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Financial Accounting II

Workbook

The ICFAI University


# 52, Nagarjuna Hills, Hyderabad 500 082

ICFAI April, 2005. All rights reserved.


No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying or otherwise - without prior permission in writing from The ICFAI University.

ISBN. No. 81-314-0232-0 Ref. No. FA-II WB 04200501 For any clarification regarding this book, the students may please write to the ICFAI University giving the above reference number of this book specifying chapter and page number. While every possible care has been taken in type-setting and printing this book, the ICFAI University welcomes suggestions from students for improvement in future editions.

Preface
The ICFAI University has been upgrading its study material to make it more beneficial to the students for self-study through the Distance Learning mode. We are delighted to publish a workbook for the benefit of the students preparing for the examinations. The workbook is divided into three parts. Brief Summaries of Chapters A brief summary of all the chapters in the textbook are given here for easy recollection of the topics studied. Part I: Questions and Answers on Basic Concepts (with Explanatory Notes) Students are advised to go through the relevant textbook carefully and understand the subject thoroughly before attempting Part I. In no circumstances should the students attempt Part I without fully grasping the subject material provided in the textbook. Part II: Problems and Solutions The students should attempt Part II only after carefully going through all the solved examples in the textbook. A few repetitive problems are provided for the students to have sufficient practice. Part III: Model Question Papers (with Suggested Answers) The Model Question Papers are included in Part III of this workbook. The students should attempt all model question papers under simulated examination environment. They should self score their answers by comparing them with the model answers. Effective from April, 2003, the examinations for all the subjects of DBF/CFA (Level-I) consist of only multiple choice questions. Each paper consists of Part A and Part B. Part A is intended to test the conceptual understanding of the students. It contains 40 questions carrying one point each. Part B contains problems with an aggregate weightage of 60 points. Please remember that the ICFAI University examinations follow high standards that demand rigorous preparation. Students have to prepare well to meet these standards. There are no short-cuts to success. We hope that the students will find this workbook useful in preparing for the ICFAI University examinations. Work Hard. Work Smart. Work Regularly. You have every chance to succeed. All the best.

Detailed Curriculum
Accounting for Intangible Assets: Characteristics, Operating Expenses versus Intangible Assets, Amortization, Valuation of Goodwill, Patents, Trade Marks and Trade Names, Copyrights, Other Intangibles and Deferred Charges, Research and Development Costs, Investments in Securities and Innovative Property. Accounting for Shares: Accounting Treatment for Issues of Shares, Issue of Shares at a Premium and discount, Forfeiture and Re-issue of shares, Rights and Bonus Shares, Preference Shares: Issue, Conversion and Redemption, Underwriting and Brokerage on Shares, Valuation of Shares. Accounting for Debentures: Issue of Debentures, Redemption of Debentures, Debenture Redemption Reserve, Purchase of Own Debentures, Fully Convertible, Partly Convertible and Nonconvertible Debentures. Preparation of Financial Statements of Limited Companies: Requirements of the Companies Act for presentation of Profit and Loss Account and Balance Sheet of a Company, Preparation of Trial Balance, Profit and Loss Account and Balance Sheet of Limited Companies, Treatment of Special items relating to Company Final Accounts. Statutory Audit and Annual Reports: Legal Requirements for Statutory Audit, Auditors Duties and Liabilities, Qualifications in Auditors Reports, Auditors Duties in relation to Accounting Standards. Contents of Annual Reports, Chairmans Statement, Directors Report, Notes to Financial Statements. Limitations of Financial Statements: Critical Review of Financial Statements, Reworking Financial Statements after Removing the Effect for Abnormal Items and Changes in Accounting Policies. Introduction to Consolidated Accounts of Holding and Subsidiary Companies: Introduction, Determining the Types of Control, Legal Definition and Requirement, Meaning of Holding Company and Subsidiary Company, Particulars of Balance Sheet of a Holding Company with regard to its Subsidiaries, Financial year of the Holding Company and its Subsidiaries, Rights of Holding Companys Representatives and Members, Advantages and Disadvantages of Consolidation of Financial Statements, Basic Rules for Preparing a Consolidated Balance Sheet, Forms and Techniques, Some Special Adjustments. Current Developments and ERP.

Contents

Brief Summaries of Chapters

Part I: Questions and Answers on Basic Concepts (with Explanatory Notes)

10

Part II: Problems and Solutions

65

Part III: Model Question Papers (with Suggested Answers)

223

Brief Summaries of Chapters


Accounting for Intangible Assets
Intangibles are non-physical but valuable resources like goodwill, patents, and copyrights owned by the firm. The intangible assets can be classified into the following four categories: Goodwill: Arises when payment is made in acquiring another business or asset at higher than the book value. It represents the extraordinary profit earning capability of the enterprise due to reputation, brand name, location, management. Rights: Example, Patents, Copyrights, Trademarks, Licenses, Secret Processes, Franchises, etc. Deferred Revenue Expenditure: Expenditure for which the payment is incurred in one year and the benefits arising out of the asset would be for a number of years. Example, R&D costs are deferred, and appear on the assets side of the balance sheet. Debit balance or deficit in the profit and loss account representing accumulated losses.

Methods of Valuing Goodwill Simple Profit Method: While calculating the goodwill under this method, the following are ascertained: a. b. The average annual profit expected to accrue in the future. The number of years of purchase of goodwill.

Super Profit Method: This method tries to ascertain whether or not the existing business is capable of earning higher than the normal profit (i.e., are there any super profits). The super profits are then multiplied by an agreed number of years of purchase to arrive at the value of goodwill. To evaluate goodwill under this method, the following are ascertained: a. b. c. Expected average annual profits. Reasonable Rate of Return or Normal Rate of Earnings. Capital Employed in the Business.

Amortization of Goodwill Usually the value of the goodwill is amortized over a period of time. The journal entry to be passed for amortization of goodwill is Profit and Loss a/c To Goodwill a/c Technical know-how should be recorded in the books of account only when some consideration in money or moneys worth has been paid for it. Technical know-how can be of two types: i. Relating to manufacturing processes, and ii. Relating to plans, designs and drawings of buildings or plant and machinery. The cost of an intangible asset is measured by (a) the amount of cash disbursed or the fair value of other assets distributed, (b) the present value of amounts to be paid for liabilities incurred, and (c) the fair value of consideration received for stock issued. Dr

Cost of Intangibles

Disclosure A description of intangible assets, method of amortization, and estimated useful lives should be appropriately disclosed in the financial statement or in the footnotes (APB-17, par.30). Enterprises hold investments for diverse reasons. For some enterprises, investment activity is a significant element of operations and assessment of the performance of the enterprise may largely or solely depend on the reported results of this activity. Cost of an investment includes acquisition charges like brokerage, etc. On disposal of an investment, the difference between net disposable proceeds and carrying amount should be recognized as income or expenditure. The total capital of the company divided into units of small denominations are called shares.

Investments

Accounting for Shares

Classes of Shares The Companies Act provides for two classes of shares: Equity and Preference shares. Equity shareholders enjoy the voting rights but the company has no obligation to pay the dividends to them at a fixed rate every year. Even at the time of winding up of the company, they receive their share capital after payment to preference shareholders. The preference shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at the time of winding up of the company. Share capital is the capital raised by the company by the issue of shares. a. Authorized or Nominal Share Capital: It is the maximum amount up to which a company is authorized to issue shares to the public without altering the memorandum of association. b. Issued Capital: The nominal value of the shares which are offered to the public for subscription. c. d. e. Subscribed Capital: The nominal value of the shares taken up by the public. Called-up Capital: It is that part of the subscribed capital which has been called up. Paid-up Capital: It is that part of the called up capital which has been paid-up by the shareholders.

Issue of Shares The Companies Act stipulates that when shares are issued to the public for cash, the company has to come up with prospectus. Prospectus is the document which includes notice, circular, advertisement or other document inviting public to subscribe for shares or debentures. If the company asks the subscribers to pay minimum amount along with application and the rest in two or more installments then the first installment is called application money; second installment is called share allotment money; third installment is called share first call and fourth installment is called share second call or final call. On receipt of application money Bank account Dr. To Share application account On allotment of shares Share application account Dr. To Share capital account For amount due on allotment of shares, the entry would be Share allotment account Dr. To Share capital account

Journal Entries 1.

2.

3.

4.

5.

6.

7.

If the shares are issued for a premium and the premium amount is required to be paid on allotment Share allotment account Dr. To Share capital account To Share premium account Refund of excess application money in case of oversubscription Share application a/c Dr. To Bank a/c When proportionate allotment is made for all applications in case of oversubscription Share application a/c Dr. To Share capital a/c To Share allotment a/c On receipt of allotment money Bank account To Share allotment account Dr.

8.

On making first call Share first call account To Share capital account Dr.

9.

Calls in advance: The amount received by the company before the call is made is called calls in advance. The company is compelled to pay the interest. For interest on calls-in-advance Interest on calls-in-advance a/c To Bank a/c Dr.

10.

Adjustment of calls in advance Calls in advance a/c To Share call a/c Dr.

Calls in Arrears: When the shareholder does not pay his dues on allotment or on calls, it is called calls in arrears. This is transferred to a common account called calls in arrears account. Forfeiture and Reissue of shares: The shares can be forfeited in case of non-payment of allotment or call money and these can be reissued. Issue of Bonus Shares: Bonus shares are allotted to the existing shareholders without the receipt of any consideration from them. Issue of Rights Shares: The rights shares are those shares which are offered by the company to the existing shareholders. Intrinsic Value Method: Under this method, the net assets of the company including goodwill and non-trading assets are divided by the number of shares issued to arrive at the value of each share. Return on capital employed method =

Methods of Valuation of Shares

Yield Method a.

Return on capital employed x Paid-up value of shares Normal rate of return Expected rate of dividend x Paid-up value of shares Normal rate of dividend
3

b.

Valuation on the basis of dividend =

The Value of Preference Shares: The value of non-participating preference shares would be face value plus the arrear, if any. As the Participating Preference Shareholders have a right to participate in the surplus the value would be face value + Arrears in preference dividend + Surplus of each preference share. Debentures is a credit shift security. The loan raised by a company is divided into a large number of segments, similar to the case of the share capital being divided into well-defined constituents called shares and each such segment is called debenture. The debentures are issued in the same manner as the shares are issued.

Accounting for Debentures

The difference between shares and debentures Shares They are ownership securities. Return to the shareholders is in the form of dividends subject to the company earning profits. The amount is paid only after the debentures claim is fully paid. Debenture Redemption Reserve (DRR) This is the reserve created by apportioning the part of profits in equal amounts or higher if profits permit. Debentures issued at par and redeemed at par Debentures issued at discount and redeemed at par Debentures issued at premium and redeemed at par. Legal Requirements Relating to the Preparation of Financial Statements of Limited Companies. In the case of Companies registered under the Companies Act, the Act specifies the books of accounts maintained and also prescribes the format and content of the financial statement. Section 209 of the Companies Act specifies the books of accounts to be maintained by a company. In accordance with this Section, every company maintains, at its registered office, proper books of account with respect to the following: a. b. c. All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place. All sales and purchases of goods by the company. The assets and liabilities of the company. Debentures They are credit shift securities. Return to debentures is in the form of interest which is compulsory obligation even if the company makes losses. Given the first priority for payment during dissolution.

Terms of Issue and Redemption of Debentures

Preparation of Financial Statements of Limited Companies

Companies have to compulsorily maintain their accounts on accrual basis. Also the double entry system of accounting is to be followed. The Companies Act specifies with regard to the Annual accounts to be drawn up by a company that At every annual general meeting of the shareholders, the Board of Directors of the company should lay before the shareholders, a balance sheet as at the end of the accounting period which has just ended and also a profit and loss for such accounting period.

Requirements with respect to the Profit and Loss Account Part II of the Schedule VI of the Companies Act does not prescribe any format for the Profit and Loss account but only outlines the information to be included in the Profit and Loss account of the Company. Part II of Schedule VI specifies certain information to be provided by way of notes to Profit and Loss Account. Sometimes, the companies divide their income statement into the following three parts. a. Trading account showing the gross profit earned. b. Profit and Loss account showing the profit earned after tax and available for appropriation. c. Profit and Loss appropriation account. The profit and loss appropriation account shows in detail the appropriations made from the profits in respect of dividends and transfer to reserves, etc. The balance in the Profit and Loss appropriation account if it is credit will be shown on the liabilities side under the heading Reserves and Surplus. Part I of Schedule VI of the Companies Act specifies both the form and content of the balance sheet of the company. The assets of a company should be classified into: a. Fixed assets b. Investments c. Current assets, Loans and Advances d. Miscellaneous expenditure (to the extent not written off). The items appearing on the liabilities side are classified as: a. Share capital b. Reserves and surplus c. Secured loans d. Unsecured loans e. Current liabilities and Provisions. The fixed assets of the company must be, as far as possible, classified as: a. Goodwill b. Land c. Buildings d. Leasehold e. Railway sidings f. Plant and machinery g. Furniture and fittings h. Development of property i. Patents, trade marks and designs j. Livestock k. Vehicles. The investments held by a company shall be classified as: a. Investments in Government or Trust securities b. Investment in shares, debentures and bonds c. Immovable property d. Investment in the capital of partnership firms.

Details within Share Capital

The current assets, loans and advances assets should be broadly classified into Current assets and Loans and Advances. The following are shown under current assets: a. Interest accrued on investments b. Stores and spare parts c. d. e. f. g. h. Loose tools Stock-in-trade Work-in-progress Sundry debtors Cash balance on hand Bank balance.

Accounting treatment of special items in the financial statements of a Limited Company. According to the Companies Act, dividend can be declared or paid by a company for any financial year only out of the profits arrived at after providing for depreciation. The depreciation shall either be a. b. To the extent specified in Section 350. In respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety five percent of the original cost of the asset to the company by the specified period in respect of such asset. On any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety five percent of the original cost of the asset on the expiry of the specified period.

Depreciation

c.

Interest on Debentures: When a company raises funds by floating of debentures, the Profit and Loss account must be charged with the interest on the debentures. Income Tax: Dividends to both the equity and preference shareholders can be paid only out of the profits available after taking into account the income tax. The profits on which income tax is payable is termed as taxable profits and the calculation of taxable profits is based on the provisions of the Income Tax Act. Dividends: Dividends may be defined as the share of profits that is payable to each shareholder of the company. The Companies Act lays down that dividends can be paid out of profits only and prohibits the payment of any dividend out of capital. Dividends shall be paid only in cash. The dividends can be declared only by a resolution of the shareholders, if the articles of the company permit the directors can declare an interim dividend. The dividends declared by a resolution by the shareholders in the annual general meeting of the company is termed as the final dividend. The final dividend is over and above the interim dividend. Managerial Remuneration: As per the provisions of the Companies Act, commission to the managing staff should be calculated before charging such commission. However, a company may enter into an agreement to pay commission at a percentage of profits after charging such commission. The calculation of managerial remuneration shall be based on net profit after making certain adjustments as per the Companies Act. Every company has to maintain books of accounts not less than eight years along with vouchers prior to the current year. The books of accounts have to be at the registered office unless the Board of Directors have other place in mind. Section 514(2) says that proper books of accounts include such books, which are essential to explain the transactions and financial position of the company. Again by Section 209(4), other books and papers include account deeds, vouchers.

Statutory Audit and Annual Reports

The Managing Director or manager is responsible for the proper upkeep of books of accounts. Section 211(1) says that balance sheet must satisfy three basic conditions: A true and fair view of the company. It must confirm to Part 1 of Schedule VI or similar form approved by Central Government. Emphasizing on general instructions under notes.

The annual financial statements must first be approved by the Board of Directors, then signed as represented by board and then forwarded to auditors for the report. The Boards report must have an attachment to balance sheet in general meeting which comprises state of company, dividend, reserves, factors effecting financial position etc., it must also include a directors responsibility statement. The balance sheet and the P&L account are to be shown only at the AGM then filling the final accounts with register as to be done within the stipulated time frame. Regarding eligibility for appointment of an auditor, Section 226 is applicable for all types of companies where auditors qualification and disqualification are covered. Appointment of Auditors First auditors are appointed by directors, in case the director fails, the first auditors are appointed by shareholders, subsequent auditors are appointed at each AGM by ordinary resolution. The Central Government has the powers to appoint auditors if company fails to appoint or reappoint auditors. Reappointment of Auditors is done at the AGM by passing a resolution except in few cases. With respect to ceiling on number of audits, compliance of Section 224 from auditors before appointment or reappointment subject to certain exceptions. Removal of an Auditor Any auditor appointed under Section 224 (except first auditors) can be removed prior to expiry of his term by company at general meeting with prior approval of the Central Government. Rights of an Auditor The principal rights of an auditor are covered under Section 227 which confers the following rights: access to books, accounts, to call for information and explanations, to visit branches, receive remunerations, receive notices and to attend general meetings. Duties of an Auditor To report accounts pertaining to P&L account, Balance Sheet, every document attached to and annexed to them and be presented in the general meeting, facts and his opinion regarding complain with regard to Accounting Standards. Limitations of Balance Sheet 1. 2. 3. 4. 5. 6. Inability to quantify human assets. Balance Sheet is a historic document. Personal bias/judgment in creating provisions, stock valuation, depreciation, bad debts, etc. Possibility of manipulation of closing stocks, current assets. Lack of uniform accounting policies makes the comparison difficult with other entities. Window dressing is hard to escape.

Limitations of Financial Statements

Limitations of P& L Account An Interim statement hence does not reflect the reality 1. 2. 3. The profit/loss vitiated by accounting conventions and policies Does not reflect management philosophy and efficiency Historical document. 7

Here, the emphasis is on consistency of profits and reasons for fluctuations in profits. In effect one has to make out how statements are manipulated and profits reworked after removing the effect of abnormal items and changes in accounting policies. Professional entries of an accountant specify certain fundamental principles, which are integrity, objectivity, independence, confidentiality, and technical standards, professional competence. Holding company is a company which acquires a complete or majority of shares in any other company. The company being acquired is called a subsidiary company. The holding company can also acquire controlling composition of directors, controlling the holding company which in turn controls a subsidiary. The balance sheet of holding companies must be attached with documents of subsidiary with copies of P&L account, Balance Sheet, Board of Directors, Auditors Report, Holding Companys interest. Rules for preparing consolidated statements: Before consolidating the balance sheet, investment of holding company in entire share capital of subsidiary company has to be changed with the assets and liabilities of the subsidiary company. Goodwill/Cost of control: It is the excess price paid for investment over the share of equity by holding company. Capital Reserve is the excess share in equity or net assets of subsidiary over the price paid for investment. Minority Interest: Shares held by outsiders in the subsidiary company are known as minority interest. After this, the companys profits or losses & reserves are treated accordingly if they are capital profit or losses and revenue profits or losses considering the date of acquisition wherein before the date comes under capital profits or losses, postacquisition becomes revenue profits or losses. Then intercompany transactions like goods sold on credit, bills of exchange, loans, which are owned by one company, should be eliminated. Also intercompany unrealized profit is also to be eliminated.

Consolidated Accounts of Holding and Subsidiary Companies

Capital and Revenue Profits:

Revaluation of Assets and Liabilities: If revaluation is done at the time of acquisition for the subsidiary company, the profit or loss arising out of revaluation is treated as capital profit or loss. Minority shareholders are to be treated accordingly. Preference Shares: If the preference shares of subsidiary are held by the holding company, the difference between cost and paid-up value of shares gives the cost of control. The minority interest share is up to the paid-up value plus the dividend till the date of consolidation. Bonus Shares: The treatment of bonus shares depends upon whether they are issued out of pre-acquisition profits or post-acquisition profits. It is only in case of post-acquisition that first, one has to adjust the bonus shares from post-acquisition profits and then only the holding companys share in the revenue profits of subsidiary company be calculated. Dividend: If the dividend of the subsidiary company pertains to pre-acquisition profits, it is treated as capital gain, which is utilized for reducing goodwill. If the dividend is from the post-acquisition profits, shareholders of the holding company have the right for their share. Some of the advantages of consolidating the final statements of holding and subsidiary companies are to understand and present a purposeful financial position of the group which in turn can aid in proper valuation of the holding company.

Some of the disadvantages of consolidating the final statements of holding and subsidiary companies are the inability to assess the creditworthiness of subsidiary from the final statements, which is difficult to interpret, the consolidated retained earnings rarely match with dividend for holding company shareholders, detailed information is difficult to analyze unless it is provided. The Accounting Standard 21 deals with procedures, preparation and presentation of consolidated financial statements. The Accounting Standard 23 deals with accounting for investments in associates in consolidated financial statements wherein accounting for these by investors are applied. Equity method is used here. The International Accounting Standard 27 deals with procedures, preparation and presentation of consolidated financial statements and accounting for investments in subsidiaries. It covers the financial position, operations and necessary disclosures. The US GAAP has FAS-94 which deals with consolidation of all majority owned subsidiaries, ARB-51 deals with consolidated financial statements and ARB-43 deals with comparative financial statements. Value added statement is an information communique of the addition of wealth the organization is able to make with the efforts of management and employees using capital. There are two concepts of value added Gross Value Added: This is arrived at by deducting from sales revenue and any other direct income and investment income, the cost of all materials and services and other extraordinary expenses. Net Value Added: This is arrived at by deducting the depreciation from the gross value added. Maximizing shareholders value has always been the main objective of a company. A company is said to have created economic value only if the return on its capital is greater than the opportunity cost. Economic Value Added (EVA) is only, one variation of residual income and capital. EVA is a residual income measure that subtracts the cost of capital from the operating profits generated by the business. Market value added is the difference between the market value of invested capital and book value of invested capital. Market value added is a measure of shareholders value. Brand valuation is a tool that quantifies the economic value of a brand. An increasing importance is being placed on brand creation and management. The value of a brand is found by Earnings Valuation Method: Under this method, the value of a brand (like any other asset) is the present value of the future earnings of that brand. Cost Method: This method involves stating the brand value at its cost to the company. This is relatively easy when brand is acquired.

Current Developments and ERP


Brand valuation is expected to acquire vital significance for most firms. Brands have a strong franchise in the market and are valuable assets which should be properly managed.

Part I: Questions on Basic Concepts


Accounting for Intangible Assets
1. The valuation of goodwill is necessary in the case of a. b. c. d. e. 2. a. b. c. d. e. 3. a. b. c. d. e. 4. a. b. c. d. e. 5. a. b. c. d. e. 6. a. b. c. d. e. Sale of company Valuation of shares Purchase of other company Both (a) and (b) above All of (a), (b) and (c) above. The goodwill of established firms is more when compared to new businesses. Goodwill can never be negative. Goodwill differs in its composition in different trades. Both (a) and (c) above. All of (a), (b) and (c) above. Goodwill Secret processes Large marketing and advertisement campaign costs Both (a) and (c) All of (a), (b) and (c) above. Future maintainable profits Capital employed Normal rate of return Both (a) and (c) above. All of (a), (b) and (c) above. Can be shown in the assets side of the balance sheet Can be shown in the liabilities side of the balance sheet Can be shown in the trading account Can be shown in the profit and loss account It is not shown in the balance sheet. The value of goodwill is more in case of purchase of super profit method as compared to the annuity method of super profit. For the purpose of calculation of goodwill, past profits will have to be adjusted in order to determine the future expected profits. In annuity method, goodwill is equated to the future value of present profits earned by discounting them applying a normal rate of return. Net assets basis of valuation of shares is concerned with the asset backing per share. For calculating the value of shares, rate of earning and net rate of dividend should be taken into consideration if the shares are being acquired for control purposes.

Which of the following statements is/are true?

Intangible assets includes

Valuation of goodwill is dependent on

Purchased goodwill

Which of the following statements is not true?

7.

Which of the following is not a consideration in determining the useful life of an intangible asset? a. b. c. d. e. Legal, regulatory, or contractual provisions. Provisions for renewal or extension. Expected actions of competitors. Initial cost. None of the above. Simple profit method. Capitalization of super profits. Annuity method of super profits. Purchase of super profits method. Book-value method. Account receivable. Account payable. Demand bank deposits. Net long-term receivables. Patents and trademarks. Goodwill. Patents. Copyrights. Trademarks. Franchise. Capitalization of average profits methods. Capitalization of super profits method. Annuity method of super profits. Number of years purchase of average profits method. Super profits method. It represents a non-physical value over and above the physical assets. It is the present value of firms expected super earnings. It is a non-monetary fixed asset. It can either be purchased goodwill or inherent goodwill. It is a non-monetary identifiable intangible asset. Gross fixed assets + Current assets Gross fixed assets Depreciation + Current assets Gross fixed assets + Current assets Current liabilities Gross fixed assets Depreciation + Current assets Current liabilities Current assets Current liabilities.

8.

Which of the following is not a method of calculating goodwill? a. b. c. d. e.

9.

Which of the following is a non-monetary asset? a. b. c. d. e.

10.

Which of the following intangible assets is considered as an unidentifiable intangible asset? a. b. c. d. e.

11.

Which of the following methods of valuation of goodwill uses the present value factor? a. b. c. d. e.

12.

Which of the following is not a feature of goodwill? a. b. c. d. e.

13.

Capital employed is equal to a. b. c. d. e.

11

14.

Which of the following factors is used as a multiplier of super profits in valuation of goodwill of a business? a. Average capital employed in the business. b. Simple profits. c. Number of years purchase. d. Normal rate of return. e. Normal profits. The amount to be collected on application of shares should be a. Not more than 5% of nominal value of shares b. More than 5% of nominal value of shares c. More than 5% of issue price of shares d. Not more than 5% of issue price of shares e. 5% of issue price of shares. What is the time specified for issue of shares at a discount once the sanction from the Company Law Board is obtained? a. 2 months. b. 1 year. c. 2 years. d. 6 months. e. 3 years. Discount on issue of shares is shown on a. Assets side under miscellaneous expenditure b. Assets side under current assets c. Liabilities side under current liability d. Liabilities side under reserves e. None of the above. Bonus shares can be issued out of a. General reserves b. Investment allowance reserve c. Share premium collected in cash d. Both (a) and (c) above e. All of (a), (b) and (c) above. Which of the following statements is/are not true? a. Bonus issue can be made in lieu of dividends. b. Residual reserves after issue of bonus shares should be at least 40% of called-up capital. c. Bonus issue cannot be made within 12 months of any rights issue. d. Both (a) and (b) above. e. Both (a) and (c) above. Preference shares redeemable within ____ years can be issued. a. 5 b. 7 c. 10 d. 15 e. 20.

Accounting for Shares


15.

16.

17.

18.

19.

20.

12

21.

Preference shares can be redeemed from the a. b. c. d. e. Proceeds of fresh issue of shares Accumulated profits General reserve Both (a) and (c) above All of (a), (b) and (c) above. Brokerage and underwriting commission are the same. Broker does not guarantee the sale of a specified number of the securities. The broker buys the securities which have not been subscribed for. Both (a) and (b) above. All of (a), (b) and (c) above. 5% 10% 15% 20% There is no limit. 5% p.a. 6% p.a. 10% p.a. 4% p.a. 15% p.a. Economic policies of government Yield of other related shares in the stock exchange Demand and supply of shares Rate of dividend paid All of the above. Assessment of wealth tax Assessment of income tax Amalgamation Both (a) and (c) above All of (a), (b) and (c) above. The application money should not be less than 5% of the issue price of shares. The application money should not be less than 5% of the nominal value of shares. Bonus issue can be made within 12 months of any rights issue. Both (a) and (b) above. Both (a) and (c) above.

22.

Which of the following statements is/are true? a. b. c. d. e.

23.

The maximum rate of premium at which shares can be issued is a. b. c. d. e.

24.

The rate of interest paid on calls-in-advance is a. b. c. d. e.

25.

The value of the shares of a company depends on a. b. c. d. e.

26.

Valuation of shares has to be done for a. b. c. d. e.

27.

Which of the following is true? a. b. c. d. e.

13

28.

29.

30.

31.

32.

33.

Securities premium account cannot be used for a. Issue of bonus shares b. Writing-off of preliminary expenses c. Declaration of dividend d. Writing-off of commission or discount on issue of shares and debentures e. Providing for premium payable on redemption of debentures. Profit on reissue of forfeited shares is transferred to the a. Share capital account b. General reserve account c. Bonus shares account d. Capital reserve account e. Forfeited shares account. Which of the following is true with regard to issue of shares at discount? a. The maximum rate of discount can be 15%. b. At least one year should have elapsed from the commencement of business before shares are issued at a discount. c. The issue should be authorized by a special resolution. d. The shares which are issued at a discount should not be of a class already issued. e. Sanction of the Company Law Board is not required. The discount allowed on re-issue of forfeited shares is debited to the a. Share capital account b. Profit and Loss account c. Discount allowed account d. Forfeited shares account e. Capital reserve account. When shares are issued at discount, the maximum rate shall not exceed a. 5% of the face value b. 10% of the face value c. 15% of the face value d. 10% of the value for which shares are issued e. 20% of the value for which shares are issued. Redeemable preference shares can be redeemed out of a. The sale proceeds of investments b. The proceeds of a fresh issue of shares c. Share premium d. The proceeds of issue of debentures e. The sale proceeds of fixed assets.
Which of the following statements is/are true?

34.

a. b. c. d.

e. 14

Partly paid preference shares cannot be redeemed. Capital redemption reserve amount can be utilized for writing-off preliminary expenses. Redemption of preference shares cannot be made out of fresh issue of debentures. When preference shares are redeemed out of profits, a sum equal to the nominal amount of the shares so redeemed should be transferred out of profit to the General Reserve. Both (c) and (d) above.

35.

The minimum subscription amount that should be received on a public issue is a. b. c. d. e. 75% of the issued capital 90% of the issued capital 80% of the issued capital 75% of the authorized capital 90% of the authorized capital. Share premium. Capital reserve. Development rebate reserve. Profits prior to incorporation. Sinking fund. Decrease cost of control Increase cost of control Have no effect on cost of control Decrease capital losses Increase capital losses. A bonus issue can be made out of capital reserves. A bonus issue can be made only after 12 months from the date of incorporation. A bonus issue can be made only after 12 months from any public/rights issue. A bonus issue can be made only after 12 months from the date of commencement of business. Bonus shares can be issued in lieu of dividend. The application money should not be less than 5% of the issue price of share. The application money should not be less than 5% of the nominal value of share. The application money should not be less than 10% of the issue price of share. The application money should be 10% of the nominal value of share. The amount of application money to be collected is left to the discretion of the company.

36.

From which of the following accounts can transfers be made to capital redemption reserve? a. b. c. d. e.

37.

Issue of bonus shares by the subsidiary company out of capital profits will a. b. c. d. e.

38.

Which of the following is true? a. b. c. d. e.

39.

Which of the following statements is true with regard to issue of shares? a. b. c. d. e.

40.

Before forfeiting the shares, the Board of Directors shall give the defaulting shareholder, a notice period of a. b. c. d. e. 21 days 14 days 30 days 45 days 60 days.

41.

When shares to be forfeited are issued at a premium and the premium money which is duly received on the shares forfeited, the treatment of share premium amount will be: a. b. c. d. e. Share premium account will be further credited Share premium account will be further debited Share premium account already debited will not be canceled Share premium account credited will not be canceled Share premium account shall be transferred to capital reserve. 15

42.

Which of the following statements is not true with regard to redemption of preference shares? a. b. c. d. e. Partly paid shares cannot be redeemed. The redemption of preference shares shall be taken as reduction of Companys authorized share capital. When shares are issued for redemption in future, it will not be treated as increase in capital. Preference shares can be redeemed either out of the profit by capitalization or out of fresh issue of shares. Premium on redemption of preference shares is provided out of the share premium account.

43.

In case of oversubscription, if shares are allotted pro rata, the excess application money received on shares allotted is a. b. c. d. e. Refunded to the shareholders Forfeited and the amount is treated as share premium Adjusted against allotment money Adjusted against call monies Adjusted against both (c) and (d) above. It is paid to the underwriters on the amount of subscription procured by them. It is paid to the underwriters on the amount of shares or debentures underwritten by them. It is paid only for the amount subscribed by the general public and not on firm underwriting. Underwriting commission is not paid on the amount of shares or debentures devolved on the underwriters. Underwriting commission is paid on the amount of privately placed issue. If authorized by Articles With the sanction of the Company Law Board With the approval of the Central Government If authorized by a special resolution of the Company If authorized by an ordinary resolution of the Company. Of promoters quota Of applications by banks against their underwriting commitments Shares which are not underwritten Both (a) and (b) above Both (a) and (c) above. Right shares means the shares which are offered by a company to the existing shareholders. The price of the right shares is always above the market price of the shares. Right shares are those shares which are offered by the company by converting the partly paid shares into fully paid shares. Right shares are those shares which are offered by directors of the company to their friends and relatives at lower prices. The expenses on issue of right shares is always high.

44.

Which of the following statements is true with regard to the underwriting commission? a. b. c. d. e.

45.

Calls-in-Advance can be received only a. b. c. d. e.

46.

Brokerage will not be allowed in case a. b. c. d. e.

47.

Which of the following statements is correct? a. b. c. d. e.

16

48.

Securities premium account may be applied by the company for a. b. c. d. e. Issue of fully paid bonus shares Writing-off preliminary expenses The premium payable on the redemption of preference shares or debentures Writing-off discount allowed on shares or debentures All of the above. Value of rights Number of right shares x (Market value Issue price) = Number of old shares Value of rights Number of right shares = x Issue price Number of old shares Value of rights Number of right shares = x New price Number of old shares Value of rights Number of right shares x (Market value Issue price) = Number of old shares + New shares

49.

Which of the following items is true? a.

b.

c.

d.

50.

51.

52.

Value of rights Number of right shares x (Market value Issue price) = Number of old shares New shares Which of the following methods is not related to the valuation of equity shares? a. Intrinsic value method. b. Yield method. c. Fair value method. d. Super profit method. e. Both (c) and (d) above. When redeemable preference shares are due for redemption, the entry passed is a. Debit redeemable preference share capital account; Credit cash account b. Debit redeemable preference share capital account; Credit preference shareholder account c. Debit preference shareholder account; Credit cash account d. Debit preference shareholder account; Credit redeemable preference share capital account e. Debit redeemable preference capital account; Credit capital redemption reserve account. Which of the following statements is true in respect of brokerage? a. Brokerage will be paid when the applications are made by the banks against their underwriting commitments. b. The listed companies are allowed to pay brokerage on private placement of capital at a maximum rate of 0.25%. c. Brokerage will not be allowed in respect of promoters quota, including the amounts taken up by the directors. d. The mailing cost and other out-of-pocket expenses for canvassing of public issues, etc., will be borne by the companies but not stock brokers. e. The broker is an insurer against the undersubscription and is personally liable for subscription of unsubscribed shares. 17

e.

53.

54.

55.

56.

57.

58.

The premium collected on issue of debentures is transferred to a. Profit & Loss account b. Profit & Loss appropriation account c. Security premium account d. Reserve capital account e. General reserve account. As per Schedule VI, which of the following is true regarding the treatment of calls-inarrears in the final accounts of a company? a. The amount will be shown under the head current assets on the assets side of the balance sheet. b. The amount will be deducted from the share capital in the balance sheet. c. The amount will be shown under the head current liabilities. d. The amount will be shown in the P & L account as a loss without showing it in the balance sheet. e. The amount will be added to the share capital in the balance sheet. Which of the following cannot be utilized for the redemption of Preference Shares of a company? a. Proceeds of fresh issue of shares b. Securities premium on fresh issue of shares c. General reserve d. Profit and loss account e. Dividend equalization reserve. The accounting entry involved for issue of shares to promoters for the services rendered by them is a. Debit goodwill account and credit share capital account b. Debit cash account and credit share capital account c. Debit promoters account and credit share capital account d. Debit share capital account and credit cash account e. Debit goodwill account and credit calls-in-arrear account. Underwriting commission will not be paid on the amount of shares taken by a. Promoters b. Directors c. Employees d. Directors friends e. All of the above. At the time of forfeiture of shares which were originally issued at a discount, the accounting entry involves i. A debit to Share capital account with the called-up value of shares forfeited. ii. A credit to Share forfeiture account with the amount received on forfeited shares. iii. A credit to Discount on issue of shares with the amount of discount allowed on forfeited shares. iv. A credit to Calls-in-arrears with the amount due but not paid on forfeited shares. v. A debit to Share capital account with the paid-up value of shares. a. Both (i) and (iv) above b. Both (iv) and (v) above c. Both (i) and (ii) above d. (i), (ii) and (iii) above e. (i), (ii), (iii) and (iv) above.

18

104.

The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage of profits which will have to be compulsorily transferred to reserve is a. b. c. d. e. 2.5% 5.0% 7.5% 10.0% 12.5%. Dividend is payable on the calls paid in advance by the shareholder. Capital redemption reserve can be utilized for writing-off miscellaneous expenses and losses. Profit on cancellation of debentures is to be transferred to general reserve. Any dividend remaining unpaid after 3 years from the date on which it became due can be transferred to capital reserve. When the proposed dividend does not exceed 10%, it is not obligatory on the company to transfer any profits to its reserve.

105.

Which of the following statement is true? a. b. c. d. e.

106.

The amount of capital which can be called-up only at the time of winding up of the company is called a. b. c. d. e. Contributory capital Capital reserve Reserve capital Share reserve Authorized capital. Reserves and surplus Secured loans Unsecured loans Current liabilities Provisions.

107.

As per Schedule VI to the Companies Act, 1956 unclaimed dividends are to be shown as a. b. c. d. e.

108.

The directors of a company have proposed a dividend of 8% of the paid-up capital, the percentage of profits which will have to be compulsorily transferred to reserves is a. b. c. d. e. 2.5% 5.0% 7.5% 10.0% Nil.

109.

Which of the following is/are true regarding the treatment of interim dividend in the financial statements? a. b. c. d. e. It is debited to the profit and loss appropriation account. It is debited to the profit and loss account. It is shown under the head current liabilities in the balance sheet. It is shown under the head provisions in the balance sheet. Both (a) and (d) above.

26

110.

Which of the following is true if the dividend is not claimed within 7 years from the date of its transfer to a special bank account? a. b. c. d. e. The company retains it. The amount is distributed to the remaining shareholders. The amount is transferred to the Registrar of Companies under its general revenue account. The amount is transferred to the Revenue account of the Company Law Board. The amount is transferred to the Investor Education and Protection Fund. Board of Directors Board of Directors after obtaining approval of shareholders Board of Directors after approval of Stock Exchange Only by shareholders Board of Director after approval of Central Government. Dividends can be paid out of profits arrived at after setting-off depreciation. Central Government may allow any company to declare dividends out of profits before providing depreciation. A company paying dividends must also transfer a prescribed percentage of profit to reserve. The shareholders have the power to enhance the dividend recommended by the Board of Directors. Dividend shall be paid only in cash. Liability for calls on partly paid-up shares. Liability in respect of bills discounted. Liability under guarantee. Interim dividend. Arrears of dividend on cumulative preference shares. Dividend and interest can be paid out of capital. Premium on issue of debentures can be utilized for paying dividends. Capital profit realized in cash can be used for paying dividends. Capital profit transferred to capital reserve can be used for paying dividends. Dividends can be paid out of capital but interest cannot be paid out of capital. 10 years 8 years 5 years 4 years 2 years.

111.

Interim Dividend of a company can be declared by a. b. c. d. e.

112.

Which of the following is not true regarding declaration of dividends by a company? a. b. c. d. e.

113.

Which of the following is not an example of contingent liability? a. b. c. d. e.

114.

Which of the following statements is correct? a. b. c. d. e.

115.

As per Law, the books of accounts of a company should be preserved for a period of a. b. c. d. e.

27

116.

Which of the following deductions is permitted under Section 350 of the Companies Act, for the calculation of managerial remuneration? a. b. c. d. e. Any tax notified as a tax on excess or abnormal profits. Special depreciation. Initial depreciation. Development rebate reserve. Any compensation, damages or payments made voluntarily. A sum set aside to provide for repayment of debentures. The surplus arising on a professional revaluation of fixed asset. An amount set aside to provide for the increased cost of replacement of fixed asset. A sum set aside from profit towards a special publicity campaign, which is to be started in the following year. A sum retained to provide for loss that may arise out of doubtful debts. When they are proposed by the directors Only after 42 days of declaration Only after the approval of proposed dividend at the Annual General Meeting Only after the approval of the Registrar of Companies When provision is made in the books of accounts.

117.

Which of the following is a capital reserve? a. b. c. d. e.

118.

A shareholder can claim the dividends a. b. c. d. e.

119.

Which of the following items is not considered for deduction from profit in respect of calculation of managerial remuneration? a. b. c. d. e. Directors remuneration. Interest on mortgages executed by the company and loans and advances secured by a charge on its fixed or floating assets. Any compensation or damage to be paid by virtue of any legal liability, including a liability arising from a breach of contract. Expenses on repairs, whether to immovable or to movable property, provided the repairs are not of capital nature. Loss of capital nature including loss on sale of the undertaking or any of the undertakings of the company or any part thereof.

120.

Managerial remuneration payable to directors, manager, managing director is based on net profit. Which of the following statements is not true in respect of calculation of net profit for managerial remuneration? a. b. c. d. e. Credit shall be given for any subsidy received from Central Government. Credit shall be given for profit on sales by the company of forfeited shares. Credit shall be given for revenue profit, i.e., difference between original cost and WDV, on sale of fixed assets. Debit shall be given for any compensation or damage to be paid in virtue of any legal liability, including a liability arising from a breach of contract. Debit shall not be given for income tax payable by the company under Indian Income Tax Act, 1921.

28

121.

122.

123.

124.

125.

126.

127.

Which of the following information is/are required by way of notes to profit and loss a/c according to Part II of Schedule VI of the Companies Act, 1956? a. Managerial remuneration paid or payable under section 198 of the Companies Act. b. Other allowances and commission including guarantee commission. c. In case of manufacturing companies, the notes relating to licensed capacity, installed capacity and actual production in respect of goods manufactured. d. Value of imports calculated on C.I.F basis by the company during the financial year in respect of raw materials, components, spare parts and capital goods. e. All of the above. Which of the following items cannot be shown as reserves? a. Capital reserves. b. Share premium. c. Sinking fund. d. Capital redemption reserve. e. Profit and loss account at the beginning of the year. Which of the following is not an item under Current Assets, Loans and Advances under Part 1 of Schedule VI of the Companies Act, 1956? a. Interest accrued on investment. b. Bill of exchange. c. Balances with customs, port trust, etc. d. Development expenditure not adjusted. e. Prepaid Insurance. Which of the following reserves does not represent Revenue Reserve? a. Investment allowance reserve. b. Statutory Reserve. c. Dividend equalization reserve. d. Reserve on revaluation of assets. e. General reserve. The term Divisible Profits means a. Profit disclosed by P&L a/c b. Profit disclosed by P&L a/c minus corporate tax c. Profit disclosed by P&L a/c minus corporate tax minus dividend d. Profit available to shareholders for distribution as dividend e. Profit disclosed by P&L a/c minus corporate tax plus depreciation and provisions. Which of the following is not a secured loan? a. Debentures. b. Fixed deposits. c. Loans and advances from banks d. Loans and advances from subsidiaries. e. Other loans and advances. Which of the following statements is not true? a. Goodwill is one of the few assets which is usually not depreciated. b. Future bad debts are usually projected as a percentage of debtors. c. An expenditure which will benefit the future period is capital expenditure or prepaid expenditure. d. Goods spoiled and lost by fire are credited to trading account. e. Appreciation of the market value of assets must be taken into account if the correct profit of the year is to be determined. 29

128.

Which of the following will appear in the profit and loss appropriation account? a. Provision for taxation for current year. b. Directors fees. c. Auditors fees. d. Proposed dividend. e. Penalty paid under disputes. Which of the following is incorrect? a. Dividend can be declared out of current profits arrived at after providing for depreciation on assets, not only for the current year but also for any arrears of depreciation of the past years. b. c. d. e. Dividend can be declared out of undistributed profits of the past years. Dividend can be declared out of any money provided by the Central or State Government for the payment of dividend. Dividend shall be payable only in cash. Dividend can be declared out of current profits without transferring any part of the distributable profit to reserves. As an expense in the profit and loss account As an appropriation of profits in the profit and loss appropriation account As a current liability in the balance sheet Under the head current assets along with other current assets such as sundry debtors Under the head loans and advances in the balance sheet. A body corporate. Managing Director of the company. Wife of the Managing Director of the company. A shareholder of the company. An individual who is indebted to the company for a sum exceeding Rs.1,000.

129.

130.

Advance tax that appears in the trial balance is shown a. b. c. d. e.

131.

Who among the following is not disqualified for appointment as auditor of a company? a. b. c. d. e.

132.

Under which of the following circumstances, is a special resolution not required to appoint an auditor of a company? a. b. c. d. e. Where 27% of equity share capital is held by a State Government. Where 30% of preference share capital is held by a public financial institution. Where 49% of equity share capital is held by the Central Government. Where 78% of debentures is held by a nationalized bank. Both (b) and (d) above.

133.

Which of the following statements is/are not true with regard to maintenance of books of accounts by a company? a. b. c. d. e. The books of account can be either on cash system or accrual system of accounting. Companies have to compulsorily follow double entry system of accounting. A set of cost accounts must be maintained in addition to the financial accounts by the companies that are engaged in manufacturing, processing or mining activities. The books of accounts should be preserved for a period of eight years preceding the current year. The books of accounts shall be open to inspection by any director during business hours.

30

134.

The auditor of a company gives a report that the financial statements of the company reflect a true and fair view subject to certain reservations. Such a report is known as a. b. c. d. e. Clean report Qualified opinion Unqualified opinion Provisional report subject to issue of final report Both (a) and (c) above.

135.

Which of the following conditions is/are essential for the reappointment of the retiring auditor? i. ii. iii. iv. a. b. c. d. e. Passing of resolution at the Annual General Meeting. Approval from the Central Government. The retiring auditor should be qualified for reappointment. The retiring auditor has not notified in writing his unwillingness to be reappointed. Only (i) above Only (ii) above Both (i) and (ii) above (i), (ii) and (iii) above (i), (iii) and (iv) above.

136.

In addition to the Managing Director or Manager of the company, who among the following is/are responsible for keeping proper books of accounts of a company? i. ii. iii. iv. v. a. b. c. d. e. Every legal advisor of the company. Every banker of the company. Every officer and other employee and agent in default. Every auditor of the company. Every member of the company. Only (iii) above Both (i) and (iv) above Both (iii) and (iv) above Both (iv) and (v) above All (i), (ii), (iii), (iv) and (v) above. Board of Directors of the company Members of the company Central government Statutory auditors Income tax authorities.

137.

Special Auditor is appointed to conduct special audit of a company by the a. b. c. d. e.

138.

Who among the following persons held responsible for the failure to take reasonable steps to keep proper books of account of a company? a. b. c. d. e. Auditor. Chief Finance Officer. Chief Accounts Officer. Managing Director. Legal Advisor.

31

139.

140.

141.

142.

Which of the following persons can be appointed as an auditor of a company? a. A body corporate. b. A person indebted to the company for Rs.1,500. c. A person holding the shares of the company as a trustee. d. A person disqualified to be appointed as an auditor of its subsidiary company. e. An officer of the company. In terms of Part I Schedule VI of the Companies Act, 1956, which of the following assets is categorized under Fixed Assets? a. Vehicles. b. Loose tools. c. Debts outstanding for a period exceeding six months. d. Fixed deposit with nationalized bank. e. Long-term investments. The maximum amount beyond which a company is not allowed to raise funds, by issue of shares is a. Issued capital b. Reserve capital c. Nominal capital d. Subscribed capital e. Paid-up capital. When should the first auditor of the company be appointed by the Board of Directors? a. In the first Annual General Meeting of the company. b. Within one month from the date of registration of the company. c. Within 3 months from the date of registration of the company. d. Within 6 months from the date of registration of the company. e. Within 12 months from the date of registration of the company. Annual reports must be submitted to the registrar within _____ days of Annual General Meeting. a. 7 b. 14 c. 30 d. 40 e. 60. Which of the following is optional while submitting the annual report? a. Directors report. b. Auditors report. c. P & L account. d. Balance sheet. e. Funds flow statement. Audit begins where _________ ends. a. Selling b. Accounting c. Business d. Accounting year e. Stock valuation.

Statutory Audit and Annual Reports


143.

144.

145.

32

146.

Auditing is compulsory in the case of a. b. c. d. e. Charitable trusts Joint stock company Partnership Both (a) and (c) above All of the above. By the management of the company As specified in the Memorandum of company As specified in the Articles of company By the appointing authority Both (b) and (c) above.

147.

Remuneration of auditor is fixed a. b. c. d. e.

148.

The auditor shall inform the registrar of companies in writing about his acceptance within days from the receipt of the offer from the company a. b. c. d. e. 7 days 10 days 14 days 21 days 30 days. B cannot be appointed as an auditor of A Ltd. B can be appointed as an auditor of A Ltd. B can be appointed as an auditor if permitted by central government. B cannot be appointed as an auditor of any Limited Company. B can be appointed as an auditor it permitted by shareholders.

149.

B, a chartered accountant gave guarantee for the goods purchased from A Ltd. a. b. c. d. e.

150.

An audit firm consisting of 2 partners have taken up audit of companies with Rs.30 lakh of paid-up share capital. How many companies can the firm take up? a. b. c. d. e. 10 40 30 15 20.

151.

If the paid-up share capital is less than Rs.25 lakh, how many public companies can a firm consisting of 2 partners take? a. b. c. d. e. 10 40 20 30 15. Negligent discharge of their duties Misfeasance Misstatements in the prospectus Fraud and for furnishing false information Professional misconduct. 33

152.

An auditor will be held liable under I.P.C for a. b. c. d. e.

153.

A qualified report is given when a. b. c. d. e. The auditor is not completely satisfied with the accounts He was unable to get the required information There is a significant error in the accounts Both (b) and (c) above All of (a), (b) and (c) above.

154.

Which of the following is not considered as statutory books required to be maintained by the company? a. b. c. d. e. Register of charges. Register of investments not held in the companys name. Register of debenture holders. Register of employees. Register of members. The amount of dividend declared. The status of affairs of the company. The amount proposed to be transferred to reserves. Appointment of additional director. Material changes affecting financial position of the company. Is liable for damages occasioned by failure to exercise maximum level of skill in discharging his duties Is exempted from liability under the Indian Penal Code for furnishing false information Is liable for professional misconduct if he does not mention deviations from mandatory accounting standards Can be held liable for making misstatements in the prospectus All of (a), (c) and (d) above. Technology absorption. Financial state of affairs of the company. Foreign exchange earnings of the company. Statement of accounting policies. Conservation of energy.

155.

Which of the following does not form part of the Directors Report? a. b. c. d. e.

156.

A statutory auditor a. b. c. d. e.

157.

Which of the following need not be stated in the Directors Report? a. b. c. d. e.

158.

According to the Companies Act, the books of accounts of a company are required to be maintained on_________. a. b. c. d. e. Accrual basis only Accrual basis or cash basis and on double entry system Cash basis and double entry system Accrual basis and double entry system Cash basis only.

34

159.

160.

161.

162.

163.

164.

Auditors are said to issue an unqualified opinion when they a. Are not independent of the company being audited b. Are not familiar with the company or the industry within which the company operates c. Find the financial statements to be inconsistent with standards d. Consider the financial statements a fair presentation e. Are not qualified for being appointed as the auditor of the company. The first auditors of the company shall be appointed by the board, a. Within six months from the date of registration of the company b. In the first AGM of the company c. Within one month from the date of registration of the company d. Within 12 months from the date of registration of the company e. Within 3 months from the date of registration of the company. Which of the following is optional and not a legal requirement while submitting the Annual Report of a listed company? a. Chairmans statement. b. Directors report. c. Auditors report. d. Statement of contingent liabilities. e. Statement of sources and application of funds. A professional auditor will be held liable under specific statutory liabilities for a. Misstatements in the prospectus b. Fraud and furnishing false information c. Professional misconduct d. Negligent discharge of his duties e. Both (a) and (d) above. Which of the following statements is not correct? a. The first auditor of the company shall be appointed by the Board of Directors within one month from the date of registration of the company. b. The auditor shall be appointed at the annual general meeting and shall hold office from the conclusion of that meeting to the conclusion of the next annual general meeting. c. The auditor should inform the Registrar his acceptance or non-acceptance within 60 days from the receipt of the offer from the company. d. The remuneration of auditor is fixed by the appointing authority. e. The auditor is entitled to receive notices and other communications pertaining to all general meetings of the company. Which of the following statements is true with regard to issue of shares by a joint stock company? a. Shares cannot be issued for consideration other than cash. b. In the event of oversubscription, the company can allot more number of shares than those specified in the prospectus. c. As per the SEBI guidelines, the minimum subscription clause is applicable only to the first issue of shares by the company. d. The share application money is converted into share capital only after the board of directors approving the allotment of shares. e. The first issue of shares can be made at a discount.

35

165.

Which of the following will not form part of Miscellaneous Expenditure of the Balance Sheet of a company? a. b. c. d. e. Preliminary expenses. Underwriting expenses. Loss on sale of fixed assets. Discount on issue of shares. Interest paid out of capital during construction. Share capital General administrative expenses Preliminary expenses Profit and loss appropriation account Legal expenses.

166.

The costs in incorporating a company should be debited to a. b. c. d. e.

167.

Which of the following receipts is included in calculation of net profits for the purpose of calculating remuneration payable to managerial personnel? a. b. c. d. e. Subsidy received from any Government. Profit on sale of forfeited shares. Profit from the sale of part of undertaking. Profit from the sale of immovable property. Profit on issue of shares at a premium.

168.

As per Schedule VI of the Companies Act, 1956, which of the following is not shown in the Balance Sheet of a company under the head Fixed Assets? a. b. c. d. e. Lease hold property. Development of property Railway sidings. Designs. Unadjusted development expenditure. .

169.

According to Schedule VI of the Companies Act, 1956, which of the following assets is/are shown under the head investments in the balance sheet of a company? i. ii. iii. iv. a. b. c. d. e. Investments in the capital of partnership firms. Investment in trust securities. Investment in shares. Investment in debentures. Only (i) above Only (ii) above Both (iii) and (iv) above (ii), (iii) and (iv) above All (i), (ii), (iii) and (iv) above. Authorized share capital Net profit Paid-up capital Called-up capital Called-up share capital plus calls-in-advance less unpaid calls.

170.

Dividends are usually paid as a percentage of a. b. c. d. e.

36

171.

Declared dividend should be classified in the Balance Sheet as a a. b. c. d. e. Provision Current liability Reserve Current asset Miscellaneous expenditure.

172.

According to the Companies Act, 1956, which of the following items is/are not shown under the head Provisions in the balance sheet? a. b. c. d. e. Proposed dividends Provision for taxation Unclaimed dividends Provisions for insurance, pension and similar staff benefit schemes Both (b) and (c) above.

173.

On June 10, 2001, Santosh Ltd. has taken a bank loan on which interest at the rate of 8% per annum is payable on June 30 and December 31, every year. The loan is secured by a charge on the factory building. The interest accrued and due as on March 31, 2003 was shown in the Balance Sheet of the company under the head a. b. c. d. e. Current liabilities Secured loans Miscellaneous expenditure Loans and advances Unsecured loans.

174.

Which of the following items should not appear under the head unsecured loans in the Balance Sheet of a company? a. b. c. d. e. Sinking funds. Loans and advances from subsidiaries. Short-term loans and advances from banks. Loans and advances from others. Fixed deposits accepted.

175.

Which of the following denotes the dividend declared by the directors between two annual general meetings? a. b. c. d. e. Proposed dividend. Final dividend. Interim dividend. Declared dividend. Unpaid dividend. Provision Current liability Reserve Current asset Miscellaneous expenditure. 37

176.

Proposed dividend should be classified in the Balance Sheet as a. b. c. d. e.

Limitations of Financial Statements


177. Which of the following area(s) is/are prone to multiplicity of accounting policies to inflate or deflate profits? a. b. c. d. e. 178. Valuation of inventories. Conversion of foreign currency items. Depreciation methods. Recognition of revenues/expenses. All of the above.

Which of the following is/are limitation(s) of a Balance Sheet? i. ii. iii. a. b. c. d. e. It does not contain certain assets and liabilities despite its claim to be the statement of all assets and liabilities. The factors, which have a vital bearing on the earnings of the organization, are not disclosed. Personal judgment plays a great part in determining the figures of the balance sheet. Only (i) above. Only (ii) above. Only (iii) above. Both (ii) and (iii) above. All (i), (ii) and (iii) above.

Consolidated Accounts of Holding and Subsidiary Companies


179. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing the Consolidated Balance Sheet, the share of minority shareholders should be a. b. c. d. e. 180. Shown under proposed dividend in the consolidated balance sheet Credited to investment account Credited to consolidated profit and loss account Added to minority interest in consolidated balance sheet Credited to goodwill account.

Which of the following statements is/are true? Holding company can acquire controlling interest over the subsidiary company by a. b. c. d. e. Holding more than 50% of shares in subsidiary company having voting rights. Controlling the composition of board of directors. Controlling a holding company which controls a subsidiary company. Both (a) and (c) above. All of (a), (b) and (c) above.

181.

The time interval between the dates of balance sheet of holding company and subsidiary company a. b. c. d. e. Can be up to 1 year Cannot be more than 6 months Can be more than 6 months Can be more than 1 year Can be more than 9 months.

38

182.

183.

184.

185.

186.

187.

188.

