By: Vinit Mishra Sir: Ca Intermediate

Ca Intermediate
By : Vinit Mishra Sir

ALL INDIA RANK - 04 4
ARUL KUMAR
(STUDENT OF TOP-20)
10 ALL INDIA RANK -10
MEGHANA SAWAKAR
(STUDENT OF TOP-20)
“Inspire You to Achieve Dreams”
Our Mission…..
“We are here to Help you, Motivate you, Guide
you and Inspire you to Clear exam in one shot”
Our Vision…..
“Inspire to Achieve Dreams”
“At Any How

At Any Cost
I AM THE CHAMPION”
INDEX
PARTNERSHIP ACCOUNTS
QUESTIONS AND ANSWERS

Question – 1
State the Circumstances when Garner V/S Murray rule not applicable.
ANSWER:
Non-Applicability of Garner vs Murray rule:
1. When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in their capital
ratio. If incidentally, a solvent partner has a debit balance in his capital account, he will escape the
liability to bear the loss due to insolvency of another partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital account of the
insolvent partner.
4. When all the partners of the firm are insolvent.
Question – 2
W paid a premium to other partners of the firm at the time of his admission to the firm, with a
condition that they will not be dissolved before the expiry of five years. The firm is dissolved
after three years. W claims refund of premium.
(i) List the criteria for the calculation of the amount of refund.
(ii) Also list any two conditions when no claim in this respect will arise.
ANSWER:
If the firm is dissolved before the term expires, as is the case, W being a partner who has paid a premium
on admission will have to be repaid/refunded
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence.
No claim for refund will arise if:
(i) The firm is dissolved due to the death of a partner,
(ii) If the dissolution of the firm is basically because of misconduct of W,
(iii) If the dissolution is through an agreement and such an agreement does not have a stipulation for a
refund of premium.
Question – 3
Can a partner be called upon to pay the liability of the LLP? If yes, under what circumstances?
1
Video Classes by Vinit Mishra 9354719404 www.cadreamers.com
ANSWER:
Under the LLP Act, 2008, any obligation of the LLP arising out of a contract or otherwise will be the
sole obligation of the LLP. The partners of an LLP in the normal course of business are not liable for the
debts of the LLP. However, a partner will be liable for his own wrongful acts or commissions, but will
not be liable for the wrongful acts or commissions of other partners of the LLP.
Question – 4
Under what circumstances, an LLP can be would up by the Tribunal.
ANSWER:
Under the following circumstances, an LLP can be wound up by the Tribunal:
(i) If the LLP decides that it should be wound up by the Tribunal;
(ii) If for a period of more than six months, the number of partners of the LLP is reduced below two;
(iii) If the LLP is unable to pay its debts;
(iv) If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the
state or public order;
(v) If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar
for five consecutive financial years;
(vi) If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
Question – 5
Explain the nature of a Limited Liability Partnership. Who can be a designated partner in a
Limited Liability Partnership?
ANSWER:
Nature of Limited Liability Partnership:
A limited liability partnership is a body corporate formed and incorporated under the LLP Act, 2008
and is a legal entity separate from that of its partners. A limited liability partnership shall have perpetual
succession and any change in the partners of a limited liability partnership shall not affect the existence,
rights, or liabilities of the limited liability partnership.
Designated partners:
Every limited liability partnership shall have at least two designated partners who are individuals and at
least one of them shall be a resident in India. In case of a limited liability partnership in which all the
partners are bodies corporate or in which one or more partners are individuals and bodies corporate,
at least two individuals who are partners of such limited liability partnership or nominees of such bodies
corporate shall act as designated partners.
Question – 6
P, Q, and R are partners sharing profits and losses as to 2:2:1. Their Balance Sheet as on 31st
March, 20X1 is as follows:
Liabilities ₹ Assets ₹
Capital accounts Plant and Machinery 1,08,000
P 1,20,000 Fixtures 24,000
2
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve Fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000
They decided to dissolve the business. The following are the amounts realized:
Particulars ₹
Plant and Machinery 1,02,000
Fixtures 18,000
Stock 84,000
Sundry debtors 44,400
Creditors allowed a discount of 5% and realization expenses amounted to ₹ 1,500. There was
an unrecorded asset of ₹ 6,000 which was taken over by Q at ₹ 4,800. An amount of ₹ 4,200
due for GST had come to notice during the course of realization and this was also paid.
You are required to prepare:
(i) Realization account.
(ii) Partners’ capital accounts.
(iii) Cash account.
ANSWER:
Realization Account
Particulars ₹ Particulars ₹
To Debtors 48,000 By Creditors 48,000
To Stock 60,000 By Cash A/c (Assets realized):
To Fixtures 24,000 Plant and Machinery 1,02,000
To Plant and machinery 1,08,000 Fixtures 18,000
To Cash A/c (Creditors) 45,600 Stock 84,000
To Cash A/c (GST) 4,200 Sundry Debtors 44,400 2,48,400
To Cash A/c (Realization expenses) 1,500 By Q (Unrecorded asset)* 4,800
To Profit on Realization
P 3,960
Q 3,960
R 1,980 9,900
3,01,200 3,01,200
Partners’ Capital Accounts

Particulars P Q R Particulars P Q R
₹ ₹ ₹ ₹ ₹ ₹
3
To Realization A/c 4,800 By Balance b/d 1,20,000 48,000 24,000
(unrecorded asset)
To Cash (Bal. fig.) 1,47,960 71,160 37,980 By Reserve Fund 24,000 24,000 12,000
By Realization A/c 3,960 3,960 1,980

(Profit)
1,47,960 75,960 37,980 1,47,960 75,960 37,980
Cash Account
To Balance b/d 60,000 By Realization A/c (Creditors) 45,600
To Realization A/c (Assets) 2,48,400 By Realization A/c (Expenses) 1,500
By Realization A/c (GST) 4,200
By P’s Capital A/c 1,47,960
By Q’s Capital A/c 71,160
By R’s Capital A/c 37,980
3,08,400 3,08,400
Question – 7
‘Thin’, ‘Short’ and ‘Fat’ were in partnership sharing profits and losses in the ratio of 2:2:1.
On 30th September, 20X1 their Balance Sheet was as follows:
Capital Accounts: Premises 50,000
Thin 80,000 Fixtures 1,25,000
Short 50,000 Plant 32,500
Fat 20,000 1,50,000 Stock 43,200
Current Accounts: Debtors 54,780
Thin 29,700
Short 11,300
Fat (Dr.) (14,500) 26,500
Sundry Creditors 84,650
Bank Overdraft 44,330
3,05,480 3,05,480
‘Thin’ decides to retire on 30th September, 20X1 and as ‘Fat’ appears to be short of private
assets, ‘Short’ decides that he does not wish to take over Thin’s share of partnership, so all
three partners decide to dissolve the partnership with effect from 30th September, 20X1. It
then transpires that ‘Fat’ has no private assets whatsoever.
The premises are sold for ₹ 60,000 and the plant for ₹ 1,07,500. The fixtures realize ₹ 20,000
and the stock is acquired by another firm at a book value less 5%. Debtors realize ₹ 45,900.
Realization expenses amount to ₹ 4,500.
The bank overdraft is discharged and the creditors are also paid in full.
4
You are required to write up the following ledger accounts in the partnership books following
the rules in Garner vs. Murray:
(i) Realization Account;
(ii) Partners’ Current Accounts;
(iii) Partners’ Capital Accounts showing the closing of the firm’s books.
ANSWER:
Realization Account
To Premises 50,000 By Sundry Creditors 84,650
To Plant 1,25,000 By Bank:
To Fixtures 32,500 Premises 60,000
To Stock 43,200 Plant 1,07,500
To Debtors 54,780 Fixtures 20,000
To Bank (Creditors) 84,650 Stock 41,040
To Bank (Expenses) 4,500 Debtors 45,900 2,74,440
By Loss on Realization transferred to
Partners’ Current A/cs
Thin 14,216
Short 14,216
Fat 7,108 35,540
3,94,630 3,94,630
Partners’ Current Accounts

Particulars Thin Short Fat Particulars Thin Short Fat
₹ ₹ ₹ ₹ ₹ ₹
To Balance b/d - - 14,500 By Balance b/d 29,700 11,300 -
To Realization 14,216 14,216 7,108 By Capital A/c - 2,916 21,608

Transfer
To Capital A/c transfer 15,484 - -
29,700 14,216 21,608 29,700 14,216 21,608

Particulars Thin Short Fat Particulars Thin Short Fat
₹ ₹ ₹ ₹ ₹ ₹
To Current A/c - 2,916 21,608 By Balance b/d 80,000 50,000 20,000
To Fat’s Capital A/c 990 618 - By Current A/c 15,484 - -

Deficiency in the (transfer)
ratio of 8:5
By Bank 14,216 14,216

(Realization loss)
5
To Bank 1,08,710 60,682 - By Thin & Short 1,608
Capital A/cs
1,09,700 64,216 21,608 1,09,700 64,216 21,608
Working Notes:
(i) Bank Account
To Realization A/c 2,74,440 By Balance b/d 44,330
To Thin’s Capital A/c 14,216 By Realization A/c (Creditors) 84,650
To Short’s Capital A/c 14,216 By Realizations A/c (Expenses) 4,500
By Thin’s Capital A/c 1,08,710
By Short’s Capital A/c 60,682
3,02,872 3,02,872
(ii) Fat’s deficiency has been by borne Thin & Short in the ratio of their fixed capitals i.e., 8:5 following
the rule in Garner vs. Murray.
Question – 8
Amit, Sumit, and Kumar are partners sharing profit and losses in the ratio 2:2:1. The partners
decided to dissolve the partnership on 31st March 20X1 when their Balance Sheet was as
under:
Liabilities Amount Assets Amount

Capital Accounts: Land & Building 1,35,000
Amit 55,200 Plant & Machinery 45,000
Sumit 55,200 Furniture 25,500
General Reserve 61,500 Investments 15,000
Kumar’s Loan A/c 15,000 Book Debts 60,000
Loan from D 1,20,000 Less: Prov. for bad debts (6,000) 54,000
Trade Creditors 30,000 Stock 36,000
Bills Payable 12,000 Bank 13,500
Outstanding Salary 7,500 Capital Withdrawn:
Kumar 32,400
3,56,400 3,56,400
The following information is given to you:

(i) Realization expenses amounted to ₹ 18,000 out of which ₹ 3,000 was borne by Amit.
(ii) A creditor agreed to takeover furniture of book value ₹ 12,000 at ₹ 10,800. The rest of
the creditors were paid off at a discount of 6.25%.
(iii) The other assets realized as follows:
Furniture - Remaining taken over by Kumar at 90% of book value
Stock - Realized 120% of book value
Book Debts - ₹ 12,000 of debts proved bad, remaining were fully realized
6
Land & Building - Realized ₹ 1,65,000
Investments -Taken over by Amit at 15% discount
(iv) For half of his loan, D accepted Plant & Machinery and ₹ 7,500 cash. The remaining
amount was paid at a discount of 10%.
(v) Bills payable were due on an average basis of one month after 31st March 20X1, but
they were paid immediately on 31st March @ 6% discount "per annum".
Prepare the Realization Account, Bank Account and Partners’ Capital Accounts in the
books of Partnership firm.
ANSWER:
Realization Account
To Land and Building 1,35,000 By Provision for bad debts 6,000
To Plant and Machinery 45,000 By Loan from D 1,20,000
To Furniture 25,500 By Trade creditors 30,000
To Investment 15,000 By Bills payable 12,000
To Book debts 60,000 By Outstanding salary 7,500
To Stock 36,000 By Kumar – Furniture taken over
To Bank (Realization expenses) 15,000 (13,500 x .9) 12,150
To Amit – Realization expenses 3,000 By Bank A/c –
To Bank A/c – Stock Realized 43,200
Bill Payable 11,940 Land & Building 1,65,000
D’s Loan 61,500 Debtors 48,000 2,56,200
Creditors 18,000 By Amit (Investment taken over) 12,750
Salary 7,500
To Profit transferred to partner’s
capital Accounts
Amit 9,264
Sumit 9,264
Kumar 4,632 23,160
4,56,600 4,56,600
Bank Account
To Balance b/d 13,500 By Realization A/c 1,13,940
(payment of liabilities: 11,940 +
7,500 + 54,000 + 15,000 +
18,000 + 7,500)
By Amit
To Realization A/c (Assets realized) 2,56,200 By Sumit 79,314
7
To Kumar 12,618 89,064
2,82,318 2,82,318

Particulars Amit Sumit Kumar Particulars Amit Sumit Kumar
₹ ₹ ₹ ₹ ₹ ₹
To Balance b/d 32,400 By Balance b/d 55,200 55,200
By Kumar’s Loan 15,000
To Realization A/c 12,750 By General Reserve 24,600 24,600 12,300

(Investment taken over)
To Realization A/c 12,500 By Realization A/c 3,000

(Furniture taken over) (expenses)
To Bank A/c 79,314 89,064 By Realization A/c 9,264 9,264 4,632

(profit)
By Bank A/c 12,618
92,064 89,064 44,550 92,064 89,064 44,550
Working Notes:
1. Payment for Bills Payable
Particulars Amount (₹)

Bills payable as per Balance sheet 12,000
Less: Discount for early payment {12,000 x 6% x (1/12)} 60
Amount Paid in Cash 11,940
2. Payment to D’s Loan

D’s Loan as per Balance Sheet 120,000.00
50% of Loan adjusted as below:
Plant & Machinery accepted at Book Value (₹ 45,000) and ₹7,500 in cash. 7,500
Balance 50% of Loan adjusted as below:
In cash after allowing discount of 10% i.e. ₹ 60,000 - ₹ 6,000 = ₹ 54,000. 54,000
3. Payment to Trade Creditors

Trade Creditors as per Balance Sheet 30,000
Less: Furniture of Book Value ₹ 12,000 accepted at value ₹ 10,800 10,800
19,200
Less: Discount @ 6.25% 1,200
Amount paid in cash 18,000
4. Furniture taken over by Kumar
8
Furniture as per Balance Sheet 25,500
Less: Furniture of Book Value ₹ 12,000 accepted by trade creditors 12,000
13,500
Less: 10% of Books Value 1,350
Value of Furniture taken over by Kumar 12,150
Question – 9
A, B, and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were ₹
9,600, ₹ 6,000 and ₹ 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Liability for interest on loans from: Investments 1,000
Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200
Stock 4,000
The assets realized in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying the maximum possible loss procedure.
ANSWER:
Statement of Distribution of Cash
Realizat Interest Interest

Partners’ Capitals
ion on loans on loans
from from
partners’ partners
A B C Total
spouses
(₹) (₹) (₹) (₹) (₹) (₹) (₹)

Balance due (1) 2,000 1,000 9,600 6,000 8,400 24,000
(i) Sales of Investments 1,000 (1,000) --
1,000 1,000
(ii) Sales of furniture 2,000 (1,000) (1,000)
-- --
(iii) Sale of machinery 1,200
Maximum possible loss ₹ 22,800

(total of capitals ₹ 24,000 less
cash available ₹ 1,200) allocated
to partners in the profit sharing
(11,400) (6,840) (4,560) (22,800)
ratio i.e. 5:3:2
Amounts at credit (1,800) (840) 3,840 1,200
9
Deficiency of A and B written off
against C 1,800 840 (2,640) --
Amount paid (2) -- -- 1,200 1,200
Balance in capital accounts (1 – 2) 9,600 6,000 7,200 22,800

= (3)
(iv) Sales of stock 4,000

Maximum possible loss 18,800
(₹ 22,800 - ₹ 4,000) Allocated to
(9,400) (5,640) (3,760) (18,800)
partners in the ratio 5:3:2
Amounts at credit and cash paid 200 360 3,440 4,000

(4) (4,000)
Balance in capital accounts left unpaid – Loss (3 – 4) = (5) 9,400 5,640 3,760 18,800
Question – 10
The partners A, B, and C have called you to assist them in winding up the affairs of their
partnership on 30th June, 20X1. Their Balance Sheet as on that date is given below:
Sundry Creditors 17,000 Cash at Bank 6,000
Capital Accounts: Sundry Debtors 22,000
A 67,000 Stock in trade 14,000
B 45,000 Plant and Equipment 99,000
C 31,500 Loan – A 12,000
Loan – B 7,500
1,60,500 1,60,500
(1) The partners share profit and losses in the ratio of 5:3:2
(2) Cash is distributed to the partners at the end of each month
(3) A summary of liquidation transactions are as follows:
July 20X1
₹ 16,500 – collected from Debtors; balance is uncollectable.
₹ 10,000 – received from the sale of entire stock.
₹ 1,000 – liquidation expenses paid.
₹ 8,000 – cash retained in the business at the end of the month.
August 20X1
₹ 1,500 – liquidation expenses paid. As part payment of his Capital, C accepted a piece
of equipment for ₹ 10,000 (book value ₹ 4,000).
₹ 2,500 – cash retained in the business at the end of the month.
September 20X1
₹ 75,000 – received on sale of remaining plant and equipment.
₹ 1,000 – liquidation expenses paid. No cash retained in the business.
10
Required: Prepare a schedule of cash payments as of September 30, showing how the cash
was distributed under ‘Highest Relative Capital Method’.
ANSWER:
Statement of Distribution of Cash
Creditors Capitals
Particulars
(₹) (₹) A (₹) B (₹) C (₹)
Balance Due after loan (W.N.(i)) 17,000 55,000 37,500 31,500
July
Balance available 6,000
Realization less expenses and cash
retained 17,500
Amount available and paid 23,500 17,000 -- -- 6,500
Balance due -- 55,000 37,500 25,000
August
Opening balance 8,000
Expenses paid and balance carried
forward
4,000
Available for distribution
4,000
Cash paid to ‘B’ and Equipment given
to C.
-- 4,000 10,000
(Excess paid to ‘C’ ₹ 7,333
September 55,000 33,500 15,000
Opening balance 2,500
Amount realized less expenses 74,000
Amount paid to partners 41,500 25,400 9,600
76,500
13,500 8,100 5,400
Working Note:
(i) Highest Relative Capital Basis
Particulars A (₹) B (₹) C (₹)

Scheme of payment for July Balance of Capital of
Capital Accounts 67,000 45,000 31,500
Less: Loans (12,000) (7,500) ---
A 55,000 37,500 31,500
Profit-sharing ratio 5 3 2
Capital Profit sharing ratio 11,000 12,500 15,750
Capital in profit sharing ratio, taking A’s capital as base 55,000 33,000 22,000
B
11
Excess of C’s Capital and B’s Capital (A-B) 4,500 9,5000
Profit –sharing ratio 3 2
Capital in profit sharing ratio taking B’s Capital as base 4,500 3,000
Excess of C’s Capital over B 6,500
(ii) Highest Relative Capital Basis
Particulars A (₹) B (₹) C (₹)

Scheme of payment for September Balance of Capital
Accounts (A) 55,000 33,500 15,000
Profit-sharing ratio 5 3 2
Capital/ Profit sharing ratio 11,000 11,167 7,500
Capital in profit sharing ratio taking C’s capital as base 55,000 33,500 15,000
(B)
Excess of A’s capital and B’s capital (A-B) 17,500 11,000 --
Profit-sharing ratio 5 3
Capital in profit sharing ratio 3,500 3,667
Capital in profit sharing ratio taking A’s capital as base 17,500 10,500 --
Excess of B’s capital over A’s capital -- 500 --
Payment ₹ 500 (C) -- (500) --
Balance of Excess 17,500 10,500
Payment ₹ 28,000 (D) (17,500) (10,500) --
Balance [A-C-D] 37,500 22,500 15,000
Payment (₹ 76,500 - ₹ 28,500) ₹ 48,000 (D) (24,000) (14,400) (9,600)
Loss 13,500 8,100 5,400
Total Payment ₹ 76,500 [A+C+D] 41,500 25,000 9,600
Question – 11
Describe the accounting procedure involved in amalgamation of two or more partnership
firms.
ANSWER:
Amalgamation includes:
Closing the books of old firm
(a) Each firm should prepare a Revaluation Account relating to its own assets and liabilities and
transfer the balance to the partners’ capital accounts in the profit-sharing ratio.
(b) Entries for raising goodwill should be passed.
(c) Assets and liabilities not taken over by the new firm should be transferred to the capital
accounts of partners in the ratio of their capitals.
12
(d) The new firm should be debited with the difference between the value of assets and liabilities taken
over by it; the assets should be credited and liabilities debited.
(e) Partners’ capital accounts should be transferred to the new firm’s account.
Opening the books of the new firm
Debit assets taken out at the agreed values
Credit the liabilities taken over at the agreed values, and
Credit individual partner’s capital accounts with the closing balances in the erstwhile firm.
Question – 12
P and Q are partners of P & Co. sharing Profit and Losses in the ratio of 3:1 and Q and R are
partners of R & Co., sharing profits and losses in the ratio of 2:1. On 31st March, 20X1, they
decide to amalgamate and form a new firm M/s PQR & Co., wherein P, Q and R would be
partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on
the above date are as under
Liabilities P & Co. R & Co. Assets P & Co. R & Co.
(₹) (₹) (₹) (₹)
Capitals: Fixed Assets:
P 2,40,000 -- Building 50,000 60,000
Q 1,60,000 2,00,000 Plant & Machinery 1,50,000 1,60,000
R -- 1,00,000 Office equipment 20,000 6,000
Reserve 50,000 1,50,000 Current assets:
Sundry Creditors 1,20,000 1,16,000 Stock-in-trade 1,20,000 1,40,000
Due to P & Co. -- 1,00,000 Sundry debtors 1,60,000 2,00,000
Bank Overdraft 80,000 -- Bank Balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 --
6,50,000 6,66,000 6,50,000 6,66,000
The amalgamated firm took over the business on the following terms:
(a) Building of P & Co. was valued at ₹ 1,00,000.
(b) Plant and machinery of P & Co. was valued at ₹ 2,50,000 and that of R & Co. at ₹ 2,00,000.
(c) All Stock in trade is to be appreciated by 20%
(d) Goodwill valued of P & Co. at ₹ 1,20,000 and R & Co. at ₹ 60,000, but the same will not
appear in the books of PQR & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their
capitals according to the profit sharing ratio.
(f) Provisions for doubtful debts has to be carried forward at ₹ 12,000 in respect of debtors
of P & Co. and ₹ 26,000 in respect of debtors of R & Co.
You are required to prepare the Balance Sheet of new firm and capital accounts of the
partners in the books of old firms.
13
ANSWER:
Balance Sheet of M/s PQR & Co. as at 31st March, 20X1
Liabilities (₹) Assets (₹)
Capitals: Building
(₹1,00,000 + ₹ 60,000) 1,60,000
P 5,52,000 Plant and Machinery
(₹ 2,50,000 + ₹ 2,00,000) 4,50,000
Q 3,68,000 Office equipment
(₹ 20,000 + ₹ 6,000) 26,000
R 1,84,000 11,04,000 Stock-in-trade
(₹1,44,000 + ₹ 1,68,000) 3,12,000
Sundry creditors Sundry debtors
(1,20,000 + 1,16,000) 2,36,000 (₹ 1,60,000 + ₹ 2,00,000) 3,60,000
Bank overdraft 80,000 Less: Provision for doubtful
debts (38,000) 3,22,000
(₹ 12,000 + ₹ 26,000)
Bank balance (₹30,000 + ₹
90,000)
1,20,000
Cash in hand
30,000*
14,20,000 14,20,000
In the books of P & Co.

