1) Explain GAAP as per regulations of ICAI.

What is the significance of these rules

as per IFRS?
GAAP (generally accepted accounting principles) is a collection of commonlyfollowed accounting rules and standards for financial reporting. The acronym is
pronounced "gap."
GAAP specifications include definitions of concepts and principles, as well as
industry-specific rules. The purpose of GAAP is to ensure that financial reporting
is transparent and consistent from one organization to another.There is no
universal GAAP standard and the specifics vary from one geographic location or
industry to another. In the United States, the Securities and Exchange
Commission (SEC) mandates that financial reports adhere to GAAP requirements.
The Financial Accounting Standards Board (FASB) stipulates GAAP overall and the
Governmental Accounting Standards Board (GASB) stipulates GAAP for state and
local government. Publicly traded companies must comply with both SEC and
GAAP requirements.
Many countries around the world have adopted the International Financial
Reporting Standards (IFRS). IFRS is designed to provide a global framework for
how public companies prepare and disclose their financial statements. Adopting
a single set of world-wide standards simplifies accounting procedures for
international countries and provides investors and auditors with a cohesive view
of finances. IFRS provides general guidance for the preparation of financial
statements, rather than rules for industry-specific reporting.
GAAP vs. IFRS
GAAP is focused on the practices of U.S. companies. The Financial Accounting
Standards Board (FASB) issues GAAP. The international alternative to GAAP is the
International Financial Reporting Standards (IFRS) set by the International
Accounting Standards Board (IASB). The IASB and the FASB have been working
on the convergence of IFRS and GAAP since 2002. Due to the progress achieved
in this partnership, in 2007, the SEC removed the requirement for non-U.S.
companies registered in America to reconcile their financial reports with GAAP if
their accounts already complied with IFRS. This was a big achievement, because
prior to the ruling, non-U.S. companies trading on U.S. exchanges had to provide
GAAP-compliant financial statements

2) Explain journal proper. What entries are recorded in it?

Journal proper is one of the important journals or subsidiary books. It is a
subsidiary book in which not all but only a few types of transactions are
recorded. There are certain types of transactions which are not recorded in other
subsidiary books but are recorded in the journal proper. These transactions, for
example, include the transactions relating to drawings, outstanding expenses,
accrued incomes, reserves, provisions, interest on capital, drawing of goods and
assets by proprietor, loss of goods by some reasons, and credit purchase and

sale of other assets such as land, buildings, machinery, and furniture. In journal
proper book, the transactions are recorded by passing journal entries based on
the rules of debit and credit. Formally, thus, the journal paper may be defined as
a journal or subsidiary book in which not all but only a few types of financial
transactions of the business are recorded systematically in a chronological order
as and when they take place.

3) What do you mean by suspense a/c and why is it open?

Suspense accounts are used when your trial balance is out of balance or when
you have an unidentified transaction. The suspense account is a general ledger
account that acts as a holding account until the error is discovered or the
unknown transaction is identified. When working with the trial balance, you can
open one suspense account to hold all of the discrepancies until you find them.
However, suspense accounts are temporary accounts that must be closed by the
end of your accounting cycle.
t is useful to have a suspense account, rather than not recording transactions at all until there is
sufficient information available to create an entry to the correct account(s). Otherwise, larger
unreported transactions may not be recorded by the end of a reporting period, resulting in
inaccurate financial results.
For example, a customer sends in a payment for $1,000 but does not specify which open invoices
it intends to pay. Until the accounting staff can ascertain which invoices to charge, it temporarily
parks the $1,000 in the suspense account. In this case, the initial entry to place the funds in the
suspense account is:
Debit
Cash

Credit

$1,000

Suspense account

$1,000

The accounting staff contacts the customer, identifies which invoices are to be paid with the
$1,000, and shifts the funds out of the suspense account with this entry:
Debit
Suspense account

Credit

$1,000

Accounts receivable

$1,000

As another example, a supplier delivers an invoice for $2,500 of services, which is payable in 30
days. The accounting staff is uncertain which department will be charged with the invoice, so the
accounting staff records the following initial invoice, while the department managers argue over
who is responsible for payment:
Debit
Suspense account

$2,500

Credit

Accounts payable

$2,500

The initial entry records the invoice in the accounts payable system in a timely manner, so that the
company can pay it in 30 days. The department managers eventually decide that the office
supplies account of the sales department should be charged with the expense, so the accounting
staff records the following entry:
Debit
Supplies Sales dept.

