CHARTERED ACCOUNTANCY PROFESSIONAL II

(CAP-II)

Revision Test Paper

June 2020

Education Department
The Institute of Chartered Accountants of Nepal

The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
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Paper 1 : Advanced Accounting

Paper 1: Advanced Accounting

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Revision Questions:
Nepal Financial Reporting Standards (NFRS)
Question No 1.
On 1 Shrawan 2075, SK Co. Ltd. began to construct a supermarket which had an estimated
useful life of 40 Years. It purchased a leasehold interest in the site for Rs 25 million. The
construction of the building cost Rs 9 million and the fixtures and fittings cost Rs 6 million.
The construction of the supermarket was completed on 31 Asadh 2076 and it was brought
into use on 1 Shrawan 2076.
SK Co. Ltd. borrowed Rs 40 million on 1 Shrawan 2075 in order to finance this project. The
loan Carried interest @ 10% p.a. It was repaid on 30 Aswin 2076
Required: Calculate the total amount to be included at cost in property, plant and equipment
in respect of the development at 31 Asadh 2076..
Question No.2
Value the following items of inventory
a) Materials costing Rs12000 bought for processing and assembly for a profitable special
order. Since buying these items, the cost price has fallen to Rs10,000.
b) Equipment constructed for a customer for an agreed price of Rs18,000. This has
recently been completed at a cost of Rs16,800. It has now been discovered that, in order
to meet certain regulations, conversion with an extra cost of Rs 4,200 will be required.
The customer has accepted partial responsibility and agreed to meet half the extra cost.

Question No. 3
V. Ltd sold 1 lakh vacuum pumps during the year 2075-76 with a condition to make good by
repair/replacement any manufacturing defects reported within 6 months from the date of sale.
Past experience in this regard showed that there were no replacements carried out, but
minor/major repairs were necessitated to the extent of 10%/5% respectively of the units sold.
The cost of such minor/major would amount to Rs 1,000/Rs 6,000 respectively. While
finalizing the accounts for the year, the company does not reflect provision in this regard.
Comment as per Nepal Accounting Standard.

Question No 4
Mini Ltd took a factory premises on lease on 1.4.2073 for Rs 200,000 per month. The lease is
operating lease. During Asadh,2074, Mini Ltd relocates its operation to a new factory building.
The lease on the old factory premises continues to be live up to 30.12. 2076.The lease cannot
be cancelled and cannot be sub-let to another user. The management insists that lease rent of
balance 33months up to 30.12.2076 should be provided in the accounts for the year ending
31.3. 2074.Mini Ltd seeks your advice.

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Question No 5
At the end of the financial year ending on 31st Asasdh,2075, a company finds that there are
twenty law suits outstanding which have not been settled till the date of approval of accounts
by the Board of Directors. The possible outcome as estimated by the board is as follows:
Probability
Loss(Rs)
In respect of five cases(win) 100% -
Next ten Cases(Win) 60% -
Lose (low Damages) 30% 120,000
Lose (High Damages) 10% 200,000
Remaining five cases
Win 50% -
Lose (low Damages) 30% 100,000
Lose (High Damages) 20% 210,000
Outcome of each case is to be taken as a separate entity ascertain in the amount of contingent
loss and the accounting treatment in respect thereof

Question No 6
During 2071 a company discovered that certain items had been included in inventory at 31
Asadh 2070 at a value of Rs 2.5 million but they had in fact been sold before the year end.
The original figures reported for the year ending 31 Asadh 2070 and the figures for the current
year 2071 are given below:

2071 2070
Particulars Rs in Thousands Rs in Thousands
Sales 52,100 48,300
Cost of Sales (33,500) (30,200)
Gross Profit 18,600 18,100
Tax (4,600) (4,300)
Net Profit 14,000 13,800
The cost of goods sold in 2071 includes the Rs 2.5 million error in opening inventory. The
retained earnings at 1 Shrawan 2070 were Rs 11.2million.(Assume that the adjustment will
have no effect on the tax charges)
Show the 2071 statement of profit or loss with comparative figures and the retained earnings
for each year. Disclosure of other comprehensive income is not required.