Particulars P (₹) Q (₹) Particulars P (₹) Q (₹)

To Capital A/cs – 4,89,000 2,43,000 By Balance b/d 2,40,000 1,60,000
M/s PQR & Co. By Reserve (3:1) 37,500 12,500
By Profit on 2,11,500 70,500
Realisation A/c
(W.N.4)
4,89,000 2,43,000 4,89,000 2,43,000
In the books of R & Co.

Particulars Q (₹) R (₹) Particulars Q (₹) R (₹)

To Capital A/cs – 3,68,000 1,84,000 By Balance b/d 2,00,000 1,00,000
M/s PQR & Co. By Reserve (2:1) 1,00,000 50,000
By Profit on 68,000 34,000
Realization (W.N.5)
3,68,000 1,84,000 3,68,000 1,84,000
Working Notes:
(1) Computation of purchase consideration
14
Particulars P & Co. (₹) R & Co. (₹)
Assets:
Goodwill 1,20,000 60,000
Building 1,00,000 60,000
Plant and Machinery 2,50,000 2,00,000
Office Equipment 20,000 6,000
Stock-in-trade 1,44,000 1,68,000
Sundry debtors 1,60,000 2,00,000
Bank Balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 --
(A) 9,44,000 7,94,000
Liabilities:
Creditors 1,20,000 1,16,000
Provision for doubtful debts 12,000 26,000
Due to P & Co. -- 1,00,000
Bank overdraft 80,000 --
(B) 2,12,000 2,42,000
Purchase consideration (A – B) 7,32,000 5,52,000
(2) Computation of proportionate capital
Particulars (₹)
M/s PQR & Co. (Purchase Consideration) (₹7,32,000 + ₹ 5,52,000) 12,84,000
Less: Goodwill adjustment (1,80,000)
Total Capital of new firm (Distributed in ratio 3:2:1) 11,04,000
P’s proportionate capital 5,52,000
Q’s proportionate capital 3,68,000
R’s proportionate capital 1,84,000
(3) Computation of Capital Adjustments
Particulars P Q R Total
(₹) (₹) (₹) (₹)
Balance transferred from P & Co, 4,89,000 2,43,000 7,32,000
Balance transferred from R & Co. 3,68,000 1,84,000 5,52,000
4,89,000 6,11,000 1,84,000 12,84,000
Less: Goodwill written off in the ratio of 3:2:1 (90,000) (60,000) (30,000) (1,80,000)
Existing capital 3,99,000 5,51,000 1,54,000 11,04,000
Proportionate capital 5,52,000 3,68,000 1,84,000 11,04,000
Amount to be brought in (paid off) 1,53,000 (1,83,000) 30,000
15
(4) In the books P & Co. Realization Account
To Building 50,000 By Creditors 1,20,000
To Plant & Machinery 1,50,000 By Bank overdraft 80,000
To Office equipment 20,000 By M/s PQR & Co. 7,32,000
To Stock-in-trade 1,20,000 (Purchase consideration)
To Sundry debtors 1,60,000 (W.N.1)
To Bank Balance 30,000
To Cash in hand 20,000
To Due from R & Co. 1,00,000
To Partners capital A/cs
P 2,11,500
Q 70,500 2,82,000
9,32,000 9,32,000
(5) In the books of R & Co. Realization Account
To Building 60,000 By Creditors 1,16,000
To Plant & Machinery 1,60,000 By Due to P & Co. 1,00,000
To Office equipment 6,000 By M/s PQR & Co. 5,52,000
To Stock-in-trade 1,40,000 (Purchase consideration)
To Sundry debtors 2,00,000 (W.N.1)
To Bank Balance 90,000
To Cash in hand 10,000
To Partners capital A/cs
Q 68,000
R 34,000 1,02,000
7,68,000 7,68,000
Note: The adjustments in the Capital Accounts of P, Q and R (both for Goodwill and the amounts paid
to Q by P and R) can be shown in their Capital Accounts in the Books of P & Co. and R & Co.
respectively. In such a case the Capital Account of the partners carried to PQR & Co will be the same
amounts as shown in the Balance Sheet of PQR & Co.
Question – 13
‘S’ and ‘T’ were carrying on business as equal partners. Their Balance Sheet as on 31st
March, 20X1 stood as follows:
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
16
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000
The operations of the business were carried on till 30th September, 20X1. S and T both
withdrew in equal amounts half the amount of profits made during the current period of 6
months after 10% per annum had been written off on building and plant and 5% per annum
written off on furniture. During the current period of 6 months, creditors were reduced by ₹
50,000, Bills payable by ₹ 11,500 and Bank overdraft by ₹ 75,000. The Joint Life policy was
surrendered for ₹ 47,500 on 30th September, 20X1. Stock was valued at ₹ 3,17,000 and debtors
at ₹ 3,25,000 on 30th September, 20X1. The other items remained the same as on 31st March,
20X1.
On 30th September, 20X1 the firm sold its business to ST Ltd. the value of goodwill was
estimated at ₹ 5,40,000 and the remaining assets were valued on the basis of the Balance
Sheet as on 30th September, 20X1. The ST Ltd. paid the purchase consideration in equity
shares of ₹ 10 each. You are required to prepare a Realization Account and Capital accounts
of the partners.
ANSWER:
Realization Account
To Sundry assets: By Creditors 2,77,500
Stock 3,17,000 By Bills Payables 51,000
Debtors 3,25,000 By Bank overdraft 75,000
Plant 1,63,875 By Share in ST Ltd. (W.N.3) 18,80,000
Building 8,64,500
Furniture 73,125
To Profit:
S 2,70,000
T 2,70,000 5,40,000
22,83,500 22,83,500
Date Particulars S (₹) T (₹) Date Particulars S (₹) T (₹)

20X1 To cash-Drawings 20,000 20,000 20X1 By Balance b/d 6,40,000 6,60,000
April 1 (W.N.2) April 1
Sept. 30 To Shares in ST Ltd. 9,30,000 9,50,000 Sept. 30 By Profit 40,000 40,000
(W.N.2)
By Realization 2,70,000 2,70,000
A/c (Profit)
9,50,000 9,70,000 9,50,000 9,70,000
17
Working Notes:
(1) Ascertainment of total capital:
Balance Sheet as on 30th September, 20X1
Sundry Creditors 2,77,500 Building 9,10,000
Bills Payable 51,000 Less: Depreciation (45,500) 8,64,500
Bank overdraft 75,000 Plant 1,72,500
Total capital (bal. fig.) 13,40,000 Less: Depreciation (8,625) 1,63,875
Furniture 75,000
Less: Depreciation (1,875) 73,125
Stock 3,17,000
Debtors 3,25,000
17,43,500 17,43,500
(2) Profit earned during six months to 30 September, 20X1
Particulars (₹)
Total capital (of S and T) on 30th September, 20X1 (W.N.1) 13,40,000
Capital on 1st April, 20X1
S 6,40,000
T 6,60,000 13,00,000
Net increase (after drawings) 40,000
Since drawings are half of profits therefore, actual profit earned is ₹ 40,000 x 2 = ₹ 80,000 (Shared
equally by partners S and T).
Half of the profits, has been withdrawn by both the partners equally i.e. drawings ₹ 40,000 (₹ 80,000
x ½) withdrawn by S and T in 1:1 (i.e. ₹ 20,000 each).
(3) Purchase consideration:
Particulars ₹
Total assets (W.N.1) 17,43,500
Add: Goodwill 5,40,000
22,83,500
Less: liabilities (2,77,500 + 51,000 + 75,000) (4,03,500)
Purchase consideration
18,80,000
Note: The above solution is given on the basis that reduction in bank overdraft is after surrender of
Joint life policy.
Question – 14
X, Y and Z were in partnership sharing profits and losses 3:2:1. There was no provision in the
agreement for interest on capital or drawings.
X died on 31.3.20X1 and on that date, the partners’ balance were as under:
18
Capital Account: X - ₹ 60,000, Y – ₹ 40,000, Z - ₹ 20,000.
Current Account: X - ₹ 40,000 (Cr.), Y - ₹ 30,000 (Cr.), Z - ₹ 10,000 (Dr.)
By the partnership agreement, the sum due to X‘s estate was required to be paid within a
period of 3 years, and minimum installment of ₹ 30,000 each were to be paid, the first such
installment falling due immediately after death and the subsequent installments at half-yearly
intervals. Interest @ 6% p.a. was to be credited half yearly.
In ascertaining his share, goodwill (not recorded in the books) was to be valued at ₹ 90,000
and the assets, excluding the Joint Endowment Policy (mentioned below), were valued at ₹
60,000 in excess of the books values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets.
The Joint Assurance Policy shown in the books at ₹ 40,000 matured on 1.4.20X1, realizing ₹
52,000; payments of ₹ 30,000 each were made to X’s Executors on 1.4.20X1, 30.9.20X1 and
31.3.20X2. Y and Z continued trending on the same terms as previously and the net profit for
the year ending 31.3.20X2 (before charging the interest due to X’s estate) amounted to -- ₹
52,000. During that period, the partners’ drawings were Y - ₹ 15,000; and Z - ₹ 8,000.
On 1.4.20X2, the partnership was dissolved and an offer to purchase the business as a going
concern for ₹ 1,80,000 was accepted on that day. A cheque for that sum was received on
30.6.20X2.
The balance due to X’s estate, including interest, was paid on 30.6.20X2 and on that day, Y and
Z received the sums due to them.
You are required to write-up the Partners’ Capital and Current Accounts from 1.4.20X1 to
30.6.20X2. Show also the account of the executors of X.
ANSWER:
Particulars X Y Z Particulars X Y Z
₹ ₹ ₹ ₹ ₹ ₹
31.3.20X1 31.3.20X1
To Balance b/d -- -- 10,000 By Balance b/d 40,000 30,000 --
To X’s Current A/c – -- 30,000 15,000 By Y’s Current 30,000 -- --
goodwill (W.N.1). A/c –goodwill
To X’s Current A/c – -- 20,000 10,000 (W.N.1)
Revaluation Profit By Z’s Current 15,000 -- --
(W.N.2)
A/c-Goodwill
To X’s Capital A/c – (W.N.1)
transfer 1,21,000 -- --
By Y’s Current
20,000 -- --
A/c –Revaluation
Profit (W.N.2)
By Z’s Current A/c –
Revaluation 10,000
Profit (W.N.2)
By Joint assurance 6,000 4,000 2,000
Policy
By balance c/d 16,000 33,000
1,21,000 50,000 35,000 1,21,000 50,000 35,000
19
1.4.X1 31.3.X2
To Balance b/d 16,000 33,000 By Profit & Loss 29,136 14,568
31.3.X2 Appropriation A/c
To Drawings A/c 15,000 8,000 By Balance c/d 1,864 26,432
31,000 41,000 31,000 41,000
1.4.X2 1.4.X2
To Balance b/d 1,864 26,432 By Realisation A/c 31,674 15,837
Profit
To Y’s Capital A/c- 29,810 -- By Z’s Capital A/c – -- 10,595
Transfer transfer
31,674 26.432 31,674 26,432

₹ ₹ ₹ ₹ ₹ ₹
31.3.X1 31.3.X1
To X’s Executors A/c 1,81,000 -- -- By Balance b/d 60,000 40,000 20,000
To Balance c/d -- 40,000 20,000 By X’s Current A/c 1,21,000 -- --
1,81,000 40,000 20,000 1,81,000 40,000 20,000
31.3.X2 1.4.X1
To Balance c/d 40,000 20,000 By Balance b/d 40,000 20,000
40,000 20,000 40,000 20,000
1.4.X2 1.4.X2
To Z’s Current A/c – -- 10,595 By Balance b/d 40,000 20,000
transfer
30.6.X2 1.4.X2
To Bank A/c 69,810 9,405 By Y’s Current A/c – 29,810 ---
transfer
69,810 20,000 69,810 20,000
X’s Executor’s Account
Date Particulars ₹ Date Particulars ₹

1.4.20X1 To Bank A/c 30,000 31.3.20X1 By X’s Capital A/c 1,81,000
31.3.20X1 To Balance c/d 1,51,000
1,81,000 1,81,000
30.9.20X1 To Bank A/c 30,000 1.4.20X1 By Balance b/d 1,51,000
To Balance c/d 1,25,530 30.9.20X1 By Interest A/c 4,530
1,55,530 1,55,530
31.3.20X2 To Bank A/c 30,000 1.10.20X1 By Balance b/d 1,25,530
To Balance c/d 99,296 31.3.20X2 By Interest A/c 3,766
1,29,296 1,29,296
20
30.6.20X2 To Bank A/c 1,00,785 1.4.20X2 By Balance b/d 99,296
30.6.20X2 By Interest A/c 1,489
1,00,785 1,00,785
Working Notes:
(1) Adjustment in regard to Goodwill
Partners X Y Z
Share of goodwill before death (₹) 45,000 30,000 15,000
Share of goodwill after death (₹) - 60,000 30,000
Gain (+)/Sacrifice (-) (₹) (45,000) 30,000 15,000
Cr. Dr. Dr.
(2) Adjustment in regard to revaluation of assets
Partners X Y Z
Share of profit on revaluation credited to all the (₹) 30,000 20,000 10,000
partners - 40,000 20,000
Debited to the continuing partners (₹) (30,000) 20,000 10,000
(₹) Cr. Dr. Dr.
(3) Ascertainment of Profit for the year ended 31.3.X2
(₹) (₹)
Profit before charging interest on balance due to X’s executors 52,000
Less: Interest payable to X’s executors
From 1.4.X1 to 30.9.X1 4,530
From 1.10.X1 to 31.3.X2 3,766 (8,296)
Balance of profit to be shared by Y and Z in 2:1 43,704
(4) Ascertainment of Sundry Assets as on 31.3.X2
Capital Account – Y 40,000 Sundry Assets (balancing figure) 1,31,000
Capital Account – Z 20,000 Partner’s Current A/c – Y 1,864
X’s Executors A/c 99,296 Partner’s Current A/cs – Z 26,432
1,59,296 1,59,296
(5) Realization Account
To Sundry Assets A/c 1,31,000 By Bank A/c (purchase 1,80,000
To Interest A/c – X’s Executors 1,489 Consideration)
To Partner’s Capital A/c – Y 31,674
21
To Partner’s Capital A/c – Z 15,837
1,80,000 1,80,000
(6) Bank Account
To Purchase Consideration 1,80,000 By X’s Executors A/c 1,00,785
By Y 69,810
By Z 9,405
1,80,000 1,80,000
Question – 15
Ramesh, Roshan and Rohan were partners of the firm ‘3R Enterprises’ sharing profits and
losses in the ratio of 3:2:1 respectively. On 31st March, 20X1 their Balance Sheet stood as
follows:
Ramesh’s Capital A/c 16,80,000 Land and Buildings 14,00,000
Roshan’s Capital A/c 11,60,000 Machinery 11,00,000
Rohan’s Capital A/c 6,70,000 Furniture 6,10,000
General Reserve 6,30,000 Stock 8,40,000
Creditors 6,00,000 Debtors 6,00,000
Cash at Bank 1,90,000
47,40,000 47,40,000
On the above-mentioned date, the partners decided to convert their firm into a private limited
company and named it ‘3R Enterprises (Private) Ltd.’. The company took over all the assets
including cash at bank and all the creditors for ₹ 42,00,000 payable in the form of fully paid
equity shares of ₹ 10 each. It recorded in its books, land and buildings at ₹ 16,40,000,
machinery at ₹ 9,90,000 and created a provision for bad debts @ 5% on debtors. The expenses
of the take-over came to ₹ 23,000 which were paid and borne by the company.
The expenses of getting the company incorporated were ₹ 57,000.
The partners distributed the company’s shares amongst themselves in their profit sharing
ratio. They settled their accounts by paying or receiving cash.
Prepare Realization Account and all the partners’ capital accounts in the firm’s ledger and
pass journal entries in the books of the company for all of its transactions mentioned above.
ANSWER:
In the books of 3R Enterprises
Realization Account
To Land and Building 14,00,000 By Creditors 6,00,000
To Machinery 11,00,000 By 3R Enterprises (PVT. Ltd. A/c 42,00,000
22
To Furniture 6,10,000
To Stock 8,40,000
To Debtors 6,00,000
To Cash at Bank 1,90,000
To Ramesh’s Capital 30,000
To Roshan’s Capital 20,000
To Rohan’s Capital 10,000
48,00,000 48,00,000

Particulars Ramesh Roshan Rohan Particulars Ramesh Roshan Rohan
₹ ₹ ₹ ₹ ₹ ₹
To Shares in 3R (Pvt.) 21,00,000 14,00,000 7,00,000 By Balance b/d 16,80,000 11,60,000 6,70,000
Ltd. A/c By General Reserve 3,15,000 2,10,000 1,05,000
To Bank A/c - - 85,000 By Realisation A/c 30,000 20,000 10,000
(settlement) (profit)
By Bank A/c 75,000 10,000 --
(settlement)
21,00,000 14,00,000 7,85,000 21,00,000 14,00,000 7,85,000
In the Books of 3R Enterprises (Private) Ltd.

Journal Entries
(₹) (₹)
1. Business Purchase A/c Dr. 42,00,000
To M/s 3R Enterprises 42,00,000
(consideration payable for Business Purchased)
2. Land and Building A/c Dr. 16,40,000
Machinery A/c Dr. 9,90,000
Furniture A/c Dr. 6,10,000
Stock A/c Dr. 8,40,000
Debtors A/c Dr. 6,00,000
Bank A/c Dr. 1,90,000
To Creditors A/c 6,00,000
To Provision for doubtful debts A/c 30,000
To Business Purchase A/c 42,00,000
To Capital Reserve A/c (Balancing figure) 40,000
(Assets and liabilities taken over for ₹ 42,00,000; balance
credited to capital reserve)
3. Capital reserve A/c (Expenses of takeover) Dr. 23,000
To Bank A/c 23,000
(Expenses for take over debited to capital reserve)
23
4. M/s 3R Enterprises A/c Dr. 42,00,000
To Equity share capital A/c 42,00,000
(Allotment of fully paid equity shares to discharge consideration
for business)
5. Preliminary expenses A/c Dr. 57,000
To Bank A/c 57,000
(Expenses incurred to get the company incorporated)
Question – 16
Sagar & Sons is a partnership firm consisting of Mr. X, Mr. Y, and Mr. Z who share profits and
losses in the ratio of 2:2:1, and UTS Ltd. is a company doing similar business.
The firm (Sagar & Sons) and the company (UTS Ltd.) provide you the following Ledger
Balances as on 31.3.20X1:
Sagar & Sons (₹) UTS Ltd. (₹)

Debit balances:
Plant and Machinery 5,00,000 16,00,000
Furniture & Fixtures 50,000 2,25,000
Inventories 2,00,000 8,50,000
Trade receivables 2,00,000 8,25,000
Cash at bank 10,000 4,00,000
Cash hand in 40,000 1,00,000
Credit balances:
Equity share capital: Equity shares of ₹ 10 20,00,000
each
Partners’ capitals:
X 2,00,000
Y 3,00,000
Z 1,00,000
General reserve 1,00,000 7,00,000
Trade payables 3,00,000 13,00,000
On the Balance Sheet date, it was decided that the firm M/s Sagar & Sons be dissolved and all
the assets (except cash in hand and cash at bank) and all the liabilities of the firm be taken
over by UTS Ltd. by issuing 50,000 shares of ₹ 10 each at a premium of ₹ 2 per share.
Partners of Sagar & Sons agreed to divide the shares issued by UTS Ltd. in the profit-sharing
ratio and bring necessary cash for settlement of their capital.
The trade payables of Sagar & Sons includes ₹ 1,00,000 payable to UTS Ltd. An unrecorded
liability of ₹ 25,000 of Sagar & Sons must also be taken over by UTS Ltd.
Prepare:
(1) Realisation account, Partners' capital accounts, and Cash in hand/Bank account in the
books of Sagar & Sons.
24
(2) Pass journal entries in the books of UTS Ltd. for acquisition of Sagar & Sons and draw the
Balance Sheet of UTS Ltd. after the takeover.
ANSWER:
(i) In the books of Sagar & Sons
Realization Account
To Plant & Machinery 5,00,000 By Trade payable 3,00,000
To Furniture & Fixture 50,000 By UTS Ltd. (Refer W.N.) 6,00,000
To Inventories 2,00,000 By Partner’s Capital Accounts
(loss):
To Trade receivables 2,00,000 X’s Capital A/c 20,000
Y’s Capital A/c 20,000
Z’s Capital A/c 10,000 50,000
9,50,000 9,50,000

₹ ₹ ₹ ₹ ₹ ₹
To Realisation A/c 20,000 20,000 10,000 By Balance b/d 2,00,000 3,00,000 1,00,000
To Shares in UTS Ltd. 2,40,000 2,40,000 1,20,000 By General Reserve 40,000 40,000 20,000
To Cash -- 80,000 -- By Cash 20,000 -- 10,000
2,60,000 3,40,000 1,30,000 2,60,000 3,40,000 1,30,000
Cash and Bank Account
Particulars Cash (₹) Bank (₹) Particulars Cash (₹) Bank (₹)
To Balance b/d 40,000 10,000 By Cash A/c (Contra)* 10,000
To Bank A/c (Contra)* 10,000 By Y 80,000
To X 20,000
To Z 10,000
80,000 10,000 80,000 10,000
(ii) Journal Entries in the Books of UTS Ltd.
Dr. (₹) Cr. (₹)

