Ca Inter Advanced Accounts Imp Questions Booklet Chapter - NBFC

CA INTER ADVANCED ACCOUNTS IMP QUESTIONS BOOKLET
CHAPTER – NBFC
Question 1
Bright Finance Ltd. is a non-banking financial company. It provides you with the following information
regarding its outstanding amount, Rs 200 lakhs of which instalments are overdue on 200 accounts for
last one month (amount overdue Rs 40 lakhs), on 24 accounts for two months (amount overdue Rs 24
lakhs), on 10 accounts for more than 30 months (amount overdue Rs 20 lakhs) and on 4 accounts for
more than two years (amount over due Rs 20 lakhs-already identified as sub-standard assets) and one
account of Rs 10 lakhs which has been identified as non-recoverable by the management. Out of 10
accounts overdue for more than 30 months, 6 accounts are already identified as sub-standard (amount
Rs 6 lakhs) for more than twelve months and other are identified as sub-standard asset for a period of
less than twelve months.
Classify the assets of the company in line with Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Solution
Statement showing classification as per Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016
(Rs in
lakhs)
Standard Assets:
Accounts (Balancing figure) 86.00
200 accounts overdue for a period of 1 month 40.00
24 accounts overdue for a period of 2 months 24.00 150.00
Sub-Standard Assets:
4 accounts identified as sub-standard asset for a period less than 14.00
12 months
Doubtful Debts:
6 accounts identified as sub-standard for a period more than 12 6.00
months
4 accounts identified as sub-standard for a period more than 2 20.00
years
Loss Assets
1 account identified by management as loss asset 10.00
Total overdue 200.00
1
Compiled by CA JAI CHAWLA Sir & Team
Question 2
XYZ Limited is an NBFC registered with RBI as non-deposit accepting company. Its main activity
includes issuing term loans of different tenures. One of its major customers, ABC Ltd, is engaged in
the business of manufacturing. However, due to fall in demand and non-recovery of existing trade
receivables, ABC Ltd. is facing working capital difficulties. As on 31st March, 20X1 outstanding
amount in respectto ABC Ltd. is as under:
Principle amount outstanding (for more than 8 months): Rs 250 lakhs Interest and penalties on the
above: Rs 30 lakhs
XYZ Ltd. is following accrual system for accounting of its income. Following the same, the Company has
accrued Rs 30 lakhs as interest income in the Financial Statements for the year ended 31st March,
20X1.
You are required to state whether income accrual of Rs 30 lakhs is in accordance with Non Banking
Finance Company – Systemically Important Non Deposit taking Company Directions, 2016?
Solution
As per the said directions, Non- performing asset shall mean: a term loan inclusiveof unpaid interest,
when the instalment is overdue for a period of six months or more or on which interest amount
remained overdue for a period of six months or more. In the present case, dues of ABC Ltd. is
outstanding for more than 6 months. Hence, ABC Ltd. will need to be classified as NPA in the books of
XYZ Ltd. as on 31st March, 20X1. Once an asset becomes NPA, any income on the said asset need to
be recognized on cash basis. Also, previous income accrued but not received, need to be reversed.
Based on the same, XYZ Ltd. shall stop accruing further interest accrual on term loan of ABC Ltd.
Also, Rs30 lakhs accrued but not realized, need to be reversed.
Question 3
Lokraj Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer durables.
The following information is extracted from its books for the year ended 31st March, 2017:
Asset Funded Interest Overdue but recognized in Net Book Value of
Profit & loss A/c Assets outstanding
Period Overdue Interest Amount
(Rs in crore) (Rs in crore)
Washing Machines Up to 12 months 450.00 20,550.00
Air Conditioners For 24 months 25.25 675.00
Music systems For 30 months 15.25 225.00
Refrigerators For 21 months 60.15 1,050.00
Air purifiers Up to 12 months 18.25 980.00
LCD Televisions For 45 months 420.00 21,200.00
You are required to calculate the amount of additional provision to be made.
2
Solution:
On the basis of the information given, in respect of hire purchase and leased assets, additional provision
shall be made as under:
(Rs in crore)
(a) Where hire charges are overdue Nil -
upto 12 months
(b) Where hire charges are overdue 10% of the net book value 172.50
for more than 12 months but upto 24 10% x (675+1,050)
months
(c) Where hire charges are overdue 40 percent of the net book 90
for more than 24 months but upto 36 value
months 40% x 225
(d) Where hire charges or lease 70 percent of the net book 14,840
rentals are overdue for more than 36 value
months but upto 48 months 70% x 21,200
Total 15,102.50
3
CHAPTER – INTERNAL RECONSTRUCTION
Question 4
The Balance Sheet of A & Co. Ltd. as at 31-12-20X1 is as follows:
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,50,000
B Reserves and Surplus 2 (5,35,000)
2 Non-current liabilities
A Long-term borrowings 3 3,75,000
3 Current liabilities
A Trade Payables 3,00,000
B Short term borrowings - Bank Overdraft 1,95,000
C Other current liabilities 4 1,22,500
Total 16,07,500
Assets
1 Non-current assets
A Property, plant and equipment 5 4,75,000
B Intangible assets 6 1,67,500
C Non-current investments 7 55,000
2 Current assets
A Inventories 4,25,000
B Trade receivables 4,85,000
Total 16,07,500
4
Notes to accounts
Rs
1 Share Capital
Equity share capital:
75,000 Equity Shares of Rs 10 each 7,50,000
Preference share capital:
4,000 6% Cumulative Preference Shares of Rs 100 each 4,00,000
11,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (5,35,000)
(5,35,000)
3 Long-term borrowings
Secured
6% Debentures (secured on the freehold property) 3,75,000
3,75,000
4 Other current liabilities
Loan from directors 1,00,000
Interest payable on 6% debentures 22,500
1,22,500
5 Property plant and Equipment
Freehold property 4,25,000
Plant 50,000
4,75,000
6 Intangible assets
Goodwill 1,30,000
Patents 37,500
1,67,500
7 Non-current investments
Investments at cost 55,000
55,000
The Court approved a Scheme of re-organization to take effect on 1-1-20X2, whereby:
(i) The Preference shares to be written down to Rs 75 each and Equity Shares to
Rs 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three fourths to be
waived and Equity Shares of Rs 2 each to be allotted for the remaining quarter.
(iii) Interest payable on debentures to be paid in cash.
5
(iv) Debenture-holders agreed to take over freehold property, book value
Rs 1,00,000 at a valuation of Rs 1,20,000 in part repayment of their holdings and to provide
additional cash of Rs 1,30,000 secured by a floating charge on company’s assets at an interest
rate of 8% p.a.
(v) Patents and Goodwill to be written off.
(vi) Inventory to be written off by Rs 65,000.
(vii) Amount of Rs 68,500 to be provided for bad debts.
(viii) Remaining freehold property after giving to debenture holders, to be re-valued at Rs 3,87,500.
(ix) Investments be sold for Rs 1,40,000.
(x) Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares
of Rs 2 each and as to 5% in cash, and balance 5% being waived.
(xi) There were capital commitments totalling Rs 2,50,000. These contracts are to be cancelled on
payment of 5% of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflecting the above transactions (including cash
transactions) and prepare the Balance Sheet of the company after completion of the Scheme.
Solution
Journal of A & Co. Ltd.
Dr. Cr.
Rs Rs
20X2 Equity Share Capital A/c (Rs 10) Dr. 7,50,000
Jan. 1 To Capital Reduction A/c 6,00,000
(Reduction of equity shares of
Rs 10 each to shares of Rs 2
each as per Reconstruction
Scheme dated...)
6% Cum. Preference ShareDr. 4,00,000
Capital A/c (Rs 100)
To Capital Reduction A/c 1,00,000
To Pref. Share Capital A/c (Rs 75) 3,00,000
(Reduction of preference shares of Rs 100
each to shares of Rs 75 each as per
reconstruction scheme)
Jan. 1 Capital Reduction Account Dr. 24,000
To Equity Share Capital Account 24,000
6
(Arrears of preference dividends satisfied
by the issue of equity shares, 25% of the
amount due,
Rs 96,000)
20X2 Freehold Property A/c Dr. 82,500
Jan. 1 To Capital Reduction A/c 82,500
(Appreciation in the value of property:
Book value Revalued Figure
Rs 1,00,000 Rs 1,20,000
Rs 3,25,000 Rs 3,87,500
Total Rs 4,25,000 Rs 5,07,500
Profit on revaluation: Rs 82,500)
” 6% Debentures A/c Dr. 1,20,000
To Freehold Property A/c 1,20,000
(Claims of debenture-holders, in part, in
respect of principal discharged by transfer
of freehold property vide Scheme of
Reconstruction)
Interest payable A/c Dr. 22,500
To Bank A/c 22,500
(Debenture interest paid)
” Bank A/c Dr. 1,30,000
To 8% Debentures A/c 1,30,000
(8% Debentures issued for cash)
” Bank A/c Dr. 1,40,000
To Investment A/c 55,000
To Capital Reduction A/c 85,000
(Sale of Investment for Rs 1,40,000 cost
being Rs 55,000; profit credited to Capital
Reduction Account)
” Directors’ Loan A/c Dr. 1,00,000
To Equity Share Capital A/c 90,000
To Bank A/c 5,000
To Capital Reduction A/c 5,000
7
(Directors’ loan discharged by issue of
equity shares of Rs 90,000, cash payments
of Rs 5,000 and surrender of Rs 5,000, vide
Scheme of Reconstruction)
” Capital Reduction A/c Dr. 8,48,500
To Patents 37,500
To Goodwill 1,30,000
To Inventory 65,000
To Provision for Doubtful Debts 68,500
To Bank 12,500
To Profit & Loss Account 5,35,000
(Writing off patents, goodwill, profit and
loss account and reducing the value of stock,
making the required provision for doubtful
debts and payment for cancellation of
capital commitments)
Note: Penalty charges for cancellation of the contract amounts to Rs 12,500 (2,50,000X5%) being paid
in cash.
Balance Sheet of A & Co. Ltd. (And Reduced) as at 1st January, 20X2
A Long-term borrowings 2 3,85,000
A Trade Payables 3,00,000
B Short term provision 3 68,500
Total 13,17,500
Assets
A Property, plant and equipment 4 4,37,500
B Intangible assets 5 -
2 Current assets
8
B Trade receivables 4,85,000
C Cash and cash equivalents 35,000
Total 13,17,500
Notes to accounts
1 Share Capital
Equity share capital
1,32,000 Equity shares of Rs 2 each (of the above 2,64,000
57,000 shares have been issued for consideration
other than cash)
Preference share capital
4,000 6% Preference shares of Rs 75 each 3,00,000
Total 5,64,000
Secured
6% Debentures 2,55,000
8% Debentures Total 1,30,000
Short term provision 3,85,000
Provision for doubtful debts
3 Property, plant and equipment 68,500
Freehold property 4,25,000
Add: Appreciation under scheme of Reconstruction
4 82,500
Less: Disposed of Plant
(1,20,000)
Net carrying value
Intangible assets Goodwill 3,87,500
Less: Written off under scheme of Reconstruction 50,000
Net carrying value 4,37,500
Intangible assets
5
Goodwill
Less: Written off under scheme of 1,30,000
Reconstruction Net carrying value (1,30,000) NIL
Patents 37,500
Less: Written off under scheme of Reconstruction (37,500) -
Net carrying value
- NIL
9
Question 5
Given below is the Balance sheet of Rebuilt Ltd. as at 31.3.20X1:
B Reserves and Surplus 2 (4,51,000)
A Long-term borrowings (Loan) 3 5,73,000
Trade Payables 2,07,000
A
Other current liabilities 35,000
B
Total 17,14,000
Assets
Non-current assets
Property, plant and equipment 4 6,68,000
1
A Intangible assets 5 3,18,000
B
Current assets
3,28,000
2 B Trade receivables
Total 17,14,000
Notes to accounts
Rs
1 Share Capital
Equity share capital 7,50,000
15,000 Equity Shares of Rs 50 each
12,000, 7% Cumulative Preference Shares of Rs 50 each
(Preference dividend is in arrears for five years) 6,00,000
Total 13,50,000
10
Debit balance of Profit and loss Account (4,51,000)
(4,51,000)
Loan 5,73,000
5,73,000
4 Property, plant and Equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,68,000
6,68,000
5 Intangible assets
Trademarks and Goodwill at cost 3,18,000
3,18,000
The Company is not earning profits, short of working capital and a scheme of reconstruction has been
approved by both the classes of shareholders. A summary of the scheme is as follows:
(a) The equity shareholders have agreed that their Rs 50 shares should be reduced to Rs 2.50 by
cancellation of Rs 47.50 per share. They have also agreed to subscribe for three new equity
shares of Rs 2.50 each for each equity share held.
(b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for
each Rs 50 share, 4 new 5% preference shares of Rs 10 each, plus 6 new equity shares of Rs
2.50 each, all credited as fully paid.
(c) Lenders to the company for Rs 1,50,000 have agreed to convert their loan into share and for
this purpose they will be allotted 12,000 new preference shares of Rs 10 each and 12,000 new
equity shares of Rs 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000, new equity shares of
Rs 2.50 each in addition to any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, Rs 2,00,000 is to be used to reduce the loan
due by the company.
(f) The equity share capital cancelled is to be applied:
i. to write off the debit balance in the profit and loss A/c; and
ii. to write off Rs 35,000 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill.
Show by journal entries how the financial books are affected by the scheme and prepare
the balance sheet of the company after reconstruction. The nominal capital as reduced
is to be increased to Rs 6,50,000 for preference share capital and Rs 7,50,000 for
equity share capital.
11
Solution:
In the books of Rebuilt Ltd.
Journal Entries
Particulars Debit Credit
(Rs) (Rs)
1. Equity share capital A/c (Rs 50) Dr. 7,50,000
To Equity share capital A/c (Rs 2.50) 37,500
To Capital reduction A/c 7,12,500
(Being equity capital reduced to nominal value
of Rs 2.50 each)
2. Bank A/c Dr. 1,12,500
To Equity share capital 1,12,500
(Being 3 right shares against each share was
issued and subscribed)
3. 7% Preference share capital A/c (Rs 50) Dr. 6,00,000
Capital reduction A/c Dr. 60,000
To 5% Preference share capital (Rs 10) 4,80,000
To equity share capital (Rs 50) 1,80,000
(Being 7% preference shares of Rs 50 each
converted to 5% preference shares of Rs 10
each and also given to them 6 equity shares
for every share held)
4. Loan A/c Dr. 1,50,000
To 5% Preference share capital A/c 1,20,000
To Equity share capital A/c 30,000
(Being loan to the extent of Rs 1,50,000
converted into share capital)
5. Bank A/c Dr. 1,00,000
To Equity share application money A/c 1,00,000
(Being shares subscribed by the directors)
6. Equity share application money A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being application money transferred to
capitalA/c)
12
7. Loan A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being loan repaid)
8. Capital reduction A/c Dr. 6,52,500
To Profit and loss A/c 4,51,000
To Plant A/c 35,000
To Trademarks and Goodwill A/c (Bal.fig.) 1,66,500
(Being losses and assets written off to the
extent required)
Balance sheet of Rebuilt Ltd. (and reduced) as at 31.3.20X1
Equity and Liabilities 1 10,60,000
1 Shareholders' funds
Share capital
a 2,23,000
Non-current liabilities
a Current liabilities 2,07,000
3 a Trade Payables 35,000
b Other current liabilities Total 15,25,000
Assets
Non-current assets
Property, plant and equipment
1 a 2 6,33,000
Intangible assets
Current assets
b 3 1,51,500
Inventories
2 a
Trade receivables 4,00,000
b Cash and cash equivalents
3,28,000
c 4 12,500
Total 15,25,000
13
Notes to accounts
Rs
1 Share Capital
Authorized capital:
65,000 Preference shares of Rs 10 each 6,50,000
3,00,000 Equity shares of Rs 2.50 each Issued, 7,50,000
subscribed and paid up: 14,00,000
1,80,000 equity shares of Rs 2.5 each 4,60,000
60,000, 5% Preference shares of Rs 10 each 6,00,000 10,60,000
2 Property plant and equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,33,000 6,33,000
3 Intangible assets
Trademarks and goodwill 1,51,500
4 Cash and cash equivalents
Bank (1,12,500+1,00,000-2,00,000) 12,500
14
CHAPTER - CONSOLIDATED FINANCIAL STATEMENTS
Question 6:
A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.20X1 at cost of Rs 10,00,000 when B Ltd. had an
equity share capital of Rs 10,00,000 and reserves and surplus of Rs 80,000. In the four consecutive
years, B Ltd. fared badly and suffered losses of Rs 2,50,000, Rs 4,00,000, Rs 5,00,000
and Rs 1,20,000 respectively. Thereafter in 20X5- X6, B Ltd. experienced turnaround and registered
an annual profit of Rs 50,000. In the next two years i.e. 20X6-X7 and 20X7-X8, B Ltd. recorded
annual profits of Rs 1,00,000 and Rs 1,50,000 respectively. Show the minority interests and cost
of control at the end of each year for the purpose of consolidation.
Solution
The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in
the equity of the subsidiary. The excess, and any further losses applicable to the minority, are adjusted
against the majority interest except to the extent that the minority has a binding obligation to, and is
able to, make good the losses. If the subsidiary subsequently reports profits, all such profits are
allocated to the majority interest until the minority's share of losses previously absorbed by the
majority has been recovered. Accordingly, the minority interests will be computed as follows:
Year Profit/(Loss) Minority Additional Minority's Share Cost of
Interest Consolidated P of losses borne Control
(30%) & L (Dr.) Cr. by A Ltd.
Rs Balance
At the time of -
acquisition in 3,24,000
20X1 - (W.N.)
20X1-X2 (2,50,000) (75,000) (1,75,000) 2,44,000

(W.N.)
Balance 2,49,000
20X2-X3 (4,00,000) (1,20,000) (2,80,000) 2,44,000
Balance 1,29,000
20X3-X4 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)
Loss of 21,000 (21,000) 21,000 21,000
minority
borne by
Holding Co.
Balance Nil (3,71,000)
15
20X4-X5 (1,20,000) (36,000) (84,000) 2,44,000
Loss of
minority 36,000 (36,000) 36,000 57,000
borne by
Holding Co.
Balance Nil (1,20,000)
20X5-X6 50,000 15,000 35,000 2,44,000
Profit share (15,000) 15,000 (15,000) 42,000
of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.
Balance Nil 50,000

20X6-X7 1,00,000 30,000 70,000
Profit share (30,000) 30,000 (30,000) 12,000 2,44,000
of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.
Balance Nil 100,000

