ADVANCED ACCOUNTING SHORT NOTES PROBLEMS

Buy-Back of Securities

Q. 1 The Balance Sheet of Modern Ltd. as on 31st March, 2018 is as follows:

Equity & Liabilities Rs. Assets Rs.

1. Shareholders’ Funds 1. Non-Current Assets
A) Share Capital Fixed Assets 66,00,000
Equity Share Capital of Rs.10 50,00,000 Investments 18,00,000
each
B) Reserves & Surplus 2. Current Assets
General Reserve 6,50,000 Stock 11,87,000
Securities Premium 5,40,000 Trade Receivables 9,60,000
Profit and Loss account 3,75,000 Cash and Bank balance 7,10,000
2. Non-Current Liabilities
12% Debentures 25,00,000
Term Loan 13,25,000
3. Current Liabilities
Trade Payables 8,67,000
Total Equity & Liabilities 1,12,57,000 Total Assets 1,12,57,000

The shareholders adopted the resolution on the date of above-mentioned Balance Sheet to:
a. Buy Back 20% of the paid-up capital @ Rs. 15 each
b. Issue 5,000 13% Debentures of Rs.100 each at a premium of 10% to finance the
buyback of shares
c. Maintain a balance of Rs. 3,00,000 in general reserve account; and
d. Sell investments worth Rs. 8,00,000 for Rs. 6,50,000. You are required to pass the
necessary journal entries to record the above transactions.

Q. 2 Perrotte Ltd. has the following Capital Structure as on 31.3.17

Particulars (Rs. in crores)

a. Equity Share Capital (Shares of Rs. 10 each fully paid) 330
b. Reserves and Surplus
General Reserve 240
Securities premium account 90
Profit & Loss Account 90
Infrastructure Development Reserve 180 600
c. Loan Funds 1,800

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The Shareholders of Perrotte Ltd. on the recommendation of their Board of Directors, have
approved on 12.9.17 a proposal to buy back the maximum permissible number of Equity
shares considering the large surplus funds available at the disposal of the company.
The prevailing market value of the company’s share is Rs. 25 per share and in order to induce
the existing shareholders to offer their shares for buyback, it was decided to offer a price of
20% over market.

You are required to compute the maximum number of shares that can be bought back in the
light of the above information and also under a situation where the loan funds of the company
were either Rs. 1,200 crores or Rs. 1,500 crores.

Assuming that the entire buy back is completed by 9.12.2017, show the accounting entries in
the company’s books in each situation. [Note: Infrastructure Reserve is created to satisfy
Income-tax Act requirements]

Q. 3 Extra Ltd. furnishes you with the following summarized Balance Sheet as on 31.3.18:

Equity & Liabilities Rs. Assets Rs.

Equity shares of Rs. 10 each fully paid 100 Fixed assets less depreciation 50
9% Redeemable preference shares 20 Investments at cost 120
of Rs. 100 each fully paid
Capital Reserves 8 Current assets 142
Revenue Reserves 50
Securities premium 60
10% Debentures 4
Current liabilities 70
312 312

a. The company redeemed the preference shares at a premium of 10% on 1st April, 2018
b. It also bought back 3 lakhs equity shares of Rs. 10 each at Rs. 30 per share. The
payment for the above was made out of huge bank balances, which appeared as a
part of the current assets
c. Included in its investment were “investments in own debentures” costing Rs. 2 lakhs
(face value Rs. 2.2 lakhs). These debentures were cancelled on 1st April, 2018.
d. The company had 1,00,000 equity stock options outstanding on the above-mentioned
date, to the employees at Rs. 20 when the market price was Rs. 30 (This was included
under current liabilities). On 1.4.18 employees exercised their options for 50,000
shares.
e. Pass the journal entries to record the above and prepare Balance sheet on 1.4.18

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Q. 4 W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20. A, B, C and

D hold preference share capital in the proportion of 30:40:20:10. If the paid up capital of the
company is Rs. 40 lakh and Preference share capital is Rs. 20 lakh, find their voting rights in
case of resolution of winding up of the company.

