Test Series: March, 2018

MOCK TEST PAPER

INTERMEDIATE (NEW) : GROUP – II
PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum Marks: 100)

1. (a) X Ltd. negotiates with Bharat Petroleum Corporation Ltd (BPCL), for construction of “Franchise
Retail Petrol Outlet Stations”. Based on proposals submitted to different “Zonal offices of BPCL,
the final approval for one outlet each in Zone A, Zone B, Zone C, Zone D, is awarded to X Ltd.
Agreement (in single document) is entered into with BPCL for ` 490 lakhs. The agreement lays
down values for each of the four outlets (` 88 + 132 + 160 + 110 lakhs) in addition to individual
completion time. Examine and Decide whether X Ltd., will treat it as a single contract or four
separate contracts.
(b) From the following information, you are required to compute the basic and adjusted Earnings per
share:
Net profit for 2015-16 11 lakh
Net profit for 2016-17 15 lakh
No. of shares issued before rights issue 5 lakhs
Right issue One for every 5 held
Right issue price 15 per share
Last date of exercising right option 1-06-2016
Fair value of shares before right issue 21 per share
(c) A Ltd. sold machinery having WDV of ` 40 lakhs to B Ltd. for ` 50 lakhs and the same machinery
was leased back by B Ltd. to A Ltd. The lease back is operating lease. Explain the accounting
treatment as per AS 19 in the following cases:
(i) Sale price of ` 50 lakhs is equal to fair value.
(ii) Fair value is ` 45 lakhs and sale price is ` 38 lakhs.
(iii) Fair value is ` 40 lakhs and sale price is ` 50 lakhs.
(iv) Fair value is ` 46 lakhs and sale price is ` 50 lakhs
(v) Fair value is ` 35 lakhs and sale price is ` 39 lakhs.
(d) Sun Ltd. has entered into a sale contract of ` 5 crores with X Ltd. during 2015-2016 financial
year. The profit on this transaction is ` 1 crore. The delivery of goods to take place during the
first month of 2016-2017 financial year. In case of failure of Sun Ltd. to deliver within the
schedule, a compensation of ` 1.5 crores is to be paid to X Ltd. Sun Ltd. planned to
manufacture the goods during the last month of 2015-2016 financial year. As on balance sheet
date (31.3.2016), the goods were not manufactured and it was unlikely that Sun Ltd. will be in a
position to meet the contractual obligation.
(i) Should Sun Ltd. provide for contingency as per AS 29? Explain.
(ii) Should provision be measured as the excess of compensation to be paid over the profit?
(4 parts x 5 Marks = 20 Marks)
1

© The Institute of Chartered Accountants of India

2. (a) Paper Limited comes out with a public issue of share capital on 01 -01-2016 of 30,00,000 equity
shares of ` 10 each at a premium of 5%. ` 2.50 is payable on application (on or before 31-01-
2016) and ` 3 on allotment (31-3-2016) including premium.
This issue was underwritten by two underwriters namely White and Black, equally, the
commission being 4% of the issue price. Each of the underwriters underwrites 60,000 shares
firm. Subscriptions including firm underwriting came for 28,80,000 shares, the distribution of
forms being White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.
One of the allottees (using forms marked with name of White) for 6000 shares fails to pay the
amount due to allotment, all the other money due being received in full including any due from
the shares devolving upon the underwriters. The commission due was paid separately.
6,000 shares of one allottee who failed to pay the allotment money were finally forfeited by
30-06-2016 and were re-allotted for payment in cash of ` 4 per share. You are required to
prepare each underwriter’s liability (in shares) in statement form and to pass necessary journal
entries to record the above events and transactions (including cash).
(b) SMM Ltd. has the following capital structure as on 31 st March, 2017: ` in crore
Particulars Situation Situation
(i) Equity share capital (shares of ` 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory Reserve) 320 320
(iii) Loan Funds 3,200 6,000
The company has offered buy back price of ` 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. (8 +12 = 20 Marks)
3. (a) The Balance Sheet of Lion Limited as on 31-03-2016 is given below:
Particulars Note No. Amount (` in lakh)
Equity & Liabilities
Shareholders' Funds
Shares’ Capital 1 1,400
Reserves & Surplus 2 (522)
Non-Current Liabilities
Long term Borrowings 3 700
Current Liabilities
Trade Payables 4 102
Other Liabilities 5 24
Total 1704
Assets
Non-Current Assets
Fixed Assets
Tangible Assets 6 750