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Hire Purchase Accounting

Question No 7
A Ltd purchases a plant on hire purchase basis for Rs 100,000 and makes the payment in the
following order:
Down payment Rs 20,000
1st installment after one year 40,000
2nd installment after two year Rs 20,000
and the last installment after 3 years
The cash price of the plant is Rs 86,000
You are required to calculate (i) the total interest (ii) the interest included in each installment.
Question No 8
Arghakhachi Traders sells goods on hire purchase basis on the following terms:
Cost Rs 2,000 Selling Price Rs 3,000 Deposit Payable 20% Monthly Installment Payable 12
Monthly installment are payable on the last date of the month in which the sales takes place.
Other details are:
2071 2072
Sales 300Nos 600Nos
Installment Received Rs.375,000 Rs.10,70,000
Sales take place evenly throughout the year. In 2072, 40 items sold in 2068 on which a total
of 300 installments had been received were repossessed.
Required: Show ledger accounts for both the years in the books of Arghakhachi Traders.
Accounting for Amalgamation, Absorption and Corporate Restructuring
Question No 9
Small Limited and Little Limited, two Companies in the field of specialty chemicals, decided
to go in for a follow on public offer after completion of an amalgamation of their businesses.
As per agreed terms initially a new company Big Ltd will be incorporated on 1st Shrawan, 2075
with an authorized capital of Rs 2 crore comprised of 20lakh equity shares of Rs 10 each. The
holding company would acquire the entire shareholding of Small ltd & Little Ltd and in turn
would issue its share to the outside holders of these shares. It is also agreed that the
consideration would be a multiple of the average P/E ratio for the period 1st Shrawan,2014 to
31st Aswin,2074 times the rectified profits of each company, subject to necessary adjustments
for complying with the terms of the share issue.
The following information is supplied to you:

Particulars Small Ltd. Little Ltd.

Ordinary Shares of Rs. 10each(Nos.) 40lakhs 20Lakhs
10% Preference Shares of Rs 100
each(Nos.) 2 Lakh Nil

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10% Preference Shares of Rs 10

each(Nos.) Nil 2 Lakhs
5% debentures of Rs 10 each (Nos.) 4Lakhs 4Lakhs
Investments Held
(a) 4 Lakh ordinary shares in small ltd - Rs 40 Lakhs
(b) 2 Lakh ordinary shares in little ltd Rs 20 Lakhs -
Profit before interest and tax(PBIT)
after
considering impact of Inter-Company
Transactions and Holdings. Rs 50 Lakhs Rs 25 Lakhs
Average P/E ratio Shrawan 2074-
Aswin 2074 10 8

The following additional information is also furnished to you in respect of adjustments required
to the profit figure as given above:
1. The profits of the respective companies would be adjusted for the half the value of
contingent liabilities as on 31st Asadh 2074.
2. Trade receivables of small Ltd include an irrecoverable amount of Rs 2 lakh against
which Rs 1 lakh was recovered but kept in advance account.
3. Little Ltd had omitted to provide for increased FOREX liability of US$ 10,000 on loan
availed in financial year 2073-74 for purchase of Machinery. The Machinery was
acquired on 1st Baisakh,2074 and put to use in financial year 2074-75. The additional
liability arose due to change in exchange rates and is arrived at in conformity with
prevailing provisions of NAS 21. The exchange rate is US $ 1=NRS 50.
4. Small Ltd. has omitted to invoice a sale that took place on 31st Asadh ,2074 of goods
costing Rs 250,000 at a markup of 15 percent instead the goods were considered as
part of closing inventory.
5. Closing Inventory of Rs 45 lakhs of Little Ltd. as on 31st Asadh ,2074 stands
undervalued by 10 percent.
6. Contingent liabilities of Small Ltd and Little Ltd.as on 31st Asadh,2074 stands at Rs 5
lakhs and Rs10 lakhs respectively.
The terms of the share issue are as under:
I. Shares in Big Ltd will be issued at a premium of Rs 13 per share for all external
shareholders of Small Ltd. The premium will be Rs 15 per share for shares in Big Ltd.
issued to all external shareholders of little ltd.
II. No shares in Big Ltd. will be issued in lieu of the investments (intercompany holdings)
of both companies. Instead the shares so held shall be transferred to Big Ltd at the close
of the financial year ended 31st Asadh,2075 at par value consideration payable on date
of transfer.
III. Big Ltd would in addition to the issue of shares to outside shareholders of Small Ltd
and Little Ltd make a preferential allotment on 31st Asadh,2075 of 2 lakhs ordinary
shares at a premium of Rs 28 per share to Virgin Capital Ltd (VCL). These shares will
not be eligible for any dividends declared or paid till that date.