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LIQUIDATION OF COMPANIES

LISTS TO BE USED IN STATEMENT OF AFFAIRS:

List A Assets not specifically pledged

List B Assets specifically pledged [secured creditors having fixed charge]
List C Preferential Creditors
List D Secured creditors having floating charge
List E Unsecured Creditors – Non-Preferential
List F Preference Share Holders
List G Equity Share Holders
List H Surplus/Deficiency Statement

FORMAT – STATEMENT OF AFFAIRS:

Assets not specifically Pledged [LIST A] {The following List is only illustrative and
not exhaustive:}
Cash
Debtors
Bills Receivable
Loose Tools
Calls in Arrears
Total I

Assets Specifically Pledged [LIST B] [figures are imaginary]

Items Realisable Outstanding Deficiency Surplus
Value liability
Land & Building 100000 70000 - 30000

Plant & Machinery 40000 125000 85000 -

Total surplus 30000

I + 30000 = J

Summary of Gross Assets

Assets not specifically pledged [As per List A] I
Assets specifically pledged [as per List B] 140000
Total [I + 140000] K

Discharge of Liabilities
Gross Liabilities Particulars Amount
B/Fd J
110000 Secured creditors having specific charge [as per List ----
[70000+40000] B]
J
L Preferential Creditors [as per List C] L
M

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N Secured Creditors having floating charge [as per List N
D]
O
P Unsecured creditors – Non preferential [as per List E] P
Q [including deficiency of Rs.85000] R

Summary of cross verification

Summary of Gross Assets K
Summary of Gross Liabilities Q
K–Q R

Payment of Capital
B/Fd R
Preference Share Holder [as per S
List F]
T
Equity Share Holder [as per List G] U
If it is positive – Surplus
If it is negative – Deficiency V

List H – Surplus / Deficiency Statement

Amount
I Items decreasing Surplus or Increasing Deficiency W
Estimated realizable value of assets < Book Value
P & L balance in assets side
Contingent liability

II Items Increasing Surplus or Decreasing Deficiency X

Estimated realizable value of assets > Book value
Reserves in liabilities side

III Surplus W – X = Y [Or] Should be equal to V

Deficiency W – X = Z

IMPORTANT POINTS:
• All assets are to be considered at their realisable value
• All liabilities including contingent liabilities are to be considered
• Statement of Affairs should be prepared even before the appointment of liquidator.
Therefore, legal expenses, liquidators remuneration and liquidation expenses will not
be included
• Calls in arrears will be included in LIST A (Uncalled capital will not be included). The
amount which is not recoverable on calls-in-arrears is shown as deduction from called
up capital. Therefore, share capital will be taken at before deducting towards calls in
arrears

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• If only a portion of Call in arrears is recoverable, then to the extent it will be shown in
List A. At the time of “Settlement of Capital”, consider capital only to the extent of
balance capital (i.e. capital – Call in arrears irrecoverable)
• Uncalled capital if any, will be shown as a note at the end of the “Statement of affairs”
• Unclaimed dividend if any will be shown as unsecured creditors. However this amount
will be paid only after payment of unsecured creditors
• If no information is given, generally debentures (including interest till the date of
liquidation) are treated as having floating charge on all the assets of the company.
Debenture interest after liquidation till the date of actual payment shall be considered
only if the company is solvent. Where the company is insolvent, interest is payable up
to the date of liquidation.
• Liability in respect of bills discounted by the company is contingent; any amount
expected to be paid in respect of bills discounted should be included in List E

LIQUIDATOR’S FINAL STATEMENT

Liquidator’s Final Statement of Account:

 It is the duty of the liquidator to realize the assets of the company under liquidation and
settle the account of every creditor proving his claim against the company
 It is therefore, necessary for him to prepare a statement showing how much he realised
and how the same was disbursed among the claimants.
 Liquidator has to maintain a “Cash Book” for receipts and payments and has to submit a
summary of the same to the court in case of compulsory winding up and to the company
in case of voluntary winding up
 Such summary statement is called as “Liquidator’s Final Statement of Account”

“Sources of Cash for Settlement” to the Liquidator:

Sources of Cash

Net Result of Cash in Hand Surplus from Sale proceeds of Contributions

Trading activity Secured the Assets made by
& Creditors contributories

Order of payment/Presentation for Liquidators Final Statement:

Note: 1 Secured Creditors [Wholly or Partly]

 Payment to secured creditors is not shown in liquidator’s final statement of account
 Secured Creditors will be settled to the extent of their claim or the amount realised by
sale of securities held by them whichever is less
 If the claims of secured creditors are less than the securities realised, then the
surplus will be shown as receipt
 If the claims of the secured creditors are more than the securities realised, then the
balance amount [unsatisfied] is included with “Unsecured Creditors”

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Note: 2 Liquidator’s Remuneration:

Liquidator’s Remuneration shall be fixed as follows:

Fixed as a % on Fixed as % on
the assets the payment
Fixed Amount Others Combination
realised made to

Important Points:
a. While calculating liquidator’s remuneration on assets realised, the amount of cash and
bank balance is not included. However, if the inclusion of cash and bank balance is
specifically mentioned, then it should be taken into consideration

b. In case if liquidator’s remuneration is fixed as a % on assets realised, and the security is

realised by the creditors themselves, then the remuneration of the liquidator on the assets
realised will be the “Surplus received from secured creditors”

c. In case if liquidator’s remuneration is fixed as a % on the payment made to creditors:

i) If sufficient amount is available to make payment to creditors and liquidator’s remuneration,

then,
Remuneration = [Amount due to creditors x Rate fixed]

ii) If sufficient amount is not available to make payment to creditors, then

Remuneration = [Amount due to creditors x Rate/(100+Rate)]

Note: 3 Payments and Order of Presentation

 Preferential creditors have priority over debenture holders [carrying floating charge]
 However, while preparing the liquidator’s final statement of account, payment to
preferential creditors is shown after the payment to debenture holders [having floating
charge]

Note: 4 Interest on Liabilities:

 In case of solvent companies, interest on liabilities [loan, debenture etc.] is payable upto
the date of payment
 In case of insolvent companies, interest on liabilities is payable upto the date of winding
up
 A company is said to be solvent, if the assets realised are sufficient to pay all creditors
of the company in full, and some surplus is left over

Note: 5 Unsecured Creditors

 Liability in respect of dividend or amounts due to shareholders on account of profits will
be included in the category of unsecured creditors. However, payments regarding
dividend etc.. will be made only after the outsiders are satisfied
 A contingent liability may become a actual liability on the happening of a certain event. In
that case, it amount should be included in the category of unsecured creditors.

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Note: 6 Preference Shareholders
 If preference dividend are declared but not paid, then they are paid as debt and not as
arrear
 If preference dividend is in arrear [cumulative preference share only] for one or more
years, and it has not been declared, then unless otherwise mentioned in the articles,
arrears should be paid, only when, after making payment to preference capital and equity
capital in full and surplus is left. To be precise, preference dividend can be paid if it is in
arrear, even before making payment to equity shareholders by virtue of provision in the
articles of company
 If the shares are not specifically stated as non-cumulative, then it should be treated as
cumulative
 No dividend is generally payable for any period falling after the commencement of winding
up

Note: 7 Treatment of Surplus:

 Amount left over after paying to preference shareholders will go to equity shareholders
 Any surplus leftover will again goes to equity shareholders, unless the preference shares
are participating preference shares
 If preference shares are participating preference shares, then they have a right to share
the surplus left after paying equity share capital

Note: 8 Treatment of Calls in Arrear and Calls in advance

Before making payment to contributories, if there are any calls-in-arrears, it should be
collected by the liquidator first. Similarly if there is any calls-in-advance, it should be returned
to the concerned shareholders before making any payment for capital

Note: 9 Appointment of Receiver:

Sometimes, debenture holders may have power (as per the agreement) to appoint a receiver
in certain circumstances. If a receiver is appointed, he shall realise the assets specifically /
generally. He shall meet the expenses/payment in priority to the debenture holders including
his expenses and remuneration but excluding liquidator’s remuneration. After settling the
above, balance amount will be utilised for satisfying debenture holders.