(12,000) Nil 2,44,000
20X7-X8 1,50,000 45,000 1,05,000
(12,000) 12,000
Balance 33,000 1,17,000
16
Working Note:
Calculation of Minority interest and Cost of control on 1.4.20X1
Share of Holding Minority
Co. Interest
100% 70% 30%
(Rs) (Rs) (Rs)
Share Capital 10,00,000 7,00,000 3,00,000
Reserve 80,000 56,000 24,000
7,56,000 3,24,000
Less: Cost of (10,00,000)
investment
Goodwill 2,44,000
Question 7:
H Ltd and its subsidiary S Ltd provide the following information for the year ended 31st March, 20X3:
H Ltd. S Ltd.
(Rs in lacs) (Rs in lacs)
Sales and other income 5,000 1,000
Increase in Inventory (closing less opening) 1,000 200
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50
Other Information:
H Ltd. sold goods to S Ltd. of Rs120 lacs at cost plus 20%. Inventory of S Ltd. includes such goods
valuing Rs 24 lacs. Administrative expenses of S Ltd. include Rs 5 lacs paid to H Ltd. as consultancy
fees. Selling and distribution expenses of H Ltd. include Rs 10 lacs paid to S Ltd. as commission.
H Ltd. holds 80% of equity share capital of Rs 1,000 lacs in S Ltd. prior to 20X1-20X2. H Ltd. took
credit to its Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd.
for the year 20X1-20X2.
Prepare a consolidated statement of profit and loss..
17
Solution
Consolidated statement of profit and loss of H Ltd. and its subsidiary S Ltd. for the year
ended on 31st March, 20X3
Particulars Note No. Rs in Lacs

I. Revenue from operations 1 5,865
II. Total revenue 5,865

III. Expenses
Cost of material purchased/consumed 2 1,180
Changes of inventories of finished 3 (1,196)
goods
Employee benefit expense 4 950
Finance cost 5 150
Depreciation and amortization expense 6 150
Other expenses 7 535
Total expenses 1,769
IV. Profit before tax (II-III) 4,096
Notes to Accounts
Rs in Rs in
Lacs Lacs
1. Revenue from operations
Sales and other income
H Ltd. 5,000
S Ltd. 1,000
6,000
Less: Inter-company sales (120)
Consultancy fees received by H Ltd. from S Ltd. (5)
Commission received by S Ltd. from H Ltd. (10) 5,865
2. Cost of material purchased/consumed
H Ltd. 800
S Ltd. 200
1,000
18
Less: Purchases by S Ltd. from H Ltd. (120) 880
Direct expenses (Production)
H Ltd. 200
S Ltd. 100 300
1,180
3. Changes of inventories of finished goods
1,196
H Ltd. 1,000
S Ltd. 200
1,200
Less: Unrealized profits Rs 24 lacs × 20 (4)
120
4. Employee benefits and expenses
Wages and salaries:
H Ltd. 800
S Ltd. 150 950
5. Finance cost
Interest:
H Ltd. 100
S Ltd. 50 150
6. Depreciation
H Ltd. 100
S Ltd. 50 150
7. Other expenses
Administrative expenses
H Ltd. 200
S Ltd. 100
300
Less: Consultancy fees received by H Ltd. from S Ltd. (5) 295
Selling and distribution Expenses:
19
H Ltd. 200
S Ltd. 50
250
Less: Commission received by S Ltd. from H Ltd. (10) 240
535
8. Tax Expenses
H Ltd. 1,200
S. Ltd. 200 1,400
Question 8
Subsidiary B Ltd. provides the following balance sheet::
Particulars Note 20X0 20X1
No. (Rs) (Rs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000 5,00,000
(b) Reserves and Surplus 2 2,86,000 7,14,000
(2) Current Liabilities

(a) Short term borrowings 3 -- 1,70,000
(b) Trade Payables 4,90,000 4,94,000
(c) Short-term provisions 4 3,10,000 4,30,000
Total 15,86,000 23,08,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 5 2,72,000 2,24,000
Equipment
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 5,97,000 7,42,000
(b) Trade Receivables 5,94,000 8,91,000
(c) Cash & Cash Equivalents 51,000 3,000
(d) Other current assets 6 72,000 48,000
Total 15,86,000 23,08,000
20
Notes to Accounts
20X0 20X1
(Rs) (Rs)
1. Share capital
5,000 equity shares of Rs10 each, fully paid 5,00,000 5,00,000
up
2.
Reserves and Surplus
2,86,000 7,14,000
General Reserves
3. Short term borrowings
Bank overdraft -- 1,70,000
4. Short term provisions
Provision for taxation
3,10,000 4,30,000
Property, plant and equipment
5. Cost
Less: Depreciation 3,20,000 3,20,000
(48,000) (96,000)
Total 2,72,000 2,24,000
6. Other current Assets
Prepaid expenses 72,000 48,000
Also consider the following information:
(a) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the accounting year.
(b) A Ltd. values inventory on weighted average basis while B Ltd. used FIFO basis. To bring B Ltd.’s
values in line with those of A Ltd, its value of inventory is required to be reduced by Rs12,000 at
the end of 20X0 and Rs 34,000 at the end of 20X1.
(c) B Ltd. deducts 1% from Trade Receivables as a general provision against doubtful debts.
(d) Prepaid expenses in B Ltd. include advertising expenditure carried forward of
Rs 60,000 in 20X0 andRs 30,000 in 20X1, being part of initial advertising expenditureof Rs 90,000
in 20X0 which is being written off over three years. Similar amount of advertising expenditure of
A Ltd. has been fully written off in 20X0.
Restate the balance sheet of B Ltd. as at 31st December, 20X1 after considering the above information,
for the purpose of consolidation. Would restatement be necessary to make the accounting policies
adopted by A Ltd. and B Ltd. uniform.
Solution
As per para 20 and 21 of AS 21, Consolidated financial statements:
Consolidated financial statements should be prepared using uniform accounting policies for like
transactions and other events in similar circumstances. If it is not practicable to use uniform accounting
policies in preparing the consolidated financial statements, that fact should be disclosed together
21
with the proportions of the items in the consolidated financial statements to which the different
accounting policies have been applied.
If a member of the group uses accounting policies other than those adopted in the consolidated
financial statements for like transactions and events in similar circumstances, appropriate adjustments
are made to its financial statements when they are used in preparing the consolidated financial
statements.
Accordingly in the given case, restatement would be required to make the accounting policies of A Ltd
and B Ltd uniform.
Adjusted reserves of B Ltd.:

Rs Rs
Reserves as given 7,14,000
Add: Provision for doubtful debts 9,000
{[8,91,000 / 99 X 100]-8,91,000}
7,23,000
Less: Reduction in value of Inventory 34,000
Advertising expenditure to be written off 30,000 (64,000)
Adjusted reserves 6,59,000
Note: No adjustment would be required in respect of opening inventory of B Ltd as that will not
have any impact on P&L.
Restated Balance Sheet of B Ltd. as at 31st December, 20X1
Particulars Note No. (Rs)
(a) Share Capital 1 5,00,000
(b) Reserves and Surplus 2 6,59,000
(a) Short term borrowings 3 1,70,000
(b) Trade Payables 4,94,000
(c) Short-term provision 4 4,30,000
Total 22,53,000
II. Assets
(a) Property, Plant and Equipment 5 2,24,000
22
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 6 7,08,000
(b) Trade Receivables 7 9,00,000
(c) Cash & Cash Equivalents 3,000
(d) Other current assets 8 18,000
Total 22,53,000
Notes to Accounts
20X1
(Rs)
1. Share capital
5,000 equity shares of Rs 10 each, fully paid up 5,00,000
2. Reserves and Surplus
General Reserves (refer to WN) 6,59,000
3. Short term borrowings
Bank overdraft 1,70,000
Provision for taxation 4,30,000
5. Property, plant and equipment
Cost 3,20,000
Less: Depreciation (96,000)
Total 2,24,000
6. Inventory
Actual inventory 7,42,000
Less: Change in method of valuation (34,000)
Total 7,08,000
7. Trade receivables
Actual trade receivables 8,91,000
Add: Adjustment for provision 9,000
Total 9,00,000
8. Other current Assets
Prepaid expenses 48,000
23
Question 9
On 31st March, 20X1, the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
Balance Sheet of H Ltd.
and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note H Ltd. (Rs S Ltd. (Rs
No. in Lacs) in Lacs)
(a) Share Capital 1 12,000 4,800
(b) Reserves and Surplus 2 5,499 3,000
(a) Trade payables 1,461 854
(b) Short term provisions 3 855 394
(c) Other current liabilities 4 1,572 160
Total 21,387 9,208
II. Assets
Property, Plant and Equipment 5 9,468 5,486
Non-current Investments 3,000
(Shares in S Ltd.)
(2) Current assets
(a) Inventories 3,949 1,956
(b) Trade receivables 2,600 1,363
(c) Cash and cash equivalents 1,490 204
(d) Short term loans and advances 6 520
(e) Other current assets 7 360 199
Total 21,387 9,208
24
Notes to Accounts
H Ltd. (Rs S Ltd. (Rs
in lacs) in lacs)
1. Share Capital
Authorized share capital 15,000 6,000
Equity shares of Rs 10 each, fully paid up
Issued and Subscribed:
Equity shares of Rs 10 each, fully paid up 12,000 4,800
Total 12,000 4,800
2. Reserves and surplus
General Reserve 2,784 1,380
Profit and Loss Account: 2,715 1,620
Total 5,499 3,000
Provision for Taxation 855 394
4. Other current liabilities
Bills Payable 372 160

Dividend payable 1,200 --
1,572 160
Land and Buildings 2,718 -
Plant and Machinery 4,905 4,900
Furniture and Fittings 1,845 586
Total 9,468 5,486
6. Short term loans and advances
Sundry Advances 520 --
7. Other current assets
Bills Receivable 360 199
The following information is also provided to you:
(a) H Ltd. purchased 180 lakh shares in S Ltd. on 31st March, 20X0 when thebalances of General
Reserve and Profit and Loss Account of S Ltd. stood at Rs 3,000 lakh and Rs1,200 lakh
respectively.
(b) On 1st April, 20X0, S Ltd. declared a dividend @ 20% for the year ended 31st March, 20X0.
H Ltd. credited the dividend received by it to its Profit and Loss Account.
(c) On 1st January, 20X1, S Ltd. issued 3 fully paid-up bonus shares for every 5 shares held out of
25
balances of its general reserve as on 31st March, 20X0.
(d) On 31st March, 20X1, all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H
Ltd. But on that date, H Ltd. held only Rs 45 lakh of these acceptances in hand, the rest having
been endorsed in favour of its trade payables.
(e) On 31st March, 20X1, S Ltd.’s inventory included goods which it had purchased for Rs
100 lakh from H Ltd. which made a profit @ 25% on cost.
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at31st March, 20X1.
Answer:
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note No. (Rs in Lacs)
(a) Share Capital 1 12,000
(b) Reserves and Surplus 2 7,159
(2) Minority Interest [W.N.6] 3,120
(a) Trade payables 3 2,315
(b) Short term provisions 4 1,249
(c) Other current liabilities 5 1,687
Total 27,530
II. Assets
Property, Plant and Equipment 6 14,954
(2) Current assets
(a) Inventories 7 5,885
(b) Trade receivables 8 3,963
(c) Short term loans and advances 9 1,694
(d) Cash and cash equivalents 10 520
(e) Other current assets 11 514
Total 27,530
26
Notes to Accounts
(Rs in (Rs in lacs)
lacs)
1 Share Capital
. Authorized share capital
Equity shares of Rs10 each, fully paid up 15,000
Issued and Subscribed:
Equity shares of Rs 10 each, fully paid up 12,000
Total 12,000
Reserves and surplus
Capital Reserve (Note 5)
2. 1,320
General Reserve (2,784 +
2,892
108) Profit and Loss Account:
H Ltd. 2,715
Less: Dividend wrongly credited 360
Unrealized Profit 20 (380)
2,335
Add: Share in S Ltd.’s Revenue profits 612 2,947
Total 7,159
3. Trade payables
H 1,461
Ltd. S 854 2,315
4. Ltd.
Short term provisions
Provision for Taxation
H Ltd.
855
S Ltd.
394
Total
1,249
Other current liabilities
5.
Bills Payable
H Ltd. Rs 372
S Ltd. Rs 160
Rs 532
Less: Mutual owing Rs (45) 487
Dividend payable
H Ltd. 1,200
Total 1,687
27
Land and Buildings
H Ltd. 2,718
Plant and Machinery
H Ltd. Rs 4,905
S Ltd. Rs4,900 9,805
Furniture and Fittings
H Ltd. Rs 1,845
S Ltd. Rs 586 2,431
Total 14,954
7. Inventories
Stock
H Ltd. 3,949
S Ltd. 1,956
5,905
Less: Unrealized profit (20) 5,885
8. Trade receivables
H Ltd. Rs2,600
S Ltd. Rs 1,363 3,963
9. Short term loans and advances
Sundry Advances 520
Total 520
10. Cash and cash equivalents
Cash and Bank Balances 1,694
Total 1,694
11. Other current assets
Bills Receivable
H Ltd. Rs 360
S Ltd. Rs 199
Rs 559
Less: Mutual Owing Rs (45)
Total 514
28
Share holding pattern of S Ltd.
Shares as on 31st March, 20X1 (Includes 480 lakh shares (4,800
bonus shares issued on 1st January, 20X1) lakhs/
Rs 10)
H Ltd.’s holding as on 1st April, 20X0 180 lakhs
Add: Bonus received on 1st January, 20X1 108 lakhs (180 / 5 × 3)
Total H Ltd.’s holding as on 31st March, 20X1 288 lakhs i.e. 60 %
[288/480×100]
Minority Shareholding 40%
Working Notes:
1. S Ltd.’s General Reserve Account
Rs in lakhs Rs in lakhs
To Bonus to equity 1,800 By Balance b/d 3,000
shareholders (WN-8)
To Balance c/d 1,380 By Profit and Loss A/c 180
(Balancing figure)
3,180 3,180
2. S Ltd.’s Profit and Loss Account
Rs in lakhs Rs in lakhs
To General Reserve 180 By Balance b/d 1,200
[WN 1]
To Dividend paid By Net Profit for the
(20% on Rs3,000 600 year* 1,200
lakhs)
To Balance c/d 1,620 (Balancing figure)
2,400 2,400
*Out of Rs 1,200 lakhs profit for the year, Rs 180 lakhs has been transferred toreserves.
3. Distribution of Revenue profits
Rs in lakhs
Revenue profits (W. N. 2) 1,200
Less: Share of H Ltd. 60% (720)
(General Reserve Rs 108 + Profit and Loss Account Rs
612)
Share of Minority Shareholders (40%) 480
Note: The question can also be solved by taking Rs 1,080 lakhs as post acquisition Profit and Loss
29
balance and Rs 180 lakhs as post acquisition General Reserve balance. The final answer will be same.
4. Calculation of Capital Profits
Rs in lakhs
General Reserve on the date of acquisition less bonus shares 1,200
(Rs 3,000 – Rs 1,800)
Profit and loss account on the date of acquisition less 600
dividend paid (Rs 1,200 – Rs 600)
1,800
H Ltd.’s share = 60% of Rs 1,800 lakhs = Rs 1,080 lakhs Minority interest = Rs 1,800 – Rs 1,080 = Rs
720 lakhs
5. Calculation of capital reserve
Rs in lakhs
Paid up value of shares held (60% of Rs4,800) 2,880
Add: Share in capital profits [WN 4] 1,080
3,960
Less: Cost of shares less dividend received (Rs 3,000 – Rs (2,640)
360)
Capital reserve 1,320
6. Calculation of Minority Interest
Rs in lakhs
40% of share capital (40% of Rs 4,800) 1,920
Add: Share in revenue profits [WN 3] 480
Share in capital profits [WN 4] 720
3,120
30
CHAPTER - LIQUIDATION OF COMPANIES
Question 10
M. Ltd. resolved on 31st December, 20X0 that the company be wound up voluntarily. The following
were the ledger balances extracted from its books as on that date:
Rs
Equity shares of Rs 10 each 2,00,000
9% Preference shares of Rs 10 each 1,00,000
Plant (less depreciation w/o Rs 85,000) 2,15,000
Stock in trade 2,50,000
Trade receivables 55,000
Trade payables 75,000
Bank balance 74,000
Preliminary Expenses 6,000
Profit & Loss A/c (balance on 1st January, 20X0) 30,000
Trading loss for the year 20X0 24,000
Preference dividend for the year 20X0 6,000
Outstanding Expenses (including mortgage interest) 25,000
4% Mortgage loan (secured by floating charge) 2,00,000
On 1st January, 20X1 the liquidator sold M. Ltd.’s Plant for Rs 2,05,000 and stock in trade forRs
2,00,000. The sale was completed in January, 20X1 and the consideration satisfied as to Rs 2,62,200
in cash and as to the balance in 6% Debentures of the purchasing company issued to the liquidator at
a premium of 2%.
The remaining steps in the liquidation were as follows:
(1) The liquidator realized Rs 52,000 out of the book debts and the cost of collection amounted to Rs
2,000.
(2) The loan mortgage was discharged on 31st January, 20X1 along with interest from 31st July, 20X0.
Trade payables were discharged subject to 2% and outstanding expenses excluding mortgage
interest were settled for Rs 2,000;
(3) On 30th June 20X1 six month’s interest on debentures was received from M. Ltd.
(4) Liquidation expenses amounting to Rs 3,000 and liquidator’s remuneration of 3% on
disbursements to members were paid on 30th June, 20X1 when:
(a) The preference shareholders were paid out in cash; and
(b) The debentures on M. Ltd. and the balance of cash were distributed rateably among the equity
31
shareholders.
Prepare the Liquidator’s Statement of Account showing the distribution.
Solution
Liquidator’s Final Statement of Account
Receipts Rs Payments Rs
Balance at Bank 74,000 Liquidator’s Remuneration 7,302
Sundry Assets Realized: (2,50,700 X 3/103)
Trade Receivables 52,000 Liquidation Expenses 3,000
Less: cost of Collection (2,000) 50,000 Mortgage Loan 2,00,000
6% Debentures 1,42,800 Interest on Loan 4,000
Cash 2,62,200 Trade payables: (75,000X98%) 73,500
Interest on Debentures (6 months) 4,200 Outstanding Expenses 2,000
Preference Shareholders:
Preference Capital 1,00,000
Equity Shareholders:
6% Debentures
Cash (Balancing Figure) 1,42,800
598
Total 5,33,200 Total 5,33,200
Working Notes:
Rs
1. Assets sold including stock in trade (2,05,000+2,00,000) 4,05,000