1. Business Purchase Account Dr. 6,00,000
To Liquidators of Sagar & Sons 6,00,000
(Being business of Sagar & Sons purchased and payment due)
2. Plant and Machinery A/c Dr. 5,00,000
Furniture and Fixture A/c Dr. 50,000
Inventories A/c Dr. 2,00,000
25
Trade Receivables A/c Dr. 2,00,000
To Trade Payables 3,00,000
To Unrecorded Liability 25,000
To Business Purchase Account 6,00,000
To Capital Reserve (B.F.) 25,000
(Being take over of all assets and liabilities)
3. Liquidators of Sagar & Sons Dr. 6,00,000
To Equity Share Capital Account 5,00,000
To Securities Premium Account 1,00,000
(Being purchase consideration discharged in the form of shares
of ₹ 10 each issued at a premium of ₹ 2 each)
4. Trade Payable Account Dr. 1,00,000
To Trade Receivables Account 1,00,000
(Being mutual owing eliminated)
Working Note:
Computation of purchase consideration:
50,000 Equity shares of ₹ 12 each = ₹ 6,00,000
Equity Shares to be given to partners:
X = 20,000 Shares @ ₹ 12 = ₹ 2,40,000
Y = 20,000 Shares @ ₹ 12 = ₹ 2,40,000
Z = 10,000 Shares @ ₹ 12 = ₹ 1,20,000
Balance Sheet of UTS Ltd. (After takeover of Sagar & Sons)
As at 31st March, 20X1
Particulars Notes ₹
Equity and Liabilities
1. Shareholders’ funds
A. Share Capital 1 25,00,000
B. Reserves and Surplus 2 8,25,000
2. Non-current liabilities
3. Current liabilities
A. Trade Payables 15,00,000
Others (Unrecorded liability) 25,000
Total 48,50,000
Assets
1. Non-current assets
A. Property, Plant and Equipment 3 23,75,000
2. Current assets
26
A. Inventories 10,50,000
B. Trade receivables 9,25,000
C. Cash and cash equivalent 4 5,00,000
Total 48,50,000
Notes to accounts
Particulars ₹
1. Share Capital
Equity Share capital
2,50,000 Equity Shares of ₹ 10 each fully paid (50,000 shares were issued in 25,00,000
consideration other than for cash)
2. Reserves and Surplus
Securities Premium 1,00,000
General Reserve 7,00,000
Capital Reserve 25,000
8,25,000
3. Property, Plant and Equipment
Plant & Machinery 21,00,000
Furniture & Fixtures 2,75,000
23,75,000
4. Cash & Cash Equivalent 4,00,000
Cash at Bank 1,00,000
Cash in Hand 5,00,000
27
ACCOUNTING FOR EMPLOYEE STOCK OPTION
PLANS (ESOP)

Question – 1
What are employees stock option plans as per the Guidance Note on Accounting for Share
Based Payments?
ANSWER:
Employee Stock Option Plans (ESOPs) are plans under which an enterprise grants options for a
specified period to its employees to purchase its shares at a fixed or determinable price. ESOPs entitle
the employees to receive:
(a) Cash or other assets of the enterprise for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the enterprise or another group enterprise, or
(b) Equity instruments (including shares or share options) of the enterprise or another group enterprise,
provided the specified vesting conditions, if any, are met.
Question – 2
Explain the importance of employee stock option plans in the modern time.
ANSWER:
ESOPs are plans under which an enterprise grants options for a specified period to its employees to
purchase its shares at a fixed or determinable price. One advantage of ESOPs as remuneration is that
they need not entail any cash cost to the enterprise. Unlisted companies, in particular, start-up
companies, often give share-based compensation since they cannot afford to pay high salaries to their
employees but are willing to share the future prosperity of the company. It is hence important that cost
relating to these stock option plans get recognized in the financial statements.
The importance of Employee Stock Option Plan lies in the following advantages which accrue to both
the company and the employees:
1. Stock options provide an opportunity to employees to participate and contribute in the growth of
the company.
2. Stock options create long term wealth in the hands of the employees.
3. They are important means to attract, retain and motivate the best available talent for the company.
4. It creates a common sense of ownership between the company and its employees.
Question – 3
Define the following terms:
(i) Vesting
(ii) Exercise Period
28
ANSWER:
Vesting means to become an entitlement. Under an employee stock option plan, a counterparty’s
right to receive cash, other assets or equity instruments of the enterprise vests when the counterparty’s
entitlement is no longer conditional on the satisfaction of any vesting conditions.
Exercise Period is the time period after vesting within which the counterparty should exercise
his/her/its right to apply for equity instruments (including shares or share options) against the option
vested in him in pursuance of the employee stock option plan.
Question – 4
(i) Grant date
(ii) Exercise Price
ANSWER:
Grant Date is the date at which the enterprise and another party (i.e. an employee) agree to an
employee stock option plan, being when the enterprise and the counterparty have a shared
understanding of the terms and conditions of the arrangement. At grant date, the enterprise confers on
the counterparty the right to cash, other assets, or equity instruments of the enterprise, provided the
specified vesting conditions, if any, are met. If that agreement is subject to an approval process (for
example, by shareholders), grant date is the date when that approval is obtained.
Exercise Price is the price payable by the counterparty for exercising the option granted to him/her/it
in pursuance of the employee stock option plan.
Question – 5
X Co. Ltd. has its share capital divided into equity shares of ₹ 10 each. On 1.4.20X1 it granted
20,000 employees’ stock option at ₹ 50 per share when the market price was ₹ 120 per share.
Fair value per option was ₹ 70. The options were to be exercised between 15th March, 20X2
and 31st March, 20X2. The employees exercised their options for 16,000 shares only and the
remaining options lapsed. The company closes its books on 31st March every year. Show
Journal entries (with narration) as would appear in the books of the company up to 31st March,
20X2.
ANSWER:
In the books of X Co. Ltd.
Journal Entries
₹ ₹
15.03.20X2 Bank A/c (16,000 x 50) Dr. 8,00,000
to Employee compensation expense A/c
31.3.X2 [16,000 x (70)] Dr. 11,20,000
To Equity share capital A/c (16,000 x 10) 1,60,000
To Securities premium A/c [16,000 x (120 – 10)] 17,60,000
29
(Being shares issued to the employees against the options
vested to them in pursuance of Employee Stock Option
plan)
31.3.X2 Profit and Loss A/c Dr. 11,20,000
To Employee compensation expenses A/c 11,20,000
(Being transfer of employee compensation transfer to
profit and loss account)
Notes:
No entry is passed when Stock Options are granted to employees. Hence, no entry will be passed on 1
April 20X1.
Question – 6
S Ltd. grants 1,000 options to its employees on 1.4.20X0 at ₹ 60. The vesting period is two and
a half years. The maximum exercise period is one year. Market price on that date is ₹ 90. Fair
value per option is ₹ 30. All the options were exercised on 31.7.20X3. Journalize, if the face
value of equity share is ₹ 10 per share.
ANSWER:
Books of S Ltd.
Journal Entries
Date Particulars Debit (₹) Credit (₹)

31.3.X1 Employees Compensation Expense Account Dr. 12,000
To Employees Stock Option Outstanding Account 12,000
(Being compensation expense recognized in respect of
1,000 options granted to employees at discount of ₹ 30
each, amortized on straight line basis over 2 ½ years)
Refer WN)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense Account 12,000
(Being employees compensation expenses of the year
transferred to P&L A/c)
31.3.X2 Employees Compensation Expense Account Dr. 12,000
(Being compensation expense recognized in respect of
1,000 options granted to employees at discount of ₹ 30
each, amortized on straight line basis over 2½ years)
(Refer WN)
To Employees Compensation Expenses Account 12,000
30
31.3.X3 Employees Compensation Expenses Account Dr. 6,000
(Being balance of compensation expenses amortized ₹
30,000 less ₹ 24,000) (Refer WN)
To Employees Compensation Expenses Account 6,000
31.7.X3 Bank Account (₹ 60 x 1,000) Dr. 60,000
To Equity Share Capital Account 10,000
To Securities Premium Account 50,000
(Being exercise of 1,000 options at an exercise price of
₹60)
31.7.X3 Stock Option Outstanding A/c (₹30 x 1,000) Dr. 30,000
To Securities Premium Account 30,000
(Being the balance in the Employees Stock Option
Outstanding Account transferred to Securities Premium
A/c)
Working Notes:
1. Total employees compensation expense = 1,000 x (₹ 30) = ₹ 30,000
2. Employees compensation expense has been written off during 2½ years on straight line basis as
under:
I year = ₹ 12,000 (for full year)
II year = ₹ 12,000 (for full year)
III year = ₹ 6,000 (for half year)
Question – 7
A company has its share capital divided into shares of ₹ 10 each. On 1-4-20X1, it granted 5,000
employees stock options at ₹ 50, when the market price was ₹ 140. Fair value per option was
₹ 90. The options were to be exercised between 1-3-20X2 to 31-03-20X2. The employees
exercised their options for 4,800 shares only; remaining options lapsed. Pass the necessary
journal entries for the year ended 31- 3-20X2, with regard to employees’ stock options.
ANSWER:
In the books of Company
Journal Entries
Date Particulars Debit (₹) Credit (₹)

1-3-X2 Bank A/c Dr. 2,40,000
to Employees compensation expenses A/c Dr. 4,32,000
31-3-X2 To Equity Share Capital A/c 48,000
31
To Securities Premium A/c 6,24,000
(Being allotment to employees 4,800 shares of ₹ 10
each at a premium of ₹ 130 at an exercise price of ₹ 50
each)
31-3-X2 Profit and Loss Account Dr. 4,32,000
To Employees compensation expenses A/c 4,32,000
(Being transfer of employees compensation expenses)
Working Note:
1. Employee Compensation Expenses = ₹ 90 (Fair value per option) x 4,800 = ₹ 4,32,000/-.
2. The Employees Compensation Expense is transferred to Securities Premium Account.
3. Securities Premium Account = ₹ 50 – ₹ 10 = ₹ 40 per share + ₹ 90 per share on account of discount
of option price over market price = ₹ 130 per share = ₹ 130 x 4,800 = ₹ 6, 24,000/- in total.
Question – 8
Ganga Ltd. has its share capital divided into Equity Shares of Rs. 10 each. On 1st April, 2019,
the company offered 250 shares to each of its 520 employees at Rs. 60 per share, when the
market price was Rs. 150 per share. The options were to be exercised between 01-03-2020 to
31-03-2020. 410 employees accepted the offer and paid Rs. 60 per share on purchased shares
and the remaining options lapsed. The company closes its books on 31st March every year.
You are required to show Journal Entries (with narrations) as would appear in the books of
Ganga Ltd. for the year ended 31st March, 2020 with regard to employee stock options.
[MTP March 21 (5 Marks)]
ANSWER:
Journal Entries in the books of Ganga Ltd.
Rs. Rs.
1.3.20 Bank A/c (1,02,500 x Rs. 60) Dr. 61,50,000
to Employee compensation expense A/c Dr. 92,25,000
31.3.20 (1,02,500 x Rs.90)
To Equity share capital A/c (1,02,500 x Rs.10) 10,25,000
To Securities premium A/c (1,02,500 x Rs.140) 1,43,50,000
(Being shares issued to the employees against the options vested to
them in pursuance of Employee Stock Option Plan)
31.3.20 Profit and Loss A/c Dr. 92,25,000

To Employee compensation expense A/c 92,25,000
(Being transfer of employee compensation expenses to Profit and Loss
Account)
Question – 9
Om Ltd. has its share capital divided into Equity Shares of Rs. 10 each. On 1st April, 2020, the
company offered 250 shares to each of its 520 employees at Rs. 60 per share, when the market
price was Rs. 150 per share. The options were to be exercised between 01-03-2021 to 31-03-
2021.
32
410 employees accepted the offer and paid Rs. 60 per share on purchased shares and the
remaining options lapsed. You are required to show Journal Entries (with narrations) as would
appear in the books of Om Ltd. for the year ended 31st March, 2021 with regard to employee
stock options. [MTP April 21 (5 Marks)]
ANSWER:
Rs. Rs.
1.3.21 Bank A/c (1,02,500 x Rs. 60) Dr. 61,50,000
To Employee compensation expenses A/c Dr. 92,25,000
31.3.21 (1,02,500 x Rs. 90) 10,25,000
To Equity share capital A/c (1,02,500 x Rs. 10) 1,43,50,000
To Securities premium A/c
(1,02,500 x Rs. 140)
(Being shares issued to the employees against the
options vested to them in pursuance of Employee
Stock Option Plan)
31.3.21 Profit and Loss A/c Dr. 92,25,000
To Employee compensation expenses A/c 92,25,000
(Being transfer of employee compensation expenses to
Profit and Loss Account)
Question – 10
At the beginning of the year 1, Harmony Limited grants 600 options to each of its 1000
employees. The contractual life of option granted is 6 yrs.
Other relevant information is as follows:
Vesting Period 3 years
Exercise period 3 years
Expected Life 5 years
Exercise Price ₹ 100
Market Price ₹ 100
Expected Forfeitures per year 3%
The option granted vest according to a graded schedule of 25% at the end of the year 1, 25%
at the end of the year 2 and the remaining 50% at the end of the year 3.
You are required to calculate total compensation expenses for the options expected to vest
and cost and cumulative cost to be recognized at the end of all the three years assuming that
expected forfeiture rate does not change during the vesting period when the Intrinsic value of
the options at the grant date is ₹ 7 per options. [July 21 (5 Marks)]
ANSWER:
Since the options granted have a graded vesting schedule, the enterprise segregates the total plan into
different groups, depending upon the vesting dates and treats each of these groups as a separate plan.
The enterprise determines the number of options expected to vest under each group as below:
33
Vesting Date Options expected to
(Year-end) vest
1 600 options x 1,000 employees x 25% x 0.97 1,45,500 options
2 600 options x 1,000 employees x 25% x 0.97 x 0.97 1,41,135 options
3 600 options x 1,000 employees x 50% x 0.97 x 0.97 x 2,73,802 options
0.97
Total options expected to vest 5,60,437 options
In case of intrinsic value method, total compensation expenses for the options expected to vest would
be
Vesting Date (End of Expected Vesting Value per Option (₹) Compensation
year) (No. of Options) Expenses (₹)
1 1,45,500 7 10,18,500
2 1,41,135 7 9,87,945
3 2,73,802 7 19,16,614
5,60,437 39,23,059
Total compensation expenses of ₹ 39,23,059, determined at the grant date, would be attributed to the
years 1, 2 and 3 as below:
Vesting Date Cost to be recognized

(End of Year) Year 1 Year 2 Year 3
1 10,18,500
2 4,93,972.50* 4,93,972.50
3 6,38,871 6,38,871 6,38,872
Cost for the year 22,51,343.50 11,32,843.50 6,38,872
Cumulative cost 21,51,343.50 32,84,187 39,23,059
* Alternatively, it may be rounded off as ₹ 4,93,972 in year 1 and ₹ 4,93,973 in year 2.
Question – 11
(i) Vesting Period;
(ii) Grant Date. [RTP May 21]
ANSWER:
(i) Vesting Period: It is the time period between grant date and the date on which all the specified
vesting conditions of an employee share-based payment plan is to be satisfied.
(ii) Grant Date: It is the date at which the enterprise and its employees agree to the terms of an
employee share-based payment plan. At grant date, the enterprise confers on the employees the
right to cash or shares of the enterprise, provided the specified vesting conditions, if any, are met.
34
If that agreement is subject to an approval process, (for example, by shareholders), grant date is
the date when that approval is obtained.
35
BUY BACK OF SHARES

Question – 1
What are the conditions to be fulfilled by a joint Stock Company to buy-back its equity shares
as per Companies Act, 2013? Explain in brief.
ANSWER:
Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to buy-back its
own equity shares.
Question – 2
Explain the meaning of equity shares with differential rights.
ANSWER:
Equity shares with Deferential Rights means the share with dissimilar rights as to dividend, voting or
otherwise.
Question – 3
Can preference shares be also issued with differential rights? Explain.
ANSWER:
No; the preference shares cannot be issued with differential rights. It is only the equity shares, which are
issued.
Question – 4
SMM Ltd. has the following capital structure as on 31st March, 20X1: (₹ in crore)
Particulars Situation I Situation II

(i) Equity share capital (shares of ₹ 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory 320 320
Reserve)
(iii) Loan Funds 3,200 6,000
The company has offered buy-back price of ₹ 30 per equity share. You are required to
calculate maximum permissible number of equity shares that can be bought back in both
situations and also required to pass necessary Journal Entries.
36
ANSWER:
Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
When loan fund is

Particulars
₹ 3,200 crores ₹ 6,000 crores
Shares Outstanding Test (W.N.1) 30 30
Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be bought 24 Nil
back [least of the above]
Journal Entries for the Buy-Back

(applicable only when loan fund is ₹ 3,200 crores)
₹ in crores
Particulars Debit Credit
(a) Equity Shares buy-back account Dr. 720
To Bank account 720
(Being payment for buy-back of 24 crores equity shares of ₹
10 each @ ₹ 30 per shares)
(b) Equity shares capital account Dr. 240
Premium Payable on buy-back account Dr. 480
To Equity share buy-back account 720
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buy-back account 480
(Being Premium Payable on buy-back account charged to
securities premium and general reserve/Profit & Loss A/c)
(c) General Reserve / Profit & Loss A/c Dr. 240
To Capital redemption reserve account 240
(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 120
25% of the shares outstanding 30
37
2. Resources Test
Particulars
Paid up capital (₹ in crores) 1,200
Free reserves (₹ in crores) (1,080 + 400 + 200) 1,680
Shareholders’ funds (₹ in crores) 2,880
25% of Shareholders fund (₹ in crores) ₹ 720 crores
Buy-back price per share ₹ 30
Number of shares that can be bought back 24 crores shares
3. Debt Equity Ratio Test : Loans cannot be in excess of twice the Equity Funds post Buy-
Back
Particulars When loan fund is
₹ 3,200 crores ₹ 6,000 crores

(a) Loan funds (₹) 3,200 6,000
(b) Minimum equity to be maintained after buy-back in 1,600 3,000
the ratio of 2:1 (₹) (a/2)
(c) Present equity shareholders fund (₹) 2,880 2,880
(d) Future equity shareholder fund (₹) (see W.N.4) 2,560 N.A.
(2,880-320)
(e) Maximum permitted buy-back of Equity (₹) [(d) – 960 Nil
(b)]
(f) Maximum number of shares that can be bought back 32 crore shares Nil
@ ₹ 30 per share
As per the provisions of the Companies Act, 2013, Qualifies Does not
company Qualify
4. Amount transferred to CRR and maximum equity to be bought back will be calculated by
simultaneous equations method
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is
‘y’ Than
Equation 1: (Present Equity – Transfer to CRR) – Minimum Equity to be maintained =
Maximum permitted Buy-Back
= (2,880 – x ) – 1,600 = y
= 1280 – x = y (1)
Equation 2: Maximum Permitted Buy-Back x Nominal Value per Share/Offer Price per
Share
y/30 x 10 = x
or
3x = y (2)
38
By solving the above two equations we get
x = ₹ 320
y = ₹ 960
Question – 5
KG Limited furnishes the following Balance Sheet as at 31st March, 20X1:
A. Share Capital 1 1,200
B. Reserves and Surplus 2 810
Long term borrowings 3 750
A. Trade Payables 745
B. Other Current Liabilities 195
Total 3,700
Assets
A. Property, plant and Equipment 4 2,026
B. Non-Current Investments 74
2. Current assets
A. Inventories 600
B. Trade receivables 260
C. Cash and Cash equivalents 740
Total 3,700
Notes to Accounts
Particulars ₹
1. Share Capital
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of ₹ 10 each) 1,200
Securities premium 175
General reserve 265
Capital redemption reserve 200
Profit & Loss A/c 170
Total 810
3. Long term borrowings
39
12% Debentures 750
4. Property, plant and equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2.026
On 1st April, 20X1, the company announced the buy-back of 25% of its equity shares @ ₹ 15
per share. For this purpose, it sold all of its investments for ₹ 75 lakhs.
On 5th April, 20X1, the company achieved the target of buy-back. On 30th April, 20X1 the
company issued one fully paid up equity share of ₹ 10 by way of bonus for every four equity
shares held by the equity shareholders.
You are required to:
(1) Pass necessary journal entries for the above transactions.
(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares.
ANSWER:
In the books of KG Limited
Journal Entries
₹ in laksh
Date 20X1 Particulars Debit Credit
April 1 Bank A/c Dr. 75

To Investment A/c 74
To Profit on sale of investment 1
(Being investment sold on profit)
April 5 Equity share capital A/c Dr. 300
Securities premium A/c Dr. 150
To Equity shares buy-back A/c 450
(Being the amount due to equity shareholders on
buy-back)
Equity shares buy-back A/c Dr. 450
To Bank A/c 450
(Being the payment made on account of buy-back
of 30 lakh Equity shares)
April 5 General reserve A/c Dr. 265
Profit and Loss A/c Dr. 35
To Capital redemption reserve A/c 300
(Being amount equal to nominal value of buy-back
shares from free reserves transferred to capital
redemption reserve account as per the law)
April 30 Capital redemption reserve A/c Dr. 225
40
To Bonus shares A/c (W.N.1) 225
(Being the utilization of capital redemption reserve
to issue bonus shares)
Bonus shares A/c Dr. 225
To Equity share capital A/c 225
(Being issue of one bonus equity share for every
four equity shares held)
Balance Sheet (After buy-back and issue of bonus shares)
I. Equity and Liabilities
1) Shareholder’s Funds
(a) Share Capital 1 1,125
(b) Reserves and Surplus 2 436
2) Non-current liabilities
Long term borrowings 3 750
3) Current Liabilities
(a) Trade Payables 745
(b) Other Current Liabilities 195
Total 3,251
II. Assets
1) Non-current assets
(a) Property, plant and Equipment 4 2,026
2) Current Assets
(a) Inventories 600
(b) Trade receivables 260
(c) Cash and Cash equivalents 365
Total 3,251
Notes to Accounts
Particulars ₹
1. Share Capital
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of ₹ 10 each) 1,125
General Reserve 265
Less: Transfer to CR (265) -
Capital Redemption Reserve 200
Add: Transfer due to buy-back of shares from P/L 35
41
Add: Transfer due to buy-back of shares from General Reserve 265
Less: Utilisation for issue of bonus shares (225) 275
Less: Adjustment for premium paid on buy-back (150) 25
Profit & Loss A/c 170
Add: Profit on sale of investment 1
Less: Transfer to CRR (35) 136
Total 436
12% Debentures 750
Land and Building 1,800
Plant and Machinery 226
Net carrying value 2.026
Working Notes:
1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = ₹ 255 lakhs
2. Cash at bank after issue of bonus shares
Particulars ₹ in lakhs
Cash balance as on 1st April, 20X1 740
Add: Sale of investments 75
815
Less: Payment for buy-back of shares (450)
365
Note: In the given solution, it is possible to adjust transfer to capital redemption reserve account or
capitalization of bonus shares from any other free reserves or securities premium (to the extent
available) also.
Question – 6
M/s. Vriddhi Infra Ltd. (a non-listed company) provide the following information as on
31.3.2020:
(₹)
Land and Building 21,50,000
Non- current Investment 2,00,000
Trade Receivables 5,50,000
Inventories 1,80,000
Cash and Cash Equivalents 40,000
Share capital:1,00,000 Equity Shares of ₹ 10 each fully paid up 10,00,000
42
Securities Premium 3,00,000
General Reserve 2,50,000
Profit & Loss Account (Surplus) 1,50,000
10% Debentures (Secured by floating charge on all assets) 20,00,000
Unsecured Loans 8,00,000
Trade Payables 1,20,000
On 21st April, 2020 the Company announced the buy back of 15,000 of its equity shares @ ₹
15 per share. For this purpose, it sold all its investment for ₹ 2.50 lakhs.
On 25th April, 2020, the company achieved the target of buy back. On 1st May, 2020 the
company issued one fully paid up share of ₹ 10 each by way of bonus for every eight equity
shares held by the equity shareholders.
You are required to pass necessary Journal Entries for the above transactions.
[RTP May 2021]
ANSWER:
In the books of Vriddhi Infta Ltd.
Journal Entries
Date Particulars Dr. Cr.