Credit

$2,500

Suspense account

$2,500

Regularly review the items in a suspense account, with the objective of shifting transactions into
their appropriate accounts as soon as possible. Otherwise, the amounts in the account can grow to
quite substantial proportions, and be very difficult to deal with months later, especially if there is
minimal documentation of why transactions were initially placed in the account. Accordingly, there
should be a daily measurement of the balance in the suspense account, which the controller uses
as the trigger for ongoing investigations. Further, it is useful to track which transactions are
repeatedly shunted into the suspense account, so that systems can be enhanced to make it easier
to properly identify these items in the future, thereby keeping them out of the suspense account.
The suspense account is classified as a current asset, since it is most commonly used to store
payments related to accounts receivable. It is possible to also have a liability suspense account, to
contain accounts payable whose disposition is still being decided. If so, the liability suspense
account is classified as a current liability.
All suspense account items should be eliminated by the end of the fiscal year. Otherwise, a
company is issuing financial statements that contain unidentified transactions, and which are
therefore incorrect.

4) What are different methods of calculating purchase consideration?

Purchase consideration:

As per section 14 it is the price paid by Transferee Company to the transferor

company for the purchase of its business.

Methods of purchase consideration:

There are different methods of purchase consideration depending upon the

terms and conditions settled between the transferor company.

1)
Net asset method: under this method the net asset value is calculated by
deducting all the liabilities taken over by the transferee company from the entire
asset taken by the transferee company. The value of the assets and liabilities is
not that appear in the balance sheet but it is that which is decided between the
two companies.

2)
Net payment method: in this case purchase consideration is calculated by
adding all the payments made by the transferee company to the shareholders of
the transferor company. Payment can be in the form of cash, shares or
debentures.

3)
Lump sum method: this is the case when Transferee Company agrees to
pay Transferor Company a fixed sum of money. Like xyz limited agrees to pay abc
ltd 25 lakh. This is lump sum method.

4)
Intrinsic value or share exchange method: in this method to calculate
purchase consideration following method is used:

Net asset available to the equity shareholders DIVIDED BY

number of equity shares.
5) Differentiate between debentures and shares.
Debenture holder is a creditor of the company and cannot take part in the
management of the company while a shareholder is the owner of the company. It
is the basic distinction between a debenture and a share.
Debenture holders will get interest on debentures and will be paid in all
circumstances, whether there is profit or loss will not affect the payment of
interest on debentures. Shareholder will get a portion of the profits called
dividend which is dependent on the profits of the company. It can be declared by
the directors of the company out of profits only.
Shares cannot be converted into debentures whereas debentures can be
converted into shares.
Debentures will get priority is getting the money back as compared to
shareholder in case of liquidation of a company.
There are no restriction on issue of debentures at a discount, whereas shares at
discount can be issued only after observing certain legal formalities.

Convertible debentures which can be converted into shares at the option of

debenture holder can be issued whereas shares convertible into debentures
cannot be issued.
There can be mortgage debentures i.e. assets of the company can be mortgaged
in favor of debenture holders. But there can be no mortgage shares. Assets of
the company cannot be mortgaged in favor of shareholders.

6) Explain the necessity of ledger accounting. Why is ledger known as principle

book of accounts?
The final destination of all entries made in the journal is the ledger as they are all
subsequently transferred to it. The ledger is the most important book under the
double-entry system. Ledger is a permanent book of record, which contains all
accounts relating to the financial transactions of a business. Therefore, it is also
called the book of accounts. An account contained in the ledger book is called
ledger account. A ledger account is a statement shaped liked an English alphabet
'T' that systematically contains all financial transactions relating to either a
particular person or thing for a certain period of time. Ledger account provides
financial information such as how much a particular person owes to or from the
business, what is the value of particular asset the business possesses at a point
in time, or what is the amount of particular head of expense or income business
has incurred or earned during a particular period. , The ledger book, therefore,
contains the details of all classified information of financial transactions of the
business. It is also called the principal book of account or main book of
accounts. It collects records and provides the financial information of the
business in a classified manner so as to ascertain the profit and loss and financial
position of the business at a certain point of time.
Sample

7) In case of disagreement of the trial balance, in what order would you follow
the procedure to locate the errors?
In case Trial Balance disagrees, following steps should be taken to locate the
errors:
- Totalling of all the subsidiary books and trial balance should be checked
carefully.
- Opening balances of all the accounts are properly brought down in the current
years books of account.