Minority interest consists of a. Face value of the shares held by outsider b. Proportional capital profits c. Proportional revenue profits d. Both (a) and (c) above e. All of (a), (b) and (c) above. Cost of control is a. The excess of price paid for the investment over and above the share in equity b. Excess of price paid for investment over and above the net assets acquired by the holding company c. The excess of share in equity over and above the price paid for the investment d. Either (a) or (b) above e. Either (b) or (c) above. Revenue profits are a. The post-acquisition profits of subsidiary company b. The post-acquisition profits of holding company c. The profits earned by the subsidiary company from regular transactions d. The profits earned by the holding company from regular transactions e. None of the above. Which of the following statements is/are true? a. Revaluation profit is treated as capital profit. b. Revaluation reserve can be used for paying dividend. c. Revaluation reserve can be used for writing-off goodwill. d. Both (a) and (b) above. e. Both (a) and (c) above. Capital profits are a. Profits earned by the subsidiary company up to the date of acquisition of shares by the holding company b. Post-acquisition profits of the subsidiary company c. Post-acquisition profits of the holding company d. Pre-acquisition profits of the holding company e. Profits earned by the subsidiary company by unusual transactions. The share of holding company in the proposed dividend of the subsidiary company from its pre-acquisition profit should be a. Credited to the investment account b. Debited to the investment account c. Credited to consolidated profit and loss account d. Debited to consolidated profit and loss account e. None of the above. Which of the following statements is true? a. Capital reserve is the excess of the share in equity of the subsidiary over and above the price paid for the investment. b. Goodwill is the excess of the share in equity of the subsidiary over and above the price paid for the investment. c. Capital reserve is the excess price paid for the investment over and above the share in equity. d. Both (a) and (b) above. e. Both (a) and (c) above. 39

189.

Which of the following statements is not true? a. b. c. d. e. A company is a subsidiary of a holding company when the latter company controls the composition of the Board of Directors of the former company. Dividends paid out of pre-acquisition profits by the subsidiary company must be credited to investment account by the holding company. Bonus shares issued out of pre-acquisition profits by the subsidiary company will have no effect on the Consolidated Balance Sheet. The parent organization acquiring controlling interest in another company is called the holding company. Minority Interest = Paid-up value of shares held by outsiders.

190.

XYZ Company purchased ABC Company. If the purchase consideration paid by XYZ. Company exceeds the value of net assets of ABC Company, the balance is a. b. c. d. e. Debited to goodwill a/c. Debited to capital reserve a/c. Credited to goodwill a/c. Credited to capital reserve a/c. Shown as a loss by debiting the profit and loss a/c.

191.

In the process of preparing consolidated financial statements, which of the following items need not to be eliminated? a. b. c. d. e. Inter-company profit in beginning inventory. Inter-company profit in ending inventory. Inter-company profit on inter company sale of a fixed asset. Inter-company dividends receivable/payable. Inter-company profit on inventory sold to a non-affiliated company.

192.

Which of the following statements is/are not true with regard to the treatment of postacquisition profits of a subsidiary company? a. b. c. d. e. The holding company and minority shareholders should share such profits in proportion to their respective holdings. The share of such profits of minority shareholders should be added to the amount of minority interest. The share of such profit of holding company shall be added to the cost of investments for calculation of cost of control/goodwill. The share of such profit of holding company should be treated as revenue profits and shall be credited to profit and loss account of holding company. Both (a) and (d) above.

193.

Revenue profits for consolidation of balance sheet of holding company and subsidiary company are a. b. c. d. e. The post-acquisition profits of holding company The post-acquisition profits of subsidiary company The profits after the financial year but before the date of acquisition of subsidiary company The profits earned by the holding company from regular transactions The profits earned by the subsidiary company from regular transactions.

40

194.

Which of the following statements is/are not true? a. b. When holding company acquires all the shares of the subsidiary company, the latter company becomes a wholly owned subsidiary. When the holding company acquires more than half of the shares of subsidiary company, those shareholders who have a minority share are referred to as minority shareholders. Minority interest is always calculated at the date of the consolidated balance sheet but not when the holding company takes the control. Minority interest in the consolidated balance sheet is a liability to the shareholder of the holding company. Both (c) and (d) above. Post-acquisition profits of the subsidiary company are always capital profits. Every holding company is required to prepare consolidated balance sheet and profit and loss account under the Companies Act, 1956. Holding company means the company which holds the entire shares of another company. A company is a subsidiary of a holding company when the latter company controls the composition of the board of directors of the former company. Both (c) and (d) above.

c. d. e. 195. a. b. c. d. e. 196.

Which of the following statements is/are true?

According to AS-23, which of the following accounting methods is adopted in accounting of an Associate in the Consolidated Financial Statements? a. b. c. d. e. Cost method. Equity method. Amortized cost method. Super profit method. Moving average method.

197.

In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of the proportionate share of minority shareholders in the i. ii. iii. iv. v. a. b. c. d. e. Nominal value of share capital of subsidiary company. Reserves of the holding company. Reserves and profits of the subsidiary company at the time of acquisition by the holding company. Income of the holding company after its acquisition. Income of the subsidiary company after its acquisition by the holding company. Only (i) above Both (i) and (ii) above Both (i) and (iv) above (i), (iii) and (iv) above (i), (iii) and (v) above.

198.

When the amount of investment in subsidiary is more than the nominal value of the share capital acquired by the holding company, the difference represents a. b. c. d. e. Goodwill Capital reserve Securities premium Capital profit Both (a) and (d) above. 41

199.

Dividends paid by a subsidiary company out of pre-acquisition profits are a. b. c. d. e. Adjusted against investment in subsidiary at the time of consolidation of accounts Adjusted against general reserve at the time of consolidation of accounts Credited to profit and loss account as revenue receipts at the time of consolidation of accounts Ignored for consolidation purposes The claims of the shareholders of the holding company.

200.

According to Accounting Standard-18, an individual is considered to have a substantial interest in an enterprise, if that individual, directly or indirectly, has a. b. c. d. e. 20% interest in the preference share capital of the enterprise 10% or more interest in the equity share capital of the enterprise 15% or more interest in the voting power of the enterprise 20% or more interest in the voting power of the enterprise 5% or more interest in the voting power of the enterprise.

201.

According to Accounting Standard-23, which of the following evidences the existence of significant influence by an investor? a. b. c. d. e. Representation on the board of directors of the investee. Participation in policy making processes. Provision of essential technical information. Both (a) and (b) above. All (a), (b) and (c) above.

202.

At the time of consolidation of accounts of the holding company, which of the following is/are to be considered while calculating the cost of control? i. ii. iii. iv. v. a. b. c. d. e. Value of shares acquired. Pre-acquisition profits/losses. Profits/losses on revaluation of assets. Profits/losses on revaluation of liabilities. Post-acquisition profits/losses. Only (i) above. Both (i) and (ii) above. (i), (ii) and (iii) above. (i), (ii), (iii) and (iv) above. All (i), (ii), (iii), (iv) and (v) above.

203.

The assets of the subsidiary company are revalued as on the date of acquisition by the holding company. In the consolidated Balance Sheet, the reduction in the value of assets (if any) of the subsidiary company is to be debited to a. b. c. d. e. Goodwill Capital reserve of the holding company Profit and loss account of the holding company Profit and loss account of the subsidiary company General reserve of the holding company.

42

204.

In which of the following situations, a holding company need not prepare the consolidated financial statements? i. Where the holding company is a subsidiary of another company. ii. Where the control in the subsidiary company is intended to be temporary. iii. Where the subsidiary company operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent. a. Only (i) above b. Only (ii) above c. Only (iii) above d. Both (ii) and (iii) above e. All (i), (ii) and (iii) above. Value addition is a. The difference between sales and cost of material and services purchased from outside b. The difference between sales and cost of material purchased c. Pre-tax profit + Labor + Depreciation + Interest d. Both (b) and (c) above e. Both (a) and (c) above. Value addition is equal to a. Conversion cost b. Conversion cost + Administration cost c. Conversion cost + Administration cost + Selling costs + Profits d. Conversion costs + Opening stock e. Conversion costs + Opening stock + Closing stock. Which of the following is not true with regard to Value Added Statements? a. Value added statements enhance the attitude of employees towards their employers firms. b. Value added statements help in introducing the productivity linked bonus scheme for employees. c. Ratios based on value added statements can be used for international comparisons. d. Value added statements show the companys contribution to national income. e. Value added statements serve as a substitute to the existing financial statements. The possible use(s) of information provided in the value added statement is/are a. A means of predicting managerial efficiency b. A means of evaluating the relative rewards of shareholders against the company c. A means of indicating a companys wage paying ability in wage negotiations d. A means of evaluating what is nebulously referred to as the social performance of a company e. All of the above. The difference between gross value added and net value added is a. Investment income b. Extraordinary expenses c. Dividend on shares d. Depreciation e. Capital profit. 43

Current Developments and ERP


205.

206.

207.

208.

209.

210.

Value added is measured as a difference between the a. b. c. d. e. Sales revenue and the cost of material bought Sales revenue and the cost of services bought Pre-tax profit and the depreciation Sales revenue and the cost of labor, depreciation and interest Sales revenue and the cost of material and services bought.

211.

While computing the profits of a business, which of the following measures considers the cost of debt as well as the cost of equity? a. b. c. d. e. Gross value added. Net value added Market value added. Brand value added. The computation of EVA involves a complex procedure. EVA can be improved by downsizing profitable operations. EVA is a residual income measure that subtracts the cost of capital from the operating profit generated by a business. EVA can be used for making day-to-day decisions as well as for strategic planning. EVA is one variation of residual income with adjustments in the method of calculation. . Economic value added.

212.

Which of the following is not true with regard to Economic Value Added (EVA)? a. b. c. d. e.

44

Part I: Answers on Basic Concepts (with Explanatory Notes)


Accounting for Intangible Assets
1. 2. (e) Valuation of goodwill is necessary in the case of valuation of shares, sale of company, purchase of other companies, companies amalgamation etc. (d) The value of Goodwill is more for established firms when compared to new businesses. Goodwill is different for different trades. If the purchase consideration payable on takeover exceeds the net value of the assets to be taken over, it is termed as goodwill. If the net value of the assets to be taken over exceeds the purchase consideration, it is termed as negative goodwill. The term negative goodwill is used in America, but in India, it is termed as capital reserve. (e) Intangible assets lack physical substance but possess economic value and are long-term assets of a firm. These assets include goodwill, rights i.e. patents etc., secret processes, deferred revenue expenditure and debit balance of profit and loss account. Thus, the correct option is (e). (e) The value of goodwill is the present value of the expected future incomes that will be generated over and above the normal rate of return. Thus, the valuation of goodwill is based upon profitability of the firm i.e. the profits which are maintainable in the future and the capital employed i.e. funds of the equity shareholders and normal rate of return i.e. rate of return expected by the investors. (a) Purchased goodwill arises only on purchase of business, it is reflected by a purchase transaction, its cost could depend upon the future maintainable profits, and it can be shown in the balance sheet. (e) If the shares are being acquired for control purposes only rate of earning should be taken into account for calculating the value of shares. Net Rate of dividend is taken into consideration only when few shares are acquired. (b) Provisions for renewals or extension are not taken into account in determining the useful life of an intangible assets. (e) Book value method is not a method of calculating goodwill. (e) Patents and trademarks are non-monetary assets. (a) Goodwill is considered as an unidentifiable intangible asset. (c) Annuity Method of super profits (c) of valuation of goodwill uses the present value factor since there is a heavy loss of interest. Capitalization of average profits method (a) is not the correct answer since there is no such method through which goodwill can be assigned a value. Capitalization of super profits method (b) tries to find out the amount of capital needed for earning the super profit and it does not consider the present value factor and hence is not the correct answer. Number of years purchase of average profits method (d) is also known as simple profit method wherein the goodwill is calculated with the help of the average annual profit expected to accrue in future based on past profits and the number of years of purchase as agreed by the parties and is not the correct answer. Number of years of purchase of super profits method (e) wherein super profits are computed taking into account the average profits and the normal rate of return in the similar type of industry based on the capital employed in the business the difference between the average profit and the normal return is the super profit and is multiplied with the number of years purchase as agreed by the parties. And it is not the correct answer. Thus, alternative (c) is the correct answer.

3.

4.

5.

6.

7. 8. 9. 10. 11.

Financial Accounting II

12.

(e) Goodwill is unidentifiable intangible and hence the statement in alternative (e) is incorrect and the correct answer states that it is a non-monetary identifiable intangible asset. It is non-monetary in character is true but it is not identifiable. The other features stated in alternatives. It represents a non-physical value over and above the physical assets (a) It is the present value of firms expected super earnings, (b) it is the price paid for future earnings. It is a non-monetary fixed asset, (c) it is shown under fixed assets which of nonmonetary in character the goodwill can be either purchased or self-generated, (d) are the true features of goodwill and are not the correct answers. (d) Capital employed = Net fixed assets + Net current assets = Gross fixed assets Depreciation + Current assets Current liability.

13.

14.

(c) Number of years purchase is the factor with which the super profits will have to be multiplied in order to arrive at the value of goodwill. Super profits: Average annual profits (Average capital employed x Normal rate of return) Goodwill: Number of years purchase x super profits.

Accounting for Shares


15. (b) The application should be filed with the company or its bankers and should be accompanied by the application money. The company fixes the application money. The application money fixed by the company should not be less than 5 percent of nominal value of the shares. (a) According to Section 79 of the Companies Act, 1956, a company can issue shares at a discount if the following conditions are satisfied. a. b. c. d. e. The shares that are to be issued at a discount should be of a class, which has already been issued. This should be authorized by passing a resolution at the general meeting and sanctioned by the Company Law Board. The maximum rate of discount at which the shares are to be issued should be specified in the resolution and the maximum limit is 10 percent. At least a year should have been elapsed from commencement of the business by the company before the shares are issued at a discount. The shares should be issued at a discount within two months after the sanction from the Company Law Board has been obtained or as specified by the Company Law Board.

16.

17. 18. 19.

(a) Discount on issue of shares is a fictitious asset and should be shown on the asset side of the balance sheet under miscellaneous expenditure. (e) Bonus shares issue can be made only out of free reserves built out of genuine profits or share premium collected in cash. (d) Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of bonus shares shall be subject to the prescribed SEBI guidelines, which inter alia provide for the following. i. ii. iii. iv. v. Bonus issue shall not be made within 12 months of any public/rights issue. Reserves created out of revaluation of fixed assets shall not be capitalized. Bonus issue shall not be made in lieu of the dividend. Bonus issue shall not be made unless partly paid shares, if any, existing is made fully paid-up. Residual reserves after issue of bonus shares should be at least 40% of increased paid up capital.

46

Part I

20. 21.

(e) As per the Companies Act, 1956, only preference shares, which are redeemable within 20 years, can be issued. (e) Section 80 of the Companies Act allows a company, if authorized by the articles of association, to issue preference shares, which can be redeemed by the company according to the terms of the issue subject to the following legal restrictions. i. ii. Shares cannot be redeemed unless they are fully paid-up. Shares can be redeemed only out of profits of the company, which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose of redemption. To the extent that the shares are redeemed out of profits, capital redemption account must be credited, debiting the profit and loss account, general reserve or other accounts showing profits otherwise available for distribution of dividends. Before the shares are redeemed, the premium, if any, payable on redemption must be provided for out of the profits of the company or out of the share premium account.

iii.

iv. 22.

(b) Brokerage is different from underwriting. Brokers does not guarantee the sale of a specified number of securities. The broker cannot buy the securities which have not been subscribed for. Thus, options (a) and (c) are false and option (b) is true. (e) There is no maximum rate of premium at which shares can be issued. (b) The company must pay interest on the calls-in-advance. Interest on calls-in-advance is paid from the date of the receipt of advance to the date of appropriation at the rate of 6 percent per annum. (e) There are so many factors which can influence the value of shares of a company. They are policies of government demand and supply of shares rate of dividends, yield value etc. (e) Valuation of shares is done for different purpose. Among them a few are Assessment of wealth tax, income tax, Amalgamation etc. (b) The application should be filed with the company or its bankers and should be accompanied by the application money. The company fixes the application money. The application money fixed by the company should not be less than 5 percent of the nominal value of the shares. (c) According to Section 78 of the Companies Act, share premium account may be applied by the company for: i. ii. iii. iv. issuing to members of the company fully paid bonus shares, writing-off preliminary expenses of the company, writing-off expenses of, or the commission paid or discount allowed on issue of share or debentures of the company, providing for premium payable on the redemption of any redeemable preference shares or debentures.

23. 24.

25. 26. 27.

28.

29.

(d) The profit on forfeiture is a capital gain to the company and hence it is transferred to the capital reserve account.

47

Financial Accounting II

30.

(b) In order to issue shares at a discount, a company has to fulfill all the conditions laid down in Section 79 of the Companies Act which are as follows: a. b. c. The shares to be issued at a discount must be of a class already issued. The issue of the shares at a discount must be authorized by a resolution passed by the company in general meeting and sanctioned by the CLB. The resolution must specify the maximum rate of discount at which the shares are to be issued. If the maximum rate of discount specified in the resolution exceeds 10%, the issue shall not be sanctioned by the CLB unless the Board is of the opinion that a higher percentage of discount may be allowed in the special circumstances of the case. At the time of the issue of shares at a discount, the company must have been working for at least a year from the date it was entitled to commence business. The shares to be issued at a discount must be issued within 2 months after the date on which the issue is sanctioned by the CLB.

d. e. 31. 32. 33.

(d) The discount allowed on re-issue of forfeited shares is a loss and is debited to forfeited shares account. Any surplus in forfeited shares account is transferred to Capital Reserve a/c. (b) According to the Companies Act, 1956 when shares are issued at discount, the maximum rate shall not exceed 10% at the face value. (b) Redeemable preference shares can be redeemed only out of profits of the company, which would otherwise be available for the dividend, or out of the proceeds of a fresh issue of shares made for the purpose of redemption. (a) According to Section 80 of Companies Act, 1956 preference shares cannot be redeemed unless they are fully paid. (b) The minimum subscription amount that should be received on a public issue is 90 percent of the issued capital. (e) Since only those profits which are otherwise available for dividends can be used for redemption of preference shares, transfer to capital redemption reserve account should be made only from such accounts which represent divisible profits. Amounts in share premium account, forfeited shares A/c, profits prior to incorporation A/c, development rebate reserve A/c and capital reserve A/c must not be transferred to capital redemption reserve A/c. (c) Issue of bonus shares by the subsidiary company out of capital profits will have no effect on cost of control. Because holding companys share in the pre-acquisition profit is reduced and paid-up value of shares held increases. Thus, there is no effect on cost of control. (c) According to the SEBI guidelines, bonus issue shall not be made within 12 months of any public/rights issue. (b) The application should be filed with the company or its bankers and should be accompanied by the application money. The company fixes the application money. The application money fixed by the company should not be less than 5 percent of the nominal value of the shares. (b) Before forfeiting the shares, the Board of Directors shall give the defaulting shareholder a notice period of 14 days.

34. 35. 36.

37.

38. 39.

40.

48

Part I

41.

(d) If premium on forfeited shares has been received, then share premium account must not be debited on forfeiture of shares i.e., once the premium is received it should not be canceled. (b) Redemption of preference shares does not amount to reduction of share capital since it is made out of profits which are otherwise available for dividends thereby keeping the security available to creditors intact. (e) If the shares are allotted on pro-rata, the excess application money received on shares allotted is adjusted against allotment money and call monies. (b) Underwriting commission is paid to the underwriters on the amount of shares/debentures underwritten by them. (a) A company, if its Articles of Association permit, may receive from shareholders the amount remaining unpaid on shares held by them even though the amount has not been called up. Interest on calls-in-advance should be paid at 6% p.a. (d) Brokerage will not be paid on the shares allotted to promoters and on applications by banks against their underwriting commitments. (a) Right shares means the shares which are offered by a company to the existing shareholders. The price of these share is always above the market price and they cannot be issue for converting partly paid shares into fully paid shares. The expenses on the issue of these shares is always low. Thus, all options except (a) are wrong. (e) Share premium can be used in all the given cases. (d) Value of rights
= Number of right shares x (Market value Issue price) Number of old shares + New shares

42.

43. 44. 45.

46. 47.

48. 49.

50. 51.

(d) Super profits method is used in the valuation of goodwill not in the valuation of shares. (b) When redeemable preference shares are due for redemption, the entry passed is Preference share capital A/c Dr. To Preference shareholders A/c

52. 53. 54. 55.

(c) Brokerage will not be allowed in respect of promoters quota including the amounts taken up by the directors. (c) The premium collected on issue of debentures should be transferred to the security premium account. (b) As per Schedule VI, the amount of calls-in-arrears will be deducted from the share capital in the liabilities side of the balance sheet. (b) Securities Premium on fresh issue of shares (b) cannot be utilized for the redemption of Preference Shares of a company. As per the Companies Act, the redemption may be done from the proceeds of fresh issue of shares or undistributed profits which would otherwise be available for dividend. Thus, proceeds of fresh issue of shares, (a) General reserve, (c) Profit and loss account credit balance and Dividend equalization reserves are not the correct answers since they can be utilized for redemption of preference shares. (a) The accounting entry involved for issue of shares to promoters for the services rendered by them is debit goodwill account and credit share capital account (a). Since in recognition of the value of services rendered by the promoters, certain number of shares are allotted to them for which no consideration comes forth and is debited to goodwill and credited to share capital account. Since, no cash comes forth and no obligation from the promoters to pay in future, the entries in alternatives (b) and (c) are incorrect. It is issue of shares in lieu of the services rendered and hence share capital account is not debited and no payment of cash is involved and cash account cannot be credited and alternative (d) is incorrect. Since, no payment from the directors is expected, the question of calls-in-arrears does not arise and the alternative (e) is incorrect. 49

56.

Financial Accounting II

57.

(e) According to Section 76 of the Companies Act, a company is authorized to pay underwriting commission only if the shares or debentures are offered to the general public. No underwriting commission can be paid, if the issue is privately placed. The shares taken by Promoters, Directors, employees and directors friends cannot be considered as shares offered to the general public. As such no underwriting commission is payable on these shares. (e) At the time of forfeiture of shares which were originally issued at a discount, the accounting entry involves Share capital account Dr. (with the called-up value of shares forfeited) To Share forfeiture account (with the amount received on forfeited shares) To Discount on issue of shares (with the amount of discount allowed on forfeited shares) To Calls-in-arrears (with the amount due but not paid on forfeited shares) Thus, the combination of the above entries, the alternative (e) is the correct answer. Share capital is not debited with the paid-up value of shares and the alternatives with the combination v are incorrect. Alternative (e) is the correct answer.

58.

59.

(e) When the shares are forfeited, the share capital account is debited with the called-up amount and the share forfeiture account is credited with the paid-up amount on the forfeited shares. Hence, the answer is (e). The calls-in-arrear account is credited with the defaulted amount. (d) Redeemable preference shares can be redeemed only out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption. Hence (d) is false. Section 80 of the Companies Act, 1956, allows a company, if authorized by its articles of association, to issue preference shares, which can be redeemed by the company. Hence (a) is true. Bonus issue can be made out of reserves built out of genuine profits or share premium collected in cash. Hence (b) is true. Share premium can be utilized to provide for premium payable on the redemption of preference shares or debentures of the company. Hence (c) is true. Companies Act, 1956 provides that the preference shares cannot be redeemed unless they are fully paid-up. Hence (e) is true. Thus the correct answer is (d) which is false statement. (c) Brokerage will not be allowed in respect of promoters quota, including the amounts taken up by the directors, their friends and the employees, in respect of the rights issues taken up or renounced by the existing shareholders and when applications are made by the institutions or banks against their underwriting commitments. However, brokerage can be paid by the listed companies on private placement at a maximum rate of 0.5 percent. Thus, the correct answer is (c). (b) Called-up capital is the amount on the shares which is actually demanded by the company to be paid. However, there may be some shareholders who may make default in the payment. The money due from them is called calls-in-arrears. This amount should be deducted from the called-up capital to arrive at the paid-up capital. Thus, (b) is the correct answer. (e) The intrinsic value method of valuation of shares is also known as break-up value method and asset backing method. The yield method is known as earning capacity method. The fair value method is an average of intrinsic value method and yield method. Hence the answer is (e).

60.

61.

62.

63.

50

Part I

64.

(a) Forfeited shares can be re-issued at a premium. Thus, the statement in alternative (a) is false. The statements in other alternatives are true, if share premium is already received, share premium account cannot be debited with the amount of premium on forfeiture of shares; Shares can be issued at a discount, only after one year from the commencement of business; Share premium can be utilized only for specific purposes as per the provisions of Section 78 of the Companies Act and it cannot be utilized to redeem preference shares. The forfeited shares cannot be reissued for a loss more than the gain on those shares. (d) Dividends may be termed as the share of profits that is payable to the shareholders of a company. The Companies Act lays down the dos and donts associated with declaration/payment of dividends. As per the Companies Act, that dividends are paid on paid-up capital which is a part of the called-up capital that has been paid-up by the shareholders and made available with the company for utilization. Hence, it is proper to pay dividends on paid-up capital. The other alternatives a. Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in nature unless and until the entire amount is called-up and paid-up. Since the entire amount is not made available for utility, dividends cannot be declare on authorized capital. b. c. e. Issued capital is the part of nominal capital that is offered to the public for subscription and the entire amount is not available for claiming dividend. Called-up capital is that part of the subscribed capital which has been called-up and cannot be a base for calculation of dividend. Reserve capital is that part of uncalled capital which is to be called-up in the event of winding-up of a company and under any circumstances, dividend cannot be declared on it.

65.

66.

(d) If the allotment money is not paid by the shareholder, there will be a debit balance (of that unpaid money) in share allotment account. Other options, stated in (a), (b), (c) and (e) are not correct. (a) Bonus shares are allotted to the existing shareholders without any consideration being received from them, if authorized by the articles of association. (c) The formula to calculate the value of share under yield method is =
Expected rate of return Paid-up value of share Normal rate of return

67. 68.

Hence, the normal rate of return and paid-up value of share is required. The net assets of the business and number of equity shares are required to calculate the value of share under intrinsic value method. Thus the answer is (c). 69. (e) Preference share capital, equity share capital, calls-in-arrear and share forfeiture should be shown under the head Share capital in the balance sheet. However the preference dividend will be shown under provisions if it is proposed and under current liabilities if declared. The unclaimed dividend also will be shown under the head current liabilities. Thus the answer is (e). (a) This is a case of oversubscription. In such a situation the company can follow any of the alternatives given in option (b), (c) and (d). However option (a) cannot be followed. Where the issue is of only 30,000 equity shares, the company cannot issue more than the total issue advertised for. Since the number of shares to be issued is decided as per the resolution taken, to increase the issue size another resolution should be passed. Hence this solution is infeasible. (d) As per the Companies Amendment Act, 1988, only preference shares, which are redeemable within 20 years, can be issued.

70.

71.

51

Financial Accounting II

Accounting for Debentures


72. (d) Debenture may be defined as an acknowledgement of a debtor loan raised by a company. It is a creditorship security entitled to a fixed rate of interest. It can also be issued for consideration other than cash. (d) Debentures can be issued for consideration otherwise than cash and can also be issued as collateral security for borrowings from financial institutions. However, it cannot be issued in lieu of dividends. (c) When debentures are issued as consideration for purchase of any fixed asset, fixed asset a/c is debited (debit what comes in) and debentures a/c is credited (liability and credit the benefit given). (b) When debentures become due for redemption debentures a/c is debited (for cancellation) and debenture holders a/c is credited (liability). (e) When debentures are issued at discount and redeemed at premium, the entry at the time of issue is Bank a/c Loss on issue of debenture a/c To To 77. 78. Debentures a/c Premium on redemption of debentures a/c (premium payable at the time of redemption). Dr. Dr. (premium to be payable at the time of redemption) Discount on issue of debenture a/c Dr.

73.

74.

75. 76.

(d) The premium payable on redemption of debentures can be written off from the share premium account or from the accumulated profits. (b) Convertible debentures are subject to the following guidelines issued by the SEBI. i. Issue of Fully Convertible Debentures (FCDs) having a conversion period more than 36 months will not be permissible, unless conversion is made optional with put or call option. Compulsory credit rating will be required if conversion is made for FCDs after 18 months. Premium amount on conversion, time of conversion in stages if any shall be predetermined and stated in the prospectus. The issuer will freely determine interest rates for the debentures. Any conversion in part or whole of the debentures will be optional at the hands of the debenture holder, if the conversion takes place at or after 18 months from the date of allotment but before 36 months. In case of NCDs/PCDs credit rating is compulsory when maturity exceeds 18 months. Premium amount at the time of conversion for the PCD shall be determined and stated in the prospectus. Redemption amount, period of maturity yield on redemption for the PCDs/NCDs shall be indicated in the prospectus. The discount on the non-convertible portion of the PCD in case they are traded and the procedure for their purchase on spot trading basis must be disclosed in the prospectus.

ii. iii.

iv.

v. vi.

vii.

79. 80.

(a) According to the Companies Act, 1956, the underwriting commission payable shall not exceed 5 percent on the issue price of shares and 2.5 percent of debentures. (b) No company shall, after the commencement of the Companies Act, 1956, issue any debentures carrying voting rights at any meeting of the company, whether generally or in respect of particular classes of business.

52

Part I

81.

(c) When debentures are issued as collateral security, the final entry for recording the transaction in the book is Debenture suspense a/c Dr. (shown in the asset side)

To Debentures a/c (shown in the liabilities side) 82. (c) Debentures can be issued at a discount and redeemed at a premium. But cannot redeemed at discount. Debenture holders are not owners of the company they get their interest irrespective of profits. Debentures must be redeemed within 20 years from their issue. Thus all options except option (c) are wrong. (e) 10% debentures means that the debentures carry coupon of 10% i.e., debenture holders get 10% interest on their holding irrespective of profits. (a) As per the guidelines issued by the SEBI, a debenture issue having a maturity of more than 18 months necessitates the creation of a special A/c known as the debenture redemption reserve A/c. This is achieved by setting apart a portion of the annual profits and appropriating it to the DRR A/c and can either be in equal installments or even higher amounts if profits permit. Such DRR should be equivalent to at least 50% of the amount of debenture issue prior to the commencement of the redemption. (d) When interest on own debentures account becomes due, it is credited to interest on own debentures account and debenture interest account is debited. (d) When debentures are issued at par, and redeemed at premium the journal entry is Bank account Loss on issue of Debenture a/c To Debentures a/c (liability) Dr. Dr. (Cash received) (Loss on redemption)

83. 84.

85. 86.

To premium on redemption of debenture a/c (loss but now it is liability payable at the time of redemption) 87. (a) The gain on redemption of own debentures by cancellation is to be credited to Capital reserve (a) since it is capital profit. And the loss on cancellaion is to be tranaferred either to share premium account or profit and loss account. Thus, the alternative (a) is the correct answer. The amount to be accumulated for redemption of debentures or preference shares is to be credited to Capital redemption reserve and (b) account the gain on redemption of own debentures is not credited and is not the correct answer. Since the gain is not out of business activity, it cannot be credited to general reserve (c) and is not the correct answer. The loss on redemption of own debentures is debited to securities premium (d) account and it is not the correct answer. The gain on redemption is credited to capital reserve account and it is not credited to profit and loss account and any loss on redemption is debited to profit and loss account or securities premium account. Thus, alternative (e) is not the correct answer. Hence, alternative (a) is the correct answer. (d) The profit or loss on cancellation of own debentures is calculated at the time of cancellation of own debentures. The profit/loss on cancellation cannot be ascertained unless they are paid. Hence (d) is the correct answer. (d) Debentures for which no charge is created on the assets of the company are known as simple debentures whereas if any charge is created, they are known as mortgage debentures. In case of registered debentures, a clear details enumerating the names, addresses, etc., of the holders are maintained meticulously in the Register of Debentures. Their transfer requires a Deed of transfer. In case of bearer debentures, the debentures can be transferred by mere delivery. Convertible debentures are those, which can be converted into shares at the option of the debenture holders. Thus, the correct answer is (d).

88.

89.

53

Financial Accounting II

90.

(a) Premium on redemption of debentures is a personal account and is shown on the liabilities side of the balance sheet as it depicts the amount payable to the debenture holders at the time of redemption. Hence (a) is the answer. It is not shown on the assets side of balance sheet. It is not credited to profit and loss account/profit and loss appropriation account/profit and loss adjustment account. (d) A prospectus (d) means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares or debentures of a body corporate. Total capital of a company is divided into units of small denominations which are called as shares. Share certificate (a) is an ownership security. Debenture (b) is a formal document constituting acknowledgement of a debt given under the seal of the company. Fixed deposit receipt (c) is the acknowledgement of deposit of a certain sum of money repayable after a fixed tenure as per the contract and share warrant (e) is a financial instrument that gives the holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e) are not correct. (e) Debenture can be issued for cash or consideration other than cash. It can be issued as collateral security, but it cannot be issued in lieu of dividends. Hence, (e) is true. (a) Loss on issue of debentures is the fictitious asset. It is not in the nature of real asset, fixed asset or current asset. It is not classified as current liability. Hence, (a) is correct. (d) A sinking fund by definition is a fund created by an appropriation of profits and represented by specific investments, and which is brought into existence for a special purpose such as the replacement of an asset on the expiration of its useful life or the redemption of debentures.

91.

92. 93. 94.

Preparation of Financial Statements of Limited Companies


95. 96. (e) Provident fund means the amount payable to employees. Thus, it is a liability not a reserve. (b) Profit and loss appropriation account shows figures with respect to interim dividend, proposed final dividend, transfers to general and other reserves and accumulated balance in profit and loss account carried forward. Provision for tax is shown in the P & L a/c, the actual assessment of tax may be more than or less than the provision made. Only that adjustment will be shown in P&L appropriation account. (e) Dividends can be paid out of current profits or from accumulated profit or the monies provided by the Central government in pursuance of a guarantee given by concerned government. (b) The proposed dividend becomes declared dividend on its adoption by the shareholders in the Annual General Meeting. The company must pay the dividend to the shareholders within 30 days from the date of announcement of the dividend (earlier 42 days). (b) Where the dividend proposed exceeds 12.5 percent but does not exceed 15 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 5 percent of the current profits. (c) In some special circumstances, company can pay interest on share capital however, interest can be paid only on paid-up capital. (a) The rate of Interest (if interest is paid out of capital) should not exceed 4% p.a. or such other rates as the Central Government may notify. (a) The maximum remuneration payable to the whole-time Directors is limited to 10 percent of net adjusted profits. (b) Conservation principle states that anticipate no profit but provide for all possible losses. Provisions for bad debts and discount are possible losses. They are not actual losses for the current year. But according to this principle we should take into account these two losses in the current year.

97.

98.

99.

100. 101. 102. 103.

54

Part I

104.

(c) Where the dividend proposed exceeds 15 percent but does not exceed 20 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 7.5 percent of the current profits. (e) Dividends are not paid on the calls paid in advance by the shareholders. Capital redemption reserve should be utilized only for issue of Bonus shares profit on cancellation of debentures is to be transferred to sinking fund a/c. Any dividend remaining unpaid after 3 years from the date on which it became due can be transferred to General Reserve account of Central Government. It is not obligatory on the company to transfer any profits to its reserve, if the proposed dividend does not exceed 10%. Thus all options except (e) are wrong. (c) The amount of capital, which can be called-up only at the time of winding-up of the company, is called reserve capital. (d) As per Schedule VI of the Companies Act, 1956 unclaimed dividends are to be shown under the head current liabilities. (e) Where the dividend proposed does not exceed 10 percent of the paid-up capital, the company need not transfer any amount to the reserves out of current profits. (a) Interim dividend paid should be shown in the debit side of profit & loss appropriation a/c because it is an appropriation of profit. (e) According to the Companies Amendment Act, 1999 if the dividend is not claimed within 7 years from the date of its transfer, the amount must be transferred to the Investor Education and Protection Fund. (a) If the articles of the company permit, the directors can declare an interim dividend between two annual General meetings. (d) Shareholders do not have any power to change the dividend recommended by the Board of Directors. (d) Contingent liability means the liability may or may not arise in the future. Interim dividend is not a liability. It is paid in between two annual general meetings. The items given in the all other options are contingent liabilities. (c) Dividend and interest cannot be paid out of capital. Premium on issue of debentures cannot be utilized for paying dividends. The premium collected on the issue of debenture is in the nature of a capital profit and hence the same is to be transferred to capital reserve account and shall be shown into the balance sheet under the heading Reserves and Surplus of the liabilities side. (b) According to the Companies Act, 1956, the books of accounts of a company should be preserved for a period of 8 years. (a) According to Section 350 of the Companies Act any tax notified as a tax on excess or abnormal profits can be deducted from the profits for the calculation of managerial remuneration. (b) Any surplus arising on a professional revaluation of fixed assets is treated as capital reserve. All other reserves given in other options are treated as revenue reserves. (c) Shareholders can claim the dividends only after the approval of the proposed dividend at the Annual General Meeting. The dividend so approved should be paid within 30 days from the date of declaration. (e) Loss of capital nature is not deducted from profit in determines the profit for calculation of managerial remuneration. Thus, loss on sale of the undertaking or any of the undertakings of the company or any part thereof is not considered for deduction from profit in respect of calculation of managerial remuneration. (b) Profit on sale of forfeited shares is a capital natured profit. Thus, it should not be credited to Profit and Loss a/c. The amount of profit is transferred to capital reserve and is shown under Reserves and Surplus in the liabilities side of the Balance Sheet.

105.

106. 107. 108. 109. 110.

111. 112. 113.

114.

115. 116.

117. 118.

119.

120.

55

Financial Accounting II

121.

(e) According to Part II Schedule VI of Companies Act, 1956 the Profit and Loss account shall also contain or given by way of a note detailed information showing separately the following payments provided or made during the financial year. a. b. Managerial remuneration under Section 198 of the Act paid or payable. Computation of Net profits in accordance with Section 349 of the Act with relevant details of the calculation of commissions payable by way of percentage of such profits. Detailed information in regard to amounts paid to the auditor. In case of manufacturing companies, the notes relating to licensed capacity, installed capacity and actual production in respect of goods manufactured. Value of imports calculated on C.I.F basis by the company during the financial year in respect of raw materials. Components, spare parts and capital goods. Expenditure in foreign currency during the year etc.

c. d. e. f. 122.

(e) Profit and Loss account at the beginning of the year is credited to profit and loss appropriation account. After all the adjustments, the balance i.e., profit and loss account at the end of the year is shown as reserve in the liabilities side of the balance sheet. (d) Development expenditure not adjusted is a capital expenditure and is shown under miscellaneous expenditure in the Assets side of the Balance sheet. (d) The profit/loss arised on revaluation of fixed asset is a capital natured profit/loss. Thus, reserve on revaluation of assets is a Capital Reserve. (d) Divisible profits means profits available to shareholders for distribution as dividend, i.e., the profit after deductions all expenses, losses, depreciation, taxes and reserves. (b) Fixed deposit is not a secured loan. (e) Appreciation of the market value of asset is a capital profit and is transferred to Reserve for revaluation of assets. It should not be credited to profit and loss account in determining the correct profit of the year. (d) Profit and loss appropriation account shows figures with respect to interim dividend, proposed final dividend, transfers to general and other reserves and accumulated balance in profit and loss account carried forward. (e) Dividends should be declared out of current profits after transferring the reserves. (e) Advance tax paid is an advance and is shown under loans and advances in the balance sheet. (c) Section 226 of the Companies Act specifies the persons qualified as an auditor of the company and the wife of the Managing Director of the company (c) if otherwise qualified can be appointed as an auditor of a company. A body corporate (a) is disqualified to be appoint as auditor of a company. An officer or employee of the company is disqualified and by virtue of this, Managing Director of the company (b) is disqualified to appoint as an auditor of a company. A shareholder of the company (d) with voting rights cannot be appointed as auditor of a company. An individual who is indebted to the company for a sum exceeding Rs.1,000 (e) or who has given any guarantee or provided any security in connection with the indebtedness of any third person is disqualified to be an auditor of a company. Thus, alternative (c) is the correct answer. (d) Where 78% of debentures is held by a nationalized bank (d) a company need not pass a special resolution of appoint an auditor of the company. In case of the situations stated in other alternatives where 27% of equity share capital is held by a State Government (a) where 30% of preference share capital is held by a public financial institution and where 49% of equity is held by the Central Government (c) a special resolution is required to appoint an auditor (d) is the correct answer.

123. 124. 125. 126. 127.

128.

129. 130. 131.

132.

56

Part I

133.

134.

(a) As per the Companies Act, 1956, with regard to maintenance of books of accounts by a company it is mandatory that the books of account are to be maintained under accrual system of accounting it cannot be any other system of accounting. Thus, the statement in alternative (a) The books of account can be either on cash system or accrual system of accounting is false and is the correct answer. The statements in other alternatives are true with regard to maintenance of books of accounts and are not the correct answers (b) Companies have to compulsorily follow double entry system of accounting (c) A set of cost accounts must be maintained in addition to the financial accounts by the companies that are engaged in manufacturing, processing or mining activities (d) the books of accounts should be preserved for a period of eight years preceding the current year (e) the books of account shall be open to inspection by any director during business hours. Thus, (a) is the correct answer. (b) The auditor of a company gives a report that the financial statements of the company reflect a true and fair view subject to certain reservations. Such a report is known as qualified opinion (b). The alternative (b) is the correct answer. Clean report (a) specifies that the financial statements of the company reflect a true and fair view and there are nothing which needs to be qualified. Unqualified opinion (c) states that there is nothing which needs to be qualified it is a clean report and is not the correct answer. Provisional report subject to issue of final report (d) is not a report to be given by the auditor and is not the correct answer. Alternative (e) the combination of two incorrect answers is also incorrect. Thus, alternative (b) is the correct answer. (e) As per section 224(2) of the Companies Act, 1956, explains the situation where an auditor may be reappointed at the annual general meeting and accordingly the statements in (i), (ii) and (iv) are essential for reappointment of the retiring auditor. i. iii. iv. Passing of resolution at the annual general meeting, The retiring auditor should be qualified for reappointment, The retiring auditor has not notified in writing his unwillingness to be reappointed. Thus, the combination of these statements i.e., alternative (e) is the correct answer. The alternative (b) which states the statement in (ii) Approval from the Central Government is incorrect because if is not required for reappointment of the retiring auditor and other alternative (a), (c) and (d) are not correct because of the wrong combination of one none correct statements. Thus, alternative (e) is the correct answer.

135.

136.

(a) Every officer and other employee and agent in default is/are held responsible for keeping proper books of accounts of a company in addition to the Managing Director or Manager of the company. Thus, alternative (a) is the correct answer. The other persons mentioned in other statements and alternatives (b), (c), (d) and (e) are incorrect because they are not the persons held liable for proper keeping books of accounts. Thus, the correct answer is (a). (c) Special Auditor is appointed to conduct special audit of a company by the Central Government (c). Board of directors of the company (a); The Members of the company (b); Statutory auditors (d); and Income Tax authorities (e) do not appoint any special auditor to conduct special audit of a company. Thus, alternative (c) is the correct answer. (d) The Managing Director or Manager is held responsible for the failure to take reasonable steps to keep proper books of account of a company. If the company does not have a managing director or a manager, every director of the company is held responsible for the failure to keep proper books of accounts. (c) According to Section 226(3) of the Companies Act, 1956, a body corporate, an officer of the company, a person indebted to the company for an amount exceeding Rs.1,000, a person disqualified to be appointed as an auditor of its subsidiary company, a person holding any security of the company are disqualified to be appointed as an auditor. However, a person holding the shares of the company as a nominee of a trustee for any third person and in which the holder has no beneficial interest shall not be disqualified. Hence the answer is (c). 57

137.

138.

139.

Financial Accounting II

140.

(a) According to Schedule VI of the Companies Act, 1956, Vehicles are to be shown in the Balance Sheet under the head Fixed Assets. Loose tools and debts outstanding for more than 6 months and fixed deposit with nationalized bank are to be shown under Current assets. The long-term investments are to be shown under the head investments. Thus the answer is (a). (c) The maximum amount beyond which a company is not allowed to raise funds by issue of shares is called nominal capital or authorized capital. The issued capital is that part of the nominal capital issued to the public and subscribed capital is that part of the issued capital which is subscribed by the public. Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that capital which will be called-up only in case of liquidation. (b) According to the provision of Companies Act, the first auditor of a company should be appointed by the board of directors within one month from the date of registration of the company. Hence (b) is true.

141.

142.

Statutory Audit and Annual Reports


143. 144. 145. 146. (c) According to the Companies Act, 1956, annual reports must be submitted to the Registrar within 30 days of the Annual General Meeting. (e) According to the Indian Companies Act, a company need not submit a statement of sources and application of funds in its Annual Report. (b) Auditing is a process of verification and checking of accounting records. Thus, Audit begins where accounting ends. (b) According to Section 216 of the Companies Act, the profit and loss account of the company should be annexed to the balance sheet and the auditors report. Thus, auditing is compulsory for joint stock companies. (d) Auditors appointed by different authorities in different circumstances. The appointing authority determines the remuneration of auditor. (e) Every auditor appointed at an annual general meeting should within 30 days of the receipt of the intimation from the company, inform the Registrar in writing about his acceptance or refusal of the appointment. Thus option (e) is correct. (a) As per Section 226, a person who is indebted to the company or has given any guarantee or security in connection with indebtedness of any third person to the company for amount exceeding Rs.1,000 is disqualified to be appointed as an auditor. (e) As per Section 224 (IB), the ceiling on the number of audits is 20 companies out of which not more than 10 companies should have a paid-up share capital exceeding 25 lakh. (b) According to subsections (1B) and (1C) of section 224, an individual cannot be auditor of more than twenty companies at a time. In case of partnership firm, the ceiling is twenty companies per partner of the firm. Thus, the firm having 2 partners can take 40 companies audit. (d) Apart from the specific criminal liabilities under the Companies Act and the Indian Income Tax Act, a professional accountant is also liable under the Indian Penal Code for frauds and for furnishing false information, etc. (a) A qualified report is given by the auditor when he is not completely satisfied with the accounts. A qualified opinion implies that the auditor states that the financial statements reflect a true and fair view subject to certain reservations. (d) A register of employees is not a statutory book and is not required to be maintained by the company. However, a register of employees is maintained for the purpose of internal accounting purposes. (d) The Directors need not give the information regarding the appointment of additional director in their report. Thus, appointment of additional directors does not form part of Directors Report.

147. 148.

149.

150. 151.

152.

153.

154.

155.

58

Part I

156.

157. 158. 159. 160.

161. 162. 163. 164.

165.

166.

167.

(e) A statutory auditor is liable for damages occasioned by in discharging his duties for professional misconduct for making misstatements in prospectus. Thus, option (e) is correct. (d) A statement on accounting policies is generally stated in the Auditors Report and not in the Directors Report. (d) According to the Companies Act, 1956, the books of accounts of a company are required to be maintained on accrual basis and on double entry system. (d) Auditors are said to issue an unqualified opinion when they consider the financial statements a fair presentation. (c) The first auditors of the company shall be appointed by the Boards of Directors within one month of the date of registration of the company and the auditor or auditors so appointed shall hold office until the conclusion of the first Annual General meeting. In case the board fails to appoint the first auditors, the company in a general meeting will appoint them. (e) According to Companies Act, 1956, a company need not submit a statement of sources and application of funds in its Annual Report. (a) A professional auditor will be held liable under specific statutory liabilities for misstatements in the prospectus. (c) The auditor should inform the Registrar his acceptance or non-acceptance within 30 days from the receipt of the offer from the company. (d) The application money received from the public on issue of shares, unless allotment is approved by the board of directors of the company it cannot be converted into share capital and till such time, the application money received will remain as liability. Thus, the statement in alternative (d) is true. The other statements are not the correct answers because, the Shares can be issued for consideration other than cash and the alternative (a) is incorrect. In the event of oversubscription, the company cannot allot more number of shares than those specified in the prospectus and the company has to allot the shares either on pro-rata or return the excess number of applications and refund the excess money. Thus, the alternative (b) is incorrect answer. As per the SEBI guidelines, the minimum subscription clause is applicable to the issue of shares either the first issue or subsequent issues of shares by the company and thus, the statement in alternative (c) is incorrect. As per the provisions of Section 79 of the Companies Act, the shares cannot be issued at a discount unless at least an year should have been elapsed from commencement of the business by the company and the shares which are to be issued at a discount should be of a class which has already been issued. Thus, the alternative (e) is not the correct answer. Thus, the correct answer is alternative (d). (c) The loss on sale of fixed assets (c) is debited to profit and loss account and is not carried over under miscellaneous expenditure in the balance sheet of a company and alternative (c) is the correct answer. The following will form part of Miscellaneous Expenditure of the Balance Sheet of a company till they are adjusted/written off completely Preliminary expenses (a) Underwriting expenses (b) Discount on issue of shares (d) and Interest paid out of capital (e) are not the correct answers. (c) The costs in chartering a company are considered as preliminary expenses and hence should be debited to preliminary expenses account. Subsequently, they will be written off over a period of time. (a) Subsidy received from any Government is included while calculating remuneration payable to managerial personnel and alternative (a) is the correct answer. The receipts stated in other alternatives Profit on sale of forfeited shares (b), Profit from the sale of part of undertaking (c), Profit from the sale of immovable property (d) and Profit on issue of shares at a premium (e) are not included in the profit while calculating the remuneration payable to the managing personnel. Thus, alternative (a) is the correct answer. 59

Financial Accounting II

168.

(e) As per schedule VI of the Companies Act, 1956, unadjusted development expenditure (e) is shown under miscellaneous expenditure and is the correct answer. It is not shown under the head fixed assets. The other assets stated in alternatives Lease hold property (a) Development of property (b) Railway sidings (c) and Designs (d) are the fixed assets and not the correct answers. Thus, alternative (e) is the correct answer. (e) According to the Schedule VI of the Companies Act, 1956, the following assets is/are shown under the head investments in the balance sheet of a company. i ii iii iv Investments in the capital of partnership firms Investment in trust securities Investment in shares Investment in debentures.

169.

Hence the alternative (e) the combination of all the investments mentioned above is the correct answer. 170. (c) Dividends are usually paid as a percentage of called-up capital less calls-in-arrear (c). It is not paid on authorized capital (a) unless it is fully called-up and paid-up. Net profit (b) is the basis for declaring dividends but the computation is as a percentage of paid-up capital. And is not the correct answer. No dividend is payable on calls-in-advance hence the alternative (d) which states paid-up share capital plus calls-in-advance is incorrect. The alternative (e) is also incorrect because, it also includes calls-in-advance. Thus, alternative (c) is the correct answer. (b) The proposed dividend is classified as a provision and shown on the liability side of the balance sheet. The dividend finally decided by the shareholders in the annual general meeting as payable is termed as Declared Dividend. Any dividend declared must be paid within thirty days from the date of declaration. Hence, a declared dividend must be classified as a current liability in the balance sheet of the company. Thus the answer is (b). (c) Dividend is the share of profits payable to each shareholder. It is decided by the shareholders in the annual general meeting. It must be paid within 30 days from the date of declaration of dividend. It is paid by posting the dividend warrants to the shareholders. If the declared dividend is unpaid simply due to the fact that such dividend has not been claimed by some shareholders, it is kept by the company in separate account, known as unclaimed dividend account. It is the current liability of the company. It cannot be classified as provisions in the balance sheet, but proposed dividend can be defined as provision in the balance sheet. But, (a), (b), (d) and (e) are the items of provisions in the balance sheet. Therefore (c) is true. (b) Schedule VI of the Companies Act, 1956 clearly specifies that the interest accrued on secured loans but not paid should be shown under the head Secured Loans. (a) Sinking fund is created out of profits. It is the part of profits and should be listed under the head Reserves and Surplus and not under unsecured loans. Loans and advances from subsidiaries, short-term loans and advances from banks, loans and advances from others and fixed deposits are unsecured loans. (c) Though dividends can be declared only by a resolution of the shareholders, if the articles permit, the directors can declare an interim dividend (c) between two annual general meetings. The dividend recommended by the directors is termed as proposed dividend (a) till such time it is approved by the shareholders in the AGM. The dividend finally decided by the shareholders in the AGM as payable is termed as Declared dividend (d). The unclaimed portion of it is unpaid/ unclaimed dividend (e). Final dividend (b) gives rise to an enforceable obligation. (a) The proposed dividend is classified as a provision and shown on the liability side of the balance sheet. The dividend finally decided by the shareholders in the annual general meeting as payable is termed as Declared Dividend. Any dividend declared must be paid with thirty days from the date of declaration. Hence, a declared dividend must be classified as a current liability in the balance sheet of the company. Thus the answer is (b).

171.

172.

173. 174.

175.

176.

60

Part I

Limitations of Financial Statements


177. (e) The valuation of inventories (a) can be a tool to inflate or deflate the actual profits by adoption of various methods depending on economic conditions. While translating the foreign currency transactions (b) into reporting currency, different rates can be adopted to manipulate the profits. Various depreciation methods (c) change the value of depreciation whereby profits can be inflated or deflated. The policy of recognizing expenses / incomes (d) as capital revenue matters considerably and changes the profits of a business thus, in all the areas (a), (b), (c) and (d), the changes in existing accounting policies result in inflation or deflation of profits. These are prone to multiplicity of accounting policies. (e) Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does not contain certain assets and liabilities. For example, the efficient management force is a human asset available to the organization. Though efforts are being made to quantify and present the human resources, most of the balance sheets do not present the same. Also dissatisfied labor force is a liability to the organization. The factors, which have a vital bearing on the earnings of the organization such as changes in the managerial personnel, cessation of agreements, loss of markets, are not disclosed. Personal judgment plays a great part in determining the figures for the balance sheet. Example, provision for depreciation, stock valuation, provision for bad debts are more based on the personal judgment and is therefore not free from bias. Hence the answer is (e). (a) If the proposed dividend appear in the balance sheet of subsidiary while preparing the consolidated balance sheet, the share of minority share holder should be shown under proposed dividend in the consolidated balance sheet. (e) Section 4 of the Companies Act defines a subsidiary company: A company is a subsidiary of another if and only if a. that other company controls the composition of its board of directors. b. that other company enjoys or exercises more than half of the total voting power or more than half of the equity share capital. c. the company is a subsidiary of any company which is that other companys subsidiary. (b) Where the financial year of the subsidiary does not coincide with that of the holding company, then the holding company must attach the preceding financial year balance sheet of the subsidiary to its own balance sheet as on particular date. It is also provided in the sub-section 2(c) of Section 212 that the time interval between the dates of balance sheets of the holding company and the subsidiary company should not be more than six months. (e) Minority interest consists of face value of the shares held by outsider. Proportional capital profits and proportional revenue profits. (d) The holding company may acquire the shares in subsidiary company at a premium or at a discount. If the price paid for the investment is over and above the share in equity, or the net assets acquired by the holding company. The difference is treated as goodwill or cost of control. (a) Profits earned and reserves built-up subsequent to the date of purchase are treated as revenue profits. If the fall in the value of assets occurs after the date of acquisition, the loss should be treated as an ordinary revenue loss. (e) Profit on revaluation of assets and liabilities is treated as capital profit and the amount is transferred to Revaluation Reserve. The reserve can be used for writing off goodwill. (a) Profits existing in or earned by the subsidiary company up to the date of acquisition of shares by the holding company are capital profits. Any increase in the value of fixed assets of the subsidiary company, whether before or after the date of acquisition will also be treated as capital profits and if there is reduction in the value of the fixed assets as on the date of acquisition, it must be treated as capital loss and debited to the goodwill account.

178.

Consolidated Accounts of Holding and Subsidiary Companies


179.

180.

181.

182. 183.

184.

185. 186.

61

Financial Accounting II

187. 188.

(a) The share of holding company in the proposed dividend of the subsidiary company from its pre-acquisition profit should be credited to investment account. (a) The holding company may acquire the shares in subsidiary company at a premium or at a discount. If the share in equity is over and above the price paid for investment, the difference is treated as Capital Reserve. (e) Minority interest includes share in paid-up capital, capital profits and revenue profits. (a) If the purchase consideration paid is more than the net assets, the excess price paid is treated as goodwill. So, the excess price should be debited to goodwill a/c. (e) Inter company profit on inventory sold to a non-affiliated company need not to be eliminated in the preparation of consolidated financial statements. (c) The share in post-acquisition profit is a revenue profit and it should be credited to profit and loss account of holding company. (b) The post-acquisition profits of subsidiary company are treated as revenue profits for consolidation of balance sheet of holding company. (d) Minority interest in the consolidated balance sheet is not a liability to the shareholders of the holding company but to the shareholders of the subsidiary company. (a) Only option (d) is true. Option (a) is false because post acquisition profits are always revenue profits. Option (b) is false because every holding company need not be prepared consolidated financial statements. Option (c) is false because the holding company need not be holds the entire shares of another company. (b) Equity method is adopted in accounting for investments of the investor, when the investor has significant influence over the investee. Cost method (a) is the method wherein the acquisition of any asset is reported in the books at its historical cost. And it is not the appropriate method to account for the investments where the investor has significant influence. Amortized cost method (c) is a method wherein the cost of the asset is amortized over its useful life and is not the appropriate method. Super profit method (d) is one of the methods of valuation of goodwill. Moving average method (e) is a method of valuation of inventories and is not the method of accounting for investments of the investor when the investor has significant influence over the investee. Thus, (b) is the correct answer. (e) In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of the proportionate share of minority shareholders in the (i) Nominal value of share capital of subsidiary company (iii) Reserves and profits of the subsidiary company at the time of acquisition by the holding company and (v) Income of the subsidiary company after the acquisition by the holding company. Hence, the alternative (e) the combination of the these statements is the correct answer. (ii) Reserves of the holding company and (iv) Income of the holding company after its acquisition are entirely the share of the share holders of the holding company and do not belong to the minority shareholders of the subsidiary company and the alternatives (b), (c) and (d) with these statements are incorrect. The alternative (a) is incorrect because it does not represent the entire share of the minority shareholders. Thus, alternative (e) is the correct answer. (a) When the value of investment in subsidiary company is more that the nominal value of the share capital acquired by the holding company, the difference represents Goodwill on consolidation (a) is the correct answer. On the other hand Capital reserve on consolidation (b) is the excess of the share in equity or net assets of the subsidiary over and above the price paid for the investment and is not the correct answer. Securities premium on consolidation (c) there is no such account on consolidation as regards the price paid for the control over the subsidiary company. Securities premium is the amount representing the value of the share over and above its face value and is not the correct answer. Capital profit (d) is the profit and reserves of the subsidiary company, of which the holding company will have proportionate share. The capital profits are the post-acquisition profits of the subsidiary company and is not the correct answer. The alternative (e) the combination of (a) and (d) one correct answer with one incorrect answer is incorrect and thus, (a) is the correct answer.