2020 ₹ ₹
April Bank A/c Dr. 2,50,000
21 To Investment A/c 2,00,000
To Profit on sale of investment 50,000
(Being investment sold on profit)
April Equity share capital A/c Dr. 1,50,000
25 Securities premium A/c Dr. 75,000
To Equity shares buy back A/c 2,25,000
(Being the amount due to equity shareholders on
buy back)
Equity shares buy back A/c Dr. 2,25,000
To Bank A/c 2,25,000
(Being the payment made on account of buy back
of 15,000 Equity Shares)
General Reserve A/c OR P&L A/c Dr. 1,50,000
To Capital redemption reserve A/c 1,50,000
(Being amount equal to nominal value of buy
back shares transferred from free reserves to
capital redemption reserve account as per the
law)
May 1 Capital redemption reserve A/c Dr. 1,06,250
43
To Bonus shares A/c (W.N.1) 1,06,250
(Being the utilization of capital redemption
reserve to issue bonus shares)
Bonus shares A/c Dr. 1,06,250
To Equity share capital A/c 1,06,250
(Being issue of one bonus equity share for every
ten equity shares held)
Working Note:
Amount of bonus shares = (1,00,000 − 15,000) x x 10
= ₹ 1,06,250
Question – 7
E, F, G and H hold Equity Capital in Alpha Co. in the proportion of 30:30:20:20. S, T, U and V
hold preference share capital in the proportion of 40:30:10:20. If the paid up capital of the
company is ₹ 120 Lakh and Preference share capital is ₹ 60 Lakh, You are required to calculate
their voting rights in case of resolution of winding up of the company.
ANSWER:
E, F, G and H hold Equity capital is held by in the proportion of 30:30:20:20 and S, T, U and V hold
preference share capital in the proportion of 40 : 30 : 10 : 20. As the paid up equity share capital of the
company is ₹ 120 Lakhs and Preference share capital is ₹ 60 Lakhs (2 : 1), then relative weights in the
voting right of equity shareholders and preference shareholders will be 2/3 and 1/3. The respective
voting right of various shareholders will be
E = 2/3X30/100 = 3/15
F = 2/3X30/100 = 3/15
G = 2/3X20/100 = 2/15
H = 2/3X20/100 = 2/15
S = 1/3X40/100 = 2/15
T = 1/3X30/100 = 1/10
U = 1/3X10/100 = 1/30
V = 1/3X20/100 = 1/15
Question – 8
M Ltd. furnishes the following Balance sheet as at 31St March, 20X1:
Particulars Notes ₹ (in 000)

A. Share Capital 1 5,000
B. Reserves and Surplus 2 6,310
44
2. Non-current liabilities 3 400
Long term borrowings
3. Current liabilities 40
A. Trade Payables
Total 11,750
Assets
A. Property, plant and Equipment 4 2,750
B. Non-Current Investments (at cost) 5,000
2. Current assets
A. Inventories 1,000
B. Trade receivables 2,000
C. Cash and Cash equivalents 1,000
Total 11,750
Notes to accounts
Particulars ₹ in (‘000)
1. Share Capital
Authorized, Issued and Subscribed Capital:
3,00,000 Equity shares of ₹ 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
Total 5,000
Capital reserve 10
Revenue reserve 4,000
Profit and Loss account 1,800
Total 6,310
10% Debentures 400
4. Property, plant and Equipment (PPE)
PPE: Cost 3,000
Less: Provision for depreciation (250)
Net carrying value 2,750
The company passed a resolution to buy-back 20% of its equity capital @ ₹ 15 per share. For
this purpose, it sold its investments of ₹ 30 lakhs for ₹ 25 lakhs.
You are required to pass necessary Journal entries. [ICAI Material]
45
SOLUTION:
Journal Entries in the books of M Ltd.
Particulars Dr. Cr.

(₹ in ‘000) (₹ in ‘000)
1. Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500
To Investment A/c 3,000
(Being investment sold for the purpose of buy-back of Equity
Shares)
2. Equity shares capital A/c Dr. 600
Premium payable on buy-back Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back of equity shares)
3. Equity shares buy-back A/c Dr. 900
To Bank A/c 900
(Being payment made for buy-back of equity shares)
4. Securities premium A/c Dr. 300
To Premium payable on buy-back 300
(Being Premium payable on buy-back charged from Securities
Premium)
5. Revenue reserve A/c Dr. 600
To Capital Redemption Reserve A/c 600
(Being Creation of capital redemption reserve to the extent of the
equity shares bought back)
46
AMALGAMATION OF COMPANIES

Question – 1
The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March, 20X1:
Particulars Notes Yes Ltd. No Ltd.

(₹ in crores)
A. Share Capital 1 12 5
B. Reserves and Surplus 88 10
A. Long-term borrowings 2 -- 10
3. Current liabilities 33
Total 133 40
Assets
A. Property, plant and Equipment 3 20 6
B. Non-Current investment 4 13 --
2. Current assets 100 34
Total 133 40
Notes of accounts
Yes Ltd. No Ltd.

1. Share Capital
Equity share capital
Authorized share capital 25 5
Issued and subscribed:
Equity shares of ₹ 10 each fully paid 12 5
12 5
2. Long term borrowing
Unsecured loan from Yes Ltd. -- 10
-- 10
Gross value 70 30
Depreciation (50) (24)
47
20 6
4. Non-current investments
30 lakhs equity shares of ₹ 10 each 3 --
Long term loan to No Ltd. 10 --
13 --
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity share of
Yes Ltd. issued at a premium of ₹ 2 per share for every five equity shares held by them in No
Ltd. The necessary approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the
above if the amalgamation is in the nature of merger.
ANSWER:
Journal Entries in the books of No Ltd.
(₹ in Crores)
Dr. Cr.
Realization Account Dr. 64.00

To Property, Plant and equipment Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realization Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realization Account 49.00
(Being the transfer of liabilities and provision to Realization
Account)
Yes Ltd. Dr. 1.2
(Being the amount of consideration due from Yes Ltd.
credited to Realization Account)
Equity Shareholders Account Dr. 13.80
(Being the loss on Realization transferred to equity share –
holders account)
Equity Share Capital Account Dr. 5.00
Reserves and Surplus Account Dr. 10.00 15.00
To Equity Shareholders Account
(Being the amount of share capital, reserves and surplus
credited to equity shareholders account)
48
Equity shares of Yes Ltd. Dr. 1.20
To Yes Ltd. 1.20
(Being the receipt of 10 lakhs equity shares of ₹ 10 each at ₹
12 per share for allotment to shareholders)
Equity shareholders Account Dr. 1.20
To Equity shares of Yes Ltd. 1.20
(Being the distribution of equity shares received from Yes Ltd.
to shareholders)
Journal Entries in the books of Yes Ltd.

(₹ in Crores)
Dr. Cr.
Business Purchase Account Dr. 1.2

To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation – W.N. 1)
Property, plant and equipment Dr. 6.00
Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00
To Business Purchase Account 1.20
To Reserve & Surplus A/c 10.00
To Profit & Loss A/c* 3.80
(Being the assets and liabilities taken over and the surplus
transferred to Profit and loss account)
Liquidator of No Ltd. Dr. 1.20
To Equity Share Capital Account 1.00
To Securities Premium Account 0.20
(Being the allotment to shareholders of No Ltd. 10 Lakhs
equity shares of ₹ 10 each at premium of ₹ 2 per share)
Unsecured Loan (from Yes Ltd.) Dr. 10.00
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)
Working Note:
Purchase Consideration ₹ in crores
× ₹ 1.2 i.e., 10 lakhs equity shares at ₹ 12 per share 1.20

.
Number of equity shares of ₹ 10 each to be issued = 10 lakhs.
49
Question – 2
The following are the Balance Sheets of X Ltd. and Y Ltd.:
Particulars Notes X Ltd. (₹) Y Ltd. (₹)

A. Share Capital 1 1,00,000 50,000
B. Reserves and Surplus 2 10,000 (10,000)
A. Long-term borrowings 3 -- 15,000
A. Trade Payables 25,000 5,000
Total 1,35,000 60,000

Assets
A. Property, Plant and Equipment 1,20,000 60,000
B. Non-current investments 4 15,000 --
Total 1,35,000 60,000
Notes of accounts
Yes Ltd. No Ltd.

1. Share Capital
Equity share capital 1,00,000 50,000
1,00,000 50,000
Profit and Loss A/c 10,000 --
Profit and Loss A/c (debit balance) -- (10,000)
10,000 (10,000)
3. Long term Borrowings
Loan from X Ltd. -- 15,000
Loan to Y Ltd. 15,000 --
15,000 --
A new company XY Ltd. is formed to acquire the sundry assets and trade payables of X Ltd.
and Y Ltd. and for this purpose, the sundry assets of X Ltd. are revalued at ₹ 1,00,000. The
debt due to X Ltd. is also to be discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.
50
ANSWER:
Books of X Ltd.
Realization Account
₹ ₹
To Sundry Assets 1,20,000 By Trade payables 25,000
By XY Ltd. (Purchase consideration) 75,000
By Shareholders (Loss on realization) 20,000
1,20,000 1,20,000
Shareholders Account
₹ ₹
To Realization Account (Loss) 20,000 By Equity Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000
Loan Y Ltd.
₹ ₹
To Balance b/d 15,000 By Shares in XY Ltd. 15,000
Shares in XY Ltd.
₹ ₹
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000
XY Ltd.
₹ ₹
To Realization Account 75,000 By Shares in XY Ltd. 75,000
Question – 3
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form
a new company named Super Fast Express Ltd. The balance sheets of both the companies
were as under:
Particulars Notes Super Express Fast Express

Ltd. (₹) Ltd. (₹)
A. Share Capital 1 20,00,000 10,00,000
B. Reserves and Surplus 2 1,00,000 2,60,000
51
A. Long-term provisions 3 1,00,000 --
A. Trade Payables 60,000 40,000
Total 22,60,000 13,00,000

Assets
A. Property, Plant and 4 14,00,000 11,00,000
Equipment
B. Intangible assets 5 -- 1,00,000
2. Current assets
A. Inventories 3,00,000 40,000
B. Trade receivables 2,40,000 40,000
C. Cash and Cash equivalents 6 3,20,000 20,000
Total 22,60,000 13,00,000
Notes of accounts
Super Express Fast Express

Ltd. (₹) Ltd. (₹)
1. Share Capital
Equity share of ₹ 100 each 20,00,000 10,00,000
Insurance reserve 1,00,000 --
Employee profit sharing reserve -- 60,000
Reserve account -- 1,00,000
Surplus -- 1,00,000
1,00,000 2,60,000
3. Long term Provisions
Provident fund 1,00,000 --
Total 1,00,000 --
Land and Building 10,00,000 6,00,000
Plant and machinery 4,00,000 5,00,000
14,00,000 11,00,000
5. Intangible assets
Goodwill -- 1,00,000
-- 1,00,000
6. Cash and Cash Equivalents
52
Cash at Bank 2,20,000 10,000
Cash in hand 1,00,000 10,000
3,20,000 20,000
The assets and liabilities of both the companies were taken over by the new company at their
book values. The companies were allotted equity shares of ₹ 100 each in lieu of purchase
consideration amounting to ₹ 30,000 (20,000 for Super-Fast Express Ltd and 10,000 for Fast
Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd. considering pooling method.
ANSWER:
Balance Sheet of Super Fast Express Ltd.
(a) Share Capital 1 3,00,000
(b) Reserves and Surplus 2 3,60,000
(a) Long-term provisions 3 1,00,000
(a) Trade payables 1,00,000
Total 35,60,000
II. Assets
(a) Property, Plant and Equipment 4 25,00,000
(b) Intangible assets 5 1,00,000
2) Current Assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000
Notes to Accounts
₹
1. Share Capital
Issued, subscribed and paid up
30,00,000
30,000 Equity shares of ₹ 100 each
Total 30,00,000
53
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3. Long-term provision
Provident fund 1,00,000
Total 1,00,000
Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
Goodwill 1,00,000
Total 1,00,000
6. Cash and cash equivalents
Balance with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
Question – 4
Robert Ltd. and Diamond Ltd. give the following information as at 31.03.2020:
Robert Ltd. Diamond Ltd.

(Rs. in lakhs) (Rs. in lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 22,500 9,000
Securities Premium 4,500 -
Foreign Project Reserve - 465
General Reserve 14,250 4,800
Profit and Loss Account 4,305 1,162.5
12% Debentures - 1,500
Trade payables 1,800 694.5
Provisions 2,745 1,053
Land and Buildings 9,000 -
Plant and Machinery 21,000 7,500
Furniture, Fixtures and Fittings 3,456 2,550
54
Inventory 11,793 6.061.5
Trade receivables 3,180 1,650
Cash at Bank 1,671 913.5
All the bills receivable held by Diamond Ltd. were Robert Ltd.'s acceptances.
On 1st April 2020, Robert Ltd. took over Diamond Ltd. in an amalgamation in the nature of
merger. It was agreed that in discharge of consideration for the business, Robert Ltd. would
allot three fully paid equity shares of Rs. 10 each at par for every two shares held in Diamond
Ltd. It was also agreed that 12% debentures in Diamond Ltd. would be converted into 13%
debentures in Robert Ltd. of the same amount and denomination.
Details of trade receivables and trade payables are as under:
Particulars Robert Diamond

Ltd. Ltd.
(Rs. in lakhs)
Trade Payables:
Creditors 1,620 694.5
Bills Payable 180 -
1,800 694.5
Trade receivables:
Debtors 3,180 1,530
Bills Receivables - 120
3,180 1,650
Expenses of amalgamation amounting to Rs. 1.5 lakhs were borne by Robert Ltd.
You are required to:
(i) Pass journal entries in the books of Robert Ltd. and
(ii) Prepare Robert Ltd.'s Balance Sheet immediately after the merger.
ANSWER:
Books of Robert Ltd.
Journal Entries
(Rs. In Lacs) (Rs. In Lacs)

Business Purchase A/c Dr. 13,500
To Liquidator of Diamond Ltd. 13,500
(Being business of Diamond Ltd. taken over for
consideration settled as per agreement)
Plant and Machinery Dr. 7,500
Furniture & Fittings Dr. 2,550
55
Inventory Dr. 6,061.5
Debtors Dr. 1,530
Cash at Bank Dr. 913.5
Bills Receivable Dr. 120
To Foreign Project Reserve 465
To General Reserve Rs. (4,800 - 4,500) 300
To Profit and Loss A/c 1,162.5
To Liability for 12% Debentures 1,500
To Creditors 694.5
To Provisions 1,053
To Business Purchase A/c 13,500
(Being assets & liabilities taken over from Diamond Ltd.)
Liquidator of Diamond Ltd. A/c Dr. 13,500
To Equity Share Capital A/c 13,500
(Purchase consideration discharged in the form of equity
shares)
Profit & Loss A/c Dr. 1.5
To Bank A/c 1.5
(Liquidation expenses paid and charged to P& L A/c)
Liability for 12% Debentures A/c Dr. 1,500
To 13% Debentures A/c 1,500
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 120
To Bills Receivables A/c 120
(Cancellation of mutual owing on account of bills)
Balance Sheet of Robert Ltd. as at 1st April, 2020 (after merger)
Particulars Notes Rs. (in lakhs)

1 Shareholders' funds
A Share capital 1 36,000
B Reserves and Surplus 2 24,981
2 Non-current liabilities
A Long-term borrowings 3 1,500
3 Current liabilities
A Trade Payables (1,800 + 694.5 – 120) 2,374.5
B Short-term provisions (2,745 + 1,053) 3,798
Total
68,653.5
56
Assets
1 Non-current assets
A Property, Plant & Equipment 4 43,506
2 Current assets
A Inventories (11,793+6,061.5) 17,854.5
B Trade receivables (3,180+1,650-120) 4,710
C Cash and cash equivalents (1,671+913.5-1.5) 2,583
Total 68,653.5
Notes to Accounts
Rs.
1. Share Capital
Authorized, issued, subscribed and paid-up: 36 crores equity shares of Rs. 10
each (out of these shares, 13.5 crores shares have been issued for consideration
other than cash) 36,000
General Reserve 14,550
Securities Premium 4,500
Foreign Project Reserve 465
Profit and Loss Account Rs. (4,305 + 1,162.5 - 1.5) 5,466
Total 24,981
3. Long-term borrowings
Secured
13% Debentures 1,500
4. PPE
Land & Buildings 9,000
Plant & Machinery 28,500
Furniture & Fittings 6,006
Total 43,506
Working Note:
Computation of purchase consideration
Purchase consideration was discharged in the form of three equity shares of Robert Ltd. for every two
equity shares held in Diamond Ltd.
Purchase consideration = Rs. 9,000 lacs x = Rs. 13,500 lacs
57
Question – 5
The summarized Balance Sheets of Black Limited and White Limited as on 31st March, 2020 is
as follows:
Particulars Notes Black Limited White Limited

(₹ in 000) (₹ in 000)
Shareholders’ Funds
(a) Share Capital 1 6,000 3,600
(b) Reserves and Surplus 2 1,080 660
Current Liabilities
Trade payables 600 360
Total 7,680 4,620
Assets
Non-current assets
Property, Plant and Equipment 3,600 2,400
Current assets
(a) Inventories 960 720
(b) Trade receivables 1,680 1,080
(c) Cash and Cash Equivalents 1,440 420
Total 7,680 4,620
Note Particulars Black Limited White Limited

No. (₹ in 000) (₹ in 000)
1. Share Capital 6,000 3,600
Equity Shares of ₹ 100 each
Reserves and Surplus
2. General Reserves 360 180
Profit and Loss Account 72 480
Total 1,080 660
Black Limited takes over White Limited on 1st July, 2020.

No Balance Sheet of White Limited is available as on that date. It is, however estimated that
White Limited earned profit of ₹ 2,40,000 after charging proportionate depreciation @ 10%
p.a. on Property Plant and Equipment, during April-June, 2020.
Estimated profit of Black Limited during these 3 months was ₹ 4,80,000 after charging
proportionate deprecation @ 10% p.a. on Property Plant and Equipment
Both the companies have declared and paid 10% dividend within this 3 months' period.
58
Goodwill of White Limited is valued at ₹ 2,40,000 and Property Plant and Equipment are valued
at ₹ 1,20,000 above the depreciated book value on the date of takeover.
Purchase consideration is to be satisfied by Black Limited by issuing shares at par.
Ignore income tax. You are required to:
(i) Compute No. of shares to be issued by Black Limited to White Limited against purchase
consideration.
(ii) Calculate the balance of Net Current Assets of Black Limited and White Limited as on 1st
July, 2020.
(iii) Give balance of Profit or Loss of Black Limited as on 1st July, 2020
(iv) Give balance of Property Plant and Equipment as on 1st July, 2020 after takeover.
[July 21 (10 Marks)]
ANSWER:
(i) No. of shares issued by Black Ltd. to White Ltd. against purchase consideration
White Ltd. ₹ ₹
Goodwill 2,40,000
Property, plant and equipment 24,00,000
Less: Depreciation [24,00,000 x 10% x 3/12] (60,000)
23,40,000
Add: Appreciation 1,20,000 24,60,000
Inventory 7,20,000
Trade receivables 10,80,000
Cash and Bank balances 4,20,000
Add: Profit after depreciation 2,40,000
Add: Depreciation (non-cash) 60,000 3,00,000
Less: Dividend [36,00,000 x 10%] 3,60,000 3,60,000
48,60,000
Less: Trade payables (3,60,000)
Purchase Consideration 45,00,000
Number of shares to be issued by Black Ltd. @ ₹ 100 45,000 shares
each
(ii) Calculation of Net Current Assets as on 01.07.2020
Black Ltd. White Ltd.

₹ ₹ ₹ ₹
Current assets:
Inventory 9,60,000 7,20,000
59
Trade receivables 16,80,000 10,80,000
Cash and Bank 14,40,000 4,20,000
Less: Dividend (6,00,000) (3,60,000)
Add: Profit after depreciation 4,80,000 2,40,000
Add: Depreciation being noncash 90,000 14,10,000 60,000 3,60,000
40,50,000 21,60,000
Less: Trade payables (6,00,000) (3,60,000)
34,50,000 18,00,000
(iii) Profit and Loss Account balance of Black Ltd. as on 1.07.2020
₹
P & L A/c balance as on 31.03.2020 7,20,000
Less: Dividend paid (6,00,000)
1,20,000
Add: Estimated profit for 3 months after charging depreciation 4,80,000
6,00,000
(iv) Property, plant and equipment as on 01.07.2020
Property, plant and equipment of Black Ltd. as on 31.03.2020 36,00,000

Less: Depreciation for 3 months [36,00,000 x 10% x 3/12] (90,000)
35,10,000
Property, plant and equipment of White Ltd.
Taken over as on 31.03.2020 24,00,000
Less: Proportionate depreciation for 3 months on fixed assets (60,000)
23,40,000
Add: Appreciation above the estimated book value 1,20,000 24,60,000
Total Property, plant and equipment as on 1.7.2020 59,70,000
Question – 6
Mohan Ltd. gives you the following information as on 31st March, 2020:
₹
Share capital:
Equity shares of ₹ 10 each 3,00,000
6,000, 9% cumulative preference shares of ₹ 10 each 60,000
Profit and Loss Account (Dr. balance) 1,70,000
10% Debentures of ₹ 100 each 2,00,000
60
Interest payable on Debentures 20,000
Trade Payables 1,50,000
Property, Plant and Equipment 3,40,000
Goodwill 10,000
Inventory 80,000
Bank Balance 20,000
A new company Ravi Ltd. is formed with authorised share capital of ₹ 4,00,000 divided into
40,000 Equity Shares of ₹ 10 each. The new company will acquire the assets and liabilities of
Mohan Ltd. on the following terms:
(i) (a) Mohan Ltd.'s debentures are paid by similar debentures in new company and for
outstanding accrued interest on debentures, equity shares of equal amount are issued
at par.
(b) The trade payables are paid by issue of 12,000 equity shares at par in full and final
settlement of their claims.
(c) Preference shareholders are to get equal number of equity shares issued at par.
Dividend on preference shares is in arrears for three years. Preference shareholders
to forgo dividend for two years. For balance dividend, equity shares of equal amount
are issued at par.
(d) Equity shareholders are issued one share at par for every three shares held in Mohan
Ltd.
(ii) Current Assets are to be taken at book value (except inventory, which is to be reduced
by 10%). Goodwill is to be eliminated. The Property, plant and equipment is taken over
at ₹ 3,08,400.
(iii) Remaining equity shares of the new company are issued to public at par fully paid up.
(iv) Expenses of ₹ 5,000 to be met from bank balance of Mohan Ltd. This is to be adjusted from
the bank balance of Mohan Ltd. before acquisition by Ravi Ltd.
You are required to prepare:
(a) Realisation account and Equity Shareholders' account in the books of Mohan Ltd.
(b) Bank Account and Balance Sheet with notes to accounts in the books of Ravi Ltd.
[RTP May 21]
ANSWER:
In the books of Mohan Ltd.
(i) Realisation Account
To Goodwill 10,000 By 10% Debentures 2,00,000
To Property, plant and 3,40,000 20,000
By Interest accrued on debentures
equipment
61
To Inventory 80,000 By Trade payables 1,50,000
To Trade receivables 1,10,000 By Ravi Ltd. (Purchase 1,65,400
consideration) (W.N.1)
To Bank 15,000 By Equity shareholders A/c (loss on 25,000
(20,000 – 5,000) realization) (Bal. fig.)
To Preference
Shareholders A/c
(W.N.2) 5,400
5,60,400 5,60,400
(ii) Equity Shareholders’ Account
₹ ₹
To Profit & loss A/c 1,70,000 By Equity Share capital 3,00,000
To Expenses* 5,000
To Equity shares in Ravi Ltd. 1,00,000
To Realization A/c 25,000
3,00,000 3,00,000
*Alternatively, expenses may be routed through Realization account.

