ADVANCED ACCOUNTING ARIVUPRO ACADEMY

INDEX – MODULE 1 {VERSION 3}

TOPIC PAGE NO
INTERNAL RECONSTRUCTION 1.1-1.53
BUYBACK OF SECURITIES 2.1-2.38
CASH FLOW STATEMENT (AS 3) 3.1-3.49
AMALGAMATION OF COMPANIES (AS 14) 4.1-4.51
CONSOLIDATED FINANCIAL STATEMENTS 5.1-5.60
INTRODUCTION , OVERVIEW & APPLICABILITY OF ACCOUNTING 6.1-6.10
STANDARDS
AS 13: ACCOUNTING FOR INVESTMENTS 7.1-7.26
AS 2: VALUATION OF INVENTORIES 8.1-8.14
AS 23 – ACCOUNTING FOR INVESTMENT IN ASSOCIATES IN 9.1-9.12
CONSOLIDATED FINANCIAL STATEMENTS
AS 27 – FINANCIAL REPORTING OF INTERESTS IN JOINT 10.1-10.18
VENTURE
AS 28 – IMPAIRMENT OF ASSETS 11.1- 11.17

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Chapter 1 INTERNAL RECONSTRUCTION

• When a company has been making losses for a number of years, the financial position does not
present a true and fair view of the state of the affairs of the company.
• In such a company the assets are overvalued, the assets side of the balance sheet consists of
fictitious assets, useless intangible assets and debit balance in the profit and loss account.
• Such a situation brings the need for reconstruction.
• Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets,
reassessment of liabilities and by writing off the losses already suffered by reducing the paid up
value of shares and/or varying the rights attached to different classes of shares.

DIFFERENCE BETWEEN INTERNAL AND EXTERNAL RECONSTRUCTION-

Basis Internal Reconstruction External Reconstruction
Liquidation The existing company is not The existing company is
liquidated liquidated.
Formation No new company is formed but only A new company is formed to take
the rights of shareholders and over the liquidated company.
creditors are changed.
Reduction of capital There is certain reduction of capital There is no reduction of capital.
and sometimes the outside In fact there is a fresh share
liabilities like debenture holders capital of the company.
may have to reduce their claim.
Legal position Internal reconstruction is done as External reconstruction is
per provisions of section 66 of the regulated by section 232 of the
Companies Act, 2013 Companies Act, 2013.

METHODS OF INTERNAL RECONSTRUCTION:

• Alteration of share capital :
✓ Sub-divide or consolidate shares into smaller or higher Denomination
✓ Conversion of share into stock or vice-versa

• Variation of shareholders’ rights :

✓ Only the specific rights are changed. There is no change in the amount of capital.

• Reduction of share capital

• Compromise, arrangements etc.
• Surrender of Shares.

While preparing the balance sheet of a reconstructed company, the following points are to be kept in mind:
(a) After the name of the company, the words “and Reduced” should be added only if the Court so
orders.
(b) In case of fixed assets, the amount written off under the scheme of reconstruction must be shown
for five years.

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1. On 31-12-20X1, B Ltd. had 20,000, Rs 10 Equity Shares as authorized capital and the shares were all
issued on which Rs 8 was paid up. In June, 20X2 the company in general meeting decided to sub-
divide each share into two shares of Rs 5 with Rs 4 paid up. In June, 20X3 the company in general
meeting resolved to consolidate 20 shares of Rs 5, Rs 4 per share paid up into one share of Rs 100
each, Rs 80 paid up.

Pass entries and show how share capital will appear in notes to Balance Sheet as on 31-12-20X1, 31-12-
20X2 and 31-12-20X3.

Solution

Journal Entries
20X2 Rs Rs
June Equity Share Capital (Rs 10) A/c Dr. 1,60,000
To Equity Share Capital (Rs 5) A/c 1,60,000
(Being the sub-division of 20,000 shares of
Rs 10 each with Rs 8 paid up into 40,000
shares Rs 5 each with Rs 4 paid up by
resolution in general meeting dated )
20X3 Equity Share Capital (Rs 5) A/c Dr. 1,60,000
June To Equity Share Capital (Rs 100) A/c 1,60,000
(Being consolidation of 40,000 shares of
Rs 5 with Rs 4 paid up into 2,000 Rs 100
shareswith Rs 80 paid up)

Notes to Balance Sheet

Liabilities: Rs
As on 31-12-20X1
1. Share Capital
Authorized:
2,00,000
20,000 Equity Shares of Rs 10 each
Issued, Subscribed and Paid up:
20,000 Equity Shares of Rs 10 each Rs 8 per share paid up 1,60,000
As on 31-12-20X2 2,00,000
1. Share Capital
Authorized:
40,000 Equity Shares of Rs 5 each
Issued, Subscribed and Paid up:
40,000 Equity Shares of Rs 5 each Rs 4 per share paid up 1,60,000
As on 31-12-20X3 Rs
1. Share Capital
Authorized:
2,000 Equity Shares of Rs 100 each 2,00,000
Issued, Subscribed and Paid up:
2,000 Equity Shares of Rs 100 each Rs 80 per share paid up 1,60,000

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2. C Ltd. had Rs 5,00,000 authorized capital on 31-12-20X1 divided into shares of Rs 100 each out of
which 4,000 shares were issued and fully paid up. In June 20X2 the Company decided to convert the
issued shares into stock. But in June, 20X3 the Company re-converted the stock into shares of Rs 10
each, fully paid up.
Pass entries and show how Share Capital will appear in Notes to Balance Sheet as on 31-12-20X1, 31-12-
20X2 and 31-12-20X3.

Solution
Journal Entries

20X2
June Equity Share Capital A/c Dr. 4,00,000
To Equity Stock A/c 4,00,000
(Being conversion of 4,000 fully paid Equity
Shares of Rs 100 into Rs 4,00,000 Equity
Stock as per resolution in general meeting
dated…)
20X3
June Equity Stock A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being re-conversion of Rs 4,00,000 Equity
Stock into 40,000 shares of Rs 10 fully paid
Equity Shares as per resolution in General
Meeting dated...)

Notes to Balance Sheet

As on 31-12-20X1
Share Capital
Authorized 5,00,000
5,000 Equity Shares of Rs 100 each

Issued and Subscribed

4,000 Equity Shares of Rs 100 each fully called up 4,00,000
As on 31-12-20X2 Rs
Share Capital
Authorized
5,000 Equity Shares of Rs 100 each 5,00,000
Issued and Subscribed
Equity Stock- 4,000 Equity Shares of Rs 100 converted into Stock 4,00,000
As on 31-12-20X3 Rs
Share Capital

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Authorized
50,000 Equity Shares of Rs 10 each 5,00,000
Issued and Subscribed
40,000 Equity Shares of Rs 10 each fully called up 4,00,000

3. The Balance Sheet of A & Co. Ltd. as at 31-3-20X2 is as follows:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,50,000
B Reserves and Surplus 2 (5,35,000)
2 Non-current liabilities
A Long-term borrowings 3 3,75,000
3 Current liabilities
A Trade Payables 3,00,000
B Short term borrowings - Bank Overdraft 1,95,000
C Other current liabilities 4 1,22,500
Total 16,07,500
Assets
1 Non-current assets
A Property, plant and equipment 5 4,75,000
B Intangible assets 6 1,67,500
C Non-current investments 7 55,000
2 Current assets
A Inventories 4,25,000
B Trade receivables 4,85,000
Total 16,07,500

Notes to accounts
Rs
1 Share Capital
Equity share capital:
75,000 Equity Shares of Rs 10 each 7,50,000
Preference share capital:
4,000 6% Cumulative Preference Shares of Rs 100 each 4,00,000
11,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (5,35,000)

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(5,35,000)
3 Long-term borrowings
Secured
6% Debentures (secured on the freehold property) 3,75,000
3,75,000
4 Other current liabilities
Loan from directors 1,00,000
Interest payable on 6% debentures 22,500
1,22,500
5 Property plant and Equipment
Freehold property 4,25,000
Plant 50,000
4,75,000
6 Intangible assets
Goodwill 1,30,000
Patents 37,500
1,67,500
7 Non-current investments
Investments at cost 55,000
55,000

The Court approved a Scheme of re-organization to take effect on 1-4-20X2, whereby:

(i) The Preference shares to be written down to Rs 75 each and Equity Shares to Rs 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and
Equity Shares of Rs 2 each to be allotted for the remaining quarter.
(iii) Interest payable on debentures to be paid in cash.
(iv) Debenture-holders agreed to take over freehold property, book value Rs 1,00,000 at a valuation of Rs
1,20,000 in part repayment of their holdings and to provide additional cash of Rs 1,30,000 secured by a
floating charge on company’s assets at an interest rate of 8% p.a.
(v) Patents and Goodwill to be written off.
(vi) Inventory to be written off by Rs 65,000.
(vii) Amount of Rs 68,500 to be provided for bad debts.
(viii) Remaining freehold property after giving to debenture holders, to be re-valued at Rs 3,87,500.
(ix) Investments be sold for Rs 1,40,000.
(x) Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of Rs 2 each
and as to 5% in cash, and balance 5% being waived.
(xi) There were capital commitments totalling Rs 2,50,000. These contracts are to be cancelled on payment
of 5% of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflecting the above transactions (including cash transactions)
and prepare the Balance Sheet of the company after completion of the Scheme.

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Solution
Journal of A & Co. Ltd.
Dr. Cr.
Rs Rs
20X2 Equity Share Capital A/c (Rs 10) Dr. 7,50,000
April 1 To Capital Reduction A/c 6,00,000
To Equity Share Capital A/c (Rs 1,50,000
2)

(Reduction of equity shares of Rs 10 each to

shares of Rs 2 each as per Reconstruction
Scheme dated...)
” 6% Cum. Preference Share Capital A/c Dr. 4,00,000
(Rs 100)
To Capital Reduction A/c 1,00,000
To Pref. Share Capital A/c (Rs 75) 3,00,000
(Reduction of preference shares of Rs 100
each to shares of Rs 75 each as per
reconstruction scheme)
” Capital Reduction Account Dr. 24,000
To Equity Share Capital Account 24,000
(Arrears of preference dividends satisfied by the
issue of equity shares, 25% of the amount due,
Rs 96,000)
” Freehold Property A/c Dr. 82,500
To Capital Reduction A/c 82,500
(Appreciation in the value of property:
Book value Revalued Figure
Rs 1,00,000 Rs 1,20,000
Rs 3,25,000 Rs 3,87,500
Total Rs 4,25,000 Rs 5,07,500
Profit on revaluation: Rs 82,500)
” 6% Debentures A/c Dr. 1,20,000
To Freehold Property A/c 1,20,000
(Claims of debenture-holders, in part, in
respect of principal discharged by transfer of
freehold property vide Scheme of
Reconstruction)
” Interest payable A/c Dr. 22,500
To Bank A/c 22,500

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(Debenture interest paid)

” Bank A/c Dr. 1,30,000

To 8% Debentures A/c 1,30,000
(8% Debentures issued for cash)
” Bank A/c Dr. 1,40,000
To Investment A/c 55,000
To Capital Reduction A/c 85,000
(Sale of Investment for Rs 1,40,000 cost being
Rs 55,000; profit credited to Capital Reduction
Account)
” Directors’ Loan A/c Dr. 1,00,000
To Equity Share Capital A/c 90,000
To Bank A/c 5,000
To Capital Reduction A/c 5,000
(Directors’ loan discharged by issue of equity
shares of Rs 90,000, cash payments of Rs
5,000 and surrender of Rs 5,000, vide Scheme
of Reconstruction)
” Capital Reduction A/c Dr. 8,48,500
To Patents 37,500
To Goodwill 1,30,000
To Inventory 65,000
To Provision for Doubtful Debts 68,500
To Bank 12,500
To Profit & Loss Account 5,35,000
(Writing off patents, goodwill, profit and loss
account and reducing the value of stock,
making the required provision for doubtful
debts and payment for cancellation of capital
commitments)
Note: Penalty charges for cancellation of the contract amounts to Rs 12,500 (2,50,000X5%) being paid in
cash.

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Balance Sheet of A & Co. Ltd. (And Reduced) as at 1st April, 20X2
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 5,64,000
2 Non-current liabilities
A Long-term borrowings 2 3,85,000
3 Current liabilities
A Trade Payables 3,00,000
Total 12,49,000
Assets
1 Non-current assets
A Property, plant and equipment 3 4,37,500
B Intangible assets 4 -
2 Current assets
A Inventories 3,60,000
B Trade receivables 5 4,16,500
C Cash and cash equivalents 35,000
Total 12,49,000

Notes to accounts
1 Share Capital
Equity share capital
1,32,000 Equity shares of 2 each (of the above57,000 2,64,000
shares have been issued for consideration other than
cash)
Preference share capital
4,000 6% Preference shares of 75 each 3,00,000
Total 5,64,000

2 Long-term borrowings
Secured
6% Debentures 2,55,000
8% Debentures 1,30,000
Total 3,85,000
3 Property, plant and equipment
Freehold property 4,25,000
Add: Appreciation under scheme of Reconstruction 82,500
Less: Disposed of (1,20,000) 3,87,500
Plant 50,000
4,37,500
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4 Net carrying value

Intangible assets 1,30,000
Goodwill (1,30,000)
Less: Written off under scheme of Reconstruction NIL
Net carrying value 37,500
Patents (37,500) -
Less: Written off under scheme of Reconstruction - NIL
5 Net carrying value 4,85,000
Trade Receivables 68,500
Less: Provision for doubtful debts 4,16,500

4. Given below is the Balance sheet of Rebuilt Ltd. as at 31.3.20X1:

Particulars Notes
Equity and Liabilities
1
Shareholders’ funds
A Share capital 1 13,50,000
B Reserves and Surplus 2 (4,51,000)
Non-current liabilities
A Long-term borrowings (Loan) 3 5,73,000
Current liabilities
A Trade Payables 2,07,000
B Other current liabilities 35,000
Total 17,14,000
Assets
Non-current assets
A Property, plant and equipment 4 6,68,000
B Intangible assets 5 3,18,000
Current assets
A Inventories 4,00,000
B Trade receivables 3,28,000
Total 17,14,000

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Notes to accounts
Rs
1 Share Capital
Equity share capital 7,50,000
15,000 Equity Shares of Rs 50 each
Preference share capital
12,000, 7% Cumulative Preference Shares of Rs 50 each
(Preference dividend is in arrears for five years) 6,00,000
Total 13,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (4,51,000)
(4,51,000)
3 Long-term borrowings
Loan 5,73,000
5,73,000
4 Property, plant and Equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,68,000
6,68,000
5 Intangible assets
Trademarks and Goodwill at cost 3,18,000
3,18,000
The Company is not earning profits, short of working capital and a scheme of reconstruction has been
approved by both the classes of shareholders. A summary of the scheme is as follows:
(a) The equity shareholders have agreed that their Rs 50 shares should be reduced to Rs 2.50 by
cancellation of Rs 47.50 per share. They have also agreed to subscribe for three new equity shares of Rs
2.50 each for each equity share held.
(b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for each Rs 50
share, 4 new 5% preference shares of Rs 10 each, plus 6 new equity shares of Rs 2.50 each, all credited as
fully paid.
(c) Lenders to the company for Rs 1,50,000 have agreed to convert their loan into share and for this
purpose they will be allotted 12,000 new preference shares of Rs 10 each and 12,000 new equity shares of
Rs 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000, new equity shares of Rs 2.50 each in addition
to any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, Rs 2,00,000 is to be used to reduce the loan due by the
company.
(f) The equity share capital cancelled is to be applied:
i. to write off the debit balance in the profit and loss A/c; and
ii. to write off Rs 35,000 from the value of plant.

Any balance remaining is to be used to write down the value of trademarks and goodwill.

Show by journal entries how the financial books are affected by the scheme and prepare the balance sheet
of the company after reconstruction. The nominal capital as reduced is to be increased to Rs 6,50,000 for
preference share capital and Rs 7,50,000 for equity share capital.
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Solution
In the books of Rebuilt Ltd.
Journal Entries
Particulars Debit Credit

1. Equity share capital A/c (50) Dr. 7,50,000

To Equity share capital A/c (2.50) 37,500
To Capital reduction A/c 7,12,500
(Being equity capital reduced to nominal value
of 2.50 each)
2. Bank A/c Dr. 1,12,500
To Equity share capital 1,12,500
(Being 3 right shares against each share was
issued and subscribed)
3. 7% Preference share capital A/c (50) Dr. 6,00,000
Capital reduction A/c Dr. 60,000
To 5% Preference share capital ( 10) 4,80,000
To equity share capital (50) 1,80,000
(Being 7% preference shares of 50 each
converted to 5% preference shares of 10 each
and also given to them 6 equity shares for
every share held)
4. Loan A/c Dr. 1,50,000
To 5% Preference share capital A/c 1,20,000
To Equity share capital A/c 30,000
(Being loan to the extent of 1,50,000
converted into share capital)
5. Bank A/c Dr. 1,00,000
To Equity share application money A/c 1,00,000
(Being shares subscribed by the directors)

6. Equity share application money A/c Dr. 1,00,000

To Equity share capital A/c 1,00,000
(Being application money transferred to capital
A/c)
7. Loan A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being loan repaid)
8. Dr. 6,52,500

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Capital reduction A/c 4,51,000

To Profit and loss A/c 35,000
To Plant A/c 1,66,500
To Trademarks and Goodwill A/c (Bal.fig.)
(Being losses and assets written off to the
extent required)

Balance sheet of Rebuilt Ltd. (and reduced) as at 31.3.20X1

Particulars Notes
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 10,60,000
2 Non-current liabilities
a Long-term borrowings 2,23,000
3 Current liabilities
a Trade Payables 2,07,000
b Other current liabilities 35,000
Total 15,25,000
Assets

1 Non-current assets

a Property, plant and equipment 2 6,33,000

b Intangible assets 3 1,51,500

2 Current assets
a Inventories 4,00,000
b Trade receivables 3,28,000
c Cash and cash equivalents 4 12,500
Total 15,25,000

Notes to accounts
`
1. Share Capital
Authorized capital:
65,000 Preference shares of 10 each 6,50,000
3,00,000 Equity shares of 2.50 each 7,50,000 14,00,000
Issued, subscribed and paid up:
1,80,000 equity shares of 2.5 each 4,60,000
60,000, 5% Preference shares of 10 each 6,00,000 10,60,000
2. Property plant and equipment
Building at cost less depreciation 4,00,000

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Plant at cost less depreciation 2,33,000 6,33,000

3. Intangible assets
Trademarks and goodwill 1,51,500
4. Cash and cash equivalents
Bank (1,12,500+1,00,000-2,00,000) 12,500

5. Repair Ltd. is in the hands of a receiver for debenture holders who hold a charge on all assets except
uncalled capital. Repair Ltd. gives the following information as regards creditors on 31st March,
20X1:

Property, plant and equipment (Cost 3,90,000) - estimated at 1,50,000

Cash in hand of the receiver 2,70,000
Charged under debentures 4,20,000
Uncalled capital 1,80,000
Deficiency 7,50,000
6,000 shares of 60 each, 30 paid up 1,80,000
First debentures 3,00,000
Second debentures 6,00,000
Unsecured trade payables 4,50,000
A holds the first debentures for Rs 3,00,000 and second debentures for Rs 3,00,000. He is also an unsecured
creditor for Rs 90,000. B holds second debentures for Rs 3,00,000 and is an unsecured trade payables for Rs
60,000.

The following scheme of reconstruction is proposed:

1. A is to cancel Rs 2,10,000 of the total debt owing to him, to bring Rs 30,000 in cash and to take first
debentures (in cancellation of those already issued to him) for Rs 5,10,000 in satisfaction of all his claims.
2. B is to accept Rs 90,000 in cash in satisfaction of all claims by him.
3. In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four
shares of Rs 7.50 each, fully paid against their claim for each share of Rs 60. The balance of 25% is to be
postponed and to be payable at the end of three years from the date of Court’s approval of the scheme.
The nominal share capital is to be increased accordingly.
4. Uncalled capital is to be called up in full and Rs 52.50 per share cancelled, thus making the shares of Rs
7.50 each.
Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary
journal entries.

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Solution
Journal Entries
Particulars Debit Credit

First debentures A/c Dr. 3,00,000

Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 90,000
To A’s A/c 6,90,000
(Being A’s total liability ascertained)

A’s A/c Dr. 2,10,000

To Capital reduction A/c 2,10,000
(Being cancellation of debt upto ` 2,10,000)
Bank A/c Dr. 30,000
To A’s A/c 30,000
(Being cash received in course of settlement)
A’s A/c Dr. 5,10,000
To First debentures A/c 5,10,000
(Being liability of A, discharged against first
debentures)
Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 60,000
To B’s A/c 3,60,000
(Being B’s liability ascertained)
B’s A/c Dr. 3,60,000
To Bank A/c 90,000
To Capital reduction A/c 2,70,000
(Being B’s liability discharged)
Unsecured trade payables A/c Dr. 3,00,000
To Equity share capital A/c 1,12,500
To Loan (Unsecured) A/c 75,000
To Capital reduction A/c 1,12,500
(Being settlement of unsecured creditors)
Share call A/c Dr. 1,80,000
To Share capital A/c 1,80,000
(Being final call money due)
Bank A/c Dr. 1,80,000
To Share call A/c 1,80,000
(Being final call money received)

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Share capital A/c (Face value ` 60) Dr. 3,60,000

To Share capital (Face value ` 7.50) 45,000
To Capital reduction A/c 3,15,000
(Being share capital reduced to ` 7.50 each)
Capital reduction A/c Dr. 9,07,500
To Profit and loss A/c 8,70,000
To Capital Reserve 37,500
(Being reconstruction surplus used to write off
losses and balance transfer to capital reserve)

Working Notes:
1. Settlement of claim of remaining unsecured creditors
75% of ` 3,00,000 2,25,000
Considering their claim for share of ` 60 each
2,25,000/60 =3,750 shares
Less: Number of shares to be issued
3,750 x 4= 15,000 shares of ` 7.5 each
Total value= 15,000 x 7.50 (1,12,500)
Transferred to Capital reduction A/c 1,12,500

2. Ascertainment of profit and loss account’s debit balance at the time of reconstruction
` `
Asset
Property, plant and equipment 3,90,000
Cash 2,70,000 6,60,000
Less: Capital & Liabilities:
Share capital 1,80,000
1st Debenture 3,00,000
nd
2 Debenture 6,00,000
Unsecured trade payables 4,50,000 (15,30,000)
Profit and loss A/c (Debit balance) (8,70,000)

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6. Vaibhav Ltd. gives the following ledger balances as at 31st March 20X1:
Rs
Property, Plant and Equipment 2,50,00,000
Investments (Market-value Rs 19,00,000) 20,00,000
Current Assets 2,00,00,000
P & L A/c (Dr. balance) 12,00,000
Share Capital: Equity Shares of Rs 100 each 2,00,00,000
6%, Cumulative Preference Shares of Rs 100 each 1,00,00,000
5% Debentures of Rs 100 each 80,00,000
Creditors 1,00,00,000
Provision for taxation 2,00,000

The following scheme of Internal Reconstruction is sanctioned:

(i) All the existing equity shares are reduced to Rs 40 each.
(ii) All preference shares are reduced to Rs 60 each.
(iii) The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing
debentures of Rs 100 each and exchange the same for fresh debentures of Rs 70 each for every debenture
held by them.
(iv) Property, Plant and Equipment is to be written down by 20%.
(v) Current assets are to be revalued at Rs 90,00,000.
(vi) Investments are to be brought to their market value.
(vii) One of the creditors of the company to whom the company owes Rs 40,00,000 decides to forgo 40% of
his claim. The creditor is allotted with 60000 equity shares of Rs 40 each in full and final settlement of his
claim.
(viii) The taxation liability is to be settled at Rs 3,00,000.
(ix) It is decided to write off the debit balance of Profit & Loss A/c.

Pass journal entries and show the Balance Sheet of the company after giving effect to the above.

Solution
Journal Entries in the books of Vaibhav Ltd.

(i) Equity share capital ( 100) A/c Dr. 2,00,00,000

To Equity Share Capital ( 40) A/c 80,00,000
To Capital Reduction A/c 1,20,00,000
(Being conversion of equity share capital of
100 each into 40 each as per reconstruction
scheme)
(ii) 6% Cumulative Preference Share capital 1,00,00,000
( 100) A/c Dr.
To 6% Cumulative Preference Share 60,00,000
Capital ( 60)A/c
To Capital Reduction A/c 40,00,000
(Being conversion of 6% cumulative preference
shares capital of 100 each into
60 each as per reconstruction scheme)
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(iii) 5% Debentures (100) A/c Dr. 80,00,000

To 6% Debentures (70) A/c 56,00,000
To Capital Reduction A/c 24,00,000
(Being 6% debentures of 70 each issued to
existing 5% debenture holders. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 40,00,000
To Equity Share Capital (40) A/c 24,00,000
To Capital Reduction A/c 16,00,000
(Being a creditor of 40,00,000 agreed to surrender
his claim by 40% and was allotted 60,000 equity
shares of 40 each in full settlement of his dues as
per reconstruction scheme)

(v) Provision for Taxation A/c Dr. 2,00,000

Capital Reduction A/c Dr. 1,00,000

To Liability for Taxation A/c 3,00,000

(Being conversion of the provision for taxation
into liability for taxation for settlement of the
amount due)
(vi) Capital Reduction A/c Dr. 199,00,000
To P & L A/c 12,00,000
To Property, Plant and Equipment A/c 50,00,000
To Current Assets A/c 110,00,000
To Investments A/c 1,00,000
To Capital Reserve A/c (Bal. fig.) 26,00,000
(Being amount of Capital Reduction utilized in
writing off P & L A/c (Dr.) Balance, PPE, Current
Assets, Investments and the Balance transferred
to Capital Reserve)
(vii) Liability for Taxation A/c Dr. 3,00,000
To Current Assets (Bank A/c) 3,00,000
(Being the payment of tax liability)

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Balance Sheet of Vaibhav Ltd. (and reduced) as at 31st March, 20X1

Particulars Notes
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 164,00,000
b Reserves and Surplus 2 26,00,000
2 Non-current liabilities
Long-term borrowings 3 56,00,000
3 Current liabilities
Trade Payables (1,00,00,000 less 40,00,000) 60,00,000
Total 3,06,00,000
Assets
1 Non-current assets
a Property, plant and equipment 4 2,00,00,000

b Investments 5 19,00,000
2 Current assets 6 87,00,000
Total 3,06,00,000

Notes to accounts

1. Share Capital
Equity share capital
Issued, subscribed and paid up
2,60,000 equity shares of 40 each
(of the above 60,000 shares have been issued 1,04,00,000
for consideration other than cash)
Preference share capital
Issued, subscribed and paid up
1,00,000 6% Cumulative Preference shares of
60,00,000
60 each
Total 1,64,00,000
2. Reserves and Surplus
Capital Reserve 26,00,000
3. Long-term borrowings
Secured
6% Debentures 56,00,000
4. Property, Plant and Equipment
Carrying value 2,50,00,000
Adjustment under scheme of reconstruction (50,00,000) 2,00,00,000
5. Investments
20,00,000

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Adjustment under scheme of reconstruction (1,00,000) 19,00,000

6. Current assets
2,00,00,000
Adjustment under scheme of reconstruction (1,10,00,000)
90,00,000
Taxation liability paid (3,00,000) 87,00,000

Working Note:
Capital Reduction Account
To Liability for taxation 1,00,000 By Equity share capital 1,20,00,000
A/c
To P & L A/c 12,00,000 By 6% Cumulative
To Property, plant and preferences
equipment 50,00,000
To Current assets 1,10,00,000 Share capital 40,00,000
To Investment 1,00,000 By 5% Debentures 24,00,000
To Capital Reserve
(Bal. fig.) 26,00,000 By Sundry creditors 16,00,000
2,00,00,000 2,00,00,000

7. Following is the Balance Sheet of ABC Ltd. as at 31st March, 20X1:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 26,00,000
B Reserves and Surplus 2 (4,05,000)
2 Non-current liabilities
A Long-term borrowings 3 12,00,000
3 Current liabilities
A Trade Payables 5,92,000
B Short term borrowings - Bank overdraft 1,50,000
Total 41,37,000
Assets
1 Non-current assets
A Property, plant and equipment 4 11,50,000
B Intangible assets 5 70,000

C Non-current investment 6 68,000

2 Current assets
A Inventory 14,00,000
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B Trade receivables 14,39,000

C Cash and cash equivalents 10,000
Total 41,37,000

Notes to accounts:
Rs
1 Share Capital
Equity share capital:
2,00,000 Equity Shares of Rs 10 each 20,00,000
6,000, 8% Preference shares of Rs 100 each 6,00,000
26,00,000
2 Reserves and Surplus
Debit balance of Profit and loss A/c (4,05,000)
(4,05,000)
3 Long-term borrowings
9% debentures 12,00,000
12,00,000
4 Property, Plant and Equipment
Plant and machinery 9,00,000
Furniture and fixtures 2,50,000
11,50,000
5 Intangible assets
Patents and copyrights 70,000
70,000
6 Non-current investments
Investments (market value of Rs 55,000) 68,000
68,000

The following scheme of reconstruction was finalized:

(i) Preference shareholders would give up 30% of their capital in exchange for allotment of 11% Debentures
to them.
(ii) Debenture holders having charge on plant and machinery would accept plant and machinery in full
settlement of their dues.
(iii) Inventory equal to Rs 5,00,000 in book value will be taken over by trade payables in full settlement of
their dues.
(iv) Investment value to be reduced to market price.
(v) The company would issue 11% Debentures for Rs 3,00,000 and augment its working capital requirement
after settlement of bank overdraft.

Pass necessary Journal Entries in the books of the company. Prepare Capital Reduction account and Balance
Sheet of the company after internal reconstruction.

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Solution
In the Books of ABC Ltd.
Journal Entries
Particulars
8% Preference share capital A/c Dr. 6,00,000
To 11% Debentures A/c 4,20,000
To Capital reduction A/c 1,80,000
[Being 30% reduction in liability of preference share
capital and issue of 11% debentures]
9% Debentures A/c Dr. 12,00,000
To Plant & machinery A/c 9,00,000
To Capital reduction A/c 3,00,000
[Settlement of debenture holders by allotment of
plant & machinery]
Trade payables A/c Dr. 5,92,000
To Inventory A/c 5,00,000
To Capital reduction A/c 92,000
[Being settlement of creditors by giving Inventories]

Bank A/c Dr. 3,00,000

To 11% Debentures A/c 3,00,000
[Being fresh issue of debentures]
Bank overdraft A/c Dr. 1,50,000
To Bank A/c 1,50,000
[Being settlement of bank overdraft]
Capital reduction A/c Dr. 5,72,000
To Investment A/c 13,000
To Profit and loss A/c 4,05,000
To Capital reserve A/c 1,54,000
[Being decrease in investment and profit and loss
account (Dr. bal.); and balance of capital reduction
account transferred to capital reserve]

Capital Reduction Account

To Investments A/c 13,000 By Preference share capital A/c 1,80,000

To Profit and loss A/c 4,05,000 By 9% Debenture holders A/c 3,00,000
To Capital reserve A/c 1,54,000 By Trade payables A/c 92,000
5,72,000 5,72,000

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Balance Sheet of ABC Ltd. (And Reduced) As at 31st March 20X1

Particulars Note No
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 20,00,000
(b) Reserves and Surplus 2 1,54,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 7,20,000
Total 28,74,000

II. Assets
(1) Non-current assets
(a) Property, plant and equipment 4 2,50,000
(b) Intangible assets 5 70,000
(c) Non-current investments 6 55,000
(2) Current assets
(a) Inventories (Rs 14,00,000 – Rs 9,00,000
5,00,000)
(b) Trade receivables 14,39,000
(c) Cash and cash equivalents
Cash at Bank (W. N.) 1,60,000
Total 28,74,000

Notes to Accounts

1. Share Capital
2,00,000 Equity shares of Rs 10 each fully paid-up 20,00,000
2. Reserve and Surplus
Capital Reserve 1,54,000
3. Long Term Borrowings
11% Debentures (Rs 4,20,000 + Rs 3,00,000) 7,20,000
4. Property, Plant and Equipment
Plant & machinery 9,00,000
Less: Adjustment on scheme of reconstruction 9,00,000 -
Furniture & fixtures 2,50,000
5 Intangible assets
Patents & copyrights 70,000
3,20,000
6. Non-Current Investments
Investments (Rs 68,000 – Rs 13,000) 55,000
Working Note:
Cash at bank = Opening balance + 11% Debentures issued – Bank overdraft paid
= Rs 10,000 + Rs 3,00,000 – Rs 1,50,000 = Rs 1,60,000
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8. The balance sheet of Indu Ltd as at 31st March was as follows-

Liabilities Amount Assets Amount
10,000 Equity shares of Rs 100 10,00,000 Machinery 3,50,000
each
15% Debentures 3,00,000 Stock 2,53,000
Accrued Interest 45,000 Debtors 2,30,000
Creditors 52,000 Bank 20,000
Provisions for Income Tax 36,000 P&L a/c 5,80,000
TOTAL 14,33,000 TOTAL 14,33,000

Following scheme of reconstruction has been approved –

• Each share shall be sub divided into 10 fully paid shares of Rs 10 each
• After sub division each shareholder shall surrender to the company, 50% of his holdings for the
purpose of re issue to debenture holders and creditors.
• Out of the shares surrendered, 10,000 shares of Rs 10 each shall be converted into 10% preference
shares of Rs 10 each fully paid up.
• The claims of debenture holders shall be reduced by 50%. In consideration of the reduction, the
debenture holders shall receive preference shares of Rs 1,00,000 which are converted out of shares
surrendered.
• Creditors claim shall be reduced by 25% and balance claim is to be settled by the issue of equity
shares of Rs 10 each out of the shares surrendered.
• Balance of P&L a/c to be written off.
• The shares surrendered and not reissued shall be cancelled. Journalize

9. Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by the
court-
1. Furniture and Fixtures which stood at the books at Rs 1,50,000 to be written down to Rs 95,000. The
freehold premises which was valued at Rs 7,00,000 showed an appreciation of Rs 55,000.
2. Plant and machinery showed fall in value of Rs 89,000, to be recorded in the books. Investment at Rs
2,00,000 was brought down to the existing market value at Rs 1,05,000.
3. Debenture holders accepted to receive the following in lieu of their present 9% debentures of Rs
2,50,000-
a. 1/5th of the total to be paid in cash to them.
b. To take over the land and buildings of value Rs 72,000.
c. To forgo the remaining unpaid portion as a policy of reconstruction.

Write off the profit and loss A/c debit balance at Rs 70,000 which had been accumulated over the years. In
case of any shortfall, the balance of the General reserve of Rs 1,50,000 can be utilized to write off the losses
under reconstruction scheme.

Show the necessary journal entries as part of the reconstruction process considering that balance in general
reserve utilized to write off the losses as per reconstruction scheme.

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SOLUTION-
Journal entries in the books of Parth Ltd.
Dr. Cr.
Reconstruction A/c Dr. 2,39,000
To Furniture and Fixtures A/c 55,000
To Plant and machinery A/c 89,000

To Investment A/c 95,000

(Writing off overvalued assets as per Reconstruction
Scheme dated.)
Freehold premises A/c Dr. 55,000
To Reconstruction A/c 55,000
(Being the increase in the premises credited to
reconstruction account as per reconstruction scheme)
9% Debentures A/c Dr. 2,50,000
To Bank A/c 50,000
To Land and building A/c 72,000
To Reconstruction A/c 1,28,000
(Being the debenture holders claim settled partly and
foregone partly as per reconstruction scheme)
Reconstruction A/c Dr. 70,000
To Profit and loss A/c 70,000
(Being the loss written off as per reconstruction
scheme)
General reserve A/c Dr. 1,26,000
To Reconstruction A/c 1,26,000
(Being the balance in general reserve utilized to write
off the losses as per reconstruction scheme)

10. The following scheme of reconstruction has been approved for Win Limited:
(i) The shareholders to receive in lieu of their present holding at 1,00,000 shares of Rs 10 each, the
following:
(a) New fully paid Rs 10 Equity shares equal to 3/5th of their holding.
(b) 10% Preference shares fully paid to the extent of 1/5th of the above new equity shares.
(c) Rs 40,000, 8% Debentures.
(ii) An issue of Rs 1 lakh 10% first debentures was made and allotted, payment for the same being received
in cash forthwith.
(iii) Goodwill which stood at Rs 1,40,000 was completely written off.
(iv) Plant and machinery which stood at Rs 2,00,000 was written down to Rs 1,50,000.
(v) Freehold property which stood at Rs 1,50,000 was written down by Rs 50,000.

You are required to draw up the necessary Journal entries in the Books of Win Limited for the above
reconstruction. Suitable narrations to Journal entries should form part of your answer.

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

SOLUTION-
Journal Entries
` `
Equity Share Capital (old) A/c Dr. 10,00,000
To Equity Share Capital (` 10) A/c 6,00,000
To 10% Preference Share Capital A/c 1,20,000
To 8% Debentures A/c 40,000
To Capital Reduction A/c 2,40,000
(Being new equity shares, 10% Preference Shares,
8% Debentures issued and the balance transferred
to Reconstruction account as per the Scheme)

Bank A/c Dr. 1,00,000

To 10% First Debentures A/c 1,00,000
(Being allotment of 10% first Debentures)
Capital Reduction A/c Dr. 2,40,000
To Goodwill Account 1,40,000
To Plant and Machinery Account 50,000
To Freehold Property Account 50,000
(Being Capital Reduction Account utilized for
writing off of Goodwill, Plant and Machinery and
Freehold property as per the scheme)

11. Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge losses.
The following is the Balance Sheet of the Company as at 31.3.20X1 before reconstruction:
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 65,00,000
B Reserves and Surplus 2 (20,00,000)
2 Non-current liabilities
A Long-term borrowings 3 15,00,000
3 Current liabilities Total
A Trade Payables 5,00,000
65,00,000

Assets
1 Non-current assets
A Property, plant and equipment 4 45,00,000
B Intangible assets 5 20,00,000
2 Current assets Nil
Total 65,00,000

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Notes to accounts
Rs
1 Share Capital
Equity share capital
Authorized share capital
75,00,000
1,50,000 Equity shares of Rs 50 each
Issued, subscribed and paid up capital
50,000 Equity Shares of Rs 50 each 25,00,000
1,00,000 Equity shares of Rs 50 each, Rs 40 paid up 40,00,000
65,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (20,00,000)
(20,00,000)
3 Long-term borrowings
Secured: 12% First debentures 5,00,000
12% Second debentures 10,00,000
15,00,000
4 Property, Plant and Equipment
Building 10,00,000
Plant 10,00,000
Computers 25,00,000
45,00,000
5 Intangible assets
Goodwill 20,00,000
20,00,000

The following is the interest of Mr. X and Mr. Y in Green Limited:

Mr. X Mr. Y
Rs Rs
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
Trade payables 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up Rs 50 shares 3,00,000 2,00,000
Partly paid up shares (Rs 40 paid up) 5,00,000 5,00,000

The following Scheme of Reconstruction is approved by all parties interested and also by the Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted
into equity shares of Rs 20 each.
(b) Mr. X is to cancel Rs 7,00,000 of his total debt (other than share amount) and to pay Rs 2 lakhs to the
company and to receive new 14% First Debentures for the balance amount.
(c) Mr. Y is to cancel Rs 3,00,000 of his total debt (other than equity shares) and to accept new 14% First
Debentures for the balance.
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(d) The amount thus rendered available by the scheme shall be utilised in writing off of Goodwill, Profit and
Loss A/c Loss and the balance to write off the value of computers.

You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the
reconstructed company.

SOLUTION-
Journal Entries in books of Green Limited
Dr. Cr.
Rs Rs
Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of Rs 10 per share on 1,00,000 equity shares
called up as per reconstruction scheme)

Equity Share Capital Account (Rs 50) Dr. 75,00,000

To Equity Share Capital Account (Rs 20) 30,00,000

To Capital Reduction Account 45,00,000

(Reduction of equity shares of Rs 50 each to shares of

Rs 20 each as per reconstruction scheme)

12% First Debentures Account Dr. 3,00,000

12% Second Debentures Account Dr 7,00,000
Trade payables Account Dr. 2,00,000
To X 12,00,000

(The total amount due to X, transferred to his account)

Bank Account Dr 2,00,000

To X 2,00,000

(The amount paid by X under the reconstruction

scheme)

12% First Debentures Account Dr. 2,00,000

12% Second Debentures Account Dr 3,00,000
Trade payables Account Dr. 1,00,000
To Y 6,00,000

(The total amount due to Y, transferred to his account)

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Y A/c Dr 6,00,000
To 14% First Debentures Account 3,00,000

To Capital Reduction Account 3,00,000

(The amount due to Y discharged by issue of 14% first

debentures)

X A/c Dr 14,00,000
To 14% First Debentures Account 7,00,000

To Capital Reduction Account 7,00,000

(The amount due to X discharged by issue of 14% first

debentures)

Capital Reduction Account Dr 55,00,000

To Goodwill Account 20,00,000

To Profit and Loss Account 20,00,000

To Computers Account 15,00,000

(The balance amount of capital reduction account
utilised in writing off goodwill, profit and loss account,
and computers - Working Note)

Balance Sheet of Green Limited (and reduced) as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
2 Non-current liabilities
a Long-term borrowings 2 10,00,000
3 Current liabilities
a Trade Payables 2,00,000
Total 42,00,000
Assets
1 Non-current assets
a Property, plant and equipment 3 30,00,000
2 Current assets
Cash and cash equivalents 12,00,000
Total 42,00,000

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Notes to accounts
`
1. Share Capital
Equity share capital
Issued, subscribed and paid up
1,50,000 equity shares of ` 20 each 30,00,000
Total 30,00,000
2. Long-term borrowings
Secured
14% First Debentures 10,00,000
Total 10,00,000

3. Property, Plant and Equipment

Building 10,00,000
Plant 10,00,000
Computers 10,00,000
Total 30,00,000

Working Note:
Capital Reduction Account

To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000

To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000

12. The following is the Balance Sheet of Weak Ltd. as at 31.3.20X1:

Particulars Notes Rs
Equity and Liabilities
1
Shareholders’ funds
A Share capital 1 1,50,00,000
B Reserves and Surplus 2 (6,00,000)

2 Non-current liabilities
A Long-term borrowings 3 40,00,000
3 Current liabilities
A Trade Payables 50,00,000
B Short term provisions 4 1,00,000
Total 2,35,00,000

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Assets
1 Non-current assets
A Property, plant and equipment 1,25,00,000
B Non-current investment 5 10,00,000
2 Current assets 1,00,00,000
Total 2,35,00,000

Notes to accounts
Rs
1 Share Capital
Equity share capital
1,00,000 Equity Shares of Rs 100 each 1,00,00,000
50,000, 12% Cumulative Preference shares of Rs 100 each 50,00,000
1,50,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)
3 Long-term borrowings
40,000, 10% debentures of Rs100 each 40,00,000
40,00,000
4 Short term provisions
Provision for taxation 1,00,000
1,00,000
5 Non-current investments
Investments (market value of Rs 9,50,000) 10,00,000
10,00,000

The following scheme of reorganization is sanctioned:

(i) All the existing equity shares are reduced to Rs 40 each.
(ii) All preference shares are reduced to Rs 60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders surrender their existing
debentures of Rs 100 each and exchange the same for fresh debentures of Rs 70 each for every debenture
held by them.
(iv) One of the creditors of the company to whom the company owes Rs 20,00,000 decides to forgo 40% of
his claim. He is allotted 30,000 equity shares of Rs 40 each in full satisfaction of his claim.
(v) Property, plant and equipment are to be written down by 30%.
(vi) Current assets are to be revalued at Rs 45,00,000.
(vii) The taxation liability of the company is settled at Rs 1,50,000.
(viii) Investments to be brought to their market value.
(ix) It is decided to write off the debit balance of Profit and Loss account.

Pass Journal entries and show the Balance sheet of the company after giving effect to the above.

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SOLUTION-
Journal Entries in the books of Weak Ltd.

(i) Equity share capital (Rs 100) A/c Dr. 1,00,00,000

To Equity Share Capital (Rs 40) A/c 40,00,000
To Capital Reduction A/c 60,00,000
(Being conversion of equity share capital of
Rs 100 each into Rs 40 each as per
reconstructionscheme)
(ii) 12% Cumulative Preference Share capital 50,00,000
(Rs 100) A/c Dr.
To 12% Cumulative Preference Share 30,00,000
Capital (Rs 60) A/c
To Capital Reduction A/c 20,00,000
(Being conversion of 12% cumulative preference
share capital of Rs 100 each into Rs 60 each as per
reconstruction scheme)

(iii) 10% Debentures A/c Dr. 40,00,000

To 12% Debentures A/c 28,00,000
To Capital Reduction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-
holders for 70% of their claims. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv) Trade payables A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
To Capital Reduction A/c 8,00,000
(Being a creditor of Rs 20,00,000 agreed to
surrender his claim by 40% and was allotted
30,000 equity shares of Rs 40 each in full
settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To current assets(bank A/c) A/c 1,50,000
(Being liability for taxation settled)
(vi) Capital Reduction A/c Dr. 99,00,000
To P & L A/c 6,00,000
To Property, plant and equipment A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000

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(Being amount of Capital Reduction utilized in

writing off P & L A/c (Dr.) Balance, Property, plant
and equipment, Current Assets, Investments
through capital reduction account)
(vii) Capital Reduction A/c Dr 50,000
50,000
To capital Reserve A/c
(Being balance in capital reduction account
transferred to capital reserve account)

Balance Sheet of Weak Ltd. (and reduced) as at 31.3.20X1

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 82,00,000
b Reserves and Surplus 2 50,000
2 Non-current liabilities
a Long-term borrowings 3 28,00,000
3 Current liabilities
a Trade Payables 30,00,000
Total 1,40,50,000
Assets
1 Non-current assets
a Property, plant and equipment 4 87,50,000
b Investments 5 9,50,000
2 Current assets 6 43,50,000
Total 1,40,50,000

Notes to accounts
Rs Rs
1. Share Capital
Equity share capital
Issued, subscribed and paid up
1,30,000 equity shares of Rs 40 each 52,00,000
Preference share capital
Issued, subscribed and paid up
50,000 12% Cumulative Preference shares of Rs 60 each 30,00,000
Total 82,00,000
2. Reserves and Surplus
50,000
Capital Reserve

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3. Long-term borrowings
Secured
12% Debentures 28,00,000
4. Property, plant and Equipment
1,25,00,000
Total PPE

(37,50,000)
Adjustment under scheme of reconstruction 87,50,000

5. Investments 10,00,000
Adjustment under scheme of reconstruction (50,000) 9,50,000
6. Current assets 45,00,000
Adjustment under scheme of reconstruction (1,50,000) 43,50,000

Working Note:
Capital Reduction Account
Rs Rs
To Current Asset 50,000 By Equity share capital 60,00,000
To P & L A/c 6,00,000 By 12% Cumulative 20,00,000
preference share
capital
To Property, plant and 37,50,000 By 10% Debentures 12,00,000
equipment
To Current assets 55,00,000 By Trade payables 8,00,000
To Investment 50,000
To Capital Reserve
(bal. fig.) 50,000
1,00,00,000 1,00,00,000

13. The following is the Balance Sheet of X Ltd. as at 31st March, 20X1:
Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 36,00,000
B Reserves and Surplus 2 (14,40,000)
2 Non-current liabilities
A Long-term borrowings 3 6,00,000
3 Current liabilities
A Trade Payables 3,00,000
B Short term borrowings - Bank overdraft 6,00,000
Total 36,60,000

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Assets
1 Non-current assets
A Property, plant and equipment 4 30,00,000
B Intangible assets 5 90,000
2 Current assets
a Inventories 2,60,000
b Trade receivables 2,80,000
C Cash and cash equivalents 30,000
Total 36,60,000

Notes to accounts
Rs
1 Share capital
24,000 Equity Shares of Rs 100 each 24,00,000
12,000, 10% Preference Shares of Rs 100 each 12,00,000
Total 36,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (14,40,000)
(14,40,000)
3 Long-term borrowings
10% debentures 6,00,000
6,00,000
4. Property, plant and Equipment
Land and Building 12,00,000
Plant and Machinery 18,00,000
30,00,000
5 Intangible assets
Goodwill 90,000
90,000

On the above date, the company adopted the following scheme of reconstruction:
(i) The equity shares are to be reduced to shares of Rs 40 each fully paid and the preference shares to be
reduced to fully paid shares of Rs 75 each.
(ii) The debenture holders took over Inventories and Trade receivables in full satisfaction of their claims.
(iii) The Land and Building to be appreciated by 30% and Plant and machinery to be depreciated by 30%.
(iv) The debit balance of profit and loss account and intangible assets are to be eliminated.
(v) Expenses of reconstruction amounted to Rs 5,000.
Give journal entries incorporating the above scheme of reconstruction and prepare the reconstructed
Balance Sheet

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SOLUTION-
In the books of X Ltd: Journal Entries
31st March, 20X1
(i) Equity Share Capital A/c (Rs 100) Dr. 24,00,000
To Equity Share Capital A/c (Rs 9,60,000
40)

To Capital Reduction A/c 14,40,000

(Being 24,000 equity shares of Rs 100 each
reduced to Rs 40 each fully paid up)
(ii) 10% Preference Share Capital A/c (Rs 100) Dr. 12,00,000
To 10% Preference Share Capital 9,00,000
A/c(Rs 75)
To Capital Reduction A/c 3,00,000
(Being 12,000 Preference shares of Rs 100
eachreduced to Rs 75 each fully paid up)
(iii) 10% Debentures A/c Dr. 6,00,000
To Inventories A/c 2,60,000
To Trade receivables A/c 2,80,000
To Capital Reduction A/c 60,000
(Being debenture holders given Inventories and
Trade receivables in full settlement of their claims)
(iv) Land & Building A/c Dr. 3,60,000
To Capital Reduction A/c 3,60,000
(Being Land & Building appreciated by 30%)
(v) Capital reduction A/c Dr. 5,000
To Cash A/c 5,000
(Being expenses of reconstruction paid)
(vi) Capital Reduction A/c Dr. 20,70,000
To Goodwill A/c 90,000
To Profit and Loss A/c 14,40,000
To Plant & Machinery A/c 5,40,000
(Being various losses written off, assets
writtendown through Capital Reserve A/c)
(vii) Capital Reduction Dr. 85,000
To Capital Reserve A/c (Bal. Fig.) 85,000
(Being balance in Capital Reduction
A/ctransferred to Capital Reserve A/c)

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Balance Sheet (And Reduced) of X Ltd as at 31st March, 20X1

Particulars Notes No. Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 18,60,000
b Reserves and Surplus 2 85,000
2 Current liabilities
a Trade Payables 3,00,000
b Short term borrowings 6,00,000
Total 28,45,000
Assets
1 Non-current assets
a Property, plant and equipment 3 28,20,000
2 Current assets
Cash and cash equivalents (30,000 -5,000) 25,000
Total 28,45,000

Notes to accounts
1. Share Capital Rs
Equity share capital
24,000 equity shares of Rs 40 each fully paid up 9,60,000
Preference share capital
12,000, 10% Preference shares of Rs 75
9,00,000
eachfully paid up
Total 18,60,000
2. Reserves and Surplus
Capital Reserve 85,000
3. Property, plant and Equipment
Land and Building 15,60,000
Plant and Machinery 12,60,000
Total 28,20,000

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ADDITIONAL QUESTIONS ON INTERNAL RECONSTRUCTION-

14. Recover Ltd decided to reorganize its capital structure owing to accumulated losses and adverse
market condition. The Balance Sheet of the company as on 31st March 2020 is as follows-
Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 3,50,000
B Reserves and surplus 2 (70,000)
2 Non-current liabilities
A Long-term borrowings 3 55,000

3 Current liabilities
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
5,05,000
Assets
1 Non-current assets
A Property, Plant Equipment 4 3,35,000
B Intangible assets 5 50,000
C Non-current investments 6 40,000
2 Current assets
A Inventories 30,000
B Trade receivables 50,000
5,05,000

Notes to accounts:

1 Share Capital Rs
Equity share capital:
20,000 Equity Shares of Rs 10 each 2,00,000
Preference share capital:
15,000 8% Cumulative Preference Shares of Rs 10 each
(preference dividend has been in arrears for 4 years) 1,50,000
3,50,000
2 Reserves and surplus
Securities premium 10,000
Profit and loss account (debit balance) (80,000)
(70,000)
3 Long-term borrowings
Secured
9% Debentures (secured on the freehold property 50,000
Accrued interest on 9% debentures 5,000

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55,000
4 Property, Plant and Equipment
Freehold property 1,20,000
Leasehold property 85,000
Plant and machinery 1,30,000
3,35,000

5 Intangible assets
Goodwill 50,000
50,000
6 Non-current investments
Non-Trade investments at cost 40,000
40,000

Subsequent to approval by court of a scheme for the reduction of capital, the following steps were taken:
i. The preference shares were reduced to Rs 2.5 per share, and the equity shares to Rs 1 per share.
ii. One new equity share of Rs 1 was issued for the arrears of preferred dividend for past 4 years.
iii. The balance on Securities Premium Account was utilized and was transferred to capital reduction
account.
iv. The debenture holders took over the freehold property at an agreed figure of Rs 75,000 and paid the
balance to the company after deducting the amount due to them.
v. Plant and Machinery was written down to Rs 1,00,000.
vi. Non-trade Investments were sold for Rs 32,000.
vii. Goodwill and obsolete stock (included in the value of inventories) of Rs 10,000 were written off.
viii. A contingent liability of which no provision had been made was settled at Rs 7,000 and of this amount,
Rs 6,300 was recovered from the insurance.

You are required (a) to show the Journal Entries, necessary to record the above transactions in the
company’s books and (b) to prepare the Balance Sheet, after completion of the scheme (RTP MAY 2021)

SOLUTION-
Journal entries In the books of Recover Ltd
Particulars Dr. Cr.

8% Cumulative Preference share capital (` 10) A/c Dr. 1,50,000

To 8% Cumulative Preference share capital 37,500
(`2.5) A/c
To Capital reduction (` 7.5) A/c 1,12,500
(Preference shares being reduced to shares of ` 2.5
per share and remaining transferred to capital
reduction account as per capital reduction scheme)
Equity share capital A/c (`10) Dr. 2,00,000
To Equity Share capital A/c (` 1) 20,000
To Capital reduction A/c (` 9) 1,80,000
(Equity shares reduced to ` 1 per share with the
remaining amount transferred to capital reduction ac
as a part of the internal reconstruction scheme.)

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Capital reduction A/c Dr. 48,000

To Equity share capital A/c 48,000
(Equity shares of ` 1 issued in lieu of the arrears of
preference dividend for 4 years as a part of the
internal reconstruction scheme)
Securities Premium A/c Dr. 10,000
To Capital reduction A/c 10,000
(Amount from the securities premium utilized towards
the capital reduction a/c as a part of the internal
reconstruction scheme)
9% Debentures A/c Dr. 50,000
Accrued interest on debentures A/c Dr 5,000
Bank A/c Dr. 20,000
Capital reduction A/c Dr. 45,000
To Freehold property A/c 1,20,000
(Debenture holders being paid by the sale of property,
which is sold at a loss debited to the capital reduction
account. Amount received in excess being refunded
to company by debenture holders as a part of the
internal reconstruction scheme.)
Capital reduction A/c Dr. 90,000
To Plant and Machinery Ac 30,000
To Goodwill A/c 50,000
To Inventory A/c 10,000
(The assets written off as a part of the internal
reconstruction scheme)
Bank A/c Dr. 32,000
Capital reduction A/c Dr. 8,000
To Investments A/c 40,000
(Investments sold at a loss debited to capital
reduction account as a part of the internal
reconstruction scheme)
Contingent Liability A/c Dr. 7,000
To Bank A/c 7,000

(Contingent liability paid as a part the internal

ofreconstruction scheme)
Bank A/c Dr. 6,300
Capital reduction A/c Dr. 700
To Contingent Liability A/c 7,000
(The insurance company remitting par of the
contingency payment amount) t
Capital reduction A/c Dr. 80,000
To Profit and loss A/c 80,000

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(Accumulated losses written off to capital reduction

account as a part of the internal reconstruction
scheme).
Capital reduction A/c Dr. 30,800
To Capital reserve A/c 30,800
(The balance in capital reduction account transferred
to capital reserve as a part of the internal
reconstruction scheme)

Balance sheet of Recover Ltd. as at 31st March 2020 (and reduced)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,05,500
B Reserves and surplus 2 30,800
2 Non-current liabilities
A Long-term borrowings -
3 Current liabilities
A Trade Payables 80,000
B Bank Overdraft 90,000
3,06,300
Total
Assets
1 Non-current assets
A Property, Plant and Equipment 3 1,85,000

2 Current assets
A Inventories 20,000
B Trade receivables 50,000
C Cash and cash equivalents 4 51,300
Total 3,06,300

Notes to accounts:
1 Share Capital `
Equity share capital
68,000 Equity Shares of ` 1 each 68,000
Preference share capital
15,000 8% Cumulative Preference Shares of ` 2.5 each 37,500
1,05,500
2 Reserves and surplus
Capital reserve 30,800
3 Property, Plant and Equipment
Leasehold property 85,000
Plant and machinery 1,00,000

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1,85,000
4 Cash and cash equivalents
Bank A/c (20,000+32,000-7000+6,300) 51,300

15. Z Limited provides the following information as on 31st March, 2021:

Particulars Amount in
Share Capital:
5,00,000 Equity shares of Rs 10 each fully paid up 50,00,000
9%, 20,000 Preference shares of Rs 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (Dr. balance) 14,60,000
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000
Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000

Non-Current Assets:
Property, plant and Equipment:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
Intangible Assets:
Goodwill 11,00,000
Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000
Inventory 10,00,000
Note: Preference dividend is in arrears for last 2 years.
Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover Rs 1,00,000 and Rs 60,000
were also payable to Mr. Y and Mr. Z respectively as trade payable.

The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of Rs 5.00 each.
(ii) The Preference shares be reduced to Rs 50 each and the preference shareholders agreed to forego their
arrears of preference dividends, in consideration of which 9% preference shares are to be converted into
10% preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including interest on
debentures. Mr. Y and Mr. Z also agreed to pay Rs 1,00,000 and Rs 60,000 respectively in cash and to
receive new 12% debentures for the balance amount.

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(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their 50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for the balance.
(vi) Capital commitments of Rs 3.00 lacs were cancelled on payment of Rs 15,000 as penalty.
(vii) Directors refunded Rs 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid Rs 15,000.
(ix) The taxation liability of the company was settled for Rs 75,000 and was paid immediately.
(x) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to pass journal entries for all the above-mentioned transactions including amounts to be
written off for Goodwill, Patents and Loss in Profit and Loss account. Also prepare Bank Account and
Reconstruction A/c (RTP MAY 2022)

SOLUTION-
Journal Entries in the Books of Z Ltd.

(i) Equity Share Capital (` 10 each) A/c Dr. 50,00,000

To Equity Share Capital (` 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of
` 10 each fully paid into same number of fully
paid equity shares of ` 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (` 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 50 10,00,000
each) A/c
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of
` 100 each into same number of 10% preference
share of ` 50 each and claims of preference
dividends settled as per scheme of
reconstruction.)

(iii) 10% Secured Debentures A/c Dr. 9,60,000

Trade payables A/c Dr. 1,00,000
Interest on Debentures payable A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
To Reconstruction A/c 5,78,000
(Being ` 11,56,000 due to Y (including trade
payables) cancelled and 12% debentures
allotted for the amount after waving 50% as
per
scheme of reconstruction.)

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(iv) 10% Secured Debentures A/c Dr. 6,40,000

Trade Payables 60,000
Interest on debentures payable A/c 64,000
Bank A/c 60,000
To 12% debentures A/c 4,42,000
To Reconstruction A/c 3,82,000
(Being ` 7,64,000 due to Z (including trade
payables) cancelled and 12% debentures
allotted for the amount after waving 50% as
per
scheme of reconstruction.)
(v) Trade payables A/c Dr. 1,70,000
To Reconstruction A/c 1,70,000
(Being remaining trade payables sacrificed 50%of
their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (` 5) A/c 40,000
To Reconstruction A/c 60,000
(Being Directors' loan claim settled by issuing
8,000 equity shares of ` 5 each as per scheme of
reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for
cancellation of capital commitments of ` 3
Lakhs.)
(viii) Bank A/c Dr. 1,00,000
To Reconstruction A/c 1,00,000

(Being refund of fees by directors credited

toreconstruction A/c.)
(ix) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement
against provision for tax)
(xi) Land and Building A/c Dr. 2,00,000
To Reconstruction A/c 2,00,000
(Being appreciation in value of Land & Building
recorded)
(xii) Reconstruction A/c Dr. 49,85,000
To Goodwill A/c 11,00,000
To Patent A/c 5,00,000

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To Profit and Loss A/c 14,60,000

To Plant and Machinery A/c 6,50,000
To Furniture & Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction,
balance of reconstruction A/c transfer to Capital
Reserve.)