189. 190. 191. 192. 193. 194. 195.

196.

197.

198.

62

Part I

199.

(a) Dividends paid by a subsidiary company out of pre-acquisition profits are adjusted against Investment A/c for the purpose of arriving at cost of control at the time of consolidation of accounts (a) since they form part of capital profits they are adjusted against the cost of control and alternative (a) is the correct answer. Since, they are capital profits, they cannot be adjusted against general reserve at the time of consolidation (b) is the incorrect answer. They are not revenue receipts to be transferred to Profit and Loss account at the time of consolidation of accounts and alternative (c) is the incorrect answer. Since they are part of capital profits, they cannot be ignored for consolidation purposes. And alternative (d) is incorrect. The dividends declared out of post-acquisition profits are the claims of the shareholders of the holding company and do not form part of cost of control. The alternative (e) is not the correct answer. Thus, alternative (a) is the correct answer. (d) An individual is considered to have a substantial interest in an enterprise, if that individual owns, directly or indirectly 20% interest in the voting power of the enterprise (d). The other alternatives are incorrect answers because they do not comply with the condition specified. Thus, (d) is the correct answer. (e) According to Accounting Standard-23, Representation on the board of directors of the investee (a); Participation in policy making processes (b) and (c) Provision of essential technical information. All the three evidences the existence of significant influence by an investor. (d) While calculating the cost of control at the time of consolidation of accounts of the holding company, the proportionate of share of the holding company in the values stated in the statements (i) Value of shares acquired (ii) Pre-acquisition profits/losses (iii) Profits/losses on revaluation of assets (iv) Profits/losses on revaluation of liabilities is considered. The combination of these statements i.e., alternative (d) is the correct answer. Post-acquisition profits/losses are not considered while computing cost of control. The alternatives (a), (b), (c) and (e) which do not constitute the correct combination are not the correct answers. (a) As on the date of acquisition by the holding company, the reduction in the value of fixed assets in the event of revaluation of the assets (if any) of the subsidiary company, at the time of consolidation is to be debited to (a) Goodwill. The capital reserve of the holding company (b) Profit and loss account of the holding company (c) General reserve of the holding company (e) are not effected by the reduction in the value of fixed assets of the subsidiary company and are not the correct answers. Profit and loss account of the subsidiary company (d) is not effected by the revaluation the proportionate loss of holding company is adjusted against the goodwill and proportionate share of minority shareholders is reduced from minority interest. Thus, alternative (d) is not the correct answer. Alternative (a) is the correct answer. (e) Consolidated financial statements need not be prepared by a holding company which is a subsidiary of another holding company. A subsidiary company is excluded from consolidation if the control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future or if the subsidiary company operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent. Hence the answer is (e).

200.

201.

202.

203.

204.

Current Developments and ERP


205. (e) Addition of wealth made by the organization with the efforts of the management and employees using the capital is called value addition. Value added is measured as a difference between the sales and the cost of material and services purchased from outside. It is a key measure of performance and wealth creating abilities of the organization. In calculating profit, bought-in-materials and services, labor, depreciation, interest, etc., are deducted from sales revenue. In calculating the value added, only the cost of bought-in-materials and services are deducted. That is, the value added equals pre-tax profit plus labor, depreciation and interest. (c) According to the additive approach, all the items that create value such as wages and salaries, interest, depreciation, rent, rates and insurance, employee benefits, other overhead expenses and profit before tax are all added up to give the sum of value-added. In short, value addition (according to the additive approach) = Conversion cost + Administration cost + Selling costs + Profits. 63

206.

Financial Accounting II

207.

(e) Following are the advantages of the value added statement. i. VA concept is the most relevant concept of the social responsibility concept of the enterprise. Social responsibility concept says that the organization is a social institution working for the benefit of many interested groups in the society. Thus, VA statement reflects the broader view of the companys objectives and responsibilities. This enhances the attitude of the employees towards their employing firms. VA statement can be taken as a means in introducing the productivity linked bonus scheme for employees. VA based ratios can be used for comparisons with other companies and international comparisons. VA statement can be used to measure the size and importance of a company in the economy. This statement shows the companys contribution to national income. VA statement is formed on the basis of the general concepts like going concern, matching, consistency on which the current balance sheets and income statements are based. So, VA statement is a complementary to the existing statements.

ii. iii. iv. v.

However, VA statements cannot be used as substitutes for the existing financial statements. 208. (a) Value added statements are the means of predicting managerial efficiency. They cannot evaluate the relative rewards of shareholders against the company, social performance of the company and wage paying ability in wage negotiations. Thus only option (a) is correct. (d) Gross value added is arrived by deducting from sales revenue and any other direct income and investment income, the cost of all materials and services and other extraordinary expenses. Whereas net value added is derived by deducting depreciation from the gross value added. (e) Under Subtractive approach of computation of value added is measured as a difference between the sales revenue and the cost of material and services bought (e). In calculating profit, bought in materials and services, labor, depreciation interest, etc., are deducted from sales revenue and while calculating value added only the coast of bought in materials and services are deducted. Thus, alternative (e) is the correct answer and the components in other alternatives do not suit the computation and are not the correct answers. (c) Economic value added (c) measure considers the cost of debt as well as the cost of equity while computing profit of a business. Gross Value added (a) is arrived at by deducting from sales revenue and any other direct income and investment income, the cost of all materials and services and other extraordinary expenses and thus it includes other expenses in addition to the cost of debt and equity. And is not the correct answer. Net value added (b) is derived by deducting depreciation from the gross value added. Market value added (d) is the difference between the market value of the invested capital and book value of invested capital. It is a measure of shareholders value. And is not the correct answer. Brand Value Added (e) is a tool that quantifies the economic value of a brand. And is not the correct answer. Thus, (c) is the correct answer. (b) EVA can be improved by downsizing non-profitable operations, units or by selling off sub-standard assets. Hence (b) is false. The computation of EVA involves a complex procedure. Stern and Stewart suggested 175 different assumptions and adjustments on the basic measure. EVA is a residual income measure that subtracts the cost of capital from the operating profit generated by a business. In other words, EVA measures whether the operating profit is enough competed to the total cost of capital. EVA is simply after-tax operating profit minus the total annual cost of capital. EVA is one variation if residual income with adjustments in the method of calculation. Unlike the traditional measure of accounting profit where only part of the cost of capital (cost of debt) is deducted, EVA requires deduction of full cost of capital (Cost of debt as well as cost of equity). EVA can be used for making day-to-day decisions as well as for strategic planning. For this purpose, EVA points have to be identified. An EVA point is one which has revenue, expenditure and capital issue attached to it. EVA destroyers for each EVA point are identified and steps are taken to improve them. EVA analysis is made for each and every EVA point for decisionmaking. Thus (a), (c), (d) and (e) are true.

209.

210.

211.

212.

64

Part II: Problems


Accounting for Intangible Assets
Based on the following information answer the questions 1 to 3. The following information is extracted from the books of Jeet and Company. (a) Capital employed Rs.1,00,000 (b) Normal rate of profit 10% (c) Present value of annuity of Re.1 for five years at 10% 3.78 (d) Net profits for five years: 1st year 2nd year 3rd year 4th year 5th year Rs.14,400 Rs.15,400 Rs.16,900 Rs.17,400 Rs.17,900.

The profits included non-recurring profits on an average basis of Rs.1,000 out of which it was deemed that even non-recurring profits had a tendency of appearing at the rate of Rs.600 p.a. 1. Goodwill of the business as per annuity method is a. b. c. d. e. 2. a. b. c. d. e. 3. a. b. c. d. e. Rs.22,680 Rs.18,000 Rs.60,000 Rs.24,000 Rs.28,000. Rs.22,680 Rs.18,000 Rs.60,000 Rs.22,000 Rs.24,000. Rs.22,680 Rs.18,000 Rs.60,000 Rs.38,000 Rs.24,000.

Goodwill of the business as per three years purchase of super profits is

Goodwill of the business as per capitalization of super profit method is

Based on the following information answer the questions 4 and 5. ABC Co. Ltd., has agreed to purchase the business carried on by Mr. X. For this purpose goodwill is to be valued at 3 years purchase of the weighted average profits of the past 4 years. Weights to be used are 1, 2, 3, and 4 respectively. The profits of the previous years were 2001 Rs.15,000 2002 Rs.18,000 2003 Rs.22,000 2004 Rs.25,000. The accounts of the business revealed that i. In the year 2001, a major repair costing Rs.2,000 was made in respect of plant and machinery. It was agreed that the amount, which was charged to revenue, was to be capitalized for the purpose of valuing goodwill subject to 10% depreciation on the diminishing balance method.

Financial Accounting II

ii. iii. 4.

The closing stock for the same year was overvalued by Rs.1,000. Rs.2,500 managerial remuneration was to be provided for. The average profits of the business is a. b. c. d. e. Rs.20,800 Rs.19,337 Rs.18,448 Rs.16,589 Rs.17,234. Rs.62,389 Rs.42,347 Rs.58,011 Rs.63,848 Rs.72,648.

5.

The value of goodwill of the business is a. b. c. d. e.

Based on the following information answer the questions 6 to 8. Given below is the balance sheet of XYZ Co. Ltd as on 31-12-2003. Liabilities 10,000 Equity shares of Rs.10 each General Reserve P & L a/c Balance on 1-1-03 Profit for the year 8% debentures Creditors Provision for taxation Depreciation fund: Plant & Machinery Rs. Assets 1,00,000 Goodwill Land and Building 45,000 Plant & Machinery Investments 6,000 Stock 24,000 Debtors 50,000 Less: Provision 30,000 Cash at bank 20,000 Preliminary expenses 25,000 70,000 10,000 60,000 20,000 5,000 Rs. 15,000 40,000 50,000 60,000 50,000

3,00,000 3,00,000 Profit for the year includes Rs.3,000 income from investments. Investments are all in Government Securities. Land and Buildings are worth Rs.1,00,000 and Plant and Machinery Rs.20,000. Normal return on capital employed in this type of business is 10%. 6. The average capital employed by the XYZ Ltd. is a. b. c. d. e. 7. a. b. c. d. e. Rs.1,50,000 Rs.1,60,500 Rs.1,39,500 Rs.1,59,500 Rs.1,69,500. Rs.24,000 Rs.7,050 Rs.21,000 Rs.13,950 Rs.22,500.

Super profit of the XYZ Ltd. is

66

Part II

8.

The value of goodwill on the basis of 3 years purchase of super profits is equal to a. b. c. d. e. Rs.73,000 Rs.21,150 Rs.63,000 Rs.41,850 Rs.67,500.

Based on the following information answer the questions 9 to 11. PPX Ltd. gives the following information about past profits. Year 1999 2000 2001 2002 2003 Profits (Rs.000) 22 23 24 25 22

On scrutiny it is found that (i) up to 2001 PPX Ltd. followed FIFO method of finished stock valuation thereafter adopted LIFO method, (ii) up to 2002 it followed straight-line method of depreciation and thereafter adopted written down value method. Given below are the details of stock valuation. (figures in Rs.000) Year Opening Stock FIFO 1999 2000 2001 2002 2003 40.00 46.00 49.20 38.90 42.00 LIFO 39.80 41.20 47.90 39.10 38.50 Closing Stock FIFO 46.00 49.20 38.90 42.00 45.00 LIFO 41.20 47.90 39.10 38.50 43.10

Straight-line and written down value methods of depreciation were as follows. Year 1999 2000 2001 2002 2003 9. a. b. c. d. e. Rs.23,000 Rs.26,500 Rs.19,050 Rs.22,550 Rs.30,445. Straight-line 12.10 14.15 15.00 16.70 18.00 W.D.V. (Rs.000) 17.00 18.10 19.25 19.60 19.40

The adjusted profit for the year 2000 is

67

Financial Accounting II

10.

The adjusted profit for the year 2001 is a. b. c. d. e. Rs.24,000 Rs.25,500 Rs.29,750 Rs.21,250 Rs.22,750. Rs.25,000 Rs.27,900 Rs.23,650 Rs.22,100 Rs.22,000.

11.

The adjusted profit for the year 2002 is a. b. c. d. e.

Based on the following information answer the questions 12 to 16. The Balance Sheet of Moon Ltd. disclosed the following financial position as on 31st March, 2003. Liabilities Rs. Assets Rs. Paid-up capital Goodwill at cost 30,000 1,75,000 30,000 shares of Rs.10 each fully 3,00,000 Land and buildings at cost paid (less depreciation) Capital reserve 20,000 Plant and machinery at cost 90,000 (less depreciation) Sundry creditors 71,000 Stock at cost 1,15,000 Provision for taxation 55,000 Book debts Rs.98,000 Profit and loss account 66,000 Less: Provision for bad debts Rs. 3,000 95,000 Cash at bank 7,000 5,12,000 5,12,000 you are asked to value the goodwill of Moon Ltd. on the basis of five years purchase of super profits, for which the following information is supplied: i. ii. iii. iv. v. 12. Adequate provision has been made in the accounts for income tax and depreciation. The rate of income tax may be taken at 50%. The average rate of dividend declared by the company for the past five years was 15%. The reasonable return on capital invested in the class of business done by the company is 12%. Closing capital can be assumed as capital employed. The value of capital employed is a. b. c. d. e. 13. a. b. c. d. e. 68 Rs.4,11,000 Rs.4,82,000 Rs.4,75,000 Rs.3,56,000 Rs.2,66,000. Rs.34,250 Rs.40,167 Rs.42,720 Rs.39,584 Rs.22,167.

The normal profit of the company is

Part II

14.

The future maintainable profit (based on profits of previous year) is a. b. c. d. e. Rs.42,720 Rs.66,000 Rs.50,000 Rs.55,000 Rs.11,000. Rs.8,470 Rs.23,280 Rs.23,250 Rs.11,167 Rs.12,280. Rs.61,400 Rs.42,350 Rs.55,835 Rs.1,16,400 Rs.1,16,250.

15.

The super profit of the company is a. b. c. d. e.

16.

The value of goodwill on five years purchase of super profits is a. b. c. d. e.

Based on the following information answer the questions 17 to 20. The Balance Sheet of Jaico Ltd. as on March 31, 2003 is as follows: Liabilities Equity share capital of Rs.10 each, issued & fully paid Reserves & Surplus Share premium Profit & Loss account 14% Debenture Sundry creditors Rs. 8,00,000 2,10,000 60,000 1,20,000 3,60,000 1,10,000 Goodwill Freehold property Plant & machinery Building Investment Stock Debtors Cash at bank Assets Fixed assets Rs.

1,50,000 4,20,000 3,80,000 2,20,000 1,50,000 1,30,000 1,40,000 70,000 16,60,000 16,60,000 Profit before tax for 2002-2003 amounted to Rs.5,00,000 including Rs.15,000 as interest on tax free investment. However, an additional amount of Rs.30,000 per annum shall be required to be spent for smooth running of the business. Market value of plant & machinery and building are estimated at Rs.5,00,000 and Rs.4,80,000 respectively. For this valuation, further depreciation to the extent of Rs.50,000 should be taken into consideration. The tax rate applicable to the company is 50%. Return on capital at the rate of 10% may be considered normal for this business. The current year profit computed after the aforesaid adjustments may be treated as the expected average profit of the company. Similarly, the capital employed computed based on the current years figures, may be treated as the average capital employed. 17. The Capital employed by the business as on 31st March, 2003 is a. b. c. d. e. Rs.12,70,000 Rs.17,40,000 Rs.16,30,000 Rs.13,80,000 Rs.12,00,000. 69

Financial Accounting II

18.

The average maintainable trading profit for the year end March 31, 2003 is a. b. c. d. e. Rs.5,00,000 Rs.4,05,000 Rs.2,72,500 Rs.1,92,500 Rs.2,02,500. Rs.74,375 Rs.1,54,375 Rs.85,625 Rs.3,81,875 Rs.1,77,500. Rs.2,97,500 Rs.15,27,500 Rs.7,10,000 Rs.6,17,500 Rs.3,42,500.

19.

The super profit of the business is a. b. c. d. e.

20.

Valuation of goodwill based on four years purchase of super profit is a. b. c. d. e.

Based on the following information answer the questions 21 to 23. The following is the Balance Sheet of Tiger Ltd. Company as on March 31, 2003. Liabilities Share Capital 15,000 Equity shares of Rs.10 each General Reserve Profit and loss account: Balance on April 1, 2002 Profit for the year 10% Debentures Sundry Creditors Provision for taxation Rs.12,000 Rs.74,000 86,000 1,50,000 30,000 30,000 4,69,000 Additional information: Profit includes Rs.5,000 income from non-trade investments Present value of assets are as follows: Land and Building Plant and Machinery Investment Rs.1,61,000 Rs.1,42,000 Rs.53,000 4,69,000 1,50,000 23,000 Rs. Assets Goodwill Land & Building Plant & Machinery Investment Stock Debtors Cash at Bank Rs. 28,000 1,40,000 1,30,000 40,000 53,000 41,000 37,000

Current assets are to be recognized at their book value.

Normal return on capital employed in this type of business is 10%. Depreciation of land & building and plant & machinery are 5% and 10% respectively. Income tax rate is 50%. The company calculates goodwill from long-term funds point of view. It has been decided to calculate the value of goodwill on the basis of 3 years purchase of super profit. 70

Part II

21.

The average trading capital employed by Tiger Limited is a. b. c. d. e. Rs. 3,67,560 Rs. 3,57,650 Rs. 3,76,500 Rs. 3,76,250 Rs.3,38,250. Rs.44,050 Rs.46,250 Rs.45,700 Rs.55,250 Rs.44,250. Rs.14,750 Rs.15,300 Rs.14,250 Rs.15,750 Rs.1,32,150.

22.

The super profit of the company is a. b. c. d. e.

23.

The value of the goodwill of the company is a. b. c. d. e.

Based on the following information answer the questions 24 to 29. The following is the Balance Sheet of Alpha Limited as of 31st December, 1996 Liabilities Share Capital: Equity shares of Rs.100 each 10,00,000 Rs. Rs. Assets Fixed Assets: Land and building Machinery Motor car Less: Calls-in-arrear (Rs.20 for final call) Reserves and Surplus: General Reserve Profit and Loss Account Current Liabilities: Sundry Creditors: 1,00,000 9,00,000 Furniture Investments (face value) 3,50,000 Current Assets: 2,50,000 Stock Sundry debtors 5,00,000 Cash at Bank Miscellaneous Expenditure: Preliminary expenses 20,00,000 Additional information: i. Fixed assets are worth Building Machinery ii. Rs.6,00,000 Rs.5,20,000 20,000 20,00,000 7,25,000 2,00,000 1,05,000 25,000 50,000 4,00,000 4,50,000 25,000 Rs.

All investments are non-trading investments and are to be valued at 20% above cost. Dividend at uniform rate of 20% is earned on all investments. 71

Financial Accounting II

iii. iv. v.

For the purpose of valuation of shares, goodwill is to be valued on the basis of 3 years purchase of super profits based on average profit (after tax) of the last three years. Depreciation on appreciated value of Land and Building and Machinery is not to be considered for valuation of goodwill. Profits (after tax) are as follows: Rs. 1994 3,80,000 1995 4,20,000 1996 5,00,000 Rate of income tax 50% In 1994 machinery (Book value Rs.20,000) was sold for Rs.20,000 but the proceeds were wrongly credited to profit and loss account. The mistake has not yet been rectified. Depreciation has been charged on machinery @10% per annum on reducing balance method. In similar business, return on capital employed is 20% (after tax). Closing capital can be assumed as capital employed. The average maintainable profit of the Alpha Limited is a. b. c. d. e. Rs.3,66,000 Rs.4,15,000 Rs.4,15,900 Rs.4,95,810 Rs.4,25,900. Rs.17,00,000 Rs.22,00,000 Rs.27,00,000 Rs.15,00,000 Rs.19,00,000. Rs.85,900 Rs.75,000 Rs.26,000 Rs.1,55,810 Rs.75,900. Rs.2,25,000 Rs.2,57,700 Rs.78,000 Rs.2,27,700 Rs.4,67,430. Rs.211.77 Rs.201.77 Rs.195.77 Rs.205.77 Rs.170.00.

vi.

vii. viii. 24.

25.

Capital employed by the company is a. b. c. d. e.

26.

Super profit of the company is a. b. c. d. e.

27.

Goodwill at three years purchase of super profit is a. b. c. d. e.

28.

Valuation of fully paid shares on net asset basis is a. b. c. d. e.

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Part II

29.

Valuation of partly paid shares on net asset basis is a. b. c. d. e. 193.23 181.77 185.77 150.00 191.77.

Based on the following information answer the questions 30 to 32. The following is the Balance Sheet of Cox Ltd. Company as on March 31, 2001. Liabilities Share Capital 15,000 Equity shares of Rs.10 each General Reserve Profit and loss account: Balance on April 1, 2000 Profit for the year 10% Debentures Sundry Creditors Provision for taxation Additional information Profit includes Rs.5,000 income from non-trade investments Present value of assets are as follows: Land and Buildings Plant and Machinery Investments Rs.1,70,000 Rs.1,80,000 Rs. 60,000 Rs.10,000 Rs.76,000 Rs. Assets Goodwill 1,50,000 Land & Buildings 20,000 Plant & Machinery Investment Stock 86,000 Debtors 1,50,000 Cash at Bank 54,000 Cost of issue of debenture 30,000 4,90,000 4,90,000 Rs. 32,000 1,20,000 1,30,000 50,000 50,000 45,000 33,000 30,000

Current assets are to be recognized at their book value.

Normal return on capital employed in this type of business is 10%. Depreciation of land & buildings and plant & machinery are 5% and 10% respectively. Income tax rate is 50%. It has been decided to calculate the value of goodwill on the basis of 5 years purchase of super profit. The company computes goodwill on long-term funds point of view. 30. The average trading capital employed by Cox Limited is a. b. c. d. e. 31. a. b. c. d. e. Rs.3,64,450 Rs.3,68,320 Rs.3,70,550 Rs.3,67,520 Rs.3,57,250. Rs.41,525 Rs.31,845 Rs.22,125 Rs.22,450 Rs.41,775.

The super profit of the company is

73

Financial Accounting II

32.

The value of the goodwill of the company is a. b. c. d. e. Rs.2,09,465 Rs.88,250 Rs.1,82,520 Rs.1.08,870 Rs.2,07,625.

33.

The net profit for the company after tax for the last 3 years was Rs.65,000, Rs.68,020 and Rs.69,000 respectively. The capital employed was Rs.6,50,000. Assuming simple average, if the normal rate of return is 10%, then the super profit is a. b. c. d. e. Rs.6,500 Rs.4,000 Rs.3,020 Rs.2,340 Nil.

34. The following is the balance sheet of Rainbow Ltd. as on March 31, 2003. Liabilities 80,000 Equity shares of Rs.10 each General reserve Profit & loss A/c. Balance as on April 01, 2002 Profit before tax for the year Sundry creditors Bills payable Provision for taxation 40,000 1,60,000 Rs. Rs. Assets Rs. 40,000 4,70,000 4,20,000 50,000 40,000 1,00,000 40,000 50,000

8,00,000 Goodwill 1,00,000 Plant & Machinery Land & Buildings Investments (10%) 2,00,000 Stock 70,000 Sundry debtors 30,000 Bills receivable 50,000 Cash & Bank Discount on issue of shares

40,000 12,50,000 Additional information i. The assets were revalued as under Plant & Machinery Land & Buildings Investments ii. iii. iv. v. Rs.5,00,000 Rs.4,00,000 Rs.70,000 12,50,000

Profit includes Rs.5,000 income from non-trading investments. Normal return on capital employed in the similar business is 10%. Adjustment of depreciation is not required for valuation of goodwill. Income tax rate is 30%. The value of goodwill on the basis of 4 years purchase of super profits of the company is a. b. c. d. e. Nil Rs.19,600 Rs.15,925 Rs.63,700 Rs.78,400.

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Part II

35. The following is the Balance Sheet of Pioneer Ltd. as on March 31, 2003. Liabilities 75,000 equity shares of Rs.10 each fully paid General reserve Profit & loss a/c Bank loan (20%) Sundry creditors Provision for taxation Rs. Assets Plant and Machinery 1,00,000 Land and Buildings 2,30,000 Stock-in-trade 1,50,000 Sundry debtors 2,80,000 Cash at bank 1,40,000 Discount on issue of shares Preliminary expenses 16,50,000 Additional information i. ii. Sundry debtors include a debt of Rs.90,000 of which only Rs.60,000 is likely to be recovered. A provision has to be made for the balance. The profits earned by the company after payment of tax at the rate of 40% in the last four years were as under: 1999-2000 2000-2001 2001-2002 2002-2003 iii. 1999-2000 2000-2001 2001-2002 2002-2003 a. b. c. d. e. 36. Rs.60,000 Rs.73,000 Rs.90,000 Rs.1,10,000 No goodwill. Year 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 Rs. 75,000 3,00,000 3,75,000 4,50,000 7,42,500 Rs.1,00,000 Rs.1,10,000 Rs.1,30,000 Rs.1,40,000 11% 12% 14.5% 14.5% Rs. 60,000 6,00,000 2,50,000 1,10,000 4,00,000 90,000 50,000 90,000 16,50,000

7,50,000 Goodwill

The dividends paid by the company for the last four years were as follows:

The value of goodwill (rounded off) of the company by using the capitalization method is

The profits of Kavya Ltd. for the past 5 years are as under:

The company noticed the following errors, while computing the weighted average profits for the purpose of valuation of goodwill: On October 01, 2000, repair expenses of Rs.30,000 for machinery were capitalized. Kavya Ltd. provides depreciation at the rate of 10% on straightline method. The profit for the year 2002-2003 includes profit of Rs.22,500 on sale of plant. 75

Financial Accounting II

The weighted average profit of the company to be considered for valuation of goodwill is a. b. c. d. e. 37. Rs.4,76,100 Rs.3,79,500 Rs.2,84,100 Rs.5,00,100 Rs.3,78,500. Liabilities Capital Long-term loan Creditors Bank overdraft Rs. 5,00,000 2,00,000 50,000 25,000 Assets Land and building Machinery Fictitious assets Debtors Stock Cash

Consider the following Balance Sheet of Mitra Enterprises as on March 31, 2003: Rs. 3,00,000 2,50,000 60,000 75,000 80,000 10,000 7,75,000 7,75,000 The profit of the year 2002-2003 was Rs.50,000 and accrued evenly throughout the year. The rate of return in a similar business is 10%. The normal profit of Mitra Enterprises is a. b. c. d. e. Rs.47,500 Rs.41,500 Rs.44,000 Rs.50,000 Rs.51,500.

38.

Dinakar operates a garment store in a hired premises at a rent of Rs.1,20,000 per annum. The owner of the premises, who has recently completed her fashion-designing course, wishes to purchase the garment store. The details of the business of Dinakar are as under: a. b. c. d. e. The profit for the year 2002-2003 is Rs.2,30,000 The capital employed by Dinakar is Rs.20,00,000. The value of the premises is Rs.4,00,000. Rs.58,000 Rs.62,000 Rs.1,10,000 Rs.1,20,000 Rs.1,78,000. Liabilities Share capital Capital reserve Profit and loss account Sundry creditors Rs. Assets Rs. 4,60,000 3,20,000 2,80,000 80,000 90,000 10,000 10,000 12,50,000

If the normal return on capital employed is 12%, the super profit is

39.

Consider the following Balance Sheet of Kumar Ltd. as on March 31, 2003: 7,00,000 Land and buildings 2,90,000 Plant and machinery 1,80,000 Non-trading investments 80,000 Sundry debtors Inventory Cash and bank Preliminary expenses 12,50,000

76

Part II

The market values of assets are as under: Land and building Plant and machinery Non-trading investments Rs.5,50,000 Rs.4,00,000 Rs.2,50,000

Sundry debtors includes Rs.10,000 due from Suchitra who has become insolvent. The capital employed of the company, for the purpose of valuation of goodwill is a. b. c. d. e. 40. Rs.12,90,000 Rs.10,40,000 Rs.13,00,000 Rs.11,20,000 Rs.13,70,000.

During the year 2002-2003, Fiza Ltd. reported a profit of Rs.4,20,000 after paying tax at the rate of 50%. This profit includes an income of Rs.45,000 being a claim lodged in the month of January 2002 for which no entry was passed in the year 2001-2002. The company expects to introduce a new product in the year 2003-2004. The introduction of the new product leads to an increase of fixed expenses by Rs.50,000. The estimates of new product are as under: Sales Direct expenses (including material and wages) Share of fixed expenses a. b. c. d. e. Rs.4,47,500 Rs.5,10,000 Rs.4,75,000 Rs.2,60,000 Rs.4,70,000. Rs.2,25,000 Rs.1,75,000 Rs.5,00,000

The future maintainable post-tax profits of the company are

41.

Company A is purchasing Company B for Rs.60 lakh in an all cash deal. It will takeover the following assets and liabilities from Company B. Cash and bank balances Rs. 6 lakh Accounts receivable Rs.48 lakh Fixed assets Rs.20 lakh Total liabilities to be taken over by Company A amounts to Rs.30 lakh. Company A has agreed to value Company Bs patents, licenses and Rs.13 lakh. software for The amount of goodwill Company A is paying for purchasing B is a. b. c. d. e. Rs.6,00,000 Rs.5,00,000 Rs.3,00,000 Rs.2,50,000 Rs.1,50,000.

42.

Shikha Tandon, Manager of Shivram Associates wants to know what her companys adjusted average profit for the past 3 years have been. For this purpose she provides you the yearly profit figures of the company. Year ending 31st Dec. Profit for the year in Rs. 2000 2001 2002 40,000 48,000 20,000 77

Financial Accounting II

She also provides you with the following information Purchases of Fixed Assets of Rs.8,000 were mistakenly accounted as an expense in the year 2000. The Company generally depreciates fixed assets @10% p.a. on straightline method. 2. There was a stock shortage due to theft of Rs.12,000 in 2002. The insurance company only paid Rs.3,000. The company debited the rest to the Stock Shortage account. 3. In 2001, the company sold some unwanted machinery and accounted a profit of Rs.9,000 on it. The average adjusted profit of the company using simple average method is a. Rs.40,136 b. Rs.36,775 c. Rs.38,768 d. Rs.37,867 e. Rs.38,680 Ms. Shikha Tandon of M/s. Shivram Associates wants you to calculate the average adjusted profit of her company using the weighted average method. The Weights can be assumed to be 1, 2 and 3 respectively. The average adjusted profit of the company is a. Rs.34,700 b. Rs.28,600 c. Rs.30,100 d. Rs.33,400 e. Rs.32,700. The average rate of dividend declared by a company is 12%. The present market value of a Rs.10 fully paid-up share of the company is trading at Rs.13 per share. The normal rate of return is a. 11.45% b. 12.28% c. 8.75% d. 7.84% e. 9.23%. Balance Sheets of M/s. Teri-Meri Products as on 31st March 2001 and 31st March 2002. 1.

43.

44.

45.

Liabilities Share Capital General Reserve Profit and Loss A/c Term Loan Sundry Creditors

31.3.2001 31.3.2002 Assets 31.3.2001 31.3.2002 1,00,000 1,00,000 Net Fixed Assets 4,00,000 3,80,000 3,50,000 4,00,000 Investments 3,60,000 3,00,000 7,50,000 9,20,000 Stock 3,80,000 4,10,000 2,00,000 1,00,000 Sundry Debtors 6,00,000 7,20,000 4,00,000 3,80,000 Cash and Bank 20,000 50,000 Preliminary Expenses 40,000 40,000 Total 18,00,000 19,00,000 Total 18,00,000 19,00,000 M/s. Miski Products Private Limited has entered into an agreement to buy Teri-Meri Products as on 31-3-2002. Non-Trade Investments amount to Rs.3 lakh. The average capital employed during the accounting year 31st March, 2002 is a. b. c. d. e. 78 Rs.8,60,000 Rs.10,80,000 Rs.7,90,000 Rs.9,40,000 Rs.12,21,000.

Part II

46.

Balance Sheet of Greater Vicky Refineries Ltd. as on 31st March 2003 Liabilities and Capital Amount Rs. 10,00,000 5,00,000 11,00,000 3,00,000 5,00,000 7,50,000 50,000 42,00,000 Assets Sundry Net Fixed Assets Inventories Investments (Non-Trade) Sundry Debtors Cash and Bank Preliminary Expenses Total Assets Amount Rs. 18,50,000 8,50,000 4,20,000 7,00,000 3,00,000 80,000 42,00,000

Share Capital 10% Preference Shares General Reserve Profit and Loss Term Loan from Janta Bank Sundry Creditors Proposed Dividend Pref. Total Liabilities Balance as on 1-4-2002 in a. b. a. b. c. d. e.

Profit and Loss A/c was Rs.50,000. General Reserve was Rs.8,50,000. Rs.21,25,000 Rs.28,15,000 Rs.18,65,000 Rs.25,21,000 Rs.20,12,000

The average capital employed by Vicky Refineries Ltd. is

Based on the following information answer the questions 47 and 48. Vilas Ltd. purchased the business of Prakash on 1st April, 2003. Profits earned by Prakash during the past three years ending 31st March were: 2001 Rs.1,00,000 2002 Rs.1,20,000 2003 Rs.1,08,000. It was found out that profit for the year 2001 included Rs.4,000, profit on sale of machinery. Loss due to fire in 2003 was Rs.6000. Prakash did not insure his business. However, Vilas Ltd.s bankers insisted that the insurance should cover the new business too. The premium on the new insurance would be Rs.1,000 per annum. Prakash used to claim a salary of Rs.2,000 per month, which now would not be paid. In addition Prakash had hired a manager to look after the companys accounts and the salary paid was Rs.1,500 per month. Mr. Dalal, Vilas Accounts manager feels that the company need not hire the manager of Prakash, as Vilas Ltd.s Accounts department can look into the accounts. The goodwill is estimated at 2 years purchase of the average profit. 47. The average maintainable profit of the company is a. b. c. d. e. 48. a. b. c. d. e. Rs.1,51,000 Rs.1,28,000 Rs.1,61,000 Rs.1,58,000 Rs.1,54,000. Rs.2,14,000 Rs.3,02,000 Rs.3,08,000 Rs.3,06,000 Rs.3,04,000 79

The value of goodwill of the business is

Financial Accounting II

Based on the following information answer the questions 49 to 51. A Ltd. desires to sell its business to B Ltd. who has had average past profits of Rs.2,40,000 per annum and the same amount is expected to continue for the next few years. However B Ltd. wishes to make certain changes to the companys functioning. i. ii. B Ltd. will not pay Rs.25,000 p.a. towards Board Meeting expenses and Directors sitting fees to A Ltd.s Board as it already has a Board of Directors in place. B Ltd. also owns a corporate office, where A Ltd.s operations will be shifted and thus the present premises of A Ltd. need not be rented. B Ltd. will thus save Rs.40,000 p.a.

The net assets of A Ltd., excluding its goodwill, have been agreed to be valued at Rs.34,00,000. A normal rate of return in this type of business is considered to be 8%. It is decided that the goodwill of A Ltd. will be computed based on Capitalization of Average Profit Methods. 49. The average future maintainable profit of the business is a. b. c. d. e. 50. a. b. c. d. e. 51. a. b. c. d. e. Rs.3,05,000 Rs.3,15,000 Rs.3,03,000 Rs.3,00,000 Rs.3,09,000. Rs.32,10,250 Rs.41,16,125 Rs.38,12,500 Rs.44,15,600 Rs.35,18,200. Rs.4,12,500 Rs.5,18,000 Rs.2,22,000 Rs.9,32,000 Rs.3,27,000.

The capitalized net worth of the business is

The goodwill of the business is

Based on the following information answer the questions 52 to 55. Komal Trivedi runs a mid-sized publishing house. Big Publishers Ltd., a leading publishing house is planning to buy Komals business. Negotiations are in the final stage. It is agreed that the goodwill will be calculated only on the basis of super profits of the business. She gives you the following information. The net profit from the business for the past 5 years, after providing for taxation are as follows: Rs.80,000, Rs.90,000, Rs.98,000, Rs.1,05,000, Rs.1,12,000. The capital employed in the business is Rs.8,40,000. Komal feels that in the publishing industry 10% is a reasonable rate of return. 52. Super profit of the company is a. b. c. d. e. 80 Rs.18,000 Rs.22,000 Rs.16,000 Rs.13,000 Rs.12,000.

Part II

53.

Goodwill based on 5 years purchase of super profits is a. b. c. d. e. Rs.52,000 Rs.65,000 Rs.58,000 Rs.74,000 Rs.68,000. Rs.49,140 Rs.52,612 Rs.66,420 Rs.43,470 Rs.48,230. Rs.1,18,000 Rs.1,24,000 Rs.1,80,000 Rs.1,30,000 Rs.1,32,000.

54.

Goodwill based on annuity method, (Annuity value of Re. 1 @ 10% for 5 years is 3.78) is a. b. c. d. e.

55.

Goodwill based on capitalization of super profit is a. b. c. d. e.

Based on the following information answer the questions 56 to 61. Captain Blip Ltd. has given you the following Balance Sheet of Captain Krum Ltd. Balance Sheet of Captain Krum Ltd. as on 31/12/2002 Amount Assets Rs. Share Capital 4,00,000 Sundry Fixed Assets Reserves and Surplus 2,20,000 Investments (Non-Trade) Profit and Loss A/c 7,40,000 Inventory Sundry Creditors 13,20,000 Debtors Proposed Dividend 40,000 Cash and Bank balance 27,20,000 The following other information is also provided to you: a. b. c. d. The non-trade investments fetch 5% return. Normal rate of return is 7% for this type of business. Profit and other relevant information is given below: Year 1998 Profit Before Tax Provision for Leave Leave Encashment Encashment paid 1,20,000 10,000 Loss due to Fire Liabilities Amount Rs. 8,40,000 3,00,000 6,80,000 7,80,000 1,20,000 27,20,000

The present tax rate is 35%. However Blip Ltd., expects this to fall to 30% in the future.

1999 90,000 12,000 8,000 2000 1,35,000 15,000 3,000 8,000 2001 1,20,000 18,000 10,000 2002 95,000 21,000 6,000 The accounting policy of Captain Blip Ltd., unlike Captain Krum Ltd., is to account leave encashment on payable, rather than paid basis. Find out the value of goodwill of Captain Krum on super profit basis. The super profits are expected to continue for 5 years. The Re.1 annuity @ 7% for 5 years can be taken to be Rs.4.10. 81

Financial Accounting II

56.

Average capital employed by the company is a. b. c. d. e. Rs.8,16,425 Rs.7,96,125 Rs.10,69,125 Rs.10,34,675 Rs.6,28,745. Rs.55,120 Rs.58,430 Rs.62,160 Rs.64,720 Rs.50,500. Rs.5,642 Nil Rs.7,722 Rs.4,640 Rs.9,712. Nil Rs.1,22,475 Rs.1,15,535 Rs.1,21,215 Rs.1,16,145. Rs.35,650 Rs.56,205 Nil Rs.48,415 Rs.52,135. Rs.28,612 Rs.22,126 Nil Rs.40,520 Rs.30,740. Rs. 12,00,000 12% 2,15,000 1,81,400 2,25,000

57.

Average after tax profits of the company is a. b. c. d. e.

58.

Super profit of the company is a. b. c. d. e.

59.

Goodwill as per the capitalization method is a. b. c. d. e.

60.

Goodwill as per the super profit method is a. b. c. d. e.

61.

Goodwill as per the annuity method is a. b. c. d. e.

62. The following information is extracted from the financial statements of ABC Ltd. Average capital employed Rate of return on capital is Net profit of the firm after tax for the past 3 years

82

Part II

63.

64.

The super profit of the company is a. Rs.63,200 b. Rs.65,000 c. Rs.65,850 d. Rs.68,000 e. Rs.1,44,000. The net profits of a company after providing for taxation, for the past five years are Rs.40,000, Rs.42,000, Rs.45,000, Rs.46,000 and Rs.47,000 respectively. The capital employed in the business is Rs.4,00,000 on which a reasonable return of 10% is expected. The super profit of the company is a. Rs.4,000 b. Rs.4,400 c. Rs.40,000 d. Rs.44,000 e. Rs.1,80,000. The net profit of a company after providing tax for the past 5 years are: Rs.30,000; Rs.38,000; Rs.39,500; Rs.42,500 and Rs.45,000. The capital employed in the business is Rs.3,60,000. If the normal rate of return is expected to be 10%, the super profit would be a. Rs.4,500 b. Rs.4,250 c. Rs.3,800 d. Rs.3,600 e. Rs.3,000.

Accounting for Shares


Based on the following information answer the questions 65 to 69. G Limited invited applications for 15,000 of its equity shares of Rs.10 each issued at Rs.11.50 payable as follows: On application on 1st July, 2003 Rs.7.50 per share On allotment on 31st July, 2003 Rs.2.00 per share On first and final call on 31st August, 2003 Rs.2.00 per share An applicant to whom 40 shares were allotted failed to pay the amount due to the first and final call and his shares were forfeited on 31st October, 2003. These shares were reissued on 15th November, 2003 as fully paid at Rs.9 per share. 65. The journal entry passed on the allotment of the shares is a. b. Share allotment account To Equity share capital account Share application account Share premium account To Equity share capital account Equity share capital account Share premium account To Share application account Equity share capital account Share premium account To Share application account Equity share capital account Share premium account To Share application Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. 30,000 30,000 1,20,000 22,500 1,42,500 1,20,000 22,500 1,42,500 1,40,000 2,500 1,42,500 1,20,000 12,500 1,32,500 83

c.

d.

e.

Financial Accounting II

66.

67.

The amount debited to the bank account receipt of first and final call amount is a. Rs.13,500 b. Rs.36,820 c. Rs.29,920 d. Rs.38,420 e. Rs.28,580. The journal entry passed on the forfeiture of the shares are Equity Share Capital Account Dr. To Share First and Final Call Account To Shares Forfeited Accounts b. Equity Share Capital Account Dr. To Share First and Final Call Account To Shares Forfeited Account c. Equity Share Capital Account Dr. To Share First and Final Call Account To Shares Forfeited Account d. Equity Share Capital Account Dr. Share First and Final Call Account Dr. To Shares Forfeited Account e. Shares Forfeited Accounts Dr. Share First and Final Call Account Dr. To Equity Share Capital account The journal entries passed on the reissue of the forfeited shares are a. Bank Account Dr. Shares Forfeited Account Dr. To Equity Share Capital Account b. Bank Account Dr. Shares Forfeited Account Dr. To Shares Capital Account c. Bank Account Dr. Shares Forfeited Account Dr. To Equity Share Capital Account d. Equity Share Capital Account Dr. Shares Forfeited Account Dr. To Bank Account e. Equity Share Capital Account Dr. Shares Forfeited Account Dr. To Bank Account The entry for transfer to capital reserve on reissue of the forfeited shares is a. b. c. d. e. Capital Reserve Account To Shares Forfeited Account Capital Reserve Account To Shares Forfeited Account Shares Forfeited Account To Capital Reserve Account Shares Forfeited Account To Capital Reserve Account Shares Forfeited Account To Capital Reserve Account Dr. Dr. Dr. Dr. Dr. a. 400 320 80 640 320 320 400 80 320 320 320 640 400 80 480 40 360 400 360 40 400 140 360 500 40 360 400 140 360 500 280 280 360 360 40 40 360 360 280 280

68.

69.

84

Part II

Based on the following information answer the questions 70 to 72. A Limited company issued 40,000 equity shares of Rs.10 each, at a premium of Rs.2.50 per share. The amount payable was Rs.2 on application, Rs.4.50 on allotment (including premium) and Rs.6 on call. 96,400 shares were applied for and owing to heavy oversubscription, allotment was made as follows. Applicants for 23,000 shares (in respect of application for 2,000 or more shares) were allotted 10,560 shares. Applicants for 48,000 shares (in respect of applications for 1000 or more shares) were allotted 14,200 shares. Applications for 25,400 shares were allotted 15,240 shares pro rata.

It was decided that the excess amount received on application would be utilized in payment of allotment money and the surplus, if any, would be refunded. X to whom 300 shares were allotted on pro rata basis failed to pay the allotment money. Y who was allotted 450 shares also on pro rata basis failed to pay the call money. Their shares were consequently forfeited after the call was made. 70. The entry for the receipt of the shares application money is Bank Account To Share Application Account b. Share Application Account To Bank Account c. Share Application Account To Bank Account d. Bank Account To Share Application Account e. Bank Account To Share Application Account The journal entry for the forfeiture of the shares is a. Share Capital Account Equity Share Premium Account Forfeited Shares Account To Share Allotment Account
To Share Call Account

a.

Dr. Dr. Dr. Dr. Dr.

1,92,800 1,92,800 1,92,800 1,92,800 1,60,000 1,60,000 1,60,000 1,60,000 4,33,800 4,33,800

71.

Dr. Dr. Dr.

2,800 950 4,500 750 7,500

b.

c.

d.

Share Capital Account Equity Share Premium Account Forfeited Shares Account To Share Allotment Account To Share Call Account Share Capital Account Equity Share Premium Account To Forfeited Shares Account To Share Allotment Account To Share Call Account Share Capital Account Equity Share Premium Account Forfeited Shares Account To Share Allotment Account To Share Call Account

Dr. Dr. Dr.

4,500 950 2,800 750 7,500

Dr. Dr.

7,500 750 2,800 950 4,500

Dr. Dr. Dr.

2,800 750 4,500 550 7,500 85

Financial Accounting II

72.

Share Allotment Account Dr. 3,000 Equity Share Premium Account Dr. 950 Forfeited Shares Account Dr. 4,500 To Share Call Account 950 To Share Capital Account 7,500 The balance in the bank account after all the above mentioned transactions are completed is a. b. c. d. e. Rs.5,02,250 Rs.4,24,600 Rs.4,90,850 Rs.4,94,550 Rs.4,98,250.

e.

Based on the following information answer the questions 73 to 78. ABC Limited issued 50,000 equity shares of Rs.10 each at a premium of Rs.2.50 per share. Under the terms of the issue, the shares were to be paid for as follows: 2003 January 1, on application (including Rs.2.50 premium on issue per share) February 1, on allotment Rs.5.00 Rs.5.00

March 1, balance Rs.2.50 The issue was oversubscribed. The applications received are summarized below: Number of Applications in Categories 40 Applied for by each applicant in the three categories Issued to each applicant 1,000 500 20 10,000 1,000 1 40,000 10,000

One of the conditions of the issues was that amounts overpaid on application were to be retained by the company and used in reduction of further sums due on shares allotted. All surplus contributions were refunded on 15th February, 2003. S who had subscribed Rs.5,000 on an application for 1,000 shares was unable to meet the claim due on March 1. On April 1, 2003 the directors forfeited his shares. All other shareholders paid the sums requested on the due dates. On May 1, 2003 the directors reissued the forfeited shares as fully paid to G, on receiving a payment of Rs.5,250. 73. The amounts refunded to A, B and C categories of the applicant respectively are: a. b. c. d. e. 74. a. b. c. d. e. NIL, Rs.7,50,000, Rs.75,000 Rs.75,000, NIL, Rs.7,50,000 Rs.2,00,000, Rs.2,00,000, Rs.1,00,000 Rs.7,50,000, 75,000, NIL Rs.2,00,000, Rs.10,00,000, Rs.1,00,000. NIL, Rs.7,50,000, Rs.50,000 NIL, Rs.50,000, Rs.25,000 Rs.50,000, NIL, 25,000 Rs.75,000, Rs.50,000, Rs.25,000 Rs.50,000, Rs.25,000, NIL.

The amount transferred to Calls-in-advance for various categories of the applicants are

86

Part II

75.

The entry for the receipt of the share application money is a. Share Application and Allotment Account To Bank Account b. Bank Account To Share Application and Allotment Account c. Share Application and Allotment Account To Bank Account d. Share Application and Allotment Account To Bank Account e. Bank Account Dr. 7,50,000 Dr. 8,25,000 8,25,000 Dr. 7,50,000 7,50,000 Dr. 14,00,000 14,00,000 Dr. 14,00,000 14,00,000

76.

To Share Application and Allotment Account 7,50,000 The Journal entry for transferring share application and allotment money to share capital and share premium account is a. Share Application and Allotment Account Dr. To Share Capital Account To Share Premium account To Bank Account To Calls-in-advance Account b. Share Capital Account Dr. 14,00,000 3,75,000 1,25,000 8,25,000 75,000 Dr. 14,00,000 8,25,000 3,75,000 1,25,000 75,000 Dr. 14,00,000 1,25,000 3,75,000 8,25,000 75,000 Dr. 14,00,000 1,25,000 8,25,000 3,75,000 75,000 14,00,000 3,75,000 1,25,000 8,25,000 75,000

To Share Application and Allotment Account To Share Premium Account To Bank Account To Calls-in-advance Account c. Share Application and Allotment Account To Share Capital Account To Share Premium Account To Bank Account To Calls-in-advance Account d. Share Application and Allotment Account To Share Capital Account To Share Premium Account To Bank Account To Calls-in-advance Account e. Share Application and Allotment Account To Share Capital Account To Share Premium Account To Bank Account To Calls-in-advance Account

87

Financial Accounting II

77.

The journal entry for the forfeiture of the shares is Share Capital Account Dr. To Shares Forfeited Account To Shares First & Final Call Account b. Share Capital Account Dr. To Shares Forfeited Account To Shares First & Final Call Account c. Share Capital Account Dr. To Shares Forfeited Account To Shares First & Final Call Account d. Share Capital Account Dr. To Shares Forfeited Account To Shares First & Final Call Account e. Share Capital Account Dr. To Shares Forfeited Account To Shares First & Final Call Account The journal entry for the reissue of the forfeited shares is a. Bank Account Shares Forfeited Account To Share Capital account To Share Premium Account To Capital Reserve Account b. Bank Account Shares Forfeited Account To Share Capital Account To Share Premium Account To Capital Reserve Account c. Bank Account Shares Forfeited Account To Share Capital Account To Share Premium Account To Capital Reserve Account d. Bank Account Shares Forfeited Account To Share Capital Account To Share Premium Account To Capital Reserve Account e. Bank Account Shares Forfeited Account To Share Capital Account To Share Premium Account To Capital Reserve Account Dr. Dr. 3,750 5,250 5,000 3,750 250 Dr. Dr. 5,250 3,750 3,750 5,000 250 Dr. Dr. 3,750 5,250 3,750 250 5,000 Dr. Dr. 3,750 5,250 5,000 250 3,750 Dr. Dr. a. 5,000 2,500 2,500 5,000 3,000 2,000 5,000 1,750 3,250 5,000 3,750 1,250 5,000 1,250 3,750 5,250 3,750 5,000 250 3,750

78.

88

Part II

79.

Bright Foods Limited is increasing its share capital by way of right issue to the shareholders in proportion of one new share for every four shares held. The market value of the share at the time of announcement of the right issue is Rs.250. The company offers under right issue, a share of Rs.100 at a premium of Rs.25. The value of right is a. b. c. d. e. Rs.25 Rs.22 Rs.20 Rs.28 Rs.24.

80.

Apoorva Granite Limited had allotted 15,000 shares to the applicants of 21,000 shares on pro rata basis. The amount payable was Rs.2 on application; Rs.5 on allotment (including premium of Rs.2 each); Rs.5 on first and final call. Vijay, a shareholder failed to pay first and final call on his 500 shares. All these shares were reissued @ Rs.8 per share. The amount credited to the capital reserve is a. b. c. d. e. Rs.1,200 Rs.1,800 Rs.1,500 Rs.1,700 Rs.1,400.

81.

ABC Limited has issued 40,000 equity shares which were underwritten by three different person as follows: A B C A B C 20,000 Shares 12,000 Shares 8,000 Shares 2,000 Shares 1,000 Shares 3,000 Shares

In addition there was firm underwriting by:

The company received applications for 30,400 shares including firm underwriting. The numbers of marked forms were as follows: A B C 6,000 Shares 9,000 Shares 3,400 Shares

The allocation of liability of A, B and C respectively in case the underwriting agreement did not provide relief for firm underwriting is a. b. c. d. e. 10,000, 11,000 and 9,000 shares 6,000, 1,500 and 8,500 shares 10,000, 1,000 and 6,000 shares 8,000, 7,000 and 6,600 shares 8,000, 1,000 and 6,600 shares.

Based on the following information answer the questions 82 to 85. Sonex Ltd., had allotted 10,000 shares to applicants for 14,000 shares on pro rata basis. The amount payable was Rs.2 on application, Rs.5 on allotment (including premium of Rs.2 each), Rs.3 on first call and Rs.2 on second and final call. Vikas, who was allotted 300 shares, failed to pay the first call. On his subsequent failure to pay the second and final call, all his shares were forfeited. Out of the forfeited shares, 200 shares were reissued @ Rs.9 per share. 89

Financial Accounting II

82.

The journal entry for the forfeiture of shares is a. Share first call A/c. Share second call A/c. To Share capital A/c b Share capital A/c. Share Premium A/c. To Shares forfeited A/c. c. Share Capital A/c. To Shares Forfeited A/c. To Share Premium A/c. d. Share Capital A/c. To Share First Call A/c. To Share Second and Final Call A/c. To Shares Forfeited A/c. e. Bank A/c. Shares Forfeited A/c. To Share Second and Final Call A/c. To Share Premium A/c. Dr. 1,500 1,500 2,000 1,500 Dr. 2,800 1,800 200 Dr. Dr. Dr. Dr. Dr. Dr. Dr. 1,600 200 1,800 200 1,600 1,800 1,800 200 2,000 1,500 900 600 Dr. 3,000 900 600 1,500 Dr. 2,100 1,500 600 Dr. Dr. 3,000 600 3,600 Dr. Dr. 3,000 600 3,600

83.

The journal entry for reissue of forfeited shares is a. Bank A/c. To Share Capital A/c. To Share Forfeited A/c. b. Bank A/c. Share Capital A/c. To Share Forfeited A/c c. Capital Reserve A/c. Share Capital A/c. To Share Forfeited A/c. d. Bank A/c. Shares Forfeited A/c. To Equity Share Capital A/c. e. Share Forfeited A/c. To Bank A/c. To Share Forfeited

84.

The amount transferred to the capital reserve upon reissue of forfeiture of the shares is a. b. c. d. e. Rs.600 Rs.720 Rs.900 Rs.800 Rs.1,100.

90

Part II

85.

The journal entry for transfer to the capital reserve upon reissue of forfeiture of the shares is a. b. c. d. e. Capital Reserve A/c. To Shares Forfeited A/c. Shares Forfeited A/c. To Capital Reserve A/c. Capital Reserve A/c. To Bank A/c. Shares Forfeited A/c. To Capital Reserve A/c. Bank A/c. To Capital Reserve A/c. Dr. 800 800 Dr. 800 800 Dr. 500 500 Dr. 600 600 Dr. 600 600

86.

Ray Ltd. issued 1,000 shares of Rs.10 each. The called-up value is Rs.6 per share. The company forfeited 50 shares of Mr. De for non-payment of allotment money of Rs.4 per share. On forfeiture, share forfeiture account will be a. b. c. d. e. Credited with Rs.500 Debited with Rs.500 Credited with Rs.200 Debited with Rs.200 Credited with Rs.100.

87.

AB Ltd. offers 5 right shares to its existing shareholders for every 7 shares held by them. If the price of right issue is Rs.200 per share and its market value is Rs.260 per share, then the value of a right is a. b. c. d. e. Rs.52.00 Rs.40.00 Rs.25.00 Rs.21.66 Rs.20.00.

88.

Sangria Ltd. proposed to issue 10,000 equity shares of Rs.100 each at a premium of 200%. The minimum amount of application money to be collected per share is a. b. c. d. e. Rs.5.00 Rs.30.00 Rs.15.00 Rs.10.00 Cannot be issued at a premium of 200%. Liabilities Equity shares of Rs.10 each fully paid-up 12% Redeemable preference shares of Rs.100 each fully paid-up General Reserve Profit & Loss account Share premium Sundry creditors Rs. Assets Rs. 19,50,000 4,50,000 2,00,000

89.

The following is the Balance Sheet of VIBGYR Ltd. as on March 31, 2003: 10,00,000 Sundry assets 8,00,000 Investments 4,00,000 Cash at bank 2,50,000 25,000 1,25,000 26,00,000 26,00,000 91

Financial Accounting II

The Board of Directors of the company decided to redeem the preference shares at a premium of 10%. In order to facilitate the redemption, the Board has taken the following decisions: To sell the investments for Rs.4,00,000. To issue sufficient equity shares at a premium of Rs.2 per share to raise the balance need of funds. To maintain minimum bank balance of Rs.50,000.

The Board of Directors initiated the above course of action during the month of April, 2003 and redeemed all the preference shares. The amount to be transferred to Capital Redemption Reserve is a. b. c. d. e. 90. Rs.70,000 Rs.5,25,000 Rs.1,25,000 Rs.8,00,000 Rs.5,50,000.

