareholders 50,000
Loss to be borne by them 460,000
Loss per Equity share (Rs. 460,000/8,000) 57.50
Amount payable to Equity shareholders:
Each Equity share of Rs. 75 paid up 17.50
Each Equity share of Rs. 60 paid up 2.50

Accounting for Partnership

Solution 15:
Realization Account
Particulars Rs. Rs. Particulars Rs.
To Sundry assets at book value 790,000 By Creditors 70,000
To Anil's capital – creditors 70,000 By Cash – surrender of policy 84,000
To Partner's capital – profit: By Anil's capital – motor car 14,000
Anil (1/2) 29,100 By Anil's capital – debtors* 110,200
Sunil (3/10) 17,460 By SR Ltd – consideration 640,000
Rahim (1/5) 11,640 58,200
918,200 918,200
* Rs. 116,000 less 5%.

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CAP II Advance Accounting- June 2019

Anil's Capital & Current Account

Particulars Rs. Particulars Rs.
To Realisation A/c – motor cars 14,000 By Balance b/d 290,000
To Realisation A/c – debtors 110,200 By Realisation A/c – creditors 70,000
To Shares in SR Ltd. 220,000 By Realisation A/c – profit 29,100
To Cash 44,900
389,100 389,100

Sunil's Capital & Current Account

Particulars Rs. Particulars Rs.
To Shares in SR Ltd. 132,000 By Balance b/d 174,000
To Cash 59,460 By Realisation A/c – profit 17,460
191,460 191,460

Rahim's Capital & Current Account

Particulars Rs. Particulars Rs.
To Shares in SR Ltd. 88,000 By Balance b/d 136,000
To Cash 59,640 By Realisation A/c – profit 11,640
147,640 147,640

SR Ltd.
Balance Sheet as on 1st Shrawan, 2074
Liabilities Rs. Assets Rs. Rs.
Share capital: Fixed assets:
Authorised: Goodwill 146,000
10,000 12% pref. shares of Rs. 20 each 200,000 Premises 40,000
25,000 ordinary shares of Rs. 20 each 500,000 Machinery 140,000
700,000
Issued and paid up: Motor cars 40,000
8,000 12% pref. shares of Rs. 20 each 160,000 Furniture 25,000 391,000
22,000 ordinary shares of Rs. 20 each 440,000 Current assets:
Stock 150,000
Bank balance 48,000 198,000
Preliminary expenses 11,000
600,000 600,000
Working notes:
(i) Purchase consideration:
Rs.
Cash 80,000
Ordinary shares (Rs. 520,000 – Rs. 80,000) 440,000

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CAP II Advance Accounting- June 2019

Preference shares – discharge of Anil's loan 120,000

Total 640,000
(ii) Computation of goodwill:
Rs. Rs.
Purchase consideration 640,000
Less: Assets taken over:
Machinery 140,000
Motor cars 40,000
Furniture 20,000
Stock 150,000
Bank balance 144,000 494,000
Goodwill 146,000

(iii) Bank balance:

Rs. Rs.
Bank balance taken over 144,000
Less: Purchase consideration discharged 80,000
Purchase of furniture from Anil 5,000
Formation expenses 11,000 96,000
Balance 48,000
(iv) Preference shares issued:
Rs.
For discharging Anil's loan (Rs. 20 × 6,000) 120,000
For purchasing premises owned by Anil (Rs. 20 × 2,000) 40,000
Total 160,000
(v) Furniture:
Rs.
Taken over from partnership 20,000
Separately purchased Anil's personal furniture 5,000
Total 25,000

Accounting for Non-profit making organization

Solution 16:

Kathmandu Books Circle Society

Income and expenditure account for the year ended Ashadh 31, 2074
Dr. Cr.
Expenditure Amount Incomes Amount
To, Electric charges 7,200 By, Entrance fees 7,500
To, Postage & stationary 5,000 25% of 30000
To, Telephone charges 5,000
To, Rent 88,000 By Membership subscription 200,000
Add: Outstanding 4,000 92,000 Less: Received in Advance (10,000) 190,000
To, Salaries 66,000
Add: Outstanding 3,000 69,000 By, Sale proceeds of paper 1,500
By, Hire of lecture hall 20,000
To, Amortization & By, Interest on securities
8,000
Depreciation (WN-1) (WN-2)
Electrical fittings 15,000 Add: Receivable 500 8,500