Bank Account
` `
To Reconstruction (Y) 1,00,000 By Balance b/d (overdraft) 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 (capital commitment
(refund of earlier fees by penalty paid)
directors)

By Reconstruction A/c 15,000

(reconstruction
expenses paid)
By Provision for tax A/c 75,000
(tax paid)
By Balance c/d 55,000
2,60,000
2,60,000

Reconstruction Account
` `
To Bank (penalty) 15,000 By Equity Share
To Bank (reconstruction expenses) 15,000 Capital A/c 25,00,000
To Goodwill 11,00,000 By 9% Pref. Share
To Patent 5,00,000 Capital A/c 10,00,000
To P & L A/c 14,60,000 By Mr. Y (Settlement) 5,78,000
To P & M 6,50,000 By Mr. Z (Settlement) 3,82,000
To Furniture and Fixtures 1,00,000 By Trade Payables A/c 1,70,000
To Trade investment 50,000 By Director’s loan 60,000
To Inventory 2,50,000 By Bank 1,00,000
To Trade Receivables 1,00,000 By Provision for tax 25,000
To Capital Reserve (bal. fig.) 7,75,000 By Land and Building 2,00,000
50,15,000 50,15,000

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16. The Balance Sheet of Revise Limited as at 31st March, 20X1 was as follows :
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 10,00,000
B Reserves and surplus 2 (6,00,000)
2 Non-current liabilities
A Long-term borrowings 3 2,00,000
3 Current liabilities
A Trade Payables 72,000
B Other current liabilities 4 24,000
C Short term provisions 5 24,000
Total 7,20,000
Assets
1 Non-current assets
A Property, Plant and Equipment 6 1,00,000
2 Current assets
A Inventory 3,20,000
B Trade receivables 2,70,000
C Cash and cash equivalents 30,000
Total 7,20,000

Notes to Accounts

`
1 Share Capital
Equity share capital
10,000 Equity Shares of ` 100 each 10,00,000
10,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)

3 Long-term borrowings
12% debentures 2,00,000
2,00,000
4 Other current liabilities
Interest payable on debentures 24,000
24,000
5 Short term provisions
Provision for taxation 24,000

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24,000
6 Property, Plant and Equipment
Machinery 1,00,000
1,00,000

It was decided to reconstruct the company for which necessary resolution was passed and sanctions were
obtained from appropriate authorities. Accordingly, it was decided that: (a) Each share is sub-divided into
ten fully paid up equity shares of ` 10 each. (b) After sub-division, each shareholder shall surrender to the
company 50% of his holding, for the purpose of re-issue to debenture holders and trade payables as
necessary. (c) Out of shares surrendered, 10,000 shares of ` 10 each shall be converted into 12% preference
shares of ` 10 each, fully paid up. (d) The claims of the debenture-holders shall be reduced by 75 per cent.
In consideration of the reduction, the debenture holders shall receive preference shares of ` 1,00,000 which
are converted out of shares surrendered. (e) Trade payables claim shall be reduced to 50 per cent, it is to be
settled by the issue of equity shares of ` 10 each out of shares surrendered. (f) Balance of profit and loss
account to be written off. (g) The shares surrendered and not re-issued shall be cancelled. You are required
to show the journal entries giving effect to the above and the resultant Balance Sheet

Solution

Dr. Cr.
` `
Equity Share Capital (` 100) A/c Dr. 10,00,000
To Share Surrender A/c 5,00,000
To Equity Share Capital (` 10) A/c 5,00,000
(Subdivision of 10,000 equity shares of ` 100 each
into 1,00,000 equity shares of ` 10 each and
surrender of 50,000 of such subdivided shares as
per capital reduction scheme)
12% Debentures A/c Dr. 1,50,000
Interest payable A/c Dr. 18,000
To Reconstruction A/c 1,68,000
(Transferred 75% of the claims of the debenture
holders to reconstruction account in consideration
of which 12% preference shares are being issued
out of share surrender account as per capital
reduction scheme)
Trade payables A/c Dr. 72,000
To Reconstruction A/c 72,000
(Transferred claims of the trade payables to
reconstruction account, 50% of which is being
clear reduction and equity shares are being issued
in consideration of the balance)
Share Surrender A/c Dr. 5,00,000

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To 12% Preference Share Capital A/c 1,00,000

To Equity Share Capital A/c 36,000
To Reconstruction A/c 3,64,000
(Issued preference and equity shares to discharge
the claims of the debenture holders and the trade
payables respectively as a per scheme and the
balance in share surrender account is being
transferred to reconstruction account)
Reconstruction A/c Dr. 6,04,000
To Profit and Loss A/c 6,00,000
To Capital Reserve A/c 4,000
(Adjusted debit balance of profit and loss account
against the reconstruction account and the
balance in the latter is being transferred to capital
reserve)

Balance Sheet of Revise Limited (and reduced) as at...

Particulars Note No. `

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,36,000
(b) Reserves and Surplus 2 4,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 50,000
(3) Current Liabilities
(a) Other current liabilities 4 6,000
(b) Short-term provisions 5 24,000
Total 7,20,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 6 1,00,000
(2) Current assets
(a) Inventories 3,20,000

(b) Trade receivables 2,70,000

(c) Cash and cash equivalents 30,000
Total 7,20,000

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Notes to Accounts

`
1. Share Capital
Equity Share Capital
Issued Capital: 53,600 Equity Shares of ` 10 each 5,36,000
Preference Share Capital
Preference Shares 1,00,000
(Of the above shares all are allotted as fully paid up pursuant
to capital reduction scheme by conversion of equity shares
without payment being received in cash)
6,36,000
2. Reserve and Surplus
Capital Reserve 4,000
3. Long-term borrowings
Unsecured Loans
12% Debentures 50,000
4. Other current liabilities
Interest payable on debentures 6,000
5. Short-term provisions
Provision for Income-tax 24,000
6. Property, plant and Equipment
Machinery 1,00,000

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17. X Ltd. had Rs 1,00,000 equity share capital divided into 1,000 shares of Rs 100 each out of which Rs
80 per share was called up and paid up. It has 1,500 cumulative preference shares of Rs 100 each
fully paid up. Intangible assets include Goodwill of Rs 80,000 and patents of Rs 27,800. Preference
dividends are in arrears of Rs 33,000.

You are required to show the entries (Ignore dates) under each of the following conditions: (i) If X Ltd.
resolves to subdivide the equity shares into 10,000 equity shares of Rs 10 each of which Rs 8 per share is
called up and paid up.

(ii) If X Ltd. resolves to convert its 1,000 equity shares of Rs 100 each (assume fully - paid) into Rs 1,00,000
worth of stock.

(iii) The preference shares are to be converted into 11% unsecured debentures of Rs 100 each (including
arrears of dividends).

(iv) Patents and Goodwill to be written-off (MAY 2023: 5 Marks)

SOLUTION
Journal Entries in the books of X Ltd.
Rs Rs
(i) Equity Share Capital (Rs 100) A/c Dr. 80,000
To Equity Share Capital (Rs 10) A/c 80,000
(Being the sub-division of 1,000 shares of Rs 100
each with Rs 80 paid up into 10,000 shares Rs 10
each with Rs 8 paid up by resolution in general
meeting dated )

(ii) Equity Share Capital (Rs 100) A/c Dr. 1,00,000

To Equity Stock A/c 1,00,000
(Being conversion of 1,000 fully paid Equity
Shares of Rs 100 into Rs 1,00,000 Equity Stock as
per resolution in general meeting dated…)

(iii) Cumulative Preference Share Capital A/c Dr. 1,50,000

Capital Reduction (Reconstruction) A/c Dr. 33,000
To 11% Debentures (Unsecured) 1,83,000
(Being 1,500 cumulative preference shares of
Rs 100 each fully paid up converted into 11%
debentures of Rs 100 each (including arrears of
dividends amounting Rs 33,000)

(iv) Capital Reduction (Reconstruction) A/c Dr. 1,07,800

To Goodwill 80,000
To Patents 27,800
(Writing off patents, goodwill)
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INTERNAL RECONSTRUCTION

Q18)The following is the Balance Sheet of Star Ltd. as on 31st March, 2019:
Rs
A. Equity & Liabilities
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of Rs 100 each fully paid 9,00,000
10,000 Equity Shares of Rs 100 each fully paid 10,00,000
(b) Reserve & Surplus:
Profit & Loss Account (2,00,000)
2. Non-current liabilities:
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” 6% Debentures (Secured on Chennai Works) 3,50,000
3. Current Liabilities and Provisions:
(a) Workmen’s Compensation Fund:

Bombay Works 10,000

Chennai Works 5,000
(b) Trade Payables 1,25,000
Total 24,90,000
B. Assets:
Non- current Assets:
1. Property, Plant & Equipment:
Bombay Works 9,50,000
Chennai Works 7,75,000
2. Investment:
Investments for Workman’s Compensation Fund 15,000
3. Current Assets:
(a) Inventories 4,50,000
(b) Trade Receivables 2,50,000
(c) Cash at Bank 50,000
24,90,000

A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as
follows:
(i) Paid up value of 7% Preference Share to be reduced to Rs 80, but the rate of dividend being raised to 9%.
(ii) Paid up value of Equity Shares to be reduced to Rs 10.
(iii) The directors to refund Rs 50,000 of the fees previously received by them.
(iv) Debenture holders forego their interest of Rs 26,000 which is included among the trade payables.
(v) The preference shareholders agreed to waive their claims for preference share dividend, which is in
arrears for the last three years.

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(vi) “B” 6% Debenture holders agreed to take over the Chennai Works at Rs 4,25,000 and to accept an
allotment of 1,500 equity shares of Rs 10 each at par, and upon their forming a company called Zia Ltd. (to
take over the Chennai Works) they allotted 9,000 equity shares of Rs 10 each fully paid at par to Star Ltd.
(vii) The Chennai Worksmen’s compensation fund disclosed that there were actual liabilities of Rs 1,000
only. As a consequence, the investments of the fund were realized to the extent of the balance. Entire
investments were sold at a profit of 10% on book value and the proceeds were utilized for part payment of
the creditors.
(viii) Inventory was to be written off by Rs 1,90,000 and a provision for doubtful debts is to be made to the
extent of Rs 20,000.
(ix) Chennai works completely written off.
(x) Any balance of the Capital Reduction Account is to be applied as two-third to write off the value of
Bombay Works and one-third to Capital Reserve (RTP MAY 2020)

Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried into effect

SOLUTION
In the books of Star Ltd. Journal Entries
Amount Amount
Particulars
` `
(i) 7% Preference share capital (` 100) Dr. 9,00,000
To 9% Preference share capital (` 80) 7,20,000
To Capital reduction A/c 1,80,000
(Being preference shares reduced
to
` 80 and also rate of dividend raised from 7%
to 9%)

(ii) Equity share capital A/c (` 100 each) Dr. 10,00,000

To Equity share capital A/c (` 10 each) 1,00,000
To Capital reduction A/c 9,00,000
(Being reduction of nominal value of one
share of ` 100 each to ` 10 each)
(iii) Bank A/c Dr. 50,000
To Capital reduction A/c 50,000
(Being directors refunded the fee amount)
(iv) Trade payables A/c (Interest on debentures) Dr. 26,000
To Capital reduction A/c 26,000
(Being interest forgone by the debenture
holders)
(v) No entry required
(vi) a ‘B’ 6% Debentures A/c Dr. 3,50,000
To Debentures holders A/c 3,50,000
(Being amount due to Debentures holders)
b Debentures holders A/c Dr. 4,40,000
To Chennai Works A/c 4,25,000
To Equity share capital A/c 15,000

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(Being Chennai works taken over and equity

shares issued to ‘B’ 6% Debenture holders)
c Equity share of Zia Ltd. A/c Dr. 90,000
To Debentures holders A/c 90,000
(Being 9,000 equity shares of Zia Ltd. issued by
Debentures holders)
(vii) a Chennai Works – Workmen Compensation Dr. 4,000
Fund
To Capital reduction A/c 4,000
(Being difference due to reduced amount of
actual liability transferred to capital reduction
account)
b Bank A/c Dr. 15,400
To Investment for Workmen 14,000
Compensation Fund

To Capital reduction A/c 1,400

(Being investment for Workmen
Compensation Fund sold @ 10% profit)
c Trade Payables A/c Dr. 15,400
To Bank A/c 15,400
(Being part payment made to trade payables)
(viii) Capital reduction A/c Dr. 2,10,000
To Provision for Doubtful Debts A/c 20,000
To Inventory A/c 1,90,000
(Being assets revalued)
(ix) Capital reduction A/c Dr. 5,50,000
To Profit & Loss A/c 2,00,000
To PPE – Chennai Works 3,50,000
(Being assets revalued and losses written off)
(x) Capital reduction A/c Dr. 4,01,400
To PPE – Bombay Works 2,67,600
To Capital reserve A/c 1,33,800
(Being assets revalued and remaining amount
transferred to capital reserve account)

Q19) 6% Preference Share capital as per B/s is Rs 6 lacs, 6% preference shares are converted into 8%
Preference shares and they are revalued in a manner in which total return after conversion remains
unaffected. Pass Journal Entry

Solution
6% Preference Share capital a/c Dr 600,000
To 8% Preference Share capital A/c 4,50,000 (36,000 / 8%)
To Capital Reduction A/c 150,000

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MULTIPLE CHOICE QUESTIONS (MCQ) (HOMEWORK)

Q1. When the object of reconstruction is usually to re-organise capital or to compound with creditors or to
effect economies then such type of reconstruction is called
(a) Internal reconstruction with liquidation
(b) Internal reconstruction without liquidation of the company
(c) External reconstruction
(d) None of the above.

Q2. The accumulated losses under scheme of internal reconstruction are written off against
(a) Capital Reduction account
(b) Share Capital account
(c) Shareholders’ account
(d) Reserve and surplus

Q3. A process of reconstruction, which is carried out without liquidating the company and forming a new
one is called
(a) Internal reconstruction.
(b) External reconstruction
(c) Amalgamation in the nature of merger
(d) Amalgamation in the nature of purchase.

Q4. Reconstruction is a process by which affairs of a company are reorganized by

(a) Revaluation of assets and Reassessment of liabilities.
(b) Writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights
attached to different classes of shares.
(c) Both (a) and (b)
(d) None of the above.

Q5. For reduction of the share capital, the permission has to be sought from
(a) Court.
(b) Controller.
(c) State government.
(d)Shareholders.

Q6. In case of internal reconstruction

(a) Only one company is liquidated.
(b) Two or more companies are liquidated.
(c) No company is liquidated.
(d) Two companies amalgamated

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Chapter 2 BUYBACK OF SECURITIES

MEANING-
• Buy back of shares means purchase of its own shares by a company.
• When shares are bought back by a company, they have to be cancelled by the company.
• Thus, shares buy back results in decrease in share capital of the company.

OBJECTIVES/ADVANTAGES OF BUY-BACK OF SHARES:

• To increase earning per share if there is no dilution in company’s earnings as the buy-back of shares
reduces the outstanding number of shares.
• To increase promoters holding as the shares which are bought back are cancelled.
• To discourage others to make hostile bid to take over the company as the buy back will increase the
promoters holding.
• To pay surplus cash to shareholders when the company does not need it for business.

AS PER SECTION 68 OF COMPANIES ACT 2013 A COMPANY MAY BUY BACK ITS OWN SHARES OUT OF -
• Free Reserves
• Securities Premium or
• Proceeds of issue of any shares or other specified securities

IMPORTANT PROVISIONS FOR BUY BACK -

• Company’s Articles of Association must contain authorization for buy back
• A special resolution has to be passed at general meeting of the company for buy back above 10%
and upto 25% of total paid up equity share capital and free reserves
• Buyback of equity shares in any financial year should not exceed 25% of its total paid up equity
capital & Free reserves .
• The ratio of the aggregate of secured and unsecured debts owed by the company after buy back is
not more than twice the paid up capital and its free reserves (Debt Equity ratio should not exceed 2)
Secured + Unsecured Debts < 2
Paid up capital + Free Reserves
• All the shares for buy back are fully paid up
• There should be gap of 1 year between two buy back
• Every buy-back shall be completed within twelve months from the date of passing the special
resolution, or the resolution passed by the board of directors.
• CRR is created from Free Reserves
• CRR is created to fill the capital gap.
• Journal entry for CRR is
General Reserve/P&L a/c Dr
To CRR a/c
• Ignore Premium on Buyback and Premium on fresh issue of shares& securities for CRR purpose.

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1. M Ltd. furnishes the following Balance Sheet as at 31st March, 20X1:

Particulars Notes Rs (in 000)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 5,000
B Reserves and Surplus 2 6,310
2 Non-current liabilities
Long term borrowings 3 400
3 Current liabilities
A Trade Payables 40
Total 11,750
Assets
1 Non-current assets
A Property, plant and Equipment 4 2,750
B Non-Current Investments (at cost) 5,000
2 Current assets
A Inventories 1,000
B Trade receivables 2,000
C Cash and Cash equivalents 1,000
Total 11,750

Notes to accounts
No. Particulars Rs in (‘000)
1 Share Capital
Authorized, Issued and Subscribed Capital:
3,00,000 Equity shares of Rs 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
Total 5,000
2 Reserves and Surplus
Capital reserve 10
Revenue reserve 4,000
Securities premium 500
Profit and Loss account 1,800
Total 6,310
3 Long term borrowings
10% Debentures 400
4 Property, Plant and Equipment (PPE)
PPE: Cost 3,000
Less: Provision for depreciation (250)
Net carrying value 2,750

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The company passed a resolution to buy-back 20% of its equity capital @ Rs 15 per share. For this purpose,
it sold its investments of Rs30 lakhs for Rs 25 lakhs.

You are required to pass necessary Journal entries.

Solution
Journal Entries in the books of M Ltd. in ‘000
Particulars Dr. Cr.
1. Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500

To Investment A/c 3,000

(Being investment sold for the purpose of buy-back
of Equity Shares)
2. Equity share capital A/c Dr. 600
Premium payable on buy-back Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back of equity shares)
3. Equity shares buy-back A/c Dr. 900
To Bank A/c 900
(Being payment made for buy-back of equity shares)
4. Securities Premium A/c Dr. 300
To Premium payable on buy-back 300
(Being premium payable on buy-back charged from
Securities premium)
5. Revenue reserve A/c Dr. 600
To Capital Redemption Reserve A/c 600
(Being creation of capital redemption reserve to
theextent of the equity shares bought back)

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2. Anu Ltd. (a non-listed company) furnishes you with the following balance sheet as at 31st March,
20X1: (in crores Rs)
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A
Share capital 1 100
B
Reserves and 2 300
2 A Surplus
Total
Current liabilities 40
Trade Payables 440

Assets
1 Non-current assets
A Property, plant and equipment 3 -
B Non-Current Investments 4 100
2 Current assets
A Trade receivables 140
B Cash and Cash equivalents 200
Total 440

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed share capital:
12% Redeemable preference shares of Rs 100 each, 75
fullypaid up
Equity shares of Rs 10 each, fully paid up 25
Total 100
2 Reserves and Surplus
Capital reserve 15
Securities premium 25
Revenue reserves 260
Total 300
3 Property, Plant and Equipment
PPE Cost 100
Less: Provision for depreciation (100)
Net carrying value NIL
4 Non-Current Investments
Non-current investments at cost (Market value 100
Rs 400 Cr.)

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The company redeemed preference shares on 1st April, 20X1. It also bought back 50 lakhs equity shares of
Rs 10 each at Rs 50 per share. The payments for the above were made out of the huge bank balances,
which appeared as a part of current assets.

You are asked to:

(i) Pass journal entries to record the above.
(ii) Prepare balance sheet as at 1.4.20X1.

Solution
Journal entries in the books of Anu Ltd. Rs in crores
Particulars Dr. Cr.
st
1 12% Preference share capital A/c Dr. 75
April, To Preference shareholders A/c 75
20X1 (Being preference share capital account
transferred to shareholders account)
Preference shareholders A/c Dr. 75
To Bank A/c 75
(Being payment made to shareholders)
Shares buy-back A/c Dr. 25
To Bank A/c 25
(Being 50 lakhs equity shares bought back @ Rs 50
per share)
Equity share capital A/c (50 lakhs х Rs 10) Dr. 5
Securities premium A/c (50 lakhs х Rs 40) Dr. 20
To Shares buy-back A/c 25
(Being cancellation of shares bought back)
Revenue Reserve A/c Dr. 80
To Capital Redemption Reserve A/c (75+5) 80
(Being creation of capital redemption reserve to
the extent of the face value of preference shares
redeemed and equity shares bought back)

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(ii) Balance Sheet of Anu Ltd as at 1.4.20X1 (in crores Rs)

Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 20
B Reserves and Surplus 2 280
2 Current liabilities
A Trade Payables 40
Total 340
Assets
1 Non-current assets
A Property, plant and equipment 3 -
B Non-Current Investments 4 100
2 Current assets
A Trade receivables 140
B Cash and Cash equivalents 5 100
Total 340

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed share capital
20
200 lakhs Equity shares of Rs10 each fully paid
Total 20
2 Reserves and Surplus
Capital reserve 15
Capital redemption reserve 80
Securities premium 25
Less: Utilization for buy-back of shares (20) 5

Revenue Reserve 260

Less: transfer to Capital redemption reserve (80) 180
Total 280
3 Property, plant and Equipment
PPE: cost 100
Less: Provision for depreciation (100)
Net carrying value -
4 Non-Current Investments
Non-current investments at cost 100

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(Market value Rs400 Crores)

5 Cash and Cash Equivalents
Cash and Cash Equivalents as on 31.3.20X1 200
Less: Bank payment for redemption and buy-back (100)
Total 100

3. Dee Limited (a non-listed company) furnishes the following Balance Sheet as at 31st March, 20X1:
(in thousand )
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,700
B Reserves and Surplus 2 9,700
2 Current liabilities
A Trade Payables 1,400
Total 13,800
Assets
1 Non-current assets
A Property, plant and Equipment 9,300
B Non-Current Investments 3,000

2 Current assets
A Inventories 500
B Trade receivables 200
C Cash and Cash equivalents 800
Total 13,800

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
2,50,000 Equity shares of Rs 10 each fully paid up 2,500
2,000, 10% Preference shares of Rs 100 each 200
(Issued two months back for the purpose of buy-back)
Total 2,700
2 Reserves and Surplus
Capital reserve 1,000
Revenue reserve 3,000
Securities premium 2,200
Profit and loss account 3,500
Total 9,700
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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.

Solution
Journal Entries in the books of Dee Limited (in thousand)
Particulars Dr. Cr.
(i) Bank Account Dr. 2,200
Profit and Loss Account Dr. 800
To Investment Account 3,000
(Being the investments sold at loss for the purpose of
buy-back)

(ii) Equity Share buy-back Account Dr. 2,500

To Bank Account 2,500
(Being the payment made on buy-back)
(iii) Equity Share Capital Account Dr. 500
Premium Payable on Buy-Back Account Dr. 2,000
2,500
To Equity Shares Buy-Back Account
(Being the buy-back amount allocated to equity share
capital)
(iv) Securities premium Account Dr. 2,000
To Premium payable on buy-back Account 2,000
(Being the premium payable on buy-back adjusted
against securities premium account)
(v) Revenue reserve Account Dr. 300
To Capital Redemption Reserve Account 300
(Being the amount equal to nominal value of equity
shares bought back out of free reserves transferred to
capital redemption reserve account)

Balance Sheet of Dee Limited as at 1st April, 20X1 (After buy-back of shares) (in thousand)
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,200
B Reserves and Surplus 2 6,900
2 Current liabilities
A Trade Payables 1,400
Total 10,500
Assets
1 Non-current assets
A Property, plant and Equipment 9,300
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2 Current assets
A Inventories 500

B Trade receivables 200

C Cash and Cash equivalents 500
Total 10,500

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
2,50,000 Equity shares of Rs 10 each fully paid up 2,000
2,000, 10% Preference shares of Rs 100 each 200
(Issued two months back for the purpose of buy-
back)
Total 2,200
2 Reserves and Surplus
Capital reserve 1,000
Capital redemption reserve 300
Securities Premium 2,200
Less: Premium payable on buy-back of shares (2,000) 200
Revenue reserve 3,000
Less: Transfer to Capital redemption reserve (300) 2,700
Profit and loss A/c 3,500
Less: Loss on investment (800) 2,700
Total 6,900

4. Extra Ltd. (a non-listed company) furnishes you with the following Balance Sheet as at 31st March,
20X1: (in lakhs)
Particulars Notes
Equity and Liabilities
1
Shareholders’ funds
A Share capital 1 120
B Reserves and Surplus 2 118

2 Non-current liabilities
3
Long term borrowings 4
3 Current liabilities
A Trade Payables 70
Total 312
Assets

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1 Non-current assets
A Property, plant and Equipment 50
B Non-current Investments 120
2 Current assets
A Cash and Cash equivalents 142
Total 312

Notes to accounts
No. Particulars
1 Share Capital
Authorized, issued and subscribed capital:
Equity shares of 10 each fully paid 100
9% Redeemable preference shares of 100 each fully paid 20
Total 120
2 Reserves and Surplus
Capital reserves 8
Revenue reserves 50
Securities premium 60
Total 118
3 Long term borrowings
10% Debentures 4

(i) The company redeemed the preference shares at a premium of 10% on 1st April, 20X1.
(ii) 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.
(iii) Included in its investment were “investments in own debentures” costing Rs 2 lakhs (face value Rs 2.20
lakhs). These debentures were cancelled on 1st April, 20X1.
(iv) 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 Rs30 (This was included under current liabilities). On
1.04.20X1 employees exercised their options for 50,000 shares.
(v) Pass the journal entries to record the above.
(vi) Prepare Balance Sheet as at 01.04.20X1.

Solution (Rs in lakhs)

Date Particulars Debit Credit

20X1
1st April 9% Redeemable preference share capital A/c Dr. 20.00
Premium on redemption of preference shares A/c Dr. 2.00
To Preference shareholders A/c 22.00
(Being preference share capital transferred to
shareholders account)
Preference shareholders A/c Dr. 22.00

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To Bank A/c 22.00

(Being payment made to shareholders)
Equity shares buy-back A/c Dr. 90.00
To Bank A/c 90.00
(Being 3 lakhs equity shares of 10 each bought
back @ 30 per share)
Equity share capital A/c Dr. 30.00
Securities premium A/c Dr. 60.00
To Equity Shares buy-back A/c 90.00
(Being cancellation of shares bought back)
Revenue reserve A/c Dr. 50.00

To Capital redemption reserve A/c 50.00

(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed and equity shares
bought back as per the law)
10% Debentures A/c Dr. 2.20
To Investment (own debentures) A/c 2.00
To Profit on cancellation of own debentures A/c 0.20
(Being cancellation of own debentures costing
2 lakhs, face value being 2.20 lakhs and the
balance being profit on cancellation of
debentures)
Bank A/c Dr. 10.00
Employees stock option outstanding (Current
liabilities) A/c Dr. 5.00
To Equity share capital A/c 5.00
To Securities premium A/c 10.00
(Being the allotment to employees, of 50,000
shares of 10 each at a premium of 20 per share
in exercise of stock options byemployees)

Securities premium A/c Dr. 2.00

To Premium on redemption of preference 2.00
shares A/c
(Being premium on redemption of preference
shares adjusted through securities premium)

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Balance Sheet of Extra Ltd. as at 01.04.20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 75.00
B Reserves and Surplus 2 66.20

2 Non-current liabilities
Long term borrowings 3 1.80
3 Current liabilities
A Other Current Liabilities 4 65.00
Total 208
Assets
1 Non-current assets
A Property, plant and Equipment 50.00
B Non-current Investments 5 118.00
2 Current assets
A Cash and Cash equivalents 6 40.00
Total 208

Notes to Accounts
No. Particulars
1 Share Capital
Equity shares of 10 each fully paid 100
Less: Cancellation of bought back shares (30)
Add: Shares issued against ESOP 5
Total 75
2 Reserves and Surplus
Capital Reserve
Opening balance 8.00
Add: Profit on cancellation of debentures 0.20 8.20
Revenue reserves
Opening balance 50.00
Less: Creation of Capital Redemption Reserve (50.00) -
Securities Premium
Opening balance 60.00
Less: Adjustment for cancellation of equity shares (60.00)

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Less: Adjustment for premium on redemption of (2.00)

preference shares
Add: Shares issued against ESOP at premium 10.00 8.00
Capital Redemption Reserve 50.00
Total 66.20
3 Long term borrowings
10% Debentures 4.00
Less: Cancellation of own debentures (2.20)
Total 1.80
4. Other Current liabilities
Opening balance 70.00
Less: Adjustment for ESOP outstanding (5.00)
Total 65.00
5. Non-current investments
Opening balance 120.00
Less: Investment in own debentures (2.00)
Total 118.00
6. Cash and Cash Equivalents
Opening balance 142.00
Less: Payment to preference shareholders (22.00)
Less: Payment to equity shareholders (90.00)
Add: Share price received against ESOP 10.00
Total 40.00

5. Pratham Ltd. (a non-listed company) has the following Capital structure as on 31st March, 20X1:

Particulars Rs Rs
Equity Share Capital (shares of Rs 10 each fully paid 30,00,000
Reserves & Surplus
32,50,000
General Reserve

Security Premium Account 6,00,000

Profit & Loss Account 4,30,000
Revaluation Reserve 6,20,000 49,00,000
Loan Funds 42,00,000

You are required to compute by Debt Equity Ratio Test, the maximum number of shares that can be bought
back in the light of above information, when the offer price for buy-back is Rs 30 per share.

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6. Perrotte Ltd. (a non-listed company) has the following Capital Structure as on 31.03.20X1:
Particulars (in crores)
(1) Equity Share Capital (Shares of Rs 10 each fully - 330
paid)
(2) Reserves and Surplus
General Reserve 240 -
Securities Premium Account 90 -
Profit & Loss Account 90 -
Infrastructure Development Reserve 180 600
(3) Loan Funds 1,800

The Shareholders of Perrotte Ltd., on the recommendation of their Board of Directors, have approved on
12.09.20X1 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 shares is Rs 25 per share and in order to induce the existing
shareholders to offer their shares for buy-back, it was decided to offer a price of 20% over market.
You are also informed that the Infrastructure Development Reserve is created to satisfy Income-tax Act
requirements.

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 09.12.20X1, show the accounting entries in the
company’s books in each situation.

Solution
Statement determining the maximum number of shares to be bought back
Number of shares
Particulars When loan fund is
Rs 1,800 crores Rs 1,200 crores Rs 1,500 crores
Shares Outstanding Test 8.25 8.25 8.25
(W.N.1)
Resources Test (W.N.2) 6.25 6.25 6.25
Debt Equity Ratio Test Nil 3.75 Nil
(W.N.3)
Maximum number of shares
that can be bought back Nil 3.75 Nil
[least of the above]

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Journal Entries for the Buy-Back (applicable only when loan fund is Rs 1,200 crores)
Rs in crores

Particulars Debit Credit

(a) Equity share buy-back account Dr. 112.5
To Bank account 112.5
(Being buy-back of 3.75 crores equity shares of Rs 10
each @ Rs 30 per share)
(b) Equity share capital account Dr. 37.5
Securities premium account Dr. 75

To Equity share buy-back account 112.5

(Being cancellation of shares bought back)
(c) General reserve account Dr. 37.5
To Capital redemption reserve account 37.5
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of share capital bought back out of redeemed
through free reserves)

Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 33
25% of the shares outstanding 8.25

2. Resources Test
Particulars
Paid up capital (Rsin crores) 330
Free reserves (Rsin crores) 420
Shareholders’ funds (Rsin crores) 750
25% of Shareholders fund (Rsin crores) Rs187.5 crores
Buy-back price per share Rs30
Number of shares that can be bought back (shares in 6.25 crores shares
crores)

3. Debt Equity Ratio Test

Particulars When loan fund is
1,800 1,200 1,500
crores crores crores
(a) Loan funds (in crores) 1,800 1,200 1,500
(b) Minimum equity to be
maintained after buy-back in the 900 600 750
ratio of 2:1 (in crores)

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(c) Present equity shareholders fund 750 750 750

(in crores)

(d) Future equity shareholder fund N.A. 712.5 N.A.

(in crores) (750-37.5)
(e) Maximum permitted buy-back of Nil 112.5 Nil
Equity (in crores) [(d) – (b)]

(f) Maximum number of shares 3.75

thatcan be bought
back @ 30 per share (shares in Nil Nil
crores)

7. SMM Ltd. has the following capital structure as on 31st March, 20X1: Rs in crore
Particulars Situation Situation
I II
(i) Equity share capital (shares of Rs10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200

Infrastructure Development Reserve 320 320

(StatutoryReserve)
(iii) Loan Funds 3,200 6,000

The company has offered buy-back price of Rs 30 per equity share. You are required to calculate maximum
permissible number of equity shares that can be bought back in both situations and also required to pass
necessary Journal Entries.

SOLUTION-
Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
Rs 3,200 crores Rs 6,000 crores
Shares Outstanding Test (W.N.1) 30 30
Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be 24 Nil
bought back [least of the above]

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Journal Entries for the Buy-Back (applicable only when loan fund is Rs3,200 crores)
` in crores
Particulars Debit Credit
(a) Equity shares buy-back account Dr. 720
To Bank account 720
(Being payment for buy-back of 24 crores equity
shares of ` 10 each @ ` 30 per share)
(b) Equity share capital account Dr. 240
Premium Payable on buy-back account Dr. 480
To Equity share buy-back account 720
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buy-back account 480
(Being Premium Payable on buy-back account
charged to securities premium and general
reserve/Profit & Loss A/c)

(c) General Reserve / Profit & Loss A/c Dr. 240

To Capital redemption reserve account 240
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of share capital bought back out of
redeemed through free reserves)

Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 120
25% of the shares outstanding 30

2. Resources Test
Particulars
Paid up capital (Rsin crores) 1,200
Free reserves (Rsin crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (Rsin crores) 2,880
25% of Shareholders fund (Rsin crores) Rs720 crores
Buy-back price per share Rs30
Number of shares that can be bought back 24 crores shares

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3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
Particulars When loan fund is
Rs3,200 crores Rs6,000 crores
(a) Loan funds (Rs) 3,200 6,000
(b) Minimum equity to be 1,600 3,000
maintained after buy-back in
the ratio of 2:1 (Rs) (a/2)
(c) Present equity shareholders 2,880 2,880
fund (Rs)
(d) Future equity shareholders 2,560 (2,880-320) N.A.
fund

(e) Maximum permitted buy- 960 Nil

back of Equity (Rs) [(d) – (b)]
(f) Maximum number of shares 32 crore shares
that can be bought back @ Nil
Rs 30 per share
As per the provisions of the
Companies Act, 2013, Qualifies Does not Qualify
company

8. KG Limited furnishes the following Balance Sheet as at 31st March, 20X1:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,200
B Reserves and Surplus 2 810
2 Non-current liabilities
Long term borrowings 3 750
3 Current liabilities
A Trade Payables 745
B Other Current Liabilities 195
Total 3,700
Assets
1 Non-current assets
A Property, plant and equipment 4 2,026
B Non-current Investments 74
2 Current assets
A Inventories 600
B Trade receivables 260
C Cash and Cash equivalents 740
Total 3,700

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Notes to accounts
No. Particulars
1 Share Capital
Authorized, issued and subscribed capital

Equity share capital (fully paid up shares of Rs 10 each) 1,200

2 Reserves and Surplus
Securities premium 175
General reserve 265
Capital redemption reserve 200
Profit & loss A/c 170
Total 810
3 Long term borrowings
12% Debentures 750
4 Property, plant and equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026

On 1st April, 20X1, 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 75 lakhs.

On 5th April, 20X1, the company achieved the target of buy-back. On 30th April, 20X1 the company issued
one fully paid up equity share of Rs 10 by way of bonus for every four equity shares held by the equity
shareholders.

You are required to:

(1) Pass necessary journal entries for the above transactions.
(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares.

SOLUTION-

Journal Entries In the books of KG Limited

Date Particulars Dr. Cr.
20X1 (Rs in lakhs)
April 1 Bank A/c Dr. 75
To Investment A/c 74

To Profit on sale of investment 1

(Being investment sold on profit)
April 5 Equity share capital A/c Dr. 300
Securities premium A/c Dr. 150
To Equity shares buy-back A/c 450

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(Being the amount due to equity shareholders on

buy-back)
Equity shares buy-back A/c Dr. 450
To Bank A/c 450
(Being the payment made on account of buy-back of
30 Lakh Equity Shares)
April 5 General reserve A/c Dr. 265
Profit and Loss A/c Dr. 35
To Capital redemption reserve A/c 300
(Being amount equal to nominal value of buy-back
shares from free reserves transferred to capital
redemption reserve account as per the law)
April 30 Capital redemption reserve A/c Dr. 225
To Bonus shares A/c (W.N.1) 225
(Being the utilization of capital redemption reserve to
issue bonus shares)
Bonus shares A/c Dr. 225
To Equity share capital A/c 225
(Being issue of one bonus equity share for every four
equity shares held)

Balance Sheet (After buy-back and issue of bonus shares)

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,125
B Reserves and Surplus 2 436
2 Non-current liabilities
Long term borrowings 3 750

3 Current liabilities
A Trade Payables 745
B Other Current Liabilities 195
Total 3,251
Assets
4
1 Non-current assets
A Property, plant and equipment 2,026
2 Current assets
A Inventories 600
B Trade receivables 260
C Cash and Cash equivalents 365
Total 3,251

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Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
1,125
Equity share capital (fully paid up shares of Rs 10 each)
2 Reserves and Surplus
General Reserve 265
Less: Transfer to CR (265) -
Capital Redemption Reserve 200
Add: Transfer due to buy-back of shares from P/L 35
Add; Transfer due to buy-back of shares from
GeneralReserve 265
Less: Utilisation for issue of bonus shares (225) 275
Securities premium 175
Less: Adjustment for premium paid on buy-back (150) 25
Profit & Loss A/c 170
Add: Profit on sale of investment 1

Less: Transfer to CRR (35) 136

Total 436
3 Long term borrowings
12% Debentures 750
4 Property, Plant and Equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026

Working Notes:
1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = Rs 225 lakhs
2. Cash at bank after issue of bonus shares
Particulars Rs in lakhs
Cash balance as on 1st April, 20X1 740
Add: Sale of investments 75
815
Less: Payment for buy-back of shares (450)
365

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9. Following is the Balance Sheet of Competent Limited as at 31st March, 20X1:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 12,50,000
B Reserves and Surplus 2 18,75,000
2 Non-current liabilities
Long term borrowings 3 28,75,000

3 Current liabilities
A Other Current Liabilities 16,50,000
Total 76,50,000
Assets
1 Non-current assets 4
A Property, plant and Equipment 46,50,000
2 Current assets
A Other Current Assets 30,00,000
Total 76,50,000

Notes to accounts
No. Particulars
1 Share Capital
Authorized, issued and subscribed capital:
12,50,000
Equity share capital (fully paid up shares of Rs 10 each)
2 Reserves and Surplus
Securities premium 2,50,000
Profit and loss account 1,25.000
Revenue reserve 15,00,000
Total 18,75,000
3 Long term borrowings
14% Debentures 18,75,000
Unsecured Loans 10,00,000
Total 28,75,000
4 Property, plant and equipment
Land and Building 19,30,000
Plant and machinery 18,00,000
Furniture and fitting 9,20,000
Net carrying value 46,50,000

The company wants to buy-back 25,000 equity shares of Rs 10 each, on 1st April, 20X1 at Rs 20 per share.
Buy-back of shares is duly authorized by its articles and necessary resolution has been 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 shown as part of Current Assets.
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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 the
Balance Sheet after buy-back of shares.

SOLUTION-

Determination of Buy-back of maximum no. of shares as per the Companies Act, 2013
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding 1,25,000
25% of the shares outstanding 31,250

2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves
Particulars
Paid up capital (Rs) 12,50,000
Free reserves (Rs) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000
Shareholders’ funds (Rs) 31,25,000
25% of Shareholders fund (Rs) 7,81,250
Buy-back price per share Rs 20
Number of shares that can be bought back (shares) 39,062
Actual Number of shares for buy-back 25,000

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
Particulars Rs
(a) Loan funds (Rs) (18,75,000+10,00,000+16,50,000) 45,25,000
(b) Minimum equity to be maintained after buy-back
in the ratio of 2:1 (Rs) (a/2) 22,62,500
(c) Present equity/shareholders fund (Rs) 31,25,000
(d) Future equity/shareholders fund (Rs) (see W.N.) 28,37,500
2F
(31,25,000 – 2,87,500)
(e) Maximum permitted buy-back of Equity 5,75,000
(Rs)[(d) – (b)]
(f) Maximum number of shares that can be bought 28,750 shares
back @ Rs 20 per share
(g) Actual Buy-Back Proposed 25,000 Shares

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Summary statement determining the maximum number of shares to be bought back

Particulars Number of shares
Shares Outstanding Test 31,250
Resources Test 39,062
Debt Equity Ratio Test 28,750
Maximum number of shares that can be bought 28,750
back [least of the above]

Company qualifies all tests for buy-back of shares and came to the conclusion that it can buy maximum
28,750 shares on 1st April, 20X1.

However, company wants to buy-back only 25,000 equity shares @ Rs 20. Therefore, buy-back of 25,000
shares, as desired by the company is within the provisions of the Companies Act, 2013.

Journal Entries for buy-back of shares

Particulars Debit (Rs) Credit (Rs)
(a) Equity shares buy-back account Dr. 5,00,000
To Bank account 5,00,000
(Being buy-back of 25,000 equity shares of Rs
10 each @ Rs 20 per share)
(b) Equity share capital account Dr. 2,50,000
Securities premium account Dr. 2,50,000
To Equity shares buy-back account 5,00,000
(Being cancellation of shares bought back)
(c) Revenue reserve account Dr. 2,50,000
To Capital redemption reserve account 2,50,000
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of capital bought back through free
reserves)

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Balance Sheet of M/s. Competent Ltd. as at 31st March, 20X1

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 10,00,000
B Reserves and Surplus 2 16,25,000
2 Non-current liabilities
Long term borrowings 3 28,75,000
3 Current liabilities
A Other Current Liabilities 16,50,000
Total 71,50,000
Assets
1 Non-current assets
A Property, plant and equipment 4 46,50,000
2 Current assets
A Other Current Assets (30,00,000 – 5,00,000) 25,00,000
Total 71,50,000

Notes to accounts

No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of 10,00,000
Rs 10 each)
2 Reserves and Surplus
Profit and Loss A/c 1,25,000
Revenue reserves 15,00,000

Less: Transfer to CRR (2,50,000) 12,50,000

Securities premium 2,50,000
Less: Utilization for share buy-back (2,50,000) -
Capital Redemption Reserves 2,50,000
Total 16,25,000
3 Long term borrowings

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14% Debentures 18,75,000

Unsecured Loans 10,00,000
Total 28,75,000
4 Property, plant and equipment
Land and Building 19,30,000
Plant and machinery 18,00,000
Furniture and fitting 9,20,000
Net carrying value 46,50,000

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ADDITIONAL QUESTIONS ON BUYBACK OF SECURITIES

10. Mohan Ltd. furnishes the following summarised Balance Sheet on 31st March 2021.
(Rs in Lakhs)
Amount
Equity and Liabilities:
Shareholders’ fund
Share Capital
Equity Shares of 10 each fully paid up 780
6% Redeemable Preference shares of 50 each fully Paid up 240
Reserves and Surplus
Capital Reserves 58
General Reserve 625
Securities Premium 52
Profit & Loss 148
Revaluation Reserve 34
Infrastructure Development Reserve 16

Non-current liabilities
7% Debentures 268
Unsecured Loans 36
Current Liabilities 395
2652
Assets:
Non-current Assets
Plant and Equipment less depreciation 725
Investment at cost 720
Current Assets 1207
2652

Other Information:
(1) The company redeemed preference shares at a premium of 10% on 1st April,2021.
(2) It also offered to buy back the maximum permissible number of equity shares of Rs 10 each at Rs 30 per
share on 2nd April 2021.
(3) The payment for the above was made out of available bank balance, which appeared as a part of the
current assets.
(4) The company had investment in own debentures costing Rs 60 lakhs (face value Rs 75 lakhs). These
debentures were cancelled on 2nd April 2021.
(5) On 4th April 2021 company issued one fully paid-up equity share of Rs 10 each by way of bonus for
every five equity shares held by the shareholders.

You are required to:

(a) Calculate maximum possible number of equity shares that can be bought back as per the Companies
Act, 2013 and
(b) Record the Journal Entries for the above-mentioned information (DEC 2021 – 10 MARKS)

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SOLUTION-
(i) Statement determining the maximum number of shares to be bought back
Number of shares (in lakhs)
Particulars When loan fund is Rs 304 lakhs
Shares Outstanding Test (W.N.1) 19.5
Resources Test (W.N.2) 11.175
Debt Equity Ratio Test (W.N.3) 29.725
Maximum number of shares that can 11.175
bebought back [least of the above]
Thus, the company can buy 11,17,500 Equity shares at Rs 30 each.

Working Notes:
1. Shares Outstanding Test
Particulars (Shares in lakh)
Number of shares outstanding 78
25% of the shares outstanding 19.5

2. Resources Test
Particulars
Paid up capital (Rs in lakh) 780
Free reserves (Rs in lakh) (625+52+148-24-240*) 561
Shareholders’ funds (Rs in lakh) 1341
25% of Shareholders fund (Rs in lakh) 335.25
Buy-back price per share 30
Number of shares that can be bought back 11.175
*Amount transferred to CRR is excluded from free reserves.
Premium on redemption also reduced.

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
Particulars Rs In lakh
(a) Loan funds (Rs) 304
(b) Minimum equity to be maintained after buy- 152
back in the ratio of 2:1 (Rs) (a/2)
(c) Present equity shareholders fund (Rs) 1341
(d) Future equity shareholders fund (Rs) (see 1043.75 (1341-297.25)
W.N.4)
(e) Maximum permitted buy-back of Equity 891.75
(Rs)[(d) – (b)]
(f) Maximum number of shares that can 29.725
bebought back @ Rs 30 per share
As per the provisions of the Companies Act, Qualifies
2013, company

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Alternatively, when current liabilities are considered as part of loan funds, in that case Debt Equity Ratio
Test will be done as follows:
Particulars ` in lakh
(a) Loan funds (`) 699
(b) Minimum equity to be maintained after 349.5
buy-back in the ratio of 2:1 (a/2)
(c) Present equity shareholders fund 1341
(d) Future equity shareholders fund 1093.125 (1341-247.875)

(e) Maximum permitted buy-back of Equity 743.625

[(d) – (b)]
(f) Maximum number of shares that can be 24.7875
bought back @ ` 30 per share
As per the provisions of the Companies Qualifies
Act, 2013, company

(ii) Journal Entries for Buy Back

Date Particulars Debit Credit
2021
1st April 6% Redeemable preference share capital A/c Dr. 240
Premium on redemption of preference shares Dr. 24
A/c
To Preference shareholders A/c 264
(Being preference share capital transferred
to shareholders account)
Preference shareholders A/c Dr. 264
To Bank A/c 264
(Being payment made to shareholders)
General Reserve or P&L A/c* Dr. 24

To Premium on redemption 24
ofpreference shares A/c
(Being premium on redemption of
preferenceshares adjusted through securities
premium)
2nd April Equity shares buy-back A/c Dr. 335.25
To Bank A/c 335.25
(Being 11.175 lakhs equity shares of ` 10
each bought back @ ` 30 per share)
Equity share capital A/c Dr. 111.75
Securities Premium A/c Dr. 52
General Reserve or P&L A/c Dr. 171.50
To Equity Shares buy-back A/c 335.25
(Being cancellation of shares bought back)
General reserve A/c Dr. 351.75
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To Capital redemption reserve A/c 351.75

(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed and equity
shares bought back as per the law ie. 240+
111.75 lakhs)
2nd April 7% Debentures A/c Dr. 75
To Investment (own debentures) A/c 60
To Profit on cancellation of own 15
debentures A/c
(Being cancellation of own debentures
costing ` 60 lakhs, face value being ` 75
lakhs and the balance being profit on
cancellation of debentures)
4th April Capital Redemption Reserve Dr. 133.65
To Bonus Shares A/c 133.65
(Being issue of one bonus equity share for
every five equity shares held)
Bonus shares A/c Dr. 133.65
To Equity share capital A/c 133.65
(Being bonus shares issued)

Working Note: Bonus Share to be issued =66.825 (78 - 11.175) lakh shares divided by 5 = 13.365 lakh
shares.

Note: *Securities premium has not been utilized for the purpose of premium payable on redemption of
preference shares assuming that the company referred in the question is governed by Section 133 of the
Companies Act, 2013 and complies with the Accounting Standards prescribed for them. Alternative entry
considering otherwise is also possible by utilizing securities premium amount.

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11. Rohan Ltd. furnishes the following information as at 31-03-2021.

Share Capital:
Equity Share Capital of Rs 20 each fully paid up 50,00,000
10,000, 10% Preference Shares of Rs 100 each fullypaid up 10,00,000 60,00,000

Reserves & Surplus:

Capital Reserve 1,00,000
Security Premium 12,00,000
Revenue Reserve 5,00,000
Profit and Loss 25,50,000 43,50,000
12% Debentures 12,50,000
Current Liabilities and Provisions 5,50,000
Property, Plant and Equipment 1,00,75,000
Current Assets:
Investment 3,00,000
Inventory 2,00,000
Cash and Bank 15,75,000 20,75,000

The shareholders adopted the following resolution on 31st March, 2021:

(1) Buy back 25% of the paid-up capital and it was decided to offer a price of 20% over market price. The
prevailing market value of the company's share is Rs 30 per share.
(2) To finance the buy-back of shares, company:
(a) Issues 3,000, 14% debentures of Rs 100 each at a premium of 20%.
(b) Issues 2,500, 10% preference shares of Rs 100 each.
(3) Sell investment worth Rs 1,00,000 for Rs 1,50,000.
(4) Maintain a balance of RsRs 2,00,000 in Revenue Reserve.
(5) Later, the company issue three fully paid up equity shares of Rs 20 each by way of bonus for every 15
equity shares held by the equity shareholders.

You are required to pass the necessary journal entries to record the above transactions (RTP NOV 2021)

SOLUTION-
Journal Entries In the books of Rohan Limited
Particulars Dr. Cr.

1. Bank A/c Dr. 3,60,000

To 14 % Debenture A/c 3,00,000
To Securities Premium A/c 60,000
(Being 14 % debentures issued to finance buy back)
2. Bank A/c Dr. 2,50,000
To 10% preference share capital A/c 2,50,000
(Being 10% preference share issued to finance buy
back)
3. Bank A/c Dr. 1,50,000
To Investment A/c 1,00,000

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To Profit on sale of investment 50,000

(Being investment sold on profit)
4. Equity share capital A/c (62,500 x `20) Dr. 12,50,000
Premium on buyback or Securities premium A/c Dr. 10,00,000
(62,500 x `16)
To Equity shares buy back A/c (62,500 x `36) 22,50,000
(Being the amount due to equity shareholders on
buy back)
5. Equity shares buy back A/c Dr. 22,50,000
To Bank A/c 22,50,000
(Being the payment made on account of buy back of
62,500 Equity Shares as per the Companies Act)
6. Revenue reserve Dr. 3,00,000
Profit and Loss A/c Dr. 7,00,000
To Capital redemption reserve A/c 10,00,000

(Being amount equal to nominal value of buy back

shares from free reserves transferred to capital
redemption reserve account as per the law)
[12,50,000 less 2,50,000]
7. Capital redemption reserve A/c Dr. 7,50,000
To Bonus shares A/c 7,50,000
(Being the utilization of capital redemption reserve to
issue 37,500 bonus shares)
8. Bonus shares A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000
(Being issue of 3 bonus equity share for every
15 equity shares held)

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12. What are the conditions to be fulfilled by a Joint Stock Company to buy -back its equity shares as per
Companies Act, 2013? Explain. (MAY 2023: 5 Marks)

SOLUTION

As per the Companies Act, 2013 a joint stock company has to fulfill the following conditions to buy-back its
own equity shares:

(1) (a) the buy-back is authorised by its articles;

(b) a special resolution has been passed in general meeting of the company authorising the buy-back;
However, the above provisions do not apply where the buy-back is 10% or less of the paid-up equity capital
+ free reserves and is authorized by a board resolution passed at a duly convened meeting of the directors.

(c) the buy-back must be equal or less than 25% of the total paid-up capital and free reserves of the
company: (Resource Test)

(d) Further, the buy-back of shares in any financial year must not exceed 25% of its total paid-up capital and
free reserves: (Share Outstanding Test)

(e) the ratio of the debt owed by the company (both secured and unsecured) after such buy-back is not
more than twice the total of its paid-up capital and its free reserves: (Debt-Equity Ratio Test)

(f) all the shares or other specified securities for buy-back are fully paid-up;

(g) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in
accordance with the regulations made by the Securities and Exchange Board of India in this behalf;

Provided that no offer of the buy-back under this sub section shall be made within a period of one year
reckoned from the date of closure of a previous offer of buy-back if any. This means that there cannot be
more than one buy-back in one year.

(2) Every buy-back shall be completed within twelve months from the date of passing the special resolution,
or the resolution passed by the board of directors.

(3) Where a company purchases its own shares out of the free reserves or securities premium account, a
sum equal to the nominal value of shares so purchased shall be transferred to the Capital Redemption
Reserve Account and details of such account shall be disclosed in the Balance Sheet.

(4) Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against free
reserves and/or securities premium account.

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Q13) Following is the summarized Balance Sheets of Z Limited as on 31st March, 2024:

Particulars (Rs)
EQUITY AND LIABILITIES:
Share Capital
Equity shares of Rs 100 each 60,00,000
8% Preference shares of Rs 100 21,00,000
each10% Debentures of Rs 100 18,00,000
each 16,80,000
Trade Payables
Total 1,15,80,000
ASSETS:
Goodwill 81,000

Property, Plant and Equipment 72,00,000

Trade Receivables 13,75,000
Inventories 9,80,000
Cash at Bank 1,33,000
Own Debentures (Nominal value of Rs 6 lakhs) 5,76,000
Profit and Loss A/c 12,35,000
Total 1,15,80,000
On 1stApril, 2024, court approved the following reconstruction scheme for Z Limited:

(i) Each equity share shall be sub-divided into 10 equity shares of Rs 10 each fully paid up. After sub-
division, equity share capital will be reduced by 40%.

(ii) Preference share dividends are in arrear for last 4 years. Preference shareholders agreed to waive 75%
of their dividend claim and accept payment for the balance.

(iii) Own debentures of Rs 2,40,000 (nominal value) were sold at 98 cum interest and remaining own
debentures were cancelled.

(iv) Debenture holders of Rs 6,00,000 agreed to accept one machinery of book value of Rs 9,00,000 in full
settlement.

(v) Remaining Property, Plant and Equipment were valued at Rs 60,00,000.

(vi) Trade Payables, Trade Receivables and Inventories were valued at Rs 15,00,000, Rs 13,00,000 and Rs
9,44,000 respectively. Goodwill and Profit and Loss Account (Debit balance) are to be written off.

(vii) Company paid Rs 60,000 as penalty to avoid capital commitments of Rs 12 lakhs.

(viii) Interest on 10% Debentures is paid every year on 31st March.

You are required to: (1) Pass necessary journal entries in the books of Z Limited to implement the above
schemes.
(2) Prepare Capital Reduction Account.
(3) Prepare Bank Account (MAY 2024: 14 Marks)

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SOLUTION
Journal entries In the Books of Z Ltd. as on 1st April 2024
Particulars Dr. Cr.
01.04.2024 Amount Amount
(Rs) (Rs)
1. Equity share capital A/c (Rs 100) Dr. 60,00,000
To Equity share capital A/c (Rs 10) 60,00,000
(Being sub-division of one share of
Rs 100 each into 10 shares of Rs 10 each)
2. Equity share capital A/c (Rs 10) Dr. 24,00,000
To Capital reduction A/c 24,00,000
(Being reduction of Equity capital by 40%)
3. Capital reduction A/c Dr. 1,68,000
To Bank A/c 1,68,000
(Being payment in cash of 25% of arrear
of preference dividend) [21,00,000x8%] x
4 years
4. Bank A/c Dr. 2,35,200
To Own debentures A/c 2,30,400
(5,76,000/6,00,000) x 2,40,000
To Capital reduction A/c 4,800
(Being profit on sale of own debentures of
Rs 2,40,000 transferred to capital reduction
A/c)
5. 10% Debentures A/c Dr. 3,60,000
(6,00,000 -2,40,000)
To Own debentures A/c 3,45,600
To Capital reduction A/c 14,400
(Being profit on cancellation of own
debentures transferred to capital
reduction A/c)

6. 10% Debentures A/c Dr. 6,00,000

Capital reduction A/c Dr. 3,00,000
To Machinery or PPE A/c 9,00,000
(Being machinery taken up by debenture
holders for Rs 6,00,000)
7. Capital reduction A/c (balancing figure) Dr. 3,00,000
To PPE A/c 3,00,000
(72,00,000 - 9,00,000 - 60,00,000)
(Being PPE revalued)
8. Trade payables A/c Dr. 1,80,000
(16,80,000 -15,00,000)

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To Trade receivables A/c 75,000

(13,75,000-13,00,000)
To Inventory A/c 36,000
(9,80,000-9,44,000)
To Capital Reduction A/c 69,000
(Being assets and liabilities revalued)
9. Capital reduction A/c Dr. 13,16,000
To Goodwill A/c 81,000
To Profit and Loss A/c 12,35,000
(Being the above assets written off)
10. Capital reduction A/c Dr. 60,000
To Bank A/c 60,000
(Being penalty paid for avoidance of
capital commitments)
11. Capital reduction A/c Dr. 3,44,200
To Capital reserve A/c 3,44,200
(Being the credit balance in Capital
Reduction A/c transferred to Capital
Reserve)

Capital Reduction Account

(Rs) (Rs)
To Bank 1,68,000 By Equity Share Capital 24,00,000
To Property, Plant & 3,00,000 By Trade Payable 1,80,000
Equipment
To Property, Plant & 3,00,000 By Bank A/c (Profit on 4,800
Equipment Sale)
To Trade Receivables 75,000 By 10% debentures A/c 14,400
(Profit on cancellation)
To Inventory 36,000
To Goodwill 81,000
To Profit and Loss A/c 12,35,000
To Cash/Bank A/c 60,000
To Capital Reserve 3,44,200
25,99,200 25,99,200

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Bank Account

Rs Rs
To To balance b/d 1,33,000 By Capital Reduction 1,68,000
To Own Debenture 2,35,200 By Capital Reduction A/c 60,000
(2,30,400 +4,800) By balance c/d 1,40,200
3,68,200 3,68,200

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MCQ QUESTIONS (HOMEWORK)

Q1 . As per section 68(1) of the Companies Act, buy-back of own shares by the company, shall not exceed
(a) 25% of the total paid-up capital and free reserves of the company.
(b) 20% of the total paid-up capital and free reserves of the company.
(c) 15% of the total paid-up capital and free reserves of the company.
(d) 10% of the total paid-up capital and free reserves of the company.

Q2. The companies are permitted to buy-back their own shares out of
(a) Free reserves and Securities premium
(b) Proceeds of the issue of any shares.
(c) Both (a) and (b)
(d) Neither (a) nor (b).

Q3. When a company purchases its own shares out of free reserves; a sum equal to nominal value of shares
so purchased shall be transferred to
(a) Revenue redemption reserve.
(b) Capital redemption reserve.
(c) Buy-back reserve
(d) Special reserve

Q4. State which of the following statements is true?

(a) Buy-back is for more than twenty-five per cent of the total paid-up capital and free reserves of the
company.
(b) Partly paid shares cannot be bought back by a company.
(c) Buy-back of equity shares in any financial year shall exceed twenty-five per cent of its total paid-up
equity capital in that financial year.
(d) Partly paid shares can be bought back by a company.

Q5. Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against
(a) Free reserves.
(b) Securities premium
(c) Both (a) and (b).
(d) Neither (a) nor (b).

Q6. Advantages of Buy-back of shares include to

(a) Encourage others to make hostile bid to take over the company.
(b) Decrease promoters holding as the shares which are bought back are cancelled.
(c) Discourage others to make hostile bid to take over the company as the buy-back will increase the
promoters holding.
(d) All of the above.

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Chapter 3 CASH FLOW STATEMENT

Cash flow statement provides information about the changes in cash and cash equivalents of an
enterprise
A) CASH: It consists of cash in hand and demand deposits with bank.

B) CASH EQUIVALENT: It consists of short term highly liquid investments having maturity less than three
months, which can be readily converted, into cash without decline of its value. In other words, these
investments can be converted into cash without any risk.

CASH FLOWS FROM OPERATING ACTIVITIES:

Operating activities: They are principal revenue producing activities of the enterprises other than investing
and financing activities. Examples of cash flows from operating activities are as follows:

a. cash receipts from the sale of goods and the rendering of services;
b. cash receipts from royalties, fees, commissions and other revenue;
c. cash payments to suppliers for goods and services;
d. cash payments to and on behalf of employees;
e. cash payments or refunds of income taxes unless they can be specifically identified with financing
and investing activities

CASH FLOWS FROM INVESTMENT ACTIVITIES:

Investment Activities: The activities of acquisition and disposal of long term assets and other investments
not included in cash equivalents are investing activities. It includes making and collecting loans acquiring
and disposal of debt and equity instruments property and fixed assets etc. Examples of cash flows arising
from investing activities are:

a. Cash payments to acquire fixed assets (including intangibles). These payments include those relating
to capitalized research and development costs and self-constructed fixed assets;
b. cash receipts from disposal of fixed assets (including intangibles);
c. cash payments to acquire shares or debt instruments of other enterprises and interests in joint
ventures.
d. cash advances and loans made to third parties (other than advances and loans made by a financial
enterprise);
e. cash receipts from the repayment of advances and loans made to third parties (other than advances
and loans of a financial enterprise);

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CASH FLOW FROM FINANCING ACTIVITIES:

Financing Activities: Those activities that are result in change in size and composition of owner’s capital and
borrowings of the organization. It includes receipts from issuing shares, debentures, bonds, borrowing and
payment of borrowed amount, loan etc.

a. Sale of shares
b. Buy back of shares
c. Redemption of preference shares
d. Issue/ redemption of debentures
e. Long term loan /payment thereof
f. Dividend /interest paid

OTHERS:

Loans/Advances given and Interests earned -

(a) Loans and advances given and interests earned on them in the ordinary course of business are operating
cash flows for financial enterprises.
(b) Loans and advances given and interests earned on them are investing cash flows for non-financial
enterprises.

(c) Loans and advances given to subsidiaries and interests earned on them are investing cash flows for all
enterprises.
(d) Loans and advances given to employees and interests earned on them are operating cash flows for all
enterprises.
(e) Advance payments to suppliers and interests earned on them are operating cash flows for all
enterprises.
(f) Interests earned from customers for late payments are operating cash flows for non-financial
enterprises.

LOANS/ADVANCES TAKEN AND INTERESTS PAID -

(a) Loans and advances taken and interests paid on them in the ordinary course of business are operating
cash flows for financial enterprises.
(b) Loans and advances taken and interests paid on them are financing cash flows for non-financial
enterprises.
(c) Loans and advances taken from subsidiaries and interests paid on them are financing cash flows for all
enterprises.
(d) Advance taken from customers and interests paid on them are operating cash flows for non-financial
enterprises.
(e) Interests paid to suppliers for late payments are operating cash flows for all enterprises.
(f) Interests taken as part of inventory costs in accordance with AS 16 are operating cash flows.

INVESTMENTS MADE AND DIVIDENDS EARNED -

(a) Investments made and dividends earned on them in the ordinary course of business are operating cash
flows for financial enterprises.
(b) Investments made and dividends earned on them are investing cash flows for non-financial enterprises.
(c) Investments in subsidiaries and dividends earned on them are investing cash flows for all enterprises.

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DIVIDENDS PAID -
Dividends paid are financing cash outflows for all enterprises.

INCOME TAX -
(a) Tax paid on operating income is operating cash outflows for all enterprises
(b) Tax deducted at source against income are operating cash outflows if concerned incomes are operating
incomes and investing cash outflows if the concerned incomes are investment incomes, e.g. interest
earned.
(c) Tax deducted at source against expenses are operating cash inflows if concerned expenses are operating
expenses and financing cash inflows if the concerned expenses are financing expenses, e.g. interests paid.