© The Institute of Chartered Accountants of India

 Current Assets
Current Investments 7 200
Inventories 8 300
Trade Receivables 9 450
Cash & Cash Equivalents 10 4
Total 1704
Notes to Accounts:
` in Lakhs
(1) Share Capital
Authorised :
200 lakh shares of ` 10 each 2,000
8 lakh, 8% Preference Shares of ` 100 each 800
2,800
Issued, Subscribed and paid up:
100 lakh Equity Shares of ` 10 each, full paid up 1,000
4 lakh 8% Preference Shares of ` 100 each, fully paid up 400
Total 1400
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (522)
(3) Long Term Borrowings
6% Debentures (Secured by Freehold Property) 400
Directors’ Loan 300
700
(4) Trade Payables
Trade payables for Goods 102
(5) Other Current Liabilities
Interest Accrued and Due on 6% Debentures 24
(6) Tangible Assets
Freehold Property 550
Plant & Machinery 200
750
(7) Current Investment
Investment in Equity Instruments 200
(8) Inventories
Finished Goods 300
(9) Trade Receivables
Trade receivables for Goods 450
(10) Cash and Cash Equivalents
Balance with Bank 4

© The Institute of Chartered Accountants of India

 The Board of Directors of the company decided upon the following scheme of reconstruction with
the consent of respective shareholders:
(1) Preference Shares are to be written down to ` 80 each and Equity Shares to ` 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3 rd and for balance
1/3rd, Equity Shares of ` 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of ` 300 lakh in
part payment of their holding. Balance Debentures to remain as liability of the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at ` 400 lakh.
(6) All investments sold out for ` 250 lakh.
(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of ` 2 each to be
allowed.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to ` 600 lakh have been settled by paying
5% penalty of contract value.
You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after
the implementation of scheme of internal reconstruction.
(b) A Liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount
distributed to Preferential Creditors and 3% on the payment made to Unsecured Creditors. The
assets were realized for ` 25,00,000 against which payment was made as follows:
Liquidation expenses ` 25,000
Secured Creditors ` 10,00,000
Preferential Creditors ` 75,000
The amount due to Unsecured Creditors was ` 15,00,000. You are asked to calculate the total
Remuneration payable to Liquidator. Calculation shall be made to the nearest multiple of a
rupee. (15 + 5 = 20 Marks)
4. (a) From the following information as on 31 st March, 2016 of Xeta Insurance Co. Ltd. engaged in fire
insurance business, prepare the Revenue Account, reserving 50% of the net premiums for
unexpired risks and an additional reserve of ` 7,00,000:
Particulars Amount (`)
Reserve for unexpired risk on 31st March, 2015 15,00,000
Additional reserve on 31st March, 2015 3,00,000
Claims paid 19,20,000
Estimated liability in respect of outstanding claims on 31st March, 2015 1,95,000
Estimated liability in respect of outstanding claims on 31st March, 2016 2,70,000
Expenses of management (including ` 90,000 incurred in connection with claims) 8,40,000
Re-insurance premium paid 2,25,000
Re-insurance recoveries 60,000
4

© The Institute of Chartered Accountants of India

 Premiums 33,60,000
Interest and dividend (gross before TDS) 1,50,000
Profit on sale of investments 30,000
Commission 50,000

(b) As on 31st March 2016, Strong Bank Ltd. has a balance of ` 27 crores in “rebate on bills
discounted” account. The bank provides you the following further information:
(1) During the financial year ending 31 st March 2017, Strong Bank Ltd. discounted bills of
exchange of ` 4,000 crores charging interest @ 15% p.a. and the average period of
discount being 146 days.
(2) Bills of exchange of ` 600 crores were due for realization from the acceptors/customers after
31st March 2017, the average period outstanding after 31st March 2017, being 73 days.
You are required to pass necessary journal entries in the books of Strong Ba nk Ltd. for the above
transactions.
(c) A Mutual Fund raised 100 lakh on April 1, 2017 by issue of 10 lakh units of ` 10 per unit. The
fund invested in several capital market instruments to build a portfolio of ` 90 lakhs. The initial
expenses amounted to ` 5 lakh. During April, 2017, the fund sold certain securities of cost ` 38
lakhs for ` 40 lakhs and purchased certain other securities for ` 28.20 lakhs. The fund
management expenses for the month amounted to ` 4.50 lakhs of which ` 0.35 lakh was in
arrears. The dividend earned was ` 1.20 lakhs. 75% of the realized earnings were distributed.
The market value of the portfolio on 30.04.2017 was ` 112 lakh.
Determine NAV per unit. (10 Marks +6 Marks +4 Marks = 20 Marks)
5. (a) Given below are the Profit & Loss Accounts of H Ltd. and its subsidiary Ltd. for the year ended
31st March, 2017:
H Ltd. S Ltd.
(` in lacs) (` in lacs)
Incomes:
Sales and other income 5,000 1,000
Increase in Inventory 1,000 200
6,000 1,200
Expenses:
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
2,400 700
Profit before tax 3,600 500
Provision for tax 1,200 200
Profit after tax 2,400 300
Dividend paid 1,200 150
Balance of Profit 1,200 150