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CAP II Advance Accounting- June 2019

Furniture 5,000
By, Deficit -excess of
Books 46,000 66,000 16,700
expenditure over Income
244,200 244,200

Kathmandu Books Circle Society

Balance sheet as on Ashadh 31, 2074
Liabilities Amount Assets Amount

Capital fund 793,000 Electrical fittings 150,000

Add: Entrance fees
22,500 Less: Depreciation (15,000) 135,000
capitalization
Less: Excess of expenses
(16,700) 798,800 Furniture 50,000
over income
Less: Depreciation (5,000) 45,000
Outstanding Expense Digital Books 460,000
Rent 4,000 Less: Amortization (46,000) 414,000
Salaries 3,000 7,000
Investment in Securities 190,000
Membership subscription in advance 10,000 Accrued interest 500 190,500

Cash at bank 20,000

- Cash in hand 11,300
815,800 815,800

Working Notes
1 Depreciation & Amortization 2 Interest on securities
Electrical fittings @10% 15,000 Interest @5% p.a. on 150,000 full year 7,500
Furniture @10% 5,000 Interest @5% p.a. on 40,000 half year 1,000
Digital Books @10% 46,000 Total 8,500
Total 66,000 Less: Received (8,000)
Receivable 500

Accounting for Banks

Solution 17:
As per the provision of the NRB Directives, a bank can provide credit up to 25% of its core capital to a single
party. This limit is called the single obligor limit (SOL). While calculating the SOL, core capital of previous
quarter shall be taken as base. In case any excess credit than SOL, additional 100% provision shall be made
for such excess credit amount.
Before calculating the provision amount, SOL of the bank shall be tested upon.

Computation of SOL and credit amount in excess of SOL

Particulars Amount
Core Capital
Paid up Equity Share Capital 171,010
General reserve 155,432
Retained earnings 87,886
Un-audited current year cumulative profit 31,991
Less: Deferred Revenue expenses (2,884)
Total Core capital 443,435

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CAP II Advance Accounting- June 2019

Single obligor limit ( 25% of the core capital) 110,859

Loan to single party 125,000
Loan in excess of SOL 14,141
Computation of loan loss provision amount as per NRB Directive

Computation of Loan Loss Provision amount

Categories Loan Amt Provision Provision
Rate Amount
Not due or <=3 months Pass 1,673,000 1% 16,730
>1 months <= 3 months Watch list 100,000 5% 5,000
>3 months <= 6 months Sub-standard 13,612 25% 3,403
>6 months <= 12 months Doubtful 782 50% 391
>12 months Loss 2,198 100% 2,198
Total 1,689,592 27,722
Additional provision for loan in excess of SOL 14,141
Total Provision amount 41,863

Mechi Bank Ltd

Movement in Provision Amount
For Third Quarter of Fiscal Year 2074/75
Amount in NPR
Particulars Amount
Opening Provision amount 16,983
Closing Provision amount 41,863
Movement in provision amount (addition during the quarter) 24,880

Accounting for Departments

Solution 18:

Departmental Profit & Loss (Adjustment) Account

Particulars A Rs. B Rs. C Rs. Particulars A Rs. B Rs. C Rs.
To Services from A 9,240 4,950 By Services from A to B 9,240
To Supplies from B 35,760 6,480 By Services from A to C 4,950
To Supplies from C 400 5,600 By Services from B to A 35,760
To Charge in respect of
staff 4,400 1,100 By Services from B to C 6,480
To Increase in Dept.
Profit 30,700 By Services from C to A 400
(or Decrease in Dept.
Loss) By Services from C to B 5,600
By Recovery in respect of
Staff 1,100 4,400
By Decrease in Dept.

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Profit
(or Increase in Dept.
Loss) 25,270 5,430
40,560 46,640 11,430 40,560 46,640 11,430
Notes:
10% has been added to cost of A dept. services to find out transfer price for B and C. 20% has been added to
costs of supplies of B dept. to find out transfer price for A and C dept.

