CA INTERMEDIATE

SUBJECT- ADVANCE ACCOUNT

Test Code – IJP 2514

BRANCH - () (Date :)

Head Office : Shraddha, 3rd Floor, Near Chinai College, Andheri (E), Mumbai – 69.
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 Tel : (022) 26836666

ANSWER : 1

MULTIPLE CHOICE QUESTIONS :

No. ANSWER Marks

1. (i) A Rs. 2,00,000 incurred as legal cost 2
(ii) C Rs. 2,32,000 2
(iii) D Rs. 1,64,000 2
2. (i) B 31,250 2
(ii) D 39,062 2
(iii) C 28,750 2
(iv) C 28,750 2
3. (i) A Cash flow from Operating Activities 2
(ii) A Cash flow from Operating Activities 2
(iii) B Cash Flow from Investing Activities 2
4. A Unearned finance Income 2
5. B A credit of Rs. 5,000 2
6. B An entity providing banking facilities to Skyline Limited in the normal 2
course of business
7. B Rs. 2 million 2
8. D The difference between the carrying amount and the disposal 2
proceeds, net of expenses, would be disclosed in the profit and loss
account.

ANSWER : 1(A)
Seattle Branch Trial Balance (in Rs.)

Particulars Rate as per Rs. Debit Rs. Credit Rs.

Stock (01.01.2022) 79.00 17,38,000
Purchases 79.50 79,50,000
Sales 79.50 1,03,74,750
Goods from HO Given 24,00,000
Salaries
($ 4,000 + $ 500 = $ 4,500 □ Rs. 79.50)1 79.50 3,57,750
Head Office A/c. Given 21,90,000
Sundry Debtors 89.00 1,95,800
Sundry Creditors 89.00 1,33,500
Cash at Bank & Hand 89.00 71,200
Salaries Outstanding ( 500 Rs. 89) 89.00 44,500
Exchange gain 30,000
1,27,42,750 1,27,42,750

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The amount of outstanding salary amounting $ 500 (included in the salaries) may be converted at
Rs. 83 and the salary paid during the year at Rs. 79.50. In that case the amount of salaries including
outstanding salary debited in the trial balance will be for Rs. 3,59,500 [(4,000*79.5 = 3,18,000) +
(500 * 89 = 41,500). In this case, the amount of exchange gain will be computed as Rs. 34,250.
(5 MARKS)
ANSWER : 1(B)
Journal Entries

Rs. Rs.
Equity Share Capital (old) A/c Dr. 75,00,000
To Equity Share Capital (Rs. 10) A/c 45,00,000
To 6% Preference Share Capital (Rs. 10) A/c 18,00,000
To 7% Debentures A/c 2,50,000
To Capital Reduction A/c 9,50,000
(Being new equity shares, 6% Preference Shares,
7% Debentures issued and the balance transferred
to Reconstruction account as per the Scheme)
Building A/c Dr. 1,50,000
Capital Reduction A/c Dr. 9,53,000
To Goodwill Account 2,70,000
To Plant and Machinery Account 1,00,000
To Furniture Account 88,000
To Investment A/c 4,20,000
To Profit & Loss A/c 2,25,000
(Being Capital Reduction Account utilized for
writing off of Goodwill, Plant and Machinery,
furniture, investment and Profit & Loss as per the
scheme)
General reserve A/c Dr. 3,000
To Capital Reduction A/c 3,000
(Being general reserve utilized to write off the
balance in Capital reduction A/c)

Note: In place of Capital Reduction Account, Reconstruction Account or Internal Reconstruction

Account may also be used in the above journal entries.

(5 MARKS)
ANSWER : 1(C)
Computation of contract cost

Rs. Lakh Rs. Lakh

Material cost incurred on the contract (net of closing stock) 21 – 4 17

Add: Labour cost incurred on the contract (including outstanding 16
amount)
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7

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 Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80
Percentage of completion = Cost incurred till date/Estimated total cost
= Rs. 45,00,000/Rs. 80,00,000
= 56.25%
Contract revenue and costs to be recognized

Contract revenue (Rs. 85,00,000 x 56.25%) = Rs. 47,81,250

Contract costs = Rs. 45,00,000

(4 MARKS)
ANSWER : 2(A)
The question deals with the issue of Applicability of Accounting Standards to a non – corporate
entity. For availment of the exemptions, first of all, it has to be seen that M/s Omega & Co. falls in
which level of the non – corporate entities. Its classification will be done on the basis of the
classification of non corporate entities as prescribed by the ICAI. According to the ICAI, non –
corporate entities can be classified under 4 levels viz Level I, Level II, Level III and Level IV entities.

