CMA Volume 2 Merged

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Index
Sr. No Topic Name Page No
1 Miscellaneous Company 1-5

Accounts
2 ESOP 6-9
3 Issue in Financial Statements 10-25
4 Consolidation of Accounts 26-88
5 Valuation of Goodwill and Shares 89-119
6 Underwriting 120-125
7 Buy Back of Shares 126-136
8 Budgetary Control 137-143
Unique Academy CS Executive
Chapter 1 – Miscellaneous Company Accounts

1. Bonus Shares
Q 1. The Balance Sheet of A Ltd. as at 31-03-1995 is as follows:
Balance Sheet as at 31-03-1995
Equity and Liabilities Rs.
Shareholders Funds
Authorized Share Capital 1,50.000 Equity Shares of Rs 10 each 1,500,000
Issued, Subscribed and Paid-up 80.000 Equity Shares of 7.50 each called- 600,000
up and paid-up
Reserves:
Capital Redemption Reserve 150,000
Plant Revaluation Reserve 20,000
Share Premium Account 150,000
Development Rebate Reserve 230,000
Investment Allowance Reserve 250,000
General Reserve 300,000
1,700,000
Non Current Assets Rs.
Sundry Assets 1,700,000
1,700,000
The company wanted to issue bonus shares to its shareholders at the rate of one share for every two
shares held. Necessary resolutions were passed: requisite legal requirements were complied with:
(a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
(b) Show the amended Balance Sheet.
Comments
Issue of bonus shares — Most candidates failed to show separately in the amended balance sheet,
sources used for issue of bonus shares. Most candidates debited bank account instead of general
reserve account in order to make partly paid shares fully paid up.
Solution
In the Books of A Ltd.
Journal Entries
Particulars Dr. Amt Cr. Amt
(i) Share Final Calls A/c Dr. 2,00,000
To Share Capital A/c 2,00,000
(Being the final call of Rs.2.50 each on 80,000 equity
shares made)
(ii) Bank A/c Dr. 2,00,000

To Share Final Call A/c 2,00,000
(Being the amount due on final call received)
(iii) General Reserves Dr. 3,00,000

Securities Premium A/c Dr. 1,00,000
Mo no - 8007916622/33 Page | 1
To Bonus to Share holders A/c 4,00,000

(Being the appropriation made as above to facilitate
issue of fully paid up bonus shares at the rate of one

share for every two shares held)
(iv) Bonus to shareholders A/c Dr. 4,00,000

To Equity Share Capital A/c 4,00,000
(Being the issuance of 40,000 fully paid up shares of Rs.10
each by way of bonus)
Balance Sheet (after bonus issue)
Equity and Liabilities Amount

Shareholders Funds
Authorised Share Capital
1,50,000 equity shares of Rs. 10 each 1,500,000
Issued and Subscribed 1,20,000 Equity Shares of Rs. 10 each fully paid 1,200,000
Of the above, 40,000 equity shares are allotted as fully paid up by way
of bonus shares
Reserves and Surplus
Securities Premium 50,000
Development Rebate Reserve 230,000
Investment Allowance Reserve 250,000
Plant Revaluation Reserve 20,000
1,900,000
Non Current Assets Amount
Sundry Assets 1,700,000
Current Assets
Bank 200,000
1,900,000
Q 2. Bee Ltd. had the following Balance on 31-03-1999:
Particulars Rs.
6% Preference Shares of Rs.25 each fully paid 2,00,000
Equity Shares of Rs.100 each fully paid 10,00,000
Share Premium Account 2,00,000
Capital Redemption Reserve Account 1,00,000
General Reserve 3,00,000
Profit and Loss Account 80,000
On the date. Land and Building which stood at Rs. 5,00.000 in the books were revalued at Rs. 8.00,000. It
was decided to:
(i) Consolidate the preference shares into shares of Rs. 100 each;
(ii) Subdivide the equity shares of Rs. 1 each:
(iii) Adopt the revaluation of Land and Building; and
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(iv) Issue fully paid up bonus shares to equity shareholders equal to 50% of the present Equity Share Capital. revenue
reserve and profit being used only if necessary for the purpose.
Q 3. Following is the extract of the Balance Sheet of Beltex Ltd. as at 31st March, 2000.
Shareholders Funds
Authorized Capital 100,000
10,000 12% Preference shares of Rs. 10 each 1,000,000
1.00,000 Equity shares of Rs 10 each 1,100,000
Issued and Subscribed capital: 80,000

8,000 12% Preference shares of Rs. 10 each fully paid 720,000
90.000 Equity shares of Rs. 10 each, Rs. 8 paid up
Reserves and Surplus:
General reserve 120,000
Capital reserve 75,000
Securities premium 25,000
Profit and Loss Account 200,000
Non Current Liabilities
12% Partly Convertible Debentures @ Z 100 each 500,000
On 1st April. 2000 the Company has made final call @ Rs.2 each on 90,000 equity shares. The call money
was received by 20th April, 2000. Thereafter the company decided to capitalize its reserves by way of
bonus at the rate of one share for every four shares held. Share premium of Rs. 25,000 includes a
premium of Rs. 5,000 for shares issued to vendors pursuant to a scheme of amalgamation. Capital
reserves include Rs. 40,000, being profit on sale of plant and machinery. 20% of 12% debentures are
convertible into equity shares of Rs. 10 each fully paid on 1st July, 2000.
Show necessary entries in the books of the company and prepare the extract of the Balance Sheet
immediately after bonus issue but before conversion of debentures. Are the convertible debenture
holders entitled to bonus shares?
Solution
Beletex Ltd. Journal Entries
2000 Particulars Rs. Rs.
April 1 Equity Share Final Cali A/c Dr. 1,80,000
(Final call of Rs.2 per share on 90,000 equity shares due as per
Board's Resolution dated….)
April 20 Bank No Dr. 1,80,000

To Equity Shares Final Call A/c 1,80,000
(Final call money on 90,000 equity shares received)
Capital Reserve A/c Dr. 40,000
Securities Premium A/c Dr. 20,000
General Reserve A/c Dr. 1,20.000
Profit and Loss A/c Dr. 45,000
To Bonus to Shareholders A/c 2,25,000
(Bonus issue @ one share for every four share held by utilizing
Mo no - 8007916622/33 Page | 3
various reserves as per Board's resolution dated )

April 20 Bonus to Shareholders A/c, Dr. 2,25,000
To Equity Share Capital A/c 2.25,000
(Being capitalization of profit made)
Q 4. A Company issued bonus shares to the shareholders — one share to holders of 10 shares.
The following are the details, pass journal entries:
Particulars Rs.
Equity Capital 10,000 shares of Rs. 100 each 10,00,000
Preference Capital 6,000 shares of Rs. 100 each 6,00,000
Ans. Rs. 1,00,000 to be capitalized
Q 5. X Ltd. has resolved to utilise Rs. 3,00,000 out of the general reserve balance to declare bonus to
the shareholders in the form of payment of final call @ 73 per share on 1,00.000 equity shares of no
each. Along with this, the company further decided to utilise the balance of share premium account to
issue fully paid-up bonus shares in the ratio of one equity share for every five equity shares held. Show
journal entries in the books of X Ltd.
Ans. Share Premium Account is utilized to the extent of Rs. 2,00,000
Q 6. The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2012:
Notes
(1) Share Capital Rs. in lakhs

Authorised:
20 crore shares of Rs. 10 each 20,000
Issued and Subscribed:
10 crore Equity Shares of Rs. 10 each 10,000
2 crore 11% Cumulative Preference Shares of Rs.10 each 2.000
Total 12,000
Called and paid up

10 crore Equity Shares of Rs.10 each. Rs. 8 per share called and paid up 8,000
2 crore 11% Cumulative Preference Shares of Rs. 10 each. fully called and
paid up 2,000
Total 10,000
(2) Reserves and Surplus:
Capital Reserve 485
Securities Premium 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss (Appropriation) Account 273
Total 4,798
On 2nd April, 2012 the company made the final call on equity shares @ Rs. 2 per share. The entire
money was received in the month of April, 2012.
On 1st June, 2012 the company decided to issue to equity shareholders bonus shares at the rate of 2
Mo no - 8007916622/33 Page | 4
shares for every 5 shares held and for this purpose. it decided to utilize the capital reserves to the
maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital
and Reserves and Surplus relevant to the Balance Sheet of the company immediately after me issue of
bonus snares.
Mo no - 8007916622/33 Page | 5
Chapter 2 - ESOP
Q 1. X Ltd. offered 15.000 ESOP'S to it's employees on April 1, 2001. Exercisable on 31st March, 2004. On 1st January,
2002, 1000 options were withdrawn from employee X. On 31st March, 2003 2000 options were cancelled due to
resignation of employees. Rest of the options were availed by employees on due date. Market price on 1-4-2001
for equity shares of company is Rs. 40 (face value Rs. 10). However, market price on 31-3-2004 is Rs. 80 per share.
Journalize entries.
Q 2. A company grants 500 options on 1-4-1999 at Rs. 40 when the market price is Rs. 160 the vesting period is two and
a half years, the maximum exercise period is one year. Also 150 unvested options lapsed on 1-5-2001, 300 options
are exercised on 30-6-2002 and 50 vested options lapsed at the end of the exercise period. Journalize.
Q 3. Bharat Ltd. grants 1,000 employees stock options on 1.4.2006 at Rs. 40, when the market price is 1160. The vesting
period is 2% years and the maximum exercise period is one year. 300 unvested options lapse on 1.5.2008. 600
options are exercised on 30.6.2009. 100 vested options lapse at the end of the exercise period.
Pass Journal Entries giving suitable narrations.
Solution
Journal Entries in the Books of Bharat Ltd.
Date Particulars Dr. (Rs.) Cr.(Rs.)
31.3. Employees compensation expenses
2008 account Dr. 48,000
To Employees stock option outstanding account 48,000
(Being compensation expenses recognized in respect of
the employees stock option i.e. 1.000 options granted
to employees at a discount of Rs. 120 each. amortised
on straight line basis over 2 ½ years)
Profit and loss account Dr. 48,000

To Employees compensation expenses account 48,000
(Being expenses transferred to profit and loss account
at the end of the year)
31.3. Employees stock option outstanding

2009 account (W.N.1) Dr. 12,000
To General Reserve account (W.N.1) 12,000
(Being excess of employees compensation expenses
transferred to general reserve account)
30.6. Bank A/c (600 x Rs. 40) Dr. 24,000

2009 Employee stock option outstanding
account (600 x Rs. 120) Dr. 72,000
To Equity share capital account (600 x Rs. 10) 6,000
To Securities premium account (600 x Rs. 150) 90,000
(Being 600 employees stock option exercised at an
exercise price of Rs. 40 each)
Mo no - 8007916622/33 Page | 6
01.10. Employee stock option outstanding account Dr. 12,000 12,000

2009 To General reserve account
(Being Employees stock option outstanding A/c
transferred to General Reserve A/c. an lapse of 100
options at the end of exercise of option period)
Working Note
On 31.3.2009, Bharat Ltd. will examine its actual forfeitures and make necessary adjustments, if any to reflect
expenses for the number of options, which have actually vested. 700 employees stock options have completed 2.5
years vesting period. the expense to be recognized during the year is in negative i.e.
Rs.
No. of options actually vested (700 x Rs.120) 84,000
Less: Expenses recognized ?(48.000 + 48.000) 96,000
Excess expenses transferred to goon' reserve 12,000
Q 4. A Company has its share capital dividend into shares of 10 each. On 1st April 2010 it granted 20,000 employees'
stock options at Rs. 40, when the market price was Rs. 130. The options were to be exercised between 1st
January 2011 to 15th March 2011. The employees exercised heir options for 18,000 shares only: the remaining
options lapsed. The company closes its books on 31st March every year. Pass Journal entries with regard to
employees' stock option.
Q 5. A company has its share capital divided into shares of Rs. 10 each. On 1-4-2010, it granted 5.000 employees
stock option at Rs. 50. when the market price was Rs. 140. The options wereto be exercised between 1-12-2010
to 28-2-2011. The employees exercised their options for 4,800 shares only; the remaining options lapsed Pass the
necessary Journal Entries for the year ended 31-3-2011, with regard to employee's stock option
Q.6. On 1st April, 2010. a company offered 100 shares to each of its 500 employees at Rs. 50 per share. The employees
are given a month to accept the offer. The shares issued under the plan shall be subject to lock-in on transfer
for three years from the grant date. The market price of shares of the company on the grant date is 21 60 per share.
Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at Rs. 56 per
share.
On 30th April, 2010, 400 employees accepted the offer and paid Rs. 50 per share purchased. Nominal value of each
share is Rs. 10.
Record the issue of share in the books of the company under the aforesaid plan.
Q 7. Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2008 for Rs. 20, depending upon the
employees at the time of vesting of options. The market price of the share is Rs. 50. These options will vest
at the end of year 1 if the earning of Choice Ltd. increases 16%, or it will vest at the end of the year 2 if the average
earning of two years increases by 13%, or lastly it will vest at the end of the third year if the average earning of 3
years will increase by 10%. 5,000 unvested options lapsed on 31.3.2009. 4,000 unvested options lapsed on
31.3.2010 and finally 3,500 unvested options lapsed on 31.3.2011.
Following is the earning of Choice Ltd.:

Year ended on Earning (in %)
31.3.2009 14%
31.3.2010 10%
31.3.2011 7%
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850 employees exercised their vested options within a year and remaining options were unexercised at the end of
the contractual life. Pass Journal entries for the above.
Q 8. Following is the Balance Sheet of M/s Competent Limited as on 31st March. 2012:

Shareholders Funds
Equity Shares of Rs. 10 each fully paid 12.50,000
Revenue Reserve 15,00,000
Securities Premium 2,50.000
Profit & Loss Account 1,25,000
Non Current Liabilities
12% Debentures 18,75,000
Unsecured Loans 10,00,000
Current Liabilities 16,50,000
Total 76,50,000
Assets Rs.
Non Current Assets
Fixed Assets 46,50,000
Current Assets 30,00,000
Total 76,50,000
The Company wants to buy back 25.000 equity shares of Rs. 10 each, on 1st April. 2012. at Rs. 20 per share. Buy
back of shares is duly authorized by its articles and necessary resolution passed by the company towards this. The
payment for buy back of shares will be made by the company out of sufficient bank balance available as a part of
Current Assets.
Comment with your calculations, whether buy back of shares by company is within the provisions of the Companies
Act, 1956. If yes, pass necessary journal entries towards buy back of shares and prepare Balance Sheet after buy
back of shares.
Q 9. On 1st April 2012, a company offered 100 shares to each of its 400 employees at Rs. 25 per share. The employees
are given a month to accept the shares. The shares issued under the plan shall be subject to lock-in to transfer for
three years from the grant date i.e. 30th April. 2012. The market price of shares of the company on the grant date
is Rs. 30 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is
estimated at Rs. 28 per shares. Upto 30th April, 2012, 50% of employees accepted the offer and paid Rs. 25 per
share purchased. Nominal value of each share is Rs. 10. Record the issue of shares in the books of the company
under the aforesaid plan.
Q 10. ABC Ltd. came up with public issue of 3.00,000 Equity Shares of Rs. 10 each at Rs. 15 per share. P. Q and R took
underwriting of the issue in ratio of 3 : 2 : 1 with the provisions of firm underwriting of 20.000, 14,000 and 10.000
shares respectively.
Applications were received for 2.40,000 shares excluding firm underwriting. The market applications from public
were received as under:
P 60,000
Q 50,000
R 60.000
Compute the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit
of firm underwriting is not given to individual underwriters.
Mo no - 8007916622/33 Page | 8
Securities Premium 350 Investments 148

General Reserve 930 Stock 1,200
Profit and Loss A/c 340 Debtors 520
12% Debentures 1,500 Cash at Bank 740
Sundry Creditors 750
Sundry Provision 390
6,660 6,660
On 1st April 2008, the company announced the buy-back of 25% of its equity shares Rs. 15 per share. For the purpose,
it sold all its investment for Rs. 150 lakhs and issued 2,00,000, 14% Pref. shares of Rs. 100 each at par-the entire
amount entire amount being payable in application.
The issue was fully subscribed. The company achieved the target of the buy-back. Later, the company issued one fully
paid-up equity share of Rs. 10 by way of bonus share for every four equity shares held by the equity shareholders.
Show Journal entries for all the transactions including cash transactions.
Ans.:
Funds required for buy-back Rs. (in lakhs)
For buy-back of equity shares, 2,400 x 600

Less: Proceeds from Issue of 14% Pref. Shares 200
400
In the Books of Y Ltd.

Journal
Date Particulars L.F. Debit Rs. Credit Rs.
2008 Bank A/c Dr. 200
Apr.1 To 14% Pref. Share Application A/c 200
(Application money of 2,00,000, 14% Pref. Share of Rs. 100
each transferred to Pref. Share Capital as per special resolution
dated…..)
Bank A/c Dr. 150
To Investment A/c 148
“ Profit and Loss A/c 2
(Investment sold at a loss.)
14% Pref. Share Application A/c Dr. 200
To 14% Pref. Share Capital A/c 200
(Application money of 2,00,000, 14% Pref. Share of Rs. 100
each transferred to Pref. Share Capital as per Board’s resolution
dated…..)
Equity share Capital A/c Dr. 600
Securities Premium A/c Dr. 300
To Equity Shareholder A/c 900
(25% of the shares were bought back @ 15 per share’s as per
Board’s Resolution dated)
Equity shareholders A/c Dr. 900
To Bank A/c 900
(Amount paid to Equity Shareholders against buy-back of
shares)
General Reserve A/c Dr. 400
To Capital Redemption Reserve A/c 400
(A sum equal to nominal value of buy-back of shares transferred
to Capital Redemption Reserve out of General Reserve)
Capital Redemption Reserve A/c Dr. 400
Securities Premium A/c Dr. 50
To Bonus to Shareholders A/c 450
(Bonus shares are issued in the ratio of 1:4 as per Shareholders’
Resolution ............ )
Mo no - 8007916622/33 Page | 9
Chapter 3 – Issues in Financial Statements

1. Provision for Tax
Q 1. The trial balance of Complex Ltd. as at 31st March, 1998, shows the following items:
Particulars Dr. (Rs.) Cr. (Rs.)

Advance payment of income-tax 2,20,000
Provision for income-tax for the year ended 31-3-97 1,20,000
The following further information's are given:

(i) Advance payment of income-tax includes 21,40,000 for 1996-97.
(ii) Actual tax liability for 1996-97 amounts to 21,52,000 and no effect for the same has so far been given inaccounts.
(iii) Provision for income-tax has to be made for 1997-98 for 21,60,000.
You are required to prepare (a) provision for income-tax account, (b) advance payment of income-tax account, (c)
liabilities for taxation account and also show, how the relevant items will appear in the profit and loss account and
balance sheet of the company.
Comments
Most of the candidates could not approach this part of the question properly. It has been observed by the examiners
that the candidates, in general, do not have knowledge of the accounting treatment of Advance Tax and Provision for
Taxation.
Solution
Complex Ltd.
(a) Provision for Income Tax (1997-98) Account
Particulars Dr. Rs. Cr. Rs.
31.3.98 To Income-tax A/c 1,20,000 1.4.97 By Balance b/d 1,20,000
To Balance old 1,60,000 31.3.98 By Profit and Loss A/c 1,60,000
2,80,000 2,80.000
(b) Advance Payment of Income Tax Account
31.3.98 To Balance b/d 2,20,000 31.3.98 By Provision for income tax
(1996-97) A/c 1,40,000
By Balance c/d 80,000
2,20,000 2,20,000
(c) Income Tax Account
31.3.98 To Advance Tax 1,40,000 31.3.98 ByProvision for Income
To Balance o/d 12,000 tax A/c 1,20,000
By P&L A/c 32,000
1,52,000 1,52,000
Profit and Loss Account

for the year ended 31st March, 1998 (Extracts)
Profit before Taxation
(-) Taxation for the year 1,60,000
Taxation adjustment of previous year 32,000 1,92,000
Net Profit
Mo no - 8007916622/33 Page | 10
Q 2. Prepare provision for taxation account in following cases. Assuming year ending on 31st March. 2003.
Case-I Trial Balance
Dr. Cr.
Provision for taxation -- 80,000
Advance tax 50,000 --
Create provision for current tax Rs. 40,000.
Case-II Trial Balance
Dr. Cr.
Provision for taxation -- 1,40,000
Advance tax 2,20,000 2,20,000 ---
Create provision for current tax Rs. 70,000. During the year 2002-2003 income tax assessment for 1998-99 is
completed at Rs. 35,000 against which provision existed Rs. 27.000 (advance tax paid for 1998-99 was 13,000) appeal
was not filed with higher authorities.
Case-III Trial Balance
Dr. Cr.
Provision for taxation -- 2.50,000
Advance tax 1,50,000 --
Create provision for current tax Rs.1,00,000. During the year 2002-2003 income tax assessment for 1998-99 is
completed at Rs. 50,000 against which amount provided was Rs. 55,000 (advance tax paid for 1998-99 was Rs.
52,000) appeal was not filed with higher authorities.
Case-IV Trial Balance
Dr. Cr.
Provision for taxation -- 4,50,000
Advance tax 3,00,000 ---
Create provision for current tax Rs. 1,00,000. During the year 2002-2003 income tax assessment for 1998-99 is
completed at Rs. 70,000 against which provision existed Rs. 50,000 (Advance tax paid for 1998-99 was 40,000). An
appeal was filed with C.I.T. (appeals) against additions. Assume high probability of losing
2. Divisible Profit
Q 3. Calculate amount available for dividend

Year ended 31st December (in Rs. lakhs)
No . Particulars 1996 1997 1998 Total
1. Depreciation as provided in the books 3 2 8 13
2. Depreciation chargeable under section 205 13 10 8 31
3. Profit before charging depreciation -15 -7 37 15
4. Profit after charging depreciation as in (1) -18 -9 29 2
5. profit after charging depreciation as in (2) -28 -17 29 -16
Solution
Profit before Dep. Schedule II Dep. Profit
1996 -15 -13 Nil
1997 -7 -10 Nil
1998 37 -8 29
Mo no - 8007916622/33 Page | 11
(-) Arrears of Dep.

1996 13
1997 10 23 06
Therefore profit = 6,00,000
Q 4. Calculate amount of dividend.
Particulars Rs.
Equity share capital (Amount called up) 10,00,000
Calls in arrears 80,000
Calls in advance 20,000
Rate of dividend 10%
Solution
Calculation of Dividend:
= (Equity Share Capital — Calls in advance) x Rate of dividend
= (10,00,000 — 80,000) x 10% = 92,000
Q 5. The Articles of Association of S Ltd. provide the following:

(i) That 20% of the Profits of each year shall be transferred to Reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for Staff bonus.
(iii) That the Balance available for distribution shall be applied.
(a) In paying 14% on cumulative Preference shares.
(b) In paying 20% dividend on Equity shares
(c) One-third of the balance available as additional dividend on Preference shares and 2/3 as
additional equity divined.
A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 12% on
Preference shares after making provisions (i), (ii) and (iii) mentioned above. The company has issued 13,000, 14%
cumulative participating preference shares of Rs.100 each fully paid and 70.000 Equity shares of Rs,10 each fully paid
up.
The profit for the year 2008 was 110, 00,000 and balance brought form previous year 180,000. Provide Rs.31,200 for
depreciation and Rs. 80,000 for taxation before making other appropriations. Prepare Profit and Loss Appropriation
A/c.
Solution
for the year ended 31st March, 2008
Particulars Rs. Particulars Rs.
To Depreciation 31,200 By Profit 10,00,000
To Provision for income tax 80,000
To Net profit c/d 8,88,800
10,00,000 10,00,000
To Reserve fund 1,77,760 By Balance b/d 80,000
To Proposed preference 2,75.450 By Net profit b/d 8,88,800
dividend (1,82,000 + 93,450)
To Proposed equity dividend 3,26,900
(1,40.000 + 1,86,900)
Mo no - 8007916622/33 Page | 12
To Bonus to employees 32,690

(14,000 + 18,690)
To Balance c/d 1,56,000
Total 9,68,800 Total 9,68,800
Working Note:
Balance of amount available for Preference and Equity Rs.
shareholders and Bonus for Employees
Credit side total 968800
Less: Dr. side (177760 + 182000 + 140000 + 140000 +156000) 669760
299040
Suppose remaining balance after staff bonus is x

Preference share holders will get share remaining balance
=X x 1/3 = 1/3 X
Equity share holders will get shares from remaining balance
=Xx 2/3=2/3 X
Bonus to employees = 213 X x 10/100 = 2/30 X
2/3 X + 1/3 X + 2/30 X = 299040
32 X = 8971200
X = 8971200/32 = Rs. 280350
Share of the preferences share holders = Rs. 280350 x 1/3 = Rs. 93450
Share of equity share holders = Rs. 280350 x 2/3 = Rs. 186900
Bonus to employees = Rs. 280350 x 2/30 = Rs. 18690
Q 6. The following items were extra. ted from the Balance Sheet of Xansa Ltd. as on 1st April, 2009:
Rs
13.1/2% Preference Share capital 4,00.000
Equity Share Capital fully paid up 5,00,000
Equity Share Capital 60% partly paid up 3,00,000
Securities Premium 7,00,000
15% Debentures 10,0 00
Profit before interest on debentures and before payment: of tax @ 30% is Rs 11,50,000 for the year ended 31st
March, 2010.
The Board of Directors of the Company proposed a dividend of 15% on equity capital and capitalization of profits for
making partly paid-up shares into fully paid up. Corporate dividend tax is payable @ 15%.
Pass the necessary Journal entries to incorporate the Board's recommendations and show how the items concerned
would be shown on the liabilities side of the Balance Sheet of Xansa Ltd. as on 31st March, 2010.
Solution
Journal Entries
Particulars Dr. Rs Cr. Rs
Profit and Loss A/c Dr 1,50,000
To Debenture Interest A/c 1,50,000
(Being transfer of debenture interest to profit and loss account)
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Profit and Loss A/c Dr. 3,00,000

To Provision for Taxation A/c 3,00,000
(Being provision for tax made @ 30% on 10,00,000 i.e.
11,50,000 — 1,50,000)
Profit and Loss A/c Dr. 7,00,000

To Profit and Loss Appropriation A/c 7,00,000
(Being transfer of net profit to profit and loss appropriation
account)
Profit and Loss Appropriation A/c Dr. 54,000

To Proposed preference share dividend A/c 54,000
(Being preference share dividend payable @ 13 1/2 %
on Rs 4,00,000)
Profit and Loss Appropriation A/c Dr. 1,20,000

To Proposed equity share dividend A/c 1,20,000
(Being equity share dividend payable @. 15% on Rs 8,00,000)
Profit and Loss Appropriation A/c Dr. 26,100

To Provision for corporate dividend tax A/c 26,100
(Being provision made for corporate dividend ax@ 15% on
total dividend of Rs 1,74,000)
Profit and Loss Appropriation A/c Dr. 2,00,000

(Being partly paid equity shares converted to fully paid up,
by capitalization of profit)
Balance Sheet (Extracts) as on 31st March, 2010
Share Capital: Rs
13%% preference share capital 4,00,000
Equity share capital fully paid up - 10,00,000
Reserves and Surplus:
Profit and Loss Appropriation Account 2,99,900
Secured Loan:
Provisions:
Corporate Income-tax 3,00,000
Proposed Dividend:
Preference 54,000
(+) Equity 1,20,000 1,74,000
Corporate Dividend Tax 26,100
Note: it is assumed that debenture interest has been paid.
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Q 7. (a) A company can declare and pay dividend out o distribution. Interpret the distributable profit.
A company has earned profit before depreciation Rs 80 lakhs, depreciation as per books is Rs 126 lakhs and
depreciation as per section 123 of the Companies Act works out to Rs 62 lakhs. Compute the maximum amount that
can be paid as dividend for the relevant accounting year.
(b) A joint stock company, earning adequate profits, has four part-time directors and a whale time director. What is
the maximum managerial remuneration it can pay to its—
(i) Part-time directors taken together and
(ii) to whole time director? What will be your Solution if the company had only part-time directors and no whole-time
director?
Solution
(a) Distributable profits mean profit arrived at after providing for depreciation on assets, not only for the year in
which the profits are earned but also for any arrears of depreciation of the past years, calculated in the manner
prescribed by Section 123 of the Companies Act, 2013.
Computation of maximum amount that can be paid as Dividend:

(Rs in lakhs)
Profit before depreciation 80.00
Less: Depreciation as per Section 123 62.00
Distributable profit 18.00
Therefore, maximum amount which can be paid as dividend would be Rs 18.00 lakhs.
(b) A joint stock company, earning adequate profits and having part-time directors as well as whole-time directors
can pay the maximum managerial remuneration to them as follows:
(i) The total remuneration to part-time directors taken together should not exceed 1% of the net profit of the
company, if the is a managing or whole-time director.
(ii) The total remuneration to a whole-time director should not exceed 5% of the net profits of thecompany.
If there are, only part-time directbrs and no managing or Whole-time director in the company, the maximum
managerial remuneration paid to them should not exceed 3% of the net profits of the company.
Note.— With the approval of the Central Government, the Above limits can be exceeded.
3. Director Remunerations
Q 8. The following it the draft Profit & Loss Account of the Paper Company of India Ltd. for the year ending 31st
March, 1999:
Administrative, Selling Balance b/d 3,12,632
Finance Expenses 5,73,804 Balance from Trading
National Defense Fund 18,800 Account 38,35,414
Directors' fees 23,484 Int. on Investment 10,964
Interest on Debentures 2,824 Transfer fees 37
Managing Directors Profit on sale of
Remuneration 1,40,000 Plant:
Depreciation on fixed assets 4,69,713 Amount
Provision for taxation 11,40,000 Realized 40,000
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General reserve 5,00,000 Written

Debentures Sinking Fund 4,800 Book value 31,000 9,000
Investment Revaluation Reserve 9,800 (Cost 35,000)
Balance c/d . 12,84,822
Total 41,68,047 Total 41,68,047
As an auditor you are required to comment on the managerial remuneration.
Solution
Net Profit (bat c/d) 12,84,822
(+) mg. Director's remuneration 1,40,000
(+) Provision for taxation 11,40,000
(+) General reserve 5,00,000
(+) Debentures sinking fund 4,800
(+) Investment Revaluation Reserve 9,800
(+) Capital profit 5,000
(+) Op profit 3,12,632
(+) Depreciation Charged 4,69,173
(+) Depreciation as per schedule XIV (assumed) 4,69,173
27,61,790
Remuneration = 3,03,797
Q 9. The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 1999:
Administrative, Selling and distribution Balance b/d 5,72,350
expenses 8,22,542 Balance from Trading
Donation to charitable funds 25,500 Account 40,25,365
Directors fees 66,750 Subsidies received from
Interest on debentures 31,240 Govt. 2,32,560
Compensation for breach of contract 42,530 Int. on Investment 15,643
Managerial remuneration 2,85,350 Transfer fees 722
Depreciation on fixed assets 5,22,543 Profit on sale of Machinery:
Provision for taxation 12,42,500 Amount
General reserve 4,00,000 Realized 55,000
Investment Revaluation Reserve 12,500 Written
Balance c/d 14,20,185 (-) Down value 30,000 25,000
Total 48,71,640 Total 48,71,640
Additional Information:
(i) Original Cost of the machinery sold was Rs 40,000.
(ii) Depreciation on fixed assets as per Schedule II of the Companies Act, 1956. was Rs 5,75,345
You are required to comment on the managerial remuneration in the following situations:
(a) There is only one whole time director:
(b) There are two whole time directors:
(c) There are two whole time directors. a part time director and a manager.
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Solution
Calculation of Profits u/s 349
Net profit (bat C/d) 14,20,185
(+) Mgrs remuneration 2,85,350
(+) Depreciation charged 5,22,543
(+)Provision for Taxation 12,42,500
(+) General reserve 4,00,000
(+) Investment revel reserve 12,500
(-) Opening profit 5,72,350
(-) Profit on Machinery - Capital Profit 15,000
(55,000-40,000)
(-) Depreciation as per Sch (IV) 5,75,345
Book Profits 27,20,383

(a) 5% pf 27,20,383 = 1,36,019
(b) 10% = 2,72,038
(c) 11% = 2,99,242
Q 10. From the following particulars of Ganga Limited, you are required to calculate the managerial remuneration in
the following situation:
(i) There is only one whole time director.
(ii) There are two whole time directors.
(iii) There are two whole time directors, a part time director and a manager.
Particulars Rs.
Net profit before provision for. income-tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10.000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule XIV 2,60,000
Actual expenditure incurred on repairs during the year 15,000
Comments
Most of the candidates calculated profit under section 349 correctly but erred in applying prescribed percentage
rates while computing the amount of managerial remuneration.
Solution
Sections 198 and 309 of the Companies Act, 1956 prescribe the maximum percentage of profit that can be paid as
managerial remuneration. For this purpose, profit is to be calculated in the manner a specified in Section 349.
Calculation of Net Profit u/s 349 of the Companies Act, 1956

Particulars Rs. Rs.
Net Profit before provision for income tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Add back: Depreciation provided in the books 3.10,000
Provision for repairs of machinery 25,000 3.35,000
12,05,410
Less: Depreciation allowable under Schedule XIV 2,60,000
Add : Actual expenditure incurred on repairs 15.000 2,75,000
Profit under Section 349 9,30,410
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Calculation of Managerial Remuneration

(i) There is only one whole time director Managerial remuneration = 5% of ?9,30,410
= Rs.46.520.50
(ii) There are two whole time directors:— Management remuneration = 10% of 29,30,410
= 293,041
(iii) There are two whole time directors, a part time director and a manager
Managerial remuneration = 11% of 29,30,410
= Rs. 1,02,345.10
(b) Interest on Performing Assets should be recognised on accrual basis, but interest on Non-performing Assets
should be recognised on cash basis.
Particulars Rs. in Lakh
Interest on cash credit and overdrafts (1,800+70) 1,870
Interest on term loan (480+40) 520
Interest on bills purchased and discounted (700+36) 736
Total income to be recognized 3,126
Q 11. The following is the Profit and Loss A/c of S.S. Ltd. for the year ended 31st March, 1993:

To Salaries and wages 15,000 By Gross Profit 4.00.000
To Repairs to fixed assets 5,000 By Profit on sale of machinery
To General expenses 4,000 (cost Rs. 80,000 and WDV
To compensation for breach of value Rs. 40,000) 45,000
contract 2.500 By Subsidy 10.000
To Depreciation 24.000
To Loss on sale of Investment 3.500
To Expenditure on Scientific 25.000
Research (cost of setting up a
new laboratory)
To Debenture Interest 7,500
To Interest on unsecured loans 1.500
To Provision for Income-tax 1,60,000
To Proposed dividends 1.00,000
To Balance cid 1.07.000
Total 4,55.000 Total 4,55,000
Calculate the overall managerial remuneration under Section 198, presuming that depreciation allowed under sec.
350 is Rs.30,000.
Solution
Net Profit as per Profit & Loss 1,07,000
(+) proposed dividend 1,00,000
(+) provision & Tax 1,60,000
(+) expenses on scientific research 25,000
(+) capital profit. 5.000
(+) depreciation charges 24,000
(+) depreciation allowed u/s 350 30,000
Total 3,81,000
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Q 12. Calculate the managerial remuneration from the following particulars of Astha Ltd. due to the managing
director of the company at the rate of .. Also determine the excess remuneration paid. if any:
Particulars Rs.
Net Profit 2,00,000
Net Profit is calculated after considering the following:
Depreciation 40,000
Preliminary expenses 10,000
Tax provision 3,10,000
Director's fee 8.000
Bonus 15,000
Profit on sale of fixed assets
(original cost: 120,000 down written value: Rs. 11,000) 15,500
Provision for doubtful debts 9,000
Scientific research expenditure (for setting up new machinery) 20,000
Managing Director's remuneration paid 30,000
Other information:
Depreciation allowable under Schedule XIV of the Companies Ac 35,000
Bonus liability as per Payment of Bonus Act. 1965 18,000
Q 13. The following extract of Balance sheet of X Ltd. was obtained:

