Roll No………

Total No. of Questions — 6] [Total No. of Printed Pages — 5

Time Allowed : 3 Hours Maximum Marks : 100
Answers to questions are to be given only in English except in the cases of candidates who
have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers
in Hindi, his answers in Hindi will not be valued.
Answer all Questions
Wherever appropriate suitable assumptions should be made by the candidate.
Working notes should form part of the answer.
Marks
1. (a) Following is the information of two companies for the year ended 31st March, 2009: 10
Aikya Bakya
Ltd. Ltd.
Rs. Rs.
Equity shares of Rs.10 each
8,00,000 10,00,000
10 per cent Preference shares of
6,00,000 4,00,000
Rs.10 each
3,00,000 3,00,000
Profit after tax

Assume that the market expectation is 18 percent and 80 percent of the profits are
distributed as dividends.

(i) What is the rate you would pay to the equity shares –
(a)If you are buying a small lot?
(b) If you are buying a controlling interest in shares?
If you plan to invest only in Preference shares, which company’s preference share
(ii)
would you choose?
(b) From the following particulars of three companies, ascertain the value of goodwill. 6
Terms and conditions are as follows:
(i) Assets are to be revalued.
(ii) Goodwill is to be valued at four years’ purchase of average super profits for three
years. Such average is to be calculated after adjustment of depreciation at ten
per cent on the amount of increase/decrease on revaluation of fixed assets.
Income tax is to be ignored.
 (iii) Normal profit on capital employed is to be taken at 10 per cent, capital employed
being considered on the basis of net revalued amounts of tangible assets.
The summarized Balance Sheets and relevant information are given below:

(Rs. in Lakhs)
Liabilities P Ltd. Q Ltd. R Ltd. Assets P Ltd. Q Ltd. R Ltd.
Equity shares of 12.00 14.00 6.00 Goodwill – 100 –
Rs.10 each 2.00 1.00 2.00 Net 16.00 12.00 10.00
Reserves 4.00 – 2.00 tangible
10 percent block
debentures 4.00 3.00 2.00
Trade and
expenses
creditors
22.00 18.00 12.00 22.00 18.00 12.00

P Ltd. Q Ltd. R Ltd.

Rs. Rs. Rs.
Revaluation of 20,00,000 10,00,000 12,00,000
tangible block 7,00,000 2,80,000 1,60,000
Revaluation of
current assets 3,60,000 2,88,000 1,56,000
Average annual
profit for three years
before charging
debenture interest
2. Agni Ltd. and Bayu Ltd. both engaged in similar merchanting activities since 2006, decide 16
to amalgamate their businesses. A holding company, Chandrama Ltd. would be formed on
1st January, 2008 to acquire the entire shares in both the companies.
From the information given below you are required to prepare:
(a) A statement of purchase consideration, supported by requisite working notes.
(b) Balance Sheet of Chandrama Ltd. after the transactions have been completed.
(i) The terms of the offer were:
• Rs.100, 15 per cent debentures for every Rs.100 of net assets owned by
each company on 31st December, 2007.
• Rs.100 equity shares based on two years purchase of profit before taxation.
The profit is to be determined by taking weighted average profits of 2006
and 2007, weights being 1 and 2 respectively.
(ii) It was agreed that the accounts of Bayu Ltd. for the two years ended
31st December, 2007 be adjusted, where necessary, to conform to the
accounting policies followed by Agni Ltd.
(iii) The Pre–tax profits, including investment income, of the two companies were
as follows:
2006 2007
Rs. Rs.
Agni Ltd. 16,38,000 18,36,000
Bayu Ltd. 17,88,300 25,74,000
 (iv) Agni Ltd. values its stock on FIFO basis while Bayu Ltd. used a different basis.
To bring Bayu Ltd.’s values in line with those of Agni Ltd, value of its stock will
require to be reduced by Rs.36,000 at the end of 2006 and Rs.1,02,000 at the
end of 2007.
(v) Both the companies use straight line method of depreciation.
(vi) Bayu Ltd. deducts 1 per cent from trade debtors as a general provision against
doubtful debts.
(vii) Prepaid expenses in Bayu Ltd. include advertisement expenditure carried
forward of Rs.1,80,000 in 2006 and Rs.90,000 in 2007, being part of initial
advertising in 2006, which is being written off over three years. Similar
expenditure in Agni Ltd. has been fully written off in 2006.
(viii) To bring Director’s remuneration on to a comparative basis, the profits of Bayu
Ltd. are to be reduced by Rs.1,20,000 in 2006 and Rs.1,80,000 in 2007 and
the net assets are also to be adjusted accordingly.
Balance Sheets as at 31st December, 2006 and 2007 were as follows:
Agni Ltd.
Liabilities 2006 2007 Assets 2006 2007
Rs. Rs. Rs. Rs.
Share Fixed assets:
capital Furniture
issued and and
subscribed: 12,00,000 12,00,000 Fixtures: 6,90,000 6,90,000
12,000 at cost (69,000) (1,38,000)
shares of – 2,10,000 Less:
Rs.100 7,98,300 16,74,000 depreciation
each, fully Investments: — 7,80,000
paid Quoted
Reserves investments 18,30,000 21,75,000
and 15,02,700 18,21,000 at market 18,00,000 22,20,000
Surplus: 8,40,000 9,60,000 value 30,000 42,000
Capital Current 60,000 96,000
reserve assets:
Revenue Stock at cost
reserve Sundry
debtors
Current Prepaid
Liabilities expenses
and Cash at bank
provisions:
Sundry
creditors
Provision
for
taxation
43,41,000 58,65,000 43,41,000 58,65,000
Bayu Ltd.
Liabilities 2006 2007 Assets 2006 2007
Rs. Rs. Rs. Rs.
Share Fixed assets:
capital: Furniture
Issued and and 9,60,000 9,60,000
subscribed fixture at (1,44,000) (2,88,000)
 15,000 cost
Equity 15,00,000 15,00,000 Less:
shares of Depreciation
Rs.100
each, fully 8,58,000 21,42,000
paid Investments: – 12,00,000
Reserves Quoted
and 14,70,000 14,82,000 investments 17,91,000 22,26,000
surplus: – 5,10,000 (Market
Revenue 9,30,000 12,90,000 value 17,82,000 26,73,000
reserve Rs.14,70,000 2,16,000 1,44,000
Current ) 1,53,000 9,000
liabilities Current
and assets:
provisions: Stock at cost
Sundry Sundry
creditors debtors
Bank Less:
overdraft provision
Provision Prepaid
for expenses
taxation Cash at bank
47,58,000 69,24,000 47,58,000 69,24,000