INSURANCE CLAIMS RECEIVED -

(a) Insurance claims received against loss of stock or loss of profits are extraordinary operating cash inflows
for all enterprises.
(b) Insurance claims received against loss of fixed assets are extraordinary investing cash inflows for all
enterprises.
AS 3 requires separate disclosure of extraordinary cash flows, classifying them as cash flows from operating,
investing or financing activities, as may be appropriate.

PRESENTATION OF CASH FLOW STATEMENT –

• DIRECT METHOD
• INDIRECT METHOD

1. Intelligent Ltd., a non-financial company has the following entries in its Bank Account. It has sought
your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire

Discuss in the context of AS 3 Cash Flow Statement.

Solution
(i) Loans and advances given and interest earned
(1) to suppliers = Operating Cash flow
(2) to employees =Operating Cash flow
(3) to its subsidiary companies = Investing Cash flow

(ii) Investment made in subsidiary company and dividend received = Investing Cash flow

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(iii) Dividend paid for the year = Financing Cash Outflow

(iv) TDS on interest income earned on investments made = Investing Cash Outflow
(v) TDS on interest earned on advance given to suppliers = Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire = Extraordinary item to be shown under
a separate heading as ‘Cash inflow from investing activities’.

2. Following are extracts of the Balance Sheets of Ajay Ltd.:

Particulars Notes 31.3.20X1 31.3.20X2
Rs Rs
Equity and Liabilities
Shareholder’s funds
(a) Share capital 1 5,00,000 5,00,000
(b) Reserve & surplus 2 50,000 90,000
Non-current liabilities
(a) Long-term borrowings 3 5,00,000 7,50,000
Current liabilities
(a) Other current liabilities 4 --- 5,000

Assets
Non-current assets
(a) Intangible assets 5 2,05,000 1,80,000

Notes to accounts
31.3.20X1 31.3.20X2
Rs Rs
1 Share Capital
50,000 Equity Shares of Rs10 each 5,00,000 5,00,000
2 Reserve & surplus
Profit & Loss A/c 50,000 90,000
3 Long-term borrowings
10% Debentures 5,00,000 7,50,000
4 Other current liabilities
Unpaid interest --- 5,000
5 Intangible assets
Goodwill 2,05,000 1,80,000
You are required to show the related items in Cash Flow Statement.

Solution
An Extract of Cash Flow Statement for the year ending 31.3.20X2
Rs
Cash flows from operating activities:
Closing balance as per Profit & Loss A/c 90,000
Less: Opening balance as per Profit & Loss Alc (50,000)
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Add: Goodwill amortisation 25,000

Add: Interest on Debentures (Refer Note 1) 75,000
Net Cash from Operating Activities 1,40,000
Note 1: Interest has been computed on the closing balance of debentures as on 31.3.20X2 assuming that all
the additions/ deletions were made, if any, at the beginning of the year

Cash flows from financing activities:

Proceeds from debentures (Refer Working Note) 2,50,000
Interest paid on Debentures [less unpaid] (70,000)
Net Cash from Financing Activities 1,80,000

Working Note:
10% Debentures Account
Particulars Rs Particular Rs
To Balance c/d 7,50,000 By Balance b/d 5,00,000
By Bank A/c (Bal. fig.) 2,50,000

7,50,000 7,50,000

3. From the following information, calculate cash flow from operating activities:
Summary of Cash Account for the year ended March 31, 20X1
Particulars Rs Particulars Rs
To Balance b/d 1,00,000 By Cash Purchases 1,20,000
To Cash sales 1,40,000 By Trade payables 1,57,000
To Trade receivables 1,75,000 By Office & Selling 75,000
Expenses
To Trade Commission 50,000 By Income Tax 30,000
To Sale of Investment 30,000 By Investment 25,000
To Loan from Bank 1,00,000 By Repayment of Loan 75,000
To Interest & Dividend 1,000 By Interest on loan 10,000
By Balance c/d 1,04,000
5,96,000 5,96,000

Solution
Cash Flow Statement of …… for the year ended March 31, 20X1(Direct Method)
Particulars Rs Rs
Operating Activities:
Cash received from sale of goods 1,40,000
Cash received from Trade receivables 1,75,000
Trade Commission received 50,000 3,65,000
Less: Payment for Cash Purchases 1,20,000
Payment to Trade payables 1,57,000

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Office and Selling Expenses 75,000

Payment for Income Tax 30,000 (3,82,000)
Net Cash Flow used in Operating Activities (17,000)

4. The following summary cash account has been extracted from the company’saccounting
records:
Summary Cash Account
(Rs ’000)
Balance at 1.3.20X1 35
Receipts from customers 2,783
Issue of shares 300
Sale of fixed assets 128
2,047 3,246
Payments to suppliers

Payments for property, plant & equipment 230

Payments for overheads 115
Wages and salaries 69
Taxation 243
Dividends 80 (3,034)
Repayments of bank loan 250
Balance at 31.3.20X2 212
Prepare Cash Flow Statement of this company Hills Ltd. for the year ended 31stMarch, 20X2 in
accordance with AS-3 (Revised).

The company does not have any cash equivalents

Solution
Hills Ltd
Cash Flow Statement for the year ended 31st March, 20X2 (Using direct method)
(Rs ’000)
Cash flows from operating activities
Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)
Cash generated from operations 552
Income taxes paid (243)
Net cash from operating activities 309
Cash flows from investing activities
Payments for purchase of fixed assets (230)
Proceeds from sale of fixed assets 128
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Net cash used in investing activities (102)

Cash flows from financing activities
Proceeds from issuance of share capital 300
Bank loan repaid (250)

Dividend paid (80)

Net cash used in financing activities (30)

Net increase in cash and cash equivalents 177

Cash and cash equivalents at beginning of period 35
Cash and cash equivalents at end of period 212

5. Prepare cash flow statement of M/s MNT Ltd. for the year ended 31st March, 20X1 with the help of
the following information:
(1) Company sold goods for cash only.
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to Rs 3,82,500.
(3) Opening inventory was lesser than closing inventory by Rs 35,000.
(4) Wages paid during the year Rs 4,92,500.
(5) Office and selling expenses paid during the year Rs 75,000.
(6) Dividend paid during the year Rs 30,000.
(7) Bank loan repaid during the year Rs 2,15,000 (included interest Rs 15,000).
(8) Trade payables on 31st March, 20X0 exceed the balance on 31st March, 20X1 by Rs 25,000.
(9) Amount paid to trade payables during the year Rs 4,60,000.
(10) Tax paid during the year amounts to Rs 65,000 (Provision for taxation as on 31.03.20X1Rs 45,000).
(11) Investments of Rs 7,00,000 sold during the year at a profit of Rs 20,000.
(12) Depreciation on fixed assets amounts to Rs 85,000.
(13) Plant and machinery purchased on 15th November, 20X0 for Rs 2,50,000.
(14) Cash and Cash Equivalents on 31st March, 20X0Rs 2,00,000.
(15) Cash and Cash Equivalents on 31st March, 20X1Rs 6,07,500.

Solution
M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 20X1 (Using direct method)
Particulars Rs Rs
Cash flows from Operating Activities
Cash sales (Rs 3,82,500/.30) 12,75,000
Less: Cash payments for trade payables (4,60,000)
Wages Paid (4,92,500)
Office and selling expenses (75,000) (10,27,500)
Cash generated from operations before taxes 2,47,500
Income tax paid (65,000)

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Net cash generated from operating activities (A) 1,82,500

Cash flows from investing activities
Sale of investments (7,00,000 + 20,000) 7,20,000
Payments for purchase of Plant & machinery (2,50,000)
Net cash used in investing activities (B) 4,70,000
Cash flows from financing activities
Bank loan repayment (including interest) (2,15,000)
Dividend paid (30,000)
Net cash used in financing activities (C) (2,45,000)
Net increase in cash (A+B+C) 4,07,500
Cash and cash equivalents at beginning of the period 2,00,000
Cash and cash equivalents at end of the period 6,07,500

6. Ryan Ltd provides you the following information at the year-end, March 31, 20X1:
Rs Rs
Sales 6,98,000
Cost of Goods Sold (5,20,000)
1,78,000
Operating Expenses
(including Depreciation Expense of Rs 37,000) (1,47,000)
31,000
Other Income / (Expenses):
Interest Expense paid (23,000)
Interest Income received 6,000
Gain on Sale of Investments 12,000
Loss on Sale of Plant (3,000)
(8,000)
23,000
Income tax (7,000)
16,000

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Information available:

31st March 31st March

20X1 20X0
Rs Rs
Plant 7,15,000 5,05,000
Less: Accumulated Depreciation (1,03,000) (68,000)
6,12,000 4,37,000
Investments (Long term) 1,15,000 1,27,000
Inventory 1,44,000 1,10,000
Trade receivables 47,000 55,000
Cash 46,000 15,000
Prepaid expenses 1,000 5,000
Share Capital 4,65,000 3,15,000
Reserves and surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Trade payables 50,000 43,000
Outstanding liabilities 12,000 9,000
Income taxes payable 3,000 5,000

Analysis of selected accounts and transactions during 20X0-X1

1. Purchased investments for Rs 78,000.
2. Sold investments for Rs 1,02,000. These investments cost Rs 90,000.
3. Purchased plant assets for Rs 1,20,000.
4. Sold plant assets that cost Rs10,000 with accumulated depreciation of Rs 2,000 for Rs 5,000.
5. Issued Rs 1,00,000 of bonds at face value in an exchange for plant assets on 31st March, 20X1.
6. Repaid Rs 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of Rs 10 each.
8. Paid cash dividends Rs 8,000.
Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method.

Solution
Ryan Ltd- Cash Flow Statement for the year ending 31st March, 20X1
Rs Rs
Cash flows from operating activities
Net profit before taxation 23,000
Adjustments for:
Depreciation 37,000
Gain on sale of investments (12,000)
Loss on sale of plant assets 3,000
Interest expense 23,000
Interest income (6,000)

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Operating profit before working capital changes 68,000

Decrease in trade receivables 8,000
Increase in inventory (34,000)
Decrease in prepaid expenses 4,000
Increase in trade payables 7,000
Increase in outstanding liabilities 3,000
Cash generated from operations 56,000
Income taxes paid* (9,000)
Net cash generated from operating activities 47,000
Cash flows from investing activities
Purchase of plant (1,20,000)
Sale of plant 5,000
Purchase of investments (78,000)
Sale of investments 1,02,000
Interest received 6,000
Net cash used in investing activities (85,000)
Cash flows from financing activities
Proceeds from issuance of share capital 1,50,000
Repayment of bonds (50,000)
Interest paid (23,000)
Dividends paid (8,000)
Net cash from financing activities 69,000
Net increase in cash and cash equivalents 31,000
Cash and cash equivalents at the beginning of the 15,000
period
Cash and cash equivalents at the end of the period 46,000

*Working Note:
Rs
Income taxes paid:
Income tax expense for the year 7,000
Add: Income tax liability at the beginning of the year 5,000
12,000
Less: Income tax liability at the end of the year (3,000)
9,000

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7. The balance sheets of Sun Ltd. as at 31st March 20X1 and 20X0 were as:
Particulars Notes 20X1 20X0
` `
Equity and Liabilities
1 Shareholder’s funds
(a) Share capital 1 60,000 50,000
(b) Reserve & surplus 2 5,000 4,000
2 Current liabilities
(a) Trade Payables 4,000 2,500
(b) Other current 3 - 1,000
liabilities
(c) Short term provision
(provision for tax) 1,500 1,000
Total 70,500 58,500
Assets
1 Non-current assets
(a) Property, Plant & 4 39,500 29,000
Equipment
2 Current assets
(a) Current investments
2,000 1,000
(b) Inventories
17,000 14,000
(c) Trade receivables
8,000 6,000
(d) Cash & cash 5 4,000 8,500
equivalents
70,500 58,500

Notes to accounts
20X1 20X0
Rs Rs
1 Share Capital
Equity Shares of Rs10 each 60,000 50,000

2 Reserve & surplus

Profit and Loss Account 5,000 4,000

3 Other current liabilities

Dividend Payable - 1,000

4 Property, plant and equipment (at WDV)

Building 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Total 39,500 29,000
5 Cash and cash equivalents
Cash and Bank 4,000 8,500

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The profit and loss statement for the year ended 31st March, 20X1 disclosed:
Particulars Rs
Profit before tax 4,500
Tax expense: Current tax (1,500)
Profit for the year 3,000
Declared dividend (2,000)
Retained Profit 1,000

Further information is available:

Fixtures Vehicles
Rs Rs
Depreciation for the year 1,000 2,500
Disposals:
Proceeds on disposal of vehicles — 1,700
Written down value — (1,000)
Profit on disposal 700
Prepare a Cash Flow Statement for the year ended 31st March, 20X1.

Solution
Sun Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
Rs Rs
Cash flows from operating activities
Net Profit before taxation 4,500
Adjustments for:
Depreciation 3,500
Profit on sale of vehicles (1,700 – 1,000) (700)
Operating profit before working capital changes 7,300
Increase in Trade receivables (2,000)
Increase in inventories (3,000)
Increase in Trade payables 1,500
Cash generated from operations 3,800
Income taxes paid (W.N.1) (1,000)
Net cash generated from operating activities 2,800
Cash flows from investing activities
Sale of vehicles 1,700
Purchase of current investments (1,000)
Purchase of vehicles (W.N.3) (8,000)
Purchase of fixtures (W.N.3) (7,000)
Net cash used in investing activities (14,300)
Cash flows from financing activities
Issue of shares for cash 10,000

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Dividends paid (W.N.2) (3,000)

Net cash generated from financing activities 7,000

Net decrease in cash and cash equivalents (4,500)

Cash and cash equivalents at beginning ofperiod
(See Note) 8,500
Cash and cash equivalents at end of period(See
Note) 4,000
Note to the Cash Flow Statement
Cash and Cash Equivalents
31.3.20X1 31.3.20X0

Bank and Cash 4,000 8,500

Cash and cash equivalents 4,000 8,500

Working Notes:
Rs
1. Income taxes paid
Income tax expense for the year 1,500
Add: Income tax liability at the beginning of the year 1,000
2,500
Less: Income tax liability at the end of the year (1,500)
1,000
2. Dividend paid
Declared dividend for the year 2,000
Add: Amount payable at the beginning of the year 1,000
3,000
Less: Amount payable at the end of the year -
3,000
3. Property, plant and equipment acquisitions
Fixtures Vehicles
Rs Rs
W.D.V. at 31.3.20X1 17,000 12,500
Add back:
Depreciation for the year 1,000 2,500

Disposals — 1,000
18,000 16,000
Less: W.D.V. at 31.12.20X0 (11,000) (8,000)
Acquisitions during 20X0-20X1 7,000 8,000

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Note: Current investments may not be readily convertible to a known amount of cash and may not be
subject to an insignificant risk of changes in value as per the requirements of AS 3 and hence those have
been considered as investing activities.

8. Ms. Jyoti of Star Oils Limited has collected the following information for the preparation of cash
flow statement for the year ended 31st March, 20X1:
(` in lakhs)
Net Profit 25,000
Dividend paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to the Statement of Profit and Loss 20,000
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income received on investments 2,506
Interest expenses of the year 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank Balance) 56,081
Purchase of Fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and bank balance 5,003
Closing cash and bank balance 6,988

Prepare the Cash Flow Statement for the year ended 31 March 20X1 in accordancewith AS 3. (Make
necessary assumptions)

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Solution
Star Oils Limited- Cash Flow Statement for the year ended 31st March, 20X1
(` in lakhs)
Cash flows from operating activities
Net profit before taxation (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,434
Changes in working capital (Excluding cash and bank (56,081)
balance)
Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)

Cash flows from investing activities

Sale of assets (W.N.1) 145
Sale of investments (27,765 + 100) 27,865
Receipt of grant for capital projects 12
Interest income on investments 2,506
Purchase of fixed assets (14,560)

Investment in joint venture (3,850)

Expenditure on construction work-in progress (34,740)
Net cash used in investing activities (22,622)
Cash flows from financing activities
Proceeds from calls in arrear 2

Proceeds from long-term borrowings 25,980

Proceed from short-term borrowings 20,575
Interest paid (10,520)
Dividend (including dividend tax) paid (8,535) 27,502
Net increase in cash and cash equivalents 1,985
Cash and cash equivalents at the beginning of the 5,003
period
Cash and cash equivalents at the end of the period 6,988

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Working note:
1. Book value of the assets sold 185
Less : Loss on sale of assets (40)
Proceeds on sale 145

9. From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year
ended 31st March, 20X1 in accordance with AS 3 (Revised) using the direct method. The company
does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.20X1
Rs’000 Rs’000
Balance on 1.4.20X0 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Asset 200
Receipts from Customers 2,800 Overhead expense 200
Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250

Dividend 50
Repayment of Bank Loan 300
Balance on 31.3.20X1 150
3,250 3,250

Solution
X Ltd- Cash Flow Statement for the year ended 31st March, 20X1 (Using direct method)
Rs ’000 Rs ’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash generated from operating activities 250
Cash flows from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)

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Net increase in cash 100

Cash at the beginning of the year 50
Cash at the end of the year 150

10. Given below are the relevant extracts of the Balance Sheet and the Statement of Profitand Loss of
ABC Ltd. along with additional information:

Extract of Balance sheet

Particulars Notes 31.3.20X1 31.3.20X0
(` in lakhs) (` in lakhs)
Equity and Liabilities
1 Current liabilities
(a) Trade Payables 250 230
(b) Short term Provisions 1 200 180
(c) Other current liabilities 2 70 50

Assets
1 Current assets
(a) Inventories 200 180
(b) Trade Receivables 400 250
(c) Other current assets 3 195 180

Statement of Profit and Loss of ABC Ltd. for the year ended 31st March, 20X1
Particulars Notes ` in lakhs
I Revenue from operations 4,150
II Other income 4 100
III Total income (I + II) 4,250
Expenses:
Purchases of Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100

Finance cost 5 60
Other expenses 200
IV Total expenses 3,540
V Profit before tax (III – IV) 710
VI Tax expense:
Current tax 200

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VII Profit for the year from 510

continuing operations

Appropriations
Balance of Profit and Loss account brought forward 50
Transfer to general reserve 200
Dividend paid 330

Notes to accounts:
20X1 20X0
(` in lakhs) (` in lakhs)
1 Short term Provisions:
Provision for Tax 200 180

2 Other current liabilities:

Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60

Compute cash flow from operating activities using both direct and indirect method.

Solution
Cash Flows from Operating Activities
` in lakhs ` in lakhs
Using Direct Method
Cash Receipts:
Cash sales and collection from Trade
receivables
Sales + Opening Trade receivables – Closing 4,150 + 250 − 400 4,000
Trade receivables (A)
Cash payments:
Cash purchases & payment to Trade
payables
Purchases + Opening Trade payables – 2,400 + 230 − 250 2,380
Closing Trade payables
Wages and salaries paid 800 + 40 − 50 790
Cash expenses 200 + 10 – 20 190
Taxes paid – Advance tax 195
(B) 3,555

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Cash flow from operating activities (A – B) 445

Using Indirect Method
Profit before tax 710
Add: Non-cash items : Depreciation 100
Add: Interest : Financing cash inflow 60
Less: Interest and Dividend : Investment (100)
cash outflow
Less: Tax paid (195)
Working capital adjustments
Trade receivables 250−400 (150)
Inventories 180−200 (20)
Trade payables 250−230 20
Outstanding wages 50−40 10
Outstanding expenses 20−10 10 (130)
Cash flow from operating activities 445

11. Prepare Cash flow for Gamma Ltd., for the year ending 31.3.20X1 from the following information:
(1) Sales for the year amounted to Rs 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to Rs 55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to Rs 18 crores and salary paid amounted to Rs 22 crores.
(4) The Company redeemed debentures of Rs 20 crores at a premium of 10%. Debenture holders were
issued equity shares of Rs 15 crores towards redemption and the balance was paid in cash. Debenture
interest paid during the year was Rs 1.5 crores.
(5) Dividend paid during the year amounted to Rs 11.7 crores.
(6) Investment costing Rs 12 crores were sold at a profit of Rs 2.4 crores.
(7) Rs 8 crores was paid towards income tax during the year.
(8) A new plant costing Rs 21 crores was purchased in part exchange of an old plant. The book value of the
old plant was Rs 12 crores but the vendor took over the old plant at a value of Rs 10 crores only. The
balance was paid in cash to the vendor.
(9) The following balances are also provided:
Rs in crores Rs in crores
1.4.20X0 31.3.20X1
Debtors 45 50
Creditors 21 23
Bank 6 18.2

Solution
Gamma Ltd.- Cash Flow Statement for the year ended 31st March, 20X1(Using direct method)
Particulars Rs in crores Rs in crores
Cash flows from operating activities
Cash sales (60% of 135) 81
Cash receipts from Debtors 49
[45+ (135x40%) - 50]
Cash purchases (20% of 55) (11)
Cash payments to suppliers (42)
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[21+ (55x80%) – 23]

Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 37
Income tax paid (8)
Net cash generated from operating activities 29
Cash flows from investing activities
Sale of investments (12+ 2.40) 14.4
Payments for purchase of fixed assets (21 – 10) (11)
Net cash generated from investing activities 3.4
Cash flows from financing activities
Redemption of debentures (22-15) (7)
Interest paid (1.5)
Dividend paid (11.7)
Net cash used in financing activities (20.2)
Net increase in cash 12.2
Cash at beginning of the period 6.0
Cash at end of the period 18.2

12. From the following information of Mr. Zen, prepare a Cash flow statement as per AS-3 for the
year ended 31.3.20X1:
Ledger balances of Mr. Zen as of 20X0 and 20X1
As on 1.4.20X0 As on 1.4.20X1
Rs Rs
Zen’s Capital A/c 10,00,000 12,24,000
Trade payables 3,20,000 3,52,000
Mrs. Zen’s loan 2,00,000 --
Loan from Bank 3,20,000 4,00,000
Land 6,00,000 8,80,000
Plant and Machinery 6,40,000 4,40,000
Inventories 2,80,000 2,00,000
Trade receivables 2,40,000 4,00,000
Cash 80,000 56,000

Additional information:
A machine costing Rs 80,000 (accumulated depreciation there on Rs24,000) was soldfor Rs 40,000. The
provision for depreciation on 1.4.20X0 was Rs 2,00,000 and 31.3.20X1 was Rs 3,20,000. The net profit for
the year ended on 31.3.20X1 was Rs 3,60,000.

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Solution
Cash Flow Statement of Mr. Zen as per AS 3 for the year ended 31.3.20X1
Rs
(i) Cash flow from operating activities
Net Profit (given) 3,60,000
Adjustments for
Depreciation on Plant & Machinery 1,44,000
(W.N.2)
Loss on Sale of Machinery (W.N.1) 16,000 1,60,000
Operating Profit before working capital 5,20,000
changes
Decrease in inventories 80,000
Increase in trade receivables (1,60,000)
Increase in trade payables 32,000 (48,000)
Net cash generated from operating activities 4,72,000
(ii) Cash flow from investing activities
Sale of Machinery (W.N.1) 40,000
Purchase of Land (8,80,000 – 6,00,000) (2,80,000)
Net cash used in investing activities (2,40,000)
(iii) Cash flow from financing activities
Repayment of Mrs. Zen’s Loan (2,00,000)
Drawings (W.N.3) (1,36,000)

Loan from Bank 80,000

Net cash used in financing activities (2,56,000)
Net decrease in cash (24,000)
Opening balance as on 1.4.20X0 80,000
Cash balance as on 31.3.20X1 56,000

Working Notes:
1. Plant & Machinery A/c
Rs Rs
To Balance b/d 8,40,000 By Cash – Sales 40,000
(6,40,000 + 2,00,000) By Provision for 24,000
Depreciation A/c
By Profit & Loss A/c – 16,000
Loss on Sale (80,000 –
64,000)
By Balance c/d
(4,40,000+3,20,000) 7,60,000
8,40,000 8,40,000

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2. Provision for depreciation on Plant and Machinery A/c

Rs Rs
To Plant and 24,000 By Balance b/d 2,00,000
MachineryA/c
To Balance c/d 3,20,000 By Profit & Loss A/c 1,44,000
(Bal. fig.)
3,44,000 3,44,000

3. To find out Mr. Zen’s drawings:

Rs
Opening Capital 10,00,000
Add: Net Profit 3,60,000
13,60,000
Less: Closing Capital (12,24,000)
Drawings 1,36,000

13. Classify the following activities as (a) Operating activities, (b) Investing activities (c) Financing
activities (d) Cash equivalents with reference to AS 3 (Revised).
(a) Brokerage paid on purchase of investments
(b) Underwriting commission paid
(c) Trading commission received
(d) Proceeds from sale of investment
(e) Purchase of goodwill
(f) Redemption of preference shares
(g) Rent received from property held as investment
(h) Interest paid on long-term borrowings
(i) Marketable securities (having risk of change in value)
(j) Refund of income tax received

SOLUTION-
Classification of activities with reference to AS 3
a. Brokerage paid on purchased of investments Investing Activities
b. Underwriting Commission paid Financing Activities
c. Trading Commission received Operating Activities
d. Proceeds from sale of investment Investing Activities
e. Purchase of goodwill Investing Activities
f. Redemption of Preference shares Financing Activities
g. Rent received from property held Investing Activities
as investment
h. Interest paid on long term borrowings Financing Activities
i. Marketable securities Not a Cash equivalent
j. Refund of Income tax received Operating activities

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14. How will you disclose following items while preparing Cash Flow Statement of Gagan Ltd. as per AS-
3 for the year ended 31st March, 20X2?
(i) 10% Debentures issued: As on 01-04-20X1 Rs 1,10,000
As on 31-03-20X2 Rs 77,000
(ii) Debentures were redeemed at 5% premium at the end of the year. Premium was charged to the Profit &
Loss Account for the year.
(iii) Unpaid Interest on Debentures: As on 01-04-20X1 Rs 275
As on 31-03-20X2 Rs 1,175
(iv) Debtors of Rs 36,000 were written off against the Provision for Doubtful Debts A/c during the year.
(v) 10% Bonds (Investments): As on 01-04-20X1 Rs 3,50,000
As on 31-03-20X2 Rs 3,50,000
(vi) Accrued Interest on Investments: As on 31-03-20X2 Rs 10,500

SOLUTION-
Cash Flow Statement of M/s Gagan Ltd. for the year ended March 31, 20X2
A Cash Flow from Operating Activities
Net Profit as per Profit & Loss A/c xxxx
Add: Premium on Redemption of Debentures 1,650
Add: Interest on 10% Debentures 11,000
Less: Interest on 10% Investments (35,000)
B Cash Flow from Investing Activities
Interest on Investments [35,000-10,500] 24,500
C Cash Flow from Financing Activities
Interest on Debentures paid [11,000 - (1,175 - 275)] –
(10,100)
outflow
Redemption of Debentures [(1,10,000 - 77,000) at 5%
(34,650)
premium] – outflow

15. From the following Balance sheet of Grow More Ltd., prepare Cash Flow Statement for the year
ended 31st March, 20X1 :
Particulars Notes 31st March, 31st March,
20X1 20X0
Equity and Liabilities
1 Shareholders’ funds
A Share capital 10,00,000 8,00,000
B Reserves and Surplus 1 3,00,000 2,10,000
2 Non-current liabilities
Long term borrowings 2 2,00,000 -
3 Current liabilities
A Trade Payables 7,00,000 8,20,000
B Other current liabilities 3 - 1,00,000
C Short term provision 1,00,000 70,000
(provision for tax)
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Total 23,00,000 20,00,000

Assets
1 Non-current assets
A Property, plant and 13,00,000 9,00,000
Equipment 4
B Non-Current Investments 1,00,000 -
2 Current assets
A Inventories 4,00,000 2,00,000
B Trade receivables 5,00,000 7,00,000

C Cash and Cash - 2,00,000

equivalents
Total 23,00,000 20,00,000

Notes to accounts
No. Particulars 31st March, 20X1 31st March, 20X0
1 Reserves and Surplus
Revenue reserve 2,00,000 1,50,000
Profit and Loss account 1,00,000 60,000
Total 3,00,000 2,10,000

2 Long term borrowings

Debentures (issued at end of 2,00,000 --
year)

3. Other current liabilities

Dividend payable - 1,00,000

4 Property, plant and

equipment
Plant and machinery 7,00,000 5,00,000
Land and building 6,00,000 4,00,000
Net carrying value 13,00,000 9,00,000

(i) Depreciation @ 25% was charged on the opening value of Plant and Machinery.
(ii) At the year end, one old machine costing Rs 50,000 (WDV Rs 20,000) was sold for Rs 35,000. Purchase
was also made at the year end.
(iii) Rs 50,000 was paid towards Income tax during the year.
(iv) Construction of the building got completed on 31.03.20X1 and hence no depreciation may be charged
on the same.

Prepare Cash flow Statement.

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SOLUTION-
Cash Flow Statement of Grow More Ltd for the year ended 31st March, 20X1

Cash Flow from Operating Activities

Rs
Increase in balance of Profit and Loss Account 40,000
(1,00,000 – 60,000)
Provision for taxation (W.N.1) 80,000
Transfer to General Reserve (2,00,000 – 1,50,000) 50,000

Depreciation (W.N.2) 1,25,000

Profit on sale of Plant and Machinery (15,000)
Operating Profit before Working Capital changes 2,80,000
Increase in Inventories (2,00,000)
Decrease in Trade receivables 2,00,000
Decrease in Trade payables (1,20,000)
Cash generated from operations 1,60,000 1,10,000
Income tax paid (50,000)
Net Cash generated from operating activities

Cash Flow from Investing Activities

Purchase of fixed assets (3,45,000)
Expenses on building (6,00,000 – 4,00,000) (2,00,000)
Increase in investments (1,00,000)
Sale of old machine 35,000 (6,10,000)
Net Cash used in investing activities

Cash Flow from Financing activities

Proceeds from issue of shares 2,00,000
(10,00,000 – 8,00,000)
Proceeds from issue of debentures 2,00,000
Dividend paid (1,00,000) 3,00,000

Net cash generated from financing activities

Net increase in cash or cash equivalents NIL
Cash and Cash equivalents at the beginning of the 2,00,000
year
Cash and Cash equivalents at the end of the year Nil

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Working Notes:
1 Provision for taxation account
Rs Rs
To Cash (Paid) 50,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By Profit and Loss 80,000
A/c
(Balancing
figure)
1,50,000 1,50,000

2 Plant and Machinery account

Rs Rs
To Balance b/d 5,00,000 By Depreciation 1,25,000
To Profit and Loss A/c 15000
(profit on sale of
machine)
To Cash (Balancing figure) 3,45,000 By Cash (sale of 35,000
machine)
_______ By Balance c/d 7,00,000
8,60,000 8,60,000

16. From the following Balance Sheets and information, prepare Cash Flow Statement of Ryan Ltd.
by Indirect method for the year ended 31st March, 20X1:
Particulars Notes 31st March 31st March
20X1 20X0
Rs Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 6,00,000 7,00,000
B Reserves and Surplus 2 4,20,000 3,00,000
2 Non-current liabilities
Long term borrowings 3 2,00,000 -
3 Current liabilities
A Trade Payables 1,15,000 1,10,000
B Other current liabilities 4 30,000 80,000
C Short term provision (provision for
tax) 95,000 60,000
Total 14,60,000 12,50,000
Assets
1 Non-current assets
A Property, plant and Equipment 5 9,15,000 7,00,000

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B Non-Current Investments 50,000 80,000

2 Current assets
A Inventories 95,000 90,000
B Trade receivables 2,50,000 2,25,000
C Cash and Cash equivalents 50,000 90,000
D Other Current assets 1,00,000 65,000
Total 14,60,000 12,50,000

Notes to accounts
No. 31st March, 31st March,
20X1 20X0
1. Share capital
Equity share capital 6,00,000 5,00,000
10% Redeemable Preference share
capital -- 2,00,000
Total 6,00,000 7,00,000
2 Reserves and Surplus
Capital redemption reserve 1,00,000 -
Capital reserve 70,000 -
General reserve 1,50,000 2,50,000
Profit and Loss account 1,00,000 50,000
Total 4,20,000 3,00,000
3 Long term borrowings
9% Debentures 2,00,000 --

4. Other current liabilities

Dividend payable - 60,000
Liabilities for expenses 30,000 20,000
Total 30,000 80,000

5 Property, plant and equipment

Plant and machinery 7,65,000 5,00,000
Land and building 1,50,000 2,00,000
Net carrying value 9,15,000 7,00,000

Additional Information:
(i) A piece of land has been sold out for Rs1,50,000 (Cost – Rs1,20,000) and the balance land was revalued.
Capital Reserve consisted of profit on revaluation of land.
(ii) On 1st April, 20X0 a plant was sold for Rs90,000 (Original Cost – Rs70,000 and W.D.V. – Rs 50,000) and
Debentures worth Rs1 lakh were issued at par as part consideration for plant of Rs4.5 lakhs acquired.
(iii) Part of the investments (Cost – Rs50,000) was sold for Rs70,000.
(iv) Pre-acquisition dividend received Rs5,000 was adjusted against cost of investment.
(v) Interim dividend was declared and paid @ 15% during the current year.
(vi) Income-tax liability for the current year was estimated at Rs1,35,000.

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(vii) Depreciation @ 15% has been charged on Plant and Machinery but no depreciation has been charged
on Building.

SOLUTION
Cash Flow Statement of Ryan Limited For the year ended 31st March, 20X1
Rs Rs
Cash flow from operating activities
Net Profit before taxation (W.N.1) 2,75,000
Adjustment for
Depreciation (W.N.3) 1,35,000
Profit on sale of land (30,000)
Profit on sale of plant (W.N.3) (40,000)
Profit on sale of investments (W.N.4) (20,000)
Interest on debentures (2,00,000 X 9%) 18,000

Operating profit before working capital changes 3,38,000

Increase in inventory (5,000)
Increase in trade receivables (25,000)
Increase in Other current assets (W.N.9) (35,000)
Increase in Trade payables 5,000
Increase in liabilities for expenses 10,000
Cash generated from operations 2,88,000
Income taxes paid (W.N.8) (1,00,000)
Net cash generated from operating activities 1,88,000
Cash flow from investing activities
Proceeds from sale of land (W.N.2) 1,50,000
Proceeds from sale of plant (W.N.3) 90,000
Proceeds from sale of investments (W.N.4) 70,000
Purchase of plant (W.N.3) (3,50,000)
Purchase of investments (W.N.4) (25,000)
Pre-acquisition dividend received (W.N.4) 5,000
Net cash used in investing activities (60,000)
Cash flow from financing activities
Proceeds from issue of equity shares 1,00,000
(6,00,000 – 5,00,000)
Proceeds from issue of debentures 1,00,000
(2,00,000 – 1,00,000)
Redemption of preference shares (2,00,000)
Dividends paid (1,50,000)
Interest paid on debentures (18,000)
Net cash used in financing activities (1,68,000)

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Net decrease in cash and cash equivalents (40,000)

Cash and cash equivalents at the beginning of the year 90,000
Cash and Cash equivalents at the end of the year 50,000

Working Notes: 1
Rs
Net profit before taxation
Retained profit 1,00,000
Less: Balance as on 31.3.20X0 (50,000)
50,000
Provision for taxation 1,35,000
Dividend 90,000
2,75,000

2 Land and Building Account

Rs Rs
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000
To Profit and Loss A/c (Profit 30,000 By Balance c/d 1,50,000
on sale)
To Capital reserve
(Revaluation profit) 70,000
3,00,000 3,00,000

3 Plant and Machinery Account

Rs Rs
To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss account 40,000 By Depreciation 1,35,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000

4 Investments Account
Rs Rs
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend

To Bank (Balancing figure) 25,000 (Pre-acquisition) 5,000

By Balance c/d 50,000
1,25,000 1,25,000

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5 Capital Reserve Account

Rs Rs
To Balance c/d 70,000 By Profit on revaluation of 70,000
land
70,000 70,000

6 General Reserve Account

Rs Rs
To Capital redemption 1,00,000 By Balance b/d 2,50,000
reserve
To Balance c/d 1,50,000

2,50,000 2,50,000

7 Dividend payable Account

Rs Rs
To Bank (Balancing 1,50,000 By Balance b/d 60,000
figure)
To Balance c/d - By Profit and loss 90,000
account
1,50,000 1,50,000

8 Provision for Taxation Account

Rs Rs
To Bank (Balancing figure) 1,00,000 By Balance b/d 60,000
To Balance c/d 95,000 By Profit and loss 1,35,000
account
1,95,000 1,95,000

9 Other Current Assets Account

Rs Rs
To Balance b/d 65,000
To Bank (Balancing figure) 35,000 By Balance c/d 1,00,000
1,00,000 1,00,000

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17. The Balance Sheet of New Light Ltd. as at 31st March, 20X1 and 20X0 (for the yearsended) are as
follows:
Rs Rs
st st
Notes 31 March 31 March
20X0 20X1
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 16,00,000 18,80,000
B Reserves and Surplus 2 8,40,000 11,00,000
2 Non-current liabilities
Long term borrowings 3 4,00,000 2,80,000
3 Current liabilities
A Other current liabilities 4 6,00,000 5,20,000
B Short term provision
(provision for tax) 3,60,000 3,40,000
Total 38,00,000 41,20,000
Assets
1 Non-current assets
A Property, plant and Equipment 5 22,80,000 26,40,000
B Non-Current Investments 4,00,000 3,20,000
2 Current assets
A Cash and Cash equivalents 10,000 10,000
B Other Current assets 11,10,000 11,50,000
Total 38,00,000 41,20,000

Notes to accounts
No. Particulars 31st March, 31st March,
20X0 20X1
1. Share capital
Equity share capital 12,00,000 16,00,000
10% Preference share capital 4,00,000 2,80,000
Total 16,00,000 18,80,000
2 Reserves and Surplus
General reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Total 8,40,000 11,00,000
3 Long term borrowings
9% Debentures 4,00,000 2,80,000
Total 4,00,000 2,80,000
4. Other current liabilities
Dividend payable 1,20,000 -
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
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5 Property, plant and equipment

Property, plant and equipment 32,00,000 38,00,000
Less: Depreciation (9,20,000) (11,60,000)
Net carrying value 22,80,000 26,40,000

Additional information:
(i) The company sold one property, plant and equipment for Rs 1,00,000, the cost of which was Rs 2,00,000
and the depreciation provided on it was Rs80,000.
(ii) The company also decided to write off another item of property, plant and equipment costing Rs 56,000
on which depreciation amounting to Rs 40,000 has been provided.
(iii) Depreciation on property, plant and equipment provided Rs 3,60,000.
(iv) Company sold some investment at a profit of Rs 40,000.
(v) Debentures and preference share capital redeemed at 5% premium. Debentures were redeemed at the
year end.
(vi) Company decided to value inventory at cost, whereas previously the practice was to value inventory at
cost less 10%. The inventory according to books on 31.3.20X0 was Rs 2,16,000. The inventory on 31.3.20X1
was correctly valued at Rs 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.

SOLUTION-
New Light Ltd - Cash Flow Statement for the year ended 31st March, 20X1
A. Cash Flow from operating activities Rs Rs
Profit after appropriation
Increase in profit and loss A/c after inventory
adjustment [Rs3,40,000 – (Rs2,40,000 + Rs24,000)] 76,000
Transfer to general reserve 1,60,000
Provision for tax 3,40,000
Net profit before taxation and extraordinary item 5,76,000
Adjustments for:
Depreciation 3,60,000
Loss on sale of property, plant and equipment 20,000
Decrease in value of property, plant and 16,000
equipment
Profit on sale of investment (40,000)
Premium on redemption of preference share 6,000
capital
Interest on debentures 36,000
Premium on redemption of debentures 6,000
Operating profit before working capital changes 9,80,000
Increase in current liabilities
(Rs5,20,000 –Rs4,80,000) 40,000

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Increase in other current assets

[Rs11,50,000 – (Rs 11,10,000 + Rs24,000)] (16,000)
Cash generated from operations 10,04,000
Income taxes paid (3,60,000)
Net Cash generated from operating activities 6,44,000
B. Cash Flow from investing activities
Purchase of property, plant and equipment (8,56,000)
(W.N.3)
Proceeds from sale of property, plant and 1,00,000
equipment (W.N.3)
Proceeds from sale of investments (W.N.2) 1,20,000
Net Cash used in investing activities (6,36,000)
C. Cash Flow from financing activities
Proceeds from issuance of share capital 4,00,000
Redemption of preference share capital (1,26,000)
(Rs1,20,000 + Rs6,000)
Redemption of debentures (Rs 1,20,000 + Rs (1,26,000)
6,000) Dividend paid (1,20,000)
Interest on debentures (36,000)
Net Cash generated from financing activities (8,000)
Net increase/decrease in cash and cash equivalent Nil
during the year
Cash and cash equivalent at the beginning of the 10,000
year
Cash and cash equivalent at the end of the year 10,000

Working Notes:
1 Revaluation of inventory will increase opening inventory by Rs 24,000.
2,16,000/90 x 10 = Rs 24,000

Therefore, opening balance of other current assets would be as follows:

Rs 11,10,000 + Rs 24,000 = Rs 11,34,000

Due to under valuation of inventory, the opening balance of profit and loss account be increased by Rs
24,000.

The opening balance of profit and loss account after revaluation of inventory will be Rs 2,40,000 + Rs
24,000 = Rs 2,64,000

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2. Investment Account
Rs Rs
To Balance b/d 4,00,000 By Bank A/c 1,20,000
To Profit and Loss A/c (balancing figure
(Profit on sale of being investment
investment) 40,000 By sold) 3,20,000
Balance c/d
4,40,000 4,40,000

3 Accumulated Depreciation Account

Rs Rs
To Property, plant 80,000 By Balance b/d 9,20,000
and equipment
A/c
To Property, plant 40,000 By Profit and loss A/c 3,60,000
and equipment (depreciation for the
A/c year)
To Balance c/d 11,60,000
12,80,000 12,80,000
4 Property, Plant and Equipment Account
Rs Rs Rs
To Balance b/d 32,00,000 By Bank A/c (sale of 1,00,000
assets)
To Bank A/c 8,56,000 By Accumulated
(balancing figure depreciation A/c 80,000
being assets By Profit and loss
purchased) A/c(loss 20,000 2,00,000
on sale of assets)
By Accumulated
depreciation A/c 40,000
By Profit and loss A/c
(assets written 16,000 56,000
off)
By Balance c/d 38,00,000
40,56,000 40,56,000

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18. ABC Ltd. gives you the Balance sheets as at 31st March 20X0 and 31st March 20X1. You are required to prepare
Cash Flow Statement by using indirect method as per AS 3 for the year ended 31st March 20X1:
Particulars Notes Rs Rs
st st
31 March 31 March
20X0 20X1
Equity and Liabilities
1 Shareholders’ funds
A Share capital 50,00,000 50,00,000
B Reserves and Surplus 26,50,000 36,90,000
2 Non-current liabilities
Long term borrowings 1 - 9,00,000
3 Current liabilities
A Short-term borrowings 1,50,000 3,00,000
(Bank loan)
B Trade payables 8,80,000 8,20,000
C Other current liabilities 2 4,80,000 2,70,000
Total 91,60,000 1,09,80,000

Assets
1 Non-current assets
A Property, plant and 21,20,000 32,80,000
Equipment 3
2 Current assets
A Current Investments 11,80,000 15,00,000
B Inventory 20,10,000 19,20,000
C Trade receivables 4 22,40,000 26,40,000
D Cash and Cash equivalents 15,20,000 15,20,000
E Other Current assets (Prepaid 90,000 1,20,000
expenses)
Total 91,60,000 1,09,80,000

Notes to accounts
No. Particulars Rs20X0 20X1
1 Long term borrowings
9% Debentures (issued at the end - 9,00,000
of year)
Total - 9,00,000

2. Other current liabilities

Dividend payable 1,50,000 -
Liabilities for expenses 3,30,000 2,70,000
Total 4,80,000 2,70,000

3 Property, plant and equipment

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Plant and machinery 27,30,000 40,70,000

Less: Depreciation (6,10,000) (7,90,000)
Net carrying value 21,20,000 32,80,000

4 Trade receivables
Gross amount 23,90,000 28,30,000
Less: Provision for doubtful debts (1,50,000) (1,90,000)
Total 22,40,000 26,40,000

Additional Information:
(i) Net profit for the year ended 31st March, 20X1, after charging depreciation Rs 1,80,000 is Rs 10,40,000.
(ii) Trade receivables of Rs 2,30,000 were determined to be worthless and were written off against the
provisions for doubtful debts account during the year.

SOLUTION-
Cash Flow Statement of ABC Ltd. for the year ended 31.3.20X1
Cash flows from Operating Activities Rs Rs
Net Profit 10,40,000
Add: Adjustment For Depreciation (Rs7,90,000 – 1,80,000
Rs6,10,000)
Add: Adjustment for Provision for Doubtful Debts 2,70,000
(Rs 4,20,000 – Rs1,50,000)
Operating Profit Before Working Capital Changes 14,90,000
Add: Decrease in Inventories 90,000
(Rs 20,10,000 – Rs 19,20,000)
15,80,000
Less: Increase in Current Assets
Trade Receivables
(Rs 30,60,000 – Rs23,90,000) 6,70,000
Prepaid Expenses (Rs 1,20,000 – Rs90,000) 30,000
Decrease in Current Liabilities:
Trade Payables (Rs 8,80,000 – Rs 8,20,000) 60,000
Expenses Outstanding
(Rs 3,30,000 – Rs 2,70,000) 60,000 (8,20,000)
Net Cash generated from Operating Activities 7,60,000

Cash Flows from Investing Activities

Investment in Current Investments (3,20,000)
Purchase of Plant & Machinery (13,40,000)
(Rs 40,70,000 – Rs 27,30,000)
Net Cash Used in Investing Activities (16,60,000)
Cash Flows from Financing Activities

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Bank Loan Raised (Rs 3,00,000 – Rs 1,50,000) 1,50,000

Issue of Debentures 9,00,000
Payment of Dividend (1,50,000)
Net Cash Used in Financing Activities 9,00,000
Net Increase in Cash During the Year -
Add: Cash and Cash Equivalents as on 1.4.20X0 15,20,000
Cash and Cash Equivalents as on 31.3.20X1 15,20,000

Note:
1. Bad debts amounting Rs 2,30,000 were written off against provision for doubtful debts account during
the year. In the above solution, Bad debts have been added back in the balances of provision for doubtful
debts and trade receivables as on 31.3.20X1. Alternatively, the adjustment of writing off bad debts may be
ignored and the solution can be given on the basis of figures of trade receivables and provision for doubtful
debts as appearing in the balance sheet on 31.3.20X1.
2. Current investments (i.e. Marketable securities) may not be readily convertible to a known amount of
cash and be subject to an insignificant risk of changes in value as per the requirements of AS 3 and hence
those have been considered as investing activities

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ADDITIONAL QUESTIONS ON CASH FLOW STATEMENT

19. Following information was extracted from the books of S Ltd. for the year ended 31st March,2020 :
(1) Net profit before talking into account income tax and after talking into account the following items was
Rs30 lakhs;
(i) Depreciation on Property, Plant & Equipment Rs7,00,000
(ii) Discount on issue of debentures written off Rs45,000.
(iii) Interest on debentures paid Rs4,35,000
(iv) Investment of Book value Rs3,50,000 sold for Rs3,75,000.
(v) Interest received on Investments Rs70,000

(2) Income tax paid during the year Rs 12,80,000

(3) Company issued 60,000 Equity Shares of Rs10 each at a premium of 20% on 10th April,2019.
(4) 20,000,9% Preference Shares of Rs100 each were redeemed on 31st March, 2020 at a premium of 5%
(5) Dividend paid during the year amounted to Rs11 Lakhs (including dividend distribution tax)
(6) A new Plant costing Rs7 Lakhs was purchased in part exchange of an old plant on 1 st January,2020. The
book value of the old plant was Rs8 Lakhs but the vendor took over the old plant at a value of Rs6 Lakhs
only. The balance amount was paid to vendor through cheque on 30th March,2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to value inventory at
cost less 10%. The inventory according to books on 31.03.2020 was Rs 14,76,000. The inventory on
31.03.2019 was correctly valued at Rs 13,50,000.
(8) Current Assets and Current Liabilities in the beginning and at the end of year 2019-2020 were as:
As on 1st April,2019 As on 31st March,2020
(Rs) (Rs)
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash &Bank Balances 2,40,700 3,70,500
Trade Payables 2,84,700 2,87,300
Outstanding Expenses 97,000 1,01,400

You are required to prepare a Cash Flow Statement for the year ended 31st March, 2020 as per AS 3
(revised) using the indirect method. (JAN 2021 : 12 Marks)

Answer
Cash Flow Statement of S Ltd for the year ended 31st March, 2020
Rs Rs
Cash flows from operating activities
Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000

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{14,76,000 less 16,40,000(14,76,000/90X100)}

Operating profit before working capital changes 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Cash flows from investing activities
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000)
Issue of shares 7,20,000
Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)
Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500
*Net profit given in the question is after considering only the items listed as information point (1) of the
question ; hence amount of loss on plant not added back.

20. The following figures have been extracted from the books of Manan Limited for the year ended on
31.3.2020. You are required to prepare the Cash Flow statement as per AS 3 using indirect method.
(i) Net profit before taking into account income tax and income from law suits but after taking into account
the following items was Rs 30 lakhs :
(a) Depreciation on Property, Plant & Equipment Rs 7.50 lakhs.
(b) Discount on issue of Debentures written off Rs 45,000.
(c) Interest on Debentures paid Rs 5,25,000.
(d) Book value of investments Rs 4.50 lakhs (Sale of Investments for Rs 4,80,000).
(e) Interest received on investments Rs 90,000.
(ii) Compensation received Rs1,35,000 by the company in a suit filed.
(iii) lncome tax paid during the year Rs 15,75,000.
(iv) 22,500, 10% preference shares of Rs 100 each were redeemed on 02-04-2019 at a premium of 5%.

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(v) Further the company issued 75,000 equity shares of Rs10 each at a premium of 20% on 30.3.2020 (Out
of 75,000 equity shares, 25,000 equity shares were issued to a supplier of machinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 Rs 7.50 lakhs and interim
dividend paid Rs 2.50 lakhs for the year 2019-2020.
(viii) Land was purchased on 02.4.2019 for Rs3,00,000 for which the company issued 22,000 equity shares
of Rs 10 each at a premium of 20% to the land owner and balance in cash as consideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years were as detailed
below:
As on 01.04.2019 As on 31.3.2020
Rs Rs
Inventory 18,00,000 19,77,000
Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payables 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700
(MTP NOV 2021: 10 MARKS)

SOLUTION-
Cash Flow Statement of Manan Ltd for the year ended 31st March, 2020
Rs Rs
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 30,00,000
Adjustments for:
Depreciation on Property, plant and equipment 7,50,000
Discount on issue of debentures 45,000
Interest on debentures paid 5,25,000
Interest on investments received (90,000)
Profit on sale of investments (30,000) 12,00,000
Operating profit before working capital changes 42,00,000
Adjustments for:
Increase in inventory (1,77,000)
Decrease in trade receivable 7,350
Increase in trade payables 450
Increase in outstanding expenses 10,200 (1,59,000)
Cash generated from operations 40,41,000
Income tax paid (15,75,000)
Cash flow from ordinary items 24,66,000
Cash flow from extraordinary items:
Compensation received in a suit filed 1,35,000

Net cash flow from operating activities 26,01,000

Cash flow from Investing Activities;
Sale proceeds of investments 4,80,000

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Interest received on investments 90,000

Purchase of land (3,00,000 less 2,64,000) (36,000)
Net cash flow from investing activities 5,34,000
Cash flow from Financing Activities
Proceeds of issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (23,62,500)
Preference dividend paid (2,25,000)
Interest on debentures paid (5,25,000)
Dividend paid (7,50,000 + 2,50,000) (10,00,000)
Net cash used in financing activities (35,12,500)
Net decrease in cash and cash equivalents during the (3,77,500)
year
Add: Cash and cash equivalents as on 31.3.2019 3,94,450
Cash and cash equivalents as on 31.3.2020 16,950

21. Classify the following activities as (a) Operating Activities, (b) Investing Activities, (c) Financing
Activities (d) Cash Equivalents. ( HOMEWORK)
(a) Purchase of Machinery.
(b) Proceeds from issuance of equity share capital
(c) Cash Sales.
(d) Proceeds from long-term borrowings.
(e) Cheques collected from Trade receivables.
(f) Cash receipts from Trade receivables.
(g) Trading Commission received.
(h) Purchase of investment.
(i) Redemption of Preference Shares.
(j) Cash Purchases.
(k) Proceeds from sale of investment
(l)Purchase of goodwill.
(m) Cash paid to suppliers.
(n) Interim Dividend paid on equity shares.
(o) Wages and salaries paid.
(p) Proceed from sale of patents.
(q) Interest received on debentures held as investment.
(r) Interest paid on Long-term borrowings.
(s) Office and Administration Expenses paid
(t) Manufacturing Overheads paid.
(u) Dividend received on shares held as investments.
(v) Rent Received on property held as investment.
(w) Selling and distribution expense paid.
(x) Income tax paid
(y) Dividend paid on Preference shares.
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(z) Underwritings Commission paid.

(aa) Rent paid.
(bb) Brokerage paid on purchase of investments.
(cc) Bank Overdraft
(dd) Cash Credit
(ee) Short-term Deposits
(ff) Highly liquid Marketable Securities (without risk of change in value)
(gg) Refund of Income Tax received.

Solution
(a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.
(b) Investing Activities: a, h, k, l, p, q, u, v, bb & ee.
(c) Financing Activities: b, d, i, n, r, y, z, cc & dd.
(d) Cash Equivalent: ff.

22. X Ltd. purchased debentures of `10 lacs of Y Ltd., which are redeemable within three months. How
will you show this item as per AS 3 while preparing cash flow statement for the year ended on 31st
March, 20X1? ( HOMEWORK)

Solution
As per AS 3 on ‘Cash flow Statement’, cash and cash equivalents consists of cash in hand, balance with
banks and short-term, highly liquid investments. If investment, of `10 lacs, made in debentures is for
short-term period then it is an item of ‘cash equivalents’.

However, if investment of `10 lacs made in debentures is for long-term period then as per AS 3, it should be
shown as cash flow from investing activities.

23. Classify the following activities as per AS 3 Cash Flow Statement:

(i) Interest paid by financial enterprise
(ii) Tax deducted at source on interest received from subsidiary company
(iii) Deposit with Bank for a term of two years
(iv) Insurance claim received towards loss of machinery by fire
(v) Bad debts written off ( HOMEWORK)

Solution
(i) Interest paid by financial enterprise - Cash flows from operating activities
(ii) TDS on interest received from subsidiary company - Cash flows from investing activities
(iii)Deposit with bank for a term of two years - Cash flows from investing activities
(iv)Insurance claim received against loss of fixed asset by fire - Extraordinary item to be shown as a separate
heading under ‘Cash flow from investing activities’.
(v) Bad debts written off- It is a non-cash item which is adjusted from net profit/loss under indirect
method, to arrive at net cash flow from operating activity.

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24. Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited for the year ended
31-3-20X1.
Particulars `
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
Interest on loan received from subsidiary companies 82,500
Pre-acquisition dividend received on investment made 62,400
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(TDS of 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred 9,600) 84,000

Solution
Cash Flow Statement from Investing Activities of M/s Creative Furnishings Limited for the year ended 31-
03-20X1
Cash generated from investing activities ` `
Interest on loan received 82,500
Pre-acquisition dividend received on investment made 62,400
Unsecured loans given to subsidiaries (4,85,000)
Interest received on investments (gross value) 76,200
TDS deducted on interest (8,200)
Sale of plant 74,400
Cash used in investing activities (before extra ordinary item) (1,97,700)
Extraordinary claim received for loss of plant 49,600
Net cash used in investing activities (after extra ordinary (1,48,100)
item)

NOTES –
• Debenture interest paid and Term Loan repaid are financing activities and, therefore, not considered
for preparing cash flow from investing activities.
• Plant acquired by issue of 8% debentures does not amount to cash outflow, hence also not
considered in the above cash flow statement.

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25. The summarized Balance Sheets of Flora Limited for the year ended 31st March, 2022 and 31st
March, 2023 are as below:
Assts 31/03/2023 31/03/2022
(Rs) (Rs)
Goodwill 15,000 28,000
Land 5,75,000 6,00,000
Furniture and Fixtures 48,000 44,000
Vehicles 22,000 28,000
Office Equipment 21,000 -
Long-term Investments 60,000 1,10,000
Stock-in-hand 96,000 88,000
Bills Receivables 18,150 14,500
Trade Receivables 46,000 52,000
Cash and Bank Balances 1,29,850 34,500
Total 10,31,000 9,99,000

Liabilities 31/03/2023 31/03/2022

(Rs) (Rs)
Equity Shares Capital 6,80,000 5,00,000

General Reserves 90,000 60,000

Profit and Loss Account 93,000 52,000
Capital Reserve 75,000 -
8% Debentures of Rs 100 each - 3,00,000
Loan from Mr. Andrew - 15,000
Bills Payables 11,000 13,000
Trade Payables 49,000 45,000
Creditors for Equipment 10,500 -
Outstanding Expenses 4,500 3,000
Provision for Taxation 18,000 11,000
Total 10,31,000 9,99,000

Additional Information:
(i) On 1st April, 2022, one of the vehicles was sold for Rs 3,000. No new purchases were made during the
year.
(ii) A part of the total land was sold for Rs 1,25,000 (Cost Rs 1,00,000) and the balance land was revalued.
Capital reserve consists of profit on revaluation of balance land. No new purchases were made during the
year.
(iii) Depreciation provided during the year-
• Furniture and Fixtures Rs 5,000
• Vehicles Rs 2,200

(iv) Interim dividend of 5,000 was paid during the year.

(v) Provision for taxation for the year 2022-2023 was Rs 16,000.
(vi) 8% Debentures were redeemed at par after half year interest payment on 30th September, 2022.
(vii) Part of the long-term investments were sold at a profit of 8,000.
(viii) Interest income received during the year on long-term investment was 6,500.

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You are required to prepare Cash Flow Statement from Operating Activities for the year ended 31st March,
2023 using indirect method. (All workings should form part of the answer) (MAY 2023: 10 Marks)

SOLUTION
Cash Flow Statement of Flora Limited from Operating Activities For the year ended 31st March, 2023
Rs Rs
Net profit before taxation (W.N.1) 92,000
Adjustment: Depreciation on Furniture & Fixtures 5,000
Depreciation on Vehicles 2,200
Profit on sale of land (Rs 125000 - Rs 100000) (25,000)
Loss on sale (Vehicle) 800
Profit on sale of long-term investments (8,000)
Interest received (6,500)
Interest on debentures 12,000
Goodwill written off 13,000 (6,500)
Operating profit before working capital changes 85,500

Increase in Stock in Hand (8,000)

Increase in Bills Receivables (3,650)
Decrease in Trade Receivables 6,000
Decrease in Bills payable (2,000)
Increase in Trade Payables 4,000
Increase in outstanding expenses 1,500 (2,150)
Cash generated from Operations 83,350
Less: Income taxes paid 9,000
Cash flow from Operating activities 74,350

Working Notes:
1) Net Profit before Taxation
Increases in Profit and Loss A/c (93,000-52,000) 41,000
Increases in General Reserve (90,000-60,000) 30,000
Interim dividend Paid 5,000
Transfer – provision for Taxation 16,000
Increase in retained earnings (Net Profit before Taxation) 92,000

2) Provision for Taxation Account

` `
To Bank (Balancing figure) 9,000 By Balance b/d 11,000
To Balance c/d 18,000 By Profit and loss account 16,000
27,000 27,000

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3) Vehicles Account
Particulars (`)
Opening Balance 28,000
Less: Depreciation (2,200)
Less: Closing Balance (22,000)
Book value of vehicle sold 3,800
Less: Sale Value (3,000)
Loss on sale of Vehicle 800

Q26) The following information is provided for Aarambh Limited:

Particulars 31st March 2023 31st March 2024

Profit and Loss a/c 5,400 (Dr.) 37,800

Provision for Taxation 2,21,400 1,35,000
General Reserve 54,000 81,000
12% Debentures 1,18,000 2,91,600
Trade Payables 1,29,600 1,18,800
8% Current Investments 54,000 1,08,000
Property, plant and equipment (Gross) 3,99,600 3,99,600
Accumulated Depreciation 1,29,600 1,62,000
Trade Receivables (Gross) 81,000 2,61,360
Provision for Doubtful Debts 27,000 54,000
Inventories 1,35,000 81,000
Cash and Cash Equivalents 54,00 30,240

Additional information:
(i) Income tax provided during the year Rs 1,62,000.
(ii) New debentures have been issued at the end of current financial year.
(iii) New investments have been acquired at the end of the current financial year.

You are required to calculate net Cash Flow from Operating Activities.

SOLUTION-
Cash Flow from Operating Activities
Rs
Difference between Profit and Loss Account Rs (37,800 + 5,400) 43,200
Add: Transfer to General Reserve (81,000-54,000) 27,000
Add: Adjustment for Provision for taxation 1,62,000
Profit Before tax 2,32,200
Add: Adjustment for Depreciation (Rs 1,62,000 – Rs 1,29,600) 32,400

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Add: Adjustment for provision for doubtful debt (Rs 54,000 – 27,000
Rs 27,000)
Add: Debenture Interest Paid Rs (1,18,800 × 12%) 14,256
Less: Income from Investments (54,000 × 8%) (4,320)
Operating Profit before Working Capital changes 3,01,536
Decrease in Inventories Rs (1,35,000-81,000) 54,000
Increase in Trade receivables Rs (2,61,360-81,000) (1,80,360)
Decrease in Trade payables Rs (1,29,600-1,18,800) (10,800)
Cash generated from operations 1,64,376
Income tax paid (2,48,400)
Net Cash generated from Operating Activities (84,024)

Working Note:
Provision for taxation account

To Cash (Paid) 2,48,400 By Balance b/d 2,21,400

(Balancing figure)
To Balance c/d 1,35,000 By Profit and Loss A/c 1,62,000

3,83,400 3,83,400

Q27)From the following particulars calculate cash flows from Operating activities:

Particulars Rs
Retained earning 17,000
Depreciation 4,000
Loss on Sale of Machinery 3,000
Provision for tax 7,000
Interim Dividend paid during the year 10,000
Dividend paid during the year 8,000
Premium payable on redeemable Preference Shares 2,000
Profit on sale of investment 10,000
Refund of tax 1,000

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Additional Information:

31. 3. 22 31. 3. 23
Rs Rs
Trade Receivable 10,000 12,000
Trade Payable 7,000 15,000
Provision for Tax 4,000 7,000
Prepare Expenses 2,000 1,000
Outstanding Expenses 1,400 1,000
(RTP MAY 2024)

SOLUTION-
Calculation of Cash Flow from Operating Activities
Particulars Amount
Rs
Retained earnings 17,000
Add: Depreciation 4,000
Add: Loss on sale of Machinery 3,000

Add: Premium Payable on redeemable Preference 2,000

Shares
Add: Dividend paid 8,000
Add: Interim dividend paid during the year 10,000
Add: provision for tax made during the current year 7,000
Less: Refund of tax (1,000)
Less: Profit on Sale of Investment (10,000)
Operating Profit before Working Capital Changes 40,000
Add: Decrease in Prepaid Expenses 1,000
Less: Increase in Trade receivable (2,000)
Add: Increase in Trade Payable 8,000
Less: Decrease in Outstanding Expenses (400)
Cash generated from (Net of refund) operation 46,600
Less: Income tax paid (4,000 – 1,000) (3,000)
Net Cash flow operating activities 43,600

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MCQ (HOMEWORK)

Q1. While preparing cash flow statement, conversion of debt to equity

(a) Should be shown as a financing activity.
(b) Should be shown as an investing activity.
(c) Should not be shown as it is a non-cash transaction
(d) Should not be shown as operating activity.