© The Institute of Chartered Accountants of India

 Other Information:
H Ltd. sold goods to S Ltd. of ` 120 lacs at cost plus 20%. Inventory of S Ltd. includes such
goods valuing ` 24 lacs. Administrative expenses of S Ltd. include ` 5 lacs paid to H Ltd. as
consultancy fees. Selling and distribution expenses of H Ltd. include ` 10 lacs paid to S Ltd. as
commission.
H Ltd. holds 80% of equity share capital of ` 1,000 lacs in S Ltd. prior to 2015-2016. H Ltd. took
credit to its Profit and Loss Account, the proportionate amount of dividend declared and paid by
S Ltd. for the year 2015-2016.
You are required to prepare a consolidated profit and loss account of H Ltd. and its subsidiary
S Ltd. for the year ended on 31st March, 2017.
(b) The summarized Balance Sheet of K Ltd. for the year ended on 31 st March, 2015, 2016 and 2017
are as follows:
(` in thousands)
Liabilities 31.3.2015 31.3.2016 31.3.2017
1,60,000 equity shares of ` 10 each, fully paid 1,600 1,600 1,600
General reserve 1,200 1,400 1,600
Profit and Loss account 140 160 240
Trade Payables 600 800 1,000
3,540 3,960 4,440
Assets
Goodwill 1,000 800 600
Building and Machinery less, depreciation 1,400 1,600 1,600
Inventory 1,000 1,200 1,400
Trade Receivables 20 160 440
Bank balance 120 200 400
3,540 3,960 4,440
Additional information:
(a) Actual valuations were as under:
Building and machinery less, depreciation 1,800 2,000 2,200
Inventory 1,200 1,400 1,600
Net profit (including opening balance after writing off
depreciation, goodwill, tax provision and transferred to
general reserve) 420 620 820
(b) Capital employed in the business at market value at the beginning of 201 4-15 was
` 36,60,000 which included the cost of goodwill. The normal annual return on average
capital employed in the line of business engaged by K Ltd. is 12½%.
(c) The balance in the general reserve on 1 st April, 2014 was ` 10 lakhs.
(d) The goodwill shown on 31.3.2015 was purchased on 1.4.2014 for ` 10 lakhs on which date
the balance in the Profit and Loss account was ` 1,20,000.
(e) Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method).
You are required to compute the average capital employed in each year and find out the value of
goodwill. (12 Marks +8 Marks = 20 Marks)

© The Institute of Chartered Accountants of India

6. (a) A company has its share capital divided into shares of ` 10 each. On 1-1-20X1, it granted 5,000
employees stock options at ` 50, when the market price was ` 140. The options were to be
exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their options for 4,800
shares only; remaining options lapsed. Pass the necessary journal entries for the year ended
31-3-20X2, with regard to employees’ stock options.
(b) Explain “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions.
(c) Explain on ‘presentation of MAT credit’ in the financial statements in brief.
OR
How will a company classify its investment in preference shares, which are convertible into equity
shares within one year from the balance sheet date? Will it classify the investment as a current
asset or a non-current asset? Explain.
(d) XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 2016 for ` 2,80,000. The issued
capital of ABC Ltd., on 1st January, 2016 was ` 2,00,000 and the balance in the Profit & Loss
Account was ` 1,20,000.
During the year ended 31 st December, 2016, ABC Ltd. earned a profit of ` 40,000 and at year
end, declared and paid a dividend of ` 60,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
You are required to compute amount of minority interest as on 1st January, 2016 and
31st December, 2016? (4 Parts x 5 Marks = 20 Marks)

© The Institute of Chartered Accountants of India

 Test Series: March, 2018
MOCK TEST PAPER
INTERMEDIATE (NEW) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) As per para 7 of AS 7 on ‘Construction Contracts’, when a contract covers a number of assets, the
construction of each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have
been able to accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
In the given case, each outlet is submitted as a separate proposal to different Z onal Office, which
can be separately negotiated, and costs and revenues thereof can be separately identified. Hence,
each asset will be treated as a “single contract” even if there is one document of contract.
Therefore, four separate contract accounts have to be recorded and maintained in the books of X
Ltd. For each contract, principles of revenue and cost recognition have to be applied separately and
net income will be determined for each asset as per AS -7.
(b) Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediately prior to exercise of rights + Total amount received from exercise of rights

Number of shares outstanding prior to exercise + number of shares issued in the exercise
(` 21.00 x 5,00,000 shares) + (`15.00 x 1,00,000 shares)
5,00,000 shares + 1,00,000 shares
Theoretical ex-rights fair value per share = ` 20.00
(a) Computation of adjustment factor
Fair value per share prior to exercise of rights ` (21.00)
(b) = =1.05
Theoretica l ex - rights value per share ` (20.00)

Computation of earnings per share

Year Year
2015-16 2016-17
EPS for the year 2015-16 as originally reported: ` 2.20
(` 11,00,000/5,00,000 shares)
EPS for the year 2015-16 restated for rights issue: ` 2.10
[` 11,00,000/ (5,00,000 shares x 1.05)]
EPS for the year 2016-17 including effects of rights
` 15,00,000
issue ` 2.55
(5,00,000 x 1.05 x 2 / 12) + (6,00,000 x 10 / 12)

(c) Following will be the treatment in the given cases:

(i) When sales price of ` 50 lakhs is equal to fair value, A Ltd. should immediately recognise the
profit of ` 10 lakhs (i.e. 50 – 40) in its books.
(ii) When fair value of leased machinery is ` 45 lakhs & sales price is ` 38 lakhs, then loss of
` 2 lakhs (40 – 38) to be immediately recognised by A Ltd. in its books provided loss is not
1

© The Institute of Chartered Accountants of India

 compensated by future lease payment.
(iii) When fair value is ` 40 lakhs & sales price is ` 50 lakhs then, profit of ` 10 lakhs is to be
deferred and amortised over the lease period.
(iv) When fair value is ` 46 lakhs & sales price is ` 50 lakhs, profit of ` 6 lakhs (46-40) to be
immediately recognised in its books and balance profit of ` 4 lakhs (50-46) is to be
amortised/deferred over lease period.
(v) When fair value is ` 35 lakhs & sales price is ` 39 lakhs, then the loss of ` 5 lakhs (40-35) to
be immediately recognised by A Ltd. in its books and profit of ` 4 lakhs (39-35) should be
amortised/deferred over lease period.
(d) (i) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an
enterprise has a present obligation, as a result of past events, that probably requires an
outflow of resources and a reliable estimate can be made of the amount of obligation, a
provision should be recognised. Sun Ltd. has the obligation to deliver the goods within the
scheduled time as per the contract. It is probable that Sun Ltd. will fail to deliver the goods
within the schedule and it is also possible to estimate the amount of compensation. Therefore,
Sun Ltd. should provide for the contingency amounting ` 1.5 crores as per AS 29.
(ii) Provision should not be measured as the excess of compensation to be paid over the profit.
The goods were not manufactured before 31st March, 2016 and no profit had accrued for the
financial year 2015-2016. Therefore, provision should be made for the full amount of
compensation amounting ` 1.50 crores.
2. (a) Statement showing liability of underwriters
a Particulars Basis White Black
A. Gross Liability [No. of Shares) 1:1 15,00,000 15,00,000
B. Less: Marked Applications {Net of firm underwriting} (15,00,000) (10,20,000)
C. Balance [A-B] - 4,80,000
D Less: Unmarked Applications 1:1 (1,20,000) (1,20,000)
E Balance [C-D] (1,20,000) 3,60,000
F Less: Firm Underwriting (60,000) (60,000)
G Balance (1,80,000) 3,00,000
H Credit for White ’s Oversubscription 1,80,000 (1,80,000)
I Net Liability - 1,20,000
J Add: Firm Underwriting 60,000 60,000
K Total Liability [No. Shares] 60,000 1,80,000
Note: In the above statement, it has been assumed that the benefit of firm underwriting is given to
individual underwriter.
Journal Entries
2016
Jan 31 Bank A/c Dr. 72,00,000
To Equity Share Application A/c 72,00,000
(Being application money received @ ` 2.50 per share)
March Equity Share Application A/c Dr. 72,00,000
To Equity Share Capital A/c 72,00,000
(Being the transfer of application money to share
capital on 28,80,000 shares vide Board’s Resolution)

© The Institute of Chartered Accountants of India

 March Equity Share Allotment A/c Dr. 86,40,000
(28,80,000 x ` 3)
To Equity Share Capital A/c (28,80,000 x ` 2.5) 72,00,000
To Securities Premium A/c (28,80,000 x ` 0.5) 14,40,000
(Being allotment money due on 28,80,000 shares
allotted to public)
Black (1,20,000 x ` 5.5) Dr. 6,60,000
To Equity Share Capital A/c 6,00,000
(1,20,000 x ` 5)
To Securities Premium A/c 60,000
(1,20,000 x ` 0.5)
(Being the application and allotted money due on net
liability of underwriter i.e. 1,20,000 shares)
March Bank A/c Dr. 92,82,000
To Equity Share Allotment A/c 86,22,000
[(28,80,000 – 6,000) x ` 3]
To Black (1,20,000 x ` 5.5) 6,60,000
(Being the receipt of money due on allotment except
from the allottee for 6,000 shares)
March Underwriting Commission A/c Dr. 12,60,000
To Black A/c 6,30,000
To White A/c 6,30,000
(Being commission @ 4 % on issue price of ` 10.50 for
` 30 lakh shares payable to underwriters)
March Black A/c 6,30,000
White A/c 6,30,000
To Bank A/c 12,60,000
(Being commission paid to underwriters)
June 30 Equity Share Capital A/c (6,000 x 5) Dr. 30,000
Securities Premium A/c (6,000 x 0.5) Dr. 3,000
To Share Allotment A/c (6,000 x 3) 18,000
To Forfeited Shares A/c (6,000 x 2.5) 15,000
(Being 6,000 shares forfeited vide Board’s Resolution)
June 30 Bank A/c (6,000 x ` 4) Dr. 24,000
Forfeited Shares A/c Dr. 6,000
To Equity Share Capital A/c (6,000 x ` 5) 30,000
(Being the reissue of 6,000 shares @ ` 4 as ` 5 paid
up at par)
Forfeited Shares A/c (15,000 – 6,000) Dr. 9,000
To Capital Reserve A/c 9,000
(Being the transfer of profit on reissue)