Silver Coats Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium of Rs.2 per share. The entire issue was underwritten by three underwriters in the following percentages: Anil Vimal Sunil 30% 40% 30% 22,000 shares 24,000 shares 28,000 shares 16,000 shares

The details of marked and unmarked applications received are: Marked applications of Anil Vimal Sunil Unmarked applications a. b. c. d. e. 91. Nil 9,600 3,200 16,000 8,000.

The final liability of Vimal in terms of number of shares is

Fairex Ltd. issued 2,000 10% Preference shares of Rs.100 each at par, which are redeemable at a premium of 10%. For the purpose of redemption, the company issued 1,500 Equity Shares of Rs.100 each at a premium of 20% per share. At the time of redemption of Preference Shares, the amount to be transferred by the company to the Capital Redemption Reserve Account is a. b. c. d. e. Rs.50,000 Rs.40,000 Rs.2,00,000 Rs.2,20,000 Rs.70,000.

92.

The Authorized Share Capital of SIRI Ltd. is Rs.15,00,000, which is divided into 1,00,000 Equity Shares of Rs.10 each and 5,000 10% Preference Shares of Rs.100 each. Out of 1,00,000 equity shares, 80,000 shares have been subscribed and called-up and paid-up to the extent of Rs.8 per share.

92

Part II

93.

The company has the following balances as on March 31, 2003: Profit & Loss a/c (Credit) Rs.2,00,000 General reserve Rs.2,20,000 The company has decided in a general meeting to capitalize part of the above reserves for the following purposes: To make partly paid equity shares into fully paid shares. To issue one bonus share for every eight shares held. The amount to be transferred to Bonus to Shareholders account to effect the above transactions is a. Rs.1,00,000 b. Rs.1,60,000 c. Rs.2,60,000 d. Rs.3,10,000 e. Rs.4,20,000. Sonic Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share amount was payable as: On application On first call On second and final call Rs.2 Rs.3 Rs.2 On allotment (including premium) Rs.5

Applications were received for 14,000 shares and the shares were allotted to applicants on pro rata. Vikas, who was allotted 300 shares, failed to pay the first call. On his subsequent failure to pay the second and final call, all his shares were forfeited. Out of the forfeited shares, 200 shares were reissued @ Rs.9 per share. The amount transferred to capital reserve is a. b. c. d. e. 94. Rs.200 Rs.1,000 Rs.800 Rs.1,300 Rs.1,200.

Amax Ltd., a listed company, proposed to issue 10,000 equity shares of Rs.100 each at par by way of private placement. The maximum amount of brokerage that can be paid by the company is a. b. c. d. e. Rs.5,000 Rs.10,000 Rs.50,000 Rs.25,000 No brokerage can be paid.

95.

The issued capital of Marshal Ltd. is Rs.100,00,000 divided into 10,00,000 shares which were issued at a premium of 100%. The company offers two shares for every three shares held to its existing shareholders. If the rights issue price is Rs.410 per share and the market value at the time of rights issue is Rs.560 per share, the value of right is a. b. c. d. e. Rs.60 Rs.20 Rs.150 Rs.410 Rs.560. 93

Financial Accounting II

96.

Mars Ltd. issued 10,000 18% debentures of Rs.100 each at a premium of 20%. Mr. Solomon entered into an underwriting agreement for 80% of the issue with a firm liability of 1,000 debentures under a clause of maximum commission. Marked applications were for 6,000 debentures. The underwriting commission payable to Mr. Solomon is a. b. c. d. e. Rs.30,000 Rs.24,000 Rs.48,000 Rs.20,000 Rs.18,000.

97.

Prosperous Ltd. is a newly established company which issued 20,000 shares of Rs.100 each at a premium of Rs.20 per share payable as follows: On application On allotment On first call On second and final call Rs.20 Rs.50 (including premium) Rs.30 Rs.20

Applications were received for 30,000 shares and pro rata allotment was made to applicants of 24,000 shares. Money excess received on application was employed on account of sum due on allotment. Rahul, to whom 400 shares were allotted failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Mahesh, the holder of 600 shares failed to pay the two calls and his shares were forfeited after the second call. Of the forfeited shares, 800 shares were reissued to Kishore at a discount of 10%, the whole of Rahuls forfeited shares being reissued. The total of liabilities side of the Balance Sheet of the company after effecting the above transactions will be a. b. c. d. e. 98. Rs.24,00,000 Rs.24,03,600 Rs.28,00,000 Rs.27,80,000 Rs.23,78,000.

Kanishk Ltd. issued 1,50,000 equity shares of Rs.10 each at a premium of Rs.2 payable as under: On application Rs.2

On allotment (including premium) Rs.5 On first call On final call Rs.3 Rs.2

Sudha, who applied for 1,000 shares, was allotted 600 shares. She failed to pay the amount due on first call and final call. The shares allotted to her were forfeited. Out of the forfeited shares, 300 shares were reissued to Mr. Tarun at Rs.9 per share. The balance in the share forfeiture account is a. b. c. d. e. 94 Rs.1,500 Rs.1,200 Nil Rs.3,000 Rs.4,200.

Part II

99.

100.

101.

Zidney Ltd. issued 20,000 equity shares of Rs.100 each at par, out of which, only Rs.85 is called-up. Mr. Arun did not pay the call money of Rs.25 and hence all the 1,000 shares allotted to him were forfeited. If all these shares are to be reissued as fully paid-up, the minimum amount to be collected is a. Rs.40,000 b. Rs.1,00,000 c. Rs.15,000 d. Rs.60,000 e. Rs.25,000. Little Stars Ltd. issued 20,000 shares of Rs.10 each at a premium of 20% on May 01, 2003, payable as follows: On application Rs.4.50 (inclusive of premium) On allotment Rs.2.50 On first and final call Rs.5.00 Mrs. Nandita, to whom 1,000 shares were allotted, has paid Rs.5,000 on June 01, 2003. At the time of remitting allotment money, she indicated that the excess money should be adjusted towards call money. The directors of the company made the first and final call on October 31, 2003. The company has policy of paying interest in calls-in-advance. The amount of interest paid to Mrs. Nandita on calls-in-advance is a. Rs.62.50 b. Rs.52.08 c. Rs.125.00 d. Rs.150.00 e. Rs.75.00. Sunshine Ltd. issued 2,00,000 equity shares of Rs.10 each at a premium of 20%, payable: On application Rs.2 On allotment Rs.5 (including premium) On first call Rs.3 On final call Rs.2 Mr. Suresh, to whom 500 shares were allotted, failed to pay the first call money and his shares were forfeited before the final call is made. The journal entry to record the forfeiture by the company is a. Share capital a/c. Share premium a/c. To Share first call a/c. To Share forfeiture a/c. Share capital a/c. Share premium a/c. To Share first call a/c. To Share final call a/c. To Share forfeiture a/c. Share capital a/c. To Share first call a/c. To Share forfeiture a/c. Share capital a/c. To Share first call a/c. To Share forfeiture a/c. Share capital a/c To Share premium a/c. To Share first call a/c. To Share forfeiture a/c. Dr. Dr. Rs. 4,000 1,000 Rs.

1,500 3,500 Dr. Dr. 5,000 1,000 1,500 1,000 3,500 Dr. 4,000 1,500 2,500 Dr. 5,000 1,500 3,500 Dr. 5,000 1,000 1,500 2,500 95

b.

c.

d.

e.

Financial Accounting II

102.

Krishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Ramya, to whom 300 shares were allotted failed to pay the final call of Rs.30 per share and hence, all her shares were forfeited. At the time of forfeiture, the amount transferred to share forfeiture account was a. Rs.9,000 b. Rs.18,000 c. Rs.21,000 d. Rs.27,000 e. Rs.30,000. The directors of Ganga Ltd. made the final call of Rs.30 per share on May 15, 2003 indicating the last date of payment of call money to be May 31, 2003. Mr.Hasan, holding 5,000 shares paid the call money on July 15, 2003. If the company adopts Table A, the amount of interest on calls-in-arrear to be paid by Mr. Hasan is a. b. c. d. e. Rs.625.00 Rs.937.50 Rs.750.00 Rs.1,125.00 Rs.1,250.00.

103.

104.

Sundaram Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20% payable Rs.4 on application (including premium), Rs.5 on allotment and the balance on first and final call. The company received applications for 15,000 shares and allotment was made pro rata. Sudhir, to whom 3,000 shares were allotted, failed to pay the amount due on allotment. All his shares were forfeited after the call was made. The forfeited shares were reissued to Namita at par. Assuming that no other bank transactions took place, the bank balance of the company after affecting the above transactions is a. Rs.1,14,000 b. Rs.1,32,000 c. Rs.1,20,000 d. Rs.1,00,000 e. Rs.1,26,000. Kumar Ltd. issued 75,000 shares of Rs.10 each at par payable Rs.2 on application, Rs.4 on allotment and Rs.4 on call. Applications were received for 75,000 shares and all applicants were allotted in full. Rahul, who was allotted 500 shares, paid Rs.2,500 at the time of allotment indicating that the excess amount to be adjusted against call money. Subsequently, when the directors made the call, Rahul paid the balance amount. The entry to record the receipt of balance amount and adjustment of calls-in-advance is a. Bank a/c Dr. Calls-in-Advance a/c. To Share first and final call a/c. Share first and final call a/c. To Bank a/c. To Calls-in-Advance a/c. Bank a/c. To Calls-in-Advance a/c. Bank a/c. Calls-in-Advance a/c. To Share first and final call a/c. Share first and final call a/c. Bank a/c. To Calls-in-Advance a/c. Dr. Dr. Rs.500 Rs.1,500 Rs.2,000 Rs.2,000 Rs.1,500 Rs.500 Dr. Dr. Dr. Dr. Dr. Rs.500 Rs.500 Rs.1,500 Rs.500 Rs.2,000 Rs.1,500 Rs.500 Rs.2,000.

105.

b.

c. d.

e.

96

Part II

106.

Hitech Ltd. acquired assets worth Rs.7,50,000 from Light-blue Ltd. by issue of shares of Rs.100 at a premium of 25%. The number of shares to be issued by Hitech Ltd. to settle the purchase consideration is a. b. c. d. e. 6,000 shares 7,500 shares 9,375 shares 5,625 shares 10,000 shares.

107.

The following is an extract of the Balance Sheet of Guru Ltd. Liabilities 15,000 Preference shares of Rs.10 each fully paid-up 1,20,000 Equity shares of Rs.10 each, Rs.7 paid-up General reserve Securities premium Capital reserve Profit and loss account Rs. 1,50,000 8,40,000 2,00,000 50,000 1,00,000 3,50,000

The directors decided to issue one bonus share for every three shares held, after making the final call of Rs.3 per share. It was decided to use capital reserve, securities premium, general reserve to the fullest extent possible and the deficit to be adjusted from profit and loss account. The capital reserve includes a cash gain of Rs.60,000 against the sale of machinery. The securities premium includes Rs.10,000 being the amount of premium on the shares issued to promoters. The amount to be adjusted from profit and loss account, for the issue of bonus shares is a. b. c. d. e. 108. Rs.1,50,000 Rs.90,000 Rs.1,20,000 Rs.1,00,000 Rs.50,000.

Great Tyres Ltd. issued 80,000 shares of Rs.10 each at a premium of 25% payable Rs.2 on application, Rs.4.50 (including premium) on allotment and the balance on call. Applications were received for 1,92,800 shares and allotment was made as under: Applicants for 50,800 shares were allotted 30,480 shares pro rata Applicants for 96,000 shares were allotted 28,400 shares pro rata Applicants for 46,000 shares were allotted 21,120 shares pro rata

The surplus money, if any, would be refunded only after utilizing the excess received on application towards the payment of allotment dues. The amount refunded to the applicants is a. b. c. d. e. Rs. Nil Rs.7,400 Rs.1,92,800 Rs.1,34,400 Rs.2,25,600. 97

Financial Accounting II

109.

A company offered 60,000 shares of Rs.10 each at a premium of 50%. 48,000 shares were underwritten by Feroz. The number of shares subscribed by the public was 54,000 out of which the marked applications were for 36,000 shares. The liability of Feroz is for a. b. c. d. e. 6,000 shares 12,000 shares 4,800 shares 4,000 shares Nil shares.

110.

Harish Ltd. issued 5,000 shares of Rs.100 each at a premium of 30% payable Rs.50 (inclusive of premium) on application, Rs.30 on allotment and Rs.50 on call. Applications were received for 7,500 shares and allotment was made pro rata. Harita, an allottee of 1,000 shares failed to pay the amount due on call. All her shares were forfeited and were reissued to Hema as fully paid-up for Rs.90 per share. The amount to be transferred to share forfeiture account is a. b. c. d. e. Rs.40,000 Rs.30,000 Rs.50,000 Rs.70,000 Rs.80,000.

111.

The share capital of Suhasini Ltd. consists of 5,000 equity shares of Rs.100 each. The net profit for the year 2002-03 amounted to Rs.1,00,000 of which, the directors proposed to distribute Rs.75,000 to the shareholders as dividend. The minimum amount of profits to be transferred to reserve is a. b. c. d. e. Rs.Nil Rs.3,750 Rs.5,000 Rs.7,500 Rs.2,500. On application On allotment On first call On final call Rs.2 Rs.5 (including premium) Rs.3 Rs.2

112.

Sunshine Ltd. issued 2,00,000 equity shares of Rs.10 each at a premium of 20%, payable:

Mr. Suresh, to whom 1,000 shares were allotted, failed to pay the first call money and his shares were forfeited before the final call is made. The journal entry to record the forfeiture by the company is Rs. a. Share capital a/c. Share premium a/c. To Share first call a/c. To Share forfeiture a/c. b. Share capital a/c. Share premium a/c. To Share first call a/c. To Share final call a/c. To Share forfeiture a/c. 98 Dr. Dr. 10,000 2,000 3,000 2,000 7,000 Dr. Dr. 8,000 2,000 3,000 7,000 Rs.

Part II

c.

Share capital a/c. To Share first call a/c. To Share forfeiture a/c.

Dr.

8,000 3,000 5,000

d.

Share capital a/c. To Share first call a/c. To Share forfeiture a/c.

Dr.

10,000 3,000 7,000

e.

Share capital a/c To Share premium a/c. To Share first call a/c.

Dr.

10,000 2,000 3,000

113.

To Share forfeiture a/c. 5,000 Consider the following data pertaining to three underwriters Amit, Bhoumick and Chandini: Particulars Shares underwritten Marked applications a. b. c. d. e. 1,500 shares 1,160 shares 1,600 shares 1,550 shares 440 shares. Amit 4,000 3,000 Bhoumick Chandini 8,000 4,000 12,000 5,500

If total applications received are for 22,400 shares, the final liability of Chandini is

114.

Gautam Ltd. issued 5,000, 8% preference shares of Rs.100 each at a discount of 10%, which are redeemable at par. The amount of reserves available which can be used for redemption is Rs.2,00,000. For the purpose of redemption, it was decided to issue equity shares of Rs.10 each at a premium of 10%. The number of shares to be issued for redemption of preference shares is a. b. c. d. e. 30,000 shares 27,273 shares 50,000 shares 45,455 shares 20,000 shares.

115.

Zenith Ltd. forfeited 1,000 shares of Rs.10 each, which were issued at a discount of 10%, for non-payment of first call of Rs.2 and final call of Rs.3. Of the forfeited shares, 800 shares were reissued to Guru at a discount of 30%. The journal entry to record the reissue is Rs. a. a. To Bank a/c. To Share forfeiture a/c. b. b. Share forfeiture a/c. To Share capital a/c. Bank a/c. Dr. 5,600 99 Dr. 2,400 8,000 Bank a/c. Dr. 5,600 5,600 2,400 Share capital a/c. Dr. 8,000 Rs.

Financial Accounting II

c. c. Discount on issue of shares a/c. Share forfeiture a/c To Share capital account. d. d. Discount on issue of shares a/c. To Share capital a/c. e. e. To Share forfeiture a/c. To Share capital a/c. 116. 2,400 5,600 Bank a/c. Dr. 8,000 Dr. 2,400 8,000 Bank a/c. Dr. 5,600 Dr. Dr. 800 1,600 8,000

Bishop Limited offers to its existing shareholders two shares for every five shares held by them. The rights issue price is Rs.20 (Rs.10 being the premium). The present market value of the share is Rs.25. The value of the rights is a. b. c. d. e. Rs.1.84 Rs.2.12 Rs.1.43 Rs.2.35 Rs.1.56.

Based on the following information answer questions 117 to 120. A Co. issued 10000 shares. Amount payable is as follows. On Application On Allotment On First Call On Second Call Rs.2 Rs.3 Rs.3 Rs.2

D, a shareholder to whom 200 shares were allotted, failed to pay the first and second call money. His shares were forfeited, the forfeited shares were issued to R as fully paid for the Rs.9 per share. 117. The amount credited to share forfeiture is a. b. c. d. e. 118. a. b. c. d. Rs.1,000 Rs.600 Rs.400 Rs.1,800 Rs.200. Debited Rs.1,000 Credited Rs.1,000 Debited Rs.600 Credited Rs.600

Calls-in-arrears is

100

Part II

e. 119. a. b. c. d. e. 120. a. b. c. d. e.

None of the above. Debited with Rs.1,000 Debited with Rs.200 Credited with Rs.1,800 Credited with Rs.200 Credited with Rs.1,000. Rs.1,000 Rs.1,800 Rs.1,200 Rs.800 Rs.200.

On reissue of shares, share forfeiture account is

Amount transferred to capital reserve is

Based on the following information answer questions 121 to 125. Y Ltd. forfeited 500 shares of face value Rs.10 held by A for non-payment of the 1st call of Rs.4. A has paid Rs.6 towards application and allotment money for each share. The company reissued 300 shares at Rs.9 each. 121. On forfeiture the amount debited to share capital account is a. b. c. d. e. 122. a. b. c. d. e. 123. a. b. c. d. e. 124. a. b. c. d. Rs.5,000 Rs.3,000 Rs.2,000 Rs.1,000 Rs.500. Debited with Rs.3,000 Credited with Rs.3,000 Debited with Rs.2,000 Credited with Rs.2,000 None of the above. Debited with Rs.3,000 Credited with Rs.3,000 Debited with Rs.300 Credited with Rs.300 Debited with Rs.2,700. Rs.2,000 Rs.1,000 Rs.1,500 Rs.800 101

On forfeiture, share forfeiture account is

On reissue of forfeited shares, share forfeiture account is

The amount transferred to capital reserve is

Financial Accounting II

e. 125. a. b. c. d. e. 126.

Rs.300. Rs.900 Rs.1,200 Rs.300 Rs.100 None of the above.

The share forfeiture account has a balance of

As per the terms of rights issue of Mazigon Ltd., its shareholders are to get two shares for every eight shares held by them. If the right issue price is Rs.120 and the market value per share is Rs.200, then the value of a right is a. b. c. d. e. Rs.16.00 Rs.20.00 Rs.30.00 Rs.50.00 Rs.64.00.

127.

Beta Ltd. issued 50,00,000 equity shares of Rs.10 each at par. The issue was fully underwritten X 40%; Y 40% and Z 20%. Applications were received for a total of 48,00,000 shares of which the marked applications were as follows: X 26,00,000; Y 14,00,000; Z 5,00,000 The liability of the underwriters is a. b. c. d. e. X 80,000; Y 80,000; Z 40,000 X 53,333; Y 80,000; Z 66,667 X Nil; Y Nil; Z 2,00,000 X Nil; Y 2,00,000; Z Nil X 2,00,000; Y Nil; Z Nil.

128.

A Ltd. issued 1,00,000 shares of Rs.10 each to the public of which 80,000 shares were subscribed for. The issue price was Rs.12 payable Rs.5 on application (inclusive of premium), Rs.5 on allotment and Rs.2 when called up. All the shareholders paid the allotment amounts, while call moneys were not received in respect of 10,000 shares. As per the terms of issue, these shares were forfeited. The balance in the share premium account after the forfeiture will be a. b. c. d. e. Rs.20,000 Rs.1,20,000 Rs.1,40,000 Rs.1,60,000 Rs.2,00,000.

129.

Zed Ltd. forfeited 500 shares (face value Rs.10) called up Rs.6 held by A for non-payment of 1st call of Rs.2 per share. It reissued 300 of the forfeited shares @ Rs.9 per share and the amount transferred to capital reserve shall be a. b. c. d. e. Rs.300 Rs.800 Rs.900 Rs.1,000 Rs.2,000.

130. 102

Rainbow Ltd. issued 5,00,000 equity shares, which was underwritten by Red 40%, White

Part II

30% and Blue 30%. Applications for 4,00,000 shares were received in all, out of which application for 1,00,000 shares had the stamp of Red, 50,000 shares that of White and those for 1,00,000 shares that of Blue. The remaining applications did not bear any stamp. The liabilities of the underwriters are: a. b. c. d. Red 1,00,000; White 1,00,000; Blue 50,000 Red 50,000; White 1,00,000; Blue 1,00,000 Red 40,000; White 55,000; Blue 5,000 Red 5,000; White 40,000; Blue 55,000

e. Red Nil; White 55,000; Blue 5,000. 131. A and B are two underwriters, underwrite 2000 and 3000 shares. Total applications are for 4000 shares out of which marked applications are for A 1700 and for B 2100. The liability of A and B for unsubscribed shares will be a. 400 and 600 respectively b. 500 and 500 respectively c. 220 and 780 respectively d. 447 and 553 respectively e. 450 and 550 respectively. 132. The face value of the equity shares of a company is Rs.10 and the current market price is Rs.17. The company issues right shares at the rate of 3 equity shares for every 5 existing equity shares held, the right shares being priced at Rs.13. The value of rights is a. Rs.7.00 b. Rs.2.50 c. Rs.1.50 d. Rs.4.00 e. Nil. 133. If the company issues Rs.40,000 amount of equity shares at a discount of 10% for redemption of preference shares of Rs.1,50,000 at a premium of 5%, then the amount to be transferred to capital redemption reserve account is a. Rs.1,21,500 b. Rs.1,10,000 c. Rs.1,17,500 d. Rs.1,23,000 e. Rs.1,14,000. 134. If Rs.6 has been called-up by the company for a share of Rs.10 and Rs.5 is paid, the amount is forfeited by debiting the share capital account by a. Rs.11 b. Rs.10 c. Rs.6 d. Rs.5 e. Rs.4. 135. If the yield rate of return of Expert Ltd. is 15.75%, normal rate of return is 9% and nominal value of its equity share is Rs.10, then the value of an equity share of Expert Ltd. is a. Rs.20.00 b. Rs.17.50 c. Rs.15.75 d. Rs.14.18 e. Rs.12.00. Based on the following information answer questions 136 to 138. 103

Financial Accounting II

AB Company forfeited 50 shares (face value Rs.10) held by Mr. X for non-payment of 1st call of Rs.3 per share. The called-up value is Rs.7. The company reissued 40 shares of forfeited shares @ Rs.8 per share as fully paid-up. 136. On forfeiture the amount debited to share capital account is a. Rs.500 b. Rs.400 c. Rs.350 d. Rs.200 e. Rs.150. 137. On reissue of forfeited shares, share forfeiture account is a. Debited by Rs.150 b. Credited by Rs.100 c. Debited by Rs.100 d. Debited by Rs.80 e. Credited by Rs.80. 138. On reissue of forfeited shares, the amount transferred to capital reserve is a. Rs.200 b. Rs.160 c. Rs.120 d. Rs.100 e. Rs.80. 139. ABC Ltd. has Rs.1,00,000 worth of redeemable preference shares to be redeemed at a premium of 10%. The balance sheet shows a profit figure of Rs.25,000 and a share premium account of Rs.4,000. The required amount from fresh issue of shares is a. Rs.89,000 b. Rs.85,000 c. Rs.81,000 d. Rs.75,000 e. Rs.71,000. 140. AB Company proposes a dividend of 10%. The called-up equity capital of the company is Rs.12,00,000 and there are calls-in-arrears to the extent of Rs.30,000. The dividend amount payable is a. Rs.1,50,000 b. Rs.1,20,000 c. Rs.1,17,000 d. Rs.1,15,000 e. Rs.1,10,000. 141. XY Ltd. offers to its existing shareholders 3 shares for every 7 shares held by them. The market value of the share is Rs.80 and the right issue price is Rs.60 per share. The value of right is ____ and post-issue price is ____. a. Rs.6.00; Rs.74 b. Rs.8.57; Rs.71.43 c. Rs.18.00; Rs.62 d. Rs.20.00; Rs.80 e. Rs.24.00; Rs.84. 142. OK Company issued 1000 shares of Rs.10 each with a premium of Rs.2 payable as follows: On Application Rs.6 (including premium) On Allotment Rs.3 On First & Final call Rs.3 104

Part II

Mr. Jahar, a shareholder to whom 60 shares were allotted failed to pay the first and final call. His shares were forfeited. 60% of the forfeited shares were reissued to Mr. Ali as fully paid for Rs.7 per share. After reissue of share, the credit balance in the share forfeiture account is a. Rs.600 b. Rs.420 c. Rs.252 d. Rs.180 e. Rs.168. Based on the following information answer the questions 143 to 145. Balance-sheet of ABC Ltd. 31st March, 2000 31st March, 2001 400 1,400 40 160 600 1,200 1,000 (Rs. in crore) 31st March, 2002 1,500 300 1,500 800

143.

144.

145.

Gross Fixed Asset Accumulated Depreciation Net Current Assets Loans Share Capital Equity Shares of Rs.10 each 800 1,000 1,000 Profit before Tax 40 120 240 Preliminary Expenses c/f 60 40 20 The normal rate of return is 15 percent. The rate of tax is 40 percent. The company has undergone major expansion in the year 2001 which started yielding result in the year 2002. The value of the equity shares on net asset basis is a. Rs.21 b. Rs.23 c. Rs.16 d. Rs.19 e. Rs.20. The value of shares on yield basis is a. Rs.9.85 b. Rs.10.95 c. Rs.10.10 d. Rs.10.04 e. Rs.10.40. The fair value of each equity share is a. Rs.14.70 b. Rs.21.30 c. Rs.16.80 d. Rs.12.60 e. Rs.13.90.

Based on the following information answer the questions 146 to 151.


The following is the Balance Sheet of May Fair Co. Ltd. as at 31st December, 1995:

Liabilities Share capital: Equity Shares of Rs.100 each Less: Calls-in-Arrears (Rs.20 for final call)

Assets Fixed Assets: 10,00,000 Goodwill 1,00,000 Machinery Factory Shed Vehicle

Rs.

Rs. 1,00,000 5,00,000 5,50,000 1,50,000 105

Financial Accounting II

10% Preference shares of Rs.10 each fully paid Reserve and Surplus: General Reserve Profit and Loss Account Current Liabilities Bank Loan Sundry Creditors
Additional information:

9,00,000 Furniture 50,000 Investments 2,00,000 Current Assets: 4,00,000 Stock-in-trade 4,00,000 Sundry Debtors 7,00,000 4,00,000 Cash at bank 1,00,000 3,00,000 Miscellaneous Expenditure: Preliminary Expenses 50,000 2,00,000 6,00,000 28,00,000 28,00,000

i. ii.

iii.

Fixed assets are worth 20% above their book value. Depreciation on appreciated value of fixed assets not to be considered for valuation of goodwill. Of the investments, 60% is non-trading and the balance is trading. All trade investments are to be valued at 25% above cost. A uniform rate of dividend @ 15% is earned on all investments. For the purpose of valuation of shares, goodwill is to be considered on the basis of 4 years purchase of the super profits based on average profit (after tax) of the last 3 years. Profits (after tax) are as follows: Rs. 1993 4,00,000 1994 4,30,000 1995 4,50,000 In a similar business, return on capital employed is 15% (after tax). In 1993 new machinery costing Rs.20,000 was purchased but wrongly charged to revenue (no effect has yet been given for rectifying the same). Depreciation charged on machinery is @ 10% on reducing balance method. The Net Tangible operating assets on 31st December, 1995 is a. b. c. d. e. Rs.20,17,496 Rs.20,17,469 Rs.20,17,964 Rs.20,17,946 Rs.20,17,649. Rs.4,20,907 Rs.4,20,709 Rs.4,29,007 Rs.4,20,097 Rs.4,20,791. Rs.1,17,437 Rs.1,17,143 Rs.1,17,347 Rs.1,17,473 Rs.1,17,734.

iv.

146.

147.

The average annual profits of the business is a. b. c. d. e.

148.

The super profit for the business is a. b. c. d. e.

149.

Goodwill of the business is a. Rs.4,69,829 b. Rs.4,69,982

106

Part II

150.

151.

c. Rs.4,69,298 d. Rs.4,69,892 e. Rs.4,69,289. The value of fully paid shares is a. Rs.230.47 b. Rs.231.74 c. Rs.234.70 d. Rs.230.74 e. Rs.220.74. The value of partly paid shares is a. Rs.206.65 b. Rs.210.74 c. Rs.230.45 d. Rs.218.25 e. Rs.212.62.

Based on the following information answer the questions 152 to 157. Below is given the Balance Sheet of Smitha Ltd. as at 31st December, 2003: Liabilities Share Capital: Equity shares of Rs.10 each Less: Calls-in-arrear (Rs.2 for final call) 6% preference shares of Rs.10 each Less: Calls-in-arrear (Rs.2 for final call) Reserves and Surplus: General Reserve Profit and Loss Account Current Liabilities Bank Loan Sundry Creditors Bills Payable
Additional Information:

Rs.

Assets

Rs. 20,000 1,10,000 1,20,000 60,000 80,000 80,000 55,000 90,000 10,000 10,000 6,35,000

Fixed Assets: 2,00,000 Goodwill 5,000 Machinery 1,95,000 1,00,000 Land and Buildings 1,000 Furniture and Fixtures 99,000 Vehicles Investment 80,000 Current Assets: 16,000 Stock and Trade Sundry Debtors 60,000 Cash and Bank 1,55,000 Preliminary Expenses 30,000 6,35,000

i.

For the purpose of valuation of shares, goodwill is to be considered on the basis of 2 years purchase of the super profits based on average profit of last 4 years. Profits are as follows: Rs. 2000 80,000 2001 90,000 2002 1,05,000 2003 1,10,000 In a similar business normal return on capital employed is 15%. Fixed assets are worth 30% above their actual book value. Stock is overvalued by Rs.5,000. Debtors are to be reduced by Rs.1,000. All trade investments are to be valued at 10% below cost. 107

ii. iii.

Financial Accounting II

iv.

Of the investment 10% is trade and the balance non-trade. Trade investments were purchased on 1-1-2003. 50% of the non-trade investments were acquired on 1-1-2002 and the rest on 1-1-2001. A uniform rate of dividend of 10% is earned on all investments. In 2001 a new machinery costing Rs.10,000 was purchased but wrongly charged to revenue. (No Rectification has yet been made for above.) In 2002 some old furniture (Book value Rs.5,000) was disposed off for Rs.3,000. (Depreciation is charged on machinery @ 10% on reducing system. Ignore Taxation and Dividend).

The following further information is relevant: i. ii.

152.

The value of fully paid shares is a. b. c. d. e. Rs.19.16 Rs.21.86 Rs.21.68 Rs.21.64 Rs.21.36. Rs.19.86 Rs.20.16 Rs.16.43 Rs.18.22 Rs.22.27. Rs.4,01,760 Rs.4,01,617 Rs.4,06,420 Rs.4,01,677 Rs.4,10,744. Rs.98,415.20 Rs.94,816.60 Rs.92,572.50 Rs.96,630.90 Rs.95,378.50. Rs.28,802 Rs.20,112 Rs.20,208 Rs.28,376 Rs.24,680. Rs.55,664 Rs.62,372 Rs.60,482 Rs.57,604

153.

The value of partly paid shares is a. b. c. d. e.

154.

The net tangible operating asset as on 31st December, 2003 is a. b. c. d. e.

155.

The average profits for the four years is a. b. c. d. e.

156.

The super profit of the business is a. b. c. d. e.

157.

Goodwill of the business is a. b. c. d.

108

Part II

e. 158.

Rs.56,274.

The value of equity share of Buzy Bee Ltd. as per yield method is Rs.195.80 and as per fair value method is Rs.205.20. The value of the equity share according to intrinsic value method is a. b. c. d. e. Rs.205.50 Rs.214.60 Rs.195.80 Rs.225.50 Rs.265.00. Liabilities Equity share capital Reserves and surplus 12% Debentures Sundry creditors Bank overdraft Provision for taxation Rs. Assets 6,00,000 Land and buildings 2,10,000 Plant and machinery 1,50,000 Furniture and fixtures 72,500 Sundry debtors 32,500 Inventories 45,000 Cash 11,10,000 The following assets are revalued as under: Land and buildings Rs.5,00,000 Plant and machinery Rs.2,00,000 Sundry debtors Rs.85,000 The profit of the company for the year ended March 31, 2003 was Rs.1,15,500. The company charges depreciation on all its fixed assets at the rate of 10% per annum. The depreciation adjustment on the revalued assets should be made for one year. The return on capital employed to equity shareholders is a. b. c. d. e. 14.33% 12.89% 13.12% 10.85% 14.15%. The paid-up share capital of the company consists of 1,000, 15% preference shares of Rs.100 each and 20,000 equity shares of Rs.10 each. The average annual profits of the company after providing for depreciation and taxation amounted to Rs.75,000. It is considered necessary to transfer Rs.10,000 to general reserve before declaring any dividend. The normal return expected by investors on equity shares in similar business is 10%. Rs.33.3 Rs.37.5 Rs.10.0 Rs.25.0 109 Rs. 4,70,000 2,50,000 2,00,000 90,000 65,000 35,000 11,10,000

159.

The Balance Sheet of Marvel Ltd. as on March 31, 2003 is as under:

160.

The following information is extracted from the books of Mercury Limited: i. ii.

iii. a. b. c. d.

The value of an equity share of Mercury Ltd. is

Financial Accounting II

e. 161.

Rs.27.5. Particulars Share capital: Authorized share capital (50,000 equity shares of Rs.10 each) Called-up and paid-up capital (37,500 shares of Rs.8 each) Capital employed Profit for the year 2002-2003 5,00,000 3,00,000 4,50,000 63,000 Rs.

Consider the following data pertaining to Zenith Ltd. as on March 31, 2003:

If the normal return is 10%, the value of equity share of Zenith Ltd. is a. b. c. d. e. 162. Rs.11.67 Rs.8.50 Rs.11.20 Rs.9.30 Rs.14.00.

Consider the following data pertaining to Wise Ltd. as on March 31, 2003: Particulars 1,000 Equity shares of Rs.100 each Rs. 1,00,000

1,000 10% Preference shares of Rs.100 each 1,00,000 500 14% Debentures of Rs.100 each Sundry creditors Fixed assets Current assets The asset backing of equity shares is a. b. c. d. e. 163. Nil 1 time 2 times 3 times 4 times. 50,000 65,000 2,50,000 65,000

Consider the following data pertaining to Mayuri Ltd. as on March 31, 2003: Particulars Per share Face value Paid-up value Rs. Share Capital: 20,000 equity shares 10,000 equity shares 10,000 equity shares 100 100 100 100 80 70 Rs.

110

Part II

If the value of net assets of the company is Rs.51,00,000, the value per share of Rs.80 paid-up share is a. b. c. d. e. 164. Rs.120.00 Rs.140.00 Rs.107.50 Rs.156.70 Rs.127.50.

Kusuma Ltd. announced a rights issue of four shares of Rs.100 each at a premium of 160% for every five shares held by the existing shareholders. The market value of the share at the time of rights issue is Rs.440. The value of right is a. b. c. d. e. Rs.124 Rs.352 Rs.80 Rs.110 Rs.65.

165.

Consider the following particulars relating to Winner Ltd.: The equity share capital of Winner Ltd. consists of 1,50,000 equity shares of Rs.10 each fully paid-up. The net profits for the past three years are: Rs.2,52,500, Rs.3,10,000, and Rs.4,50,000. Out of these profits, 20% is transferred to general reserve. If the normal rate of return is 15%, the value of share under the yield method is a. b. c. d. e. Rs.15.00 Rs.8.33 Rs.6.67 Rs.10.00 Rs.12.00. Rs.6,25,000 Rs.7,50,000

166.

Consider the following data pertaining to a company: Average capital employed Closing capital employed a. b. c. d. e. Rs.6,87,500 Rs.6,25,000 Rs.5,62,500 Rs.5,00,000 Rs.1,25,000.

The amount of capital employed at the beginning of the year was

Based on the following information answer the questions 167 and 168. The net assets of a company are Rs.75 lakh. The equity shares of the company are divided into 1. 2. 167. a. b. 1,00,000, Rs.10 fully paid-up 50,000, Rs.5 fully paid-up Rs.26 Rs.30

The value of Rs.5 fully paid-up shares on net asset basis is

111

Financial Accounting II

c. d. e. 168. a. b. c. d. e.

Rs.32 Rs.38 Rs.28. Rs.60 Rs.64 Rs.67 Rs.58 Rs.55.

The value of Rs.10 fully paid-up shares on net asset basis is

Based on the following information answer the questions 169 to 174. Balance Sheet of Cupboard and Cupboards Ltd. is given below as at 31st March, 2002: Liabilities and Capital Share Capital: 1,20,000 Equity shares of Rs.10 each Amount Rs. Assets Amount Rs. 3,00,000 4,40,000

Fixed Assets: 12,00,000 Buildings Machinery Reserves and Surplus: Current Assets, Loans and Advances Profit and Loss Account 1,00,000 Inventory Current Liabilities and Provision: Sundry Debtors Bank Overdraft 20,000 Cash and Bank Balance Sundry Creditors 1,20,000 Provision for Taxation 2,20,000 Proposed Dividend 1,20,000 17,80,000 The net profits of the company before taxation were as follows: Year 1999-00 2000-01 2001-02 Rs. 4,00,000 4,80,000 4,40,000

6,00,000 3,20,000 1,20,000

17,80,000

On 31st March 2002, the buildings were revalued at Rs.4,00,000 and machineries, Rs.5,00,000, Rs.20,000 are bad debts which have now been identified. A 10% return would be considered reasonable for a business of this nature. Use the intrinsic method to value the shares. Goodwill may be calculated at three years purchase of super profits. Depreciation rates for buildings is 2%, and on machinery 10%. Assume the income tax rate to be 50%. 169. Average capital employed by the company is a. b. c. d. e. 170. a. b. 112 Rs.15,66,000 Rs.15,60,000 Rs.16,40,000 Rs.16,20,000 Rs.20,00,000. Rs.2,12,667 Rs.2,18,436

Average maintainable profit is

Part II

c. d. e. 171. a. b. c. d. e. 172. a. b. c. d. e. 173. a. b. c. d. e. 174. a. b. c. d. e.

Rs.2,16,567 Rs.2,09,435 Rs.2,10,315. Rs.1,32,000 Rs.1,44,000 Rs.1,50,000 Rs.1,68,000 Rs.1,56,000. Rs.46,327 Rs.56,667 Rs.44,746 Rs.60,160 Rs.62,470. Rs.1,78,000 Rs.1,64,000 Rs.1,69,000 Rs.1,70,000 Rs.1,75,000. Rs.18.22 Rs.15.74 Rs.13.42 Rs.11.12 Rs.10.48. Balance Sheet of Don Quixote Ltd. is given as under as on 31st March, 2003 Liabilities and Capital Equity Share Capital: Rs.10 fully paid-up Rs.5 partly paid-up 8% Preference Capital Reserves and Surplus Sundry Creditors 1,50,000 Buildings 1,00,000 Machinery 50,000 Sundry Debtors 1,50,000 Stock 2,00,000 Cash and Bank 6,50,000 1,00,000 2,00,000 1,05,000 1,25,000 20,000 6,50,000 Equity Dividend 10% 12% 15% 113 Amount Rs. Assets Amount Rs.

The normal profit is

Super profit of the business is

The goodwill of the business is

Valuation of the shares on Net Asset basis is

Based on the following information answer the questions 175 to 179.

Profit and dividends paid in the last three years are given below: Year 2000-01 2001-02 2002-03 Profit before tax 1,10,000 1,25,000 1,60,000

Financial Accounting II

Expenses are expected to increase by Rs.10,000. Please assume income tax rate to be 35%. Equity shares of a company of this size and in this type of industry, generally pays around 8% as dividend. Normal rate of return is 10%. 175. The average maintainable profit of the company based on weighted average method is a. b. c. d. 176. Rs.92,400 Rs.80,500 Rs.88,600 Rs.77,300

177.

178.

179.

e. Rs.91,100. The value of Rs.10 paid-up shares (in case controlling interest in the firm is to be transferred) is a. Rs.22.16 b. Rs.29.74 c. Rs.25.86 d. Rs.30.82 e. Rs.34.28. The value of Rs.5 partly paid-up shares (in case controlling interest in the firm is to be transferred) is a. Rs.20.12 b. Rs.20.14 c. Rs.20.86 d. Rs.20.92 e. Rs.21.22. The value of Rs.10 paid-up shares (in case only a few shares are to be transferred) is a. Rs.16.42 b. Rs.17.56 c. Rs.18.22 d. Rs.15.22 e. Rs.16.46. The value of Rs.5 partly paid-up shares (in case only a few shares are to be transferred) is a. Rs.8.12 b. Rs.8.23 c. Rs.7.22 d. Rs.6.12 e. Rs.8.18.

Based on the following information answer the questions 180 to 195. Bach and Chenoy Limiteds Balance Sheet as on 31/3/2003 is given below. Liabilities and Capital Share Capital: 1,00,000 Equity Shares of Rs.10 fully paid-up 50,000 Equity shares of Rs.10, Rs.8 paid-up 1,00,000 Equity Shares of Rs.5 fully paid-up Free Reserves 13% Debentures Sundry Creditors Tax Provision 114 Amount Rs. 10,00,000 4,00,000 5,00,000 25,00,000 12,00,000 28,95,000 6,00,000 Assets Amount Rs. 28,00,000 13,00,000 12,00,000 22,00,000 6,00,000 2,80,000

Sundry Net Fixed Assets Non-Trade Investments Stock Sundry Debtors Cash and Bank Preliminary Expenses

Part II

Proposed Dividend Additional Information: 1.

2,85,000 83,80,000

83,80,000

Profit before taxes for the last five years are as follows: 1999 2000 2001 2002 2003 Rs.4,40,000 Rs.4,60,000 Rs.4,20,000 Rs.4,50,000 Rs.4,40,000

2. 3. 4. 5. 6. 7. 8. 180.

The 13% Debentures are partially convertible. 50% of these will be converted into equity shares next year. Non-trade investments earn @ 6% p.a. The company is planning to shift its offices to a bigger location. The estimated additional costs would be Rs.20,000 per annum. Since the value of the Indian rupee is appreciating, the company expects a foreign currency loss of Rs.24,000 p.a. on its exports for the foreseeable future . Present tax rate is 35%, but the company expects it to fall to 30% in future. Normal return is 8% on the closing capital. Assume that proposed dividend rate will not change after conversion of part of debentures into equity. Closing capital employed by the company is a. b. c. d. e. Rs.22,28,000 Rs.24,12,000 Rs.24,20,000 Rs.30,20,000 Rs.22,20,000. Rs.2,15,000 Rs.2,12,000 Rs.2,00,000 Rs.2,24,000 Rs.2,30,000. Rs.1,87,000 Rs.1,98,000 Rs.1,93,600 Rs.1,92,700 Rs.1,93,400. Rs.32,200 Rs.31,500 Rs.30,400 115

181.

Future maintainable profit of the company is a. b. c. d. e.

182.

Normal profit of the company is a. b. c. d. e.

183.

Super profits of the company is a. b. c.

Financial Accounting II

d. e. 184. a. b. c. d. e. 185. a. b. c. d. e. 186. a. b. c. d. e. 187. a. b. c. d. e. 188. a. b. c. d. e. 189. a. b. c. d. e. 190.

Rs.31,400 Rs.35,000. Rs.1,51,000 Rs.1,52,000 Rs.1,58,000 Rs.1,42,000 Rs.1,58,000. Rs.38,71,000 Rs.37,71,000 Rs.38,72,000 Rs.42,62,000 Rs.41,00,000. Rs.15.28 Rs.16.22 Rs.22.12 Rs.21.13 Rs.24.18. Rs.13.22 Rs.13.78 Rs.13.28 Rs.14.22 Rs.15.12. Rs.7.12 Rs.7.15 Rs.7.64 Rs.8.12 Rs.9.12. Rs.18.33 Rs.15.28 Rs.17.22 Rs.11.13 Rs.18.12.

Goodwill of the company at 5 years purchase of super profit is

Net assets available to the shareholders (including goodwill as calculated above) is

The value of Rs.10 fully paid-up shares based on intrinsic value method is

The value of Rs.10, Rs.8 paid-up shares based on intrinsic value method is

The value of Rs.5 fully paid-up shares based on intrinsic value method is

The value of converted debentures of Rs.10 based on intrinsic value method is

The value per fully paid-up share of Rs.10 based on dividend yield method assuming normal dividend in the industry to be 10% is a. b. c. Rs.12 Rs.18 Rs.15

116

Part II

d. e. 191. a. b. c. d. e. 192.

Rs.20 Rs.16. Rs.7.2 Rs.7.5 Rs.8.4 Rs.8.9 Rs.9.1.

The value per fully paid-up share of Rs.5 based on dividend yield method is

193.

194.

195.

The value per partly paid-up share of Rs.8 based on dividend yield method is a. Rs.16 b. Rs.20 c. Rs.12 d. Rs.18 e. Rs.14. The value per fully paid-up share of Rs.10 based on Earning per Share (EPS) assuming normal EPS in industry to be 1.2 per each share of Rs.10 paid-up fully is a. Rs.10.45 b. Rs.12.50 c. Rs.14.20 d. Rs.16.80 e. Rs.13.25. The value per fully paid-up share of Rs.5 based on Earning per Share (EPS) is a. Rs.7.15 b. Rs.7.95 c. Rs.6.25 d. Rs.5.80 e. Rs.5.20. The value per partly paid up share of Rs.8 based on Earning per Share (EPS) is a. Rs.12 b. Rs.10 c. Rs.16 d. Rs.18 e. Rs.13.

Based on the following information answer the questions 196 to 200. Sun Limited invited applications from public for 1,00,000 equity shares of Rs.10 each at a premium of Rs.5 per share. The entire issue was underwritten by the underwriters A, B, C and D to the extent of 30%, 30%, 20% and 20% respectively with the provisions of firm underwriting of 3,000, 2,000,1,000 and 1,000 shares respectively. The underwriters were entitled to the maximum commission permitted by Law. The company received applications for 70,000 shares from public out of which applications for 19,000, 10,000, 21,000 and 8,000 shares were marked in favor of A, B, C and D respectively. 196. The number of shares unsubscribed are a. b. c. 1,00,000 70,000 7,000

117

Financial Accounting II

d. e. 197. a. b. c. d. e. 198. a. b. c. d. e. 199. a. b. c. d. e. 200. a. b. c. d. e.

77,000 23,000. 77,000 65,000 58,000 12,000 7,000. 2,750, 12,750, Nil and 7,500 shares 12,750, 2,750, Nil and 7,500 shares 12,750, Nil, 2,750 and 7,500 shares 7,500, 12,750, Nil and 2,750 shares 12,750, 7,500, Nil and 7,500 shares. 5,750, 14,750, 1,000 and 8,500 shares 5,750, 12,750, 1,000 and 8,500 shares 15,750, 4,750, 1,000 and 8,500 shares 5,750, 14,750, 8,500 and 1,000 shares 1,750, 14,750, 8,500 and 1,000 shares. Rs.15,000, Rs.15,000, Rs.22,500 and Rs.22,500 Rs.28,300, Rs.21,000, Rs.18,000 and Rs.17,000 Rs.22,500, Rs.22,500, Rs.15,000 and Rs.15,000 Rs.21,100, Rs.18,000, Rs.33,000 and Rs.22,000 Rs.28,000, Rs.22,000, Rs.31,000 and Rs.22,000.

The number of unmarked applications are

The net liabilities of A, B, C and D respectively are

The total liabilities of A, B, C and D respectively ( including firm underwriting) are

The underwriting commission for A, B, C and D respectively are

Based on the following information answer the questions 201 to 206. The following information is made available from the books of a public limited company: Paid-up Share Capital:

Equity shares of Rs.10 each 14% Preference shares of Rs.100 each

Rs.11,00,000 Rs.9,00,000 Rs.20,00,000

Average net profit and expected normal yield are Rs.5,25,000 and 24% respectively. It is also observed that the net tangible assets are revalued by Rs.1,85,000 more than the amounts at which they are stated in the books. 118

Part II

For the purpose of valuation of shares, goodwill is to be considered on the basis of 2 years purchase of the super profit. 201. Super profits of the business for the purpose of calculation of the goodwill is a. b. c. d. e. 202. a. b. c. d. e. 203. a. b. c. d. e. 204. a. b. c. d. e. 205. a. b. c. d. e. 206. a. b. c. d. e. 207. Rs.88,100 Rs.92,500 Rs.98,400 Rs.99,200 Rs.90,600. Rs.1,84,100 Rs.1,72,400 Rs.1,78,200 Rs.1,81,200 Rs.1,84,300. Rs.13.33 Rs.13.55 Rs.14.50 Rs.15.20 Rs.16.10. Rs.4.22 Rs.5.12 Rs.5.22 Rs.6.12 Rs.3.63. Rs.12.12 Rs.15.11 Rs.18.12 Rs.15.13 Rs.17.11. Rs.15.11 Rs.14.23 Rs.16.12 Rs.17.13 Rs.18.12.

Goodwill of the business for the purpose of calculating intrinsic value of the equity shares is

Intrinsic value of the equity shares is

Earning per share for the purpose of valuing equity shares on yield basis is

Value of equity shares on yield basis is

Value of equity shares on fair value method is

Consider the following information relating to XYZ Ltd. Profit available for dividend Rs.5,88,800 119

Financial Accounting II

Share capital Normal rate of return The share value of the company is a. b. c. d. e. 208. Rs.194.11 Rs.588.80 Rs.58.88 Rs.5,888.00

1,00,000 shares @ Rs.100 per share 10%

Cannot be calculated with the given information.

An investor purchases one share of Rs.100 each (face value and paid-up value) at Rs.190 from a stock exchange on which he receives a dividend @ 20%. The yield of the investor will be a. b. c. d. e. 20% 13.33% 22.22% 10.53% 10%. The paid-up share capital of the company consists of 1,000, 15% preference shares of Rs.100 each and 20,000 equity shares of Rs.10 each. The average annual profits of the company after providing for depreciation and taxation amounted to Rs.75,000. It is considered necessary to transfer Rs.10,000 to general reserve before declaring any dividend. The normal return expected by investors on equity shares from this type of business carried on by the company is 10%. Rs.45 Rs.30 Rs.22 Rs.34 Rs.25.

209.

The following information is extracted from the books of M/s. Mercury Limited: i. ii.

iii.

The value of an equity share is a. b. c. d. e.

Accounting for Debentures


Based on the following information answer the questions 210 to 213. On 1st January, 2003, GK Limited had Rs.16,00,000 5% Debentures, outstanding in its books, redeemable on 31st December, 2003. On 1st January, 2003, the balance in Sinking Fund was Rs.14,98,000 represented by : i. ii. Rs.2,00,000 Own Debentures purchased at an average price of Rs.99; and Rs.13,20,000 nominal value of 3% Government loan.

The amount annually credited to the Sinking Fund was Rs.56,800. The interest on debentures was paid by the company every year on 31st December and interest on loan was received also on 31st December annually. On 31st December 2003, the outside investments were realized at 98 percent and all outstanding Debentures were redeemed on that date. 120

Part II

For the year ending 31 December, 2003. 210. The amount realized on the sale of the Government loan is a. b. c. d. e. 211. Rs.12,93,600 Rs.12,69,300 Rs.12,36,900 Rs.12,96,300 Rs.12,62,900.

The interest received on the government loan during the year is a. b. c. d. e. Rs.39,690 Rs.36,960 Rs.36,900 Rs.39,660 Rs.39,600.

212.

The amount debited to sinking fund account on the sale of the government loan is a. b. c. d. e. Rs.6,440 Rs.4,600 Rs.6,420 Rs.6,400 Rs.6,460.

213.

The opening balance of the government loan account is a. b. c. d. e. Rs.18,00,000 Rs.15,00,000 Rs.12,00,000 Rs.10,00,000 Rs.13,00,000.

Based on the following information answer the questions 214 and 215. Sunder Ltd. issued debentures at 94% for Rs.2,00,000 on 1st January, 2001 repayable by five equal annual drawing of Rs.40,000 each. The company closes its accounts on 31st March every year. The company decides to write-off the debenture discount during the life of the debentures. 214. The amount of discounts which the company needs to write-off respectively in year 1, 2 and 3 are: a. b. c. d. e. 215. Rs.1,200, Rs.4,300 and Rs.3,000 Rs.1,600, Rs.3,600 and Rs.2,800 Rs.2,200, Rs.3,800 and Rs.3,200 Rs.1,000, Rs.3,800 and Rs.3,000 Rs.1,000, Rs.3,800 and Rs.3,200.

The amount of discounts which the company needs to write-off respectively in year 4, 5 and 6 are: 121

Financial Accounting II

a. b. c. d. e.

Rs.1,800, Rs.1,600 and Rs.600 Rs.2,400, Rs.1,400 and Rs.700 Rs.2,200, Rs.1,400 and Rs.600 Rs.2,000, Rs.1,200 and Rs.600 Rs.2,200, Rs.1,500 and Rs.500.

216.

Star Ltd. issued 1000, 12% debentures of Rs.100 each on October 01, 1995 at a price of Rs.98. There was a provision at the time of issue that debentures can be redeemed either by purchase in the market or by drawing lots. The journal entry for the issue of the debenture is a. Bank a/c Discount on debenture a/c To 12% Debenture a/c b. Bank a/c. Interest on debenture a/c To 12% Debenture a/c c. 12% Debenture a/c To Discount on debenture a/c To Bank a/c d. Bank a/c Discount on debenture a/c To 12% Debenture a/c e. Bank a/c To 12% Debenture a/c Dr. 1,00,000 1,00,000 Dr. Dr. 1,00,000 2,000 1,02,000 Dr. 1,02,000 2,000 1,00,000 Dr. Dr. 98,000 2,000 1,00,000 Dr. Dr. 98,000 2,000 1,00,000

217.

Sun Limited purchased own debentures worth Rs.20,000 @ Rs.96 ex-interest on 31st March. The journal entry for the transactions is (assume Sun Ltd., pays debenture interest half-yearly on 30th June and 31st December) a. Bank To Interest on own debenture a/c To Own debentures a/c b. Bank To discount on own debenture a/c To Own debentures a/c c. Own debentures a/c To Interest on own debenture a/c To Bank d. Own debentures a/c Interest on own debenture a/c To Bank e. Own debentures a/c Interest on own debenture a/c To Bank Dr. Dr. 19,200 600 19,800 Dr. Dr. 20,000 800 20,800 Dr. 19,800 800 19,000 Dr. 19,800 600 19,200 Dr. 20,000 800 19,200

218.

On 1.8.2004 The moon Limited purchased own debenture worth Rs.10,000 @ Rs.97 cuminterest. The journal entry for the transaction is (assume due dates for interests are 30th

122

Part II

September and 31st March). a. Own debentures a/c Interest on own debenture a/c To Bank a/c b. Bank a/c To Interest on own debenture a/c. To Own debentures a/c c. Own debentures a/c To Interest on own debenture a/c. To Bank a/c d. Own debentures a/c Interest on own debenture a/c To Bank a/c e. Bank a/c. Interest on own debenture a/c To Own debentures a/c 219. Dr. Dr. 9,700 300 10,000 Dr. Dr. 9,200 500 9,700 Dr. 9,700 700 9,000 Dr. 9,900 200 9,700 Dr. Dr. 9,700 300 10,000

On July 01, 2001 a company purchased 200 of its own 12% debentures of Rs.100 each at the rate of Rs.97 (cum-interest). The company pays interest on March 31 and September 30 of every year. At the time of purchase the amount debited to own debenture account was a. b. c. d. e. Rs.20,000 Rs.19,400 Rs.19,000 Rs.18,800 Rs.18,500.

Based on the following information answer the questions 220 and 221. On April 01, 2001 a company purchased 500 of its own 12% Debentures at the rate of Rs.98. Interest is payable on June 30 and December 31 of every year. 220. If the price paid is ex-interest, the amount debited to interest account at the time of purchase is a. b. c. d. e. 221. Rs.6,000 Rs.3,000 Rs.2,500 Rs.1,500 Rs.1,000.

If the price paid is ex-interest, the amount debited to own debenture account at the time of purchase is a. b. c. d. e. Rs.50,000 Rs.49,000 Rs.44,000 Rs.47,500 Rs.46,500.

222.

ESS Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 19992000. Interest on debentures is payable half-yearly on September 30 and March 31 every year. The company has power to purchase its own 10% debentures in the open market for cancellation. The following purchases were made during the year 2002-2003:

123

Financial Accounting II

On July 01, 2002

400 of its own 10% debentures at the rate of Rs.96 ex-interest.

On December 01, 2002 300 of its own 10% debentures at the rate of Rs.102 cum-interest. The total amount debited to own debenture investment account was a. b. c. d. e. 223. Rs.70,000 Rs.68,500 Rs.69,000 Rs.70,600 Rs.71,600.