Balance sheet (Extract) as on 31st March, 2000
Liabilities Rs.
Issued and subscribed capital:
15,000, 14% preference shares of Rs.100 each fully paid 15,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Share suspense account 20,00,000
Capital reserves (60% is revaluation reserve) 2,50,000
Securities premium 50,000
Public deposits (Short Term) 3,70,000
Cash credit loan from SBI (Sum term) 4,65,000
Sundry creditors 3, 45,000
Assets: Rs.
Investment in shares, debentures, etc. 75,00.000
Profit and Loss account 15,25,000
Preliminary expenses not written off 55,000
Share suspense account represents application money received on shares the allotment of which is not yet made.
X Ltd. has been sustaining loss for the last few years. X Ltd. has only one whole-time director. Find out how much
remuneration X Ltd. can pay to its managerial person as per the provisions of Part II of Schedule XIII.
Would your answer differ if X Ltd, is an investment company?
Solution
Since X Ltd. is incurring losses so, managerial remuneration will be paid as per inadequacy ratio concept. Working
Mo no - 8007916622/33 Page | 19
Note 1
a) Calculation of effective capital
PSC 15,00,000
ESC 96,00,000
C/Reserve (40% of 2,50,000) 1,00,000
S/Premium 50,000
Debentures 65,00,000
(-) Investment 75,00,000
(-) Profit/ Loss A/c 15,25,000
(-) Preliminary exp. 55,000
b) 86,70,000 < 1,00,00,000 (1st Category)

Remuneration = 75,000/ month = 9.00,000/ annum
In case of Investment company
Effective capital 86,70,000
(+) Investment 75,00,000
Total 1,61,70,000
Since 1,61,70,000> 1,00,00,000 (IInd Category)
Remuneration =Rs. 1 ,00,000/ month = 12,00,000/ annum
Q 14. What are the maximum limits of Managerial remuneration for companies le" having adequate profits?
Solution
For companies having adequate profits, maximum limits of managerial remuneration in different circumstances are
as under:
(i) Overall (excluding fee feratnding meetings) 11% of, net profit
(ii) If there is one managerial person 5% of net profit
(iii) If there are more then one managerial person 10% of net profit
(iv) Remuneration of part-time clrectors:
(a) If there Is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
Q 15. The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration, subject to a
minimum of Rs. 25,000 per month. The net profits, for this purpose, are to be taken without charging income-tax and
his remuneration itself. During the year, A Ltd. made net profit of Rs. 43, 00,000 before charging Managing Director's
remuneration, but after charging provision for taxation of Rs. 17,20,000. Compute remuneration payable to the
Managing Director.
Q 16. Calculate the maximum remuneration payable to the Managing Director based on effective capital of a non-
investment company for the year, from the information given below:
Particulars (Rs. in ‘000)
(i) Profit for the year 3,000
(ii) Paid up Capital 18,000
(iii) Reserves & Surplus 7,200
(iv) Securities Premium 1,200
(v) Long Term Loans 6,000
(vi) Investments 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing Director during the year 600
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Q 17. Kumar Ltd., a non-investment company has been incurring losses for the '''T` past few years. The company
provides the following information for the current year:
Particulars ( Rs in Iakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve Rs 10 lakhs) 150
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
Application money pending allotment 720
Accumulated losses not written off 20
Investments 180
Kumar Ltd..has only one whole-elms,director, Mr. X. You are required to calculate the amount of maximum
remuneration that can be paid to him as per provision of Companies Act, if no special resolution is passed at the
general meeting of the company in respect of payment of remuneration for a period not exceeding three years.
4. Financial Statement
Q 18. From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st March 2014 as
required by Part 1, Schedule Ill of the Companies Act.
Particulars Debit (Dr) Credit (Cr)

Equity Share Capital (Face value 50,00,000 of 100 each) 50,00,000
Call in Arrears 5000
Land a Building 27,50,000
Plant & Machinery 26,25.000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Raw Materials 2,50,000
(+) Finished Goods 10,00,000 12,50,000
Provision for Taxation 3,40,000
Sundry Debtors 10,00,000
Advances 2,13,500
Proposed Dividend 3,00,000
Cash ih Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:

i. Preliminary expenses included Rs 25,000 Audit Feet and Rs 3,500 for out of pocket expenses paid to the Auditors.
ii. 10000 Equity shares were issued for consideration other than cash.
iii. Debtors of Rs 2,60,000 are due for more than 6 months.
Mo no - 8007916622/33 Page | 21
iv. The cost of the Assets were:

Building Rs 30,00,000,
Plant & Machinery Rs 35,00,000
And Furniture Rs 3,12,500
v. The balance of Rs 7,50,000 in the Loan Account with State Finance Corporation is inclusive of Rs 37,500 for
Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
vi. Balance at Bank includes Rs 10,000 with Global Bank Ltd., which is not a Scheduled Bank.
Q 19. The following is the Trial Balance of Omega Limited as on 31.3.2012: (Figures in Rs'000)
Particulars Debit (Dr) Particulars Credit (Cr)

Land at cost 220 Equity capital ( Share of Rs 10 Each) 300
Plant & Machinery at cost 770 10% Debenture 200
Trade Receivables 96 General Reserve 130
Inventories, (31.3.12) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 172
Administration Expenses 30 Suspense A/c 4
Selling Expenses 30
Debenture Interest 20
Interim Dividend Paid 18
Additional Information:
(i) The authorized share capital of the company is 40,000 shares of Rs 10 each.
(ii) The company on the advice of independent valuer wish to revalue the land' at Rs 3,60.000.
(iii) Proposed final dividend 10%.
(iv) Suspense account of Rs 4,000 represents cash received for the sale of some of the machinery on 1.4.11. The cost
of the machinery was 110,000 and the accumulated depreciation thereon being Rs 8,000.
(v) Depreciation is to be provided on plant and machinery al: 10% on cost. •
You are required to prepare Omega Limited's Balance Sheet as on 31,3.2012 and Statement of Profit and Loss for the
year ended 31.3.2012 as per Schedule III. Ignore previous years' figures & taxation.
Solution
Omega Limited
Balance Sheet as at 31st March, 2012
Particulars Note No (Rs in 000)

1. Equity and Liabilities .
Shareholders' funds
(a) Share capital 1 300
(b) Reserves and Surplus 2 500
2. Non-Current liabilities
(a) Long term borrowings 3 200
3.Current liabilities
(a) Trade Payables 52
(b) Short-term provisions 4 30
Total 1082
Mo no - 8007916622/33 Page | 22
Assets
1. Non-current assets
(a) Fixed assets
(i) Tangible assets 5 880
2. Current assets
(a) Inventories 86
(b) Trade receivables 96
(c) Cash and cash equivalents 20
Total 1082
Omega Limited
Statement of Profit and Loss for the year ended 31s1 March, 2012
Particulars Notes (Rs in 000)
I. Revenue from operations 700
II. Other Income 6 2
III. Total Revenue 702
IV. Expenses:
Purchases 320
Finance costs 7 20
Depreciation (10% of 760) 76
Other expenses 8 120
Total Expenses 536
V. Profit (Loss) for the period (I-IV) 1 166
Notes to accounts
Particulars (Rs in 000)
1. Share Capital
Equity share capital Authorized 40,000
shares of Rs 10 each Issued& subscribed & called up 400
30,000 shares of Rs 10 each 300
Total 300
2. Reserves and Surplus
Securities Premium Account 40
Revaluation reserve 140
General reserve 130
Profit & loss Balance
Opening balance 72
Add : Profit for the period 166 238
Less : Appropriations Interim Dividend (18)
Less : Proposed Final Dividend (30) 190
500
3. Long term borrowing
10% Debentures 200
4. Short term provision Proposed Final Dividend 30
5. Tangible assets
Land
Opening balance 220
Add: Revaluation adjustment 140
Closing balance 360
Mo no - 8007916622/33 Page | 23
Plant and Machinery

Opening balance 770
Less : Disposed off 10 760
Less : Depreciation (172-8+76) 240
Closing balance 520
Total 880
6.Other Income
Profit on sale of machinery: 4
Sale value of machinery 121
Less : Book value of machinery (10-8) 2 123
7. Finance costs
Debenture interest 20
8. Other expenses:
Factory expenses 60
Selling expenses 30
Administrative expenses 30 120
Q 20. On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after preparing its Profit
and Loss Account for the year ended 31st March, 2013 :
Particulars Credit Balances:

Equity shares capital, fully paid shares of Rs 10 each 70,00,000
Loan from State Finance Corporation 10,50,000
Secured by hypothecation of Plant & Machinery (Repayable within one
year if 2,00,000) Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods & expenses (Payable within 6 months) 14,00,000
Proposed Dividend 4,20,000
Provision for Dividend Distribution Tax 71,400
Total 1,33,0,000
Particulars Debit Balances:
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks:
Finished goods 14,00,000
Raw Materials 3,50,000
Sundry Debtors 14,00,000
Advances: Short-term 2,98,900
Cash ih hand 2,10,000
Balance with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
Total 1,33,63,000
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The following additional information is also provided:

i) 4,20,000 fully paid equity Shares were allotted as Consideration for land & buildings.
ii) Cost of Building 28,00,000
Cost of Plant & Machinery 49,00,000
Cost of Furniture & Fixtures 4,37,500
(iii) Sundry Debtors for 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes 18,000 with a bank which is not a scheduled Bank and the deposits of
3 5 With§ are for a period of 9 months.
(v) Unsecured loan includes c 2,00,000 from a Bank and 1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance Sheet of the Company as
on 31st March, 2013 as required under Schedule Ill of the Companies Act, 2013.
5. Schedule III
Q 21. State under which head these accounts should be classified in Balance Sheet as per Schedule III of the
Companies Act:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on Shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against, share warrant.
(viii) Long term maturity of finance lease obligation.
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Chapter 4 – Consolidation of Accounts

HOLDING AND SUBSIDIARY COMPANIES
Holding Company: A holding company is one which acquires all or a majority of the
equity shares of any other company called subsidiary company in order to have control over the subsidiary
company.
Section 4 of the Companies Act, 1956 states the circumstances, any of which must exist to constitute the
relationship of holding and subsidiary companies. Section 4 provides that a company shall be deemed to be a
subsidiary of another, if any of the following conditions are satisfied:-
(a) That other controls the composition of its Board of Directors.
(b) That other holds more than half in the nominal value of its equity share capital.
(c) The first-mentioned company is a subsidiary of any company which is that other's subsidiary.
Illustration
Company B is a subsidiary of Company A and Company C is a subsidiary of Company B. Company C is a
subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D
will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above and so
on.
For the purpose of clause (a) above, the control of the composition of the Board of directors of a company
means that the holding company has power, at its discretion, to appoint or remove all or majority of the
directors of the subsidiary company without the consent of the other persons.
It should be noted that holding and subsidiary companies are incorporated companies and each is a
separate legal entity. {Hungerford Investment Ltd, v. Turner Morison & Co. Ltd.]
Section 4(5) provides that for the purpose of this section, the term 'company' includes body corporate. Thus,
holding and subsidiary relationship can be established between an Indian Company and a Foreign Company.
ACCOUNTS OF HOLDING AND SUBSIDIARY COMPANIES
The balance sheet of a holding company should have annexed to it the following documents relating to its
subsidiary:-
a. A copy of the balance sheet of the subsidiary;
b. A copy of its profit and loss account;
c. A copy of its auditors' report;
d. A copy of its directors' report;
e. A statement indicating the extent of holding company's interest in the
subsidiary at the end of the last financial year;
(b) where directors of the holding company are unable to obtain the necessary
information, then a statement to that effect should be annexed.
The financial year of the subsidiary company may end on the same day or not as that of the holding company,
but should not be earlier than six months from the day on which the holding company's financial year ends.
(I.e. gap should no! be more than 6 months)
CONSOLIDATION OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT

Consolidation of Balance Sheet and Profit and Loss Account implies preparation of a single Balance
Sheet and Profit and Loss Account of the holding company and its subsidiaries by aggregating all items
Mo no - 8007916622/33 Page | 26
of assets, liabilities, incomes, expenses, etc., of the holding company and its subsidiaries. This is also
known as Group Accounts. Although, the Companies Act, 1956 does not make it obligatory on the part
of the holding company to prepare group accounts or consolidated accounts, it is desirable for a
holding company to prepare a consolidated Balance Sheet and Profit and Loss Account in order to have a
clear position. The various outside parties concerned with the holding company and its subsidiaries may
also be interested in the "consolidated final accounts.
PREPARATION OF CONSOLDATED BALANCE SHEET
The following are the most important points which reserve special consideration in the preparation of the
consolidated Balance Sheet of the holding company and its subsidiaries.
Rule 1: Cancellation of Investment and Share Capital

A Consolidated Balance Sheet can be prepared by simply combining all the assets and liabilities of the
holding company and its subsidiary. It will certainly balance, but it is not a Consolidated Balance Sheet. This
is because the inter – company balances have first, to be eliminated. The Investment in Subsidiary Company"
by the holding company should cancel out the Share Capital of the subsidiary company.
Rule 2: Minority Interest Calculation

When the holding company acquires all the shares of the subsidiary company, the latter company becomes a
wholly owned subsidiary, when the holding company acquires more than half but less than all the shares
of the subsidiary company, those shareholders who have a minority share are referred to as Minority
Shareholders. The interest of the minority shareholders, known as Minority Interest must be accounted for
separately in the Consolidated Balance Sheet.
A minority interest is the proportion of the subsidiary company's net assets / shareholders'
fund which belongs to the minority shareholders. Therefore, the value of the minority interest is the
portion of the share capital and reserves at the date when the holding company acquires its controlling
interest and the share of income after acquisition.
Regarding minority interest, following are the points to be remembered:

1. Minority interest is not a liability but capital of the group which does not belong to the shareholders
of the holding company.
2. Minority interest is always calculated at the date of the consolidated balance
sheet - not when the holding company takes the control.
Rule 3: Goodwill / Capital Reserve on Consolidation

When the value of "Investment in subsidiary" in the holding company's balance sheet is more than the
book value of the net assets acquired, the difference represents "Goodwill on Consolidation". In this case,
Investment in subsidiary will not cancel out against the share capital of the subsidiary unless a goodwill
equal to the difference of the two items is shown on the asset side of the Consolidated Balance Sheet.
Conversely, if the value of "Investment in subsidiary" in the holding company's balance sheet is less
than the book value of the net assets acquired, the difference represents "Capital Reserve on
Consolidation". In this case, Investment in subsidiary will not cancel out against the share capital of the
subsidiary unless a capital reserve equal to the difference of the two items is shown on the liability side of
the Consolidated Balance Sheet.
To calculate goodwill or capital reserve, the value of the net assets acquired by the
holding company in the subsidiary company must be compared with the cost of the investment.
This value can be ascertained by adding together proportionate share capital and reserve of the subsidiary.
Mo no - 8007916622/33 Page | 27
Rule 4: Reserves of the Holding and Subsidiary Company

While preparing, Consolidated Balance Sheet, reserves of the subsidiary company are
treated just as though they were part of the share capital of the subsidiary company.
Therefore, while calculating goodwill or capital reserve on consolidation and the minority interest,
reserves are to be apportioned between the holding company and the minority shareholders, The
reserves of the subsidiary company at the date of the acquisition form a part of goodwill/capital reserve and
minority interest calculation.
The reserves of the holding company, on the other hand, belong entirely to the shareholders of the
holding company and as such they are shown along with the holding company's share capital in the
Consolidated Balance Sheet.
Rule 5: Pre- and Post-acquisition Profit of Subsidiary

The profits earned by the subsidiary company before the holding company acquires its control, is known as pre-
acquisition profit or capital profit. Undrawn pre-acquisition profit is taken into consolidation for calculation of
goodwill or capital reserve. It is split between cost of control (goodwill / capital reserve calculation) and minority
interest.
The profits earned by the subsidiary company after the holding company acquires its control, is known
as post-acquisition profit or revenue profit, which can be distributed as dividend. It should be noted that
post-acquisition profit of a subsidiary company do not form part of the goodwill or capital reserve calculation.
Minority shareholders are not concerned whether the profits are pre-acquisitron or post-acquisition. Post-
acquisition profit is apportioned between holding company and minority shareholders. The share of holding
company is added with its profit, while the share of the minority shareholders form a part of the calculation
of minority interest.
Rule 6: Cancellation of Inter-company Debts and Acceptances

It is very common that member companies have business dealing not only with outsiders but also with each
other. Inter-company transactions may lead to intercom any debts and acceptances. At the time of
consolidation, inter-company debts and acceptances which are part of the, same group, are to be
cancelled out as follows:
Inter-company Debts
Inter-company debts for the sale of goods on credit owing by one company to the other company in the
same group should be eliminated from sundry debtors and sundry creditors. For example, if the holding
company sell goods to its subsidiary for Rs 10,000 on credit, \\ will appear as one of the sundry debtors in
the Balance Sheet of holding company and as one of the sundry creditors in the Balance Sheet of the
subsidiary company.
It is an internal debt and is neither an external asset nor a liability of the group. While preparing Consolidated
Bafane0 Sheet* sundry debtors of both the companies are to be added together. Simi larly, sundry creditors of
both the companies are to be added together. From this merged balance of sundry debtors and sundry
creditors, a sum of Rs 10,000 is to be deducted from both the balances. If the above adjustment is not done it
will lead to an over-statement of the figures for current assets and current liabilities in the Consolidated Balance
Sheet.
Inter-company Bills of Exchange

Bills drawn or accepted either by the holding company or its subsidiary is not an outside The item "Bills
Receivable" in one company's Balance Sheet and King item "Bills Payable" in another company's Balance Sheet
are to be cancelled out against each other like ordinary debts.
Mo no - 8007916622/33 Page | 28
But I some of the bills are discounted, their adjustment is not possible because they are no longer an
intercompany obligation. When a bill is discounted, it will have to be paid by the drawer (if not, by the drawer in
case of dishonor) to the bank (outside the group). Bills discounted generally appear at the bottom of the Balance
Sheet as a contingent liability. In the Consolidated Balance Sheet it will also appear as a contingent liability. Only
the face value of the bills that are drawn on outsiders and subsequently discounted, will appear as a contingent
liability in the Consolidated Balance Sheet as a footnote.
Rule 7: Cancellation of Inter-company Loans and Advances

Usually a Current Account is used to record inter-company loans and advances. When a loan is provided by
either of the companies to the other, a current account will exist between the holding company and its
subsidiary. For example, if the holding company makes a loan of Rs 10,000 to its subsidiary, it will appear as an
asset in the Balance Sheet of the holding company and as a liability in the Balance Sheet of the subsidiary
company. At the time of preparing the Consolidated Balance Sheet, these two amounts are to be cancelled out.
A difficulty arises where the current accounts maintained by the holding company and its subsidiary show
different figures as to the balance owed. At the time of preparing the Consolidated Balance Sheet, these two
current accounts are to be reconciled if they are not in agreement by comparing the entries in the accounts. Any
remaining difference is usually caused by goods-in- transit from the seller to the buyer, or cash-in-transit from
the buyer to the seller. In the Consolidated Balance Sheet, the cash or goods-in-transit will appear as one of the
assets and the two current accounts will cancel each other out. The general rule in these circumstances is that
adjustment should be made to the holding company's balance, whichever way the goods or cash are going,
because it is easier for the holding company's accountant to make the adjustment
Rule 8: Adjustment of Bank Balances

Bank accounts may be held by the holding company and its subsidiary at different banks. While some balances
are favorable, others are overdrawn balances, they should appear in the Consolidated Balance Sheet as assets
and liabilities respectively. It would be incorrect to adjust the overdraft balances against credit balances for the
purpose of the Consolidated Balance Sheet.
But when both the companies maintain their bank accounts at the same branch and the bank has a 'set off
agreement between the holding company and its subsidiary, the usual method is to combine all bank balances
and to set off overdraft against credit balances.
Points to Remember:
1. The investment in a subsidiary is replaced by the underlying net assets of the subsidiary.
2. Assets and liabilities are added on a line-by-line basis to the corresponding asset and liability amounts of the
holding company.
3. 100% of each asset and liability is aggregated even if the holding company owns a controlling interest of less
than 100%.
4. The minority shareholders' interest in the net assets not owned by the holding company is shown as a liability
of the Group in the Consolidated Balance Sheet.
5. Assets are stated at their cost to the Group, rather than at their cost to any individual company. Thus, inter-
company profit arising out of stock and fixed assets transfers are removed. (They are usually referred to as
unrealized profit).
6. Any inter-company debtors/creditors; bills receivable/bills payable are eliminated, so that the Consolidated
Balance Sheet shows the net asset position of the group vis-a-vis third parties.
7. Degree of control depends upon holding of equity shares only.
SOME SPECIAL ADJUSTEMENTS

1) Unrealized Profit on Trading Stock
If the holding company and its subsixdiary trade with one another, the goods bought at a profit from one
company may appear as unsold stock in the Balance Sheet of another, if the entire quantity is not sold. In the
Mo no - 8007916622/33 Page | 29
Consolidated Balance Sheet, the aggregate stock of the holding company and its subsidiary is to be stated at a
cost. But in this case, the cost to the buying company includes an element of profit earned by the selling
company.
From the viewpoint of the group, it should be ensured that no unrealized profit enters into group accounts,
Therefore,, it would be wrong to account for this profit until the goods had been sold outside the group. The
unrealised profit on inter-group stocks, still held, must be computed and should be cancelled out It should be
deducted from the consolidated profit as well as from the aggregate stock valuation for the Consolidated
Balance Sheet. The above adjustment also holds good when the subsidiary company is a wholly-owned
subsidiary.
2) Unrealized Profit on Fixed Assets

A member company may transfer fixed assets or stock which becomes fixed assets of the transferee company at
a profit. In this case, a similar problem arises as that seen in connection with trading stock transfer. At the time
of consolidation, unrealized profit short be deducted from consolidated profit as well as aggregate value of
fixed assets.
3) Revaluation of Assets
If the fixed assets of the subsidiary company are revalued at the time of acquisition of fie controlling shares of
the subsidiary company by the holding company, the effect of profit or loss on revaluation should be reflected in
the Consolidated Balance Sheet. The assets are to appear at their revalued figures in the Consolidated Balance
Sheet. If the revaluation is upward causing an increase in the book value of an asset, the same should be treated
as a pre-acquisition profit. The total revaluation profit will be apportioned and will be used in calculating
goodwill/capital reserve and minority interest. The holding company's share of the revaluation profit will be
taken to 'investment in subsidiary company1 which, in effect, will reduce the cost of control on value of goodwill
or capital reserve. If the revaluation results in a loss, the cost of control on value of goodwill or capital reserve
will be increased.
If an asset is revalued, the compounding depreciation adjustment is at so to be considered. If the revaluation

results in an increase, the depreciation that has already been charged seems to be undercharged and the
amount of extra depreciation is treated as revenue loss. This should be deducted from the Profit and Loss
Account of the subsidiary. Conversely, when there is a downward revaluation, the depreciation that has already
been provided seem to be overcharged. The amount of extra depreciation is to be written-back and considered
as a revenue profit. This should be added with the Profit and Loss Account of the subsidiary company.
4) Issue of Bonus Shares

Treatment of bonus shares issued by the subsidiary company will depend upon whether they are issued out of
pre-acquisition profit or post-acquisition profit.
If the bonus shares are issued out of pre-acquisition profit, it will not have any effect on the Consolidated
Balance Sheet. This is because it will cause decrease, in the holding company's share of pre-acquisition profit and
on the other hand paid-up value of the equity shares held by the holding company will be increased by the same
amount Therefore, the amount of goodwill or capital reserve will be the same. The portion of the bonus shares
of the minority shareholders will be added to the minority interest.
If a subsidiary company issues bonus shares out of post-acquisition profit, it will have a direct effect on the
Consolidated Balance Sheet. In such a situation, the holding company's share of revenue profit in the subsidiary
company will be reduced and the paid-up value of the shares held by the holding company in its subsidiary will
be increased because of the issue of bonus shares. This will reduce the value of goodwill or increase the value of
capital reserve. The portion of the bonus shares of the minority interest will be added to the minority interest,
as before.
Mo no - 8007916622/33 Page | 30
5) Preference Shares held by the Holding Company

When preference shares are issued by a subsidiary company and are held by the holding company (whether
wholly or partly), it should be treated in the same way as equity shares. If the holding company acquires the
preference shares at par, the cost of investment of the holding company cancels out of the shares shown on the
Balance Sheet of the subsidiary. When the preference shares are acquired al a premium or a discount, the
balance is carried to goodwill or capital reserve in the Consolidated Balance Sheet. The portion of the preference
shares owned by the minority shareholders are added to minority interest.
6) Debentures
The debentures of the holding company will appear in the liability side of the Consolidated Balance Sheet just
like equity or preference share capital Debentures issued either by the holding company or the subsidiary and
held by other should be cancelled out when they are acquired at par. When part of the debentures are held by
the minority shareholders, it should appear in the liability side of the Consolidated Balance Sheet. The holding
company's "investment in debentures in the subsidiary" will cancel out against the nominal value of debentures
shown in the subsidiary company's Balance Sheet.
If the debentures are acquired at a premium or at a discount, the difference between cost and nominal value is
adjusted against goodwill or capital reserve in the Balance Sheet.
7) Inter-company Dividends
Holding company owns majority of the shares of its subsidiary. When a dividend is paid out of profit of the
subsidiary company, the holding company is likely to receive a majority portion of it as a shareholder. It should
be noted that such dividends may be paid out of pre-acquisition profit or post-acquisition profit. The accounting
treatment in the books of the holding company will vary accordingly.
Dividend Paid Out of Pre-acquisition Profit by the Subsidiary Company

Care is needed in the treatment of any dividend received by the holding company from its subsidiary which
come out of pre-acquisition profits or post acquisition profit. The dividend should be treated as a return of
capital to the holding company, since ft transfers to the holding company part of the net assets in the subsidiary
company that have been paid for. In this situation, the correct accounting treatment is to deduct such dividend
from the cost of investment in the subsidiary for calculating goodwill or capital reserve.
Point to Remember
1) If such dividend has wrongly been credited to the Profit and Loss Account of the holding company, then it
should be rectified. For rectification, the amount of dividend received by the holding company out of pre-
acquisition profit is to deducted from the Profit and Loss Account of the holding company as well as from the
cost of investment in the shares of subsidiary. For better understanding of the accounting treatment, observe
the following:
Wrong Entry Correct Entry
a) Bank Account Dr. a) Ban k Account Dr.
To Divided Received Account To Dividend Received Account
b) Divided Received Account Dr b) Dividend Received Account Dr.
To Profit and Loss Account To Investment in Shares of Subsidiary Co.
Account
2) No adjustment is required if such dividend has already been correctly treated in the books of the holding
company.
Dividend Paid Out of Post-acquisition Profit by the Subsidiary Company

Dividend received by the holding company from a subsidiary out of post-acquisition profit is treated as
Investment income and credited to the Profit and Loss Account of the holding company.
Mo no - 8007916622/33 Page | 31
It should be noted that any interim dividend paid by the subsidiary company is also treated in the books of the
holding company in the same manner as discussed above.
8) Proposed Dividend
When a dividend is proposed by the holding company, it will be deducted from the post-acquisition profit of the
holding company (provided no proposed dividend is appearing in the Balance Sheet of the holding company) and
will be shown in the Consolidated Balance Sheet as a current liability.
Proposed dividend of the subsidiary will be deducted from the post-acquisition profit of the subsidiary company
(provided no proposed dividend is appearing in the Balance Sheet of the subsidiary company).
Holding company's share of such proposed dividend is added with the Profit and Loss Account of the holding
company. Minority's share of proposed dividend cart be added with the minority interest or it can be shown as a
current liabilities in the Consolidated Balance Sheet (along with the proposed dividend of the holding company,
if any).
Q.1. under what circumstances, a company is required to present a ‘consolidated financial statement’?
CS (Inter) – Dec 2003 (4 Marks)
Ans.:
A company is required to present a ‘consolidated financial statement’ if it is holding company and other is
subsidiary of earlier company.
Balance-sheet of holding company to include certain particulars of subsidiaries:

(1) The balance-sheet of a holding company should include copies of for subsidiary:
➢ Balance-sheet of the subsidiary
➢ Profit and loss account
➢ Report of Board of directors
➢ Report of its auditors
➢ A statement of the holding company’s interest in the subsidiary
➢ Statement as per 212 (5) and
➢ Report as per 212 (6)
(2) If the financial year of holding close latter than subsidiary accounting year then gap should be for 6 months.
(3) Material changes after the close of financial year of subsidiary should also be disclosed by holding company.
(4) If, for any reason, the holding company is unable to obtain information on any of the matters required to be
specified, a report in writing to that effect shall be attached to the balance-sheet of the holdingcompany.
(5) The documents referred above shall be signed by the persons by whom the balance-sheet of the holding
company is required to be signed.
Que. No. 2] Write a short note on: Minority interest CS (Inter) – Dec 1999 (5 Marks)
Ans.:
Minority interest represents shares owned by third parties in a consolidated financial statement of holding
company. Minority interest ordinarily appears on the balance sheet between liabilities and shareholders’
equity. It is calculated as follows.
Minority interest Rs.

Share capital held by outsider xxxx
Share of profits
- Pre acquisition xxxx
- Post acquisition xxxx
xxxx
Mo no - 8007916622/33 Page | 32
Que. No. 3] Issue of bonus shares by the subsidiary company does not affect the cost of control. Comment.
CS (Inter) – Dec 2009 (6 Marks)
Ans.:
Issue of bonus shares by the subsidiary company does not affect the cost of control. This can be discussed under
following two headings:
(1) Issue of bonus out of pre-acquisition profit: This will not affect cost of control because share of holding
company in pre-acquisition profit is reduced and on the other hand paid up value of the shares held by them
is increased.
(2) Issue of bonus out of post-acquisition profit: This will not affect cost of control because share of holding
company in post-acquisition profit is reduced and on the other hand paid up value of the shares held by
them is increased.
Illustration
The following are the summarized Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.12.2001:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

5,000 Equity Shares of
5,00,000 - Land 1,00,000 40,000
Rs 100 each
10,000 Equity
- 1,00,000 Buildings 1,00,000 50,000
Shares of Rs 10 each
profit & Loss A/c 55,000 40,000 Stock 90,000 30,000
Sundry Creditors 20,000 35,000 Sundry Debtors 40,000 30,000
Investments: 8,000 Shares of S
1,25,000 -
Ltd.
Cash in hand 1,20,000 25,000
5,75,000 1,75,000 5,75,000 1,75,000
H Ltd- acquired shares in S Ltd. on 1.1.2001 when S Ltd. had Rs 25,000 in Profit and Loss Account. No dividend
has been declared by S Ltd. in 2001.
You are required to prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.12.2001.
(UNQHM)
Solution
1) Degree of Control = 8,000 Shares/10,000 Shares = 4/5th; Minority = l/5th
Generally, three control charts are prepared as under:

1. Control Chart A: From the Balance Sheet of subsidiary company for calculating capital
profit. Post-acquisition profit, post-acquisition reserve, minority interest, etc;
2. Control Chart B : For calculating goodwill or capital reserve; and Control Chart C : For addition of other
assets and liabilities
3. Control Chart A: From the Balance Sheet of S Ltd.
Total H Ltd's Minority

Proprietary Balances Notes
(Rs) Share (4/5) Interest (1/5)
a) Capital Profit
Pre-acquisition Profit 25,000 20,000 5,000
b) Post-acquisition Profit
As per Balance Sheet 40,000
Less: Pre-acquisition Profit 25,000
15,000 12,000 3,000
Mo no - 8007916622/33 Page | 33
c) Share Capital 1,00,000

Less: Minority Interest (1/5) 20,600 10,000
80,000
Adjusted in Control Chart B 80,000
Minority Interest 28,000
Control Chart B; Calculation of Goodwill/Capital Reserve

Cost of Investments 1,25,000
Less: Capital Profit (Chart A) 20,000
Less: Face Value of Shares held 80,000 1,00,000
Goodwill 25,000
Control Chart C : Other Assets and Liabilities
Particulars Land Buildings Stock S/Debtors Cash S/Creditors P & L A/c
H Ltd 1,00,000 1,00,000 90,000 40,000 1,20,000 20,000 55,000
S Ltd 40,000 50,000 30,000 30,000 25,000 35,000 12,000
1,40,000 1,50,000 1,20,000 70,000 1,45,000 55,000 67,000
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st December, 2001
Particulars Note No. Figures as at the end Figures as at the end
of current reporting of previous
period reporting period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders funds
(a) Share capital 5,00,000 -
(b) Reserves and surplus 67,000
(c) Money received against share warrants
(d) Non-Controlling Interest (Minority 28,000
Interest)
(2) Share application money pending - -
allotment
(3) Non-current liabilities - -
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 55,000
(c) Other current liabilities
(d) Short-term provisions
Total 6,50,000
II. ASSETS
(1) Non- Current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets 2,90,000
(iii) Capital work in progress 25,000
(iv) Intangible assets under development
(b) Non –current investments
Mo no - 8007916622/33 Page | 34
(c) Deferred tax assets (net)

(d) Long term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories 1,20,000
(e) Trade receivables 70,000
(d) Cash and cash equivalents 1,45,000
(e) Short-term loans and advances
(f) Other current assets
TOTAL 6,50,000
Illustration 2
From the two Balance Sheets of H Ltd, and S Ltd., prepare a Consolidated Balance Sheet.
Share Capital : Buildings at cost 72,000 25,000
Authorised and Issued : Plant and Machinery
Shares of Rs 10 each 1,20,000 30,000 Cost 40,000 15,000
General Reserve 25,000 6,000 Less: Depreciation 10,000 5,000
Profit & loss A/c 12,000 9,000 30,000 10,000
Shares in S Ltd. : 2,000 shares
Creditors 15,000 5,000 25,000 -
of Rs 10 each
Stock 18,000 3,000
Debtors 22,000 7,000
Bank 5,000 5,000
1,72,000 50,000 1,72,000 50,000
When H Ltd acquired 2,000 shares in S Ltd , the latter company had reserves amounting to Rs. 5,000 – none of
which has been distributed since then.
(UNQHM)
Consolidated Balance Sheet of H Ltd. And its subsidiary S Ltd as at…………
Particulars Note No. Figures as at the end Figures as at the
of current reporting end of previous
1 2 3 4
(1) Shareholder’s funds
(b) Reserves and surplus 43,667 -
(c) Money received against share
Warrants -
(d) Non-Controlling Interest (Minority 15,000 -
Interest)
(2) Share application money pending
Allotment -
(3) Non-current liabilities
(a) Long-term borrowings -
(b) Deffered tax liabilities (Net) -
(c) Other Long term liabilities -
(d) Long-term provisions _
Mo no - 8007916622/33 Page | 35
(a) Short-term borrowings -

(b) Trade payables 20,000 -
(c) Other current liabilities -
(d) Short-term provisions -
TOTAL 1,98,667 -
II. ASSETS
(1) Non-current assets

(a) Fixed assets
(i) Tangible assets 1,37,000 -
(ii) Intangible assets 1,667 -
(iii) Capital work-in progress - -
(iv) Intangible assets under - -
Development
(b) Non-current investments - -
(c) Deferred tax assets (net) - -
(d) Long term loans and advances - -
(e) Other non-current assets - -
(2) Current assets
(a) Current investments - -
(b) Inventories 21,000 -
(c) Trade receivables 29,000 -
(d) Cash and cash equivalents 10,000 -
(e) Short-term loans and advances - -
(f) Other current assets - -
Total 1,98,667
Working Notes:
1. Degree of Control = 2,000 Shares/3,000 Shares = 2/3rd; Minority = l/3rd
2. Control Chart A : From the Balance Sheet of S Ltd,
Total HLld/s Share Minority
(Rs) (2/3) Interest (1/3)
a) Capital Profit
Pre-acquisition General Reserve 5,000
5,000 3,333 1,667
Profit as per Balance Sheet 9,000
Less: Pre-acquisition Profit Nil
9,000 6,000 3,000
c) Post-acquisition General Reserve
General Reserve as per Balance Sheet 6,000
Less: Pre-acquisition General Reserve (a) 5000
1,000 667 333
d) Share Capital 30,000
Less : Minority Interest 10000 10,000
20,000
3) Control Chart B : Calculation of Goodwill / Capital Reserve

Cost of Investment 25,000
Mo no - 8007916622/33 Page | 36
Less: Capital Profit 3,333

Less: Face Value of Shares held 20,000 23,333
Goodwill 1,667
4) Control Chart C: Other Assets and Liabilities
Plant and
Particulars Building Stock Debtors Bank Creditors
Machinery
H Ltd. 72,000 40,000 18,000 22,000 5,000 15,000
S Ltd 25,000 15,001) 3,000 7,000 5,000 5,000
- 55,000 - - - -
Less:
- 15,000 - - - -
Depreciation
97,000 40,000 21,000 29,000 10,000 20,000
5) Profit and Loss Account Rs 6) General Reserve Rs

H Ltd. 12,000 HLtd. 25,000
Share from S Ltd. 6,000 Share from S Ltd. 667
18,000 25,667
Illustration
Following are the Balance Sheets of R Ltd, and S Ltd, as at 31.12.2001:
Liabilities R Ltd. S Ltd. Assets R Ltd. S Ltd.