Q2. Which of the following would be considered a ‘cash-flow item from an “investing" activity’?
(a) Cash outflow to the government for payment of taxes.
(b) Cash outflow to purchase bonds issued by another company.
(c) Cash outflow to shareholders as dividends
(d) Cash outflow to make payment to trade payables.

Q3. All of the following would be included in a company’s operating activities except:
(a) Income tax payments
(b) Collections from customers or Cash payments to suppliers
(c) Dividend payments
(d) Office and selling expenses

Q4. Hari Uttam, a stock broking firm, received Rs 1,50,000 as premium for forward contracts entered for
purchase of equity shares. How will you classify this amount in the cash flow statement of the firm?
(a) Operating Activities.
(b) Investing Activities.
(c) Financing Activities.
(d) Non-cash transaction

Q5. As per AS 3 on Cash Flow Statements, cash received by a manufacturing company from sale of shares of
ABC Company Ltd. should be classified as
(a) Operating activity.
(b) Financing activity.
(c) Investing activity.
(d) Non-cash transaction

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Chapter 4 AMALGAMATION OF COMPANIES (AS 14)

• In an amalgamation, two or more companies are combined into one by merger or by one taking
over the other.

Therefore, the term ‘amalgamation’ contemplates two kinds of activities:

• Two or more companies join to form a new company or
• Absorption and blending of one by the other. Thus, amalgamation include absorption.
• The purpose of companies joining together is to secure various advantages such as economies of
large scale production, avoiding competition, increasing efficiency, expansion etc.
• The companies going into liquidation or merged companies are called vendor companies or
transferor companies. The new company which is formed to take over the liquidated companies or
the company with which the transferor company is merged is called transferee or vendee.
• Wherever an undertaking is being carried on by a company and is in substance transferred, not to
an outsider, but to another company consisting substantially of the same shareholders with a view
to its being continued by the transferee company, there is external reconstruction.

Basis Amalgamation Absorption External

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

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TYPES OF AMALGAMATION-
The Institute of Chartered Accountants of India has introduced Accounting Standard -14 (AS 14) on
‘Accounting for Amalgamations’. The standard recognizes two types of amalgamation –
• Amalgamation in the nature of merger is an amalgamation where there is a genuine pooling not
merely of assets and liabilities of the transferor and transferee companies but also of the
shareholders’ interests and of the businesses of the companies.
• Amalgamation in the Nature of Purchase

AS PER AS 14, AMALGAMATION IN THE NATURE OF MERGER IS AN AMALGAMATION WHICH SATISFIES

ALL THE FOLLOWING CONDITIONS:
✓ All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company
✓ No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies. For example, if transferor company is
following straight line method of depreciation, the book value of the assets of the transferor
company will be revised by applying the written down method of depreciation.
✓ Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
✓ The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee company, except that
cash may be paid in respect of any fractional shares
✓ The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.

METHODS OF ACCOUNTING FOR AMALGAMATIONS -

Pooling of Interest Method - Used in case of amalgamation in the nature of merger
Purchase Method – Used in case of Amalgamation in the Nature of Purchase

Goodwill arising on Amalgamation in case of Purchase method should be amortized over 5 years unless
longer period can be justified.

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1. S. Ltd. is absorbed by P. Ltd. S ltd. gives the following information on the date of absorption:
Sundry Assets 13,00,000
Share capital:
2,000 7% Preference shares of ` 100 each (fully paid-up) 2,00,000
5,000 Equity shares of ` 100 each (fully paid-up) 5,00,000
Reserves 3,00,000
6% Debentures 2,00,000
Trade payables 1,00,000

Additional information: P. Ltd. has agreed:

(i) to issue 9% Preference shares of Rs 100 each, in the ratio of 3 shares of P. Ltd. for 4 preference shares in
S. Ltd.
(ii) to issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at Rs 96 in lieu of 6% Debentures in
S. Ltd. which are to be redeemed at a premium of 20%;
(iii) to pay Rs 20 per share in cash and to issue six equity shares of Rs 100 each issued at the market value Rs
125 in lieu of every five shares held in S. Ltd.; and
(iv) to assume the liability to trade payables.
You are required to calculate the purchase consideration.

Solution
The purchase consideration will be
Rs Form
Preference shareholders: 2,000 × 3/4 × 100 1,50,000 9% Pref. shares
Equity shareholders: 5,000 × 20 1,00,000 Cash
5,000 × 6/5 × 125 7,50,000 Equity shares
10,00,000

2. Following is the balance sheet of A Ltd. as on 31st March, 20X1

Particulars Notes ` (000)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 22,50
B Reserves and Surplus 2 9,00
2 Non-current liabilities
A Long-term borrowings 3 7,00
3 Current liabilities
A Trade Payables 5,00
Total 43,50
Assets
1 Non-current assets

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Property, Plant and Equipment 4 32,50

A Non-current investments 5 6,00
B
2 Current assets
Inventories 2,00
a Trade receivables 2,00
b Cash and Cash equivalents 1,00
c Total 43,50

Notes to accounts
1 Share Capital ` in (‘000)
Equity share capital
1,50,000 Equity Shares of ` 10 each 15,00
7,500 14% Preference Shares of ` 100 each 7,50
22,50
2 Reserves and Surplus
General reserve 9,00
3 Long-term borrowings
Secured
15% Debentures 7,00
4 Property, plant and Equipment
Land and Building 32,50
5 Non-current investments
Investments at cost 6,00

B Ltd agreed to take over the assets and liabilities on the following terms and conditions:
(a) Discharge 15% debentures at a premium of 10% by issuing 15% debentures of X Ltd.
(b) PPE at 10% above the book value and investments at par value.
(c) Current assets at a discount of 10% and Current liabilities at book value.
(d) Preference shareholders are discharged at a premium of 10% by issuing 15% preference shares of
Rs.100 each.
(e) Issue 3 equity shares of 10 each for every 2 equity shares in B Ltd. and pay the balance in cash. Calculate
Purchase consideration.

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Solution
Calculation of Purchase Consideration (Net Asset value Method)
PARTICULARS (` in ‘000’s)
Value of assets taken over:
Property, Plant and Equipment 35,75
Non-Current Investments 6,00
Current Assets 4,50
Total Assets (A) 46,25
Less: Liabilities taken over:
15% Debentures 7,70
Current Liabilities 5,00
Total Liabilities (B) 12,70
Purchase consideration (A -B) 33,55
Mode of Purchase Consideration
In the form of 15% Preference shares 8,25
In the form of Equity shares 22,50
In the form of Cash (Balance) 2,80
Total 33,55

3. Let us consider the Balance Sheet of X Ltd. as at 31st March, 20X1:

Particulars Notes ` (000)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 100,00
B Reserves and Surplus 2 12,50
2 Non-current liabilities
A Long-term borrowings 3 40,00
3 Current liabilities
A Trade Payables 20,00
Total 172,50

Assets
1 Non-current assets
A Property, Plant and Equipment 4 105,50
B Non-current investments 5 5,00

2 Current assets
a Inventories 23,00
b Trade receivables 24,00
c Cash and Cash equivalents 15,00
Total 172,50

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Notes to accounts

` in (‘000)
1 Share Capital
Equity share capital
7,50,000 Equity Shares of ` 10 each 75,00
25,000 14% Preference Shares of ` 100 each 25,00
100,00
2 Reserves and Surplus
General reserve 12,50
12,50
3 Long-term borrowings
Secured
14% Debentures 40,00
40,00
4 Property, plant and Equipment
Land and Building 50,00
Plant and machinery 45,00
Furniture 10,50
105,50
5 Non-current investments
Investments at cost 5,00
5,00

Other Information:
(i) Y Ltd. takes over X Ltd. on 10th April, 20X1.
(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing 15% own debentures of
Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by issuing necessary number
of 15% Preference Shares of Y Ltd. (Face value 100 each).
(iv) Intrinsic value per share of X Ltd. is 20 and that of Y Ltd. 30. Y Ltd. will issue equity shares to satisfy the
equity shareholders of X Ltd. on the basis of intrinsic value. However, the entry should be made at par value
only. The nominal value of each equity share of Y Ltd. is 10.

Compute the purchase consideration.

Solution
Computation of Purchase consideration (` in ’000) Form
For Preference Shareholders of X Ltd. 3,000 30,000
15% Preference
shares in Y Ltd.
For equity shareholders of X Ltd. 5,000 5,00,000 Equity
(20/30 × 7,50,000) × ` 10 shares of Y Ltd.
of ` 10 each
Total Purchase consideration 8,000
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4. Neel Ltd. and Gagan Ltd. amalgamated to form a new company on 1.04.20X1. Following is the
Balance Sheet of Neel Ltd. and Gagan Ltd. as at 31.3.20X1:
Particulars Notes Neel Gagan

Equity and Liabilities

1 Shareholders’ funds
A Share capital 7,75,000 8,55,000
2 Current liabilities 6,23,500 5,57,600
Total 13,98,500 14,12,600
Assets
1 Non-current assets
A Property, Plant and Equipment 1 12,35,000 12,54,000
2 Current assets 1,63,500 1,58,600

Total 13,98,500 14,12,600

Notes to accounts:
1 Property, plant and Equipment

Land and Building 7,50,000 6,40,000

Plant and machinery 4,85,000 6,14,000

12,35,000 12,54,000

Following is the additional information:

(i) The assets of Neel Ltd. and Gagan Ltd. are to be revalued as under:
Neel Gagan
` `
Plant and machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000

(ii) The purchase consideration is to be discharged as under:

(a) Issue 24,000 equity shares of ` 25 each fully paid up in the proportion of their profitability in the
preceding 2 years.
(b) Profits for the preceding 2 years are given below:
Neel Gagan
` `
1st year 2,62,800 2,75,125
IInd year 2,12,200 2,49,875
Total 4,75,000 5,25,000

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(c) Issue 12% preference shares of ` 10 each fully paid up at par to provide income equivalent to 8% return
on net assets in the business as on 31.3.20X1 after revaluation of assets of Neel Ltd. and Gagan Ltd.
respectively.
You are required to compute the
(i) Equity and preference shares issued to Neel Ltd. and Gagan Ltd.,
(ii) Purchase consideration.

Solution
(i) Calculation of equity shares to be issued to Neel Ltd. and Gagan Ltd
Profits of Neel Gagan

` `
I year 2,62,800 2,75,125
II year 2,12,200 2,49,875
Total 4,75,000 5,25,000

The total profits- ` 4,75,000+ ` 5,25,000= ` 10,00,000

No. of shares to be issued = 24,000 equity shares in the proportion of the preceding 2 years’ profits
Neel Gagan
24,000 x 475/1000 11,400 equity shares
24,000 x 525/1000 12,600 equity shares

Calculation of 12% Preference shares to be issued to Neel Ltd. and

Gagan Ltd.
Neel Gagan
` `
Net assets (Refer working note) 8,40,000 9,24,000
8% return on Net assets 67,200 73,920
12% Preference shares to be issued 56,000 shares
 100
67,200 = 5,60,000 @ `10 each
 12 
 100 61,600 shares
73,920 = 6,16,000 @ `10 each
 12 

(ii) Total Purchase Consideration

Neel Gagan
` `
Equity shares @ of ` 25 each 2,85,000 3,15,000
12% Preference shares @ of ` 10 each 5,60,000 6,16,000
Total 8,45,000 9,31,000

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Working Note: Calculation of Net assets as on 31.3.20X1

Neel Gagan
` `
Plant and machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000
Current assets 1,63,500 1,58,600
Less: Current liabilities (6,23,500) (5,57,600)
8,40,000 9,24,000

5. Wye Ltd. acquires the business of Zed Ltd. whose balance sheet as at 31st March, 20X1 is as under:
Particulars Notes `
Equity and Liabilities

1 Shareholders’ funds
A Share capital 1 12,00,000
B Reserves and Surplus 2 1,58,000
2 Non-current liabilities
A Long-term borrowings 3 2,00,000
3 Current liabilities
A Trade Payables 1,20,000
B Other current liabilities 12,000
(Interest payable on debentures)

Total 16,90,000
Assets
1 Non-current assets
A Property, Plant and Equipment 4 10,00,000
B Intangible assets 5 2,90,000

2 Current assets
A Inventories 1,50,000
B Trade receivables 1,80,000

C Cash and Cash equivalents 70,000

Total 16,90,000

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Notes to accounts:
`
1 Share Capital
Equity Share capital (` 100 each) 8,00,000
6% Preference Share capital (` 100 each) 4,00,000
12,00,000
2 Reserves and Surplus
Capital reserve 1,00,000
Profit and loss A/c 50,000
Workmen compensation reserve
(Expected liability ` 5,000) 8,000
1,58,000
3 Long-term borrowings
6% Debentures 2,00,000
2,00,000
4 Property, Plant and Equipment
Land and Building 4,00,000
Plant and machinery 6,00,000
10,00,000
5 Intangible assets
Goodwill 2,40,000
Patents 50,000
2,90,000

Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest due on
debentures) and to pay following amounts:
(i) ` 2,00,000 7% Debentures (` 100 each) in Wye Ltd. for the existing debentures in Zed Ltd.; for the
purpose, each debenture of Wye Ltd. is to be treated as worth ` 105.
(ii) For each preference share in Zed Ltd. ` 10 in cash and one 9% preference share of ` 100 each in
Wye Ltd.
(iii) For each equity share in Zed Ltd. ` 20 in cash and one equity share in Wye Ltd. of ` 100 each
having the market value of ` 140.
(iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the extent of ` 10,000.
Actual expenses amounted to ` 12,500.

Wye Ltd. valued Land and building at ` 5,50,000 Plant and Machinery at ` 6,50,000 and patents at `
20,000 of Zed Ltd for the purpose of amalgamation.

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Solution
Purchase Consideration
` Form
(i) Preference Shares: ` 10 per share 40,000 Cash
Preference shares 4,00,000 4,40,000 Preference shares
(ii) Equity shares: ` 20 per share 1,60,000 Cash
8,000 equity shares in
Wye Ltd. @ ` 140 11,20,000 12,80,000 Equity shares
17,20,000

Realization Account
` `
To Sundry Assets 16,20,000 By Sundry Liabilities 3,25,000
To Cash (excess expenses of liquidation) 2,500 By Wye Ltd. 17,20,000
To Preference Shareholders 40,000
To Equity Shareholders A/c -
profit transferred 3,82,500
20,45,000 20,45,000

Cash Account
` `
To Balance b/d 70,000 By Realization 2,500
To Wye Ltd. 2,00,000 By Wye Ltd. 10,000
(consideration for amalgamation)
To Wye Ltd. 10,000 By Debenture-holders 12000
(liquidation expenses reimbursed) By Preference shareholder 40000
By Equity Shareholder (B/F) 215500
280000 280000

6. The following Balance Sheets are given as at 31st March, 20X1:

Particulars ` Best Ltd. ` Better Ltd.
(in lakhs) (in lakhs)

Equity and Liabilities

1 Shareholders’ funds
A Share capital 20 10
(shares of ` 100 each, fully pad)
B Reserves and Surplus 10 8
2 Current liabilities 20 2
Total 50 20

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Assets
1
Non-current assets
A 25 15
Property, Plant and Equipment
B 5 -
Non-current investments
2 20 5
Current assets
50 20
Total

The following further information is given:

(a) Better Limited issued bonus shares on 1st April, 20X1, in the ratio of one share for every two held, out of
Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s Balance
Sheet, the consideration taking the form of allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be ` 150 and the shares in Better Ltd. were valued at `
100 after the issue of the bonus shares. The allotment of shares is to be made on the basis of these values.
(d) Liabilities of Better Ltd., included ` 1 lakh due to Best Ltd., for purchases from it, on which Best Ltd.,
made profit of 25% of the cost. The goods of ` 50,000 out of the said purchases, remained in stock on the
date of the above Balance Sheet.

Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best Ltd.,
and prepare the Balance Sheet as at 1st April, 20X1 after the takeover.

Solution
Journal of Best Ltd.

Dr. Cr.

20X1 ` `

Apr. 1 Property, Plant and Equipment A/c Dr. 15,00,000

Current Assets A/c Dr. 5,00,000

To Liabilities A/c 2,00,000

To Liquidator of Better Ltd. 15,00,000

To Capital Reserve A/c 3,00,000

(Assets & Liabilities of Better Ltd. taken over

for an agreed purchase consideration of `
15,00,000 as per agreement dated .... )

Liquidator of Better Ltd. Dr. 15,00,000

To Share Capital A/c 10,00,000

To Securities Premium A/c 5,00,000

(Discharge of Purchase consideration by the

issue of equity shares of ` 10,00,000 at a
premium of ` 50 per share as per agreement)

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Trade payables A/c Dr. 1,00,000

To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in its creditors taken over, cancelled
against own Trade receivables)

Capital Reserve A/c Dr. 10,000

To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current assets of Better Ltd. written off to
Reserve Account. 20% on sale value of `50,000 shall be eliminated as unrealized
profit)

Working Note :
Calculation of Purchase consideration:
Issued Capital of Better Ltd. (after bonus issue) at ` 100 per share ` 15,00,000

Purchase consideration has been discharged by Best Ltd. by the issue of shares for ` 10,00,000 at a premium
of ` 5,00,000. This gives the value of ` 150 per share.

Balance Sheet of Best Ltd. (After absorption)

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 17,90,000
2 Current liabilities 21,00,000
Total 68,90,000
Assets
1 Non-current assets
a Property, Plant and Equipment 3 40,00,000
b Non-current investments 5,00,000
2 Current assets 23,90,000
Total 68,90,000

Notes to accounts
`
1 Share Capital
Equity share capital
Issued & Subscribed
30,000 shares of ` 100 (of the above 10,000
shares have been issued for consideration 30,00,000
other than cash)

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Total 30,00,000
2 Reserves and Surplus
Capital Reserve (3,00,000 – 10,000) 2,90,000
Securities Premium 5,00,000
Other reserves and surplus 10,00,000
Total 17,90,000
3 Property, Plant and Equipment
PPE 25,00,000
Acquired during the year 15,00,000 40,00,000
Total 40,00,000

7. K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two
companies as at the date of amalgamation was as under:
Particulars Notes ` K Ltd. ` L Ltd.
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 12,00,000 6,00,000
B Reserves and Surplus 2 3,71,375 1,97,175

2 Non-current liabilities

A Long-term borrowings 3 2,00,000 2,00,000

3 Current liabilities

A Trade Payables 1,00,000 2,10,000

Total 18,71,375 12,07,175

Assets

1 Non-current assets

A Property, Plant and Equipment 4 11,30,000 8,20,000

B Intangible assets 5 80,000 -

2 Current assets

A Inventories 2,25,000 1,40,000

B Trade receivables 2,75,000 1,75,000

C Cash and Cash equivalents 6 1,61,375 72,175

Total 18,71,375 12,07,175

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Notes to accounts
1 Share Capital K Ltd. L Ltd.
Equity shares of ` 100 each 8,00,000 3,00,000
7% Preference Shares of ` 100 each 4,00,000 3,00,000
12,00,000 6,00,000
2 Reserves and Surplus
General reserve - 1,00,000
Profit and loss account 3,71,375 97,175
3,71,375 1,97,175
3 Long-term borrowings
5% Debentures 2,00,000 -
Secured loan - 2,00,000
2,00,000 2,00,000

4 Property, plant and Equipment

Land and Building 4,50,000 3,00,000
Plant and machinery 6,20,000 5,00,000
Furniture and fittings 60,000 20,000
11,30,000 8,20,000
5 Intangible assets
Goodwill 80,000 -
80,000 -
6 Cash and Cash Equivalents
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
1,61,375 72,175

The terms of amalgamation are as under:

(A) (1) The assumption of liabilities of both the Companies.
(2) Issue of 5 Preference shares of ` 20 each in LK Ltd. @ ` 18 paid up at premium of ` 4 per share for each
preference share held in both the Companies.
(3) Issue of 6 Equity shares of ` 20 each in LK Ltd. @ ` 18 paid up at a premium of ` 4 per share for each
equity share held in both the Companies. In addition, necessary cash should be paid to the Equity
Shareholders of both the Companies as is required to adjust the rights of shareholders of both the
Companies in accordance with the intrinsic value of the shares of both the Companies.
(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5%
debentures in K Ltd. at a discount of 5% after takeover.

(B) (1) The assets and liabilities are to be taken at book values inventory and trade receivables for which
provisions at 2% and 2 ½ % respectively to be raised.
(2) The trade receivables of K Ltd. include ` 20,000 due from L Ltd

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(C) The LK Ltd. is to issue 15,000 new equity shares of ` 20 each, ` 18 paid up at premium of ` 4 per share so
as to have sufficient working capital.
Prepare ledger accounts in the books of K Ltd. and L Ltd. to close their books.

Solution
Books of K Ltd.
Realization Account
` `
To Goodwill 80,000 By 5% Debentures 2,00,000

To Land & Building 4,50,000 By Trade payables 1,00,000

To Plant & Machinery 6,20,000 By LK Ltd. 15,60,000
To Furniture & Fitting 60,000 (Purchase consideration)
To Trade receivables 2,75,000 By Equity shareholders A/c 51,375
To Stores & inventory 2,25,000 (loss)
To Cash at Bank 1,20,000
To Cash in hand 41,375
To Preference shareholders
(excess payment) 40,000
19,11,375 19,11,375

Equity Shareholders Account

` `
To Realization A/c (loss) 51,375 By Share capital 8,00,000
To Equity Shares in LK Ltd. 10,56,000 By Profit & Loss A/c 3,71,375
To Cash 64,000
11,71,375 11,71,375

7% Preference Shareholders Account

` `
To Preference Shares in LK Ltd. 4,40,000 By Share capital 4,00,000
By Realization A/c 40,000
4,40,000 4,40,000

LK Ltd. Account
` `
To Realization A/c 15,60,000 By Equity Shares in LK Ltd.
For Equity 10,56,000
Pref. 4,40,000 14,96,000
By Cash 64,000
15,60,000 15,60,000

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Books of L Ltd.
Realization Account
` `
To Land & Building 3,00,000 By Trade payables 2,10,000
To Plant & Machinery 5,00,000 By Secured loan 2,00,000
To Furniture & Fittings 20,000 By LK Ltd. (Purchase
To Trade receivables 1,75,000 consideration) 7,90,000
To Inventory of stores 1,40,000 By Equity shareholders A/c—
To Cash at bank 55,000 Loss 37,175
To Cash in hand 17,175
To Pref. shareholders 30,000
12,37,175 12,37,175

Equity Shareholders Account

` `
To Equity shares in LK Ltd. 3,96,000 By Share Capital 3,00,000
To Realization 37,175 By Profit & Loss A/c 97,175
To Cash 64,000 By Reserve 1,00,000
4,97,175 4,97,175

7% Preference Shareholders Account

` `
To prefrence shares in LK Ltd. 3,30,000 By Share Capital 3,00,000
By Realisation a/c 30,000

3,30,000 3,30,000

LK Ltd. Account
` `
To Realization A/c 7,90,000 By Equity shares in LK Ltd.
For Equity 3,96,000
Preference 3,30,000 7,26,000
By Cash 64,000
7,90,000 7,90,000

Working Notes:
(i) Purchase consideration

K Ltd. L Ltd.
` `
Payable to preference shareholders:
Preference shares at ` 22 per share 4,40,000 3,30,000
Equity Shares at ` 22 per share 10,56,000 3,96,000
Cash [See W.N. (ii)] 64,000 64,000

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15,60,000 7,90,000
(ii) Value of Net Assets

K Ltd. L Ltd.
` `
Goodwill 80,000
Land & Building 4,50,000 3,00,000
Plant & Machinery 6,20,000 5,00,000
Furniture & Fittings 60,000 20,000
Trade receivables less 2.5% 2,68,125 1,70,625
Inventory less 2% 2,20,500 1,37,200
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
18,60,000 12,00,000

Less : Debentures 2,00,000 –

Trade payables 1,00,000 2,10,000
Secured Loans – (3,00,000) 2,00,000 (4,10,000)
15,60,000 7,90,000
Payable in shares 14,96,000 7,26,000
Payable in cash 64,000 64,000

8. Consider the following balance sheets of X Ltd. and Y Ltd. as at 31st March, 20X1:

Particulars Notes ` X Ltd ` Y Ltd.

(‘000) (‘000)

Equity and Liabilities

1 Shareholders’ funds

A Share capital 1 72,00 47,00

B Reserves and Surplus 2 15,50 10,50

2 Non-current liabilities

A Long-term borrowings 3 5,00 3,50

3 Current liabilities

A Trade Payables 4,50 3,50

B Other current liabilities 2,00 1,50

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Total 99,00 66,00

Assets
1 Non-current assets
A Property, Plant and 4 63,25 36,00

Equipment
B Non-current investments 5 7,00 5,00

2 Current assets

A Inventories 12,50 9,50

B Trade receivables 9,00 10,30

C Cash and Cash equivalents 7,25 5,20

Total 99,00 66,00

Notes to accounts
X Ltd (‘000) Y Ltd (‘000)
1 Share Capital
Equity share capital (` 10 each) 50,00 30,00
14% Preference Shares capital ` 100 each 22,00 17,00
72,00 47,00
2 Reserves and Surplus
General reserve 5,00 2,50
Export profit reserve 3,00 2,00
Investment allowance reserve - 1,00
Profit and loss account 7,50 5,00
15,50 10,50
3 Long-term borrowings
13% Debentures of ` 100 each 5,00 3,50
5,00 3,50
4 Property, Plant and Equipment
Land and Building 25,00 15,50
Plant and machinery 32,50 17,00
Furniture 5,75 3,50
63,25 36,00
5 Non-current investments
Investments at cost 7,00 5,00
7,00 5,00

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X Ltd. takes over Y Ltd. on 1st April, 20X1. X Ltd. discharges the purchase consideration as below:
(i) Issued 3,50,000 equity shares of ` 10 each at par to the equity shareholders of Y Ltd.
(ii) Issued 15% preference shares of ` 100 each to discharge the preference shareholders of Y Ltd. at 10%
premium.

The debentures of Y Ltd. will be converted into equivalent number of debentures of X Ltd. The statutory
reserves of Y Ltd. are to be maintained for 2 more years.

Show the (i) Journal entries and (ii) Balance sheet of X Ltd. after amalgamation on the assumption that:
(a) the amalgamation is in the nature of merger.
(b) the amalgamation is in the nature of purchase.

Solution
(a) Amalgamation in the nature of merger:
(i) Journal Entries in the Books of X Ltd.
Dr. Cr.
` `
Business Purchase Dr. 53,70,000
To Liquidator of Y Ltd. 53,70,000
(Consideration payable for business taken over from Y
Ltd)
Sundry Assets of Y Ltd Dr. 66,00,000
General Reserve (Related to X Ltd) 4,20,000
To Sundry Liabilities of Y Ltd 8,50,000
To Export profit Reserve 2,00,000
To Investment allowance Reserve 1,00,000
To Profit & Loss 5,00,000
To Business Purchase 53,70,000
(Incorporation of various assets and liabilities taken
over from Y Ltd. at book values and difference of share
capital and purchase consideration being adjusted with
free Reserves)

Liquidator of Y Ltd. Dr. 53,70,000

To Equity Share Capital 35,00,000
To 15% Preference Share Capital 18,70,000
(Discharge of consideration for Y Ltd.’s business)
Sundry Liabilities in Y Ltd (13% Debentures in Y Ltd.) Dr. 3,50,000
To 13% Debentures 3,50,000
(Allotment of 13% Debentures to debenture holders of
Y Ltd. at Par)

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Balance Sheet of X Ltd.

Particulars Notes ` in '000
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,570
b Reserves and Surplus 2 1,930
2 Non-current liabilities
a Long-term borrowings 3 850
3 Current liabilities
a Trade Payables 800
b Other current liabilities 350
Total 16,500
Assets
1 Non-current assets
a Property, Plant and Equipment 4 9,925
b Non-current investments 1,200
2 Current assets
a Inventories 2,200
b Trade receivables 1,930
c Cash and cash equivalents 1,245
Total 16,500

Notes to accounts
` in ‘000
1 Share Capital
Equity share capital
8,50,000 Equity Shares of ` 10 each 8,500
Preference share capital
18,700, 15% Preference Shares of ` 100 each 1,870
22,000, 14% Preference Shares of ` 100 each 2,200
Total 12,570
2 Reserves and Surplus
General Reserve of X Ltd. 500
Add: General reserve of Y Ltd. 250 750
Less: Adjustment for amalgamation* (670) 80
Export Profit Reserve of X Ltd. 300
Add: Export Profit Reserve of Y Ltd. 200 500
Investment Allowance Reserve 100
Profit & Loss A/c of X Ltd. 750

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Add: Profit & Loss A/c of Y Ltd. 500 1,250

Total 1,930
3 Long-term borrowings
Secured
8,500 13% Debentures of ` 100 each 850
Total 850
4 Property, Plant and Equipment
Land & Buildings 4,050
Plant & Machinery 4,950
Furniture & Fittings 925
Total 9,925

Amalgamation in the nature of purchase:

Journal Entries in the Books of X Ltd.

Dr. Cr.
` `
Business Purchase Dr. 53,70,000

To Liquidator of Y Ltd. 53,70,000

(Consideration payable for business taken over

from Y Ltd)

Sundry Assets of Y Ltd Dr. 66,00,000

To Sundry Liabilities of Y Ltd 8,50,000

To Capital Reserve 3,80,000
To Business Purchase 53,70,000

(Incorporation of various assets and liabilities taken

over from Y Ltd. at book values and difference of
Net assets and purchase consideration being
credited to Capital reserve)

Liquidator of Y Ltd. Dr. 53,70,000

To Equity Share Capital 35,00,000

To 15% Preference Share Capital 18,70,000

(Discharge of consideration for Y Ltd.’s business)

13% Debentures in Y Ltd. Dr. 3,50,000

To 13% Debentures 3,50,000

(Allotment of 13% Debentures to debenture holders

of Y Ltd. at Par)

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Balance Sheet of X Ltd.

Particulars Notes ` in'000
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,570
b Reserves and Surplus 2 1,930
2 Non-current liabilities
a Long-term borrowings 3 850
3 Current liabilities
a Trade Payables 800
b Other current liabilities 350
Total 16,500
Assets
1 Non-current assets
a Property, Plant and Equipment 4 9,925
b Non-current investments 1,200

2 Current assets
a Inventories 2,200
b Trade receivables 1,930
c Cash and cash equivalents 1,245
Total 16,500

Notes to accounts
` in'000
1 Share Capital
Equity share capital
8,50,000 Equity Shares of ` 10 each 8,500
Preference share capital
18,700, 15% Preference Shares of ` 100 each 1,870
22,000, 14% Preference Shares of ` 100 each 2,200
Total 12,570

2 Reserves and Surplus

Capital Reserve 380
General Reserve 500
Amalgamation adjustment reserve (300)
Export Profit Reserve 500
Investment Allowance Reserve 100
Surplus (Profit & Loss A/c) 750
Total 1,930

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3 Long-term borrowings
Secured
8,500 13% Debentures of ` 100 each 850
Total 850
4 Property, Plant and Equipment
Land & Buildings 4,050
Plant & Machinery 4,950
Furniture & Fittings 925
Total 9,925

Workings Notes:
Capital Reserve arising on Amalgamation:
(A) Net Assets taken over: ` (’000) ` (’000)
Sundry Assets 66,00
Less: 13% Debentures 3,50
Trade payables 3,50
Other current liabilities 1,50 (8,50)
57,50
(B) Purchase consideration:
To Equity Shareholders of Y Ltd. 35,00
To Preference Shareholders of Y Ltd. 18,70
53,70
(C) Capital Reserve (A – B) 3,80

9. The following are the Balance Sheets of P Ltd. and Q Ltd. as at 31st March, 20X1:
Particulars Notes ` P Ltd ` Q Ltd
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 8,00,000 4,00,000
B Reserves and Surplus 3,00,000 2,00,000
2 Non-current liabilities
A Long-term borrowings 2 2,00,000 1,50,000
3 Current liabilities
A Trade Payables 2,50,000 1,50,000
Total 15,50,000 9,00,000
Assets
1 Non-current assets
A Property, Plant and Equipment 7,00,000 2,50,000
B Non-current investments 80,000 80,000
2 Current assets
A Inventories 2,40,000 3,20,000
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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

B Trade receivables 4,20,000 2,10,000

C Cash and Cash equivalents 1,10,000 40,000
Total 15,50,000 9,00,000

Notes to accounts
P Ltd. Q Ltd.
1 Share Capital
Equity shares of ` 10 each 6,00,000 3,00,000
10% Preference Shares of ` 100 each 2,00,000 1,00,000
8,00,000 4,00,000
2 Long term borrowings
12% Debentures 2,00,000 1,50,000
2,00,000 1,50,000

Details of Trade receivables and trade payables are as under:

P Ltd. (`) Q Ltd. (`)
Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
4,20,000 2,10,000
Trade payables
Sundry Creditors 2,20,000 1,25,000
Bills Payable 30,000 25,000
2,50,000 1,50,000

Property, plant and equipment of both the companies are to be revalued at 15% above book value. Both
the companies are to pay 10% Equity dividend, but Preference dividend having been already paid.

After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms:
(i) 8 Equity Shares of ` 10 each will be issued by P Ltd. at par against 6 shares of Q Ltd.
(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of 10% Preference Shares of
` 100 each at par in P Ltd.
(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued at a
discount of 10%.
(iv) ` 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry Creditors of Q Ltd. include `
10,000 due to P Ltd.
(v) Inventory in Trade and Debtors are taken over at 5% lesser than their book value by P Ltd.

Prepare:
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd.

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Solution
(a) Journal Entries in the Books of P Ltd.
Dr. Cr.
` `
Property, Plant and Equipment Dr. 1,05,000
To Revaluation Reserve 1,05,000
(Revaluation of PPE at 15% above book value)
Reserve and Surplus Dr. 60,000
To Equity Dividend 60,000
(Declaration of equity dividend @ 10%)
Equity Dividend Dr. 60,000
To Bank Account 60,000
(Payment of equity dividend)
Business Purchase Account Dr. 4,90,000
To Liquidator of Q Ltd. 4,90,000
(Consideration payable for the business taken over from
Q Ltd.)
Property, Plant and Equipment (115% of ` 2,50,000) Dr. 2,87,500
Inventory (95% of ` 3,20,000) Dr. 3,04,000
Debtors Dr. 1,90,000
Bills Receivable Dr. 20,000
Investment Dr. 80,000
Cash at Bank Dr. 10,000
(` 40,000 –` 30,000 dividend paid)
To Provision for Bad Debts (5% of ` 1,90,000) 9,500
To Sundry Creditors 1,25,000
To 12% Debentures in Q Ltd. 1,62,000
To Bills Payable 25,000

To Business Purchase Account 4,90,000

To Capital Reserve (Balancing figure) 80,000

(Incorporation of various assets and liabilities taken over

from Q Ltd. at agreed values and difference of net assets
and purchase consideration being credited to capital
reserve)

Liquidator of Q Ltd. Dr. 4,90,000

To Equity Share Capital 4,00,000

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

To 10% Preference Share Capital 90,000

(Discharge of consideration for Q Ltd.’s business)

12% Debentures in Q Ltd. (` 1,50,000 × 108%) Dr. 1,62,000

Discount on Issue of Debentures Dr. 18,000

To 12% Debentures 1,80,000

(Allotment of 12% Debentures to debenture holders of Q

Ltd. at a discount of 10%)

Sundry Creditors of Q Ltd. Dr. 10,000

To Sundry Debtors of P Ltd. 10,000

(Cancellation of mutual owing)

Goodwill Dr. 30,000

To Bank 30,000

(Being liquidation expenses reimbursed to Q Ltd.)

Capital Reserve Dr. 30,000

To Goodwill 30,000

(Being goodwill set off)

(b) Statement of Consideration payable by P Ltd. for 30,000 shares (payment method)
Shares to be allotted 30,000 / 6  8 = 40,000 shares of P Ltd.
(i) Issued 40,000 shares of ` 10 each i.e. ` 4,00,000

(ii)For 10% preference shares, to be paid at 10% discount

` 1,00,000×90 / 100= ` 90,000
Consideration amount [(i) + (ii)] ` 4,90,000

10. The financial position of two companies Hari Ltd. and Vayu Ltd. as at 31st March, 20X1 was as
under:
Particulars Notes Hari Ltd. Vayu Ltd.
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,00,000 4,00,000
B Reserves and Surplus 2 70,000 70,000
2 Non-current liabilities
A Long term provisions 3 50,000 20,000
3 Current liabilities
A Trade Payables 1,30,000 80,000

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Total 13,50,000 5,70,000

Assets
1 Non-current assets
A Property, Plant and Equipment 4 8,00,000 2,50,000
B Intangible assets 5 50,000 25,000

2 Current assets
A Inventories 2,50,000 1,75,000
B Trade receivables 2,00,000 1,00,000
C Cash and Cash equivalents 50,000 20,000
Total 13,50,000 5,70,000

Notes to accounts
Hari Ltd. Vayu Ltd.
1 Share Capital
Equity shares of ` 10 each 10,00,000 3,00,000
9% Preference Shares of ` 100 each 1,00,000 --
10% Preference Shares of ` 100 each -- 1,00,000
11,00,000 4,00,000
2 Reserves and Surplus
General reserve 70,000 70,000
70,000 70,000
3 Long term Provisions
Retirement gratuity fund 50,000 20,000
50,000 20,000
4 Property, plant and Equipment
Land and Building 3,00,000 1,00,000
Plant and machinery 5,00,000 1,50,000
8,00,000 2,50,000
5 Intangible assets
Goodwill 50,000 25,000
50,000 25,000

Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of Hari
Ltd.
(b) Goodwill of Vayu Ltd. is valued at ` 50,000, Buildings are valued at ` 1,50,000 and the Machinery at `
1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
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(d) Equity Shareholders of Vayu Ltd. will be issued necessary Equity Shares @ 5% premium.

Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition entries in the
books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31st March, 20X1.

Solution
In the Books of Vayu Ltd. Realization Account
` `

To Sundry Assets 5,70,000 By Retirement 20,000

Gratuity Fund

To Preference Shareholders By Trade payables 80,000

(Premium on
Redemption) 10,000

To Equity Shareholders By Hari Ltd. (Purchase 5,30,000

(Profit on Realization) 50,000 Consideration) ____ _

6,30,000 6,30,000

Equity Shareholders Account

` `

To Equity Shares of Hari 4,20,000 By Share Capital 3,00,000

Ltd.

By General Reserve 70,000

By Realization
Account
(Profit on
____ _ realization) 50,000

4,20,000 4,20,000

Preference Shareholders Account

` `
To 9% Preference Shares of 1,10,000 By Preference Share 1,00,000
Hari Ltd. Capital
By Realization
Account
(Premium on
Redemption of
Preference
____ Shares) 10,000
1,10,000 1,10,000

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Hari Ltd. Account

` `
To Realization Account 5,30,000 By 9% Preference Shares 1,10,000
____ _ By Equity Shares 4,20,000
5,30,000 5,30,000

In the Books of Hari Ltd.

Journal Entries
Dr. Cr.
` `
Business Purchase A/c Dr. 5,30,000

To Liquidators of Vayu Ltd. Account 5,30,000

(Being business of Vayu Ltd. taken over)

Goodwill Account Dr. 50,000

Building Account Dr. 1,50,000

Machinery Account Dr. 1,60,000

Inventory Account Dr. 1,57,500

Trade receivables Account Dr. 1,00,000

Bank Account Dr. 20,000

To Retirement Gratuity Fund Account 20,000

To Trade payables Account 80,000

To Provision for Doubtful Debts Account 7,500

To Business Purchase A/c 5,30,000

(Being Assets and Liabilities taken over as per

agreed valuation).

Liquidators of Vayu Ltd. A/c Dr. 5,30,000

To 9% Preference Share Capital A/c 1,10,000

To Equity Share Capital A/c 4,00,000

To Securities Premium A/c 20,000

(Being Purchase Consideration satisfied as

above).

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Balance Sheet of Hari Ltd. (after absorption) as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 16,10,000
B Reserves and Surplus 2 90,000
2 Non-current liabilities
A Long-term provisions 3 70,000
3 Current liabilities
A Trade Payables 2,10,000
Total 19,80,000
Assets
1 Non-current assets
A Property, Plant and Equipment 4 11,10,000
B Intangible assets 5 1,00,000
2 Current assets
A Inventories 4,07,500
B Trade receivables 6 2,92,500
C Cash and cash equivalents 70,000
Total 19,80,000

Notes to accounts
`
1 Share Capital
Equity share capital
1,40,000 Equity Shares of ` 10 each fully 14,00,000
paid (Out of above 40,000 Equity Shares
were issued in consideration other than for
cash)

Preference share capital

2,100 9% Preference Shares of ` 100 each 2,10,000
(Out of above 1,100 Preference Shares were
issued in consideration other than for cash)
Total 16,10,000
2 Reserves and Surplus
Securities Premium 20,000
General Reserve 70,000
Total 90,000

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3 Long-term provisions
Retirement Gratuity fund 70,000
Total 70,000
4 Property, Plant and Equipment
Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
5 Intangible assets
Goodwill 1,00,000
6 Trade receivables 3,00,000
Less: Provision for Doubtful Debts 7,500
2,92,500

Working Notes:
Purchase Consideration: `
Goodwill 50,000

Building 1,50,000

Machinery 1,60,000

Inventory 1,57,500

Trade receivables 92,500

Cash at Bank 20,000
6,30,000
Less: Liabilities:
Retirement Gratuity Fund (20,000)
Trade payables (80,000)
Net Assets/ Purchase Consideration 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd. to be satisfied by issue of
40,000 Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000

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11. The following are the Balance Sheets of A Ltd. and B Ltd. as at 31.3.20X1:
Particulars Notes ` A Ltd ` B Ltd
(in‘000) (in’000)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,000 1,000
B Reserves and Surplus 2 1,000 (800)
2 Non-current liabilities
A Long-term borrowings 3 750 450
3 Current liabilities
A Trade Payables 300 300
B Short term Borrowings –
Bank overdraft -- 50
Total 4,050 1,000

Assets
1 Non-current assets
A Property, Plant and Equipment 2,700 850
B Non-current investments 700 --
2 Current assets
A Trade receivables 400 150
B Cash and Cash equivalents 250 --
(cash at bank)
Total 4050 1000

Notes to accounts
1 Share capital A Ltd. (‘000) B Ltd. (‘000)

Equity shares of ` 100 each 2000 1000

2000 1000

2 Reserves and Surplus

General reserve 1000 --

Profit and loss A/c (debit balance) -- (800)

1000 (800)

3 Long term borrowings

10% debentures 500 --

Loan from banks 250 450

750 450

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B Ltd. has acquired the business of A Ltd. The following scheme of merger was approved:
(i) Banks agreed to waive off the loan of ` 60 thousands of B Ltd.
(ii) B Ltd. will reduce its shares to ` 10 per share and then consolidate 10 such shares into one share of ` 100
each (new share).
(iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of every share held in A Ltd.
(iv) Trade payables of B Ltd. includes ` 100 thousands payable to A Ltd.

Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after merger.

Solution
Calculation of purchase consideration
One share of B Ltd. will be issued in exchange of every
share of A Ltd. (i.e. 20,000 equity shares of B Ltd. will be
issued against 20,000 equity shares of A Ltd.) 20,000 shares

Journal Entries in the books of B Ltd.

Date (` in
thousands)
20X1 Dr. Cr.
March,31 Loan from bank A/c Dr. 60
To Capital reduction A/c 60
(Being loan from bank waived off to the
extent of ` 60 thousand)
Equity share capital A/c (` 100) Dr. 1,000
To Equity share capital A/c (` 10) 100
To Capital reduction A/c 900
(Being equity shares of ` 100 each
reduced to ` 10 each)

Equity share capital A/c (` 10) Dr. 100

To Equity share capital A/c (` 100 100
each)
(Being 10 equity shares of ` 10 each
consolidated to one share of ` 100 each)

Capital reduction A/c Dr. 960

To Profit and loss A/c 800
To Capital reserve A/c 160

(Being accumulated losses set off against

reconstruction A/c and balance
transferred to capital reserve account)

Property, plant and equipment A/c Dr. 2,700

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Investment A/c Dr. 700

Trade receivables A/c Dr. 400

Cash at bank A/c Dr. 250
To Trade payables A/c 300

To Loans from bank A/c 250

To 10% Debentures A/c 500
To Liquidator of A Ltd. A/c 2,000

To Reserves A/c 1,000

(Being assets, liabilities and reserves
taken over under pooling of interest
method and amount due to Liquidator)

Liquidator of A Ltd. A/c Dr. 2,000

To Equity share capital A/c 2,000
(Being payment made to liquidators of A
Ltd. by allotment of 20,000 new equity
shares)

Trade payables A/c Dr. 100

To Trade receivables A/c 100
(Being mutual owing cancelled)

Balance Sheet of B Ltd. after merger as at 31.3.20X1

Particulars Notes ` in ‘000
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 2,100
b Reserves and Surplus 2 1,160
2 Non-current liabilities
a Long term borrowings 3 1,140
3 Current liabilities
a Trade payables 500
b Short term borrowings 4 50
Total 4,950
Assets
1 Non-current assets
a Property, Plant and Equipment 3,550

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b Non-current investments 700

2 Current assets
a Trade receivables 450
b Cash and cash equivalents 250
Total 4,950

Notes to accounts

` in ‘000
1 Share Capital
21,000, Equity shares of ` 100 each fully paid 2,100
(Out of the above, 20,000 shares have been
issued for consideration other than cash)

2 Reserves and Surplus

Capital reserve 160
General reserve 1,000
Total 1,160
3 Long Term Borrowings
10% Debentures 500
Loan from Bank (250+450-60) 640 1,140
4 Short term borrowings
Bank overdraft 50

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12. The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March, 20X1:
Particulars Notes ` Yes Ltd ` No Ltd
(in crores) (in crores)

Equity and Liabilities

1 Shareholders’ funds

A Share capital 1 12 5

B Reserves and Surplus 88 10

2 Non-current liabilities

A Long term borrowings 2 -- 10

3 Current liabilities 33 15

Total 133 40

Assets

1 Non-current assets

A Property, Plant and Equipment 3 20 6

B Non-current investments 4 13 --

2 Current assets 100 34

Total 133 40

Notes of accounts
Yes Ltd. No Ltd.
1 Share Capital
Equity share capital
Authorized share capital 25 5
Issued and subscribed:
Equity shares of ` 10 each fully 12 5
paid
12 5
2 Long term borrowings
Unsecured loan from Yes -- 10
Ltd.

-- 10
3 Property, Plant and
Equipment
Gross value 70 30

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Depreciation (50) (24)

20 6
4 Non-current investments
30 lakhs equity shares of ` 10 3 --
each
Long term loan to No Ltd. 10 --
13 --

On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity share of Yes Ltd. issued
at a premium of ` 2 per share for every five equity shares held by them in No Ltd. The necessary approvals
are obtained.

You are asked to pass journal entries in the books of the two companies to give effect to the above if the
amalgamation is in the nature of merger.

13. The following are the Balance Sheets of X Ltd. and Y Ltd :
Particulars Notes ` X Ltd. ` Y Ltd.
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,00,000 50,000
B Reserves and Surplus 2 10,000 (10,000)
2 Non-current liabilities
A Long term borrowings 3 -- 15,000
3 Current liabilities
A Trade Payables 25,000 5,000
Total 135,000 60,000
Assets
1 Non-current assets
A Property, Plant and Equipment 1,20,000 60,000
B Non-current investments 4 15,000 --
Total 135,000 60,000

Notes to accounts
1 Share Capital X Ltd. Y Ltd.
Equity share capital 1,00,000 50,000
1,00,000 50,000
2 Reserves and Surplus
Profit and loss A/c 10,000 --
Profit and loss A/c (debit balance) -- (10,000)

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10,000 (10,000)
3 Long term borrowings
Loan from X Ltd. -- 15,000
4 Non-current investments
Loan to Y Ltd. 15,000 --
15,000 --

A new company XY Ltd. is formed to acquire the sundry assets and trade payables of X Ltd. and Y Ltd. and
for this purpose, the sundry assets of X Ltd. are revalued at ` 1,00,000. The debt due to X Ltd. is also to be
discharged in shares of XY Ltd.

Show the Ledger Accounts to close the books of X Ltd.

SOLUTION-

Books of X Ltd.
Realization Account
` `
To Sundry Assets 1,20,000 By Trade payables 25,000
By XY Ltd. (Purchase consideration) 75,000
By Shareholders (Loss on realization) 20,000
1,20,000 1,20,000

Shareholders Account
` `
To Realization Account (Loss) 20,000 By Equity Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000

Loan Y Ltd.
` `
To Balance b/d 15,000 By Shares in XY Ltd. 15,000

Shares in XY Ltd.
` `
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000

XY Ltd.
` `
To Realization Account 75,000 By Shares in XY Ltd. 75,000

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

14. Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a new
company named Super Fast Express Ltd. The balance sheets of both the companies were as under:

Particulars Notes Super Fast

Express Express
Ltd. Ltd.
` `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 20,00,000 10,00,000
B Reserves and Surplus 2 1,00,000 2,60,000
2 Non-current liabilities
A Long term provisions 3 1,00,000 --

2 Current liabilities
A Trade Payables 60,000 40,000
Total 22,60,000 13,00,000
Assets
1 Non-current assets
A Property, Plant and 4 14,00,000 11,00,000
Equipment
B Intangible assets 5 -- 1,00,000
2 Current assets
A Inventories 3,00,000 40,000
B Trade receivables 2,40,000 40,000
C Cash and Cash equivalents 6 3,20,000 20,000
Total 22,60,000 13,00,000

Notes to accounts
Super Express Fast Express
Ltd. ` Ltd.`
1 Share Capital
Equity shares of ` 100 each 20,00,000 10,00,000
2 Reserves and Surplus
Insurance reserve 1,00,000 --
Employee profit sharing reserve -- 60,000
Reserve account -- 1,00,000
Surplus -- 1,00,000

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1,00,000 2,60,000
3 Long term provisions
Provident fund 1,00,000 --
Total 1,00,000 --
4 Property, Plant and Equipment
Land and Building 10,00,000 6,00,000

Plant and machinery 4,00,000 5,00,000

14,00,000 11,00,000
5 Intangible assets
Goodwill -- 1,00,000
-- 1,00,000
6. Cash and Cash Equivalents
Cash at Bank 2,20,000 10,000
Cash in hand 1,00,000 10,000
3,20,000 20,000

The assets and liabilities of both the companies were taken over by the new company at their book values.
The companies were allotted equity shares of ` 100 each in lieu of purchase consideration amounting to `
30,000 (20,000 for Super-Fast Express Ltd and 10,000 for Fast Express Ltd.).

Prepare opening balance sheet of Super Fast Express Ltd. considering pooling method.

SOLUTION-
Balance Sheet of Super Fast Express Ltd.
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 3,60,000

2 Non-current liabilities
a Long-term provisions 3 1,00,000
3 Current liabilities
a Trade Payables 1,00,000
Total 35,60,000
Assets
1 Non-current assets
a Property, Plant and Equipment 4 25,00,000
b Intangible assets 5 1,00,000

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2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000

Notes to Accounts
`
1 Share Capital
Equity share capital
Issued, subscribed and paid up
30,000 Equity shares of ` 100 each 30,00,000
Total 30,00,000
2 Reserves and Surplus
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000

4 Property, Plant and Equipment

Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
6 Cash and cash equivalents
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

15. The following were the Balance Sheets of P Ltd. and V Ltd. as at 31st March, 20X1:

Particulars Notes ` P Ltd ` V Ltd

(` in Lakhs) (` in Lakhs)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 15,000 6,000
B Reserves and Surplus 2 15,370 4,335
2 Non-current liabilities
Long term borrowings 3 -- 1,000
3 Current liabilities
A Trade Payables 1,200 463
B Short term provisions 1,830 702
Total 33,400 12,500

Assets
1 Non-current assets
A Property, Plant and 4 22,304 6,750
Equipment
2 Current assets
A Inventories 7,862 4,041
B Trade receivables 2,120 1,100
C Cash and Cash equivalents 1,114 609
Total 33,400 12,500

Notes to accounts
` P Ltd ` V Ltd
(` in (` in
Lakhs) Lakhs)
1 Share Capital 15,000 6,000
2 Reserves and Surplus
Securities premium 3,000 --
Foreign project reserve -- 310
General reserve 9,500 3,200
Profit and loss account 2,870 825
15,370 4,335
3 Long term borrowings
12% debentures -- 1,000

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

-- 1,000
4 Property, Plant and
Equipment
Land and Building 6,000 --
Plant and machinery 14,000 5,000
Furniture and fixtures 2,304 1,750
22,304 6,750

All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed that in discharge
of consideration for the business P Ltd. would allot three fully paid equity shares of ` 10 each at par for every two
shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be converted into 13% debentures in P
Ltd. of the same amount and denomination.

Details of trade receivables and trade payables as under:

Trade payables P Ltd ( In lacs) V Ltd( In lacs)

Bills Payable 120 -
Trade Creditors 1,080 463
1,200 463
Trade receivables
Trade debtors 2,120 1,020
Bills Receivable — 80
2,120 1,100

Expenses of amalgamation amounting to ` 1 lakh were borne by P Ltd.

You are required to: (i) pass journal entries in the books of P Ltd. and (ii) prepare P Ltd.’s Balance Sheet
immediately after the merger.

SOLUTION-
Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)
Particulars Notes ` (in lakhs)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 24,000
B Reserves and Surplus 2 16,704
2 Non-current liabilities
A Long-term borrowings 3 1,000
3 Current liabilities
A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,819

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Assets
1 Non-current assets
A Property, Plant and Equipment 4 29,054
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,819

Notes to accounts
`
1. Share Capital
Equity share capital
Authorized, issued, subscribed and paid up
24 crores equity shares of ` 10 each 24,000
(Of the above shares, 9 crores shares have been issued for
consideration other than cash)
Total 24,000

2. Reserves and Surplus

General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,694
Total 16,704
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Property, Plant and Equipment
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,054
Total 29,054

Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for every two equity
shares held in V Ltd.
Purchase consideration = ` 6,000 lacs × 3/ 2 = ` 9,000 lacs

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

16. Sun and Neptune had been carrying on business independently. They agreed to amalgamate and
form a new company Jupiter Ltd. with an authorised share capital of ` 4,00,000 divided into 80,000
equity shares of ` 5 each. On 31st March, 20X3 the respective information of Sun and Neptune were
as follows:

Sun (`) Neptune (`)

Share capital 3,65,000 3,52,500
Current liabilities 5,97,000 1,80,250
Property, Plant and Equipment 6,35,000 3,65,000
Current assets 3,27,000 1,67,750

Additional Information:
(a) Revalued figures of non-current and Current assets were as follows:
Sun (`) Neptune (`)
Property, Plant and Equipment 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750

(b) The debtors and creditors include ` 43,350 owed by Sun to Neptune.
The purchase consideration is satisfied by issue of the following shares and debentures.
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the profitability of
their respective business based on the average net profit during the last three years which were as follows:

Sun Neptune
20X1 Profit 4,49,576 2,73,900
20X2 (Loss)/Profit (2,500) 3,42,100
20X3 Profit 3,77,924 3,59,000
(ii) 15% debenture in Jupiter Ltd. at par to provide an income equivalent to 8% return business as on capital
employed in their respective business as on 31st March, 20X3 after revaluation of assets.

You are required to:

(1) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after amalgamation.

SOLUTION-
(1) Computation of Amount of Debentures and Shares to be issued:
Sun Neptune
(i) Average Net Profit ` (4,49,576-2,500+3,77,924)/3 = 2,75,000
(2,73,900+,3,42,100+3,59,000)/3 = 3,25,000

(ii) Equity Shares Issued

(a) Ratio of distribution
Sun : Neptune
275 325

(b) Number
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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Sun : 27,500
Neptune: 32,500
60,000

(c) Amount
27,500 shares of ` 5 each = 1,37,500
32,500 shares of ` 5 each = 1,62,500

(iii) Capital Employed (after revaluation of assets)

Property, plant and equipment 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750
10,09,500 5,47,750
Less: Current Liabilities (5,97,000) (1,80,250)
4,12,500 3,67,500

(iv) Debentures Issued

8% Return on capital employed 33,000 29,400
15% Debentures to be issued to provide equivalent income:
Sun: 33,000 × 100 /15 = 2,20,000
Neptune: 29,400 × 100 /15 = 1,96,000

(2) Balance Sheet of Jupiter Ltd.

As at 31st March 20X3 (after amalgamation)
Particulars Note No `
I. Equity and Liabilities

(1) Shareholders’ Funds

(a) Share Capital 1 3,00,000

(b) Reserves and Surplus 2 64,000

(2) Non-Current Liabilities

(a) Long-term borrowings 3 4,16,000

(3) Current Liabilities

(a) Other current liabilities 7,33,900

Total 15,13,900

II. Assets
(1) Non-current assets

(a) PPE 11,00,000

(2) Current assets
(a) Other current assets 4,13,900

Total 15,13,900

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Notes to Accounts
`
1 Share Capital
Authorized
80,000 Equity Shares of ` 5 each 4,00,000
Issued and Subscribed
60,000 Equity Shares of ` 5 each 3,00,000
(all the above shares are allotted as fully paid-up
pursuant to a contract without payment being
received in cash)
2 Reserve and Surplus
Capital Reserve 64,000
3 Long-term borrowings
Secured Loans
15% Debentures 4,16,000

Working Notes:
Sun Neptune Total
` ` `
(1) Purchase Consideration
Equity Shares Issued 1,37,500 1,62,500 3,00,000
15% Debentures Issued 2,20,000 1,96,000 4,16,000
3,57,500 3,58,500 7,16,000
(2) Capital Reserve
(a) Net Assets taken over
Property, plant & equipment 7,10,000 3,90,000 11,00,000
Current Assets 2,99,500 1,14,400* 4,13,900
10,09,500 5,04,400 15,13,900
Less: Current Liabilities (5,53,650**) (1,80,250) (7,33,900)
4,55,850 3,24,150 7,80,000
(b) Purchase Consideration 3,57,500 3,58,500 7,16,000
(c) Capital Reserve [(a) - (b)] 98,350
(d) Goodwill [(b) - (a)] 34,350
(e) Capital Reserve 64,000
[Final Figure(c) -(d)]
*1,57,750–43,350= 1,14,400
** 5,97,000–43,350= 5,53,650

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MCQs (HOMEWORK)

1. In case of amalgamation, the entry for elimination of unrealized profit or loss on stock is made
(a) By the vendor company
(b) By the purchasing company
(c) By the third party
(d) By the court

2. If expenses of liquidation of the vendor company are paid by the purchasing company then, in purchasing
company’s book, the account debited is
(a) Goodwill account.
(b) Liquidation expense account.
(c) Vendor company account.
(d) General reserve.

3. Amalgamation adjustment reserve is opened in the books of the amalgamated company to incorporate
(a) Assets of the amalgamating company.
(b) Non- Statutory reserves of the amalgamating company.
(c) Statutory reserves of the amalgamating company.
(d) General reserve of the amalgamating company.

4. Amalgamation Adjustment Reserve is presented in the financial statements of the transferee company as
(a) Other current asset.
(b) Separate line item with a negative sign under the head ‘Reserves and Surplus’.
(c) Other non-current assets.
(d) Investment of the company

5. A company into which the vendor company is merged is called

(a) Transferee company.
(b) Transferor company.
(c) Selling company.
(d) Acquiree company.

6. If the purchase consideration is more than net assets (at agreed values) of the transferor company,
difference shall be recorded as __________ in the books of the transferee company.
(a) Goodwill.
(b) Capital Reserve.
(c) Profit.
(d) Loss.

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7. Which of the following statement is correct:

(a) In case of merger – ESH can be issued only equity shares as a part of Purchase consideration.
(b) In case of purchase – ESH can be issued Preference shares also as a part of Purchase consideration.
(c) Both (a) and (b) are correct.
(d) Both (a) and (b) are incorrect.

8. State which statement is correct:

(a) In case of merger – assets and liabilities can only be taken over at book values.
(b) In case of purchase – assets and liabilities can be taken over at book values or agreed values.
(c) Both (a) and (b) are correct.
(d) Both (a) and (b) are incorrect.

9. State which statement is correct:

(a) In case of merger – All Reserves and surplus of vendor company are taken over by Purchasing company.
(b) In case of Purchase – None of the Reserves and surplus of vendor company are taken over by Purchasing
company.
(c) Both (a) and (b) are correct.
(d) Only (a) is correct.

10. State which statement is correct:

(a) In case of merger – We use pooling of interest method for accounting.
(b) In case of Purchase We use purchase method or pooling of interest method depending upon whether it
is take over at agreed values or book values.
(c) Both (a) and (b) are correct.
(d) Only (a) is correct.

11. State which statement is incorrect:

(a) In case of merger – We can issue either preference shares or equity shares to PSH.
(b) In case of Purchase – We can issue either preference shares or equity shares to PSH.
(c) In case of merger – We can issue only preference shares to PSH.
(d) none of the above

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Chapter 5 CONSOLIDATED FINANCIAL STATEMENTS (AS 21)

Holding company:
It may be defined as one, which has one or more subsidiary companies and enjoys control over them

Subsidiary Company:
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a company in
which the holding company -
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at its own or together
with one or more of its subsidiary companies

Companies Act, 2013 mandated the companies having one or more subsidiaries, to
prepare Consolidated Financial Statements. According to this section, where a company
has one or more subsidiaries, it shall, in addition to separate financial statements will
prepare a consolidated financial statement of the company and of all the subsidiaries in the
same form and manner as that of its own.
It shall also attach along with its financial statements, a separate statement containing the
salient features of the financial statement of its subsidiary or subsidiaries in the prescribed
form.
Consolidated Financial Statements are intended to show the financial position of the group
as a whole - by showing the economic resources controlled by them, by presenting the
obligations of the group and the results the group achieves with its resources.