Working Note:
Statement showing transfer price
From Dept. To Dept. Cost/ Value (Rs.) Transfer Price (Rs.)
A B 8,400 9,260
A C 4,500 4,950
B A 29,800 35,760
B C 5,400 6,480
C A 400 400
C B 5,600 5,600

Nepal Accounting Standards (NAS)

Solution 19:

(a) As per NAS-2 Inventories, inventory should be valued at the lower of cost and net realizable
value. Inventories should be written down to net realizable value on an item-by-item basis in
the given case:
Items Historical Cost Net Realizable Value Valuation of Closing Stock
(Rs. in Lakhs) (Rs. in Lakhs) (Rs. in Lakhs)
A 40.00 28.00 28.00
B 32.00 32.00 32.00
C 16.00 24.00 16.00
88.00 84.00 76.00
Hence, closing stock will be valued at Rs. 76 lakhs

(b). An asset is recognized in the balance sheet when it is probable that the future economic benefits
will flow to the enterprise and the asset has a cost or value that can be measured reliably.
An asset is not recognized in the balance sheet when expenditure has been incurred for which it is
considered improbable that economic benefits will flow to the enterprise beyond the current
accounting period. Instead such a transaction results in the recognition of an expense in the
income statement. This treatment does not imply either that the intention of management in
incurring expenditure was other than to generate future economic benefits for the enterprise or
that management was misguided. The only implication is that the degree of certainty that
economic benefits will flow to the enterprise beyond the current accounting period is insufficient
to warrant the recognition of an asset.

c). As per NAS-12, Revenue from Sale of goods shall be recognized when all the following conditions
have been satisfied:
i. The entity has transferred to the buyer the significant risks and rewards of ownership of
goods;

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CAP II Advance Accounting- June 2019

ii. The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
iii. The amount of revenue can be measured reliably;
iv. It is probable that the economic benefits associated with the transaction will flow to the
entity; and
v. The cost incurred or to be incurred in respect of the transaction can be measured reliably.

d). As per NAS-16 ‘ Property, Plant & Equipment’, the depreciation method applied to an asset shall
be reviewed at least at each financial year end and, if there has been a significant change in the
expected pattern of consumption of the future economic benefits embodied in the asset, the
method shall be changed to reflect the changed pattern. Such a change shall be accounted for as
a change in an accounting estimate in accordance with NAS 08.

As per NAS ‘Accounting Policies, Changes in Accounting Estimates & Errors’, changes in
accounting estimates shall be adjusted prospectively that means the effect of a change in an
accounting estimate shall be included in the determination of net profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.

In the given case, the company can change the method of depreciation from year 2074-75 if the
conditions set aside in above paragraph have been fulfilled.
Depreciation for year 2074-75 and net book value of Machine as on 32.3.75 after Rs.
effect of the change
Book value of Machinery as on 01.04.2074 2,05,000
Current year depreciation as per new method (WDV) (205,000 X 20%) 41,000
Net Book value as on 32.03.2075 (205,000–41,000) 1,64,000

Working Note:
Book Value of Machinery and Depreciation under SLM as on 01-04-2074
Rs.
Cost of Machine purchased on 01.04.2072 3,25,000
Less: Residual Value 25,000
Depreciable amount 3,00,000
Useful life of Machine 5Years
Depreciation for 2 Years (Rs.3,00,000x2/5) 1,20,000
Book value as on01.04.2074 2,05,000

e). ‘Other Comprehensive Income’s per NAS

Other comprehensive income comprises items of income and expenses (including reclassification
adjustments) that are not recognized in profit and loss as required or permitted by other NFRSs.
The components of other comprehensive income include;
1. changes in revaluation surplus
2. re-measurements of defined benefit plans
3. gains and losses arising from translating the financial statements of a foreign operation

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CAP II Advance Accounting- June 2019

4. gains and losses from investments in equity instruments measured at fair value through other
comprehensive income in accordance NFRS related with financial instruments
5. the effective portion of gains and losses on hedging instruments in a cash flow hedge
6. for particular liabilities designed as at fair value through profit or loss, the amount of the
change in the fair value that is attributable to changes in the liability’s credit risk.