Share Capital : Fixed Assets 5,00,000 2,40,000
Equity Shares of Rs 10 Investments in 15,000
4,00,000 1,50,000
each, fully paid up Equity Shares in
General Reserve 50,000 40,000 S Ltd. on 1.1.2001 2,00,000 -
Current Assets
Profit & Loss A/c 30,000 25,000
(including Rs 10,000
stock-in-trade purchased
12% Debentures 2,00,000 - 3,00,000 2,60,000
from R Ltd.)
Current Liabilities and
3,20,000 2,85,000
Provisions
10,00,000 5,00,000 10,00,000 5,00,000
Prepare a Consolidated Balance Sheet as at 31.12.2001, assuming that (a) S Ltd's General Reserve and Profit and
Loss Account stood at Rs 25,000 and Rs 10,000 respectively on 1.1.2001 and, (b) R Ltd. sells goods at a profit of 25% on
cost. (UNQHM)
st
Consolidated Balance Sheet of R Ltd. and its subsidiary S Ltd as at 31 December, 2001

1 2 3 4
(a) Share capital -
(b) Reserves and surplus 4,00,000
(c) Money received against share warrants 1,08,000
(d) Non-Controlling Interest (Minority
Interest)
Mo no - 8007916622/33 Page | 37

allotment
(3) Non-current liabilities 2,00,000 -
(4) Current liabilities - -
(b) Trade payables
(c) Other current liabilities 6,05,000 -
(d) Short-term provisions - -
TOTAL 13,13,000 -
II. ASSETS
(a) Fixed assets
Development
(e) Other non-current assets - —
(2) Current assets
(b) Inventories - -
(c) Trade receivables - -
(d) Cash and cash equivalents - -
(f) Other current assets 5,58,000
TOTAL 13,13,000 -
Working Notes:
1) Degree of Control= 15,000 Shares/15,000 Shares= 100%; Minority Interest= NU
2) Control Chart A: From the Balance Sheet of S Ltd.
R Ltd's Minority
Total
Proprietary Balances Notes Share Interest
(Rs)
(100%) (Nil)
a) Capital Profit
1. Pre-acquisition Profit 10,000
2. Pre-acquisition General Reserve 25,000
35,000 35,000 Nil
15.000 15,000 Nil
Reserve as per Balance Sheet 40,000
Pre-acquisition General Reserve 25,000
Mo no - 8007916622/33 Page | 38
15,000 15,000 Nil

d) Equity Share Capital 1,50,000
Adjusted in Control Chart B 1,50,000
Minority Interest Nil
3) Control Chart B ; Calculation of Goodwin/Capital Reserve
Cost of to vestments 2,00,000

Less: Face Value of Shares held 1,50,000 1,85,000
Goodwill 15,000
4) Control Chart C: Addition of other Assets & Liabilities
Fixed Current Current General Profit/Loss

Particulars
Assets Assets Liabilities Reserve Account
R Ltd. 5,00,000 3,00,000 3,20,000 50,000 30,000
S Ltd. 2,40,000 260000 2,85,000 15,000 15000
- 5,60,000 - - 45,000
Less: Unrealized Profit on Stock (Note 5) - 2,000 - - 2,000
7,40,000 5,58,000 6,05,000 65,000 43,000
5) Unrealized profit on stock = 25/125 x Rs 10,000 = Rs 2,000. R Ltd. Is holding 100% equity shares of S Ltd.
Therefore, the entire amount of Rs 2,000 is to be provided for unrealized profit
Illustration 4
The following are the Balance Sheets of X Ltd, and Y Ltd, as at 31.12.2001:
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

Equity Shares of Rs 10
4,00,000 1,00,000 Equipment 2,50,000 95,000
each
Profit & Loss A/c 50,000 20,000 Investment :
9,000 Equity Shares in Y
External Liabilities 7,50,000 4,80,000 1,40,000
Ltd on 1.1.2001
Current Assets 8,10,000 5,05,000
12,00,000 6,00,000 12,00,000 6,00,000
On January 1,2001, Profit and Loss Account of Y Ltd showed a credit balance of Rs. 8,000 and equipment of Y Ltd.
Revalued by X Ltd at 20% above its book value of Rs 1,00,000 (but no such adjustment was effected m the books of Y Ltd.)
Prepare the Consolidated Balance Sheet as at 31.12.2001 (UNQHM)

1 2 3 4
Interest)
allotment
Mo no - 8007916622/33 Page | 39
(3) Non-current liabilities -

(b) Deffered tax liabilities (Net)
(c) Other Long term liabilities 12,30,000
(4) Current liabilities - -
(b) Trade payables
(c) Other current liabilities - -
TOTAL 17,03,800 -
II. ASSETS
(a) Fixed assets
Development
(e) Other non-current assets - —
(2) Current assets
(b) Inventories - -
(c) Trade receivables - -
(d) Cash and cash equivalents - -
TOTAL 17,03,000 -
Working Notes:
Degree of control = 9,000 Shares/10,000 Shares = 9/10th; Minority = 1 /10th.
Control Chart A : From the Balance Sheet of Y Ltd.
Total X Ltd/s Share Minority Interest
(Rs) (9/10) (1/10)
a) Capital Profit
L Pre-acquisition Profit 8,000
2. Revaluation Profit (Rs 1,20,000 - Rs 1,00,000) 20,000
28,000 25,200 2,800
12,000
Less: Depreciation 5 1,000
11,000 9,900 1,100
c) Share Capital 1,00,000
Less: Minority Interest (1/10) 10,000
^,000
Mo no - 8007916622/33 Page | 40

3) Control Chart B: calculation of Goodwill/Capital Reserve

Less: Face Value of Shares held 90,000
Goodwill 24,800
4) Control Chart C; Other Assets and Liabilities
Particulars Equipment Current External Profit &

Assets Liabilities Loss A/c
X Ltd. 2,50,000 8,10,000 7,50,000 50,000
Y Ltd. 95,000 5,05,000 4,80,000 9,900
3,45,00a
Add: Revaluation Profit 20,000
3,65,000
Less: Depreciation (Note 5) 1,000
3,64,000 13,15,000 12,30,000 59,900
5) Depreciation
On 1.1.2001, the value of equipment of Y Ltd. was Rs 1,00,000. On 31.12.2001, it has been shown in the
Balance Sheet at Rs 95,000. It means that in 2001 Rs 5,000 depreciation has been charged (assuming that there
was no sale of equipment).
Therefore, the rate of depreciation = Rs 5,000 /Rs^,00,000 x 100 = 5%. In 2001, depreciation should have been
charged on Rs 1,20,000 (on revalued figure). Therefore, the depreciation should have been Rs 6,000 (5% of Rs
1,20,000) but only Rs 5,000 depreciation has been charged. Therefore, extra depreciation to be charged = Rs
6,000 - Rs 5,000 = Rs 1,000.
Illustration 5
When O Ltd. purchased 24,000 equity shares in P Ltd. on 1.1.2001, P Ltd. had Rs 22,500 in General Reserve
and Rs 37,500 (Dr.) in Profit and Loss Account. From their Balance Sheets on 31.12.2001 as below, prepare a
Consolidated Balance Sheet:
Liabilities O Ltd. P Ltd. Assets O Ltd. P Ltd.

Equity Share Capital 7,50,000 3,00,000 Fixed Assets 6,75,000 1,50,000
General Reserve 90,000 7,500 Current Assets 1,20,000 1,21,500
Profit & Loss Account 60,000 - Investments in P Ltd. 2,10,000 -
Sundry Creditors 1,05,000 31,500 Profit & Loss Account - 67,500
10,05,000 3,39,000 10,05,000 3,39,000
Fixed assets standing in the books of P Ltd. Rs 90,000 was considered worth Rs 75,000 on the date of purchase
of control. For the purpose of determining the value of shares 20% depreciation has been
written-off since acquisition. Stock of O Ltd. includes Rs 30,000 on which P Ltd. made Rs 7,500 profit:
(UNQHM)
Mo no - 8007916622/33 Page | 41
Consolidated Balance Sheet of O Ltd, and its subsidiary P Ltd as at 31st December, 2001
1 2 3 4
I EQUITY AND LIABILITIES
(1) Shareholders^ funds
(a) Share capital 7,50,000
(b) Reserves and surplus 1 ,14,900
Warrants -
interest)
Allotment
(b) Trade payables 1,36,500
TOTAL 10,47,000
II ASSETS

(a) Fixed assets
(i) Tangible assets 8,13,000
(ii) Intangible assets
(iii) Capital work-in progress
(iv) Intangible assets under
Development
(b) Non-current investments
Current assets
(2) (a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
2,34,000
10,47,000
Working Notes
1. Degree of control = 24,000/30,000 Shares = 4/5th; Minority - 1/5*
2. Control Chart A : From the Balance Sheet of P Ltd
Mo no - 8007916622/33 Page | 42
Particulars Note No. Total O Minority

Rs. Ltd’s Interest
Share (1/5)
(4/5)
1 2 3 4 5
a) Capital Profit
1. Pre-acquisition Profit (37,500)
3. Revaluation Loss (Rs. 90,000 –Rs. 75,000) (15,000)
(30,000) (24,000) (6,000)
b) Post acquisition Profit
Profit as per Balance Sheet (67,500)
Less : pre- acquisition Profit (a) (37,500)
(30,000)
Add: Depreciation written-back 9 3,000
(27,000) (21,000) (5,400)
c) Post – acquisition General Reserve
Less : Pre- acquisition General Reserve 22,500
(15,000) (12,000) (3,000)
d) Share capital 3,00,000
2,40,000
3) Control Chart B: Calculation of Goodwill /Capital Reserve

Cost of Investment 2,10,000
Less : Capital Profit (24,000)
Less : Face Value of Shares held 2,40,000 2,16,000
Capital Reserve (being negative) 6,000
4) Fixed Assets Rs. 6)General Reserve Rs.

O Ltd 6,75,000 O Ltd 90,000
P Ltd 1,50,000 Share from P Ltd (12,000)
8,25,000 78,000
Less : Revaluation Loss 15,000 7) Profit and loss account
(consolidated)
8,10,000 O Ltd 60,000
Add: Depreciation written back 3,000 Share from P Ltd (21,600)
8,13,000 38,000
5) Current Assets Rs. Less : Unrealized Profit on 7,500
Stock
O Ltd 1,20,000 30,900
O Ltd 1,21,500 (8) Sundry Creditors Rs.
2,41,500 O Ltd 1,05,000
Less : Unrealized profit on 7,500 P Ltd 31,500
Stock
2,34,000 1,36,500
(9) Depreciation to be added back:

Depreciation charged on Rs 90,000 @ 20% Rs. 18,000
Mo no - 8007916622/33 Page | 43
Depreciation to be charged on Rs 75,000 @ 20% Rs. 15,000

Depreciation to be added back Rs. 3,000
Illustration 6
A Ltd. acquired 2,000 Equity Shares of Rs 100 each in B Ltd. on 31.12.2000 The summarized Balance Sheets of
the two companies as on 31.12.2001 were as follows:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Equity Share Capital : Fixed Assets 7,00,000 2,50,000
Shares of Rs 100 each 8,00,000 2,50,000 Current Assets 4,00,000 2,00,000
Reserves 3,00,000 50,000 2,000 Shares in B Ltd. at 3,00,000
cost
Profit & Loss A/c 1,00,000 1,00,000
Creditors 2,00,000 50,000
14,00,000 4,50,000 14,00,000 4,50,000
B Ltd had a credit balance of Rs. 50,000 in the Reserve and Rs. 20,000 in the Profit and Loss Account when A Ltd
acquired shares in B Ltd. B Ltd issued bonus shares in the ratio of one for every five shares held out of the profits
earned during 2001. This is not shown in the above Balance Sheet of B Ltd.
Prepare a Consolidated Balance Sheet of A Ltd and its subsidiary, as on 31,12,2001, giving all necessary
workings. (UNQHM)
Solution
Consolidated Balance Sheet of A Ltd. and its subsidiary B Ltd as at 31st December, 2001

1 2 3 4
(1) Shareholders 's funds
(a) Share capital 8,00,000 _
(b) Reserves and surplus 4,24,000 -
Warrants - -
(d) Non-Controlling Interest (Minority 80,000 -
Interest)
Allotment - -
(a) Long-term borrowings - -
(b) Deferred tax liabilities (Net) - -
(c) Other Long term liabilities - -
(d) Long-term provisions -' -
(a) Short-term borrowings - -
(b) Trade payables 2,50,000 -
(c) Other current liabilities - -
TOTAL 15,54,000 -
II
ASSETS -
Mo no - 8007916622/33 Page | 44

(a) Fixed assets
(ii) Intangible assets 4,000 :
Development
(e) Other non-current assets -
(2) Current assets
(b) Inventories
Total 15,54,000
Working Notes:
Degree of control = 2,000 Shares/2,500 Shares = 4/5th; Minority = l/5th
Control Chart A: From the Balance Sheet of B Ltd.
A ltd’s Minority
Proprietary Balances Notes Total (Rs) Share Interest
(4/5) (1/5)
a) Capital Profit
2. Pre-acquisition Reserve 50,000
70,000 56,000 14,000
Profit as per Balance Sheet 1,00,000
Less: Pre-acquisition Profit (a) 20,000
80,000
Less: Bonus Share 50,000
30,000 24,000 6,000
c) Post-acquisition Reserve 50,000
Reserve as per Balance Sheet
Less: Pre-acquisition Reserve 50,000
NIL NIL NIL
d) Share Capital 2,50,000
Add: Bonus Shares 50,000
3^000
2,40,000
3) Control Chart B : Calculation of Goodwill / Capital Reserve

Mo no - 8007916622/33 Page | 45

Goodwill 4,000
Particulars Fixed Assets C/Assets Creditors Reserve P&LA/c

A Ltd. 7,00,000 4,00,000 2,00,000 3,00,000 1,00,000
B Ltd. 2,50,000 2,00,000 50,000 - 24,000
9,50,000 6,00,000 2,50,000 3,00,000 1,24,000
Illustration 7
From the Balance Sheets and additional information given below, Prepare a Consolidated Balance Sheet.
Liabilities H.LTD S.LTD Assets H.LTD S.LTD

Share Capital (Rs 100 each) 5,00,000 2,00,000 Fixed Assets 3,50,000 3,20,000
General Reserve 60,000 40,000 Stock 35,000 15,000
Profit & Loss A/c 30,000 10,000 Debtors 60,000 30,000
12% Debentures (Rs 100 - 1,00,000 Bills Receivable 10,000 8,000
each)
Creditors 40,000 25,000 Shares in S.LTD (1,500 1,80,000 -
Sh. @ Rs 120 each)
Bills Payable 12,000 8,000 400, 12% Debentures 36,000 -
@ Rs 90 each
Proposed Dividend 40,000 20,000 Cash 11,000 30,000
6,82,000 4.03,000 6,82,000 4.03,000
Additional Information :
1. When H.. LTD. acquired the shares of S. LTD the General Reserve and Profits and Loss A/c of S. LTD showed
a balance of Rs 30,000 and Rs 4,000 (Dr.), respectively.
2. Creditoras of S.LTD include Rs 10,000 for goods supplied by H.LTD at a profit of 20% on sales. Half of the
goods wallere still in stock on 31.12.2001.
3. The bill accepted by H.LTD were all in favour of S.LTD.
4. Fixed Assets were over-valued by Rs 20,000. (UNQHM)
Illustration 8
Bengal Ltd. acquired 12,000 shares of Barakar Ltd. of the full value of Rs 10 each at a price of Rs 1,70,000 on
1.4.2001. The Balance Sheets of the two companies as at 31.3.2002 were as follows.
Liabilities Bengal Ltd. Barakar Assets Bengal Ltd. Barakar Ltd.

Ltd.
Share Capital (Shares of
10,00,000 2,00,000 Goodwill 3,00,000 70,000
Rs 10 each)
General Reserve(on 4,20,000 1,00,000 Land and Building 4,00,000 1,00,000
1.4.2001)
Sundry Creditors 2,40,000 92,000 Plant and Machinery 5,00,000 1,00,000
Bills Payable 80,000 60,000 Stock 2,00,000 40,500
Profit & Loss A/c (on 90,000 40,000 Debtors 3,00,000 1,34,500
Profit for the year ended 1,70,000 45,000 Investment 2,00,000 -
Bills Receivable 20,000 30,000
Cash and Bank 80,000 62,000
20,00,000 5,37,000 20,00,000 5,37,000
Mo no - 8007916622/33 Page | 46
1. Stock in the hands of Barakar LTD. includes goods purchased from Bengal LTD. at Rs 20,000 which includes
profit charged by the latter company at 25% on cost.
2. Both the companies have proposed 10% dividend for 2001-02.
3. Out of the Debtors and Bills Receivable of Bengal LTD. Rs 50,000 and 16,000 respectively represented due
from Barakar LTD.
Prepare a Consolidated Balance Sheet of Bengal LTD. and its subsidiary Barakar LTD.as at 31.3.2002.
(UNQHM)
Illustration 9
H Ltd. purchased control of S Ltd. on 1.1.2001. The following are the Balance Sheets of H Ltd. and S Ltd.
as at 31.12.2001:

Share Capital (Shares of
12,00,000 6,00,000 Land and Building! 2,20,000 2,80,000
Rs 10 each)
General Reserve 1,20,000 1,00,000 Plant and Machinery 4,00,000 3,60,000
45,000 Shares in S Ltd.,
Profit & Loss A/c 2,00,000 2,00,000 6,75,000 -
at cost
Creditors 2,00,000 1,60,000 Stock-in-trade 90,000 40,000
Debtors 1,00,000 1,80,000
Cash at Bank 2,35,000 2,00,000
17,20,000 10,60,000 17,20,000 10,60,000
On 1.1.2001 S Ltd. had Rs 1,00,000 in General Reserve and Rs 1,20,000 (Cr.) in Profit and Loss Account to July
2001, 10% dividend was paid by S Ltd. for 2000. Dividend received from S Ltd. was credited to Profit and Loss
Account by H Ltd. Debtors of S Ltd. includes Rs 25,000 due from H Ltd.
Prepare Consolidated Balance Sheet as on 31st December, 2001. (UNQHM)
Solution
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st December, 2001
Particulars Note No. Figures as at the Figures as at the

end of current end of previous
reporting period reporting period
1 2 3 4
(d) Non-Controlling Interest (Minority 2,25,000
Interest)
allotment
Mo no - 8007916622/33 Page | 47

(a) Short-term borrowings 3,35,000
(b) Trade payables
Total 21,40,000
II ASSETS
(a) Fixed assets 12,60,000
(i) Tangible assets 60,000
(iv) Intangible assets under development
Other non-current asset
(2) Current assets
(b) Inventories
Total 2,140,000
Working Notes:
Degree of Control = 45,000 Shares 760,000 Shares = 3/4th; Minority = l/4th
Control Chart A ; From the Balance Sheet of S Ltd.
Minority
H Ltd's Share
Proprietary Balances Notes Total («s) Interest
(3/4))
(1/4)
a) Capital Profit
Pre-acquisition Profit 1,20,000
Less: 10% Dividend for 2000 60,000 60,000
. Pro-acquisition General Reserve 1,00,000
1,60,000 1,20,000 40,000
Less: Pie-acquisition Profit 60,000
1,40,000 1,05,000 35,000
General Reserve as per Balance Sheet 1,00,000
Less: Pre-acquisition General Reserve 1,00,000
Nil Nil Nil
Less : Minority Interest (1/4) 1,50,000 1,50,000
4,50,000
Minority Interest 2,25,000
Mo no - 8007916622/33 Page | 48
3) Control Chart B ; Calculation of Goodwill/Capital Reserve

Less: Capital Profit (Chart A) 1,20,000
Less: Dividend of 2000 (Note 6) 45,000
Goodwill 60,000
Particulars L&B P&M Stock Debtors Bank Creditors

H Ltd. 2,20,000 4,00,000 90,000 1,00,000 2,35,000 2,00,000
S Ltd. 2,80,000 3,60,000 40,000 1,80,000 2,00,000 1,60,000
2,80,000 3,60,000
Less: Mutual - - - 25,000 - 25,000
Indebtedness
5,00,000 7,60,000 1,30,000 2,55,000 4,35,000 3,35,000
5) Profit and Loss Account Rs 6) In July 2001 , H Ltd. received Rs 45,000
(Consolidated) (3/4 of Rs 60,000) as dividend from S Ltd This
dividend was paid from pie-acquisition profit
of Rs 1,20,000. This dividend should have
been credited to Investment in the shares of
S Ltd. Account but wrongly il was credited to
Profit and Loss Account of H Ltd. Therefore,
for rectification, Rs 45,000 is to be
deducted from the cost of investments
as well as from Profit and Loss Account of
HLtd.
H Ltd. 2,00,000
Less: Dividend of 2,000 wrongly 45,000
credited to P&L Account (Note 6)
1,55,000
Add: Share of Post-acquisition profit 1,05,000
from S Ltd.
2,60,000
Illustration 10
Prepare a Consolidated Balance Sheet from the Balance Sheets of H Ltd. and S Ltd.:

Share Capital: Sundry Assets 8,000 1,200
Equity Shares of Rs 10 each 10,000 2,000 Stock 6,100 2,400
Reserve Fund 1,000 600 Bills Receivable 100 -
Creditors 2,000 1,200 150 Shares in S Ltd. (at cost) 1,500 -
Bills Payable - 300
17,000 5,300 17,000 5300
Following other additional information are also given:

(i) Company S Ltd. has earned all the profits only since the above 150 shares were acquired by H Ltd.
(ii) On the date of acquisition of these 150 shares by H Ltd., S Ltd. got reserves of Rs 600.
Mo no - 8007916622/33 Page | 49
(iii) The bills payable of S Ltd. were in favour of H Ltd. which had discounted Rs 200 ofthem.
(iv) Sundry assets of S Ltd. were under-valued by Rs 200.
(v) Stock of H Ltd. include goods of Rs 500 purchased from S Ltd. at a profit of 25% of cost. (UNQHM)
Solution:
Consolidated Balance Sheet of H Ltd and its subsidiary S Ltd as at 31 st December, 2001
1 2 3 4
(a) Share capital 10,000
warrants
Interest)
allotment
TOTAL 20,800
II ASSETS
(a) Fixed assets
(i) Tangible assets 9,400
development
(b) Non-content investments
(2) Current assets
(b) Inventories 8,400
(c) Trade receivables 3,000
(f) Other current assets (Stock in transit
Rs. 600 4 Cash in transit Ks. 100)
TOTAL 20,800
Mo no - 8007916622/33 Page | 50
Working Notes :
1) Degree of Control = 150 Shares / 200 Shares = ¾ th; Minority = 1/4th
2) Control Chart A ; From the Balance Sheet of S Ltd.
Proprietary Balances Notes Total HLtd's Share Minority Interest (1/4)

(Rs) (3/4)
a) Capital Profit
1 . Pre-acquisition Profit Nil
2. Pre-acquisition Reserve Fund 600
3. Revaluation Profit 200
800 600 200
Less: Pre-acquisition Profit Nil
1,200 900 300
c) Post-acquisition Reserve Fund
Reserve Fund as per Balance Sheet 600
Less: Pre-acquisition Reserve Fund 600
Nil _ -
d) Share capital 2,000
Less: Minority Interest (1/4) 500 500
1,500
2) Control Chart B : Calculation of Goodwill/Capital Reserve

Cost of Investment 1,500
Less: Capital Profit 600
Less: Face Value Shares held 1,500 2,100
Capital Reserve 600

Particulars Assets Stock Debtors B/R BiH§ Creditors P&L Reserve
Payable A/c
H Ltd. 8,000 6,100 13QO 100 - 2,000 4,000 1,000
S Ltd. 1,200 2,400 1,700 300 1,200 900 -
9,200 8,500 3,00 - - - 4,900 -
Add: 200
Revaluation - - - - -
Profit
Less: Unrealized
- 100 - - - - 100 -
Profit (Note 5)
Less: Mutual
Acceptances - - - 100 100 - - -
9,400 8,400 3,000 Nil 200 3,200 4,800 1,000
4) Unrealized profit on stock = 25/125xRs 500= Rs 100. As per AS-21, entire unrealized profit on stock is to be
eliminated.
Mo no - 8007916622/33 Page | 51
Illustration 11
The summarized Balance Sheets of P Ltd: and S Ltd, on 31st December, 2001 were as follows:
Liabilities F Ltd. S Ltd. Assets P Ltd. S Ltd.

3,000 Shares of Rs 100
3,00,000 - Investments in S Ltd., at cost 1,70,000 -
each
10,000 Shares of Rs 10
- 1,00,000 Stock 40,000 20,000
each
Capital Reserve - 55,000 Loan to P. Ltd. - 2,000
Bills Receivable
General Reserve 30,000 5,000 1,200 -
(including Rs 200 from S Ltd.)
Profit & Loss A/c 38,200 18,000 Debtors and Cash Balance 27,000 20,000
Loan from S Ltd. 2,100 -
Bills Payable
- 1,700
(including Rs 500 to P Ltd.)
Creditors 17,900 7,000
3,88,200 1,86,700 3,88,200 1,86,700
There is a contingent liability of Rs 1,000 for bills discounted given by way of a note to Balance Sheet of P Ltd. P
Ltd. acquired 8,000 shares of Rs 10 each in S Ltd. on 31st December, 2001. You are given the following additional
information:
(i) S Ltd. made a bonus issue on 31st December, 2001 of one share for every two shares held, reducing capital
reserve by an equivalent amount, but the transaction is not shown in the Balance Sheet.
(ii).Interest receivable amounting to Rs 100 in respect of loan due by P Ltd. has not been credited in the
accounts of S Ltd.
(iii). The directors decided that the fixed assets of S Ltd. were over-valued and should be written-down by Rs
5,000.
Prepare a Consolidated Balance Sheet of the two companies on 31st December, 2001, giving all workings.
(UNQHM)
Solution:
Consolidated Balance Sheet of P Ltd and its subsidiary S Ltd as at 31st December, 2001

1 2 3 4
(a) Share capital 30,000
Warrants
Interest)
Allotment
Mo no - 8007916622/33 Page | 52

TOTAL 4,29,220
II ASSETS
(a) Fixed assets
(ii) Intangible assets 31,520
development
(2) Current assets
(b) Inventories
(d) Cash and cash equivalents 48,000
(f) Other current assets (Stock in transit
Rs. 600 4 Cash in transit Ks. 100)
TOTAL 4,29,220
Note: When the date of Balance Sheet and the date of acquisition are the same, all reserves and surplus
appearing in the Balance Sheet will be treated as capital profit (i.e., pre- acquisition profit).
Working Notes:
1. Degree of Control = 8,000 Shares/10,000 Shares= 475th; Minority = 175th
2. Control Chart A; From the Balance Sheet of S Ltd.
Proprietary Balances Notes Total P Ltd's Share Minority Interest

(Rs) (4/5) (1/5)
a) Capital Profit
1. Pre-acquisition Profit 5 18,100
3. Capita] Reserve 55,000
Less: Bonus Shares 50,000
4. Revaluation Loss (5,000)
23,100 18,480 4,620
profit as per Balance Sheet 18,000
Add: Accrued Interest 100
Mo no - 8007916622/33 Page | 53
18,100
Less : Pie-acquisition Profit 18,100
Nil Nil Nil
Less: Pre-acquisition General Reserve 5,000
Nil Nil Nil
Add: Bonus Shares 50,000
1,50,000
1,20,000

Less: Face Value Shares held 1,20,000 1,38,480
Goodwill 31,250
4) Control Chart C; other Assets and Liabilities
Particulars Fixed Stock Bills Receivable Bills Debtors and cash

Assets Payable
PLtd. 1,50,000 40,000 1,200 - 27,000
S Ltd.- 1,44,700 20,000 - 1,700 20,000
2,94,700 - - - -
Less: Revaluation Loss 5,000 - - - -
Less: Mutual Acceptance - - 200 200 -
2,89,700 60,000 1,000 1,500 47,000
5) No entry has been passed in the books of S Ltd. in respect of interest accrued Rs 100. For recording
it, the entry will be :
Loan to P Ltd. Account Dr. Rs 100
To Profit and Loss Account Rs 100
Therefore, the final balance of Loan to P Ltd. will be Rs 2,100 and that of Profit and Loss Account will be Rs
18,100.
6) Loan from S Ltd. Rs 2,100 and Loan to P Ltd. Rs 2,100 will be eliminated.
Illustration 12
The following are the Balance Sheet of Hero Ltd and Sarin Ltd as at 31st December, 1995 :
Hero Sarin Hero Sarin

Liabilities Assets
Ltd Rs Ltd Rs Ltd Rs Ltd Rs
Equity Share
Capital of Rs 10 6,00,000 4,00,000 Fixed Assets 4,80,000 6,00,000
Each
General Reserve 2,00,000 3,00,000 Stock-in-trade l,00,0ou 2,50,000
Mo no - 8007916622/33 Page | 54
Profit and Loss

2,50,000 2,00,000 Debtors 2,50,000 4,50,000
Account
10% Debentures - 1,50,000 Cash 25,000 50,000
Investment in Sarin
Creditors 3,00,000 2,50,000
Ltd:
10% Debentures
Current Account
- 50,000 (Nominal Rs 85,000 -
with Hero Ltd.
80,000)
Shares in Sarin Ltd
3,50,000 -
(24,000 shares)
Current Account
80,000 -
with Sarin Ltd.
13,50,000 13,50,000 13,50,000 13,50,000
The following further information is furnished:

1. Hero Lid acquired shares in Sarin Ltd on 1st January, 1995, when the Reserve and Profit and Loss Account
was Rs 4,00,000 and Rs 2,00,000.
2. On 1st October, 1995, Sarin Ltd issued one share for every four shares held as bonus shares at a face value
of Rs 10 each. No entry is made in the books of Hero Ltd for the receipt of these bonus shares.
3. On 31.3.1995, Sarin Ltd declared a dividend out of its pre-acquisition profits of 25% on its
then capital. Hero Lid credited the dividend received to its Profit and Loss Account.
4. A remittance of Rs 10,000 by Sarin Lid to .Hero Ltd has not yet been adjusted in the books of Hero
Ltd.
5. Creditors of Sarin Lid include Rs 1,00,000 goods supplied by Hero Ltd on which Hero Ltd made
a profit of Rs 10,000. Half of the goods still in stock of Sarin Ltd on 31.12.1995.
Prepare Consolidated Balance Sheet on 31.12.1995. (UNQHM)
Solution:
Consolidated Balance Sheet of Hero Ltd as at 31st December, 1995

1 2 .3 4
Warrants -
Interest)
Allotment -
(a) Long-term borrowings 70,000
(b) Deferred tax liabilities (Net) -
(c) Other Long term liabilities -
(d) Long-term provisions -
(a) Short-term borrowings ,
(b) Trade payable^ 4,50,000
Mo no - 8007916622/33 Page | 55

TOTAL 21,10,000
II ASSETS
(a) Fixed assets
(i) Tangible assets
Development
(2) Current assets

(c) Trade receivables 6,00,000
TOTAL 21,10,000
Working Notes:
1. Degree of Control = 24,000 Shares/6,000 Shares (Bonus) / 40,000 Shares = 3/4th, Minority = 1/4th
Total Hero Ltd's Minority

(Rs) Share (3/4) Interest (1/4)
a) Capital profit
1. Pre-acquisition Profit 2,00,000
Less: Dividend paid (25% of Rs 3,20,000) 80,000 1,20,000
2. Pre-acquisition General Reserve 4,00,000
Less: Bonus Shares (8,000 x Rs 10) 80,000 3,20,000
4,40,000 3,30,000 1,10,000
Less : Pre-acquisition profit 1,20,000
80,000 60,000 20,000
c) Post-acquisition General Reserve 3,00,000
General Reserve as per Balance Sheet
Less: Pre-acquisition General Reserve 3,20,000
(20,000) (15,000) (5,000)
Less: Minority Interest 1,00,000 1,00,000
3,00,000
Mo no - 8007916622/33 Page | 56
3) Control Chart B: Calculation of Goodwill/ Capital Reserve

Cost of Investments :
In Equity Shares 3,50,000
In Debentures 85,000 4,35,000
Less: capital Profit (Chart A) 3,30,000
1,05,000
Less: Dividend from Pre-acquisition Profit 60,000

45,000
Less: Face Value of Shares held 3,00,000
Less: Face Value of Debentures held 80,000 3,80,000
Capital Reserve (being negative) (3,35,000)

Particulars Fixed Assets Stock Debtors Cash Creditors
Hero Ltd. 4,80,000 1,00,000 2,50,000 25,000 3,00,000
Satin Ltd. 6,00,000 2,50,000 4,50,000 50,000 2,50,000
10,80,000 3,50,000 7,00,000 75,000 5,50,000
Less: Mutual Indebtedness - 1,00,000 1,00,000
Less : Unrealized Profit (Note 7) 5,000 - -
3,45,000 6,00,000 4,50,000
5) Profit and Loss Rs 6) General Reserve Rs
Account (Consolidated)
Hero Ltd. 2,50,000 Hero Ltd. 2,00,000
Share from Sarin Ltd (Chart 60,000 Less: Share from Sarin Ltd (Chart A) (15,000)
A)
I 3,10,000 1.85.000
Less: Pre-acquisition Profit Half of the goods still in stock. Therefore unrealized profit on stock
wrongly credited 60,000 will be = 1/2 of Rs 10,000 = Rs 5,000. As per AS-21 entire unrealized
to P/L A/c profit on stock is to be eliminated.
2,50,000
Less: Unrealized Profit on

5,000
Stock (Note 7)
2,45,000
Illustration 13
The Balance Sheets of H Ltd. and its subsidiary S Ltd. as at 31st March, 2002 were as under:
Liabilities H Ltd.Rs S Ltd.Rs Assets HLtd.Rs IS Ltd.Rs
Share Capital : Land and Buildings 6,00,000
Equity Shares of Rs 10 20,00,000 5,00,000 Plant and Machinery 20,00,000
each, fully paid
General Reserve 3,00,000 1,00,000 Furniture and 90,000 1,00,000
Fixtures
Profit & Loss A/c : 30,000 shares in S Ltd., 6,50,000
at cost
Balance on 1.4.2001 4,00,000 2,00,000 Stock 4,00,000 7,50,000
Profit for the year ended 5,00,000 2,50,000 Debtors 1,00,000 2,80,000
Mo no - 8007916622/33 Page | 57
31.3.2002
Bills Payable 1,50,000 Cash in Hand 10,000 15,000
Creditors 3,00,000 3,00,000 Cash at Dena Bank 1 ,05,000
Canara Bank - Overdraft 2,00,000 Bills Receivable - 1,00,000
38,50,000 13,50,000 38,50,000 13,50,000
All the 30,000 shares in S Ltd. were acquired held by S Ltd. are all accepted by H Ltd. Included in Debtors of S
Ltd. is a sum of Rs 60,000 owing by H Ltd. in respect of goods supplied by SLtd.
You are required to prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. As at 31 st March,
2002. Give all your working notes clearly. (UNQHM)
Solution:
Consolidated Balance Sheet of Hero Ltd and its subsidiary S Ltd as at 31 st March 2001

1 2 .3 4
warrants
Interest)
allotment
(a) Short-term borrowings 2,00,000
(b) Trade payable 5,90,000
TOTAL 44,85,000
II ASSETS
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets 27,90,000
(iii) Capital work-in progress 95,000
development
(b) Non-cunent investments
(2) Current assets
Mo no - 8007916622/33 Page | 58

TOTAL 44,85,000
Working Notes:
1. Degree of Control = 30,000 Shares/50,000 Shares = 3/5th, Minority = 2/5th
Total H Ltd's Share Minority Interest

(Rs) (3/5) (2/5)
a) capital Profit
1 . Pre-acquisition Profit 7 3,25,000
2. Pre-acquisition General Reserve 1,00,000
4,25,000 2,55,000 1,70,000
1/2 of the profit earned during 1,25,000 75,000 50,000
2001-02
c) Post-acquisition General
Reserve
Less: Pre-acquisition General 1,00,000 - -
Reserve
Nil Nil Nil
Less : Minority Interest (2/5) 2,00,000 2,00,000
3,00,000

Less: Capital Profit 2,55,000
Goodwill 95,000

Furnitur Bills
Land and Plant and Bills
Particulars e and Stock Debtors Receivable Creditors
Building Machinery Payable
Fixtures s
1,50,00
H. Ltd. 6,00,000 20,00,000 90,000 4,00,000 1,00,00 0 - 3,00,00 0
0
S. Ltd. - - 1,00,00 0 7,50,000 2,80,00 0 1,00,000 - 3,00,00 0
. . - . 3,80,00 1,00,000 1,50,00 6,00,00
Less:
Mutual
Mo no - 8007916622/33 Page | 59
Indebted - - - 60,000 - - 60,000

Ness
Less :
Mutual
- - - - - 1,00,000 1,00,00 -
Accept
Nee
6,00,000 20,00,000 1,90,000 11,50,00 0 3,20,00 0 Nil 50,000 5,40,00 0
5) Profit and Loss Account Rs 6) General Reserve Rs

(Consolidated)
H Ltd (Rs. 4,00,000 + Rs. 5,00,000) 9,00,000 H Ltd 3,00,000
Share of Post – acquisition Profit from S 75,000 Share from S Ltd Nil
Ltd. (Chart A)
9,75,000 3,00,000
7) Pre-acquisition profit = Rs 2,00,000 (1.4.2001) + 1/2 or Rs 2,50,000 (profit earned during the year 2001-
ti2) = Rs 2,00,000 h- Rs 1,25,000 = Rs 3,25,000.
8) Bank Account may be held by the holding company and its subsidiary at different banks. When
some balances are favorable and other have overdrawn balances, they should appear in the
Consolidated Balance Sheet as assets and liabilities respectively. It would be incorrect to adjust
the overdraft balances against credit balances (Rule 8).
Illustration 14
The following are the Balance Sheets of H Ltd, and its subsidiary S Ltd, as at 31st March, 2002 :
HLtd. SLtd. HLtd. SLtd.