Consideration received:
By way of Cash 2,62,200
By Rs 1,40,000, 6% Debentures (at a premium of 2%) 1,42,800
2. Total Amount with the Liquidator 5,33,200
Less: Payments
(3,000+2,00,000+4,000+73,500+2,000) 2,82,500
Amount available for disbursement to shareholders 2,50,700
3. Disbursement to Shareholders
Preference Shareholders 1,00,000
Equity Shareholders: 1,43,398
(By way of 6% Debentures, ie, Rs 1,42,800 & the remaining amt
in cash Rs 598)
32
Question 11
X Ltd. was ordered to be wound up on 31st March, 20X2 on which date the following balances were
extracted from its books:
Rs
Goodwill 1,00,000
Building 3,50,000
Plant 5,50,000
Fixtures 23,000
Stock 38,000
Debtors 25,000
Cash 500
Profit and loss account (Dr. balance) 1,38,500
Share Capital: 10,000 Equity Shares of Rs 100 each 10,00,000
5% Debentures (Secured by Floating charge on all assets) 1,60,000
Interest payable on these debentures 4,000
Bank overdraft (secured by hypothecation of stock) 25,000
Creditors 36,000
The amounts estimated to be 35ealized are: Goodwill Rs 1,000; Building Rs 3,00,000; Plant Rs 5,25,000;
Fixtures Rs 10,000; Stock Rs 31,000; Debtors Rs 20,000.
Creditors included Rs 6,000 on account of wages of 15 men at Rs 100 per month for 4 months
immediately before the date of winding up : Rs 9,000 being the salaries of 5 employees at Rs 300
per month for the previous 6 months; Rent for godown for the last six months amounting to Rs 3,000;
Income-tax deducted out of salaries of employees Rs 1,000 and Directors Fees Rs 500.
Three years ago, the debit balance in the Profit and Loss Account was Rs 77,925 and since that date
the accounts of the company have shown the following figures:
Year Year Year
31-3-20X0 31-3-20X1 31-3-20X2
Rs Rs Rs
Gross Profit 65,000 45,000 40,000
Wages and Salaries 40,500 36,000 34,400
Electricity and Water Tax 5,750 6,380 5,260
Debentures interest 8,000 8,000 8,000
Bad Debts 8,540 7,600 6,700
33
Depreciation 6,700
Directors’ Fees 1,000 1,000 1,000
Miscellaneous Expenses 10,500 7,265 7,980
Total 80,990 66,245 63,340
In addition it is estimated that the company would have to pay Rs 5,000 as compensationto an employee
for injuries suffered by him which was contingent liability not accepted by the company.
Prepare the Statement of Affairs and the Deficiency account
Solution
Statement of Affairs (In liquidation) of X Ltd. on 31 March, 20 X2
Estimated Realisable value:
Rs
Assets not specifically pledged (as per list A)
Cash 500
Debtors 20,000
Building 3,00,000
Plant 5,25,000
Fixtures 10,000
Goodwill 1,000
8,56,500
Assets specifically pledged (as per list B)
(a) (b) (c) (d)
Estimated Due to Deficiency Surplus carried to
Realisable secured ranking as the last column
Value creditors unsecured
Rs Rs Rs Rs
Stock 31,000 25,000 — 6,000
Estimated surplus from assets specifically pledged 6,000
Estimated total assets available for preferential
creditors, Debenture holders secured by a floating 8,62,500
charge and unsecured creditors (carried forward)
Summary of Gross Assets :
Gross realised value of assets specifically 31,000
pledged
Other Assets 8,56,500
Total 8,87,500
34
Rs Rs Rs
25,000 Secured creditors (as per list B) to the extent
which claims are estimated to be covered by
assets specifically pledged
18,000
18,000 Preferential creditors (as per list ‘C’
Estimated
balance of assets available for Debenture 8,44,500
holders secured by a floating charge and
unsecured creditors)
1,64,000 Debenture holders secured by floating charge
(as per list D) 1,64,000
Estimated surplus as regards 6,80,500
debenture holders*
Unsecured creditors (as per list E)
Estimated unsecured balance of claims of
creditors partly secured on specific assets
brought
forward (c) Nil
Creditors on Trade Account 16,500
27,000 Outstanding Expenses 6,500 23,000
2,34,000 Estimated surplus as regards 6,57,500
creditors, difference
between Gross Assets (D) and
Gross Liabilities as per column (E)
Issued and called up capital :
1000 Equity Shares of Rs 100 each fully called
up as per list (G) 10,00,000
Estimated deficiency as regards 3,42,500
contributories
*Note: This must be read subject to the following :
(1) There is no unpaid capital to the called-up.
(2) The estimates are subject to cost of the winding up and to any surplus or deficiency on trading
pending realisation of assets.
List H Deficiency Account
Items contributing to deficiency:
(1) Excess of capital and liabilities over assets three years 77,925ago as shown by the balance sheet
(2) Net dividends or bonuses declared during the period Nil
(3) Net Trading Losses (after charging items shown in 60,575Note below) for the same period
35
(4) Losses other than trading losses written off or for Nil which provision has been made in the
books during the same period
(5) Estimated losses now written off for which provision has been made for thepurpose of
preparing the statement:
Bad Debts (Debtors) 5,000Loss on
Goodwill 99,000
Buildings 50,000
Plant 25,000
Fixtures 13,000
Stock 7,000
Workmen’s Compensation 5,000 2,04,000
(6) Other items contributing to deficiency: 3, 42,500
Items reducing deficiency: Nil
Deficiency as shown by the Statement of affairs 3,42,500
Notes as to net trading profits and losses:
Provision for depreciation on Property, plant and Equipment 6,700
Charged of Income-tax Nil
Interest on Debentures 24,000
Payment to directors made by the company and required by law to be
disclosed in the accounts 3,000
Balance (being other trading losses) 26,87560
Particulars of Creditors for expenses Unsecured Preferential
Directors Fees 500
Income tax on salaries — 1,000
Rent (not distrained by landlord) 3,000 —
Wages (15 men for 4 months at Rs 100 each) — 6,000
Salaries (5 men for 4 months at Rs 300 each, 3,000 6,000
Rs 9,000)
Workmen’s Compensation 5,000
6,500 18,000
Creditors on trade account are Rs 16,500 (i.e.,Rs 36,000 less the total of creditors mentioned
above, excluding Rs 5,000 for workmen’s compensation).
Working Note:
Balance in Profit & Loss A/c (Dr.) 1,38,500
(Given in Balance Sheet)
Add: Estimated Losses on Realization of Assets:
Bad Debts (Debtors) 5,000
36
Loss on
Goodwill 99,000
Buildings 50,000
Plant 25,000
Fixtures 13,000
Stock 7,000
Workmen’s Compensation 5,000 2,04,000
Total Deficiency 3,42,500
Question 12
From the following particulars, prepare a Statement of Affairs and the Deficiency of the Equipment
Ltd., which went into liquidation on December 31, 20X5:
Rs Rs
3,000 equity shares of 100 each, Rs 80 paid-up 2,40,000
6% 1,000 preference shares of Rs 100 each fully paid- 1,00,000
up
Less: Calls in arrear (5,000) 95,000
5% Debentures having a floating charge on the
assets (interest paid upto June 30, 20X5) 1,00,000
Mortgage on Land & Buildings 80,000
Trade Creditors 2,65,500
Owing for wages 20,000
Secretary’s salary (@ Rs 500 p.m.) owing 3,000
Managing Director’s salary (@ Rs 1,500 p.m.) owing 6,000
Assets Estimated to produce Book value

Rs Rs
Land & Building 1,30,000 1,20,000
Plant 1,30,000 2,00,000
Tools 4,000 20,000
Patents 30,000 50,000
Stock 74,000 87,000
Investments in the hands of a
Bank for an overdraft of Rs 1,70,000 1,80,000
1,90,000
Book Debts 60,000 90,000
37
On 31st December, 20X0, the balance sheet of the company showed a general reserve of Rs 40,000
accompanied by a debit balance of Rs 25,000 in the Profit & Loss Account.
In 20X1 the company made a profit of Rs 40,000 and declared a dividend of 10% on equity shares. The
company suffered a total loss of Rs 1,09,000 besides loss of stock due to fire of Rs 40,000 during
20X2, 20X3 and 20X4. For 20X5 accounts were not made.
The cost of winding up is expected to be Rs 15,000.
Solution
In the matter of the Companies Act, & in the matter of Equipment Ltd. (in winding up)
Statement of Affairs on 31 December, 20X5, the date of winding up
Estimated realisable value
Assets Rs
Assets not specifically pledged (as per list A)
Trade debtors 60,000
Stock in trade 74,000
Plant 1,30,000
Tools 4,000
Patents 30,000
Unpaid calls 5,000
3,03,000
Assets specifically pledged (as per list B)
Estimated Due to Deficiency Surplus
Realisation Secured Ranking as carried to the
Creditors Unsecured last column
Creditors
Rs Rs Rs Rs
Investments 1,70,000 1,90,000 20,000
Land & Building 1,30,000 80,000 50,000
3,00,000 2,70,000
Estimated surplus from assets specifically pledged
50,000
Estimated total assets available for preferential 3,53,000
creditors, debenture holders and unsecured creditors
Summary of Gross Assets:
38
Gross realisable value of - assets
specifically charged 3,00,000
others assets 3,03,000
6,03,000
Estimated total assets available for preferential
creditors, debenture holders, bank overdraft and
unsecured creditors brought forward 3,53,000
Gross Liabilities Liabilities
Rs Rs Rs
2,50,000 Secured creditors (as per List B) to the
extent to which claims are estimated
to be covered by assets specifically
pledge
22,000 Preferential creditors as per list C 22,000
(20,000 +2,000)
Estimated balance of assets available for
Debenture holders, Bank & unsecured
Creditors 3,31,000
1,02,500 Debenture holders secured by a
floating
charge as per list D (1,02,500)
Surplus as regards debenture holders 2,28,500
Unsecured creditors as per list E
Estimated unsecured balance of claim of
creditors partly secured on
specific assets 20,000
Trade creditors 2,65,500
2,92,500 Outstanding expenses 7,000 2,92,500
Estimated deficiency as regards
creditors
being the difference between gross
liabilities and gross assets 64,000
39
6,67,000
Issued & Called up Capital:
3,000 Equity shares or Rs 100 each, Rs 80 2,40,000
paid
6% 1,000 preference shares of Rs 100
each fully called 1,00,000 3,40,000
Estimated Deficiency as regards
members as per list H 4,04,000
Note: (i) The above is subject to cost to winding up estimated at Rs 15,000 and to any surplus in
deficiency on trading realisation of assets.
(ii) There are 3,000 shares unpaid @ Rs 20 per share liable to be called up.
List H - Deficiency Account

A. Item contributing to Deficiency: Rs
1. Excess of capital & liabilities over assets on 1-1-20X3 Nil
2. Net dividend & bonuses during the period Jan. - Dec. 20X1 29,700
3. Net trading losses after charging depreciation, taxation, interest on
debentures, etc. during the same period (Rs 1,09,000 + Rs 1,31,300) 2,40,300
4. Losses other than trading losses written off or for which provision
has been made in the books during the same period - stock loss. 40,000
5. Estimated losses now written off or for which provision has been made
for thepurpose of preparing the statement :
Rs
Plant 70,000
Tools 16,000
Patents 20,000
Stock 13,000
Investments 10,000
Debtors 30,000 1,59,000
6. Other reducing items contributing to deficiency NIL
4,69,000
B. Items reducing Deficiency
7. Excess of assets over capital and liabilities on 1st Jan. 20X1 15,000
8. Net trading profit during the period 1st Jan. 20X1 to 31st Dec. 20X1 40,000
9. Profit & Incomes other than trading profit during the same period
40
10. Other items Deficiency - Profit expected on Land & Building 10,000
65,000
Deficiency as shown by the statement of Affairs 4,69,000
(A) - (B) 4,04,000

Working Notes:
(1) Trial Balance to ascertain the amount of loss for 20X5
Dr. Cr.
Rs Rs
Land & Building 1,20,000
Plant 2,00,000
Tools 20,000
Patents 50,000
Stock 87,000
Investments 1,80,000
Debtors 90,000
Equity Capital 2,40,000
6% Preference share capital 95,000
5% Debentures 1,00,000
Interest Outstanding 2,500
Mortgage on Land & Building 80,000
Trade Creditors 2,65,500
Owing for Wages 20,000
Secretary’s Salary 3,000
Managing Director’s Salary 6,000
Bank Overdraft 1,90,000
Profit & Loss Account on 1-1-20X5 1,23,700
8,70,700 10,02,000
Loss for the year (balancing figure) 1,31,300 -
10,02,000 10,02,000
41
Reserve & Surplus Account
Rs Rs
20X0 To Profit & Loss A/c 25,000 20X0 By Balance b/d 40,000
Dec. 31 (Transfer) Dec. 31
20X1 20X1
To Dividend - Equity 24,000 Dec. 31 By Profit for 40,000
the year
- Preference 5,700
20X2
to 20X4 20X4
To Profit & Loss A/c (Loss) 1,09,000 Dec. 31 By Balance c/d 1,23,700
To Loss of Stock
40,000
2,03,700 2,03,700
42
CHSPTER - ACCOUNTING FOR EMPLOYEE STOCK OPTION PLAN (ESOP)
Question 13
PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1-4-2015, conditional upon the
employee remaining in the company for 2 years. The fair value of the option is Rs. 18 on the grant date
and the exercise price is Rs. 55 per share. The other information is given as under:
i) Number of employees expected to satisfy service condition are 930 in the 1st year and 850 in the
2nd year.
ii) 40 employees left the company in the 1st year of service and 880 employees have actually completed
2 year vesting period.
You are required to calculate ESOP cost to be amortized by PQ Ltd. in the years 2015- 2016 and 2016-
2017.
Solution:
Calculation of ESOP cost to be amortized
2015-2016 2016-2017
Fair value of options per Rs. 18 Rs. 18
share
No. of options expected to
vest under the scheme 93,000 (930 x 100) 88,000 (880 x 100)
Fair value of options Rs. 16,74,000 Rs. 15,84,000
Value of options recognized (Rs. 16,74,000 / 2) (Rs. 15,84,000 – Rs.
as expenses 8,37,000 8,37,000) 7,47,000
Question 14
At the beginning of year 1, the enterprise grants 1,000 stock options to each member of its sales team,
conditional upon the employees remaining in the employment of the enterprise for three years, and the
team selling more than 50,000 units of a particular product over the three-year period. The fair value
of the stock options is Rs 15 per option at the date of grant.
During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of year 3, the
enterprise has sold 55,000 units, and the stock options do not vest.
Twelve members of the sales team have remained in service for the three-year period. You are required
to examine and give comment in light of the relevant Guidance Note that whether the company should
recognise the expenses on the base of options granted or not.
43
Also state will your answer differ if, instead of modifying the performance target, the enterprise had
increased the number of years of service required for the stock options to vest from three years to
ten years.
Solution
Paragraph 19 of the Guidance Note on Share Based Payments requires, for a performance condition
that is not a market condition, the enterprise to recognize the services received during the vesting
period based on the best available estimate of the number of shares or stock options expected to vest
and to revise that estimate, if necessary, if subsequent information indicates that the number of shares
or stock options expected to vest differs from previous estimates. On vesting date, the enterprise
revises the estimate to equal the number of instruments that ultimately vested. However, paragraph
24 of the Guidance Note requires, irrespective of any modifications to the terms and conditions on
which the instruments were granted, or a cancellation or settlement of that grant of instruments, the
enterprise to recognize, as a minimum, the services received, measured at the grant date fair value of
the instruments granted, unless those instruments do not vest because of failure to satisfy a vesting
condition (other than a market condition) that was specified at grant date.
Furthermore, paragraph 26(c) of the Guidance Note specifies that, if the enterprise modifies the
vesting conditions in a manner that is not beneficial to the employee, the enterprise does not take the
modified vesting conditions into account when applying the requirements for treatment of vesting
conditions as specified in Guidance Note.
Therefore, because the modification to the performance condition made it less likely that the stock
options will vest, which was not beneficial to the employee, the enterprise takes no account of the
modified performance condition when recognizing the services received. Instead, it continues to
recognize the services received over the three-year period based on the original vesting conditions.
Hence, the enterprise ultimately recognizes cumulative remuneration expense of Rs 1,80,000 over the
three-year period (12 employees × 1,000 options × Rs 15).
The same result would have occurred if, instead of modifying the performance target, the enterprise
had increased the number of years of service required for the stock options to vest from three years
to ten years. Because such a modification would make it less likely that the options will vest, which would
not be beneficial to the employees, the enterprise would take no account of the modified service
condition when recognizing the services received. Instead, it would recognize the services received
from the twelve employees who remained in service over the original three-year vesting period.
44
Question 15
The following particulars in respect of stock options granted by a company are available
Grant date April 1,,2016
Number of employees covered 50
Number options granted per employee 1,000
Fair value of option per share on grant date (Rs.) 9
The options will vest to employees serving continuously for 3 years from grant date, provided the share
price is Rs. 65 or above at the end of 2018-19.
The estimates of number employees satisfying the condition of continuous employment were 48 on
31/03/17, 47 on 31/03/18. The number of employees actually satisfying the condition of continuous
employment was 45.
The share price at the end of 2018-19 was Rs. 68
Compute expenses to recognize in each year and show important accounts in books of the company.
Solution
The vesting of options is subject to satisfaction of two conditions viz. service condition of continuous
employment for 3 years and market condition that the share price at the end of 2018-19 is not less
than 65/-. The company should recognise value of option over 3-year vesting period from 2016-17 to
2018-19.
Year 2016-17
Fair value of option per share = Rs. 9
Number of shares expected to vest under the scheme = 48 × 1,000 = 48,000
Fair value = 48,000 × 9 = 4,32,000
Expected vesting period = 3 years
Value of option recognised as expense in 2016-17 = 4,32,000 /3 = 1,44,000
Year 2017-18
Fair value of option per share = 9
Number of shares expected to vest under the scheme = 47 × 1,000 = 47,000
Fair value = 47,000 × 9 = 4,23,000
Expected vesting period = 3 years
Cumulative value of option to recognise as expense in 2016-17 and 2017-18 = (4,23,000/ 3) × 2 = 2,82,000
Value of option recognised as expense in 2016-17 = 1,44,000
Value of option recognised as expense in 2017-18 = 2,82,000 – 1,44,000 = 1,38,000
Year 2018-19
Fair value of option per share = 9
Number of shares actually vested under the scheme = 45 × 1,000 = 45,000
Fair value = 45,000 × 9 = 4,05,000
Vesting period = 3 years
45
Cumulative value of option to recognise as expense in 2016-17, 2017-18 and 2018-19 = 4,05,000
Value of option recognised as expense in 2016-17 and 2017-18 = 2,82,000
Value of option recognised as expense in 2018-19 = 4,05,000 – 2,82,000 = 1,23,000
Question 16 (November 2020)