Non – corporate entities which meet following criteria are classified as Level IV entities :
(i) All entities engaged in commercial, Industrial or business activities, whose turnover
(excluding other income) does not exceed rupees ten crores in the immediately preceding
accounting year.
(ii) All entities engaged in commercial, industrial or business activities having borrowings
(including public deposits) does not exceed rupees two crores at any time during the
immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
As the turnover of M/s Omega & Co. is less than Rs. 10 crores and borrowings less than Rs. 2 crores,
it falls under level IV non – corporate entities. In this case, AS 3, AS 14, AS 17, AS 18, AS 20, AS 21,
AS 23, AS 24, AS 25, AS 27 and AS 28 will not be applicable to M/s Omega & Co. Relaxations from
certain requirements in respect of AS 10, AS 11, AS 13, AS 15, AS 19, AS 22, As 26 and AS 29 are also
available to M/s Omega & Co.
(5 MARKS)

ANSWER : 2(B)
The related items given in the question will appear in the Cash Flow Statement of ABC Limited for
the year ended 31st March, 2021 as follows :

Rs. Rs.
Cash flows from operating activities
Closing Balance as per Profit and Loss Account 28,00,000
Less : Opening Balance as per Profit and Loss Account (20,00,000)
8,00,000
Less : Dividend received (50,000) 7,50,000
Cash flows from investing activities

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 Dividend received 50,000
Cash flows from financing activities
Proceeds from issuance of share capital Rs. 10,00,000
Equity shares issued for cash
Proceeds from securities premium
(Rs. 5,50,000 – 5,00,000) Rs. 50,000 10,50,000
Less : Redemption of Preference shares
(Rs. 7,00,000 – Rs. 6,00,000) (1,00,000) 9,50,000
Note :
1. Machinery acquired by issue of shares does not amount to cash outflow, hence also not
considered in the cash flow statement.
2. ABC Ltd. has been considered as a non – financial company in the given answer.
(5 MARKS)
ANSWER : 3(A)
(a) Omega Bank Limited would be a related party of B Limited. As per AS 18 “associates and joint
ventures of the reporting enterprise and the investing party of venture in respect of which the
reporting enterprise is an associate or a joint venturer” are related party relationship. Further,
an associate has been defined as “an enterprise in which an investing reporting party has
significant influence and which is neither a subsidiary nor a joint venture of the party”.
Significant influence has been defined to be “participation in the financial and /or operating
policy decisions of an enterprise, but not control of those policies”. Further, it is given in the
standard that significant influence may be gained by share ownership, agreement or statute. As
regards share ownership, there is a presumption that ownership of 20 per cent or more of the
voting power enables the enterprise to exercise significant influence, unless it could be clearly
demonstrated otherwise. In the given example, Omega Bank Limited exercises significant
influence over B Limited by virtue of ownership of 25 per cent of the voting power.
Omega Bank Limited is also a provider of finance for B Limited (as it has provided a loan to B
Limited), and as per the standard, a provider of finance is deemed not to be a related party
during its normal dealings with the enterprise by virtue only of those dealing. However, in this
case, the exemption would not be available to Omega Bank Limited as the exercise of significant
influence of Omega Bank Limited over B Limited has been demonstrated on account of
ownership of more than 20 per cent of voting power. Accordingly, Omega Bank Limited would
be construed to be a related party in the financial statements of B Limited and consequently,
the latter would be required to disclose the transactions with Omega Bank Limited parties in its
financial statements.
(b) Both B Limited and C Limited are ‘associates’ of A Limited. Follow-associates cannot be
regarded as a related parties only by virtue of the relationship. AS 18 states that “enterprise
that directly, or indirectly through one or more intermediaries, control, or are controlled by, or
are under common control with, the reporting enterprise” are related parties. Further, it is
given that “associates and joint ventures of the reporting enterprise and the investing party or
venture in respect of which the reporting enterprise is an associate or a joint venturer” are also
related parties. As B Limited is not an associate of C Limited, nor is it being controlled, directly
or indirectly, by C Limited or is not so controlling C Limited, it is not a related party of C Limited.
(6 MARKS)