Liabilities Assets
Rs Rs Rs Rs
Fully paid Equity Shares of Rs
6,00,000 2,00,000 Machinery 3,90,000 1,35,000
10 each
General Reserve 3,40,000 80,000 Furniture 80,000 40,000
80% Shares in S
Profit & Loss A/c 1,00,000 60,000 3,40,000 -
Ltd., at cost
Creditors 70,000 35,000 Stock 1,80,000 1,20,000
Debtors 50,000 30,000
Cash at Bank 70,000 50,000
11,10,000 3,75,000 11,10,000 3,75,000
The following additional information is provided to you :

1. Profit and Loss Account of S Ltd. stood at Rs 30,000 on 1.4.2001, whereas General Reserve has remained
unchanged since that date.
2. H Ltd. acquired 80% shares in S Ltd. on 1.10.2001 for Rs 3,40,000 as mentioned above.
3. Included in Debtors of S Ltd. is a sum of Rs 10,000 due from H Ltd. for goods sold at a profit of 25% on cost
price. Till 31.3.2002, only one-half of the goods had been sold while the remaining goods were lying in the
godown of H Ltd. as on that date.
You are required to prepare Consolidated Balance Sheet as at 31st March, 2002. Show all calculations clearly.
(UNQHM)
Mo no - 8007916622/33 Page | 60
Solution
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March, 2002
1 2 .3 4
warrants
Interest)
allotment
(a) Short-term borrowings 95,000
(b) Trade payable
TOTAL 12,14,000
II ASSETS
(a) Fixed assets
development
(b) Non-cunent investments
(2) Current assets
TOTAL 12,14,000
Working Notes:
1. Degree of Control = 80 or 4/5th, Minority = 1/5th
Mo no - 8007916622/33 Page | 61
HLtd's Minority Interest

Proprietary Balances Notes Total (Rs)
Share (4/5) (1/5)
a) Capital Profit
1,25,000 1,00,000 25,000
15,000 12,000 3,000
Less: Pre-acquisition General Reserve 80,000 - -
Nil Nil Nil
Less: Minority Interest (20%) 40,000 40,000
1,60,000

Goodwill 80,000
Machinery Furniture Stock Debtors Bank Creditors

H. Ltd. 3,90,000 80,000 1,80,000 1 50,000 70,000 70,000
S. Ltd. 1,35,000 40,000 1,20,000 30,000 ^0,000 35,000
- - 3,00,000 80,000 - 1,05,000
Less: Mutual
- - - 10,000 - 10,000
Indebtedness
Less:
Unrealised - - 1,000 - - -
Profit (Note 8)
5,25,000 1,20,000 2,99,000 70,000 1,20,000 95,000
5) Dr. Profit and Loss Account of S Ltd, for the year ended Balance 2002 Cr.
To Balance c/d 60,000 By Balance from last year 30,000

By Profit during the year (Balancing figure) 30,000
60,000 60,000
Therefore, Profit up to 30.9.2001, if accrued evenly amounted to Rs 15,000 (1/2 of Rs 30,000) and Profit as on
30.9.2001 will be :
Profit on 1.4.2001 Rs 30,000
(+)Proportionate Profit up to 30.9.2001 Rs 15,000
Rs45,000
Mo no - 8007916622/33 Page | 62
6) Profit and Loss Account (Consolidated) Rs 7) General Reserve Rs

H Ltd. 1,00,000 H Ltd. 3,40,000
Share of Post-acquisition Profit from S Ltd. (Chart A) 12,000 Share from S Ltd. Nil
1,12,000
Less: Unrealized Profit on Stock (Note 8) 1,000
1,11,000 3,40,000
8) Calculation or Unrealized Profit on Unsold Stock

S Ltd. sold goods to H Ltd. for Rs 10,000 at a profit of 25% on cost. S Ltd. made a profit of Rs 2,000 (257125 x Rs
10,000). Half of the goods is unsold. So, unrealized profit = 1/2 of Rs 2,000 = Rs 1,000. As per AS-21 entire
unrealized profit on stock is to be eliminated.
Illustration 15
The Balance Sheets of Had Ltd, and its subsidiary Suri Ltd, as at 31st March, 2002 are as follows
Liabilities Hari Ltd.Rs Suri Ltd.Rs Assets Hari Ltd.Rs Suri Ltd.Rs
Share Capital : Plant and Machinery 4,80,000 90,000
Equity Shares of Rs 10 each
4,00,000 1,00,000 Furniture 15,000 27,000
fully paid
General Reserve
2,80,000 34,000 Investments 2,00,000 -
(1.4.2001)
Profit & Loss A/c 1,70,000 42,000 Stock 95,000 42,000
Creditors 70,000 33,QQQ Debtors 60,000 32,000
Cash at Bank 70,000 20,000
9,20,000 2,11,000 9,20,000 2,11,000
The following information is also given to you:

(i) Hari Ltd. acquired 8,000 equity shares in Suri Ltd. as at 1st July, 2001 at a cost of Rs 2,00,000.
(ii) Stock of Hari Ltd. includes Rs 6,000 relating to stock purchased from Suri Ltd. Which follows the practice of
charging 25% extra on the cost for determining the sale price,
(iii) Creditors of Hari Ltd. include Rs 10,000 on account of purchases from Suri Ltd.
(iv) Profit and Loss Account of Hari Ltd. includes dividend @ 10% for the year 2001-02 received from Suri Ltd.,
which declared and paid it after 1st July, 2002.
(v) Balance in Suri Ltd.'s Profit and Loss Account on 1st April, 2001 was Rs 26,000. Dividend @ 10% for the year
2000-01 was declared out of this balance after 1st July, 2001.
(vi).Profits during the year 2001-02 have been earned on uniform basis throughout the year.
Prepare a Consolidated Balance Sheet of Hari Ltd. and its subsidiary Suri Ltd. as at 31st March, 2002. Submit
all your working notes neatly. (UNQHM)
Solution:
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March, 2002

1 2 .3 4
warrants
Mo no - 8007916622/33 Page | 63

Interest)
allotment
(b) Trade payable 95,000
TOTAL 9,89,600
II ASSETS
(a) Fixed assets
development
(2) Current assets
TOTAL 9,89,600
Working Notes:
1. Degree of Control = 80 or 4/5th, Minority = 1/5th
Hari Ltd's
Minority Interest
Proprietary Balances Notes Total(Rs) Shares
(1/5)
(4/5)
a) Capital Profit
1 . Pre-acquisition Profit 7 32,500
Less: Dividend for 2000-01 10,000
22,500
56,500 45,200 11,300
Mo no - 8007916622/33 Page | 64

19,500 15,000 3,900
Reserve
General Reserve as per Balance
34,000
Sheet
Less: Pre-acquisition General
34,000
Reserve
Nil Nil Nil
Less: Minority Interest (1/5) 20,000 .20,000
80,000
3) Control Chart C : Other Assets and Liabilities

Less: Dividend for 2000-01 (4/5m of Rs 10,000) 8,000
Goodwill 66,800

Plant and Cash at
Particulars Furniture Stock Debtors Creditors
Machinery Bank
Had 4,80,000 15,000 95,000 60,000 70,000 70,000
Suri 90,000 27,000 42,000 32,000 20,000 35,000
- - 1,37,000 92,000 - 1,05,000
Less: Mutual Indebtedness - - - 10,000 - 10,000
Less: Unrealized Profit on
- - 1,200 - - -
Stock (Note 8)
5,70,000 42,000 1,35,800 82,000 90,000 95,000

Hari Ltd. 1,70,000 Hari Ltd 2,80,000
Less: Dividend for 2000-01 8,000 Share from Suri Ltd. Nil
1,62,000
Share of Post-acquisition Profit from Suri Ltd. (Chart A) 15,600 -
1,77,600
Less: Unrealized Profit on Stock (Note 8) 1,200
1,76,400
7) Dr. Profit and Loss Account of Suri Ltd, for the year ended 31st March, 2002
To Dividend® 10% 10,000 By Balance from last year 26,000
To Balance c/d 42,000 By Profit during the year (Balancing Figure) 26,000
52,000 52,000
So, profit upto 30.6.2001, amounted to Rs 6,500 (1/4 of Rs 26,000 Le. for 3 months) and the profit as on
30.6.2001 will be:
Mo no - 8007916622/33 Page | 65
Profit on 1.4.2001 Rs 26,000

(+) Proportionate Profit upto 30,6,2001 Rs. 6,500
Rs. 32,500
(8) Calculation of Unrealized Profit on Unsold Stock

Suri Ltd. sold goods to Hari Ltd. for Rs 6,000 at a profit of 25% on cost. Suri Ltd. made a profit of Rs 1,200
(25/^25 x Rs 6,000). As per AS-21 entire unrealized profit on stock is to be eliminated.
Illustration 16
The following are the Balance Sheets of M Ltd. and N Ltd. as at 31.12.2001 :
MLtd. NLtd. MLtd. NLtd.

Liabilities Assets
Rs Rs Rs Rs
Equity Shares of Rs 10 each, 3,00,000 2,00,000 Fixed Assets 6,00,000 3,40,000
fully paid
capital Redemption Investment in 15,000
1,20,000 -
Reserve Equity Shares in
General Reserve 1,00,000 30,000 N Ltd. on 30.6.2001 2,00,000
Profit & Loss A/c (before any Debentures of N Ltd. at
60,000 40,000 50,000
appropriation) par
Debentures of M Ltd. at
Debentures 2,00,000 1,00,000 - 60,000
par
Outstanding Interest on 30,000 15,000 Other Assets 1,50,000 1,00,000
Debentures
(for one year)
Other Liabilities 1,90,000 1,15,000
10,00,000 5,00,000 10,00,000 5,00,000
Prepare the Consolidated Balance Sheet as at 31,12,2001 assuming that N Ltd has earned uniformly in 2001
and its Profit and Loss Account showed a debit balance of Rs 20,000 on 1.1.2001. Show the workings also.
Solution Consolidated Balance Sheet of M Ltd, and its subsidiary N Ltd as at 31 December, 2001 (UNQHM)
Solution:
Consolidated Balance Sheet of M Ltd. and its subsidiary N Ltd as at 31st December 2001

1 2 .3 4
Warrants
(d) Non-Controlling Interest (Minority
Interest) 67,500
Allotment
(b) Deferred tax liabilities (Net) 1,90,000
Mo no - 8007916622/33 Page | 66

(b) Trade payable
(c) Other current liabilities 3,33,500
TOTAL 11,93,500
II ASSETS
(a) Fixed assets
development
(2) Current assets
(b) Inventories
TOTAL 9,89,600
It is assumed that both the companies have credited their respective share of interest on Debentures to
Profit and Loss Account. Other assets include accrued interest on Debentures of Rs 16,500 (Rs 9,000 +Rs
7,500).
On the other hand, if it is assumed that the accrued interest has not been adjusted, then the following
adjustment entry is to be passed:
Accrued Interest on Debenture Account Dr. Rs.16,500

To Profit and Loss Account Rs. 16,500
Working Notes:
1. Degree of Control = = 15,000 Share / 20,000 Shares = 3/4th, Minority = 1/4th
Proprietary Balances Notes Total (Rs) M Ltd's Share (3/4) Minority Interest(1/4)
a) Capital Profit
2. Pre-acquisition General
30,000
Reserve
40,000 30,000 10,000
Mo no - 8007916622/33 Page | 67

30,000 22,500 7,500
Reserve
Less: Pre-acquisition General
30,000
Reserve
Nit Nil Nil

1,50,000

Less: Face Value, of Shares held 1,50,000 1,80,000
Goodwill 20,000
4) Control Chart 0 Assets and Liabilities
Fixed Other Other Outstanding Interest

Particulars Debentures
Assets Assets Liabilities on Debentures
M Ltd. 6,00,000 1,50,000 1,90,000 30,000 2,00,000
N Ltd. 3,40,000 1,00,000 1,15,000 15,000 1,00,000
2,50,000 45.000 9,00,000
Less: Held within the
1,10,000
Group
Less : Accrued 1 6,500
Interest on 16,500
Debentures
9,40,000 2,33,500 3,05,000 28,500 1,90,000
Rs 9,000 + Rs 7,500 = Rs 16,500.

Profit and Loss Account of N Ltd.
Dr. Cr.
Date Particulars Rs Date Particulars Rs
1.1.2001 To Balance b/d 20,000 31.12.2001 By Net Profit (2001) 60,000
31.12.2001 To Balance c/d 40,000
60,000 60,000
(6) Pre-acquisition Profit = Opening balance of Rs 20,000 (Dr.) + 1/2 of Rs 60,000= Rs 20,000 (Dr.) + Rs 30,000=
RslO,000(Cr.)
Tutorial Note: Shares were acquired on 30.6.2001. So. 1/2 of the profit of 2001 will be treated as pre-acquisition
profit.
(7) Profit and Loss Account (Consolidated) Rs (8) General Reserve Rs

MLtd. 60,000 MLtd. 1,00,000
Mo no - 8007916622/33 Page | 68
Share of Post-acquisition Profit from N Ltd. (Chart A) 22,500 Share from N Ltd. Nil
82,500 1,00,000
Note: Inter-cancellation of Debentures has been made on the lines of general practice and commercial
expediency. However, it must be appreciated that Debenture is a statutory liability on the part of the issuing
company and for investing company it is an asset, transferable any time for value. Therefore, such cancellation,
froip legal point of view, is not a sound practice.
Illustration 17
On 1st July, 2001 Maharaja Ltd. acquired 8,000 shares of Rs 10 each of Praja Ltd. at Rs 1,00,000. Their
respective Balance Sheets on 31.12.2001 were as follows:
Maharaja Praja Maharaja.

Liabilities Assets Praja Ltd.Rs
Ltd.Rs Ltd.Rs Ltd.Rs
Share Capital Fixed Assets 1,00,000 1,00,000
... shares of Rs 10 each 2,00,000 1,00,000 Investments 1,00,000 -
Reserve 30,000 40,000 Stock 50,000 40,000
Creditors 25,000 15,000 cash at Bank 5,000 10,000
Bills Payable
Bills Receivable
(Accepted - all are in
- 5,000 (Received from 5,000 -
favour of Maharaja
Praja Ltd.)
Ltd.)
3,25,000 2,20,000 3,25,000 2,20,000
Additional information:
a) At the time of acquiring shares, Praja Ltd. had Rs 15,000 in Reserve and on 1.1.2001 Praja Ltd. had Rs 20,000
in Profit and Loss Account .
b) Praja Ltd. paid 10% dividend in July for the year 2000 and Maharaja Ltd. credited the share of dividend to
their Profit and Loss Account.
c) On the date of acquisition of shares, Fixed Assets of Praja Ltd. stood at Rs 1,20,000 on 1.1.2001
these were revalued at Rs 1,40,000. Stock of Praja Ltd. includes Rs 12,000 on which Maharaja Ltd.
made a profit of 25% on sales.
Proposed Dividend of both the companies for 2001 is 10%. Prepare a Consolidated Balance Sheet
as on 31st December, 2001. (UNQHM)
Solution :
Consolidated Balance Sheet of M Ltd. and its subsidiary N Ltd as at 31st December 2001

1 2 3 4
Warrants
Interest)
Mo no - 8007916622/33 Page | 69

Allotment
(b) Trade payable 40,000
TOTAL 4,65,333
II ASSETS
(a) Fixed assets
development
(2) Current assets
TOTAL 4,65,333
Working Notes:
1. Degree of Control = = 8,000 Share / 10,000 Shares = 4/5th ; Minority = 1/5th
Total Maharaja Minority Interest
(Rs) Ltd's Share (1/5)
a) Capital profit
2. Pre-acquisition Reserve 15,000
3. Revaluation Profit 8 30,000
92,500 74,000 18,500
12,500
Less: Additional
9 1,667 .
Depreciation
10,883
Less: Proposed Dividend 10,000 8,000 2,000
Mo no - 8007916622/33 Page | 70
833 666 167

; c) Post-acquisition Reserve
Reserve as per Balance Sheet 1 40,000
Less: Pre-acquisition
15,000
Reserve
25,000 20,000 5,000
80,000
Minority Interest` 45,667

Less: Dividend for 2000 (4/5 of Rs 10,000) 8,000
Capital Reserve 62,000

Fixed Cash at Bills
Particulars Stock Debtors Creditors Bills Payable
Assets Bank Receivable
Maharaja Ltd. 1,00,000 50,000 65,000 5,000 25,000 5,000
Praja Ltd. 1,00,000 40,000 70,000 10,000 15,000 - 5,000
2,00,000 90,000 - - - -
Add: Revaluation
30,000 - - - - - -
Profit (Note 8)
230,000 - - - - - -
Less: Additional
Depreciation 1,667 - - - - - -
(Note 9)
-. - - - -
Less: Unrealised
- 3,000 - ;- - -
Profit (Note 10)
Less: Mutual
- - - - - 5,000 5,000
Acceptance
2,28,333 87,000 1,35,000 15,000 40,000 Nil NO

Maharaja Ltd. 70,000 Maharaja Ltd. 30,000
Less: Dividend for 2000 8,000 Add: Share of post-acquisition 20,000
reserve
Add: Share of proposed dividend from jpraja 8,000
Ltd.
Add: Share of post-acquisition profit from Rap 666
Ltd,
Less: Unrealised profit on unsold goods 3,000
67,666 50,000
Mo no - 8007916622/33 Page | 71
7) Dr. Profit and Loss Account of Praja Ltd. for the year ended 31st December, 2001 Cr
To General Reserve
(Rs 40,000- Rs 15,000) 25,000 By Balance from last year 20,000
By Profit during the year (Balancing
To Dividend @ 10% 10,000 75,000
Figure)
To Balance c/d 60,000
95,000 95,000
Therefore, profit upto 30.6.2001, if accrued evenly, amounted to R.37,500 (1/2 of Rs 75,000) and
profit as on 30.6.2001 will be :
Profit on 1.1.2001 Rs 20.000
Less: Dividend for 2000 Rs 10,000 10,000
Proportionate profit upto 30.6.2001 37,500
Rs.47,500
Entire accretion to General Reserve may be taken as current profit as the transfer was made on the date of
account, i.e., 31.12.2001. Therefore, current profit will be Rs 37,500 - Rs 25,000 = Rs 12,500 which is same as :
As per Balance Sheet Rs 60,000

Less: Pre-aequisition profit Rs 47,500
Post-acquisition profit Rs 12,500
(8) Value of fixed assets on 31.12.2001 was Rs 1,00,000. It was standing in the books at Rs 1,20,000
on 1.1.2001. Therefore, total depreciation charged in 2001 = Rs 20,000. Rate of depreciation = Rs 20,000
/ Rs 1,20,000 x 100 = 16.67%.
The effective book value on 30.6.2001 was Rs 1,20,000 - Rs 10,000 (depreciation for 6 months @ 16.67% on Rs
1,20,000) = Rs 1,10,000. It was revalued at Rs 1,40,000. Therefore, revaluation profit = Rs 1,40,000 - Rs 1,10,000
= Rs 30,000.
(9) Calculation of Additional Depreciation on Fixed Assets

From 30.6.2001 to 31.12.2001, depreciation is to be provided @ 16.67% on Rs 1,40,000. So, depreciation of that
period will be Rs 11,667 (16.67% on Rs 1,40,000 for 6 months). However, depreciation has already been
provided for this period Rs 10,000 (1/2 of Rs 20,000). Therefore, additional depreciation = Rs 1,667.
(10) Unrealised Profit on Unsold Stock

Total unrealised profit = 25% of Rs 12,000 = Rs 3,000. As per AS-21 entire unrealised profit on stock is to be
eliminated.
Illustration 18
The following are the Balance Sheets of H Ltd, and S Ltd, as on 31s* March, 2002 ;
Liabilities HLtd.(Rs) SLtd.(Rs) Assets HLtd.(Rs) SLtd. (Rs)

Share Capital: Fixed Assets 5,00,000 4,00,000
Equity Capital of Rs 100 each, Investment in S
10,00,000 8,00,000 5,00,000 -
fully paid-up Ltd.
General Reserve 1 2,00,000 2,00,000 Current Assets 8,00,000 11,00,000
Profit & Loss A/c 4,00,000 3,00,000
Current Liabilities 2,00,000 2,00,000
18,00,000 15,00,000 18,00,000 15,00,000
Mo no - 8007916622/33 Page | 72
The following further information is furnished: (IX) H Lid. acquired 3,000 shares in S Ltd. on 1st April. 2001 when
the reserve and surplus of S Lid. were as under
a) General reserve Rs 5,00,000.

b) Profit and Loss Account (credit balance) Rs 2,00,000.
(ii) On 1st October, 2001, S Ltd issued three fully paid-up shares fof every five shares held, as bonus shares out
of pre-acquisition general reserve. No entry is made in the books of H Ltd. for the receipt of these bonus
shares.
(iii) On 30th June, 2001, S Ltd. declared 20% dividend out of pre-acquisition profits and H Ltd. credited the
receipt of dividend to its Profit and Loss Account.
(iv) S Ltd. owed H Ltd. on 31st March, 2002 Rs 1,00,000 for purchase of stock from H Ltd. The entire stock is
held by S Ltd. on 31st March. 2002. H Ltd. made a profit of 25% on cost.
(v) H Ltd. transferred for cash payment a machine to S Ltd. for Rs 80,000. The book value of
machine to H Ltd. was Rs 60,000.
Prepare a Consolidated Balance Sheet as at 31st March, 2002. Adjustment for depreciation on machine
transferred by H Ltd. to S Ltd. is to be ignored. (UNQHM)
Solution:
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March 2002

1 2 3 4
warrants
Interest)
allotment
(b) Trade payable
(c) Other current liabilities 3,00,000
TOTAL 26,60,000
II ASSETS
(a) Fixed assets
development
Mo no - 8007916622/33 Page | 73

(2) Current assets
(b) Inventories
TOTAL 26,60,000
Working Notes:
1. Degree of Control = 3,000 Share + 1,8000 Bonus Shares / 8,000 Shares = 3/5th , Minority = 2/5th
H Ltd's
Minority Interest
Proprietary Balances Notes Total (Ks) Share
(2/5)
(3/5)
a) Capital Profit
1 . Pre-acquisition Profit 2,00,000
Less: Dividend 1,00,000 1 1,00,000
2. Pre-acquisition General Reserve

5,00,000
Less: Bonus Shares 3,00,000 2,00,000
3,00,000 1,80,000 1,20,000
Less: Pre-acquisition Profit 1,00,000
2,00,000 1,20,000 80,000
Less: Pre-aequisition General 2,00,000
Reserve
' Nil Nil Nil
Less: Minority Interest (2/5) 3,20,000 3,20,000
4,80,000
3) Control Chart B: Calculation of Goodwill/Capital Reserve

Less: Dividend for 2000 (315 of Rs 1,00,000) 60,000
Capital Reserve 2,20,000
Mo no - 8007916622/33 Page | 74
Fixed Current Current

Particulars General Reserve
Assets Assets Liabilities
H Ltd. 5,00,000 8,00,000 2,00,000 2,00,000
S Ltd. 4,00,000 11,00,000 2,00,000 -
9,00,000 19,00,000 4,00,000 -
Less: Unrealised Profit out of transfer -
20,000 - - -
(Rs 80,000 - Rs 60,000)
Less: Unrealised Profit on Stock (Note
- 20,000 - -
6)
- 18,80,000 - •
Less: Mutual Indebtedness - 1,00,000 1,00,000 -
8,80,000 17,80,000 3,00,000 2,00,000
5) Profit and Loss Account (Consolidated)
H Ltd. 4,00,000
Less: Dividend from pre-a cquisition profit 60,000
3,40,000
Less: Unrealised profit on Machinery sold 20,000
3,20,000
Add: Shares of post-acquisition profit from S Ltd. (Chart A) 1,20,000
4,40,000
Less: Unrealised profit on stock 20,000
4,20,000
6) Unrealised Profit on Stock Unsold

H Ltd. made a profit of 25% on cost, i.e., 20% on Sales. Therefore, total profit = 20% of Rs 1,00,000 = Rs
20,000.
7) After issue of 3 bonus shares for every 5 shares held, the share capital is Rs 8,00,000. Therefore,
the share capital before bonus issue was Rs 5,00,000 (Rs 8,00,000 / 8 x 5).Therefore, 20% dividend
which was declared on 30th June 2001 will be calculated on share capital of Rs 5,00,000. Total
equity dividend will be Rs 1,00,000 (20 / 100 x Rs 5,00,000).
Illustration 19
Balance Sheets as on 31st March, 2002
H Ltd. H Ltd. S Ltd.

Liabilities S Ltd. Rs Assets
Rs Rs Rs
6% Preference Shares of Rs 15,000 Equity Shares
1,60,000 3,30,000
10 each in S Ltd.
1,200 Preference
Equity Shares of Rs 10 each 6,00,000 2,00,000 1,20,000
Shares in S Ltd.
1,000, 6% Debentures in
General Reserve 1,00,000 80,000 S Ltd. 10,000
Profit & Loss A/c 2,00,000 90,000 Current Assets 2,94,000 2,87,000
6% Debentures of Rs 10
- 40,000
each
Proposed Dividend:
On Equity Shares 60,000 20,000
Mo no - 8007916622/33 Page | 75
On Preference Shares - 9,600

Debenture Interest
- 2,400
accrued
Sundry Creditors 2,94,000 1,25,000
12,54,000 7,27,000 12,54,000 7,27,000
Other information is as under:

(i) The general reserve of S Ltd. as on 31.3.2001 was Rs 80,000.
(ii) H Ltd. acquired the shares in S Ltd. on 31.3.2001.
(iii) The Balance of Profit and Loss Account of S Ltd is made up as follows:
Rs.
Balance as on 31.3.2001 56,000
Net profit for the year ended 31.3.2002 63,000
1,19,600
Less : Provision for proposed dividend 29,600
90,000
(iv) The balance of Profit and Loss Account of S Ltd. as on 31.3,2001 is after providing for preference dividend of
Rs 9,600 and proposed equity dividend of Rs 10,000 both of which were subsequently paid and credited to
Profit and Loss Account of H Ltd.
(v) No entries have been made in the books of H Ltd. for debentures interest due from or
proposed dividend of S Ltd. for the year ended on 31.3.2002.
(vi). The balance of Profit and Loss Account of S Ltd. as on 31.3,2001 is after providing for preference dividend of
Rs 9,600 and proposed equity dividend of Rs 10,000 both of which were subsequently paid and credited to
Profit and Loss Account of H Ltd.
(vii).No entries have been made in the books of H Ltd. for debentures interest due from or proposed dividend
of S Ltd. for the year ended on 31.3.2002.
(viii) S Ltd has issued folly paid bonus shares of Rs 40,000 on 31.3.2002 among the existing shareholders by
drawing upon the general reserve. The transaction has not been given effect to in the books of S Ltd.
You are required to prepare the Consolidated Balance Sheet of H Ltd. with its subsidiary S Ltd.
as on 31st March, 2002. (UNQHM)
Solution
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd as at 31st March 2002

1 2 3 4
warrants
Interest)
allotment
Mo no - 8007916622/33 Page | 76
(a) Long-term borrowings 30,000

(b) Trade payable 4,19,000
(c) Other current liabilities 1,800
TOTAL 15,84,300
II ASSETS
(a) Fixed assets
development
(2) Current assets
(b) Inventories
TOTAL 15,84,300
Working Notes:
1. Degree of Control = 15,000 Shares / 20,000 Shares = 3/4th, Minority = 1/4th
Total H Ltd's Share Minority Interest

(Rs) (3/4) d/4)
a) Capital Profit
2. Pre-acquisition General Reserve
-
80,000
Less: Bonus Shares 40,000 40,000
96,000 72,000 24,000
34>000 25,500 8,500
e) Post-acquisition General Reserve
Less: Pre-acquisition General 80,000
Reserve
Nil NO NO
Mo no - 8007916622/33 Page | 77
d) Share Capital
Equity (Rs 2,00,000 + Rs 40,000) 2,40,000
Preference 1,60,000
4,00,000
Less : Minority Interest (Rs 60,000 + Rs 1,00,000 1,00,000
40,000)
3,00,000
e) Proposed Dividend 29,600 22,200 7,400

Cost of Investments (Rs 3,30,000 + Rs 1,20,000) 4,50,000
Less: Dividend for 2000-01 (Rs 7,500 + Rs 7,200) 14,700
Less: Face Value of Shares held 3,00,000
Goodwill 63,300

Particulars Other Fixed Assets Current Assets Sundry Creditors
HLtd. 5,00,000 2,94,000 2,94,000
SLtd. 4,40,000 2,87,000 1,25,000
9,40,000 5,81,000 4,19,000
5) Profit and Loss Account (Consolidated)

HLtd. 2,00,000
Add: Debenture Interest 600
Add: Share of Post-acquisition Profit from S Ltd. (Chart A) 25,500
Add: Proposed Dividend [Chart A (e)] 22,200

2,48,300
Less: Dividend for 2000-01 14,700
2,33,600
Illustration 20
Following are the balance sheets of Asha Ltd and Bipasha Ltd as on 31 st March, 2008.
LIABILITIES ASHA LTD (Rs.) BIPASHA LTD(Rs.)
Capital ( Rs10 per share) 10,00,000 8,00,000
Profit and Loss Account 4,00,000 2,00,000
Loan from Asha Ltd ---- 80,000
Bills Payable 80,000 60,000
14,80,000 11,40,000
Assets
Machinery 3,00,000 2,80,000
Furniture 50,000 20,000
Debtors 2,50,000 8,00,000
Loan to Bipasha Ltd 80,000 ----
Mo no - 8007916622/33 Page | 78
Shares in Bipasha Ltd 7,00,000 ----

Bills Receivable 1,00,000 40,000
14,80,000 11,40,000
Asha Ltd purchased 75% shares of Bipasha Ltd for Rs. 7,00,000 on 31st March 2008. Bills Payable of
Bipasha Ltd include bills of Rs. 20,000 accepted in favour of Asha Ltd.
Prepare a Consolidated Balance sheet. Dec. 2008 (UNQHM)
Illustration 21
Following are the abridged Balance Sheets of Harry Ltd and Say Ltd, as on 31 st March 2009.
Liabilities Harry Ltd (Rs) Say Ltd (Rs)

Equity share capital ( Rs.100 each) 10,00,000 4,00,000
General Reserve 1,00,000 1,70,000
Profit and Loss account 1,60,000 1,30,000
Current Liabilities 4,40,000 2,00,000
17,00000 10,00000
Assets
Fixed Assets 4,80,000 250,000
Investment of shares in say ltd 5,00,000 -
17,00000 10,00000
1. On 1st July 2008, Hary Ltd acquired 3,000 shares in Say Ltd.The reserves and surplus position of Say Ltd as
on 1st April 2008 was as under :
General Reserve Rs. 2,50,000
Profit and Loss a/c (Cr) Rs. 120,000
2. On 1st October, 2008, Say Ltd issued one equity share for every four shares held as bonus shares out of
general reserve. No entry has been made in the books of Say Ltd for the issue of bonus shares.
3. On 30th September 2008, Say Ltd, declared a dividend out of pre-acquisition profits @ 25% on Rs. 4,00,000,
it’s Capital on that date. Hary Ltd credited the dividend to it’s profit and loss account.
4. Say ltd, owed Hary Ltd, Rs. 50,000 for the purchase of stock from Hary Ltd. The entire stock is held by say ltd
on 31st March 2009. Hary Ltd made a profit of 25% on cost.
Prepare a Consolidated Balance Sheet of Hary Ltd and it’s subsidiary Say Ltd as on 31 st March 2009.
June 2009 (UNQHM)
Illustration 22
Following are the Balance Sheets of H Ltd and S Ltd as on 31 st March 2009.
LIABILITIES H Ltd (Rs) S Ltd (Rs)

Share Capital (shares of Rs.100 each) 5,00,000 2,00,000
General Reserve as on 1st April 2008 1,00,000 60,000
Profit and Loss Account 1,40,000 90,000
Bills Payable 40,000
Creditors 80,000 50,000
8,20,000 4,40,000
Assets
Goodwill 40,000 30,000
Mo no - 8007916622/33 Page | 79
Other Fixed Assets 3,60,000 2,20,000

1,500 shares in S Ltd at cost 2,40,000 -
Stock 1,00,000 90,000
Debtors 20,000 75000
Cash at Bank 60,000 25,000
8,20,000 4,40,000
The Profit and Loss account of S LTD showed a balance of Rs. 50,000 on 1st April 2008. A dividend of 15% was
paid on 15th October 2008 for the year 2007-08. The dividend was credited by H Ltd to it’s profit and loss
account. H ltd acquired shares on 1st October 2008.
The Bills Payable of S Ltd were all issued in favour of H Ltd and the same were got discounted by H ltd. included
in the Creditors of S ltd are Rs. 20,000 for goods supplied by H ltd. The Stock of S ltd includes goods to the value
of Rs. 8,000 which were supplied by H ltd at a profit of 33.33% on cost.
Prepare a Consolidated Balance Sheet of H ltd and S ltd as on 31st March 2009. June 2010 (UNQHM)
Illustration 23
On 1st October 2009 PODDAR Ltd acquired 12,000 equity shares of BHANSALI Ltd of the face value of Rs 10
each at a price of Rs.1,70,000. The Balance Sheets of two Companies as on 31st March 2010 are as follows.
LIABILITIES PODDAR LTD Rs BHANSALI LTD Rs

Equity shares of Rs.10 each 10,00000 2,00,000
General Reserve ( 1st April 2009) 4,20,000 1,00,000
Profit and Loss account (1st April 2009) 90,000 40,000
Profit for the year 1,70,000 45,000
Creditors 2,40,000 92,000
20,00000 5,37,000
Assets
Goodwill 3,00,000 70,000
Land and Building 4,00,000 1,00,000
Plant and Machinery 5,00,000 1,00,000
Stock 2,00,000 40,500
Debtors 3,00.000 1,34,500
Investments 2,00,000 -
Bills Receivable 20,000 30,000
Bank 60,000 50,000
Cash 20,000 12,000
20,00000 5,37,000
Out of the debtors and Bills Receivable of Poddar ltd Rs.50,000 and Rs.16,000 respectively represented those
due from Bhansali Ltd..The stock in the hands of Bhansali Ltd includes goods purchased from Poddar Ltd at Rs.
20,000 which includes profit charged by the latter company @ 25% at cost.
Prepare Consolidated Balance Sheet as on 31st March 2010 and also show your workings. Dec 2010 (UNQHM)
Illustration 24
Following are the Balance Sheets of H Ltd and S Ltd as at 31 st December 2010.
LIABILITIES H LTD (Rs) S LTD (Rs)

Equity shares of Rs.100 each fully paid 5,00,000 2,00,000
Mo no - 8007916622/33 Page | 80

Profit and Loss account 80,000
14 % Debentures 1,00,000
Creditors 75,000 45,000
7,55,000 3,45,000
Assets :
Fixed Assets 3,50,000 1,50,000
Stock 90,000 40,000
Debtors 60,000 30,000
14 % Debentures in S Ltd (at par) 60,000
Equity Shares in S Ltd @ Rs. 80 per share 1,20,000
Bank 75,000 25,000
Profit and Loss Account 1,00,000
7,55,000 3,45,000
H Ltd acquired 1,500 shares in S Ltd on 1st May 2010. The profit and Loss account of S Ltd showed a debit
balance of Rs. 1,50,000 on 1st January 2010. During March 2010, goods costing Rs.6,000 were destroyed by fire,
against which the insurance company paid only Rs.2,000 to S ltd. Creditors of S ltd include Rs. 20,000 for goods
supplied by H ltd on which H ltd made a profit of RS. 2,000.
Half of the goods were sold out of this. An item of plant (included in Fixed Assets) of S Ltd had book value of Rs.
15,000. It was to be revalued at Rs. 20,000 on 1st January 2010 ( ignore depreciation).
Prepare a Consolidated Balance Sheet as on 31st December 2010. June 2011 (UNQHM)
Illustration 25
The Balance Sheets of H Ltd and it’s subsidiary S Ltd as on 31 st March 2011 are as follows.