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IV. Big Ltd will go in for a 18 percent unsecured Bank overdraft facility to meet
incorporation costs of Rs 16 lakhs and towards management expenses till 31st Asadh ,
2075 estimated at Rs 14 lakhs. The overdraft is expected to be availed on 1st Jestha
,2075 and closed on 31st Asadh,2075 out of the proceeds of the preferential allotment.
V. It is agreed that interim dividends will be paid on 31.03.2075 for the period
Baisakh,2015 to Asadh,2015 by Big Ltd.at 2 percent; Small Ltd at 3 percent and Little
Ltd at 2.5 percent. Ignore dividend distribution Tax.
VI. The prevailing income tax is 25 percent.
You are required to compute the number of shares to be issued to the shareholders of each of
the companies and prepare the projected Profit and Loss account for the period from 1st
Baisakh,2075 to 31.03.2075 of Big Ltd and its Balance Sheet as on 31st Asadh 2075.

Question No 10
AB Ltd and MB Ltd. decide to amalgamate and to form a new company AM Ltd. The following
are their summarized balance sheets as at 31.3.2075:

Liabilities AB Ltd MB Ltd Assets AB Ltd MB Ltd

Share Capital( Rs 100
Each) 1,000,000 600,000 Fixed assets 750,000 200,000

General Reserve 100,000 50,000 Investments:

1500 shares in MB 350,000 -

Investment Allowance
Reserve 40,000 30,000 4000 Shares in AB - 500,000
12%
Debentures(Rs.100each) 300,000 100,000

Trade Payables 60,000 20,000 Current assets 400,000 100,000

1,500,000 800,000 1,500,000 800,000

Calculate the amount of purchase consideration for AB Ltd and MB Ltd and draw up the
balance sheet of Am Ltd after considering the following:
a. Assume amalgamation is in the nature of the purchase.
b. Fixed assets of AB Ltd are to be reduced by Rs 50000 and that of MB Ltd are to be
taken at Rs 300,000.
c. 12% debenture holders of AB Ltd and MB Ltd are discharged by AM Ltd By issuing
such number of its 15% debentures of Rs 100 each so as to maintain the same amount
of interest.
d. Shares of AM Ltd are of Rs 100 each.

Also show, how the investment allowance reserve will be treated in the financial statement
assuming the reserve will be maintained for 3 years.

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Question No 11
The following are the summarized balance sheet of X. Ltd and Y. Ltd as on 31st Asadh, 2075
X. Ltd Rs. Y. Ltd Rs.
Assets

Fixed assets 700,000 250,000

Inventory 240,000 320,000

Trade Receivables 420,000 210,000

Cash At Bank 110,000 40,000

Investments in:

6000 shares of Y .Ltd 80,000

5000 shares of X. Ltd. 80,000

1,550,000 900,000
Liabilities
Share Capital:

Equity Shares of Rs. 10 each 600,000 300,000

10% preference shares of Rs. 10 each 200,000 100,000

Reserve And Surplus 300,000 200,000

12% debentures 200,000 150,000

Trade Payables 250,000 150,000

1,550,000 900,000

Details of Trade payables and Trade receivables:

X.Ltd Rs. Y.Ltd Rs.

Trade Payables

Bills payable 30,000 25,000

Sundry Creditors 220,000 125,000

250,000 150,000
Trade receivables

Debtors 360,000 190,000

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Bills Receivables 60,000 20,000

420,000 210,000

Fixed assets of both the companies are to be revalued at 15% above book values and inventory
and debtors are to be taken over at 5% less than their book values. Both the companies are to
pay 10% equity dividends, preference dividends having been paid already.
After the above transactions are given effect to X Ltd will absorb Y.Ltd on the following terms:
I. 8 equity shares of Rs. 10 each will be issued by X Ltd at par against 6 shares of Y.Ltd.
II. 10% preference shares of Y.Ltd will be paid off at 10% discount by issue of 10%
preference shares of Rs. 100 each of X Ltd at par.
III. 12% Debenture holders of Y ltd are to be paid off at a 8% premium by 12%
debentures in X Ltd. issued at a discount of 10%.
IV. Rs. 30,000 to be paid by X.Ltd to Y.Ltd for liquidation expenses.
V. Creditors of Y Ltd include Rs. 10,000 due to X Ltd.
Prepare: (a) A statement of purchase consideration payable by X.Ltd
(b) A Balance Sheet of X Ltd after its absorption of Y.Ltd.