On April 01, 2002 the balance of 12% Debentures of Rs.100 each of Libra Ltd. was Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase in the open market. Interest on debentures is payable on September 30, and March 31, every year. On July 01, 2002, the company purchased 1,000 of its own 12% debentures as investment at Rs.99 cum-interest. The company cancelled its own 1,000 debentures on March 31, 2003. The amount of profit/loss on cancellation of own debentures on March 31, 2003 was a. b. c. d. e. Rs.1,000 (loss) Rs.4,000 (loss) Rs.4,000 (profit) Rs.3,000 (loss) Rs.1,000 (profit).

224.

Consider the following balances pertaining to Vardhan Ltd. as on March 31, 2003: 20% Debentures a/c Rs.1,00,000 Debenture redemption fund a/c Particulars Rs.32,000, 9.5%Government loan Rs.36,000, 12% Government loan Rs.12,000, 18% Debentures 334 Preference shares of Rs.100 each The above investments were sold on the same day as under: 9.5% Government loan at par 12% Government loan at 96% 18% Debentures at Rs.90 each Preference shares at Rs.105 each. Rs.1,13,000 Rs. 34,000 34,400 11,200 33,400 The above fund was invested in the following securities and shares:

On April 01, 2003, the company redeemed the debentures at a premium of 10%. The amount transferred to general reserve out of debenture redemption fund account is a. b. c. d. e. 225. 124 Rs.1,14,830 Rs.1,04,830 Rs.1,10,600 Rs.1,12,430 Rs.1,02,430.

On December 31, 2003, Audi Monocarp Ltd. buys 1,000 of its own 12% debentures of the

Part II

nominal value of Rs.100 each at Rs.97 ex-interest from the open market. The company pays debenture interest half-yearly on September 30 and March 31. The amount paid by the company in respect of the above purchase is a. b. c. d. e. 226. Rs.93,000 Rs.97,000 Rs.1,00,000 Rs.1,01,000 Rs.1,04,000.

Viran Ltd. purchased Machinery from Indraja Company for a book value of Rs.4,00,000. The consideration was paid by issue of 10% debentures of Rs.100 each at a discount of 20%. The debenture account is credited with a. b. c. d. e. Rs.4,00,000 Rs.5,00,000 Rs.3,20,000 Rs.4,80,000 Debentures cannot be issued otherwise than for cash.

227.

On April 01, 2003, the balance in debenture redemption fund account of Narmada Ltd. was Rs.80,000. This fund was invested in the following securities: Rs.40,000, 10% Government loan Rs.25,000, 8% Debentures 200 Equity shares of Rs.100 each Rs.35,000 Rs.21,000 Rs.24,000

On September 30, 2003, Government loan was sold at par, 8% debentures were sold at 98% and the equity shares were sold at Rs.125 per share. The amount transferred from debenture redemption fund investment account to debenture redemption fund account of the company was a. b. c. d. e. 228. Rs.9,500 Rs.4,500 Rs.89,500 Rs.80,000 Rs.70,500.

Jamuna Ltd. issued 40,000, 12% debentures of Rs.100 each during the year 2001-2002. Interest on debentures is payable on January 31 and July 31, every year. The company is authorized to purchase its debentures for cancellation. On September 01, 2003, the company purchased 5,000 own debentures at cum-interest price of Rs.97. To record the purchase, the amount debited to own debentures is a. b. c. d. e. Rs.4,75,000 Rs.4,80,000 Rs.4,85,000 Rs.4,70,000 Rs.5,00,000.

229.

Komal Ltd. issued 20,000, 8% debentures of Rs.10 each at par, which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be 125

Financial Accounting II

written-off every year is a. b. c. d. e. 230. Rs.40,000 Rs.10,000 Rs.20,000 Rs.8,000 Rs.5,000.

On March 31, 2003, the balance of 12% Debentures of Rs.100 each of Mars Ltd., was Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase in the open market. Interest on debentures is payable on September 30 and March 31, every year. On July 1, 2003, the company purchased 1,000 of its 12% Debentures as investment at Rs.99 cum-interest. On August 01, 2003, it purchased another 1,000 of its debentures at Rs.98 ex-interest. The company cancelled 2,000 own debentures on September 01, 2003. The profit/loss on cancellation of own debentures is a. b. c. d. e. Rs.1,000 (Loss) Rs.6,000 (Profit) Rs.3,000 (Profit) Rs.2,000 (Loss) No Profit/No Loss.

231.

Well Done Ltd. issued 500 Debentures of Rs.100 each at a discount of 10%. Holders of these debentures have an option to convert their holdings to equity shares of Rs.100 each at a premium of Rs.20 at anytime within 3 years. The total number of equity shares to be issued, if all the debenture holders opt for conversion, is a. b. c. d. e. 500 450 430 400 375.

232.

Invert Ltd. issued 20,000 12% debentures of Rs.10 each at a discount of 10%, redeemable at a premium of 5%. The journal entry to be passed at the time of issue of debentures was Rs. a. Bank a/c Discount on issue of debentures a/c To 12% Debentures a/c b. Bank a/c Discount on issue of debentures a/c Loss on redemption of debentures a/c To 12% Debentures a/c To Premium on redemption of debentures c. Bank a/c To 12% Debentures a/c Dr. 1,80,000 1,80,000 Dr. Dr. Dr. 1,80,000 20,000 10,000 2,00,000 10,000 Dr. Dr. 1,80,000 30,000 2,10,000 Rs.

126

Part II

d.

Bank a/c Discount on issue of debentures a/c To 12% Debentures a/c

Dr. Dr.

1,80,000 20,000 2,00,000

e.

12% Debentures a/c Loss on redemption of debentures a/c To Bank a/c

Dr. Dr.

1,80,000 20,000 2,00,000

Based on the following information answer questions 233 to 237. A company purchased 100 of its own 6% debentures of Rs.100 each on 1st April, 2004 @ 96. Interest is payable every year on 30th, June and 31st December. 233. The amount debited to interest account in case the price is cum-interest is a. b. c. d. e. 234. a. b. c. d. e. 235. a. b. c. d. e. 236. a. b. c. d. e. 237. Rs.150 Rs.144 Rs.160 Rs.300 Rs.240. Rs.144 Rs.150 Rs.160 Rs.240 Rs.300. Rs.10,000 Rs.10,150 Rs.9,600 Rs.9,450 Rs.9,750. Rs.10,000 Rs.10,150 Rs.9,600 Rs.9,450 Rs.9,750.

The amount debited to interest account in case the price is ex-interest is

Amount debited to own debentures a/c is (in case of cum-interest)

Amount debited to own debentures a/c is (in case price is ex-interest)

A company purchased 100 of its own 6% debentures of Rs.100 each on 1st April, 1998 @ Rs.96. Interest is payable on 30th June and 31st December every year. The amount debited to interest account, in case the price is cum-interest is a. b. c. d. e. Rs.300 Rs.240 Rs.160 Rs.150 Rs.144.

Based on the following information answer questions 238 to 240. X purchased for immediate cancellation of Rs.20,000 of its own 14% debentures in the open market at 127

Financial Accounting II

Rs.97 cum-interest on 1st December, 2002. Interest dates being March 31 and September 30. 238. The interest account is debited by a. b. c. d. Rs.934 Rs.467 Rs.600 Rs.667

e. Rs.750. 239. Own 14% debenture account is debited by a. Rs.18,933 b. Rs.18,733 c. Rs.18.650 d. Rs.18,800 e. Rs.18,467. 240. MN company buys its own 12% debentures from the market at Rs.98 cum-interest 3 months after the previous date of payment of debenture interest. The actual cost of own debenture to the company is a. Rs.98 b. Rs.97 c. Rs.95 d. Rs.94 e. Rs.92. Based on the following information answer questions 241 and 242. High Ltd. issued 200, 14% debentures of Rs.100 each at a discount of 10% and redeemable at the end of 4 years at par. 241. The accounting entry at the time of issue will be a. Debit Bank account by Rs.20,000 Credit 14% Debenture account by Rs.20,000 b. Debit Bank account by Rs.18,000 and loss on issue of debenture account by Rs.2,000 Credit 14% Debenture account by Rs.20,000 c. Debit Bank account by Rs.20,000 and discount on issue of debenture account by Rs.2,000 Credit 14% Debenture account by Rs.20,000 and premium on redemption account by Rs.2,000 d. Debit Bank account by Rs.18,000 and loss on issue of debenture account by Rs.2,000 Credit 14% Debenture account by Rs.18,000 and premium on redemption account by Rs.2,000 e. Debit Bank account by Rs.18,000 and discount on issue of debenture account by Rs.2,000 Credit 14% Debenture account by Rs.20,000. 242. The discount on issue of debenture account is shown in the assets side of balance sheet under a. Miscellaneous Expenditure at Rs.2,000 b. Current Assets at Rs.2,000 c. Other Assets at Rs.2,000 d. Fixed Assets at Rs.2,000 e. Fictitious Assets at Rs.2,000. Based on the following information answer questions 243 to 245. 128

Part II

X purchased for immediate cancellation Rs.10,000 of its own 14% debentures in the open market at Rs.98 ex-interest on 1st June, 2002, interest date being March 31 and September 30. 243. The interest account is debited by a. Rs.467 b. Rs.375 c. Rs.334 d. Rs.300 e. Rs.234. 244. Own 14% debenture account is debited by a. b. c. d. e. 245. Rs.10,000 Rs.9,800 Rs.9,400 Rs.9,325 Rs.9,234.

A company purchased 20 of its own 9% debentures @ Rs.98 on June 1, 2003. Interest is payable half-yearly on September 30 and March 31. In case debentures purchased are on cum-interest basis, the amount debited to own 9% debenture account is a. b. c. d. e. Rs.2,000 Rs.1,970 Rs.1,930 Rs.1,660 Rs.1,600.

Preparation of Financial Statement of Limited Companies.


246. An investor purchased 100 shares of Rs.100 each at a price of Rs.140 from the market. If the investor receives a dividend of 10%, then the yield on investment will be a. b. c. d. e. 247. 10.00% 8.25% 8.00% 7.14% 5.00%.

XY Ltd. proposed a dividend of 12%. The called-up equity share capital of the company is Rs.3,00,000. If the amount of calls-in-arrears is Rs.12,000, the amount of dividend payable is a. b. c. d. e. Rs.37,440 Rs.36,000 Rs.35,000 Rs.34,560 Rs.34,000.

248.

If the yield rate of a company is 14%, normal rate of return is 8% and nominal value of its equity share is Rs.10, then the value of an equity share of the company will be a. b. c. d. e. Rs.17.50 Rs.13.33 Rs.10.00 Rs.7.50 Rs.5.71. 129

Financial Accounting II

249.

The profit and loss account of Urmila Ltd. for the year ending March 31, 2003 showed a debit balance of Rs.75,000. Subsequently, it was noticed that the following transactions were omitted: Goods worth Rs.3,000 were returned to the supplier and was not recorded in the books. The rent of the godown is Rs.24,000 per annum, out of which only Rs.20,000 was paid. The rent accrued but not paid was not considered in the books of account. One cheque given by a customer for Rs.7,000 was dishonored and the fact of dishonor was not recorded in the books. Rs.76,000 (Profit) Rs.74,000 (Profit) Rs.83,000 (Loss) Rs.69,000 (Profit) Rs.76,000 (Loss). Rs. Authorized share capital Issued, called-up and paid-up capital Calls-in-advance Securities premium Profit for the current year 20,00,000 12,00,000 80,000 1,20,000 2,55,600

The profit/loss made by the company after considering the above transactions is a. b. c. d. e. 250.

Consider the following data pertaining to Ravera Ltd.

The directors of the company proposed a dividend of 12%. The amount debited to Profit and Loss appropriation account on account of proposed dividend is a. b. c. d. e. 251. Rs.30,672 Rs.2,40,000 Rs.1,53,600 Rs.1,44,000 Rs.1,58,400.

Planet Ltd. issued 1,000 14% debentures of Rs.100 each at a premium of 10%, redeemable at a premium of 5%. The journal entry to record the issue of debentures is Rs. a. Bank a/c Dr. Discount on issue of Debentures a/c Dr. To 14% Debentures a/c b. Bank a/c Dr. Loss on redemption of Debentures a/c Dr. To 14% Debentures a/c To Premium on redemption of debentures a/c To Debenture premium a/c c. Bank a/c Dr. To 14% Debentures a/c To Debenture premium a/c 1,10,000 1,00,000 10,000 1,10,000 5,000 1,00,000 5,000 10,000 1,10,000 5,000 1,15,000 Rs.

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Part II

d.

Bank a/c Dr. Loss on issue of debentures a/c Dr. To 14% Debentures a/c To Premium on redemption of debentures a/c

1,10,000 5,000 1,10,000 5,000 1,00,000 5,000

e.

14% Debentures a/c Dr. Loss on issue of debentures a/c Dr.

252.

To Bank a/c 1,05,000. The Managing Director of Charanya Ltd. is entitled to a commission of 5% on net profits before charging such commission. The net profit of the company for the year ended March 31, 2003 was reported to be Rs.25,50,000. Subsequently, it was noticed that the following transactions were omitted: Particulars Payment of Directors remuneration Sale of a plant (cost price Rs.1,00,000; written down value Rs.80,000) Payment of bonus to production executive Payment of income tax and super tax Issue of 20,000 equity shares of Rs.10 each at a premium of Rs.2 Rs. 50,000 1,10,000 50,000 5,000 2,40,000

The commission payable by the company to the managing director for the year 2002-2003 is a. b. c. d. e. 253. Rs.1,23,500 Rs.1,26,000 Rs.1,28,500 Rs.1,17,620 Rs.1,60,000.

The profits of Yankee Ltd. is Rs.15,75,000, which is arrived at after considering the following: Rs. Directors remuneration Subsidy received from the Government Income tax paid Damages paid by virtue of legal liability 21,000 3,15,000 94,500 42,000

If the managerial remuneration payable to directors is 5% after charging such commission, the commission payable is a. b. c. d. e. 254. Rs.80,500 Rs.64,500 Rs.82,500 Rs.79,500 Rs.70,500.

The following data is extracted from the books of Hyder Ltd. as on March 31, 2003: Share capital (shares of Rs.100 each) Net assets Rs.80,00,000 Rs.1,20,00,000

131

Financial Accounting II

Dividends declared

15 %

If the rate of return in other companies in the similar industry is 12%, the fair value of equity share of Hyder Ltd. is a. b. c. d. e. 255. Rs.150.00 Rs.125.00 Rs.137.50 Rs.106.25 Rs.105.00.

The balance sheet items of Swipe Ltd. as at March 31, 2003 have increased by the following amounts compared with those at the end of the previous year: Assets Liabilities Share capital Rs.1,16,000 Rs.70,000 Rs.50,000.

The only change to retained earnings during 2002-03 was relating to a dividend payment of Rs.10,000. The net income for the year 2002-03 amounted to a. b. c. d. e. Rs.14,000 Rs.10,000 Rs.8,000 Rs.6,000 Rs.4,000.

Based on the following information answer the questions 256 to 258. Mr. Dinesh, the Manager of AB Company Ltd., gets an ordinary commission of 10% on sales plus a special commission of 20% on the excess of sales over the cost of sales including the total commission payable. Further, the following information during the year ended as on March 31, 2003 is available. Total cost of production excluding commission) Rs.80,000 Sales Gross profit margin 256. The total commission payable to Mr. Dinesh is a. b. c. d. e. 257. Rs.7,280 Rs.8,660 Rs.8,750 Rs.8,150 Rs.9,120. Rs.75,000 20%

The net profit of the AB Company Ltd. as on March 31, 2003 is a. b. c. d. Rs.5,150 Rs.6,250 Rs.7,120 Rs.8,150

132

Part II

e. 258.

Rs.6,150.

The closing stock of AB Company Ltd. as on March 31, 2003 is a. b. c. d. e. Rs.20,000 Rs.10,000 Rs.20,000 Rs.15,000 Rs.25,000.

Based on the following information answer the questions 259 to 261. The following are the extracts from the trial balance of Progress Ltd. as on March 31, 2002. Dr. Rs. Provision for taxation (2000-2001) Advance tax paid for 2000-2001 Advance tax paid for 2001-2002 Tax deducted at source (2001-2002) Profit and loss account balance (2000-2001) 8,000 10,000 1,000 20,000 Cr. Rs. 10,000

Assessment for the year 2000-2001 was finalized during the year 2001-2002 and the company has not disputed the tax assessment finalized by the tax authorities. The final total tax liability for that year was fixed at Rs.12,000. The net profit earned by the company during 2001-2002 before tax amounts to Rs.30,000. The company is in 50% tax bracket. 259. The journal entry for the extra provision made for 2000-2001 is a. b. c. d e 260. Tax payable account Dr. To Provision for taxation (2000-2001) A/c. Provision for taxation A/c. Dr. To Bank A/c. Profit & Loss appropriation A/c. Dr. To Provision for taxation (2000-2001) A/c. Provision for taxation A/c. Dr. To Tax payable A/c. Tax payable A/c. Dr. To Profit & Loss A/c. Rs. 12,000 12,000 12,000 2,000 2,000 3,000 3,000 12,000 12,000 Rs. 12,000

The entry for the adjustment of advance tax paid in respect of 2000-2001 is Rs. a. Provision for Taxation (2000-2001) A/c To Advance Tax (2000-2001) A/c To Tax Payable (2000-2001) A/c b. Provision for Taxation (2000-2001) A/c To Advance Tax (2000-2001) A/c To Tax Payable (2000-2001) A/c c. Provision for Taxation (2000-2001) A/c To Advance Tax (2000-2001) A/c Dr. 14,000 1,000 133 Dr. 12,000 8,000 4,000 Dr. 15,000 3,000 12,000 Rs.

Financial Accounting II

To Tax Payable (2000-2001) A/c d. Advance Tax A/c To Provision for Taxation A/c To Tax Payable (2000-2001) A/c e. Provision for Taxation (2000-2001) A/c To Advance Tax (2000-2001) A/c To Tax Payable (2000-2001) A/c 261. The entry for the provision of tax made for 2001-2002 is Rs. a. Cash A/c Dr. 12,000 Dr. 14,000 Dr. 6,000

13,000

2,000 4,000

10,000 4,000

Rs.

To Provision for Taxation (2001-2002) A/c b. Profit & Loss A/c Dr. 12,000

12,000

To Provision for Taxation (2001-2002) A/c c. Profit & Loss A/c Dr. 10,000

12,000

To Provision for Taxation (2001-2002) A/c d. Cash A/c Dr. 15,000

10,000

To Provision for Taxation (2001-2002) A/c e. Profit & Loss A/c Dr. 15,000

15,000

To Provision for Taxation (2001-2002) A/c

15,000

Based on Companies (Declaration of Dividend out of Reserves) Rules, 1975 answer the questions 262 to 264. A Ltd., is not having sufficient profits during the year, The Board of Directors of the company decides to declare dividend out of general reserves. Following are the particulars given in respect of the company. Rs. 1. 17,500 12% preference shares of Rs.100 each fully paid 2. 7,00,000 equity shares of Rs.10 each, fully paid 3. 4. 5. 6. 7. 262. General reserve Capital reserve on revaluation of assets Share premium Profit and Loss Account (Credit) Net Profit for the year 17,50,000 70,00,000 21,00,000 3,50,000 3,50,000 63,000 3,57,000

Average rate of dividend during the last five years = 15% The shortfall which is to be drawn from the General Reserve by the company, if law permits is a. b. c. 134 Rs.5,92,000 Rs.4,90,000 Rs.4,75,000

Part II

d. e. 263. a. b. c. d. e. 264.

Rs.4,82,000 Rs.4,99,000. Rs.10,85,000 Rs.10,88,000 Rs.11,92,000 Rs.12,13,000 Rs.15,12,000.

The maximum amount that can be drawn from the reserve for payment of dividend is

The minimum balance to be maintained in the reserve after drawing the amount for payment of dividend is a. b. c. d. e. Rs.12,11,400 Rs.12,72,400 Rs.13,12,500 Rs.14,12,500 Rs.13,11,400.

265.

A manager is entitled to a commission at a certain percentage of net profit which is arrived before charging such commission. The commission is to be allowed at the following rates. First Rs.10,000 of the net profit Next Rs.20,000 of the net profit Next Rs.30,000 of the net profit Next Rs.60,000 of the net profit Balance of the net profit Nil @ 10% @ 15% @ 20% @ 30%

The net profit before charging the managers commission is Rs.1,58,000. The net profit after charging commission would be a. b. c. d. e. 266. Rs.1,58,000 Rs.1,28,100 Rs.1,33,500 Rs.1,10,600 Rs.1,30,000.

The managing director of a company is to be paid a commission of 5% on profits after charging such a commission. The following details are available: Rs. Gross Profit Audit fees Bad debts Depreciation Salaries Directors fees The commission payable is a. b. c. d. Rs.50,000 Rs.50,119 Rs.51,995 Rs.52,500 135 34,17,000 8,000 2,500 18,20,000 5,35,000 1,500

Financial Accounting II

e. 267.

Rs.52,625.

During a given period, the assets of a company increased by Rs.28,000 and liabilities decreased by Rs.75,000. During that period, dividends declared and paid amounted to Rs.25,000. The companys net income (I) or net loss (L) for the period was a. Rs.28,000 (L) b. Rs.75,000 (I) c. Rs.1,03,000 (L) d. Rs.1,28,000 (I) e. Rs.78,000 (I). The profit of a company is Rs.55,000. If the managers commission is 10% on profit after charging his commission, his total amount of commission will be a. b. c. d. e. Rs.5,555 Rs.5,500 Rs.5,000 Rs.4,545 Rs.4,500.

268.

269.

Sujata Limited had issued debentures worth Rs.10,00,000 at 14% p.a. The debenture interest is payable every six months and the due dates of payment of interest are 30th June and 31st December of every year. While the interest due on 30th June, 2002 has been paid, the amount due on 31st December, 2002 has not been paid and in addition, interest has accrued for the three months period up to 31st March, 2003. The above details will be reflected in the balance sheet as: a. Balance Sheet of Sujata Limited as on 31.3.2003 Liabilities Secured Loans 14% Debentures Add: Interest Accrued and Due Current Liabilities and Provisions: Interest accrued but not due on Debentures b. Balance Sheet of Sujata Limited as on 31.3.2003 Liabilities Secured Loans 14% Debentures Add: Interest Accrued and Due Less: Interest accrued but not due on Debentures c. Balance Sheet of Sujata Limited as on 31.3.2003 Liabilities Secured Loans 14% Debentures Current Liabilities and Provisions Interest Accrued and Due 70,000 1,000,000 Rs. Rs. 10,00,000 70,000 35,000 10,35,000 Rs. Rs. 35,000 10,00,000 70,000 10,70,000 Rs. Rs.

136

Part II

Interest accrued but not due on Debentures d. Balance Sheet of Sujata Limited as on 31.3.2003 Liabilities Secured Loans 14% Debentures Add: Interest Accrued and Due Current Liabilities and Provisions Interest accrued but not due on Debentures e. Balance Sheet of Sujata Limited as on 31.3.2003 Liabilities Secured Loans 14% Debentures Add: Interest Accrued and Due Current Liabilities and Provisions Interest accrued but not due on Debentures Based on the following information answer questions 270 to 275.

35,000

1,05,000

Rs.

Rs.

10,00,000 70,000 10,70,000 70,000 Rs. 10,00,000 1,05,000 11,05,000 35,000 Rs.

RPG Limited has paid an advance tax of Rs.3,50,000 for the previous year 1999-2000. The company has determined its tax liability as Rs.3,42,500 after drawing up the Profit and Loss Account for the year ended March 31, 2000. The assessment is completed in December 2000 and the tax liability arrived by the Income Tax Officer stands at Rs.3,60,000. 270. Which of the following journal entry as on 31.03.2000 is correct? a. Profit and Loss Account To b. Provision forIncome Tax Account (Assessment Year 2000-01) Dr. 3,42,500 3,42,500 Dr. 3,60,000 3,60,000 Dr. 10,000 10,000 Dr. 7,500 7,500

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01)

c.

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01)

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01)

e 271. a.

None of the above. Balance sheet as on March 31, 2000 Assets Loans and Advances: Advance tax for Assessment Year 2000-01 Less: Tax Assessed by the Income Tax Officer 3,50,000 3,60,000 (10,000) Rs. Rs.

The advance tax paid is to be shown in the Balance Sheet as on 31.03.2000:

b.

Balance sheet as on March 31, 2000

137

Financial Accounting II

Assets Loans and Advances: Advance tax for Assessment Year 2000-01 Add: Additional Provision c. Balance sheet as on March 31, 2000 Assets Loans and Advances: Advance tax for Assessment Year 2000-01 Less: Provision for tax for Assessment Year 2000-01 d. Balance sheet as on March 31, 2000 Assets Loans and Advances: Advance tax for Assessment Year 2000-01 Less: Provision for tax for Assessment Year 2000-01 e. 272. None of the above.

Rs. 3,50,000 10,000 Rs. 3,50,000 3,60,000 Rs. 3,50,000 3,42,500

Rs.

3,60,000 Rs.

(10,000) Rs.

7,500

The entry to be passed in the Profit and Loss Account for the year ended March 31, 2001 for tax for the Assessment Year 2000-01 is a. Profit and Loss Account To b. Provision for Income Tax Account (Assessment Year 2000 01) Dr. 17,500 17,500 Dr. 3,50,000 3,50,000 Dr. 7,500 7,500 Dr. 36,000 36,000 Dr. 10,000 10,000

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000 01)

c.

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000 01)

d.

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000 01)

e.

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000 01)

273.

The entry to be passed after completion of the assessment: a. Provision for income tax a/c (Assessment Year 2000-01) To Advance tax for assessment year 2000- 01 b. Provision for income tax a/c (Assessment Year 2000 01) To Advance tax for assessment year 2000 01 Dr. 3,60,000 3,60,000 Dr. 3,50,000 3,50,000

138

Part II

c.

Provision for income tax a/c (Assessment Year 2000 01) To Advance tax for assessment year 2000 01

Dr.

7,500 7,500

d.

Provision for income tax a/c (Assessment Year 2000 01) To Advance tax for assessment year 2000 01

Dr.

10,000 10,000

e.

Provision for income tax a/c (Assessment Year 2000 01) To Advance tax for assessment year 2000 01

Dr.

17,500 17,500

274.

The entry for payment of short fall in the tax after the completion of assessment is a. Provision for income tax a/c (Assessment Year 2000 01) To Bank a/c b. Provision for income tax a/c (Assessment Year 2000 01) To Bank a/c c. Provision for income tax a/c (Assessment Year 2000 01) To Bank a/c d. Provision for income tax a/c (Assessment Year 2000 01) To Bank a/c e. Provision for income tax a/c (Assessment Year 2000 01) To Bank a/c Dr. 3,60,000 3,60,000 Dr. 3,50,000 3,50,000 Dr. 17,500 17,500 Dr. 7,500 7,500 Dr. 10,000 10,000

275.

Sunrise Computer Ltd. employs Rajesh as Managing Director who is entitled to a salary of Rs.5,000 per month and, in addition, a commission of 1% of the net profits before charging such salary and commission. The following Profit and Loss Account of Sunrise Computer Ltd. for the year ended 31st March, 2003. Particulars To Staff salaries & bonus To General expenses To Repairs to buildings To Directors fees To R&D expenses (cost of an apparatus) To Ex-gratia payment to an employee To Depreciation To Bad debt To Compensation for breach of contract To Donations to Ramakrishna Mission To Managing directors salary Rs. Particulars 5,00,000 By Gross Profit b/d 2,50,000 By Subsidy from Central Government 70,000 12,000 23,000 4500 170000 30,000 18000 18500 60,000 Rs. 15,00,000 4,00,000

139

Financial Accounting II

To Interest on debentures To Debenture trustee remuneration To Net Profit c/d

25000 5600 713400 19,00,000 19,00,000

The depreciation appearing in the Profit and Loss Account has been calculated in accordance with Section 350. The commission payable to managing director is a. b. c. d. e. Rs.7,250 Rs.8,009 Rs.11,300 Rs.10,360 Rs.10,180.

Based on the following information answer questions 276 and 277. Tulsian Agro Products Limited, having three whole-time directors on its board, the others being part-time directors, earned profits during the year ended 31st March, 2003 to the tune of Rs.2,50,000 after taking into consideration the following: i. ii. iii. Depreciation on fixed assets (Depreciation calculated in accordance with Section 350 is Rs.32,800) Rs.47,800; Provision for income tax Rs.1,22,500; Capital expenditure included in general expenses charged to Profit and Loss Account Rs.12,500.

Calculate the maximum remuneration payable to the whole-time directors @ 10% of net profits assuming that the remuneration payable to them is to be calculated on net profits remaining after payment of commission to part-time directors and the commission to part-time directors @ 1% of net profits is to be calculated on net profits remaining after payment of remuneration to the whole-time directors. 276. The maximum remuneration payable to whole-time directors are a. b. c. d. e. 277. a. b. c. d. e. Rs.38,750 Rs.41,665 Rs.43,280 Rs.39,640 Rs.35,360. Rs.4,210 Rs.3,604 Rs.3,200 Rs.4,930 Rs.2,970.

The maximum remuneration payable to part-time directors are

Consolidated Accounts of Holding and Subsidiary Companies


Based on the following information answer the questions 278 to 287. The following are the Balance Sheets of United Ltd. and its subsidiaries Bharat Ltd. and Comfort Ltd. as on 31st March, 2003:
United Ltd. Rs. 6,25,000 Bharat Ltd. Rs. 5,00,000 Comfort Ltd. Rs. 3,00,000 Fixed Assets Investments at cost Stock in trade United Ltd. Rs. 1,40,000 5,15,000 60,000 Bharat Ltd. Rs. 2,75,000 2,65,000 Comfort Ltd. Rs. 1,87,500

Share Capital (in shares of Rs.100 each)

140

Part II
United Ltd. Rs. 90,000 80,000 51,500 8,46,500 Bharat Ltd. Rs. 50,000 10,000 60,000 6,20,000 Comfort Ltd. Rs. 36,000 Sundry Debtors 25,500 3,61,500 United Ltd. Rs. 1,31,500 Bharat Ltd. Rs. 80,000 Comfort Ltd. Rs. 1,74,000

Reserves Profits and Loss Account Sundry Creditors

8,46,500

6,20,000

3,61,500

i.

All the investments, were made on 30th September, 2002 as follows: United Ltd. 3,750 shares in Bharat Ltd. at a cost of Rs.4,25,000 and 750 shares in Comfort Ltd., at a cost of Rs.90,000. Bharat Ltd. 2,000 shares in Comfort Ltd., at a cost of Rs.2,65,000.

ii. iii.

Sundry Creditors of United Ltd., include Rs.16,500 due to Comfort Ltd., which amount is duly reflected in the books of Comfort Ltd. Sundry Creditors of Bharat Ltd., include Rs.35,000 due to United Ltd., whereas Sundry Debtors of United Limited include Rs.40,000 due from Bharat Ltd., the difference of Rs.5,000 being cash in transit from Bharat Ltd. to United Ltd. as on 31st March, 2003. The subsidiaries position as on the date of acquisition of shares (i.e. 30th September, 2002) was as follows: Bharat Ltd. Comfort Ltd. Rs. Rs. Reserves 45,000 30,000 Profit and Loss Account 5,000 4,200 Sundry Creditors 20,000 Fixed Assets 2,75,000 1,84,200 Stock-in-trade 20,000 Sundry Debtors 2,75,000 1,50,000 The whole of the stock-in-trade of Bharat Ltd., as on 30th September, 2002 was subsequently sold to United Ltd. at a profit of 20% on selling price. The stock-in-trade of United Ltd. as on 31st March, 2003 include Rs.12,500 being cost of United Ltd. of the above stock purchased from Bharat Ltd. and remaining unsold as on that date. The minority interest of Bharat Ltd. in the consolidated balance sheet of United Ltd. is a. b. c. d. e. Rs.1,50,250 Rs.1,60,750 Rs.1,58,450 Rs.1,52,520 Rs.1,54,420. Rs.32,500 Rs.32,750 Rs.30,125 Rs.30,150 Rs.31,420. Rs.1,82,425 Rs.1,80,375 Rs.1,80,735 Rs.1,82,325 141

iv.

v. vi.

278.

279.

The minority interest of Comfort Ltd. is a. b. c. d. e.

280.

The minority interest in the consolidated Balance Sheet is a. b. c. d.

Financial Accounting II

e. 281. a. b. c. d. e. 282. a. b. c. d. e. 283. a. b. c. d. e. 284. a. b. c. d. e. 285. a. b. c. d. e. 286. a. b. c. d. e. 287. a. b. c. d. e. 142

Rs.1,82,250. Rs.62,200 Rs.63,450 Rs.62,750 Rs.63,150 Rs.62,050. Rs.64,350 Rs.65,630 Rs.68,720 Rs.61,120 Rs.66,850. Rs.90,150 Rs.92,650 Rs.97,225 Rs.96,350 Nil. Rs.92,450 Rs.97,625 Rs.96,320 Rs.98,250 Rs.96,280. Rs.57,500 Rs.55,315 Rs.56,245 Rs.51,415 Rs.52,745. Rs.3,15,000 Rs.3,18,000 Rs.3,24,000 Rs.3,27,000 Rs.3,29,000. Rs.60,000 Rs.62,000 Rs.58,000 Rs.59,000 Rs.61,000.

Capital Profits for the purpose of calculating goodwill/Cost of control is

Goodwill in the consolidated balance sheet is

Profit & Loss account in the consolidated balance sheet is

Revenue reserves in the consolidated balance sheet is

Stock-in-trade in the consolidated balance sheet is

Sundry debtors in the consolidated balance sheet is

Sundry creditors in the consolidated balance sheet is

Part II

Based on the following information answer the questions 288 to 295. (Consolidation statements Reporting date of the holding company and the subsidiary company different sale of goods on approval basis.) The following are the balance sheets of the Holding company X Ltd. and the Subsidiary company Y Ltd.:
X Ltd. (As on 31-3-2003) Liabilities Rs. 5,00,000 Share capital (shares of Rs.10 each) Reserves and Surplus 2,25,000 Secured Loans Current Liabilities: Creditors 1,90,000 Provision for Tax 1,00,000 Total 10,15,000 Y Ltd. (As on 31-12-2002) Rs. Assets 2,50,000 Fixed Assets 1,02,500 1,00,000 50,000 60,000 5,62,500 Investment: 20,000 shares in Y Ltd. Current Assets: Stock Debtors Cash and Bank Total X Ltd. (As on 31-3-2003) Rs. 3,00,000 Y Ltd. (As on 31-12-2002) Rs. 2,50,000

4,50,000 1,90,000 50,000 25,000 10,15,000

1,75,000 40,000 97,500 5,62,500

Pre-acquisition profits of Y Ltd. were Rs.40,000. The following is the information about the various transactions that occurred between 31-12-2002 and 31-3-2003 in respect of Y Ltd Company: i. On January 10th 2003, X Ltd. sold goods to Y Ltd. costing Rs.2,00,000 at an invoice price of cost plus 20%. 50% of those goods were resold by Y Ltd. to X Ltd. at an invoice price within 31st March 2003(these were then sold by X Ltd. to a third party before 31-3-2003). 25% of the goods received from X Ltd. were sold by Y Ltd. to its customers on sale or return basis at an invoice price plus 10%. 25% of the goods sold on approval basis were approved by the customers before 31-3-2003 but cash is still due from them. As on 31-3-2003, Y Ltd. owes Rs.26,000 to X Ltd. in respect of the goods received from X Ltd. On February 15th 2003, certain stocks of Y Ltd. costing Rs.5,000 were completely destroyed by fire. The insurance company paid 60% of the claim. Collections from the debtors and payments to the creditors amounted to Rs.5,000 and Rs.10,000 respectively between 31-12-2002 and 31-12-2003. The creditors in the consolidated balance sheet of the two companies is a. b c. d. e. 289. Rs.2,30,000 Rs.2,28,000 Rs. 2,31,000 Rs. 2,30,500 Rs.2,26,000.

ii. iii. 288.

Adjustments required to be made in the stock of Y Ltd. for the purpose of consolidation based on the above information is a. b. c. d. e. Rs.2,74,000 Rs.2,75,000 Rs.2,72,000 Rs.2,78,000 Rs.2,77,000. Rs.4,32,250 Rs.4,26,500 Rs.4,47,500 Rs.4,51,600 143

290.

The value of the stock in the consolidated balance sheet of the two companies is a. b. c. d.

Financial Accounting II

e. 291. a. b. c. d. e. 292. a. b. c. d. e. 293. a. b. c. d. e. 294. a. b. c. d. e. 295. a. b. c. d. e.

Rs. 2,77,000. Rs.68,500 Rs.72,200 Rs.74,500 Rs.67,600 Rs.75,500. Rs.2,21,000 Rs.2,16,000 Rs.2,20,000 Rs.2,15,000 Rs.2,18,000. Rs.21,600 Rs.26,500 Rs.24,500 Rs.27,700 Rs.25,000. Rs.2,50,700 Rs.2,51,700 Rs.2,57,100 Rs.2,75,100 Rs.2,57,100. Rs.71, 440 Rs.70, 440 Rs.74,000 Rs.70,500 Rs.70, 400.

The value of the debtors in the consolidated balance sheet of the two companies is

Goodwill in the consolidated balance sheet is

Cash balance in the consolidated balance sheet is

Reserves and Surplus in the consolidated balance sheet is

Minority interest in the consolidated balance sheet is

Based on the following information answer the questions 296 and 297. X Ltd. acquired 75% of the equity share capital of Y Ltd., for Rs.90,000 when the balance sheet of Y Ltd. showed as under. Balance Sheet of Y Ltd. Rs. Share Capital: 5000 cumulative preference shares of Rs.10 each 10,000 equity shares of 50,000 Goodwill 1,00,000 Sundry assets Profit & Loss account 1,50,000 Balance Sheets of the two companies as on 31st December, 1997. 144 50,000 75,000 25,000 1,50,000 Rs.

Part II

Liabilities Equity Share Capital 2,00,000 equity shares of Rs.10 each 5000 6% Preference Shares of Rs.10 each

X 20,00,000

Assets Goodwill Sundry Assets

Y 50,000

18,10,000 1,75,000

50,000 Investments Shares in Y Ltd. P & L a/c 90,000 1,00,000

10,000 equity shares of Rs.10 each P&L a/c

1,00,000 75,000

20,00,000 2,25,000 20,00,000 2,25,000 Assume that there are no arrears of preference dividends and no equity dividends were paid by Y Ltd. 296. The minority interest in the consolidated balance sheet is a. b. c. d. e. 297. a. b. c. d. e. Rs.97,300 Rs.93,750 Rs.97,375 Rs.97,350 Rs.93,570. Rs.81,350 Rs.83,510 Rs.83,750 Rs.85,250 Rs.81,530.

Goodwill in the consolidated balance sheet is

Based on the following information answer the questions 298 to 302. Strong Ltd. acquired 3,200 equity shares of Weak Ltd. on March 31, 2001. The summarized balance sheet of the two companies as on that date are given below :
Liabilities Share capital of Rs.100 each fully paid-up General reserve Profit and loss account Bank loan Bills payable (including Rs.6,000 to Strong Ltd.) Sundry creditors Strong Ltd. (Rs.) 10,00,000 4,80,000 1,14,400 1,60,000 94,400 Weak Ltd. (Rs.) Assets Strong Ltd. (Rs.) 3,00,000 4,80,000 6,80,000 2,40,000 88,000 31,600 29,200 18,48,800 Weak Ltd. (Rs.) 3,60,000 3,18,800 72,000 80,000 16,000 8,46,800

4,00,000 Land and building 3,40,000 Plant and machinery 72,000 Investments in Weak Ltd. (at cost) Stocks 16,800 Sundry debtors 18,000 Bills receivable (including Rs.6,000 from Weak Ltd.) Cash at bank

18,48,800

8,46,800

The additional information is as follows: i. ii. Weak Ltd. made a bonus issue on March 31, 2001 of one equity share for every four shares held by its shareholders. This has not yet been accounted for. Sundry creditors of Strong Ltd., included Rs.24,000 due to Weak Ltd.

The directors have decided to revalue the land and buildings and plant and machinery of Weak 145

Financial Accounting II

Ltd. at Rs.4,00,000 and Rs.2,98,800 respectively. 298. The holding of Strong Limited in the weak limited is a. b. c. d. e. 299. 75% 80% 82% 78% 84%.

The share of Strong Limited in the capital profit computed for the purpose of determining cost of control/goodwill is a. b. c. d. e. Rs.2,48,400 Rs.2,65,600 Rs.2,56,600 Rs.2,60,000 Rs.2,54,800. Rs.14,400 Rs.14,600 Rs.12,500 Rs.20,900 Rs.16,400. Rs.1,58,320 Rs.1,64,600 Rs.1,66,400 Rs.1,62,300 Rs.1,64,500.

300.

Goodwill in the consolidated balance sheet is a. b. c. d. e.

301.

Minority interest in the consolidated balance sheet is a. b. c. d. e.

302.

H Ltd., acquired 70% share in S Ltd. Trade creditors of S Ltd. include Rs.50,000 for goods sold by H Ltd. on which H Ltd made a profit of Rs.5,000. Half of the goods were still in the stock of S Ltd. The unrealized profit included in the stock is a. b. c. d. e. Rs.5,000 Rs.3,500 Rs.2,500 Rs.1,500 Rs.750.

303.

H Ltd. acquired 80% shares of S. Ltd. on April 01, 2002. The Balance Sheets of H Ltd. and S Ltd. as on March 31, 2003 are as follows: Balance sheets of H. Ltd. and S. Ltd. as on March 31, 2003 Liabilities H Ltd. (Rs.) S Ltd. (Rs.) Assets H Ltd. (Rs.) S Ltd. (Rs.)

Share capital (Rs.10 each) General reserve Profit & loss a/c Sundry creditors

9,00,000 3,00,000 Land & buildings 3,90,000 1,50,000 Plant & machinery 1,90,000 1,30,000 Furniture & fixtures 1,00,000 60,000 Investments

4,20,000 2,40,000 3,90,000 1,30,000 1,90,000 3,20,000 90,000 20,000

146

Part II

Bills payable

60,000

50,000 Stock Sundry debtors Bills receivable Cash & bank

90,000 70,000 40,000

50,000 40,000 20,000

1,20,000 1,00,000

16,40,000 6,90,000 Other information: i.

16,40,000 6,90,000

As on the date of acquisition, the following balances were revealed in the books of S Ltd.: General reserve Profit & loss account Rs.1,00,000 Rs.60,000 (cr.)

ii. iii. iv.

H Ltd. received a dividend of Rs.24,000 from S Ltd. from pre-acquisition profits and credited the amount to investment account. Sundry debtors of H Ltd. include Rs.10,000 due from S Ltd. Total bills payable of S Ltd. consisted of bills drawn by H. Ltd. and the same were discounted with the bank by H. Ltd. The total of consolidated balance sheet of H Ltd. and S Ltd. as on March 31, 2003 was a. b. c. d. e. Rs.23,30,000 Rs.20,10,000 Rs.20,24,000 Rs.20,00,000 Rs.19,60,000.

304.

Hema Ltd. holds 75% shareholding of Suma Ltd. On March 15, 2003, Hema Ltd. sold goods for Rs.12,000. It is the practice of Hema Ltd. to sell the goods at cost plus 20%. 50% of the goods purchased from Hema Ltd. were in stock as on March 31, 2003. The amount of unrealized profit adjusted in the consolidated balance sheet as on March 31, 2003 was a. b. c. d. e. Rs.900 Rs.1,000 Rs.1,125 Rs.1,800 Rs.1,500.

305.

The balance of Profit and Loss account of Sahara Ltd. as on March 31, 2003 and as on April 01, 2002 was Rs.80,000 and Rs.35,000 respectively. On July 01, 2002, Hemanth Ltd. acquired 80% of the shares of Sahara Ltd. During the year 2002-2003, an amount of Rs.15,000 was declared as dividend out of the profits of the year 2001-2002. Assuming that the profit is accrued evenly throughout the year, the amount considered as capital profit while preparing Consolidated Balance Sheet as on March 31, 2003 was a. b. c. d. e. Rs.28,000 Rs.46,250 Rs.35,000 Rs.31,250 Rs.57,500.

306.

On March 01, 2003, Harsha Ltd. drew two bills on Sandhya Ltd., its subsidiary, for Rs.10,000 each. On the same day, Harsha Ltd. discounted one bill with a bank @ 8%. On March 31, 2003, the balances of bills receivable account of Harsha Ltd. and Sandhya Ltd. were Rs.30,000 and Rs.40,000 respectively. The amount of bills receivable shown in the Consolidated Balance Sheet as on March 31, 2003 was 147

Financial Accounting II

a. b. c. d. e. 307.

Rs.80,000 Rs.40,000 Rs.70,000 Rs.50,000 Rs.60,000.

On July 31, 2002, Hyderabad Blues Ltd. acquired 60% shares of Secunder Ltd. for Rs.8,50,000. The share capital of Secunder Ltd. consists of 1,00,000 shares of Rs.10 each. On April 01, 2002, the profit and loss account and general reserve showed balances of Rs.75,000 (Dr.) and Rs.3,00,000 respectively. Their balances as on March 31, 2003 are Rs.2,00,000 (Cr.) and Rs.3,25,000 respectively. The amount of goodwill/capital reserve shown in the consolidated balance sheet as on March 31, 2003 was a. b. c. d. e. Rs.1,25,000 (Capital reserve) Rs.55,000 (Goodwill) Rs.50,000 (Capital reserve) Rs.10,000 (Goodwill) Rs.25,000 (Goodwill).

308.

Bills payable of B Ltd. includes Rs.4,000 issued to A Ltd. which the company discounted for Rs.1,000. The amount adjusted in the consolidated balance sheet of A and B is a. b. c. d. e. Deduct Rs.3,000 from bills receivable Deduct Rs.3,000 from bills payable Add Rs.3,000 to bills receivable Add Rs.3,000 to bills payable No adjustment required.

309.

The debtors of A Ltd. include Rs.10,000 owed by B Ltd. The adjustment entry made at the time of consolidation is a. b. c. d. e. Reduce Rs.10,000 from debtors in consolidated balance sheet Reduce Rs.10,000 from creditors in consolidated balance sheet Add Rs.10,000 to debtors in consolidated balance sheet Add Rs.10,000 to creditors in consolidated balance sheet Both (a) and (b) above.

Based on the following information answer questions 310 and 311. H Ltd. acquired shares on 1st September, 2002 of S Ltd. The P&L a/c of S Ltd. showed a debit balance of Rs.1,50,000 on 1st April, 2002 and balance of P&L a/c on 31-3-2003 was Rs.90,000 (Dr.) 310. The capital profit/loss is a. Loss of Rs.90,000 b. Profit of Rs.90,000 c. Profit of Rs.1,00,000 d. Loss of Rs.35,000 e. Profit of Rs.2,40,000. 311. Revenue profit/loss is a. Loss of Rs.90,000 b. Profit of Rs.90,000 c. Loss of Rs.1,50,000 d. Profit of Rs.25,000 e. Profit of Rs.1,40,000. 148

Part II

312.

313.

314.

315.

316.

317.

Bills payable of B Ltd. includes Rs.8,000 issued to A Ltd., which the company discounted for Rs.2,000. The amount adjusted in the consolidated balance sheet is/are a. Deduct Rs.6,000 from bills payable b. Deduct Rs.6,000 from bills receivable c. Add Rs.6,000 to bills payable d. Add Rs.6,000 to bills receivable e. No adjustment required. H Ltd. purchased 70% shares of S Ltd. at Rs.1,40,000. S Ltd. has the capital of Rs.1,00,000 in shares of Rs.100 each. At the time of purchase of shares by H Ltd. the profit of S Ltd. was Rs.90,000. S Ltd. decided to make a bonus issue out of pre-acquisition profit of one share of Rs.100 each fully paid for every four shares held. Goodwill or capital reserve before issue of bonus shares is a. Rs.70,000 (Goodwill) b. Rs.77,000 (Goodwill) c. Rs.7,000 (Capital reserve) d. Rs.70,000 (Capital reserve) e. Rs.7,000 (Goodwill). H Ltd. with 80% shares of S Ltd. supplied goods to S Ltd. for Rs.50,000 with a profit of 10% on sale. 40% of the goods are still in the stock of S Ltd. The unrealized profit on stock is a. Rs.5,000 b. Rs.2,500 c. Rs.2,000 d. Rs.1,000 e. Rs.1,500. H Company acquires 60% shares of S Company on July 01, 2003. If the fixed assets of S Company are revalued upwards by Rs.1,50,000, then the share of capital profit of minority shareholders is a. Rs.90,000 b. Rs.60,000 c. Rs.37,500 d. Rs.22,500 e. Rs.15,000. Holding company acquired 70% of its subsidiary company shares on November 01, 2002. The profit and loss account of the subsidiary company showed a debit balance of Rs.50,000 on April 01, 2002 and a credit balance of Rs.25,000 on March 31, 2003. The share of capital profit of holding company is a. Rs.5,000 b. Rs.4,375 c. Rs.3,500 d. Rs.3,065 e. Rs.2,500. H Ltd. acquired 60% shares of S Ltd. on September 01, 2002. The profit and loss account of the subsidiary company, S Ltd., showed a debit balance of Rs.2,50,000 on April 01, 2002 and a debit balance of Rs.1,50,000 on March 31, 2003. The amount of capital profit/loss of the holding company, H Ltd., is a. Profit of Rs.1,00,000 b. Profit of Rs.25,000 c. Loss of Rs.25,000 149

Financial Accounting II

318.

319.

d. Loss of Rs.1,25,000 e. Loss of Rs.2,50,000. H Ltd. acquired 60% shares of S Ltd. on January 2003, at a price of Rs.3,00,000. The profit and loss account showed a debit balance of Rs.1,00,000 on April 1, 2002 and credit balance of Rs.50,000 as on March 31, 2003. The capital profit of H Ltd. is a. Rs.9,000 b. Rs.7,500 c. Rs.6,750 d. Rs.6,000 e. Rs.3,000. The creditors of H Ltd. include Rs.6,000 for purchases from S Ltd. The adjustment(s) entry made during the preparation of consolidated balance sheet will a. Reduce debtors by Rs.6,000 b. Reduce creditors by Rs.6,000 c. Increase debtors by Rs.6,000 d. Increase creditors by Rs.6,000 e. Both (a) and (b) above. H Ltd. acquired 75% shares in S Ltd. S Ltd. supplied to H Ltd. goods of the invoice value of Rs.50,000 of which 60% of the goods were still in stock of H Ltd. S Ltd. made a total profit of Rs.10,000 on goods sold to H Ltd. At the time of preparation of consolidation of balance sheet, the adjustment is/are a. b. c. d. e. Reduce Rs.5,625 from stock account Reduce Rs.5,625 from Profit & Loss account Reduce Rs.6,000 from Profit & Loss account Reduce Rs.6,000 from stock account Both (c) and (d) above.

320.

321.

H Ltd. acquired 80% shares of S Ltd. on November 1, 2000. If a machine of S Ltd. is revalued upwards by Rs.1,00,000, then the share of minority group of S Ltd. in the consolidated balance sheet as on March 31, 2001 will be a. b. c. d. e. Rs.1,00,000 Rs.80,000 Rs.70,000 Rs.56,000 Rs.20,000.

Current Development and ERP


322. Shown below are selected data from income statement. Sales Other income Operating expenses Excise duty Value added by manufacturing is a. b. c. 150 Rs.40,000 Rs.52,000 Rs.35,000 Rs. 1,00,000 12,000 1,12,000 60,000 5,000

Part II

d. e.

Rs.47,000 Rs.57,000.

Based on the following information answer questions 323 to 329. The following is the profit and loss account of Shailaja Ltd. for the year ended 31.03.2003 Sales Other income Production and operational expenses Administration expenses Interest and other charges Depreciation Profit before taxes Provision for taxation Investment allowance reserve written back Balance as per last balance sheet Rs. in lakh 200.0 10.0 210.0 160.0 6.5 8.0 5.7 29.8 2.0 27.8 0.2 28.0 1.0 29.0 Rs. in lakh 3 2 5 24 29 Rs. Increase in stock Consumption of raw material Consumption of stores Salaries and wages Cess and local taxes Other manufacturing expenses ii. Administration expenses include audit fees of Rs.1 lakh; Salaries and commission to directors Rs.2.0 lakh; and Provision for doubtful debts Rs.2.50 lakh. iii. Interest and other charges: Rs. On fixed loans from financial institutions Debentures On working capital loans from bank 323. The total value added by the business is a. b. Rs.200 lakh Rs.51.20 lakh 151 3.9 1.8 2.3 8 30.0 80.5 5.5 15.0 3.0 26.0 160.0

Transfer to general reserve Proposed dividend Surplus carried to balance sheet i. Production and Operational expenses:

Financial Accounting II

c. d. e. 324. a. b. c. d. e. a. b. c. d. e. 326. a. b. c. d. e. 327. a. b. c. d. e. 328. a. b. c. d. e. 329. a. b. c. d. e.

Rs.53.20 lakh Rs.61.20 lakh Rs.148.80 lakh. Rs.142 lakh Rs.55.70 lakh Rs.61.20 lakh Rs.53.50 lakh Rs.51.20 lakh. Rs.15.00 lakh Rs.17.00 lakh Rs.13.00 lakh Rs.2.00 lakh Rs.7.70 lakh. Rs.3.00 lakh Rs.5.00 lakh Rs.2.00 lakh Rs.7.70 lakh Rs.15.00 lakh. Rs.2.00 lakh Rs.3.90 lakh Rs.1.80 lakh Rs.3.80 lakh Rs.7.70 lakh. Rs.28.70 lakh Rs.32.50 lakh Rs.31.70 lakh Rs.31.50 lakh Rs.25.80 lakh. Rs.31.40 lakh Rs.25.80 lakh Rs.31.70 lakh Rs.32.50 lakh Rs.36.40 lakh.

The value added by the manufacturing and trading activities is

325. The value applied to pay employees and directors is

The value applied to pay government is

The value applied to pay providers of the capital is

The value applied to pay for maintenance and expansion is

The difference between the total values added by the business and profit before tax is

Based on the following information answer questions 330 to 340. Given below is the profit and loss account of Best Ltd. Profit and Loss account for the year ended 31.3.2003 152

Part II

Rs.000 Income: Sales Other income Expenditure: Operating cost Excise duty Interest on bank O.D. Interest on 10% debentures Profit before depreciation Less: Depreciation Profit before tax Provision for tax Profit after tax Less: Transfer to general Less: Dividend payable Retained profit i. ii. iii. iv. 330. 25,800 1,800 90 1,200 28,890 860 260 600 250 350 150 200 50 150 29,000 750 29,750

This represents the invoice value of goods after deducting discounts, returns sales tax. Operating expenses include Rs.15,000 (000) as wages, salaries. The Bank O.D. is treated as a temporary source of finance. The charge of taxation includes a transfer of Rs.50 (000) to the credit of deferred tax account. Rs.1,60,80,000 Rs.1,50,00,000 Rs.1,57,70,000 Rs.1,70,60,000 Rs.1,63,10,000. Rs.1,63,10,000 Rs.1,50,00,000 Rs.1,57,70,000 Rs.1,63,70,000 Rs.1,50,20,000. Rs.1,50,00,000 Rs.1,63,10,000 Rs.1,57,70,000

The total value added by the business is a. b. c. d. e.

331.

The value added by manufacturing and trading activity is a. b. c. d. e.

332.

The application of the value added to pay employees wages and salaries is a. b. c.

153

Financial Accounting II

d. e. 333. a. b. c. d. e. 334. a. b. c. d. e. 335. a. b. c. d. e. 336. a. b. c. d. e. 337.

Rs.1,50,20,000 Rs.1,50,70,000. Rs.70,000 Rs.1,40,000 Rs.1,20,000 Rs.2,00,000 Rs.5,20,000. Rs.17,00,000 Rs.18,60,000 Rs.12,50,000 Rs.17,70,000 Rs.11,60,000. Rs.12,50,000 Rs.5,20,000 Rs.11,60,000 Rs.6,10,000 Rs.5,40,000. Rs.1,45,90,000 Rs.6,10,000 Rs.12,50,000 Rs.1,64,60,000 Rs.17,70,000.

The application of the value added to pay government taxes is

The application of the value added to provider of capital is

The application of the value added to maintenance and expansion of company is

The difference between profit before tax and total value added by the business is

The percentage of application of the value added to pay employees wages and salaries to total value added is a. b. c. d. e. 91 94 78 76 88.

338.

The percentage of application of the value added to pay government tax to total value added is a. b. c. d. e. 1.98 1.10 3.58 2.98 2.20.

339.

The percentage of application of the value added to pay providers of capital to total value added is a. 6.22

154

Part II

b. c. d. e. 340.

8.42 7.32 3.58 10.30.

The percentage of application of the value added to provide for maintenance and expansion of company to total value added is a. b. c. d. e. 1.10 0.88 3.58 7.32 1.98.

155

Financial Accounting II

Part II: Solutions


Accounting for Intangible Assets
1. 2. 3. (a) Goodwill as per annuity method = 6,000 x 3.78 = Rs.22,680. (b) Goodwill as per three years purchase of super profits method = Rs.6,000 x 3 = Rs.18,000. (c) Goodwill as per capitalization method = 6,000 x 100/10 = Rs.60,000. Rs. Average Profit = Rs.(14,400 + 15,400 + 16,900 + 17,400 + 17,900)/5 = 16,400 Less: Non-recurring profit 1,000 15,400 Add: Recurring profit 600 Average adjusted profit 16,000 Normal profit 1,00,000 x 10/100 = Rs.10,000 Super profit 16,000 10,000 = 6,000 (b) Average profit (c) Value of goodwill = 1,93,370/10 = Rs.19,337. = 19,337 x 3 = Rs.58,011. 2001 Rs. 15,000 2,000 17,000 200 16,800 1,000 15,800 15,800 2,500 13,300 = = = = 2002 Rs 18,000 18,000 180 17,820 17,820 1,000 18,820 2,500 16,320 Rs. 13,300 32,640 58,014 89,416 1,93,370 Rs. 2,000 200 1,800 180 1,620 162 1,458 146 1,312 156 2003 Rs. 22,000 22,000 162 21,838 21,838 21,838 2,500 19,338 2004 Rs. 25,000 25,000 146 24,854 24,854 24,854 2,500 22,354

4. 5.