Equity shares of Rs. 100 each 30,00000 15,00000
General Reserve (1st April 2010) 8,00,000 4,00,000
Profit and Loss account 1st April 2010 2,00,000 2,50,000
Net Profit for the year 6,00,000 4,00,000
15% Debentures 10,00000 -
Creditors 4,00,000 2,70,000
Assets :
Premises 14,00000 9,00,000
Machinery 12,00000 7,00,000
Investment in shares of S ltd 17,00000 -
Inventories 7,00,000 4,50,000
Debtors 5,00,000 4,20,000
Bills Receivable 1,80,000 80,000
Cash And Bank 3,80,000 2,00,000
Misc. Expenditure ---- 1,00,000
The following is the additional information :

1. H Ltd acquired 12,000 equity shares in S ltd on 1st April 2010.
2. Bills Receivable of H ltd, include Rs.30,000 accepted by S ltd.
3. Accounts receivable of H ltd include RS. 1,00,000 due from S ltd.
4. Inventories of S Ltd include goods purchased from H ltd for Rs 1,25,000 which were invoiced by H ltd at a
profit of 25% on cost.
Mo no - 8007916622/33 Page | 81
5. Both H Ltd and S Ltd have proposed 10% dividend for the year 2010-11, but no effect has been given in the
Balance Sheet.
Prepare a Consolidated Balance Sheet giving proper working notes. Dec 2011 (UNQHM)
Illustration 26
Following are the Balance Sheets of H ltd and it’s subsidiary S Ltd as on 31 st March 2012.
EQUITY AND LIABILITIES H LTD (Rs) S LTD (Rs)

Fully paid-up equity shares of Rs. 10 each 6,00,000 2,00,000
General Reserve 3,40,000 80,000
Profit and Loss ( Surplus) 1,00,000 60,000
Trade Payables 70,000 35,000
ASSETS :
Machinery 3,90,000 1,35,000
Furniture 80,000 40,000
Investments (80% shares in S Ltd at cost) 3,40,000
Stock 1,80,000 1,20,000
Trade Receivables 50,000 30,000
Cash at Bank 70,000 50,000
11,10,000 3,75,000
The following additional information is provided :

1. Surplus in the Profit and loss statement of S Ltd stood at Rs. 30,000 on 1st April 2011, whereas general
reserve has remained unchanged since that date.
2. H Ltd acquired 80% shares in S Ltd on 1st October 2011 for Rs. 3,40,000 as mentioned above.
3. A sum of Rs.10,000 due from H Ltd for goods sold at a profit of 25% on cost price is included in trade
receivables of S Ltd. Till 31st March 2012, only half of the goods had been sold while the remaininggoods
were lying in the godowns of H ltd as on that date.
You are required to prepare the consolidated Balance sheet as on 31 st March 2012. Show all Calculations
Dec 2012 (UNQHM)
Illustration 27
The following are the Balance Sheets of H Ltd and it’s subsidiary S Ltd as on 31 st March 2012.
EQUITY AND LIABILITIES H LTD (Rs) S LTD (Rs)

Shareholder’s funds :
Share Capital
Shares of Rs.100 each fully paid 5,00,000 2,00,000
Reserves and Surplus :
Profit and Loss account 80,000 (-) 1,00,000
Non-current Liabilities
Current Liabilities :
Trade payables 75,000 45,000
7,55,000 2,45,000
ASSETS :
Non-Current Assets :
Fixed Assets 3,50,000 1,50,000
Mo no - 8007916622/33 Page | 82
Non-Current Investments :
6% Debentures in S ltd (acquired at cost) 60,000
1,500 shares in S Ltd at Rs each 1,20,000
CURRENT ASSETS
Inventories 90,000 40,000
Trade receivables 60,000 30,000
Cash 75,000 25,000
7,55,000 2,45,000
H ltd acquired the shares on 1st August 2011.The Profit and loss account of S ltd showed a debit balance of
Rs.1,50,000 on 1st April 2011. During June 2011, goods of S ltd costing Rs.6,000 were destroyed by fire against
which insurer paid only Rs. 2,000.
Trade payables of S ltd include Rs.20,000 for goods supplied by H ltd on which H ltd made a profit of Rs 2,000.
Half of the goods were still in stock on 31st March 2012.
June 2013 (UNQHM)
Illustration 28
H ltd acquired 4,000 shares on 30th June 2012 in S ltd. H ltd received 10% dividend for the year 2011 and it is
credited in profit and loss account of H Ltd.
Following are the Balance Sheets of H ltd and S ltd as on 31 st December 2012.
H LTD (Rs) S LTD (Rs)

1. EQUITY AND LIABILITIES
Share Capital
Equity share capital of RS. 10 each 60,000 50,000
Reserves and Surplus
General reserve (1.1.2012) 12,000 10,000
Profit/ Loss as on 1.1.2012 4,000 8,000
Profit for the year ended 31.12.2012 30,000 20,000
Current Liabilities
Trade payables 10,000 8,000
TOTAL 1,16,000 96,000
Assets
Non-current assets
Fixed assets 44,000 60,000
Investments
Investments in S ltd 52,000
Current Assets 20,0000 36,000
TOTAL 1,16,000 96,000
You are required to prepare consolidated Balance sheet for H ltd and S ltd as on 31st December 2012 from the
above information. Dec 2013 (UNQHM)
Illustration 29
The Balance sheets of Chanderma ltd and it’s subsidiary Tara ltd as on 31st March 2014 are as follows.
EQUITY AND LIABILITIES CHANDERMA ( Rs) TARA LTD

LTD (Rs) (Rs)
1. Shareholder’s funds
a. Share capital–authorised, issued, 10,00000
subscribed and paid-up:
Mo no - 8007916622/33 Page | 83
Preference share capital

Equity share capital of Rs.100 each as 50,00000 60,00000 15,00000 15,00000
fully paid-up:
b. Reserve and Surplus:
General Reserve 34,00000 60,000
Surplus 36,00000 70,00000 10,80,000 11,40,000
2. Current Liabilities:
a. Trade payables 10,00000 4,41,500
10,00000 2,41,500 6,83,000
1,40,00000 33,23,000
2. ASSETS
1. Non-current assets:
(a.) Fixed Assets :
Properties 37,60,000 4,00,000
Plant and machines 14,00000 87,20,000 9,13,000 20,13,000
(b) Long-term investment:
12,000 shares of Tara Ltd on 1st April 18,00000
,2013.
2. Current Assets:
(a) Inventories 13,60,000 5,06,000
(b) Trade receivables and cash 21,20,000 34,80,000 8,04,000 13,10,000
1,40,00000 33,23,000
The other information are :

1. Surplus of Chanderma Ltd includes dividend of 10% received from Tara Ltd
2. On 1st April, 2013, surplus of Tara Ltd, stood at Rs. 7,75,000and general reserve at Rs. 30,000. Chanderma
revalued plant and machinery of Tara Ltd at the time of purchase of shares by Rs.2,00,000 more than it’s
book value.
3. Inventory of Chanderma Ltd, includes Rs. 80,000 of inventory at cost purchased from Tara Ltd. Further,
trade receivables of Tara ltd include Rs.2,40,000 for the sale to Chanderma Ltd on which Tara Ltd makes a
profit of Rs. 60,000.
4. Tara Ltd made a bonus issue during the year out of pre-acquisition profits for Rs. 6,00,000. This is not
recorded in the books.
Prepare a Consolidated Balance Sheet. June 2014 (UNQHM)
Illustration 30
Prepare a Consolidated Balance Sheet from the following balance sheets of H Ltd and S Ltd.
H LTD S LTD
1. EQUITY AND LIABILITIES
1. Shareholder’s funds
a. Share Capital
Equity shares of Rs.10 10,000 2,000
b. Reserves and surplus
Reserve fund 1,000 600
Surplus 4,000 1,200
2. Current Liabilities
a. Trade payables 2,000 1,200
Mo no - 8007916622/33 Page | 84
b. Other current liabilities (Bills payable) 300

TOTAL 17,000 5,300
2. ASSETS
1. Non-current Assets
a. Sundry assets 8,000 1,200
b. Investments (1,50,000 equity shares in S Ltd at cost) 1,500
2. Current Assets
a. Inventories 6,100 2,400
b. Trade receivables 1,300 1,700
c. Other current assets (Bills receivable) 100
TOTAL 17,000 5,300
Following additional information is also given :

1. S Ltd bas earned all the profits only since the above 1,50,000 shares were acquired by H ltd.
2. On the date of acquisition of these 1,50,000 shares by H Ltd, S ltd had balance in the reserve fund of Rs.
6,00,000.
3. The bills payable of S ltd were in favour of H ltd which had discounted Rs. 2,00,000 of them.
4. Sundry assets of S ltd were undervalued by Rs. 2,00,000. Stock of H ltd includes goods of Rs. 5,00,000
purchased from S ltd on which S ltd made a profit of 25% on cost.
June 2015 (UNQHM)
Illustration 31
Jai Ltd acquired 15,000 shares in Hind ltd for Rs.1,55,000 on 1st July 2004. The Balance sheet of the two
companies as on 31st March 2005 were as follows.
LIABILITIES JAI LTD HIND LTD

Equity shares of Rs. 10 each, fully paid up 9,00,000 2,50,000
General Reserves 1,60,000 40,000
Profit and loss account 80,000 25,000
Bills payable 40,000 20,000
Creditors 50,000 30,000
12,30,000 3,65,000
Assets :
Machinery 7,00,000 1,50,000
Furniture 1,00,000 70,000
Investments 1,55,000
Stock 1,00,000 50,000
Debtors 60,000 35,000
Cash at Bank 90,000 40,000
Bills receivable 25,000 20,000
12,30,000 3,65,000
1. General reserve appearing in the balance sheet of Hind Ltd remained unchanged since 31st March 2004.
2. Profit earned by Hind Ltd for the year ended 31st March 2005, amounted to Rs. 20,000
3. On 1st February 2005, Jai ltd sold to Hind Ltd goods costing Rs. 8,000 for Rs. 10,000. There was no unsold
stock with Hind ltd on 31st March 2005. However, creditors of Hind ltd include Rs. 4,000 due to Jai ltd on
account of these goods.
4. Out of Hind ltd’s acceptance, Rs. 7,000 were those which were accepted in favour of Jai ltd.
You are required to draw a consolidated Balance sheet as on 31st March 2005. June 2006 (UNQHM)
Mo no - 8007916622/33 Page | 85
Illustration 32
The following are the balance sheets of Snow Ltd and White ltd as at 31st March 2006.
LIABILITIES SNOW LTD WHITE LTD

(Rs) (Rs)
Share Capital of Rs.10 each 14,00000 2,00,000
Profit and Loss account 2,00,000 60,000
Sundry creditors 1,80,000 1,00,000
Bills payable 20,000 30,000
Liabilities for expenses 10,000 30,000
ASSETS
Land and building 6,00,000 2,00,000
Plant and Machinery 5,60,000 1,00,000
14,000 shares in White ltd 2,00,000 ---
Stock 1,40,000 1,00,000
Sundry Debtors 3,00,000 40,000
Bills Receivable 20,000 ---
Cash and Bank Balances 90,000 40,000
The additional information is as under :

1. All the bills receivable of Snow Ltd including those discounted accepted by White ltd
2. At the time of acquisition of shares on 1st July 2005 by Snow Ltd in White Ltd, the general reserve was Rs.
40,000 and Rs.10,000 credit in profit and loss account as on 1st April 2005.
3. The stock of White Ltd includes Rs. 40,000 purchased from Snow Ltd, which has made 25% profit oncost.
4. White Ltd had declared and paid dividend equivalent to 20% for the period ended 31st march 2005 and
Snow Ltd had credited to it’s profit and loss account.
You are required to prepare a Consolidated Balance Sheet as on 31st March 2006. Dec 2006 (UNQHM)
Illustration 33
The Balance Sheets of H ltd and S ltd as on 31 st March 2006 are given below
LIABILITIES H Ltd (Rs) S ltd (Rs)

Share Capital of Rs.10 each, fully paid 5,00,000
2,00,000
Profit and Loss account 60,000 35,000
Creditors 80,000 60,000
7,40,000 3,45,000
Assets :
Fixed Assets 3,00,000 1,00,000
60% shares in S ltd at cost 1,62,400 -----
Preliminary expenses ---- 6,000
7,40,000 3,45,000
H ltd acquired the shares on 1st April 2005 and on that date, the general reserve and profit and loss account of S
Ltd showed balances of Rs. 40,000 and Rs. 8,000 respectively. No part of preliminary expenses was written off
during the year 31st March 2006.
Prepare a Consolidated Balance Sheet of H ltd and it’s subsidiary S ltd as on 31 st March, 2006.
June 2007 (UNQHM)
Mo no - 8007916622/33 Page | 86
Illustration 34
Following are the Balance Sheets of H Ltd and S Ltd as at 31 st March 2007.

Equity Share Capital :
Shares of Rs. 10 each fully paid 6,00,000 2,00,000
Creditors 70,000 35,000
11,10,000 3,75,000
ASSETS
Plant and machinery 3,90,000 1,35,000
Furniture 80,000 40,000
80% shares in S ltd (at cost) 3,40,000 ----
Stock 1,80,000 1,20,000
Debtors 50,000 30,000
Cash at Bank 70,000 50,000
11,10,000 3,75,000
1. Profit and Loss account of S Ltd stood at Rs. 30,000 on 1st April 2006, whereas general reserve stood at Rs.
80,000 even on this date.
2. H ltd acquired 80% shares in S Ltd on 1st October 2006.
3. S Ltd’s plant and Machinery which stood at Rs. 1,50,000 on 1st April 2006, was considered worth Rs 1,80,000
as on 1st October 2006. This figure is to be considered while consolidating the balance sheets.
You are required to prepare a Consolidated Balance Sheet as on 31st March 2007. June 2008 (UNQHM)
Illustration 35
The following are the Balance Sheets of X ltd and it’s subsidiary Y ltd as on 31 st March ,2011.
LIABILITIES X LTD (Rs) Y LTD (Rs) ASSETS X LTD (Rs) Y LTD(Rs)

Equity shares of Rs. 10 4,00,000 1,00,000` Equipments 2,50,000 95,000
each
Profit and loss account 50,000 20,000 Investment (9,000 equity 1,40,000
shares on Y ltd on 1st
April 2010)
External liabilities 7,50,000 4,80,000 Other Assets 8,10,000 5,05,000
12,00000 6,00,000 12,00000 6,00,000
On Ist April 2010, profit and loss account of Y ltd showed a credit balance of Rs. 8,000 and equipments of Y ltd
were revalued by X ltd at 20% above it’s book value of Rs. 1,00,000 (but no such adjustment affected in the
books of Y Ltd).
Prepare a Consolidated Balance sheet as on 31st March 2011. June 2012 (UNQHM)
Illustration 36
The Balance Sheets of H Ltd and it’s subsidiary S Ltd as 31st March 2014 are given below
H LTD (Rs) Rs S LTD Rs. Rs.

Equity and Liabilities
1 Shareholder’s funds
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a. Share Capital (authorized , issued, 15,00000 3,00,000

subscribed and paid-up capital)
Equity shares of Rs. 10 each fully called and
paid-up.
b. Reserves and Surplus
General reserve 2,25,000
6,00,000
Surplus 3,00,000 9,00,000 75,000 3,00,000
2 Current Liabilities
Trade payables 4,50,000 1,50,000
TOTAL 28,50,000 7,50,000
2. ASSETS
1. Non-current assets
a. Fixed assets
1. Machinery 9,00,000 2,70,000
2. Furniture 1,50,000 51,000
3. Other Assets 13,20,000 23,70,000 4,29,000
b. Long –term investment (2,400 shares at 4,80,000
Rs. 200 each in S ltd at cost.
TOTAL 28,50,000 7,50,000
Other relevant information :

1. Balance in general reserve and statement of profit and loss (Cr) of S ltd stood at RS. 75,000 and 45,000
respectively on the date of acquisition of it’s 80% shares by H ltd.
2. Machinery ( Book value Rs. 3,00,000) and furniture (book value Rs. 60,000) of S Ltd were revalued at Rs.
4,50,000 and Rs. 45,000 respectively for the purpose of fixing the price of it’s shares. Book value of other
assets remaining unchanged. These values are to be considered for consolidation purpose.
From the above balance sheets and additional information, prepare a consolidated Balance Sheet as at that
date. Dec 2014 (UNQHM)
Illustration 37
From the following Balance sheets of Exe ltd and Wye Ltd as on 31st March, 2007, work out-----
1. Net amount due to minority interest, and
2. Cost of Control.
LIABILITIES EXE Ltd (Rs) WYE Ltd(Rs)

Share Capital :
Shares of Rs. 100 each 15,00000 5,00,000
General Reserve 1,50,000 1,00,000
Creditors 1,87,500 1,20,000
20,37,500 7,95,000
ASSETS
Sundry Assets 14,77,500 7,95,000
4.000 shares of Rs. 100 each 5,60,000 --------
20,37,500 7,95,000
The assets of Wye Ltd included equipments worth Rs. 1,50,000 which was revalued at Rs. 1,25,000. The
investments of Exe Ltd were in shares of Wye Ltd and the same were acquired on 31st March, 2007.
Dec 2007 (UNQHM)
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Chapter 5 – Valuation OF Goodwill and Shares

Goodwill
Goodwill may be described as the aggregate of those intangible attributes of a business which contribute to its superior
earning capacity over a normal return on investment. It may arise from such attributes of a business as good reception,
a favourable location, the ability and skill of its employees and management, nature of its products, etc.
From a different angle, goodwill may be viewed as a more or less permanent impression created in the minds of the
customers of a particular organization who continue to patronize that organization despite the high price of its product
which enables the organization to earn super-profits. So, goodwill is the outcome of an impression created in the mind
of each customer. It can exist only among competitive businesses.
Lord Lindley defines goodwill as follows:

"The term goodwill can hardly be said to have any precise significance. It is generally used to denote the benefit arising
from connection and reputation and its value is what can be got for the change of being able to keep that connection
and improve it. Upon the sale of an established business its goodwill has a marketable value, whether the business is
that of a professional man or of any other person. But it is plain that goodwill has no meaning except in connection with
a continuing business, and the value of the goodwill of any business to a purchaser depends in some cases entirely, and
in all very much, on the absence of competition on the part of those by whom the business has been previously carried
on".
According to Wilson,
"Goodwill has been very ably divided into three types – cat, dog and rat – in view of the peculiar habits of these three
animals. The cat tends to stick to the abode, cat goodwill is therefore that which will adhere to the business which is
being transferred and is the most valuable. The dog follows his master, dog goodwill is difficult to transfer and is
correspondingly less valuable. The rat is a migrant, rat goodwill is practically valuless, as it represents those customers
who have no specialities either to the business or its properties and who may be here today and gone tomorrow.
Summed up, cat goodwill is adherent; dog personal and rat fugitive. Adherent goodwill is only valuable as attaching to
the business; personal goodwill is unsaleable, fugitive goodwill is only valuable in that as one fugitive goes another may
arrive."
Following are other definitions :

"Goodwill is nothing more than the probability that the old customers will resort to the old place" (Lord Eldon).
"The value of business connections, the value of the probability that present customers will continue to buy in spite of
the allurements of competing dealers" (Hatfield).
"The element of an established business which makes the business as a going concern worth more than its book value,
that is, its net worth as shown by the books" (Walton).
"It is the influence that the proprietor or his organization has upon the purchasing public through which he is enabled to
attract and retain patronage" (Wildman).
Distinguishing Features of Goodwill

Goodwill is different from any other type of assets since it is the earning power of the business. Following are the factors
distinguishing goodwill from most other assets :
(a) It represents a non-physical value over and above the physical assets.
(b) It cannot have an existence separate from the business and, therefore, cannot be realized separately.
(c) It is difficult to place a cost on goodwill as the value may fluctuate from day-to-day as a result of internal and
external circumstances, i.e., changing fortunes of the company's business.
(d) The amount or value of the goodwill and the assessment of its actual existence is highly dependent on the subjective
judgment of the valuer.
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Elements of Goodwill
R.H. Nelson suggests that goodwill generally consists of the following elements:
(a) Customer lists;
(b) Organization costs;
(c) Developmental costs;
(d) Trademarks, trade names and brands;
(e) Secret processes and formulae;
(f) Patents;
(g) Copyrights;
(h) Licenses;
(i) Franchises; and
(j) Superior earning power.
Types of Goodwill
Goodwill is generally of two types: (a) Purchased Goodwill; and (b) Non-purchased or Inherent Goodwill.
(a) Purchased Goodwill

Purchased Goodwill arises when one business buys another and the purchase consideration paid is more than the value
of the net tangible assets received. It can never exist in a new business except by purchase.
It is the accepted practice to recognize only the purchased goodwill in the accounting system. Therefore, goodwill
should enter into the books of account of a business only in connection with a valuation ascribed to it in the acquisition
price of a business.
Following are the important features of purchased goodwill:
(i) It arises on an acquisition.
(ii) It is demonstrated by a purchase transaction.
(iii) Price paid for goodwill depends upon the purchaser's expectation of future profits.
(iv) It is recognized in financial statements.
(b) Non-purchased or Inherent Goodwill

Non-purchased or inherent goodwill is referred to as internally generated goodwill and it arises when a business may
over the years generate its own goodwill.
Following are the features of non-purchased goodwill :
(i) It is internally generated.
(ii) A cost cannot be placed on these types of goodwill.
(iii) Valuation depends on subjective judgment of the valuer.
(iv) It is not demonstrated by a purchase consideration.
(v) It is never recognized in financial statements.
Factors to be taken into consideration in valuing goodwill:
1 Superior management team. 1 Market dominance

2 Outstanding sales manager or organization. 2 Economies of scale (production, advertising,
distribution, research, management).
3 Weakness in the management of a competitor. 3 Cost savings (employing technology, transaction
costs, co-ordinating activities, stockholding
savings).
4 Effective advertising. 4 Cost of financing (reduction in cost of borrowing
and lender's risk).
5 Secret or patented manufacturing process. 5 Fiscal advantages (tax losses, investment credits,
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government incentives).
6 Good labour relation. 6 Strong liquid resources.
7 Outstanding credit rating. 7 Preliminary expense savings.
8 Top flight training programme for employees. 8 Ability to guarantee supplies.
9 Good public "image". 9 Ability to guarantee market.
10 Unfavourable developments in operation of a 10 Investors' collective evaluation of political,
competitor. economic or social position.
11 Favourable association with another company. 11 Opinions of acquirer's directors as to future
policy of acquirer.
12 Strategic location. 12 Cost of acquisiton
13 Discovery of talents or resources.
14 Favourable tax conditions.
15 Favourable government regulations.
16 Favourable attitudes of customers.
17 Excellent reputation of quality and reliability of
products.
18 Number of outlets for products.
19 Number of service locations for products.
20 Favourable agency agreements.
21 Established list of customers.
22 Established licence to trade.
23 Experienced work-force
24 Good relations with suppliers
25 Superior pension fund resources
Source: ASC discussion paper – Appendix 2
Positive and Negative Goodwill

Since goodwill is the difference between the value of a business as a whole and the fair value of its separate net assets,
goodwill can be both positive and negative.
Non-purchased goodwill exists in all businesses. Positive goodwill arises when the value of the business as a whole is
more than the fair value of the separate net assets. If the real worth of the business is less than the sum of the fair
values of the separate net assets, it represents negative goodwill.
Accounting for Goodwill

Following are the methods of accounting for goodwill:
(a) Carry it as an asset and write it off over a period of years through the Profit and Loss Account.
(b) Eliminate it against reserves immediately.
(c) Retain it as an asset with no write-off unless a permanent reduction in value becomes evident.
(d) Write it off against profits immediately.
(e) Show it as a deduction from shareholders' funds which may be amortized or carried forward indefinitely.
SSAP 22 requires that non-purchased goodwill should not be shown in financial statements. Purchased goodwill should
normally be eliminated from the accounts immediately on acquisition or may be amortized over its useful economic life.
Valuation of Non-purchased Goodwill

Goodwill is an significant asset, but subject to the suspicion of arbitrations since its valuation depends on assumptions
made by the valuer. Methods to be adopted in valuing goodwill will depend upon the circumstances of each particular
case. Therefore, the figure computed as goodwill cannot be an exact one.
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There are several ways by which an accountant can compute goodwill. The valuation of goodwill is often based on the
customs of the trade and generally calculated as number of years' purchase of average profits or super profits. Here, we
will outline some of the various methods available:
(1) Average Profit Method

This method takes into account the average profits for the last few years and fixes the value of the goodwill as to many
years' purchase of this amount. Under this method, at first, average profit is calculated on the basis of the past few
years' profits. At the time of calculating average profit, precaution must be taken in respect of any abnormal items of
profit or loss which may affect future profit. It should be mentioned that average profit may be based on simple average
or weighted average.
After calculating average profit, it is multiplied by a number (3 or 4, i.e., three or four years), as agreed. The product will
be the value of the goodwill.
The main disadvantage of this method of valuing goodwill is that any trend in the level of profitability is not reflected in
the valuation of goodwill. If the simple average is used, i.e., each year's profits are given the same weightage, no
discrimination is made between a business that has rising profits and one that has falling profits. To overcome this, it is
necessary to give more weightage to the profits of recent years. If the weighted average profits are taken for the last
four years, the last year should be given a weightage of 4, the previous year a weightage of 3, the prior to that a weight
of 2 and so on. To obtain the weighted average profit, the profit of the year must be multiplied by its weightage and the
grand total should be divided by the aggregate number of weights.
Since goodwill figures rely on a series of estimates and assumptions, different weightings would produce different end
results.
Illustration 1
.
A Ltd. agreed to purchase business of a sole trader. For that purpose, goodwill is to be valued at 3 year's purchase of the
average profits of last 5 years.
Profits for these years are:

1997 – Rs 40,000; 1998 – Rs 45,000; 1999 – Rs 36,000; 2000 – Rs. 46,000;2001 – Rs 50,000.
Solution
Average Profit =
Goodwill = 3 years' purchase of average profit of last 5 years = Rs 43,400 x 3 = Rs 1,30,200.
Illustration 2
X Ltd. proposed to purchase the business carried on by Mr. A. Goodwill for this purpose is agreed to be valued at 3
years' purchase of the weighted average profits of the past four years. The appropriate weights to be used are :
1998 – 1: 1999 – 2: 2000 – 3; 2001 – 4.
Profits for these year are : 1998 – Rs 20,200; 1999 – Rs 24,800; 2000 – Rs 20,000 and 2001 – Rs 30,000.
On a scrutiny of the accounts, the following matters are revealed: (a) On 1st September, 2000 a major repair was made in
respect of the plant incurring Rs. 6,000 which amount was charged to revenue. The said sum is agreed to be capitalized
for Goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method; (b) The closing
stock for the year 1999 was overvalued by Rs. 2,400; and (c) To cover management cost an annual charge of Rs 4,800
should be made for the purpose of goodwill valuation.
You are required to compute the value of goodwill of the firm.
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Solution
Before calculating goodwill, it is necessary to compute actual profit on the basis of information given.
Calculation of Adjusted Profit

Particulars 1998 (Rs) 1999 (Rs) 2000 (Rs) 2001 (Rs)
Profit (as given) 20,200 24,800 20,000 30,000
Less : Management cost 4,800 4,800 4,800 4,800
15,400 20,000 15,200 25,200
Less: Overvaluation of closing stock - 2,400 - -
Add: Overvaluation of opening stock (Note 1) - - 2,400 -
15,400 17,600 17,600 25,200
Add: Capitalization of repairs - - 6,000 -
15,400 17,600 23,600 25,200
Less: Depreciation - - 200 580
15,400 17,600 23,400 24,620
Calculation of Average Profit

Year Profit (Rs) Weights Products (Rs)
1998 15,400 1 15,400
1999 17,600 2 35,200
2000 23,400 3 70,200
2001 24,620 4 98,480
10 2,19,280
Weighted Average Profit = Rs 2,19,280 / 10 = Rs. 21,928.