The main advantages of consolidation are given below:

(i) Single Source Document: From the consolidated financial statements,
the users of accounts can get an overall picture of the holding company
and its subsidiaries. Consolidated Profit and Loss Account gives the
overall profitability of the group.
(ii) Intrinsic value of share: Intrinsic share value of the holding company
can be calculated directly from the Consolidated Balance Sheet.
(iii) Acquisition of Subsidiary: The Minority Interest data of the
Consolidated Financial Statement indicates the amount payable to the
outside shareholders of the subsidiary company at book value which is
used as the starting point of bargaining at the time of acquisition of a
subsidiary by the holding company.
(iv) Evaluation of Holding Company in the market: The overall financial
health of the holding company can be judged using Consolidated
Financial Statements. Those who want to invest in the shares of the
holding company or acquire it, need such consolidated statement for
evaluation.

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COMPONENTS OF CONSOLIDATED FINANCIAL STATEMENTS:

• Consolidated Balance Sheet
• Consolidated Statement of Profit and Loss Account
• Consolidated Cash Flow Statement
• Notes and statements and explanatory schedules

CONSOLIDATION PROCEDURES:
The various steps involved in the consolidation process are as follows:
• the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary are eliminated. In case cost of acquisition
exceeds or is less than the acquirer’s interest, goodwill or capital reserve is
calculated retrospectively.
• intragroup transactions, including sales, expenses and dividends, are eliminated, in
full;
• unrealised profits resulting from intragroup transactions that are included in the
carrying amount of assets, such as inventory and fixed assets, are eliminated in full;
• unrealised losses resulting from intragroup transactions that are deducted in
arriving at the carrying amount of assets are also eliminated unless cost cannot be
recovered;
• minority interest in the net income of consolidated subsidiaries for the reporting
period are identified and adjusted against the income of the group in order to arrive
at the net income attributable to the owners of the parent; and
• minority interests in the net assets of consolidated subsidiaries are identified and
presented in the consolidated balance sheet separately from liabilities and the
parent shareholders’ equity.

CALCULATION OF GOODWILL/CAPITAL RESERVE (COST OF CONTROL)

• Goodwill =
Cost of Investment - Parent’s share in the equity of the subsidiary on date of
investment
• Capital Reserve =
Parent’s share in the equity of the subsidiary on date of investment – Cost of investment

Example:
H Ltd. acquires 70% of the equity shares of S Ltd. on 1.1.20x1. On that date, paid up capital
of S Ltd. was 10,000 equity shares of Rs 10 each; accumulated reserve balance was Rs
1,00,000. H Ltd. paid Rs 1,60,000 to acquire 70% interest in the S Ltd. Assets of S Ltd. were
revalued on 1.1.20x1 and a revaluation loss of Rs 20,000 was ascertained. The book value
of shares of S Ltd. is calculated as shown below:

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Rs
70% of the Equity Share Capital Rs 1,00,000 70,000
70% of Accumulated Reserve Rs 1,00,000 70,000
70% of Revaluation Loss Rs 20,000 (14,000)
1,26,000
So, H Ltd. paid a positive differential of Rs 34,000 i.e. Rs (1,60,000 – 1,26,000). This
differential is called goodwill and is shown in the balance sheet under the head
intangibles.

1. From the following data, determine in each case:

(1) Minority interest at the date of acquisition and at the date of consolidation.
(2) Goodwill or Capital Reserve.
(3) Amount of holding company’s profit in the consolidated Balance Sheet assuming holding company’s
own Profit & Loss Account to be ` 2,00,000 in each case:

Subsidiary % shares Cost Date of Consolidation

Company owned acquisition Date
1.1.20X1 31.12.20X1
Case Share Profit & Share Profit &
Capital Loss Capital Loss
Account Account

Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000

Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000

Solution
(1) Minority Interest = Equity attributable to minorities
Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. in this case it
should be equal to Share Capital + Profit & Loss A/c

Minority % Minority interest Minority interest

Shares Owned as at the date of as at the date of
acquisition consolidation
[E] [E] x [A + B] [E] X [C + D]
Case 1 [100-90] 10 % 15,000 17,000
Case 2 [100-85] 15 % 19,500 18,000
Case 3 [100-80] 20 % 14,000 14,000

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Case 4 [100-100] NIL Nil Nil

A = Share capital on 1.1.20X1
B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1

(2) Calculation of Goodwill or Capital Reserve

Shareholding Cost Total Parent’s Goodwill Capital

Equity Portion of Reserve
equity
% [F] [G] [A] + [B] [F] x [H] ` [G] – [H] ` [H] – [G]
= [H]
Case 1 90 % 1,40,000 1,50,000 1,35,000 5,000 —
Case 2 85 % 1,04,000 1,30,000 1,10,500 — 6,500
Case 3 80 % 56,000 70,000 56,000 Nil Nil
Case 4 100 % 1,00,000 90,000 90,000 10,000 —

(3) The balance in the Profit & Loss Account on the date of acquisition (1.1.20X1) is Capital profit, as such the balance
of Consolidated Profit & Loss Account shall be equal to Holding Co.’s profit.

On 31.12.20X1 in each case the following amount shall be added or deducted from the balance of holding Co.’s Profit
& Loss account

% Share P & L as P & L as on P & L post Amount to be

holding on consolidation acquisition added /
1.1.20X1 date (deducted) from
holding’s P & L
[K] [L] [M] [N] = [M]-[L] [O] = [K] x [N]
1 90 % 50,000 70,000 20,000 18,000
2 85 % 30,000 20,000 (10,000) (8,500)
3 80 % 20,000 20,000 NIL NIL
4 100 % 40,000 55,000 15,000 15,000

2. XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 20X1 for Rs1,40,000. The issued capital of
ABC Ltd., on 1st January, 20X1 was Rs1,00,000 and the balance in the Profit & Loss Account was Rs
60,000.

During the year ended 31st December, 20X1, ABC Ltd. earned a profit of Rs20,000 and at year end, declared
and paid a dividend of Rs15,000.

Show by an entry how the dividend should be recorded in the books of XYZ Ltd.

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What is the amount of minority interest as on 1st January, 20X1 and 31st December, 20X1? Also please
check whether there should be any goodwill/ capital reserve at the date of acquisition.

Solution
Total dividend paid isRs15,000 (out of post-acquisition profits), hence dividend received by XYZ will be
credited to P & L.
XYZ Ltd.’s share of dividend = Rs15,000 X 80% = Rs12,000

In the books of XYZ Ltd.

` `
Bank A/c Dr. 12,000
To Profit & Loss A/c 12,000
(Dividend received from ABC Ltd credited to
P&L A/c being out of post-acquisition profits –
as explained above)

Goodwill on consolidation (at the date of ` `

acquisition):
Cost of shares 1,40,000
Less: Face value of capital i.e. 80% of capital 80,000
Add: Share of capital profits [60,000X 80 %] 48,000 (1,28,000)
Goodwill 12,000
Minority interest on:
- 1st January, 20X1:
20% of ` 1,60,000 [1,00,000 + 60,000] 32,000
- 31st December, 20X1: 33,000
20% of `1,65,000 [1,00,000 + 60,000 + 20,000
– 15,000]

3. Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 20X1 at a cost of Rs 70 lakhs.
The following information is available from the balance sheet of Zed Ltd. as on 31st March, 20X1:

Rs in lakhs
Property, plant and equipment 120
Investments 55
Current Assets 70
Loans & Advances 15
15% Debentures 90
Current Liabilities 50

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The following revaluations have been agreed upon (not included in the above figures):
Property, plant and equipment Up by 20%
Investments Down by 10%

Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 20X1 (Face value - Rs 10
per share). Exe Ltd. purchased the shares of Zed Ltd. @ Rs 20 per share.
Calculate the amount of goodwill/capital reserve on acquisition of shares of Zed Ltd.

Solution
Revalued net assets of Zed Ltd. as on 31st March, 20X1

Rs in lakhs Rs in lakhs
Property, plant and equipment [120 X 120%] 144.0
Investments [55 X 90%] 49.5
Current Assets 70.0
Loans and Advances 15.0
Total Assets after revaluation 278.5
Less: 15% Debentures 90.0
Current Liabilities 50.0 (140.0)
Equity / Net Worth 138.5
Exe Ltd.’s share of net assets (70% of 138.5) 96.95
Exe Ltd.’s cost of acquisition of shares of Zed Ltd.
(Rs 70 lakhs – Rs 7 lakhs*) 63.00
Capital reserve 33.95
* Total Cost of 70 % Equity of Zed Ltd Rs 70 lakhs
Purchase Price of each share Rs 20
Number of shares purchased [70 lakhs /Rs 20] 3.5 lakhs
Dividend @ 20 % i.e. Rs 2 per share Rs 7 lakhs
Since dividend received is for pre-acquisition period, it has been reduced from the cost of investment in the
subsidiary company.

4. A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.20X1 at cost of Rs 10,00,000 when B Ltd. had an
equity share capital of Rs 10,00,000 and reserves and surplus of Rs 80,000. In the four consecutive
years, B Ltd. fared badly and suffered losses of Rs 2,50,000, Rs 4,00,000, Rs 5,00,000 and Rs 1,20,000
respectively. Thereafter in 20X5-X6, B Ltd. experienced turnaround and registered an annual profit
of Rs 50,000. In the next two years i.e. 20X6-X7 and 20X7-X8, B Ltd. recorded annual profits of Rs
1,00,000 and Rs 1,50,000 respectively. Show the minority interests and cost of control at the end of
each year for the purpose of consolidation

Solution

The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the
equity of the subsidiary. The excess, and any further losses applicable to the minority, are adjusted against
the majority interest except to the extent that the minority has a binding obligation to, and is able to, make

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good the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the majority
interest until the minority's share of losses previously absorbed by the majority has been recovered.
Accordingly, the minority interests will be computed as follows:

Year Profit/(Loss) Minority Additional Minority's Share Cost of

Interest Consolidated of losses borne Control
(30%) P & L (Dr.) by A Ltd.
Cr.
` Balance
At the time of -
acquisition in 3,24,000
20X1 -
(W.N.)
20X1-X2 (2,50,000) (75,000) (1,75,000) 2,44,000
(W.N.)
Balance 2,49,000
20X2-X3 (4,00,000) (1,20,000) (2,80,000) 2,44,000
Balance 1,29,000
20X3-X4 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)
Loss of 21,000 (21,000) 21,000 21,000
minority
borne by
Holding Co.
Balance Nil (3,71,000)
20X4-X5 (1,20,000) (36,000) (84,000) 2,44,000
Loss of
minority 36,000 (36,000) 36,000 57,000
borne by
Holding Co.
Balance Nil (1,20,000)
20X5-X6 50,000 15,000 35,000 2,44,000
Profit share (15,000) 15,000 (15,000) 42,000

of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.

Balance Nil 50,000

20X6-X7 1,00,000 30,000 70,000
Profit share (30,000) 30,000 (30,000) 12,000 2,44,000
of minority
adjusted
against

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losses of
minority
absorbed by
Holding Co.
Balance Nil 100,000
20X7-X8 1,50,000 45,000 1,05,000 (12,000) Nil 2,44,000
(12,000) 12,000
Balance 33,000 1,17,000

Working Note:

Calculation of Minority interest and Cost of control on 1.4.20X1

Share of Holding Co. Minority Interest

100% 70% 30%
Share Capital 10,00,000 7,00,000 3,00,000
Reserve 80,000 56,000 24,000
7,56,000 3,24,000
Less: Cost of investment (10,00,000)
Goodwill 2,44,000

5. H Ltd. acquired 3,000 shares in S Ltd., at a cost of Rs4,80,000 on 31.7.20X1. The capital of S Ltd.
consisted of 5,000 shares of Rs 100 each fully paid. The Profit & Loss Account of this company for
20X1 showed an opening balance of Rs1,25,000 and profit for the year was Rs 3,00,000. At the end
of the year, it declared a dividend of 40%. Record the entry in the books of H Ltd., in respect of the
dividend. Assume calendar year as financial year.

Solution
The profits of S Ltd., have to be divided between capital and revenue profits from the point of view of the
holding company:

Capital Revenue
Profit Profit
Rs Rs
Balance on 1.1.20X1 1,25,000 —
Profit for 20X1 (3,00,000 × 7/12) 1,75,000 (3,00,000×5/12) 1,25,000
Total 3,00,000 1,25,000
Proportionate share of H Ltd. (3/5) 1,80,000 75,000

Total dividend declared = Rs5,00,000 X 40 % = Rs 2,00,000

H Ltd.’s share in the dividend = Rs 2,00,000 X 3/5 = Rs 1,20,000

There can be two situations as regards the treatment of dividend of Rs 1,20,000:

(1) The profit for 20X1 has been utilised to pay the dividend.

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The share of H Ltd in profit for the first seven months of S Ltd = Rs 1,05,000
(i.e. Rs 1,75,000 × 3/5)
Profit for the remaining five months = Rs 75,000
(i.e.Rs 1,25,000 × 3/5).

The dividend of Rs 1,20,000 will be adjusted in this ratio of 1,05,000: 75,000

=Rs 70,000 out of profits up to 31.7.20X1 and Rs 50,000 out of profits after that date.

The dividend out of profits subsequent to 31.7.20X1 will be revenue income and that out of earlier profits
will be capital receipt. Hence the entry will be:

Rs Rs
Bank Dr. 1,20,000

To Investment Account 70,000

To Profit and Loss Account 50,000

(2) Later profits have been utilised first and then pre- acquisition profits.
In such a case, the whole of Rs 75,000 (share of H Ltd. in profits of S Ltd., after 31.7.20X1) would be
received and treated as revenue income; the remaining dividend, Rs45,000 (Rs1,20,000 less Rs 75,000)
would be capital receipt. The entry would be:

Rs Rs
Bank Dr. 1,20,000
To Investment Account 45,000
To Profit & Loss Account 75,000

6. On 31st March, 20X1, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs 12,00,000. The position of Q
Ltd. on that date was as under:

Rs
Property, plant and equipment 10,50,000
Current Assets 6,45,000
1,50,000 equity shares of Rs 10 each fully paid 15,00,000
Pre-incorporation profits 30,000
Profit and Loss Account 60,000
Trade payables 1,05,000

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P Ltd. and Q Ltd. give the following information on 31st March, 20X3:

P Ltd. Q Ltd.
Rs Rs
Equity shares of Rs 10 each fully paid (before bonus 45,00,000 15,00,000
issue)
Securities Premium 9,00,000 –

Pre-incorporation profits – 30,000

General Reserve 60,00,000 19,05,000
Profit and Loss Account 15,75,000 4,20,000
Trade payables 5,55,000 2,10,000
Property, plant and equipment 79,20,000 23,10,000
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Current Assets 44,10,000 17,55,000

Directors of Q Ltd. made bonus issue on 31.3.20X3 in the ratio of one equity share of Rs 10 each fully paid
for every two equity shares held on that date. Bonus shares were issued out of post-acquisition profits by
using General Reserve.

Calculate as on 31st March, 20X3 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated
Profit and Loss Account in each of the following cases:
(a) Before issue of bonus shares;
(b) Immediately After issue of bonus shares.

Solution
Shareholding pattern

Particulars Number of Shares % of holding

a. P Ltd.
(i) Purchased on 31.03.20X1 1,05,000

(ii) Bonus Issue (1,05,000/2) 52,500

Total 1,57,500 70%

b. Minority Interest 67,500 30%

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Calculations of (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss
Account as on 31st March, 20X3:
(a) Before issue of bonus shares

(i) Cost of control/capital reserve ` `

Investment in Q Ltd. 12,00,000

Less: Face value of investments 10,50,000

Capital profits (W.N.) 63,000 (11,13,000)
Cost of control 87,000
(ii) Minority Interest `
Share Capital 4,50,000
Capital profits (W.N.) 27,000
Revenue profits (W.N.) 6,79,500
11,56,500
(iii) Consolidated profit and loss account – P Ltd. `
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 15,85,500
31,60,500

(b) Immediately after issue of bonus shares

(i) Cost of control/capital reserve ` `

Face value of investments (` 10,50,000 + 15,75,000
` 5,25,000)
Capital Profits (W.N.) 63,000 16,38,000
Less: Investment in Q Ltd. (12,00,000)
Capital reserve 4,38,000
(ii) Minority Interest `
Share Capital (` 4,50,000 + ` 2,25,000) 6,75,000
Capital Profits (W.N.) 27,000
Revenue Profits (W.N.) 4,54,500
11,56,500
(iii) Consolidated Profit and Loss Account – P Ltd. `
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. 10,60,500
(W.N.)
26,35,500

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Working Note:
Analysis of Profits of Q Ltd.
Capital Profits Revenue Profits
(Before and Before After Bonus
after issue of Bonus Issue Issue
bonus shares)
` ` `
Pre-incorporation profits 30,000
Profit and loss account on 60,000
31.3.20X1
90,000
General reserve* 19,05,000 19,05,000
Less: Bonus shares (7,50,000)
11,55,000
Profit for period of 1st April,
20X1 to 31st March, 20X3 3,60,000 3,60,000
(` 4,20,000 – ` 60,000)
22,65,000 15,15,000
P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
Minority’s share (30%) 27,000 6,79,500 4,54,500
*Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account

7. Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31 March, 20X1 from the
following information:

H Ltd. S Ltd.
PPE 5,00,000 3,00,000
Investments
(2,000 equity shares of S Ltd.) 2,20,000
Current Assets 1,55,000 1,00,000
Share capital (Fully paid equity shares of 10 each) 5,00,000 2,50,000
Profit and loss account 2,00,000 1,00,000
Trade Payables 1,75,000 50,000
H Ltd. acquired the shares of S Ltd. on 31st March, 20X1.

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Solution
Percentage of holding:

No. of Shares Percentage

Holding Co : 2,000 (80%)
Minority shareholders : 500 (20%)
TOTAL SHARES : 2,500

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March,20X1
Note No Amount
I EQUITY AND LIABILITIES
1 Shareholder’s Fund
(a) Share Capital 1 5,00,000
(b) Reserve and Surplus 2 2,60,000
2 Minority interest 3 70,000
3 Current Liabilities
(a) Trade payables 4 2,25,000
Total 10,55,000
II ASSETS
1. Non-Current Assets
PPE 5 8,00,000
2. Current Assets 6 2,55,000
Total 10,55,000

Notes to Accounts
Amounts

1 Share capital
50,000 Equity Shares @ 10 each 5,00,000
2 Reserve and Surplus
Capital Reserve (W.N. ) 60,000
Profit and loss account 2,00,000
2,60,000
3 Minority Interest
Paid up value of shares 50,000
Add: Share in Profit and loss account 20,000 70,000
4 Trade payables
H Ltd. 1,75,000
S Ltd. 50,000
2,25,000

5 PPE
H Ltd. 5,00,000

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S Ltd. 3,00,000
8,00,000
6 Current Assets
H Ltd. 1,55,000
S Ltd. 1,00,000
2,55,000

Working Note:
Determination of Goodwill/(Capital Reserve)
Cost of investment 2,20,000
Less: Paid up value of shares (80% of 2,50,000) 2,00,000
Share in pre-acquisition profits
(80% of 1,00,000) 80,000 (2,80,000)
Capital Reserve (60,000)

8. H Ltd. and S Ltd. provide the following information as at 31st March,20X2:

H Ltd. S Ltd.
Rs Rs
PPE 1,00,000 1,30,000
Investments (8,000 equity shares of S Ltd.) 1,26,000
Current Assets 74,000 70,000
Share capital (Fully paid equity shares of Rs10 each) 1,50,000 1,00,000
Profit and loss account 50,000 40,000
Trade Payables 1,00,000 60,000
Additional information
H Ltd. acquired the shares of S Ltd. on 1-7-20X1 and Balance of profit and loss account of S Ltd. on 1-4-20X1
was 30,000.

Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31st March, 20X2.

Solution
Percentage of holding:

No. of Shares Percentage

Holding Co : 8,000 (80%)
Minority shareholders : 2,000 (20%)
TOTAL SHARES : 10,000

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Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X2
Note No Amount
I EQUITY AND LIABILITYES
1 Shareholder’s Fund
(a) Share Capital 1 1,50,000
(b) Reserve and Surplus 2 56,000
2 Minority interest 3 28,000
3 Current Liabilities
(a) Trade payables 4 1,60,000
Total 3,94,000
II ASSETS
1 Non-Current Assets:
PPE 5 2,30,000
Intangible Asset 6 20,000
2 Current Assets 7 1,44,000
Total 3,94,000

Notes to Accounts
Amount
1 Share capital 1,50,000
15,000 Equity Shares @ 10 each
2 Reserve and Surplus
Profit and loss account (50,000+ 80% of 9/12 x 10,000) 56,000

3 Minority Interest
Share capital (20% of 1,00,000) 20,000
Share in Profit and loss account (40,000 X 20%) 8,000 28,000
4 Trade payables
H Ltd. 1,00,000
S Ltd. 60,000
1,60,000
5 PPE
H Ltd. 1,00,000
S Ltd. 1,30,000
2,30,000
6 Intangible Asset
Cost of Investment 1,26,000
Less: Paid up value of shares (80% of ` 1,00,000)
Share in pre-acquisition profits (80,000)
80% of [30,000+3/12(40,000-30,000)] (26,000)
Goodwill 20,000

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7 Current Assets
H Ltd. 74,000
S Ltd. 70,000
1,44,000

9. From the Balance Sheets and information given below, prepare Consolidated Balance Sheet of Virat
Ltd. and Anushka Ltd. as at 31st March. Virat Ltd. holds 80% of Equity Shares in Anushka Ltd. since
its (Anushka Ltd.’s) incorporation.

Balance Sheet of Virat Ltd. and Anushka Ltd. as at 31st March, 20X1
Particulars Note Virat Ltd. Anushka Ltd.
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,00,000 4,00,000

(b) Reserves and Surplus 2 1,00,000 1,00,000

(2) Non-current Liabilities
Long Term Borrowings 2,00,000 1,00,000
(3) Current Liabilities
(a) Trade Payables 1,00,000 1,00,000
Total 10,00,000 7,00,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 4,00,000 3,00,000
Equipment
(b) Non-current 3 3,20,000 -
investments
(2) Current Assets 1,60,000 2,00,000
(a) Inventories 80,000 1,40,000
(b) Trade Receivables 40,000 60,000
(c) Cash & Cash Equivalents
Total 10,00,000 7,00,000

Notes to Accounts
Particulars Virat Ltd. Anushka Ltd.

1. Share capital
60,000 equity shares of ` 10 each
fully paid up 6,00,000 --
40,000 equity shares of ` 10 each
fully paid up -- 4,00,000

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Total 6,00,000 4,00,000

2. Reserves and Surplus
General Reserve 1,00,000 1,00,000
Total 1,00,000 1,00,000
3. Non-current investments
Shares in Anushka Ltd 3,20,000 --

Solution
Consolidated balance Sheet of Virat Ltd. and its Subsidiary Anushka Ltd. as at 31st March, 20X1
Particulars Note Amount
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds:
(a) Share Capital 1 6,00,000
(b) Reserve and Surplus 2 1,80,000
(2) Minority Interest 3 1,00,000
(3) Non-Current Liabilities:
Long Term Borrowings 4 3,00,000
(4) Current Liabilities:
Trade Payables 5 2,00,000
Total 13,80,000
II ASSETS:
(1) Non-Current Assets
Property, Plant & Equipment 6 7,00,000

(2) Current Assets:

(a) Inventories
7 3,60,000
(b) Trade receivables
8 2,20,000
(c) Cash and Cash Equivalents
9 1,00,000
Total 13,80,000

Notes to Accounts
Particulars ` `
1. Share capital
60,000 equity shares of `10 each fully paid up 6,00,000
2. Reserves and Surplus
General Reserve 1,00,000
Add: General reserve of Anushka Ltd (80%) 80,000

Total 1,80,000
3. Minority interest
20% share in Anushka Ltd (WN 3) 1,00,000
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4 Long term borrowings

Long term borrowings of Virat 2,00,000
Add: Long term borrowings of Anushka 1,00,000
Total 3,00,000
5. Trade payables
Trade payables of Virat 1,00,000
Add: Trade payables of Anushka 1,00,000
Total 2,00,000
6. Property, Plant and Equipment (PPE)
PPE of Virat Ltd 4,00,000
Add: PPE of Anushka Ltd 3,00,000
Total 7,00,000
7. Inventories
Inventories of Virat Ltd 1,60,000
Add: Inventories of Anushka Ltd 2,00,000
Total 3,60,000
8. Trade receivables
Trade receivables of Virat Ltd 80,000
Add: Trade receivables of Anushka Ltd 1,40,000
Total 2,20,000
9 Cash and cash equivalents
Cash and cash equivalents of Virat Ltd 40,000
Add: Cash and cash equivalents of Anushka Ltd 60,000
Total 1,00,000

Working Notes:

1. Basic Information
Company Status Dates Holding Status
Holding Co. = Virat Acquisition: Anushka’s Holding Company =
Ltd. Incorporation 80%
Subsidiary = Anushka Consolidation: 31st March, Minority Interest =
Ltd. 20X1 20%

2. Analysis of General Reserves of Anushka Ltd

Since Virat holds shares in Anushka since its incorporation, the entire Reserve balance of `1,00,000 will be
Revenue.

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3. Consolidation of Balances
Holding- 80%, Total Minority Holding Company
Minority - 20% Interest

Equity Capital 4,00,000 80,000 3,20,000 -

General Reserves 1,00,000 20,000 Nil (pre-acq) 80,000
(post-acq)
Total 1,00,000 3,20,000 80,000
Cost of Investment (3,20,000) -
Goodwill/capital reserve NIL
Parent’s Balance 1,00,000
Amount for 1,80,000
Consolidated Balance
Sheet

10. From the following balance sheets of H Ltd. And its subsidiary S Ltd. drawn up at 31st March, 20X1,
prepare a consolidated balance sheet as at that date, having regard to the following:

(i) Reserves and Profit and Loss Account of S Ltd. stood at Rs 25,000 and Rs 15,000 respectively on the date
of acquisition of its 80% shares by H Ltd. on 1st April, 20X0.
(ii) Machinery (Book-value Rs 1,00,000) and Furniture (Book value Rs 20,000) of S Ltd. were revalued at Rs
1,50,000 and Rs 15,000 respectively on 1st April, 20X0 for the purpose of fixing the price of its shares.
[Rates of depreciation computed on the basis of useful lives: Machinery 10%, Furniture 15%.]

Balance Sheet of H Ltd. and S Ltd. as at 31st March, 20X1

Particulars Note H Ltd. (`) S Ltd. (`)
No.
I. Equity and Liabilities
(1) Shareholder’s Funds
(a) Share Capital 1 6,00,000 1,00,000
(b) Reserves and Surplus 2 3,00,000 1,00,000
(2) Current Liabilities
(a) Trade Payables 1,50,000 57,000
Total 10,50,000 2,57,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 3 4,50,000 1,07,000
Equipment
(b) Other non- current 4 6,00,000 1,50,000
investments
Total 10,50,000 2,57,000

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Notes to Accounts
` H Ltd. S Ltd.
(`) (`)
1. Share capital
6,000 equity shares of ` 100 each, fully paid up 6,00,000 --
1,000 equity shares of ` 100 each, fully paid up
Total -- 1,00,000
6,00,000 1,00,000
2. Reserves and Surplus

General reserves 2,00,000 75,000

Profit and loss account 25,000
1,00,000
Total 3,00,000 1,00,000
3. Property, Plant and Equipment
Machinery 3,00,000 90,000
Furniture 17,000
Total 1,50,000 1,07,000
4,50,000
4. Other Non-current investments
Non-current Investments 4,40,000 1,50,000
Shares in S Ltd.
(800 shares at `200 each) 1,60,000 --
Total 6,00,000 1,50,000

Solution

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 20X1
Particulars Note
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,00,000
(b) Reserves and Surplus 2 3,44,600
(2) Minority Interest 3 48,150
(3) Current Liabilities
(a) Trade Payables 2,07,000
Total 11,99,750
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 4 5,97,750
(b) Intangible assets 5 12,000

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(c) Other non-current investments 6 5,90,000

Total 11,99,750

Notes to Accounts
`
1. Share capital
6,000 equity shares of ` 100 each,
fully paid up 6,00,000
Total 6,00,000
2. Reserves and Surplus
Reserves 2,00,000
Add: 4/5th share of S Ltd.’s post-
acquisition reserves (W.N.3) 40,000 2,40,000
Profit and Loss Account 1,00,000
Add: 4/5th share of S Ltd.’s post-
acquisition profits (W.N.4) 4,600 1,04,600
Total 3,44,600
3. Minority interest in S Ltd. (WN 5) 48,150
4. Property, plant and equipment
Machinery
H. Ltd. 3,00,000
S Ltd. 1,00,000
Add: Appreciation 50,000
1,50,000
Less: Depreciation (1,50,000 X 10%) (15,000) 1,35,000
Furniture
H. Ltd. 1,50,000
S Ltd. 20,000
Less: Decrease in value (5,000)
15,000
Less: Depreciation (15,000 X 15%) (2,250) 12,750 5,97,750
5. Intangible assets

Goodwill [WN 6] 12,000

6. Other non-current investments
H Ltd. 4,40,000
S Ltd. 1,50,000
Total 5,90,000

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Working Notes:
1. Pre-acquisition profits and reserves of S Ltd.
Reserves 25,000
Profit and Loss Account 15,000
40,000
H Ltd.’s = 4/5 (or 80%) × 40,000 32,000
Minority Interest= 1/5 (or 20%) × 40,000 8,000
2. Profit on revaluation of assets of S Ltd.
Profit on Machinery (1,50,000 – 1,00,000) 50,000
Less: Loss on Furniture (20,000 – 15,000) 5,000
Net Profit on revaluation 45,000
H Ltd.’s share 4/5 × 45,000 36,000
Minority Interest 1/5 × 45,000 9,000
3. Post-acquisition reserves of S Ltd.
Post-acquisition reserves (Total reserves less pre-acquisition 50,000
reserves = 75,000 – 25,000)
H Ltd.’s share 4/5 × 50,000 40,000
Minority interest 1/5 × 50,000 10,000
4. Post -acquisition profits of S Ltd.
Post-acquisition profits (Profit & loss account balance lesspre- 10,000
acquisition profits = 25,000 – 15,000)
Add: Excess depreciation charged on furniture @ 15%
on 5,000 i.e. (20,000 – 15,000) 750
10,750
Less: Under depreciation on machinery @ 10%

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on ` 50,000 i.e. (1,50,000 – 1,00,000) (5,000)

Adjusted post-acquisition profits 5,750
H Ltd.’s share 4/5 × 5,750 4,600
Minority Interest 1/5 × 5,750 1,150
5. Minority Interest
Paid-up value of (1,000 – 800) = 200 shares
held by outsiders i.e. 200 × ` 100 (or 1,00,000 X 20%) 20,000
Add: 1/5th share of pre-acquisition profits and reserves 8,000
1/5th share of profit on revaluation 9,000
1/5th share of post-acquisition reserves 10,000
1/5th share of post-acquisition profit 1,150
48,150
6. Cost of Control or Goodwill
Price paid by H Ltd. for 800 shares(A) 1,60,000
Intrinsic value of the shares-
Paid-up value of 800 shares held by H Ltd. i.e. 800 × ` 100 80,000
(or 1,00,000 X 80%)
Add: 4/5th share of pre-acquisition profits and reserves 32,000
4/5th share of profit on the revaluation 36,000
Intrinsic value of shares on the date of acquisition (B) 1,48,000
Cost of control or Goodwill (A – B) 12,000

11. a. A Ltd. holds 80% of the equity capital and voting power in B Ltd. A Ltd. sells inventories costing Rs
180 lacs to B Ltd at a price of Rs 200 lacs. The entire inventories remain unsold with B Ltd. at the
financial year end i.e. 31 March 20X1.

b. A Ltd. holds 75% of the equity capital and voting power in B Ltd. A Ltd. purchases inventories costing Rs
150 lacs from B Ltd at a price of Rs 200 lacs. The entire inventories remain unsold with A Ltd. at the financial
year end i.e. 31 March 20X1.
Suggest the accounting treatment for the above mentioned transactions in the consolidated financial
statements of A Ltd. giving reference of the relevant guidance/standard.

Solution

a. This would be the case of downstream transaction. In the consolidated profit and loss account for the
year ended 31 March 20X1, entire transaction of sale and purchase of Rs 200 lacs each, would be
eliminated by reducing both sales and purchases (cost of sales).
Further, the unrealized profits of Rs 20 lacs (i.e. Rs 200 lacs – Rs 180 lacs), would be eliminated from the
consolidated financial statements for financial year ended 31 March 20X1, by reducing the consolidated
profits/ increasing the consolidated losses, and reducing the value of closing inventories as of 31 March
20X1.

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b. This would be the case of upstream transaction. In the consolidated profit and loss account for the year
ended 31 March 20X1, entire transaction of sale and purchase of Rs 200 lacs each, would be eliminated by
reducing both sales and purchases (cost of sales).

Further, the unrealized profits of Rs 50 lacs (i.e. Rs 200 lacs – Rs 150 lacs), would be eliminated in the
consolidated financial statements for financial year ended 31 March 20X1, by reducing the value of closing
inventories by Rs 50 lacs as of 31 March 20X1. In the consolidated balance sheet as of 31 March 20X1, A
Ltd.’s share of profit from B Ltd will be reduced by Rs 37.50 lacs (being 75% of Rs 50 lacs) and the minority’s
share of the profits of B Ltd would be reduced by Rs 12.50 lacs (being 25% of Rs 50 lacs).

12. H Ltd and its subsidiary S Ltd provide the following information for the year ended 31st March,
20X3:

H Ltd. S Ltd.
(Rs in lacs) (Rs in lacs)
Sales and other income 5,000 1,000
Increase in Inventory (closing less opening) 1,000 200
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50
Other Information: H Ltd. sold goods to S Ltd. of Rs 120 lacs at cost plus 20%. Inventory of S Ltd. includes
such goods valuing Rs 24 lacs. Administrative expenses of S Ltd. include Rs 5 lacs paid to H Ltd. as
consultancy fees. Selling and distribution expenses of H Ltd. include Rs 10 lacs paid to S Ltd. as commission.

H Ltd. holds 80% of equity share capital of Rs 1,000 lacs in S Ltd. prior to 20X1-20X2. H Ltd. took credit to its
Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. for the year
20X1-20X2.
Prepare a consolidated statement of profit and loss..

Solution
Consolidated statement of profit and loss of H Ltd. and its subsidiary S Ltd. for the year ended on 31st
March, 20X3
Particulars Note No. ` in Lacs
I. Revenue from operations 1 5,865
II. Total Income 5,865
III. Expenses
Cost of material purchased/consumed 2 1,180
Changes of inventories of finished goods 3 (1,196)
Employee benefit expense 4 950
Finance cost 5 150

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Depreciation and amortization expense 6 150

Other expenses 7 535
Total expenses 1,769
IV. Profit before tax (II-III) 4,096

Notes to Accounts
` in Lacs ` in Lacs
1. Revenue from operations
Sales and other income
H Ltd. 5,000
S Ltd. 1,000
6,000
Less: Inter-company sales (120)
Consultancy fees received by H Ltd. from S Ltd. (5)
Commission received by S Ltd. from H Ltd. (10) 5,865

2. Cost of material purchased/consumed

H Ltd. 800
S Ltd. 200
1,000
Less: Purchases by S Ltd. from H Ltd. (120) 880
Direct expenses (Production)
H Ltd. 200
S Ltd. 100 300
1,180
3. Changes of inventories of finished goods
H Ltd. 1,000
S Ltd. 200
20
Less: Unrealized profits ` 24 lacs ×
120 (4) 1,196
Employee benefits and expenses
4.
Wages and salaries:
H Ltd.
800
S Ltd.
150 950
Finance cost
5.
Interest:
H Ltd.
100
S Ltd.
50 150
Depreciation
6.
H Ltd.
100

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S Ltd. 50 150
7. Other expenses
Administrative expenses
H Ltd. 200
S Ltd. 100
Less: Consultancy fees received by H Ltd. from S Ltd. (5) 295

Selling and distribution Expenses:

H Ltd. 200
S Ltd. 50
Less: Commission received by S Ltd. from H Ltd. (10) 240
535

13. Subsidiary B Ltd. provides the following balance sheet:

Particulars Note 20X0 20X1

No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000 5,00,000
(b) Reserves and Surplus 2 2,86,000 7,14,000

(2) Current Liabilities

(a) Short term borrowings 3 -- 1,70,000
(b) Trade Payables 4,90,000 4,94,000
(c) Short-term provisions 4 3,10,000 4,30,000
Total 15,86,000 23,08,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 5 2,72,000 2,24,000
Equipment
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 5,97,000 7,42,000
(b) Trade Receivables 5,94,000 8,91,000
(c) Cash & Cash Equivalents 51,000 3,000
(d) Other current assets 6 72,000 48,000
Total 15,86,000 23,08,000

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20X0 20X1

1. Share capital
5,000 equity shares of `10 each, fully paid up 5,00,000 5,00,000
2. Reserves and Surplus
General Reserves 2,86,000 7,14,000
3. Short term borrowings
Bank overdraft -- 1,70,000
4. Short term provisions
Provision for taxation 3,10,000 4,30,000
5. Property, plant and equipment
Cost 3,20,000 3,20,000
Less: Depreciation (48,000) (96,000)
Total 2,72,000 2,24,000

6. Other current Assets

Prepaid expenses 72,000 48,000

Also consider the following information:

(a) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the accounting year.
(b) A Ltd. values inventory on weighted average basis while B Ltd. used FIFO basis. To bring B Ltd.’s values in
line with those of A Ltd, its value of inventory is required to be reduced by Rs12,000 at the end of 20X0 and
Rs 34,000 at the end of 20X1.
(c) B Ltd. deducts 1% from Trade Receivables as a general provision against doubtful debts.
(d) Prepaid expenses in B Ltd. include advertising expenditure carried forward of Rs 60,000 in 20X0 andRs
30,000 in 20X1, being part of initial advertising expenditure of Rs 90,000 in 20X0 which is being written off
over three years. Similar amount of advertising expenditure of A Ltd. has been fully written off in 20X0.
Restate the balance sheet of B Ltd. as at 31st December, 20X1 after considering the above information, for
the purpose of consolidation. Would restatement be necessary to make the accounting policies adopted by
A Ltd. and B Ltd. uniform.

Solution
Restatement would be required to make the accounting policies of A Ltd and B Ltd uniform

Adjusted reserves of B Ltd.:

Rs Rs
Reserves as given 7,14,000
Add: Provision for doubtful debts 9,000
{[8,91,000 / 99 X 100]-8,91,000}
7,23,000
Less: Reduction in value of Inventory 34,000
Advertising expenditure to be written off 30,000 (64,000)
Adjusted reserves 6,59,000

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Note: No adjustment would be required in respect of opening inventory of B Ltd as that will not have any
impact on P&L.

Restated Balance Sheet of B Ltd as at 31st December, 20X1

Particulars Note No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000
(b) Reserves and Surplus 2 6,59,000
(2) Current Liabilities
(a) Short term borrowings 3 1,70,000
(b) Trade Payables 4,94,000
(c) Short-term provision 4 4,30,000
Total 22,53,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 5 2,24,000
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 6 7,08,000
(b) Trade Receivables 7 9,00,000

(c) Cash & Cash Equivalents 3,000

(d) Other current assets 8 18,000
Total 22,53,000

Notes to Accounts
20X1

1. Share capital
5,000 equity shares of Rs 10 each, fully paid up 5,00,000
2. Reserves and Surplus
General Reserves (refer to WN) 6,59,000
3. Short term borrowings
Bank overdraft 1,70,000
4. Short term provisions
Provision for taxation 4,30,000
5. Property, plant and equipment
Cost 3,20,000
Less: Depreciation (96,000)

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Total 2,24,000
6. Inventory
Actual inventory 7,42,000
Less: Change in method of valuation (34,000)
Total 7,08,000
7. Trade receivables
Actual trade receivables 8,91,000
Add: Adjustment for provision 9,000
Total 9,00,000
8. Other current Assets
Prepaid expenses
48,000

14. Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 20X1 for Rs 2,10,000. The issued
capital of Power Ltd., on 1st January, 20X1 was Rs 1,50,000 and the balance in the Profit & Loss
Account was Rs 90,000. During the year ended 31st December, 20X1, Power Ltd. earned a profit of
Rs 30,000 and at year end, declared and paid a dividend of Rs 22,500. What is the amount of
minority interest as on 1st January, 20X1 and 31st December, 20X1? Also compute goodwill/ capital
reserve at the date of acquisition.

SOLUTION-
Total dividend paid is Rs 22,500 (out of post-acquisition profits), hence dividend received by Hemant will be
credited to P & L account. Hemant Ltd.’s share of dividend = Rs 22,500 X 80% = Rs 18,000

Goodwill on consolidation (at the date of Rs Rs

acquisition):
Cost of shares 2,10,000
Less: Face value of capital i.e. 80% of capital 1,20,000
Add: Share of capital profits [90,000 X 80 %] 72,000 (1,92,000)
Goodwill 18,000
Minority interest on:
- 1st January, 20X1:
20% of Rs 2,40,000 [1,50,000 + 90,000] 48,000

- 31st December, 20X1:

20% of Rs2,47,500 [1,50,000 + 90,000 + 30,000 – 49,500
22,500]

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15. King Ltd. acquires 70% of equity shares of Queen Ltd. as on 31st March, 20X1 at a cost of Rs 140
lakhs. The following information is available from the balance sheet of Queen Ltd. as on 31st March,
20X1:

Rs in lakhs
Property, plant and equipment 240
Investments 110
Current Assets 140
Loans & Advances 30
15% Debentures 180
Current Liabilities 100

The following revaluations have been agreed upon (not included in the above figures):
Property, plant and equipment- up by 20% and Investments- down by 10%.
King Ltd. purchased the shares of Queen Ltd. @ Rs20 per share (Face value - Rs10).

Calculate the amount of goodwill/capital reserve on acquisition of shares of Queen Ltd.

SOLUTION-
Revalued net assets of Queen Ltd. as on 31st March, 20X1

` in lakhs ` in lakhs
PPE [240 X 120%] 288
Investments [110 X 90%] 99
Current Assets 140
Loans and Advances 30
Total Assets after revaluation 557
Less: 15% Debentures 180.0

Current Liabilities 100.0 (280)

Equity / Net Worth 277
King Ltd.’s share of net assets (70% of 277) 193.9
King Ltd.’s cost of acquisition of shares of Queen Ltd.
(`140 lakhs) (140)
Capital reserve 53.9

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16. From the following information, determine Minority Interest on the date of acquisition and on the
date of consolidation in each case:

Case Subsidiary % of Cost Date of Consolidation date

Company Share Acquisition
owned
01-01-20X1 31-12-20X1
Share Profit Share Profit
Capital and Loss Capital and Loss
A/c A/c
Rs Rs Rs Rs
Case-A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case-B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
Case-D M 95% 75,000 60,000 35,000 60,000 55,000

SOLUTION-

Minority Interest = Equity attributable to minorities

Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. in this case, it
should be equal to Share Capital + Profit & Loss A/c
A = Share capital on 1.1.20X1
B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1

Minority Minority interest Minority interest as

% Shares as at the date of at the date of
Owned acquisition consolidation
[E] [E] x [A + B] ` [E] X [C + D] `
Case A [100-90] 10 % 22,500 23,500
Case B [100-75] 25 % 50,000 40,000
Case C [100-70] 30 % 18,000 18,000
Case D [100-95] 5% 4,750 5,750

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17. A Ltd acquired 1,600 ordinary shares of Rs100 each of B Ltd on 1st July, 20X1. On 31st December,
20X1, the balance sheets of the two companies were as given below:

Balance Sheet of A Ltd. and its subsidiary, B Ltd as at 31st December, 20X1
Particulars Note A Ltd. B Ltd.
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000 2,00,000
(b) Reserves and Surplus 2 2,97,200 1,82,000
(2) Current Liabilities
(a) Trade Payables 47,100 17,400
(b) Short term borrowings 3 80,000
Total 9,24,300 3,99,400
II. Assets
(1) Non-current assets
(d) Property, Plant and Equipment 4 3,90,000 3,15,000
(b) Non-current Investments 5 3,40,000 --
(2) Current assets
(a) Inventories 1,20,000 36,400
(b) Trade receivables 59,800 40,000
(c) Cash & Cash equivalents 6 14,500 8,000
Total 9,24,300 3,99,400

Notes to Accounts
A Ltd. B Ltd.
Rs Rs
1. Share Capital
5,000 shares of Rs 100 each, fully paid up 5,00,000 -
2,000 shares of Rs 100 each, fully paid up - 2,00,000
Total 5,00,000 2,00,000

2. Reserves and Surplus

General Reserves 2,40,000 1,00,000
Profit & loss 57,200 82,000
Total 2,97,200 1,82,000
3. Short term borrowings
Bank overdraft 80,000 --
4. Property plant and equipment
Land and building 1,50,000 1,80,000
Plant & Machinery 2,40,000 1,35,000
Total 3,90,000 3,15,000

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5. Non-current Investments
Investment in B Ltd (at cost) 3,40,000 --
6. Cash & Cash equivalents
Cash 14,500 8,000
The Profit & Loss Account of B Ltd. showed a credit balance of Rs30,000 on 1st January, 20X1 out of which a
dividend of 10% was paid on 1st August, 20X1; A Ltd. credited the dividend received to its Profit & Loss
Account. The Plant & Machinery which stood at Rs 1,50,000 on 1st January, 20X1 was considered as worth
Rs1,80,000 on 1st July, 20X1; this figure is to be considered while consolidating the Balance Sheets. The rate
of depreciation on plant & machinery is 10% (computed on the basis of useful lives).

Prepare consolidated Balance Sheet as at 31st December, 20X1

SOLUTION-
Consolidated Balance Sheet of A Ltd. and its subsidiary, B Ltd as at 31st December, 20X1
Particulars Note No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000
(b) Reserves and Surplus 2 3,08,800

(2) Minority Interest 83,600

(3) Current Liabilities
(a) Trade Payables 3 64,500
(b) Short term borrowings 4 80,000
Total 10,36,900
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 5 7,41,000
(b) Intangible assets 6 17,200
(2) Current assets
(a) Inventories 7 1,56,400
(b) Trade receivables 8 99,800
(c) Cash & Cash equivalents 9 22,500
Total 10,36,900

Notes to Accounts
Rs
1. Share Capital
5,000 shares of Rs 100 each 5,00,000
2. Reserves and Surplus
Reserves 2,40,000
Profit & loss (Refer to W.N 8) 68,800

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Total 3,08,800
3. Trade Payables
A Ltd. 47,100
Add: B Ltd 17,400
Total 64,500
4. Short term borrowings
Bank overdraft 80,000

5. Property, plant and equipment

Land and building- A Ltd 1,50,000
Add: Land and building- B Ltd 1,80,000 3,30,000
Plant & Machinery (Refer to W.N 7) 4,11,000
Total 7,41,000
6. Intangible assets
Goodwill (refer to W.N 6) 17,200
7. Inventories
A Ltd. 1,20,000
B Ltd. 36,400
Total 1,56,400
8 Trade Receivables
A Ltd. 59,800
B Ltd. 40,000
Total 99,800
9 Cash & Cash equivalents
Cash of A Ltd 14,500
Add: cash of B Ltd. 8,000
Total 22,500

Share holding Pattern

Total Shares of B Ltd 2,000 shares
Shares held by A Ltd 1,600 shares i.e. 80 %
Minority Shareholding 400 shares i.e. 20 %

Working Notes:

1. The dividend @ 10% on 1,600 shares - Rs16,000 received by A Ltd. should have been credited to the
investment A/c, being out of pre-acquisition profits. A Ltd., must pass a rectification entry, viz.
Profit & Loss Account Dr.Rs 16,000
To Investment Rs 16,000
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2. The Plant & Machinery of B Ltd. would stand in the books at Rs 1,42,500 on 1st July, 20X1, considering
only six months’ depreciation on Rs 1,50,000 total depreciation being Rs 15,000. The value put on the
assets being Rs 1,80,000, there is an appreciation to the extent of Rs 37,500 (1,80,000 – 1,42,500).

3. Capital profits of B Ltd.

Rs Rs
Reserve on 1st January, 20X1 (Assumed there is no 1,00,000
movement in reserves during the year and hence
balance as on 1st January 20X1 is same as of
31st December 20X1)
Profit & Loss Account Balance on 1st January, 20X1 30,000
Less: Dividend paid (20,000) 10,000
Profit for 20X1:
Total Rs 82,000
Less: Rs10,000
Rs 72,000
Proportionate upto 1st July, 20X1 on time basis 36,000
(Rs 72,000/2)
Appreciation in value of Plant & Machinery 37,500
1,83,500
Less: 20% due to outsiders (36,700)
Holding company’s share 1,46,800

4. Revenue profits of B Ltd.:

Profit after 1st July, 20X1 [(82,000 – 10,000) x ½] 36,000

Less: Depreciation
10% depreciation on Rs1,80,000 for 6 months 9,000
nd
Less: Depreciation already charged for 2 half year on
(1,500)
1,50,000 (7,500)
34,500
Less: 1/5 due to outsiders (6,900)
Share of A Ltd. 27,600

5. Minority interest:

Par value of 400 shares (2,00,000 X 20%) 40,000

Add: 1/5Capital Profits [WN 3] 36,700
1/5 Revenue Profits [WN 4] 6,900
83,600

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6. Cost of Control:

Amount paid for 1,600 shares 3,40,000

Less: Dividend out of pre-acquisition profits (16,000) 3,24,000
Par value of shares 1,60,000
Capital Profits –share of A Ltd. [WN 3] 1,46,800 (3,06,800)
Cost of Control or Goodwill 17,200

7. Value of plant & Machinery:

A Ltd. 2,40,000
B Ltd. 1,35,000
Add: Appreciation on 1st July, 20X1 [1,80,000 – 37,500
(1,50,000 – 7,500)]
1,72,500
Add: Deprecation for 2nd half charged on pre- 7,500
revalued value
Less: Depreciation on Rs1,80,000 for 6 months (9,000) 1,71,000
4,11,000

8. Profit & Loss Account (Consolidated):

A Ltd. as given 57,200

Less: Dividend transferred to Investment A/c (16,000) 41,200
Share of A Ltd. in revenue profits of B Ltd. (WN 4) 27,600
68,800

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18. On 31st March, 20X1, the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:

Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note H Ltd.(Rs S Ltd.(Rs
No. in Lacs) in Lacs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 12,000 4,800

(b) Reserves and Surplus 2 5,499 3,000

(2) Current Liabilities
(a) Trade payables 3 1,833 1,014
(b) Short term provisions 4 855 394
(c) Other current liabilities 1,200 -
(Dividend payable)
Total 21,387 9,208
II. Assets
(1) Non-current assets
Property, Plant and Equipment 5 9,468 5,486
Non-current Investments 3,000
(Shares in S Ltd.)
(2) Current assets
(a) Inventories 3,949 1,956
(b) Trade receivables 6 2,960 1,562
(c) Cash and cash equivalents 1,490 204
(d) Short term loans and advances 7 520
Total 21,387 9,208

Notes to Accounts
H Ltd.(Rs S Ltd.(Rs
in lacs) in lacs)
1. Share Capital
Authorized share capital 15,000 6,000
Equity shares of Rs 10 each, fully paid up
Issued and Subscribed:
Equity shares of Rs 10 each, fully paid up 12,000 4,800
2. Reserves and surplus
General Reserve 2,784 1,380
Profit and Loss Account: 2,715 1,620
Total 5,499 3,000
3. Trade Payables
Creditors 1,461 854

Bills Payable 372 160

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1,833 1,014
4. Short term provisions
Provision for Taxation 855 394
5. Property, plant and equipment
Land and Buildings 2,718 -
Plant and Machinery 4,905 4,900
Furniture and Fittings 1,845 586
Total 9,468 5,486
6. Trade receivables
Debtors 2,600 1,363
Bills Receivable 360 199
Total 2,960 1,562
7. Short term loans and advances
Sundry Advances 520 --

The following information is also provided to you:

(a) H Ltd. purchased 180 lakh shares in S Ltd. on 31st March, 20X0 when the balances of General Reserve
and Profit and Loss Account of S Ltd. stood at Rs 3,000 lakh and Rs1,200 lakh respectively.
(b) On 1st April, 20X0, S Ltd. declared a dividend @ 20% for the year ended 31st March, 20X0. H Ltd.
credited the dividend received by it to its Profit and Loss Account.
(c) On 1st January, 20X1, S Ltd. issued 3 fully paid-up bonus shares for every 5 shares held out of balances of
its general reserve as on 31st March, 20X0.
(d) On 31st March, 20X1, all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H Ltd.
But on that date, H Ltd. held only Rs 45 lakh of these acceptances in hand, the rest having been endorsed in
favour of its trade payables.
(e) On 31st March, 20X1, S Ltd.’s inventory included goods which it had purchased for Rs 100 lakh from H
Ltd. which made a profit @ 25% on cost.

Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1.

SOLUTION-
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note No. (` in Lacs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 12,000
(b) Reserves and Surplus 2 7,159
(2) Minority Interest [W.N.6] 3,120
(3) Current Liabilities
(a) Trade payables 3 2,802
(b) Short term provisions 4 1,249
(c) Other current liabilities 5 1,200
Total 27,530
II. Assets
(1) Non-current assets
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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Property, Plant and Equipment 6 14,954

(2) Current assets
(a) Inventories 7 5,885
(b) Trade receivables 8 4,477
(c) Short term loans and advances 9 520
(d) Cash and cash equivalents 10 1,694
Total 27,530

Notes to Accounts
( in (in
lacs) lacs)
1. Share Capital
Authorized share capital 15,000
Equity shares of 10 each, fully paid up

Issued and Subscribed:

Equity shares of 10 each, fully paid up 12,000
Total 12,000
2. Reserves and surplus
Capital Reserve (Note 5) 1,320
General Reserve (2,784 + 108) 2,892
Profit and Loss Account:
H Ltd. 2,715
Less: Dividend wrongly credited 360
Unrealized Profit 20 (380)
2,335
Add: Share in S Ltd.’s Revenue profits 612 2,947
Total 7,159
3. Trade payables
Creditors
H Ltd. 1,461
S Ltd. 854 2,315
Bills Payable
H Ltd. 372
S Ltd. 160
532
Less: Mutual owing (45) 487 2,802

4.
Short term provisions

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Provision for Taxation

855
H Ltd.
394
S Ltd.
1,249
Total
5.
Other current liabilities
Dividend payable

H Ltd. 1,200
6. Property, plant and equipment
Land and Buildings
H Ltd. 2,718
Plant and Machinery
H Ltd. 4,905
S Ltd. 4,900 9,805
Furniture and Fittings
H Ltd. 1,845
S Ltd. 586 2,431
Total 14,954
7. Inventories
Stock
H Ltd. 3,949
S Ltd. 1,956
5,905
Less: Unrealized profit (20) 5,885
8. Trade receivables
Debtors
H Ltd. 2,600
S Ltd. 1,363 3,963
Bills Receivable
H Ltd. 360
S Ltd. 199
559
Less: Mutual Owing (45) 514 4,477
9. Short term loans and advances
Sundry Advances 520
10. Cash and cash equivalents
Cash and Bank Balances 1,694

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Share holding pattern of S Ltd.

Shares as on 31st March, 20X1 (Includes bonus shares 480 lakh shares (4,800 lakhs/
issued on 1st January, 20X1) ` 10)

H Ltd.’s holding as on 1st April, 20X0 180 lakhs

Add: Bonus received on 1st January, 20X1 108 lakhs (180 / 5 × 3)

Total H Ltd.’s holding as on 31st March, 20X1 288 lakhs i.e. 60 % [288/480×100]

Minority Shareholding 40%

Working Notes:
1. S Ltd.’s General Reserve Account
in lakhs in lakhs
To Bonus to equity 1,800 By Balance b/d 3,000
shareholders (WN-8)
To Balance c/d 1,380 By Profit and Loss A/c 180
(Balancing figure)
3,180 3,180

2. S Ltd.’s Profit and Loss Account

in lakhs in lakhs
To General Reserve 180 By Balance b/d 1,200
[WN 1]
To Dividend paid By Net Profit for the
(20% on `3,000 lakhs) 600 year* 1,200
To Balance c/d 1,620 (Balancing figure)
2,400 2,400
*Out of Rs 1,200 lakhs profit for the year, Rs 180 lakhs has been transferred to reserves.

3. Distribution of Revenue profits

Rs in lakhs
Revenue profits (W. N. 2) 1,200

Less: Share of H Ltd. 60% (720)

(General Reserve Rs 108 + Profit and Loss Account Rs
612)
Share of Minority Shareholders (40%) 480
Note: The question can also be solved by taking Rs 1,080 lakhs as post acquisition Profit and Loss balance
and Rs 180 lakhs as post acquisition General Reserve balance. The final answer will be same.

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4. Calculation of Capital Profits

Rs in lakhs
General Reserve on the date of acquisition less bonus shares 1,200
(Rs 3,000 – Rs 1,800)
Profit and loss account on the date of acquisition less dividend 600
paid (Rs 1,200 – Rs 600)
1,800
H Ltd.’s share = 60% of Rs 1,800 lakhs = Rs 1,080 lakhs
Minority interest = Rs 1,800 – Rs 1,080 = Rs 720 lakhs

5. Calculation of capital reserve

Rs in lakhs
Paid up value of shares held (60% of Rs4,800) 2,880
Add: Share in capital profits [WN 4] 1,080
3,960
Less: Cost of shares less dividend received (Rs 3,000 – Rs (2,640)
360)
Capital reserve 1,320

6. Calculation of Minority Interest

Rs in lakhs
40% of share capital (40% of Rs 4,800) 1,920
Add: Share in revenue profits [WN 3] 480
Share in capital profits [WN 4] 720
3,120

7. Unrealized profit in respect of inventory

Rs 100 lakhs X 25 /125 = Rs 20 lakhs

8. Computation of bonus to equity shareholders

Rs In lakhs
Shares as on 31 March 20X1 including bonus share
issued on 1 January 20X1 4,800
Or we can say these are 1 + 3/5 or 8/5
i.e. Shares before bonus issue should have been 4,800 / 8/5 = 3000
Accordingly, bonus issue would be (4,800-3,000) 1,800

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19. On 31.03.2014, the Balance sheet of H ltd and its subsidiary S ltd are –
Equity & Liabilities H Ltd S ltd
Equity Share Capital of Rs 10 each 4,00,000 1,00,000
General Reserve 75,000 35,000
P&L A/c 45,000 27,500
Creditors 35,000 25,000
Bills Payable 25,000 15,000
TOTAL 5,80,000 2,02,500
Assets
Land & Buildings 1,20,000 40,000
Machinery 1,50,000 10,000
Investments in S ltd (7500 shares at cost) 1,40,000 -
Stock 52,500 85,500
Debtors 80,000 45,000
Bills Receivable 22,500 15,000
Cash & Bank 15,000 7,000
TOTAL 5,80,000 2,02,500

Draw a consolidated balance sheet as at 31.03.2014 after considering the following –

a) H ltd acquired the shares on 31st July 2013

b) The balances of General Reserve and P&L a/c on 1st April 2013 of S ltd were Rs 10,000 and Rs
7,500 respectively
c) In Jan 2014 H ltd sold to S ltd goods costing Rs 7,500 for Rs 10,000. On 31 st March 2014, 50%
of these goods were lying as unsold in Godown of S ltd.
d) Bills Receivable of Rs 12,500 of H ltd are received from S ltd.
e) Creditors of S Ltd include Rs 6,000 due to H ltd.

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

ADDITIONAL QUESTIONS ON CONSOLIDATION

20. The following summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepared as on
31st March, 2019:

H Ltd. S Ltd. (Rs)

(Rs)
Equity and Liabilities
Shareholders' Funds
Equity Share Capital (fully paid up shares of Rs 10 12,00,000 2,00,000
each)
Reserves and Surplus
General Reserve 4,35,000 1,55,000
Profit and Loss Account 2,80,000 65,000
Current Liabilities
Trade Payables 3,25,000 1,25,000
TOTAL 22,40,000 5,45,000
H Ltd. S Ltd. (Rs)
(Rs)
Assets
Non-Current Assets
Property, Plant and Equipment
Machinery 6,40,000 1,80,000
Furniture 3,75,000 34,000
Non-Current Investments
Shares in S Ltd - 16,000 shares @ Rs 20 each 3,20,000 -
Current Assets
Inventories 2,68,000 62,000
Trade Receivables 4,73,000 2,37,000
Cash and Bank 1,64,000 32,000
TOTAL 22,40,000 5,45,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2018. On the date of acquisition, General Reserve and Profit Loss
Account of S Ltd. stood at Rs 50,000 and Rs 30,000 respectively.

• Machinery (book value Rs 2,00,000) and Furniture (book value Rs 40,000) of S Ltd. were revalued
at Rs 3,00,000 and Rs 30,000 respectively on 1st April,2018 for the purpose of fixing the price of its
shares (rates of depreciation computed on the basis of useful lives: Machinery 10% and Furniture
15%).
• Trade Payables of H Ltd. include Rs 40,000 due to S Ltd. for goods supplied since the acquisition of
the shares. These goods are charged at 10% above cost. The inventories of H Ltd. includes goods
costing Rs 55,000 (cost to H Ltd.) purchased from S Ltd.