Profit Add: Capital Expenses Less: Depreciation Less: Overvaluation of closing stock Add: Overvaluation of opening stock Less: Managerial remuneration

2001 2002 2003 2004 Note:

13,300 x 1 16,320 x 2 19,338 x 3 22,354 x 4

Capital expenses Less: Depreciation for 2001 Less: Depreciation for 2002 Less: Depreciation for 2003 Less: Depreciation for 2004

6.

(c) The average capital employed by the XYZ Ltd. = Rs.1,39,500 Calculation of Average Capital Employed Particulars Land and Buildings Plant and Machinery Stock Debtors Bank Less: Debentures Creditors Provision for tax Less: 1/2 of current years profit excluding non-trading income Rs. Rs. 1,00,000 20,000 50,000 60,000 20,000 2,50,000

50,000 30,000 20,000

1,00,000 1,50,000 10,500 1,39,500

7. (b) The Super profit of the XYZ Ltd. = Rs. 7,050. Calculation of Super Profits Profit for the year Less: Non-trading income Average maintainable profit Less: 10% of 1,39,500 (Normal Profit) Super profits 8. 9. 10. 11. (d) The adjusted profit for the year 2000 is Rs.22,550. (d) The adjusted profit for the year 2001 is Rs.21,250. (d) The adjusted profit for the year 2002 is Rs.22,100.
Recomputation of Profits Following Uniform Accounting Policy (figures in Rs.000)

Rs. 24,000 3,000 21,000 13,950 7,050

(b) Goodwill on the basis of 3 years purchase of super profits = 7,050 x 3 = Rs.21,150.

1999 2000 2001 2002 2003 1999

Book Profits (in 000) 22 23 24 25 22

Effect of Method 4.60 + 3.50 + 1.50

Effect of W.D.V. 4.90 3.95 4.25 2.90

Depreciation (17.00 12.10) (18.10 14.15) (19.25 15.00) (19.60 16.70) 6.00 1.40 4.60 3.20 6.70 3.50 10.30 8.80 1.50

Profit after changes 12.5 22.55 21.25 22.10 22

Working Notes: Increase in stock as per FIFO Less: Increase in stock for LIFO Reduction in profits Increase in stock as per FIFO Less: Increase in stock as per LIFO Increase in profits Decrease in stock as per FIFO Decrease in stock as per LIFO Increase in profits

2000

2001

157

12. (d) The value of Capital Employed = Rs.3,56,000. Calculation of Capital Employed Rs. Assets Land and Buildings Plant and Machinery Stock Book debts Less: Provision Cash at bank Gross total assets Less: Sundry creditors Provision for taxation Capital employed 13. Calculation of Normal Profits (Normal rate of return x Capital Employed)/100 12/100 x Rs.3,56,000 = Rs.42,720. 14. (d) The Future Maintainable Profits (based on profits of previous year) is Rs.55,000. Calculation of Future Maintainable Profits (based on profits of previous year) Actual profit after providing tax Rs.55,000. (As the provision for taxation @ 50% is Rs.55,000, the profits would be Rs.l,10,000 and the profits after providing for taxation also would be Rs.55,000.) 15. (e) The Super Profits of the Company is Rs.12,280. Calculation of Super Profits Rs. Actual profits 55,000 Less: Normal profits 42,720 Super profits 12,280 (a) The value of goodwill on five years purchase of super profits Amount Rs. 1,75,000 90,000 1,15,000 98,000 3,000 95,000 7,000 4,82,000 1,26,000 3,56,000

71,000 55,000

(c) The Normal Profit of the company = Rs.42,720.

16. 17.

= Rs.61,400.

Valuation of goodwill on five years purchase of super profits = Rs.12,280 x 5 = Rs.61,400. (a) The Trading Capital employed by the business as on 31st March, 2003 is Rs.12,70,000. Trading Capital Employed on March 31, 2003 Rs. Freehold property Plant and Machinery Building Stock Debtors Cash and Bank Less: Sundry creditors 14% Debenture Capital employed 4,20,000 5,00,000 4,80,000 1,30,000 1,40,000 70,000 17,40,000 (1,10,000) (3,60,000) 12,70,000 158

18.

(e) The average maintainable trading profit for the year end March 31, 2000 is Rs.2,02,500. Average Maintainable Trading Profit for the Year Ended March 31, 2000 Rs. Net profit before tax Less: Additional depreciation Additional expenses Non-operating income (interest on investment) Less: Provision for taxation @ 50% Average Trading Capital Employed Rs. Closing trading capital employed Less: 1/2 of Current year PAT excluding non-trading investment (2,02,500 x 1/2) Average capital employed 12,70,000 1,01,250 11,68,750 50,000 30,000 15,000 95,000 4,05,000 2,02,500 2,02,500 Rs. 5,00,000

19.

(c) The super profit of the business is Rs.85,625. Rs. Average maintainable profit Less: Normal profit 10% on average capital employed of Rs.11,48,750 Super profit 2,02,500 1,16,875 85,625

20. 21.

(e) Valuation of Goodwill on 4 years purchase of Super Profit = 4 x Rs.85,625 = Rs.3,42,500. (e) Rs.3,38,250 Computation of Average Trading Capital Employed Particulars Assets: Land and buildings Plant and machinery Stock Debtors Cash at bank Less: Liabilities Sundry creditors Provision for taxation Less: 1/2 of current years profit (excluding non-trading income) after tax = Rs.71,500 2 (see working note) Average capital employed 30,000 30,000 60,000 3,74,000 35,750 1,61,000 1,42,000 53,000 41,000 37,000 4,34,000 Rs. Rs.

3,38,250 159

Working Notes: Profit for the year (before tax) Less: Non-trading income Less: Income tax (50%) Current years profit 22. (a) Rs.44,050. Computation of Super Profit Particulars Profit for 2002-03 as per balance sheet Add: Interest on debenture Less: Income from investment Less: Adjustment of depreciation on change in value of assets: Land and building: 5% on Rs.21,000 (i.e. Rs.1,61,000 Rs.1,40,000)Rs.1,050 Plant and machinery: 10% on Rs.12,000 (i.e Rs.1,42,000 Rs.1,30,000) Rs.1,200 Less: Income tax (50%) Less: Normal return 10% on capital employed amount of Rs.3,38,250 Super profit 23. = Rs.1,32,150. Notes: a. Debentures have been considered as part of capital employed, since the company adopts long-term point of view for goodwill. So debenture interest has been added back to profit. Investments being non-trading assets have not been considered in capital employed, so income from investments has been excluded from profit. Cost of issue of debentures being a fictitious asset has not been considered in calculating capital employed. Goodwill as per balance sheet has not been considered in calculating capital employed on the assumption that it was brought into account by book-entry and no capital was invested to acquire the goodwill. 2,250 1,55,750 77,875 77,875 33,825 44,050 Rs. 1,48,000 15,000 89,000 5,000 1,58,000 Rs. 1,48,000 5,000 1,43,000 71,500 71,500

(e) Value of goodwill on the basis of 3 years purchase of super profit = Rs.44,050 x 3

b. c. d.

24. 25. 26. 27. 28.

(e) The average maintainable profit of the Alpha Limited is Rs.4,25,900. (a) Capital employed by the company is Rs.17,00,000. (a) Super Profits of the company is Rs.85,900. (b) Goodwill at three years purchase is Rs.2,57,700. (a) Valuation of fully paid shares on Net asset basis is 211.77. 160

29.

(e) Valuation of partly paid shares on Net asset basis is 191.77. Working Notes: i. Average Maintainable Profits

1994 1995 1996 Rs. Rs. Rs. Profits after Tax 3,80,000 4,20,000 5,00,000 Less: Adjustment for sale of machine credited to 10,000 Profit & Loss A/C (net of tax) 3,70,000 Less: Dividend on non-trade investment (net of tax) 5,000 5,000 5,000 3,65,000 4,15,000 4,95,000 Add back depreciation of Machinery sold net of tax 1,000 900 810 (half of Rs.2,000, Rs.1,800 & Rs.1,620) 3,66,000 4,15,900 4,95,810 Average profits (3,66,000 + 4,15,900 + 4,95,810)/3 = Rs.4,25,903 Say Rs.4,25,900 [Since it is specifically mentioned in the question, simple average profit has been considered as future maintainable profit. Otherwise, in case of increasing trend of profit, generally weighted average is taken.] ii. Capital Employed Land and Buildings Machinery Motor Car Furniture Stock Debtors Cash Less: Creditors Rs. 6,00,000 5,20,000 25,000 25,000 7,25,000 2,00,000 1,05,000 22,00,000 5,00,000 17,00,000

(Alternatively students may compute average capital employed deducting 1/2 of the current profit.) iii. Super Profits Maintainable Profits vide Working note (i) Normal Profits 20% on Rs.17,00,000 Super Profits Goodwill at 3 years purchase iv. Valuation of Shares on Net Assets Basis Rs. Net assets Capital employed vide Working note (ii) Add: Non-trade investments Add: Goodwill Add: Notional calls on shares No. of shares Value of fully paid shares Value of partly paid shares 17,00,000 60,000 2,57,700 1,00,000 21,17,700 10,000 211.77 191.77 161 Rs. 4,25,900 3,40,000 85,900 2,57,700

30.

(e) The average trading capital employed by the Cox Limited is Rs.3,57,250. Cox Ltd. Company Computation of Average Trading Capital Employed Particulars Assets Land and buildings Plant and machinery Stock Debtors Cash at bank Less: Current liabilities Sundry creditors Provision for taxation Less: 1/2 of current years profit (excluding non-trading income) After tax = Rs.73,500 2 (see working note) Average capital employed Working Notes: Profit for the year Less: Non-trading income Less: Income tax (50%) Current years profit Rs. 1,52,000 5,000 1,47,000 73,500 73,500 Rs. Rs. 1,70,000 1,80,000 50,000 45,000 33,000 4,78,000 54,000 30,000

84,000 3,94,000

36,750 3,57,250

31.

(a) The super profits of the company is Rs.41,525. Computation of Super Profit Particulars Profit for 2000-01 as per balance sheet Add: Interest on debenture Less: Income from investment Less: Adjustment of depreciation on change in value of assets Land and building: 5% on Rs.50,000 (i.e. Rs.1,70,000 Rs.1,20,000) Rs.2,500 Plant and machinery: 10% on Rs.50,000 (i.e., Rs.1,80,000 Rs.1,30,000) Rs.5,000 Less: Income tax (50%) Less: Normal return 10% on capital employed amount of Rs.3,57,250 Super profit Rs. 1,52,000 15,000 91,000 5,000 1,62,000

7,500 1,54,500 77,250 77,250 35,725 41,525

32.

(e) The value of the goodwill of the company is Rs.2,07,625. Value of goodwill on the basis of 5 years purchase of super profit = Rs.41,525 x 5 = Rs.2,07,625. 162

33.

Notes: a. Debentures being long-term liability have been considered as part of capital employed, so debenture interest has been added back to profit. b. Investments being non-trading assets have not been considered in capital employed, so income from investments has been excluded from profit. c. Cost of issue of debentures being a fictitious asset has not been considered in calculating capital employed. d. Goodwill as per balance sheet has not been considered in calculating capital employed on the assumption that it was brought into account by book-entry and no capital was invested to acquire the goodwill. (d) Average profit = (Rs.65,000 + Rs.68,020 + Rs.69,000)/3 = Rs.2,02,020/3 Less: 10% normal rate of return on capital employed (i.e., 10% on Rs.6,50,000) Super profit Rainbow Ltd. Average Capital Employed Present value of Assets Plant and Machinery Land and Buildings Stock Debtors Bills receivable Cash and Bank Less: Current Liabilities Sundry creditors Bills payable Provision for taxation Closing capital employed
1 of current years profit 2 Profit before tax Less: Non-trading income

= = =

Rs. 67,340 65,000 2,340

34.

(d)

Rs.

Rs. 5,00,000 4,00,000 40,000 1,00,000 40,000 50,000 11,30,000

70,000 30,000 50,000

1,50,000 9,80,000

Less:

Less: Income tax 30% 1/2 of profit 1 (i.e., Rs.1,08,500) 2 Average Capital Employed

1,60,000 5,000 1,55,000 46,500 1,08,500

54,250

9,25,750 Rs. 1,60,0000 5,000 1,55,000 46,500 1,08,500 92,575 15,925

Profit before tax for the year Less: Non-trading income Less: Income tax 30% Less: Normal profit 10% on average capital employed Super Profit Value of goodwill = Rs.15,925 x 4 = Rs.63,700.

163

35.

(b) Particulars

Pioneer Ltd. Computation of Net Tangible Assets Rs. Rs. 6,00,000 2,50,000 1,10,000 4,00,000 90,000 14,50,000 Less: Liabilities: Bank loan (20%) Sundry creditors Provision for taxation Provision for bad debt Net tangible assets 1,50,000 2,80,000 1,40,000 30,000 6,00,000 8,50,000 Plant and Machinery Land and Buildings Stock-in-trade Sundry debtors Cash at bank

Computation of average maintainable profit: Average profit after tax = Rs.1,00,000 + Rs.1,10,000 + Rs.1,30,000 + Rs.1,40,000 Rs.4,80,000 = = Rs.1,20,000 4 4 11% + 12% + 14.5% + 14.5% Average dividend paid = 4 52% = 13% = 4 Normal rate of dividend = 13% Average maintainable profit Total value of the business = x 100 Normal rate of return = Goodwill
Rs.1, 20, 000 = Rs.9,23,077 9,23,000 13%

= Total value of the business Net tangible assets = Rs.9,23,000 8,50,000 = Rs.73,000.

36.

(a) 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 Rs. Rs. Rs. Rs. Rs. Total Rs.

Profit Less: Repair expenses Add: Depreciation Less: Profit on sale of plant Adjusted profits Weights Profits Weights

75,000

3,00,000

3,75,000 30,000 1,500

4,50,000

7,42,500

3,000

3,000 22,500

75,000 1 75,000

3,00,000 2 6,00,000

3,46,500 3 10,39,500

4,53,000 4

7,23,000 5 71,41,500

18,12,000 36,15,000

Weighted average profits = Rs.71,41,500/15 = Rs.4,76,100 164

37.

(b) Particulars Total assets Less: Fictitious assets Long-term loan Creditors Bank overdraft Capital employed at the end 1 Less: of the profit during the year 2002-2003 2 Average capital employed = Rs.4,15,000 10% = Rs.41,500. Rs. 60,000 2,00,000 50,000 25,000 Rs. 7,75,000

3,35,000 4,40,000 25,000 4,15,000

Normal profit = Average capital employed Normal rate of return 38. (b) Profit for the year 2002-2003 Add: Rent (not relevant if the owner of the premises operates the business) Adjusted maintainable profits Capital employed by Dinakar Add: Value of premises Total capital employed Normal profit (12% of Rs.24,00,000) Super profits (Rs.3,50,000 Rs.2,88,000) 39. Assets Land and Buildings Plant and Machinery Sundry debtors Inventory Cash and bank Less: Sundry creditors Capital employed 40. (b) Particulars Post-tax profits of 2002-2003 Pre-tax profits of 2002-2003 (4,20,000 / 50%) Less: Income relating to 2001-2002 Normal profit of 2002-2003 Add: Estimated profit from new product Sales Less: Direct expenses Less: Additional fixed expenses Less: Tax @50% Future maintainable profit Rs. 2,30,000 1,20,000 3,50,000 20,00,000 4,00,000 24,00,000 2,88,000 62,000 Rs. 5,50,000 4,00,000 70,000 90,000 10,000 11,20,000 80,000 10,40,000 Rs. Rs. 4,20,000 8,40,000 45,000 7,95,000

(b) Consider the following Balance Sheet of Kumar Ltd. as on March 31, 2003

5,00,000 2,25,000 50,000

2,25,000 10,20,000 5,10,000 5,10,000 165

41.

(c) Company A is taking over the following amount of net assets Particulars Fixed Assets Accounts Receivable Cash and Bank Balances Total Tangible Assets taken over Add: Identifiable Intangibles (patents, license, software) Total Assets taken over Less: Liabilities taken over Net identifiable assets taken over (i) Cash Payable to shareholders of Company B (ii) Goodwill to be recorded in Company As Books (ii i) Amount Rs. 20,00,000 48,00,000 6,00,000 74,00,000 13,00,000 87,00,000 30,00,000 Amount Rs.

57,00,000 60,00,000 3,00,000 2001 48,000 800 2002 20,000 800 + 9,000

42.

(d) Particulars 1. Profit as per books 2. Purchase of Fixed Asset (working note 1) 3. Theft of Stock 4. Profit on sale of machinery Adjusted Profit Number of years = 3 Simple adjusted average profit of the company will be =
47, 200 + 38, 200 + 28, 200 1,13, 600 = = Rs.37,867 3 3 Thus the simple average adjusted profit of Shivram Associates for the past 3 years is Rs.37,867.

2000 40,000 + 8,000 800

47,200

9,000 38,200

28,200

Working Notes: i. Purchase of Fixed Assets: Since the accounting policy of the company is wrong in debiting this expense to the profit and loss account, Rs.8,000 spent on fixed assets needs to be added back to the profit. However, because of the wrong accounting of the expense, depreciation of the fixed asset @10% of Rs.8,000 i.e., Rs.800 has not been deducted from the profits in that year and subsequent years. Thus profit of all the three years is to be reduced by the depreciation amount of Rs.800. Theft of Stock: This is an abnormal item, which would not normally occur. All abnormal items are to be removed for the correct calculation of average adjusted profits for the purpose of calculation of goodwill. Hence this expense is added back. Profit on sale of Assets: This item does not reflect the companys actual earning capacity from operations and is not a regular feature of its business and hence cannot be taken into consideration for calculation of average adjusted profits. Particulars 1. Profit as per books 2. Purchase of Fixed Asset (W.N.1) 3. Theft of Stock 4. Profit on sale of machinery Adjusted Profit Weights (Assumed) 2000 40,000 + 8,000 800 2001 48,000 800 9,000 38,200 2 2002 20,000 800 + 9,000 28,200 3 166

ii.

iii.

43.

(a)

47,200 1

Weighted Average Profit = = =

(47,200 x1) + (38,200 x 2) + (28,200 x 3) 1+ 2 + 3 47,200 + 76,400 +84,600 6

2,08,200 6

= Rs.34,700.
44. (e) In this case the normal rate of return is the normal expectation from a similar business.
10 Average rate of return x Face value = 12% x = 9.23% 13 Market value

Normal Rate =
45. (d)

Computation of Capital Employed

Total Assets as per the Balance Sheet above Less: Preliminary Expenses Non-trade Investment

31.03.2001 18,00,000 40,000 3,60,000 4,00,000 14,00,000 40,000 3,00,000

31.03.2002 19,00,000

3,40,000 15,60,000 1,00,000 3,80,000

Less: Outside Liabilities Term Loan Sundry Creditors Capital Employed Average Capital Employed =

2,00,000 4,00,000 6,00,000 8,00,000

4,80,000 10,80,000

46.

8,00,000 +10,80,000 = Rs.9,40,000. 2 (a) Computation of Average Capital Employed Amount Amount Rs. Rs. Total of Assets as per Balance Sheet as on 31/3/03 42,00,000 Less: Non-trade Investments 4,20,000 Preliminary Expenses 80,000 5,00,000 37,00,000 Less: Outside Liabilities Term Loan 5,00,000 Sundry Creditors 7,50,000 Proposed Dividend 50,000 13,00,000 Capital Employed as on 31/03/03 24,00,000 1 Less: of Profit earned (excl. non-trade income) 2 Increase in Reserves 2,50,000 Increase in P&L 2,50,000 Dividend Payable 50,000 Profit for the year 5,50,000 50% of which is 2,75,000 Average Capital Employed 21,25,000

167

47.

(a) The average maintainable profit of the company is Rs.1,51,000.

Particulars Profit for 2001 Less: Non-recurring and non-trade profit

Rs. 1,00,000 4,000

Rs.

96,000 Profit for 2002 Profit for 2003 Add: Abnormal loss due to fire 1,08,000 6,000 1,14,000 3,30,000 Simple average for 3 years (As profit does not show increasing or decreasing trend) Less: Expenses to be incurred in the future Insurance Premium 1,000 1,09,000 Add: Expenses not to be incurred in future Salary of proprietor Salary to Accounts Manager (1,500 x 12) Average Maintainable Profit
48. (b) The value of goodwill of the business is Rs.3,02,000.

1,20,000

1,10,000

24,000 18,000 1,51,000

Goodwill = Average Profit x Number of Years Purchase = 1,51,000 x 2 = Rs.3,02,000.


49. 50. 51. (a) The average future maintainable profits of the business is Rs.3,05,000. (c) The capitalized net worth of the business is Rs.38,12,500. (a) The goodwill of the business is Rs.4,12,500.

Amount (Rs.) Average Net Profit (given) Add: Expenses not to be incurred in the future Board Meeting Expenses of A Ltd. Rent of A Ltd.s corporate office 25,000 40,000

Amount (Rs.) 2,40,000

65,000 Average future maintainable profit Capitalized net wealth =


3,05,000 x100 8

3,05,000 38,12,500

Less: Net assets taken over Goodwill

34,00,000 4,12,500

168

52.

(d) Super profits of the company is Rs.13,000.

Amount Rs. Profit for the past 5 years (80,000 + 90,000 + 98,000 + 1,05,000 + 1,12,000) Average profit (4,85,000/5) Less: Normal Profits (8,40,000 x 10%) Super Profits
53. (b) Goodwill based on 5 years purchase of super profits is Rs.65,000.

4,85,000 97,000 84,000 13,000

5 years purchase of super profits method Goodwill = Super profits x 5 years = 13,000 x 5 = Rs.65,000.
54. (a) Goodwill based on annuity method (Annuity value of Re.1 @ 10% for 5 years is 3.78) is Rs.49,140.

Annuity Method: Goodwill = Super profit x Annuity of Re.1 @10% for 5 years (given) = 13,000 x 3.78 = Rs.49,140.
55. (d) Goodwill based on capitalization of super profit is Rs.1,30,000.

Capitalization of Super Profits Method: Goodwill =


56. 57. 58. 59. 60. 61.
13,000 x100 Super profit x100 = = Rs.1,30,000. 10 Normal rate of return

(c) Average capital employed by the company is Rs.10,69,125. (c) Average profits of the company is Rs.62,160. (b) Super profit of the company is Rs. Nil. (a) Goodwill as per the capitalization method is Rs. Nil. (c) Goodwill as per the super profit method is Rs. Nil. (c) Goodwill as per the annuity method is Rs. Nil.

Average Capital Employed Total of assets side of the Balance Sheet Less: Non-trade Investments Sundry Creditors
1 of profit earned in 2002 2 Profit before Tax Less: Income Tax @ 35% Profit after tax

Amount Rs.

Amount Rs. 27,20,000

3,00,000 13,20,000 16,20,000 11,00,000

Less:

95,000 33,250 61,750 30,875 10,69,125

1 of PAT 2 Average Capital Employed

Note: Proposed dividend is a part of profit that was earned in 2002, and hence need not be calculated for separately.

169

Future Maintainable Profit Profit before taxes Less: Provision for Leave Encashment Add: Encashment Paid Add: Abnormal Loss

1998 1,20,000 10,000 1,10,000

1999 2000 2001 90,000 1,35,000 1,20,000 12,000 15,000 18,000 8,000 3,000 10,000 8,000 86,000 1,31,000 1,12,000

2002 95,000 21,000 6,000 80,000 1,03,800 15,000 88,800 26,640 62,160

Simple average profit (since no particular trend is noticed) Less: Income from non-trade investments (3,00,000 x 5%) Income Tax @ 30% Average After Tax Profit
Calculation of Goodwill: 1. Capitalization Method: Capitalized value of Captain Krum Ltd. 62,160 = 8,88,000 = 7% Less: Average Capital Employed = 10,69,125 Goodwill = Nil. 2. Super Profit Method: Future Maintainable Profit = 62,160 Less: Normal Profit (7% of 10,69,125) = 74,839

Super Profits Goodwill 3.


62.

= Nil = Nil. = Nil. = 2,07,200 = 1,44,000

Annuity Method: Goodwill

(a) Average Profits

= (2,15,200 + 1,81,400 + 2,25,000)/3 Return on Capital Super Profits


63.

= 12,00,000 x 0.12

= 2,07,200 1,44,000 = Rs.63,200.


(40, 000 + 42, 000 + 45, 000 + 46, 000 + 47, 000) 5

(a) Super Profit = Actual Average Profits Return on Capital Employed

Average Profits =

= 44,000 Return on Capital Employed = 4,00,000 x 10% = 40,000 Super Profit


64. (e) Average Profits = 39,000;

= 44,000 40,000 = Rs.4,000.

Super Profit = 39,000 36,000 = Rs.3,000.

Accounting for Shares


65. (a)

Rs. Dr. 30,000

Rs.

Share Allotment Account

To Equity Share Capital Account


66.

30,000

(c) The amount debited to the bank account upon receipt of first and final call amount is Rs.29,920.

170

67.

(c)

Rs. 400

Rs. 80 320 Rs.

68.

Equity Share Capital account Dr. To Share First and Final Call Account To Shares Forfeited Accounts (b) Bank Account Dr. Shares Forfeited Account To Equity Share Capital account

Rs. 360 40

400 Rs. 280 280 Rs. Rs. Rs.

69.

(e)

Shares Forfeited Account Dr. To Capital Reserve Account


70. (a)

71.

Bank Account Dr. 1,92,800 To Share Application Account 1,92,800 (c) Rs. Share Capital Account Dr. 7,500 Equity Share Premium Account Dr. 750 To Forfeited Shares Account To Share Allotment Account To Share Call Account Rs.

2,800 950 4,500

72.

(d) The balance in the bank account after all the above mentioned transactions are completed is Rs.4,94,550. Bank Account

Dr. Particulars To Share Application a/c To Share Allotment a/c To Share Call a/c To Balance b/d Rs. 1,92,800 69,950 2,35,500 4,98,250 4,94,550
73. 74.

Cr. Particulars By Share Application a/c (amount refunded) By Balance c/d Rs. 3,700

4,94,550 4,98,250

(a) The amounts refunded to A, B and C categories of the applicant respectively are NIL; Rs.7,50,000; Rs.75,000. (b) The amount transferred to Calls-in-Advance for various categories of the applicants are NIL; Rs.50,000; Rs.25,000. ABC Limited Statement of Shares Applied, Allotted and Amount Adjusted

A B C Applied 40,000 2,00,000 40,000 Allotted 20,000 20,000 10,000 Amount Received (Rs.) 2,00,000 10,00,000 2,00,000 Adjusted on allotment (Rs.) (application + allotment) 2,00,000 2,00,000 1,00,000 Transfer to Calls-in-Advance @ Rs.2.50 50,000 25,000 Refund 7,50,000 75,000 171

75.

(b)

Rs. 14,00,000

Rs. 14,00,000

Bank Account Dr. To Share Application and Allotment Account


76. (a)

Share Application and Allotment Account To Share Capital Account To Share Premium account To Bank account To Calls-in-advance Account
77. (d)

Dr.

Rs. 14,00,000

Rs. 3,75,000 1,25,000 8,25,000 75,000

Rs. 5,000

Rs. 3,750 1,250

Share Capital Account Dr. To Shares Forfeited account To Shares First & Final Call Account
78. (a)

Bank account Dr. Shares Forfeited Account Dr. To Share Capital Account To Share Premium Account To Capital Reserve Account
79. (a) The value of the right is Rs.25.

Rs. 5,250 3,750

Rs.

5,000 250 3,750 Rs.

Market value of the four shares held (4 x Rs.250) Add: Price of the shares under rights issue Total price of five shares Average price of one share = Rs.1,125/5 = Rs.225 Value of right = Market value Average price = Rs.250 Rs.225 = Rs.25 (c) 1,500 Amount received on 500 forfeited shares

1,000 125 1,125

80.

Rs. On application On allotment (including adjustment of excess application money) Amount of credit in forfeited shares account Less: Discount on reissue of forfeited shares @ Rs.2 (Rs.10 Rs.8) on 500 shares Amount to be credited to Capital Reserve
81.

Rs.2 per share Rs.3 per share Rs.5 per share

1,000 1,500 2,500 2,500 1,000 1,500

(e) ABC Limited has issued 40,000 equity shares which were underwritten by three different person as follows is 8,000, 1,000, 6,600.

Total applications received Less: Marked applications Unmarked applications Add: Firm underwriting Total direct applications from public

30,400 shares 18,400 shares 12,000 shares 6,000 shares 18,000 shares 172

Marked applications excluding firm underwriting: A B C 4,000 shares 8,000 shares 400 shares 12,400 shares Statement showing Allocation of Liability of Underwriters A B 20,000 12,000 9,000 5,400 11,000 6,600 4,000 8,000 7,000 1,400 1,000 +1,400 6,000 2,000 1,000 8,000 1,000 Rs. Share Capital A/c. (300 x Rs.10)Dr. To Share First Call A/c. To Share Second and Final Call A/c. To Shares Forfeited A/c.
83. (d) Bank A/c Dr. Share forfeited A/c Dr. To Equity Share capital A/c 2,000

Shares underwritten Less: Direct application Including firm underwriting (20:12:8) Less: Marked applications excluding firm underwriting Balance left Less: Credit for Bs surplus To A & C in 20:8 ratio Add: Firm Underwriting Total Liability
82. (d)

C 8,000 3,600 4,400 400 4,000

Total 40,000 18,000 22,000 12,400 9,600

400 3,600 9,600 3,000 6,000 6,600 15,600

Rs. 900 600 1,500

3,000

1,800 200

84. 85.

(d) The amount transferred to the capital reserve upon reissue of forfeiture of the shares is Rs.800. (d) The journal entry for transfer to the capital reserve upon reissue of forfeiture of the shares is Shares forfeited A/c. (200 x Rs.4) Dr. 800

To Capital Reserve A/c. 800 Journal Entries in Sonex Ltd. Particulars Share Capital A/c (300 x Rs.10) Dr. To Share First Call A/c (300 x Rs.3) To Share Second and Final Call A/c (300 x Rs.2) To Shares Forfeited A/c (300 x Rs.5) (Being the forfeiture of 300 equity shares of Vikas for non-payment of first and final call) Bank A/c (200 x Rs.9) Dr. Shares forfeited A/c (200 x Rs.1) Dr. (Being the reissue of 200 shares @Rs.9 per share and discounted amount of Re.1 per share is to be transferred from share forfeiture a/c) Shares forfeited A/c (200 x Rs.4) Dr. To Capital Reserve A/c (Being the profit on reissue of forfeited shares transferred to Capital Reserve) Dr. (Rs.) 3,000 Cr. (Rs.) 900 600 1,500

1,800 200 2,000 800 800

173

Working Notes:

Amount received on 200 shares on forfeiture (200 x Rs.5) Less: Amount not received on 200 shares, which were reissued (200 x Re1.) Amount to be transferred to Capital Reserve
86. (e)

Rs. 1,000 200 800

87.

88.

Called-up value per share Rs.6 Less: Allotment money not paid Rs.4 Amount paid per share Rs.2 Share forfeiture account will be credited 50 shares x Rs.2 = Rs.100. (c) Value of right = [No. of rights shares/(No. of rights shares + No. of existing shares)] x (Market price Issue price) = [5/(5 + 7) x (Rs.260 Rs.200)] = (5/12) x Rs.60 = Rs.25. (a) The application money should not be less than 5% of the nominal value of the shares. Hence, the minimum amount of application money is Rs.5 per share. The percentage of share premium has no relevance as regard the minimum amount of application money to be collected. There are no restrictions on the percentage of premium that a company can issue its shares. Thus, the alternative (a) is the correct answer.
(b) Working Notes: VIBGYR Ltd. Bank Account

89.

Dr. Cr. Particulars Rs. Particulars Rs. To Balance Account 2,00,000 By Preference shareholders To Investments Account 4,00,000 (Rs.8,00,000 Rs.1.10) 8,80,000 To Equity shares Account By Balance Account 50,000 Rs.2,75,000 27,500 shares Rs.10 Premium of Rs.2 per share Rs. 55,000 3,30,000 9,30,000 9,30,000 Amount transferred to capital redemption reserve account. Face value of preference shares Less: Face value of shares 27,500 10 (funds available by way of fresh equity issue) Rs. 8,00,000 2,75,000

5,25,000 Where redemption of preference shares is effected without corresponding issue of shares it implies it is made out of distributed profits, the gap created to the extent is transferred to the Capital Reserve Account.
90. (e)

(No. of shares) Anil Vimal Sunil Total 30,000 40,000 30,000 1,00,000 4,800 6,400 4,800 16,000 25,200 33,600 25,200 84,000 22,000 24,000 28,000 74,000 3,200 9,600 (2,800) 10,000 1,200 2,000 1,600 8,000 2,800 Nil 10,000 174

Particulars Liability Less: Unmarked applications in the ratio of 3:4:3 Less: Marked (Stamped) applications Less: Division of Sunils surplus (in the ratio of 3:4) Final liability of each underwriter

91.

(a)

Particulars Face value of shares to be redeemed (2,000 Rs.100) Less: Proceeds from fresh issue (1,500 Rs.100) Balance to be utilized from profit and loss a/c hence, amount to be transferred to capital redemption reserve

Rs. 2,00,000 1,50,000 50,000

The premium received on fresh issue of shares should not be used for redemption of preference shares. However, the same can be used for the premium payable on redemption of preference shares.
92. (c) The amount to be transferred to Bonus Dividend account is Rs.2,60,000. Working Notes:

Rs. Amount of bonus to be declared To Make the partly paid shares into fully paid 80,000 x Rs.2 To Cover bonus shares of 80,000 = 10,000 shares x Rs.10 8 Total bonus (c) Amount transferred to capital reserve is Rs.800. Working Note: Particulars Amount received on 200 shares on forfeiture (200 x Rs.5) Less: Amount of discount allowed on 200 shares, which were reissued (200 x Re.1.) Amount to be transferred to Capital Reserve
94.

1,60,000 1,00,000 2,60,000

93.

Rs. 1,000 200 800

(a) The listed companies are allowed to pay brokerage on private placement of capital at a maximum rate of 0.5%. Hence, the maximum amount of brokerage that can be paid by Amax Ltd. is 10,000 shares Rs.100 0.5% = Rs.5,000.
r (a) Value of right = (M S) N+r

95.

No. of rights issued No. of old shares Market price Issue price of rights. 2 Value of rights = (Rs.560 Rs.410) = Rs.60. 3+ 2
96. (b) Underwriting commission on debentures is 2.5% of the issue price of the debenture or any rate prescribed in the articles whichever is less. Since, the maximum rate 2.5% is considered to be rate of commission.

Where,

r N M S

= = = =

Debentures underwritten = 80% of 10,000 Marked applications Issue price per debenture

= 80% of the issue = 8,000 debentures = 6,000 = Rs.100 + 100(20%) = Rs.120 Value of 8,000 applications = 8,000 Rs.120 = Rs.9,60,000 Underwriting commission @ 2.5% on issue price =
9, 60, 000 2.5 = Rs.24, 000. 100

175

97.

(b)

Prosperous Ltd. Balance Sheet (extract)

19,80,000 3,92,000 10,000 21,600 24,03,600 Thus, the total of liabilities side of Balance sheet is Rs.24,03,600.
Working Notes:

Liabilities Share Capital: 19,800 shares of Rs.100 each fully paid Shares premium Shares forfeiture Capital reserve

Rs.

Rs. 1. Share application money received 30,000 Rs.20 Shares allotted on pro rata 20,000 against 24,000 applications 20,000 Rs.20 Shares rejected and money refunded 6,000 Rs.20 Surplus money available for allotment 2. Share allotment money 20,000 (Rs.30 + Rs.20) Less: Available on account of share application excess money Less: Default on a/c of Rahul 400 (Rs.30 + Rs.20) (Rs.20,000 Rs.1,600) Shares applied by Rahul 400 20,000 = 480 24,000 Amount paid by him on application = 480 Rs.20 Adjusted for application money = 400 Rs.20 Balance available for allotment Amount due on allotment Application money available for adjustment Amount defaulted by Rahul 3. Share first call money 20,000 Rs.30 Less: Default by Rahul 400 Rs.30 Mahesh 600 Rs.30 4. Share second call money 19,600 Rs.20 Less: Default by Mahe 600 Rs.20 5. Shares for feiture: Money received on shares held by Rahul Shares held by Mahesh 600 Rs.50 (Rs.20 + Rs.30) Less: 800 shares issued at 10% discount 800 Rs.10 Less: Balance transferred to capital reserve on reissued shares (400) 480 Rs.20 = Rs.9,600 Rs.8,000 = = 400 Rs.50 Balance in shares forfeiture a/c 6. Share capital a/c Total shares Forfeited + Reissued 20,000 (400 + 600) + 800 = 19,800 Rs.100 7. Share premium = 20,000 400 = 19,600 Rs.20 8. Capital reserve Rs. 9,600 30,000 39,600 8,000 31,600 1,600 20,000 21,600 10,000 9,600 8,000 1,600 20,000 1,600 18,400 6,00,000 12,000 18,000 5,70,000 3,92,000 12,000 3,80,000 4,00,000 1,20,000

Rs. 6,00,000

5,20,000 80,000 10,00,000 80,000 18,400 9,01,600

19,80,000 3,92,000 21,600 176

98.

(a) Amount paid by Sudha (excluding premium) = 600 x 5 = Rs.3,000

Rs.
Balance in forfeited shares account

= = =

3,000 1,500 300

Amount pertaining to reissued 300 shares Less: Discount allowed on reissue (300 x 1)

Amount to be transferred to capital reserve = 1,200 Share premium of Rs.1,200 on forfeited shares should not be reversed as the amount is already received and balance remaining in share forfeiture account is Rs.1,500.
99. (a) The discount on reissue of forfeited shares should not exceed the amount forfeited, since the discount is written off as a charge against the share forfeiture account.

Mr. Arun has paid Rs.60 (Rs.85 Rs.25) per share = Rs.60 1,000 = Rs.60,000 The maximum discount on reissue should not exceed Rs.60,000 Hence, the minimum amount to be collected = Rs.1,00,000 Rs.60,000 = Rs.40,000.
100. (a) Interest on calls-in-advance is to be paid @ 6% per annum.

Calls-in-advance paid by Mr. S. Nandita = Rs.5,000 (1,000 x 25) = Rs.2,500. Interest period from June 01, 2003 to Oct. 31, 2003 = 5 months.
Interest = 2,500 6% 101.
5 = 62.50. 12

(c) When shares are forfeited, the share capital account should be debited with called up amount (excluding premium) and corresponding credit should be given to share call account with amount not received and share forfeiture account with amount received. If the premium is already received, the same should not be reversed. Hence, the entry is

Share capital a/c

Dr.

Rs.4,000 Rs.1,500

To Share first call a/c


102.

To Share forfeiture a/c Rs.2,500 (b) The shares were issued at a discount of 10% i.e., they were issued for Rs.90 per share. Ramya failed to pay the final call of Rs.30. Hence she has paid Rs.60 (Rs.90 Rs.30). The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000.

103.

(b) If a company adopted Table A, interest on calls-in-arrear is to be paid at the rate of 5% per annum for the period between the last date fixed for payment of call and the actual date of payment. Accordingly, the interest payable by Mr.Hasan is for one and half month at the rate of 5% on Rs.1,50,000 (Rs.30 5,000 shares).

Hence interest is Rs.937.50. (i.e., 1,50,000 x 5% x


104. (b) Alternative I

1.5 ). 12

Dr. Particulars

Bank Account

Cr. Particulars Rs. 1,32,000

Rs.

To Share application (Note 1) To Share allotment (Note 2) To Share first and final call (Note 3) To Share capital (reissue) (Note 4)

60,000 By Balance c/d. 21,000 21,000 30,000 1,32,000

1,32,000 177

Working Notes:

1. 2.

Amount received on application = 15,000 Rs.4 = Rs.60,000 Amount available for adjustment against allotment = Rs.60,000 (10,000 Rs.4) = Rs.20,000 Amount receivable on allotment = (10,000 Rs.5) Rs.20,000 = Rs.30,000 No. of shares applied by Sudhir = 3,000
15,000 = 4,500 shares 10,000

Amount paid by Sudhir on application = 4,500 Rs.4 = Rs.18,000 Amount available for adjustment against allotment = Rs.18,000 (3,000 Rs.4)= Rs.6,000 Amount defaulted by Sudhir on allotment = (3,000 Rs.5) Rs.6,000 = Rs.9,000 Amount received on allotment = Rs.30,000 Rs.9,000 = Rs.21,000 3. Amount receivable on first and final call = Rs.12 Rs.4 Rs.5 = Rs.3 per share Amount received on first and final call = (10,000 3,000) Rs.3 = Rs.21,000 4. Amount received on reissue of forfeited shares = 3,000 Rs.10 = Rs.30,000
Alternative II

Amount received on 7,000 shares = 7,000 Rs.12 = Rs.84,000 Amount received from Sudhir = 4,500 Rs.4 = Rs.18,000 Amount received on 3,000 shares on reissue = Rs.3,000 Rs.10 = Rs.30,000 Total bank balance = Rs.84,000 + Rs.18,000 + Rs.30,000 = Rs.1,32,000
105. (d) Amount payable by Rahul on allotment is 500 shares Rs.4 = Rs.2,000

Amount of calls-in-advance paid by Rahul = Rs.2,500 Rs.2,000 = Rs.500 Amount paid by Rahul at the time of call = (500 shares Rs.4) Rs.500 = Rs.1,500 Hence, the entry to record the receipt of payment and adjustment of calls-in-advance is Bank account Calls-in-Advance a/c To Share first and final call a/c Dr. Dr. Rs.1,500 Rs.500 Rs.2,000 178

106.

(a) Issue price = Rs.100 125% = Rs.125

Number of shares to be issued =


107. (d) Number of bonus shares

Rs.7,50,000 = 6,000 shares Rs.125

= 1,20,000/3 = 40,000 Rs. Amount of bonus issue = 40,000 Rs.10 Less: Amount to be adjusted against Capital reserve (amount realized in cash) Securities premium (Rs.50,000 Rs.10,000) General reserve Amount to be utilized from profit and loss account 60,000 40,000 2,00,000 1,00,000 4,00,000

The securities premium collected in cash can be utilized for the bonus issue. Hence, the amount of Rs.10,000 on issue of shares to promoters cannot be utilized for issue of bonus shares.
108. (b)

Shares applied

Shares allotted

Application Application Excess money money money due received Rs. Rs. 60,960 56,800 42,240 1,60,000 Rs. 40,640 1,35,200 49,760 2,25,600

Allotment money due (including premium) Rs. 1,37,160 1,27,800 95,040 3,60,000

Surplus/ (deficit)

Rs. (96,520) 7,400 (45,280)

(1) 50,800 96,000 46,000 1,92,800


109.

(2) 30,480 28,400 21,120 80,000

(3) = (1) x 2 (4) = (2) x 2 (5) = (3) (4) (6) = (2) x 4.5 (7) = (5) (6) 1,01,600 1,92,000 92,000 3,85,600

Hence the amount of refund is Rs.7,400.


(a) In case of partial underwriting, the marked applications are compared with the shares underwritten to determine the liability of the underwriters.

Gross liability Less: Marked applications

48,000 shares 36,000 shares 12,000 shares

The liability of Feroz is 12,000 shares subject to a maximum of non-subscribed shares i.e., 6,000 shares (60,000 shares 54,000 shares). Hence, the liability of Feroz is for 6,000 shares.
110. (c) The amount received from Harita (excluding premium) is

(Rs.20 + Rs.30) 1,000 shares = Rs.50,000 Hence the amount credited to share forfeiture account = Rs.50,000.
111. (c) Dividend proposed is 15% of paid-up capital i.e.,
75,000 100 = 15% 5,00,000

Where the proposed dividend exceeds 12.5% but does not exceed 15% of paid-up capital, the amount to be transferred to the reserves shall not be less than 5% of the current profits. Hence, the minimum amount to be transferred to reserves is 1,00,000 5% = Rs.5,000. 179

112.

(c) When shares are forfeited, the share capital account should be debited with called up amount (excluding premium) and corresponding credit should be given to share call account with amount not received and share forfeiture account with amount received. If the premium is already received, the same should not be reversed. Hence the entry is

Share capital a/c

Dr.

Rs.8,000 Rs.3,000 Rs.5,000 Amit 4,000 1,650 2,350 3,000 (650) 650 Nil Bhoumick Chandini 8,000 3,300 4,700 4,000 700 260 440 4,950 Total 9,900

To Share first call a/c To Share forfeiture a/c


113. (b)

Particulars Shares underwritten Less: Unmarked applications (in the ratio 1:2:3) Less: Marked applications Less: Surplus of Amits share (in the ration 2:3) Final liability
114. (a)

12,000 24,000 7,050 14,100 5,500 12,500 1,550 390 1,160 1,600 Nil 1,600

Particulars Face value of shares to be redeemed (5,000 x Rs.100) Less: Available reserves Amount required to redeem the preference shares

Rs. 5,00,000 2,00,000 3,00,000

Number of equity shares to be issued is Rs.3,00,000/10 = 30,000 shares. The premium received on fresh issue of shares should not be used for redemption of preference shares though it can be used for providing premium on redemption of preference shares.
115. (c) When the reissued shares were issued at a discount earlier, the amount of original discount should be taken to discount on issue of shares account and the additional discount, if any, should be taken to shares forfeiture account. The actual amount received is to be debited to bank account. The share capital account is to be credited with the nominal value of shares.

116.

Bank a/c Discount on issue of shares a/c Share forfeiture a/c To Share capital account (c) The value of the rights is Rs.1.43. We have, r = No. of rights N = No. of old shares M = Market price S = Subscription Price

Dr. Dr. Dr.

Rs. 5,600 800 1,600

Rs.

8,000

=2 =5 = 25 = 20 r x (M S) 2 x (25 20) 10 = Rs.1.43 = = Value of rights share is given by = N+r 5+2 7

117.

(a) When shares are forfeited, the amount already paid by the shareholder is forfeited to the company. It is a capital gain to the company and is credited to share forfeiture account. Forfeited shares can be reissued. They can be reissued even at a price lower than the paidup value of the forfeited shares at the time of reissue. But the loss on reissue of a share

180

cannot be more than the gain on the forfeiture of that share credited to the forfeiture account at the time of the forfeiture. If the loss on reissue is less than the gain on forfeiture of a share, there is a net capital gain to the company which is transferred from forfeited shares account to capital reserve. Equity share capital A/c To share forfeiture A/c (Amount already paid = 200 x (2 + 3) = 1,000)
118. 119. (b) Calls-in-arrears = (3 + 2) x 200 = 1,000. On share forfeiture calls in arrears is credited with Rs.1,000. (b)

Dr. 1,000 1,000

Bank A/c Dr. 1,800 Forfeited shares A/c Dr. 200 To Equity share capital A/c 2,000 (Reissue of 200 equity shares @9 per share, the loss 10 9 = 1 per share i.e., 1 x 200).
120. (d)

Forfeited shares A/c

Dr.

800

To Capital reserve A/c 800 (Profit on reissue of 200 shares transferred from forfeited shares account to capital reserve. Gain on forfeiture = 1,000 200 = Rs.800).
121. 122. (a) The amount debited to share capital account = 10 x 500 = Rs.5,000 (b)

Share capital A/c To forfeiture A/c To calls-in-arrears A/c


123.

5,000 3,000 2,000

(Amount already paid = 500 x 6 = 3,000). (c) On reissue of forfeited shares, share forfeiture account will be debited with the discount on reissue i.e., loss. Share forfeiture = 300 x (10 9) = Rs.300.
(c) Amount transferred to capital reserve

124. 125. 126.

= 300 x 6 300 x (10 9) = Rs.1,500.


(b) Balance in share forfeiture account

= 3,000 1,500 300 = Rs.1,200.


(a) Rights issue:

r = x (M S) (N + r) Where, r = No. of rights issued N M S = = = No. of old shares Market price Issue price of rights.

2 = x (200 120) = Rs.16. (8 + 2)


127. (c) Undertaking in the context of a company means undertaking a responsibility or giving a guarantee that the shares or debentures offered to the public will be subscribed for. Underwriters issue application form for shares or debentures to members of the public. Such application forms are stamped with the name of the underwriters. The company can

181

then find out how many shares have been applied for through a particular underwriter. Such applications are known as Marked Applications. Those applications which do not bear the stamp of the underwriter are known as Unmarked Applications. Such unmarked applications will be apportioned to the underwriters in the ratio of their gross liability. Gross Liability Less: Marked applications Less: Unmarked applications (2:2:1) Less: 7,20,000 in the ratio of 2:1 Net liability
128.

X 20,00,000 26,00,000 (6,00,000) 1,20,000 (7,20,000) Nil

Y 20,00,000 14,00,000 6,00,000 1,20,000 4,80,000 (4,80,000) Nil

Z 10,00,000 5,00,000 5,00,000 60,000 4,40,000 (2,40,000) 2,00,000

Total 50,00,000 45,00,000 5,00,000 3,00,000

(d) If shares issued at a premium are forfeited, the accounting treatment depends on whether the premium on forfeited shares has been realized or not. If premium on forfeited shares has been received, share premium account must not be debited on forfeiture of shares. It is obligatory because of legal restrictions placed by Section 78 of the Companies Act on the uses of the share premium received. It means that share premium once received is not to be written back even if the shares are forfeited subsequently. Entry on forfeiture will therefore be passed as if the shares had been issued at par and no premium had been received. However, if the premium on forfeited shares has not been received but it has been credited to share premium account and debited to share allotment/calls account at the time of premium becoming due, then on forfeiture share premium account will be debited. If the company credits share premium account only when the premium has been received, then the question of debited share premium account on forfeiture will never arise.

On reissue, share premium account will not be credited if the premium had been received in respect of shares before forfeiture. Of course, if the reissue price exceeds the paid-up value of reissued price, share premium account will have to be credited with such an excess. If shares on which the share premium had not been received till forfeited shares are reissued, share premium account will be credited with the amount of share premium in respect of reissued shares and the amount to be debited to forfeited shares account will be calculated after taking into account this credit. Share premium = Application (inclusive of premium) + Allotment + Calls Face Value =5+5+25=2 Share premium = 2 x 80,000 (shares subscribed) = 1,60,000.
129. 130. (c) Amount to be transferred to capital reserve = (9 6) x 300 = Rs.900. (c)

Gross liability Less: Marked applications Less: Unmarked applications (4:3:3) Net liability
131. (c)

Red White Blue Total 2,00,000 1,50,000 1,50,000 5,00,000 1,00,000 50,000 1,00,000 2,50,000 1,00,000 1,00,000 50,000 2,50,000 60,000 45,000 45,000 1,50,000 40,000 55,000 5,000 1,00,000 A 2,000 1,700 300 80 220 B Total 3,000 5,000 2,100 3,800 900 1,200 120 200 780 1,000 182

Gross liability Less: Marked applications Less: Unmarked applications (2:3) Net liability

132.

133.

r (c) Value of Rights = x (M S) (N + r) Where, r = No. of rights issued N = No. of old shares M = Market price S = Issue price of rights. = 3/(5 + 3) x (17 13) = Rs.1.5 (a) Where the preference shares are redeemed without there being a corresponding issue of shares and the redemption is made out of distributable profits, the gap created in the capital needs to be filled up. For this purpose, an amount equal to the face value of the shares redeemed is transferred to the Capital Redemption Reserve from the undistributed profits such as the credit balances in profit and loss account, general reserve, dividend equalization reserve. Thus, in the case given, the amount to be transferred to capital redemption reserve

= (1,50,000 x 105/100) (40,000 x 90/100) = 1,21,500.


134. 135. (c) On forfeiture, the amount that has been called-up will be debited to share capital account. Thus Rs.6 will be debited share capital a/c. (b) Value of equity share
Yield rate of return = x Paid-up value of equity share Normal rate of return = (15.75/9) x 10 = 17.50.

136.

(c)

Equity Share Capital A/c Dr. Rs.350 To Share Call A/c Rs.150 To Share Forfeiture A/c Rs.200 The amount to be debited to share capital account = 350.
137. 138. (d) On reissue of forfeited shares, forfeiture account will be debited with (10 8) x 40 = Rs.80. (e) The amount to be transferred to capital reserve is the excess of gain on forfeiture over the loss on forfeiture.

139.

= 160 = 80 80 (c) The amount of preference shares to be redeemed = 1,00,000 + 10,000 (premium) out of share premium of Rs.4,000; P&L A/c of Rs.25,000; the balance is 1,10,000 29,000 = Rs.81,000.
(c) The dividend amount payable = (Equity capital Calls-in-arrears) x Percentage of dividend

Gain on forfeiture Loss on forfeiture

= =

40 x 4 40 x 2

140.

(12,00,000 30,000 = 11,70,000) x 10% = Rs.1,17,000.


141. (a) Rights issue =
No.of right shares x (Market value Rights price) Rights issued + Existing shares

= 3/10 x (80 60) = Rs.6. Post-issue price = 80 6 = Rs.74.


142. (e) Forfeited shares account = Forfeited shares x Amount paid by the shareholder = 60 x (6 + 3 2 = 7) = Rs.420. Reissued forfeited shares = 36 shares reissued (60 x 60%) @Rs.7 = Rs.252. Credit balance in the share forfeiture account = 420 252 = Rs.168.

183

143.

(d)

144.

Rs.in crore 1,200 1,500 2,700 Less: Loans 800 1,900 Number of equity shares = 100 lakh Value of each equity shares (Rs.1,900/100) = Rs.19 (e) Rs.10.40 For the financial year 2001-2002 Net Fixed Asset Net Current Asset Profit before tax Add: Preliminary expenses written off Less: Tax 40 percent Future maintainable profit Rs. 240 20 260 104 156

145.

146.

Capitalized value of future profit @15% Rs.1,040 No. of equity shares = Rs.100 lakh Value of equity shares is Rs.1,040/100 = Rs.10.40 As the company has undergone major expansion in the year 2001 which started giving yield in the year 2001-02, the profits of the previous years have been ignored for the purpose of calculating yield. (a) Rs.14.70 Fair value = (Value as per assets basis) + (Value as per yield basis)/2 = (Rs.19 + Rs.10.40)/2 = Rs.14.70 (a) The net tangible operating assets on 31st December, 1995 is Rs.20,17,496. Statement of Net Tangible Operating Assets on 31st December, 1995 Machinery Factory Shed Vehicle Furniture Machinery Addition cost Depreciation Rs. 5,00,000 5,50,000 1,50,000 50,000 20,000 5,420 14,580 12,64,580 2,52,916 15,17,496 1,00,000 4,00,000 7,00,000 1,00,000 28,17,496 Rs.2,00,000 Rs.6,00,000 8,00,000 20,17,496

Add: Appreciation 20% Trade Investment (80,000 + 20,000) Stock-in-hand Sundry Debtors Cash at Bank Less: Bank Loan Sundry Creditors

Note: Roughly half of the profits for the current year have been distributed as dividend. Hence, capital as on 31st Dec., 1995 has been taken as average capital employed.

184

147.

(d) The average annual profits of the business is Rs.4,20,097. Average Annual Profit

1993 Rs.
Reported profit Add: Machinery purchased charged to revenue, net of tax @50% Less: Depreciation net of tax @50% Less: Dividend on non-trade investment net of tax @50% Average Profit

1994 Rs. 4,30,000

1995 Rs. 4,50,000

4,00,000
10,000 4,10,000 1,000 4,09,000 9,000 4,00,000

900 9,000

810 9,000

4,29,100 4,49,190

4,20,100 4,40,190 4,20,097

(Since it is specifically mentioned in the question, simple average profit has been considered as future maintainable profit. Otherwise, in case of increasing trend of profit generally weighted average is taken.)
148. 149. (d) The super profit for the business is Rs.1,17,473. (d) Goodwill of the business is Rs.4,69,892. Calculation of Super Profits and Valuation of Goodwill

Rs. Average Profit Normal Profit @15% on Capital employed of Rs.20,17,496 Super Profits Goodwill at 4 years purchase of super profits 4,20,097 3,02,624 1,17,473 4,69,892

150. 151.

(d) The value of fully paid shares is Rs.230.74. (b) The value of partly paid shares is Rs.210.74.
Statement showing Valuation of Shares

Rs. Net tangible assets Less: Preference Capital Add: Goodwill Add: Non-Trade Investment at Cost Calls-in-arrears (notional) 20,17,496

Rs.

4,00,000 16,17,496 4,69,892 1,20,000 1,00,000 23,07,388

No. of Equity Shares Value of a fully paid shares Value of a partly paid shares
152. (b) The value of fully paid shares is Rs.21.86.

10,000 230.74 210.74

185

153.

(a) The value of partly paid shares is Rs.19.86. Statement Showing Valuation of Shares as on December 31, 2003 Rs.

Value of net tangible operating assets as shown below Value of goodwill as computed (See Q.No. 157) Non-trade investments Call-in-arrears to be collected

4,01,677 57,604 72,000 6,000 5,37,28

Less: Preference share capital Net assets attributable to equity shareholders Value of fully paid equity share = 4,37,281/20,000

1,00,000 4,37,281 = Rs.21.86 (app.)