Sun Ltd. grants 100 stock options to each of its 1200 employees on 01.04.2016 for Rs. 30, depending
upon the employees at the time of vesting of options. Options would be exercisable within a year it is
vested. The market price of the share is Rs. 60 each. These options will vest at the end of the year 1
if the earning of Sun Ltd. is 16% or it will vest at the end of year 2 if the average earning of two years
is 13%, or lastly it will vest at the end of the third year, if the average earning of 3 years is 10%. 6000
unvested options lapsed on 31.3.2017, 5000 unvested options lapsed on 31.03.2018 and finally 4000
unvested options lapsed on 31.03.2019. The earnings of Sun Ltd. for the three financial years ended on
31st March, 2017, 2018 and 2019 are 15%, 10% and 6%, respectively. 1000 employees exercised their
vested options within a year and remaining options were unexercised at the end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the statement
showing compensation expenses to be recognized at the end of each year.
Solution:
Rs. Rs.
31.3.17 Employee compensation expense A/c Dr. 17,10,000
To ESOP Outstanding A/c 17,10,000
(Being compensation expense recognized in
respect of the ESOP i.e. 100 options each
granted to 1,200 employees at a discount of Rs.
30 each, amortized on straight line basis over
vesting years (Refer W.N.)
31.3.17 Profit and Loss A/c Dr. 17,10,000
To Employee compensation expense A/c 17,10,000
(Being expenses transferred to profit and Loss
A/c)
respect of the ESOP - Refer W.N.)
A/c)
46
respect of the ESOP - Refer W.N.)
A/c)
2019-20 Bank A/c (1,00,000 x Rs. 30) Dr. 30,00,000
ESOS outstanding A/c [(31,50,000/1,05,000) x 30,00,000
1,00,000]
To Equity share capital (1,00,000 x Rs. 10) 10,00,000
To Securities premium A/c (1,00,000 x Rs. 50,00,000
50)
(Being 1,00,000 options exercised at an
exercise price of Rs. 30 each)
31.3.2020 ESOS outstanding A/c Dr. 1,50,000
To General Reserve A/c 1,50,000
(Being ESOS outstanding A/c on lapse of 5,000
options at the end of exercise of option period
transferred to General Reserve A/c)
Working Note:
Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3
(31.3.2017) (31.3.2018) (31.3.2019)
Number of options expected to 1,14,000 options 1,09,000 1,05,000
vest
Total compensation expense Rs. 34,20,000 Rs. 32,70,000 Rs. 31,50,00
accrued (60-30)
Compensation expense of the 34,20,000 x 1/2 = 32,70,000 x 2/3 Rs. 31,50,000
year Rs. 17,10,000 = Rs. 21,80,000
Compensation expense recognized Nil Rs. 17,10,000 Rs. 21,80,000
previously
Compensation expenses to be Rs. 17,10,000 Rs. 4,70,000 Rs. 9,70,000
recognized for the year
47
CHAPTER - BUYBACK OF SECURITIES AND EQUITY SHARES WITH
DIFFERENTIAL RIGHTS
Question 17 (ICAI Module)

Extra Ltd. (a non-listed company) furnishes you with the following summarized Balance Sheet as on 31st
March, 20X1: (RS. IN LAKHS)
LIABILITIES AMOUNT ASSETS AMOUNT
Equity Shares of Rs. 10 Each Fully 100 Fixed Assets Less Dep 50
Paid Investments at Cost 120
9% Redeemable Pref. Shares of 20 Current Assets 142
Rs. 100 Each Fully Paid
Capital Reserves 8
Revenue Reserves 50
Securities Premium 60
10% Debentures 4
Current Liabilities 70
312 312
i. The company redeemed the preference shares at a premium of 10% on 1st April, 20X1.
ii. It also bought back 3 lakhs equity shares of 10 each at 30 per share.
iii. The payment for the above was made out of huge bank balances, which appeared as a part of the
current assets.
iv. Included in its investment were “investments in own debentures” costing 2 lakhs (face value 2.20
lakhs). These debentures were cancelled on 1st April, 20X1.
v. The company had 1,00,000 equity stock options outstanding on the above mentioned date, to the
employees at 20 when the market price was 30 (This was included under current liabilities). On
1.04.20X1 employees exercised their options for 50,000 shares.
vi. Pass the journal entries to record the above.
vii. Prepare Balance Sheet as at 01.04.20X1
Solution:
Date Particulars Amount
01.04.X1 9% Redeemable Pref. Share Capital A/c Dr. 20.00
Premium on redemption of Pref. Shares A/c Dr. 2.00
To Pref. Shareholders A/c 22.00
01.04.X1 Pref. Shareholders A/c Dr. 22.00
To Bank A/c 22.00
01.04.X1 Equity Shares Buy-back A/c Dr. 90.00
To Bank A/c 90.00
01.04.X1 Equity Share Capital A/c Dr. 30.00
48
Premium Payable on Buy-Back A/c Dr. 60.00
To Equity Shares Buy-back A/c 90.00
01.04.X1 Revenue Reserve Dr. 50.00
To Capital Redemption Reserve 50.00
01.04.X1 10% Debentures A/c Dr. 2.20
To Investment (Own Debentures A/c) 2.00
To Profit on Cancellation of Own Deb. A/c 0.20
01.04.X1 Profit on Cancellation of Own Deb. A/c Dr. 0.20
To Capital Reserve A/c 0.20
01.04.X1 Bank A/c Dr. 10
Employee Stock Option Outstanding A/c Dr. 5
To Equity Share Capital A/c 5
To Security Premium A/c 10
01.04.X1 Security Premium A/c Dr. 2.00
To Premium on redemption of Pref. Shares A/c 2.00
Balance Sheet of Extra Ltd. as on 01.04.2017

Particulars Note no. Rs. in Lakhs
I. EQUITY & LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1 75.00
(b) Reserves & Surplus 2 66.20
(2) Non-current Liabilities

3 1.80
(a) Long Term Borrowings
6.50
(3) Current Liabilities 208.00
TOTAL
II. ASSETS
(1) Non-Current Assets
(a) Property, Plant & Equipment 50.00
(b) Non-Current Investments at Cost 118.00
4 40.00
(2) Current Assets
208.00
TOTAL
49
Notes to Accounts
Rs. in
Lakhs
1 Share Capital
Equity Share Capital 75.00
Opening Balance 100.00
Less – Cancellation of bought back shares (30.00)
Add – Shares issued against ESOP 5.00
2 Reserves & Surplus
Capital Reserve 8.20
Add- Profit on Cancellation of Debentures 0.20
Revenue Reserves -
Less – Creation of Capital Redemption Res. (50.00)
Security Premium 8.00

Less- Adjustment for cancellation of Equity (60.00)
Less – Adjustment for Premium on Red. (2.00)
Add – Shares issued against ESOP at Prem. 10.00
Capital Redemption Reserves 50.00

66.20
3 Long Term Borrowings
Secured 1.80
10% Debentures (4 – 2.20)
Working Notes
1. 10% Debentures
Less – Cancellation of Own debentures (2.20)
1.80
2. Current Liabilities
Less – Adjustment for ESOP Outstanding (5.00)
50
65.00
3. Investments at Cost
Less – Investment in own debentures (2.00)
118.00
4. Current Assets
Less – Payment to Pref. Shares (22.00)
Less – Payment to Equity Shareholders (90.00)
Add – Share price received against ESOP 10.00
40.00
Question 18 (November 2020 RTP)

Pratham Ltd. (a non-listed company) has the following Capital structure as on 31st March, 2020:
Particulars Rs. Rs.
Equity Share Capital (shares of Rs. 10 each fully paid 30,00,000
Reserves & Surplus
General Reserve 32,50,000
Security Premium Account 6,00,000
Profit & Loss Account 4,30,000
Revaluation Reserve 6,20,000 49,00,000
Loan Funds 42,00,000
You are required to compute by Debt Equity Ratio Test, the maximum number of shares that can be
bought back in the light of above information, when the offer price for buy back is Rs. 30 per share.
Solution:
Debt Equity Ratio Test
Particulars Rs.
a) Loan funds 42,00,000
b) Minimum equity to be maintained after buy back in the 21,00,000
ratio of 2:1 (Rs. in crores)
c) Present equity shareholders fund (Rs. in crores) 72,80,000
d) Future equity shareholder fund (Rs. in crores) (See Note 2) 59,85,000
(72,80,000-12,95,000)
e) Maximum permitted buy back of Equity (Rs. in crores) [(d) – 38,85,000 (by
(b)] (See Note 2) simultaneous equation)
f) Maximum number of shares that can be bought back @ Rs. 1,29,500 (by
30 per share (shares in crores) (See Note 2) simultaneous equation)
51
Working Notes:
1. Shareholders’ funds
Particulars Rs.
Paid up capital 30,00,000
Free reserves (32,50,000 +6,00,000+4,30,000) 42,80,000
72,80,000
2. As per section 68 of the Companies Act, 2013, amount transferred to CRR and maximum equity
to be bought back will be calculated by simultaneous equation method.
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account
is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Equation 1 :(Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity
to be maintained = Maximum permissible buy-back of equity
(72,80,000 –x) - 21,00,000 = y (1)

Since 51,80,000 – x = y
Equation 2: Maximum buy-back X Nominal Value
Offer price for buy-back
= Nominal value of the shares bought –back to be transferred to CRR
= (y/30 X 10) = x
3x = y
x = Rs. 12,95,000 crores and y = Rs. 38,85,000 crores
Question 19
Perrotte Ltd. (a non-listed company) has the following Capital Structure as on 31.03.20X1:
Particulars (Rs in
crores)
(1) Equity Share Capital (Shares of Rs 10 each fully - 330
paid)
(2) Reserves and Surplus
General Reserve 240 -
Securities Premium Account 90 -
Profit & Loss Account 90 -
Infrastructure Development Reserve 180 600
(3) Loan Funds 1,800
52
The Shareholders of Perrotte Ltd., on the recommendation of their Board of Directors, haveapproved on
12.09.20X1 a proposal to buy-back the maximum permissible number of Equity shares considering the
large surplus funds available at the disposal of the company.
The prevailing market value of the company’s shares is Rs 25 per share and in order to induce the
existing shareholders to offer their shares for buy-back, it was decided to offer a price of 20%
over market.
You are also informed that the Infrastructure Development Reserve is created to satisfy Income-
tax Act requirements.
You are required to compute the maximum number of shares that can be bought back in the light of
the above information and also under a situation where the loan funds of the company were either Rs
1,200 crores or Rs 1,500 crores.
Assuming that the entire buy-back is completed by 09.12.20X1, show the accounting entries in the
company’s books in each situation.
Solution
Statement determining the maximum number of shares to be bought back
Number of shares
Particulars When loan fund is

Rs 1,800 Rs 1,200 Rs 1,500
crores crores crores
Shares Outstanding 8.25 8.25 8.25
Test (W.N.1)
Resources Test (W.N.2) 6.25 6.25 6.25
Debt Equity Ratio Nil 3.75 Nil
Test (W.N.3)
Maximum number of shares Nil 3.75 Nil
that can be bought back
[least of the above]
Journal Entries for the Buy-Back (applicable only when loan fund is Rs 1,200 crores)
Rs in crores
Particulars Debit Credit
(a) Equity share buy-back account Dr. 112.5
To Bank account 112.5
(Being buy-back of 3.75 crores equity shares of Rs 10
each @ Rs 30 per share)
(b) Equity share capital account Dr. 37.5
Securities premium account Dr. 75
53
To Equity share buy-back account 112.5
(Being cancellation of shares bought back)
(c) General reserve account Dr. 37.5
To Capital redemption reserve account 37.5
(Being transfer of free reserves to
capital redemption reserve to the extent
of nominal value of share capital bought back out
of redeemed
through free reserves)
Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)

Number of shares outstanding 33
25% of the shares outstanding 8.25
2. Resources Test
Particulars
Paid up capital (Rs in crores) 330
Free reserves (Rs in crores) 420
Shareholders’ funds (Rs in crores) 750
25% of Shareholders fund (Rs in crores) Rs 187.5 crores
Buy-back price per share Rs 30
Number of shares that can be bought back (shares 6.25 crores
in crores) shares
1. Debt Equity Ratio Test
Particulars When loan fund is

Rs 1,800 Rs 1,200 Rs 1,500
crores crores crores
(a) Loan funds (Rs in crores) 1,800 1,200 1,500
(b) Minimum equity to be maintained
after buy-back in the ratio of 2:1 900 600 750
(Rs in crores)
(c) Present equity shareholders fund 750 750 750
(Rs in crores)
54
(d) Future equity shareholder fund N.A. 712.5 N.A.
(Rs in crores) (See Note 2) (750-37.5)
(e) Maximum permitted buy-back of Nil 112.5 (by Nil
Equity (Rs in crores) [(d) – (b)] simultaneous
(See Note 2) equation)
(f) Maximum number of shares that 3.75
can be bought back @ Nil (by Nil
Rs 30 per share (shares in simultaneous
crores) (See Note 2) equation)
Note:
1. Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the provisions
of the Companies Act, 2013.
2. As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should not be
more than twice the capital and its free reserve after such buy-back. In the question, it is stated
that the company has surplus funds to dispose of therefore, it is presumed that buy- back is out of
free reserves or securities premium and hence a sum equal to the nominal value of the share bought
back shall be transferred to Capital Redemption Reserve (CRR). Utilization of CRR is restricted to
issuance of fully paid-up bonus shares only. It means CRR is not available for distribution as dividend.
Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and
free reserves, amount transferred to CRR on buy-back has to be excluded from present equity.
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous
equation method.
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x’ and
maximum permitted buy-back of equity is ‘y’.
Then
Equation 1: (Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be
maintained= Maximum permissible buy-back of equity
(750 –x) - 600 = y (1)
Since 150 – x = y
Equation 2: (Maximum buy back /Offer price for buy back) X Nominal value
= Nominal value of the shares bought –back to be transferred to CRR
= (y/30 X 10) = x
[here (30 = 25% x 120]
Or 3x = y (2)
by solving the above two equations we get
x = Rs 37.5 crores
y = Rs 112.5 crores
55
CHAPTER - AMALGAMATION OF COMPANIES
Question 20 (Books of Tranferor Co.)

The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
X Ltd. Y Ltd.
(Rs) (Rs)
Equity Shares of Rs 10 each 30,00,000 9,00,000
9% Preference Shares of Rs 100 each 3,00,000 -
10% Preference Shares of Rs 100 each - 3,00,000
General Reserve 2,10,000 2,10,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Trade Payables 3,90,000 2,40,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Trade Receivables 6,00,000 3,00,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares
of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of
preceding three financial years (2016-17 : Rs 90,000; 2015-16 : Rs 78,000 and 2014-15: Rs
72,000). The profits of 2014 -15 included credit of an insurance claim of Rs 25,000 (fire
occurred in 2013-14 and loss by fire Rs 30,000 was booked in Profit and Loss Account of that
year). In the year 2015 -16, there was an embezzlement of cash by an employee amounting to Rs
10,000.
(iii) Land & Buildings are valued at Rs 5,00,000 and the Plant & Machinery at Rs 4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts is to be
created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to Rs
15,000 and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included Rs 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
56
You are required to
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.
Solution
In the Books of Y Ltd. Realisation Account
Rs Rs
To Sundry Assets : By Retirement 60,000
Gratuity Fund
Goodwill 75,000
Land & Building 3,00,000 By Trade 2,40,000
payables
Plant & Machinery 4,50,000 By X Ltd. 15,90,000
(Purchase
Inventory 5,25,000 Consideration)
Bank 60,000 17,10,000
To Preference 30,000
Shareholders
(Premium on Redemption)
To Equity Shareholders
(Profit on Realisation) 1,50,000 _______
18,90,000 18,90,000
In the Books of X Ltd. Journal Entries
Dr. Cr.
Rs Rs
Business Purchase A/c Dr. 15,90,000
To Liquidators of Y Ltd. Account (Being business of Y Ltd. 15,90,000
taken over)
Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000
Unrecorded assets Account Dr. 15,000
To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
57
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c (Being Assets and Liabilities 15,90,000
taken over as per agreed valuation).
Liquidators of Y Ltd. A/c Dr. 15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Equity Share Capital A/c 12,00,000
To Securities Premium A/c (Being Purchase Consideration 60,000
satisfied as above).
Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018
B Reserves and Surplus 2 2,70,000
A Long-term provisions 3 2,10,000
A Trade Payables 4 6,10,000
B Short term provision 5 7,500
Total 59,27,500
Assets
A Fixed assets
Tangible assets 6 33,00,000
Intangible assets 7 3,00,000
2 Current assets
A Inventories 8 12,22,500
B Trade receivables 9 8,80,000
C Other current Assets 10 15,000
D Cash and cash equivalents 11 2,10,000
Total 59,27,500
Notes to accounts
Rs
1 Share Capital
4,20,000 Equity Shares of Rs. 10 each fully paid (Out of above 42,00,000
1,20,000 Equity Shares were issued in consideration other than for
cash)
58
6,300 9% Preference Shares of Rs. 100 each (Out of above 3,300 6,30,000
Preference Shares were issued in consideration other than for cash)
Total 48,30,000
Securities Premium 60,000
General Reserve 2,10,000
Total 2,70,000
3 Long-term provisions
Retirement Gratuity fund 2,10,000
4 Trade payables (3,90,000 + 2,40,000 - 20,000*) 6,10,000
* Mutual Owings eliminated.
5 Short term Provisions
Provision for Doubtful Debts 7,500
6 Tangible assets
Land & Buildings 14,00,000
Plant & Machinery 19,00,000
Total 33,00,000
7 Intangible assets
Goodwill (1,50,000 +1,50,000) 3,00,000
8 Inventories (7,50,000 + 4,72,500) 12,22,500
9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
10 Other current Assets 15,000
11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000
Working Notes:
1. Computation of goodwill Rs
Profit of 2016-17 90,000
Profit of 2015-16 adjusted Rs 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (Rs 72,000 – 25,000) 47,000
2,25,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = RS 1,50,000
2.
Purchase Consideration: Rs
Goodwill 1,50,000
Land & Building 5,00,000
Plant & Machinery 4,00,000
Inventory 4,72,500
59
Unrecorded assets 15,000
Cash at Bank 60,000
18,97,500
Less: Liabilities:
Retirement Gratuity 60,000
Trade payables 2,40,000 (3,07,500)
Provision for doubtful debts 7,500
Net Assets/ Purchase Consideration 15,90,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd. 3,00,000
Add: 10% Premium 30,000
9% Preference Shares of X Ltd. 3,30,000
Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000
equity Shares of X Ltd. at 5% Premium 12,60,000
Total 15,90,000
Question 21
The following is the summarized Balance Sheet of A Ltd. as at 31st March, 2019:
Liabilities Amount Assets Amount