After satisfying debenture holders, balance amount left will be handover to Liquidator. Duty
of the liquidator is to satisfy the unsecured creditors and shareholders. The receiver shall
prepare “Receipts and Payments account/Receiver’s Final Statement” and shall submit the
same together with surplus if any left, to the company (if it is going concern) or to the liquidator
of the company (if liquidating concern). Note: Except for any special circumstances, the
official liquidator can be appointed as receiver to avoid expenses and conflict.

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Practical Questions

Q. 1 Mr. God is appointed as liquidator of Ego Ltd. in voluntary Liquidation, on 1st July 2018.
Following balances are extracted from the books on that date:

Equity & Liabilities Rs.

1. Shareholders’ Funds
A) Share Capital
Capital 24,000 shares of Rs.5 each 1,20,000
Less: Calls in Arrears ( 7,500) 1,12,500
B) Reserves & Surplus
Profit & loss A/c (52,500)
2. Non-Current Liabilities
Debentures 75,000
3. Current Liabilities
Bank Overdraft 27,000
Liabilities for purchases 30,000
Total Equity & Liabilities 1,92,000

Assets Rs.
1. Non-Current Assets
Machinery 45,000
Leasehold Properties 60,000
2. Current Assets
Stock-in-trade 1,500
Trade Receivables 90,000
Less: Reserve for Bad & Doubtful Debts (15,000) 75,000
Investments 9,000
Cash in Hand 1,500
Total Assets 1,92,000

You are required to prepare a statement of affairs to be submitted to the meeting of the
creditors. The following Assets are valued as under:
Machinery Rs.90,000
Leasehold Properties Rs.1,09,000
Investments Rs.6,000
Stock-in- trade Rs.3,000

Bad debts are Rs.3,000 and the doubtful debts are Rs. 6,000 which are estimated to realise
Rs.3,000. The bank overdraft is secured by deposit of the title deeds of leasehold properties.
Preferential Creditors are Rs.1,500. Telephone rent outstanding is Rs.120.

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Q. 2 Prepare SOA as far as possible of Luck Ltd. which went into liquidation on 30.6.18

Particulars Amount
Equity Share Capital – 20,000 Equity Shares of Rs.10 each, Rs.5 paid-up 1,00,000

7% Preference Share Capital – 20,000 Shares of Rs.10 each fully paid 2,00,000
6% First Mortgage Debentures secured by a Floating charge upon the whole of 1,50,000
the assets of the company except un-called capital
Fully Secured Creditors (value of Securities Rs.35,000) 30,000

Partly Secured Creditors (value of Securities Rs.10,000) 20,000

Preferential Creditors for rent, taxes, salaries or wages 6,000
Bills Payable 1,00,000
Unsecured Creditors 70,000
Bank Overdraft 10,000
Bills Receivable in Hand 15,000
Bills Discounted (one bill for Rs.10,000 estimated to be bad) 30,000

Investments in shares – Estimated value Rs.35,000 (deposited with secured 50,000

creditors)
G.P. Notes: estimated values Rs.10,000 (deposited with secured creditors) 15,000
Book debts:
Good 10,000
Doubtful (estimated to produce 50 paisa in a rupee) 7,000
Bad 6,000
Land and Building (estimated to produce Rs.1,00,000) 1,50,000

Stock –in- Trade (estimated to produce Rs.40,000) 50,000

Machinery and Tools (estimated to produce Rs.2,000) 5,000

Cash in Hand 100

Q. 3 For “M Ltd.” winding up order has been issued as on 31.3.18. The Reserves of the
company on 1.4.17 amounted to Rs. 7,500. You are required to prepare “Statement of Affairs
& Deficiency Account”

Particulars Amount Particulars Amount

Freehold premises (book value 3,75,000 Bank overdraft – unsecured 58,125
Rs.4,50,000) valued at
First mortgage of freehold 3,00,000 Cash in Hand 825
premises
Second mortgage of freehold 1,12,500 Stock (at cost Rs.50,850) 33,900
premises
estimated to realise