Value of partly paid equity share = Rs.21.86 Rs.2.00 = Rs.19.86 (app.)


154. (d) The net tangible operating asset as on 31st December, 2003 is Rs.4,01,677. Statement of Net Tangible Operating Assets as on 31st December, 2003

Fixed Assets Machinery including Rs.7,290 for a machine charged to Revenue in 2001 Land and Buildings Furniture and Fixtures Vehicles

Rs.

Rs. 1,17,290 1,20,000 60,000 80,000 3,77,290

Add: 30% appreciation

1,13,187 4,90,477

Trade Investment (8,000 less 10%) Stock-in-Trade Sundry Debtors Cash at Bank

7,200 50,000 89,000 10,000 6,46,677

Less: Liabilities Bank Loan Sundry Creditors Bill Payable 60,000 1,55,000 30,000 2,45,000 4,01,677
Working Notes:

i. The net tangible operating assets as computed above may be taken as the capital employed, though strictly the average of the four years, 2002 to 2003, should be taken. Since it appears that 2003 profits have been disposed of substantially before the close of the year, the capital employed in the beginning would roughly be the same as at the end. To this extent, it is nearer the average mentioned above. 186

Alternative Computation of Capital Employed

Fixed Assets Equity capital Preference capital General Reserve Profit and Loss Account Appreciation in fixed assets Less: Reduction in trade investments and other current assets Intangible assets and Non-trading investments (Rs.30,000 plus Rs.72,000)

Rs.

Rs. 1,95,000 99,000 80,000


16,000

1,20,477 5,10,477 6,800 1,02,000 1,08,800 4,01,677

155. 156. 157.

(c) The average profits for the four years is Rs.92,572.50. (a) The super profit of the business is Rs.28,802. (d) Goodwill of the business is Rs.57,604. Statement of Average Profits

2000 Rs. Reported Profit Add: Capital Expenditure charged to revenue Less: Depreciation on the above item Dividend on non-trading investments Reduction in the value of stock Add: Loss on sale of furniture (assumed extraordinary item) Less: Provision against debtors 80,000 80,000

2001 Rs. +10,000 1,000 3,600

2002 Rs.

2003 Rs.

90,000 1,05,000 1,10,000 900 7,200 +2,000 1,000 95,400 98,900 95,990 810 7,200 5,000

Note: Depreciation on additions to fixed assets, other than machinery on account of revaluation has not been taken into account for want of details. Computation of Goodwill

Rs. Total profit for the four years Average Less: Depreciation @10% on increase in the value of machinery (increase being Rs.35,187) Normal Profit: 15% on Rs.4,01,677 Super Profit say Goodwill at two years purchased
158. (b) Value as per fair value method

3,70,290.00 92,572.50 3,518.70 89,053.80 60,251.55 28,802.25 28,802.00 57,604

= (Value as per intrinsic value method + Value as per yield method)/2 Value as per intrinsic value method = (2 Rs.205.20) Rs.195.80 = Rs.214.60 187

159.

(a)

Particulars Land and buildings Plant and machinery Furniture and fixtures Sundry debtors Inventories Cash Less: 12% debentures Sundry creditors Bank overdraft Provision for taxation Capital employed

Rs.

Rs. 5,00,000 2,00,000 2,00,000 85,000 65,000 35,000 10,85,000

1,50,000 72,500 32,500 45,000

3,00,000 7,85,000 1,15,500 3,000 5,000 5,000 1,12,500

Profit for the year 2002-2003 Less: Depreciation on land and buildings Add: Depreciation on plant and machinery Less: Bad debts Profit
160. (d)

Return on capital employed = Rs.1,12,500 / Rs.7,85,000 x100 = 14.33% Rs. Average annual profit Less: Preference dividend 15% on Rs.100 x 1,000 Less: Transfer to general reserve Profit for equity shareholders Equity share capital Return on equity = 20,000 Rs.10 = Rs.2,00,000 = =
Profit for equity shareholders Outstanding balance of equity share capital
Rs.50,000 100 = 25% Rs.2,00,000

75,000 15,000 60,000 10,000 50,000

Normal rate of return = 10% Value of equity share = Rs.10


161. (c) Return on capital employed =
25% = Rs.25. 10%

Rs.63, 000 100 = 14% Rs.4,50, 000

Value of equity share = =

Return on capital employed x Paid-up value of share Normal return

14% Rs.80 = Rs.11.20. 10%

188

162.

(b) Asset backing per equity share

Net assets available for equity shareholders Equity share capital

= Rs.2,50,000 + Rs.65,000 (Rs.65,000 + Rs.50,000 + Rs.1,00,000) = Rs.3,15,000 Rs.2,15,000 = Rs.1,00,000 =


163.
Rs.1, 00, 000 Rs.1, 00, 000

= 1 time.

(a)

Net assets Add: Notional calls on uncalled up shares 2,00,000 10,000 Rs.20 3,00,000 10,000 Rs.30 Net assets available to equity share holders 56,00,000 Value of each fully paid share =
Net assets Rs.56,00,000 = Rs.140 = No.of shares 40,000

Rs. 51,00,000

Value of Rs.80 paid-up share = Rs.140 Rs.20 = Rs.120.


164.
r (c) Value of right = (M S) N+r

Where,

r N M S

= = = = = =

No of rights issued No. of existing shares Market price Issue price of rights. Rs.100 + 160% premium Rs.100 + Rs.160 = Rs.260

Value of rights
165.

4 = (440 260) = Rs.80. 4+5


Rs.2,52,500 + Rs.3,10,000 + Rs.4,50,000 = Rs.3,37,500 3

(e) Average profits =

Less: Transfer to general reserve = Rs.3,37,500 20% = Rs.67,500 Average profits after transfer to general reserve Rs.2,70,000 Expected return on share capital = = Value per share = =
166. (d)
Expected profit 100 Paid-up share capital

Rs.2,70,000 100 =18% Rs. 15,00,000

Expected rate Paid-up value of share Normal rate 18% 10 = Rs.12. 15%

Average capital employed = (Opening capital employed + Closing capital employed) 2 Opening capital employed = 2 Rs.6,25,000 7,50,000 Opening capital employed = Rs.12,50,000 Rs.7,50,000 = Rs.5,00,000. 189

167. 168.

(b) The value of Rs.5 fully paid-up share on net asset basis is Rs.30. (a) The value of Rs.10 fully paid-up shares on net asset basis is Rs.60. In case of different paid-up values of the classes of equity shares, an equivalent number of these can be determined. Thus 1,00,000 equity shares of Rs.10 fully paid-up are equivalent to 2,00,000 equity shares of Rs.5 fully paid-up. Thus, we have 2,50,000 equivalent equity shares of Rs.5 each. 75,00,000 = Rs.30 Value per share of Rs.5 paid-up = 2,50,000

169.

30 x 10 = Rs.60 5 (b) Average capital employed by the company is Rs.15,60,000. Average Capital Employed Amount Rs. Opening Capital Employed: Equity 12,00,000 Revaluation of Buildings 1,00,000 Revaluation of Machinery 60,000 Provision for bad debts (20,000) 13,40,000 Closing Capital Employed: Equity 12,00,000 Revaluation Profit 1,40,000 Profit for the year before taxes 4,40,000 17,80,000 Thus, the value of Rs.10 paid-up share = Average Capital Employed =
13,40,000 +17,80,000 = Rs.15,60,000. 2 (a) Average maintainable profit is Rs.2,12,667. (e) The normal profit is Rs.1,56,000. (b) Super profit of the business is Rs.56,667. Computation of Super profits

170. 171. 172.

Profits before tax Rs. 4,00,000 4,80,000 4,40,000 13,20,000 Less: Bad Debts 20,000 13,00,000 Simple Average Profit (since no trend is available) = (13,00,000/3) = 4,33,333. 1999-2000 2000-2001 2001-2002 Simple average profit Less: Depreciation on revaluations Buildings 2% of 1,00,000 Machinery 10% of 60,000 Average Maintainable Profits before Tax Less: Income Tax @50% Average Maintainable Profits after Tax Normal Rate of Return is 10% of 15,60,000 Super Profits 4,33,333 2,000 6,000

8,000 4,25,333 2,12,666 2,12,667 1,56,000 56,667 190

173.

(d) The goodwill of the business is Rs.1,70,000

Goodwill is 3 years purchase of super profits = 56,667 x 3 = 1,70,001 or Rs.1,70,000 (say).


174. (c) Valuation of the shares on Net Asset basis is Rs.13.42. Valuation of Shares: Intrinsic or Net Asset Basis

Buildings Machinery Stock Sundry Debtors (Less: bad debts) Cash and Bank balances Goodwill (as calculated above) Less: Bank Overdraft Sundry Creditors Provision for Taxation Proposed Dividend Net Assets Value of Equity Shares =
175.

Rs. 4,00,000 5,00,000 6,00,000 3,00,000 1,20,000 1,70,000 20,90,000 20,000 1,20,000 2,20,000 1,20,000 4,80,000 16,10,000

Net Asset 16,10, 000 = = Rs.13.42 1, 20, 000 No.of equity shares

(b) The average maintainable profit of the company based on weighted average method is Rs.80,500.

Since profit before tax shows an increasing trend, weighted average method for calculating average maintainable profit may be taken.
Average Maintainable Profit

Year 2000-01 2001-02 2002-03

Profit 1,10,000 1,25,000 1,60,000

Weight 1 2 3 6

Product 1,10,000 2,50,000 4,80,000 8,40,000 Rs.

Average Profit =

8,40,000 6

1,40,000 10,000 1,30,000 45,500 84,500 4,000 80,500

Less: Increase in expenses Less: Provision for taxation @35% Profit after tax Less: Preference dividend Average Maintainable profit for equity
176. 177.

(c) The value of Rs.10 paid-up shares (in case controlling interest in the firm is to be transferred) is Rs.25.86. (c) The value of Rs.5 partly paid-up shares (in case controlling interest in the firm is to be transferred) is Rs.20.86.

191

Valuation of shares where controlling interest is sought to be transferred: Normal rate of return is given to be 10% Capitalization factor or multiplier =
100 = 10 10

Capitalized value of equity interest = Average maintainable profit x Multiplier = 80,500 x 10 Add: Notional call on partly paid-up shares Value of Equity Number of fully paid-up equity shares after the notional call

= Rs.8,05,000 = Rs.1,00,000 = Rs.9,05,000 = 35,000

178. 179.

Value of each Rs.10 paid-up equity share = (9,05,000/35,000) = Rs.25.86 Value of each Rs.5 partly paid-up share of Rs.10 (25.86 5) = Rs.20.86. (e) The value of Rs.10 paid-up shares (in case only a few shares are to be transferred) is Rs.16.46. (b) The value of Rs.5 partly paid-up shares (in case only a few shares are to be transferred) is Rs.8.23. Valuation where only a few shares are to be taken up: Where no controlling interest is to be taken up, valuation on the basis of yield must be done on dividend yield basis. Average Dividend Since the dividend rate is showing an increase, weighted average dividend may be taken. Weighted average dividend = = Normal dividend Value of share of Rs.10
(0.10 x1) + (0.12 x 2) + (0.15 x 3) 6 0.1 + 0.24 + 0.45 = 13.17% 6 10 x13.17 = Rs.16.46 8 13.17 = 8.23. 8

= 8% =

Value of Rs.5 partially paid-up share = 5 x


180.

(c) Capital employed by the company is Rs.24,20,000. Valuation of shares of M/s Bach and Chenoy Ltd. by the intrinsic value method 1. Calculation of Goodwill

Capital Employed Total of Assets side of the Balance Sheet Less: Non-trade Investments Preliminary Expenses

Amount Rs.

Amount Rs. 83,80,000

13,00,000 2,80,000 15,80,000 68,00,000

Less: Liabilities Debentures (Net of Conversion) Sundry Creditors Tax Provision Proposed Dividend Capital Employed

6,00,000 28,95,000 6,00,000 2,85,000 43,80,000 24,20,000 192

181.

(d) Future Maintainable profit of the company is Rs.2,24,000.

Future Maintainable Profit: Since the profit does not show any trend, either upward or downward, simple average is taken for the five-year profit. Average Maintainable Profit = =
4, 40, 000 + 4, 60, 000 + 4, 20, 000 + 4,50, 000 + 4, 40, 000 5 22,10, 000 = Rs.4,42,000 5

Rs. Average Maintainable Profit Less: Income from non-trade investments Additional cost of new office Increase in forex liability Less: Income Tax @30% Expected profit after tax
182. (c) Normal profit of the company is Rs.1,93,600.

Rs. 4,42,000

78,000 20,000 24,000 1,22,000 3,20,000 96,000 2,24,000

Normal Return: Is 8% of capital employed i.e., 8% of 24,20,000 Normal Return = 1,93,600


183. (c) Super profits of the company is Rs.30,400.

Super Profit: Expected Profit less Normal Profit i.e., 2,24,000 1,93,600 = Rs.30,400
184. (b) Goodwill of the company is Rs.1,52,000.

Goodwill: 5 years purchase of super profit = Rs.30,400 x 5 = Rs.1,52,000


185. (c) Net assets available to the shareholders is Rs.38,72,000. Net Assets Available

Amount Rs. Goodwill (as calculated above) Sundry net fixed assets Non-trade investments Stock Sundry debtors Cash and Bank Less: Liabilities Net Assets available to the shareholders
186. 187.

1,52,000 28,00,000 13,00,000 12,00,000 22,00,000 6,00,000 82,52,000 43,80,000 38,72,000

(a) The value of Rs.10 fully paid-up shares based on intrinsic value method is Rs.15.28. (c) The value of Rs.10, Rs.8 paid-up shares based on intrinsic value method is Rs.13.28.

193

188. 189.

(c) The value of Rs.5 fully paid-up shares based on intrinsic value method is Rs.7.64. (b) The value of converted debentures of Rs.10 based on intrinsic value method is Rs.15.28. Number of Equivalent Equity Shares

Amount Rs. 1,00,000 equity shares of Rs.10 fully paid-up 50,000 equity shares of Rs.10, Rs.8 paid-up 1,00,000 equity shares of Rs.5 fully paid-up Shares of Convertible Debentures Add: Notional call of Rs.2 on partially paid-up shares of Rs.10 Equity Capital 10,00,000 4,00,000 5,00,000 6,00,000 25,00,000 1,00,000 26,00,000

To make this capital to be reflected in equivalent number of equity shares, let us assume all the shares are Rs.10 paid-up. Thus, number of Rs.10 equivalent equity shares = 2,60,000 nos. Net assets available to shareholders as per (2) above. Add: Notional call of Rs.2 made (since this amount will be used as asset) 38,72,000 1,00,000 39,72,000 Valuation of shares =
Net assets 39,72,000 = = Rs.15.28 2,60,000 Equity shares

Value of Rs.10 fully paid-up share Value of Rs.10, Rs.8 paid-up Value of Rs.5 fully paid-up share
190. 191. 192.

= Rs.15.28 = Rs.15.28 Rs.2 = Rs.13.28 = Rs.15.28/2 = Rs.7.64

Value of Converted debentures of Rs.10 = Rs.15.28.


(c) The value per fully paid-up share of Rs.10 based on dividend yield method is Rs.15. (b) The value per fully paid-up share of Rs.5 based on dividend yield method is Rs.7.5. (c) The value per partly paid-up share of Rs.8 based on dividend yield method is Rs.12.

Valuation of equity shares of M/s Bach and Chenoy Ltd. by the Dividend Yield Method: Proposed dividend for the year 31st March 2003 = Rs.2,85,000 Paid-up value of equity shares = Rs.19,00,000 Rate of dividend =
2,85,000 x100 = 15% 19,00,000

Normal rate of dividend = 10% (given) Value per fully paid-up share of Rs.10 = Value per fully paid-up share of Rs.5 = Value of partly paid-up share of Rs.8 =
15% x10 = Rs.15 10% 15% x 5 = Rs.7.5 10%

15% x 8 = Rs.12 10%

Note: It is assumed that proposed dividend rate will not change after conversion of part of debentures into equity.

194

193. 194. 195.

(b) The value per fully paid-up share of Rs.10 based on Earning per Share (EPS) is Rs.12.50. (c) The value per fully paid-up share of Rs.5 based on Earning per Share (EPS) is Rs.6.25. (b) The value per partly paid-up share of Rs.8 based on Earning per Share (EPS) is Rs.10.

Value of Shares on the basis of their EPS: Amount Rs. Profit before taxes Less: Income tax @35% 4,40,000 1,54,000 2,86,000 Equity Share Capital (10,00,000 + 4,00,000 + 5,00,000) 19,00,000
2,86,000 = 0.15 19,00,000

Earnings per rupee of share capital = EPS for the year 2003 for

Equity share of Rs.10 fully paid-up = 0.15 x 10 = Rs.1.5 Equity share of Rs.5 fully paid-up = 0.15 x 5 = Rs.0.75

Equity share of Rs.10, Rs.8 paid-up = 0.15 x 8 = Rs.1.2 Value of Shares for Equity share of Rs.10 fully paid-up Equity share of Rs.5 fully paid-up = = Rs.1.5 x Rs.10 = Rs.12.50 1.2
Rs.1.5 x Rs.5 = Rs.6.25 1.2 Rs.1.5 x Rs.8 = Rs.10. 1.2

Equity share of Rs.10, Rs.8 paid-up =


196. (e) Units 23,000

Calculation of Unsubscribed Shares

Units Number of shares issued by the company Less: Number of shares subscribed for: Shares from public Firm underwriting shares (3,000 + 2,000 + 1,000 + 1,000) Unsubscribed shares
197. (d) Units 12,000 Calculation of Unmarked Application

Units 1,00,000

70,000 7,000

77,000 23,000

Units Units 77,000 Number of shares subscribed for (including firm underwriting) Less: Firms underwriting 7,000 Less: Marked applications 58,000 65,000 Unmarked shares 12,000 195

198. 199.

(a) 2,750, 12,750, Nil, 7,500. (a) 5,750, 14,750, 1,000, 8,500. Statement Showing Liability of Underwriters

Particulars Gross liability Shares: Marked (58,000) Shares: Unmarked allotment (12,000) in the ratio of 3:3:2:2 Firm underwriting (B) Balance Net liability Add: Firm underwriting Total liabilities
200. (c) 22,500, 22,500, 15,000, 15,000.

Underwriters A (A) 30,000 19,000 3,600 3,000 25,600 4,400 1,650 2,750 3,000 5,750 C = (A B) (C D) B C D 8,000 2,400 1,000 11,400 8,600 1,100 7,500 1,000 8,500 30,000 20,000 10,000 21,000 3,600 2,000 2,400 1,000

Total

20,000 1,00,000 58,000 12,000 7,000 77,000 23,000 23,000 7,000 30,000

15,600 24,400 14,400 4,400) 1,650 12,750 2,000 14,750 4,400 Nil 1,000 1,000

Surplus of C apportioned the ratio (3:3:2) (D)

Calculation of Underwriting Commission

Particulars Shares underwritten (Units) Issue value @ Rs.15 (Rs.10 + Rs.5) Underwriting commission @ maximum (Rs.) permissible 5% U/S 78 of the Companies Act, 1956 in case of shares
201. (e) Rs.90,600.

Underwriters A 30,000 22,500 B 30,000 22,500 C 20,000 3,00,000 15,000 D 20,000 15,000

Total 1,00,000 75,000

4,50,000 4,50,000

3,00,000 15,00,000

Computation of Goodwill

Rs. Average net profit of the business Less: Preference dividend on Rs.9,00,000 @ 14% Less: Normal return @ 24% on (Rs.11,00,000 + Rs.1,85,000) Super profit
202. 203. (d) Rs.181,200.

5,25,000 1,26,000 3,99,000 3,08,400 90,600

Goodwill = Rs.90,600 x 2 = Rs.1,81,200.


(a) Rs.13.33.

Rs. Intrinsic value of an equity share: Equity share capital Add: Profit on revaluation of tangible fixed assets Add: Goodwill Value of 1,10,000 equity shares Value of an equity share = Rs.14,66,200/1,10,000 = Rs.13.33 196 11,00,000 1,85,000 1,81,200 14,66,200

204.

(e) Rs.3.63

Value of an equity share on yield basis: Profit Less: Preference dividend Rs. 5,25,000 1,26,000 3,99,000

205.

206. 207. 208.

Earning per share = Rs.3,99,000/1,10,000 = Rs.3.63. (d) Rs.15.13. Expected normal yield = 24% Value of equity shares = Rs.3.63/24% = Rs.15.13. (b) Rs.14.23. Fair value of an equity share = Rs.(13.33 + 15.13)/2 = Rs.14.23. (c) Share value = (Profit available for dividend/Normal rate of return)/No. of shares = (5,88,800/0.1)/1,00,000 = Rs.58.88. (d) Yield of the investor =
20 Dividend Rate x 100 = x 100 = 10.53% 190 Paid-up value of share

209.

(e)

Average annual profit Less: Preference dividend: 15% on Rs.100 x 1,000 Less: Transfer to general reserve Profit for equity shareholder

Rs. 75,000 15,000 60,000 10,000 50,000

Equity share capital = 20,000 x Rs.10 = Rs.2,00,000 Return on equity = (Profit for equity share holders/Equity share capital) x 100% =
50, 000 x 100 = 25% 2, 00, 000

Normal rate of return = 10% Value of equity share = (Return of equity/Normal rate of return) x Rs.10 =
25 x 100 = Rs.25. 10

Accounting for Debentures


210. 211. 212. 213. (a) The amount realized on the sale of the Government loan is Rs.12,93,600. (e) The interest received on the government loan during the year is Rs.39,600. (d) The amount debited to Sinking Fund account on the sale of the government securities is Rs.6,400. (e) The opening balance of the government loan account is Rs.13,00,000. 5% Debenture Accounts

Dr. 2003 2003 Dec. 31 To Sinking Fund Investment 2,00,000 Jan. 1 By Balance b/d (Own Debentures) a/c Dec. 31 To Bank a/c 14,000,00 16,00,000

Cr. 16,00,000

16,00,000 197

Sinking Fund Account

Dr. 2003 Particulars Dec. 31 To Sinking Fund Investment (3% loan) A/c (balancing figure)

Cr. Rs. 2003 6,400 Jan. 1 Particulars By Balance b/d Rs. 14,98,000

Dec. 31 To General Reserve A/c

Dec. 31 By Bank A/c (Interest on 39,600 Government loan) 16,00,000 10,000 By Interest on Own Debentures A/c By P & L Appropriation A/c 56,800 By Sinking Fund Investment (Own Debentures) A/c 2,000 16,06,400 16,06,400

Sinking Fund Investments Account (Own Debentures)

Dr. 2004 Jan. 1

Particulars To Balance b/d (NV Rs.2,00,000) To Sinking Fund A/c

Rs. 2003 Particulars 1,98,000 Dec. 31 By 5% Debentures A/c 2,000 2,00,000

Cr. Rs. 2,00,000

2,00,000

Sinking Fund Investments Account (3% Government Loan Account)

Dr. 2004 Particulars Jan. 1 To Balance b/d (NV Rs.13,20,000) (balancing figure)

Cr. Rs. 2003 Particulars 13,00,000 Dec. 31 By Bank Rs. 12,93,600

By Sinking Fund A/c 13,00,000


214. 215.

6,400 13,00,000

(d) The amount of discounts which the company needs to write-off respectively in year 1, 2 and 3 are Rs.1,000,Rs.3,800 and Rs.3,000. (c) The amount of discounts which the company needs to write-off respectively in year 4, 5 and 6 is Rs.2,200, Rs.1,400 and Rs.600.

Years (1) 1st 2nd 3rd 4th 5th 6th

Amount Used (2) 2,00,000 2,00,000 1,60,000 1,60,000 1,20,000 1,20,000 80,000 80,000 40,000 40,000

Months for which Amount used (3) 3(from Jan. to March) 9(from April to Dec.) 3(from Jan. to March) 9(from April to Dec.) 3(from Jan. to March) 9(from April to Dec.) 3(from Jan. to March) 9(from March to Dec.) 3(from Jan. to March) 9(from March to Dec.) Total

Total amount [(2) x (3)] (4) 6,00,000 18,00,000 4,80,000 14,40,000 3,60,000 10,80,000 2,40,000 7,20,000 1,20,000 3,60,000 72,00,000

Ratio (5) 60/720 or 5/60 228/720 or 19/60 180/720 or 15/60 132/720 or 11/60 84/720 or 7/60 36/720 or 3/60

198

Discount to be written off is determined as follows: Year 1 2 3 4 5 6


216. (a)

Rs. 05/60 x Rs.12,000 19/60 x Rs.12,000 15/60 x Rs.12,000 11/60 x Rs.12,000 07/60 x Rs.12,000 03/60 x Rs.12,000 1,000 3,800 3,000 2,200 1,400 600 Rs. Rs.

Bank a/c Discount on debenture a/c To 12% Debentures a/c


217. (e)

Dr. Dr.

98,000 2,000 1,00,000

(Being the amount received against issue of 12% debentures of Rs.100 each @ Rs.98). Own debentures a/c Interest on own debenture a/c To Bank Dr. Dr. 19,200 600 19,800

(Purchase of Rs.20,000 own debentures @ Rs.96 ex-interest and accrued interest paid in addition to debenture amount, for 3 months to June 30, 2000 debited to interest on own debentures a/c).
218. (d)

Own debentures a/c Interest on own debentures a/c To Bank a/c

Dr. Dr.

9,200 500 9,700

(Purchase of Rs.10,000 own debentures @ Rs.97 cum-interest and accrued interest for 5 months up to August 31, 2000 debited to interest on own debenture a/c).
219. (d)

Cost of own debentures (200 x Rs.97) = Rs.19,400 Less: Interest from April 1, 2001 to June 30, 2001 (Since it is cum-interest)[200 x Rs.100 x (3/12) x (12/100)] Rs.600 Amount debited to own debenture account = 19400 600 = Rs.18,800.
220. (d)

Here, price is ex-interest price. Interest from January 1, 2001 to March 31, 2001 = 500 x Rs.100 x (12/100) x (3/12) = Rs.1,500 So, interest will be debited by Rs.1,500.
221. (b)

Here, price is ex-interest price. Cost of 500 debentures = 500 x Rs.98 = Rs.49,000 Amount debited to own debenture account = Rs.49,000. 199

222.

(b)

Rs.
01.07.2002 400 Rs.96 ex-interest 01.12.2002 300 Rs.102 cum-interest = Rs.30,600 Rs.500 (Interest for two months 30,000 2 10 = Rs.500) 12 100

Rs.38,400 Rs.30,100

Rs.68,500 Amount debited to own debenture investment account is Rs.68,500.


223. (c) The amount of profit transferred on cancellation of debentures is Rs.4,000. Libra Ltd. Journal Entries

Date July 01, 2002 Own Debenture A/c

Particulars Dr. Dr.

Dr. Rs. 96,000 3,000

Cr. Rs.

Interest on Debenture A/c To Bank A/c

99,000

(Being the purchase of 1000 own debentures at the rate of Rs.99 cum-interest. Interest for 3 months from April 1,2002 to June 30, 2002 is Rs.3,000) March 31, 2003 12% Debentures A/c To Own debenture A/c To Capital reserve A/c (Being the profit on redemption of debentures transferred to capital reserve A/c)
224. (e) The amount transferred to general reserve account is Rs.1,02,430. Vardhan Ltd. Debenture Redemption Fund Investment Account

Dr.

1,00,000 96,000 4,000

Dr. Particulars 31.3.2003 To Balance b/f 32,000, 9.5% Government loan 36,000, 12% Government loan 12,000, 18% Debentures To Preference shares To Debenture redemption fund a/c (gain) 12% Government loan Preference shares 160 1,670 34,000 34,400 11,200 33,400 Rs. Particulars 31.3.2003 By Bank (sale) 9.5% Government loan (at par) 12% Government loan (Rs.36,000 96%) 18% Debentures (120 Rs.90) By Preference shares (334 Rs.105) By Debenture Redemption Fund a/c 1,830 (loss) 9.5% Government loan 18% Debentures 1,14,830 2,000 400

Cr. Rs.

32,000 34,560 10,800 35,070

2,400 1,14,830 200

Debenture Redemption Fund a/c

Dr. Particulars 1.4.2003 To Debenture Redemption Fund Investment account (loss on sale) To Debenture holders account (Premium on debentures) Rs. 2,400 Particulars 31.3.2003 By Balance b/f Rs.

Cr. 1,13,000

10,000 1.4.2003 By Debenture Redemption Fund Investment Account (Profit on sale) 1,02,430 1,14,830

1,830

To General reserve a/c


225.

1,14,830

(c) The nominal value of debentures Rs.1,00,000 of each Rs.100 at the rate of Rs.97 ex-interest will be of value Rs.97,000 and the amount of interest at the rate of 12% from 1.10.2003 to 31.12.2003 for 3 months will be Rs.3,000 and the total price paid is Rs.1,00,000. (b) Sometimes the companies may go for issue of debentures towards consideration for purchase of fixed asset. In such cases, the debentures may be issued at par/at discount/at premium. In the present case, the journal entry will be:

226.

For purchase of Land and Building: i. Machinery a/c To Indraja & Company a/c For issue of debentures at discount of 20% ii. Indraja & Company a/c Discount on issue of debentures To 10% Debentures a/c Thus 10% debentures are figured at Rs.5,00,000.
227. (a)

Dr.

Rs.4,00,000 Rs.4,00,000

Dr. Dr.

Rs.4,00,000 Rs.1,00,000 Rs.5,00,000

(Issue of 5,000 debentures of face value Rs.100 each at a discount of 20%)

Dr. Particulars To Balance b/d

Debenture Redemption Fund Investment Account

Cr. Rs. 40,000 24,500 25,000 89,500

Rs. 35,000 21,000 9,500 89,500

Particulars By Bank: 10% Government loan 8% Debentures

10% Government loan 8% Debentures To Equity shares To Debenture redemption fund a/c

24,000 Equity shares

228. (b) Interest for one month from July 31, 2003 to September 01, 2003 is

5,000 shares Rs.100

1 12% = Rs.5,000 12

Amount debited to own debentures account is (5,000 shares Rs.97) Rs.5,000 = Rs.4,80,000.
229. (d) Amount debited to loss on issue of debentures = Rs,20,000 Rs.10 20% = Rs.40,000

Amount of loss on issue of debentures to be written off every year = Rs.40,000/5 = Rs.8,000. 201

230.

(b)

Date

Particulars

July 1, 2003 Own Debentures A/c Dr. Interest on Debentures A/c Dr. To Bank A/c 99,000 (Being the purchase of 1000 own debentures at the rate of Rs.99 cum-interest. Interest for 3 months from April 1,2003 to June 30, 2003 is Rs.3,000) Dr. 98,000 August 01, Own Debenture A/c 2003 Interest on Debenture A/c Dr. 4,000 To Bank A/c 1,02,000 (Being the purchase of 1000 own debentures at Rs.98 ex-interest. Interest for 4 months from April 1, 2003 to July 31, 2003 is Rs.4,000) 12% Debentures A/c Dr. 2,00,000 September 01, 2003 To Own debenture A/c 1,94,000 To Capital reserve A/c 6,000 (Being the profit on redemption of debentures transferred to capital reserve A/c) Thus, the profit on cancellation of own debentures transferred to capital reserve is Rs.6,000.
231. (d) Debenture amount = 500 units Rs.100 = Rs.50,000 These debentures are converted into equity shares of Rs.100 each at a premium of Rs.20.

Dr. (Rs.) 96,000 3,000

Cr. (Rs.)

So, the amount of equity share per unit = Rs.100 + Rs.20 = Rs.120 No. of equity shares to be issued =
232.
Rs.50,000 = 400 shares. Rs.120

(b) In case of issue of debentures at discount and redeemable at a premium, discount on issue of debentures a/c should be debited with the amount of discount, loss on issue of debentures a/c should be debited with the amount of premium payable on redemption and Bank account should be debited with actual amount received. Corresponding credit should be given to debentures a/c with face value of debentures and premium on redemption of debentures a/c with amount of premium. Hence the entry is

Particulars Bank a/c Discount on issue of debentures a/c Loss on issue of debentures a/c To 12% Debentures a/c To Premium on redemption of debentures
233. 234.

Rs. Dr. Dr. Dr. 1,80,000 20,000 10,000

Rs.

2,00,000 10,000

(a) Amount to be debited to Interest A/c in case the price is cum-interest

= 3/12 x 6/100 x 10,000 = Rs.150.


(b) Amount to be debited to Interest A/c in case the price is ex-interest

= 3/12 x 6/100 x 10,000 = Rs.150.


235. (d) Amount debited to own debentures account in case of cum-interest

= 9,600 150 = Rs.9,450.


236. (c) Amount debited to own debentures account in case of ex-interest = Rs.9,600.

202

237.

(d) Amount debited to interest account, in case the price is cum-interest

= 100 shares x Rs.100 per share x 6% x 3/12 (from 1st January to 31st March) = Rs.150.
238. 239. 240. (b) Interest on debentures = 2/12 x 20,000 x 14% = Rs.467. (a) Debentures account = 97 x 200 467 = Rs.18,933. (c) Actual cost of own debentures to the company

= 98 (100 x 3/12 x 12%) = Rs.95.


241. 242. 243. 244. 245. (e) When debentures are issued at discount actual amount received is debited to Bank a/c and being discount a loss. It is debited and par value of debentures is credited. (a) The discount on issue of debenture account is a capital loss and it is shown in the assets side of the balance sheet under miscellaneous expenditure. (e) Interest on debentures account is debited with = 2/12 x 10,000 x 14% = Rs.234. (b) Since the debentures are issued at ex-interest, own debentures account is debited by

= Rs.9,800.
(c) Interest on Debentures = 2,000 x 9% x 2/12 = Rs.30.

The amount debited to own debentures account = (20 x 98) 30 = Rs.1,930.

Preparation of Financial Statements of Limited Companies


246. (d) Yield on investment

= Dividend/Actual Investment = 10 % on Rs.100/Rs.140 = Rs.10/Rs.140 = 0.0714 or 7.14%.

247.

(d)

Called-up equity share capital Less: Calls-in-arrear Paid-up capital Amount of dividend
248.

= = = = =

Rs. 3,00,000 12,000 2,88,000 12% on Rs.2,88,000 Rs.34,560.

(a) Value of equity share = (Yield rate of return/Normal rate of return) x Nominal value of equity shares = (14%/8%) x Rs.10 = Rs.17.50. (e)

249.

Particulars Loss as reported by the accountant Less: Goods returned to supplier Add: Rent not considered Loss after considering all aspects
250. 251.

Rs. 75,000 (3,000) 4,000 76,000

The non-recording of return of cheque does not affect the profit/loss.


(d) No dividends can be paid on call-in-advance or on calls-in-arrears.

Dividend = 12% on Rs.12,00,000 = Rs.1,44,000.


(b) In case of issue of debentures at premium and redeemable at a premium, loss on issue of debentures a/c should be debited with the amount of premium payable on redemption and Bank account should be debited with actual amount received. Corresponding credit should be given to debentures a/c with face value of debentures and premium on redemption of debentures a/c with the amount of premium payable on redemption payable on redemption and premium on issue of debentures with premium received.

203

The journal entry will be Particulars Bank a/c Dr. Loss on redemption of debentures a/c Dr. To 14% Debentures a/c To Debentures premium a/c To Premium on redemption of debentures a/c
252. (a)

Rs. 1,10,000 5,000

Rs.

1,00,000 10,000 5,000 Rs. Rs. 25,50,000 20,000 25,70,000 1,00,000 24,70,000

Particulars Net Profit as calculated Add: Revenue Profit on sale of plant Less: Directors remuneration Bonus paid to production executive Net Profit

50,000 50,000

Where the amount for which the fixed asset is sold exceed the written-down value, credit shall be given for so much of the excess as is not higher than the difference between the original cost of the fixed asset and its written down value. Hence only Rs.20,000 (Rs.1,00,000 Rs.8,00,000) should be added. The directors remuneration and the bonus paid to any member of companys staff should be deducted whereas income tax and super tax should not be deducted. Credit should not be given to profits by way of premium on shares. Managing Directors Commission = 24,70,000 5% = Rs.1,23,500.
253. (d) To arrive at the profits for calculating managerial remuneration, the directors remuneration, damages paid by virtue of legal liability shall be deducted and subsidy received from Government shall be added. However, the income tax payable shall not be deducted. Hence the profit for the purpose of calculating managerial remuneration is Rs.15,75,000 + Rs.94,500 = Rs.16,69,500.

Commission = Rs.16, 69, 500


254.

5 = Rs.79,500. 105

(c) Value of share as per intrinsic value method

Net Assets Rs.120,00,000 = = Rs.150 No. of Shares 80,000

Value of share as per yield method


Rate of dividend Value of share Normal dividend 15% = Rs.100 = Rs.125 12% Value of share as per fair value method

= (Rs.150 + Rs.125)/2 =Rs.137.50.


255. (d)

Rs. Assets increased by Add: Dividend paid during the year Less: Liabilities increased by Share capital increased by Net income for the year

Rs. 1,16,000 10,000 1,26,000

70,000 50,000 1,20,000 6,000 204

256.

(c) Rs.8,750

Sales Less: Gross profit 20% Cost of goods sold i. ii. Ordinary commission:

Rs. 75,000 15,000 60,000

257.

10% on Rs.75,000 = Rs.7,500 Special commission: 20/120[Rs.75,000 (Rs.60,000 + Rs.7,500)] or 1/6(Rs.7,500) = Rs.1,250 Total commission = Rs.8,750 (b) Rs.6,250. Net Profit = Gross profit Total commission = Rs.15,000 Rs.8,750 = Rs.6,250. (a) Rs.20,000. Closing Stock = Cost of production Cost of goods sold = Rs.80,000 Rs.60,000 = Rs.20,000. (c) Particulars Rs. Rs. Profit & Loss Appropriation A/c Dr. 2,000 2,000 To Provision for Taxation (2000-2001) A/c (Extra Provision of Rs.2,000 made for 2000-2001)

258.

259.

260.

(b)

Particulars Rs. Rs. Provision for Taxation (2000-2001) A/c Dr. 12,000 To Advance Tax (2000-2001) A/c 8,000 To Tax Payable (2000-2001) A/c 4,000 (Advance tax paid in respect of 2000-2001 adjusted against provision for tax for 2000-2001)
261. (e)

Particulars Profit and Loss A/c Dr. To Provision for Taxation (2001-2002) A/c (Provision for tax made for 2001-2002)
262. (b) Rs.4,90,000.

Rs. 15,000

Rs. 15,000

Amount available for dividend Profit and Loss account (Cr.) Profit for the year

Rs. 63,000 3,57,000 4,20,000 Less: Dividend on preference 2,10,000 Profit available for equity shareholders 2,10,000 In the instant case, profits being low, at the maximum 10% dividend can 7,00,000 be declared to equity shareholders and hence total amount needed Shortfall which is to be drawn from General reserve, if law permits 4,90,000
263. (a) Rs.10,85,000.

Maximum amount that can be drawn should not exceed 10% of paid-up capital and free reserves i.e.10 % of Rs.10,85,000 (Rs.70,00,000 + 21,00,000 + 17,50,000). 205

264.

(c) Rs.13,12,500.

After drawing the balance, reserves should not fall below 15 % of the paid-up capital i.e., Rs.87,50,000 x 15% (Capital Reserve and Share premium have to be ignored for this purpose).
265. (b)

On first

10,000 @ Nil 20,000 @ 10% 30,000 @ 15% 60,000 @ 20%

2,000 4,500 12,000 11,400 29,900

(Balance)

38,000 @ 30% 1,58,000

Net profit after charging commission = 1,58,000 29,900 = 1,28,100.


266. (a) Net profit = Gross profit All the operating expenses = Rs.10,50,000

Commission = 10,50,000 x 5/105 = Rs.50,000.


267. (d) Net profit = Increase in assets + Decrease in liabilities + Dividends declared and paid

= 28,000 + 75,000 + 25,000 = Rs.1,28,000.


268. (c) Managers commission = (% of commission/100 + percentage of commission) x Net profit = 10/110 x 55,000 = 5,000. (a) The interest of Rs.70,000 being the interest due for the six-month period up to 31st December, 2000 is termed as Interest Accrued and Due and though this outstanding amount is a short-term liability, as per the Companies Act, it must be shown in the Balance Sheet along with the amount outstanding in respect of debentures. The interest of Rs.35,000 being the interest due for the three month period up to 31st March, 2001 is termed as Interest Accrued but not Due since the next due date for payment of interest is only 30th June, 2001.

269.

In the Profit and Loss Account, the Interest on debenture will be shown as follows: Profit and Loss Account of Sujata Limited Particulars Rs.

To Debenture Interest 1,40,000 Interest accrued but not due should be shown in the Balance Sheet as a current liability.
Balance Sheet of Sujata Limited as on 31.3.2003

Liabilities
Secured Loans

Rs.

Rs.

14% Debentures Add: Interest Accrued and Due


Current Liabilities and Provisions Interest accrued but not due on Debentures 270. (b)

10,00,000 70,000 10,70,000 35,000

Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01)

Dr. 3,42,500 3,42,500

206

271.

(d) The advance tax paid will be shown as: Balance Sheet as on March 31, 2000

Assets Loans and Advances Advance tax for Assessment Year 2000-01
272.

Rs. 3,50,000

Rs.

Less: Provision for Tax for Assessment Year 2000-01 (b) Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01) Dr.

3,42,500 7,500

Rs.17,500 Rs.17,500 Dr. Rs.3,50,000 Rs.3,50,000

273.

(a)

Provision for Income Tax a/c (Assessment Year 2000-01) To Advance tax for assessment year 2000-01
274. (a)

Provision for Income Tax a/c (Assessment Year 2000-01) To Bank a/c

Dr. Rs.10,000 Rs.10,000

Advance tax of Rs.3,50,000 is paid by a company for the previous year 1999-2000 the entry to record this would be Advance Tax for Assessment Year 2000-01 Account To Bank Account Dr. Rs.3,50,000 Rs.3,50,000

While preparing the Trial Balance as on March 31, 2000, the Advance Tax for Assessment Year 2000-01 will be included in the Trial Balance as a debit balance of Rs.3,50,000. The company determines its tax liability as Rs.3,42,500 after drawing up the Profit and Loss Account for the year ended March 31, 2000. This liability must be provided for by passing the entry as Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01) Dr. Rs.3,42,500 Rs.3,42,500

While the tax liability will appear as an expense in the Profit and Loss Account, the Provision for Income Tax will be shown in the Balance Sheet as a current liability and the Advance Tax of Rs.3,50,000 paid will be shown as an advance on the asset side of the balance sheet. Another acceptable method of presentation is to set-off the advance and the provision relating to the same assessment year against each other and take only the net amount either to the liability or asset side of the balance sheet. In the example given above, since the advance exceeds the provision, the net amount would be presented as follows:
Balance Sheet as on March 31, 2000

Assets Loans and Advances Advance tax for Assessment Year 2000-01 Less: Provision for Tax for Assessment Year 2000-01

Rs.

Rs.

3,50,000 3,42,500 7,500

207

Till such time the assessment is completed, the balances in the advance and provision accounts will be carried forward. The assessment is completed in December 2000 and the tax liability is arrived at the Income Tax Officer at Rs.3,60,000, the accounting treatment will be as follows: i. The provision for tax is short of the actual liability by Rs.17,500. The company will have to provide for this extra liability. In the Profit and Loss Account for the year ended March 31, 2001 the increase in liability will be provided for by making the following entry. Profit and Loss Account To Provision for Income Tax Account (Assessment Year 2000-01) Dr. Rs.17,500 Rs.17,500

ii.

The above entry will be in addition to the entry required to be passed in respect of tax payable for the financial year 2000-01. Since the assessment has been completed, the advance tax account can be closed by transfer to the provision account. The journal entry for the transfer will be Provision for Income Tax a/c (Assessment Year 2000-01) To Advance tax for assessment year 2000-01 Rs.3,50,000 Dr. Rs.3,50,000

iii.

The balance of tax payable amounting to Rs.10,000 (is 3,60,000 3,50,000) must be paid shortly after the completion of assessment. When the short-fall in tax is paid, the entry will be, Provision for Income Tax a/c (Assessment Year 2000-01) To Bank a/c Rs.10,000 Dr. Rs.10,000

With the recording of the above entries, the Balance Sheet as on March 31, 2001 will not list any items pertaining to tax payable for Assessment Year 2000-01. The ledger accounts are given as follows: Advance Tax for Assessment Year 2000-01 Account Dr. Particulars 2000 April-1 To Balance b/d Rs. Particulars 2001 March-31 3,50,000 By Provision for Income Tax Account 3,50,000 Cr. Rs.

Provision for Income Tax Account (Assessment Year 2000)

Dr. Particulars 2000 December To Bank a/c 2001 March-31 To Advance Tax for Assessment Year a/c 3,50,000 By Profit and Loss a/c 3,60,000 Rs. Particulars 2000 April 1 10,000 By Balance b/d

Cr. Rs.

3,42,500

17,500 3,60,000 208

275.

(b) Rs.10,259. For calculating managing directors remuneration, first of all, the profits as per Section 349 have to be calculated in the following manner. Calculation of Profits for the Purposes of Managerial Remuneration

Notes Gross Profit as per Profit and Loss a/c Add: Subsidy from Central Government Less: Sums to be deducted as per rules: Staff salaries and bonus General expenses Repairs to buildings Directors fees Depreciation Bad debts Compensation for breach of contract Donation to R.K. Mission Interest on debentures Debenture trustee remuneration Net Profits for Managing Directors Commission Commission payable to the Managing Director (@ 1% on Rs.8,00,900)

Rs. Rs. 15,00,000 4,00,000 19,00,000

5,00,000 2,50,000 70,000 12,000 1,70,000 30,000 18,000 18,500 25,000 5,600 10,99,100 8,00,900 8,009

Note: Cost of research equipment, ex-gratia, etc., are not treated as allowable expenses for computing managerial remuneration. 276. 277. (d) The maximum remuneration payable to whole-time directors are Rs.39,640. (b) The maximum remuneration payable to part-time directors are Rs.3,604. Calculation of Profit for Managerial Remuneration

Rs. Profit as per Profit & Loss a/c Add: Depreciation as per Book Add: Provision for Income Tax Add: Capital expenditure charged to Profit & Loss a/c Less: Depreciation as per Section 350

Rs. 2,50,000

47,800 1,22,500 12,500 1,82,800 4,32,800 32,800 4,00,000

Maximum remuneration payable to the whole-time directors = 10% of the net profits after charging commission payable to part-time directors. Again maximum commission payable to part-time directors = 1% of the net profits after charging remuneration payable to wholetime directors. Let, maximum remuneration to whole-time directors = x And maximum commission to part-time directors = y x = 10% of (Rs.4,00,000 y) y = 1% of (Rs.4,00,000 x) or x = Rs.40,000 0.1y y = Rs.4,000 0.01x or x + 0.1y = Rs.40,000 0.01x + y = Rs.4,000 (1) (2) (1) (2) (1) (2) 209

Multiplying equation (1) by (1) and equation (2) by 100, we get: x + 0.1y = Rs.40,000
x +100y = Rs.4,00,000

99.9y = 3,60,000

(Subtracting)

or y = Rs.3,604 (approx.). Therefore, x = 10% of (Rs.4,00,000 Rs.3,604) = Rs.39,640 (approx.) Managerial remuneration given in the adjustments for the preparation of final statements should be charged to Profit and Loss Account on the debit side and should be shown on the liabilities side under the head Current Liabilities in the Balance Sheet.

Consolidated Accounts of Holding and Subsidiary Companies


278. 279. 280. 281. 282. 283. 284. 285. 286. 287. (a) The minority interest of Bharat Ltd., in the consolidated balance sheet of United Ltd., is Rs.1,50,250. (c) The minority interest of Comfort Ltd., is Rs.30,125. (b) The minority interest in the consolidated balance sheet is Rs.1,80,375. (d) Capital profits for the purpose of calculating goodwill/Cost of control is Rs.63,150. (e) Goodwill in the consolidated balance sheet is Rs.66,850. (c) Profit and Loss account in the consolidated balance sheet is Rs.97,225. (d) Revenue reserves in the consolidated balance sheet is Rs.98,250. (a) Stock-in-trade in the consolidated balance sheet is Rs.57,500. (e) Sundry debtors in the consolidated balance sheet is Rs.3,29,000. (a) Sundry creditors in the consolidated balance sheet is Rs.60,000.

Consolidated Balance Sheet of United Ltd. and its Subsidiaries, Bharat Ltd. and Comfort Ltd. as at 31.3.2003

Liabilities Share Capital: 6,250 Shares of Rs.100 each fully paid-up Revenue Reserves Profit and Loss A/c Sundry Creditors: United Ltd. Bharat Ltd. Less: Mutual owing (16,500 + 35,000) Minority Interest 51,500 60,000 1,11,500 51,500

Rs.

Assets Goodwill

Rs. 66,850 1,40,000 2,75,000 1,87,500 60,000 2,500 57,500 6,02,500

6,25,000 Fixed Assets: United Ltd. 98,250 97,225 Bharat Ltd. Comfort Ltd. Stock- in-trade Less: Unrealized Profit 20 12,500 60,000 100 1,80,375 Sundry Debtors: United Ltd. Bharat Ltd. Comfort Ltd. Less: Mutual owing (16,500 + 40,000) Cash in Transit 10,60,850

1,31,500 80,000 1,74,000 3,85,500 56,500 3,29,000 5,000 10,60,850 210

Working Notes: 1. Analysis of Profits

Capital Profits Rs. Comfort Ltd. Reserves 30,000

Revenue Reserves

Revenue Profits Profit & Loss Account Rs. Rs.

6,000 (36,000 30,000 Created after 30.09.2002)

Profit and Loss A/c Balance b/d on 30.09.2002 Increase in balance after 30.09.2002 (25,500 4,200) Share of United Ltd. (1/4) Share of Bharat Ltd. (2/3) Minority Interest (1/12) Bharat Ltd. Reserves

4,200 21,300 34,200 8,550 22,800 2,850 34,200 45,000 6,000 1,500 4,000 500 6,000 5,000 (Created after 30.09.2002: 50,000 45,000) 21,300 5,325 14,200 1,775 21,300

Profit and Loss A/c Balance b/d on 30.09.2002 Increase in balance after 30.09.2002 (10,000 5,000) Share in Comfort Ltd. Share of United Ltd. (3/4) Minority Interest (1/4) United Ltd. Reserves Profit and Loss Account Share in Bharat Ltd. Share in Comfort Ltd. Less: Stock Reserves 20 12,500 100 2.

5,000 5,000 14,200 19,200 14,400 4,800

22,800 72,800 54,600 18,200

4,000 9,000 6,750 2,250 90,000

54,600 8,550 63,150

6,750 1,500 98,250

80,000 14,400 5,325 99,725 2,500

97,225
Calculation of Minority Interest

Share Capital: Nominal value of shares held Share as calculated in (1) above Capital Profits Revenue Reserves Revenue Profits

Bharat Ltd. Comfort Ltd. 1,25,000 25,000 (1,250 shares of Rs.100 each) (250 shares of Rs.100 each) 1,25,000 25,000 18,200 2,850 2,250 500 4,800 1,775 1,50,250 30,125 Total Minority Interest: Rs.1,50,250 + Rs.30,125 = Rs.1,80,375. 211

3.

Calculation of Goodwill or Cost of Control

Amount paid for investments: Rs. United Ltd. Bharat Ltd. Less: Nominal value of shares held: In Bharat Ltd. (3,750 shares of Rs.100 each) In Comfort Ltd. (1,375 shares of Rs.100 each) Capital Profits as calculated in (1) above 3,75,000 2,75,000 63,150 7,13,150 Goodwill
288. 289. 290. 291. 292. 293. 294. 295.

Rs.

5,15,000 2,65,000 7,80,000

66,850

(a) The creditors in the consolidated balance sheet of the two companies is Rs.2,30,000. (b) Adjustments required to be made in the stock of Y Ltd. for the purpose of consolidation based on the above information is Rs.2,75,000. (c) The value of the stock in the consolidated balance sheet of the two companies is Rs.4,47,500. (e) The value of the debtors in the consolidated balance sheet of the two companies is Rs.75,500. (e) Goodwill in the consolidated balance sheet is Rs.2,18,000. (b) Cash balance in the consolidated balance sheet is Rs.26,500. (e) Reserves and surplus in the consolidated balance sheet is Rs.2,57,100. (e) Minority Interest in the consolidated balance sheet is Rs.70,400. Consolidated Balance Sheet of X Ltd. and its Subsidiary Y Ltd. as on 31-3-2003

Liabilities Share capital: Shares of Rs.10 each Reserves and Surplus: Secured Loans Current Liabilities: Creditors Less: Mutual indebtedness Provision for Tax Minority Interest

Amount Rs.

Amount Rs.

Assets Goodwill

Amount Rs.

Amount Rs. 2,18,000

5,00,000 Fixed Assets 2,57,100 Current Assets: 1,00,000 Stock (Less: Unrealized profit) 1,90,000 + 66,000 26,000 1,00,000 + 60,000 Debtors 2,30,000 (Less: Mutual indebtedness) 1,60,000 Cash and Bank 70,400 13,17,500

(3,00,000 + 2,50,000)

5,50,000

(1,90,000 + 2,75,000 17,500) (50,000 + 51,500 26,000) 25,000 + 1,500 75,500 26,500 4,47,500

13,17,500 212

Working Note 1: Adjustments to be made in the balance sheet items of Y Ltd.

i. Particulars Balance as on 31-12-2002 Add: Unsold stock out of goods purchased from X Ltd. *

Stock Rs. 1,75,000 1,05,000 2,80,000 Less: Loss of stock by fire 5,000 2,75,000

* Invoice value of the goods sold by X Ltd. to Y Ltd. Less: Resold by Y Ltd. to X Ltd. (50%)

= 2,00,000 x 1.2

= 2,40,000 1,20,000 = 15,000 1,05,000

Less: Sales approved by the customers = 2,40,000 x 0.25 x 0.25 before 31-3-2003 for sales made on approval basis ii. Cash and Bank Particulars Balance as on 31-12-2002 Collections from the debtors Sales on approval basis (2,40,000 x 0.25 x 0.25 x 1.1) Payment to the creditors Purchases from X Ltd. Insurance claim received Amount paid to X Ltd. (1,20,000 26,000) Rs. 97,500 5,000 (10,000) 3,000 (94,000) 1,500
Working Note 2: Post-acquisition reserves

Debtors Rs. 40,000 (5,000) 16,500 51,500

Creditors Rs. 50,000 (10,000) 1,20,000 (94,000) 66,000

Particulars Reserves and Surplus balance as on 31-12-2002 Less: Pre-acquisition profits Add: Profit from sale of goods purchased from X Ltd. (15,000 x 1.1 15,000) Less: Abnormal loss on goods destroyed (5,000 x 0.4)

Rs. 1,02,500 (40,000) 1,500 2,000 62,000

Working Note 3: Goodwill/Capital reserve on consolidation

Particulars Amount paid for 20,000 shares Less: Nominal value of proportionate share capital Share of pre-acquisition profits (20,000/25,000) x 40,000 Goodwill

Rs.

Rs. 4,50,000

2,00,000 32,000 2,32,000 2,18,000 213

Working Note 4: Minority Interest

Particulars Paid-up value of 5,000 shares Add: 20% of Reserves and surplus (40,000 + 62,000) x 0.2

Rs. 50,000 20,400 70,400

Working Note 5: Reserves and Surplus of X Ltd.

Particulars Balance as on 31-3-2003 Add: Share of post-acquisition reserves of Y Ltd. (62,000 x 0.8)

Rs. 2,25,000 49,600 2,74,600

Less: Unrealized profit on stock (1,05,000/6)

17,500 2,57,100

296. 297.

(b) The minority interest in the consolidated balance sheet is Rs.93,750. (c) Goodwill in the consolidated balance sheet is Rs.83,750. Consolidated Balance Sheet of X Ltd. and its Subsidiary Y Ltd. as on 31-12-97

Liabilities Share capital Minority Interest

Amount Rs. 20,00,000 Goodwill 93,750 Sundry assets

Assets

Amount Rs. 83,750 19,85,000

Profit and Loss a/c X Ltd.1,00,000 Less: Y Ltd. 75,000 25,000 20,93,750 Rs.
Capital Profits Y Ltd. P & L a/c balance (loss)

20,93,750

25,000 18,750 6,250 1,00,000 75,000

X Ltd. share

3 4

Minority interest Revenue profits: Y Ltd. profit for the year (75,000 + 25,000) X Ltd. share
3 4 1 4

Minority interest

25,000

Consolidated Profit and Loss a/c X Ltd. P & L a/c balance (loss) Less: Revenue profits from Y Ltd. Loss 1,00,000 75,000 25,000 214

Rs.
Minority Interest Pref. share capital Equity share capital Revenue profits

Less: Capital loss


Cost of Control/Goodwill Cost of shares Capital loss Existing goodwill

50,000 25,000 25,000 1,00,000 6,250 93,750 90,000 18,750 50,000 1,58,750 75,000 83,750

Less: Fair value of shares Goodwill


298. 299. 300. 301.

(b) The holding of Strong Limited in the Weak Limited is 80%. (b) The share of Strong Limited in the capital profit computed for the purpose of determining cost of control/goodwill is Rs.2,65,600. (a) Goodwill in the consolidated balance sheet is Rs.14,400. (c) Minority interest in the consolidated balance sheet is Rs.1,66,400. Consolidated Balance Sheet of Strong Ltd. and Weak Ltd. as at 31.12.2001

Liabilities Share capital of Rs.100 each fully paid-up General reserve Profit and loss account Bank loan Minority interest Sundry creditors Strong Ltd. Weak Ltd. Less: Mutual indebtedness Bills payable Weak Ltd. Less: Mutual indebtedness

Rs.