© The Institute of Chartered Accountants of India

 (b) Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
` 3,200 crores ` 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 bought back 24 Nil
[least of the above]
Journal Entries for the Buy Back
(applicable only when loan fund is ` 3,200 crores)
` in crores
Debit Credit
(a) Equity share buyback 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 buyback account Dr. 480
To Equity share buyback 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 buyback account 480
(Being Premium Payable on buyback 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 (` in crores) 1,200
Free reserves (` in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (` in crores) 2,880
25% of Shareholders fund (` in crores) ` 720 crores
Buy back price per share ` 30
Number of shares that can be bought back 24 crores shares

© The Institute of Chartered Accountants of India

 3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy
Back
Particulars When loan fund is
` 3,200 crores ` 6,000 crores
(a) Loan funds (`) 3,200 6,000
(b) Minimum equity to be maintained 1,600 3,000
after buy back in the ratio of 2:1
(`) (a/2)
(c) Present equity shareholders fund 2,880 2,880
(`)
(d) Future equity shareholders fund 2,560 (2,880-320) N.A.
(`) (see W.N.4)
(e) Maximum permitted buy back of 960 Nil
Equity (`) [(d) – (b)]
(f) Maximum number of shares that 32 crore shares
can be bought back @ ` 30 per Nil
share
As per the provisions of the
Companies Act, 2013, company Qualifies Does not Qualify
4 Amount transferred to CRR and maximum equity to be bought back will be calculated
by simultaneous equation method
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity
is ‘y’ Then
Equation 1 : (Present Equity- Transfer to CRR)- Minimum Equity to be maintained = Maximum
Permitted Buy Back
= (2,880 – x) – 1,600 = y
= 1280 – x =y (1)
Equation 2: Maximum Permitted Buy Back X Nominal Value Per Share/Offer Price Per Share
y
=  10  = x Or 3x = y (2)
 30 
by solving the above two equations we get
x= ` 320
y = ` 960
3. (a) Journal Entries in the books of Lion Ltd.
Particulars Debit Credit
(` in lakhs) ( ` in lakhs )
(i) 8% Preference share capital A/c (`100 each) Dr. 400
To 8% Preference share capital A/c 320
(` 80 each)
To Capital Reduction A/c 80
(Being the preference shares of `100 each reduced
to `80 each as per the approved scheme)

© The Institute of Chartered Accountants of India

 (ii) Equity share capital A/c (`10 each) Dr. 1,000
To Equity share capital A/c (` 2 each) 200
To Capital Reduction A/c 800
(Being the equity shares of `10 each reduced to ` 2
each)
(iii) Capital Reduction A/c Dr. 32
To Equity share capital A/c (` 2 each) 32
(Being 1/3rd arrears of preference share dividend of 3
years to be satisfied by issue of 8 lakhs equity shares of
` 2 each)
(iv) 6% Debentures A/c Dr. 300
To Freehold property A/c 300
(Being claim of Debenture holders settled in part by
transfer of freehold property)
(v) Accrued debenture interest A/c Dr. 24
To Bank A/c 24
(Being accrued debenture interest paid)
(vi) Freehold property A/c Dr. 150
To Capital Reduction A/c 150
(Being appreciation in the value of freehold property)
(vii) Bank A/c Dr. 250
To Investments A/c 200
To Capital Reduction A/c 50
(Being investment sold at profit)
(viii) Director’s loan A/c Dr. 300
To Equity share capital A/c (` 2 each) 90
To Capital Reduction A/c 210
(Being director’s loan waived by 70% and balance
being discharged by issue of 45 lakhs equity shares
of `2 each)
(ix) Capital Reduction A/c Dr. 972
To Profit and Loss A/c 522
To Trade receivables A/c (450x 40%) 180
To Inventories-in-trade A/c (300x 80%) 240
To Bank A/c (600 x 5%) 30
(Being certain value of various assets, penalty on
cancellation of contract, profit and loss account debit
balance written off through Capital Reduction
Account)
(x) Capital Reduction A/c 286
To Capital reserve A/c 286
(Being balance transferred to capital reserve
account as per the scheme)