CA SANDESH .C H Page 5.44

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

You are required to prepare the Consolidated Balance Sheet of H Ltd with its subsidiary S Ltd. as at 31st March,
2019 (RTP NOV 2019 & MTP MARCH 2022: 15 MARKS)

SOLUTION-

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2019

Particulars Note
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 12,00,000
(1,20,000 equity shares of 10
each)
(b) Reserves and Surplus 1 8,16,200
(2) Minority Interest (W.N.4) 99,300
(3) Current Liabilities
(a) Trade Payables 2 4,10,000
Total 25,25,500

II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment
(i) Tangible assets 3 13,10,500
(ii) Intangible assets 4 24,000
(b) Current assets
(i) Inventories 5 3,25,000
(ii) Trade Receivables 6 6,70,000
(iii) Cash at Bank 7 1,96,000
Total 25,25,500

Notes to Accounts

1. Reserves and Surplus

General Reserves 4,35,000
Add: 80% share of S Ltd.’s post-
acquisition reserves (W.N.3) 84,000 5,19,000
Profit and Loss Account 2,80,000
Add: 80% share of S Ltd.’s post- 21,200
acquisition profits (W.N.3)
Less: Unrealised gain (4,000) 17,200 2,97,200
8,16,200
2. Trade Payables

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

H Ltd. 3,25,000
S Ltd. 1,25,000
Less: Mutual transaction (40,000) 4,10,000
3. Tangible Assets
Machinery
H Ltd. 6,40,000
S Ltd. 2,00,000
Add: Appreciation 1,00,000
3,00,000
Less: Depreciation (30,000) 2,70,000 9,10,000
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000

Less: Decrease in value (10,000)

30,000
Less: Depreciation 25,500
(4,500) 4,00,500
13,10,500
4. Intangible assets
Goodwill [WN 5] 24,000
5. Inventories
H Ltd. 2,68,000
S Ltd. 62,000 3,30,000
Less: Inventory reserve (5,000)
3,25,000
6. Trade Receivables
H Ltd. 4,73,000
S Ltd. 2,37,000
7,10,000
Less: Mutual transaction (40,000)
6,70,000
7. Cash and Bank
H Ltd. 1,64,000
S Ltd. 32,000 1,96,000

Working Notes:

1.Profit or loss on revaluation of assets in the books of S Ltd. and their bookvalues as on 1.4.2018

Machinery
Revaluation as on 1.4.2018 3,00,000
Less: Book value as on 1.4.2018 (2,00,000)
Profit on revaluation 1,00,000
Furniture

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Revaluation as on 1.4.2018 30,000

Less: Book value as on 1.4.2018 (40,000)
Loss on revaluation (10,000)

2.Calculation of short/excess depreciation

Machinery Furniture
Upward/ (Downward) Revaluation (W.N. 4) 1,00,000 (10,000)
Rate of depreciation 10% p.a. 15% p.a.
Difference [(short)/excess] (10,000) 1,500

3.Analysis of reserves and profits of S Ltd. as on 31.03.2019-

Pre-acquisition Post-acquisition profits (1.4.2018

profit upto – 31.3.2019)
1.4.2018
(Capital profits) General Profit and loss
Reserve account
General reserve as on 31.3.2019 50,000 1,05,000
Profit and loss account as on 31.3.2019 30,000 35,000

Upward Revaluation of machinery as on 1,00,000

1.4.2018
Downward Revaluation of Furniture as on (10,000)
1.4.2018
Short depreciation on machinery (W.N. 5) (10,000)

Excess depreciation on furniture (W.N. 5) 1,500

Total 1,70,000 1,05,000 26,500

4.Minority Interest-

Paid-up value of (2,00,000 x 20%) 40,000

Add: 20% share of pre-acquisition profits and
reserves 16,000
[(20% of (50,000 + 30,000)]
20% share of profit on revaluation 18,000
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300
1,00,300
Less: Unrealised Profit on Inventory
(55,000 x 10/110) x 20% (1,000)
99,300

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5.Cost of Control or Goodwill-

Cost of Investment 3,20,000

Less: Paid-up value of 80% shares 1,60,000
80% share of pre-acquisition profits and reserves

( 64,000 + 72,000) 1,36,000 (2,96,000)

Cost of control or Goodwill 24,000

21. Moon Ltd. and its subsidiary Star Ltd. provided the following information for the year ended 31st
March, 2021:

Particulars Moon Ltd (Rs) Star Ltd. (Rs)

Equity Share Capital 20,000,000 6,000,000
Finished Goods Inventory as on 01.04.2020 4,200,000 3,010,000
Finished Goods Inventory as on 31.03.2021 8,575,000 3,762,500
Dividend Income 1,680,000 437,500
Other non-operating Income 350,000 105,000
Raw material consumed 13,930,000 4,725,000
Selling and Distribution Expenses 3,325,000 1,575,000
Production Expenses 3,150,000 1,400,000
Loss on sale of investments 262,500 Nil
Sales and other operating income 33,250,000 19,075,000
Wages and Salaries 13,300,000 2,450,000
General and Administrative Expenses 2,800,000 1,225,000
Royalty paid Nil 50,000
Depreciation 315,000 140,000
Interest expense 175,000 52,500

Other information

• On 1st September 2018 Moon Ltd., acquired 50,000 equity shares of Rs 100 each fully paid up in Star Ltd.

• Star Ltd. paid a dividend of 10% for the year ended 31st March 2020. The dividend was correctly
accounted for by Moon Ltd.

• Moon Ltd. sold goods of Rs 17,50,000 to Star Ltd. at a profit of 20% on selling price. Inventory of Star Ltd.
includes goods of Rs 7,00,000 received from Moon Ltd.

• Selling and Distribution expenses of Star Ltd. include Rs 2,12,500 paid to Moon Ltd. as brokerage fees.

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• General and Administrative expenses of Moon Ltd. include Rs 2,80,000 paid to Star Ltd. as consultancy
fees.

• Star Ltd. used some resources of Moon Ltd., and Star Ltd. paid Rs 50,000 to Moon Ltd. as royalty.

Prepare Consolidated Statement of Profit and Loss of Moon Ltd. and its subsidiary Star Ltd. for the year
ended 31st March, 2021 as per Schedule III to the Companies Act, 2013 (DEC 2021: 15 MARKS)

SOLUTION-

Consolidated statement of profit and loss of Moon Ltd. and its subsidiary Star Ltd. for the year ended on
31st March, 2021

Particulars Note No.

Revenue from operations 1 5,00,32,500
Other Income 2 18,10,000
Total revenue (I) 5,18,42,500
Expenses:
Cost of material purchased/consumed 3 2,14,55,000
Changes (Increase) in inventories of finished goods 4 (49,87,500)
Employee benefit expense 5 1,57,50,000
Finance cost 6 2,27,500
Depreciation and amortization expense 7 4,55,000
Other expenses 8 84,32,500
Total expenses (II) 4,13,32,500
Profit before tax (II-III) 1,05,10,000

Notes to Accounts:

1. Revenue from operations

Sales and other operating revenues1
Moon Ltd. 3,32,50,000
Star Ltd. 190,75,000
523,25,000
Less: Inter-company sales (17,50,000)
Consultancy fees received by (2,80,000)
Star Ltd. from Moon Ltd.
Royalty received by Moon Ltd. (50,000)
from Star Ltd.
5,00,32,500
Brokage received by Moon Ltd. (2,12,500)
from Star Ltd.

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2. Other Income
Dividend income:
Moon Ltd. 16,80,000
Star Ltd. 4,37,500 21,17,500
Loss on sale of investments Star Ltd. (2,62,500)
Other Non-operating Income
Moon Ltd. 3,50,000
Star Ltd. 1,05,000 4,55,000 18,10,000
Less – Dividend from Star ltd (500,000)
(50,00,000 x 10%)

3. Cost of material purchased/consumed

Moon Ltd. 1,39,30,000
Star Ltd. 47,25,000
1,86,55,000
Less: Purchases by Star Ltd. From
Moon Ltd. (17,50,000) 1,69,05,000
Direct expenses (Production)
Moon Ltd. 31,50,000
Star Ltd. 14,00,000 45,50,000 2,14,55,000
4. Changes (Increase) in inventories of
finished goods
Moon Ltd. 43,75,000
Star Ltd. 7,52,500
51,27,500
Less: Unrealized profits ` 7,00,000 ×
20/100 (1,40,000) 49,87,500

5. Employee benefits and expenses

Wages and salaries:
Moon Ltd. 1,33,00,000
Star Ltd. 24,50,000 1,57,50,000
6 Finance cost
Interest:
Moon Ltd. 1,75,000
Star Ltd. 52,500 2,27,500

7. Depreciation
Moon Ltd. 3,15,000
Star Ltd. 1,40,000 4,55,000
8. Other expenses
General & Administrative expenses:

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Moon Ltd. 28,00,000

Star Ltd. 12,25,000
40,25,000
Less: Consultancy fees received byStar (280,000) 37,45,000
Ltd. from Moon Ltd.
Royalty:
Star Ltd. 50,000
Less: Received by Moon Ltd. Selling (50,000) Nil
and distribution Expenses:
Moon Ltd. 33,25,000
Star Ltd. 15,75,000
49,00,000
Less: Brokerage received by Moon (2,12,500) 46,87,500 84,32,500
Ltd. from Star Ltd.

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22. Zoom Ltd. acquired 70% shares of Star Ltd. @ Rs 30 per share. Following is the extract of Balance
Sheet of Star Ltd.:

Rs
15,00,000 Equity Shares of Rs 10 each 1,50,00,000
15% Debentures 15,00,000
Trade Payables 82,50,000
Property, Plant and Equipment 1,05,00,000
Investments 67,50,000
Current Assets 1,02,00,000
Loans and Advances 33,00,000

On the same day Star Ltd. declared dividend at 20% and as agreed between both the companies Property,
Plant and Equipment were to be depreciated @ 10% and investment to be taken at market value of Rs
90,00,000. Calculate the Goodwill or Capital Reserve to be recorded in Consolidated Financial Statements.
(RTP MAY 2024)

SOLUTION-

Calculation of Goodwill or Capital

Reserve Rs Rs
Cost of Investment in Star Ltd. (70%
stake):
15,00,000 Equity Shares x 70% x Rs 30 per
share 3,15,00,000
Less: Pre-acquisition dividend:
10,50,000 shares x Rs 2 (21,00,000) 2,94,00,000
Less: Share of Zoom Ltd. in Net Assets of
Star Ltd (W.N) (1,55,40,000)
Goodwill on Date of Acquisition 1,38,60,000

Working Note:
Calculation of net asset Rs Rs
Assets
Property, Plant and Equipment 1,05,00,000

Less: Value written off (Rs 105 lakhs x

10%) (10,50,000)
94,50,000

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Investments at Market Value 90,00,000

Current Assets 1,02,00,000
Loans and Advances 33,00,000 3,19,50,000
Less: Liabilities
Trade Payables 82,50,000
15% Debentures 15,00,000 (97,50,000)
Net Assets of Star Ltd. 2,22,00,000
Share of Zoom Ltd. in Net Assets of Star
Ltd.: 70% 1,55,40,000

23. Gamma Ltd. acquired 24,000 equity shares of Rs 10 each, in Beta Ltd. on October 1, 2023 forRs
4,60,200. The profit and loss account of Beta Ltd. showed a balance of Rs 15,000 on April 1,2023.
The plant and machinery of Beta Ltd. which stood in the books at Rs 2,25,000 on April 1,2023 was
considered worth Rs 2,70,000 on the date of acquisition.

The information of the two companies as at 31-3-2024 was as follows:

Gamma Ltd. Beta Ltd.
(Rs) (Rs)
Shares capital (fully paid equity sharesof Rs
10 each) 7,50,000 3,00,000
General reserve 3,60,000 1,50,000
Profit and loss account 85,800 1,23,000
Current Liabilities 2,54,700 49,500
Land and building 2,70,000 2,85,000
Plant and machinery 3,60,000 2,02,500
Investments 4,60,200
Current assets 3,60,300 1,35,000

You are required to compute impact of revaluation of Plant and Machinery

(MTP MAY 2024 :7 Marks)

SOLUTION-
Impact of Revaluation of Plant and Machinery will be as –
Rs
Book value of Plant and Machinery as on 01-04-2023 2,25,000
(2,25,000-2,02,500) 10%
Depreciation Rate = 22,500/2,25000 x100
2,25,000
Book value of Plant and Machinery as on 01-10-2023 aftersix
months depreciation @10% (2,25,000-11,250) 2,13,750
Revalued at 2,70,000
Revaluation profit (2,70,000-2,13,750) 56,250
Share of Gamma Limited in Revaluation Profit (80%) 45,000
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Share of Minority in Revaluation profit (20%) 11,250

Additional Depreciation on appreciated value to be
charged from post-acquisition profits
(10% of Rs 22,5,000 for 6 months) + (10% of Rs 2,70,000 for6
months) less Rs 22500 (as already charged) 2,250
Share of Gamma Limited in additional depreciation that will
reduce its share (80%) in post-acquisition profit by 1,800
Share of Minority Interest in additional depreciation 450

Working note:
Percentage of holding:
No. of Shares Percentage
Holding Co. : 24,000 (80%)
Minority shareholders : 6,000 (20%)
TOTAL SHARES : 30,000

24. The Balance Sheets of Art Limited and Craft Limited as on 31 March 2024 are as below:

Particulars Note Art Limited Craft Limited

No (Rs) (Rs)
I. Equity and Liabilities
a. Shareholder’s Fund
i. Share Capital 1 6,50,000 4,00,000
ii. Reserve & Surplus 2 3,12,000 2,48,000
b. Current Liabilities
i. Trade Payables 1,45,000 92,000
ii. Short term borrowings 3 70,000 -
11,77,000 7,40,000
II. Assets
a. Non-current Assets
i. Property, Plant & 4 4,21,000 3,60,000
Equipment
ii. Non-current investment 5 4,32,000 -
b. Current Assets
i. Inventories 1,66,000 2,05,000
ii. Trade Receivables 6 1,33,500 1,68,300
iii. Cash & Cash equivalent 24,500 6,700
11,77,000 7,40,000

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Notes to Accounts:

Art Limited Craft Limited

(Rs) (Rs)
1. Share capital
6,500 shares of Rs 100 each fully paid 6,50,000
up4,000 shares of Rs 100 each fully - 4,00,000
paid-up
Total 6,50,000 4,00,000
2. Reserves and Surplus

General Reserve 1,20,000 40,000

Profit and Loss account 1,92,000 2,08,000
Total 3,12,000 2,48,000
3. Short term borrowings -
Bank Overdraft 70,000
4. Property Plant & Equipment
Land & Building 1,90,000 1,35,000
Plant & Machinery 2,31,000 2,25,000
Total 4,21,000 3,60,000
5. Non-current investments -
Investment in Craft Limited (Cost) 4,32,000
6. Cash & Cash equivalents
Cash 24,500 6,700

Additional information:

(i) Art Limited acquired 3,200 ordinary shares of Craft Limited on 1st October, 2023. The Reserve & Surplus
and Profit & Loss Account of Craft Limited showed a credit balance of Rs 40,000 and Rs 58,700 respectively
as on 1st April, 2023.

(ii) The Plant & Machinery of Craft Limited which stood at Rs 2,50,000 as on 1 st April, 2023 was considered
worth Rs 2,20,000 on the date of acquisition. The depreciation on Plant & Machinery is calculated @ 10%
p.a. on the basis of useful life. The revaluation of Plant & Machinery is to be considered at the time of
consolidation.

(iii) Craft Limited deducts 1% from Trade Receivables as a general provision against doubtful debts. This
policy is not followed by Art Limited.

(iv) On 31st March 2024, Craft Limited's inventory includes goods which it had purchased from Art Limited
for 1,03,500 which made a profit of 15% on cost price.

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You are required to prepare a consolidated Balance Sheet as on 31st March 2024.

(MAY 2024: 14 Marks)

SOLUTION-

Consolidated Balance Sheet of Art and Craft Ltd As on 31st March, 2024

Particulars Note no. Rs

I. Equity & Liabilities
(1) Shareholders’ fund
(a) Share Capital 1 6,50,000
(b) Reserves & Surplus 2 3,73,460
(2) Minority Interest 3 1,26,740
(3) Current Liabilities
(a) Short term borrowings 4 70,000
(b) Trade Payables (1,45,000 + 92,000) 2,37,000
Total 14,57,200
II. Assets
(1) Non-current Assets
(a) Property, Plant & Equipment 5 7,65,000
(2) Current Assets
(a) Inventories 6 3,57,500
(b) Trade Receivables 7 3,03,500
(c) Cash & Cash Equivalents 8 31,200
Total 14,57,200

Notes to Accounts

Sr. No. Particulars Rs

1. Share Capital
Issued, Subscribed & Paid-up Capital
a) Equity Share Capital
6,500 Equity Shares of Rs 100 each 6,50,000

2. Reserves & Surplus

Profit & Loss A/c (WN 5) 2,40,100
General Reserve (WN 5) 1,20,000
Capital Reserve (W.N. 3) 13,360
3,73,460
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3. Minority interest in Craft Ltd. (W.N.4) 1,26,740

4. Short-term borrowings
Bank Overdraft 70,000
5. Property, Plant & Equipment
Land & Building
Art Ltd. 1,90,000
Craft Ltd. 1,35,000 3,25,000
Plant & Machinery
Art Ltd. 2,31,000
Craft Ltd. (2,25,000-17,500+1,500) 2,09,000 4,40,000
7,65,000
6. Inventories
Art Ltd. 1,66,000
Craft Ltd. 2,05,000
Less: unrealized profit (13,500) 3,57,500
7. Trade Receivables
Art Ltd. 1,33,500
Craft Ltd. 1,70,000 3,03,500
8. Cash & Cash Equivalents
Art Ltd. 24,500
Craft Ltd. 6,700 31,200

Working Notes:

1. Shareholding Pattern

Total 4,000 shares

3,200 shares 800 shares
Art Ltd (80%) 20% Minority Interest

2. Analysis of Profit

General reserve Profit and loss account

Opening balance 40,000 58,700
Closing balance 40,000 2,08,000
Changes during the year 1,49,300

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Analysis of Profit

Particulars Pre acquisition Post acquisition

profit (6 months) profit (6 months)
(Rs) (Rs)
Opening Balances 98,700
(40,000 + 58,700)
Profit for 6 months 74,650 74,650
(1,49,300 x 6/12)
Provision reversed 850 850
(1,700) (W.N. 8)
Revaluation Loss (W.N. 6) (17,500) -
Savings in depreciation (W.N. 6) - 1,500
Total 1,56,700 77,000
Holding (80%) 1,25,360 61,600
Minority Interest (20%) 31,340 15,400

3. Cost of Control

Particulars Rs Rs
Cost of Investment (Given) 4,32,000

Less: Share in Net Assets:

a) Share Capital (3,200 shares × Rs100) 3,20,000
b) Capital Profit (W.N. 2) 1,25,360 (4,45,360)
Capital Reserve 13,360

4. Minority Interest

Particulars Rs
Share Capital (800 shares × 100) 80,000
Capital Profit (W.N. 2) 31,340
Revenue Profit (W.N. 2) 15,400
Total 1,26,740

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5. Consolidated Profit and General Reserve of Art Ltd

Particulars Profit and loss General

account Rs reserve
Rs
Balance as per Balance Sheet 1,92,000 1,20,000
Revenue Profit 61,600 -
Unrealized Profit (Downstream) (13,500)
Total 2,40,100 1,20,000

6. Calculation of Revaluation Profit /Loss

Particulars Rs
Balance as on 01.04.2023 (given) 2,50,000
Depreciation for 6 months (2,50,000 × 10% × 6/12) (12,500)
WDV as on date of acquisition 2,37,500
Revalued amount 2,20,000
Revaluation Loss 17,500

7. Savings in Depreciation

= Depreciation Provided for 6 months – Depreciation Should be

= 12,500 – (2,20,000 × 10% × 6/12)

= 1,500

8. Calculation of provision reversed

Trade Receivable (Given) =1,68,300 it is after provision i.e 99%

So, 100% will be 1,70,000 therefor provision will be 1,700

Note: As per para 20 and 21 of AS 21, Consolidated financial statements: Consolidated financial statements
should be prepared using uniform accounting policies for like transactions and other events in similar
circumstances. If it is not practicable to use uniform accounting policies in preparing the consolidated
financial statements, that fact should be disclosed together with the proportions of the items in the
consolidated financial statements to which the different accounting policies have been applied

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MCQs (HOMEWORK)

1. Minority interest should be presented in the consolidated balance sheet

(a) As a part of liabilities.
(b) As a part of equity of the parent’s shareholders.
(c) Separately from liabilities and the equity of the parent’s shareholders.
(d) As a part of assets.

2. Minority of the subsidiary is entitled to

(a) Capital profits of the subsidiary company.
(b) Revenue profits of the subsidiary company.
(c) Both capital and revenue profits of the subsidiary company.
(d) Neither capital nor revenue profits of the subsidiary.

3. In consolidation of accounts of holding and subsidiary company _________ is eliminated in full.

(a) Current liabilities of subsidiary company.
(b) Reserves and surplus of both holding and subsidiary company.
(c) Mutual indebtedness.
(d) Nothing.

4. In consolidated balance sheet, the share of the outsiders in the net assets of the subsidiary must be
shown as
(a) Minority interest.
(b) Capital reserve.
(c) Current liability.
(d) Current assets.

5. Provision for Tax made by the subsidiary company will appear in the consolidated balance sheet as an
item of
(a) Current liability.
(b) Revenue profit.
(c) Capital profit.
(d) Current assets.

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Chapter 6 INTRODUCTION, OVERVIEW & APPLICABILITY OF ACCOUNTING

STANDARDS

Accounting Standards (ASs) are written policy documents issued by the Government with the support of
other regulatory bodies (e.g., Ministry of Corporate Affairs (MCA) issuing Accounting Standards for
corporates in consultation with National Advisory Committee on Accounting Standards (NACAS)) covering
the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the
financial statements.

Accounting Standards reduce the accounting alternatives in the preparation of financial statements within
the bounds of rationality, thereby, ensuring comparability of financial statements of different enterprises.

ACCOUNTING STANDARDS DEAL WITH THE FOLLOWING-

(i)recognition of events and transactions in the financial statements,
(ii) measurement of these transactions and events,
(iii) presentation of these transactions and events in the financial statements in a manner that is meaningful
and understandable to the reader, and
(iv) the disclosure relating to these transactions and events to enable the public at large and the
stakeholders and the potential investors in particular, to get an insight into what these financial statements
are trying to reflect and thereby facilitating them to take prudent and informed business decisions.

BENEFITS OF ACCOUNTING STANDARDS-

(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a reasonable
extent or eliminate altogether confusing variations in the accounting treatment followed for the purpose of
preparation of financial statements.
(ii) Requirements for additional disclosures: There are certain areas where important information is not
statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitiate comparison, to a
limited extent, of financial statements of companies situated in different parts of the world.

STANDARDS SETTING PROCESS-

The Institute of Chartered Accountants of India (ICAI), being a premier accounting body in the country, took
upon itself the leadership role by constituting the Accounting Standards Board (ASB) in 1977.

The standard-setting procedure of ASB can be briefly outlined as follows:

• Identification of broad areas by ASB for formulation of AS
• Constitution of study groups by ASB to consider specific projects and to prepare preliminary drafts
of the proposed accounting standards.
• Consideration of the preliminary draft prepared by the study group of ASB and revision, if any
• Circulation of draft of accounting standard (after revision by ASB) to the Council members of the
ICAI and specified outside bodies such as MCA, Securities and Exchange Board of India (SEBI),
Comptroller and Auditor General of India (C&AG), Central Board of Direct Taxes (CBDT), Standing
Conference of Public Enterprises (SCOPE), etc. for comments.
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• Meeting with the representatives of the specified outside bodies to ascertain their views on the
draft of the proposed accounting standard
• Finalisation of the exposure draft of the proposed accounting standard and its issuance inviting
public comments.
• Consideration of comments received on the exposure draft and finalisation of the draft accounting
standard by the ASB for submission to the Council of the ICAI for its consideration and approval for
issuance
• Consideration of the final draft of the proposed standard by the Council of the ICAI and if found
necessary, modification of the draft in consultation with the ASB is done
• The accounting standard on the relevant subject (for non-corporate entities) is then issued by the
ICAI. For corporate entities the accounting standards are issued by the Ministry of Corporate Affairs
in consultation with the NFRA.

INDIAN ACCOUNTING STANDARDS (IND AS) -

They are IFRS converged standards issued by the Central Government of India under the supervision and
control of Accounting Standards Board (ASB) of ICAI and in consultation with National Advisory Committee
on Accounting Standards (NACAS).

ROADMAP FOR IMPLEMENTATION OF THE INDIAN ACCOUNTING STANDARDS (IND AS)-

For Companies other than banks, NBFCs and Insurance Companies-

Phase I 1st April 2015 or thereafter: Voluntary Basis for all companies (with
Comparatives)
1st April 2016: Mandatory Basis
(a) Companies listed / in process of listing on Stock Exchanges in
India or Outside India having net worth > 500 crore
(b) Unlisted Companies having net worth > 500 crore
(c) Parent, Subsidiary, Associate and Joint venture of above
Phase II 1st April 2017: Mandatory Basis
(a) All companies which are listed/or in process of listing inside or
outside India on Stock Exchanges not covered in Phase I (other
than companies listed on SME Exchanges)
(b) Unlisted companies having net worth of 250 crore or more
(c) Parent, Subsidiary, Associate and Joint venture of above
Once Ind AS are applicable, an entity shall be required to follow the Ind AS for all the subsequent financial
statements

FOR SCHEDULED COMMERCIAL BANKS (EXCLUDING RRBS), INSURERS/INSURANCE COMPANIES AND

NON-BANKING FINANCIAL COMPANIES (NBFC’S)-

Non-Banking Financial Companies (NBFC’s)

Phase I: From 1st April, 2018 (with comparatives)
▪ NBFCs (whether listed or unlisted) having net worth Rs 500 crore or
more

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▪ Holding, Subsidiary, JV and Associate companies of above NBFC

other than those already covered under corporate roadmap shall
also apply from said date
Phase II: From 1st April, 2019 (with comparatives)
▪ NBFCs whose equity and/or debt securities are listed or are in the
process of listing on any stock exchange in India or outside India
and having net worth less than 500 crore
▪ NBFCs that are unlisted having net worth Rs 250 crore or more but
less than Rs 500 crore
▪ Holding, Subsidiary, JV and Associate companies of above other
than those already covered under corporate roadmap shall also
apply from said date
Voluntary adoption of Ind AS is not allowed.

SCHEDULED COMMERCIAL BANKS (EXCLUDING RRB’S) -

• Scheduled Commercial Banks (SCBs) excluding Regional Rural Banks (RRBs) were initially required to
implement Indian Accounting Standards (Ind AS) from 1 April 2018. RBI vide a press release dated 5
April 2018, deferred the implementation of Ind AS by one year i.e. from 1 April 2019.
• However, later on it deferred the Ind AS implementation till further notice RBI through a notification
dated 22 March 2019.

INSURERS/INSURANCE COMPANIES -
• IRDAI (Insurance Regulatory and Development Authority of India) deferred the implementation of
Ind AS in the insurance sector till further notice.

CARVE OUTS/INS IN IND AS-

• The Government of India in consultation with the ICAI decided to converge and not to adopt IFRS
issued by the IASB.
• Accordingly, while formulating Ind AS, efforts have been made to keep these Standards, as far as
possible, in line with the corresponding IAS/IFRS and departures have been made where considered
absolutely essential
• Various terminology related changes have been made to make it consistent with the terminology
used in law, e.g., ‘statement of profit and loss’ in place of ‘statement of comprehensive income’ and
‘balance sheet’ in place of ‘statement of financial position
• The differences which are in deviation to the accounting principles and practices stated in IFRS, are
commonly known as Carve-outs.
• Additional guidance given in Ind AS over and above what is given in IFRS, is termed as Carve in.

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APPLICABILITY OF ACCOUNTING STANDARDS-

Accounting Standards apply in respect of any enterprise engaged in commercial, industrial or business
activities, whether or not profit oriented and even if established for charitable or religious purposes.

Accounting Standards however, do not apply to enterprises solely carrying on the activities, which are not
of commercial, industrial or business nature (e.g., an activity of collecting donations and giving them to
flood affected people).

CRITERIA FOR CLASSIFICATION OF NON-CORPORATE ENTITIES AS DECIDED BY THE INSTITUTE OF

CHARTERED ACCOUNTANTS OF INDIA-
Level I Entities -
Non-corporate entities which fall in any one or more of the following categories, at the end of the relevant
accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange,
whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other income)
exceeds rupees 250 Crores in the immediately preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings (including public deposits)
in excess of rupees fifty crore (50 Cr) at any time during the immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.

Level II Entities -
Non-corporate entities which are not Level I entities but fall in any one or more of the following categories
are classified as Level II entities:
(i) All commercial, industrial and business reporting entities, whose turnover (excluding other income)
exceeds rupees 50 crore but does not exceed rupees 250 crore in the immediately preceding accounting
year.
(ii) All commercial, industrial and business reporting entities having borrowings (including public deposits)
in excess of rupees 10 crore but not in excess of rupees 50 crore at any time during the immediately
preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above

Level III Entities-

Non-company entities which are not covered under Level I and Level II but fall in any one or more of the
following categories are classified as Level III entities:

(i) All entities engaged in commercial, industrial or business activities, whose turnover (excluding other
income) exceeds rupees ten crore but does not exceed rupees fifty crore in the immediately preceding
accounting year.
(ii) All entities engaged in commercial, industrial or business activities having borrowings (including public
deposits) in excess of rupees two crore but does not exceed rupees ten crore at any time during the
immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above

Level IV Entities
Non-company entities which are not covered under Level I, Level II and Level III are considered as Level IV
entities.

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Additional requirements-
• Where an entity, being covered in Level II or Level III or Level IV, had qualified for any exemption or
relaxation previously but no longer qualifies for the relevant exemption or relaxation in the current
accounting period, the relevant standards or requirements become applicable from the current
period and the figures for the corresponding period of the previous accounting period need not be
revised merely by reason of its having ceased to be covered in Level II or Level III or Level IV, as the
case may be. The fact that the entity was covered in Level II or Level III or Level IV, as the case may
be, in the previous period and it had availed of the exemptions or relaxations available to that Level
of entities shall be disclosed in the notes to the financial statements. The fact that previous period
figures have not been revised shall also be disclosed in the notes to the financial statements.
• Where an entity has been covered in Level I and subsequently, ceases to be so covered and gets
covered in Level II or Level III or Level IV, the entity will not qualify for exemption/relaxation
available to that Level, until the entity ceases to be covered in Level I for two consecutive years.
Similar is the case in respect of an entity, which has been covered in Level II or Level III and
subsequently, gets covered under Level III or Level IV.

Example
M/s Omega & Co. (a partnership firm), had a turnover of ` 1.25 crores (excluding other income) and
borrowings of ` 0.95 crores in the previous year. It wants to avail the exemptions available in application of
Accounting Standards to non-corporate entities for the year ended 31.3.20X1. Advise the management of
M/s Omega & Co in respect of the exemptions of provisions of ASs, as per the directive issued by the ICAI.

Solution
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 ` 10 crores and borrowings less than ` 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.

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CRITERIA FOR CLASSIFICATION OF COMPANIES UNDER THE COMPANIES (ACCOUNTING STANDARDS)

RULES, 2021

Small and Medium Sized Company –

As per clause 2(e) of the Companies (Accounting Standards) Rules, 2021, “Small and Medium Sized
Company” (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange,
whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees 250 crore in the immediately
preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of rupees 50 crore at any time
during the immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is not a small and medium-sized
company

Accounting Standards not applicable to SMCs in their entirety:

AS 17 Segment Reporting

Non-SMCs -
Companies not falling within the definition of SMC are considered as Non-SMCs

1. XYZ Ltd., with a turnover of Rs 50 crores during previous year and borrowings of Rs 1 crore during
any time in the previous year, wants to avail the exemptions available in adoption of Accounting
Standards applicable to companies for the year ended 31.3.20X1. Advise the management on the
exemptions that are available as per the Companies (Accounting Standards) Rules, 2021.

SOLUTION-
The question deals with the issue of Applicability of Accounting Standards for corporate entities.
The companies can be classified under two categories viz SMCs and Non SMCs under the Companies
(Accounting Standards) Rules, 2021.

As per the Companies (Accounting Standards) Rules, 2021, criteria for above classification as SMCs, are:
“Small and Medium Sized Company” (SMC) means, a company-
• whose equity or debt securities are not listed or are not in the process of listing on any stock exchange,
whether in India or outside India;
• which is not a bank, financial institution or an insurance company;
• whose turnover (excluding other income) does not exceed rupees two-fifty crores in the immediately
preceding accounting year;
• which does not have borrowings (including public deposits) in excess of rupees fifty crores at any time
during the immediately preceding accounting year; and
• which is not a holding or subsidiary company of a company which is not a small and medium-sized
company.

Since, XYZ Ltd.’s turnover was Rs 50 crores which does not exceed Rs 250 crores and borrowings of Rs 1
crore are less than Rs 50 crores, it is a small and medium sized company (SMC).

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2. A company was classified as Non-SMC in 20X1-X2. In 20X2-X3, it has been classified as SMC. The
management desires to avail the exemptions or relaxations available for SMCs in 20X2-X3. However,
the accountant of the company does not agree with the same. Comment.

Solution-
As per Companies (Accounting Standards) Rules, 2021, an existing company, which was previously not a
SMC and subsequently becomes a SMC, should not be qualified for exemption or relaxation in respect of
accounting standards available to a SMC until the company remains a SMC for two consecutive accounting
periods. Therefore, the management of the company cannot avail the exemptions/ relaxations available to
the SMCs for the FY 20X2-X3.

3. Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. Discuss and
explain the benefits of Accounting Standards.

Solution-
Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. Accounting
Standards provide a set of standard accounting policies, valuation norms and disclosure requirements.
Accounting standards aim at improving the quality of financial reporting by promoting comparability,
consistency and transparency, in the interests of users of financial statements.

The following are the benefits of Accounting Standards:

(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a reasonable
extent confusing variations in the accounting treatment followed for the purpose of preparation of financial
statements.
(ii) Requirements for additional disclosures: There are certain areas where important is not statutorily
required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitate comparison, to a
limited extent, of financial statements of companies situated in different parts of the world. However, it
should be noted in this respect that differences in the institutions, traditions and legal systems from one
country to another give rise to differences in Accounting Standards adopted in different countries.

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4. Based upon criteria for rating of non-corporate entity, categorize the following as Level I, Level II
and Level IIl Level IV entities for the purpose of compliance of Accounting Standards in India.
(a) Rama Textiles whose turnover (excluding other income) exceeds ten crore but does not exceed rupees
fifty crore in the immediately preceding accounting year.
(b) Star Industries is having borrowings (including public deposits) in excess of rupees two crore but not in
excess of rupees ten crore at any time during the immediately preceding accounting year.
(c) Newman Industries is having borrowings (including public deposits) less than rupees fifty lakh at any
time during the immediately preceding accounting year.
(d) SS Finance is a financial institution carrying its business in India since last 10 years.
(e) DD Finance, holding company of SS Finance. (Entity mentioned at Point (v) above)
(f) Reliable Co-op Bank, a co-operative bank, carrying banking operations since last 15 years
(RTP MAY 2024)

SOLUTION-
(a) Level III Entity – Rama textiles, whose turnover (excluding other income) exceeds rupees ten crore but
does not exceed rupees fifty crore in the immediately preceding accounting year.

(b) Level III Entity – Star industries is having borrowings (including public deposits) in excess of rupees two
crore but not in excess of rupees ten crore at any time during the immediately preceding accounting year.

(c) Level IV Entity– Newman Industries is having borrowings (including public deposits) of less than rupees
fifty lakhs at any time during the immediately preceding accounting year.

(d) Level I Entity – SS is a financial institution carrying its business in India since last 10 years.

(e) Level I Entity – DD finance, holding company of SS finance (Entity mentioned in point (d) above).

(f) Level I Entity – Reliable co-operative banks carrying on banking business for the last 15 years

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MCQ QUESTIONS (HOMEWORK)

Q1. Accounting Standards for non-corporate entities in India are issued by

(a) Central Govt.
(b) State Govt.
(c) Institute of Chartered Accountants of India.
(d) MCA

Q2. Accounting Standards

(a) Harmonise accounting policies and eliminate the non-comparability of financial statements.
(b) Improve the reliability of financial statements.
(c) Both (a) and (b).
(d) manipulate the data for the management.

Q3. It is essential to standardize the accounting principles and policies in order to ensure
(a) Transparency
(b) Consistency.
(c) Comparability .
(d) All the above

Q4. Which committee is responsible for approval of accounting standards and their modification for the
purpose of applicability to companies?
(a) NFRA.
(b) MCA.
(c) Central Government Advisory Committee.
(d) IASB

Q5. Global Standards facilitate

(a) Cross border flow of money.
(b) Comparability of financial statements.
(c) Uniformity and Transparency of financial statements.
(d) All the three.

Q6. Non-corporate entities which are not Level I entities whose turnover (excluding other income) exceeds
rupees ___________ but does not exceed rupees two-fifty crores in the immediately preceding accounting
year are classified as Level II entities.
(a) five crores.
(b) two crores.
(c) fifty crores.
(d) ten crores.

Q7. The following Accounting Standard is not applicable to Non-corporate Entities falling in Level II in its
entirety
(a) AS 10.
(b) AS 17.
(c) AS 2.
(d) AS 13.

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Q8. All non-corporate entities engaged in commercial, industrial and business reporting entities, whose
turnover (excluding other income) exceeds rupees 250 crores in the immediately preceding accounting
year, are classified as
(a) Level II entities.
(b) Level I entities.
(c) Level III entities.
(d) Level IV entities.

Q9. All non-corporate entities engaged in commercial, industrial or business activities having borrowings
(including public deposits) in excess of rupees two crores but does not exceed rupees ten crores at any time
during the immediately preceding accounting year
(a) Level II entities.
(b) Level IV entities.
(c) Level III entities.
(d) Level I entities.

Q10. “Small and Medium Sized Company” (SMC) means, a company-

(a) which may be a bank, financial institution or an insurance company.
(b) whose turnover (excluding other income) does not exceed rupees two-fifty crores in the immediately
preceding accounting year;
(c) whose turnover (excluding other income) does not exceed rupees fifty crores in the immediately
preceding accounting year;
(d) whose turnover (excluding other income) does not exceed rupees five hundred crores in the
immediately preceding accounting year.

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Chapter 7 AS 13 – INVESTMENT ACCOUNTS

THIS STANDARD DOES NOT DEAL WITH:

• The basis for recognition of interest, dividends and rentals earned on investments which are
covered by AS 9
• Operating or finance leases
• Investments on retirement benefit plans and life insurance enterprises
• Mutual funds, venture capital funds and/ or the related asset management companies, banks and
public financial institutions formed under a Central or State Government Act or so declared under
the Companies Act, 2013

Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals,
for capital appreciation, or for other benefits to the investing enterprise.

Basic Classification : Investments are generally classified into :-

• A current investment- It is an investment that is by its nature readily realisable and is intended to be
held for not more than one year from the date on which such investment is made. The intention to
hold for not more than one year is to be judged at the time of purchase of investment.
• A long term investment – It is an investment other than a current investment

INVESTMENT RE-CLASSIFICATION-
Re-classification of From: Long Term Investments From: Current Investments
Investments To: Current Investments To: Long Term Investments
(a) Cost, or Cost, or
Transfers are made (b) Carrying Amount, Fair Value,
at whichever is less, at the date of whichever is less, at the date of
transfer. transfer.

DETERMINATION OF COST -
• Acquired Investments : Cost of an acquired / purchased Investment = Purchase Price + Acquisition
Charges, e.g. Brokerage, Fees, Stamp Duties, etc
• If an investment is acquired, or partly acquired, by the issue of shares or other securities, the
acquisition cost is the fair value of the securities issued or asset given up. The fair value may not
necessarily be equal to the nominal or par value of the securities issued.

Example: Rama Ltd acquired certain investments by issuing its 500 Shares, deemed fully paid up. As on the
date of acquiring the said investment, the Company's Shares, were quoted in the Stock Exchange at Rs 438
per Share, whilst the Face value was Rs 100 per Share. The cost of investment = Fair Value of the securities
issued = 438 X 500 = Rs 2,19,000. The Face Value per Share is not relevant

• If an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of
the investment is determined by reference to the fair value of the asset given up or the fair value of
the investment acquired, whichever is more clearly evident.

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Example: Rajeev Ltd acquired certain investments by handing over a part of its machinery to the Seller and
paying Rs 37,000 in cash. The WDV of the Machine was Rs 36,000 while the Realizable Value of the machine
on that date was Rs 20,000, The Cost of Investment = Fair Value of asset given up + Balance Acquisition
price paid = Rs 20,000 + Rs 37,000 = 57,000. On the other hand, if the Investments acquired consisted of
1,000- Shares of another Company quoted at Rs 58.65 each, the Fair Value of the investment acquired may
be taken at 1,000 Shares x Rs 58.65 = Rs 58,650

• Interest paid on Cum Interest purchase and Pre acquisition dividend should be reduced from the
cost of investment.

INVESTMENT PROPERTIES -
• An investment property is an investment in land or buildings that are not intended to be occupied
substantially for use by, or in the operations of, the investing enterprise.
• An investment property is accounted for in accordance with cost model as prescribed in AS 10
(Revised), ‘Property, Plant and Equipment’.

VALUATION OF CURRENT INVESTMENTS-

i. Current Investments are valued at Cost or Market Value whichever is lower.
ii. Cost or Market value should be determined either on individual investment basis or category of
investment basis. Example – Equity , Preference shares etc. Valuation of current investments on
overall (i.e global) basis is not appropriate.

1. Give your comments on the following situations, each being independent of the other
• Current Investments were acquired at a cost of Rs 86 Lakhs whereas their Fair Market Value as on
the Balance Sheet date was Rs 90 Lakhs. Due to insufficiency of profits from operations, the
Company would like to recognize the profit on these investments for ‘ improving’ its Financial
Statements.
• Current Investments are valued at lower of Cost and Fair Value. Valuation is being done on a global
basis

VALUATION OF LONG TERM INVESTMENTS-

i. Carrying Amount: Long-Term Investments are usually carried at Cost.
ii. Basis: Long-Term Investments are of individual importance to an enterprise. So, the Carrying
Amount is determined on an individual basis.
iii. Decline in Value:
(a) When there is a permanent decline in the value of a long-term investment, the Carrying Amount
is reduced in order to recognise the decline. The reduction in value shall be determined and
made for each investment individually.
(b) Temporary Fall in the value of long-term investments need not be provided for.
iv. Reversal of reduction: When there is a rise in the value or that the reasons for reduction no longer
exist, the reduction in Carrying Amount should be reversed. The reduction or reversal of such
reduction in the Carrying Amount
should be charged or credited to the Profit and Loss Statement.
v. Indicators: Factors which indicate whether a decline is temporary or otherwise are -
• the Market Value of the Investment,
• the Investee's Assets and Results,
• the expected Cash Flows from the investment

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DISPOSAL OF INVESTMENTS -
On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net
of expenses, is recognised in the profit and loss statement.

DISCLOSURE -
The following disclosures in financial statements in relation to investments are appropriate: -
• The accounting policies followed for valuation of investments.
• The amounts included in profit and loss statement for:
o Interest, dividends (showing separately dividends from subsidiary companies), and
rentals on investments showing separately such income from long term and current
investments. Gross income should be stated, the amount of income tax deducted at
source being included under Advance Taxes Paid.
o Profits and losses on disposal of current investments and changes in carrying amount of
such investments.
o Profits and losses on disposal of long term investments and changes in the carrying
amount of such investments.
• The aggregate amount of quoted and unquoted investments, giving the aggregate market value of
quoted investments

2. An unquoted long term investment is carried in the books at a cost of Rs 2 lakhs. The published
accounts of the unlisted company received in May, 20X1 showed that the company was incurring
cash losses with declining market share and the long term investment may not fetch more than Rs
20,000. How will you deal with this in preparing the financial statements of R Ltd. for the year ended
31st March, 20X1 ?

Solution
As it is stated in the question that financial statements for the year ended 31st March, 20X1 are under
preparation, the views have been given on the basis that the financial statements are yet to be completed
and approved by the Board of Directors. Also, the fall in value of investments has been considered on
account of conditions existing on the balance sheet date.

Investments classified as long term investments should be carried in the financial statements at cost.
However, provision for diminution should be made to recognise a decline, other than temporary, in the
value of the investments, such reduction being determined and made for each investment individually. AS
13 (Revised) ‘Accounting for Investments’ states that indicators of the value of an investment are obtained
by reference to its market value, the investee's assets and results and the expected cash flows from the
investment. On these bases, the facts of the given case clearly suggest that the provision for diminution
should be made to reduce the carrying amount of long term investment to Rs 20,000 in the financial
statements for the year ended 31st March, 20X1.

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3. X Ltd. on 1-1-20X1 had made an investment of Rs 600 lakhs in the equity shares of Y Ltd. of which
50% is made in the long term category and the rest as temporary investment. The realisable value of
all such investment on 31-3-20X1 became Rs 200 lakhs as Y Ltd. lost a case of copyright. From the
given market conditions, it is apparent that the reduction in the value is not temporary in nature.
How will you recognise the reduction in financial statements for the year ended on 31-3-2017 ?

Solution
X Ltd. invested Rs 600 lakhs in the equity shares of Y Ltd. Out of the same, the company intends to hold 50%
shares for long term period i.e. Rs 300 lakhs and remaining as temporary (current) investment i.e. Rs 300
lakhs. Irrespective of the fact that investment has been held by X Ltd. only for 3 months (from 1.1.20X1 to
31.3.20X1), AS 13 (Revised) lays emphasis on intention of the investor to classify the investment as current
or long term even though the long term investment may be readily marketable.

In the given situation, the realisable value of all such investments on 31.3.20X1 became Rs 200 lakhs i.e. Rs
100 lakhs in respect of current investment and Rs 100 lakhs in respect of long term investment.

As per AS 13 (Revised), ‘Accounting for Investment’, the carrying amount for current investments is the
lower of cost and fair value. In respect of current investments for which an active market exists, market
value generally provides the best evidence of fair value.

Accordingly, the carrying value of investment held as temporary investment should be shown at realisable
value i.e. at Rs 100 lakhs. The reduction of Rs 200 lakhs in the carrying value of current investment will be
charged to the profit and loss account.
Standard further states that long-term investments are usually carried at cost. However, when there is a
decline, other than temporary, in the value of long term investment, the carrying amount is reduced to
recognise the decline.

Here, Y Ltd. lost a case of copyright which drastically reduced the realisable value of its shares to one third
which is quiet a substantial figure. Losing the case of copyright may affect the business and the
performance of the company in long run. Accordingly, it will be appropriate to reduce the carrying amount
of long term investment by Rs 200 lakhs and show the investments at Rs 100 lakhs, since the downfall in
the value of shares is other than temporary. The reduction of Rs 200 lakhs in the carrying value of long term
investment will also be charged to the Statement of profit and loss.

4. M/s Innovative Garments Manufacturing Company Limited invested in the shares of another
company on 1st October, 20X3 at a cost of Rs 2,50,000. It also earlier purchased Gold of Rs 4,00,000
and Silver of Rs 2,00,000 on 1st March, 20X1. Market value as on 31st March, 20X4 of above
investments are as follows :

Shares – Rs 2,25,000
Gold – Rs 6,00,000
Silver- Rs 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments Manufacturing
Company Limited for the year ending 31st March, 2017 as per the provisions of Accounting Standard 13
"Accounting for Investments"?

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Solution
As per AS 13 (Revised) ‘Accounting for Investments’, for investment in shares - if the investment is
purchased with an intention to hold for short-term period (less than one year), then it will be classified as
current investment and to be carried at lower of cost and fair value, i.e., in case of shares, at lower of cost
(Rs 2,50,000) and market value (Rs 2,25,000) as on 31 March 20X4, i.e., Rs 2,25,000.

If equity shares are acquired with an intention to hold for long term period (more than one year), then
should be considered as long-term investment to be shown at cost in the Balance Sheet of the company.
However, provision for diminution should be made to recognise a decline, if other than temporary, in the
value of the investments.
Gold and silver are generally purchased with an intention to hold it for long term period (more than one
year) until and unless given otherwise. Hence, the investment in Gold and Silver (purchased on 1st March,
20X1) should continue to be shown at cost (since there is no ‘other than temporary’ diminution) as on 31st
March, 20X4, i.e., Rs 4,00,000 and Rs 2,00,000 respectively, though their market values have been
increased.

5. ABC Ltd. wants to re-classify its investments in accordance with AS 13 (Revised). Decide and state on
the amount of transfer, based on the following information:
(a) A portion of current investments purchased for Rs 20 lakhs, to be reclassified as long term investment,
as the company has decided to retain them. The market value as on the date of Balance Sheet was Rs 25
lakhs.
(b) Another portion of current investments purchased for Rs 15 lakhs, to be reclassified as long term
investments. The market value of these investments as on the date of balance sheet was Rs 6.5 lakhs.
(c) Certain long term investments no longer considered for holding purposes, to be reclassified as current
investments. The original cost of these was Rs 18 lakhs but had been written down to Rs 12 lakhs to
recognise other than temporary decline as per AS 13 (Revised). Fair value is Rs 13 lacs.

Solution
As per AS 13 (Revised), where investments are reclassified from current to long-term, transfers are made at
the lower of cost and fair value at the date of transfer.
(1) In the first case, the market value of the investment is Rs 25 lakhs, which is higher than its cost i.e. Rs 20
lakhs. Therefore, the transfer to long term investments should be carried at cost i.e. Rs 20 lakhs.

(2) In the second case, the market value of the investment is Rs 6.5 lakhs, which is lower than its cost i.e. Rs
15 lakhs. Therefore, the transfer to long term investments should be carried in the books at the market
value i.e. Rs 6.5 lakhs. The loss of Rs 8.5 lakhs should be charged to profit and loss account.
As per AS 13 (Revised), where long-term investments are re-classified as current investments, transfers are
made at the lower of cost and carrying amount at the date of transfer.

(3) In the third case, the book value of the investment is Rs 12 lakhs, which is lower than its cost i.e. Rs 18
lakhs. Here, the transfer should be at carrying amount and hence this re-classified current investment
should be carried at Rs 12 lakhs.

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6. On 1.4.20X1, Mr. Krishna Murty purchased 1,000 equity shares of Rs 100 each in TELCO Ltd. @ Rs
120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs 100 as cost of
shares transfer stamps. On 31.1.20X2, Bonus was declared in the ratio of 1: 2. Before and after the
record date of bonus shares, the shares were quoted at Rs 175 per share and Rs 90 per share
respectively. On 31.3.20X2, Mr. Krishna Murty sold bonus shares to a Broker, who charged 2%
brokerage.

Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as Current assets and
closing value of investments shall be made at Cost or Market value whichever is lower.

Solution
In the books of Mr. Krishna Murty
Investment Account for the year ended 31st March, 20X2
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
1.4.20X1 To Bank A/c 1,00,000 1,23,000 31.3.20X2 By Bank A/c 50,000 44,100
(W.N.1) (W.N.2)
31.1.20X2 To Bonus shares 50,000 − 31.3.20X2 By Balance c/d
(W.N.5) (W.N.4) 1,00,000 82,000
31.3.20X2 To Profit & loss
A/c (W.N.3) − 3,100
1,50,000 1,26,100 1,50,000 1,26,100

Working Notes:
1. Cost of equity shares purchased on 1.4.20X1 = (1,000 ×Rs 120) + (2% of Rs 1,20,000) + (½% of Rs
1,20,000) = Rs 1,23,000
2. Sale proceeds of equity shares (bonus) sold on 31st March, 20X2= (500 ×Rs 90) – (2% of Rs 45,000) = Rs
44,100.

3. Profit on sale of bonus shares on 31st March, 20X2

= Sale proceeds – Average cost
Sale proceeds = Rs 44,100
Average cost = Rs (1,23,000 /1,50,000) x 50,000 = Rs 41,000
Profit = Rs 44,100 – Rs 41,000 = Rs 3,100.

4. Valuation of equity shares on 31st March, 20X2

Cost = (Rs 1,23,000/1,50,000) x 1,00,000 = Rs 82,000
Market Value = 1,000 shares × Rs 90 = Rs 90,000
Closing balance has been valued at Rs 82,000 being lower than the market value.

5. Bonus shares do not have any cost.

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7. On 1st April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs 15 per share
(nominal value Rs 10 each). He provides you the further information:
(1) On 20th June, 20X1 he purchased another 10,000 shares of P Ltd. at Rs 16 per share.
(2) On 1st August, 20X1, P Ltd. issued one equity bonus share for every six shares held by the shareholders.
(3) On 31st October, 20X1, the directors of P Ltd. announced a right issue which entitles the holders to
subscribe three shares for every seven shares at Rs 15 per share. Shareholders can transfer their rights in
full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs 2 per share and subscribed the rest on
5th November, 20X1.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 20X2

Solution
In the books of Rajat
Investment Account(Equity shares in P Ltd.)
Date Particulars No. of Amount Date Particulars No. of Amount
shares shares
1.4.X1 To Balance b/d 50,000 7,50,000 31.3.X2 By Balance c/d 90,000 12,10,000
20.6.X1 To Bank A/c 10,000 1,60,000 (Bal. fig.)
1.8.X1 To Bonus issue
(W.N.1) 10,000 -
5.11.X1 To Bank A/c
(right shares)
(W.N.4) 20,000 3,00,000
90,000 12,10,000 90,000 12,10,000

Working Notes:
(1) Bonus shares = 10,000 shares 50,000 + 10,0006
(2) Right shares = (50,000 + 10,000 + 10,000)/ 7 x 3 = 30,000 shares
(3) Sale of rights = 30,000 shares××1/3 x 2 = 20,000 to be credited to statement of profit and loss
(4) Rights subscribed = = 30,000 x 2/3 ×15 = 300,000

8. On 1.4.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of Rs 15 per share (Nominal
value Rs 10). On 20.6.20X1, he purchased another 5,000 shares of the company at Rs16 per share.
The directors of ‘X’ Ltd. announced a bonus and rights issue. No dividend was payable on these
issues. The terms of the issue are as follows:
Bonus basis 1:6 (Date 16.8.20X1).
Rights basis 3:7 (Date 31.8.20X1) Price Rs 15 per share.
Due date for payment 30.9.20X1.

Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar sold 33.33% of his
entitlement to Sekhar for a consideration of Rs 2 per share.

Dividends: Dividends for the year ended 31.3.20X1 at the rate of 20% were declared by X Ltd. and received
by Sundar on 31.10.20X1. Dividends for shares acquired by him on 20.6.20X1 are to be adjusted against the
cost of purchase.

On 15.11.20X1, Sundar sold 25,000 equity shares at a premium of Rs 5 per share.

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You are required to prepare in the books of Sundar.

(1) Investment Account
(2) Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.20X1and shares are valued at average cost.

Solution
Books of Sundar
Investment Account (Equity Shares in X Ltd.)
No. Amount No. Amount
` `
1.4.20X1 To Bal b/d 25,000 3,75,000 31.10.20X1 By Bank — 10,000
20.6.20X1 To Bank 5,000 80,000 (dividend
16.8.20X1 To Bonus 5,000 — on shares
(W.N.1) acquired on
30.9.20X1 To Bank 10,000 1,50,000 20/6/20X1)
(Rights (W.N.4)
Shares)
(W.N.3)
15.11.20X1 To Profit 44,444 15.11.20X1 By Bank 25,000 3,75,000
(on sale of (Sale of
shares) shares)
31.12.20X1 By Bal. c/d 20,000 2,64,444
(W.N.6)
45,000 6,49,444 45,000 6,49,444

Profit and Loss Account (An extract)

To Balance c/d 1,04,444 By Profit transferred 44,444
By Sale of rights (W.N.3) 10,000
By Dividend (W.N.4) 50,000
1,04,444 1,04,444

Working Notes:
(1) Bonus Shares = (25,000+5,000)/ 6 = 5,000 shares
(2) Right Shares = (25,000+5,000+5,000)/ 7×3 = 15,000 shares
(3) Right shares renounced = 15,000×1/3 = 5,000 shares
Sale of right shares = 5,000 x 2 = Rs 10,000
Right shares subscribed = 15,000 – 5,000 = 10,000 shares
Amount paid for subscription of right shares = 10,000 x 15 = Rs 1,50,000

(4) Dividend received = 25,000 (shares as on 1st April 20X1) × 10 × 20% = Rs 50,000
Dividend on shares purchased on 20.6.20X1 = 5,000×10×20% = Rs 10,000 is adjusted to Investment A/c

(5) Profit on sale of 25,000 shares

= Sales proceeds – Average cost
Sales proceeds = Rs 3,75,000
Average cost = (3,75,000+80,000+1,50,000-10,000)/ 45,000 ×25,000 = 3,30,556
Profit = Rs 3,75,000– Rs 3,30,556= Rs 44,444.
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(6) Cost of shares on 31.12.20X1

(3,75,000+80,000+1,50,000-10,000)/ 45,000×20,000 = 2,64,444

9. On 1st January 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the shares was Rs10
each but their book value was Rs 16 per share. On 1st June 20X1, Singh purchased 5,000 more
equity shares in the company at a premium of Rs 4 per share.

On 30th June, 20X1, the directors of X Ltd. announced a bonus and rights issue. Bonus was declared at the
rate of one equity share for every five shares held and these shares were received on 2nd August, 20X1.

The terms of the rights issue were:

(a) Rights shares to be issued to the existing holders on 10th August, 20X1.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at the
rate of one share per every three held at Rs 15 per share-the whole sum being payable by 30th September,
20X1.
(c) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights he sold
to Ananth for a consideration of Rs 1.50 per share.
(e) Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared by the Company and
received by Singh on 20th October, 20X1.
(f) On 1st November, 20X1, Singh sold 20,000 equity shares at a premium of Rs 3 per share.

The market price of share on 31-12-20X1 was Rs 14. Show the Investment Account as it would appear in
Singh’s books on 31-12-20X1 and the value of shares held on that date.

Solution
Investment Account-Equity Shares in X Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount
shares shares
` ` ` `
20X1 20X1
Jan. 1 To Bal. 20,000 - 3,20,000 Oct. 20 By Bank 30,000 7,500
b/d (dividend)
[20,000 x
10 x 15%]
[5,000 x 10
x 15%]

June 1 To Bank 5,000 - 70,000 Nov. 1 By Bank 20,000 2,60,000

Aug. 2 To Bonus 5,000 — Nov. 1 By P & L 1,429
Issue A/c (W.N.2)
Sep. 30 To Bank 5,000 - 75,000 Dec. 31 By Balance 15,000 1,96,071
(Right) c/d (W.N.3)
(W.N.1)
Dec.31 To Profit 30,000
& Loss
A/c
(Dividend
income)
35,000 30,000 4,65,000 35,000 30,000 4,65,000

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Jan. 1, To 15,000 1,96,071

20X2 Balance
b/d

Working Notes:
1. Right shares
No. of right shares issued = (20,000 + 5,000 + 5,000)/ 3 = 10,000 shares
No. of right shares subscribed = 10,000 x 50% = 5,000 shares
Amount of right shares issued = 5,000 x 15 = Rs 75,000
No. of right shares sold = 10,000 – 5,000 = 5,000 shares
Sale of right shares = 5,000 x 1.5 = Rs 7,500 to be credited to statement of profit and loss

2. Cost of shares sold — Amount paid for 35,000 shares

Rs
(Rs3,20,000 + Rs70,000 + Rs75,000) 4,65,000
Less: Dividend on shares purchased on June 1 (since the (7,500)
dividend pertains to the year ended 31st March, 20x1, i.e., the
pre- acquisition period)
Cost of 35,000 shares 4,57,500
Cost of 20,000 shares (Average cost basis) 2,61,429
Sale proceeds 2,60,000
Loss on sale 1,429

3. Value of investment at the end of the year

Assuming investment as current investment, closing balance will be valued based on lower of cost or net
realisable value.
Here, Net realisable value is Rs14 per share i.e. 15,000 shares x Rs 14 = Rs 2,10,000 and
cost = { 4,57,500×15,000 / 35,000 } 1,96,071. Therefore, value of investment at the end of the year will be
Rs 1,96,071.

10. A Limited purchased 5,000 equity shares (nominal value Rs 100 each) of Allianz Limited for Rs 105
each on 1st April, 20X1. The shares were quoted cum dividend. On 15th May, 20X1, Allianz Limited
declared & paid dividend of 2% for year ended 31st March, 20X1. On 30th June, 20X1 Allianz Limited
issued bonus shares in ratio of 1:5. On 1st October, 20X1 Allianz Limited issued rights share in the
ratio of 1:12 @ 45 per share. A Limited subscribed to half of the rights issue and the balance was
sold at Rs 5 per right entitlement. The company declared interim dividend of 1% on 30th November,
20X1. Right shares were not entitled to dividend. The company sold 3,000 shares on 31st December,
20X1 at Rs 95 per share. The company A Ltd. incurred 2% as brokerage while buying and selling
shares.

You are required to prepare Investment Account in books of A Ltd for the year ended 31st March, 20X2.

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Solution
In the books of A Ltd.
Investment in equity shares of Allianz Ltd. for the year ended 31st March, 20X2
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `
20X1 20X1
April 1 To Bank A/c 5,000 - 5,35,500 May 15 By Bank A/c - - 10,000
(W.N.1) (dividend)
(W.N.6)
June To Bonus 1,000 - - Nov. 30 By Bank A/c - 6,000
30 Issue (W.N 2) (Interim
Oct. 1 To Bank A/c 250 - 11,250 dividend) (W.N.7) -
(W.N. 3)
Dec.31 To P & L A/c - - 21,660 Dec. 31 By Bank A/c 3,000 - 2,79,300
(W.N. 5) (W.N. 5)

20X2 20X2
March To P & L A/c - 6,000 - March By Balance c/d
31 (b.f.) 31 (W.N. 7) 3,250 - 2,79,110
6,250 6,000 5,68,410 6,250 6,000 5,68,410

Working Notes:
1. Calculation of cost of purchase on 1st April, 20X1
Rs 105 X 5,000 shares = Rs 5,25,000
Add: Brokerage (2%) = Rs 10,500
Rs 5,35,500

2. Calculation of number of bonus shares issued

Bonus Shares = 5,000/5× 1=1,000

3. Calculation of right shares subscribed

Right Shares = 6,000 /12 =500 shares
Shares subscribed = shares 500/2 = 250
Value of right shares subscribed = 250 shares @ Rs 45 per share = Rs 11,250

4. Calculation of sale of right entitlement

250 shares x Rs 5 per share = Rs 1,250
(Amount received from sale of rights will be credited to P&L a/c)

5. Calculation of profit on sale of shares

Total holding =5,000 shares original
1,000 shares bonus
250 shares right shares
6,250 shares

3,000 shares were sold on 31.12.20X1

Cost of total holdings of 6,250 shares (on average basis)
= Rs 5,35,500 + Rs 11,250 – Rs 10,000 = Rs 5,36,750

Average cost of 3,000 shares would be

= 5,36,750 / 6,250 × 3,000
=2,57,640
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Sale proceeds of 3,000 shares (3,000 x Rs 95) 2,85,000

Less: 2% Brokerage (5,700)
2,79,300
Less: Cost of 3,000 shares (2,57,640)
Profit on sale 21,660

6. Dividend received on investment held as on 15th May, 20X1

= Rs 10,000 (5,000 x Rs 100 x 2%) adjusted to Investment A/c

7. Dividend amounting Rs 6,000 received on 30.11.20X1 will be credited to P&L A/c

8. Calculation of closing value of shares (on average basis) as on 31st March, 20X2
Rs5,36,750 / 6250 × 3,250
= 279,110

11. Smart Investments made the following investments in the year 20X1-X2:
12% State Government Bonds having nominal value Rs100
Date Particulars
01.04.20X1 Opening Balance (1200 bonds) book value of Rs 126,000
02.05.20X1 Purchased 2,000 bonds @ Rs 100 cum interest
30.09.20X1 Sold 1,500 bonds at Rs 105 ex interest

Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X
Ltd.
15.04.20X1 Purchased 5,000 equity shares @ Rs 200 on cum right
basis;
Brokerage of 1% (on cum-right price) was paid in
addition (Nominal Value of shares Rs 10)
03.06.20X1 The company announced a bonus issue of 2 shares for
every 5 shares held.
16.08.20X1 The company made a rights issue of 1 share for every 7
shares held at Rs 250 per share.
The entire money was payable by 31.08.20X1.
22.8.20X1 Rights to the extent of 20% was sold @ Rs 60. The
remaining rights were subscribed.
02.09.20X1 Dividend @ 15% for the year ended 31.03.20X1 was
received on 16.09.20X1
15.12.20X1 Sold 3,000 shares @ Rs 300. Brokerage of 1% was
incurred extra.
15.01.20X2 Received interim dividend @ 10% for the year 20X1 –X2
31.03.20X2 The shares were quoted in the stock exchange @ Rs 220

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Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is
followed and no dividend is received on bonus shares as bonus shares are declared on 3.6.20X1 and
dividend pertains to the year ended 31.03.20X1.