In the books of Ravi Ltd.
(i) Bank Account
₹ ₹
To Business Purchase 15,000 By Balance c/d (Bal. fig.) 1,09,600
To Equity shares
application & 94,600
allotment A/c (W.N. 3)
1,09,600 1,09,600
(ii) Balance Sheet as at 31st March, 2020
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
Share capital 1 4,00,000
(2) Non-current liabilities
Long-term borrowings 2 2,00,000
Total 6,00,000
II. Assets
(1) Non-current assets
62
(a) Property, Plant Equipment 3,08,400
(2) Current assets
(a) Inventories 72,000
(b) Trade receivables 1,10,000
(c) Cash and cash equivalents 1,09,600
Total 6,00,000
Notes to Accounts
₹
1. Share capital
Authorised share capital
40,000 equity shares of ₹ 10 each 4,00,000
Issued and subscribed
40,000 shares of ₹ 10 each fully paid up 4,00,000
(out of the above, 30,540 (W.N.3) shares have been allotted as fully
paid-up pursuant to contract without payment being received in cash)
2. Long Term Borrowings
10% Debentures 2,00,000
Working Notes:
(1) Calculation of Purchase consideration
₹
Payment to preference shareholders
6,000 equity shares @ ₹ 10 60,000
For arrears of dividend: (6,000 x ₹ 10) x 9% 5,400
Payment to equity shareholders
(30,000 shares x 1/3) @ ₹ 10 1,00,000
Total purchase consideration 1,65,400
(2) Preference Shareholders’ Account in books of Mohan Ltd.
₹ ₹
To Equity Shares in 65,400 By Preference Share 60,000
Ravi Ltd. capital
By Realization A/c (Bal. 5,400
fig.)
65,400 65,400
(3) Preference Shareholders’ Account in books of Mohan Ltd.
63
Number of shares
Authorized equity shares 40,000
Less: Equity shares issued for
Interest accrued on debentures 2,000
Trade payables of Mohan Ltd. 12,000
Preference shareholders of Mohan Ltd. 6,000
Arrears of preference dividend 540
Equity shareholders of Mohan Ltd. 10,000 (30,540)
Number of equity shares issued to public at par for cash 9,460
64
INTERNAL RECONSTRUCTION

Question – 1
What are the methods of internal reconstruction generally followed by companies?
ANSWER:
Methods of Internal reconstruction:
 Sub-division or consolidation of shares into smaller or higher Denomination and Conversion of share
into stock or vice-versa
 Variation of shareholders’ rights
 Reduction of share capital
 Compromise, arrangements etc.
 Surrender of Shares.
Question – 2
Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by
the court-
1. Furniture and Fixtures which stood at the books at ₹ 1,50,000 to be written down to ₹
95,000. The freehold premises which was valued at ₹ 7,00,000 showed an appreciation of
₹ 55,000.
2. Plant and machinery showed fall in value of ₹ 89,000, to be recorded in the books.
Investment at ₹ 2,00,000 was brought down to the existing market value at ₹ 1,05,000.
3. Debenture holders accepted to receive the following in lieu of their present 9% debentures
of ₹ 2,50,000-
a. 1/5th of the total to be paid in cash to them.
b. To take over the land and buildings of value ₹ 72,000.
c. To forgo the remaining unpaid portion as a policy of reconstruction.
Write off the profit and loss A/c debit balance at ₹ 70,000 which had been accumulated over
the years. In case of any shortfall, the balance of the General reserve of ₹ 1,50,000 can be
utilized to write off the losses under reconstruction scheme.
Show the necessary journal entries as part of the reconstruction process considering that
balance in general reserve utilized to write off the losses as per reconstruction scheme.
ANSWER:
Journal Entries in the books of Parth Ltd.
Dr. (₹) Cr. (₹)

Reconstruction A/c Dr. 2,39,000
65
To Furniture and Fixtures A/c 55,000
To Plant and machinery A/c 89,000
(Writing off overvalued assets as per Reconstruction Scheme
dated.)
Freehold premises A/c Dr. 55,000
To Reconstruction A/c 55,000
(Being the increase in the premises credited to reconstruction
account as per reconstruction scheme)
9% Debentures A/c Dr. 2,50,000
To Bank A/c 50,000
To Land and Building A/c 72,000
To Reconstruction A/c 1,28,000
(Being the debenture holders claim settled partly and foregone
partly as per reconstruction scheme)
Reconstruction A/c Dr. 70,000
To Profit and loss A/c 70,000
(Being the loss written off as per reconstruction scheme)
General reserve A/c Dr. 1,26,000
(Being the balance in general reserve utilized to write off the
losses as per reconstruction scheme)
Question – 3
The following scheme of reconstruction has been approved for Win Limited:
(i) The shareholders to receive in lieu of their present holding at 1,00,000 shares of ₹ 10
each, the following:
(a) New fully paid ₹ 10 Equity shares equal to 3/5th of their holding.
(b) 10% Preference shares fully paid to the extent of 1/5th of the above new equity
shares.
(c) ₹ 40,000, 8% Debentures.
(ii) An issue of ₹ 1 lakh 10% first debentures was made and allotted, payment for the same
being received in cash forthwith.
(iii) Goodwill which stood at ₹ 1,40,000 was completely written off.
(iv) Plant and machinery which stood at ₹ 2,00,000 was written down to ₹ 1,50,000.
(v) Freehold property which stood at ₹ 1,50,000 was written down by ₹ 50,000.
You are required to draw up the necessary Journal entries in the Books of Win Limited for the
above reconstruction. Suitable narrations to Journal entries should form part of your answer.
66
ANSWER:
Journal Entries
₹ ₹
Equity Share Capital (old) A/c Dr. 10,00,000
To Equity Share Capital (₹ 10) A/c 6,00,000
To 10% Preference Share Capital A/c 1,20,000
To 8% Debentures A/c 40,000
To Capital Reduction A/c 2,40,000
(Being new equity shares, 10% Preference Shares, 8% Debentures
issued and the balance transferred to Reconstruction account as
per the Scheme)
Bank A/c Dr. 1,00,000
To 10% First Debentures A/c 1,00,000
(Being allotment of 10% first Debentures)
Capital Reduction A/c Dr. 2,40,000
To Goodwill Account 1,40,000
To Plant and Machinery Account 50,000
To Freehold Property Account 50,000
(Being Capital Reduction Account utilized for writing off of
Goodwill, Plant and Machinery and Freehold property as per the
scheme)
Question – 4
Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge
losses. The following is the Balance Sheet of the Company as at 31.3.20X1 before
reconstruction:
(b) Reserves and Surplus 2 (20,00,000)
(a) Long-term borrowings 3 15,00,000
(a) Trade Payables 5,00,000
Total 65,00,000
II. Assets
(a) Property, plant and Equipment 4 45,00,000
67
(b) Intangible assets 5 20,00,000
2) Current Assets Nil
Total 65,00,000
Notes to Accounts
₹
1. Share Capital
Equity share capital:
Authorized shares capital
1,50,000 Equity Shares of ₹ 50 each 75,00,000
Issued, subscribed and paid up capital
50,000 Equity Shares of ₹ 50 each 25,00,000
1,00,000 Equity Shares of ₹ 50 each, ₹ 40 paid up 40,00,000
65,00,000
Debit balance of Profit and loss Account (20,00,000)
(20,00,000)
Secured: 12% First debentures 5,00,000
12% Second debentures 10,00,000
15,00,000
Building 10,00,000
Plant 10,00,000
Computers 25,00,000
45,00,000
Goodwill 20,00,000
20,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited:
Mr. X (₹) Mr. Y (₹)

12% First Debentures 3,00,000 2,00,000
12% Second debentures 7,00,000 3,00,000
Trade Payables 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up ₹ 50 shares 3,00,000 2,00,000
Partly paid up shares (₹ 40 paid up) 5,00,000 5,00,000
68
The following Scheme of Reconstruction is approved by all parties interested and also by the
Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares
be converted into equity shares of ₹ 20 each.
(b) Mr. X is to cancel ₹ 7,00,000 of his total debt (other than share amount) and to pay ₹ 2
lakhs to the company and to receive new 14% First Debentures for the balance amount.
(c) Mr. Y is to cancel ₹ 3,00,000 of his total debt (other than equity shares) and to accept new
14% First Debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in writing off of
Goodwill, Profit and Loss A/c Loss and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance
Sheet of the reconstructed company.
ANSWER:
Journal Entries in the books of Green Limited
Dr. (₹) Cr. (₹)

Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of ₹ 10 per share on 1,00,000 equity shares called up as
per reconstruction scheme )
Equity Share Capital Account (₹ 50) Dr. 75,00,000
To Equity Share Capital Account (₹ 20) 30,00,000
To Capital Reduction Account 45,00,000
(Reduction of equity shares of ₹ 50 each to shares of ₹ 20 each
as per reconstruction scheme)
12% First Debentures Account Dr. 3,00,000
12% Second Debentures Account Dr. 7,00,000
Trade payables Account Dr. 2,00,000
To X 12,00,000
(The total amount due to X, transferred to his account)
Bank Account Dr. 2,00,000
To X 2,00,000
(The amount paid by X under the reconstruction scheme)
12% First Debentures Account Dr. 2,00,000
12% Second Debentures Account Dr. 3,00,000
Trade payables Account Dr. 1,00,000
To Y 6,00,000
(The total amount due to Y, transferred to his account)
Y Dr. 6,00,000
69
To 14% First Debentures Account 3,00,000
(The amount due to Y discharged by issue of 14% first debentures)
X Dr. 14,00,000
To 14% First Debentures A/c 7,00,000
(The cancellation of ₹ 7,00,000 out of total debt of Mr. X and
issue of 14% first debentures for the balance amount as per
reconstruction scheme)
Capital Reduction Account Dr. 55,00,000
To Profit and Loss Account 20,00,000
To Computers Account 15,00,000
(The balance amount of capital reduction account utilised in
writing off goodwill, profit and loss account, and computers –
Working Note)
Balance Sheet of Green Limited (and reduced)

as at 31st March, 20X1
Total 42,00,000
II. Assets
2) Current Assets
Cash and cash equivalents 12,00,000
Total 42,00,000
Notes to Accounts
₹
1. Share Capital
Equity shares capital
70
1,50,000 equity shares of ₹ 20 each 30,00,000
Total 30,00,000
Secured
14% First Debentures 10,00,000
Total 10,00,000
Building 10,00,000
Plant 10,00,000
Computers 10,00,000
Total 30,00,000
Working Note:
Capital Reduction Account
₹ ₹
To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000
To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000
Question – 5
Sapra Limited has laid down the following terms upon the sanction of the reconstruction
scheme by the court.
(i) The shareholders to receive in lieu of their present holding at 7,50,000 shares of ₹ 10
each, the following:
New fully paid ₹ 10 Equity Shares equal to 3/5th of their holding.
Fully paid ₹ 10, 6% Preference Shares to the extent of 2/5th of the above new equity
shares.
7% Debentures of ₹ 250,000.
(ii) Goodwill which stood at ₹ 2,70,000 is to be completely written off.
(iii) Plant & Machinery to be reduced by ₹ 1,00,000, Furniture to be reduced by ₹ 88,000 and
Building to be appreciated by ₹ 1,50,000.
(iv) Investment of ₹ 6,00,000 to be brought down to its existing market price of ₹ 1,80,000.
(v) Write off Profit & Loss Account debit balance of ₹ 2,25,000.
In case of any shortfall, the balance of General Reserve of ₹ 42,000 can be utilized to write off
the losses under reconstruction scheme.
71
You are required to show the necessary Journal Entries in the books of Sapra Limited of the
above reconstruction scheme considering that balance in General Reserve is utilized to write
off the losses. [July 21 (5 Marks)]
ANSWER:
Journal Entries
₹ ₹
Equity Share Capital (old) A/c Dr. 75,00,000
To Equity Shares Capital (₹ 10) A/c 45,00,000
To 6% Preference Share Capital (₹ 10) A/c 18,00,000
To 7% Debentures A/c 2,50,000
(Being new equity shares, 6% Preference Shares, 7%
Debentures issued and the balance transferred to
Reconstruction account as per the Scheme)
Building A/c Dr. 1,50,000
Capital Reduction A/c Dr. 9,53,000
To Plant and Machinery Account 1,00,000
To Furniture Account 88,000
To Investment A/c 4,20,000
To Profit & Loss A/c 2,25,000
(Being Capital Reduction Account utilized for writing off of
Goodwill, Plant and Machinery, furniture, investment and
Profit & Loss as per the scheme)
General reserve A/c Dr. 3,000
To Capital Reduction A/c 3,000
(Being general reserve utilized to write off the balance in
Capital reduction A/c)
Note: In place of Capital Reduction Account, Reconstruction Account or Internal Reconstruction

Account may also be used in the above journal entries.
Question – 6
Recover Ltd decided to reorganize its capital structure owing to accumulated losses and
adverse market condition. The Balance Sheet of the company as on 31st March 2020 is as
follows-
EQUITY AND LIABILITIES
A Share capital 1 3,50,000
B Reserves and surplus 2 (70,000)
72
A Long-term borrowings 3 55,000
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
5,05,000
ASSETS
A Property, Plant Equipment 4 3,35,000
B Intangible assets 5 50,000
C Non-current investments 6 40,000
2 Current assets
A Inventories 30,000
B Trade receivables 50,000
5,05,000
Notes to accounts:
1. Share Capital ₹
20,000 Equity Shares of ₹ 10 each 2,00,000
Preference share capital:
15,000 8% Cumulative Preference Shares of ₹ 10 each
(preference dividend has been in arrears for 4 years) 1,50,000
3,50,000
2. Reserves and surplus
Securities premium 10,000
Profit and loss account (debit balance) (80,000)
(70,000)
Secured
9% Debentures (secured on the freehold property 50,000
Accrued interest on 9% debentures 5,000
55,000
4. Property, plant and Equipment
Freehold property 1,20,000
Leasehold property 85,000
Plant and machinery
73
1,30,000
3,35,000
Goodwill 50,000
50,000
Non-Trade investments at cost 40,000
40,000
Subsequent to approval by court of a scheme for the reduction of capital, the following steps
were taken:
i. The preference shares were reduced to ₹ 2.5 per share, and the equity shares to ₹ 1 per
share.
ii. One new equity share of ₹ 1 was issued for the arrears of preferred dividend for past 4
years.
iii. The balance on Securities Premium Account was utilized and was transferred to capital
reduction account.
iv. The debenture holders took over the freehold property at an agreed figure of ₹ 75,000
and paid the balance to the company after deducting the amount due to them.
v. Plant and Machinery was written down to ₹ 1,00,000.
vi. Non-trade Investments were sold for ₹ 32,000.
vii. Goodwill and obsolete stock (included in the value of inventories) of ₹ 10,000 were written
off.
viii. A contingent liability of which no provision had been made was settled at ₹ 7,000 and of
this amount, ₹ 6,300 was recovered from the insurance.
You are required (a) to show the Journal Entries, necessary to record the above transactions
in the company’s books and (b) to prepare the Balance Sheet, after completion of the scheme.
[RTP May 2021]
ANSWER:
In the Books of Recover Ltd.
Journal Entries
Particulars Dr. Cr.

₹ ₹
8% Cumulative Preference share capital (₹ 10) A/c Dr. 1,50,000
To 8% Cumulative Preference share capital (₹2.5) A/c 37,500
To Capital reduction (₹ 7.5) A/c 1,12,500
74
(Preference shares being reduced to shares of ₹ 2.5 per share
and remaining transferred to capital reduction account as per
capital reduction scheme)
Equity shares capital A/c (₹ 10) Dr. 2,00,000
To Equity Share capital A/c (₹ 1) 20,000
To Capital reduction A/c (₹ 9) 1,80,000
(Equity shares reduced to ₹ 1 per share with the remaining
amount transferred to capital reduction ac as a part of the
internal reconstruction scheme.)
Capital reduction A/c Dr. 48,000
To Equity share capital A/c 48,000
(Equity shares of ₹ 1 issued in lieu of the arrears of preference
dividend for 4 years as a part of the internal reconstruction
scheme)
Securities Premium A/c Dr. 10,000
To Capital reduction A/c 10,000
(Amount from the securities premium utilized towards the
capital reduction a/c as a part of the internal reconstruction
scheme)
9% Debentures A/c Dr. 50,000
Accrued interest on debentures A/c Dr. 5,000
Bank A/c Dr. 20,000
To Freehold property A/c 1,20,000
(Debenture holders being paid by the sale of property, which
is sold at a loss debited to the capital reduction account.
Amount received in excess being refunded to company by
debenture holders as a part of the internal reconstruction
scheme.)
To Plant and Machinery A/c 30,000
To Goodwill A/c 50,000
To Inventory A/c 10,000
(The assets written off as a part of the internal reconstruction
scheme)
Bank A/c Dr. 32,000
75
(Investments sold at a loss debited to capital reduction
account as a part of the internal reconstruction scheme)
Contingent Liability A/c Dr. 7,000
To Bank A/c 7,000
(Contingent liability paid as a part of the internal
Bank A/c Dr. 6,300
Capital reduction A/c Dr. 700
To Contingent Liability A/c 7,000
(The insurance company remitting par of the contingency
payment amount)
(Accumulated losses written off to capital reduction account
as a part of the internal reconstruction scheme).
To Capital reserve A/c 30,800
(The balance in capital reduction account transferred to
capital reserve as a part of the internal reconstruction scheme)
Balance sheet of Recover Ltd. as at 31st March 2020 (and reduced)
EQUITY AND LIABILITIES
A Share capital 1 1,05,500
B Reserves and surplus 2 30,800
A Long-term borrowings -
A Trade Payables 80,000
B Bank overdraft 90,000
Total 3,06,300
ASSETS
A Property, Plant Equipment 3 1,85,000
2 Current assets
A Inventories 20,000
76
B Trade receivables 50,000
C Cash and cash equivalents 4 51,300
Total 3,06,300
Notes to accounts:
1. Share Capital ₹
68,000 Equity Shares of ₹ 1 each 68,000
Preference share capital:
15,000 8% Cumulative Preference Shares of ₹ 2.5 each 37,500
1,05,500
2. Reserves and surplus
Capital reserve 30,800
Leasehold property 85,000
Plant and machinery 1,00,000
1,85,000
4. Cash and cash equivalents
Bank A/c (20,000 + 32,000 – 7000 + 6,300) 51,300
Question – 6
Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by
the court-
4. Furniture and Fixtures which stood at the books at ₹ 1,50,000 to be written down to ₹
95,000. The freehold premises which was valued at ₹ 7,00,000 showed an appreciation of
₹ 55,000.
5. Plant and machinery showed fall in value of ₹ 89,000, to be recorded in the books.
Investment at ₹ 2,00,000 was brought down to the existing market value at ₹ 1,05,000.
6. Debenture holders accepted to receive the following in lieu of their present 9% debentures
of ₹ 2,50,000-
a. 1/5th of the total to be paid in cash to them.
b. To take over the land and buildings of value ₹ 72,000.
c. To forgo the remaining unpaid portion as a policy of reconstruction.
Write off the profit and loss A/c debit balance at ₹ 70,000 which had been accumulated over
the years. In case of any shortfall, the balance of the General reserve of ₹ 1,50,000 can be
utilized to write off the losses under reconstruction scheme.
Show the necessary journal entries as part of the reconstruction process considering that
balance in general reserve utilized to write off the losses as per reconstruction scheme.
77
ANSWER:
Journal Entries in the books of Parth Ltd.
Dr. (₹) Cr. (₹)

Reconstruction A/c Dr. 2,39,000
To Furniture and Fixtures A/c 55,000
To Plant and machinery A/c 89,000
(Writing off overvalued assets as per Reconstruction Scheme
dated.)
Freehold premises A/c Dr. 55,000
To Reconstruction A/c 55,000
(Being the increase in the premises credited to reconstruction
account as per reconstruction scheme)
9% Debentures A/c Dr. 2,50,000
To Bank A/c 50,000
To Land and Building A/c 72,000
(Being the debenture holders claim settled partly and
foregone partly as per reconstruction scheme)
Reconstruction A/c Dr. 70,000
(Being the loss written off as per reconstruction scheme)
General reserve A/c 1,26,000
(Being the balance in general reserve utilized to write off the
losses as per reconstruction scheme)
Question – 6
The following is the Balance Sheet of Weak Ltd. as at 31.3.20X1:
(a) Share Capital 1 1,50,00,000
(b) Reserves and Surplus 2 (6,00,000)
(b) Short term provisions 4 1,00,000
78
Total 2,35,00,000
II. Assets
(a) Property, plant and Equipment 1,25,00,000
(b) Non-current investment 5 10,00,000
2) Current Assets 1,00,00,000
Total 2,35,00,000
Notes to Accounts
₹
1. Share Capital
1,00,000 Equity Shares of ₹ 100 each 1,00,00,000
50,000, 12% Cumulative Preference shares of ₹ 100 each 50,00,000
1,50,00,000
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)
40,000, 10% debentures of ₹ 100 each 40,00,000
40,00,000
4. Short term provisions 1,00,000
Provision for taxation 1,00,000
Investments (market value of ₹ 9,50,000) 10,00,000
10,00,000
The following scheme of reorganization is sanctioned:

(i) All the existing equity shares are reduced to ₹ 40 each.
(ii) All preference shares are reduced to ₹ 60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders surrender
their existing debentures of ₹ 100 each and exchange the same for fresh debentures of ₹
70 each for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes ₹ 20,00,000 decides to
forgo 40% of his claim. He is allotted 30,000 equity shares of ₹ 40 each in full satisfaction
of his claim.
(v) Property, plant and equipment are to be written down by 30%.
(vi) Current assets are to be revalued at ₹ 45,00,000.
(vii) The taxation liability of the company is settled at ₹ 1,50,000.
79
(viii) Investments to be brought to their market value.
(ix) It is decided to write off the debit balance of Profit and Loss account.
Pass Journal entries and show the Balance sheet of the company after giving effect to the
above.
ANSWER:
Journal Entries in the books of Weak Ltd.
Dr. (₹) Cr. (₹)