8,000 Equity shares of 8,00,000 Building 3,40,000
100 each
10% Debentures 4,00,000 Machinery 6,40,000
Loans 1,60,000 Inventory 2,20,000
Trade payables 3,20,000 Trade receivables 2,60,000
General Reserve 80,000 Bank 1,36,000
Patent 1,30,000
Share issue Expenses 34,000
TOTAL 17,60,000 TOTAL 17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
B Ltd. would take over all assets, except bank balance and Patent at their book values less 10%. Goodwill
is to be valued at 4 year’s purchase of super profits, assuming that the normal rate of return be 8% on
the combined amount of share capital and general reserve.
B Ltd. is to take over trade payables at book value.
The purchase consideration is to be paid in cash to the extent of 6,00,000/- and the balance in fully
paid equity shares of 100/- each at 125/- per share.
The average profit is Rs. 1,24,400.
60
The liquidation expenses amounted to Rs. 16,000.
B Ltd. sold prior to 31st March, 2018 goods costing Rs. 1,20,000 to A Ltd. for Rs. 1,60,000. Rs. 1,00,000
worth of goods are still in Inventory of A Ltd. on 31st March, 2018.
Trade payables of A Ltd. include Rs. 40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance Sheet of B
Ltd. as at 1st April, 2019 after the takeover.
Solution
Books of A Limited
Realization Account
Particulars Rs. Particulars Rs.
TO Building 3,40,000 BY Trade payables 3,20,000
TO Machinery 6,40,000 BY B Ltd. 12,10,000
TO Inventory 2,20,000 BY Equity Shareholders 76,000
(Loss)
TO Trade receivables 2,60,000
TO Patent 1,30,000
TO Bank (Exp.) 16,000
16,06,000 16,06,000
Bank Account
To Balance b/d 1,36,000 By Realization (Exp.) 16,000
To B Ltd. 6,00,000 By 10% Debentures 4,00,000
By Loan 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000
Equity Share Holders Account

To Realization Account 76,000 Equity share capital 8,00,000
To Share issue Expenses 34,000 General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000
B Ltd
Balance Sheet as on 1st April, 2019 (An extract)
Particulars Notes Rs.
EQUITY AND LIABILITIES
a Share capital 1 4,88,000
61
b Reserves and Surplus 2 1,07,000
a Trade Payables 3 2,80,000
b Bank overdraft 6,00,000
14,75,000
ASSETS
Property, Plant and Equipment
Tangible assets 4 8,82,000
B In Tangible assets 5 2,16,000
2 Current assets
a Inventories 6 1,83,000
b Trade receivables 7 1,94,000
14,75,000
Notes to Accounts
Sr. No. Particulars Rs.
1 Share Capital
4,880 Equity shares of 100 each 4,88,000
(Shares have been issued for
consideration other than cash)
Total 4,88,000
2 Reserves and Surplus (an extract)
Securities Premium 1,22,000
Profit and loss account
Less: Unrealized profit (15,000) (15,000)
Total 1,07,000
3 Trade payables
Opening balance 3,20,000
Less: Inter-company transaction (40,000) 2,80,000
cancelled upon amalgamation
4 Tangible assets
Buildings 3,06,000
Machinery 5,76,000
Total 8,82,000
5 Intangible assets
62
Goodwill 2,16,000
6 Inventories
Less: Cancellation of profit upon (15,000) 1,83,000
amalgamation
7 Trade receivables
Less: Intercompany transaction (40,000) 1,94,000
cancelled upon amalgamation
Working Notes:
1. Valuation of Goodwill Rs.
Average profit 1,24,400
Less: 8% of Rs. 8,80,000 (70,400)
Super profit 54,000
Value of Goodwill = 54,000 x 4 2,16,000
1. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Inventory 1,98,000
Trade receivables (2,60,000-26,000) 2,34,000
Total Assets 15,30,000
Less: Trade payables (3,20,000)
Net Assets 12,10,000
Out of this Rs. 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000) Rs. 6,10,000 in
shares of 125/-. Thus, the number of shares to be allotted 6,10,000/125 = 4,880 shares.
3. Unrealized Profit on Inventory Rs.
The Inventory of A Ltd. includes goods worth Rs. 25,000
1,00,000 which was sold by B Ltd. on profit.
Unrealized profit on this Inventory will be 40,000.
40000 x 100000 / 160000
As B Ltd purchased assets of A Ltd. at a price 10% less (10,000)
than the book value, 10% need to be adjusted from the
Inventory i.e., 10% of Rs. 1,00,000.
Amount of unrealized profit 15,000
63
Question 22
P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized
balance sheets of both the companies on the date of amalgamation stood as below:
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
Rs Rs Rs Rs
Equity Shares (Rs 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
100 each)
9% Pref. Shares 3,80,000 2,80,000 Furniture & 1,00,000 50,000
(Rs 100 each) Fittings
8% Debentures 2,00,000 1,00,000 Plant & Machinery 6,20,000 4,50,000
General Reserve 1,50,000 50,000 Trade receivables 3,25,000 1,50,000
Profit & Loss A/c 3,52,000 2,05,000 Inventory 2,33,000 1,05,000
Unsecured Loan - 1,75,000 Cash at bank 2,08,000 1,75,000
Trade payables 88,000 1,60,000 Cash in hand 54,000 20,000
19,90,000 12,90,000 19,90,000 12,90,000
PQ Ltd. took over the assets and liabilities of both the companies at book value after creating
provision @ 5% on inventory and trade receivables respectively and depreciating Furniture & Fittings
by @ 10%, Plant and Machinery by @ 10%. The trade receivables of P Ltd. include Rs 25,000 due from
Q Ltd.
PQ Ltd. will issue:
 5 Preference shares of Rs 20 each @ Rs 18 paid up at a premium of Rs 4 per share for each
pref. share held in both the companies.
 6 Equity shares of Rs 20 each @ Rs 18 paid up a premium of Rs 4 per share for each equity
share held in both the companies.
 6% Debentures to discharge the 8% debentures of both the companies.
 20,000 new equity shares of Rs 20 each for cash @ Rs 18 paid up at a premium of Rs 4 per
share.
 PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights
as per the intrinsic value of the shares of both the companies.
You are required to prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books.
64
Solution
In the Books of P Ltd.
Realization Account
Rs Rs
To Land & Building 4,50,000 By 8% Debentures 2,00,000
To Plant & Machinery 6,20,000 By Trade Payables 88,000
To Furniture & Fitting 1,00,000 By PQ Ltd. 16,02,100
To Trade receivables 3,25,000 (Purchase
consideration)
To Inventory/Stock 2,33,000 By Equity Shareholders A/c 1,37,900
To Cash at Bank 2,08,000 (loss)
To Cash in Hand 54,000
To Preference shareholders 38,000
(excess payment)
20,28,000 20,28,000
Equity Shareholders Account

Rs Rs
To Realization A/c (loss) 1,37,900 By Share capital 8,20,000
To Equity Shares in PQ Ltd. 10,82,400 By Profit & Loss A/c 3,52,000
To Cash 1,01,700 By General Reserve 1,50,000
13,22,000 13,22,000
9% Preference Shareholders Account

Rs Rs
To Preference Share in PQ 4,18,000 By Pref. Share Capital 3,80,000
Ltd.
By Realization A/c 38,000
4,18,000 4,18,000
PQ Ltd. Account
To Realization 16,02,100 By Shares in PQ Ltd.
A/c
For Equity 10,82,400 15,00,400
For Pref. 4,18,000
By Cash
1,01,700
16,02,100 16,02,100
65
8% Debentures holders Account
Rs Rs
To 6% Debentures 2,00,000 By 8% Debentures 2,00,000
Books of Q Ltd.
Realization Account
Rs Rs
To Land & Building 3,40,000 By 8% Debentures 1,00,000
To Plant & Machinery 4,50,000 By Trade payables 1,60,000
To Furniture & Fittings 50,000 By Unsecured loan 1,75,000
To Trade receivables 1,50,000 By PQ Ltd. (Purchase
To Inventory 1,05,000 consideration) 7,92,250
To Cash at bank 1,75,000 By Equity Shareholders A/c 90,750
To Cash in hand 20,000 Loss
To Pref. shareholders 28,000
13,18,000 13,18,000
Equity Shareholders Account

Rs Rs
To Equity shares in PQ Ltd. 4,22,400 By Share Capital 3,20,000
To Realization 90,750 By Profit & Loss A/c 2,05,000
To Cash 61,850 By General Reserve 50,000
5,75,000 5,75,000
9% Preference Shareholders Account

Rs Rs
To Preference Share in PQ Ltd. 3,08,000 By Share Capital 2,80,000
By Realization A/c 28,000
3,08,000 3,08,000
PQ Ltd. Account
Rs Rs
To Realization A/c 7,92,250 By Equity share in PQ Ltd.
For Equity 4,22,400
Preference 3,08,000 7,30,400
By cash 61,850
7,92,250 7,92,250
66
8% Debentures holders Account
Rs Rs
To 6% Debentures 1,00,000 By 8% Debentures 1,00,000
Working Notes:
(a) Purchase consideration
P Ltd. Rs Q Ltd. Rs
Payable to preference shareholders:
Preference share at Rs 22 per share 418000 308000
Equity shares at Rs 22 per share 1082400 422400
Cash [see W.N.(ii) 101700 61850
1602100 792250
Value of Net Assets
P Ltd. Rs Q Ltd.
Rs
Land & Building 4,50,000 3,40,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Furniture and fittings less 10% Dep 90,000 45,000
Trade Receivable less 5% 3,08,750 1,42,500
Inventory less 5% 2,21,350 99,750
Cash at Bank 2,08,000 1,75,000
Cash in Hand 54,000 20,000
Less: Debentures (2,00,000) (1,00,000)
Trade Payables (88,000) (1,60,000)
Secured Loans 0 (1,75,000)
16,02,100 7,92,250
Payable in Shres 15,00,400 7,30,400
Payable in Cash* 1,01,700 61,850
67
(iii) P Q
Plant &Machinery 6,20,000 4,50,000
Less: Depreciation 10% 62,000 45,000
5,58,000 4,05,000
Furniture & Fixtures 1,00,000 50,000
Less: Depreciation 10% 10,000 5,000
90,000 45,000
*This cash is paid to equity shareholders of both the companies for adjustment of their rights as
per intrinsic value of both companies.
68
CHAPTER - FINANCIAL STATEMENTS OF BANKING COMPANIES
Question 23
The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2017.
Rs
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000
The following further information is given:
(i) A customer to whom a sum of Rs 16 lakhs has been advanced has become insolvent and it is
expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs 2,10,000 was found necessary by the
auditors.
(iii) Rebate on bills discounted on 31.3.2016 was Rs 19,000 and on 31.3.2017 was Rs 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was nil as on 31.3.2016.
Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.2017.
69
Solution:
TOP Bank Limited
Profit and Loss Account for the year ended 31st March, 2017
Schedule Year ended
31.03.2017
(Rs in ‘000s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
III. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80
IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80
Year ended 31.3.

2017 (Rs in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees 320
70
II. Rent and taxes 144
III. Depreciation on bank’s properties 48
IV. Director’s fee, allowances and expenses 48
V. Auditors’ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40
768.46
Working Note:
(Rs in ‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2016 19.00
Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)
5,923.18
Question 24
From the following information, calculate the amount of Provisions and Contingencies and prepare Profit
and Loss Account of ‘Supreme Bank Limited’ for the year ending 31st March, 2018:
Income Rs in lakhs Expenditure Rs in lakhs
Interest and discount 1,835 Interest expended 1,136
Interest accrued on 8 Printing & stationery 18
Investments
Commission, exchange 12 Repair & maintenance 2
and brokerage
Profit on sale of 1 Payment to and provision 80
investments for employees (salaries,
bonus etc.)
Rent received 2 Other Operating Expenses 5
Additional Information:
Rs in lakhs
(i) Rebate on bills discounted to be provided for 3
(ii) Classifications of Advances:
Standard Assets 4,100
Sub-Standard Assets (fully secured) 380
Doubtful Assets not covered by security 155
Doubtful Assets covered by security
For 1 year 10
More than 1 year, but less than 2 years 18
71
More than 2 year, but less than 3 years 35
More than 3 year 22
Loss Assets 50
(iii) Make tax provision @ 35% of the profit.
(iv) Profit and Loss Account (Cr.) brought forward from the previous 65
year
Solution:
(a) Calculation of Provisions and Contingencies
(i) Provision on Non-Performing Assets

Rs in lakhs
Particulars Amount % of Provision Provision
Standard Assets 4,100 0.4 16.40
Sub-standard Assets 380 15 57
Doubtful Assets not covered by security 155 100 155
Doubtful Assets covered by security:
For 1 year 10 25 2.50
More than 1 year, but less than 2 years 18 40 7.20
More than 2 years & but less than 3 years 35 40 14
More than 3 years 22 100 22
Loss Assets 50 100 50
4,770 324.10
(ii) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure (excluding tax)]
= 35% of [(1,840 +15) – (1,136+105+324.10)] = Rs 101.47 lakhs
Total Provisions and contingencies = Provisions on NPAs + Provisions for tax
= 324.10 + 101.47 = Rs 425.57 lakhs
(b) Supreme Bank Limited

Profit and Loss Account for the year ended 31st March, 2018
Particulars Schedule No. Rs in lakhs
I Income
Interest Earned 13 1,840
Other Income 14 15
1,855
II Expenditures
Interest Expended 1,136
Operating Expenses 16 1,05
72
Provisions & Contingencies 425.57
1,666.57
III Profit/Loss
Net Profit/Loss for the year 188.43
Profit/Loss brought forward 65
253.43
IV Appropriations
Transfer to Statutory Reserve @ 25% of 188.43 47.11
Transfer to Other Reserves -
Balance carried over to Balance Sheet 206.32
253.43
Schedule 13 – Interest earned
I Interest & Discount (1,835 – 3) 1,832
II Interest on Investments 8
1,840
Schedule 14- other income
Commission, exchange and brokerage 12
Profit on sale of investments 1
Rent received 2
15
Schedule 16- Operating Expenses
Printing & stationery 18
Repair & maintenance 2
Payment to and provision for employees (salaries, bonus etc.) 80
Other Operating Expenses 5
105
73
Question 25
Astha Bank has the following Capital Funds and Assets as at 31st March, 2018:
Rs in crores
Capital Funds:
Equity Share Capital 600.00
Statutory Reserve 470.00
Profit and Loss Account (Dr. Balance) 30.00
Capital Reserve (out of which Rs 25 crores were due to revaluation of 130.00
assets and balance due to sale of assets)
Assets:
Balance with other banks 15.00
Cash balance with RBI 35.50
Claim on Banks 52.50
Other Investments 70.00
Loans and Advances:
(i) Guaranteed by government 22.50
(ii) Guaranteed by DICGC/ECGC 110.00
(iii) Other 9,365.00
Premises, furniture and fixtures 92.50
Leased assets 40.00
Off- Balance Sheet items:
(i) Acceptances, endorsements and letters of credit 1,100.00
(ii) Guarantees and other obligations 6,200.00
You are required to:
(i) Segregate the capital funds into Tier I and Tier II capitals.
(ii) Find out the risk-adjusted assets and risk weighted assets ratio.
Solution:
(a)
(i) Capital Funds –
Tier I: Rs in crore
Equity Share Capital 600
Statutory Reserve 470
Capital Reserve (arising out of sale of assets) 105
Less: Profit & Loss (Dr. bal.) (30)
1,145
Capital Funds - Tier II:
Capital Reserve (arising out of revaluation of assets) 25
Less: Discount to the extent of 55% (13.75)
74
11.25
(ii) Risk Adjusted Assets
Funded Risk Assets Rs in crores percentage weight amount Rs in crores
Cash Balance with RBI 35.50 0 —
Balances with other Banks 15 20 3
Claims on banks 52.50 20 10.50
Other Investments 70 100 70
Loans and Advances:
(i) guaranteed by government 22.50 0 —
(ii) guaranteed by DICGC/ECGC 110 50 55
(iii) Others 9,365 100 9,365
Premises, furniture and fixtures 92.50 100 92.50
Leased Assets 40 100 40
9,636
Off-Balance Sheet Item Rs in Crore Credit Conversion Factor Rs In Crore
Acceptances, Endorsements
and Letters of credit 1,100 100 1,100
Guarantees and other obligations 6,200 100 6,200
7,300
Risk Weighted Assets Ratio: Capital Funds (Tier I & Tier II) × 100 / Risk Adjusted Assets off
Balance sheet items
= (1,145 +11.25)/ (9,636 +7,300)
= (1,156.25 /16,936) x 100 = 6.83% (rounded off)
Question 26
i) What is meant by the term “Rebate on bills discounted”? Explain in brief.
ii) For a banking company, bills for collection was Rs. 21 lakhs as on 1st April, 2019. During 2019-20,
bills received for collection amounted to Rs. 193.50 lakhs. Bills collected were Rs. 141 lakhs. Bills
dishonored was Rs. 16.50 lakhs. Prepare Bills for Collection (Assets) and Bills for Collection
(Liabilities) Account.
Solution:
i) Banks discount hundreds of bills every day and when someone gets a bill discounted, the bank credits
the discount account with the full amount of the discount, the bank will earn in respect of that bill.
But in practice, it frequently happens that some of these bills will not mature by the close of the
accounting year. The portion of the discount which relates to the period falling after the close of
the accounting period is called 'rebate on bills discounted', or 'unearned discount'.
75
ii) Bills for Collection (Assets) Account
Rs. in lacs Rs. in lacs
To Balance b/d 21 By Bills for collection 141
To Bills for collection 193.5 By Bills dishonored 16.5
By Balance c/d 57
214.5 214.5
Bills for Collection (Liabilities) Account