© The Institute of Chartered Accountants of India

 Capital Reduction Account
Dr. Cr.
(` in lakhs) (` in lakhs)
To Equity Share Capital 32 By Preference Share Capital 80
To Trade receivables 180 By Equity Share Capital 800
To Finished Goods 240 By Freehold Property 150
To Profit & Loss A/c 522 By Bank 50
To Bank A/c 30 By Director’s Loan 210
To Capital Reserve 286
1,290 1,290
Notes to Balance Sheet
(` in lakhs) (` in lakhs)
1. Share Capital
Authorised:
200 lakhs Equity shares of ` 2 each 400
8 lakhs 8% Preference shares of ` 80 each 640
1,040
Issued:
161 lakhs equity shares of ` 2 each 322
4 lakhs Preference Shares of ` 80 each 320
642
2. Tangible Assets
Freehold Property 550
Less: Utilized to pay Debenture holders (300)
250
Add: Appreciation 150 400
Plant and Machinery 200
600
(b) Calculation of Total Remuneration payable to Liquidator
Amount in `
2% on Assets realised 25,00,000 x 2% 50,000
3% on payment made to Preferential creditors 75,000 x 3% 2,250
3% on payment made to Unsecured creditors (Refer W.N) 39,255
Total Remuneration payable to Liquidator 91,505
Working Note:
Liquidator’s remuneration on payment to unsecured creditors = Cash available for unsecured
creditors after all payments including liquidation expenses, payment to secured creditors,
preferential creditors & liquidator’s remuneration
= ` 25,00,000 – ` 25,000 – ` 10,00,000 – ` 75,000 – ` 50,000 – ` 2,250 = ` 13,47,750.
Liquidator’s remuneration on payment to unsecured creditors = 3/103 x ` 13,47,750= ` 39,255

© The Institute of Chartered Accountants of India

4. (a) Name of the Insurer: Xeta Insurance Company Limited
Registration No. and Date of registration with IRDA: ……………………..
Revenue Account for the year ended 31 st March, 2016
Particulars Schedule Amount (`)
Premium earned (net) 1 26,67,500
Profit on sale of investment 30,000
Others –
Interest and dividend (gross) 1,50,000
Total (A) 28,47,500
Claims incurred (Net) 2 20,25,000
Commission 3 50,000
Operating expenses related to insurance 4 7,50,000
Total (B) 28,25,000
Operating profit from insurance business (A) – (B) 22,500
Schedule –1 Premium earned (net)
`
Premium received 33,60,000
Less: Premium on reinsurance ceded (2,25,000)
Net Premium 31,35,000
Less: Adjustment for change in Reserve for Unexpired risk (as per (4,67,500)
W.N.)
Total premium earned 26,67,500
Schedule -2 Claims incurred (net)
`
Claims paid 19,20,000
Add: Expenses regarding claims 90,000
20,10,000
Less: Re-insurance recoveries (60,000)
19,50,000
Add: Claims outstanding as on 31 st March, 2016 2,70,000
22,20,000
Less: Claims outstanding as on 31 st March, 2015 (1,95,000)
20,25,000
Schedule -3 Commission
`
Commission paid 50,000

© The Institute of Chartered Accountants of India

 Schedule-4 Operating expenses related to Insurance Business
`
Expenses of management (` 8,40,000 – ` 90,000) 7,50,000
Working Note:
Calculation for change in Reserve for Unexpired risk:
`
Reserve for Unexpired Risk as on 31 st March, 2016 15,67,500
Additional Reserve as on 31 st March, 2016 7,00,000 22,67,500
Less: Reserve for Unexpired Risk as on 31 st March, 2015 15,00,000
Additional Reserve as on 31 st March, 2015 3,00,000 (18,00,000)
4,67,500
(b) In the books of Strong Bank Ltd.
Journal Entries
Particulars Debit (`) Credit (`)
Rebate on bills discounted A/c Dr. 27
To Discount on bills A/c 27
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 4,000
To Discount on bills A/c 240
To Clients A/c 3,760
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 18
To Rebate on bills discounted A/c 18
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
Discount on bills A/c Dr. 249
To Profit and Loss A/c 249
(Being the amount of income for the year from discounting of
bills of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
15 146
` 4,000 crores   = ` 240 crores
100 365
2. Calculation of rebate on bill discounted
15 73
` 600 crores   = ` 18 crores
100 365
(It is assumed that discounting rate of 15% is used for the bill of ` 600 crores also)
3. Income from bills discounted transferred to Profit and Loss A/c would be calculated by
preparing Discount on bills A/c

© The Institute of Chartered Accountants of India

 Discount on bills A/c
` in crores
Date Particulars Amount Date Particulars Amount
31 March To Rebate on 18 1st April, By Rebate on bills 27
2017 bills discounted 2016 discounted b/f
” To Profit and 2016-17 By Bills purchased
Loss A/c (Bal. Fig.) 249 and discounted 240
267 267
(c)
` in lakhs ` in lakhs
Opening bank balance [` (100 – 90 - 5) lakhs] 5.00
Add: Proceeds from sale of securities 40.00
Dividend received 1.20 46.20
Less: Cost of securities 28.20
Fund management expenses
[` (4.50–0.35) lakhs] 4.15
Capital gains distributed
[75% of ` (40.00 – 38.00) lakhs] 1.50
Dividends distributed (75% of ` 1.20 lakhs) 0.90 (34.75)
Closing bank balance 11.45
Closing market value of portfolio 112
123.45
Less: Arrears of expenses (0.35)
Closing net assets 123.10
Number of units 10,00,000
Closing Net Assets Value (NAV) ` 12.31
5. (a) Consolidated Profit & Loss Account of H Ltd. and its subsidiary S Ltd.
for the year ended on 31st March, 2017
Particulars Note No. ` in Lacs
I. Revenue from operations 1 5,865
II. Total revenue 5,865
III. Expenses
Cost of Material purchased/Consumed 3 1,180
Changes of Inventories of finished goods 2 (1,196)
Employee benefit expense 4 950
Finance cost 6 150
Depreciation and amortization expense 7 150
Other expenses 5 535
Total expenses 1,769
IV. Profit before Tax(II-III) 4,096
10