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8% debentures carrying a 1,50,000 Issued Capital:
floating charge on the
undertaking, interest due 1st
January and 1st July and paid on
due dates
Managing Director’s 22,500 Equity Shares of Rs.10 each 1,50,000
emoluments Not an e/ee
fully called up
(6 months) NON pref
Staff salary unpaid (one month) 16,050 Calls-in-arrears, Rs.3,000 1,500
estimated to realise
Trade Receivables Unsecured creditors 2,96,250
– Good 31,500 Contingent liability in respect 18,000
of a claim for damages
Rs.37,500 – estimated to be
settled for
– Doubtful (estimated to realise 12,900 Tax liability for year ending 5,250
50%) 31.3.2016
– Bad 72,750 Tax liability for year ending 1,275
31.3.2017
Plant and Machinery (book value 1,74,000 Tax liability for year ending 2,700
Rs.2,47,500) estimated to realise 31.3.2018

Liquidator’s Final Statement of Account:

Q. 4 A company went into liquidation on 31.3.18, when the following Balance Sheet was
prepared:

Equity & Liabilities Rs.

1. Shareholders’ Funds
A) Share Capital
19,500 shares of Rs.10 each 1,95,000
fully paid
B) Reserves & Surplus
Profit & Loss A/c (98,680)
2. Non-Current Liabilities
Partly secured (on freehold 55,310
property)
Unsecured 99,790
3. Current Liabilities
Trade Payables (Preferential) 24,200
Bank Overdraft (unsecured) 12,000
Total Equity & Liabilities 2,87,620

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Assets Rs.
1. Non-Current Assets
Goodwill and patents 50,000
Freehold building 48,000
Plant 65,500
2. Current Assets
Stock-in-trade 56,800
Cash 2,500
Trade Receivables 64,820
Total Assets 2,87,620

The Liquidator realized the assets as follows: Freehold property Rs. 35,000, Plant Rs. 51,000,
Stock-in-trade Rs. 39,000 Trade Receivables Rs. 58,500 and cash Rs. 2,500. The expenses
of liquidation amounted to Rs. 1,000 and the liquidator's remuneration was agreed to 2.5%
on the amount realised and 2% on the amount paid to unsecured creditors. You are required
to prepare the liquidator's final account.

Q. 5 The following particulars relate to a Limited Company which has gone into voluntary
liquidation. You are required to prepare the Liquidator’s Statement of Account allowing for his
remuneration @ 2½% on all assets realized excluding call money received and 2% on the
amount paid to unsecured creditors including preferential creditors.

Share capital issued:

10,000 Preference shares of Rs.100 each fully paid up.
50,000 Equity shares of Rs.10 each fully paid up.
30,000 Equity shares of Rs.10 each, Rs.8 paid up.

Assets realized Rs.20,00,000 excluding the amount realized by sale of securities held by
partly secured creditors.
Rs.
Preferential creditors 50,000
Unsecured creditors 18,00,000
Partly secured creditors (Assets realized Rs.3,20,000) 3,50,000
Debenture holders having floating charge on all assets of the company 6,00,000
Expenses of liquidation 10,000

A call of Rs.2 per share on the partly paid equity shares was duly received except in case of
one shareholder owning 1,000 shares. Also calculate the percentage of amount paid to the
unsecured creditors to the total unsecured creditors.

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Q. 6 X Ltd went into voluntary liquidation on 31.12.17 when their Balance sheet read as
follows:
Equity & Liabilities Rs.
1. Shareholders’ Funds
A) Share Capital
15,000 10% cumulative preference shares of Rs.100/- each fully paid 15,00,000
7,500 equity shares of Rs.100 each, Rs.75 paid 5,62,500

22,500 equity shares of Rs.100 each, Rs.60 paid 13,50,000

B) Reserves & Surplus
Profit and Loss a/c. (8,53,750)
2. Non-Current Liabilities
15% Debentures secured by a floating charge 7,50,000
3. Current-Liabilities
Interest outstanding on Debentures 1,12,500
Trade Payables 9,56,250
Total Equity & Liabilities 43,77,500

Assets Rs.
1. Non-Current Assets
Land and Buildings 7,50,000
Machinery and Plant 18,75,000
Patents 3,00,000
2. Current Assets
Stock 4,02,500
Trade Receivables 8,25,000
Cash at Bank 2,25,000
Total Assets 43,77,500

Preference dividends were in arrears for 2 years and the creditors included preferential
creditors of Rs. 38,000. The assets were realised as follows: Land and Buildings Rs. 9,00,000;
Machinery and Plant Rs. 15,00,000; Patents Rs. 2,25,000; Stocks Rs. 4,50,000; Trade
Receivables Rs. 6,00,000.