Goodwill = 3 years, purchase of weighted average profit = Rs. 21,928 x 3 = Rs. 65,784.
Note:
(1) Closing stock of 1999 becomes the opening stock of 2000
(2) Depreciation of 2000 = 10% of Rs. 6,000 for 4 months = Rs. 200. 2001 = 10% of (Rs 6,000 - 200) = Rs 580.
Super Profit Method

Super profit is the excess of actual profit over the normal profit of an enterprise. A common method of valuation of
goodwill is the super-profit method. A business unit may possess some advantages which enable it to make extra profits
over and above the amount that would be earned if the capital of the business was invested elsewhere with similar
risks. These extra profits, generally expressed as super profits, can be valued, and goodwill is the value of the few years'
purchase of super profit.
Therefore, under this method, super profits are taken as the basis for calculating goodwill in place of average profit. Like
the previous method, this value is also computed by applying a traditional rule acceptable in the trade, e.g., three or
four years' purchase of super profit. For calculating goodwill, the following steps are as follows:
Step 1 Calculate capital employed (it is the total of shareholder's equity plus long term debt or fixed assets plus net
current assets).
Step 2 Calculate normal return by multiplying capital employed with normal rate of return.
Step 3 Calculate average maintainable profit of the business.
Step 4 Calculate the difference between the average maintainable profit and normal return as calculated above. This
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difference is called super profit (if it is positive).
Step 5 Multiply that super profit by the number of year's purchase. the product is the value of the goodwill.
Illustration 3
The following particulars are available in respect of the business carried on by Sucharan.
(i) Capital employed – Rs. 50,000
(ii) Trading profit (after tax) :
1998 – Rs 12,200;
1999 – Rs 15,000;
2000 – Rs 2,000 (Loss); and
2001 – Rs 21,000.
(iii) Market rate of interest on investment – 8%.
(iv) Rate of risk return on capital invested in business – 2%.
(v) Remuneration from alternative employment of the proprietor (if not engaged in business) Rs 3,600 p.a.
You are required to compute the value of goodwill on the basis of 3 years purchase of super profits of the business
calculated on the average profit of the last four years.
Solution
(1) Calculation of Average Profits (2) Calculation of Super Profits
Particulars Rs Particulars Rs
1998 12,200 Average Profits `11,550
1999 15,000 Less: Remuneration 3,600
2000 (2,000) Average Trading Profits 7,950
2001 21,000 Less: Normal Profit @ 10% on Rs 50,000 5,000
46,200 Super Profits 2,950
Average Profits = Rs 46,200 /4 11,550
Goodwill = 3 year's purchase of super profits = Rs 2,950 x 3 = Rs 8,850.
Illustration 4
From the following information calculate the value of goodwill :
(a) Average capital employed Rs 12,00,000.
(b) Company declares 15% dividend on the shares of Rs 20 each fully paid, which is quoted in the market at Rs 25.
(c) Net trading profit of the firm (after tax) for the past 3 years : Rs 2,15,200; Rs 1,81,400; Rs 2,25,000.
You are required to compute the value of goodwill on the basis of 5 years purchase of super profits of the business
calculated on the average profit of the last three years.
Solution
(1) Calculation of Average Profits (2) Calculation of Super Profits
st
1 Year 2,15,200 Average Trading Profits 2,07,200
2nd Year 1,81,400 Less: Normal Profit @ 12% on Rs 12,00,000 (Note 2) 1,44,000
3rd Year 2,25,000 Super Profits 63,200
6,21,600
Average Profits = Rs 6,21,600 / 2,07,200
3
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Goodwill = 5 year's purchase of super profits = Rs 63,200 x 5 = Rs 3,16,000.
Working Notes :
(1) Dividend per share = 15% of Rs 20 = Rs 3.
(2) Rate of return on capital =
Illustration 5
Following is the Balance Sheet of Navin Traders as on 31.3.2002:
Liabilities Rs Assets Rs
Creditors 1,52,160 Fixed Assets 3,60,000
Capital 6,56,000 Current Assets 4,88,160
Reserve 1,60,000 Investments in shares 1,20,000
9,68,160 9,68,160
The following net profits were earned which included a fixed income on investment of Rs. 8,000 per year.
Year ended 31 March : 1999 Rs 1,28,000; 2000 : Rs 1,44,000; 2001 : Rs 1,72,000;2002 : Rs 1,80,000.
Standard rate of return on capital employed in this type of business is 8%.
Calculate the value of goodwill of the above business at three years purchase of the average super profits for the four
years assuming (i) that each years profit is immediately withdrawn in full by the proprietor and (ii) the weight to be
assigned to the profits for the purpose of averaging are :
Year : 1999 2000 2001 2002

Weight : 1 1.5 2 2.5
Ignore Income tax.
Solution
(1) Calculating of Trading Profit
Particulars 1999 (Rs) 2000 (Rs) 2001 (Rs) 2002 (Rs)
Profit 1,28,000 1,44,000 1,72,000 1,80,000
Less : Income on Investment 8,000 8,000 8,000 8,000
Trading Profits 1,20,000 1,36,000 1,64,000 1,72,000
(2) Calculation of Weighted Average Profit

Particulars 1999 (Rs) 2000 (Rs) 2001 (Rs) 2002 (Rs) Total (Rs)
Trading Profits 1,20,000 1,36,000 1,64,000 1,72,000 5,92,000
Weight 1 1.5 2 2.5 7
Product 1,20,000 2,04,000 3,28,000 4,30,000 10,82,000
Weighted Average Profit = Rs 10,82,000 / 7 = Rs 1,54,571
(3) Calculation of Capital Employed (4) Calculation of Super Profits

Fixed Assets 3,60,000 Weighted Average Profits 1,54,571
Current Assets 4,88,160 Less: Normal Profit @ 8% on Rs 6,96,000 55,680
8,48,160 Super Profits 98,891
Less % Creditors 1,52,160
6,96,000
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Goodwill = 3 years' purchase of super profits = 3 x Rs 98,891 = Rs 2,96,673.
Illustration 6
Negotiation is going on for transfer of X Ltd. on the basis of the Balance Sheet and the additional information as given
below:
Balance Sheet of X Ltd. as on 31st March, 2002
Share Capital (Rs 10 fully paid-up shares) 10,00,000 Goodwill 1,00,000
Capital 4,00,00 Land and Building 3,00,000
Reserve 3,00,000 Plant and Machinery 8,00,000
Investments 1,00,000
Stock 2,00,000
Debtors 1,50,000
Cash and Bank 50,000
17,00,000 17,00,000
Profit before tax for 2001-02 amounted to Rs. 6,00,000 including Rs 10,000 as interest on investment. However, an
additional amount of Rs 50,000 p.a. shall be required to be spent for smooth running of the business.
Market values of Land and Buildings and Plant and Machinery are estimated at Rs. 9,00,000 and Rs. 10,00,000
respectively. In order to match the above figures further depreciation to the extent of Rs 40,000 should be taken into
consideration.
Income tax rate may be taken at 50%. Return on capital at the rate of 20% before tax be considered normal for this
business at the present stage.
For the purpose of determining the rate of return, profit for this year after the aforesaid adjustments may be taken as
expected average profit. Similarly, average trading capital employed is also be considered on the basis of the position in
this year. It has been agreed that four years' purchase of super profit shall be taken as the value of goodwill for the
purpose of the deal. You are required to calculate the value of goodwill of the company.
Solution
(1) Calculation of Capital Employed (2) Computation of Avg. Maintainable Trading Profit
Particulars Rs Particulars Rs Rs
Land and Buildings (Market value) 9,00,000 Net Profit before Tax 6,00,000
Plant and Machinery (Market value) 10,00,000 Less: Additional Depreciation (given) 40,000
Stock 2,00,000 Less: Additional recurring expenses (given) 50,000
Debtors 1,50,000 Less: Interest on Investment (Non- 10,000 1,00,000
Cash and Bank 50,000 operating profit) 5,00,000
23,00,000 2,50,000
Less: Provision for Tax @ 50% 2,50,000
Less Sundry Creditors 3,00,000 Profit after Tax
20,00,000
(3) Calculation of Average Capital Employed (4) Calculation of Super Profits

Closing capital employed [as per above (1)] 20,00,000 Profit after tax (Trading) 2,50,000
Less : ½ of average maintainable trading profit Less: 10% of Average Capital employed 1,87,500
Super Profits
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after tax (Note 2) 1,25,000

18,75,000
Goodwill = 4 years' purchase of super profit = Rs 62,500 x4 = Rs 2,50,000.
Working Notes:
(1) For the purpose of computation of capital employed, investment should not be taken into consideration. Similarly,
income from such investment should not be included in the average maintainable profit.
(2) For calculating average capital employed, ½ of average maintainable profit after tax is to be deducted from the
closing capital employed.
Illustration 7
From the following information, prepare statements showing :
(i) Capital employed;
(ii) Average capital employed;
(iii) Goodwill on the basis of 5 years' purchase of the average super profit:
Balance Sheet of Z Ltd. as on 31.12.2001

20,000 Equity Shares of Rs 10 each 2,00,000 Goodwill 30,000
1,00, 9% Preference shares of Rs 100 each 1,00,000 Fixed Assets 3,50,000
Reserve and Provision : Investments : 6% Govt. Loan 45,000
(Provision for taxation Rs 20,000) 2,00,000 Current Assets 2,00,000
10% Debentures 90,000 Share Selling Commission 10,000
Creditors 60,000 Discount on issue of Debentures 15,000
6,50,000 6,50,000
The current market value of the plant included in fixed assets is Rs 15,000 more. The average profit of the company
(after deductions for interest on debentures and govt. taxes) is Rs 68,000. Expected rate of return is 10%.
Solution
Fixed Assets : Rs (3,50,000 + 15,000) 3,65,000 Closing Capital Employed 4,85,000
Current Assets 2,00,000 Less: ½ of Adjusted Average Trading Profit
5,65,000 after tax (Note 1) (1/2 of Rs 71,150) 35,575
Less: Liabilities Average Capital Employed 4,49,425
Creditors 60,000
Provision for taxation 20,000 80,000
Closing Capital Employed 4,85,000
(c) Value of Goodwill = 5 years' purchase average super profit = 5 x Rs 26,207 (Note 2) = Rs 1,31,035; say – Rs
1,31,000.
Working Notes:
(1) Calculation of Adjusted Average Trading Profit after Tax
Particulars Total (Rs)
Average Annual Profit after tax 68,000
Less : Interest on investment after tax shield : Rs (45,000 x 6/100 x 50/100), assuming rate of tax 50% 1,350
Mo no - 8007916622/33 Page | 97
66,650
Add: Interest on Debenture after tax shield : Rs (90,000 x 10/100 x 50/100) 4,500
71,150
(2) Calculation of Average Super Profit

Adjusted Average Trading Profit after tax 71,150
Less : Normal return on Average capital employed (10% on Rs 4,49,425) 44,943
Super Profits 26,207
Tutorial Notes:
(1) At the time of calculating capital employed, investment in 6% Government loan should not be taken into
consideration.
(2) Debenture should be treated as a part of capital employed. Therefore, it should not be deducted from the total
assets.
(3) For calculating adjusted trading profit, interest on investment (after tax) should be deducted from average annual
profit (because, investment has not been considered while calculating capital employed).
(4) All fictitious assets (e.g. share selling commission and discount on issue of debentures) should not be taken in the
computation of capital employed.
(5) Goodwill appearing in the Balance Sheet is not purchased goodwill. Therefore, it has not been taken into
consideration for calculating capital employed.
(3) Capitalization of Average Profit Method

Under this method, the business unit is valued by applying the following formula:
Total value of the firm = x 100
After calculating the value of the firm in the above manner, the net assets of the business unit is deducted from this and
the balance is the value of the goodwill.
Illustration 8
Ascertain the value of goodwill of Shoenischit Limited carrying on business from the following :
Balance Sheet as at 30th June, 2002

Paid-up Capital – 2,500 shares of Rs 100 each full 25,00,000 Goodwill at cost 2,50,000
paid 4,80,000 Land and Building at cost 11,00,000
Bank Overdraft 8,05,000 Plant and Machinery at cost less 10,00,000
Sundry Creditors 4,25,000 depreciation
Provision for Taxation 6,00,000 Stock-in-trade 15,00,000
Profit & Loss Appropriation Account Book debts less provision for bad 9,60,000
48,10,000 debts 48,10,000
The company started operations in 1997 with a paid-up capital as aforestated of Rs 25,00,000. Profits earned before
providing for taxation have been as follows:
Year ended 30 June : 1998 : Rs 6,00,000; 1999 : Rs 7,50,000; 2000 : Rs 8,50,000; 2001 : Rs 9,50,000: 2002 : Rs 8,50,000.
Income tax @ 50% has been payable on these profits. Dividends have been distributed from the profits of the first three
years @ 10% and from those of the next two years @ 15% of the paid-up capital.
Mo no - 8007916622/33 Page | 98
Solution
Computation of Net Tangible Assets Computation of Average Maintainable Profit
Tangible Assets : 30th June, 1998 6,00,000
Land and Buildings 11,00,000 30th June, 1999 7,50,000
Plant and Machinery 10,00,000 30th June, 2000 8,50,000
Stock-in-trade 15,00,000 30th June, 2001 9,50,000
th
Book debts less provision 9,60,000 30 June, 2002 8,50,000
[A] 45,60,000 40,00,000
Liabilities: 4,80,000 Average Profit = Rs 40,00,000 / 5 8,00,000

Bank Overdraft 8,05,000 Less: provision for tax : 50% 4,00,000
Sundry Creditors 4,25,000 Profit after Tax 4,00,000
[B]
Net Tangible Assets [A - B] 28,50,000
Average dividend paid = [(10 % x 3) + (15% x 2)] / 5 = 12%.
Total value of the business = x 100 = x 100 = Rs 33,33,333
Goodwill = Total value of the business Less Net Tangible Assets = Rs 33,33,333 – Rs 28,50,000 = Rs 4,83,333.
(4) Capitalization of Super Profit Method

Under this method, goodwill is calculated by capitalizing super profits at agreed rate. The goodwill is calculated directly
by applying the following formula :
Good will =
Where p = Adjusted forecast maintainable profit; r = Normal rate of return; c = Capital employed; and m = Capitalization
ratio.
Illustration 9
The net profit of the business after tax, for the past five years are : Rs 2,00,000; Rs 2,12,500; Rs 2,30,000; Rs 2,62,500;
and Rs 2,95,000. The capital employed in the business is Rs 20,00,000. The normal rate of return expected in this type of
business is 10%. It is expected that the company will be able to maintain its super profit for the next 5 years. Calculate
the value of goodwill on the basis of capitalization of super profit method.
Solution
Average Maintainable Profit =
= Rs 12,00,000 / 5 = Rs 2,40,000
Goodwill =
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where,
P = Average maintainable profit = Rs 2,40,000
r = Normal rate of return = 10%
c = Capital employed = Rs 20,00,000
m = Capitalization ratio = 10%
(5) Annuity Method

An annuity is a series of equal periodic payments occuring at equal intervals of time. Under this method, goodwill is
calculated by taking the average super profit as the value of an annuity over a certain number of years. The present
value of the above annuity, discounted at the given rate of interest (normal rate of return) is the value of thegoodwill.
If the value of annuity is not given, the following formula can be applied for valuing goodwill :
V=[]
Where, V = value of the goodwill; a = average super profit; i = rate of interest per annum; n = number of years.
Illustration 10
The net profit of a company after providing for taxation for the past five years are :
Rs 40,000; Rs 50,000; Rs 70,000 and Rs 80,000.
The net tangible assets in the business is Rs 4,00,000 on which the normal rate of return is expected to be 10%. It is also
expected that the company will be able to maintain its super profits for next five years.
Calculate the value of goodwill of the business on the basis of an annuity of super profits, taking the present value of an
annuity of one rupee for five years at 10% interest is Rs 3.78.
Solution
Calculation of Average Profits Calculation of Super Profits
st
1 Year 40,000 Average Profits 54,000
2nd Year 50,000 Less: Normal return on capital employed
3rd Year 30,000 (10% of Rs 4,00,000) 40,000
4th Year 70,000
5th Year 80,000 Super Profits 14,000
2,70,000
Total Profit
Average Profits = Rs 2,70,000 / 5 = Rs 54,000
Goodwill = Super Profit x Value of an annuity

Goodwill = Rs 14,000 x 3.78 = Rs 52,920.
The following important points are to be noted in determining the profits upon the basis of which goodwill is to be
valued:
(a) From the total profit, income from investments are to be excluded. This is because, the capital value of these
investments are not to be considered while calculating the capital employed. The return from investments are not
trading incomes and will not normally be that expected from the use of other assets.
(b) The changes for depreciation can cause a change in the amount of net profits. If excessive depreciation is charged, it
should be added back. On the other hand, where depreciation charges are inadequate, a further charge should be
made. Therefore, the charges for depreciation should be properly reviewed.
(c) Income from any assets not generally used in the business should be excluded from profits as also the value of the
asset from the capital employed.
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(d) Abnormal profits and losses, arising from abnormal circumstances, should be eliminated from the profits of the
years in which they occurred.
(e) Excessive remuneration, i.e, above normal or fair remuneration paid to the owners or directors should be written-
back by the amount it exceeds over fair remuneration.
(f) Abnormal expenditure on advertisements in a particular accounting should be properly adjusted. It should be
allocated in such a fashion that each year is charged with the average normal expenditure on advertisement.
Valuation of Purchased Goodwill

The method of valuation of purchased goodwill compares the value of the net tangible and identifiable intangible assets
with the bargained purchase price of the business which is acquired. The difference is the value of the goodwill.
Therefore, purchased goodwill is the residual or the excess of the cost over the fair value of the identifiable net assets
acquired.
Valuation of Shares
A share represents an interest in a company. There are a number of ways in which the shares of a company may be
valued. It can be valued either as an entitlement to a share of future profits, or as an interest in the net assets that
comprise the company. Therefore, the choice of method of valuation is often governed by the reasons for the
investment. The majority of shareholders of a company are interested in dividends. On the other hand, a majority of
shareholders may be interested in the realisable value of the company's net assets since they can liquidate a company.
There may be instances where a company's shares are not quoted on any stock exchange. The ability to place realistic
valuations on such investments is of great importance.
Need for Valuation

(1) When two or more companies amalgamate or one company absorbs another company, it is necessary to from a fair
and equitable basis of valuation for transferring the shares. The prices quoted in the stock exchange, if any, do not
properly indicate the actual value of the shares. For formulating amalgamation and absorption schemes, a fresh
valuation method should be taken up.
(2) When a company has decided to undergo a process of reconstruction, to protect the rights of the dissenting
shareholders, a fresh valuation of shares should be taken up. The dissenting shareholders should be paid as per the
valuation of shares in respect of their holdings.
(3) When preference shares or debentures are converted into equity shares, a fresh valuation method should be
adopted for equity shares to calculate exchange ratio. It is necessary to ascertain the number of equity shares
required to be issued (based on the new valuation) for debentures as preference shares.
(4) Shares are often pledged as security for raising loans. In such cases, fresh valuation of shares is necessary to know
the real worth of shares on the basis of which loan is to be provided.
(5) When one company acquires majority of the shares of another company, It is necessary to value such shares.
(6) The survivor of a deceased person, who gets some shares of a company made by the will, may require the valuation
of such shares, which are not quoted in the stock exchange, for estate duty purposes.
(7) Under a scheme of nationalization, when the share of a company are taken over by the Government, it is necessary
to value the shares for reasonable compensation to the holders.
(8) When a partnership firm is dissolved and the firm is having some investment in shares, it is necessary to value those
shares for proper distribution among the partners.
Factors Affecting Valuation of Shares

(1) The nature of the company's business.
(2) Percentage of dividend declared on the shares.
(3) The demand and supply of shares.
(4) The income yielding capacity of the company.
(5) The availability of sufficient assets over liabilities.
(6) General economic conditions, e.g., availability of raw materials, possibility of new competitions.
(7) Financial, political and other factors affecting the business.
Mo no - 8007916622/33 Page | 101
(8) The fact that there is no free market for unquoted shares.
Methods of Valuation
There are two widely applied methods for the valuation of shares :
(a) The Assets Backing Method; and
(b) the Yield Valuation Method.
There are also circumstances where one method of valuation would not be suitable. In such circumstances, a number of
alternative methods may be used as a broad framework in which to agree on a valuation.
Asset Backing Method

This method is also known as Asset-Valuation Method or Intrinsic Value Method. Under this method, the share's value is
simply the net assets, or equity, divided by the number of shares. The value of a share is first determined by ascertaining
the value of net assets of a company and then dividing them by the number of shares. Therefore, it is necessary to
estimate the worth of the assets and liabilities. In ascertaining the amount of net assets, the value of goodwill as well as
the value of any contingent assets should also be taken into consideration. The following points are important and
should be borne in mind for estimating the net assets :
(1) The fixed assets of the company should be revalued at their net realisable value.
(2) Inventory should be taken at current market prices.
(3) Investments should also be taken at current market prices. These can be taken at cost if the fall in the market value
is believed to be temporary.
(4) Other current assets like Bills Payable or Sundry Debtors should be valued at their expected net realisable value.
(5) All fictitious assets appearing in the Balance Sheet are to be eliminated.
(6) Goodwill may be valued on the basis of super profits.
(7) All unrecorded assets and liabilities are to be taken into consideration.
From the aggregate value of the assets, all external liabilities are to be deducted to arrive at the net assets figure. The
external liabilities include Sundry Creditors, Bills Payable, Loan, Debentures, etc.
The net assets of a company, as ascertained above, will be the basis of valuation of shares, and would be apportioned in
the following manner :
(1) If the preference shareholders have priority to dividend as well as to capital on a winding-up, they will be valued at
par if they expect the same rate of dividend as specified in the shares. But if the required rate of return is more than
the specified rate, they are to be valued above par to cover both capital and dividend.
(2) After deducting the value of preference shares, as calculated above, from the net assets, the balance will be divided
by the number of equity shares. The resultant figure will be the value of each equity share. The Assets Backing
Method is generally applied under the following circumstances :
(1) For formulating schemes of amalgamation;
(2) For acquiring majority of the shares and controlling the company;
(3) When there is a liquidation.
Illustration 11
The Balance Sheet as at 31st March, 2002 showed the following position:
Share Capital : Debtors 5,00,000
20,000 equity shares of Rs 100 each 20,00,000 Stock-in-hand 15,00,000
General Reserve 6,00,000 Plant 10,00,000
Profit and Loss Account 3,50,000 Factory Premises 11,50,000
Current Liabilities :
Bank Overdraft 3,00,000
Creditors 4,00,000
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41,50,000 41,50,000
Additional information :
(i) Net profits of the company for the last five years before providing for taxation were as follows:
Rs 4,10,000; Rs 6,40,000; Rs 7,00,000; Rs 8,50,000; Rs 9,00,000.
(ii) Managerial remuneration of Rs 60,000 has been charged for each year.
(iii) The market value of the assets were as follows: Stock – Rs 15,50,000; Plant – Rs 10,40,000; Factory premises – Rs
12,83,000.
(iv) Taxation may be considered at 50%.
(v) Goodwill should be valued at 5 years' purchase of super profits.
(vi) Normal rate of return – 10% p.a.
On the basis of the above information, find out the intrinsic value of shares. Indicate assumptions, if any, clearly.
Solution
(1) Calculation of Capital Employed
Net Assets Basis Net worth Basis
Assets Rs Rs Rs Rs
Debtors 5,00,000 Equity Share Capital 20,00,000
Stock in hand 15,50,000 General Reserve 6,00,000
Plant 10,40,000 Profit and Loss Account 3,50,000 29,50,000
Add: Revaluation Profit :
Factory Premises 12,83,000 43,73,000 Stock Rs (15,50,000 – 15,00,000) 50,000
Less: Outside Plant Rs (10,40,000 – 10,00,000) 40,000
Liabilities : 3,00,000 Factory Premises (12,83,000- 1,33,000
Bank Overdraft 4,00,000 11,50,000) 2,23,000
Creditors 5,00,000 12,00,000 Capital Employed 31,73,000
Provision for 31,73,000

Taxation
Capital Employed
(2) Calculation of Super Profit

Average maintainable trading profit (Rs 4,10,000 + Rs 6,40,000 + Rs 7,00,000 + Rs 8,50,000 + Rs 9,00,000)/5 7,00,000
Add : Back managerial remuneration 60,000
7,60,000
Less: Managerial remuneration (maximum 11% allowable under Companies Act, 1956) 83,600
Profit before Tax 6,76,400
Less: Tax 50% 3,38,200
Profit after Tax 3,38,200
Less: Normal return – 10% on Capital Employed 3,17,300
Super Profit 20,900
(3) Valuation of Shares under Intrinsic Value Method

Net assets as in (1) above 31,73,000
Goodwill as in (3) above 1,04,500
32,77,500
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Number of Shares 20,000

Value per share (Rs 32,77,500 / 20,000)
1,63,875
Assumption: No depreciation has been charged on increased value of different assets.
Yield Valuation Method

This method is also known as Market Value Method. The word 'yield' means a rate of return relating cash invested to
cash received (or expected to be received). Yield may be 'Earning yield' or 'Dividend yield'. They are as under:
(i) Earning Yield

A company cannot grow and can never be in a position to increase its dividends, if it distributes all of its profits as
dividends. There are also legal restrictions by the Companies Act for distribution of profits as dividends. Therefore, a
shareholder will have interest both in the retained profits as well as distributed profits. Under this method, shares are
valued on the basis of the earnings expected by using an average of recent years as the best indicator of what future
earnings of the company will be. Under this method, value of each share is calculated by applying the following formula :
Value Per Share = x Face Value of Share
*Expected Rate of Earnings (ERE) = x 100
While fixing the normal rate of return, the degree of risk involved and the current rate of interest of gilt-edged securities
should also be taken into consideration.
Illustration 12
From the following information of P. Merchandise Co. Ltd., compute the value of its equity shares by (capitalization of)
earning method.
Balance Sheet as on 31st December, 2001
Share Capital : Fixed Assets 5,00,000
Equity shares of Rs 10 each, fully paid 2,50,000 Current Assets 3,00,000
Reserve and Surplus 1,00,000 Preliminary Expenses 25,000
12% Debentures (since 1996) 2,50,000
Other Liabilities 2,25,000
8,25,000 8,25,000
Year ending 31st December

Particulars 1997 (Rs) 1998 (Rs) 1999 (Rs) 2000 (Rs) 2001 (Rs)
Sales 6,00,000 7,00,000 8,00,000 5,00,000 9,00,000
Operating costs 3,45,000 3,95,000 4,45,000 2,95,000 4,95,000
Interest on Loan from Bank 25,000 25,000 25,000 25,000 25,000
Assume rate of taxation at 60% and the rate of normal earnings at 12 ½ %. Also show the working
Solution
Sales 6,00,000 7,00,000 8,00,000 5,00,000 9,00,000
Less: Operating Cost 3,45,000 3,95,000 4,45,000 2,95,000 4,95,000
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Profit before Interest and tax (PBIT) 2,55,000 3,05,000 3,55,000 2,05,000 4,05,000
Less: Interest on bank loan 25,000 25,000 25,000 25,000 25,000
Less: Interest on Debentures 30,000 30,000 30,000 30,000 30,000
Profit before tax (PBT) 2,00,000 2,50,000 3,00,000 1,50,000 3,50,000
Less : Tax @ 60% 1,20,000 1,50,000 1,80,000 90,000 2,10,000
Profit after tax (PAT) 80,000 1,00,000 1,20,000 60,000 1,40,000
Average Profit = = Rs 1,00,000 ; Expected Rate of Earnings on Capital = x 100 = 40%
Normal rate of return = 12.5% (given)
Value Per Share = x Face Value of Share = x Rs 10 = Rs 32
Illustration 13
From the following Balance Sheet of J. Adams Co. Ltd. as on 31.12.2001, compute the value of its equity shares by
capitalization of earnings method :
Share Capital: Fixed Assets at cost, less depreciation 6,00,000
Equity Shares of Rs 10 each 5,00,000 Current Assets 5,75,000
Reserve and Surplus 1,50,000 Preliminary Expenses 25,000
10% Debentures (Issued at par on 1.1.1997,
redeemable at par on or before 2006) 3,00,000
Current Liabilities 2,50,000
12,00,000 12,00,000
Particulars 31.12.1997 31.12.1998 31.12.1999 31.12.2000 31.12.2001

Sales Rs 9,00,000 11,00,000 14,00,000 8,00,000 16,00,000
Expenses Rs 3,50,000 5,80,000 6,00,000 3,10,000 8,00,00
Interest on Loan Rs 20,000 40,000 50,000 60,000 20,000
Interest on Debentures Rs 30,000 30,000 30,000 30,000 30,000
It is the usual practice of the company to transfer Rs 30,000 every year to General Reserve. Assume rate of
taxation at 50% and the rate of normal earning at 12.5%. Also show the workings.
Solution
Sales 9,00,000 11,00,000 14,00,000 8,00,000 16,00,000
Less: Expenses 3,50,000 5,80,000 6,00,000 3,10,000 8,00,000
Profit before Interest and tax (PBIT) 5,50,000 5,20,000 8,00,000 4,90,000 8,00,000
Less: Interest on loan 20,000 40,000 50,000 60,000 20,000
Less: Interest on Debentures 30,000 30,000 30,000 30,000 30,000
Profit before tax (PBT) 5,00,000 4,50,000 7,20,000 4,00,000 7,50,000
Less : Tax @ 50% 2,50,000 2,25,000 3,60,000 2,00,000 3,75,000
Profit after tax (PAT) 2,50,000 2,25,000 3,60,000 2,00,000 3,75,000
Average Profit = = Rs 2,82,000
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Expected Rate of Earnings = x 100 = 56.4% Normal Rate of Return = 12.5% (given).
Value Per Share = x Face Value of Share = x Rs 10 = Rs 45.12
Alternatively,
Capitalized value of the business based on earnings = Rs 2,82,000 / 12.5% = Rs 22,56,000.
Value Per Share = = = Rs 45.12
Tutorial Note : Amount transferred to reserve Rs 30,000 should not be taken into consideration for calculation of value
of shares under this method.
(ii) Dividend Yield

There may be circumstances where the shareholder has little or no influence over dividend policy. In such cases, it may
be more appropriate to value the shares based on dividends than earnings.
The following matters must be taken into consideration while making an estimate of the expected future profits
available for equity share dividends:
(1) The average past profits of the company require an adjustment, if necessary, should any special factor(s) cause the
future profits to differ from the past.
(2) Adequate provision should be made for depreciation, taxation and other liabilities.
(3) The amount of profits to be set aside for preference share dividend.
In connection with the valuation of shares on the yield basis, the following points may be given due consideration:
(1) Depending on the circumstances, the average rate of return is generally taken for three to five years.
(2) During a period of time, if the profits fluctuate violently, it is better to eliminate abnormal periods, where the profits
earned are too high or too low.
(3) The rate of dividend is dependent on the liquid position of the company. If the liquidity position of the company is
not satisfactory, it will not be in a position to declare adequate rate of dividend though the company earned
adequate rate of earnings.
(4) Under this method, shares are valued on the basis of the expected dividends. The following formula is adopted for
valuation of shares :
Value Per Share = x Paid-up Value of Share
Illustration 14
From the following information, calculate the value of an equity share:
(i) The paid-up share capital of a company consists of 1,000, 15% Preference Shares of Rs 100 each and 20,000 Equity
Shares of Rs 10 each
(ii) The average annual profits of the company, after providing for depreciation and taxation amounted to Rs 75,000. It
is considered necessary to transfer Rs 10,000 to General Reserve before declaring any dividend.
(iii) The normal return expected by investors on equity shares from the type of business carried on by the company is
10%
Solution
Calculation of Expected Rate of Dividend
Mo no - 8007916622/33 Page | 106

Particulars Rs
Profit after tax 75,000
Less: Transferred to General Reserve 10,000 Value Per Share = x Paid-up
65,000
Value
Less: Preference dividend @ 15% on Rs 1,00,000
Profit available to Equity Shareholders 15,000
50,000 = x Rs 10 = Rs 25
*Expected Rate of Dividend = x 100 = x 100 = 25%
Illustration 15
From the following information relating to a company, calculate the value of its equity shares.
Issued equity share capital – 10,000 shares of Rs 10 each; Paid-up equity share capital – Rs 8 per share.
6% Preference share capital – 1,00,000 shares of Rs each fully paid; Annual transfers to general reserve – 20%.
Rate of tax – 50%; Expected profits before tax – Rs 2,00,000.
Normal rate of return – 20%.
Particulars Rs
Expected Profits (before tax) 2,00,000
Less: Income tax @ 50% 1,00,000 Value Per Share = x Paid-up
Profit after tax 1,00,000 Value
Less: Transferred to General Reserve @ 20% 20,000
80,000
Less: Preference Dividend : 6% on Rs 10,00,000 = x Rs 8 = Rs 10
Profits available to Equity Shareholders 60,000
20,000
*Expected Rate of Dividend = x 100 = x 100 = 25%
Valuation of Goodwill....Practical Questions......
Illustration No. 1
The balance sheet of manufacturing Co. Ltd. disclosed the following financial position as at 31st March, 1996:
Liabilities Rs. Assets Rs.
Paid up capital: Goodwill at cost 30,000
30,000 shares of Land & buildings at cost 1,75,000
(Rs. 10 each, fully paid) 3,00,000 (less depreciation)
Capital reserve 20,000 Plant & machinery at cost 90,000
Sundry creditors 71,000 (less depreciation)
Provisions for taxation 55,000 Stock at cost 1,15,000
Profit & loss account 66,000 Book debts 98,000
Less: Provision for bad debts 3,000 95,000
Cash at Bank 7,000
5,12,000 5,12,000
Mo no - 8007916622/33 Page | 107
You are asked to value the goodwill of the Manufacturing Co. Ltd. on the basis of 5 year’s purchase of super profits,
for which purpose the following information is supplied:
(1) Adequate provision has been made in the accounts for income tax and depreciation.
(2) The rate of income-tax may be taken at 50%.
(3) The average rate of dividend declared by the company for the past five years was 15%.
(4) The reasonable return on capital invested in the class of business done by the company in 12%.
Illustration No. 2
The following is the balance sheet of N Ltd. as on 31st March 2012:
Equity share capital 5,00,000 Land & Building 2,00,000
(paid of Rs. 10 each) Plant & Machinery 2,81,500
Profit & loss account 1,00,000 Furniture 47,000
General reserve 60,000 Trading investments at cost 40,000
10% Debenture 1,30,000 Non trading investments 1,20,000
Sundry creditors 50,000 Stock 75,000
Bills payable 35,000 Debtors 1,05,000
Outstanding expenses 12,000 Cash at bank 18,500
8,87,000 8,87,000
(1) Standard rate of return on capital employed in this type of business is 8%.
(2) Profits & weight to be considered for last 4 years are as follows:
Year Weight Rs.
2007-2008 1 1,28,000
2008-2009 1.5 1,44,000
2009-2010 2 1,72,000
2010-2011 2.5 1,80,000
(3) Above net profit included a fixed income on non-trading investment of Rs. 8,000 peryear.
(4) At the end of year 2008-2009 closing stock was overvalued by Rs. 25,000.
Calculate goodwill on weighted average super profit basis at 2 years purchase. Ignore taxation.
Illustration No. 3
The net profits after tax of Z Ltd. for the past 5 years are as follows:
Year Profit
2007-2008 2,56,000
2008-2009 2,64,000
2009-2010 3,76,000
2010-2011 4,86,000
2011-2012 5,30,500
The capital employed in the business will be Rs. 16, 00,000.