3. (a) Parikshit Ltd. holds Rs.1,00,000 of loans yielding 18 per cent interest per annum for 6
their estimated lives of 9 years. The fair value of these loans, after considering the
interest yield, is estimated at Rs.1,10,000.

The company securitises the principal component of the loan plus the right to receive
interest at 14% to Susovana Corporation, a special purpose vehicle, for Rs.1,00,000.

Out of the balance interest of 4 percent, it is stipulated that half of such balance
interest, namely 2 per cent, will be due to Parikshit Ltd. as fees for continuing to
service the loans. The fair value of the servicing asset so created is estimated at
Rs.3,500. The remaining half of the interest is due to Parikshit Ltd. as an interest strip
receivable, the fair value of which is estimated at Rs.6,500.

Give the accounting treatment of the above transactions in the form of journal entries
in the books of originator.
(b) The Annuity fund of Patiala University accepts an annuity – based gift from an 5
alumnus who specifies that he receives a monthly payment of Rs.25,000 for the
remainder of his life. The gift consists of cash of Rs.20 lakh and securities having a
market value of Rs.15 lakh at the time of the gift. The investment income of annuity
fund for a particular month comes to Rs.38,500.
Draft journal entries in the University’s books.
(c) From the following information taken from the books of Sunagarik Ltd. relating to staff 5
and community benefits, you are required to prepare a statement classifying the
various items under the appropriate heads, required under corporate social reporting:
Particulars Rs. in lakhs
Environmental improvements 36.18
Medical facilities 9.00
Training programmes 18.45
Generation of job opportunities 109.35
Municipal taxes 19.26
Increase in cost of living in the vicinity due to company’s operations 29.79
Concessional transport, water–supply etc. 20.25
 Generation of business 45.00
Leave encashment and leave travel benefits 93.60
Education facilities for children of staff members 38.88
Subsidised canteen facilities 25.92
Extra work put in by staff and officers for drought relief 33.30
4. (a) The borrowings profile of Santra Pharmaceuticals Ltd. set up for the manufacture of 10
antibiotics at Navi Mumbai is as under:
Date Nature of Amount Purpose of Incidental
borrowings borrowed borrowings expenses
Rs.
1st January, 15% demand 60 lakhs Acquisition of Fixed 8.33%
2008 loan 40 lakhs assets 5%
1st July, 2008 14.5% Term 50 lakhs Acquisition of plant 8%
loan and machinery
1st October,
14% bonds Acquisition of fixed
2008
assets

The incidental expenses consist of commission and service charges for arranging the
loans and are paid after rounding off to the nearest lakh.
Fixed assets considered as qualifying assets are as under:

Rs.
Sterile Manufacturing shed 10,00,000
Plant and machinery (total) 90,00,000
Other fixed assets 10,00,000

The Project is completed on 1st January, 2009 and is ready for commercial production.
Show the capitalization of the borrowing costs.
(b) A company is engaged in the business of ship building and ship repair. On completion 6
of the repair work, a work completion certificate is prepared and countersigned by ship
owner (customer). Subsequently, invoice is prepared based on the work completion
certificate describing the nature of work done together with the rate and the amount.