- Ledger accounts have been properly balanced and the balances of ledger
accounts have been correctly shown in the trial balance.
- To locate some errors the difference in the trial balance in halved.
- Another way is dividing the difference in the trial balance by 9.
- If the difference gets divisible without leaving any reminder that indicates the
transposition of the amounts.
- To locate certain other errors, current year trial balance can be compared with
the trial balance of the previous year.
measures to rectify the errors
If the trial balance does not agree, in such case to close the books of accounts
the difference in the trial balance is posted in a suspense account and then the
trial balance is tallied. As the balance in the Suspense account needs to be nil.
Thus, attempts are made to locate the errors and the rectification is made
through suspense account. It should be remembered that Suspense account
exists till the time all the errors are located and rectified making the balance of
Suspense account nil.
The other way of rectifying the errors is by passing rectification entries. These
entries are passed when the errors which affect two account and do not affect
the agreement in the Trial balance. In this method of rectification the following
steps are taken:
- First find out the wrong entry passed
- Second, write the correct entry which should have passed.
- Third, to nullify the wrong effect, reverse the same and reinstate the correct by
passing rectification entry.
For e.g.: Rs. 200 received from Ravi have been credited to Ram.

Wrong Entry: Cash A/c----------Dr. 200

To, Ram A/c 200
Correct Entry: Cash A/c----------Dr. 200
To, Ravi A/c 200
Rectification Entry: Ram A/c--------Dr. 200 To, Ravi A/c 200
To, Ravi A/c 200
8) Differentiate between outstanding expenses, prepaid expenses and
accrued expenses.

9) Differentiate amalgamation, absorption and reconstruction.

Amalgamation is a process in which two companies liquidate to create a new
company, which takes over the business of the liquidating companies. The
transferor companies lose their identity to form a new company (transferee
company). It includes absorption of one company by the other company.
Accounting Standard 14, issued by ICAI (Institute of Chartered Accountants of
India) deals with Accounting for Amalgamation. Methods of accounting for
amalgamation are Pooling of interest Method and Purchase Method.
In this process, the companies which go into liquidation is known as
Amalgamating Companies or Vendor Companies whereas the company which is
newly formed is referred to as the Amalgamated Company or Vendee Company.
The liquidating companies are of the same nature and size, who mutually decide
to wound up the company to form a separate legal entity with a new name. The
transferee company has the right over the assets and liabilities of the transferor
company. There are various advantages of amalgamation i.e. synergy,
expansion, reduction in competition, an increase in efficiency, etc.
Difference Between Amalgamation and Absorption

August 6, 2015 By Surbhi S Leave a Comment

amalgamation vs absorptionAmalgamation, as its name suggests, is nothing but

two companies becoming one. On the other hand, Absorption is the process in
which the one dominant company takes control over the weaker company.

Amalgamation can occur in two ways i.e. in the form of merger or the form of
absorption. However, there is a little bit of confusion and bewilderment which
takes birth in the mind of many people regarding these two terms, when they are
asked to distinguish the two. Here, we have compiled all the differences
between Amalgamation and Absorption, which you were looking for.

Content: Amalgamation Vs Absorption

Comparison Chart
Definition
Key Differences
Conclusion

Comparison Chart

BASIS FOR COMPARISON AMALGAMATION

ABSORPTION

Meaning
The process in which two or more than companies are wound up to
form a new company, which acquires their business is known as Amalgamation.
The process in which one company takes over the other company is known
as Absorption.
Act

Voluntary

Voluntary or hostile

Minimum number of companies involved

Three Two

Creation of new company Yes, a new company is formed

not formed

No, new company is

Size of entities
The entities are of the same size.
overpowers the smaller entity.

The bigger the entity

How many companies are liquidated? Minimum 2 companies

the merged company

Only one, i.e.