Reasonable rate of return of return of 15% is expected.
Calculate the value of the goodwill of the business on the basis of:
(1) Average profit method at 2 years purchase.
(2) Weighted average profit method at 2 years purchase assuming weight to be 1, 2,3,4,5.
(3) Super-profits basis at 4 years purchase. Super profit to be calculated on the basis of average profit.
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(4) Annuity method on super-profits basis, taking the present value of an annuity of Rs. 1 for the 4 years at 15% as Rs.
2.855.
(5) Capitalization of future maintainable profit.
(6) Capitalization of super profit method (Capitalization rate 15%)
Illustration No. 4
The net profits of a company after providing for taxation for the past five years are Rs. 78,000, Rs. 82,000, Rs. 88,000, Rs.
93,000 and Rs. 99,000. The capital employed in the business is Rs. will be able 8, 00,000 on which a reasonable rate of
return of return of 10% is expected. It is expected that the company to maintain its super profits for the next five years.
(1) Calculate the value of the goodwill of the business on the basis of an annuity of super-profits, taking the present
value of an annuity of one rupee for the five years at 10% interest as Rs. 3.78.
(2) How would your answer differ if the goodwill is valued by capitalizing the excess of the annual average profits over
the reasonable return on capital employed on the basis of the same return of 10%?
Illustration No. 5
X Ltd. proposed to purchase the business carried on by B and Co. Goodwill for this purpose is agreed to be valued at
three years purchase of the weighted average profits for the past four years.
The appropriate weights and profits for the past four years are as under:
Year Weight Profit (Rs. in Lakhs)

1997-1998 1 110
1998-1999 2 115
1999-2000 3 145
2000-2001 4 180
On scrutiny of the accounts, the following information is gathered:
(1) On 1st December, 1999, major repairs were carried out on building incurring Rs. 30 lakh which were charged to
revenue. The above mentioned sum was agreed to be capitalized for goodwill calculation subject to adjustment of
depreciation @ 10% p.a. under written down value method.
(2) The closing stock for the year 1999-2000 was undervalued by Rs. 10 lakh.
(3) To cover management cost, an annual charge of Rs. 20 lakh is to be considered for the purpose of valuation
goodwill.
Compute the value of goodwill of the firm.
Illustration No. 6
M Ltd. Proposed to purchase the business carried on by N Ltd. Goodwill for this purpose is agreed to be valued at three
year’s purchase of the weighted average profits of the past four years. The appropriate weights to be used and profit for
the years are as under:
Year Weight Profit (Rs.)
1995-1996 1 1,01,000
1996-1997 2 1,24,000
1997-1998 3 1,00,000
1998-1999 4 1,50,000
The books of account were closed every year on 31st March. On a scrutiny of the accounts, the following matters are
revealed:
(1) On 1st December, 1997, major repairs were carried out in respect of the plant, spending Rs. 30,000 which was
charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject to adjustment of
depreciation @ 10% p.a. on reducing balance method.
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(2) The closing stock on 31st March, 1997 was overvalued by Rs. 12,000.
(3) To cover management cost, as annual charge of Rs. 24,000 should be made for the purposes of valuation of goodwill.
Compute the value of goodwill of the business.
Illustration No. 7
The net profit of a business after providing for taxation, for the past five years is: Rs. 40,000, Rs. 42,500, Rs. 46,000, and
Rs. 52,500 & Rs. 59,000. The capital employed in the business is Rs. 4, 00,000. The normal rate of return expected in this
type of business is 10%. It is expected that the company will be able to maintain its super profit for the next 5 years.
Calculate the value of goodwill on the basis of:
(1) Five year’s purchase of super profits
(2) Annuity method, taking the present value of annuity of Rs. 1 for five years at 10% as 3.78
(3) Capitalization of super profits.
Illustration No. 8
Precision Ltd. proposed to purchase the business carried on by Fasteners Pvt. Ltd. The goodwill for this purpose is
agreed to be valued at five years' purchase of the weighted average profit for the past four years (use appropriate
weights). Profits for the past four years are as follows:
Year Profit Weight
1999-2000 2,52,500 1
2000-2001 3,10,000 2
2001-2002 2,50,000 3
2002-2003 3,50,000 4
On scrutiny of the books of account, the following matters were revealed:
(i) On 1st December, 2001, a major repair was made in respect of the plant incurring Rs. 75,000 which was charged to
revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of depreciation @
10% on reducing balance method.
(ii) The closing stock for the year 2000-2001 was overvalued by Rs. 30,000.
(iii) To cover management costs, an annual charge of Rs. 60,000 should be made for the purpose of valuation of
goodwill.
You are required to compute the value of goodwill.
Illustration No. 9
Following is the balance sheet of Danny Ltd. as on 31st March, 2005:
Liabilities Rs.
3,000, 6% Preference shares of Rs. 100 each, fully paid-up 3,00,000
1,30,000 Equity shares of Rs. 10 each, fully paid-up 13,00,000
Profit and loss account 9,00,000
Sundry creditors 4,78,500
35,78,500
Assets
Goodwill 1,00,000
Free-hold property 7,50,000
Plant and machinery less depreciation 7,00,000
Stock 7,40,000
Debtors (net) 7,98,500
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Cash and bank balances 4,90,000

35,78,500
The following are additional information:

(i) The profit after tax for the three financial years 2002-2003, 2003-2004 and 2004-2005, after charging debenture
interest, was Rs. 4, 41,000, Rs. 6, 45,000 and Rs. 4, 80,000 respectively.
(ii) The normal rate of return is 10% on the net assets attributed.
(iii) The value of freehold property is to be ascertained on the basis of 8% return. The current rental value is Rs. 1,
00,800.
(iv) The rate of tax applicable is 40%.
(v) 10% of profits for the financial year 2003-2004 referred to above arose from a transaction of non-recurringnature.
(vi) A provision of Rs. 31,500 on sundry debtors was made in the financial year 2004-2005 which is no longer required;
profit for the year 2004-2005 is to be adjusted for this item.
(vii) A claim of Rs. 16,500 against the company is to be provided and adjusted against profit for the financial year
ended on 31st March, 2005.
(viii) Goodwill may be calculated at 3 times adjusted average profits of the 3 years.
(ix) Capital employed may be taken as on 31st March, 2005.
You are required to ascertain the value of goodwill of the company.
Illustration No. 10
The average net profit before adjustment(s) is Rs. 5, 14,000. The profit includes interest at 8% on non-trading
investments. The cost of these investments is Rs. 1, 98,200 while the face value is Rs. 2, 00,000. Expenses amounting to
Rs. 7,000 per annum are likely to be discontinued in future.
The provision for income-tax is made at 30%. The normal rate of return may be taken at 10%. The average capital
employed in the business (including investments) is Rs. 18, 98,200.
Assuming four years purchase of super-profits, what is the value of goodwill?
Illustration No. 11
Abridged balance sheet of Rama Ltd. as on 31st March, 2009 is as follows:
Liabilities Rs.
Share capital 6,00,000
Reserves and surplus 50,000
Bank overdraft 10,000
Creditors 60,000
Provision for taxation 1,10,000
Proposed dividend 60,000
8,90,000
Assets
Fixed assets 3,70,000
Current assets 5,20,000
8,90,000
(1) The net profits of the company after deducting working expenses but before providing for taxation were as under:
Year Rs.
2006–2007 3,18,000
2007–2008 3,40,000
2008–2009 3,12,000
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(2) On 31st March, 2009, fixed assets were at Rs. 4, 50,000. Sundry debtors on the same date included Rs. 10,000 which
is irrecoverable.
(3) Having regard to the type of business, a 10% return on average capital employed is considered as reasonable.
Ascertain the value of goodwill on the basis of three years purchase of annual super profits. Also calculate goodwill by
capitalisation of average maintainable profits. Depreciation on fixed assets is charged @ 10% per annum and the rate of
tax is 30%.
Valuation of Shares.....Practical Qustions....
Illustration No. 1
Capital Structure of NS Ltd. is as follows:
Types of capital Rs.
5,00,000 Equity shares of Rs. 10 each fully paid up 50,00,000
5,00,000 Equity shares of Rs. 10 each, Rs. 8 paid up 40,00,000
5,00,000 Equity shares of Rs. 10 each, Rs. 6 paid up 30,00,000
12% Debenture 10,00,000
20,000, 9% Preference shares of Rs. 100 each 20,00,000
Expected profit per year before interest & tax Rs. 61,20,000
Rate of tax 40%
Transfer to general reserve every year 10% of profit
Normal rate of dividend 15%
Ascertain the value of equity shares on yield basis on the basis on above information.
Illustration No. 2
Given below is the balance sheet of Modern Wools Ltd. as at 31st March 1993:
Share capital: Land & buildings 2,70,000
Authorised & issued: Plant & machinery 1,00,000
6,000 shares of Rs. 100 each, fully paid-up 6,00,000 Stock 3,60,000
Profit and loss account 40,000 Sundry debtors 1,60,000
Bank overdraft 10,000
Creditors 80,000
Provision for dividends 60,000
8,90,000 8,90,000
The net profits of the company after deducting usual working expenses but before providing for taxation were as under:
Year Rs.
1992-1993 2,00,000
1991-1992 2,20,000
1990-1991 1,80,000
1989-1990 2,20,000
1988-1989 1,70,000
On 31st March, 1993, land & building was revalued at Rs. 2, 80,000 and plant & machinery at Rs. 1, 20,000 and sundry
debtors on the same date include Rs. 4,000 as irrecoverable.
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Having regard to nature of the business, 10% return on net tangible capital invested is considered reasonable. Land &
building and plant & machinery are subject to depreciation of 5% & 15% respectively.
You are required to value the company's share ex-dividend. Valuation of goodwill may be based on 5 years, purchase of
annual super profits. (Tax rate is to be assumed at 50%).
Illustration No. 3
The profit of a company, limited by shares, for the year ended 31st March, 1995 were Rs. 60,00,000. After setting apart
amounts for interest on borrowings, taxation and other provisions, the net surplus available to shareholders is
estimated at Rs. 15, 00,000. The company’s capital base consisted of:
(1) 1,00,000 equity shares of Rs. 100 each, Rs. 50 per share paid up; and
(2) 25,000 12% cumulative redeemable preference shares of Rs. 100 each fully paid up.
Enquires in the stock market reveal that shares of companies engaged in similar business and declaring a dividend of
15% on equity shares are quoted at a premium of 10%. What do you expect the market value of the company’s shares
to be, basing your working on the yield method?
Illustration No. 4
From the following particulars, calculate the value of an equity share:
2,000, 9% Preference shares of Rs. 100 each Rs. 2,00,000
50,000 Equity shares of Rs. 10 each, Rs. 8 Per share paid up Rs. 4,00,000
Expected profit per year before tax Rs. 2,18,000
Rate of tax 40%
Transfer to general reserve every year 20% of profit
Normal rate of earning 15%
Illustration No. 5
On 31st March, 1997 the balance sheet of a joint stock company disclosed the following position:
Share Capital: Goodwill 40,000
40,000 equity shares of Other fixed assets 5,00,000
Rs. 10 each, fully paid 4,00,000 Current assets 2,00,000
Profit and loss account 20,000
Current liabilities 1,30,000
7,40,000 7,40,000
(1) On 31st March, 1997 the goodwill of the company was valued at Rs. 50,000 while other fixed assets were valued at
Rs. 3, 50,000.
(2) The net profit earned by the company amounted to Rs. 51,600 for 1994-1995; Rs. 52,000 for 1995-1996; and Rs.
51,650 for 1996-1997.
(3) Every year an amount equal to 20% of the profit earned was transferred to general reserve- this being considered
reasonable in the industry in which the company is engaged.
(4) A return of 10% on the investment is considered fair in the industry.
Compute the value of the company’s share by the yield method.
Illustration No. 6
From the following particulars, calculate the fair value of an equity share assuming that out of the total assets, those
Mo no - 8007916622/33 Page | 113
amounting to Rs. 41,00,000 are fictitious:

(1) Share capital:
- 5, 50,000 10% Preference shares of Rs. 100 each, fully paid-up.
- 55, 00,000 Equity shares of Rs. 10 each, fully paid-up.
(2) Liability to outsiders: Rs.75,00,000
(3) Reserves and surplus: Rs. 45,00,000
(4) The average normal profit after taxation earned every year by the company during the last five year, Rs. 85,05,000.
(5) The normal profit earned on the market value of fully paid equity shares of similar companies is 12%.
Illustration No. 7
BALANCE SHEET of DIAMOND LTD. As on 31 st March, 2001:

Liabilities Rs. (in Lakhs) Assets Rs. (in Lakhs)
Share Capital: Land and building 110

Fully paid up shares Plant and machinery 130
of Rs. 100 each 200 Patent and trade marks 20
General reserve 40 Stock 48
Profit and loss account 32 Sundry debtors 88
Sundry creditors 128 Bank balance 52
Provision for income-tax 60 Preliminary expenses 12
460 460
The expert valuer valued the land and building at Rs. 240 lakh, goodwill at Rs. 160 lakh and plant and machinery at Rs.
120 lakh. Out of the total debtors, it is found that debtors for Rs. 8 lakh are bad. The profits of the company have been
as follows:
For the year 1998-1999 Rs. 92 Lakh

The company follows the practice of transferring 25% of profits to general reserve. Similar type of companies earn at
10% of the value of their shares. Plant and machinery and land and building have been depreciated at 15% and 10%
respectively.
Ascertain the value of shares of the company under:
(1) Intrinsic value method
(2) Yield value method and
(3) Fair value method
Illustration No. 8
On 31st March, 2006, the balance sheet of Himalaya Ltd. disclosed the following position:
Liabilities Rs.
Subscribed share capital of Rs. 10 each, fully paid 4,00,000
General reserve 1,90,000
Current liabilities 1,30,000
9,40,000
Assets
Goodwill 40,000
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Other fixed assets 5,00,000

Current assets 4,00,000
9,40,000
On the above mentioned date, the tangible fixed assets were independently valued at Rs. 3, 50,000 and goodwill at Rs.
50,000.
The net profits for three years were: 2003-2004: Rs. 1,03,200, 2004-2005: Rs. 1,04,000 and 2005-2006: Rs. 1,03,300 of
which 20% was transferred to general reserve, this proportion being considered reasonable in the industry in which the
company is engaged and where a fair return on investment may be taken at 18%. Ignore taxation.
Compute the value of the company’s share by:

(i) Net assets method and
(ii) Yield method
Illustration No. 9
The capital structure of Hertz Ltd. is as follows:
Rs.
14% Preference shares of Rs. 10 each 20,00,000
Equity shares of Rs. 10 each Reserves 32,00,000
and surplus 16,00,000
11% Loans from banks/financial institutions 28,00,000
The average annual profit before payment of tax and interest is Rs. 24, 00,000. The income-tax rate is assumed to be @
40%. Price-earnings ratio is 9.
Illustration No. 10
The balance sheet of Super Sound Ltd. as at 31st March, 2005 is given below:
Share capital: Buildings 2,25,000
9,000 Equity shares of Machinery 3,30,000
Rs. 100 each, fully paid-up 9,00,000 Sundry debtors 2,40,000
Profit and loss account 75,000 Stock 4,50,000
Bank overdraft 15,000 Bank 90,000
Creditors 90,000
Provision for dividends 90,000
13,35,000 13,35,000
The net profits of the company after deducting usual working expenses but before providing for taxation were as under:
Year Rs.
2002-2003 3,00,000
2003-2004 3,60,000
2004-2005 3,30,000
On 31st March, 2005, building was revalued at Rs. 3, 00,000; machinery at Rs. 3, 75,000 and sundry debtors on the same
date include Rs. 10,000 as irrecoverable. Having regard to nature of the business, 10% return on net tangible capital
invested is considered reasonable.
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You are required to value the company's share ex-dividend. Valuation of goodwill may be based on 3 years, purchase of
annual super profits. Rate of depreciation on buildings is 2% and on machinery is 10%. The income-tax rate is to be
assumed at 35%.
All workings should form part of your answer.
No. of shares 9,000
Illustration No. 11
The subscribed share capital of a company consists of 10,000, 14% preference shares of Rs. 100 each and 2,00,000
equity shares of Rs. 10 each. All the shares are fully paid-up. The average annual profit of the company after providing
depreciation but before taxation is Rs. 25, 00,000. It is considered necessary to transfer Rs. 1, 25,000 to general reserve
before declaring any dividend. Rate of taxation is 50%. [No answer is provide in answer sheet]
The normal return expected by investors on equity shares from the type of business carried on by the company is 20%.
From the above information, calculate the following:
(i) Amount available for equity dividend
(ii) Rate of dividend and
(iii) Value of an equity share
Particular Rs.
Profit before tax 25,00,000
(-) Tax (12,50,000)
Profit after tax 12,50,000
(-) Transfer to general reserve (1,25,000)
(-) Preference Share capital (10, 00,000 x 14%) (1,40,000)
Profit available for equity shareholder 9,85,000
Profit available to equity shareholder

Expected rate of dividend = x 100
Equity share capital
9,85,000
= x 100 = 49.25%
20,00,000
Expected rate
Yield value per share = x Paid up value per share
Normal rate
49.25
= x 10 = 24.63
20
Illustration No. 12
The balance sheet of Beauty Ltd. as at 31st March, 2008 was as follows:
Liabilities Rs.
Equity shares of Rs. 10 each 10,00,000
General reserves 5,00,000
Provision for depreciation on equipments 3,00,000
Staff welfare fund 80,000
Proposed dividend 1,50,000
32,00,000
Assets
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Goodwill 2,00,000
Equipments (at cost) 18,00,000
Stocks 7,00,000
Debtors 3,00,000
Cash at bank 1,50,000
Advertisement suspense account 50,000
32,00,000
The following further information is available:

(i) For this type of business, a fair return on capital employed after tax is 18%.
(ii) Equipments are to be revalued at Rs. 16, 00,000.
(iii) Stocks are considered to have a net realisable value of Rs. 6, 60,000.
(iv) Goodwill in this type of business is normally valued at 3 years’ super profits.
(v) Included in the debtors is a balance of Rs. 20,000 which may prove irrecoverable.
(vi) Profits for the last three years (before interest and taxes) are as follows:
Year Rs.
2007 – 2008 10,80,000
2006 – 2007 10,20,000
2005 – 2006 11,00,000
(vii) Company profits are taxed @ 40%.
You are required to calculate the

(1) Value of goodwill and
(2) Value of each equity share on net asset basis.
Illustration No. 13
On the basis of the following information, calculate the value of equity share:
5,000, 6% Preference shares of Rs. 100 each, fully paid Rs. 5,00,000
30,000 Equity shares of Rs. 10 each, fully paid 3,00,000
Total tangible assets (other than goodwill) 9,49,000
Total outside liabilities 95,000
Average net profit after tax 62,560
Expected normal yield for equity shares is 7% of capital employed. Goodwill is to be taken at 5 years' purchase of super
profits, if any.
Illustration No. 14
On the basis of following information, compute the value of an equity share and a preference share of both Chelsi Ltd.
and Nensi Ltd.
(i) When only a few shares are sold and
(ii) When controlling shares are to be sold
Chelsi Ltd. (Rs.) Nensi Ltd. (Rs.)
Profit after tax 10,00,000 10,00,000

12% Preference share capital (shares of Rs. 100 each) 10,00,000 20,00,000
Equity share capital (shares of Rs. 10 each) 50,00,000 40,00,000
Market expectation for both companies is 15% & 80% profit is distributed.
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Illustration No.15
The following particulars of Jag Ana Ltd. are available:
(i) Share capital:
- 10,000 Equity shares of Rs. 10 each fully paid
- 1,000 12% Preference shares of Rs. 100 each fully paid
(ii) Reserves and surplus: Rs. 15,000
(iii) External liabilities:
Creditors: Rs. 12,000
Bills payable: Rs. 6,000
(iv) The average normal profits (after taxation) earned each year by the company: Rs. 28,500.
(v) Assets of the company include one fictitious item of Rs. 800.
(vi) The fair or normal rate of return in respect of the equity shares of this type of company is ascertained at 10%.
Calculate the value of each equity share by using:

(1) Assets backing method
(2) Yield method
(3) Fair value method
Illustration No. 16
Balance sheet of Diamond Ltd. as at 30th June, 2009 is given below:
Liabilities Rs.
Share capital: 40,000 Shares of Rs. 10 each 4,00,000
Profit and loss account 64,000
Income-tax reserve 1,20,000
9,20,000
Assets
Land and buildings 2,20,000
Plant and machinery 2,60,000
Patents and trade marks 40,000
Stock 96,000
Debtors 1,76,000
Bank balance 1,04,000
9,20,000
The expert valuer valued the land and buildings at Rs. 4, 80,000, goodwill at Rs. 3, 20,000 and plant and machinery at Rs.
2, 40,000. Out of the total debtors, it is found that debtors of Rs. 16,000 are bad. The profits of the company have been
as follows:
31st March, 2007: Rs. 1, 84,000
31st March, 2008: Rs. 1, 76,000
31st March, 2009: Rs. 1, 92,000
The company follows the practice of transferring 25% of profits to general reserve. Similar type of companies earn at
10% of the value of their shares. Plant and machinery, and land and buildings have been depreciated at 15% and 10%
respectively. Ascertain the value of shares of the company by using:
(i) Intrinsic value method
(ii) Yield value method and
(iii) Fair value method
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Illustration No. 17
Following are the information of two companies for the year ended 31st March, 2010:
Particulars Company A Rs. Company B Rs.
Equity shares of Rs. 10 each 8,00,000 10,00,000
10% Preference shares of Rs. 10 each 6,00,000 4,00,000
Profit after tax 3,00,000 3,00,000
Assuming that the market expectation is 18% and 80% of the profits are distributed, what is the price per share you
would pay for the equity shares of each company
(i) If you are buying a small lot and
(ii) If you are buying controlling interest shares?
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Chapter 6 – Underwriting
Illustration 1.
Yash Ltd issued 1,00,000 equity shares. The whole of the issue was underwritten as:
X – 40%; Y – 30%; and Z – 30%.
Application for 80,000 shares were received in all, out of which applications for 20,000 shares had the stamp of X;
those for 10,000 shares had that of Y; and 20,000 shares had that of Z. The remaining applications for 30,000
shares did not bear any stamp. Show the liability of the Underwriters.
Illustration 2.
On 1st January, 2018, Sun Ltd. issued a prospectus inviting applications for subscription in 10,00,000 equity shares
of Rs 10 each. The whole issue was fully underwritten by A, B, C and D as:
A – 30%; B – 25%; C – 35%; and D – 10%.
The applications were received for 8,00,000 shares of which marked applications were as follows :
A – 1,80,000; B – 2,00,000; C – 2,03,000; and D – 1,67,000.
Find out the liability of individual underwriters.
Illustration 3
Rajal Ltd incorporated on 1st January 2018 issued a prospectus inviting applications for 20,000 equity shares of Rs
10 each. The whole issue was fully underwritten by A, B and C as follows:
A – 10,000 shares; B – 6,000 shares; and C – 4,000 shares.
Applications were received for 16,000 shares of which marked applications were as follows:
A – 8,000 shares; B – 2,850 shares; and C – 4,150 shares.
You are required to find out the liability of individual underwriters.
Illustration 4
Export Ltd incorportated on 1st January, 2018 issued a prospects inviting applications for 5,00,000 equity shares of
Rs 10 each
The whole issue was fully underwritten by K,B, D, M as:

K – 2,00,000; B – 1,50,000; D – 1,00,000; and M – 50,000.
The applications were received for 4,50,000 shares of which marked applications were as follows:
K – 2,20,000; B – 90,000: D – 1,10,000; and M – 10,000.
Find out the liability of individual underwriters.
Illustration 5
V Ltd. issued 20,000 shares which were underwritten as follows:
A – 12,000 shares ; B – 5,000 shares; and C – 3,000 shares.
The total subscriptions excluding firm underwriting but including marked applications were for 10,000 shares. The
marked applications were : A – 2,000 shares ; B – 4,000 shares; and C – 1,000 shares.
You are required to show the allocation of liability of the underwriters.
Illustration 6
JPO Ltd. offerd to the public to issue 18,00,000 shares at par. These offer was underwritten by three underwriters:
Chetan, Dola and Ellias equally with firm underwriting 60,000 shares each. Subscriptions totalled 15,80,000 shares
including the market from which were :
Chetan – 5,00,000 shares; Dola – 5,40,000 shares; Ellias – 4,40,000 shares.
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The underwritters had applied for the number of shares covered by firm undertaking
Calculate the liability of the underwriters (No. of shares).
Illustration 7
Cristal Ltd has an authorized capital of Rs 50,00,000 divided into 5 lacs shares of Rs 10 each. The company issued
1,00,000 shares for subscription to the public at a premium of Rs 5 each. The entire issue was underwritten as
follows:
A – 60,000 shares (firm underwriting 10,000 shares)
B – 30,000 shares (firm underwriting 4,000 shares)
C – 10,000 shares (firm underwriting 2,000 shares)
Of the total issue, only 90,000 shares including firm underwriting were subscribed for. Marked applications from
excluding firm underwriting were :
A – 32,000 Shares; B – 20,000 shares : C – 8,000 shares.
Calculate the liability of each underwriter giving the benefit of firm underwriting to all.
Illustration 8
Avij Ltd. came up with public issue of 3,00,000 equity shares of Rs 10 each at Rs 15 per share, P, Q and took
underwriting of the issue in ratio of 3 : 2 : 1 with the provision of firm underwriting of 20,000, 14,000 and shares
respectively.
Applications were received for 2,40,000 shares excluding firm underwriting. The marked applications from public
were received as under :
P – 60,000; Q – 50,000; R – 60,000.
Compute the liability of each underwriter as regards the number of shares to be taken up assuming that the
benefit of firm underwriting is not given to individual underwriters.
Illustration 9
Fam Ltd invited applications from public for 1,00,000 equity share of Rs 10 each at a premium of ‘Rs 5 per share.
The entire issue was underwritten by the underwriters A, B, C and D to the extent of 30%, 30%, 20% and 20%
respectively with the provision of firm underwriting of 3,000, 2,000 1,000 and 1,000 shares respectively. The
underwriters were entitled to the maximum commission permitted by law.
The company received applications for 70,000 Shares from public our of which applications for 19,000, 10,000
21,000 and 8,000 shares were marked in favour A, B, C and D respectively.
Calculate the liability of each of the underwriters. Also ascertain the underwriting commission payable to
the different underwriters.
Illustration 10
A Joint stock company issued 15,00,000 equity shares of Rs 10 each at par 30% of the issue was reserved for the
promoters and the balance was offered to the general public, the entire amount being asked for with the
applications
P, Q and R agreed to underwrite the public issue in the ratio 3 : 1 : 1 respectively, and also agreed to firm
underwriting of 30,000, 20,000 and 10,000 shares respectively.
The underwriting commission was fixed at 2%. The marked applications were as follows :
P – 5,50,000 shares; Q – 2,00,000 shares; R – 1,50,000 shares.
Unmarked applications excluding for shares underwritten firm totalled 50,000 shares.
You are required to –

(i) ascertain the number of shares taken up by each one of the underwriters.
(ii) calculate the amount received from or paid to each one of the underwriters by the company in settlement.
Mo no - 8007916622/33 Page | 121
Illustration 11
Pentak Ltd. came up with an issue of 20,00,000 equity shares of Rs 10 each par. 5,00,000 shares were issued to the
promoters and the balance offered to the public was underwritten by three underwriters – Sagar, Akashy and
Shubham – equally, with including the market from which were:
Sagar – 4,25,000 shares: Akashy – 4,50,000 shares; Shubham – 3,50,000 shares.
The underwritters had applied for number of shares covered by firm underwriting. The amounts payable on
applications and allotment were Rs 2.50 and Rs 2 respectively. The agreed commission was 2.5%.
Illustration 12
A joint stock company resolved to issue 10 lakh equity shares of Rs 10 each at a premium of Rs 1 per share. One
lakh of these shares were taken up by the directors of the company, their relatives, associates and friends, the entire
amount being received forthwith. The remaining shares were offered to the public, the entire amount being asked
for with applications.
The issue was underwritten by X, Y and Z for a commission @ 2% of the issue price, 65% of the issue was
underwritten by X, while Y’s and Z’s shares were 25% and 10% respectively.
X 30,000 shares , Y 20,00,000 shares and Z 10,000 shares. The underwriters were to submit unmarked applications
for shares underwritten firm with full applications money along with members of the general public.
Marked applications were as follows : X 1,19,500 shares; Y 57,500 shares and Z 10,500 shares.
Unmarked applications were as follows :
Accounts with the underwriters were promptly settled.
You are required to :

(i) Prepare to statement calculating underwriter’s liability for shares other than shares underwritten firm.
(ii) Pass journal entries for all the transactions including cash transactions.
Illustration 13
Magic Ltd issued 80,000 equity shares which were underwritten as follows :
Mr A 48,000 equity shares
Messrs B & Co. 20,000 equity shares
Messrs C Crop. 12,000 equity shares
The above mentioned underwriters made applications for ‘firm’ underwritings as follows :
Mr. A 6,400 equity shares
Messrs B & Co.

8,000 equity shares
Messrs C Crop. 2,400 equity shares
The total applications excluding ‘firm’ underwriting, but including marked applications were for 40,000 equity
shares.
The marked applications were as under:

Mr. A 8,000 equity shares
Messrs B & Co. 10,000 equity shares
Messrs C Corp. 4,000 equity shares
(The underwriting contracts provide that underwriters be given credit for ‘frim’ applications and that credit for
unmarked applications be given in proportion to the shares underwritten.). You are required to show the allocation
of liability. Working will be considered as a part of you answer.
Illustration 14.
Oyster Ltd. issued 25,00,000 equity shares of Rs 10 each at par. 7,00,00 shares were issued to the promoters and
the balance offered to the public was underwritten by three underwriters P, Q and R in the ratio of 2 : 3 : 4 with
Mo no - 8007916622/33 Page | 122

firm underwriting of 50,000, 60,000 and 70,000 shares each respectively. Total subscription received 13,88,000
shares including marked application and excluding firm underwriting.
Marked applications were as follows :

P – 3,00,000; Q – 3,50,000; and R 4,50,000.
Unmarked and surplus applications to be distributed in gross liability ratio,

Ascertain the liability of each underwriter,.
Illustration 15.
Shree Ltd came out with an issue of 45,00,000 equity shares. of Rs 10 each at a premium of Rs 2 per share. The
promoters took 20% of the issue and the balance was offered to the public. The issue was equally underwritten by
A & Co, B & Co and C & Co.
Each underwriter took firm underwriting of 1,00,000 Subscriptions for 31,00,000 equity shares were received with
marked from for the underwriters as given below :
A & Co. 7,25,000 shares
B & Co. 8,40,000 shares
C & Co. 13,10,000
shares
Total 28,75,000 shares
The underwriters are eligible for a commission of 5% on issue price of shares. The entire amount towards shares
subscription has to be paid along with application.
You are required to :

(a) Compute the underwriters libilty (number of shares);
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the book of Shree Ltd. relating to underwriting.
Illustration 16.
A company made a public issue of 1,25,000 equity shares of Rs 100 each at par, Rs 50 payable on application. The
entire issue was underwritten by four parties – A, B, C and D in the proportion of 30%, 25% , 25% and 20%
respectively. Under the terms agreed upon, a commission of 2% was payable on the amounts underwritten.
A, B, C and D had also agreed on “firm” underwriting of 4,000, 6,000, Nil and 15,000 shares respectively. The
total subscription, excluding from underwriting but including marked applications was for 90,000 shares. Marked
applications received were as : A – 24,000; C – 12,000; B – 20,000; and D – 24,000.
Ascertain the liability of the individual Underwriter and also show the journal entries that you would make in the
the books of company. All working should from part of your answer.
If the benefit of firm underwriting is not given to individual underwriter :
Illustration 17
Smith Ltd issued to public 1,50,000 equity shares of Rs 100 at par. Rs 60 per share was payable along with
application and the balance on allotment. The issue was underwritten equality by Ali, Bali, and Charlie. Smith Ltd
accordingly made the allotment and received as per detailed below:
Underwriters Firm application Marked application Total

Ali 5,000 40,000 45,000
Bali 5,000 46,000 51,000
Charlie 3,000 34,000 37,000
Unmarked application 7,000
Total 1,40,000
Mo no - 8007916622/33 Page | 123

It was agreed to credit the unmarked applications equally to Ali and Charlie. Smith Ltd. accordingly made the
allotment and received the amount due from public. The underwriters settled their accounts.
You are required to:

(i) Prepare a statement showing the liability of the underwriters and;
(ii) journalise the above transactions (including cash) in the book of Smith Ltd.
Illustration 18
Yash Ltd issued 1,00,000 equity shares of Rs 10 each at par. A & Co. agreed to underwrite 80% of the whole issue.
Application were received fro 70,000 shares out of which applications for 50,000 shares were marked.
Determine the net liability of A & Co.
Illustration 19
Amul Ltd., incorporated on 1st January, 2016, issued a prospectus inviting applications for 1,00,000 equity shares
of Rs 10 each. The issue was partially underwritten by A, B and C as follows: A – 40%; B – 30%; C – 20%.
Application were received for 80,000 shares of which marked application for 1,00,000 equity shares of Rs 10 each.
The issue was partially underwriters.
Illustration 20
V Ltd. issued 10,000 shares of Rs 100 each at a premium of Rs 15 each. 90% of the issue was underwritten by M/s
Borker and Co. at a commission of 1% on the nominal face value. Applications were received for 8,000 shares and
allotment was fully made. All the amount due from allottees was received in one installment. The accounts with
Broker & Co. were settled.
Show the Journal entries to record the transaction.
Illustration 21
A entered into an underwriting agreement with B Ltd for 60% of the issue of 15% Rs 50,0000 debentures with a
firm underwriting of Rs 5,00,000. Marked applications were for Rs 35,00,000 debentures.
Calculate the liability of the underwriter and the commission payable to him.
Multiple Choice
Select the best choice to complete each sentence or answer each question below:
1. The payment of commission to underwriter(s) is to be authorized by
A the board of directors
B the article of association
C the memorandum of association
2. A merchant banker can act as a underwriter provided he holds a certificate granted by

A Government of India
B Company Law Board
C SEBI
3. In respect of every underwritten issue, the merchant banker (s) shall undertake a minimum obligation of
A 5% of the total underwriting commitment or Rs 35 lacs whichever is less
B 10% of the total underwriting commitment or Rs 20 lacs whichever is less
C 5% of the total underwriting commitment or Rs 25 lacs whichever is less.
4. As per the provision of the Companies Act, 2013, in case of shares, the commission paid or agreed to be
paid does not exceed
A 2% of the issue price
B 2.5% of face value
C 5% of the issue price
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5. As per the provision of the Companies Act, 2013, in case of debentures, the commission paid or agreed to
be paid does not exceed
A 2% of the face value
B 2.5% of the issue price
C 5% of the issue price
Mo no - 8007916622/33 Page | 125

Chapter 7 - Buy Back of Shares

(Illustration 1)
Amit Limited furnished you with the following Balance Sheet as on 31.3.2018:
Balance Sheet of Amit Limited as at 31st March, 2018
Note Amount
Particulars No. ( Rs in Crore)
(1) (2) (3)
I.EQUITY AND LIABILITIES
(1) Shareholders’ Funds :
(a) Share Capital (1) 100
(b) Reserves and Surplus (2) 400
(2) Share Application Money Pending Allotment :
(3) Non- current Liabilities :
(4) Current Liabilities :
(a) Short-term Borrowings 50
(b) Trade Payables 100
(C) Other Current Liabilites 50
TOTAL 700
II.ASSETS
(1) Non – current Assets :
(a) Fixed Assets
(i) Tangible Assets (3) 400
(2) Current Assets :
(a) Current Investments 40
(b) Inventories 100
(c) Trade Receivables 100
(d) Cash and Cash Equivalents 60
TOTAL 700
Notes to Account
(1)Share Capital (2) Reserve and Surplus
Particulars Rs in Crore Rs in Crore
Authorised Capital : General Reserve 260
5 Crore Equity Shares of Rs 10 each 50 Securities Premium 25
15 Crore, 12% Preference Shares of Rs 10 each 150 Profit and Loss Account 115
200 400
Issued, Subscribed and Paid-up Capital (3) Fixed Assets :
2.5 Crore Equity shares of Rs 10 each 25 (a)Trangible Assets
7.5 Crore, 12% Preference Shares of Rs 10each 75 Land and Building 250
100 Plant and Machinery 100
Furniture 50
400
The Company bought back 50 lakh equity shares of Rs 10 each at Rs 50 per share
The payment for this was made out of the bank balance. Pass journal entries to record these transactions.
(Illustration 2)
Delight Ltd. Decided to buy back 60,000 of the equity shares of Rs 10 each at a premium of 25% For this, it issues
5,000 7.5% Preference Shars of Rs 100 each at par. The company has Rs 80,000 in General Reserve, Rs 1,00,000 in
Profit and Loss Account (Cr.), Rs 1,20,000 in Capital Reserve and Rs 1,00,000 in security premium. It decided to
utilize profits and reserves also. Give Journal Entries assuming that the transactions have been duly carried out.
(Illustration 3)
Mo no - 8007916622/33 Page | 126