Solution
In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 20X2
Date Particulars Nos. Interest Amount Date Particulars Nos. Interest Amount

1.4.X1 To Opening 1,200 3,600 1,26,000 30.6.X1 By Bank A/c - 19,200 -

balance b/d (Interest)

(W.N.7) (3,200 x 100 x
12% x 6/12)
2.5.X1 To Bank A/c 2,000 8,000 1,92,000 30.9.X1 By Bank A/c (W.N.1 1,500 4,500 1,57,500
(W.N.8) & W.N.9)
30.9.X1 To P & L A/c 8,437.50 31.12.X1 By Bank A/c - 10,200 -
(Profit on (Interest)
Sale) (W.N.1) (1,700 x 100 x
12% x 6/12)

31.3.X2 To P & L A/c 27,400 31.3.X2 By Bal. c/d (W.N.2 1,700 5,100 1,68,937.50
(Interest) & W.N.10)

3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50

Investments in Equity shares of X Ltd. for year ended 31.3.20X2

Date Particulars Nos. Dividend Amount Date Particulars Nos. Dividend Amount

15.4.X1 To Bank A/c 5,000 10,10,000

(W.N.3)

3.6.X1 To Bonus 2,000 - - 16.9.X1 By Bank - - 7,500

Issue (Dividend)
(5,000 x 10
x 15%)
(refer note
1 and 2)

31.8.X1 To Bank A/c 800 2,00,000 15.12.X1 By Bank (Sale) 3,000 - 8,91,000
(W.N.11) (W.N.4)

15.12.X1 To P & L A/c 4,28,500 15.1.X2 By Bank 4,800

(W.N.5) (interim
dividend)
(W.N.12)

31.3.X2 To P & L A/c 4,800 31.3.X2 By Bal. c/d 4,800 7,40,000

(W.N.6)

7800 4,800 16,38,500 7800 4,800 16,38,500

Working Notes:
1. Profit on sale of bonds on 30.9.X1
= Sales proceeds – Average cost
Sales proceeds = Rs1,57,500 (i.e., 1,500 x 105)
Average cost = Rs [(1,26,000+1,92,000) ×1,500/3,200] = 1,49,062.50
Profit = 1,57,500– Rs 1,49,062.50=Rs8,437.50

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2. Valuation of bonds on 31st March, 20X2

Cost = Rs3,18,000/3,200 x1,700 = 1,68,937.50

3. Cost of equity shares purchased on 15/4/20X1

= Cost + Brokerage
= (5,000 ×Rs 200) + 1% of (5,000 ×Rs 200) =Rs 10,10,000

4. Sale proceeds of equity shares on 15/12/20X1

= Sale price – Brokerage
= (3,000 ×Rs 300) – 1% of (3,000 ×Rs 300) =Rs 8,91,000.

5. Profit on sale of shares on 15/12/20X1

= Sales proceeds – Average cost
Sales proceeds = Rs 8,91,000
Average cost = Rs [(10,10,000+2,00,000-7,500) × 3,000/7,800]
= Rs [12,02,500 × 3,000/7,800] = 4,62,500
Profit = Rs 8,91,000 – Rs4,62,500=Rs 4,28,500.

6. Valuation of equity shares on 31st March, 20X2

Cost = Rs [12,02,500× 4,800/7,800]= Rs 7,40,000
Market Value = 4,800 shares × Rs 220 = Rs 10,56,000
Closing stock of equity shares has been valued at Rs 7,40,000 i.e. cost being lower than the market value.

7. Interest accrued on opening balance of bonds = 1,200 x 100 x 12% x 3/12

= Rs 3,600

8. Interest element in bonds purchased on 02.05.20X1

= 2,000 x 100 x 12% x 4/12 = Rs 8,000
Cost of investment (amount in investment column)
= (2,000 x 100) – 8,000 = Rs 1,92,000

9. Interest element in bonds sold on 30.09.20X1

= 1,500 x 100 x 12% x 3/12 = Rs 4,500

10. Interest accrued on closing balance of bonds

= 1,700 x 100 x 12% x 3/12 = Rs 5,100

11. Right shares

No. of right shares issued = (5,000 + 2,000) x 1/7 = 1,000 shares
No. of right shares sold = 1,000 x 20% = 200 shares
Proceeds from sale of right shares = 200 x 60 = Rs 12,000
to be credited to statement of profit and loss

No. of right shares subscribed = 1,000 – 200 = 800 shares

Amount of right shares subscribed = 800 x 250 = Rs 2,00,000

12. Amount of interim dividend = (5,000 + 2,000 + 800 – 3,000) x 10 x 10%

= Rs 4,800
Note: The amount of dividend for the period, for which shares were not held by the investor, has been
treated as capital receipt.

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12. Maruti has made following transactions during the financial year 2013-14:
Date Particulars
01.05.2013 Purchased 24,000 12% Bonds of Rs 100 each at Rs 84 cum-interest. Interest is payable on
30th September and 31st March every year.
15.06.2013 Purchased 1,50,000 equity shares of Rs 10 each in Alpha Limited for Rs 25 each through a
broker, who charged brokerage @ 2%.
10.07.2013 Purchased 60,000 equity shares of Rs 10 each in Beeta Limited for Rs 44 each through a
broker, who charged brokerage @2%.
14.10.2013 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2013 Sold 80,000 shares in Alpha Limited for Rs 22 each.
01.01.2014 Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2014 Beeta Limited made a right issue of one equity share for every four shares held at Rs 5 per
share. Mr. Maruti exercised his option for 40% of his entitlements and sold the balance
rights in the market at Rs 2.25 per share.
01.03.2014 Sold 15,000 12% Bonds at Rs 90 ex-interest.
15.03.2014 Received 18% interim dividend on equity shares of Beeta Limited.

Interest on 12% Bonds was duly received on due dates.

Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited and Equity Shares of
Beeta Limited in the books of Mr. Maruti for the year ended on 31st March, 2014.

Solution
In the books of Mr. Maruti
12% Bonds for the year ended 31st March, 2014
Date Particulars No. Interest Amount Date Particulars No. Interest Amount
` ` ` `
2013 To Bank A/c 24,000 24,000 19,92,000 2013 By Bank-Interest - 1,44,000
May, 1 (W.N.7) Sept. 30 (24,000 x 100
x
12% x 6/12)
2014 To P & L A/c - - 1,05,000 2014 By Bank 15,000 75,000 13,50,000
March 1 (W.N.1) Mar. 1 A/c (W.N.8)
2014 To P & L A/c (b.f.) 2,49,000 2014 By Bank-Interest 54,000
March Mar. 31 (9,000 x 100 x
31 12% x 6/12)
By Balance c/d
(W.N.2) 9,000 - 7,47,000
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000

Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 2014
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` `

2013 To Bank A/c 1,50,000 -- 38,25,000 2013 By Bank A/c 80,000 - 17,60,000

June 15 ([1,50,000 x 25] + [2% Oct. 31

x (1,50,000 x 25)])

Oct. 14 To Bonus Issue 1,00,000 - - 2014 By Bank A/c 2,55,000

(1,50,000/3 x 2) Jan. 1 –dividend
(1,70,000 x
10 x 15%)

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2013 To P & L A/c 5,36,000 March By Balance 1,70,000 - 26,01,000

Oct. 31 (W.N.3) 31 c/d
(W.N.4)

2014 To P & L A/c

Mar. 31 2,55,000

2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000

Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 2014
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `

2013 To Bank A/c 60,000 -- 26,92,800 2014 By Bank – - 1,18,800

July 10 ([60,000 x 44] March 15 dividend
+ [2% x [(60,000 + 6,000)
(60,000 x 44)] x 10 x 18%]

2014 To Bank A/c 6,000 - 30,000 March 31 By Balance c/d

Jan. 15 (W.N. 5) (bal. fig.) 66,000 - 27,22,800

March To P & L A/c - 1,18,800 -

31

66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800

Working Notes:
1. Profit on sale of 12% Bond
Sales price Rs 13,50,000
Less: Cost of bond sold = (Rs 12,45,000) {19,92,000 / 24,000 x 15,000}
Profit on sale Rs 1,05,000

2. Closing balance as on 31.3.2014 of 12 % Bond

= Rs 7,47,000 {19,92,000/ 24,000 x 9,000}

3. Profit on sale of equity shares of Alpha Ltd.

Sales price Rs 17,60,000
Less: Cost of bond sold = 38,25,000 2,50,000 x 80,000 (Rs 12,24,000)
Profit on sale Rs5,36,000

4. Closing balance as on 31.3.2014 of equity shares of Alpha Ltd.

38,25,000/ 2,50,000 x 1,70,000 = Rs 26,01,000

5. Calculation of right shares subscribed by Beeta Ltd.

Right Shares = 60,000 shares / 4 x 1= 15,000 shares
Shares subscribed by Mr. Maruti = 15,000 x 40%= 6,000 shares
Value of right shares subscribed = 6,000 shares @ Rs 5 per share = Rs 30,000

6. Calculation of sale of right entitlement by Beeta Ltd.

No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares x Rs 2.25 per share = Rs 20,250
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.

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7. Purchase of bonds on 01.05.2013

Interest element in purchase of bonds = 24,000 x 100 x 12% x 1/12 = Rs 24,000
Investment element in purchase of bonds = (24,000 x 84) – 24,000 = Rs 19,92,000

8. Sale of bonds on 01.03.2014

Interest element in purchase of bonds = 15,000 x 100 x 12% x 5/12 = Rs 75,000
Investment element in purchase of bonds = 15,000 x 90 = Rs 13,50,000

13. Mr. X acquires 200 shares of a company on cum-right basis for Rs 70,000. He subsequently receives
an offer of right to acquire fresh shares in the company in the proportion of 1:1 at Rs 107 each. He
does not subscribe but sells all the rights for Rs 12,000. The market value of the shares after their
becoming ex-rights has also gone down to Rs 60,000. What should be the accounting treatment in
this case?

SOLUTION-
As per AS 13, where the investments are acquired on cum-right basis and the market value of investments
immediately after their becoming ex-right is lower than the cost for which they were acquired, it may be
appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to the
market value. In this case, the amount of the ex-right market value of 200 shares bought by X immediately
after the declaration of rights falls to Rs60,000. In this case, out of sale proceeds of Rs 12,000, Rs 10,000
may be applied to reduce the carrying amount to bring it to the market value and Rs 2,000 would be
credited to the profit and loss account.

14. The following information is presented by Mr. Z (a stock broker), relating to his holding in 9% Central
Government Bonds.
Opening balance (nominal value) Rs 1,20,000, Cost Rs 1,18,000 (Nominal value of each unit is Rs 100).
1.3.20X1 Purchased 200 units, ex-interest at Rs 98.
1.7.20X1 Sold 500 units, ex-interest out of original holding at Rs 100.
1.10.20X1 Purchased 150 units at Rs 98, cum interest.
1.11.20X1 Sold 300 units, ex-interest at Rs 99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st December. Show the
investment account as it would appear in his books. Mr. Z follows FIFO method.

SOLUTION-
In the Books of Mr. Z
9% Central Government Bonds (Investment) Account
Particulars Nominal Interest Principal Particulars Nominal Interest Principal
Value Value
20X1 ` ` ` 20X1 ` ` `
Jan.1 To Balance Mar. By Bank A/c
b/d 1,20,000 2,700 1,18,000 31 (W.N.3) - 6,300 -
(W.N.1)
March To Bank A/c July 1 By Bank A/c
1 (W.N.2) 20,000 750 19,600 (W.N.4) 50,000 1,125 50,000
July 1 To P&L A/c - - 833 Sept. By Bank A/c
(W.N.5) 30 (W.N.6) - 4,050 -

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Oct. 1 To Bank A/c Nov. By Bank A/c

(150 x 98) 15,000 - 14,700 1 (W.N.7) 30,000 225 29,700
Nov. 1 To P&L A/c - - 200 Dec. By Balance
(W.N.8) 31 c/d (W.N. 9 75,000 1,688 73,633
& W.N.10)
Dec. To P&L A/c
31 (b.f.) 9,938
(Transfer)
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333

Working Note:
1. Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = Rs 2,700
2. Purchase of bonds on 1. 3.20X1
Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = Rs 750
Investment element in purchase of bonds = 200 x 98 = Rs 19,600
3. Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = Rs 6,300

4. Sale of bonds on 1.7.20X1

Interest element = 500 x 100 x 9% x 3/12 = Rs 1,125
Investment element = 500 x 100 = Rs 50,000

5. Profit on sale of bonds on 1.7.20X1

Cost of bonds = (1,18,000/ 1,200) x 500 = Rs 49,167
Sale proceeds = Rs 50,000
Profit element = Rs 833

6. Interest for half-year ended 30 September

= 900 x 100 x 9% x 6/12 = Rs 4,050

7. Sale of bonds on 1.11.20X1

Interest element = 300 x 100 x 9% x 1/12 = Rs 225
Investment element = 300 x 99 = Rs 29,700

8. Profit on sale of bonds on 1.11.20X1

Cost of bonds = (1,18,000/ 1,200) x 300 = Rs 29,500
Sale proceeds = Rs 29,700
Profit element = Rs 200
9. Closing value of investment
Calculation of closing balance: Nominal Rs
value
Bonds in hand remained in hand at
31st December 20X1
From original holding 40,000 1,18,000 39,333
 40,000
(1,20,000 – 50,000 – 30,000) = 1,20,000

Purchased on 1st March 20,000 19,600

Purchased on 1st October 15,000 14,700
75,000 73,633
10. Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 = Rs 1,688
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15. Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (Rs 100 each) of
P Ltd., held as Current assets:

1.4.20X1 Opening balance – Nominal value Rs 1,20,000, Cost Rs 1,18,000

1.7.20X1 100 Debentures purchased ex-interest at Rs 98
1.10.20X1 Sold 200 Debentures ex-interest at Rs 100
1.1.20X2 Purchased 50 Debentures at Rs 98 ex-interest
1.2.20X2 Sold 200 Debentures ex-interest at Rs99
Due dates of interest are 30th September and 31st March.

Mr. Purohit closes his books on 31.3.20X2. Brokerage at 1% is to be paid for each transaction (at ex-interest
price).

Show Investment account as it would appear in his books. Assume FIFO method. Market value of 8%
Debentures of P Limited on 31.3.20X2 is Rs 99.

SOLUTION-

Investment A/c of Mr. Purohit for the year ending on 31-3-20X2

(Scrip: 8% Debentures of P Limited) (Interest Payable on 30th September and 31st March)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` `
1.4.20X1 To Balance b/d 1,20,000 - 1,18,000 30.9.20X1 By Bank (1,300 x - 5,200 -
100 x 8% x 6/12)
1.7.20X1 To Bank (ex- 10,000 200 9,898 1.10.20X1 By Bank (W.N.4) 20,000 - 19,800
Interest) (W.N.1)
1.10.20X1 To Profit & Loss 133 1.2.20X2 By Bank (ex- 20,000 533 19,602
A/c (W.N.4) Interest) (W.N.5)
1.1.20X2 To Bank (ex- 5,000 100 4,949 1.2.20X2 By Profit & Loss 64
Interest) (W.N.2) A/c (W.N.5)
31.3.20X2 To Profit & Loss - 9,233 31.3.20X2 By Bank (950 x 100 - 3,800 -
A/c (Bal. fig.) x 8% x 6/12)
31.3.20X2 By Balance c/d 95,000 - 93,514
(W.N.3)
1,35,000 9,533 1,32,980 1,35,000 9,533 1,32,980

Working Notes:
1. Purchase of debentures on 1.7.20X1
Interest element = 100 x 100 x 8% x 3/12 = Rs 200
Investment element = (100 x 98) + [1% (100 x 98)] = Rs 9,898

2. Purchase of debentures on 1.1.20X2

Interest element = 50 x 100 x 8% x 3/12 = Rs 100
Investment element = {(50 x 98) + [1%(50 x 98)]} = Rs 4,949

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3. Valuation of closing balance as on 31.3.20X2:

Market value of 950 Debentures at Rs 99 = 94,050

Cost of 800 Debentures cost = { 1,18,000x80,000/ 1,20,000} = 78,667

100 Debentures cost = 9,898
50 Debentures cost = 4,949
93,514
Value at the end = Rs 93,514, i.e., whichever is less

4. Profit on sale of debentures as on 1.10.20X1

Sales price of debentures (200 x 100) 20,000

Less: Brokerage @ 1% (200)
19,800
Less: Cost of Debentures  1,18,000 
 x20,000  =
1,20,000 (19,667)
 
Profit on sale 133

5. Loss on sale of debentures as on 1.2.20X2

Sales price of debentures (200 x 99) 19,800

Less: Brokerage @ 1% (198)
19,602
 1,18,000 
Less: Cost of Debentures  x20,000  =
1,20,000 (19,666)
 
Loss on sale 64
Interest element in sale of investment = 200 x 100 x 8% x 4/12 533

16. Hindukush Purchased on 1st March 2011, 5% Debentures in Kabini ltd at a face value of Rs 2.4 Lacs
at Rs 90 cum interest. Hindukush operates the calendar yr for accounting purposes while Kabini ltd
has the financial yr its accounting and pays interest on 31st March and 30th Sept. Stamp and
expenses on purchase was Rs 200. Brokerage was 2% on cost.

1st Sept - Rs 1,00,000 Debentures were sold at Rs 92 ex-interest, less Brokerage at 2%.
30th Sept - Rs 80,000 Debentures were purchased at Rs 91 ex-interest, Brokerage 2%, Expenses Rs 100.
1st Dec -Rs 60,000 Debentures were sold at Rs 94 cum-interest, less Brokerage at 2%.

Market value of the debentures at the end of yr was Rs 91.

Prepare Investment a/c using average cost method of valuation for recognizing Profit or loss on sale of
investments.

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

ADDITONAL QUESTIONS ON INVESTMENT ACCOUNTS

17. On 1st April, 2019 Mr. Shyam had an opening balance of 1000 equity shares of X Ltd Rs 1,20,000
(face value Rs100 each).

On 5.04.2019 he further purchased 200 cum-right shares for Rs 135 each. On 8.04.2019 the director of X Ltd
announced right issue in the ratio of 1:6.

Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr. Rahul at the rate of Rs 20
each.

All the shares held by Shyam had been acquired on cum right basis and the total market price (ex-right) of
all these shares after the declaration of rights got reduced by Rs 3,400.
On 10.10.2019 Shyam sold 350 shares for Rs 140 each.
31.03.2020 The market price of each share is Rs 125 each.
You are required to prepare the Investment account in the books of Mr. Shyam for the year ended
31.03.2020 assuming that the shares are being valued at average cost (RTP MAY 2021)

SOLUTION-
In the books of Mr. Shyam for the year ending on 31-3-2020
(Scrip: Equity Shares of X Limited)
Date Particulars Qty Amount Date Particulars Qty Amount
1.4.2019 To Balance 1000 1,20,000 8.04.2019 By Bank A/c (W.N.1) 3,400
b/d
5.04.2019 To Bank 200 27,000 10.10.2019 By Bank A/c 350 49,000
(200x 135) (350x140)
10.10.2019 To Profit & 7,117 31.3.2020 By Balance 850 1,01,717
Loss A/c c/d(W.N.3)
(W.N.2)
1200 1,54,117 1200 1,54,117
Working Notes:
1. Sale of Rights Rs 4,000
The market price of all shares of X Ltd after shares becoming ex-rights has been reduced by Rs 3,400
In this case out of sale proceeds of Rs4,000; Rs 3,400 may be applied to reduce the carrying amount to the
market value and Rs 600 would be credited to the profit and loss account.

2. Profit on sale of 350 shares

Amount
Sale price of 350 shares (350 shares X 140 each) Rs 49,000
Less: Cost of 350 shares [(1,20,000+27,000-3,400) X350]/1200 Rs 41,883
Profit Rs 7,117

3. Valuation of 850 shares as on 31.03.2020

Particulars Amount
Cost price of 850 shares Rs 1,01,717
[(1,20,000 +27,000 -3,400) x 850 /1,200]
Fair Value as on 31.03.2020 [850 X Rs 125 each] Rs 1,06,250
Cost price or fair value whichever is less Rs 1,01,717

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Q18) On 15th June, 2024, Y limited wants to re-classify its investments in accordance with AS 13 (revised).
Decide and state the amount of transfer, based on the following information:
(1) A portion of long term investments purchased on 1st March, 2023 are to be re-classified as current
investments. The original cost of these investments was Rs 14 lakhs but had been written down by Rs 2
lakhs (to recognise 'other than temporary' decline in value). The market value of these investments on 15th
June, 2024 was Rs 11 lakhs.

(2) Another portion of long term investments purchased on 15th January, 2023 are to be re-classified as
current investments. The original cost of these investments was Rs 7 lakhs but had been written down to Rs
5 lakhs (to recognize 'other than temporary' decline in value). The fair value of these investments on 15th
June, 2024 was Rs 4.5 lakhs.

(3) A portion of current investments purchased on 15th March, 2024 for Rs 7 lakhs are to be re-classified as
long term investments, as the company has decided to retain them. The market value of these investments
on 31st March, 2024 was Rs 6 lakhs and fair value on 15th June 2024 was Rs 8.5 lakhs.

(4) Another portion of current investments purchased on 7th December, 2023 for Rs 4 lakhs are to be re-
classified as long term investments. The market value of these investments was: on 31st March, 2024 Rs 3.5
lakhs
on 15th June, 2024 Rs 3.8 lakhs (MTP Sep 2024: 7 Marks)

SOLUTION
As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as current
investments, transfers are made at the lower of cost and carrying amount at the date of transfer; and
where investments are reclassified from current to long term, transfers are made at lower of cost and fair
value on the date of transfer.

Accordingly, the re-classification will be done on the following basis:

(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence this re-
classified current investment should be carried at Rs 12 lakhs in the books

(ii) In this case also, carrying amount of investment on the date of transfer is less than the cost; hence this
re-classified current investment should be carried at Rs 5 lakhs in the books.

(iii) In this case, reclassification of current investment into long-term investments will be made at Rs 7 lakhs
as cost is less than its fair value of Rs 8.5 lakhs on the date of transfer.

(iv) In this case, market value (considered as fair vale) is Rs 3.8 lakhs on the date of transfer which is lower
than the cost of Rs 4 lakhs. The reclassification of current investment into long-term investments will be
made at Rs 3.8 lakhs

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Q19) A Ltd. purchased on 1st April, 2023 8% convertible debenture in C Ltd. of face value of Rs 2,00,000 @
Rs 108. On 1st July, 2023 A Ltd. purchased another Rs 1,00,000 debentures @ Rs 112 cum interest. On 1st
October, 2023 Rs 80,000 debentures were sold @ Rs 105. On 1st December, 2023, C Ltd. give option for
conversion of 8% convertible debentures into equity share of Rs 10 each. A Ltd. received 5,000 equity
shares in C Ltd. in conversion of 25% debentures held on that date. The market price of debenture and
equity share in C Ltd. on 31st December, 2023 is Rs 110 and Rs 15 respectively. Interest on debenture is
payable each year on 31st March, and 30th September. Prepare investment account in the books of A Ltd.
on average cost basis for the accounting year ended 31st December, 2023.
(MTP SEP:10 Marks)

SOLUTION-

Investment Account for the year ending on 31st December, 2023 Scrip : 8% Convertible Debentures in C
Ltd. [Interest Payable on 31st March and 30th September]

Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
value Value

1.4.23 To Bank 2,00,000 - 2,16,000 30.09.23 By Bank - 12,000 -

A/c A/c
1.7.23 To Bank 1,00,000 2,000 1,10,000 [`3,00,000
A/c (W.N.1) x 8% x
(6/12]
31.12.23 To P & L - 14,033 - 1.10.23 By Bank 80,000 84,000
A/c A/c
[Interest] 1.10.23 By P & L 2,933
A/c (loss)
(W.N.3)

1.12.23 By Bank 733

A/c
(Accrued
interest)
(` 55,000 x
.08 x 2/12)
1.12.23 By Equity 55,000 59,767
shares in C
Ltd. (W.N.
3 and 4)
31.12.23 By Balance
c/d (W.N.5) 1,65,000 3,300 1,79,300
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C LTD.

Date Particulars Cost Date Particulars Cost

(Rs) (Rs)
1.12.23 To 8 % debentures 59,767 31.12.23 By balance c/d 59,767

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Working Notes:
(i) Cost of Debenture purchased on 1st July = Rs 1,12,000 – Rs 2,000 (Interest) = Rs1,10,000

(ii) Cost of Debentures sold on 1st Oct.

= (Rs 2,16,000 + Rs 1,10,000) x 80,000/3,00,000 = Rs 86,933

(iii) Loss on sale of Debentures = Rs 86,933– Rs84,000 = Rs 2,933

Nominal value of debentures converted into equity shares
=Rs 55,000 [(Rs 3,00,000 – 80,000) x.25]

Interest received before the conversion of debentures

Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733

(iv) Cost of Debentures converted = (Rs 2,16,000 + Rs1,10,000) x 55,000/3,00,000 = Rs 59,767

(v) Cost of closing balance of Debentures

= (Rs 2,16,000 + Rs1,10,000) x 1,65,000 / 3,00,000 = Rs 1,79,300

(vii) Closing balance of Debentures has been valued at cost.

(viii) 5,000 equity Shares in C Ltd. will be valued at cost of Rs 59,767 being lower than the market value Rs
75,000 (Rs 15 x5,000)

Note: It is assumed that interest on debentures, which are converted into cash, has been received at the
time of conversion.

Q20) A company is engaged in the business of refining, transportation and marketing of petroleum
products. During the financial year ended 31st March, 2024, the company acquired controlling interest
from Government of India in another public sector undertaking @ ` 1,551 per share as against the book
value of ` 192.58 per share and market value of ` 876 per share as on 18th February, 2024.

Thus, the strategic premium of ` 675 per share has been paid considering various tangible and intangible
factors.

The above investment in the shares of the acquired company has been considered as long term strategic
investment and, therefore, has been accounted for at cost, i.e. at ` 1,551 per share in the financial
statements. No provision for diminution in value has been made in the books of account.

As per the requirement of Schedule III to the Companies Act, 2013, the aggregate market value of the
quoted shares has been properly reflected in the financial statements.

On 28th March, 2024, the acquired shares were quoted at ` 880 per share on BSE and the current market
price as on 18th July was around ` 300.

Considering the tangible and intangible benefits the Management is of the view that there is no permanent
diminution in the value of the strategic investment in the acquired company, as the same has been

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considered as a long-term investment. Therefore, there is no need for provision for diminution in the value
of the shares of the acquired company.

Required:
(i) Whether the accounting treatment 'at cost' under the head ‘Long Term Investments’ without providing
for any diminution in value is correct and in accordance with the provisions of AS 13.

(ii) If any provision for diminution in the value is to be made, whether such provision should be charged to
the profit and loss account or whether same can be considered as deferred expenditure and amortised over
a period of 5 years. Whether it is open for the company to charge off such diminution in the value in the
books of account instead of creating provision.

(iii) Whether the premium paid for strategic benefits for investment described in facts of the case, can be
accounted for separately in the books of account keeping in view that AS 13 specifies that long term
investments should be recorded at cost and there is no specific provision in the standard in respect of
accounting for premium paid for strategic benefits
(RTP SEP 2024)

SOLUTION-
(i) The accounting treatment 'at cost' under the head 'Long Term Investment’ in the separate financial
statements of the company without providing for any diminution in value is correct and is in accordance
with the provisions of AS 13 provided that there is no decline, other than temporary, in the value of
investment.

(ii) The provision for diminution in the value of investment should be a charge to the profit and loss
statement. As per the requirements of AS 13, the diminution in the value of investment can neither be
accounted for as deferred revenue expenditure nor it can be written off in the statement of profit and loss

(iii) The long-term investments should be carried at cost as per the requirements of AS 13. The amount paid
over and above the market price should be treated as cost and cannot be accounted for separately.

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MCQ (HOMEWORK)

1. The cost of Right shares is

(a) added to the cost of investments.
(b) subtracted from the cost of investments.
(c) no treatment is required.
(d) added to cost of investments at market value.

2. Long term investments are carried at

(a) fair value.
(b) cost less ‘other than temporary’ decline.
(c) Cost and market value whichever is less.
(d) Cost and market value whichever is higher.

3 Current investments are carried at

(a) Fair value.
(b) cost.
(c) Cost and fair value, whichever is less.
(d) Cost and fair value, whichever is higher.

4. A Ltd. acquired 2,000 equity shares of Omega Ltd. on cum-right basis at 75 per share. Subsequently,
omega Ltd. made a right issue of 1:1 at 60 per share, which was subscribed for by A. Total cost of
investments at the year - end will be
(a) 2,70,000.
(b) 1,50,000.
(c) 1,20,000.
(d) 1,70,000

5. Cost of investment includes

(a) Purchase costs.
(b) Brokerage and Stamp duty paid.
(c) Both (a) and (b).
(d) none of the above.

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Chapter 8 AS 2 – VALUATION OF INVENTORIES

AS 2 (Revised) defines inventories as assets held:

• for sale in the ordinary course of business, or
• in the process of production for such sale, or
• for consumption in the production of goods or services for sale, including maintenance supplies and
consumables other than machinery spares, servicing equipment and standby equipment meeting the
definition of Property, plant and equipment.

AS 2 IS NOT APPLICABLE FOR:

(a) Work in progress arising under construction contracts
(b) Work in progress arising in the ordinary course of business of service providers
(c) Shares, debentures and other financial instruments held as stock-in-trade
(d) Producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the
extent that they are measured at net realisable value in accordance with well established practices in those
industries

1. Grow More Private Limited a Wholesaler in Food and Other Agro Products has valued the year end
inventory on Net Realizable Value on the ground that AS-2 does not apply to inventory of
Agriculture Products. Comment

2. Varada Ltd purchased goods at the cost of Rs 40 Lakhs in October. Till the end of the financial year,
75% of the Stocks were sold. The Company wants to disclose Closing Stock at Rs 10 Lakhs. The
expected Sale Value is Rs 11 Lakhs and a commission at 10% on sale is payable to the Agent. What is
the correct value of Closing Stock?

Solution
As per AS 2 (Revised) “Valuation of Inventories”, the inventories are to be valued at lower of cost or net
realisable value.
In this case, the cost of inventory is Rs 10 lakhs. The net realisable value is 11,00,000 × 90% = Rs 9,90,000.
So, the stock should be valued at Rs 9,90,000.

COMPONENTS OF COST OF INVENTORIES-

The Cost of Inventories shall comprise all -
• Costs of Purchase,
• Costs of Conversion, and
• Other Costs incurred in bringing the inventories to their present location and condition.

The costs of purchase -consist of the purchase price including duties and taxes (other than those
subsequently recoverable by the enterprise from the taxing authorities, and other expenditure directly
attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase

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Costs of Conversion includes -

Type of Cost Costs directly related to Variable Production Fixed Production
the units of production. Overheads Overheads
Example Direct Labour, i.e. cost of Indirect Costs which vary Indirect Costs which
workers who are directly directly or nearly remain relatively
associated in the directly, with the volume constant regardless of
production process. of production, e.g. the level of production,
Indirect Materials, e.g. Factory
Indirect Labour Management Costs,
Depreciation
FIXED PRODUCTION OVERHEADS ARE ABSORBED ON NORMAL CAPACITY OR ACTUAL CAPACITY WHICHEVER IS
HIGHER

3. State with reference to AS, how will you value the inventories in the following case. Per kilogram of
Finished Goods consisted of Material Cost Rs 100 per kg, Direct Labour Cost Rs 20 per kg and Direct
Variable Production Overhead Rs 10 per kg. Fixed Production charges for the year on normal
capacity of 1,00,000 kg is Rs 10 Lakhs. 2,000 kg of Finished Goods are on stock at the year-end.

4. Lambodar Ltd’s normal production volume is 50,000 units and the Fixed Overheads are estimated at
Rs 5,00,000. Give the treatment of Fixed Production OH under AS - 2, if actual production during a
period was - (a) 42,000 units (b) 50 000 units, and (c) 60,000 units.

How is cost allocated for Joint Products?

Situation Accounting Treatment
Production of • Compute Joint Costs of all Main Products.
Joint Products • Apportion Joint Costs over various products on a rational and consistent
only basis, e.g. Relative Sale Value at split-off point or Sale value at completion.

Production of • Compute Joint Costs of all Main Products.

Main Product(s) • Compute Net Realisable Value (NRV) of By-Product/Waste/Scrap.
and By-Products • Compute Net Joint Cost = Total Joint Costs Less NRV of By-products.
• Apportion the Net Joint Cost over the Main Products, on a rational and
consistent basis, as given above.

5. Vallabh Industries produces four Joint Products L, M, N and P from a joint process, incurring a cost
of Rs 5,71,200. Allocate the Joint Costs with the following information

Particulars L M N P
Quantity Produced (in ‘000s) 10000 kgs 12000 kgs 14000 kgs; 16000 kgs
Sales Price per kg Rs13 Rs 17 Rs 19 Rs 22
Stock Quantity at the end of year 1,625 kgs 400 kgs Nil; 1,550 kgs

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COST EXCLUSIONS:

The following costs are excluded in determining the Cost of Inventories –

Nature of Costs Explanation / Exception
1. Abnormal Costs of wasted materials, labour or Reason: Inefficiency does not make a product
other production costs. more valuable by means of higher cost, hence
excluded.
2. Storage Costs. Exception: They are includible when Storage Costs
are necessary in the production process, prior to a
further production stage.

3. Administrative Overheads, which do not Exception: They are includible when such costs
contribute to bringing the inventories to their contribute to bringing the inventories to their
present location and condition. present location and condition.

4. Selling and Distribution Costs. Reason: These are incurred after bringing the
inventories to their present location and condition
and hence excluded.

COST FORMULA –
• Mostly inventories are purchased / made in different lots and unit cost of each lot frequently differs.
• In all such circumstances, determination of closing inventory cost requires identification of units in
stock to have come from a particular lot. This specific identification is best wherever possible.
• In all other cases, the cost of inventory should be determined by the First-In First-Out (FIFO), or
Weighted Average cost formula.
• The formula used should reflect the fairest possible approximation to the cost incurred in bringing
the items of inventory to their present location and condition.
• Instead of actual, the standard costs may be taken as cost of inventory provided standards fairly
approximate the actual.
• In retail business, where a large number of rapidly changing items are traded, the actual costs of
items may be difficult to determine. The units dealt by a retailer however, are usually sold for similar
gross margins and a Retail Method is used to determine cost.

COMPARISON OF COST AND NET REALISABLE VALUE -

The comparison between cost and net realisable value should be made on item-by-item basis. In some
cases nevertheless, it may be appropriate to group similar or related items.

NRV OF MATERIALS HELD FOR USE OR DISPOSAL -

Materials and other supplies held for use in the production of inventories are not written down below cost
if the selling price of finished product containing the material exceeds the cost of the finished product. The
reason is, as long as these conditions hold the material realises more than its cost as shown below.

DISCLOSURES -
The financial statements should disclose:
(a) The accounting policies adopted in measuring inventories, including the cost formula used; and
(b) The total carrying amount of inventories together with a classification appropriate to the enterprise.

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Information about the carrying amounts held in different classifications of inventories and the extent of the
changes in these assets is useful to financial statement users. Common classifications of inventories are
• Raw materials and components,
• Work in progress,
• Finished goods,
• Stock-in-trade (in respect of goods acquired for trading),
• Stores and spares,
• Loose tools

6. In a production process, normal waste is 5% of input. 5,000 MT of input were put in process
resulting in a wastage of 300 MT. Cost per MT of input is Rs 1,000. The entire quantity of waste is on
stock at the year-end. State with reference to AS, how you will value the inventories in the above
case.

SOLUTION-
As per AS 2 (Revised), abnormal amounts of wasted materials, labour and other production costs are
excluded from cost of inventories and such costs are recognised as expenses in the period in which they are
incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be included in
determining the cost of inventories (finished goods) at the year end.

The cost of abnormal waste (50 MT x 1,052.6315 = Rs 52,632) will be charged to the profit and loss
statement.

Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = Rs 1,052.6315

Total value of inventory = 4,700 MT x Rs 1,052.6315 = Rs 49,47,368

7. Best Ltd deals in 5 products - P, Q, R, S & T which are neither similar nor interchangeable. While
closing its accounts for the year ending 31st March, the Historical cost and NRV of closing
stock were as follows-
Items P Q R S T
Historical Cost (Rs) 5,70,000 9,80,000 3,16,000 4,25,000 1,60,000
Net Realizable Value (Rs) 4,75,000 10,32,000 2,89,000 4,25,000 2,15,000

8. On 31st March, a Business Firm finds that Cost of a partly finished unit on that date is Rs 530. The
unit can be finished in the next financial year, by an additional expenditure of Rs 310. The Finished
Unit can be sold for Rs 750 subject to payment of 4% brokerage on Selling Price. The Firm seeks
your advice regarding -The amount at which the Unfinished Unit should be valued as at 31 st March,
for preparation of Final Accounts.

9. A Trader purchased certain article for Rs 85,000. He sold some of the articles for Rs 1,05,000.
Average percentage of Gross profit is 25% on cost. Opening stock was Rs 15,000. Find out Closing
stock?
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ADDITIONAL QUESTIONS ON AS 2 – VALUATION OF INVENTORIES

10. As per the provisions of AS-2, inventories should be valued at the lower of cost and selling price.
True or False?

SOLUTION-
False: Inventories should be valued at the lower of cost and net realizable value (not selling price) as per
AS 2.

11. Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-
2019. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ Rs. 120). Replacement cost of raw material A as on 31-3-2019
is Rs. 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date Rs. 260 per
unit. These units can be finished next year by incurring additional cost of Rs. 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred Rs. 320 per unit.
Expected selling price of Product X is Rs. 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2019. Also calculate the value of total
inventory as on 31-3-2019.

Solution
As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in the production of
inventories are not written down below cost if the finished products in which they will be incorporated are
expected to be sold at cost or above cost. However, when there has been a decline in the price of materials
and it is estimated that the cost of the finished products will exceed net realizable value, the materials are
written down to net realizable value. In such circumstances, the replacement cost of the materials may be
the best available measure of their net realizable value.

In the given case, selling price of product X is Rs. 300 and total cost per unit for production is Rs. 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value of finished product is
less than its cost, hence valued at Rs. 90 per unit.

(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost Rs. 260 or Net
estimated selling price or NRV i.e. Rs. 240 (Estimated selling price Rs. 300 per unit less additional cost of Rs.
60).

(iii) 1,500 units of finished product X will be valued at NRV of Rs. 300 per unit since it is lower than cost Rs.
320 of product X.

Particulars Units Cost NRV/Replacement Lower of Inventory

cost Cost or NRV Cost
Raw material A 600 120 90 90 54,000
Partly finished goods 500 260 240 240 1,20,000
Finished goods X 1500 320 300 300 450,000
TOTAL 6,24,000

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12. A private limited company manufacturing fancy terry towels had valued its closing inventory of
inventories of finished goods at the realizable value, inclusive of profit and the export cash
incentives. Firm contracts had been received and goods were packed for export, but the ownership
in these goods had not been transferred to the foreign buyers.

You are required to advise the company on the valuation of the inventories in line with the provisions of
AS 2.

Solution-
Accounting Standard 2 “Valuation of Inventories” states that inventories should be valued at lower of
historical cost and net realizable value. The standard states, “at certain stages in specific industries, such as
when agricultural crops have been harvested or mineral ores have been extracted, performance may be
substantially complete prior to the execution of the transaction generating revenue. In such cases, when
sale is assured under forward contract or a government guarantee or when market exists and there is a
negligible risk of failure to sell, the goods are often valued at net realizable value.

Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into
account the facts stated, the closing inventory of finished goods (Fancy terry towel) should have been
valued at lower of cost and net realizable value and not at net realizable value. Further, export incentives
are recorded only in the year the export sale takes place. Therefore, the policy adopted by the company for
valuing its closing inventory of inventories of finished goods is not correct.

13. A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The
company provides you following information for the year ended 31st March, 2017

Particulars Rs per unit

Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300

Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80

Additional Information:
(i) Total fixed overhead for the year was Rs 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according to
AS 2, when
(i) Net realizable value of Chemical Y is Rs 800 per unit
(ii) Net realizable value of Chemical Y is Rs 600 per unit

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Solution –
(i) When Net Realizable Value of the Chemical Y is Rs 800 per unit

NRV is greater than the cost of Finished Goods Y i.e. Rs 660 (Refer W.N.)
Hence, Raw Material and Finished Goods are to be valued at cost.
Value of Closing Stock:
Particulars Quantity Rate(Rs) Amount ( Qty * Rate)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000

(ii) When Net Realizable Value of the Chemical Y is Rs 600 per unit
NRV is less than the cost of Finished Goods Y i.e. Rs 660. Hence, Raw Material is to be valued at
replacement cost and Finished Goods are to be valued at NRV since NRV is less than the cost.

Value of Closing Stock:

Particulars Quantity Rate(Rs) Amount ( Qty * Rate)
Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000

Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X Rs
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440

Chemical Y
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (Rs 4,00,000/20,000 units) 20
Cost 660

14. The company X Ltd., has to pay for delay in cotton clearing charges. The company up to 31.3.2014
has included such charges in the valuation of closing stock. This being in the nature of interest, X
Ltd. decided to exclude such charges from closing stock for the year 2014-15. This would result in
decrease in profit by Rs 5 lakhs. Comment.

Answer
As per AS 2 (revised), interest and other borrowing costs are usually considered as not relating to bringing
the inventories to their present location and condition and are therefore, usually not included in the cost of
inventories. However, X Ltd. was in practice to charge the cost for delay in cotton clearing in the closing
stock. As X Ltd. decided to change this valuation procedure of closing stock, this treatment will be
considered as a change in accounting policy and such fact to be disclosed as per AS 1.

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Therefore, any change in amount mentioned in financial statement, which will affect the financial position
of the company should be disclosed properly as per AS 1, AS 2 and AS 5.
Also a note should be given in the annual accounts that, had the company followed earlier system of
valuation of closing stock, the profit before tax would have been higher by Rs 5 lakhs.

15. The expected production for the year was 15,000 kg of the finished product. Due to fall in market
demand the sales price for the finished goods was 20 per kg and the replacement cost for the raw
material was Rs 9.50 per kg on the closing day. You are required to calculate the closing inventory
as on that date from the following data –

Particulars Kg. Rs
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
Sales 10,000 2,80,000
Closing Inventory: Raw Materials 900
Finished Goods 1200
(RTP MAY 2020)

Solution-
(a) Calculation of cost for closing inventory

Raw Material Consumed (Opening Stock + Purchases – Closing 10,200

Stock)
(1,100+10,000-900)
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500

Fixed Overhead 75,000 x 10,200 51,000

15,000
Cost of Production 2,29,500
Cost of closing inventory per unit (2,29,500/10,200) Rs 22.50
Net Realisable Value per unit Rs 20.00

Since net realisable value is less than cost, closing inventory will be valued at Rs 20.

As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost
i.e. Rs 9.50.

Value of Closing Stock

Finished Goods (1,200 x 20) 24,000
Raw Materials (900 x 9.50) 8,550
TOTAL 32,550

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16. From the following information provided by XYZ Limited you are required to compute the closing
inventory:

Raw Material P
Closing balance 600 units
per unit
Cost price including GST 250
Input tax credit available 20
Freight inward 30
Handling charges 15
Replacement cost 180

Finished goods Q
Closing balance 1500 units
per unit
Material consumed 250
Direct labour 70
Direct overhead 30

Total fixed overhead for the year was Rs 3,00,000 on a normal capacity of 30,000 units while actual
production has been of 25,000 units.

Calculate the value of closing stock, when

(i) Net realizable value of the finished good Q is Rs 450 per unit.
(ii) Net Realizable value of the Finished Good Q is Rs 340 per unit. (MTP OCT 2021: 5 MARKS)

SOLUTION-
(i) When Net Realizable Value of the Finished Good Q is Rs 450 per unit

Value of Closing Stock:

Valuation Qty. Rate Amount
Base
Raw Material P Cost 600 275 1,65,000
Finished Good Q Cost 1,500 360 5,40,000
Total value of closing stock 7,05,000

(ii) When Net Realizable Value of the Finished Good Q is Rs 340 per unit

Since NRV of finished goods Q is less than its cost i.e. Rs 360 (Refer W.N.), raw material P is to be valued at
replacement cost and finished goods is to be valued at NRV.

Value of Closing Stock:

Valuation Base Qty. Rate Amount
Raw material P Replacement cost 600 180 1,08,000
Finished good Q Net Realisable Value 1,500 340 5,10,000
Total value of closing 6,18,000
stock

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Working Note:

Statement showing calculation of cost of raw material P and finished good Q

Raw Material P
Cost Price (250-20) 230
Add: Freight Inward 30
Handling charges 15
Cost 275
Finished Goods Q
Materials consumed 250
Direct Labour 70
Variable overheads 30
Fixed overheads (Rs 3,00,000 / 30,000 units) 10
360

17. The inventory of Rich Ltd. as on 31st March, 2020 comprises of Product – A: 200 units and Product –
B: 800 units.
Details of cost for these products are:

Product – A: Material cost, wages cost and overhead cost of each unit are Rs 40, Rs 30 and Rs 20
respectively, Each unit is sold at Rs 110, selling expenses amounts to 10% of selling costs.

Product – B: Material cost and wages cost of each unit are Rs 45 and Rs 35 respectively and normal selling
rate is Rs 150 each, however due to defect in the manufacturing process 800 units of Product-B were
expected to be sold at Rs 70.

You are requested to value closing inventory according to AS 2 after considering the above
(RTP MAY 2021)

SOLUTION-

According to AS 2 ‘Valuation of Inventories’, inventories should be valued at the lower of cost and net
realizable value.

Material cost Rs 40 x 200 = 8,000

Wages cost Rs 30 x 200 = 6,000

Overhead Rs 20 x 200 = 4,000

Total cost Rs 18,000
Realizable value [200 x (110-11)] Rs 19,800
Hence inventory value of Product -A Rs 18,000

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Product – B
Material cost Rs 45 x 800 = 36,000
Wages cost Rs 35 x 800 = 28,000
Total cost Rs 64,000
Realizable value (800 x 70) Rs 56,000
Hence inventory value of Product-B Rs 56,000
Total Value of closing inventory i.e. Product A + Product B Rs 74,000
(18,000+ 56,000)

Q18) Well Wear Limited is a Textile Manufacturing Company and engaged in the production of Polyester (P)
and Nylon (N). While manufacturing the main products, a by-product Fiber (F) is also produced. Details of
the cost of production are as under:

Purchase of Raw Material for manufacturing process of

30,000 units Rs 3,50,000

Wages paid Rs 1,60,000
Fixed overheads Rs 1,20,000
Variable overheads Rs 60,000
Output:
Polyester (P) 12,500 Units
Nylon (N) 10,000 Units
Fiber (F) 3,200 Units
Closing Inventory:
Polyester (P) 1,600 Units
Nylon(N) 400 Units

Average market price of Polyester and Nylon is Rs 100 and Rs 60 per unit respectively, by-product Fiber is
sold@Rs 40 per unit. There is a profit of Rs 8,000 on sale of by-product after incurring separate processing
expenses of Rs 10,000 and packing charges of Rs 9,000. Rs 5,000 was realized from sale of scrap. On the
basis of the above information, you are required to compute the value of closing inventory of Polyester and
Nylon. (MAY 2024: 7 Marks)

SOLUTION-

As per AS 2 ‘Valuation of Inventories’, most by-products as well as scrap or waste materials by their nature,
are immaterial. They are often measured at net realizable value and this value is deducted from the cost of
the main product.
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Determination of value of closing inventory of Polyester and Nylon

Polyester Nylon
Closing inventory in units 1,600 units 400 units
Cost per unit Rs31.14 Rs18.68
Value of closing inventory Rs49,824 Rs7,472

Working Notes

1. Calculation of net realizable value of by-product, Fiber

Rs
Selling price of by-product Fiber (3,200 units x Rs 40 1,28,000
per unit)
Less: Separate processing (10,000)
charges of by-product Fiber
Packing charges (9,000)
Net realizable value of by-product 1,09,000
Fiber

2. Calculation of cost of conversion for allocation between joint products Polyester and Nylon

Rs Rs
Raw material 3,50,000

Wages 1,60,000
Fixed overhead 1,20,000
Variable overhead 60,000
6,90,000
Less: NRV of by-product Fiber (W.N. 1) (1,09,000)

Sale value of scrap (5,000) (1,14,000)

Joint cost to be allocated 5,76,000
betweenPolyester and Nylon

Determination of “basis for allocation” and allocation of joint cost to Polyester and Nylon

Polyester Nylon
Output in units (a) 12,500 units 10,000 units

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Sales price per unit (b) Rs100 Rs60

Sales value (a x b) Rs12,50,000 Rs6,00,000
Total value (12,50,000 + 6,00,000)
= 18,50,000
Joint cost of Rs 5,76,000 allocated in Rs3,89,189 Rs1,86,811
theratio of 12,50,000 : 6,00,000
d. Cost per unit [c/a] Rs31.14 Rs18.68
e. Closing stock in units 1600 40
f. Closing stock value (d x e) 49,824 747.20

Q19) Kirti Ltd. is in the business of manufacturing computers. During the year ended 31st March, 2024, the
company manufactured 550 computers. It has the policy of valuing finished stock of goods at a standard
cost of Rs 1.8 lakh per computer. The details of the costs are as under:

(Rs in
lakh)
Raw material consumed 400
Direct Labour 250
Variable production overheads 150
Fixed production overheads (including interest of 290
Rs 100 lakh)

Compute the value cost per computer for the purpose of closing stock (RTP SEP 2024)

SOLUTION-
As per para 9 of AS 2 ‘Valuation of Inventories’, for inclusion in the cost of inventory, allocation of fixed
production overheads is based on the normal capacity of the production facilities.

In this, case finished stock has been valued at a standard cost of Rs 1.8 lakh per computer which incidentally
synchronizes with the value computed on the basis of absorption costing as under:

(Rs in lakh)
Materials 400
Direct Labour 250
Variable production overheads 150
Fixed production overheads 290
Less: Interest (100) 190
Total cost 990

Number of computers produced = 550 computers (Assumed to be normal production)

Cost per computer Rs 990 lakh / 550 computers = Rs 1.80 lakh

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MCQ (HOMEWORK)

1. Which item of inventory is under the scope of AS 2 (Revised)?

(a) WIP arising under construction contracts
(b) Raw materials
(c) Shares
(d) Debentures held as stock in trade.

2. Materials and other supplies held for use in the production of inventories are not written down below
cost if the finished products in which they will be incorporated are expected to be
(a) sold at or above cost.
(b) sold above cost.
(c) sold less than cost.
(d) sold at market value(where market value is more than cost).

3. All of the following costs are excluded while computing value of inventories except?
(a) Selling and Distribution costs
(b) Allocated fixed production overheads based on normal capacity.
(c) Abnormal wastage
(d) Storage costs

4. Identify the statement(s) which is/are incorrect.

(a) Storage costs which is a necessary part of the production process is included in inventory valuation.
(b) Administration overheads are never included in inventory valuation.
(c) Full amount of variable production overheads incurred are included in inventory valuation.
(d) Administration overheads are always included in inventory valuation.

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Chapter 9 AS 23: ACCOUNTING FOR INVESTMENT IN ASSOCIATES IN

CONSOLIDATED FINANCIAL STATEMENTS

SCOPE
• AS 23 describes the principles and procedures for recognizing investments in associates (in which
the investor has significant influence, but not a subsidiary or joint venture of investor) in the
consolidated financial statements of the investor.
• An investor which presents consolidated financial statements should account for investments in
associates as per equity method in accordance with this standard but in its separate financial
statements, AS 13 will be applicable

DEFINITION-
• Equity is the residual interest in the assets of an enterprise after deducting all its liabilities.
• An associate is an enterprise in which the investor has significant influence and which is neither a
subsidiary nor a joint venture of the investor.
• Significant influence is the power to participate in the financial and/or operating policy decisions of
the investee but not control over those policies.
• Any enterprise having 20% or more of the voting power or any interest directly or indirectly in any
other enterprise will be assumed to have significantly influence the other enterprise unless proved
otherwise

An enterprise can influence the significant economic decision making by many ways like:
 Having some voting power.
 Representation on the board of directors or governing body of the investee.
 Participation in policy-making processes.
 Interchange of managerial personnel.
 Provision of essential technical information.

If it can be clearly demonstrated that an investor holding 20% or more of the voting power of the investee
does not have significant influence, the investment will not be accounted for as an associate.

Example 1
A Ltd. has 70% holding in C Ltd. and B Ltd. also has 28% holding in the same company. So, A Ltd. with the
majority holding i.e. more than 50% is the parent company i.e. a holding company. Since B Ltd. holds more
than 20% but not more than 50% in C Ltd., C Ltd. will be an associate of B Ltd.

Example 2
A Ltd. is holding 90% share in B Ltd. and 10% shares in C Ltd., and B Ltd. is holding 11%shares in C Ltd. In
this case, A Ltd. is parent of B Ltd.

As far as the relationship between A Ltd. and C Ltd. is concerned; A Ltd. has a total of direct and indirect
holding of (10 + 11) 21% in C Ltd., Thus, C Ltd. is an associate of A Ltd. It may however be noted that for
consolidated financial statement purposes, the holding will be 19.9% (10% + 90% of 11%),.
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ASSOCIATES ACCOUNTED FOR USING THE EQUITY METHOD

• The equity method is a method of accounting whereby the investment is initially recorded at cost,
identifying any goodwill/capital reserve arising at the time of acquisition.
• The carrying amount of the investment is adjusted thereafter for the post acquisition change in the
investor’s share of net assets of the investee. The consolidated statement of profit and loss reflects
the investor’s share of the results of operations of the investee.
• Goodwill/capital reserve arising on the acquisition of an associate by an investor should be included
in the carrying amount of investment in the associate but should be disclosed separately.

1. A Ltd. acquire 45% of B Ltd. shares on April 01, 20X1, the price paid was Rs 15,00,000. Following are
the extracts of balance sheet of B Ltd. as of 1 April 20X1: Paid up Equity Share Capital Rs 10,00,000
Securities Premium Rs 1,00,000 Reserve & Surplus Rs 5,00,000 B Ltd. has reported net profits of Rs
3,00,000 and paid dividends of Rs 1,00,000 for the year ended 31 March 20X2. Calculate the amount
at which the investment in B Ltd. should be shown in the consolidated balance sheet of A Ltd. as on
March 31, 20X2

Solution
Calculation of Goodwill/Capital Reserve under Equity Method
Particulars Rs Rs
Investment in B Ltd. (A) 15,00,000
Equity Shares 10,00,000
Security Premium 1,00,000
Reserves & Surplus 5,00,000
Net Assets 16,00,000
45% of Net Asset (B) 7,20,000
Goodwill (A-B) 7,80,000

Calculation of Carrying Amount of Investment in the year ended on 31st March, 20X2
Particulars Rs
Investment in Associate as per AS 23:
Share of Net Assets on 1 April 20X1 7,20,000
Add: Goodwill 7,80,000
Cost of Investment 15,00,000
Add: Profit during the year (3,00,000 x 45%) 1,35,000
Less: Dividend paid (1,00,000 x 45%) (45,000)
Carrying Amount of Investment 15,90,000

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CIRCUMSTANCES UNDER WHICH EQUITYMETHOD IS NOT FOLLOWED

• Control is intended to be temporary because the investment is acquired and held exclusively with a
view to its subsequent disposal in the near future OR
• It operates under severe long-term restrictions, which significantly impair its ability to transfer funds
to the investor.
• It ceases to have significant influence in an associate but retains, either in whole or in part, its
investment.
• From the date of discontinuing the use of the equity method, investments in such associates should
be accounted for in accordance with AS 13, Accounting for Investments.
• For this purpose, the carrying amount of the investment at that date should be regarded as cost
thereafter.
• The reasons for not applying the equity method in accounting for investments in an associate should
be disclosed in the consolidated financial statements.

Case 1:
A Ltd. holds 22% share of B Ltd. on 1st April of the year and following are the relevant information as
available on the date are Cost of Investment Rs 33,000 and Total Equity on the date of acquisition Rs
2,00,000

A Ltd.’s share in equity (2,00,000 x 22%) Rs 44,000

Less: Cost of Investment Rs (33,000)
Capital Reserve Rs 11,000

Extract of Balance Sheet: ASSETS

Investment in Associate as per AS 23 Rs Rs
Share of Net Assets as on 1 April 44,000
Less: Capital reserve (11,000) 33,000

Case 2:
A Ltd. holds 22% share of B Ltd. on 1st April of the year and following are the relevant information as
available on the date are Cost of Investment Rs 55,000 and Total Equity on the date of acquisition Rs
2,00,000.

Cost of Investment Rs 55,000

Less: A Ltd.’s share in equity (2,00,000 x 22%) Rs 44,000
Goodwill Rs 11,000

Extract of Balance Sheet: ASSETS

Investment in Associate as per AS 23 Rs Rs
Share of Net Assets as on 1 April 44,000
Add: Goodwill 11,000 55,000

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Case 1 Conversion from a passive investor to an associate in the same year:

A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 during the same year. Other
information is as follow:

Cost of Investment for 10% Rs 1,00,000 and for 15% Rs 1,45,000

Net asset on April 01 Rs 8,50,000 and on October 01 Rs 10,00,000.

Calculations for April 01:

Cost of investment Rs1,00,000
10% share in net asset Rs85,000
Goodwill Rs15,000

Calculations for October 01:

15% share in net asset Rs1,50,000
Cost of investment Rs1,45,000
Capital Reserve Rs5,000
Total goodwill (15,000 – 5,000) Rs10,000

Case 2 - Conversion from a passive investor to an associate in the same year:

A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 of the same year. Other
information is as follow:

Cost of Investment for 10% Rs 1,00,000 and for 15% Rs 1,55,000

Net asset on April 01 Rs 8,50,000 and on October 01 Rs 10,00,000.

Calculations for April 01:

Cost of investment Rs1,00,000
10% share in net asset Rs85,000
Goodwill Rs15,000

Calculations for October 01:

Cost of investment Rs1,55,000
15% share in net asset Rs1,50,000
Goodwill Rs5,000
Total goodwill (15,000 + 5,000) Rs20,000

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2. A Ltd. acquired 40% share in B Ltd. on April 01, 20X1 for Rs 10 lacs. On that date B Ltd. had 1,00,000
equity shares of Rs 10 each fully paid and accumulated profits of Rs 2,00,000. During the year 20X1-
20X2, B Ltd. suffered a loss of Rs 10,00,000; during 20X2-20X3 loss of Rs 12,50,000 and during 20X3-
20X4 again a loss of Rs 5,00,000. Show the extract of consolidated balance sheet of A Ltd. on all the
four dates recording the above events.

Solution
Calculation of Goodwill/Capital Reserve under Equity Method
Particulars Rs
Equity Shares 10,00,000
Reserves & Surplus 2,00,000
Net Assets 12,00,000
40% share of Net Assets 4,80,000
Less: Cost of Investment (10,00,000)
Goodwill 5,20,000

Consolidated Balance Sheet (Extract) as on April 01, 20X1: ASSET

Investment in Associate as per AS 23 Rs Rs
Share of Net Assets on April 1 4,80,000

Add: Goodwill 5,20,000 10,00,000

Calculation of Carrying Amount of Investment as at 31 March 20X2:

Investment in Associate as per AS 23 Rs
Share of Net Assets on 1 April, 20X1 4,80,000

Add: Goodwill 5,20,000

Cost of Investment 10,00,000

Less: Loss for the year (10,00,000 x 40%) (4,00,000)

Carrying Amount of Investment 6,00,000

Consolidated Balance Sheet (Extract) as on March 31, 20X2: ASSETS

Investment in Associate as per AS 23 Rs Rs
Share of Net Assets on 1 April, 20X1 4,80,000

Less: Share of Loss as above (4,00,000)

80,000

Add: Goodwill 5,20,000 6,00,000

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Calculation of Carrying Amount of Investment as at 31 March 20X3:

Investment in Associate as per AS 23 Rs
Carrying Amount of Investment as on 31 March 20X2 6,00,000

Less: Loss for the year (12,50,000 x 40%) (5,00,000)

Carrying Amount of Investment 1,00,000

Consolidated Balance Sheet (Extract) as on March 31, 20X3: ASSETS

Investment in Associate as per AS 23 Rs Rs
Share of Net Assets on 1 April, 20X1 4,80,000
Less: Share of Loss as above (R 4,00,000 +
s
Rs 5,00,000) (4,20,000)
Add: Goodwill 1,00,000

Calculation of Carrying Amount of Investment as at 31 March 20X4:

Investment in Associate as per AS 23 Rs
Carrying Amount of Investment 1,00,000
Less: Loss for the year (5,00,000 x 40% = 2,00,000, restricted to
Carrying amount of Investment in B Ltd.) -refer note below
Carrying Amount of Investment

Consolidated Balance Sheet (Extract) as on March 31, 20X4: ASSETS

Investment in Associate as per AS 23 Rs
Investment in B Ltd. -

OTHERS
• If, under the equity method, an investor’s share of losses of an associate equals or exceeds the
carrying amount of the investment, the investor ordinarily discontinues recognising its share of
further losses and the investment is reported at nil value.
• If the associate subsequently reports profits, the investor resumes including its share of those
profits only after its share of the profits equals the share of net losses that have not been recognised
• As far as possible the reporting date of the financial statements should be same for consolidated
financial statement. If practically it is not possible to draw up the financial statements of one or
more enterprise to such date and, accordingly, those financial statements are drawn up to reporting
dates different from the reporting date of the investor, adjustments should be made for the effects
of significant transactions or other events that occur between those dates and the date of the
consolidated financial statements. In any case, the difference between reporting dates of the
concern and consolidated financial statement should not be more than six months
• Accounting policies followed in the preparation of the financial statements of the investor, investee
and consolidated financial statement should be uniform for like transactions and other events in
similar circumstances. If accounting policies followed by different enterprises in the group are not

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uniform, then adjustments should be made in the items of the individual financial statements to
bring it in line with the accounting policy of the consolidated statement.
• Investments in associates accounted for using the equity method should be classified as long-term
investments and disclosed separately in the consolidated balance sheet.
• In case an associate has made a provision for proposed dividend (i.e. dividend declared after the
reporting period but it pertains to that reporting year) in its financial statements, the investor's
share of the results of operations of the associate should be computed without taking into
consideration the proposed dividend

3. Bright Ltd. acquired 30% of East India Ltd. shares for Rs 2,00,000 on 01-06-20X1. By such an
acquisition Bright can exercise significant influence over East India Ltd. During the financial year
ending on 31-03-20X1 East India earned profits Rs 80,000 and declared a dividend of Rs 50,000 on
12-08-20X1. East India reported earnings of Rs 3,00,000 for the financial year ending on 31-03-20X2
(assume profits to accrue evenly) and declared dividends of Rs 60,000 on 12-06-20X2.