Definition of Amalgamation

Amalgamation is a process in which two companies liquidate to create a new

company, which takes over the business of the liquidating companies. The
transferor companies lose their identity to form a new company (transferee
company). It includes absorption of one company by the other company.
Accounting Standard 14, issued by ICAI (Institute of Chartered Accountants of
India) deals with Accounting for Amalgamation. Methods of accounting for
amalgamation are Pooling of interest Method and Purchase Method.

In this process, the companies which go into liquidation is known as

Amalgamating Companies or Vendor Companies whereas the company which is
newly formed is referred to as the Amalgamated Company or Vendee Company.

The liquidating companies are of the same nature and size, who mutually decide
to wound up the company to form a separate legal entity with a new name. The
transferee company has the right over the assets and liabilities of the transferor
company. There are various advantages of amalgamation i.e. synergy,
expansion, reduction in competition, an increase in efficiency, etc. Amalgamation
is divided into two categories:

Amalgamation in the nature of merger: Two company merges to form a new

company.
Amalgamation in the nature of purchase: One company purchases another
company.
Definition of Absorption
The process in which one company acquires the business of another company is
known as Absorption. In this process, a smaller existing company is overpowered
by an existing larger company. No new company is established in absorption.
There are two companies involved in this process, i.e. the company who takes
over the business of the other company is known as Absorbing Company, and
the company whose business is taken over is known as Absorbed Company. AS
14, Accounting for Amalgamation, governs the absorption of companies.
In this process, the weaker company looses its identity by merging itself with
stronger company. The transferee company exercises control over the transferor
company. The two companies differ in their size, structure, financial condition
and operations. The companies either mutually take the decision of absorption,
or it can be a hostile takeover.

The main reason behind absorption is gaining synergy, expansion, and

instantaneous growth.
Key Differences Between Amalgamation and Absorption

The following are the differences between amalgamation and absorption:

When two companies join and liquidate to give birth to a new company is known
as Amalgamation. Absorption is a process whereby one company occupies
control over the other company.
Amalgamation is voluntary in nature, whereas Absorption can be discretionary or
hostile.
In amalgamation, there are minimum three companies involved, i.e. two
amalgamating companies and one new company which is formed by the fusion
of the two companies. Conversely, in Absorption only two companies are
involved.
In amalgamation, the formation of the new company is there while in absorption
no such new company is formed.
The size of the companies going through amalgamation is more or less the same.
On the contrary, one company of bigger size overpowers the company of smaller
size in Absorption.
Amalgamation is a wider term than Absorption because the former includes the
latter.
Concept And Types Of Reconstruction
When a company is suffering loss for several past years and suffering from
financial difficulties, it may go for reconstruction. In other words, when a
company's balance sheet shows huge accumulated losses, heavy fictitious and
intangible assets or is in financial difficulties or is to over capitalized, and then
the process of reconstruction is restored.
Reconstruction may be internal and external.
1. External reconstruction
When a company is suffering losses for the past several years and facing
financial crisis, the company can sell its business to another newly formed
company. Actually, the new company is formed to take over the assets and
liabilities of the old company. This process is called external reconstruction. In
other words, external reconstruction refers to the sale of the business of existing
company to another company formed for the purposed. In external
reconstruction, one company is liquidated and another new company is formed.

The liquidated company is called "Vendor Company" and the new company is
called "Purchasing Company". Shareholders of vendor company become the
shareholders of purchasing company.
2. Internal Reconstruction
Internal reconstruction refers to the internal re-organization of the financial
structure of a company. It is also termed as re-organization which permits the
existing company to be continued. Generally, share capital is reduced to write off
the past accumulated losses of the company. The accounting procedure of
internal reconstruction is distinct from that of amalgamation, absorption and
external reconstruction.
10) Write short note on Inter company holding.
AMALGAMATION INTER COMPANY OWING (PURCHASING COMPANY
HAVING SHARES IN SELLING COMPANY)
Inter company holdings are divided into three types
Purchasing company holding shares in selling company
Selling company holding shares in purchasing company
Purchasing company and selling company hold shares in each other

11) What are different types to issue debentures?

Debentures are classified into various types. These are redeemable,
irredeemable, perpetual, convertible, non-convertible, fully, partly, secured,
mortgage, unsecured, naked, first mortgaged, second mortgaged, the bearer,
fixed, floating rate, coupon rate, zero coupon, secured premium notes, callable,
puttable, etc.