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ANSWER : 3(B)
AS 17 explains that, “a single geographical segment does not include operations in economic
environments with significantly differing risks and returns. A geographical segment may be a single
country, a group of two or more countries, or a region within a country”. Accordingly, to identity
geographical segments, Company A needs to evaluate whether the segments reflected in the
management information system function in environments that are subject to significantly differing
risks and returns irrespective of the fact whether they are within the same country.
The Standard recognizes that, “Determining the composition of a business or geographical segment
involves a certain amount of judgement…”. Accordingly, while the management information system
of the Company provides segment information for rural and urban geographical segments for the
purpose of internal reporting, judgement is required to determine whether these segments are
subject to significantly differing risks and returns based on the definition of geographical segment.
In making such a judgement, aspect like different pricing and other policies, e.g., credit policies,
deployment of resources between different regions etc., may be considered for the purpose
identifying ‘urban and ‘rural’ as separate geographical segment.

Company A, in making judgment for identifying geographical segments, should also consider the
relevance, reliability and comparability over time of segment information that will be reported. The
Standard, explains that, “In making that judgement, enterprise management takes into account the
objective of reporting financial information by segment as set forth in the standard and the
qualitative characteristics of financial statements. The qualitative characteristics include the
relevance, reliability and comparability over time of financial information that is reported about the
different groups of products and services of an enterprise and about its operations in particular
geographical areas, and the usefulness of that information for assessing the risks and returns of the
enterprise.”

(6 MARKS)

ANSWER : 3(C)
As per AS 14, consideration for the amalgamation means the aggregate of the shares and other
securities issued and the payment made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company.
Computation of Purchase
Consideration
Particulars Rs.
Equity Shares (50,000 □ 15) 7,50,000
Cash payment 50,000
12% Preference Share Capital 2,00,000
Purchase Consideration 10,00,000

Note: Payment to debenture holders are not covered by the term ‘consideration’.
Journal entry
Particulars Rs. Rs.
Liquidation of Rina Ltd. A/c. 10,00,000
To Equity share capital A/c. 5,00,000
To 12% preference share capital A/c. 2,00,000

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 To Securities premium A/c. 2,50,000
To Bank / Cash A/c. 50,000
(Being payment of cash and issue of shares for discharge of
purchase consideration)

(5 MARKS)
ANSWER : 4(A)

Consolidated Profit & Loss Account

Particulars Note No. (Rs.)
Revenue from operations 1 13,05,000
Total Revenue (A) 13,05,000
Less : Expenses
Purchases 2 9,00,000
Other expenses 3 3,06,000
Changes in inventories of finished goods 4 (1,00,000)
Total Expenses (B) 11,06,000
Profit Before Tax (A – B) 1,99,000

Consolidated Balance Sheet

Note No. (Rs.)

I Equity and Liabilities
1. Shareholders’ funds
Share capital 5 4,01,000
Reserves and Surplus 6 1,99,000
2. Non – current Liabilities
Long term borrowings 7 2,00,000
3. Current Liabilities 8 1,00,000
9,00,000
II Assets
Non – current Assets
Property, Plant and Equipment 9 6,00,000
Current Assets
Inventories 10 1,00,000
Other current assets 11 2,00,000
9,00,000

Notes to Accounts
Particulars Rs.
1. Revenue from operations
Sales :
A Ltd. 7,25,000
B Ltd. 5,80,000 13,05,000
2. Purchases

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 A Ltd. 5,00,000
B Ltd. 4,00,000 9,00,000
3. Other expenses
A Ltd. 1,70,000
B Ltd. 1,36,000 3,06,000
4. Closing Inventory
A Ltd. 50,000
B Ltd. 50,000 1,00,000
5. Share Capital
A Ltd. 1,96,490
B Ltd. 2,04,510 4,01,000
6. Reserves and Surplus Profit and Loss Account.
A Ltd. 99,500
B Ltd. 99,500 1,99,000
7. Long Term Borrowings Unsecured Loans :
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000
8. Current Liabilities
A Ltd. 50,000
B Ltd. 50,000 1,00,000
9. Property, Plant and Equipment
A Ltd. 3,00,000
B Ltd. 3,00,000 6,00,000
10. Inventories
A Ltd. 50,000
B Ltd. 50,000 1,00,000
11. Other Current Assets
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000