Calculate the carrying amount of investment in:

(i) Separate financial statements of Bright Ltd. as on 31-03-20X2;
(ii) Consolidated financial statements of Bright Ltd.; as on 31-03-20X2;
(iii) What will be the carrying amount as on 30-06-20X2 in consolidated financial statements?

SOLUTION-
(i) Carrying amount of investment in Separate Financial Statement ofBright Ltd. as on 31.03.20X2
Rs
Amount paid for investment in Associate (on 1.06.20X1) 2,00,000

Less: Pre-acquisition dividend (Rs 50,000 x 30%) (15,000)

Carrying amount as on 31.3.20X2 as per AS 13 1,85,000

(ii) Carrying amount of investment in Consolidated Financial Statements of Bright Ltd. as on 31.3.20X2 as
per AS 23

Rs
Carrying amount as per separate financial statements 1,85,000
Add: Proportionate share of 10-month profit of
investee as per equity method (30% of
Rs 3,00,000 x 10/12) 75,000
Carrying amount as on 31.3.20X2 2,60,000

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(iii) Carrying amount of investment in Consolidated Financial Statement of Bright Ltd. as on 30.6.20X2 as
per AS 23
Rs
Carrying amount as on 31.3.20X2 2,60,000
Less: Dividend received (Rs 60,000 x 30%) (18,000)
Carrying amount as on 30.6.20X2 2,42,000

4. A Ltd. acquired 25% of shares in B Ltd. as on 31.3.20X1 for Rs 3 lakhs. The Balance Sheet of B Ltd. as
on 31.3.20X1 is given below:
Rs
Share Capital 5,00,000
Reserves and Surplus 5,00,000
10,00,000
Fixed Assets 5,00,000
Investments 2,00,000
II. Current Assets 3,00,000
10,00,000

During the year ended 31.3.20X2 the following are the additional information available:
(i) A Ltd. received dividend from B Ltd., for the year ended 31.3.20X1 at 40% from the Reserves.
(ii) B Ltd., made a profit after tax of Rs 7 lakhs for the year ended 31.3.20X2.
(iii) B Ltd., declared a dividend @ 50% for the year ended 31.3.20X2 on 30.4.20X2.

A Ltd. is preparing Consolidated Financial Statements in accordance with AS 21 for its various subsidiaries.
Calculate:
(i) Goodwill if any on acquisition of B Ltd.’s shares.
(ii) How A Ltd., will reflect the value of investment in B Ltd., in the Consolidated Financial Statements?
(iii) How the dividend received from B Ltd. will be shown in the Consolidated Financial Statements?

SOLUTION-
In terms of AS 23, B Ltd. will be considered as an associate company of A Ltd. as shares acquired represent
to more than 20%.

(i) Calculation of Goodwill (Rs in lakhs)

Amount paid towards acquisition of stake in B Ltd. 3
Less: Pre-acquisition dividend (Rs 5,00,000 x 40% x 25%) 0.50
Cost of Investment in B Ltd. 2.50
Less: Share in the value of Equity of B Ltd. as at the date of investment (2.50)
[25% of Rs 10 lakhs (Rs 5 lakhs + Rs 5 lakhs)]
Goodwill NIL

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(ii) A Ltd. Consolidated Profit and Loss Account for the year ended 31st March, 20X2 (An extract)
Rs in lakhs
Other income:
Share of profits in B Ltd. 1.75
Pre-acquisition Dividend received from
B Ltd. 0.50
Transfer to investment A/c (0.50) Nil

(iii) A Ltd. Consolidated Balance Sheet as on 31.3.20X2 (An extract)

Rs in lakhs
Non-current investments
Investment in B Ltd.
Cost of Investment in B Ltd. 2.50
Share of profit for year 20X1 – 20X2 1.75
4.25
Add: Goodwill NIL 4.25

Working Notes:
1. Pre-acquisition dividend received from B Ltd. amounting to Rs 0.50 lakhs will be reduced from
investment value in the books of A Ltd.

2. B Ltd. made a profit of Rs 7 lakhs for the year ended 31st March, 20X2. A Ltd.’s share in the profits of Rs 7
lakhs is Rs 1.75 lakhs. Investment in B Ltd. will be increased by Rs 1.75 lakhs and consolidated profit and
loss account of A Ltd. will be credited with Rs 1.75 lakhs in the consolidated financial statement of A Ltd.

3. Dividend declared on 30th April, 20X2 will not be recognized in the consolidated financial statement of A
Ltd.

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5. Hill Ltd. has a share capital of 50,000 shares @ ` 100 per share. Sun Ltd. acquired 15% shares in Hill
Ltd. on 1.4.2024. It also acquired all the 5,000, 12% convertible debentures of ` 100 each of Hill Ltd.
These debentures will be converted at par into equity shares of Hill Ltd. after 3 years. State whether,
as per AS 23, Hill Ltd. is an Associate of Sun Ltd. or not with reasons? (RTP SEP 2024)

SOLUTION-
As per para 3 of AS 23 ‘Accounting for Investments in Associates in Consolidated Financial Statements’, an
associate is an enterprise in which the investor has significant influence and which is neither a subsidiary
nor a joint venture of the investor.

Further as per an explanation to para 4 of the standard, for the purpose of classification of associate, the
potential equity shares of the investee held by the investor will not be taken into account for
determining the voting power of the investor. In other words, the voting power should be determined on
the basis of the current outstanding securities with voting rights.

The current outstanding securities with voting rights in Hill Ltd. is only 15% and the remaining holding is on
account of potential equity shares. Since potential equity shares do not have voting rights they will not be
taken into consideration while determining the significant influence of Sun Ltd. on Hill Ltd. Hence, Hill Ltd.
is not an associate of Sun Ltd.

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MCQ

1. Identity which of the statements are correct.

An enterprise can influence the significant economic decision making by many ways like:
(i) Representation on the board of directors or governing body of the investee.
(ii) Participation in policy-making processes.
(iii) Interchange of managerial personnel.
(iv) Provision of essential technical information.

(a) Statement (i) and (ii) are correct.

(b) Statement (i), (ii) and (iii) are correct.
(c) Statement (i), (ii), (iii) and (iv) are correct.
(d) Statement (ii) and (iii) are correct.

2. A Ltd. is holding 90% share in B Ltd. and 10% shares in C Ltd., and B Ltd. is holding 11% shares in C Ltd.
Identity which of the statements are incorrect.
(i) In this case, A Ltd. is parent of B Ltd.
(ii) As far as the relationship between A Ltd. and C Ltd. is concerned; A Ltd. has a total of direct and indirect
holding of (10% + 90% of 11%) 19.9 % in C Ltd.
(iii) C Ltd. is an associate of A Ltd.

(a) Statement (ii) is incorrect.

(b) Statement (iii) is incorrect.
(c) Statement (ii) and (iii) both are incorrect.
(d) All statements are incorrect.

3. A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 of the same year. Other
information is as follows:
Cost of Investment for 10% Rs 1,00,000 and for 15% Rs 1,55,000
Net asset on April 01 Rs 8,50,000 and on October 01 Rs 10,00,000.

What is the amount of goodwill or capital reserve arising on significant influence?

(a) Goodwill = Rs 10,000.
(b) Goodwill = Rs 20,000.
(c) Capital Reserve = Rs 10,000.
(d) Capital Reserve = Rs 20,000.

4. A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 during the same year.
Other information is as follow:
Cost of Investment for 10% Rs 1,00,000 and for 15% Rs 1,45,000
Net asset on April 01 Rs 8,50,000 and on October 01 Rs 10,00,000.
What is the amount of goodwill or capital reserve arising on significant influence?
(a) Goodwill = Rs 10,000.
(b) Goodwill = Rs 20,000.
(c) Capital Reserve = Rs 10,000.
(d) Capital Reserve = Rs 20,000.

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5. Identity which of the statements are correct.

(i) In case an associate has made a provision for proposed dividend (i.e. dividend declared after the
reporting period but it pertains to that reporting year) in its financial statements, the investor's share of the
results of operations of the associate should be computed without taking into consideration the proposed
dividend.
(ii) In case an associate has made a provision for proposed dividend (i.e. dividend declared after the
reporting period but it pertains to that reporting year) in its financial statements, the investor's share of the
results of operations of the associate should be computed after taking into consideration the proposed
dividend.
(iii) The potential equity shares of the investee held by the investor should not be taken into account for
determining the voting power of the investor.
(iv) The potential equity shares of the investee held by the investor should be taken into account for
determining the voting power of the investor.

(a) Statement (i) and (iii).

(b) Statement (ii) and (iv).
(c) Statement (i) only.
(d) Statement (iii) only

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Chapter 10 FINANCIAL REPORTING OF INTERESTS IN JOINT VENTURE

DEFINITION-
• A joint venture is a contractual arrangement whereby two or more parties undertake an economic
activity, which is subject to joint control.
• Venturers have joint control on the economic activity: The operating and financial decisions are
influenced by the venturers and they also share the results of the economic activity.
• Non-existence of contractual agreement will disqualify an organization to be covered in AS 27.

Irrespective of the form of the contract, the content of the contract ideally should include the following
points:
• The activity, duration and reporting obligations of the joint venture.
• The appointment of the board of directors or equivalent governing body of the joint venture and the
voting rights of the venturers.
• Capital contributions by the venturers.
• The sharing by the venturers of the output, income, expenses or results of the joint venture.

Example 1
IDBI gave loan to the joint venture entity of L&T and Tantia Construction, they signed an agreement
according to which IDBI will be informed for all important decisions of the joint venture entity. This
agreement is to protect the right of the IDBI, hence just signing the contractual agreement will not make
investor a venturer.

Example 2
X Ltd invested Rs 200 crore as initial capital along with Y Ltd and Z Ltd in GFH Ltd. The purpose of X Ltd
making this investment is to grow the business of GFH Ltd along with the other investors. All investors have
a right to attend to the meetings and to take decisions with respect to the business of GFH Ltd. All investors
are actively involved in running the business of GFH Ltd and have a share in the returns generated by GFH
Ltd in an agreed proportion.

GFH Ltd is an example of a Joint Venture and X Ltd, Y Ltd and Z Ltd are all Venturers.

Example 3
Mr. A, M/s. B & Co. and C Ltd. entered into a joint venture, where according to the agreement, all the
policies making decisions on financial and operating activities will be taken in a regular meeting attended by
them or their representatives. Implementation and execution of these policies will be the responsibility of
Mr. A. Here Mr. A is acting as venturer as well as manager of the concern

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FORMS OF JOINT VENTURES

Joint ventures may take many forms and structures, this Statement identifies them in three broad types –
• Jointly Controlled Operations (JCO)
• Jointly Controlled Assets (JCA) and
• Jointly Controlled Entities (JCE).

JOINTLY CONTROLLED OPERATIONS (JCO)

Under this set up, venturers do not create a separate entity for their joint venture business but they use
their own resources for the purpose.
Following are the key features of JCO:
a. Each venturer has his own separate business.
b. There is no separate entity for joint venture business.
c. All venturers are creating their own assets and maintain them.
d. Each venturer record only his own transactions without any separate set of books maintained for the
joint venture business.
e. There is a common agreement between all of them.
f. Venturers use their assets for the joint venture business.
g. Venturers met the liabilities created by them for the joint venture business.
h. Venturers met the expenses of the joint venture business from their funds.
i. Any revenue generated or income earned from the joint venture is shared by the venturers as per the
contract.

Example 4
Mr. A (dealer in tiles and marbles), Mr. B (dealer in various building materials) and Mr. C (Promoter) enters
into a joint venture business, where any contract for construction received will be completed jointly, say,
Mr. A will supply all tiles and marbles, Mr. B will supply other materials from his godown and Mr. C will look
after the completion of construction. As per the contractual agreement, they will share any profit/loss in a
predetermined ratio. None of them are using separate staff or other resources for the joint venture
business and neither do they maintain a separate account. Everything is recorded in their personal business
only.

Venturer doesn’t maintain a separate set of books but they record only their own transactions of the joint
venture business in their books

1. Mr. A, Mr. B and Mr. C entered into a joint venture to purchase a land, construct and sell flats. Mr. A
purchased a land for Rs 60,00,000 on 01.01.20X1 and for the purpose he took loan from a bank for
Rs 50,00,000 @ 8% interest p.a. He also paid registering fees Rs 60,000 on the same day. Mr. B
supplied the materials for Rs 4,50,000 from his godown and further he purchased the materials for
Rs 5,00,000 for the joint venture. Mr. C met all other expenses of advertising, labour and other
incidental expenses which turnout to be Rs 9,00,000. On 30.06.20X1 each of the venturer agreed to
take away one flat each to be valued at Rs 10,00,000 each flat and rest were sold by them as follow:
Mr. A for Rs 40,00,000; Mr. B for Rs 20,00,000 and Mr. C for Rs 10,00,000. Loan was repaid on the
same day by Mr. A along with the interest and net proceeds were shared by the partners equally.

You are required to prepare the draft Consolidated Profit & Loss Account and Joint Venture Account in the
books of each venturer.

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Solution
Draft Consolidated Profit & Loss Account
Particulars Rs Rs Particulars Rs Rs
To Purchase of By Sale of
Land: Flats:
Mr. A 60,00,000 Mr. A 40,00,000
To Registration 20,00,000
Mr. B
Fees:
Mr. A 60,000 Mr. C 10,00,000 70,00,000
To Materials: By Flats taken
by Venturers:
Mr. B 9,50,000 Mr. A 10,00,000
To Other Mr. B 10,00,000
Expenses:
Mr. C 9,00,000 Mr. C 10,00,000 30,00,000
To Bank
Interest:
Mr. A 2,00,000
To Profits:
Mr. A 6,30,000
Mr. B 6,30,000
Mr. C 6,30,000 18,90,000
1,00,00,000 1,00,00,000

In the Books of Mr. A

Joint Venture Account
Particulars Rs Particulars Rs
To Bank Loan (Purchase of 50,00,000 By Bank (Sale of Flats) 40,00,000
Land)
To Bank:(Purchase of Land) By Land & Building 10,00,000
10,00,000
To Bank (Registration Fees) By Bank (Received from 14,20,000
60,000 Mr. B)
To Bank (Bank Interest) 2,00,000 By Bank (Received from 4,70,000
Mr. C)
To Profit on JV 6,30,000
68,90,000 68,90,000

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In the Books of Mr. B

Joint Venture Account
Particulars Rs Particulars Rs
To Purchases (Material 4,50,000 By Bank (Sale of
Supplied) Flats) 20,00,000
To Bank (Materials) 5,00,000 By Land & Building 10,00,000
To Profit on JV 6,30,000
To Bank (Paid to Mr. A) 14,20,000
30,00,000 30,00,000

In the Books of Mr. C

Joint Venture Account
Particulars Rs Particulars Rs
To Bank (Misc. Expenses) 9,00,000 By Bank (Sale of 10,00,000
Flats)
To Profit on JV 6,30,000 By Land & Building 10,00,000
To Bank (Paid to Mr. A) 4,70,000
20,00,000 20,00,000

JOINTLY CONTROLLED ASSETS (JCA)

• There is no separate legal identity.
• There is a common control over the joint assets.
• Each venturer incurs separate expenses for their transactions.
• In their financial statement, venturer shows only their share of the asset and total income earned by
them along with total expenses incurred by them.

Following are the few differences between JCO and JCA:

• In JCO, venturers use their own assets for joint venture business but in JCA they jointly own the
assets to be used in joint venture.
• Under JCO all expenses and revenues are shared at an agreed ratio, in JCA only expenses on joint
assets are shared at the agreed ratio.

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2. A Ltd., B Ltd. and C Ltd. decided to jointly construct a pipeline to transport the gas from one place to
another that was manufactured by them. For the purpose following expenditure was incurred by
them: Buildings Rs 12,00,000 to be depreciated @ 5% p.a., Pipeline for Rs 60,00,000 to be
depreciated @ 15% p.a., computers and other electronics for Rs 3,00,000 to be depreciated @ 40%
p.a. and various vehicles of Rs 9,00,000 to be depreciated @ 20% p.a.

They also decided to equally bear the total expenditure incurred on the maintenance of the pipeline that
comes to Rs 6,00,000 each year.

You are required to show the consolidated balance sheet and the extract of Statement of Profit & Loss and
Balance Sheet for each venturer.

Solution
Consolidated Balance Sheet
Note
I Equity and liabilities
Shareholders’ funds:
Share Capital 1 71,40,000
71,40,000
II Assets
Non-current Assets
Property, Plant and Equipment: 2 71,40,000
71,40,000

Notes to Accounts

1. Share capital
A Ltd. 23,80,000

B Ltd. 23,80,000
C Ltd. 23,80,000 71,40,000
2. Property, Plant and Equipment
Land & Building:

A Ltd. 3,80,000

B Ltd. 3,80,000

C Ltd. 3,80,000 11,40,000

Plant & Machinery:

A Ltd. 17,00,000

B Ltd. 17,00,000

C Ltd. 17,00,000 51,00,000

Computers:
60,000

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A Ltd. 60,000
B Ltd. 60,000 1,80,000
C Ltd.

Vehicles: 2,40,000
A Ltd. 2,40,000
B Ltd. 2,40,000 7,20,000
C Ltd.

In the Books of A Ltd.

Extract of statement of Profit & Loss
Particulars Note No.

Depreciation and amortisation expense 1 4,20,000

Other operating Expenses (Pipeline Expenses) 200,000

Extract of Balance Sheet

Note No.
Assets
Non-current assets
Property, Plant and Equipment 2 23,80,000

Notes to Accounts

1. Depreciation and amortisation expense

Land & Building 20,000
Plant & Machinery 3,00,000
Computers 40,000
Vehicles 60,000 4,20,000
2. Land & Building 4,00,000
Less: Depreciation (20,000) 3,80,000
Plant & Machinery 20,00,000
Less: Depreciation (3,00,000) 17,00,000
Computers 1,00,000
Less: Depreciation (40,000) 60,000
Vehicles 3,00,000
Less: Depreciation (60,000) 2,40,000
23,80,000

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In the Books of B Ltd.

Extract of draft Profit & Loss Account
Particulars Note No. `
Depreciation and amortisation expense 1 4,20,000

Other operating Expenses (Pipeline Expenses) 200,000

Extract of Balance Sheet

Note No. `
Assets
Non-current assets
Property, Plant and Equipment 2 23,80,000

Notes to Accounts
` `
1. Depreciation and amortisation expense
Land & Building 20,000
Plant & Machinery 3,00,000

Computers 40,000

Vehicles 60,000 4,20,000

2. Land & Building 4,00,000

Less: Depreciation (20,000) 3,80,000

Plant & Machinery 20,00,000

Less: Depreciation (3,00,000) 17,00,000

Computers 1,00,000

Less: Depreciation (40,000) 60,000

Vehicles 3,00,000

Less: Depreciation (60,000) 2,40,000

23,80,000

In the Books of C Ltd

Extract of Draft Profit & Loss Account Note No. `
Depreciation and amortisation expense 1 4,20,000

Other operating Expenses (Pipeline Expenses) 200,000

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Extract of Balance Sheet

Note No. `
Assets
Non-current assets
Property, Plant and Equipment 2 23,80,000

Notes to Accounts
` `
1. Depreciation and amortisation expense

Land & Building 20,000

Plant & Machinery 3,00,000

Computers 40,000

Vehicles 60,000 4,20,000

2. Land & Building 4,00,000

Less: Depreciation (20,000) 3,80,000

Plant & Machinery 20,00,000

Less: Depreciation 17,00,000
(3,00,000)

Computers 1,00,000

Less: Depreciation (40,000) 60,000

Vehicles 3,00,000

Less: Depreciation (60,000) 2,40,000

23,80,000

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JOINTLY CONTROLLED ENTITIES (JCE)

• This is the format where venturer creates a new entity for their joint venture business
• All the venturers pool their resources under new banner and this entity purchases its own assets,
create its own liabilities, expenses are incurred by the entity itself and sales are also made by this
entity.
• The net result of the entity is shared by the venturers in the ratio agreed upon in the contractual
agreement

Example
A Ltd and B Ltd are two infrastructure companies operating in City A. The local authority has issued a tender
to construct a metro stretch for ` 2,000 crore and had invited bidders to apply for the tender. A Ltd and B
Ltd, jointly form a new entity AB Ltd that bids for the tender. All machinery and equipment will be the
responsibility of A Ltd. All funding will be managed and controlled by B Ltd. Revenue and operating
expenses will be shared jointly by A Ltd and B Ltd in the proportion of 60:40.

In the above example AB Ltd constitutes a Jointly Controlled Entity (JCE)

3. A Ltd. a UK based company entered into a joint venture with B Ltd. in India, wherein B Ltd. will
import the goods manufactured by A Ltd. on account of joint venture and sell them in India. A Ltd.
and B Ltd. agreed to share the expenses & revenues in the ratio of 5:4 respectively whereas profits
are distributed equally. A Ltd. invested 49% of total capital but has equal share in all the assets and
is equally liable for all the liabilities of the joint venture. Following is the trial balance of the joint
venture at the end of the first year:

Particulars Dr. (Rs ) Cr. (Rs )

Purchases 9,00,000
Other Expenses 3,06,000
Sales 13,05,000
Property, Plant and Equipment 6,00,000
Current Assets 2,00,000
Unsecured Loans 2,00,000
Current Liabilities 1,00,000
Capital 4,01,000

Closing inventory was valued at Rs 1,00,000. You are required to prepare the Consolidated Financial
Statement.

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Solution
Consolidated Profit & Loss Account
Particulars Note No.

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.
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

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Notes to Accounts
Particulars

1. Revenue from operations

Sales:

A Ltd. 7,25,000
B Ltd. 5,80,000 13,05,000

2. Purchases
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 & 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

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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

CONSOLIDATED FINANCIAL STATEMENTS OF A VENTURER

• Proportionate consolidation is a method of accounting and reporting whereby a venturer's share of
each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as
separate line items in the venturer's financial statements.
• Proportionate consolidation method of accounting is to be followed except in the following cases:
➢ Investment is intended to be temporary because the investment is acquired and held
exclusively with a view to its subsequent disposal in the near future. And
➢ Joint venture operates under severe long-term restrictions, which significantly impair its
ability to transfer funds to the venturers
• In both the above cases, investment of venturer in the share of the investee is treated as investment
according to AS 13.
• As far as possible the reporting date of the financial statements of jointly controlled entity and
venturers should be same. If practically it is not possible to draw up the financial statements to such
date and, accordingly, those financial statements are drawn up to different reporting dates,
adjustments should be made in joint venturer’s books for the effects of significant transactions or
other events that occur between the jointly controlled entity’s date and the date of the venturer’s
financial statements. In any case, the difference between reporting dates should not be more than
six months.
• Accounting policies followed in the preparation of the financial statements of the jointly controlled
entity and venturer should be uniform for like transactions and other events in similar
circumstances. If accounting policies followed by venturer and jointly controlled entity are not
uniform, then adjustments should be made in the items of the venturer to bring it in line with the
accounting policy of the joint venture

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4. A Ltd. entered into a joint venture with B Ltd. on 1:1 basis and a new company C Ltd. was
formed for the same purpose and following is the balance sheet of all the three companies:

Particulars A Ltd. B Ltd. C Ltd.

Share Capital 10,00,000 7,50,000 5,00,000

Reserve & Surplus 18,00,000 16,00,000 12,00,000

Loans 3,00,000 4,00,000 2,00,000

Current Liabilities 4,00,000 2,50,000 1,00,000

Property, Plant and Equipment 30,50,000 26,25,000 19,50,000

Investment in JV 2,50,000 2,50,000 -

Current Assets 2,00,000 1,25,000 50,000

Prepare the balance sheet of A Ltd. and B Ltd. under proportionate consolidation method.

Solution
Balance Sheet of A Ltd.
Note No.

I Equity and liabilities

1. Shareholders’ funds:
Share Capital 10,00,000
Reserves and Surplus 1 24,00,000

2. Non-current liabilities 2 4,00,000

3. Current Liabilities 3 4,50,000

TOTAL 42,50,000

II Assets
Non-current Assets
Property, Plant and Equipment: 4 40,25,000
Current Assets 5 2,25,000
42,50,000

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Notes to Accounts
` `
1. Reserves and Surplus
A Ltd. 18,00,000
C Ltd. 6,00,000 24,00,000
2. Long Term Borrowings
Loans:
A Ltd. 3,00,000
C Ltd. 1,00,000 4,00,000
3. Current Liabilities:
A Ltd. 4,00,000
C Ltd. 50,000 4,50,000
4. Property, Plant and Equipment:
A Ltd. 30,50,000
C Ltd. 9,75,000 40,25,000
5. Current Assets:
A Ltd. 2,00,000
C Ltd. 25,000 2,25,000

Balance Sheet of B Ltd.

Note No. (`)
I Equity and liabilities
1. Shareholders’ funds:
Share Capital 7,50,000
Reserves and Surplus 1 22,00,000
2. Non-current liabilities 2 5,00,000
3. Current Liabilities 3
3,00,000
37,50,000

II Assets
1. Non-current Assets
Property, Plant and Equipment 4 36,00,000
2. Current Assets 5
1,50,000
37,50,000

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Notes to Accounts
` `
1. Reserves and Surplus
A Ltd. 16,00,000
C Ltd. 6,00,000 22,00,000

2. Long Term Borrowings

Loans:
A Ltd. 4,00,000

C Ltd. 1,00,000 5,00,000

3. Current Liabilities:

A Ltd. 2,50,000

C Ltd. 50,000 3,00,000

4. Property, Plant and Equipment:

A Ltd. 26,25,000

C Ltd. 9,75,000 36,00,000

5. Current Assets:

A Ltd. 1,25,000

C Ltd. 25,000 1,50,000

5. JVR Limited has made investments of Rs 97.84 crores in equity shares of QSR Limited in pursuance
of Joint Venture agreement till 20X1-X2 (i.e., more than 12 months). The investment has been made
at par. QSR Limited has been in continuous losses for the last 2 years. JVR Limited is willing to
reassess the carrying amount of its investment in QSR Limited and wish to provide for diminution in
value of investments. However, QSR Limited has a futuristic and profitable business plans and
projection for the coming years. Discuss whether the contention of JVR Limited to bring down the
carrying amount of investment in QSR Limited is in accordance with the Accounting Standard.

SOLUTION
As per para 26 of AS 27 “Financial Reporting of Interests in Joint Ventures”, in a venturer’s separate
financial statements, interest in a jointly controlled entity should be accounted for as an investment in
accordance with AS 13 ‘Accounting for Investments’.

As per para 17 of AS 13 “Accounting for Investments”, long-term investments are usually carried at cost.
However, when there is a decline, other than temporary, in the value of a long-term investment, the
carrying amount is reduced to recognize the decline. Indicators of the value of an investment are obtained
by reference to its market value, the investee’s assets and results and the expected cash flows from the
investment. The type and extent of the investor’s stake in the investee are also taken into account.
However, where there is a decline, other than temporary, in the carrying amounts of long-term
investments, the resultant reduction in the carrying amount is charged to the profit and loss statement.

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Since the investment was made in the year 20X1-20X2 i.e., more than a year, it is a long-term investment.
In the given case, though the QSR Ltd. is in continuous losses for past 2 years, yet it has a futuristic and
profitable business plans and projections for the coming years. Here, one of the indicators i.e. ‘losses
incurred to the company’ may lead to diminution in the value of the shares while the other indicator that
‘the company has positive expected cash flows from its business plans’ does not lead to decline in the value
of shares.

Considering both the facts, in case the expectation of profitable business plans and positive cash flows is
based reliable presumptions (such as tender in favour of QSR Ltd., strong order book etc.), the decline will
be regarded as temporary in nature and the investment in equity shares will continue to be carried at cost
only.

However, should the aforesaid presumptions be based on projections without reasonable evidence backing
the claims, the decline could be regarded as non-temporary in nature in which case the write down of the
carrying amount become necessary in line with AS 13, thereby implying the contention of QSR Ltd. to be
correct.

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MCQs

1. State which of the following statements are incorrect.

(i) The requirements relating to accounting for joint ventures in consolidated financial statements according
to proportionate consolidation method, as contained in AS 27, applies only when consolidated financial
statements are prepared by venturer.
(ii) The requirements relating to accounting for joint ventures in consolidated financial statements
according to proportionate consolidation method, as contained in AS 27, applies irrespective whether
consolidated financial statements are prepared by venturer or not.
(iii) An investor in joint venture, which does not have joint control, should report its interest in a joint
venture in its consolidated financial statements in accordance with AS 13, AS 21 and AS 23as the case may
be.

(a) Point (i) is incorrect.

(b) Point (ii) is incorrect.
(c) Point (iii) is incorrect.
(d) None of the above

2. Identify which of the following is not a feature of a Jointly controlled operations (JCO):
a. Each venturer has his own separate business.
b. There is a separate entity for joint venture business.
c. Each venturer record only his own transactions without any separately set of books maintained for the
joint venture business.
d. There is a common agreement between all of them.

3. Identify which of the following is/are not a feature of a Jointly controlled assets (JCA)
(i) There is a separate legal identity.
(ii) There is a common control over the joint assets.
(iii) Expenses on jointly held assets are shared by the venturers as per the contract.
(iv) In their financial statement, venturer shows only their share of the asset and total income earned by
them along with total expenses incurred by them.

(a) Point no. (i) only.

(b) Point no. (i) and (iii).
(c) Point no. (iii) and (iv).
(d) Point (i) and (ii).

4. Identify which is/ are features of a Jointly controlled entity (JCE):

(i) Venturer creates a new entity for their joint venture business.
(ii) All the venturers pool their resources under new banner and this entity purchases its own assets, create
its own liabilities, expenses are incurred by the entity itself and sales are also made by this entity.
(iii) The revenues and expenses of the entity is shared by the venturers in the ratio agreed upon in the
contractual agreement.

(a) Point no. (i) only.

(b) Point no. (i) and (ii).
(c) Point no. (i) , (ii) & (iii).
(d) Point no. (iii).

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5. Identify the correct statements. From the date of discontinuing the use of the proportionate
consolidation method:
(i) If interest in entity is more than 50%, investments in such joint ventures should be accounted for in
accordance with AS 21, Consolidated Financial Statements.
(ii) If interest is 20% or more but upto 50%, investments are to be accounted for in accordance with AS 23,
Accounting for Investment in Associates in Consolidated Financial Statements.
(iii) For all other cases investment in joint venture is treated as per AS 13, Accounting for Investments.
(iv) For this purpose, the fair value of the investment at the date on which joint venture relationship ceases
to exist should be regarded as cost thereafter.

(a) Point no. 1 and 2.

(b) Point no. 1, 2 and 3.
(c) Point no. 1, 2, 3 and 4.
(d) None of the above.

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Chapter 11 AS 28: IMPAIRMENT OF ASSETS

INTRODUCTION
• AS 28 came into effect in respect of accounting period commenced on or after 1-4-2004 and is
mandatory in nature from that date for the following:
(i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India,
and enterprises that are in the process of issuing equity or debt securities that will be listed on a
recognised stock exchange in India as evidenced by the board of directors’ resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for the
accounting period exceeds 50 crores.
• In respect of all other enterprises, the Accounting Standard came into effect in respect of accounting
periods commenced on or after 1-4-2005 and is mandatory in nature from that date

SCOPE:
The standard should be applied in accounting for impairment of all assets except
• Inventories (AS 2),
• Assets arising under construction contracts (AS 7),
• Financial assets including investments covered under AS 13, and
• Deferred tax assets (AS 22).

ASSESSMENT:
• An enterprise should assess at each balance sheet date whether there is any indication that an asset
may be impaired.
• If any such indication exists, the enterprise should estimate the recoverable amount of the asset.
• An asset is impaired when the carrying amount of the asset exceeds its recoverable amount.

External sources of information:

a. During the period, an asset’s market value has declined significantly more than would be expected as a
result of the passage of time or normal use.
b. Significant changes with an adverse effect on the enterprise have taken place during the period, or will
take place in the near future, in the technological, market, economic or legal environment in which the
enterprise operates or in the market to which an asset is dedicated.
c. Market interest rates or other market rates of return on investments have increased during the period,
and those increases are likely to affect the discount rate used in calculating an asset’s value in use and
decrease the asset’s recoverable amount materially.

Internal sources of information:

a. Evidence is available of obsolescence or physical damage of an asset.
b. Significant changes with an adverse effect on the enterprise have taken place during the period, or are
expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is
expected to be used. These changes include plans to discontinue or restructure the operation to which an
asset belongs or to dispose of an asset before the previously expected date

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MEASUREMENT OF RECOVERABLE AMOUNT

• An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.
• Recoverable amount is the higher of an asset’s net selling price and it’s value in use.
• Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction
between knowledgeable, willing parties, less the costs of disposal.
• Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding
finance costs and income tax expense.
• The best evidence for net selling price is a price in the bidding sales agreement for the disposal of
the assets or similar assets. In the absence of this, net selling price is estimated from the
transactions for the assets in active market, if the asset has the active market. If there is no binding
sale agreement or active market for an asset, net selling price is based on the best information
available.
• Value in Use is the present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the end of its useful life.

BASIS FOR ESTIMATES OF FUTURE CASH FLOWS

• Cash flow projections should be based on the most recent approved budgets/forecasts for a
maximum of five years.
• Financial budgets/forecasts over a period longer than five years may be used if management is
confident that these projections are reliable and it can demonstrate its ability, based on past
experience, to forecast cash flows accurately over that longer period.
• Cash flow projections should be based on reasonable and supportable assumptions that represent
management’s best estimate

COMPOSITION OF ESTIMATES OF FUTURE CASH FLOWS

Estimates of future cash flows should include
• Projections of net cash inflows from the continuing use of the asset
• Projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and that can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
• Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life.
• Future cash outflows or inflows expected to arise because of restructuring of the organization
should be not considered.
• Any future capital expenditure enhancing the capacity of the assets and its related savings/outflow
should be excluded.
• Any increase in expected cash inflow from the above expenditure should also be excluded

FOREIGN CURRENCY FUTURE CASH FLOWS

They are estimated in the currency in which it will be generated and then they are discounted for the time
value of money using a discount rate appropriate for that currency. we convert cashflow in the reporting
currency on the basis of AS 11.

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DISCOUNT RATE
• The discount rate(s) should be a pre-tax rate(s) that reflect(s) current market assessments of the
time value of money and the risks specific to the asset.
• A rate that reflects current market assessments of the time value of money and the risks specific to
the asset is the return that investors would require if they were to choose an investment that would
generate cash flows of amounts, timing and risk profile equivalent to those that the enterprise
expects to derive from the asset.
• When an asset-specific rate is not directly available from the market, an enterprise uses other bases
to estimate the discount rate such as incremental borrowing rate, rate using capital asset pricing
model, etc.

RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS

• When this recoverable amount is less than the carrying amount, this difference termed as
Impairment Loss.
• It should be written off immediately as expenses to Profit & Loss Account
• If assets are carried out at revalued figures then the impairment loss equivalent to revalued surplus
is adjusted with it and the balance (if any) is charged to Profit & Loss Account.
• Depreciation for the coming years on the assets are recalculated on the basis of the new carrying
amount, residual value and remaining useful life of the asset, according to AS 10

CASH GENERATING UNIT

A cash generating unit is the smallest identifiable group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows from other assets or groups of assets.

Example 1
A mining enterprise owns a private railway to support its mining activities. The private railway could be sold
only for scrap value and the private railway does not generate cash inflows from continuing use that are
largely independent of the cash inflows from the other assets of the mine.

It is not possible to estimate the recoverable amount of the private railway because the value in use of the
private railway cannot be determined and it is probably different from scrap value. Therefore, the
enterprise estimates the recoverable amount of the cash-generating unit to which the private railway
belongs, that is, the mine as a whole.

Example 2
A bus company provides services under contract with a municipality that requires minimum service on each
of five separate routes. Assets devoted to each route and the cash flows from each route can be identified
separately. One of the routes operates at a significant loss.

Since the enterprise does not have the option to curtail any one bus route, the lowest level of identifiable
cash inflows from continuing use that are largely independent of the cash inflows from other assets or
groups of assets is the cash inflows generated by the five routes together. The cash-generating unit for each
route is the bus company as a whole.

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GOODWILL
• Goodwill does not generate cash flows independently from other assets or groups of assets and,
therefore, the recoverable amount of goodwill as an individual asset cannot be determined.
• As a consequence, if there is an indication that goodwill may be impaired, recoverable amount is
determined for the cash generating unit to which goodwill belongs. This amount is then compared
to the carrying amount of this cash-generating unit and any impairment loss is recognized.
• If goodwill can be allocated on a reasonable and consistent basis, an enterprise applies the ‘bottom-
up’ test only. If it is not possible to allocate goodwill on a reasonable and consistent basis, an
enterprise applies both the ‘bottom-up’ test and ‘top-down’ test.

Example:
At the end of 20X0, enterprise M acquired 100% of enterprise Z for Rs 3,000 lakhs. Z has 3 cash-generating
units A, B and C with net fair values of Rs 1,200 lakhs, Rs 800 lakhs andRs 400 lakhs respectively. M
recognises goodwill of Rs 600 lakhs (Rs 3,000 lakhs less Rs 2,400 lakhs) that relates to Z.

At the end of 20X4, A makes significant losses. Its recoverable amount is estimated to be Rs 1,350 lakhs.
Carrying amounts are detailed below (Rs In Lakh)
End of 20X4 A B C Goodwill Total
Net carrying 1300 1200 800 120 3420
amount

Scenario A - Goodwill Can be Allocated on a Reasonable and Consistent Basis

On the date of acquisition of Z, the net fair values of A, B and C are considered a reasonable basis for a pro-
rata allocation of the goodwill to A, B and C.

Allocation of goodwill at the end of 20X4:

A B C Goodwill
End of 20X0
Net fair values 1200 800 400 2400
Pro-Rata 50% 33% 17% 100%
End of 20X4
Net carrying amount 1300 1200 800 3300
Allocation of goodwill 60 40 20 120
(Using pro rate above)
Net carrying amount (After goodwill) 1360 1240 820 3420

In accordance with the ‘bottom-up’ test, M compares A’s recoverable amount to its carrying amount after
the allocation of the carrying amount of goodwill:
End of 20X4 A (Rs. In Lakh)
Carrying amount after allocation of goodwill 1360
Recoverable amount 1350
Impairment loss 10

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M recognises an impairment loss of Rs 10 lakhs for A. The impairment loss is fully allocated to the goodwill
in accordance with paragraph 87 of AS 28.

Scenario B - Goodwill Cannot be Allocated on a Reasonable and Consistent Basis

There is no reasonable way to allocate the goodwill that arose on the acquisition of Z to A, B and C. At the
end of 20X4, Z’s recoverable amount is estimated to be Rs 3,400 lakhs.

At the end of 20X4, M first applies the ‘bottom-up’ test in accordance with paragraph 78(a) of this
Statement. It compares A’s recoverable amount to its carrying amount excluding the goodwill.
End of 20X4 A (Rs. In Lakh)
Carrying amount 1300
Recoverable amount 1350
Impairment loss 0

Therefore, no impairment loss is recognised for A as a result of the ‘bottom-up’ test.

Since the goodwill could not be allocated on a reasonable and consistent basis to A, M also performs a ‘top-
down’ test in accordance with paragraph 78(b) of AS 28. It compares the carrying amount of Z as a whole to
its recoverable amount (Z as a whole is the smallest cash-generating unit that includes A and to which
goodwill can be allocated on a reasonable and consistent basis).

Application of the ‘top-down’ test (Amount in Rs lakhs)

End of 20X4 A B C Goodwill Total
Carrying amount 1300 1200 800 120 3420
Impairment loss arising from the 0 - - - 0
‘bottom-up’ test
Carrying amount after the ‘bottom-up’ 1300 1200 800 120 3420
test
Recoverable amount - - - - 3400
Impairment loss arising from ‘top- - - - - 20
down’ test

Therefore, M recognises an impairment loss of Rs 20 lakhs that it allocates fully to goodwill in accordance
with paragraph 87 of AS 28.

CORPORATE ASSETS
• Key characteristics of corporate assets are that they do not generate cash inflows independently
from other assets or groups of assets and their carrying amount cannot be fully attributed to the
cash-generating unit under review.
• If the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis
to the cash-generating unit under review, an enterprise should apply the ‘bottom-up’ test only; and
• If the carrying amount of the corporate asset cannot be allocated on a reasonable and consistent
basis to the cash-generating unit under review, an enterprise should apply both the ‘bottom-up’ and
‘top-down’ tests.

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IMPAIRMENT LOSS FOR A CASH GENERATING UNIT

• First, to goodwill allocated to the cash-generating unit (if any); and
• Then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset
in the unit
• The carrying amount of an asset should not be reduced below the highest of:
a. Its net selling price (if determinable);
b. Its value in use (if determinable); and
c. Zero

Example 4
A machine has suffered physical damage but is still working, although not as well as it used to. The net
selling price of the machine is less than its carrying amount. The machine does not generate independent
cash inflows from continuing use. The smallest identifiable group of assets that includes the machine and
generates cash inflows from continuing use that are largely independent of the cash inflows from other
assets is the production line to which the machine belongs. There coverable amount of the production line
shows that the production line taken as a whole is not impaired.

Assumption 1: Budgets/forecasts approved by management reflect no commitment of management to

replace the machine.

The production line is not impaired, therefore, no impairment loss is recognised for the machine.
Nevertheless, the enterprise may need to reassess the depreciation period or the depreciation method for
the machine. Perhaps, a shorter depreciation period or a faster depreciation method is required to reflect
the expected remaining useful life of the machine or the pattern in which economic benefits are consumed
by the enterprise

Assumption 2: Budgets/forecasts approved by management reflect a commitment of management to

replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its
disposal are estimated to be negligible. The machine’s value in use can be estimated to be close to its net
selling price. Therefore, the recoverable amount of the machine can be determined and no consideration is
given to the cash-generating unit to which the machine belongs (the production line). Since the machine’s
net selling price is less than its carrying amount, an impairment loss is recognised for the machine.

REVERSAL OF AN IMPAIRMENT LOSS

• An enterprise should assess at each balance sheet date whether there is any indication that an
impairment loss recognised for an asset in prior accounting periods may no longer exist or may have
decreased.
• If any such indication exists, the enterprise should estimate the recoverable amount of that asset.
• An impairment loss recognised for an asset in prior accounting periods should be reversed if there
has been a change in the estimates of cash inflows, cash outflows or discount rates used to
determine the asset’s recoverable amount since the last impairment loss was recognised.
• If impairment loss was written off to profit and loss account, then the reversal of impairment loss
should be recognized as income in the financial statement immediately.
• If impairment loss was adjusted with the Revaluation Reserve; then reversal of impairment loss will
be written back to the reserve account to the extent it was adjusted, any surplus will be recognised
as revenue.

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• But in any case the increased carrying amount of an asset due to a reversal of an impairment loss
should not exceed the carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior accounting periods

REVERSAL OF AN IMPAIRMENT LOSS FOR A CASH-GENERATING UNIT

A reversal of an impairment loss for a cash-generating unit should be allocated to increase the carrying
amount of the assets of the unit in the following order:
a. First, assets other than goodwill on a pro-rata basis based on the carrying amount of each asset in the
unit; and
b. Then, to goodwill allocated to the cash-generating unit (if any)

In allocating a reversal of an impairment loss for a cash generating unit under paragraph 106, the carrying
amount of an asset should not be increased above the lower of:
(a) its recoverable amount (if determinable); and
(b) the carrying amount that would have been determined (net of amortisation or depreciation) had no
impairment loss been recognised for the asset in prior accounting periods

REVERSAL OF AN IMPAIRMENT LOSS FOR GOODWILL

An impairment loss recognised for goodwill should not be reversed in a subsequent period unless:
a. The impairment loss was caused by a specific external event of an exceptional nature that is not expected
to recur; and
b. Subsequent external events have occurred that reverse the effect of that event.

IMPAIRMENT IN CASE OF DISCONTINUING OPERATIONS

The approval and announcement of a plan for discontinuance is an indication that the assets attributable to
the discontinuing operation may be impaired or that an impairment loss previously recognised for those
assets should be increased or reversed.

DISCLOSURE
a. The amount of impairment losses recognised in the statement of profit and loss during the period and
the line item(s) of the statement of profit and loss in which those impairment losses are included;
b. The amount of reversals of impairment losses recognised in the statement of profit and loss during the
period and the line item(s) of the statement of profit and loss in which those impairment losses are
reversed;
c. The amount of impairment losses recognised directly against revaluation surplus during the period; and
d. The amount of reversals of impairment losses recognised directly in revaluation surplus during the period

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1. Ergo Industries Ltd. gives the following estimates of cash flows relating to Property, Plant and
Equipment on 31-12-20X1. The discount rate is 15%.
Year Cash Flow (Rs in lakhs)
20X2 4000
20X3 6000
20X4 6000
20X5 8000
20X6 4000
Residual value at the end of 20X6 = Rs 1000 lakhs
Property, Plant and Equipment purchased on 1-1-20XX = Rs 40,000 lakhs
Useful life = 8 Years
Net selling price on 31-12-20X1 = 20,000 lakhs

Calculate on 31-12-20X1:
(a) Carrying amount at the end of 20X1
(b) Value in use on 31-12-20X1
(c) Recoverable amount on 31-12-20X1
(d) Impairment loss to be recognized for the year ended 31-12-20X1
(e) Revised carrying amount (f) Depreciation charge for 20X2.

Note: The year 20XX is the immediate preceding year before the year 20X0.

Solution
Calculation of value in use
Year Cash Flow Discount as per 15% Discounted cash flow
20X2 4,000 0.870 3,480
20X3 6,000 0.756 4,536
20X4 6,000 0.658 3,948
20X5 8,000 0.572 4,576
20X6 4,000 0.497 1,988
20X6 (residual) 0.497 497
1,000
19,025

(a) Calculation of carrying amount:

Original cost = Rs 40,000 lakhs
Depreciation for 3 years = [(40,000-1000)3/8] = Rs 14,625 lakhs
Carrying amount on 31-12-20X1 = [40,000-14,625] = Rs 25,375 lakhs

(b) Value in use = Rs 19,025 lakhs

(c) Recoverable amount = higher of value in use and net selling price i.e. Rs 20,000 lakhs.

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(d) Impairment Loss = Rs (25,375-20,000) = Rs 5,375 lakhs

(e) Revised carrying amount = Rs (25,375-5,375) = Rs 20,000 lakhs

(f) Depreciation charge for 20X2 = (20,000-1000)/5 = Rs 3,800 lakhs

2. X Ltd. is having a plant (asset) carrying amount of which is Rs 100 lakhs on 31.3.20X1. Its balance
useful life is 5 years and residual value at the end of 5 years is Rs 5 lakhs. Estimated future cash flow
from using the plant in next 5 years are:
For the year ended on Estimated cash flow (Rs in lakhs)
31.3.20X2 50
31.3.20X3 30
31.3.20X4 30
31.3.20X5 20
31.3.20X6 20

Calculate “value in use” for plant if the discount rate is 10% and also calculate the recoverable amount if
net selling price of plant on 31.3.20X1 is Rs 60 lakhs.

Solution
Present value of future cash flow
Year Future Discount @ 10% Rate Discounted cash
ended Cash Flow flow
31.3.20X2 50 0.909 45.45
31.3.20X3 30 0.826 24.78
31.3.20X4 30 0.751 22.53
31.3.20X5 20 0.683 13.66
31.3.20X6 20 0.620 12.40
118.82
Present value of residual price on 31.3.20X6 = 5 0.620 3.10
Present value of estimated cash flow by use of an asset and
residual value, which is called “value in use”. 121.92

If net selling price of plant on 31.3.20X1 is Rs 60 lakhs, the recoverable amount will be higher of Rs 121.92
lakhs (value in use) and Rs 60 lakhs (net selling price), hence recoverable amount is Rs 121.92 lakhs

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3. G Ltd., acquired a machine on 1st April, 20X0 for Rs 7 crore that had an estimated useful life of 7
years. The machine is depreciated on straight line basis and does not carry any residual value. On 1st
April, 20X4, the carrying value of the machine was reassessed at Rs 5.10 crore and the surplus
arising out of the revaluation being credited to revaluation reserve. For the year ended March,
20X6, conditions indicating an impairment of the machine existed and the amount recoverable
ascertained to be only Rs 79 lakhs. You are required to calculate the loss on impairment of the
machine and show how this loss is to be treated in the books of G Ltd. G Ltd., had followed the
policy of writing down the revaluation surplus by the increased charge of depreciation resulting
from the revaluation.

Solution
Statement Showing Impairment Loss
(in crores)

Carrying amount of the machine as on 1st April, 20X0 7.00

Depreciation for 4 years i.e. 20X0-20X1 to 20X3-20X

(4.00)

Carrying amount as on 31.03.20X4 3.00

Add: Upward Revaluation (credited to Revaluation Reserve 2.10

account)

Carrying amount of the machine as on 1st April, 20X4 (revalued) 5.10

Less: Depreciation for 2 years i.e. 20X4-20X5& 20X5-20X6

(3.40)

Carrying amount as on 31.03.20X6 1.70

Less: Recoverable amount (0.79)

Impairment loss 0.91

Less: Balance in revaluation reserve as on 31.03.20X6:

Balance in revaluation reserve as on 31.03.20X4 2.10

Less: Enhanced depreciation met from revaluation reserve

20X4-20X5 & 20X5-20X6=[(1.70 – 1.00) x 2 years] (1.40)

Impairment loss set off against revaluation reserve balance as

per para 58 of AS 28 “Impairment of Assets” (0.70)

Impairment Loss to be debited to profit and loss account 0.21

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4. X Ltd. purchased a Property, Plant and Equipment four years ago for Rs 150 lakhs and depreciates it
at 10% p.a. on straight line method. At the end of the fourth year, it has revalued the asset at Rs 75
lakhs and has written off the loss on revaluation to the profit and loss account. However, on the
date of revaluation, the market price is Rs 67.50 lakhs and expected disposal costs are Rs 3 lakhs.
What will be the treatment in respect of impairment loss on the basis that fair value for revaluation
purpose is determined by market value and the value in use is estimated at Rs 60 lakhs?

Solution
Treatment of Impairment Loss
As per para 57 of AS 28 “Impairment of assets”, if the recoverable amount (higher of net selling price and its
value in use) of an asset is less than its carrying amount, the carrying amount of the asset should be
reduced to its recoverable amount. In the given case, net selling price is Rs 64.50 lakhs (Rs 67.50 lakhs – Rs
3 lakhs) and value in use is Rs 60 lakhs. Therefore, recoverable amount will be Rs 64.50 lakhs. Impairment
loss will be calculated as Rs 10.50 lakhs [Rs 75 lakhs (Carrying Amount after revaluation - Refer Working
Note) less Rs 64.50 lakhs (Recoverable Amount)].

Thus impairment loss of Rs 10.50 lakhs should be recognised as an expense in the Statement of Profit and
Loss immediately since there was downward revaluation of asset which was already charged to Statement
of Profit and Loss.

Working Note: Calculation of carrying amount of the Property, Plant and Equipment at the end of the
fourth year on revaluation
(Rs in lakhs)
Purchase price of a Property, Plant and Equipment 150.00
Less: Depreciation for four years [(150 lakhs / 10 years) x 4 (60.00)
years]
Carrying value at the end of fourth year 90.00
Less: Downward revaluation charged to profit and loss account (15.00)
Revalued carrying amount 75.00

5. A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The
price paid for a purchased magazine title is recognized as an intangible asset. The costs of creating
magazine titles and maintaining the existing titles are recognized as an expense when incurred. Cash
inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed
by customer segments. The level of advertising income for a magazine title depends on the range of
titles in the customer segment to which the magazine title relates. Management has a policy to
abandon old titles before the end of their economic lives and replace them immediately with new
titles for the same customer segment. What is the cash-generating unit for an individual magazine
title?

SOLUTION
It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the
level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer
segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, although
titles are managed by customer segments, decisions to abandon titles are made on an individual title basis.

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Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent of
each other and that each magazine title is a separate cash-generating unit

6. An asset does not meet the requirements of environment laws which have been recently enacted.
The asset has to be destroyed as per the law. The asset is carried in the Balance Sheet at the year
end at Rs 6,00,000. The estimated cost of destroying the asset is Rs 70,000. How is the asset to be
accounted for?

SOLUTION
As per AS 28 “Impairment of Assets”, impairment loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount, where recoverable amount is the higher of an asset’s net selling
price and its value in use• . In the given case, recoverable amount will be nil [higher of value in use (nil)
and net selling price (negative Rs 70,000)]. Thus impairment loss will be calculated as Rs 6,00,000 [carrying
amount (Rs 6,00,000) – recoverable amount (nil)]. Therefore, asset is to be fully impaired and impairment
loss of Rs 6,00,000 has to be recognized as an expense immediately in the statement of Profit and Loss as
per para 58 of AS 28.

Further, as per para 60 of AS 28, When the amount estimated for an impairment loss is greater than the
carrying amount of the asset to which it relates, an enterprise should recognise a liability if, and only if, that
is required by another Accounting Standard. Hence, the entity should recognize liability for cost of disposal
of Rs 70,000 as per AS 10 & 29.

7. Venus Ltd. has a fixed asset, which is carried in the Balance Sheet on 31.3.20X1 at Rs 500 lakhs. As at
that date the value in use is Rs 400 lakhs and the net selling price is Rs 375 lakhs.

From the above data:

(i) Calculate impairment loss.
(ii) Prepare journal entries for adjustment of impairment loss.
(iii) Show, how impairment loss will be shown in the Balance Sheet.

SOLUTION
(i) Recoverable amount is higher of value in use Rs 400 lakhs and net selling price Rs 375 lakhs.
Recoverable amount = Rs 400 lakhs
Impairment loss = Carried Amount – Recoverable amount
= Rs 500 lakhs – Rs 400 lakhs = Rs 100 lakhs.

(ii) Journal Entries

Particulars Dr. Cr.
Amount Amount
( Rs inlakhs) ( Rs in lakhs)

(i) Impairment loss account Dr. 100

To Provision for Accumulated 100
Impairment Loss Account

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(Being the entry for accounting

impairment loss)
(ii) Profit and loss account Dr. 100
To Impairment loss 100
(Being the entry to transfer
impairmentloss to profit and loss
account)

(iii) Balance Sheet of Venus Ltd. as on 31.3.20X1

(in lakhs)
Fixed Asset
Asset less depreciation 500
Less: Impairment loss (100)
400

8. Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1 st April, 20X1 for Rs 60
lakhs. The machine was expected to have a productive life of 6 years. At the end of financial year
20X1-20X2 the carrying amount was Rs 41 lakhs. A short circuit occurred in this financial year but
luckily the machine did not get badly damaged and was still in working order at the close of the
financial year. The machine was expected to fetch Rs 36 lakhs, if sold in the market. The machine by
itself is not capable of generating cash flows. However, the smallest group of assets comprising of
this machine also, is capable of generating cash flows of Rs 54 crore per annum and has a carrying
amount of Rs 3.46 crore. All such machines put together could fetch a sum of Rs 4.44 crore if
disposed. Discuss the applicability of Impairment loss.

SOLUTION
As per provisions of AS 28 “Impairment of Assets”, impairment loss is not to be recognized for a given asset
if its cash generating unit (CGU) is not impaired. In the given question, the related cash generating unit
which is group of asset to which the damaged machine belongs is not impaired; and the recoverable
amount is more than the carrying amount of group of assets. Hence there is no need to provide for
impairment loss on the damaged sachet filling machine.

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9. From the following details of an asset

(i) Find out impairment loss
(ii) Treatment of impairment loss
(iii) Current year depreciation

Particulars of asset:
Cost of asset Rs 56 lakhs
Useful life period 10 years
Salvage value Nil
Current carrying value Rs 27.30 lakhs
Useful life remaining 3 years
Recoverable amount Rs 12 lakhs
Upward revaluation done in last year Rs 14 lakhs

SOLUTION
According to AS 28 “Impairment of Assets”, an impairment loss on a revalued asset is recognised as an
expense in the statement of profit and loss. However, an impairment loss on a revalued asset is recognised
directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed
the amount held in the revaluation surplus for that same asset

Impairment Loss and its treatment Rs

Current carrying amount (including revaluation amount of 27,30,000
Rs 14 lakhs)

Less: Current recoverable amount (12,00,000)

Impairment Loss 15,30,000

Impairment loss charged to revaluation reserve 14,00,000

Impairment loss charged to profit and loss account 1,30,000

After the recognition of an impairment loss, the depreciation (amortization) charge for the asset should be
adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on
a systematic basis over its remaining useful life.

In the given case, the carrying amount of the asset will be reduced to Rs 12,00,000 after impairment. This
amount is required to be depreciated over remaining useful life of 3 years (including current year).
Therefore, the depreciation for the current year will be Rs 4,00,000.

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10. A plant was acquired 15 years ago at a cost of Rs 5 crores. Its accumulated depreciation as at 31st
March, 20X1 was Rs 4.15 crores. Depreciation estimated for the financial year 20X1-20X2 is Rs 25
lakhs. Estimated Net Selling Price as on 31st March, 20X1 was Rs 30 lakhs, which is expected to
decline by 20 per cent by the end of the next financial year.

Its value in use has been computed at Rs 35 lakhs as on 1st April, 20X1, which is expected to decrease by 30
per cent by the end of the financial year.

(i) Assuming that other conditions for applicability of the impairment Accounting Standard are satisfied,
what should be the carrying amount of this plant as at 31st March, 20X2?
(ii) How much will be the amount of write off for the financial year ended 31st March, 20X2?
(iii) If the plant had been revalued ten years ago and the current revaluation reserves against this plant
were to be Rs 12 lakhs, how would you answer to questions (i) and (ii) above?
(iv) If the value in use was zero and the enterprise were required to incur a cost of Rs 2 lakhs to dispose of
the plant, what would be your response to questions (i) and (ii) above?

SOLUTION
As per AS 28 “Impairment of Assets”, if the recoverable amount of an asset is less than its carrying
amount, the carrying amount of the asset should be reduced to its recoverable amount and that reduction
is an impairment loss. An impairment loss on a revalued asset is recognized as an expense in the statement
of profit and loss. However, an impairment loss on a revalued asset is recognised directly against any
revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount held in
the revaluation surplus for that same asset.

In the given case, recoverable amount (higher of asset’s net selling price and value in use) will be Rs 24.5
lakhs on 31.3.20X2 according to the provisions of AS 28 [Refer working note].
(Rs in lakhs)
(i) Carrying amount of plant (after impairment) as on 31st 24.50
March, 20X2
35.50
(ii) Amount of write off (impairment loss) for the
financialyear ended 31st March, 20X2 [Rs 60 lakhs – Rs
24.5 lakhs]
(iii) If the plant had been revalued ten years ago
Debit to revaluation reserve 12.00
Amount charged to profit and loss account 23.50
(Rs 35.50 lakhs – Rs 12 lakhs)
(iv) If Value in use is zero
Value in use (a) Nil
Net selling price (b) (-)2.00
Recoverable amount [higher of (a) and (b)] Nil
Carrying amount (closing book value) Nil
Amount of write off (impairment loss) (Rs 60 lakhs – Nil) 60.00
Entire book value of plant will be written off and
charged to profit and loss account.
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Working Note:
Calculation of Closing Book Value, Estimated Net Selling Value and Estimated Value in Use of Plant at 31st
March, 20X2
(Rs in lakhs)
Opening book value as on 1.4.20X1 (Rs 500 lakhs – 85
Rs 415 lakhs)
Less: Depreciation for financial year 20X1–20X2 (25)
Closing book value as on 31.3.20X2 60
Estimated net selling price as on 1.4.20X1 30
Less: Estimated decrease during the year (20% of (6)
Rs 30 lakhs)
Estimated net selling price as on 31.3.20X2 24
Estimated value in use as on 1.4.20X1 35.0
Less: Estimated decrease during the year (30% of (10.5)
Rs 35 lakhs)
Estimated value in use as on 31.3.20X2 24.5

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MCQs

1. If there is indication that an asset may be impaired but the recoverable amount of the asset is more than
the carrying amount of the asset, the following are true:
(a) No further action is required and the company can continue the asset in the books at the book value
itself.
(b) The entity should review the remaining useful life, scrap value and method of depreciation and
amortization for the purposes of AS 10.
(c) The entity can follow either (a) or (b).
(d) The entity should review the scrap value and method of depreciation and amortization for the purposes
of AS 10.

2. In case Goodwill appears in the Balance Sheet of an entity, the following is true:
(a) Apply Bottom up test if goodwill cannot be allocated to CGU (cash generating unit) under review.
(b) Apply Top down test if goodwill cannot be allocated to CGU (cash generating unit) under review.
(c) Apply both Bottom up test and Top down test if goodwill cannot be allocated to CGU (cash generating
unit) under review.
(d) Apply either Bottom up test or Top down test if goodwill cannot be allocated to CGU (cash generating
unit) under review.

3. In case of Corporate assets in the Balance Sheet of an entity, the following is true:
(a) Apply Bottom up test if corporate assets cannot be allocated to CGU (cash generating unit) under
review.
(b) Apply Top down test if corporate assets cannot be allocated to CGU (cash generating unit) under review.
(c) Apply both Bottom up test and Top down test if corporate assets cannot be allocated to CGU (cash
generating unit) under review.
(d) Apply either Bottom up test or Top down test if corporate assets cannot be allocated to CGU (cash
generating unit) under review.

4. In case of reversal of impairment loss, which statement is true:

(a) Goodwill written off can never be reversed.
(b) Goodwill written off can be reversed without any conditions to be met.
(c) Goodwill written off can be reversed only if certain conditions are met.
(d) Goodwill written off can be reversed.

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