ACCOUNTANCY -III

END SEMESTER EXAMINATION 2023

1. Explain the valuation of Bonus Shares. (25)
Ans. Meaning: Bonus shares are the additional shares given to the current
shareholders of the company free of cost, in proportion to their existing
shareholding.
Bonus shares are given to the current shareholders in lieu of a dividend pay
out.
The basic principle behind a bonus issue is that the total number of shares
issued grows at a fixed ratio of shares held to outstanding shares.
For Example: If an existing shareholder of the company has 200 shares and
the corporation declares a 4:1 bonus, he will receive four additional shares
for free. That’s a total of 800 shares for free, and his total holdings will rise to
1000 shares after the Bonus Shares are issued
Accounting of Bonus Shares:
▪ A company issues bonus shares out of its accumulated reserves &
surpluses.
▪ A bonus issue results in the decrease of reserves and an equivalent
increase in the share capital.
▪ Total equity of the company remains the same.
Advantage of Bonus Shares Issue:

• The issuance of bonus shares increases the number of outstanding

shares and the participation of smaller investors in the Company’s
stock, improving liquidity.
• When an investor receives bonus shares, he or she is not required to
pay any taxes.
• Bonus shares are a sign of the company’s health. It’s a hint that the
company will be able to service its higher debt.
• The bonus issuance allows the corporation to save money and reinvest
it back into the business.
• The perception of the company’s size grows as the issued share capital
grows.
• Increase the Company’s share base by encouraging retail participation.
• Issuing additional shares & using cash for business growth of Company
increases investor belief in operation of the Company.
2. Give horizontal format of a balance sheet of company. (22)
Ans. A horizontal format lists all the assets on the left-hand side and all the
liabilities on the right. While drafting it, accountants first have to divide the
page horizontally into two halves.
The first half of a horizontal balance sheet on the left-hand side shows capital
and liabilities, while the other half shows all assets.
Horizontal Format of Balance Sheet: -