The Balance Sheet of Tag Ltd as on 31st March, 2018

Balance Sheet of Tag Ltd. as at 31st March, 2018
Note Amount
Particulars No. (Rs)
(a) Share capital (1) 80,00,000
(b) Reserves and Surplus (2) 36,80,000
(2) Share Application Money Pending Allotment:
(3) Non-current Liabilities :
(a) Long – term Borrowings – 6.5% Debentures 3,00,000
(4) Current Liabilities
(a) Trade Payables 2,53,000
TOTAL 1,22,33,000
II.ASSETS
(1) Non-current Assets :
(a) Fixed Assets
(i) Tangible Assets (3) 85,00,000
(a) Current Investments 10,80,000
(b) Trade Receivables 5,40,000
(c) Cash and Cash Equivalents 21,13,000
TOTAL 1,22,33,000
Notes to Accounts :
(1) Share Capital (2) Reserve and Surplus
Authorised Capital : Securities Premium 25,00,000
10,00,000 Equity Shares of Rs. 10 each 1,00,00,000 General Reserve 7,00,000
issued Subscribed and Paid – up Capital : Profit and Loss 4,80,000
8,00,000 Equity Shares of Rs 10 each fully paid-up 80,00,000 36,80,000
(3) Fixed Assets :
(a) Tangible
Land and Building 30,00,000
Machinery 45,00,000
Furniture 10,00,000
85,00,000
st
On 1 April, 2018 the company announced the buy back if ist 25% equity shares at Rs 20 per share. For that purpose
the company sod its entire investments at Rs 12,00,000 and issued 8,000, 10% Preference Shares of Rs 100 each. The
company utilised 50% of the General Reserve, 100% of the Profit and Loss Account and the rest was taken from the
Securities Premium Account. Show necessary Journal Entires.
(Illustration 4)
On 31st March, 2018 following was the Balance Sheet of Freelance Ltd. :
Balance Sheet of Freelance Ltd. as at 31st March, 2018

Note Amount
Particulars No. (Rs in lakh)
(1) (2) (3)
(1)Shareholders’ Funds :
(a) Share Capital (1) 2,400
(b) Reserve and Surplus (2) 1,620
(c) Money Received against share Warrnats
Mo no - 8007916622/33 Page | 127
(2) Share Application Money Pending Allotment : -

(3) Non-current Liabilities : -
(a) Long-term Borrowings – 12% Debentures
1,500
(a) Short- term Borrowings -
(b) Trade Payable 750
(c) Other Current Liabilities 390
TOTAL 6,600
II. ASSETS
(1) Non- Current Assets:
(a) Fixed Assets
(i) Tangible Assets (3) 4,052
(b) Non- Current Investments
(2) Current Assets
(a) Current Investments 148
(c) Trade Receivables 520
(d) Cash and Cash Equivalents 740
TOTAL 6,660
Notes to Accounts:
Particulars Rs in Lakhs Particulars Rs in Lakhs
Authorized Capital : Securities Premium 350
300 Lakhs Equity Shares of Rs 10 each 3,000 General Reserve 930
3 Lakhs Preference Shares of Rs 100 each 300 Profit and Loss Account 340
3,300 1,620
Issued, Subscribed and Paid – up Capital : (3) Fixed Assets
240 Lakhs Equity Shares of Rs 10 each fully paid 2,400 (a) Tangible Assets
Plat and Machinery 3,600
Furniture 452
4,052
On 1st April, 2018, the company announced the buy back of 25% of its equity shares @ Rs 15 per Share. For this
purpose, it sold all of its investments for Rs 150 lakhs and issued 2,00,000, 14% preference shares of Rs 100 each at
par – the entire amount being payable with application.
The issue was fully subscribed. The company achieved the target of the buy back. Later the company issued one
fully paid – up equity share of Rs 10 by way of bonus shares for every four equity shares held by the equity
shareholders.
(Illustration 5)
The Balance Sheet of Mi Ltd. as at 31st March, 2018 is as follows:
Balance Sheet of Mi Ltd. as at 31st March, 2018

Note Amount
(1) (2) (3)
(a) Share Capital (1) 50,00,000
(b) Reserve and Surplus (2) 15,65,000
(c) Money Received against Share Warrants -
Mo no - 8007916622/33 Page | 128
(3) Non – current Liabilities : (3) 38,25,000

(a) Long – term Borrowings
(a) Short- term Borrowings -
(b) Trade Payable -
(c) Other Current Liabilities 8,67,000
TOTAL 1,12,57,000
II. ASSETS
(1) Non- current Assets :
(a) Fixed Assets
(i) Tangible Assets 66,00,000
(b) Non-current Investments 18,00,000
(a) Current Investments
(C) Trade Receivables 9,60,000
(d) Cash and Cash Equivalents 7,10,000
TOTAL 1,12,57,000
Notes Account
Authorised Capital General Reserve 6,50,000
5,00,000 Equity Shares of Rs 10 each 50,00,000 Securities Premium 5,40,000
Issued, Subscribed and Paid-up Capital : Profit and Loss 3,75,000
5,00,000 Equity Shares of Rs 10 each fully paid 50,00,000 15,65,000
(3) Long-term Borrowings

Team Loan 13,25,000
38,25,000
The shareholders adopted the resolution on the date of the above mentioned Balance Sheet to:
(i) buy back 20% of the paid-up capital @ Rs 15 each.
(ii) issue 5,000, 13% Debentures of Rs 100 each at premium of 10% to finance the buy back of shares.
(iii) maintain a balance of Rs 3,00,000 in general reserve account; and
(iv) sell investment worth Rs 8,00,000 for Rs 6,50,000.
You are required to pass the necessary journal entries to record the above transactions and prepare the Balance Sheet
immediately after the buy back.
(Illustration 6)
Milk Limited Furnished the following summarized Balance Sheet as at 31st March. 2018:
Balance Sheet of the Milk Limited as at 31st March, 2018

Note Amount
Particulars No (Rs 100)
(1) (2) (3)
(a) Share Capital (1) 27,00
(b) Reserve and Surplus (2) 97,00
(c) Money Received against share Warrants -
(3) Non-current Liabilities -
Mo no - 8007916622/33 Page | 129
(a) Short-term Borrowings -

(b) Trade Payables -
(c) Other Current Liabilities 14,00
TOTAL 1,38,00
II.ASSETS
(1) Non-current Assets
(a) Fixed Assets
(i) Tangible Assets 93.00
(b) Non-current Liabilities -
(a) Current Investments 30,00
(b) Inventories -
(C) Trade Receivables -
(d) Cash and Cash Equivalents 15,00
TOTAL 1,38,00
Notes to Accounts
Particulars (Rs ‘000) (Rs ‘000)
Authorised shares Capital Capital Reserve 10,00
2,50,000 Equity Shares of Rs 10 each 25,00 General Reserve 30,00
5,000 Preference Shares of Rs 100 each 5,00 Securities Premium 22,00
30,00 Profit and Loss Account 97,00
Issued and Shares of Rs 10 each fully paid
2,000, 10% Preference Sh. of Rs.100 each fully paid
(Issued for the purpose of buy back)
27,00
The company passed a resolution to buy back 20% of its equity capital @ Rs 50 per share. For this purpose, it sold all
of its investment for Rs 22,00,000.
You are required to Pass necessary Journal entries and prepare the Balance Sheet after buy – back.
(Illustration 7)
The following is the Balance Sheet of XYZ Limited as on 31.3.2018:
Balance Sheet of XYZ Ltd. as at 31st March, 2018

Note Amount
(1) (2) (3)
(3) Non-current : Liabilities :
(a) Long-term Borrowings (3) 23,00,000
(a) Other Current Liabilities 5,00,000
TOTAL 63,00,000
Notes to Accounts:
Authorised Capital General Reserve 12,00,0000
Mo no - 8007916622/33 Page | 130
1,50,000, Equity Shares of Rs 10 each 15,00,000 Profit and Loss Account 11,00,000
Issued, Subscribed and Paid –up Capital : Securities Premium 2,00,000
1,00,000 Equity Shares of 10 each fully paid -up 10,00,000 25,00,000
Secured Loans 15,00,000
Unsecured Loans 8,00,000
23,00,000
The Company intends to buy – back 20,000 equity shares of Rs 10 each at a premium of 150%.
State whether the company can do so and it yes, then pass journal entries. Also prepare the post-buy back Balance
Sheet.
(Illustration 8)
Following is the Balance Sheet of Ajanta Limited as at 31st March, 2018
Balance Sheet of Ajanta Limited as at 31st March.2018

Note Amount
Particulars No (Rs)
(c) Money Received against share Warrants -
(3) Non – current Liabilities :
(a) Long – term Borrowings (3) 28,75,000
(a) Short – term Borrowings 6,50,000
(b) Trade Payables 5,00,000
(C) Other Current Liabilities 5,00,000
TOTAL 76,50,000
II.ASSETS
(1) Non – current Assets :
(a) Fixed Assets
(b) Non – current investments
(a) Current Investments 5,00,000
(c)Trade Receivables 5,00,000
76,50,000
Notes to Accounts:
Authorised Capital: Revenue Reserve 15,00,000
1,50,000 Equity Shares of Rs 10 each 15,00,000 Securities Premium 2,50,000
Issued, Subscribed and Paid – up Capital : Profit and Loss Account 1,25,000
(3) Long-term Borrowings (4) Fixed Assets
Secured Loans : (a)Tangible Assets
12% Debentures 18,75,000 Land and Building 26,50,000
Unsecured Loans 10,00,000 Plant and Machinery 15,00,000
28,75,000 Furniture and Fittings 5,00,000
Mo no - 8007916622/33 Page | 131

46,50,000
The Company wants to buy back 25,000 equity shares of Rs 10 each on 1st April. 2018 at Rs. 20 Per Share. Buy Back
of Share is Dully authorized by its articles and necessary resolution passed by the company towards this. The payment
for Buy Back of Shares will be made by the company out of sufficient Bank Balance Available.
Comment with your calculations whether buy back of shares by company is within the provisions of the Companies
Act, 2013. If yes, pass necessary journal entries towards buy back of shares and prepare a Balance Sheet after buy
back of shares.
(Illustration 9)
The following is the Balance Sheet of Shree Limited as on 31.3.2018:
Balance Sheet of Shree Limited as at 31st March. 2018

Note (Rs)
Particulars No.
(1) (2) (3)
(C) Money Received against Share Warrants -
(a) Long – term Borrowings (3) 40,00,000
(4) (4) Current Liabilities :
(a) Short – term Borrowings -
TOTAL 2,30,000
II.ASSETS
(a) Fixed Assets
(b) Non-current Investments 15,00,000
(a) Current Investments -
(c) Trade Receivables 50,00,000
(d) Cash and Cash Investments 47,00,000
TOTAL 2,30,00,000
Notes to Accounts
Particulars (Rs) Particulars (Rs)
Authorised Capital : General Reserve 10,00,000
10,00,000 Equity Shares of Rs 10 each 1,00,00,000 Profit and Loss Account 50,00,000
Issued, Subscribed and Paid-up Capital : Securities Premium 20,00,000
(3) Long –term Borrowings (4) Fixed Assets

Secured Loans : (a) Tangible Assets
12% Debentures 20,00,000 Land and Building 40,00,000
Unsecured Loans 20,00,000 Plant and Machinery 36,00,000
Furniture and Fittings 22,00,000
40,00,000
98,00,000
Mo no - 8007916622/33 Page | 132
The company decided to buy back the maximum number of equity shares as may be permitted by law at a price of Rs
20 per share. You are required to pass journal entries and prepare post buy back Balance Sheet.
(Illustration 10)
The following is the summarized Balance Sheet of M/s. Vidhi Infra Ltd. as at 31.3.2016 :
Balance Sheet of M/s. Vidhi infra Ltd. as at 31st March, 2016

Note (Rs)
Particulars No.
(1) (2)_ (3)
(a) Share Capital (1,00,000 Equity Shares of Rs 10 each fully paid up) 10,00,000
(b) Reserves and Surplus :
Profit and Loss Account Surplus 1,50,000
(3) Non –current Liabilities
(a) Long –term Borrowings – 10% Debentures (Secured by floating Charges on all assets) 20,00,000
(b) Unsecured Loan 8,00,000
(4) Current Liabilities and Provisions :
TOTAL 46,20,000
II. ASSETS
(a) Fixed Assets
(i) Tangible Assets
Land and Building 21,50,000
Plant and Machinery 15,00,000
(b) Non – Current Investments 2,00,000
(a) Trade Receivables 5,50,000
(c) Cash and Cash Equivalents 40,000
46,20,000
On 21st April, 2016 the company the buy-back of 25,000 of its equity shares @ Rs 15 per share. For this purpose, it
sold all its investments for Rs 2.50 lakhs.
On 25th April, 2016 the company achieved the target of buy-back. On 1st May, 2016 the Company issued one
fully paid-up share of Rs 10 each by way of bonus for every five equity shares held by the equity shareholders.
You are required to pass necessary Journal entries for the above transactions.
All necessary workings should from part of your answer.
(Illustration 11)
SS Ltd. has the following capital structure as on 31st March, 2017 :

Particulars Situation - 1 Situation - II
Rs in crore Rs in crore
(i) Equity Share Capital (Share of Rs 10 each) 1,200 1,200
(ii) Reserves :
General Reserve 1,080 1,080
Securities Premium 400 400
Mo no - 8007916622/33 Page | 133
Profit and Loss 200 200

Infrastructure Development Reserve (Statutory Reserve) 320 320
(iii) Loans Funds 3,200 6,000
The company has offered buy – back of Rs 30 per equity share.
You are required to calculate maximum possible number of equity shares that can be brought back in both situations
and also required to pass necessary Journal entries.
(Illustration 12)
The following is the Balance Sheet of SBI Limited as at 31.3.2018:
Balance Sheet of SBI Limited as at 31st March, 2018

Note (Rs)
Particulars No.
(1) (2) (3)
(c) Money Received against Share Warrants -
(a) Long –term Borrowings (3) 3,70,000
(a) Short – term Borrowings -
(b) Trade Payables 10,000
TOTAL 6,70,000
II. ASSETS
(1). Non – current Assets
(a) Fixed Assets
(i) Tangible Assets 3,00,000
(b) Non – current Investments 1,20,000
(a) Current Investments -
(b) Inventories -
(c) Trade Receivables -
TOTAL 6,70,000
Notes to Accounts:
Authorised Capital : Securities Premium 10,000
10,000 Equity Shares of Rs 10 each 1,00,000 General Reserve 70,000
2,000 Preference Shares of Rs 10 each 20,000 Profit and Loss account 20,000
1,20,000 Debenture Redemption Reserve 40,000
Issued, Subscribed and Paid – up Capital : Investment Allowance Reserve 36,000

10,000 Equity Shares of Rs 10 each fully paid 1,00,000 (Available for utilization – Rs 20,000)
1,000 Preference Shares of Rs 10 each 10,000 Capital Redemption Reserve 4,000
1,10,000 1,80,000
10% Debentures 80,000
Team Loan (Secured) 30,000 1,10,000
Mo no - 8007916622/33 Page | 134

Team Loan (Unsecured) 2,60,000
3,70,000
1. Investment of the Cost of Rs. 40,000 were sold for Rs. 30,000.
2. Additional Tax Liability for Income Tax Rs. 2,000 for the year 2016-17.
3. The Company intends to buy back its equity shares at the beginning of the next financial year to the maximum
extent as permissible under law.
You are required to compute the maximum number of equity shares that can be bought back by the company. Also
pass necessary journal entries assuming that such buy back has been carried out and prepare the new Balance Sheet.
Multiple Choice
Select the best choice to complete each sentence or answer each question below:
1) The buy back of equity shares in any financial year should not exceed
A. 20% of the total paid-up equity share capital in that financial year
B. 25% of the total paid-up equity share capital in that financial year
C. 25% of the total called-up equity share capital in that financial year
D. 20% of the total paid-up equity share capital plus free reserves of that financial year
2) The special resolution will not be required when the buy back is not exceeding
A. 20% of total equity share capital plus free reserve of the company
B. 15% of total equity share capital plus free reserve of the company
C. 10% of total equity share capital plus free reserve of the company
D. None of the above
3. Post buy back debt-equity ratio should not exceed

A. 1:1
B. 1: 2
C. 2:1
D. 3:2
4. Every buy back shall be completed within a period of

A. 6 months from the date of passing of the special resolution
B. 3 months from the date of passing of the special resolution
C. 1 year from the date of passing of the special resolution
D. 1 months from the date of passing of the special resolution
5. Shares bought back shall be extinguished and physically destroyed within

A. 10 days from the last date of completion of buy back
B. 5 days from the last date of completion of buy back
C.15 days from the last date of completion of buy back
D.7 days from the last date of completion of buy back
6. The offer for buy back shall remain open for period of
A. not less than 10 days and not exceeding 20 days from the date of dispatch of the letter of offer
B. not less than 15 days and not exceeding 20 days from the date of dispatch of the letter of offer
C. not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer
D. not less than 20 days and not exceeding 30 days from the date of dispatch of the letter of offer
7. SEBI (Buy back of Securities) Regulation, 1998 is applicable to

A. private limited companies only
B. unlisted public limited companies only
C. both private limited and public limited companies
D. only listed public limited companies
Mo no - 8007916622/33 Page | 135

8. Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 is applicable to
A. only private limited companies
B. only unlisted public limited companies
C. only listed companies
D. all companies
9. Where a company purchase its own shares out of free reserve or securities premium, a sum should be
transferred to Company Redemption Reserve which should be
A. equal to the amount paid to the shareholder who sold this shares
B. equal to paid-up capital of the company
C. equal to the nominal value of shares so purchased
D. none of the above
10. A company after the completion of a buy back of its shares

A. can not issue same kind of shares within one year
B. can not issue same kind of shares within 6 months
C. can issue same kind of shares within 6 months
D. can not issue bonus shares
Mo no - 8007916622/33 Page | 136

Chapter 8 – Budgetary Control

Budget
A financial and/ or quantitative statement prepared and approved prior to a defined period of time of
the policy to be pursued during that period for the purpose of attaining a given objective. it may include
income, expenditure and employment of capital.
Budgeting
Budgeting means preparation of budgets.
Budgetary Control
Budgetary Control means the establishment of Budget and then constant checking and evaluation of actual
results with budget goals and taking corrective action where needed.
The fundamental principles of Budgetary control are:

(I) Establishing a plan and target performance to co-ordinate all activities of business.
(i) ) Recording of actual performance.
(i) i) Comparison of the actual performance with that planned.
(iv) ) Ascertainment of variances and analysis of reasons.
(v) ) Taking corrective action.
Special Features of Budget

The following features of budget are evident from the above definition:
(I) A budget may be expressed in term of money or quantity or both.
(ii) It is prepared for a definite period.
(iii) It is prepared prior to the period during which it is to operate.
(iv) Before its preparation the objectives to be attained and the policies to be followed for
achieving that objective are laid down by higher authorities.
(v) Budget can be prepared for one or more functions like sales, production, purchase, labour,
overhead, cash, capital expenditure etc. known as Functional Budget.
(vi) The Master Budget gives the combined and summarized picture of all the functional budgets.
Master Budget includes Profit & loss account and Balance Sheet.
Objectives and Consequently the Advantages of Preparing Budgets

(i) The budget gives advance intimation to the executives at different levels of management of the
objectives to be attained and policies to be pursued (followed).
Budget is a means of co-ordination for the whole organization and it brings team spirit as all are involved in
formulation of budget. For preparing budgets the various factors like production capacity, sales
possibilities, procurement of material, labour etc. are balanced and co - ordinated, so
that all the activities proceeds according to the objectives.
(i) i ) It is a means of communication. The top management lays down complex plans and it
is communicated by budget to lower level who are responsible for execution.
(iv) ) As the budget gives the guidelines and directions for the activities to be carried at
various levels, it facilitates the delegation of authority to such levels and ultimately
helps the
centralized control.
(v) ) Budget gives a yardstick for comparing the actual results, finding out deviations and its
reasons and taking corrective actions.
Budget Period
The period covered by a budget is known as budget period. The length of the budget period depends
upon the nature of the plan and circumstances of the business. For example Industries engaged in
manufacture of heavy machines, ship etc. which involves high capital expenditure and with little
change in product design etc. use long term budget period may be 3 to 5 years. Whereas concern
engaged in manufacture of clothing and articles of personal wear and experiencing seasoned
fluctuations in demand due to change in fashion use smaller budget period may be 6 months.
Normally one year is the period used in majority of cases as it coincides with the accounting year.
Short term budgets are costly to prepare and operate, while the long term budgets cannot have the
Mo no - 8007916622/33 Page | 137
effective means of controlling a business. A common practice however, is to have a series of budget
periods. Thus, the sales budget may cover next five year while production and cost budget may
cover only next year. The capital expenditure budget may cover even 5 to 10 years. Long term
budget may be supplemented by short term budget for example a long term budget of 3 to 5 years may
be supplemented by short term budget of 1 year or less. For control purposes, these yearly
budgets should be divided into months so that actual results can be compared with those budgeted to
remedy the defects.
Budget Manual
The budget manual is a schedule, document or booklet setting out the responsibilities of the persons
engaged in the routine of and the forms and records required for budgetary control. It should be
well written and properly indexed so that a copy there of may be given to each department head for guidance.
Manual should include the following matters:

(a) Brief explanation of the principles of Budgetary control system its objectives and benefits.
(b) Procedure to be adopted in operating the system
(c) Defining responsibilities, authorities and duties of functional managers, budget committee &
(d) Budget officer.
(e) The specimen forms and procedure of various reports and statement required.
(f) The account code and classification used by the company
(g)(1) The Budget calendar showing the dates for completion of each part of the budget and
submission of reports.
(h)(g) The follow up procedure.
(i) Master/ Functional Budgets
(j) Approved targets for individual functions of the business are known as Functional Budget. Functional
Budgets are prepared for each function and they are subsidiary to the Master Budget. The functional
budgets are: (i) Sales budget, (ii) Production budget, (iii) Material usage budget, (iv) Material purchase
budget, (v) Labour budget, (vi) Factory overhead budget, (vii) Selling and Dist. Cost budget, (viii)
Administrative cost budget, (ix) Production cost budget, (x) Cost of Goods sold budget, (xi) Capital
Expenditure budget, (xii) Cash budget.
(k)The consolidation of all functional budget is known as the master budget. Master Budget is the
Budgeted profit and loss account and Balance sheet of the organization:
(l) Fixed and Flexible Budget

(m) A Budget may be established either as a fixed budget or flexible budget. A fixed budget is a
budget which is designed for a specific planned output level & is not adjusted to the level of activity
attained at the time of comparison between the budgeted and actual costs. Fixed budget is not very
useful for control purposes, it has limited application and is used mainly for fixed expenses.
(n)Flexible budget also known as variable or sliding scale budget which is designed to furnish budgeted
costs for any level of activity actually attained. A flexible budget is more elastic, useful and
practical. A flexible budget takes into account actual circumstances like change in output or length of
working period. For the purpose of flexible budget items of expenditure are divided in fixed,
variable and semi variable.
(o)Basic budgets
(p)Basic budget has been defined as a budget which is prepared for use unaltered over a long period of
time. This does not take into consideration current conditions and can be attainable under standard
conditions.
(q)Current Budgets
(r) A current budget can be defined as a budget which is related to the current conditions and is
prepared for use over a short period of time. This budget is more useful than basic budget, as the target
it lays down will be corrected to current conditions.
(s)Zero Base Budgeting
(t) Zero base budgeting is a revolutionary concept of planning the future activities and there is a sharp
contradiction from conventional budgeting. Zero base budgeting may be defined as a planning and
budgeting process which requires each manager to justify his entire budget request in detail from
Mo no - 8007916622/33 Page | 138

scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should
spend any money at all.
Programme Budgeting
A program budget is a budget designed for a specific activity or program. This budget includes only
revenue and expenses for a specific program. Program budgets are used in many organizations
including businesses and schools. Establishing a budget by grouping expenditures and revenues into
functional activities, or programs (as is done in line -item budgeting), a program budget would
include only proposed capital expenditures for a specific program.
Performance Budgeting
The concept of performance budgeting relates to greater management efficiency specially in
government work. With a view to introducing a system's approach, the concept of performance
budgeting was developed and as such there was a shift from financial classification to 'cost' or
`objective' classification. Performance budgeting, is therefore, looked upon as a budget based on
functions, activities and projects and is linked to the budgetary system based on objective
classification of expenditure.
The purpose of performance budgeting is to focus attention upon the work to be done, services
to be rendered rather than things to be spent for or acquired. Performance budgeting takes a
system view of activities by trying to associate the inputs of the expenditure with the
output of accomplishment in terms of services, benefits etc.
Control Ratios
Three important ratios are commonly used by the management to find out whether the
deviations of actual from budgeted results are favourable or otherwise. These ratios are expressed in
terms of percentages. If the ratio is 100% or more, the trend is taken as favourable. The indication is
taken as unfavourable if the ratio is less than 100%. These ratios are:
1. Activity Ratio
It is a measure of the level of activity attained over a period. It is obtained when the number of
standard hours equivalent to the work produced are expressed as a percentage of the budgeted
hours.
Activity Ratio = Standard hours x 100
Budgeted hours
2. Capacity Ratio
This ratio indicates whether and to what extent budgeted hours of activity are actually utilised. It is
the relationship between the actual number of working hours and the maximum possible number of
working hours in a budget period.
Capacity Ratio = Actual hours worked x 100
Budget hours
3. Efficiency Ratio
This ratio indicated the degree of efficiency attained in production. It is obtained when the standard hours
equivalent to the work produced, are expressed as a percentage of the actual hours spent in producing that
work.
Efficiency Ratio = Standard hours x100
Actual hours worked
Practical Questions
Ql. From the following data, prepare a production budget for the ABC Co. Ltd: Stocks
for the budgeted period:
Product As on rt January As on 30Th June
A 8,000 10,000
B 9,000 8,000
C 12,000 14,000
Normal loss in production: Requirements to fulfill sales programme:
Mo no - 8007916622/33 Page | 139

A 4% A 60,000 units
B 2% B 50,000 units
C 6% C 50,000 units
Q2. The following are the estimated sales of a company for eight months ending 30.11.2007:
Months Estimated Sales (units)
April 2007 12,000
May 2007 13,000
June 2007 9,000
July 2007 8,000
August 2007 10,000
September 2007 12,000
October 2007 14,000
November 2007 12,000
As a matter of policy, the company maintains the closing balance of finished goods and raw materials as
follows:
StockItem Closing balance of a month
Finished Goods 50% of the estimated sales for the next month.
Raw Materials Estimated consumption for the next month.
Every unit of production requires 2 kg of raw material costing Z 5 per kg.
Prepare Production Budget (in units) and Raw Materials Purchase Budget (in units and cost) of the company for
the half year ending 30 September, 2007.
Q3. From the following average figures of previous quarters, prepare a manufacturing
overhead budget for the quarter ending on March 31, 2005. The budgeted output during this
quarter is 4,000 units.
Fixed Overheads 20,000
Variable Overheads 10,000 (varying @ 5 per unit)
Semi-variable Overheads 10,000 (40% fixed and 60% varying @ 3 per units)
Multiple Choice Questions

1. spells out duties and responsibilities of various executives concerned with budgets.
(a) Wage sheet (b) Budget Manual
(c) Cost Sheet (d) Sales Record
2. A factor which influences all other budgets is called —

(a) Direct Factor (b) Indirect Factor
(c) Key Factor (d) None of these
3.Master budget is —
(a) Total of all budgets
(c) Average of all budgets
4.Zero-Base Budgeting was first used by — (a) (b) Expansion of all budgets
Jimmy Carter (d) Summary of all budgets
(c) LIMA, England (b) De Paula
(d) None of the above
5. The basic difference between a fixed budget and flexible budget is that —
(a) A fixed budget cannot be changed whereas flexible budget can be easily changed.
(b) A fixed budget is budget for simple measure of activity whereas flexible budget in
on different activity levels.
(c) A fixed budget is concerned with fixed expenses whereas flexible budgets deals
with variable expenses.
(d) All the above
6. Production budget is governed by —
Mo no - 8007916622/33 Page | 140

(a) Cost Budget (b) Material Budget

(c) Fixed Budget (d) Sales Budget
7. Budgetary Control is useful for the control of costs relating to —

(a) Short term Budget (b) Long term Budget
(c) Middle term Budget (d) All of the above
8. Budget is prepared —
(a) Before a specified period (b) After a specified period
(c) During a specified period (d) None of the above
9. is set first and all other budgets are subordinate to it.

(a) Long term budget (b) Capital Expenditure Budget
(c) Budget for the key factor (d) Master Budget
10. A budget which represents fixed asset expenditure during the budget period is known as —
(a) Fixed Budget (b) Long-term Cash Budget
(c) Mid-term Budget (d) Capital Expenditure Budget
11. A ______________ is required to be set up to provide an effective medium for co-ordination and
review of the budget programme.
(a) Planning committee (b) Management committee
(c) Budget committee (d) All of the above
12. is a method of budgeting whereby all activities are re-evaluated each time a
budget is formulated.
(a) Tradition Budgeting (b) Zero base budgeting
(c) Flexible budgeting (d) All of above
13. A responsibility centre that has control over both cost and revenue is known as —
(a) Profit centre (b) Cost centre
(c) Investment centre (d) All of above
14. Budget which gives an estimate of the anticipated receipts and payments during budget
period is known as —
(a) Fixed Budget (b) Flexible Budget
(c) Long term Budget (d) Cash Budget
15. The budget which is designed to remain unchanged irrespective of the level of activity
actually attained is known as —
(a) Fixed Budget (b) Flexible Budget
(c) Short term Budget (d) Cash Budget
16. The formula for calculating activity Ratio in Budgetary Control is—
Standard hours for actual production
(a) Activity Ratio = x 100
Budgeted hours
(b) Activity Ratio = Actual hours : 100
Budgeted hours
Budgetedhours
(C) Activity Ratio ---------------------------------------------- 100
Standard hours for actual production
(d) Activity Ratio T Budgeted hours± 100
Actual hours
17. is a period for which the budget is prepared.

(a) Budget period (b) Accounting period
Mo no - 8007916622/33 Page | 141

(c) T ime period (d) None of the above
18. A is generally prepared for one year or lesser period.

(a) Long term budget (b) Short term budget
(c) Both (a) and (b) (d) None of the above
19. The budget is a foundation upon which the other functional budgets are built.
(a) Cash (b) Master
(c) Sales or revenue (d) Production
20. is known as the process of designing, implementing and operating budgets.

(a) Budgetary Control (b) Budget Variance
(c) Budgeting (d) Budget Manual
21. The documentation of policies and procedure involved in implementation of budgetary control system is
called -
(a) Budget Program (b) Production Manual
(c) Program Budget (d) Budget Manual
22. The responsibility for preparation, presentation and interpretation of the budget of the company is
on -
(a) Budget specialist (b) Budget controller
(c) Finance controller (d) Finance director
23. is a section of an organization for which separate budgets can be prepared and
control exercised.
(a) Cost centre (b) Budget centre
(c) Responsibility centre (d) Investment centre
24. In ZBB all activities are _____ each time when budget is set.
(a) Planned (b) Estimated
(c) Re-evaluated (d) Monitored
25. In a flexible budget format, the depreciation at the output level of 9,000 units is 24,000, the
depreciation per unit at 10,000 unit level would be —
(a) Z 1.87 (b) Z 2.67
(c) Z 2.40 (d) Z 2.50
26. The cost per unit of a product manufactured amounts to 80 (75% variable) when the production
is 5,000 units. When production increases by 25%, the cost of production will be
per unit.
(a) Z76 (b) 72.5
(c) Z 75 (d) 70
27. The budgeted annual sales of a firm is 80 Iakhs and 25% of the same is cash sale. If the average
amount of debtors of the company is Z 5 lakhs, the average collection period of credit sales is —
(a) 2 Months (b) 1 Month
(c) 15 Days (d) None of the above
step for budgeting
28. Forecasting is a (b) Secondary
(a) Preliminary (d) Next
(c) Last
29. Budgets on the basis of efficiency can be classified into:
(a) Functional and master budget (b) Fixed and flexible budget
(c) Basic and current budget (d) Long period and short period budget
30. Budgets on the basis of scope can be classified into:

Mo no - 8007916622/33 Page | 142
31. Budgets on the basis of condition can be classified into:

32. If the production capacity is 50,000 units and it cannot be increased in the short run, all budgets,
say, the sales budget and raw materials purchase budget, will have to be based on the production of
(a) 25,000 units (b) 50,000 units
(c) 75,000 units (d) 1,00,000 units
33. Fixed budgets can be established only for a __ of time when the actual output is not
anticipated to differ much from the budgeted output
(a) Small period (b) Long period
(c) Both long and short period (d) None of the above
34. Zero base budgeting may be better known as budgeting from:

(a) The beginning (b) The end
(c) The middle (d) All of the above
35. if an investment center has a $ 15,000 controllable margin and $ 2,00,000 of sales, what average
operating assets are needed to have a return on investment of 10% ?
(a) $ 20,000 (b) $ 25,000
(c) $ 1,50,000 (d) $ 2,00,000
36. The manager of an investment center can improve ROI by increasing

(a) Average operating assets (d) Controllable fixed costs
(c) Controllable margin (d) Variable costs
37. if a company plans to sell 16,000 units of product but sells 20,000, the most appropriate comparison
of the cost data associated with the sales will be by a budget based on
(a) The original planned level of activity
(b) 18,000 units of activity
(c) 20,000 units of activity
16,000 units of activity
Mo no - 8007916622/33 Page | 143

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At Unique Academy For Commerce it is not just about teaching a subject,

Unique Academy For Commerce

1 Miscellaneous Company 1-5

Chapter 1 – Miscellaneous Company Accounts

(ii) Bank A/c Dr. 2,00,000

(iii) General Reserves Dr. 3,00,000

To Bonus to Share holders A/c 4,00,000

issue of fully paid up bonus shares at the rate of one

(iv) Bonus to shareholders A/c Dr. 4,00,000

Balance Sheet (after bonus issue)

Equity and Liabilities Amount

Q 2. Bee Ltd. had the following Balance on 31-03-1999:

Issued and Subscribed capital: 80,000

April 20 Bank No Dr. 1,80,000

various reserves as per Board's resolution dated )

Ans. Share Premium Account is utilized to the extent of Rs. 2,00,000

(1) Share Capital Rs. in lakhs

Called and paid up

Pass Journal Entries giving suitable narrations.

Profit and loss account Dr. 48,000

31.3. Employees stock option outstanding

30.6. Bank A/c (600 x Rs. 40) Dr. 24,000

01.10. Employee stock option outstanding account Dr. 12,000 12,000

Following is the earning of Choice Ltd.:

Equity and Liabilities Rs.

Securities Premium 350 Investments 148

For buy-back of equity shares, 2,400 x 600

In the Books of Y Ltd.

Chapter 3 – Issues in Financial Statements

Particulars Dr. (Rs.) Cr. (Rs.)

The following further information's are given:

Profit and Loss Account

Q 3. Calculate amount available for dividend

(-) Arrears of Dep.

Therefore profit = 6,00,000

Q 4. Calculate amount of dividend.

Q 5. The Articles of Association of S Ltd. provide the following:

To Bonus to employees 32,690

Suppose remaining balance after staff bonus is x

Profit and Loss A/c Dr. 3,00,000

Profit and Loss A/c Dr. 7,00,000

Profit and Loss Appropriation A/c Dr. 54,000

Profit and Loss Appropriation A/c Dr. 1,20,000

Profit and Loss Appropriation A/c Dr. 26,100

Profit and Loss Appropriation A/c Dr. 2,00,000

Balance Sheet (Extracts) as on 31st March, 2010

Note: it is assumed that debenture interest has been paid.

Computation of maximum amount that can be paid as Dividend:

General reserve 5,00,000 Written

As an auditor you are required to comment on the managerial remuneration.

Book Profits 27,20,383

Calculation of Net Profit u/s 349 of the Companies Act, 1956

Calculation of Managerial Remuneration

Particulars Rs. Particulars Rs.

Q 13. The following extract of Balance sheet of X Ltd. was obtained:

Would your answer differ if X Ltd, is an investment company?

b) 86,70,000 < 1,00,00,000 (1st Category)

Particulars Debit (Dr) Credit (Cr)

The following additional information is also provided:

iv. The cost of the Assets were:

Particulars Debit (Dr) Particulars Credit (Cr)

Particulars Note No (Rs in 000)