The debenture classification is based on their tenure, redemption, mode of

redemption, convertibility, security, transferability, type of interest rate, coupon
rate, etc. Following are the various types of debentures vis-a-vis their basis of
classification.
Redemption / Tenure
Redeemable and Irredeemable (Perpetual) Debentures: Redeemable debentures
carry a specific date of redemption on the certificate. The company is legally
bound to repay the principal amount to the debenture holders on that date. On
the other hand, irredeemable debentures, also known as perpetual debentures,

do not carry any date of redemption. This means that there is no specific time of
redemption of these debentures. They are redeemed either on the liquidation of
the company or when the company chooses to pay them off to reduce their
liability by issues a due notice to the debenture holders beforehand.
Convertibility
Convertible and Non-Convertible Debentures: Convertible debenture holders
have an option of converting their holdings into equity shares. The rate of
conversion and the period after which the conversion will take effect are declared
in the terms and conditions of the agreement of debentures at the time of issue.
On the contrary, non-convertible debentures are simple debentures with no such
option of getting converted into equity. Their state will always remain of a debt
and will not become equity at any point of time.
Fully and Partly Convertible Debentures: Convertible Debentures are further
classified into two Fully and Partly Convertible. Fully convertible debentures are
completely converted into equity whereas the partly convertible debentures
have two parts. Convertible part is converted into equity as per agreed rate of
exchange based on an agreement. Non-convertible part becomes as good as
redeemable debenture which is repaid after the expiry of the agreed period.
Security
Secured (Mortgage) and Unsecured (Naked) Debentures: Debentures are
secured in two ways. One when the debenture is secured by the charge on some
asset or set of assets which is known as secured or mortgage debenture and
another when it is issued solely on the credibility of the issuer is known as the
naked or unsecured debenture. A trustee is appointed for holding the secured
asset which is quite obvious as the title cannot be assigned to each and every
debenture holder.
First Mortgaged and Second Mortgaged Debentures: Secured / Mortgaged
debentures are further classified into two types first and second mortgaged
debentures. There is no restriction on issuing different types of debentures
provided there is clarity on claims of those debenture holders on the profits and
assets of the company at the time of liquidation. First mortgaged debentures
have the first charge over the assets of the company whereas the second
mortgage has the secondary charge which means the realization of the assets
will first fulfill the obligation of first mortgage debentures and then will do for
second ones.
Transferability / Registration
Registered Unregistered Debentures (Bearer) Debenture: In the case of
registered debentures, the name, address, and other holding details are
registered with the issuing company and whenever such debenture is transferred
by the holder; it has to be informed to the issuing company for updating in its
records. Otherwise, the interest and principal will go the previous holder because
the company will pay to the one who is registered. Whereas, the unregistered

commonly known as bearer debenture. can be transferred by mere delivery to

the new holder. They are considered as good as currency notes due to their easy
transferability. The interest and principal are paid to the person who produces
the coupons, which are attached to the debenture certificate. and the certificate
respectively.
Interest Rates
Fixed and Floating Rate Debentures: Fixed rate debentures have fixed interest
rate over the life of the debentures. Contrarily, the floating rate debentures have
the floating rate of interest which is dependent on some benchmark rate say
LIBOR etc.
No Coupon Rate
Zero Coupon and Specific Rate Debentures: Zero coupon debentures do not carry
any coupon rate or we can say that there is zero coupon rate. The debenture
holder will not get any interest on these types of debentures. Need not get
surprised, for compensating against no interest, companies issue them at a
discounted price which is very less compared to the face value of it. The implicit
interest or benefit is the difference between the issue price and the face value of
that debenture. These are also known as Deep Discount Bonds .All other
debentures with specified rate of interest are specific rate debentures which are
just like a normal debenture.
Secured Premium Notes / Debentures: These are secured debentures which are
redeemed at a premium over the face value of the debentures. They are similar
to zero coupon bonds. The only difference is that the discount and premium.
Zero coupon bonds are issued at the discount and redeemed at par whereas the
secured premium notes are issued at par and redeemed at the premium.
Mode of Redemption
Callable and Puttable Debentures / Bonds: Callable debentures have an option
for the company to buyback and repay to the investors whereas, in the case of
puttable debentures, the option lies with the investors. Puttable debenture
holders can ask the company to redeem their debenture and ask for principal
repayment.