Rs. in lacs Rs. in lacs
To Bills for collection 141 By Balance b/d 21
To Bills dishonored 16.5 By Bills for collection 193.5
To Balance c/d 57
214.5 214.5
76
ACCOUNTING STANDARD - 7
Question 27
On 1st December, 2018, “Sampath” Construction Company Limited undertook a contract to construct a
building for Rs. 108 lakhs. On 31st March, 2019 the company found that it had already spent Rs. 83.99
lakhs on the construction. A prudent estimate of additional cost for completion was Rs. 36.01 lakhs.
You are required to compute the amount of provision for foreseeable loss, which must be made in the
Final Accounts for the year ended 31st March, 2019 based on AS 7 “Accounting for Construction
Contracts.”
Solution:
Calculation of foreseeable loss for the year ended 31st March, 2019
(as per AS 7 “Construction Contracts”)
Particulars (Rs. in lakhs)
Cost incurred till 31st March, 2019 83.99
Prudent estimate of additional cost for 36.01
completion
Total cost of construction 120.00
Less: Contract price (108.00)
Foreseeable loss 12.00
According to para 35 of AS 7 (Revised 2002) “Construction Contracts”, when it is probable that total
contract costs will exceed total contract revenue; the expected loss should be recognized as an expense
immediately. Therefore, amount of Rs.12 lakhs is required to be provided for in the books of Sampath
Construction Company for the year ended 31st March, 2019.
Question 28
A construction contractor has a fixed price contract for Rs 9,000 lacs to build a bridge in 3 years
time frame. A summary of some of the financial data is as under:
(Amount Rs in lacs)
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2,093 6,168* 8,100**
Estimated profit for whole contract 950 1,000 1,000
*Includes Rs 100 lacs for standard materials stored at the site to be used in year 3 to complete the
work.
**Excludes Rs 100 lacs for standard material brought forward from year 2.
The variation in cost and revenue in year 2 has been approved by customer.
77
Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss to be
recognized in the Statement of Profit and Loss as per AS-7 (revised).
Answer:
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in three
years are computed below:
(Amount in Rs lakhs)
Up to the Recognized in Recognized in
reporting date previous years current year
Year 1
Revenue (9,000 x 26%) 2,340 - 2,340
Expenses (8,050 x 26%) 2,093 - 2,093
Profit 247 - 247
Year 2
Revenue (9,200 x 74%) 6,808 2,340 4,468
Expenses (8,200 x 74%) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200 x 100%) 9,200 6,808 2,392
Expenses (8,200 x 100%) 8,200 6,068 2,132
Profit 1,000 740 260
Working Note:
Year 1 Year 2 Year 3
Revenue after considering variations 9,000 9,200 9,200
Less: Estimated profit for whole contract 950 1,000 1,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred upto the reporting date (B) 2,093 6,068 8,200
(6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%
78
ACCOUNTING STANDARD - 9
Question 29
Given below are the following informations of B.S. Ltd.
1. Goods of Rs.50,000 were sold on 18-03-2018 but at the request of the buyer these were
delivered on 15-04-2018.
2. On 13-01-2018 goods of Rs.1,25,000 are sent on consignment basis of which 20% of the goods
unsold are lying with the consignee as on 31-03-2018.
3. Rs.1,00,000 worth of goods were sold on approval basis on 01-12-2017. The period of approval
was 3 months after which they were considered sold. Buyer sent approval for 75% goods up to
31-01-2018 and no approval or disapproval received for the remaining goods till 31-03-2018.
4. Apart from the above, the company has made cash sales of Rs 7,80,000 (gross). Trade discount
of 5% was allowed on the cash sales.
You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be recognized
as revenue for the year ended 31st March, 2018 in above cases in the context of AS-9.
Solution
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should be
regarded as being achieved when the following conditions are fulfilled:
I. the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
II. no significant uncertainty exists regarding the amount of the consideration that will be derived
from the sale of the goods.
Case (i)
The sale is complete but delivery has been postponed at buyer’s request. B.S. Ltd. should
recognize the entire sale of Rs.50,000 for the year ended 31st March, 2018.
Case (ii)
In case of consignment sale revenue should not be recognized until the goods are sold to
a third party.20% goods lying unsold with consignee should be treated as closing inventory
and sales should be recognized for Rs.1,00,000 (80% of Rs.1,25,000).
Case (iii)
In case of goods sold on approval basis, revenue should not be recognized until the goods
have been formally accepted by the buyer or the buyer has done an act adopting the
transaction or the time period for rejection has elapsed or where no time has been fixed, a reasonable
time has elapsed. Therefore, revenue should be recognized for the total sales
amounting Rs.1,00,000 as the time period for rejecting the goods had expired.
79
Case (iv) Trade discounts given should be deducted in determining revenue. Thus Rs 39,000 should be
deducted from the amount of turnover of Rs 7,80,000 for the purpose of recognition of revenue. Thus,
revenue should be Rs 7,41,000.
Thus total revenue amounting Rs.9,91,000 (50,000 + 1,00,000 + 1,00,000 + 741000) will be recognized
for the year ended 31st March, 2018 in the books of B.S. Ltd.
Question 30
Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following information
for the year ended 31st March,2020:
(i) On 31st December, 2019 shoes worth Rs. 3,20,000 were sent to Mohan Shoes for sale on consignment
basis of which 25% shoes were unsold and lying with Mohan Shoes as on 31st March, 2020.
(ii) On 10th January, 2020, Tonk Tanner supplied shoes worth Rs. 4,50,000 to Shani Shoes and
concurrently agrees to re-purchase the same goods on 11th April. 2020.
(iii)On 21st March, 2020 shoes worth Rs. 1,60,000 were sold to Shoe Shine but due to refurbishing of
their showroom being underway, on their request, shoes were delivered on 12th April, 2020.
You are required to advise the accountant of Tonk Tanners, when amount is to be recognised as revenue
in 2019 -20 in above cases in the context of AS 9.
Answer:
(i) Shoes sent to Mohan Shoes (consignee) for consignment sale
In case goods are sent for consignment sale, revenue is recognized when significant risks of ownership
have passed from seller to the buyer.
In the given case, Mohan Shoes is the consignee i.e. an agent of Tonk Tanners and not the buyer.
Therefore, the risk and reward is considered to vest with Tonk Tanners only till the time the sale is
made to the third party by Mohan Shoes; although the goods are held by Mohan Shoes. Hence, in the
year 2019- 2020, the sale will be recognized for the amount of goods sold by Mohan Shoes to the third
party i.e. for Rs. 3,20,000 x 75% = Rs. 2,40,000.
(ii) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same goods at
a later date
For such transactions that are in substance a financing agreement, the resulting cash inflow is not
revenue and should not be recognised as revenue in the year 2019-2020. Hence, sale of Rs. 4,50,000 to
Shani Shoes should not be recognized as revenue.
(iii)Delivery is delayed at buyer’s request
On 21st March, 2020, if Shoe Shine takes title and accepts billing for the goods then it is implied
that the sale is complete and all the risk and rewards of ownership has been transferred to the
buyer. In case no significant uncertainty exists regarding the amount of consideration for sale,
revenue shall be recognized in the year 2019-2020 irrespective of the fact that the delivery is
delayed on the request of Shoe Shine.
80
Question 31
Rajendra undertook a contract Rs. 20,00,000 on an arrangement that 80% of the value of work done,
as certified by the architect of the contractee should be paid immediately and that the remaining 20%
be retained until the Contract was completed.
In Year 1, the amounts expended were Rs. 8,60,000, the work was certified for Rs. 8,00,000 and 80%
of this was paid as agreed. It was estimated that future expenditure to complete the Contract would
be Rs. 10,00,000.
In Year 2, the amounts expended were Rs. 4,75,000. Three-fourth of the work under contract was
certified as done by December 31st and 80% of this was received accordingly. It was estimated that
future expenditure to complete the Contract would be Rs. 4,00,000.
In Year 3, the amounts expended were Rs. 3,10,000 and on June 30th, the whole Contract was
completed.
Show how Contract revenue would be recognized in the P & L A/c of Mr. Rajendra each year.
Answer:
(a) Year 1 Rs.
Actual expenditure 8,60,000
Future estimated expenditure 10,00,000
Total Expenditure 18,60,000
8,60,000
% of work completed = 18,60,000
x 100 = 46.24% (rounded off)
Revenue to be recognized = 20,00,000 x 46.24% = Rs. 9,24,800
Year 2
Actual expenditure 4,75,000
Future Expenditure 4,00,000
Expenditure incurred in Year 18,60,000
17,35,000
4,75,000+8,60,000
% of work completed = 17,35,000
= 76.95% (rounded off)
Revenue to be recognized (cumulative) = 20,00,000 x 76.95% = 15,39,000
Less: revenue recognized in Year 1 = ( 9,24,800)
Revenue to be recognized in Year 2 Rs. 6,14,200
Year 3
Whole contract got completed therefore total contract value less revenue recognized up to year 2 will
be amount of revenue to be recognized in year 3 i.e. 20,00,000 – 15,39,000 (9,24,800 + 6,14,200) = Rs.
4,61,000.
Note: Calendar year has been considered as accounting year.
81
ACCOUNTING STANDARD – 14
Question 32
Som Ltd. agreed to takeover Dove Ltd. on 1st April, 2020. The terms and conditions of takeover were
as follows:
(i) Som Ltd. issued 56,000 equity shares of Rs.100 each at a premium of Rs.10 per share to the
equity shareholders of Dove Ltd.
(ii) Cash payment of Rs. 1,00,000 was made to equity shareholders of Dove Ltd.
(iii) 20,000 fully paid preference shares of Rs. 70 each issued at par to discharge the preference
shareholders of Dove Ltd.
You are required to calculate the amount of purchase consideration as per the
provisions of AS 14.
Answer:
(b) As per AS 14, ‘Accounting for Amalgamations’ consideration for the amalgamation means the
aggregate of shares and other securities issued and payment made in form of cash or other assets
by the transferee company to the shareholders of the transferor company.
Computation of Purchase Consideration:

(a) Preference Shares:
20,000 Preference shares in Som Ltd. @ Rs. 70 per share 14,00,000
(b) Cash 1,00,000
(c) Equity shares: 56,000 equity shares in Som Ltd.
@ Rs. 110 per share 61,60,000
76,60,000
Question 33
Astha Ltd. is absorbed by Nistha Ltd.; the consideration being the takeover of liabilities. the payment
of cost of absorption not exceeding Rs. 10,000 (actual cost Rs. 9,000); the payment of the 9%
debentures of Rs. 50,000 at a premium of 20% through 8% debentures issued at a premium of 25%
of face value and the payment of Rs.15 per share in cash and allotment of three 11% preference
shares of Rs. 10 each and four equity shares of Rs.10 each at a premium of 20% fully paid for every
five shares in Astha Ltd.
The number of shares of the vendor company are 1,50,000 of Rs. 10 each fully paid. Calculate purchase
consideration as per AS 14.
Answer:
As per AS 14 ‘Accounting for Amalgamations’, the term ‘consideration’ has been defined 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 company to the shareholders of the transferor company.
82
The payment made by transferee company to discharge the Debenture holders and outside liabilities
and cost of winding up of transferor company shall not be considered as part of purchase
consideration.
Computation of Purchase Consideration
Rs.
Cash payment Rs.15 x 1,50,000 22,50,000
11% Preference Shares of Rs. 10 each [(1,50,000 x 9,00,000
3/5) x Rs. 10]
Equity shares of Rs. 10 each @ 20%
premium [(1,50,000 x 4/5) x Rs. 12] 14,40,000
Total Purchase consideration 45,90,000
Question 34
List the conditions to be fulfilled as per AS 14 (Revised) for an amalgamation to be in the nature of
merger, in the case of companies
Answer:
Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions.
i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company and the business of the transfer or company is intended to be
carried on, after the amalgamation, by the transferee company
ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee company, except that cash
may be paid in respect of any fractional shares.
iv) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
83
Question 35
A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The market prices
are generally 20% above cost. You are required to examine whether the policy adopted by the company
for pricing inter-segment transfers at reduced prices is correct or not in line with the provisions of AS
17?
Answer:
AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis that
the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and
any change therein should be disclosed in the financial statements. Hence, the enterprise can have its
own policy for pricing inter - segment transfers and hence, inter-segment transfers may be based on
cost, below cost or market price. However, whichever policy is followed, the same should be disclosed
and applied consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by
the company is correct if followed consistently.
Question 36
The Chief Accountant of Cotton Garments Limited gives the following data regarding its five
segments: (Rs in Crore)
Particulars A B C D E Total
Segment Assets 40 15 10 10 5 80
Segment Results (95) 5 5 (5) 15 (75)
Segment Revenue 310 40 30 40 30 450
The Chief Accountant is of the opinion that segment "A" alone should be reported. Is he justified in his
view? Examine his opinion in the light of provisions of AS 17 'Segment Reporting'.
Answer:
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified as
a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss,
Whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
Further, if the total external revenue attributable to reportable segments constitutes less than 75%
of total enterprise revenue, additional segments should be identified as reportable segments even if
84
they do not meet the 10% thresholds until at least 75% of total enterprise revenue is included in
reportable segments.
Accordingly,
(a) On the basis of revenue from sales criteria, segment A is a reportable segment.
(b) On the basis of the result criteria, segments A & E are reportable segments (since their
results in absolute amount is 10% or more of Rs 100 crore).
(c) On the basis of asset criteria, all segments except E are reportable segments.
Since all the segments are covered in atleast one of the above criteria, all segments have to be reported
upon in accordance with AS 17.
Hence, the opinion of chief accountant that only segment ‘A’ is reportable is wrong.
85
Question 37
ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs 10,00,000. The economic life
of the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd. pays Rs 3,50,000.
The lessee has guaranteed a residual value of Rs 40,000 on expiry of the lease to the lessor. However,
XYZ Ltd. estimates that the residential value of the machinery will be Rs 35,000 only. The implicit rate
of return is 16% and PV factors at 16% for year 1, year 2, year 3 and year 4 are 0.8621, 0.7432, 0.6407
and 0.5523 respectively. You are required to calculate the value of machinery to be considered by ABC
Ltd. and the finance charges for each year.
Solution
As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at the inception
of a finance lease. Such recognition should be at an amount equal to the fair value of the leased asset
at the inception of lease. However, if the fair value of the leased asset exceeds the present value of
minimum lease payment from the standpoint of the lessee, the amount recorded as an asset and liability
should be the present value of minimum lease payments from the standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is Rs 10, 00,000 and the net present value of minimum
lease payments is Rs 10,01,497 (Refer working Note). As the present value of the machine is more than
the fair value of the machine, the machine and the corresponding liability will be recorded at fair value
of Rs 10,00,000.
Calculation of finance charges for each year

Year Finance Payment Reduction in Outstanding
charge (Rs) (Rs) outstanding liability (Rs)
liability (Rs)
1st year beginning - - - 10,00,000
End of 1st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4th year 53,430 3,50,000 2,96,570 37,366
86
Working Note:
Present value of minimum lease payments

Annual lease rental x PV factor Rs 9,79 ,405
Rs 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523)
Present value of guaranteed residual value Rs 40,000 x (0.5523) Rs 22,092
Rs 10,01,497
Question 38
Aksat International Limited has given a machinery on lease for 36 months, and its useful life is 60
months. Cost & fair market value of the machinery is Rs 5,00,000. The amount will be paid in 3 equal
annual installments and the lessee will return the machinery to lessor at termination of lease. The
unguaranteed residual value at the end of 3 years is Rs 50,000. IRR of investment is 10% and present
value of annuity factor of Rs 1 due at the end of 3 years at 10% IRR is 2.4868 and present value of Rs
1 due at the end of 3rd year at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease or operating
lease. If it is finance lease, calculate unearned finance income.
Solution
Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3rd year
= Rs 50,000 x 0.7513
= Rs 37,565
Present value of lease payments = Rs 5,00,000 – Rs 37,565
= Rs 4,62,435
The percentage of present value of lease payments to fair value of the equipment is
(Rs 4,62,435/ Rs 5,00,000) x 100 = 92.487%.
Since, lease payments substantially covers the major portion of the fair value; the lease constitutes a
finance lease.
Calculation of Unearned Finance Income

Annual lease payment = Rs 4,62,435/ 2.4868 =Rs 1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed residual value
= (Rs 1,85,956 × 3) + Rs 50,000
= Rs 5,57,868 + Rs 50,000 = Rs 6,07,868
Unearned finance income = Gross investment - Present value of minimum lease payments and
unguaranteed residual value
= Rs 6,07,868 – Rs 5,00,000 = Rs 1,07,868
87
Question 39
A Ltd. sold JCB having WDV of Rs 20 lakhs to B Ltd. for Rs 24 lakhs and the same JCB was leased back
by B Ltd. to A Ltd. The lease is operating lease. In context of Accounting Standard 19 "Leases" explain
the accounting treatment of profit or loss in the books of A Ltd. if
(i) Sale price of Rs 24 lakhs is equal to fair value.
(ii) Fair value is Rs 20 lakhs and sale price is Rs 24 lakhs.
(iii) Fair value is Rs 22 lakhs and sale price is Rs 25 lakhs.
(iv) Fair value is Rs 25 lakhs and sale price is Rs 18 lakhs.
(v) Fair value is Rs 18 lakhs and sale price is Rs 19 lakhs.
Solution
Following will be the treatment in the given cases:
(i) When sale price of Rs 24 lakhs is equal to fair value, A Ltd. should immediately recognise the profit
of Rs 4 lakhs (i.e. 24 – 20) in its books.
(ii) When fair value is Rs 20 lakhs & sale price is Rs 24 lakhs then profit of Rs 4 lakhs is to be deferred
and amortised over the lease period.
(iii) When fair value is Rs 22 lakhs & sale price is Rs 25 lakhs, profit of Rs 2 lakhs (22 - 20) to be
immediately recognised in its books and balance profit of Rs 3 lakhs (25-22) is to be
amortised/deferred over lease period.
(iv) When fair value of leased machinery is Rs 25 lakhs & sale price is Rs 18 lakhs, then loss of Rs 2 lakhs
(20 – 18) to be immediately recognised by A Ltd. in its books provided loss is not compensated by
future lease payment.
When fair value is Rs 18 lakhs & sale price is Rs 19 lakhs, then the loss of Rs 2 lakhs (20-18) to be
immediately recognised by A Ltd. in its books and profit of Rs 1 lakhs (19-18) should be
amortised/deferred over lease period.
Question 40
Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being Rs. 11,50,000. Economic life of
the machine as well as lease term is 4 years. At the end of each year, lessee pays Rs. 3,50,000 to lessor.
Jaya Ltd. has guaranteed a residual value of Rs. 70,000 on expiry of the lease to Deluxe Ltd., however
Deluxe Ltd. estimates that residual value
will be only Rs. 25,000. The implicit rate of return is 10% p.a. and present value factors at 10% are :
0.909, 0.826, 0.751 and 0.683 at the end of 1
st, 2nd , 3rd and 4th year respectively.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease liability as
per AS-19.
Answer:
According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability
at an amount equal to the fair value of the leased asset at the inception of the finance lease. However,
if the fair value of the leased asset exceeds the present value of the minimum lease payments from the
88
standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of
the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the interest rate
implicit in the lease. Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Payment Internal rate of Present value Rs.
Rs. return (Discount
rate @10%)
1 3,50,000 0.909 3,18,150
2 3,50,000 0.826 2,89,100
3 3,50,000 0.751 2,62,850
4 4,20,000* 0.683 2,86,860
Total 14,70,000 11,56,960
Present value of minimum lease payments Rs. 11,56,960 is more than fair value at the inception of lease
i.e. Rs. 11,50,000, therefore, the lease liability and machinery should be recognized in the books at Rs.
11,50,000 as per AS 19.
Question 41 - Operating and Finance lease