Branch Account
Question No 12
Subash Electricals has its branches at Chitwan and Palpa to whom goods are invoiced at cost
plus 25%. Following information is available of the transactions at Chitwan Branch for the year
ending 31st Asadh, 2072:
Balances As at 1.4.2071 As at 31.3.2072
Stock at invoice price Rs 40,000 ?
Debtors Rs 12,000 Rs 11,000
Petty Cash 150 250

Transactions during 2071-2072: Rs.

Goods sent to branch 4, 20,000
Goods returned to head office 15,000
Cash Sales 1, 05,000
Credit Sales 1, 80,000
Normal Loss(at cost) 280
Goods pilfered (at invoice price) 3,000

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Goods lost in fire(at invoice price) 4,000

Insurance company paid to Head Office for loss by fire at Chitwan 3,000
Cash sent for petty expenses 32,000
Bad debts At Chitwan Branch 400
Goods Transferred to Palpa Branch under instructions From Head Office at
Invoice price 12,000
Insurance Charge Paid by Head Office 200
Goods returned by debtors 500
Note: Goods transferred to Palpa Branch(given above) were in transit on 31st Asadh,2072.
Prepare (i) Branch Stock Account (ii) Branch Adjustment Account (iii) Branch Profit and loss
account (iv) Stock Reserve Account
Question No 13
Sriniwash Ltd having head office in Kathmandu has branch at Mahendranagar where a
complete set of books is maintained. All purchases are made at Kathmandu and stock required
by the branch is invoiced to it by the head office at selling price less 15 percent. The branch
manager is entitled to a commission equal to one-third of the net profit earned by the branch
on the basis of invoice price. The following are the respective Trial balances of the head office
and the branch as on 31st Asadh, 2072.

Head Office Branch

Particulars Dr. Rs Cr. Rs Dr. Rs Cr.Rs
Capital 94,200
Sundry Debtors & Sundry Creditors 89,700 24,600 7,550 6,150
Stock at beginning of year at cost:
Head Office 124,150
Branch 32,150
Stock at Branch beginning of year as
invoiced 36,270 36,270
Purchases 307,250
Goods Invoiced during the year 102,500 102,500
Salaries 35,280 14,680
Sundry Expenses 16,170 2,290
Branch Account 23,230
Head Office Account 5,800
Cash on hand and at bank 24,800 3,260
Furniture 15,000 2,000
Sales 410,160 168,200
667,730 667,730 174,350 174,350

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The cost Price of goods invoiced to Mahendranagar was Rs 81,900.The stock in hand at the
end of the year at Kathmandu was valued at Rs 45,250 at cost and at Mahendranagar Rs.14,160
at cost and Rs.17,660 at invoice price. The difference between the adjustment account is due
to a remittance in transit from the Branch to the Head Office.
Prepare the trading and profit and loss account for the year ending on 31st Asadh,2072(in
columnar form) and the consolidated Balance Sheet as at that date.
Partnership Account
Question No 14
A,B and K were carrying business as oil dealers and they share profits seven-fifteenth, five-
fifteenth and three-fifteenth respectively. On 31st Asadh,2071 they dissolve partnership. The
Balance Sheet of the firm on that date was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 12,500 Land & Building 37,500

Loan from A at 5 percent 30,000 Plant 11,250

Capitals: Furniture 5,000

A 45,000 Stock 53,250

B 30,000 Sundry Debtors 15,000

K 12,500 Cash at Bank 8,000

130,000 130,000
A and B wanted K to join them in floating the concern as a Private Limited Company but K
refused and A and B arranged to pay K out and then form the company. The arrangements
between A,B and K were as follows:
A and B took over the liabilities at book figure plus Rs.2,500 allowed for realization expenses;
they also took over the Cash at Bank and the Furniture was sold for Cash realizing Rs 3,700.The
other assets A and B agreed to take over as follows:
Land and Building Rs.50,000; Plant less 10 percent; Stock less 20 percent; Debtors at
Rs.10,575
A and B having paid the realization expenses Rs.2,500 and having paid out Karun by providing
the required cash in the same proportion as they share the profits and losses interse proceed to
sell the assets as they stand to COJIG & Company Private Limited for Rs.60,000 cash and
Rs.60,000 in fully paid shares. The latter A and B take in the same proportions as they share
profits and losses.
A and B this pay off the liabilities and close the partnership books.
Required: Show (a) the Bank Account; (b) the Capital Accounts; (c) the Realisation Accounts;
and (d) COJIG & Company Private Limited Accounts.