Solution 20:

(a). Leases
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the property.
A rental agreement is a lease in which the asset is tangible property. Leases for intangible
property can include use of a computer program (similar to a license, but with different
provisions), or use of a radio frequency (such as a contract with a cell-phone provider). It is a
written agreement under which a property owner allows a tenant to use the property for a
specified period of time and rent. The lease will either provide specific provisions regarding the
responsibilities and rights of the lessee and lessor, or there will be automatic provisions as a result
of local law. In general, by paying the negotiated fee to the lessor, the lessee (also called a tenant)
has possession and use (the rental) of the leased property to the exclusion of the lessor and all
others except with the invitation of the tenant.

(b). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one insurance
company cannot afford to cover, e.g., aviation insurance. Generally, in such cases, an insurance
company insures the whole risk itself and lays off the amount it has accepted to other insurance of
reinsurance companies, retaining only that much risk which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a 'ceding company' and
a 're-insurer' whereby the former agrees to 'cede' and the later agrees to accept a certain specified
share of risk or liability upon terms as set out in the agreement.

(c). Contingent Assets

An entity shall not recognize a contingent asset.
1. Contingent assets usually arise from unplanned or other unexpected events that give
rise to the possibility of an inflow of economic benefits to the entity. An example is a
claim that an entity is pursuing through legal processes, where the outcome is uncertain.
2. Contingent assets are not recognized in financial statements since this may result in the
recognition of income that may never be realized. However, when the realization of
income is virtually certain, then the related asset is not a contingent asset and its
recognition is appropriate.
3. A contingent asset is disclosed, as required by paragraph 89, where an inflow of
economic benefits is probable.
4. Contingent assets are assessed continually to ensure that developments are appropriately
reflected in the financial statements. If it has become virtually certain that an inflow of
economic benefits will arise, the asset and the related income are recognized in the
financial statements of the period in which the change occurs. If an inflow of economic
benefits has become probable, an entity discloses the contingent asset.

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(d). Non Banking Assets (NBA)

Bank can sale the property which has taken as collateral security, against loan and advances given
to the borrower in case of default, to recover outstanding principal and interest amount. If such
properties couldn’t be sold through auction then the bank can assume the properties in its own
name. Such assumed property is called ‘Non Banking Asset (NBA)’. Recognition of the NBA should
be done at lower of total outstanding amount (principal plus accrued interest thereon as on the
date of assume) and prevailing market value of the properties. The difference between the two
should be recorded as an expense in the year of assume. As per the requirement of the Unified
Directives of Nepal Rastra Bank (NRB), 100% provision should be provided to total value of NBA
from the year of assume. It means institution shouldn’t hold NBA.

(e) Accounting Estimates

As a result of the uncertainties in business activities, many financial statement items cannot be
measured with precision but can only be estimates. These are called accounting estimates.
Therefore, the management makes various estimates and assumptions of assets, liabilities,
incomes and expenses as on the date of preparation of financial statements. This process of
estimation involves judgments based on the latest information available.

Examples of estimation in some fields are:

i) Estimation of useful life of depreciable assets.

ii) Estimation of provision to be made for bad and doubtful debts.

(f). Components of financial statements

Following are components of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;

(g). Watch list in Loan loss provisioning

Nepal Rastra Bank (NRB) has formulated a new category of loan for provisioning purposes. As per
the NRB’s Rule, all loans are required to be classified into 5 different categories including Watch
List whereby 5% of the total loan is required to be kept as provisioning though the provision can
be reversed when the loan becomes performing later. Provision made for watch list loans is a
general loan loss provision. As per the circular issued by NRB, the loans having the following
characteristics are to be classified as Watch List loans:
1. If interest and principal repayments are overdue for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on
temporary basis.
3. Loan and advances to customers/ group of customers who have been categorized as non
performing by other banks and financial institutions.

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CAP II Advance Accounting- June 2019

4. Firms/Companies/Organizations having negative net worth or net loss though interest and
principal are served on regular basis.
5. Loan and advances having multiple banking exposure more than Rs. 1 billion and have not
entered into consortium agreement.
6. Specifically specified by NRB after due inspection.

(h). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts
under which revenue and expenditure are accounted for. It follows double entry system;
however, do not follow the mercantile system of accounting. Government accounting system
broadly classifies expenditure into administrative and development expenses. Accounting system
followed by the government differentiates Capital expenditures and revenue expenditure in its
subsidiary records. Office of the Financial Comptroller General specifies the chart of accounts
under which all the government revenue and expenditure are to be accounted for.