On 1 April 20X1 Venus Ltd entered into two leasing contracts:
The first contract was a contract to lease manufacturing machine (M1) for a two-year period. The
estimated useful economic live of the M1 at the start of the lease was five years. It was the
responsibility of the lessor to repair and insure the M1. The lease contract stated that Venus Ltd should
pay a deposit of Rs 6,00,000 at the start of the lease followed by monthly payments of Rs 2,00,000 in
arrears.
The second contract was to lease another manufacturing machine (M2). The lease was for a four-year
period, which was the estimated useful economic life of the machines. Venus Ltd is required to repair
and insure the M2, which has no estimated residual value at the end of the lease. The lease rentals were
set at Rs 10,000 every six months, payable in advance. The rate of interest implicit in this lease was 5%
per six-monthly period and the present value of the minimum lease payments was very close to the fair
value of the assets at the inception of the lease, which was estimated at Rs 70,000.
Show the necessary treatment in the financial statement for the year ended 31st March 20X2 of Venus
Ltd in accordance of AS 19.
Solution:
Lease of machine M1
The first lease is for two years while the life of the manufacturing machine (M1) is five years, so this
is an operating lease. Therefore the operating lease rentals should be charged to profit and loss account
on a straight line basis per annum is Rs 27,00,000 (6,00,000 + 24 x 2,00,000)/2
89
Lease of machine M2
The second lease is a finance lease as the lease period is equal to the economic life of the machines and
the present value of minimum lease payment is close to the fair value of the assets.
An asset and liability is recognised at Rs 70,000 being the present value of minimum lease payment is
recognised.
Lease Liability
Period ended Balb/f Payment Bal in period Interest Bal c/f
(5%)
30 September 70,000 (10,000) 60,000 3,000 63,000
20X1
31 March 20X2 63,000 (10,000) 53,000 2,650 55,650
31 September 55,650 (10,000) 45,650 2,283 47,933
20X2
Closing Liability: 55,650

Current liability (55,650-17,717) 37,933
Non-Current liability (20,000-2,283) 17,717
The total finance cost for the period is Rs. 5,650 (3,000 + 2,650)
90
Question 42
The following information relates to M/s. XYZ Limited for the year ended 31st March, 2017:
 Net Profit for the year after tax: Rs. 75,00,000
 Number of Equity Shares of Rs 10 each outstanding: Rs 10,00,000
 Convertible Debentures Issued by the Company (at the beginning of the year)
Particulars Nos.
8% Convertible Debentures Rs 100 each 1,00,000
Equity Shares to be issued on conversion 1,10,000
The Rate of Income Tax: 30%.
You are required to calculate Basic and Diluted Earnings per Share (EPS).
Solution:
Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares outstanding during the
year
Rs 75,00,000 / 10,00,000 = Rs.7.50 per share
Computation of diluted earnings per share = Adjusted net profit for the current year / Weighted
average number of equity shares
Adjusted net profit for the current year

Rs
Net profit for the current year 75,00,000
Add: Interest expense for the current year 8,00,000
Less: Tax relating to interest expense (30% of 8,00,000) (2,40,000)
Adjusted net profit for the current year 80,60,000
Number of equity shares resulting from conversion of debentures

= 1,10,000 Equity shares (given in the question)
Weighted average number of equity shares used to compute diluted earnings per share = 11,10,000
shares (10,00,000 + 1,10,000)
Diluted earnings per share = 80,60,000/ 11,10,000 = Rs 7.26 per share
Note: Conversion of convertible debentures into Equity Share will be dilutive potential equity shares.
Hence, to compute the adjusted profit the interest paid on such debentures will be added back as the
same would not be payable in case these are converted into equity shares.
91
Question 43
The following information relates to M/s. XYZ Limited for the year ended 31st March, 2019:
Net Profit for the year after tax: Rs. 37,50,000
Number of Equity Shares of Rs. 10 each outstanding: Rs.5,00,000
Convertible Debentures Issued by the Company (at the beginning of the year)
Particulars Nos.
8% Convertible Debentures of Rs. 100 each 50,000
Equity Shares to be issued on conversion 55,000
The Rate of Income Tax: 30%.
You are required to calculate Basic and Diluted Earnings Per Share (EPS).
Solution
Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares outstanding during the
year
Rs.37,50,000 / 5,00,000 = Rs.7.50 per share
Computation of diluted earnings per share =

Weighted average number of equity shares

Particulars Amount
Net profit for the current year 37,50,000
Add: Interest expense for the current year 4,00,000
Less: Tax relating to interest expense (30% of (1,20,000)
4,00,000)
Adjusted net profit for the current year 40,30,000
Number of equity shares resulting from conversion of debentures = 55,000 Equity shares (given in
the question)
Weighted average number of equity shares used to compute diluted earnings per share =
5,55,000 shares (5,00,000 + 55,000)
Diluted earnings per share = 40,30,000/ 5,55,000 = Rs.7.26 per share
92
Note: Conversion of convertible debentures into Equity Share will be dilutive potential equity shares.
Hence, to compute the adjusted profit the interest paid on such debentures will be added back as the
same would not be payable in case these are converted into equity shares.
Question 44
From the following information, you are required to compute the basic and adjusted Earnings per share:
Net profit for 2015-16 11 lakh
Net profit for 2016-17 15 lakh
No. of shares issued before rights issue 5 lakhs
Right issue One for
every 5 held
Right issue price 15 per share
Last date of exercising right option 1-06-2016
Fair value of shares before right issue 21 per share
Answer:
Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights
+ Total amount received from exercise of rights
Number of shares outstanding prior to exercise +
number of shares issued in the exercise
(Rs. 21.00 x 5,00,000 shares) + (Rs.15.00 x 1,00,000 shares)

5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = Rs. 20.00

(a) Computation of adjustment factor
Fair value per share prior to exercise of rights Rs.(21.00)

(b) Theoretica I ex−right value per share
= Rs.(20.00)
= 1.05
Computation of earnings per share