(i) Equity share capital (₹ 100) A/c Dr. 1,00,00,000
To Equity Share Capital (₹ 40) A/c 40,00,000
(Being conversation of equity share capital of ₹ 100 each
into ₹ 40 each as per reconstruction scheme)
(ii) 12% cumulative Preference Share capital (₹ 100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (₹ 60) 30,00,000
A/c
(Being conversion of 12% cumulative preference share
capital of ₹ 100 each into ₹ 60 each as per
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
(Being 12% debentures issued to 10% debenture-
holders for 70% of their claims. The balance transferred
to capital reduction account as per reconstruction
scheme)
(iv) Trade payable A/c Dr. 20,00,000
To Equity Shares capital A/c 12,00,000
(Being a creditor of ₹ 20,00,000 agreed to surrender his
claim by 40% and was allotted 30,000 equity shares of
₹ 40 each in full settlement of his dues as per
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To Current assets (bank A/c) A/c 1,50,000
(Being liability for taxation settled)
(vi) Capital Reduction A/c Dr. 99,00,000
To P & L A/c 6,00,000
80
To Property, plant and equipment A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
(Being amount of Capital Reduction utilized in writing
off P & L A/c (Dr.) Balance, Property, plant and
equipment, Current Assets, Investments through capital
reduction account)
(vii) Capital Reduction A/c Dr. 50,000
To Capital Reserve A/c 50,000
(Being balance in capital reduction account transferred
to capital reserve account)
Balance Sheet of Weak Ltd. (and reduced) as at 31.3.20X1
(b) Reserves and Surplus 2 50,000
Total 1,40,50,000
II. Assets
(b) Investments 5 9,50,000
2) Current Assets 6 43,50,000
Total 1,40,50,000
Notes to Accounts
₹
1. Share Capital
1,30,000 equity shares of ₹ 40 each 52,00,000
Preference share capital
50,000 12% Cumulative Preference shares of ₹ 60 each 30,00,000
Total 82,00,000
81
Capital Reserve 50,000
Secured
4. Property, plant and Equipment
Total PPE 1,25,00,000
Adjustment under scheme of reconstruction (37,50,000) 87,50,000
5. Investments 10,00,000
Adjustment under scheme of reconstruction (50,000) 9,50,000
6. Current assets 45,00,000
Adjustment under scheme of reconstruction (1,50,000) 43,50,000
Working Note:
Capital Reduction Account
₹ ₹
To Current Assets 50,000 By Equity Share capital 60,00,000
To P & L A/c 6,00,000 By 12% Cumulative preference 20,00,000
share capital
To Property, plant and 37,50,000 By 10% Debentures 12,00,000
equipment
To Current assets 55,00,000 By Trade payables 8,00,000
To Investment 50,000
To Capital Reserve (bal. fig.) 50,000
1,00,00,000 1,00,00,000
82
LIQUIDATION OF COMPANIES
Question – 1
XYZ Limited is being would up by the tribunal. All the assets of the company have been charged
to the company’s bankers to whom the company owes ₹ 5 crores. The company owes
following amounts to others:
 Dues to workers - ₹ 1,25,00,000
 Taxes Payable to Government - ₹ 30,00,000
 Unsecured Creditors - ₹ 60,00,000
You are required to compute with the reference to the provision of the Companies Act, 2013
the amount each kind of creditors is likely to get if the amount realized by the official liquidator
from the secured assets and available for distribution among creditors is only ₹ 4,00,00,000.
ANSWER:
Section 326 of the Companies Act, 2013 is talks about the overriding preferential payments to be made
from the amount realized from the assets to be distributed to various kind of creditors. According to the
proviso given in the section 326 the security of every secured creditor should be deemed to be subject
to a paripassu change in favour of the workman to the extent of their portion.
×
Workman’s Shares to Secured Assets =
, , , × , , ,
Workman’s Shares to Secured Asset =
, , , , , ,
= 4,00,00,000 x
Workman’s Shares to Secured Assets = 80,00,000

Amount available to secured creditor is ₹ 400 Lakhs – 80 Lakhs = 320 lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.
Question – 2
Rain Ltd. went into liquidation on 31st March, 20X1. Following are the details regarding share
capital of the company:-
I. 30,000 Equity shares of ₹ 100 each, ₹ 80 paid up.
II. 80,000 Equity shares of ₹ 50 each, ₹ 25 paid up.
III. 4,00,000 Equity shares of ₹ 10 each, fully paid up.
Surplus available with the liquidator after payment of all the liabilities ₹ 24,00,000. Distribute
this surplus money among different categories of shareholders.
83
ANSWER:
Particulars I II III Total

No. of shares 30,000 80,000 4,00,000 5,10,000
Equity share capital (@ ₹ 100/50/10) 30,00,000 40,00,000 40,00,000 1,10,00,000
Paid up share Capital 24,00,000 20,00,000 40,00,000 84,00,000
(A)
Loss due to Liquidation
(B) (16,36,364) (21,81,818) (21,81,818) (60,00,000)
(₹ 60,00,000 in the ratio of 3:4:4)
Surplus amount distributed among different

categories of shareholders (A) – (B) 7,63,636 (1,81,818) 18,18,182 24,00,000
Note: Shareholders of category I and III will get surplus amount, while category II shareholders will pay
₹ 1,81,818.
Question – 3
A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount
distributed to Preferential creditors and 3% on the payment made to unsecured creditors. The
assets were realized for ₹ 50,00,000 against which payment was made as follows:
Liquidation ₹ 50,000
Secured Creditors ₹ 20,00,000
Preferential Creditors ₹ 1,50,000
The amount due to Unsecured creditors was ₹ 30,00,000
You are asked to calculate the total Remuneration payable to Liquidator. Calculation shall be
made to the nearest multiple of a rupee.
ANSWER:
Calculation of Total Remuneration payable to Liquidator
Amount in ₹
2% on Assets realized (50,00,000 x 2%) 1,00,000
3% on payment made to Preferential creditors (1,50,000 x 3%) 4,500
3% on payment made to Unsecured creditors
(Refer W.N.) 78,510
Total Remuneration payable to Liquidator 1,83,010
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses, payment to
secured creditors, preferential creditors & liquidator’s remuneration
= ₹ 50,00,000 – ₹ 50,000 – ₹ 20,00,000 – ₹ 1,50,000 – ₹ 1,00,000 – ₹ 4,500
= ₹ 26,95,500
Since cash balance is available for unsecured creditors, Liquidator’s remuneration on payment to
unsecured creditors = ₹ 26,95,500 X 3 /103= ₹ 78,510 (rounded off)
84
Question – 4
Full Stop Limited gives you the following ledger balances as on 31st March 20X1, being the
date of voluntary winding up:
₹
Land & building 5,20,000
Plant & machinery 7,80,000
Inventory in trade 3,25,000
Book debts 10,25,000
Profit & loss account (Dr. balance) 5,50,000
Share capital:
5,000, 10% Cumulative Preference shares of ₹ 100 each, fully paid up 5,00,000
5,000 Equity shares of ₹ 100 each, ₹ 60 per share called and paid up 3,00,000
5,000 Equity shares of ₹ 100 each, ₹ 50 per share called and paid up 2,50,000
Securities premium 7,50,000
Preferential creditors 1,05,000
Bank overdraft 4,85,000
Trade creditors 6,00,000
Preference dividend is in arrears for three years. By 31-03-20X1, the assets realized were as
follows:
₹
Land & Building 6,20,000
Inventory in trade 3,10,000
Book debts 6,60,000
Expenses of liquidation are ₹ 86,000. The remuneration of the liquidator is 2% of the realization
of assets. Income tax payable on liquidation is ₹ 67,000. Assuming that the final payments
were made on 31-03-20X1, prepare the Liquidator’s Statement of Account.
ANSWER:
Liquidator’s Statement of Account
Receipts ₹ Payments ₹
Land & Building 6,20,000 Liquidator’s remuneration 46,000
Inventory in trade 3,10,000 Liquidation expenses 86,000
Plant & Machinery 7,10,000 Preferential creditors 1,05,000
Book debts 6,60,000 10% Debentures 2,10,000
Income tax payable 67,000
Bank overdraft 4,85,000
Trade creditors 6,00,000
85
Preference shareholders:
Capital 5,00,000
Arrears of preference dividend for
3 years 1,50,000
Refund on 5,000 shares of ₹ 60
paid up @ ₹ 10.10 per share (Refer 50,500
W.N.)
Refund on 5,000 shares of ₹ 50
paid up @ ₹ 0.10 per share (Refer
W.N.) 500
23,00,000 23,00,000
Working Note:
₹
Total equity capital paid up (3,00,000 + 2,50,000) 5,50,000
Less: Balance available after payment to secured, unsecured, preferential creditors (51,000)
and preference shareholder
(23,00,000 – 46,000 – 86,000 – 2,10,000 – 1,05,000 – 67,000 – 4,85,000 -
6,00,000 – 5,00,000 – 1,50,000)
Loss to be borne by 10,000 equity shareholders 4,99,000
Loss per share ₹ 49.90
Hence, amount of refund on ₹ 50 per share paid up (₹ 50 - ₹ 49.90) ₹ 0.10
Amount of refund on ₹ 60 per share paid up (₹ 60 - ₹49.90) ₹ 10.10
Question – 5
A, B, C and D hold Equity Share Capital in the proportion of 40:30:20:10 and P, Q, R and S hold
Preference Share Capital in the proportion of 30:40:20:10 in Alpha Ltd. If the paid up Equity
Share Capital of Alpha Ltd. is ₹ 75 lacs and the Preference Share Capital is ₹ 25 lacs, find their
voting rights in the case of resolution of winding up of the company. [Nov 2020]
ANSWER:
A, B, C and D hold Equity capital is held by in the proportion of 40:30:20:10 and P, Q, R and S hold
preference share capital in the proportion of 30:40:20:10. As the paid-up equity share capital of the
company is ₹ 75 Lakhs and Preference share capital is ₹ 25 Lakh (3:1), then relative weights in the voting
right of equity shareholders and preference shareholders will be 3/4 and 1/4.
The respective voting right of various shareholders will be:
A = 3/4X40/100 = .3 (30%)
B = 3/4X30/100 = .225 (22.5%)
C = 3/4X20/100 = .15 (15%)
D = 3/4X10/100 = .075 (7.5%)
P = 1/4X30/100 = .075 (7.5%)
86
Q = 1/4X40/100 = 0.1 (10%)
R = 1/4X20/100 = .05 (5%)
S = 1/4X10/100 = .025 (2.5%)
Question – 6
In the winding up of a company, certain Creditors could not receive payments out of the
realization of assets and out of contribution from "A" list contributories. Liquidation started
on 1st April, 2020. The following persons have transferred their holdings before winding up :
Name Date of Transfer No. of shares Amount due to creditors on the date
transferred of transfer (₹)
O 4th April, 2019 1,000 42,000

P 2nd Feb, 2019 300 25,000
Q 8th Sep, 2019 200 57,000
R 11th Nov, 2019 1,400 85,000
S 2nd Feb, 2020 800 66,000
T 1st March, 2020 1,400 95,000
The shares were of ₹ 100 each, ₹ 70 being called up and paid up on the date of transfers.
'X' was the transferee of shares held by S. 'X' paid ₹ 30 per share as calls in advance
immediately on becoming a member.
Ignoring Expenses of Liquidation, Remuneration of Liquidator, etc. work out the amount to be
realized from the above contributories. [Jan 21 (10 Marks)]
ANSWER:
Statement of Liability as Contributories of Former Members
Creditors Amount to be O Q R T Amount to
outstanding paid to 1,000 200 1,400 1,400 be
creditors paid to the
Shares Shares Shares Shares
(Increase in creditors
creditors)
Date ₹ ₹ ₹ ₹ ₹ ₹ ₹
April 4 42,000 42,000 10,500 2,100 14,700 14,700 42,000

Sep 8 57,000 15,000 - 1,000 7,000 7,000 15,000
Nov 11 85,000 28,000 - - 14,000 14,000 28,000
March 1 95,000 10,000 - - - 10,000 6,300*
Total (A) 10,500 3,100 35,700 45,700

Maximum liability at ₹ 30 per shares on shares 30,000 6,000 42,000 42,000
held (B)
Amount paid [Lower of (A) and (B)]
10,500 3,100 35,700 42,000 91,300
*₹ (10,000 – 3,700 = 6,300)

T can be called upon to pay maximum only ₹ 42,000. So T will pay only ₹ 6,300 (42,000 – 14,700 –
7,000 – 14,000) out of ₹ 10,000 above. Hence incremental creditors on 1.03.2020 amounting to ₹
3,700 (10,000 – 6,300) will not be receiving any payment.
87
Note:
1. P will not be liable to pay any amount as the winding up proceedings commenced after one year
from the date of the transfer.
2. S also will not be liable, as the transferee X has paid the balance ₹ 30 per share as call in advance.
Question – 7
Equity Capital is held by Anu, Adi and Arun in the proportion of 30 : 30 : 40 and Preference
Share Capital is held by Sonu, Shri and Sanaya in the proportion of 40 : 10 : 50. If the paid up
Equity Share Capital of the company is ₹ 60 lakhs and Preference Share Capital is ₹ 30 lakhs,
find the proportion and percentage of their voting right in case of resolution of winding up of
the company. [Jan 21 (4 Marks)]
ANSWER:
Equity capital is held by Anu, Adi and Arun in the proportion of 30:30:40. Sonu, Shri and Sanaya hold
preference share capital in the proportion of 40:10:50. If the paid up equity share capital of the company
is ₹ 60 lakhs and Preference share capital is ₹ 30 Lakh, then relative weight in the voting right of equity
shareholders and preference shareholders will be 2/3 and 1/3.
The respective voting right of various shareholders will be:
Shareholders Relative weights Voting Power

Anu 2/3X30/100 3/15 20.00%
Adi 2/3X30/100 3/15 20.00%
Arun 2/3 X40/100 4/15 26.67%
Sonu 1/3X40/100 4/30 13.33%
Shri 1/3X10/100 1/30 3.33%
Sanaya 1/3X50/100 5/30 16.67%
Question – 8
BT Ltd. went into Voluntary Liquidation on 31st March, 2019. It gives the following information
as on 31st March, 2019:
Rs.
Issued & Subscribed Capital:
10,000 12% cumulative preference shares of Rs. 100 each, fully paid 10,00,000
10,000 Equity Shares of Rs. 100 each 75 per share paid up 7,50,000
20,000 Equity Shares of Rs. 100 each 60 per share paid up 12,00,000
Profit & Loss Account (Dr. balance) 5,25,000
12% Debentures (Secured by a floating charge) 10,00,000
Interest outstanding on Debentures 1,20,000
Creditors 8,50,000
88
Furniture 4,75,000
Patents 1,45,000
Stock 1,80,000
Cash at Bank 75,700
Preference dividends were in arrear for 1 year. Creditors include preferential creditors of Rs.
75,000. Balance creditors are discharged subject to 5% discount.
Assets are realised as under:
Rs.
Furniture 2,85,000
Patents 90,000
Stock 2,80,000
Expenses of liquidation amounted to Rs. 45,000. The liquidator is entitled to a remuneration of
3% on all assets realised (except cash at bank). All payments were made on 30th June, 2019.
You are required to prepare the Liquidator's Final Statement of Account as on 30th June, 2019.
Working Notes should form part of the answer. [MTP March 21 (10 Marks)]
ANSWER:
BT Limited
Liquidator’s Statement of Accounts
Receipts Rs. Rs. Payments Rs. Rs.

To Assets By Liquidation 45,000
realized: expenses
Bank 75,700 By Preferential 75,000
creditors
Other assets: By Liquidator’s 1,29,600
Remuneration
(W.N.1)
Land & 24,50,000 By Debenture
building holders:
Plant & 9,00,000 Debentures 10,00,000
Machinery
Furniture 2,85,000 Interest 1,20,000
accrued
89
Patents 90,000 Interest 1-4-19 30,000 11,50,000
to 30-6-19
Stock 2,80,000 By Unsecured 7,36,250
creditors
Trade 3,15,000 43,20,000 By Preferential
receivables shareholders
Preference 10,00,000
capital
Arrear of 1,20,000 11,20,000
Dividend
32,55,850
By Equity
shareholders -
Rs. 32.995 on 6,59,900
20,000 shares
Rs. 47.995 on 4,79,950
_________ 10,000 shares
43,95,700 43,95,700
Working Notes:
(1) Liquidator’s remuneration 43,20,000 × 3/100 =Rs. 1,29,600
(2) As the company is solvent, interest on the debentures will have to be paid for the period 1-4-2019
to 30-6-2019= 10,00,000 x 12% x 3/12 = Rs. 30,000
(3) Total equity capital - paid up (7,50,000 +12,00,000) Rs. 19,50,000
Less: Balance available (43,95,700 — 32,55,850) Rs. (11,39,850)
Rs. 8,10,150
Loss to be borne by 30,000 equity shares
Loss per share Rs. 27.005
Hence, Refund for share on Rs. 60 paid share (60 - 27.005) Rs. 32.995
Refund for share on Rs. 75 paid (75 - 27.005) Rs. 47.995
90
BANKING COMPANIES

Question – 1
From the following information find out the amount of provisions required to be made in the
Profit & Loss Account of a commercial bank for the year ended 31st March, 20X1:
(i) Packing credit outstanding from Food Processors ₹60 lakhs against which the bank holds
securities worth ₹ 15 lakhs. 40% of the above advance is covered by ECGC. The above
advance has remained doubtful for more than 3 years.
(ii) Other advances:
Assets classification ₹ in lakhs

Standard 3,000
Sub-standard 2,200
Doubtful:
For one year 900
For two years 600
For three years 400
For more than 3 years 300
Loss assets 600
ANSWER:
(i) Packing Credit
(₹ in lakhs)
Amount outstanding (packing credit) 60
Less: Realisable value of securities (15)
45
Less: ECGC cover (40%) (18)
Balance being unsecured portion of packing credits 27
Required provision:
Provision for unsecured portion (100%) 27.0
Provision for secured portion (100%) 15.0
42.0
(ii) Other advances:
(₹ in lakhs)
Assets Amount % of provision Provision
91
Standard 3,000 0.40 12
Sub-standard 2,200 15 330
Doubtful:
For one year 900 25 225
For two years 600 40 240
For three years 400 40 160
For more than three years 300 100 300
Loss 600 100 600
Required provision 1,867
Note: Sub-standard and Doubtful advances have been assumed as fully secured. However, in case it is
assumed that no security cover is available for these advances, provision will be made for @ 25% for
sub-standard and 100% for doubtful advances.
Question – 2
From the following information find out the amount of provisions to be shown in the Profit and
Loss Account of a Commercial Bank:
Assets (₹ in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300
Loss Assets 500
ANSWER:
Computation of provision in the Profit & Loss Account of the Commercial Bank:
Assets Amount % of Provision

(₹ in lakhs) Provision (₹ in lakhs)
Standard 4,000 0.40 16
Sub-standard* 2,000 15 300
Doubtful upto one year* 900 25 225
Doubtful upto three years* 400 40 160
Doubtful more than three years* 300 100 300
Loss 500 100 500
1,501
* Sub-standard and doubtful assets are assumed as fully secured.
Question – 3
From the following information, compute the amount of provisions to be made in the Profit and
Loss Account of a Commercial bank:
92
Assets (₹ in lakhs)
(i) Standard (Value of security ₹ 6,000 Lakhs) 7,000
(ii) Sub-standard 3,000
(iii) Doubtful
(a) Doubtful for less than one year 1,000
(Realisable value of security ₹ 500 lakhs)
(b) Doubtful for more than one year, but less than 3 years 500
(Realisable value of security ₹ 300 lakhs)
(c) Doubtful for more than 3 years (No security) 300
ANSWER:
Statement showing Provisions on various performing and non-performing assets
Amount % of Provision
(₹ in lakhs) provision (₹ in lakhs)
Standard 7,000 0.40 28
Sub-standard 3,000 15 450
Doubtful (less than one year)
On secured portion 500 25 125
On unsecured portion 500 100 500
Doubtful (more than one year but less than three years)
On secured portion 300 40 120
On unsecured portion 200 100 200
Doubtful Unsecured (more than three years) 300 100 300
Total provision 1,723
Question – 4
Statement of interest on advances in respect of Performing assets and Non-Performing
Assets of Omega Bank is as follows:- (₹in lakhs)
Performing Assets Non-Performing Assets

Interest Interest Interest Interest
earned received earned received
Cash credit and overdrafts 1800 1060 450 70
Term Loan 480 320 300 40
Bills purchased and discounted 700 550 350 36
Find out the income to be recognized for the years ended 31st March, 20X1.
ANSWER:
Interest on performing assets should be recognised on accrual basis, but interest on NPA should be
recognised on cash basis.
₹ in Lakhs
93
Interest on cash credits and overdraft (1800 + 70) = 1,870
Interest on Term Loan (480 + 40) = 520
Income from bills purchased and Discounted (700 + 36) = 736
3,126
Question – 5
State with reason whether the following cash credit accounts are NPA or not:
Case – 1 Case – 2
Sanctioned limit 60,00,000 45,00,000
Drawing power 56,00,000 42,00,000
Amount outstanding continuously 01-01-X1 to 31-03-X1 48,00,000 30,00,000
Total interest debited for the above period 3,84,000 2,40,000
Total credits for the above period Nil 3,20,000
ANSWER:
Case – 1 Case – 2
₹ ₹
Sanctioned limit 60,00,000 45,00,000
Drawing power 56,00,000 42,00,000
Amount outstanding continuously from 1.01.20X1 to 31.03.20X1 48,00,000 30,00,000
Total interest debited 3,84,000 2,40,000
Total credits - 320,000
Is credit in the account is sufficient to cover the interest debited No Yes
during the period
NPA NOT NPA
Question – 6
For a banking company, bills for collection was ₹ 21 lakhs as on 1st April, 20X1. During 20X1-
X2, bills received for collection amounted to ₹ 193.50 lakhs. Bills collected were ₹ 141 lakhs.
Bills dishonoured was ₹ 16.50 lakhs. Prepare Bills for Collection (Assets) and Bills for
Collection (Liabilities) Account.
ANSWER:
Bills for Collection (Assets) Account
₹ in lakhs ₹ in lakhs
To Balance b/d 21 By Bills for collection 141
To Bills for collection 193.5 By Bills dishonoured 16.5
By Balance c/d 57
214.5 214.5
94
Bills for Collection (Liabilities) Account
To Bills for collection 141 By Balance b/d 21
To Bills dishonoured 16.5 By Bills for collection 193.5
To Balance c/d 57
214.5 214.5
Question – 7
ABC bank Ltd. has a balance of ₹ 40 crores in “Rebate on bills discounted” account as on 31st
March, 20X1. The Bank provides you the following information:
(i) During the financial year ending 31st March, 20X2 ABC Bank Ltd. discounted bills of
exchange of ₹ 5,000 crores charging interest @ 14% and the average period of discount
being 146 days.
(ii) Bills of exchange of ₹ 500 crores were due for realization from the acceptors/customers
after 31st March, 20X2. The average period of outstanding after 31st March, 20X2 being
73 days. These bills of exchange of ₹ 500 crores were discounted charging interest@
14% p.a.
You are requested to pass necessary Journal Entries in the books of ABC Bank Ltd. for the
above transactions.
ANSWER:
In the books of ABC Bank Ltd.
Journal Entries
(₹ in crores)
Particulars Debit Credit