The expenses of liquidation amounted to Rs.27,250. The liquidator is entitled to a commission

of 3% on assets realised except cash. Assuming the final payments including those on
debentures were made on 30th June, 2018, show the liquidator's final statement of Account.

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Q. 7 The Beetel Valley Mining Co. Ltd. went into voluntary liquidation on 1.1.18, as its mines
had reached such a state of depletion that it become too costly to excavate further minerals.
The Liquidator, whose remuneration is 3% on realisation of assets and 2% on distribution to
shareholders, realized all the assets. The following was the position of the company on
31.12.17.

Particulars Rs.
Cash on Realisation of Assets 5,00,000
Expenses of Liquidation 9,000
Unsecured creditors (including salaries for 1 month prior to liquidation, 68,000
Rs.6,000)
5,000 6% Preference Shares of Rs.30 each (dividend paid up to 31st 1,50,000
December, 2016)
10,000 Equity Shares of Rs.10 each, Rs.9 per share called and paid up 90,000
General Reserve as at 31st December 2017 1,20,000
Profit and Loss Account as at 31st December, 2017 20,000

Under the Articles of Association of the company the Preference Shareholders’ have the right
to receive one third of the surplus remaining after repaying the equity share capital.

Q. 8 The following is the Balance Sheet of Over Confident Ltd., as on 31st December 2018.

Equity & Liabilities Rs.

1. Shareholders’ Fund
A) Share Capital
10,000 7% Preference Shares of Rs.10 1,00,000
each
10,000 Equity Shares of Rs.10 each, 1,00,000
fully paid
5,000 Equity Shares of Rs.10 each, 42,500

Rs.8.50 paid
B) Reserves & Surplus
Profit and Loss Account (33,500)
2. Non-Current Liabilities
6% Debentures 2,50,000
Loan on Mortgage 30,000
3. Current Liabilities
Bank Overdraft 25,000
Trade Creditors 55,000
Income Tax payable 20,000
Total Equity & Liabilities 5,89,000

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Assets Rs.
1) Non-Current
Assets
Sundry Assets 5,29,000
Preliminary Expenses 10,000
Buildings 50,000
Total Assets 5,89,000

The mortgage was secured on the buildings and the debentures were secured by a floating
charge on all the asset of the company. The debenture holders appointed a Receiver. A
Liquidator was also appointed, the company being voluntarily wound-up. The expenses of
liquidation were Rs.2,000. The Receiver was entrusted with the task of realizing the Buildings
which fetched Rs.40,000. The Receiver took charge of "Sundry Assets" amounting to
Rs.4,00,000 and sold them for Rs.3,70,000. The Bank was secured by a personal guarantee
of the directors who discharged their obligations in full.

The balance of the assets realised by liquidator for Rs.1,25,000. The remuneration of the
liquidator was Rs.750. Preference dividend was in arrear for 3 years. Prepare the accounts
to be submitted by the Receiver and Liquidator.

B LIST OF CONTRIBUTORIES

Q. 9 The Liquidation of MP Ltd. commenced on April 2, 2018 certain creditors could not
receive payments out of the realisation of assets and out of the contributions from "A" list
contributories. The following are the details of certain transfers took place in 2017 and 2018.

Shareholders No. of Date of Creditors remaining unpaid

outstanding shares ceasing to be and at the date of ceasing to
transferred member be member
X 1,500 1st March Rs.4,000
2017
A 1,000 1st May 2017 Rs.6,000
st
B 1,500 1 October Rs.7,500
2017
C 300 1st Nov 2017 Rs.8,000
st
D 200 1 Feb. 2018 Rs.9,000

All the shares were Rs. 10 each Rs. 6 paid up ignoring expenses, remuneration to liquidator,
etc. show the amount to be realized from the various persons listed above.

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