© The Institute of Chartered Accountants of India

 V. Tax Expenses 8 1,400
VI. Profit After Tax 2,696
Profit transferred to Consolidated Balance Sheet
Profit After Tax 2,696
Dividend paid
H Ltd. 1,200
S Ltd. 150
1,350
Less: Share of H Ltd. in dividend of S Ltd.
80% of ` 150 lacs (120) (1,230)
Profit to be transferred to consolidated balance sheet 1,466
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. Increase in Inventory
H Ltd. 1,000
S Ltd. 200
1,200
20
Less: Unrealized profits ` 24 lacs × (4) 1,196
120
7,061
3. 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
H Ltd. 200
S Ltd. 100 300
1,180
4. Employee benefits and expenses
Wages and Salaries:
H Ltd. 800

11

© The Institute of Chartered Accountants of India

 S Ltd. 150 950
5. Other Expenses
Administrative Expenses
H Ltd. 200
S Ltd. 100
300
Less: Consultancy fees received by H Ltd. from S Ltd. (5) 295
Selling and Distribution Expenses:
H Ltd. 200
S Ltd. 50
250
Less: Commission received from S Ltd. from H Ltd. (10) 240
535
6. Finance Cost
Interest:
H Ltd. 100
S Ltd. 50 150
7. Depreciation and Amortisation
Depreciation:
H Ltd. 100
S Ltd. 50 150
8. Provision for tax
H Ltd. 1,200
S. Ltd. 200 1,400
(b) 1. Capital Employed at the end of each year
31.3.2015 31.3.2016 31.3.2017
` ` `
Goodwill 10,00,000 8,00,000 6,00,000
Building and Machinery (Revaluation) 18,00,000 20,00,000 22,00,000
Inventory (Revalued) 12,00,000 14,00,000 16,00,000
Trade Receivables 20,000 1,60,000 4,40,000
Bank Balance 1,20,000 2,00,000 4,00,000
Total Assets 41,40,000 45,60,000 52,40,000
Less: Trade Payables (6,00,000) (8,00,000) (10,00,000)
Closing Capital 35,40,000 37,60,000 42,40,000
Add: Opening Capital 36,60,000 35,40,000 37,60,000
Total 72,00,000 73,00,000 80,00,000
Average Capital 36,00,000 36,50,000 40,00,000
Since the goodwill has been purchased, it is taken as a part of Capital employed.

12

© The Institute of Chartered Accountants of India

 2. Valuation of Goodwill
(i) Future Maintainable Profit 31.3.2015 31.3.2016 31.3.2017
Net Profit as given 4,20,000 6,20,000 8,20,000
Less: Opening Balance (1,20,000) (1,40,000) (1,60,000)
Adjustment for Valuation of Opening - (2,00,000) (2,00,000)
Inventory
Add: Adjustment for Valuation of closing 2,00,000 2,00,000 2,00,000
inventory
Goodwill written off - 2,00,000 2,00,000
Transferred to General Reserve 2,00,000 2,00,000 2,00,000
Future Maintainable Profit 7,00,000 8,80,000 10,60,000
Less: 12.50% Normal Return (4,50,000) (4,56,250) (5,00,000)
(ii) Super Profit 2,50,000 4,23,750 5,60,000
(iii) Average Super Profit = ` (2,50,000+4,23,750+5,60,000) ÷3 = ` 4,11,250
(iv) Value of Goodwill at five years’ purchase= ` 4,11,250 × 5 = ` 20,56,250.
6. (a) Journal Entries in the books of company
Date Particulars Dr. ` Cr. `
1-3-X2 to Bank A/c Dr. 2,40,000
31-3-X2 Employees compensation expenses A/c Dr. 4,32,000
To Equity Share Capital A/c 48,000
To Securities Premium A/c 6,24,000
(Being allotment to employees 4,800 shares of
` 10 each at a premium of ` 130 at an exercise price of
` 50 each)
31-3-X2 Profit and Loss account Dr. 4,32,000
To Employees compensation expenses A/c 4,32,000
(Being transfer of employees compensation expenses)
Working Note:
1. Employee Compensation Expenses = Discount between Market Price and option price
= ` 140 – ` 50 = ` 90 per share = ` 90 x 4,800 = ` 4,32,000/- in total.
2. The Employees Compensation Expense is transferred to Securities Premium Account.
3. Securities Premium Account = ` 50 – ` 10 = ` 40 per share + ` 90 per share on account of
discount of option price over market price = ` 130 per share = ` 130 x 4,800 = ` 6, 24,000/-
in total.
(b) ‘Non-performing asset’ means:
(a) an asset, in respect of which, interest has remained overdue for a period of six months or
more;
(b) a term loan inclusive of unpaid interest, when the instalment is overdue for a period of six months
or more or on which interest amount remained overdue for a period of six months or more;
(c) a demand or call loan, which remained overdue for a period of six months or more from the
date of demand or call or on which interest amount remained overdue for a period of six
months or more;
(d) a bill which remains overdue for a period of six months or more;
(e) the interest in respect of a debt or the income on receivables under the head ‘other current
13