Rebate on bills discounted A/c Dr. 40
To Discount on bills A/c 40
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 5,000
To Discount on bills A/c 280
To Clients A/c 4,720
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 14
To Rebate on bills discounted A/c 14
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
Discount on bills A/c Dr. 306
To Profit and Loss A/c 306
95
(Being the amount of income for the year from discounting
of bills of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
₹ 5,000 crores x 14/100 x 146/365 = ₹ 280 crores
2. Calculation of rebate on bill discounted
₹ 500 crores x 14/100 x 73/365 = ₹14 crores
3. Income from bills discounted transferred to Profit and Loss A/c would be calculated by preparing
Discount on bills A/c.
Discount on bills A/c (₹ in crores)
Date Particulars Amount Date Particulars Amount

31.3.20X2 To Rebate on bills 14 1.4.20X1 By Rebate on bills 40
discounted discounted b/d
“ To Profit and Loss A/c 306 20X1 – X2 By Bills purchased and 280
(Bal. Fig.) discounted
320 320
Question – 8
From the following information, prepare the Profit & Loss A/c of Indus Bank Ltd. for the year
ending 31st March, 2020. Also give necessary schedules.
Particulars Figures in
'000
Total Interest earned on term loans 2,550
Interest earned on term loans classified as NPA 731
Interest received on term loans classified as NPA 238
Total Interest earned on cash credits and overdrafts 5,663
Interest earned but not received on cash credit and overdrafts treated 923
as NPA
Interest on deposits 4,120
Commission 201
Profit on sale of investments 1,876
Profit on revaluation of investments 342
Income from Investments 2,174
Payments to and provision form employees 2,745
Rent, Taxes and Lighting 385
Printing and Stationery 62
Director’s fees, allowances and expenses 313
96
Repairs and Maintenance 56
Depreciation on Bank’s property 99
Insurance 43
Also make necessary provision on Risk Assets as per the following details:
Particulars Figures in
'000
Standards 4,700
Sub-Standard (fully secured) 1,900
Doubtful Assets no covered by security 400
Doubtful Assets covered by Securities’ for 1 year 40
Loss Assets 300
ANSWER:
Indus bank Limited
Profit & Loss Account for the year ended 31st March, 2020
Schedule Rs. ’000s

I. Income
Interest earned 13 8,971
Other income 14 2,419
Total 11,390
II. Expenditure
Interest expended 15 4,120
Operating expenses 16 3,703
Provisions (Refer W.N.) 1,013.8
Total 8,836.8
III. Profit/Loss 2,553.20
Schedule 13 – Interest Earned
Rs. ’000s
Interest / discount on advances bills
Interest on term loans [2,550- (731-238)] 2,057
Interest on cash credits and overdrafts (5,663-923) 4,740
Income on investments 2,174
8,971
97
Note: Interest on nonperforming assets is recognized on receipt basis.
Schedule 14 – Other Income
Rs. ’000s
Commission, exchange and brokerage 201
Profit on sale of investments 1,876
Profit on revaluation of investments 342
2,419
Schedule 15 – Interest Expended
Rs. ’000s
Interest on deposits 4120
Schedule 16 – Operating Expenses
Rs. ’000s
Payments to and provision for employees - salaries, bonus and allowances 2,745
Rent, taxes and lighting 385
Printing & stationery 62
Director’s fee, allowances and expenses 313
Depreciation Charges 99
Repairs & maintenance 56
Insurance 43
3,703
Working Note:
Provisions Rs.
’000s
Provision for standard and non-performing assets
Standard (4,700 x .4%) 18.8
Sub-standard (1900 x 15%) 285
Doubtful (400 x 100%) 400
Doubtful (40 x25%) 10
Loss assets (300 x 100%) 300
1,013.8
Question – 8
(i) The following is an extract of Trial Balance of a bank as on 31st March, 2021:
Dr. (Rs.) Cr. (Rs.)

98
Bills Discounted 15,16,800
Discount Received 1,26,859
Rebate on Bills discounted not due on 31st 26,592
March, 2020
An analysis of bill discounted is as follows:
Amount in Rs. Due Date Rate of Discount

1,46,200 4th May, 2021 15
2,30,400 12th May, 2021 15
4,35,900 28th May, 2021 15
4,36,200 18th June, 2021 16
2,68,100 4th July, 2021 16
You are required to calculate Rebate on Bills Discounted as on 31st March, 2021 and
show necessary Journal Entries.
(ii) The following information relates to a bank:
Assets Rs. In Lakhs

Standard 75,00
Sub-Standard 60,00
Doubtful: for 1 Year (fully secured) 12,00
for 1 to 3 Year (fully secured) 9,00
for more than 3 Years 9,00
Loss Assets 15,00
Additional Information:
(1) Standard Assets includes Rs. 15,00 Lakhs Advances to Commercial Real Estate
(CRE).
(2) Out of Rs. 60,00 Lakhs of Sub-Standard Asset Rs. 20,00 Lakhs are unsecured.
Unsecured amount includes Rs. 5,00 Lakhs in respect of Infrastructure Loan
Accounts with ESCROW safeguard.
(3) Doubtful Asset for more than 3 Years includes Rs. 4,00 Lakhs, which is covered by
50% ECGC, value of security of which is Rs. 150 Lakhs.
You are required to find out the amount of provision to be shown in the Profit & Loss
Account of Bank. [MTP April 21 (4 Marks)]
ANSWER:
(i) Statement showing rebate on bills discounted
Value Due Date Days after 31.3.2021 Rate of Discount

discount Amount
1,46,200 4.5.21 (30 + 4) = 34 15% 2,043
2,30,400 12.5.21 (30 + 12) = 42 15% 3,977
99
4,35,900 28.5.21 (30 + 28) = 58 15% 10,390
4,36,200 18.6.21 (30 + 31 + 18) = 79 16% 15,106
2,68,100 4.7.21 (30 + 31 + 30 + 4) = 95 16% 11,165
15,16,800 Rebate on bills discounted on 31.3.2021 42,681
Note: 365 days have been considered in a year.

In the books of SM Bank Ltd. – Journal Entries
(i) Rebate on bills discounted Account Dr. 26,592

To Discount on bills Account 26,592
[Being opening balance of rebate on bills
discounted account transferred to discount on bills
account]
(ii) Bills purchased & discounted Account Dr. 15,16,800
To Discount on bills Account 1,26,859
To Clients Account 13,89,941
(Being bills purchased and discounted during the
year)
(iii) Discount on bills Account Dr. 42,681
To Rebate on bills discount Account 42,681
[Being provision made on 31st March, 2021]
(iv) Discount on bills Account Dr. 1,10,770
To Profit and loss Account* 1,10,770
[Being transfer of discount on bills, of the year, to
profit and loss account]
*Credit to Profit and Loss A/c will be as follows:

Rs. (1,26,859 + 26,592 – 42,681) = Rs. 1,10,770
(ii) Statement showing the amount of provisions on Assets
(Rs. in lakhs)
Assets Amount % of Provision
provision
Standard:
Advances to CRE 15,00 1 15
Others 60,00 .4 24
Sub-standard:
Secured 40,00 15 6,00
Unsecured-Others 15,00 25 3,75
Unsecured infrastructure 5,00 20 1,00
Doubtful Secured:
100
Up to one year 12,00 25 3,00
For more than 1 year up to 3 years 9,00 40 3,60
More than 3 years 4,00 W.N.1 2.75
Doubtful unsecured (more than 3 years) 5,00 100 5,00
Loss 15,00 100 15,00
Total Provision Required 40,49
Working Note:
Provision required where assets are ECGC covered
Rs. In Lakhs
Outstanding balance (ECGC Covered) 4,00
Less: Value of security 1,50
Unrealised balance 2,50
Less: ECGC Cover @ 50% 1,25
Net Unsecured Balance 1,25
Provision for unsecured portion @100% 1,25
Provision for secured portion @100% 1,50
Total Provision to be made 2,75
Question – 8
The following are the figures extracted from the books of New Bank Limited as on 31.03.2021.
Figure in ₹
Interest and Discount received 48,11,200
Interest paid on Deposits 22,95,920
Salaries and allowances 8,40,510
Directors fees and allowances 45,000
Issued and subscribed capital 16,00,000
Commission, Exchange and Brokerage received 1,45,000
Postage and Telegrams 60,000
Statutory Reserve Fund 8,00,000
Interest on cash credit 2,65,000
Profit on sale on Investments 1,15,800
Depreciation on Bank’s Property 40,000
Interest on Overdraft 1,20,000
Rent Received 65,000
Legal Expenses 21,000
101
Auditors Fees 5,000
Statutory Expenses 38,000
The following information is also given:

(i) A customer to whom a sum of ₹ 5 Lakhs was advanced has become insolvent and it is
expected that only 50% can be recovered from his estate.
(ii) Make necessary provisions on Risk Assets:
Standard (excluding above ₹ 5,00,000) 10,00,000

Sub-Standard (fully secured 8,20,000
Doubtful assets covered by security for 1 year 40,000
Loss assets 1,00,000
(iii) Provide ₹ 6,50,000 for Income Tax.

(iv) The directors desire to declare 10% dividend.
(v) 25% or profit is to be transferred to Reserve fund.
(vi) Rebate on Bills discounted on 31.03.2020 was ₹ 20,000 and ₹ 15,000 on 31.03.2021.
You are required to prepare Profit & Loss A/c of New Bank Limited for the year ended
31.03.2021. [July 21 (10 Marks)]
ANSWER:
New Bank Limited
Profit and Loss Account for the year ended 31st March, 2021
Schedule Year ended

31,03,2021
₹
I. Income:
Interest earned 13 52,01,200
Other income 14 3,25,800
Total 55,27,000
II. Expenditure
Interest expended 15 22,95,920
Operating expenses 16 10,49,510
Provisions and contingencies 11,37,000
(6,50,000 + 2,37,000 + 2,50,000)
Total 44,83,430
III. Profit/Losses
Net Profit for the year 10,44,570
Profit brought forward Nil
102
10,44,570
IV. Appropriations
Transfer to statutory reserve (25% of 10,44,570) 2,61,143
Proposed dividend 1,60,000
Balance carried over to balance sheet 6,23,427
10,44,570
Note: Profit & Loss Account balances of ₹ 6,23,427 will appear under the head ‘Reserves and Surplus’
in Schedule 2 of the Balance sheet.
Year ended 31.3.2021 (₹)

Schedule 13 – Interest Earned
I. Interest/discount on advances/ bills (Refer W.N.) 48,16,200
Interest on cash credit* 2,65,000
Interest on overdraft* 1,20,000
52,01,200
Schedule 14 – Other Income
I. Commission, Exchange and brokerage 1,45,000
II. Profit on sale of investment 1,15,800
III. Rent received 65,000
3,25,800
Schedule 15 – Interest Expended
I. Interests paid on deposits 22,95,920
22,95,920
Schedule 16 – Operating Expense
I. Payment to and provisions for employees (salaries & allowances) 8,40,510
II. Depreciation on assets 40,000
III. Director’s fee, allowances and expenses 45,000
IV. Auditor’s fee 5,000
V. Statutory (law) expenses 38,000
VI. Postage and telegrams 60,000
VII. Legal expenses 21,000
10,49,510
*Considered to be earned.
Working Notes:
1.
103
₹
Interest and discount received 48,11,200
Add: Rebate on bills discounted on 31.3.2020 20,000
Less: Rebate on bills discounted on 31.3.2021 (15,000)
48,16,200
2.
Classification of Assets Amount of % age of Amount of

Advances provision provision
Standard assets 10,00,000 0.40 4,000
Sub-standard assets 8,20,000 15 1,23,000
Doubtful assets:
For one year (secured) 40,000 25 10,000
Loss assets 1,00,000 100 1,00,000
Total provisions required 2,37,000
Question – 8
Forward Bank Ltd. furnishes the following information as on 31st March, 2020.
Amount in ₹
Bills Discounted 82,23,000
Rebate on bills discounted as 1st April, 2019 1,32,960
Discount received 6,33,990
Details of bills discounted is as given below:
Value of Bills (₹) Due Date Rate of Discount

10,95,000 15th June, 2020 14%
30,00,000 25th June, 2020 12%
16,92,000 5th July, 2020 16%
24,36,000 15th July, 2020 16%
(i) Calculate the rebate on bills discounted as on 31st March, 2020. Take 365 days in year.
(ii) Pass necessary Journal Entries. [RTP May 21]
ANSWER:
In order to determine the amount to be credited to the Profit and Loss A/c it is necessary to first ascertain
the amount attributable to the unexpired portion of the period of the respective bills. The workings are
as given below:
Value (₹) Due Date Days after 31-03-2020 Discount % Discount

Amount ₹
104
10,95,000 15-06-2020 (30+31 + 15) = 76 14% 31,920
30,00,000 25-06-2020 (30 + 31 + 25) = 86 12% 84,822
16,92,000 05-07-2020 (30 + 31 + 30 + 5) = 96 16% 71,203
24,36,000 15-07-2020 (30 + 31 + 30 + 15) = 106 16% 1,13,191
Rebate on bills discounted as on _________
31.3.2020 3,01,136
The Journal entries will be as follows:
Dr. Cr.
₹ ₹
Rebate on Bills Discounted A/c Dr. 1,32,960
To Discount on Bills A/c 1,32,960
(Being the transfer of Rebate on Bills Discounted on 1.4.2019 to
Discount on Bills Account)
Discount on Bills A/c Dr. 3,01,136
To Rebate on Bills Discounted A/c 3,01,136
(Being the transfer of rebate on bills discounted required on
1.4.2020 from discount on Bills Account)
Discount on Bills A/c Dr. 4,65,814
To Profit and Loss A/c 4,65,814
(Being the amount of discount on Bills transferred to Profit and
Loss Account)
Working Note:
The amount of discount to be credited to the Profit and Loss Account will be:
Transfer from Rebate on bills discount as on 1.4.19 1,32,960
Add: Discount received during the year ended 31-3-2020 6,33,990
7,66,950
Less: Rebate on bills discounted as on 31.3.2020 (3,01,136)
4,65,814
105
NON-BANKING FINANCIAL COMPANIES

Question – 1
While closing its books of account at year end, a Non-Banking Finance Company has its
advances classified as follows:
₹ in lakhs
Standard assets 84,000
Sub-standard assets 6,700
Secured portions of doubtful debts:
− Upto one year 1,600
− One year to three years 450
− More than three years 150
Unsecured portions of doubtful debts 485
Loss assets 240
Calculate the amount of provision, which must be made against the advances as per the Non-
Banking Financial Company - Non-Systemically Important Non-Deposit taking Company
(Reserve Bank) Directions, 2016.
ANSWER:
Calculation of provision required on advances as at year end, as per the Non-Banking
Financial Company - Non-Systemically Important Non-Deposit taking Company (Reserve
Bank) Directions, 2016
Amount Percentage of Provision

₹ in lakhs provision ₹ in lakhs
Standard assets 84,000 0.25 210.00
Sub-standard assets 6,700 10 670.00
Secured portions of doubtful debts-
− Upto one year 1,600 20 320.00
− One year to three years 450 30 135.00
− More than three years 150 50 75.00
Unsecured portions of doubtful debts 485 100 485.00
Loss assets 240 100 240.00
2,135.00
Question – 2
Using the same information given in Question 1 relating to advances, calculate the amount of
provision, which must be made against the advances as per Non-Banking Financial Company
106
- Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016.
ANSWER:
Calculation of provision required on advances as at year end, as per the Non-Banking
Financial Company – Non-Systemically Important Non-Deposit taking Company and Deposit
taking Company (Reserve Bank) Directions, 2016
Amount Percentage of Provision

₹ in lakhs provision ₹ in lakhs
Standard assets 84,000 0.40 336.00
Sub-standard assets 6,700 10 670.00
Secured portions of doubtful debts-
− Upto one year 1,600 20 320.00
− One year to three years 450 30 135.00
− More than three years 150 50 75.00
Unsecured portions of doubtful debts 485 100 485.00
Loss assets 240 100 240.00
2,261.00
Question – 3
Peoples Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer
durables. The following information is extracted from its books as at year end:
Interest Overdue but recognized in Profit & Net Book

loss Value of
Asset Funded
Assets
Period Overdue Interest Amount outstanding
(₹ in crore) (₹ in crore)
LCD Televisions Upto 12 months 480.00 20,123.00
Washing Machines For 24 months 102.00 2,410.00
Refrigerators For 30 months 50.50 1,280.00
Air Conditioners For 45 months 26.75 647.00
You are required to calculate the amount of provision to be made.
ANSWER:
On the basis of the information given, in respect of hire purchase and leased assets, additional
provision shall be made as under:
(₹ in crore)
(a) Where hire charges are overdue upto 12 months Nil -
(b) Where hire charges are overdue for more than 12 10% of the net book value 241
months but upto 24 months 10% x 2,410
107
(c) Where hire charges are overdue for more than 24 40 % of the net book value 512
months but upto 36 months 40% x 1,280
(d) Where hire charges are overdue for more than 36 70 % of the net book value 452.90
months but upto 48 months 70% x 647
Total 1,205.90
Question – 4
Universal Financers Ltd. is a Non-Banking Financial Company.
It provides you the following information regarding its advances of ₹ 440 lakhs, of which
instalments are overdue on :
 550 accounts for last 3 months (amount overdue ₹ 105 lakhs)
 75 accounts for 4 months (amount overdue ₹ 64 lakhs)
 25 accounts for more than 30 months (amount overdue ₹ 66 lakhs)
 15 accounts already identified as sub-standard for more than 3 years (unsecured) (amount
overdue ₹ 82 lakhs)
 8 accounts of ₹ 33 lakhs have been identified as non-recoverable by the management. (out
of 25 accounts overdue for more than 30 months, 17 accounts are already identified as
sub standard for more than 12 months (amount overdue ₹ 19 lakhs) and others are
identified as substandard asset for a period of less than 12 months.
Classify the assets of the company In line with the Non-Banking Financial Company -
Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016. [Jan 21 (5 Marks)]
ANSWER:
Statement showing classification as per Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016
(₹ in lakhs)
Standard Assets
Accounts (Balancing figure) 90
550 accounts overdue for a period of 3 months 105
75 accounts overdue for a period of 4 months 64 259
Sub-Standard Assets
8 accounts identified as sub-standard asset for a period less than 12 months 47
Doubtful Debts
17 accounts identified as sub-standard for a period more than 12 months 19
15 accounts identified as sub-standard for a period more than 3 years 82
Loss Assets
8 accounts identified by management as loss asset 33
108
Total overdue 440
Question – 5
Omega 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,
2020:
Assets Funded Interest Overdue but recognized in Net Book Value

Profit & Loss of
Period Overdue Interest Amount Assets outstanding
(Rs. In crore) (Rs. In crore)

LCD Televisions Up to 12 Months 500.00 20,000
Washing Machines For 24 Months 100.00 2,000
Refrigerators For 30 Months 50.00 1,250
Air Conditioners For 45 Months 25.00 600
Mobile Phones For 60 Months 10.00 100
You are required to calculate the amount of provision to be made.
[MTP March 21 & RTP May 21 (4 Marks)]
ANSWER:
On the basis of the information, in respect of hire purchase and leased assets, additional
provision shall be made as under:
(₹ in crore)
(a) Where hire charges are overdue upto 12 Nil -
months
(b) Where hire charges are overdue for more 10% of the net book value 200
than 12 months but upto 24 months (10% x 2,000)
(c) Where hire charges are overdue for more 40 percent of the net book value 500
than 24 months but upto 36 months (40% x 1,250)
(d) Where hire charges or lease rentals are 70 percent of the net book value 420
overdue for more than 36 months but upto (70% x 600)
48 months
(e) Where hire charges or lease rentals are 100% of net book value 100
overdue for more than 48 months (100% x 100)
Total 1,220
Question – 6
A NBFC provides the following information:
Rs. in crores
Investment in shares of subsidiaries and group companies 100
109
Investment in debentures of subsidiaries and group Companies 100
Cash and bank balances 200
Paid-up equity capital 150
Free reserves 200
Loans 400
Deposits 400
You are required to compute 'Net owned Fund' from the above information as per Non-Banking
Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016. [MTP April 21 (4 Marks)]
ANSWER:
Statement showing computation of ‘Net Owned Fund’
Rs. in crores
Paid up Equity Capital 150 50
Securities Premium
Free Reserves 200
A 400
Investments
In shares of subsidiaries and group companies 100
In debentures of subsidiaries and group companies 100
B 200
10% of A 40
Excess of Investment over 10% of A (200 - 40) C 160
Net Owned Fund [(A) - (C)] (400 - 160) 240
Question – 7
Siddharth Auto Financiers Limited is a NBFC providing Finance for purchasing of Auto
Rickshaws. The following information is extracted from its books for the year 31st March, 2021:
Interest Overdue but recognised in Profit and Loss Account Net Book Value of Assets
Outstanding
Period Overdue Interest Amount (₹ in Crore) (₹ in crores)
Up to 12 Months 750.00 30,000
For 24 Months 200.00 4,000
For 30 Months 200.00 3,750
For 45 Months 250.00 3,000
For 60 Months 500.00 10,000
You are required to calculate the amount of provision to be made. [July 21 (5 Marks)]
110
ANSWER:
On the basis of the information, in respect of financed assets, provision shall be made as
under:
(₹ in crore)
(a) Where hire charges are overdue upto 12 Nil -
months
(b) Where hire charges are overdue for more 10% of the book value 400
than 12 months but upto 24 months 10% x 4,000
(c) Where hire charges are overdue for more 40 percent of the net book value 1,500
than 24 months but upto 36 months 40% x 3,750
(d) Where hire charges or lease rentals are 100% of net book value 10,000
overdue for more than 36 months but (100% x 100)
upto 48 months
Total 14,000
Question – 8
Calculate ‘Owned Fund’ of a NBFC based on the following facts:
Paid up share capital: ₹ 400 lakhs
Free reserves: ₹ 200 lakhs
Securities Premium: ₹ 50 lakhs
Capital Reserves (surplus arising due to sale of assets): ₹100 lakhs
Compulsory convertible preference shares (CCPS): ₹ 50 lakhs
Revaluation Reserve: ₹ 100 lakhs [RTP May 21]
ANSWER:
Owned fund calculation:
Paid up share capital: ₹ 400 lakhs
Free reserves: ₹ 200 lakhs
Compulsory convertible preference shares (CCPS): ₹ 50 lakhs
Securities Premium: ₹ 50 lakhs
Capital reserve: ₹ 100 lakhs
Total Owned fund: ₹ 800 lakhs ie. ₹ (400 + 200 + 50 + 50 + 100) lakhs
111
CONSOLIDATION OF ACCOUNTS
[ACCOUNTING STANDARD 21]