Customer scrutinizes the invoice and any variation is informed to the company.
Negotiations take place between the company and the customer. Negotiations may
result in a deduction being allowed from the invoiced amount either as a lumpsum or
as a percentage of the invoiced amount. The accounting treatment followed by the
company is as follows:

When the invoice is raised, the customer’s account is debited and ship repair
(i)
income account is credited with the invoiced amount.
Deduction, if any, arrived after negotiation is treated as trade discount by
(ii)
debiting the ship repair income account.
(iii) At the close of the year, negotiation in respect of certain invoices had not been
completed. In such cases, based on past experience, a provision for anticipated
loss is created by debiting the Profit and Loss account. The provision is disclosed
in Balance Sheet.

Following two aspects are settled in the negotiations:

(i) Errors in billing arising on account of variation between the quantities as per work
completion certificate and invoice and other clerical errors in preparing the
invoice.
 (ii) Disagreement between the company and customer about the rate/cost on which
prior agreement has not been reached between them.
Comment:
Whether the accounting treatment of deduction as trade discount is correct? If
(i)
not, state the correct accounting treatment.
Whether the disclosure of the provision for anticipated loss in Balance Sheet is
(ii)
correct; if not, state the correct accounting treatment.

5. (a) Santhosh Ltd. granted 500 options to each of its 2,500 employees in 2003 at an 10
exercise price of Rs.50 when the market price was the same. The contractual life
(vesting and exercise period) of the options granted is 6 years with the vesting period
and exercise period being 3 years each. The expected life is 5 years and the expected
annual forfeitures are estimated at 3 per cent. The fair value per option is arrived at
Rs.15. Actual forfeitures in 2003 were 5 per cent. However at the end of 2003 the
management of Santhosh Ltd. still expects that the actual forfeitures would average
only 3 per cent over the entire vesting period. During 2004 the management revises
its estimated forfeiture rate to 10 per cent per annum. Of the 2,500 employees, 1,900
employees have completed the 3 year vesting period. 1,000 employees exercise their
right to obtain shares vested in them in pursuance of ESOP at the end of 2007 and
500 employees exercise their right at the end of 2008. The rights of the remaining
employees expire unexercised at the end of 2008. The face value per share is Rs.10.
Show the necessary journal entries with suitable narrations. Workings should form
part of the answer.
(b) On 1st February, 2008, an Indian Company sold goods to an American Company at an 10
invoice price of US $20,000 when the spot market rate was Rs.48.10 to a U.S. dollar.
Payment was to be made in three months time, namely, by 1st May, 2008.

To avoid the risk of foreign exchange fluctuations the Indian exporter acquired a
forward contract to sell U.S. $20,000 at Rs.47.90 per U.S. dollar on 1st May, 2008.

The Indian company’s accounting year ended on 31st March, 2008 and the spot rate
on this date was Rs.47.20 per U.S. dollar. The spot rate on 1st May, 2008, the date by
which the money was due from the American buyer, was Rs.50 per dollar.

Show what accounting entries will have to be made in the books of the Indian exporter
at the relevant period of time.
6. (a) Pilot Ltd. supplies the following information using which you are required to calculate 6
the economic value added.
• Financial Leverage 1.4 times
• Capital (equity and debt) Equity shares of Rs.1,000 each 34,000 (number)
Accumulated profit Rs. 260 lakhs
10 percent Debentures of Rs.10 80 lakhs
each (number)
• Dividend expectations of 17.50%
equity shareholders
• Prevailing Corporate Tax 30%
rate
(b) Amigo Mutual Fund Ltd. is a SEBI Registered mutual fund. The Company follows the 4
practice of valuing its investments on "mark to market basis". For the financial year
 ended March, 2009 the investments which were acquired at a cost of Rs.109 crores
were reflected in the Balance Sheet at Rs.89 crore. The company insists that the
depreciation in value of the investments need not be disclosed separately in its
financial statements since its investment valuation policy is disclosed as part of its
accounting policies. Discuss the validity of this argument.
(c) Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 3
2007 for Rs.60 lakhs. The machine was expected to have a productive life of 6 years.
At the end of financial year 2007-08 the carrying amount was Rs.41 lakhs. A short
circuit occurred in this financial year but luckily the machine did not get badly
damageed 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.
(d) EXOX Ltd. is in the process of finalizing its accounts for the year ended 31st March, 3
2008. The company seeks your advice on the following:
(i) The Company’s sales tax assessment for assessment year 2005–06 has been
completed on 14th February, 2008 with a demand of Rs.2.76 crore. The company
paid the entire due under protest with out prejudice to its right of appeal. The
Company files its appeal before the appellate authority where in the grounds of
appeal cover tax on additions made in the assessment order for a sum of 2.10
crore.
(ii) The Company has entered into a wage agreement in May, 2008 whereby the
labour union has accepted a revision in wage from June, 2007. The agreement
provided that the hike till May, 2008 will not be paid to the employees but will be
settled to them at the time of retirement. The company agrees to deposit the
arrears in Government Bonds by September, 2008.