Year 2015-16 Year 2016-17
EPS for the year 2015-16 as originally reported: Rs. 2.20
(Rs. 11,00,000/5,00,000 shares)
EPS for the year 2015-16 restated for rights issue: [Rs. Rs. 2.10
11,00,000/ (5,00,000 shares x 1.05)]
EPS for the year 2016-17 including effects of rights issue
Rs. 15,00,000 Rs. 2.55
1.05 10
(5,00,000 × 12 ) + ( 6,00,000 × 12)
93
Question 45
As at 1st April, 2016 a company had 6,00,000 equity shares of Rs 10 each (Rs 5 paid up by all
shareholders). On 1st September, 2016 the remaining Rs 5 was called up and paid by all shareholders
except one shareholder having 60,000 equity shares. The net profit for the year ended 31st March,
2017 was Rs 21,96,000 after considering dividend on preference shares and dividend distribution tax
on such dividend totaling to Rs 3,40,000.
Compute Basic EPS for the year ended 31st March, 2017 as per Accounting Standard 20 "Earnings Per
Share".
Solution
Basic Earnings per share (EPS) =
Net profit attributable to equity shareholders / Weighted average number of equity shares outstanding
during the year
= 21,96,000 / 4,57,500 Shares (as per working note) = Rs 4.80 per share
Working Note:
Calculation of weighted average number of equity shares
As per AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of equity share
to the extent that they were entitled to participate in dividend relative to a fully paid equity share
during the reporting period. Assuming that the partly paid shares are entitled to participate in the
dividend to the extent of amount paid, weighted average number of shares will be calculated as follows:
Date No. of equity Amount paid Weighted average no. of equity
shares per share shares
Rs Rs Rs
1.4.2016 6,00,000 5 6,00,000 х 5/10 х 5/12 = 1,25,000
1.9.2016 5,40,000 10 5,40,000 х 7/12 = 3,15,000
1.9.2016 60,000 5 60,000 х 5/10 х 7/12 = 17,500
Total weighted average equity shares 4,57,500
94
Question 46
Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second
year of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs.
1,000 lakhs and Rs. 2,000 lakhs respectively. From the third year it is expected that the timing
difference would reverse each year by Rs. 50 lakhs. Assuming tax rate of 40%, you are required to
compute to the deferred tax liability at the end of the second year and any charge to the Profit and
Loss account.
Solution
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax in
respect of timing differences which originate during the tax holiday period and reverse during the tax
holiday period, should not be recognized to the extent deduction from the total income of an enterprise
is allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Income-
tax Act. Deferred tax in respect of timing differences which originate during the tax holiday period
but reverse after the tax holiday period should be recognized in the year in which the timing
differences originate. However, recognition of deferred tax assets should be subject to the
consideration of prudence. For this purpose, the timing differences which originate first should be
considered to reverse first.
Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50 lakhs x 8 years)
will reverse in the tax holiday period and therefore, should not be recognized. However, for Rs. 600
lakhs (Rs. 1,000 lakhs – Rs. 400 lakhs), deferred tax liability will be recognized for Rs. 240 lakhs (40%
of Rs. 600 lakhs) in first year. In the second year, the entire amount of timing difference of Rs. 2,000
lakhs will reverse only after tax holiday period and hence, will be recognized in full. Deferred tax
liability amounting Rs. 800 lakhs (40% of Rs. 2,000 lakhs) will be created by charging it to profit and
loss account and the total balance of deferred tax liability account at the end of second year will be
Rs. 1,040 lakhs (240 lakhs + 800 lakhs).
95
Question 47
The following particulars are stated in the Balance Sheet of PQR Ltd. as on 31.03.2018:
(Rs in lakh)
Deferred Tax Liability (Cr.) 30.00
Deferred Tax Assets (Dr.) 15.00
The following transactions were reported during the year 2018 -2019:
i Tax Rate 30%
(Rs in lakh)
ii. Depreciation as per books 80.00
Depreciation for tax purposes 70.00
iii. Items disallowed in 2017-2018 and allowed for tax
purposes in 2018-2019. 10.00
iv. Donations to Private Trust made in 2018-2019. 10.00
There were no additions to Fixed Assets during the year.
You are required to show the impact of various items on Deferred Tax Assets and Deferred Tax
Liability as on 31.03.2019.
Answer:
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
Transactions Analysis Nature of Effect Amount
difference
Difference in Generally, written down Responding Reversal of Rs (80-70)
depreciation value method of depreciation timing DTL lakh X 30% = Rs 3
is adopted under IT Act difference lakh
which leads to higher
depreciation in earlier years
of useful life of the asset in
comparison to later years.
Disallowances, as Tax payable for the earlier Responding Reversal of Rs 10 lakh X 30%
per IT Act, of year was higher on this timing DTA = Rs 3 lakh
earlier years account. difference
Donation to private Not an allowable expenditure Permanent Not Not applicable
trusts under IT Act. difference applicable
96
Question 48
The following information is furnished in respect of Slate Ltd. for the year ending 31-3-2019:
i) Depreciation as per books Rs. 2,80,000
Depreciation for tax purpose Rs. 1,90,000
The above depreciation does not include depreciation on new additions.
ii) A new machinery purchased on 1.4.18 costing Rs. 1,20,000 on which 100% depreciation is allowed
in the 1st year for tax purpose whereas Straight-line method is considered appropriate for
accounting purpose with a life estimation of 4 years.
iii) The company has made a profit of Rs. 6,40,000 before depreciation and taxes.
iv) Corporate tax rate of 40%.
Prepare relevant extract of statement of Profit and Loss for the year ending 31-3-2019 and also
show the effect of above items on deferred tax liability/asset as per AS 22.
(b) What are the disclosure requirements for deferred tax assets and deferred tax liabilities in the
balance sheet as per AS 22?
Answer:
a) Statement of Profit and Loss for the year ended 31st March, 2019 (Extract)
Rs.
Profit before depreciation and taxes 6,40,000
Less: Depreciation for accounting purposes
(2,80,000+30,000) (3,10,000)
Profit before taxes (A) 3,30,000
Less: Tax expense (B)
Current tax (W.N.1) (3,30,000 x
40%) Deferred tax (W.N.2) 1,32,000 (1,32,000)
Profit after tax (A-B) NIL 1,98,000
Working Notes:
1. Computation of taxable income
Amount
(Rs.)
Profit before depreciation and tax 6,40,000
Less: Depreciation for tax purpose (1,90,000 + (3,10,000)
1,20,000)
Taxable income 3,30,000
Tax on taxable income @ 40% 1,32,000
97
2. Impact of various items in terms of deferred tax liability / deferred tax asset
S. Transactions Analysis Nature of Effect Amount
No difference (Rs.)
.
(i) Difference in Generally, written Responding Reversal (2,80,000 -
depreciation down timing of DTL 1,90,000) x
value method of difference 40%
depreciation is = (36,000)
adopted under IT
Act which leads to
higher
depreciation in
earlier years of
useful life of the
asset in
(ii) comparison to
later years. Timing Creation
Depreciation Due to allowance difference of DTL (1,20,000
on new of full amountas – 30,000) x
Machinery expenditure 40%
under IT Act, tax = 36,000
payable in the
earlier years is
less.
Net impact NIL
(b) The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balance should be disclosed in the notes to accounts. Deferred tax assets and liabilities
should be distinguished from assets and liabilities representing current tax for the period. Deferred
tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the
enterprise, separately from current assets and current liabilities. The nature of the evidence
supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed
depreciation or carry forward of losses under tax laws.
98
Question 49
The following particulars are stated in the Balance Sheet of HS Ltd. as on 31-3-2019: Particulars (Rs.
in lakhs)
Deferred Tax Liability (Cr.) 60.00
Deferred Tax Assets (Dr.) 30.00
The following transactions were reported during the year 2019-20:
Depreciation as per accounting records 160.00
Depreciation as per income tax records 140.00
Items disallowed for tax purposes in 2018-19 but allowed in 2019-20 20.00
Donation to Private Trust 20.00
Tax rate 30%
There were no additions to fixed assets during the year. You are required to show the impact of various
items on Deferred Tax Assets and Deferred Tax Liability as on 31-3-2020 as per AS-22.
Solution:
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
1) Difference in Depreciation- Generally, written down value method of depreciation is adopted under
income Tax Act which leads to higher depreciation in earlier years of useful life of the asset in
comparison to later years. It is timing difference for which reversal of Deferred tax liability is
required. Reversal of DTL= Rs. (160 – 140) Lakhs X 30% = Rs.6 Lakhs
2) Disallowances, as per IT Act of earlier years- Due to disallowance tax payable for the earlier years
was higher on this account. It is responding timing difference which required Reversal of Deferred
tax assets. Reversal of Deferred tax assets = Rs.20 Lakhs X 30% = Rs. 6 Lakhs
3) Donations to private trusts is not an allowable expenditure under IT Act. It is permanent difference.
Hence, no reversal of tax is required.
99
Question 50
What do you understand by Discontinuing Operations? What are the disclosure and presentation
requirements of AS 24 for discontinuing operations? Explain in brief.
Answer:
As per AS 24 “Discontinuing Operations”, a discontinuing operation is a component of an enterprise:
a. That the enterprise, pursuant to a single plan, is:
(i) Disposing of substantially in its entirety, such as by selling the component in a single
transaction or by demerger or spin-off of ownership of the component to the enterprise's
shareholders or
(ii) Disposing of piecemeal, such as by selling off the component's assets and settling its liabilities
individually or
(iii) Terminating through abandonment and
b. That represents a separate major line of business or geographical area of operations.
c. That can be distinguished operationally and for financial reporting purposes.
An enterprise should include the following information relating to a discontinuing
operation in its financial statements beginning with the financial statements for
the period in which the initial disclosure event occurs:
 A description of the discontinuing operation(s);
 The business or geographical segment(s) in which it is reported as per AS 17;
 The date and nature of the initial disclosure event.
 The date or period in which the discontinuance is expected to be completed if known or
determinable,
 The carrying amounts, as of the balance sheet date, of the total assets to be disposed of
and the total liabilities to be settled;
 The amounts of revenue and expenses in respect of the ordinary activities attributable to the
discontinuing operation during the current financial reporting period;
 The amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing
operation during the current financial reporting period, and the income tax expense related
thereto;
 The amounts of net cash flows attributable to the operating, investing, and financing activities
of the discontinuing operation during the current financial reporting period.
100
Question 51
A consumer goods producer has changed the product line as follows:
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 advise whether it should it be treated as
discontinuing operation as per AS 24?
Answer:
As per AS 24 ‘Discontinuing Operations’, a discontinuing operation is a component of an enterprise:
(i) that the enterprise, pursuant to a single plan, is:
(1) disposing of substantially in its entirety,
(2) disposing of piecemeal, or
(3) terminating through abandonment; and
(ii) that represents a separate major line of business or geographical area of operations; and
(iii) that can be distinguished operationally and for financial reporting purposes.
As per provisions of the standard, business enterprises frequently close facilities, abandon
products or even product lines, and change the size of their work force in response to market
forces. While those kinds of terminations generally are not, in themselves, discontinuing
operations, they can occur in connection with a discontinuing operation. Examples of activities
that do not necessarily satisfy criterion of discontinuing operation are gradual or evolutionary
phasing out of a product line or class of service, discontinuing, even if relatively abruptly, several
products within an ongoing line of business;
In the given case, the company has enforced a gradual enforcement of change in product line
and does not represent a separate major line of business and hence is not a discontinued
operation. If it were a discontinuing operation, the initial disclosure event is the occurrence of
one of the following, whichever occurs earlier:
(i) the enterprise has entered into a binding sale agreement for substantially all of the assets
attributable to the discontinuing operation; or
(ii) the enterprises board of directors or similar governing body has both approved a detailed,
formal plan for discontinuance and made an announcement of the plan.
101
Question 52
A company acquired patent right for Rs 1200 lakhs. The product life cycle has been estimated to be
5 years and the amortization was decided in the ratio of estimated future cash flows which are as
under:
Year 1 2 3 4 5
Estimated future cash flows
(Rs. in lakhs) 600 600 600 300 300
rd
After 3 year, it was ascertained that the patent would have an estimated balance future life of 3
th
years and the estimated cash flow after 5 year is expected to be Rs 150 lakhs. You are required to
determine the amortization pattern under Accounting Standard 26.
Answer:
Amortization of cost of patent as per AS 26
Year Estimated future cash Amortization Amortized Amount
flow (Rs in lakhs) Ratio (Rs in lakhs)
1 600 .25 300
2 600 .25 300
3 600 .25 300
4 300 .40 (Revised) 120
5 300 .40 (Revised) 120
6 150 .20 (Revised) 60
1,200
In the first three years, the patent cost will be amortized in the ratio of estimated future cash flows
i.e. (600: 600: 600: 300: 300).
The unamortized amount of the patent after third year will be Rs 300 lakh (1,200-900) which will be
amortized in the ratio of revised estimated future cash flows (300:300:150) in the fourth, fifth and
sixth year.
Question 53
Naresh Ltd. had the following transactions during the financial year 2019 -2020:
(i) Naresh Ltd. acquired running business of Sunil Ltd. for Rs. 10,80,000 on 15th May, 2019. The fair
value of Sunil Ltd.'s net assets was Rs. 5,16,000. Naresh Ltd. is of the view that due to popularity
of Sunil Ltd.’s product in the market, its goodwill exists.
(ii) Naresh Ltd. had taken a franchise on July 2019 to operate a restaurant from Sankalp Ltd. for
Rs. 1,80,000 and at an annual fee of 10% of net revenues (after deducting expenditure). The
franchise expires after 6 years. Net revenues were Rs. 60,000 during the financial year 2019-
2020.
102
(iii) On 20th August, 2019, Naresh Ltd, incurred costs of Rs. 2,40,000 to register the patent for its
product. Naresh Ltd. expects the patent’s economic life to be 8 years.
Naresh Ltd. follows an accounting policy to amortize all intangibles on straight line basis over the
maximum period permitted by accounting standards taking a full year amortization in the year of
acquisition. Goodwill on acquisition of business to be amortized over 5 years (SLM) as per AS 14.
Prepare a schedule showing the intangible assets section in Naresh Ltd. Balance Sheet at 31st March,
2020.
Answer:
Naresh Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31 st March 2020
Note No. Rs.
Assets
Intangible assets 1 8,11,200
Notes to Accounts (Extract)
Rs. Rs.
1. Intangible assets
Goodwill (Refer to note 1) 4,51,200
Franchise (Refer to Note 2) 1,50,000
Patents (Refer to Note 3) 2,10,000 8,11,200
Working Notes:
Rs.
(1) Goodwill on acquisition of business
Cash paid for acquiring the business (purchase 10,80,000
consideration)
Less: Fair value of net assets acquired (5,16,000)
Goodwill 5,64,000
Less: Amortisation as per AS 14 ie. over 5 years (as (1,12,800)
per SLM)
Balance to be shown in the balance sheet 4,51,200
(2) Franchise 1,80,000
Less: Amortisation (over 6 years) (30,000)
(3) Patent 2,40,000
Less: Amortisation (over 8 years as per SLM) (30,000)
103
Question 54
M/s. Pasa Ltd. is developing a new production process. During the financial year ended 31st March, 2019,
the total expenditure incurred on the process was Rs. 80 lakhs. The production process met the criteria
for recognition as an intangible asset on 1st November, 2018. Expenditure incurred till this date was Rs.
42 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March, 2020 was Rs. 90
lakhs. As on 31.03.2020, the recoverable amount of know how embodied in the process is estimated to
be Rs. 82 lakhs. This includes estimates of future cash outflows and inflows.
You are required to work out:
1) What is the expenditure to be charged to Profit and Loss Account for the year ended 31st March,
2019 ?
2) What is the carrying amount of the intangible asset as on 31st March, 2019?
3) What amount of expenditure to be charged to Profit and Loss Account for the year ended 31st March,
2020?
What is the carrying amount of the intangible asset as on 31st March, 2020?
Solution:
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending 31.03.2019
Rs. 42 lakhs is recognized as an expense because the recognition criteria were not met until 1st
November, 2018. This expenditure will not form part of the cost of the production process
recognized as an intangible asset in the balance sheet.
(ii) Carrying value of intangible asset as on 31.03.2019
At the end of financial year, on 31st March 2019, the production process will be recognized (i.e.
carrying amount) as an intangible asset at a cost of Rs. 38 (80-42) lakhs (expenditure incurred
since the date the recognition criteria were met, i.e., from 1st November 2018)
(iii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
(Rs. in lacs)
Carrying Amount as on 31.03.2019 38
Expenditure during 2019 – 2020 90
Book Value 128
Recoverable Amount (82)
Impairment loss to be charged to Profit and loss account 46
Rs. 46 lakhs to be charged to Profit and loss account for the year ending 31.03.2020.
104
(iv) Carrying value of intangible asset as on 31.03.2020
(Rs. in
lacs)
Book Value 128
Less: Impairment loss (46)
Carrying amount as on 31.03.2020 82
Question 55
A Company acquired for its internal use a software on 01.03.2020 from U.K. for £ 1,50,000. The
exchange rate on the date was as Rs. 100 per £. The seller allowed trade discount @ 2.5%. The other
expenditures were:
i) Import Duty 10%
ii) Additional Import Duty 5%
iii) Entry Tax 2% (Recoverable later from tax department).
iv) Installation expenses Rs. 1,50,000.
v) Professional fees for clearance from customs Rs. 50,000.
Compute the cost of software to be Capitalized as per relevant AS.
Solution:
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software £ 1,50,000
Less: Trade discount @ 2.5% £ ( 3,750)
£1,46,250
Cost in Rs. (UK £1,46,250 x Rs. 100) 146,25,000
Add: Import duty on cost @ 10% (Rs.) 14,62,500
160,87,500
Add: Additional import duty @ 5% (Rs.) 8,04,375
168,91,875
Add: Installation expenses (Rs.) 1,50,000
Add: Professional fee for clearance from customs (Rs.) 50,000
Cost of the software to be capitalized (Rs.) 170,91,875
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part
of the cost of the asset.
105
Question 56.
M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged infringement
of Copyrights. The competitor has filed a suit in the court of law seeking damages of Rs 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.
Solution:
As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should be recognized
when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognized.
In the given situation, since, the directors of the company are of the opinion that the claim can be
successfully resisted by the company; therefore there will be no outflow of the resources. Hence, no
provision is required. The company will disclose the same as contingent liability by way of the following
note:
“Litigation is in process against the company relating to a dispute with a competitor who alleges that
the company has infringed copyrights and is seeking damages of Rs 200 lakhs. However, the directors
are of the opinion that the claim can be successfully resisted by the company.”
Question 57
With reference to AS 29, how would you deal with the following in the annual accounts of the company
at the Balance Sheet dates:
(i) An organization operates an offshore oilfield where its licensing agreement requires it to
remove the oil rig at the end of production and restore the seabed. Ninety percent of the
eventual costs relate to the removal of the oil rig and restoration of damage caused by building
it, and ten percent arise through the extraction of oil. At the balance sheet date, the rig has
been constructed but no oil has been extracted.
(ii) During 2018-19 Ace Ltd. gives a guarantee of certain borrowings of Brew Ltd., whose financial
condition at that time is sound. During 2019-20, the financial condition of Brew Ltd.
deteriorates and on 31st Dec. 2019, it goes into liquidation. (Balance Sheet date 31-3-19).
106
Answer:
i) The construction of the oil rig creates an obligation under the terms of the license to remove the
rig and restore the seabed and is thus an obligating event. At the balance sheet date, however,
there is no obligation to rectify the damage that will be caused by extraction of the oil. An outflow
of resources embodying economic benefits in settlement is probable. Thus, a provision is
recognized for the best estimate of ninety per cent of the eventual costs that relate to the
removal of the oil rig and restoration of damage caused by building it. These costs are included
as part of the cost of the oil rig. However, there is no obligation to rectify the damage that will
be caused by extraction of oil, as no oil has been extracted at the balance sheet date. So, no
provision is required for the cost of extraction of oil at balance sheet date.
Ten per cent of costs that arise through the extraction of oil are recognized as a liability when
the oil is extracted.
ii) As per AS 29, for a liability to qualify for recognition there must be not only a present obligation
but also the probability of an outflow of resources embodying economic benefits to settle that
obligation.
The obligating event is the giving of the guarantee by Ace Ltd. for certain borrowings of Brew
Ltd., which gives rise to an obligation. No outflow of benefits is probable at 31 March 2019.Thus
no provision is recognized. The guarantee is disclosed as a contingent liability unless the
probability of any outflow is regarded as remote.
During 2019-20, the financial condition of Brew Ltd. deteriorates and finally goes into liquidation.
The obligating event is the giving of the guarantee, which gives rise to a legal obligation. At 31
March 2020, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation. Thus, provision is recognized for the best estimate of the
obligation.
Question 58
A Ltd. provides after sales warranty for two years to its customers. Based on past experience, the
company has the following policy for making provision for warranties on the invoice amount, on the
remaining balance warranty period.
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:
Invoice Date Amount (Rs)
th
11 Feb, 2017 60,000
25th Dec, 2017 40,000
th
04 Oct, 2018 1,35,000
st st
Calculate the provision to be made for warranty under AS-29 as at 31 March, 2018 and 31 March,
st
2019. Also compute amount to be debited to P & L account for the year ended 31 March, 2019.
107
Answer:
Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and Contingent
Assets’
st
As at 31 March, 2018 = Rs 60,000 x .02 + Rs 40,000 x .03
= Rs 1,200 + Rs 1,200 = Rs 2,400
st
As at 31 March, 2019 = Rs 40,000 x .02 + Rs 1,35,000 x .03
= Rs 800 + Rs 4,050 = Rs 4,850
st
Amount debited to Profit and Loss Account for year ended 31 March, 2019
Rs
Balance of provision required as on 31.03.2019 4,850
Less: Opening Balance as on 1.4.2018 (2,400)
Amount debited to profit and loss account 2,450
st
Note: No provision will be made on 31 March, 2019 in respect of sales amounting Rs 60,000 made on
th
11 February, 2017 as the warranty period of 2 years has already expired.
108
Question 59
The financial statements of Alpha Ltd. for the year 2019-2020 were approved by the Board of
Directors on 15th July, 2020. The following information was provided:
(i) A suit against the company’s advertisement was filed by a party on 20 th April, 2020 claiming
damages of Rs. 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company had been decided by
March, 2020. But the financial resources were arranged in April, 2020 and amount invested was
Rs. 50 lakhs.
(iii) Theft of cash of Rs. 5 lakhs by the cashier on 31st March, 2020, was detected on 16th July, 2020.
(iv) The company started a negotiation with a party to sell an immovable property for Rs. 40 lakhs
in March, 2020. The book value of the property is Rs. 30 lakh on 31st March, 2020. However,
the deed was registered on 15th April, 2020.
(v) A major fire had damaged the assets in a factory on 5 th April, 2020. However, the assets were
fully insured.
With reference to AS 4, state whether the above mentioned events will be treated as
contingencies, adjusting events or non-adjusting events occurring after the balance sheet date.
Answer:
i) Non-adjusting event: Suit filed against the company is a contingent liability but it was not
existing as on date of balance sheet date as the suit was filed on 20 th April after the balance
sheet date. As per AS 4, 'Contingencies' is restricted to conditions or situations at the balance
sheet date, the financial effect of which is to be determined by future events which may or may
not occur. Hence, it will have no effect on financial statement and will be a non-adjusting event.
(ii) Adjusting event: In the given case, terms and conditions for acquisition of business were finalised
before the balance sheet date and carried out before the closure of the books of accounts but
transaction for payment of financial resources was effected in April, 2020. Hence, necessary
adjustment to assets and liabilities for acquisition of business is necessary in the financial
statements for the year ended 31st March 2020.
(iii) Non-adjusting event: Only those events which occur between the balance sheet date and the
date on which the financial statements are approved, may indicate the need for adjustments to
assets and liabilities as at the balance sheet date or may require disclosure. In the given case, as
the theft of cash was detected on 16th July, 2020 ie after approval of financial statements, no
adjustment is required.
(iv) Non-adjusting event: Adjustments to assets and liabilities are not appropriate for events
occurring after the balance sheet date, if such events do not relate to conditions existing at the
109
balance sheet date. In the given case, sale of immovable property was under proposal stage
(negotiations only started) on the balance sheet date, and was not finalized. Therefore, adjustment
to assets for sale of immovable property is not necessary in the financial statements for the year
ended 31st March, 2020. Disclosure may be given in Report of approving Authority.
(v) Non-adjusting event: Adjustments to assets and liabilities are not appropriate for events
occurring after the balance sheet date, if such events do not relate to conditions existing at the
balance sheet date. The condition of fire occurrence was not existing on the balance sheet date.
Only the disclosure regarding fire and loss, being completely insured may be given in the report of
approving authority.
Question 60
With reference to AS 4 "Contingencies and events occurring after the balance sheet date", state
whether the following events will be treated as contingencies, adjusting events or non-adjusting
events occurring after balance sheet date in case of a company which follows April to March as its
financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the year end. However,
the assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company's advertisement was filed by a party on 10 th April, 10 days after the
year end claiming damages of Rs. 20 lakhs.
Answer:
According to AS 4 on ‘Contingencies and Events Occurring after the Balance Sheet Date’, adjustments
to assets and liabilities are required for events occurring after the balance sheet date that provide
additional information materially affecting the determination of the amounts relating to conditions
existing at the balance sheet date. However, adjustments to assets and liabilities are not appropriate
for events occurring after the balance sheet date, if such events do not relate to conditions existing
at the balance sheet date. “Contingencies” used in the Standard is restricted to conditions or
situations at the balance sheet date, the financial effect of which is to be determined by future
events which may or may not occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore,
the event becomes immaterial and the event is non- adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the
given case, suit was filed against the company’s advertisement by a party on 10th April for amount
of Rs 20 lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-
adjusting event.
110
Question 61
The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following
transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2017.
You are required to advise him in the following situations in accordance with the provisions of AS 5
(i) Provision for doubtful debts was created @ 2% till 31st March, 2016. From the Financial year
2016-2017, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2017, the management has introduced a formal gratuity
scheme in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a period of 5
years. From current year, the useful life of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after completing 5
years of service in the organization. Such employees will get pension of Rs. 20,000 per month.
Earlier there was no such scheme of pension in the organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in measuring the cost
of inventories.
Answer:
(i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2016.
Subsequently in 2016-17, the company revised the estimates based on the changed circumstances
and wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in
estimate and is not change in accounting policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in
substance from previously occurring events or transactions, will not be considered as a change
in accounting policy. Introduction of a formal retirement gratuity scheme by an employer in place
of ad hoc ex-gratia payments to employees on retirement is a transaction which is substantially
different from the previous policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is not a
change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previously
should not be treated as a change in an accounting policy. Hence the introduction of new pension
scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in accounting
policy.
111
Question 62
State whether the following items are an example of Change in Accounting policy / Change in Accounting
Estimates / Extra-Ordinary Items / Prior Period Items / Ordinary Activity.
i) Actual Bad Debts turning out to be more than provisions.
ii) Change from Cost model to Revaluation model for Measurement of carrying amount of PPE.
iii) Government grant receivable as compensation for expenses incurred in previous accounting
period.
iv) Treating Operating Lease as Finance Lease.
v) Capitalisation of borrowing cost on working capital.
vi) Legislative changes having long-term retrospective application.
vii) Change in method of depreciation from straight line to WDV.
viii) Government grant becoming refundable.
ix) Applying 10% depreciation instead of 15% on furniture.
x) Change in useful life of fixed asset.
Answer:
Classification of given items is as follows:
Sr. No. Particulars Remarks
(i) Actual bad debts turning out to be more than Change in Accounting
provisions Estimates
(ii) Change from Cost model to Revaluation model for Change in Accounting Policy
measurement of carrying amount of PPE
(iii) Government grant receivable as compensation for Extra -ordinary Items
expenses incurred in previous accounting period
(iv) Treating operating lease as finance lease. Prior- period Items
(v) Capitalisation of borrowing cost on working Prior-period Items (as
capital interest on working capital
loans is not eligible for
capitalization)
(vi) Legislative changes having long term Ordinary Activity
retrospective application
(vii) Change in the method of depreciation from Change in Accounting
straight line to WDV Estimates
(viii) Government grant becoming refundable Extra -ordinary Items
(ix) Applying 10% depreciation instead of 15% on Prior- period Items
furniture
(x) Change in useful life of fixed assets Change in Accounting
Estimates
112

Ca Inter Advanced Accounts Imp Questions Booklet Chapter - NBFC

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ca Inter Advanced Accounts Imp Questions Booklet Chapter - NBFC

Uploaded by

Copyright:

Available Formats

CA INTER ADVANCED ACCOUNTS IMP QUESTIONS BOOKLET

20X1-X2 (2,50,000) (75,000) (1,75,000) 2,44,000

Balance Nil 50,000

Balance Nil 100,000

Particulars Note No. Rs in Lacs

II. Total revenue 5,865

(2) Current Liabilities

Adjusted reserves of B Ltd.:

4. Other current liabilities

Bills Payable 372 160

1. Assets sold including stock in trade (2,05,000+2,00,000) 4,05,000

Assets Estimated to produce Book value

Summary of Gross Assets:

Gross Liabilities Liabilities

List H - Deficiency Account

(A) - (B) 4,04,000

Question 16 (November 2020)

Question 17 (ICAI Module)

Balance Sheet of Extra Ltd. as on 01.04.2017

(2) Non-current Liabilities

Security Premium 8.00

Capital Redemption Reserves 50.00

Question 18 (November 2020 RTP)

(72,80,000 –x) - 21,00,000 = y (1)

Particulars When loan fund is

Particulars (Shares in crores)

Particulars When loan fund is

Question 20 (Books of Tranferor Co.)

Liabilities Amount Assets Amount

Equity Share Holders Account

B In Tangible assets 5 2,16,000

Equity Shareholders Account

9% Preference Shareholders Account

Equity Shareholders Account

9% Preference Shareholders Account

Year ended 31.3.

(i) Provision on Non-Performing Assets

(b) Supreme Bank Limited

Bills for Collection (Liabilities) Account

Computation of Purchase Consideration:

Calculation of finance charges for each year

Present value of minimum lease payments

Calculation of Unearned Finance Income

Question 41 - Operating and Finance lease

Closing Liability: 55,650

Adjusted net profit for the current year

Number of equity shares resulting from conversion of debentures

Computation of diluted earnings per share =

Adjusted net profit for the current year

Diluted earnings per share = 40,30,000/ 5,55,000 = Rs.7.26 per share

(Rs. 21.00 x 5,00,000 shares) + (Rs.15.00 x 1,00,000 shares)

Theoretical ex-rights fair value per share = Rs. 20.00

Fair value per share prior to exercise of rights Rs.(21.00)

Computation of earnings per share

You might also like