Question – 1
Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 20X1 for ₹ 2,10,000. The
issued capital of Power Ltd., on 1st January, 20X1 was ₹ 1,50,000 and the balance in the Profit
& Loss Account was ₹ 90,000. During the year ended 31st December, 20X1, Power Ltd. earned
a profit of ₹ 30,000 and at year end, declared and paid a dividend of ₹ 22,500. What is the
amount of minority interest as on 1st January, 20X1 and 31st December, 20X1? Also compute
goodwill/ capital reserve at the date of acquisition.
ANSWER:
Total dividend paid is ₹ 22,500 (out of post-acquisition profits), hence dividend received by Hemant
will be credited to P & L account. Hemant Ltd.’s share of dividend = ₹ 22,500 X 80% = ₹ 18,000
Goodwill on consolidation (at the date of acquisition): ₹ ₹

Cost of shares 2,10,000
Less: Face value of capital i.e. 80% of capital 1,20,000
Add: Shares of capital profit [90,000 x 80%] 72,000 (1,92,000)
Goodwill 18,000
Minority interest on:
- 1st January, 20X1:
20% of ₹ 2,40,000 [1,50,000 + 90,000] 48,000
- 31st December, 20X1:
49,500
20% of ₹2,47,500 [1,50,000 + 90,000 + 30,000 – 22,500]
Question – 2
King Ltd. acquires 70% of equity shares of Queen Ltd. as on 31st March, 20X1 at a cost of ₹
140 lakhs. The following information is available from the balance sheet of Queen Ltd. as on
31st March, 20X1:
₹ in Lakhs
Property, plant and equipment 240
Investments 110
Current Assets 140
Loans & Advances 30
15% Debentures 180
Current Liabilities 100
The following revaluations have been agreed upon (not included in the above figures):
Property, plant and equipment- up by 20% and Investments- down by 10%.
112
King Ltd. purchased the shares of Queen Ltd. @ ₹20 per share (Face value - ₹10).
Calculate the amount of goodwill/capital reserve on acquisition of shares of Queen Ltd.
ANSWER:
Revalued net assets of Queen Ltd. as on 31st March, 20X1
₹ in Lakhs
PPE [240 x 120%] 288
Investments [110 x 90%] 99
Current Assets 140
Loans and Advances 30
Total Assets after revaluation 557
Less: 15% Debentures 180.00
Current Liabilities 100.00 (280)
Equity/Net Worth 277
King Ltd.’s shares of net assets (70% of 277) 193.9
King Ltd.’s cost of acquisition of shares of Queen Ltd. (₹ 140
lakhs) (140)
Capital reserve 53.9
Question – 3
From the following information, determine Minority Interest on the date of acquisition and on
the date of consolidation in each case:
% of Date of Acquisition Consolidation Date
Shares
Cost 1.1.20X1 31.12.20X1
Subsidiary owned
Case
Company Share Capital Profit & Loss Share Profit &
(₹) Account (₹) Capital (₹) Loss
Account (₹)
Case – A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case – B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case – C Z 70% 98,000 40,000 20,000 40,000 20,000
Case – D M 95% 75,000 60,000 35,000 60,000 55,000
ANSWER:
Minority Interest = Equity attributable to minorities
Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. in this case,
it should be equal to Share Capital + Profit & Loss A/c
A = Share capital on 1.1.20X1
B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1
113
Minority % Shares Minority interest Minority interest
Owned as at the date of as at the date of
acquisition consolidation
[E] [E] x [A + B] (₹) [E] x [C + D] (₹)
Case A [100 – 90] 10% 22,500 23,500

Case B [100 – 75] 25% 50,000 40,000
Case C [100 – 70] 30% 18,000 18,000
Case D [100 – 95] 5% 4,750 5,750
Question – 4
A Ltd. and its subsidiary B Ltd. give the following information for the year ended 31st March,
2020: (Rs. In Lakhs)
A Ltd. B Ltd.
Sales and other income 7,500 1,500
Increase in Inventory 1,500 300
Raw material consumed 1,200 300
Wages and Salaries 1,200 225
Production expenses 300 150
Administrative expenses 300 150
Selling and distribution expenses 300 75
Interest 150 75
Depreciation 150 75
The following information is also given:
(i) A Ltd sold goods of Rs. 180 Lakhs to B Ltd at cost plus 25% (1/6 of such goods were still
in inventory of B Ltd at the end of the year).
(ii) A Ltd. holds 72% of the Equity Capital of B Ltd and the Equity Capital of B Ltd is Rs.1,500
Lakhs on 1.4.2019 (date of acquisition of shares).
(iii) Administrative expenses of B Ltd include Rs. 8 Lakhs paid to A Ltd as consultancy fees.
Moreover, selling and distribution expenses of A Ltd include Rs.15 Lakhs paid to B Ltd as
commission.
You are required to prepare a consolidated Statement of Profit and Loss Account of A Ltd.
with its subsidiary B Ltd. for the year ended 31st March, 2020. [MTP March 21 (15 Marks)]
ANSWER:
Consolidated Profit & Loss Account of A Ltd. and its subsidiary B Ltd.
For the year ended on 31st March, 2020
Particulars Note No. Rs. in Lacs

I. Revenue from operations 1 8,797
II. Total revenue 8,797
114
III. Expenses
Cost of Material purchased/consumed 3 1,770
Changes of Inventories of finished goods 2 (1,794)
Employee benefit expense 4 1,425
Finance cost 6 225
Depreciation and amortization expense 7 225
Other expenses 5 802
Total expenses 2,653
IV. Profit before Tax(II-III) 6,144
Notes to Accounts
Rs. In Lacs Rs. In Lacs

1. Revenue from operations
Sales and other income
A Ltd. 7,500
B Ltd. 1,500
9,000
Less: Inter-company Sales (180)
Consultancy fees received by A Ltd. from B Ltd. (8)
Commission received by B Ltd. from A Ltd. (15) 8,797
2. Increase in Inventory
A Ltd. 1,500
B Ltd. 300
1,800
Less: Unrealized profits Rs. 180 x 1/6 x 25/125 (6) 1,794
3. Cost of Material purchased/ consumed
A Ltd. 1,200
B Ltd. 300
1,500
Less: Purchases by B Ltd. from A Ltd. (180) 1,320
Direct Expenses
A Ltd. 300
B Ltd. 150 450
1,770
4. Employee benefits and expenses
Wages and Salaries:
A Ltd. 1,200
115
B Ltd. 225 1,425
5. Other Expenses
Administrative Expenses
A Ltd. 300
B Ltd. 150
450
Less: Consultancy fees received by A Ltd. from B Ltd. (8) 442
Selling and Distribution Expenses:
A Ltd. 300
B Ltd. 75
375
Less: Commission received from B Ltd. from A Ltd. (15) 360
802
6. Finance Cost
Interest:
A Ltd. 150
B Ltd. 75 225
7. Depreciation and Amortization
Depreciation:
A Ltd. 150
B Ltd. 75 225
Question – 5
H Ltd. and its subsidiary S Ltd. Give the following information as on 31st March, 2021:
H Ltd. (Rs.) S Ltd. (Rs.)

Share Capital
Equity Share Capital (fully paid up shares of Rs. 10 each) 12,00,000 2,00,000
Reserves and Surplus
General Reserve 4,35,000 1,55,000
Cr. Balance in Profit and Loss Account 2,80,000 65,000
Current Liabilities
Trade Payables 3,22,000 1,23,000
Non-Current Assets
Property, Plant and Equipment
Machinery 6,40,000 1,80,000
Furniture 3,75,000 34,000
Non-Current Investments
116
Shares in S Ltd. – 16,000 shares @ Rs. 20 each 3,20,000 -
Current Assets
Inventories 2,68,000 62,000
Trade Receivables 4,70,000 2,35,000
Cash and Bank 1,64,000 32,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2020. On the date of acquisition, General
Reserve and Profit Loss Account of S Ltd. stood at Rs. 50,000 and Rs. 30,000 respectively.
Machinery (book value Rs. 2,00,000) and Furniture (book value Rs. 40,000) of S Ltd. were
revalued at Rs. 3,00,000 and Rs. 30,000 respectively on 1st April,2020 for the purpose of fixing
the price of its shares (rates of depreciation on W.D.V basis: Machinery 10% and Furniture
15%). Trade Payables of H Ltd. include Rs. 35,000 due to S Ltd. for goods supplied since the
acquisition of the shares. These goods are charged at 10% above cost. The inventories of H
Ltd. includes goods costing Rs. 55,000 (cost to H Ltd.) purchased from S Ltd.
You are required to prepare the Consolidated Balance Sheet of H Ltd. With its subsidiary as
at 31st March, 2021. [MTP April 21 (16 Marks)]
ANSWER:
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
As at 31st March, 2021
Particulars Note No. (Rs.)

(1) Shareholder's Funds
(a) Share Capital 12,00,000
(1,20,000 equity shares of Rs. 10 each)
(b) Reserves and Surplus 1 8,16,200
(2) Minority Interest (W.N.4) 99,300
(3) Current Liabilities
(a) Trade Payables 2 4,10,000
II. Assets Total 25,25,500
(1) Non-current assets
(i) Property, plant and equipment 3 13,10,500

(ii) Intangible assets 4 24,000
(2) Current assets
(i) Inventories 5 3,25,000
(ii) Trade Receivables 6 6,70,000
(iii) Cash at Bank 7 1,96,000
Total 25,25,500
Notes to Accounts
Rs.
117
General Reserves 4,35,000
Add: 80% share of S Ltd.’s post-acquisition
reserves (W.N.3) 84,000 5,19,000
Profit and Loss Account 2,80,000
Add: 80% share of S Ltd.’s post-acquisition 21,200
profits (W.N.3)
Less: Unrealised gain (4,000) 17,200 2,97,200
8,16,200
2. Trade Payables
H Ltd. 3,22,000
S Ltd. 1,23,000
Less: Mutual transaction (35,000) 4,10,000
3. Property, plant and equipment
Machinery
H Ltd. 6,40,000
S Ltd. 2,00,000
Add: Appreciation 1,00,000
3,00,000
Less: Depreciation (30,000) 2,70,000 9,10,000
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000
Less: Decrease in value (10,000)
30,000
Less: Depreciation (4,500) 25,500 4,00,500
13,10,500
Goodwill [WN 5] 24,000
5. Inventories
H Ltd. 2,68,000
S Ltd. 62,000 3,30,000
Less: Inventory reserve (5,000)
3,25,000
6. Trade Receivables
H Ltd. 4,70,000
S Ltd. 2,35,000
7,05,000
Less: Mutual transaction (35,000)
118
6,70,000
7. Cash and Bank
H Ltd. 1,64,000
S Ltd. 32,000 1,96,000
Working Notes:
1. Profit or loss on revaluation of assets in the books of S Ltd. and their book values as on
1.4.2020
Rs.
Machinery
Revaluation as on 1.4.2020 3,00,000
Less: Book value as on 1.4.2020 (2,00,000)
Profit on revaluation 1,00,000
Furniture
Revaluation as on 1.4.2020 30,000
Less: Book value as on 1.4.2020 (40,000)
Loss on revaluation (10,000)
2. Calculation of short/excess depreciation
Machinery Furniture
Upward/ (Downward) Revaluation 1,00,000 (10,000)
Rate of depreciation 10% p.a. 15% p.a.
Difference [(short)/excess] (10,000) 1,500
3. Analysis of reserves and profits of S Ltd. as on 31.03.2021
Pre- Post-acquisition profits

acquisition (1.4.2020 – 31.3.2021)
profit upto
1.4.2020
(Capital General Profit and
profits) Reserve loss account
General reserve as on 31.3.2021 50,000 1,05,000
Profit and loss account as on 31.3.2021 30,000 35,000
Upward Revaluation of machinery as on 1,00,000
1.4.2020
Downward Revaluation of Furniture as on (10,000)
1.4.2020
Short depreciation on machinery (10,000)
Excess depreciation on furniture ________ _________ 1,500

Total 1,70,000 1,05,000 26,500
119
4. Minority Interest
Rs.
Paid-up value of (2,00,000 x 20%) 40,000
Add: 20% share of pre-acquisition profits and reserves
[(20% of (50,000 + 30,000)] 16,000
20% share of profit on revaluation 18,000
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300
1,00,300
Less: Unrealised Profit on Inventory
(55,000 x 10/110) x 20% (1,000)
99,300
5. Cost of Control or Goodwill
Cost of Investment 3,20,000

Less: Paid-up value of 80% shares 1,60,000
80% share of pre-acquisition profits and reserves
(Rs. 64,000 + Rs.72,000) 1,36,000 (2,96,000)
Cost of control or Goodwill 24,000
Question – 6
The Trial Balance of X Limited and Y Limited as on 31st March, 2021 were as under:
X Limited Y Limited
(₹ in 000) (₹ in 000)
Dr. Cr. Dr. Cr.
Equity Share capital (Share of ₹ 100 each) 2,000 400
7% Preference share capital - 400
Reserves 600 200
6% Debentures 400 400
Trade Receivables/ Trade Payables 160 180 100 120
Profit & Loss A/c balance 40 30
Purchases/ Sales 1,000 1,800 1,200 1,900
Wages and Salaries 200 300
Debenture Interest 24 24
General Expenses 160 120
Preference share dividend up to 30.09.2020 7 14
Inventory (as on 31.03.2021) 200 100
120
Cash at Bank 27 12
Investment in Y Limited 1,056 -
Fixed Assets 2,200 1,580
Total 5,027 5,027 3,450 3,450
Investment in Y Limited was acquired on 1st July, 2020 and consisted of 80% of Equity Share
Capital and 50% of Preference Share Capital.
After acquiring control over Y Limited, X Limited supplied to Y Limited goods at cost plus
25%, the total invoice value of such goods being ₹ 1,20,000, one fourth of such goods were
still lying in inventory at the end of the year.
Depreciation to be charged @ 10% in X Limited and @ 15% in Y Limited on Fixed Assets.

You are required to prepare the Consolidated Statement of Profit and Loss for the year ended
on 31st March, 2021. [July 21 (15 Marks)]
ANSWER:
Consolidated Profit and Loss Account of X Ltd. and Y Ltd.
for the year ended 31st March, 2021
Particulars Note No. ₹

I. Revenue from operations 1 35,80,000
II. Total revenue 35,80,000
III. Expenses
Cost of Material purchased/Consumed 2 20,80,000
Changes of Inventories of finished goods -
Employee benefit expense 3 5,00,000
Finance cost 4 48,000
Depreciation and amortization expense 5 4,57,000
Other expenses 6 2,80,000
Total expenses 33,65,000
IV. Profit before Tax (II – III) 2,15,000
Profit transferred to Consolidated Balance Sheet
Profit After Tax 2,15,000
Preference dividend 7,000
Preference dividend payable 7,000 (14,000)
2,01,000
Share in pre-acquisition loss (WN 3) 1,800
Share of Minority interest in losses (WN 1) 1,800
121
Less: Investment Account – dividend for 3 months (Prior to (3,500)
acquisition)
Inventory reserve (WN 2) (6,000)
Profit to be transferred to consolidated balance sheet 1,95,100
Note to Accounts
₹ ₹
1 Revenue from Operations
X Ltd. 18,00,000
Y Ltd. 19,00,000
Total 37,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 35,80,000
2 Cost of Materials Purchased/ Consumed
X Ltd. 10,00,000
Y Ltd. 12,00,000
Total 22,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 20,80,000
3 Employee benefit and expenses
Wages and salaries
H Ltd. 2,00,000
S Ltd. 3,00,000 5,00,000
4. Finance cost
Interest
H Ltd. 24,000
S Ltd. 24,000 48,000
5 Depreciation
H Ltd. 2,20,000
S Ltd. 2,37,000 4,57,000
6 Other expenses
H Ltd. 1,60,000
S Ltd. 1,20,000 2,80,000
Working Note
1. Profit of Subsidiary
Revenue from Operations 19,00,000

Less: Expenses
122
Cost of Material purchased/Consumed 12,00,000
Changes of Inventories of finished goods -
Employee benefit expense 3,00,000
Finance cost 24,000
Depreciation and amortization expense 2,37,000
Other expenses 1,20,000
Total expenses (18,81,000)
Profit Before Tax 19,000
Less: Preference Dividend 14,000
Less: Preference Dividend Payable 14,000 (28,000)
Profit available for shareholders (9,000)
Minority Share (20% of loss ₹9,000) (1,800)
, ,
2. Inventory reserve = x = ₹ 6,000
3. Pre-acquisition loss = 80% of 3 month’s profit up to 30th June, 2020 i.e. 80% of ¼ of loss ₹
9,000. Hence, pre-acquisition loss = ₹ 1,800
Investment account includes Preference dividends for 3 months prior to acquisition i.e. ₹ 4,00,000
Question – 7
Long Limited acquired 60% stake in Short Limited for a consideration of ₹ 112 lakhs. On the
date of acquisition Short Limited's Equity Share Capital was ₹ 100 lakhs, Revenue Reserve
was ₹ 40 lakhs and balance in Profit & Loss Account was ₹ 30 lakhs. From the above
information you are required to calculate Goodwill / Capital Reserve in the following situations:
(i) On consolidation of Balance Sheet.
(ii) If Long Limited showed the investment in subsidiary at a carrying amount of ₹ 104 lakhs.
(iii) If the consideration paid for acquiring the 60% stake was ₹ 92 lakhs. [July 21 (5 Marks)]
ANSWER:
₹
60% of the Equity Share Capital ₹ 100 Lakhs 60
60% of Accumulated Reserve ₹ 70 Lakhs (40 + 30) Lakhs 42
Book value of shares of short Ltd. 102
(i) Goodwill / Capital Reserve computation on consolidation of balance sheet

Long Ltd. paid a positive differential of ₹ 10 Lakhs (112 - 102). This differential ₹ 10 Lakhs is called
goodwill and is shown in the balance sheet under the head intangibles
(ii) If Long Ltd. showed the investment in Short Ltd. at carrying amount of ₹ 104 Lakhs, then the
goodwill will be ₹ 2 Lakhs.
123
(iii) If the consideration paid is ₹ 92 lakhs, then there would have been capital reserve amounting ₹ 10
Lakhs (102- 92).
Question – 8
A Ltd. acquired 70% equity shares of B Ltd. @ ₹20 per share (Face value - ₹10) on 31st March,
2021 at a cost of ₹ 140 lakhs. Calculate the amount of share of A Ltd. and minority interest in
the net assets of B Ltd. on this date. Also compute goodwill/capital reserve for A Ltd. on
acquisition of shares of B Ltd. from the following information available from the balance sheet
of B Ltd. as on 31st March, 2021: [RTP May 21]
₹ in lakhs
Investments 90
Current Assets 140
Loans & Advances 30
15% Debentures 180
Current Liabilities 100
ANSWER:
Net assets of B Ltd. as on 31st March, 2021
Investments 90
Current Assets 140
Loans and Advances 30
Total Assets 620
Less: 15% Debentures 180.0
Current Liabilities 100.0 (280)
Equity / Net Worth 340
Share of Minority Interest in net assets (30% of 340) 102
A Ltd.’s share in net assets (70% of 340) 238
A Ltd.’s cost of acquisition of shares of B Ltd.
(₹140 lakhs) (140)
Capital reserve 98
124

By: Vinit Mishra Sir: Ca Intermediate

Uploaded by

Document Information

Original Description:

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

By: Vinit Mishra Sir: Ca Intermediate

Uploaded by

Copyright:

Available Formats

Ca Intermediate

By : Vinit Mishra Sir

10 ALL INDIA RANK -10

“At Any How

QUESTIONS AND ANSWERS

Partners’ Capital Accounts

By Realization A/c 3,960 3,960 1,980

1,47,960 75,960 37,980 1,47,960 75,960 37,980

Partners’ Current Accounts

To Realization 14,216 14,216 7,108 By Capital A/c - 2,916 21,608

To Capital A/c transfer 15,484 - -

29,700 14,216 21,608 29,700 14,216 21,608

Partners’ Capital Accounts

To Fat’s Capital A/c 990 618 - By Current A/c 15,484 - -

By Bank 14,216 14,216

1,09,700 64,216 21,608 1,09,700 64,216 21,608

Liabilities Amount Assets Amount

The following information is given to you:

To Realization A/c (Assets realized) 2,56,200 By Sumit 79,314

Partners’ Capital Accounts

To Balance b/d 32,400 By Balance b/d 55,200 55,200

By Kumar’s Loan 15,000

To Realization A/c 12,750 By General Reserve 24,600 24,600 12,300

To Realization A/c 12,500 By Realization A/c 3,000

To Bank A/c 79,314 89,064 By Realization A/c 9,264 9,264 4,632

By Bank A/c 12,618

92,064 89,064 44,550 92,064 89,064 44,550

Particulars Amount (₹)

2. Payment to D’s Loan

Particulars Amount (₹)

3. Payment to Trade Creditors

Particulars Amount (₹)

4. Furniture taken over by Kumar

Realizat Interest Interest

(₹) (₹) (₹) (₹) (₹) (₹) (₹)

(i) Sales of Investments 1,000 (1,000) --

(ii) Sales of furniture 2,000 (1,000) (1,000)

(iii) Sale of machinery 1,200

Maximum possible loss ₹ 22,800

Amounts at credit (1,800) (840) 3,840 1,200

Amount paid (2) -- -- 1,200 1,200

Balance in capital accounts (1 – 2) 9,600 6,000 7,200 22,800

(iv) Sales of stock 4,000

Amounts at credit and cash paid 200 360 3,440 4,000

Particulars A (₹) B (₹) C (₹)

(ii) Highest Relative Capital Basis

Particulars A (₹) B (₹) C (₹)

In the books of P & Co.

Particulars P (₹) Q (₹) Particulars P (₹) Q (₹)

In the books of R & Co.

Particulars Q (₹) R (₹) Particulars Q (₹) R (₹)

(2) Computation of proportionate capital

(3) Computation of Capital Adjustments

(5) In the books of R & Co. Realization Account

Partners’ Capital Accounts

Date Particulars S (₹) T (₹) Date Particulars S (₹) T (₹)

9,50,000 9,70,000 9,50,000 9,70,000

(2) Profit earned during six months to 30 September, 20X1

1,21,000 50,000 35,000 1,21,000 50,000 35,000

31,000 41,000 31,000 41,000

31,674 26.432 31,674 26,432

Partners’ Capital Accounts