(10 MARKS)
ANSWER : 4(B)
(i) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an
enterprise has a present obligation, as a result of past events, that probably requires an
outflow of resources and a reliable estimate can be made of the amount of obligation, a
provision should be recognised. Sun Ltd. has the obligation to deliver the goods within the
scheduled time as per the contract. It is probable that Sun Ltd. will fail to deliver the goods
within the schedule and it is also possible to estimate the amount of compensation.
Therefore, Sun Ltd. should provide for the contingency amounting Rs. 1.5 crores as per AS
29.
(ii) Provision should not be measured as the excess of compensation to be paid over the profit.
The goods were not manufactured before 31st March, 2016 and no profit had accrued for
the financial year 2015-2016. Therefore, provision should be made for the full amount of
compensation amounting Rs. 1.50 crores.
(5 MARKS)

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ANSWER : 5(A)
Journal Entries in the Books of ABC Ltd.
Date Particulars Rs. (Dr.) Rs. (Cr.)
Jan. 01, 2021 Bank Account (5,00,000 □ 68.50) Dr. 342,50,000
To Foreign Loan Account 342,50,000
March 31, 2021 Foreign Exchange Difference Account Dr. 5,00,000
To Foreign Loan Account 5,00,000
[5,00,000 □ (69.50 – 68.50)]
Jul.31, 2021 Foreign Exchange Difference Account Dr. 2,50,000
[5,00,000 □(70 – 69.5)]
Foreign Loan Account Dr. 347,50,000
To Bank Account 3,50,00,000

(7 MARKS)

ANSWER : 5(B)
Journal Entries in the books of Umang Ltd.

Dr. Rs. Cr. Rs.

1. Bank A/c Dr. 25,00,000
Profit and Loss A/c Dr. 5,00,000
To Investment A/c 30,00,000
(Being investment sold for the purpose of
buy-back of Equity Shares)
2. Bank A/c Dr. 20,00,000
To 12% Pref. Share capital A/c 20,00,000
(Being 12% Pref. Shares issued for Rs. 20,00,000)
3. Equity share capital A/c Premium payable on Dr. 50,00,000
buy - back Dr. 25,00,000
To Equity shares buy-back A/c / 75,00,000
Equity shareholders A/c
(Being the amount due on buy-back of equity
shares)
4. Equity shares buy-back A/c/ Equity share holders Dr. 75,00,000
A/c 75,00,000
To Bank A/c
(Being payment made for buy-back of equity
shares)
5. 15,00,000
Securities Premium A/c Dr.
10,00,000
General Reserve A/c Dr.
25,00,000
To Premium payable on buy-back
(Being premium payable on buy-back charged
6. from Securities premium) 30,00,000
General Reserve A/c Dr.
To Capital Redemption Reserve A/c

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 (Being creation of capital redemption reserve 30,00,000
to the extent of the equity shares bought back
after deducting fresh pref. shares issued)

(7 MARKS)

ANSWER : 6(A)
Difference between Amalgamation, Absorption and External Reconstruction

Basis Amalgamation Absorption External Reconstruction

Meaning Two or more companies In this case, an existing In this case, a newly
are wound up and a new company takes over the formed company takes
company is formed to take business of one or more over the business of an
over their business. existing companies. existing company.
Minimum At least three are At least two companies Only two companies are
number of companies involved. are involved. involved.
Companies
involved
Number of Only one resultant No new resultant Only one resultant
new resultant Company is formed. Two company is formed. company is formed.
companies companies are wound up Under this case a newly
to form a single resultant formed company takes
company. over the business of an
existing company.
Objective Amalgamation is done to Absorption is done to cut External reconstruction
cut competition and reap competition and reap the is done to reorganize the
the economies in large economies in large scale. financial structure of the
scale. company.
Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to take
amalgamate to form C Ltd. business of another over the business of an
existing company B Ltd. existing company A Ltd.

(5 MARKS)
ANSWER : 6(B)
To decide whether, the event is adjusting or not adjusting two conditions need to be satisfied
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Here both the conditions are satisfied. Court order is a conclusive evidence which has been
received before approval of the financial statements since the liability is related to earlier year. The
event will be considered as an adjusting event and accordingly the amount will be adjusted in
accounts of 2019 – 2020.
(5 MARKS)
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ANSWER : 6(C)
Valuation of closing stock
Rs.
Closing stock at cost 4,50,000
Less : Adjustment for 100 coats (W.N. 1) (20,000)
Value of inventory 4,30,000

Working Notes :
1. Adjustment for Coats

Cost included in closing stock Rs. 2,20,000

NRV of Coats Rs. 2,00,000
Adjustment to be made as NRV is less than cost Rs. 20,000

2. No adjustment required for shirts as their NRV is more than their cost which was included in
value of inventory.
(4 MARKS)

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