© The Institute of Chartered Accountants of India

 assets’ in the nature of short term loans/advances, which facility remained overdue for a
period of six months or more;
(f) any dues on account of sale of assets or services rendered or reimbursement of expenses
incurred, which remained overdue for a period of six months or more;
Note: As per Non-Banking Financial Company - Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016, the above six
months criteria for the assets covered under (a) to (f) is 4 months for the financial year ending
March 31, 2017; and from next year ending March 31, 2018 and thereafter it will be 3 months.
(g) the lease rental and hire purchase instalment, which has become overdue for a period of
twelve months or more;
Note: The above twelve months criteria for the assets covered under (g) is 6 months for the
financial year ending March 31, 2017 and from next year ending March 31, 2018 and
thereafter it will be 3 months.
(h) in respect of loans, advances and other credit facilities (including bills purchased and
discounted), the balance outstanding under the credit facilities (including accrued interest)
made available to the same borrower/beneficiary when any of the above credit facilities
becomes non-performing asset
(c) Presentation of MAT credit in the financial statements:
Balance Sheet: Where a company recognizes MAT credit as an asset on the basis of the
considerations specified in the Guidance Note on Accounting for Credit Available in respect of
Minimum Alternate Tax under the Income Tax Act, 1961, the same should be presented under the
head ‘Loans and Advances’  since, there being a convincing evidence of realization of the asset,
it is of the nature of a pre-paid tax which would be adjusted against the normal income tax during
the specified period. The asset may be reflected as ‘MAT credit entitlement’.
In the year of set-off of credit, the amount of credit availed should be shown as a deduction from
the ‘Provision for Taxation’ on the liabilities side of the balance sheet. The unavailed amount of
MAT credit entitlement, if any, should continue to be presented under the head ‘Loans and
Advances’ if it continues to meet the considerations stated in paragraph 11 of the Guidance Note.
Profit and Loss Account: According to explanation given for paragraph 21 of Accounting
Standard 22, “Accounting for Taxes on Income” in the context of Section 115JB of the Income-tax
Act, 1961, MAT is the current tax. Accordingly, the tax expense arising on account of payment of
MAT should be charged at the gross amount, in the normal way, to the statement of profit and loss
in the year of payment of MAT. In the year in which the MAT credit becomes eligible to be
recognized as an asset in accordance with the recommendations contained in this Guidance Note,
the said asset should be created by way of a credit to the statement of profit and loss and presented
as a separate line item therein.
OR
In accordance with the Schedule III, an investment realizable within 12 months from the reporting
date is classified as a current asset. Such realisation should be in the form of cash or cash
equivalents, rather than through conversion of one asset into another non -current asset. Hence,
company must classify such an investment as a non-current asset, unless it expects to sell the
preference shares or the equity shares on conversion and realise cash withi n 12 months.
(d) Total dividend paid = ` 60,000
Out of post-acquisition profit = ` 40,000
Out of pre-acquisition profit = ` 20,000


As per Schedule III to the Companies Act, 2013, it should be presented under the head ‘Non-current Assets’ sub head
‘Long-term Loans and Advances’.
14

© The Institute of Chartered Accountants of India

 Hence, 2/3rd of dividend received by XYZ will be credited to P & L and 1/3rd will be credited to
Investment.
XYZ Ltd.’s share of dividend = ` 60,000 X 80% = ` 48,000
In the books of XYZ Ltd.
` `
Bank A/c Dr. 48,000
To Profit & Loss A/c 32,000
To Investments in ABC Ltd. 16,000
(Dividend received from ABC Ltd. 1/3 credited to investment A/c
being out of capital profits – as explained above)
Goodwill on Consolidation: `
Cost of shares less dividend out of capital profits 2,64,000
Less: Face value of capital i.e. 80% of capital 1,60,000
Share of capital profits [1,20,000-20,000 (dividend portion out of
pre-acquisition profits)] X 80 % 80,000 2,40,000
Goodwill 24,000
Minority interest on: 64,000
1st January, 2016: 20% of ` 3,20,000 [2,00,000 + 1,20,000]
31st December, 2016: 20% of ` 3,00,000 [2,00,000 + 1,20,000 + 60,000
40,000 – 60,000]

15

© The Institute of Chartered Accountants of India