(i). Outsourcing the Accounting function to third party

Recently a growing trend has developed for outsourcing the accounting function to a third party.
The consideration for doing this is to save cost and to utilize the expertise of the outsourced
party. The third party maintains the accounting software and the client data, does the processing
and hands over the report from time to time.
Benefits of outsourcing the accounting function to third party:
1. The organization that outsources its accounting function is able to save time to concentrate
on the core areas of business activity.
2. The organization is able to utilize the expertise of the third party in undertaking the
accounting work.
3. Storage and maintenance of the data is in the hand of professional people.
4. The organization is not bothered about people leaving the organization in key accounting
positions. The proposition is proving to be economically and more sensible as they do not
have train the people again. Hence the training cost is saved.

(j) Compilation of accounting information for agricultural farm

Agricultural activities are carried on mostly in an unorganized manner. Generally, the farmer does
not have office and also does not find time for day to day record keeping. The transactions and
events of such agricultural activities are also not supported by vouchers or other documents in
most of the cases. Therefore, it is essential to maintain a Diary to record happenings of the day.
This Diary becomes the source document for record keeping. The following registers are required
for compilation of the accounting information of agricultural activities:
i. Cash Book: to record cash transactions.
ii. Fixed Assets Register: to record details of fixed assets such as description of assets, cost
of purchases/construction/generation, disposal, depreciation and balance.
iii. Loan Register: to record borrowings from bank, cooperatives and other agencies trade
creditors along with interest paid or payable.
iv. Stock Register: to record details of input, output and by-product – receipts, utilization,
wastage and balance.
v. Debtors and Creditors Register: to record credit transactions classified by parties involved.

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CAP II Advance Accounting- June 2019

vi. Register for National Transactions: to record transactions between farm and farm
household.
vii. Cost Analysis Register: to record crop-wise input and output inclusive of apportionment of
common costs and finding out crop profit.

The Institute of Chartered Accountants of Nepal 38

 Paper 2:

Audit And Assurance

CAP II Audit and Assurance- June 2019

REVISION QUESTION
Question No 1:
Explain the process of filing complaints against member and members holding certificate of
practice.

Question No 2:
As an auditor, comment on the following situations/statements:
You are a partner in Ashok Kumar & Associates, Chartered Accountants. You are approached by Mr
Yogendra, the managing director of Nepal Brewery Ltd, who asks your firm to become auditors of his
company. In return for giving you this appointment Mr Yogeendra says that he will expect your firm
to waive 50 per cent of your normal fee for the first year's audit. The existing auditors, Mukul
Pandey & Associates, have not resigned but Mr Yogendra informs you that they will not be re-
appointed in the future.
What action should Ashok Kumar & Associates take in response to the request from Mr
Yogedra to reduce their first year's fee by 50 per cent?
Is Mukul Pandey & Associates within their rights in not resigning when they know Mr
Yogendra wishes to replace them? Give reasons for your answer.

Question No 3
BKS & Associates, a chartered accountant firm is yet to receive their professional fee from Ms Nepal
Liquor Ltd. In spite of the overdue of the fees for past 3 years, it has yet again appointed the same
firm to conduct the annual audit of the organization. In the light of the code of conduct or the
pronouncement from the ICAN, is it appropriate for the firm to continue the engagement. Explain.

Question No 4:
Mr. Nabin, the partner of the firm Prabin & Associates, says that since he has formally e-mailed the
audit opinion along with the financial statements to the company as accepted therefore he does not
require signing the audit report. Comment.

Question No 5:
Pink Pvt. Ltd., manufacturing noodles, has valued at the year end its closing stock of packed finished
goods for which firm sales contracts have been received, at realizable value inclusive of profit and
cash incentive. As at the year end, the ownership of the goods has not been transferred to the
buyers.

Question No 6:
Distinguish between Audit Reports and Certificates:

Question No 7:
The internal auditor of the company has been asked by the managing director of the company to
ensure that no qualifications are made by the statutory auditor in his report. What are the points
that need to be examined and reported to the managing director by the chief of internal audit in
respect of the following items:
I. Fixed assets:
II. Inventory; and
III. Loans granted or taken

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