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Assume that all the above transactions are put through on Asadh 31,2071(Calculations to be
made to the nearest Rupee.)
Accounting for Debentures & Preference Shares
Question No 15
The summarized Balance Sheet of X Ltd, as on 31.03.2076 stood as follows:
Liabilities Rs. Assets Rs
500000 equity shares of Rs 10 each Fixed Assets(at cost less
fully paid 50,00,000 depreciation) 1,60,00,000
Debenture Redemption Fund
General Reserve 75,00,000 Investment 40,00,000
Debenture Redemption Fund 50,00,000 Cash & Bank Balances 50,00,000
100000,13.5% convertible debentures
2,00,00,000
of 1,00,00,000 Other current Assets
Rs 100 each
Other Loans 50,00,000
Current liabilities & Provisions 1,25,00,000
4,50,00,000 4,50,00,000

The debentures are due for redemption on 1.04.2077.The terms of issue of debentures provided
that they were redeemable at a premium of 5% and also conferred option to the debenture
holders to convert 20% of their holding into equity shares
Assuming That:
I. Except for 100 debenture holders holding 25000 debentures, the rest opted for
maximum conversion;
II. The investments realized Rs 44,00,000 on sale; and
III. All the transactions are put through, without any lag, on 1.04.2077
Redraft the Balance Sheet of the company as on 1.04.2077, after giving effect to the
redemption. Show your calculations in respect of the number of equity shares to be
allotted and the cash payment necessary.

Question No 16
On 1st July 2015, H.P Ltd issued 2000,6% debentures of R.s 100 each. The interest is payable
on 30th June and 31st December every Year. The company is allowed to purchase its own
debentures which may be cancelled or kept or re-issued at the company’s option. The company
made the following purchases by cheque in the open market.
On 31st May, 2016 200 debentures @ Rs. 98 ex-interest. On 30th September 2017,
100debentures @ R.s 97 cum interest. The debentures, which were purchased on 31st May
2016, were cancelled on 31st December 2017.All payments were made on due dates.
Pass necessary journal entries to record the above transactions (including receipts and
payments) and also show the relevant items in the Balance Sheet as on 31st December, 2017.

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HP Ltd followed English calendars for accounting purpose and closes its book account on 31st
December every year.

Question No 17
Explain about Financial Leverage Multiplier (FLM).
Question No 18
State the difference between Government Accounting and Business Accounting.
Question No 19
Write short notes on:
• Supplementary capital as per capital adequacy norms of banks and financial
institutions.
• Distribution of Management expense in Non-life Business Insurer.
• Annuity method for calculating Goodwill.
• Steps of Acquisition for Business Combination (NFRS 03)

Question No 20
Explain about Capitalization of Dismantling Cost as per NAS 16 “Property, Plant &
Equipment”.

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Answers/Hints:
Nepal Financial Reporting Standards (NFRS)
Answer 1.
Total amount to be included in the property, plant and equipment at 31 Asadh 2076:
Particulars Rs Million
Lease 25,000
Buildings 9,000
Fittings 6,000
Interest Capitalized (40,000*10%*9/12) 3,000
43,000

Only nine months’ interest can be capitalized, because NAS 23 states that capitalization of
borrowing costs must cease when substantially all the activities necessary to prepare the asset
for its intended use or sale are complete.
Answer 2
As per NAS 02 “Inventories”
a) Value at Rs.12,000.Rs.10,000 is irrelevant. The rule is lower of cost or NRV, not
lower of cost or replacement cost. Since the special order is known to be profitable,
the NRV will be above the cost.
b) Value at NRV,i.e Rs.15,900,as this is below cost
(NRV=contract price,Rs.18,000-company’s share of modification cost i.e.Rs.2100)

Answer 3
This problem is based on NAS-37.The standard provides that an enterprise should recognize a
provision only when all of the following conditions are met:
1. There is a present obligation as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
3. A reliable estimate can be made of the amount of obligation.
In the present case, V Ltd fulfils all the above conditions the sale of pumps with a warranty
obligation constitutes the present obligation as a result of the past event. It is probable that
some outflow will be involved in setting the warranty obligation, satisfy the second condition.
As per the details based on past precedence reliable estimate can be made as under:
[6000*(5%of 100000)+1000*(10%of 100000)=Rs.400lakhs
Thus, V Ltd as on 31-03-2076 should make a provision for warranty obligation against sale of
vacuum pumps to the extent of rupees 400 lakhs.

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