3. Give vertical format of a balance sheet of company. (21)

Ans. A vertical format, the top half shows capital and liabilities, while the
bottom half shows assets.
A vertical format often shows capital in the ‘bottom’ half, and in the ‘top’ half
shows assets with liabilities deducted from them (current liabilities, for
example, are deducted from current assets to show net current assets or
liabilities).
Horizontal Format of Balance Sheet: -
4. What factors should be kept in mind at the time of valuation of
goodwill? (12)
Ans. The following important factors are to be kept in mind at the time of
valuation of goodwill: -
(1) Location, (2) Time, (3) Nature of Business, (4) Capital Required (5) Trend
of Profit, (6) Efficiency of Management, and (7) Others.
1. Locational Factor: If the firm is centrally located or located in a very
prominent place, it can attract, more customers resulting in an increase in
turnover. Therefore, locational factor should always be considered while
ascertaining the value of goodwill.
2. Time Factor: Time dimension is important factor for valuation of goodwill,
hence the old firms working in the marked will have high repute and goodwill.
3. Nature of Business: This is another factor which also influences the value
of goodwill which includes:
(i) The nature of goods; (ii) Risk involved; (iii) Monopolistic nature of business;
(iv) Benefits of patents and Trademarks; (v) Easy access of raw materials, etc.
4. Capital Required: More buyers may be interested to purchase a business
which requires comparatively small amount of capital but rate of earning
profit is high and, consequently, raise the value of goodwill.
5. Trend of Profit: Value of goodwill may also be affected due to the
fluctuation in the amount of profit (i.e. on the basis of rate of return). If the
trend of profit is always rising, the value of goodwill will be high.
6. Efficiency of Management: The efficient management may also help to
increase the value of goodwill by increasing profits through proper planned
production, distribution and services. Therefore, in order to ascertain the
value of goodwill, it must be noted that such efficiency in management must
not be stopped.
7. Other Factors:
(i) Condition of the money market;
(ii) Possibility of competition;
(iii) Government policy; and
(iv) Peace and security in the country.
5. Describe the main features of Accounting Standards-14 on
Accounting for Amalgamations. (13)
Ans. The main features of Accounting Standards-14 on Accounting for
Amalgamations are as follows: -
(i) Two or more existing companies are liquidated.
(ii) An amalgamation may be either –
a. in the nature of merger, or
b. in the nature of purchase.
(iii) Accounting Standards-14 deals with accounting for amalgamations and
the treatment of any resultant goodwill or reserves
(iv) Accounting Standards-14 is directed principally to companies although
some of its requirements also apply to financial statements of other
enterprises.
(v) Accounting Standards-14 does not deal with cases of acquisitions which
arise when there is a purchase by one company.
(vi) Amalgamation is carried out as per the provisions of the Companies Act,
2013.
(vii) Amalgamation also includes ‘merger’.
(viii)All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ix) The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company.
(x) The consideration is discharged by the transferee company wholly by the
issue of equity shares only, except that cash may be paid in respect of
any fractional shares.
(xi) The Accounting Standards-14 provides two main methods of accounting
for Amalgamations: -
a. the pooling of interests method; and
b. the purchase method.
(xii) The consideration for the amalgamation may consist of securities, cash
or other assets.
6. Write short notes on different types of Company Liquidation. (18)
Ans. Forms of Liquidation: -
There are several forms of liquidation used for a number of objectives. The
three most prevalent kinds of liquidation are compulsory liquidation,
members’ voluntary liquidation, and creditors’ voluntary liquidation.
Compulsory Liquidation: Compulsory liquidation happens when creditors
or lenders seek to liquidate a firm if their debts are not paid within a short
period of time, forcing the business to sell off its assets to repay its creditors.
If you have an insolvent firm, which means it cannot pay its debts, you may
be compelled to liquidate if you have not paid your payments on time.
Members’ voluntary liquidation: In some instances, a solvent company
whose owner wishes to quit may volunteer to dissolve the company. During
this procedure, 75% of the company’s members must vote to liquidate it, after
which a liquidator is appointed to resolve the company’s debts and legal
challenges. Any remaining money are allocated to the company’s
shareholders and members.
Creditors’ Voluntary Liquidation: Creditors’ voluntary liquidation happens
when a company’s directors understand that they will be unable to pay their
obligations on time, or that their liabilities now outweigh the asset value. The
company directors select a liquidator to settle their firm’s legal problems or
debts, and the directors are then required to participate with the liquidation
process in order to repay their obligations.
7. What do you understand by Final Accounts of the Company? Describe
in brief the various provisions? (19)
Ans. Final Accounts:
Section 210 of the Companies Act governs the preparation of final account of
a Company.
Final Accounts are those accounts that are prepared by a joint stock company
at the end of a fiscal year. The purpose of creating final accounts is to provide
a clear picture of the financial position of the organization to its management,
owners, or any other users of such accounting information.
Final account preparation involves preparing a set of accounts and
statements at the end of an accounting year. The final account consists of the
following accounts:

• Trading and Profit and Loss Account

• Balance Sheet
• Profit and Loss Appropriation account
Objectives of Final Account preparation
Final accounts are prepared with the following objectives:

• To determine profit or loss incurred by a company in a given financial

period
• To determine the financial position of the company
 • To act as a source of information to convey the users of accounting
information (owners, creditors, investors and other stakeholders) about
the solvency of the company.
Profit and Loss Account:
The Indian Companies Act is silent as to the form of Profit and Loss Account.
But part II of Schedule VI contains a list of items of incomes and expenditure
which should be included in the Profit and Loss Account.
The profit and Loss Account of a Company should give a true and fair view of the
profit or loss of the Company for the financial year.
Provision and Reserves as per Company Act:
Provision:
Provision is a change against profits and finds its places on the debit side of
Profit and Loss Account. The net profit is arrived at after taking into account all
provisions. The provisions are in the nature of expense.
Thus, Profit is subjected to further any adjustment that is in order to make it
available for distribution of dividend to shareholders. It is popularly known as
above line adjustments.
Reserve:
Reserve is an appropriation out of net profits (i.e., the Profits after adjustment of
provision).
The adjustments to reserve are made in Profit and Loss Appropriation Account.
It is popularly known as below line adjustments.