Rs. Assets 10,00,000 Goodwill 4,80,000 Land and buildings 1,14,400 Strong Ltd. 1,60,000 Weak Ltd. 1,66,400 Plant and machinery: Strong Ltd. Weak Ltd. Investments Stock: Strong Ltd. 88,400 Weak Ltd. Sundry debtors: Strong Ltd. 10,800 Weak Ltd. Less: Mutual indebtedness Bills receivable: Strong Ltd. Less: Mutual indebtedness Cash at bank: Strong Ltd. Weak Ltd. 20,20,000

Rs.

Rs. 14,400

3,00,000 4,00,000 4,80,000 2,98,800

7,00,000

. 94,400 18,000 1,12,400 24,000 16,800 6,000

7,78,800 Nil

2,40,000 72,000 88,000 80,000 1,68,000 24,000 31,600 6,000 29,200 16,000 25,600 1,44,000 3,12,000

45,200 20,20,000 215

Workings:

Rs. 1. Share of Strong Ltd. = 3200/4000 = 80% Share of Minority 2.


Capital Profit

= 800/4000 = 20%

General reserve Profit and loss account

3,40,000 72,000 4,12,000

Add: Revaluation of land and buildings (Rs.4,00,000 Rs.3,60,000) Less: Revaluation of plant and machinery (Rs.3,18,800 Rs.2,98,800)

40,000 (20,000) 4,32,000

Less: Bonus shares

1,00,000 3,32,000

Share of Strong Ltd. Share of Minority 3.


Revenue Profit

2,65,600 66,400 Nil

Less: Depreciation on land and buildings (Depreciation not given) Add: Refund of depreciation in plant and machinery (Not given) 4.
Cost of Control/Goodwill

Price of investment (3,200 + 800 bonus) Less: Cost of investment = 4,000 x Rs.100 Capital profit Goodwill 5.
Minority Interest

6,80,000 Rs.4,00,000 Rs.2,65,600 6,65,600 14,400

Capital profit Revenue profit Cost of shares (800 + 200 bonus) x Rs.100

66,400 Nil 1,00,000 1,66,400

302.

(c) Sale value of goods = Rs.50,000

Profit = Rs.5,000 Rate of Profit = (Rs.5,000/Rs.50,000) x 100 = 10% Unsold goods = 1/2 x Rs.50,000 Profit on unsold stock = 10% of Rs.25,000 Unrealized profit in the unsold stock = Rs.25,000 = Rs.2,500 = Rs.2,500

Note: In the compliance of AS-21, 100% provision was made on unsold stock.

216

303.

(d) Consolidated Balance Sheet of H Ltd., and S Ltd., as on March 31, 2003

Liabilities Share capital (Rs.10 each) General reserve Capital reserve Profit and loss account H Ltd. Shares in S Ltd. (Revenue profit) Sundry creditors: H Ltd. S Ltd. Less: Mutual indebtedness Bills payable: H Ltd. S Ltd. Minority interest

Rs.

Rs. 9,00,000 3,90,000 24,000

Assets Land and building H Ltd. S Ltd. Plant and machinery H Ltd. S Ltd. Furniture and fixtures H Ltd. S Ltd. Investments

Rs.

Rs.

4,20,000 2,40,000

6,60,000

1,90,000 1,20,000 3,10,000

3,90,000 1,30,000

5,20,000

1,00,000 60,000 1,60,000 10,000 1,50,000

1,90,000 90,000

2,80,000 20,000

Stock H Ltd. S Ltd. Sundry debtors H Ltd. S Ltd. Less: Mutual indebtedness Bills receivable H Ltd. S Ltd. Cash & bank H Ltd. S Ltd.

90,000 50,000 1,20,000 1,00,000 2,20,000 10,000 2,10,000 1,40,000

60,000 50,000

1,10,000 1,16,000

70,000 40,000 40,000 20,000 20,00,000

1,10,000

60,000

20,00,000

Note: Bills accepted by S Ltd. in favor of H Ltd. have been discounted by H Ltd. These bills are no more inter-company debts. Working Notes: i. Shares of H Ltd. = 80% S Ltd. = 20% ii. Dividend received from S Ltd. out of pre-acquisition profit has been credited to investment account. Capital Profit

Particulars Balance as on date of acquisition General reserve Profit and loss account Less: Dividend Rs.24,000 100 80

Rs. 1,00,000 Rs.60,000 Rs.30,000 30,000 1,30,000 217

H Ltd. S Ltd. iii.

80% 20%

Rs.1,04,000 Rs. 26,000

Revenue Profit

Particulars General reserve (Rs.1,50,000 Rs.1,00,000) Profit & loss account (Rs.1,30,000 Rs.30,000)

Rs. 50,000 1,00,000 1,50,000

H Ltd. 80% S Ltd. 20% iv.

Rs.1,20,000 Rs.30,000

Cost of Control/Goodwill

Particulars Cost of investment Less: Nominal value of shares (80% of Rs.3,00,000) Capital profit Capital reserve v.
Minority Interest

Rs. 3,20,000 2,40,000 1,04,000 3,44,000 24,000

Particulars Nominal value of shares (20% of Rs.3,00,000) Capital profit Revenue profit
304.

Rs. 60,000 26,000 30,000 1,16,000

(b) Invoice price of the goods in stock as on March 31, 2003 is Rs.12,000 50% = Rs.6,000

Profit included in the goods invoiced at Rs.6,000


20 = Rs.1,000 120 Amount of unrealized profit to be adjusted while preparing the consolidated balance sheet

= Rs.6,000

= Rs.1,000.
305. (c)

Profit and loss account as on April 01, 2002 Less: Dividends declared Adjusted opening balance Profits earned during the year (80,000 20,000) Profits for the period April 01, 2002 to July 01, 2002 Capital profits (Rs.20,000 + Rs.15,000)

Rs. 35,000 15,000 20,000 60,000 15,000 35,000

306. (e) The bill discounted with a bank is not an inter-company owning. However, the bill retained by Harsha Ltd. is an inter-company owing and is to be deducted from the balance of bills receivable. The amount of bills receivable to be shown in the consolidated balance sheet is Rs.30,000 + Rs.40,000 Rs.10,000 = Rs.60,000.

218

307. (b) Amount transferred to reserves

= Rs.3,25,000 Rs.3,00,000 = Rs.25,000 Amount of profit for the year 2002-2003 is Rs.2,00,000 + Rs.75,000 = Rs.2,75,000 Amount of profit for 4 months (from April 01, 2002 to July 31, 2002) =
Rs.2, 75, 000 4 = Rs.91, 667 12

Capital profit = Rs.91,667 Rs.75,000 = Rs.16,667 Pre-incorporation reserve Particulars Cost of investments Less: Face value of shares (10,00,000 60%) Share of capital profits (Rs.16,667 60%) Share of reserve (Rs.3,08,333 60%) Goodwill
308. 309. 310.
Rs.25, 000 = Rs.3,00,000 + 4 = Rs.3,08,333 12

Rs.

Rs. 8,50,000

6,00,000 10,000 1,85,000 7,95,000 55,000

(e) The bill discounted with a bank is not on inter-company owing. Thus, no adjustment is required in consolidated balance sheet. (e) It is an inter company owing. Thus, Rs.10,000 should be deduct from the both debtors and creditors. (c) P&L during the year = Opening balance of P&L A/c Closing balance of P&L A/c

= 1,50,000 (loss) 90,000 (P) = 2,40,000 (Profit). Capital profit = 2,40,000 x 5/12 = 1,00,000 since the shares are acquired on 1st September, 2002, 5 months from 1st April, 2002 to 1st September, 2002.
311. 312. 313. (e) Revenue profit = 2,40,000 1,00,000 = Rs.1,40,000. (e) The bill discounted with bank is not an inter company owing. Thus, no adjustment is required in consolidated balance sheet. (e) Calculation of Goodwill

Amount paid for 70% shares in S Ltd. Less: Paid-up value of 70% shares in S Ltd., 1,00,000 x 70% Less: 70% of Profit and Loss account 90,000 x 70% Goodwill
314. 315. 316. (c) Unrealized profit on stock = 50,000 x 10% x 40% = Rs.2,000. (b) Share of capital profit = Capital profit x (100 60)

Rs. 1,40,000 70,000 63,000 7,000

= 1,50,000 x 40% = 60,000.


(b) Profit during the year

= 50,000 + 25,000 = Rs.75,000 = 75,000 x


7 12

Profit for 7 months Net capital profit

= 43,750

= 50,000 43,750 = 6,250 70 100 = Rs.4,375. 219

Share of holding company = 6,250 x

317.

(d) Capital profits in the generic sense refers to the profits earned prior to the acquisition. Capital profit in the context of holding companies connotes profit earned by the subsidiary company till the date of acquisition. As a result, profits which may be of revenue nature for the subsidiary company are capital profits so far as the holding company is concerned.

Profit during the year = 2,50,000 1,50,000 = Rs.1,00,000 Capital profit/loss = Profit during the current year from April 01, 1998 to September 01, 1998. 1,00,000 x
5 = 41,667 12

Net capital loss = 2,50,000 41,667 = 2,08,333 (loss) Share of H Ltd. = 2,08,333 x 60% = 1,25,000 (loss).
318. (b) Profit during the year = 1,50,000 9 Profit for 9 months = 1,50,00 x = 1,12,500. 12 Capital profit/loss = 1,12,500 1,00,000 = 12,500 (Profit)

Share of H Ltd. = 12,500 x 60% = 7,500 (Profit).


319. 320. (e) It is an Inter company owing. Both creditors and debtors should be reduced to the extent of Rs.6,000. (e) In order to eliminate the unrealized profits, first the total profit loaded on such unsold goods should be ascertained wherefrom, the share of the minority shareholders will be deducted and the balance being the share of the holding company shall be deducted from the profits of the company selling the goods and from the stock of the company receiving the goods.

Unrealized profit on stock

= 10,000 x 0.6 = Rs.6,000.

Full unrealized is to be eliminated in accordance with AS 21.


321. (e) Value of machine increased by Rs.1,00,000

Share of H Ltd. Share of minority group

= 80% = 20%

Therefore, share of minority group = 20% of Rs.1,00,000 = Rs.20,000.

Current Developments and ERP


322. 323. 324. 325. (c) Value added = Sales Operating expenses Excise duty = Rs.35,000. (d) The total value added by the business is Rs.61.20 lakh. (e) The value added by the manufacturing is Rs.51.20 lakh. (b) The value applied to pay employees and directors is Rs.17.00 lakh.

= (Rs.15,00,000 + Rs.2,00,000)
326. 327. 328. 329. (b) The value applied to pay government is Rs.5.00 lakh. (e) The value applied to pay providers of the capital is Rs.7.70. (d) The value applied to pay for maintenance and expansion is Rs.31.50. (a) The difference between the total values added by the business and profit before tax is Rs.31.40.

220

Shailaja Limited Value Added Statement for the Year Ended 31.3.2003

Rs. in lakh

Sales Less: Cost of bought in material and services: Production and Operational expenses (160 18) Administration expenses [6.50 2.00] Interest on working capital loan Value added by manufacturing and trading activity Add: Other income Total value added
Application of Value Added To Pay employees salaries and wages

200

142 4.5 2.3 148.8 51.2 10 61.2

15 2 3 2 1.8 3.9 2 5.7 2.8 23 31.5 61.2 7.7 5

Pay Directors Pay Government Cess and Local taxes Income tax
To Pay providers of capital:

Interest on debentures Interest on fixed loans Dividend


To Pay for maintenance and expansion:

Depreciation General reserve (3 0.20) Retained profit (24 1)

Reconciliation between Total Value Added and Profit before Tax

Rs. in lakh PBT Add back Depreciation Salaries and Wages Directors Remuneration Cess and Local Taxes Interest on Fixed Deposit Interest on Debenture 5.7 15 2 3 3.9 1.8 31.4 61.2 29.8

221

330. 331. 332. 333. 334. 335. 336. 337. 338. 339. 340.

(d) The total value added by the business is Rs.1,70,60,000. (a) The value added by manufacturing and trading activity is Rs.1,63,10,000. (a) The application of the value added to pay employees wages and salaries is Rs.1,50,00,000. (d) The application of the value added to pay government taxes is Rs.2,00,000. (c) The application of the value added to provider of capital is Rs.12,50,000. (d) The application of the value added to maintenance and expansion of company is Rs.6,10,000. (d) The difference between profit before tax and total value added by the business is Rs.1,64,60,000. (e) The percentage of application of the value added to pay employees wages and salaries to total value added is 88. (b) The percentage of application of the value added to pay government tax to total value added is 1.10. (c) The percentage of application of the value added to pay providers of capital to total value added is 7.32. (c) The percentage of application of the value added to provide for maintenance and expansion of company to total value added is 3.58. Value Added Statement for the Year Ended 31st March, 2003

Rs. in000 Sales Less: Cost of bought in material and services Operating cost (25,800 15,000) Excise duty Interest on bank O.D Value added by manufacturing and Trading activity Add: Other income Total Value Added Application of Value Added To Pay Employees Wages and Salaries To Pay Government Tax To Pay Providers of Capital Interest on Debentures Dividend To Provide for Maintenance Expansion of Company Depreciation General Reserve Deferred Tax a/c Retained Profit 29,000 10,800 1,800 90 12,690 16,310 750 17,060 Rs. in 000 15,000 88%

200 1.10% 1,200 50

1,250 7.32%

260 150 50 150

610 3.58% 17,060 100

222

Reconciliation between Profit and Value Added Statement

Rs. in 000 Profit before tax Add: Depreciation Wages and Salaries Debenture Interest Total Value Added 260 15,000 1,200 16,460 17,060 600

223

Financial Accounting II

Part III: Model Question Papers (with Suggested Answers)


The model question paper consists of two parts A and B. Part A is intended to test the conceptual understanding of the students. It contains 40 multiple-choice questions carrying one point each. Part B contains problems with an aggregate weightage of 60 points. Students are requested to note that this is an indicative format of the question paper in general and that the ICFAI University reserves the right to change, at any time, the format and the pattern without any notice. Hence, the students are advised to use the model question papers for practice purposes only and not to develop any exam-related patterns out of these model question papers. The suggested answers given herein do not constitute the basis of evaluation of the students answers in the examination. These answers have been prepared by the faculty members of ICFAI University with a view to assist the students in their studies. And, they may not be taken as the only answers for the questions given.

Model Question Paper I


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. Redeemable preference shares can be redeemed out of the a. b. c. d. 2. Sale proceeds of investments Proceeds of a fresh issue of shares Share premium Proceeds of issue of debentures

Total Points: 100

e. Sale proceeds of fixed assets. Share premium amount can be used for a. b. c. d. e. Issue of bonus shares Writing off prior period expenses Paying dividend Writing off deferred revenue expenses Writing off accumulated losses. Favorable location of the business. Efficient management. High quality of products and services that contribute to increased customer satisfaction. Superior technology. All of the above. A company can, in lieu of dividend, make a bonus issue. The Board of Directors cannot propose issue of bonus shares at the end of the accounting year. The Board of Directors can propose an issue of bonus shares in a ratio higher than 1:1. A bonus issue can be made out of reserves created by revaluation of fixed assets. A company can issue bonus shares within 12 months of an earlier issue.

3.

Which of the following is a factor that contributes to the value of goodwill of a concern? a. b. c. d. e.

4.

Which of the following statements is true? a. b. c. d. e.

224

5.

The profit or loss on own debentures is to be accounted for at the time of a. b. c. d. e. Purchase of own debentures Subsequent interest payment Cancellation of own debentures Original issue of debentures Liquidation of the company. Face value of shares held by outsiders. Proportionate share of capital profit of outsiders. Proportionate share of profit on revaluation of fixed assets of outsiders. Proportionate share of revenue profits of outsiders. All of the above.

6.

Which of the following is/are considered in the computation of minority interest? a. b. c. d. e.

7.

Which of the following appears under the head Miscellaneous expenditure on the assets side of a Balance Sheet? a. b. c. d. e. Bill discounted from bank. Prepaid insurance premium. Directors remuneration. Discount allowed on issue of shares. Income tax paid in advance. Authorized by a resolution at general meeting Approved by the Central Government Sanctioned by Registrar of Companies Both (a) and (c) above Both (a) and (b) above. In case of redemption of preference shares To keep the capital intact To protect the interest of creditors All of the above Both (a) and (b) above. Debit debenture suspense a/c, Credit debenture a/c Give it as a note to balance sheet Debit creditors a/c, Credit debenture a/c Both (a) and (b) above Both (b) and (c) above.

8.

Shares can be issued at a discount only if a. b. c. d. e.

9.

Capital redemption reserve is created a. b. c. d. e.

10.

In case of issue of debentures as a collateral security the method of recording is a. b. c. d. e.

11.

According to Schedule VI of the Companies Act, 1956, which of the following appears in the Balance Sheet of a Holding Company? i. ii. iii. iv. Investment in shares, debentures of subsidiary company. Debts due from subsidiary company. Minority interest of the subsidiary company. Secured loans from subsidiary company.

225

a. b. c. d. e. 12.

Both (i) and (ii) above Both (ii) and (iv) above Both (iii) and (iv) above (i), (ii) and (iv) above All (i), (ii), (iii) and (iv) above.

13.

14.

15.

16.

17.

Which of the following is/are true in respect of super profits? a. It is the difference between future maintainable and normal profits. b. It can be negative. c. It can never be negative. d. Both (a) and (b) above. e. Both (a) and (c) above. As per Schedule VI of the Companies Act, 1956, forfeited shares reissued will be a. Added to paid-up capital b. Deducted from paid-up capital c. Shown as a capital reserve d. Shown as a revenue reserve e. Shown as a current liability. In a perpetual inventory system, purchases of merchandize on account are recorded by debiting a. Cost of goods sold b. Accounts payable c. Purchases d. Sellers account e. Accounts receivable. Which of the following costs incurred by Metro Company in connection with the acquisition of a machine should not be included as part of the cost of this asset? a. Freight charges to have the machine delivered. b. Installation charges. c. State sales tax based on the price of the machine. d. Replacement of parts damaged when fire broke out during installation of the machine. e. The future interest charges if machinery is purchased on an installment plan. Eastwest Airlines and Indian Airlines use different useful ways in depreciating their aircraft. This difference a. Violates the consistency principle b. Violates the matching principle c. Violates the disclosure principle d. Violates the entity principle e. Is consistent with generally accepted accounting principles. The rights of an ordinary shareholder do not include the right to a. Vote for directors b. Withdraw a share of corporate net assets proportionate to the persons shareholdings c. Receive a proportionate share of corporate assets upon liquidation after creditors have been paid d. Share in profit when the board of directors declares a dividend e. Vote for auditors.

226

18.

Which of the following is optional while submitting the annual reports in the Annual General Meeting? a. b. c. d. e. Balance sheet. Profit and loss account. Funds flow statement. Directors report. Auditors report.

19.

Which of the following is not included under the head Miscellaneous expenditure on the assets side of the balance sheet? a. b. c. d. e. Discount allowed on issue of shares or debentures. Unadjusted development expenditure. Interest paid on capital during the period of construction of a project. Preliminary expenses. Bills discounted from bank. Authorized by a special resolution of the company Authorized by an ordinary resolution of the company Authorized by articles of association Sanctioned by the NCLT Approved by the Central Government. Authorized capital Issued capital Called-up capital Paid-up capital Reserve capital. General Reserve. Capital Reserve. Share Premium. Sinking Fund for Redemption of Debentures (after redemption). Profit and Loss Account (Debit-balance).

20.

Calls-in-advance can be accepted by a company at the time of issue of shares only if it is a. b. c. d. e.

21.

Dividends are usually paid on a. b. c. d. e.

22.

Which of the following is not a source for issue of bonus shares? a. b. c. d. e.

23.

24.

The possible uses for which the information provided in the value added statement is/are: a. A means of predicting managerial efficiency b. A means of evaluating the relative rewards of shareholders against the company c. A means of indicating a companys wage paying ability in wages negotiations d. A means of evaluating what is nebulously referred to as the social performance of a company e. All of the above. Which of the following statements is/are true? a. Under reducing balance method, the balance in the asset account can never be zero. b. Reducing balance method shows reduced profits in the initial years of asset. c. Reducing balance method shows increased profits in the initial years. d. Both (a) and (b) above. e. Both (b) and (c) above. 227

25.

Which of the following statements is/are correct? a. b. c. d. e. Shareholders can enhance the dividends recommended by the Board of Directors by passing a special resolution. Proposed dividend becomes declared dividend on its adoption by the shareholders in the AGM. The declared dividend must be paid within 30 days of its declaration. Both (a) and (b) above. Both (b) and (c) above. Of promoters quota Of applications by banks against their underwriting commitments Shares are not underwritten Both (a) and (b) above Both (a) and (c) above.

26.

Brokerage will not be allowed in case a. b. c. d. e.

27.

Which of the following methods of inventory valuation is an appropriate method of valuation for costlier items? a. b. c. d. e. FIFO method. LIFO method. Specific identification method. Weighted average method. None of the above. Nominal capital is the value of shares which a company is authorized to issue by its Memorandum. Subscribed capital is the part of paid-up capital which has been subscribed by the public. Called-up capital is the part of subscribed capital which has been called-up in order to carry on the business. Uncalled capital is the part of subscribed capital which has not yet been called-up. Issued capital is the part of authorized capital which is issued to the public for subscription.

28.

Which of the following statements not true? a. b. c. d. e.

29.

According to which of the following accounting concepts consolidated financial statements are prepared when a parent-subsidiary relationship exists? a. b. c. d. e. Going concern. Business entity. Materiality. Cost. Periodicity. Value added statements enhance the attitude of employees towards their employers firms. Value added statements help in introducing the productivity linked bonus scheme for employees. Ratios based on value added statements can be used for international comparisons. Value added statements show the companys contribution to national income. Value added statements serve as a substitute to the existing financial statements. 228

30.

Which of the following is not true with regard to value added statements? a. b. c. d. e.

31.

Which of the following is false with respect to goodwill? a. b. c. d. e. Goodwill though caused by factors which cannot be easily and accurately quantified, must be assigned a value. It is the present value of a firms anticipated excess earnings. It is the extra saleable value attached to a prosperous business beyond the intrinsic value of net assets. It is an identifiable intangible asset. It is like any other asset, a store of prospective revenue. They are treated as negotiable instruments. Their transfer requires a deed of transfer. They are transferable by mere delivery. The interest on it is paid to the holder irrespective of identity. They are one of the classifications of debentures from the recording point of view. Forfeited shares account General reserve account Share capital account Share premium account Capital reserve account.

32.

Which of the following is not a characteristic of Bearer Debentures? a. b. c. d. e.

33.

Profit on reissue of forfeited shares is transferred to a. b. c. d. e.

34.

The document inviting offers from public to subscribe for the debentures or shares or deposits of a body corporate is a. b. c. d. e. Share certificate Debenture Fixed deposit receipt Prospectus Share warrant. Capital reserve General reserve Securities premium account Capital redemption reserve Debentures account.

35.

Premium on issue of debentures account is transferred to a. b. c. d. e.

36.

The method of accounting for investments in an associate in consolidated financial statements is a. b. c. d. e. FIFO method LIFO method Equity method Intrinsic value method Super profit method. 229

37.

The cumulative preference shareholders enjoy preferential treatment over equity shareholders with regard to a. b. c. d. e. Priority in payment of dividend Return of capital Voting rights Cummulation of dividends All of (a), (b) and (d) above.

38.

The profit and loss appropriation section of the profit and loss account shows the appropriation of profit and is popularly known as a. b. c. d. e. Below the line Above the line Profit and loss adjustment account Specific reserve General reserve.

39.

Which of the following statements is/are true with respect to FIFO (First-in, First-out) system of inventory valuation? a. b. c. d. e. This system avoids spoilage, obsolescence and the like. The profits shown under this system are fictitious in nature. In this system, older prices and values of less useful inventory are not reflected. The goods in stock represent the most recent purchases. All of the above. Gross value added is derived by deducting depreciation from the net value added. Value added is the most relevant concept of the social responsibility concept of the enterprise. Value added equals pre-tax profit plus labor, plus depreciation and interest. It measures the value of increase in resources. Additive approach and subtractive approach are the approaches for computing value added.

40.

Which of the following is not true with regard to value added? a. b. c. d. e.

Part B: Problems (60 Points)


Solve all the problems. Points are indicated against each problem. 1. Following is the Balance Sheet of Sudan Ltd. as on March 31, 2001. Liabilities Share Capital 15,000 Equity shares of Rs.10 each General Reserve Profit and loss account: Balance on April 1, 2000 Profit for the year 10% Debentures Sundry Creditors Provision for taxation Rs.10,000 Rs.76,000 Rs. Goodwill 1,50,000 Land and Buildings 20,000 Plant and Machinery Investment Stock 86,000 Debtors 1,50,000 Cash at Bank 54,000 Cost of issue of debenture 30,000 4,90,000 4,90,000 230 Assets Rs. 32,000 1,20,000 1,30,000 50,000 50,000 45,000 33,000 30,000

The company found that the present value of assets are: Land and Buildings Rs.1,70,000 Plant and Machinery Rs.1,80,000 Investment Rs.60,000 Current assets are to be recognized at their book value. From the above data the closing capital employed (required for computation of goodwill) of Sudan Ltd. as on March 31, 2001 is a. b. c. d. e. 2. Rs.4,78,000 Rs.4,28,000 Rs.4,60,000 Rs.3,94,000 Rs.4,24,000. (2 points) The closing capital employed of Jagan Ltd. as on March 31, 2001 amounted to Rs.7,88,000. The profit for the year 2000-01 is Rs.1,52,000. Profit includes Rs.10,000 income from non-trade investments; income tax rate is 50%. The average trading capital employed of the company is a. b. c. d. e. 3. Rs.6,36,000 Rs.6,46,000 Rs.7,12,000 Rs.7,50,000 Rs.7,52,500 (2 points) The following information is extracted from the books of Mercury Limited: i. The average annual profits of the company after providing for depreciation and taxation amounted to Rs.60,000. It is considered necessary to transfer Rs.10,000 to general reserve before declaring any dividend. ii. The paid-up share capital of the company consists of 20,000 equity shares of Rs.10 each. iii. The normal return expected by investors on equity shares from this type of business carried on by the company is 10%. The value of the equity share is a. Rs.10 b. Rs.12.50 c. Rs.15 d. Rs.20 e. Rs.25 (2 points) Sonex Ltd., had allotted 10,000 shares to applicants of 14,000 shares on pro rata basis. The amount payable on application is Rs.2. Pramod applied for 420 shares. The number of shares allotted and the amount carried forward for adjustment against allotment money due is a. b. c. d. e. 60 shares; Rs.120 340 shares; Rs.160 320 shares; Rs.200 300 shares; Rs.240 420 shares; Nil (1 point) 231

4.

5.

Prasanth Ltd., had allotted 10,000 shares to applicants of 14,000 shares on pro rata basis. The amount payable was Rs.2 on application, Rs.5 on allotment (including premium of Rs.2 per share), Rs.3 on first call and Rs.2 on second and final call. Vikas, who was allotted 600 shares, failed to pay the first call. His shares were forfeited after the second and final call was made. The journal entry on forfeiture of Vikas shares is Rs. a. Share Capital A/c. To Share first call A/c. To Share second and final call A/c. To Shares forfeited A/c. To share premium A/c. b. Share capital account To Share first call A/c. To Share second and final call A/c. To Share forfeiture A/c. c. Share first call A/c. Share second and final call A/c. Share forfeiture A/c. To Share capital A/c. d. Share first call A/c. Share second and final call A/c. Share forfeiture A/c. Share premium A/c. To Share capital A/c. e. Share capital A/c. To Share forfeiture A/c. To Share premium A/c. Dr. 4,200 3,000 1,200 (2 points) Dr. Dr. Dr. Dr. 1,800 1,200 3,000 1,200 7,200 Dr. Dr. Dr. 1,800 1,200 3,000 6,000 Dr. 6,000 1,800 1,200 3,000 Dr. 7,200 1,800 1,200 3,000 1,200 Rs.

6.

Ramesh was allotted 300 shares of Rs.10 each. The following payments were made by Ramesh. Rs.2 per share in respect of application Rs.3 per share in respect of allotment He failed to pay the first call amount of Rs.2 and final call of Rs.3. The company forfeited the shares after due notice. The shares were later reissued to Naik @Rs.9 each fully paid. The amount credited to the share forfeiture account (before reissue) is __________ and the amount credited to capital reserve account after reissue of shares is ____________ . a. b. c. d. e. Rs.3,000; Rs.300 Rs.3,000; Rs.2,700 Rs.1,500; Rs.300 Rs.1,500; Rs.1,200 Rs.1,500; Rs.400. (2 points) 232

7.

On June 30, 2000, Moon Ltd. purchased its own 12% Debentures worth Rs.20,000 @Rs.96 ex-interest. The interest is payable half-yearly on 30th September and 31st March every year. At the time of purchase, the journal entry to be made in the books of the company is a. Own debenture account Interest on debentures A/c. To Cash A/c. 12% Debentures account Interest on debentures A/c. To Cash A/c. 12% Debentures account To Cash A/c. Own debentures account Interest on debentures A/c. To Cash A/c. Own debentures account Interest on debentures A/c. To Cash A/c. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Rs. 19,200 600 19,200 800 20,000 20,000 20,000 18,600 600 19,200 19,200 800 20,000 (2 points) Rs.

19,800

b.

c. d.

e.

8.

Star Ltd. issued 1000, 12% debentures of Rs.100 each on October 01, 1995 at a price of Rs.98. There was a provision at the time of issue that debentures can be redeemed either by purchase in the market or by drawing lots. The interest is payable half-yearly on 30th September and 31st March every year. On August 31, 2000, Star Ltd. purchased its own debentures worth Rs.10,000 @Rs.97 cum-interest at the time of purchase. The journal entry to be made is a. Own debenture account Interest on debentures A/c. To Cash A/c. 12% Debentures account Interest on debentures A/c. To Cash A/c. 12% Debentures account To Cash A/c. Own debentures account Interest on Debentures A/c. To Cash A/c. Own debentures account Interest on debentures A/c. To Cash A/c. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Rs. 9,700 500 9,700 500 10,200 10,000 10,000 9,700 300 10,000 9,200 500 9,700 Rs.

10,200

b.

c. d.

e.

9.

(2 points) Red Rock Ltd. issued 5,000, 15% Debentures of Rs.100 each at a discount of 5%, repayable after 5 years at a premium of 5%. At the time of issue, the amount debited to loss on issue of debentures account is a. b. c. d. e. Rs.25,000 Rs.50,000 Rs.75,000 Rs.1,00,000 Nil. (1 point) 233

10.

Strong Ltd. acquired 3,200 equity shares of Weak Ltd. on March 31, 2001at Rs.6,80,000. The share capital of Weak Ltd. comprises of 4,000 equity shares of Rs.100 each. As on that date the general reserve of Weak Ltd. stood at Rs.3,40,000 and the profit and loss (credit) balance at Rs.72,000. The additional information is as follows: i. ii. iii. a. b. c. d. e. Weak Ltd. made a bonus issue on March 31, 2001 of one equity share for every four shares held by its shareholders. This has not yet been accounted for. The directors of Weak Ltd. revalued the land and buildings upwards by Rs.40,000 and plant and machinery downwards by Rs.20,000. The share of Strong Ltd. in the capital profits (pre-acquisition) of Weak Ltd. on March 31, 2001 is Rs.3,29,600 Rs.2,65,600 Rs.3,45,600 Rs.2,72,000 Rs.3,61,600. (3 points)

11.

Sun Ltd. acquired 3,200 equity shares of Moon Ltd. on March 31, 2001. The share capital of Moon Ltd. consists of 4,000 equity shares of Rs.100 each. The cost of investment is Rs.6,80,000. Moon Ltd. made a bonus issue on March 31, 2001 of one equity share for every four shares held by its shareholders. If the share in the capital profits (pre-acquisition) profits in Moon Ltd. is Rs.2,65,600 (after adjustment for bonus), the cost of control of Sun Ltd. in Moon Ltd. is a. b. c. d. e. Rs.4,14,400 (Goodwill) Rs.3,60,000 (Goodwill) Rs.94,400 (Goodwill) Rs.14,400 (Goodwill) Rs.4,400 (Goodwill). (2 points)

12.

Light Ltd. acquired 3,200 equity shares of Dark Ltd. on March 31, 2001. The share capital of Dark Ltd. comprises of 4,000 equity shares of Rs.100 each. The capital profits and revenue profits of Dark Ltd. were Rs.3,00,000 and Rs.1,00,000 on the date of acquisition. The amount of minority interest shown in the Consolidated Balance Sheet is a. b. c. d. e. Rs.20,000 Rs.60,000 Rs.80,000 Rs.1,40,000 Rs.1,60,000. (2 points)

13.

New Bharat Ltd. issued 25,000 equity shares of Rs.10 each. The whole issue was underwritten by X, Y and Z as: X 12,500 shares Y 7,500 shares Z 5,000 shares Total 20,000 shares were applied for by the public. The applications included the following marked applications: X 10,000 Shares Y 3,000 Shares 234

Z 6,000 Shares The final liability of X, Y and Z is a. b. c. d. e. 14. 2,000 shares; 3,000 shares; Nil 2,000 shares; 2,500 shares; 3,500 shares 1,250 shares; 3,750 shares; Nil 2,000 shares; 2,500 shares; 500 shares Nil; 1,250 shares; 3,750 shares. (2 points) A company issues a share of Rs.10 on which Rs.8 is called-up and a shareholder has not paid the call money of Rs.2. The amount credited to share capital account in respect of such share is a. b. c. d. e. 15. Rs.10 Rs.8 Rs.6 Rs.4 Rs.2. (1 point) 10 shares of Rs.10 each of which Rs.8 is called-up are forfeited for non-payment of 1st call of Rs.2 per share. Of these shares 6 were reissued at Rs.6 per share. The amount to be transferred to capital reserve is a. b. c. d. e. 16. Rs.60 Rs.36 Rs.24 Rs.12 Rs.6. (1 point) An equity share of Rs.10 on which Rs.8 is called-up is forfeited for non-payment of the first call of Rs.2 per share. If the share is to be reissued as fully paid-up, the minimum amount to be collected is a. b. c. d. e. 17. Rs.10 Rs.8 Rs.6 Rs.4 Rs.2. (2 points) The following balances were outstanding in the books of Samir Ltd. as on March 31, 2003 12% Debentures (redeemable at a premium of 10%) Debenture Redemption fund The above fund was invested in the following securities: Rs.20,000, 10% Government securities 500, 18% Preference shares of Rs.100 each 2,500 Equity shares of Rs.10 each The above investments were sold on the same day as under: 10% Government securities at par. 18% Preference shares at Rs.95 each. 235 Rs.90,000 Rs.99,000 Rs.19,000 Rs.45,000 Rs.35,000

Equity shares at Rs.11 each. On April 01, 2003, the 12% debentures were redeemed at a premium of 10%. The amount transferred by the company to General reserve is a. b. c. d. e. 18. Rs. 99,000 Rs. 86,000 Rs. 95,000 Rs. 90,000 Rs.1,02,000. (3 points) Sundar Ltd., a listed company, proposed to issue 1,000 equity shares of Rs.100 each at par by way of private placement. The maximum amount of brokerage that can be paid by the company is a. b. c. d. e. 19. Rs.500 Rs.1,500 Rs.2,500 Rs.5,000 No brokerage can be paid. (1 point) During the year 1998-1999, Santosh Ltd. issued 20,000, 12% Preference shares of Rs.10 each at a premium of 5%, which are redeemable after 4 years at par. During the year 20032004, as the company did not have sufficient cash resources to redeem the preference shares, it issued 10,000, 14% debentures of Rs.10 each at a premium of 10%. At the time of redemption of 12% preference shares, the amount to be transferred to capital redemption reserve is a. b. c. d. e. 20. Rs.90,000 Rs.1,00,000 Rs.2,00,000 Rs.1,10,000 Rs.2,10,000. (1 point) On April 01, 2003, Sangeet Ltd. showed an outstanding balance of 12% debentures of Rs.6,00,000. The company also has a balance of Rs.3,00,000 in debenture redemption fund account represented by 10% investments (face value: Rs.4,00,000). On June 30, 2003, the company sold investments of the face value Rs.50,000 @95% cum-interest. The interest on investments is receivable on March 31 and September 30 every year. The profit/loss on sale of investments is a. b. c. d. e. 21. Rs.8,750 (profit) Rs.3,750 (loss) Rs.2,500 (loss) Rs.10,000 (profit) Rs.47,500 (profit).

(2 points) The Balance sheet of Sumesh Ltd. as on March 31, 2003 showed 60,000, 12% debentures of Rs.10 each. The company has power to purchase its debentures in the open market for cancellation thereof. The following were the purchases made by the company. On May 01, 2003, 4,000 of its own debentures at 95% cum-interest On June 01, 2003, 2,000 of its own debentures at 90% ex-interest 236

22.

23.

24.

Interest on debentures is payable on June 30 and December 31 every year. The balance outstanding in own debentures account of the company as on June 30, 2003 is a. Rs.38,000 b. Rs.56,000 c. Rs.54,400 d. Rs.3,000 e. Rs.2,600. (2 points) The nominal capital of Honey Bee Ltd. is Rs.1,00,00,000 divided into shares of Rs.100 each. The company offers two shares for every three shares held by its existing shareholders. If the rights issue price is Rs.300 per share and the market value at the time of rights issue is Rs.500 per share, the value of right is a. Rs.200 b. Rs.300 c. Rs.100 d. Rs.400 e. Rs.80. (1 point) The following are the Balance Sheets of H Ltd. and S Ltd. as on March 31, 2003 H Ltd. S Ltd. H Ltd. S Ltd. Liabilities Assets Rs. Rs. Rs. Rs. Share capital 15,00,000 3,00,000 Land and buildings 5,90,000 1,90,000 Profit and loss account 2,00,000 1,00,000 Plant and machinery 3,60,000 90,000 Sundry creditors 40,000 20,000 Furniture and fittings 1,80,000 75,000 Bills payable 10,000 15,000 Investments in S Ltd. 3,00,000 Short-term loan 15,000 Sundry debtors 95,000 46,000 Bills receivable 70,000 20,000 Closing stock 95,000 5,000 Cash on hand 20,000 3,000 Cash at bank 55,000 6,000 17,65,000 4,35,000 17,65,000 4,35,000 H Ltd. acquired 60% shares of S Ltd. on March 31, 2003. The total of Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on March 31,2003 is a. Rs.19,60,000 b. Rs.19,00,000 c. Rs.22,00,000 d. Rs.20,65,000 e. Rs.19,45,000. (3 points) The Balance Sheet of Snigdha Ltd. as on March 31, 2003 is as under: Liabilities Rs. Assets Rs. Share capital: Equity shares of Rs.100 each 12% Preference shares of Rs.10 each Reserves and surplus: General reserve Profit and loss account 18% Debentures Sundry creditors Bank overdraft 5,00,000 3,00,000 1,50,000 2,50,000 2,00,000 50,000 25,000 14,75,000 Land and buildings Plant and machinery Furniture and fixtures Investments Sundry debtors Inventories Cash 4,00,000 3,00,000 2,50,000 2,25,000 1,00,000 1,50,000 50,000

14,75,000

237

The 12% preference shares are redeemable at a premium of 10% during the month of August 2003. The company wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of preference shares, it proposed to sell the investments for Rs.2,00,000. The company proposes to issue sufficient number of equity shares of Rs.100 each at a premium of 5% to raise required cash resources. The number of equity shares to be issued is a. b. c. d. e. 25. 1,500 1,000 500 2,000 750. (2 points) Progress Ltd. issued 2,000 equity shares of Rs.10 each at par payable as under: On application Rs.3 On allotment Rs.4 On first and final call Rs.3 Applications were received for 2,500 shares and allotment was made on pro rata basis. Allotment money was received from all the shareholders except from Mr. Jagir, who was allotted 500 shares. The amount received on allotment is a. b. c. d. e. 26. Rs.6,000 Rs.4,875 Rs.4,500 Rs.6,500 Rs.1,625. (2 points) Consider the following data pertaining to Sneha Ltd.: Particulars Land and buildings Plant and machinery Furniture Non-trading investments Stock Sundry debtors Cash Sundry creditors Called-up share capital (equity shares of Rs.100 each) Calls-in-arrear (Rs.20 on final call) The value of fully paid-up equity share is a. Rs.132 b. Rs.128 c. Rs.130 d. Rs.126 e. Rs.134. (2 points) 238 Rs. 5,20,000 4,30,000 1,10,000 40,000 90,000 60,000 70,000 20,000 10,00,000 20,000

27.

The following are the details pertaining to the operations of Sharath Ltd. March 31, 2001 March 31, 2002 March 31, 2003 Rs. Rs. Rs. Sales 5,00,000 6,50,000 7,80,000 Other expenses 2,60,000 3,10,000 4,50,000 Interest on debentures 48,000 48,000 48,000 Assuming the tax rate of 40%, the value of goodwill on the basis of 4 years purchase of average post-tax profits is Particulars a. b. c. d. e. Rs.6,12,800 Rs.4,59,600 Rs.2,55,330 Rs.10,21,320 Rs.3,06,400. (2 points)

28.

The Balance Sheet of Lion Ltd. as on March 31, 2003 is as under: Liabilities Equity share capital Reserves and surplus 18% Debentures Sundry creditors Bank overdraft Provision for taxation Rs. Assets 5,40,000 Land and buildings 2,30,000 Plant and machinery 1,50,000 Furniture and fixtures 75,000 Sundry debtors 25,000 Inventories 50,000 Cash 10,70,000 The following assets are revalued as under: Land and buildings Plant and machinery Sundry debtors Rs.5,00,000 Rs.2,00,000 Rs.95,000 Rs. 4,50,000 2,30,000 1,90,000 1,00,000 75,000 25,000 10,70,000

The profit of the company for the year 2002-2003 is Rs.1,10,000. The company charges depreciation on all its fixed assets at the rate of 10%. The depreciation adjustment on the revalued assets should be made for one year. The return on capital employed is a. b. c. d. e. 29. 13.12% 13.76% 11.02% 12.34% 14.01%. (2 points) The authorized capital of Shilpa Ltd. consists of 2,00,000 equity shares of Rs.10 each. The called-up and paid-up capital as on April 01, 2002 is 50,000 shares of Rs.10 each. During the year 2002-2003, the following transactions took place. On April 01, 2002, the company declared dividend in the form of bonus shares of one share for every two shares held. The market value of the share as on the date of bonus issue was Rs.17. On December 31, 2002, the company offered rights shares to the existing shareholders at the rate of two shares for every five shares held for Rs.12.5 per share. All the shareholders subscribed to the rights issue offered to them.

239

The share capital of the company as on March 31, 2003, after considering the above information is a. b. c. d. e. Rs.11,25,000 Rs.10,50,000 Rs.9,50,000 Rs.10,00,000 Rs.12,00,000. (2 points) 30. The net profit of Shikal Ltd. for the year 2002-2003 is reported to be Rs.9,50,000 which was arrived at before considering the following: Particulars Subsidy received from the Government of India Profit on sale of plant (original cost: Rs.2,50,000 and written down value: Rs.1,50,000) Income tax payable Payments made voluntarily Interest on debentures Interest on secured loans Interest on unsecured loans Directors remuneration Rs. 2,50,000 1,20,000 50,000 20,000 30,000 50,000 20,000 10,000

If the manager is entitled to a commission of 5% before charging his commission, the amount of commission payable is a. b. c. d. e. Rs.60,500 Rs.59,500 Rs.58,000 Rs.57,000 Rs.60,000. (2 points) 31. Silver Spoon Ltd. is a newly formed company. It went for a public issue of 30,000 equity shares of Rs.100 each at a premium of 10% payable as under: On application On allotment On first and final call Rs.20 Rs.60 (including premium) Rs.30

The company received applications for 36,000 shares and the allotment was made pro rata. Mr. Raj, who was allotted 5,000 shares, failed to pay the call money and all his shares were forfeited. The company reissued 3,000 shares to Mr. Suraj for Rs.90 per share as fully paid-up.

240

The total of the liabilities side of the Balance Sheet of the company after considering the above particulars is a. b. c. d. e. 32. Rs.30,02,000 Rs.31,50,000 Rs.33,70,000 Rs.31,00,000 Rs.34,20,000. (3 points) The creditors of Ardha Ltd., which is a subsidiary of Purna Ltd. include Rs.6,000 due to Purna Ltd. and the debtors of Purna Ltd. include Rs.4,000 owed by Ardha Ltd. At the time of consolidation, the adjustment will be a. b. c. d. e. Reduce total creditors by Rs.6,000 Reduce total debtors by Rs.4,000 Reduce total debtors and creditors by Rs.2,000 Reduce total debtors and creditors by Rs.4,000 Reduce total debtors and creditors by Rs.6,000. (1 point)

241

Financial Accounting II

Model Question Paper I


Suggested Answers
Part A: Basic Concepts
1. (b) In the light of the restrictions imposed by the Law on the redemption of preference shares, the preference shares can be redeemed out of proceeds of fresh issue of shares. Such proceeds do not include the amount of premium if shares are issued at a premium, but stands for the actual amount received. (a) According to Section 78 of the Companies Act, share premium account may be applied by the company for issuing to members of the company fully paid-up bonus shares; it cant be used for writing-off preliminary expenses; writing-off the expenses of, or the commission paid or discount allowed on issue of shares or debentures of the company; it can be used for providing for the premium payable on the redemption of any redeemable preference shares. (e) Location of the business, efficient management, quality of product and superior technology contributes to the value of goodwill. (c) Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of bonus shares shall be subject to the prescribed SEBI guidelines, which inter alia provide for the following. i. ii. iii. iv. 5. Bonus issue shall not be made within 12 months of any public/rights issue. Reserves created out of revaluation of fixed assets shall not be capitalized. Bonus issue shall not be made in lieu of dividend. Bonus issue shall not be made unless partly paid shares, if any, existing is made fully paid-up.

2.

3. 4.

(c) The profit or loss on own debentures is to be calculated at the time of cancellation of own debentures and not at the time of purchase or next interest payment or original issue of debentures or liquidation of the company. (e) All the items given in (a), (b), (c) and (d) are considered in the computation of minority interest. Hence, (e) is correct. (d) Discount allowed on issue of shares appears under the head miscellaneous expenditure on the asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance appears under current assets of the balance sheet. Directors remuneration will be entered in the debit side of profit and loss account. Hence (d) is correct. (e) According to Section 79 of the Companies Act, 1956, a company can issue shares at a discount if the following conditions are satisfied. i. ii. iii. iv. v. The shares that are to be issued at a discount should be of a class, which has already been issued. This should be authorized by passing a resolution at the general meeting and sanctioned by the Central Government. The maximum rate of discount at which the shares are to be issued should be specified in the resolution and the maximum limit is 10 percent. At least a year should have been elapsed from commencement of the business by the company before the shares are issued at a discount. The shares should be issued at a discount within two months after the sanction from the Central Government has been obtained or as specified by the Central Government.

6. 7.

8.

242

Part III

9.

10. 11.

12. 13.

14. 15.

16.

17. 18.

19.

20.

21.

(d) According to Section 80 of the Companies Act, Capital Redemption Reserve Account must be created and credited to the extent that the shares are redeemed out of profits. The purpose of all the legal restrictions on redemption of preference shares is to keep the capital intact and not to allow redemption of preference shares affect adversely the security available to the creditors of the company. (d) If debentures are issued as a collateral security, debenture suspense a/c or creditors a/c is debited and debentures a/c is credited. (d) According to Schedule VI of the Companies Act, 1956, the following are to be shown in the balance sheet of holding company: Investment in shares, debentures of subsidiary company Debts due from subsidiary company Secured loans from subsidiary company Thus, minority interest of the subsidiary company is shown in the consolidated Balance Sheet and not in the Balance Sheet of holding company. (e) Super profit is the difference between future maintainable and normal profits. It can never be negative. (a) The shares forfeited reissued should be added to the paid-up capital according to Schedule VI of the Companies Act, 1956. However, once the shares forfeited are reissued, the balance in the shares forfeited account which pertains to the reissued shares will be transferred to capital reserve. (c) Purchases of merchandize are debited to purchases a/c and credited to cash a/c or creditors a/c. (e) The gross book value of an asset is the historical cost or the cost at which the asset is actually acquired. According to AS-10, it comprises the purchase price, including import duties and other taxes or levies and any directly attributable cost of bringing the asset to its working condition. Any trade discounts and rebates offered by the supplier are to be deducted. Examples of directly attributable costs are: i. site preparation; ii. initial delivery and handling costs; iii. installation cost, such as special foundations for plant; and iv. professional fees such as fees of architects and engineers. (a) There are in practice several ways of treating an event that may be recorded in the accounts. The consistency concept requires that once an entity has decided on one method, it will treat all subsequent events of the same character in the same fashion unless it has a sound reason to change the method of treatment of that event. (b) An ordinary shareholder cant withdraw his proportionate share of net assets of the corporate. (c) In an Annual General Meeting, submission of funds flow statement is not mandatory. But submission of balance sheet, profit & loss account, directors report and auditors report are mandatory. Hence (c) is correct. (e) Bill discounted from bank will not be reflected under the head Miscellaneous expenditure on the assets side of the balance sheet. After discounting the bill, bank account and discount account will be debited and bills receivable account will be credited. Other transactions given in (a), (b), (c) and (d) are the items under Miscellaneous expenditure. Hence (e) is correct. (c) Calls-in-advance can be accepted by the company if it is authorized by Articles of Association. Other types of authorization and approval are not required for accepting calls-in-advance. Hence (c) is true. (d) Dividends may be termed as the share of profits that is payable to the shareholders of a company. The Companies Act lays down the dos and donts associated with declaration/payment of dividends. As per the Companies Act, that dividends are paid on paid-up capital which is part of the called-up capital that has been paid-up by the shareholders and made available with the company for utilization. Hence, it is proper to pay dividends on paid-up capital. 243

Financial Accounting II

The other alternatives a. Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in nature unless and until the entire amount is called-up and paid-up. Since the entire amount is not made available for utility, dividends cannot be declare on authorized capital. Issued capital is the part of nominal capital that is offered to the public for subscription and the entire amount is not available for claiming dividend. Called-up capital is that part of the subscribed capital which has been called-up and cannot be a base for calculation of dividend. Reserve capital is that part of uncalled capital which is to be called-up in the event of winding-up of a company and under any circumstances, dividend cannot be declared on it. Thus, the statements (a), (b), (c) and (e) are not correct. 22. 23. (e) Bonus shares can be issued only from Reserves and surpluses. Debit balance of profit & loss a/c is a loss. Thus it is not a source for issue of Bonus shares. (e) Following are the advantages of the Value Added (VA) statement. i. VA concept is the most relevant concept of the social responsibility concept of the enterprise. Social responsibility concept says that the organization is a social institution working for the benefit of many interested groups in the society. Thus, VA statement reflects the broader view of the companys objectives and responsibilities. This enhances the attitude of the employees towards their employing firms. VA statement can be taken as a means in introducing the productivity linked bonus scheme for employees. VA based ratios can be used for comparisons with other companies and international comparisons. VA statement can be used to measure the size and importance of a company in the economy. This statement shows the companys contribution to national income. VA statement is formed on the basis of the general concepts like going concern, matching, consistency on which the current balance sheets and income statements are based. So, VA statement is complementary to the existing statements.

b. c. e.

ii. iii. iv. v.

24.

(d) Under the diminishing balance method (or reducing or decline balance or written down value method), a depreciation percentage rate is applied to the acquisition or construction cost at the beginning of the accounting period rather than the original cost. This depreciation percentage rate is significantly higher than a comparable depreciation rate under the straight-line method. That is, the depreciation charged off during the year is deducted from the cost of the asset at the beginning of the accounting period and the balance is known as the book value or Written Down Value (WDV). Depreciation is charged at a specified rate on the original cost of the asset in the first year and on book value or written down value of the previous year from 2nd year onwards. Thus, the depreciation is more in initial years. Thus, this method shows reduced profits in initial years. Under this method, the balance in the asset account can never be zero. (e) The shareholders can recommend the dividend at the Annual General Meeting but cannot increase or lower the dividend at the AGM. Dividends cannot be paid out of capital. The dividend so declared should be paid within 30 days (earlier 30 days) from the date of declaration. (d) Brokerage will be allowed on promoters quota and of applications by banks against their underwriting commitments. (c) Specific identification method concentrates on the physical identification and linking of the particular items sold. This method provides great latitude for measuring result at any given point of time. An obvious way to account for inventory through this method is via physical observation or the labeling of items in stock with individual numbers or codes. 244

25.

26. 27.

Part III

Specific identification requires the linkage of individual inventory items with the exact purchase costs of each unit. This kind of identification is practically impossible for vast inventories. Hence, the specific identification method continues to be largely confined to expensive individualized merchandize. 28. (b) Subscribed capital is the part of issued capital which has been subscribed by the public and it is not the part of paid-up capital. Hence (b) is false. Other statements mentioned in (a), (c), (d) and (e) are all true. (b) Consolidated financial statements should reflect the economic activities of a business enterprise measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally separate but are treated as a single business enterprise in consolidated statements, in recognition of Business Entity concept (b). The other concepts do not explain about consolidation of financial statements. The Going concern concept (a) assumes that the business entity will continue to operate in the absence of evidence to the contrary. Materiality (c) requires reporting the information that has a value significant enough to affect decisions of those using the financial statements. Cost concept (d) explains how the assets are to be recorded in the books of accounts. According to this, fixed assets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the financial accounting process is meant to provide the information about the economic activities of the business enterprise at regular intervals. It does not speak about consolidation of financial statements. (e) Following are the advantages of the value added statement: i. VA concept is the most relevant concept of the social responsibility concept of the enterprise. Social responsibility concept says that the organization is a social institution working for the benefit of many interested groups in the society. Thus, VA statement reflects the broader view of the companys objectives and responsibilities. This enhances the attitude of the employees towards their employing firms. VA statement can be taken as a means in introducing the productivity linked bonus scheme for employees. VA based ratios can be used for comparisons with other companies and international comparisons. VA statement can be used to measure the size and importance of a company in the economy. This statement shows the companys contribution to national income. VA statement is formed on the basis of the general concepts like going concern, matching, consistency on which the current balance sheets and income statements are based. So, VA statement is complementary to the existing statements.

29.

30.

ii. iii. iv. v.

31.

(d) Intangible assets are classified as either identifiable or unidentifiable. Goodwill (d), arising out of payment for reputation, brand name, location, loyalty, etc., is an unidentifiable intangible asset. Hence, alternative (d) is false. It is described as a momentum or push (a) like the momentum of a body that continues its motion against a retarding force. It, though caused by factors which cannot be easily and accurately quantified, must be assigned a value (a). It is a payment for something which places the payer in the position being able to earn more than he would be able to do by his own unaided efforts (b). It is the difference between the value of a business as a whole and the aggregate of the fair value of its net assets (c). The basic characteristic of an asset is said to have productivity. Since the goodwill helps in extra earnings, it is said to be a store of prospective revenue (e). Thus, alternatives (a), (b), (c) and (e) are true. (b) Debentures are classified as Registered or Bearer from the recording point of view (e). They are transferable by mere delivery (c). They are just like bearer cheques or government currency notes and treated as negotiable instruments (a). Interest coupons are attached to such debentures and their payment is made to the holder irrespective of identity (d). Thus, the alternatives (a), (c), (d) and (e) are features of bearer debentures. Their transfer does not require a deed of transfer. Thus, the alternative (b) is not a characteristic of Bearer Debentures. 245

32.

Financial Accounting II

33. 34.

(e) If a company makes any profit on reissue of forfeited shares, it must be transferred to capital reserve account because it is a capital profit. Hence, (e) is true. (d) A prospectus (d) means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares or debentures of a body corporate is the correct answer. Total capital of a company is divided into units of small denominations which are called shares. Share certificate (a) is an ownership security. Debenture (b) is a formal document constituting acknowledgement of a debt given under the seal of the company. Fixed deposit receipt (c) is the acknowledgement of deposit of a certain sum of money repayable after a fixed tenure as per the contract and share warrant (e) is a financial instrument that gives the holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e) are not correct. (a) The premium collected on issue of debentures is recorded in the debenture premium account and subsequently transferred to capital reserve. It is an income to the issuing company. There are no restrictions as to its use. It is not transferred to General reserve (b), capital redemption reserve (d). Securities premium account (c) reflects only premium on issue of shares. It is not a debt to be transferred to debentures (e). Thus, the correct answer is (a). (c) Equity is the residual interest in the assets of an enterprise after deducting all its liabilities. An investment in an associate should be accounted for in consolidated financial statements under the equity method (c). The other alternatives (a) and (b) FIFO i.e., First-in- First-out method, LIFO method i.e., Last-in-First-out method are the methods of accounting for inventories and (d) Intrinsic value method is one of the methods of share valuation and super profit method (e) is a method of valuation of goodwill. Thus, the methods stated in alternatives (a), (b), (d) and (e) are not correct in the present context. (e) Cumulative preference shareholders enjoy preferential treatment with regard to priority in payment of dividend, (a) repayment of capital (b) and also in case of insufficient profits their dividends (undeclared) are cumulated (d) unlike equity shareholders. Equity shareholders enjoy voting rights (c) but not the preference shareholders. Thus, the alternatives (a), (b), and (d) are true in case of cumulative preference shareholders. (a) In case of a company, it is not necessary to split the profit and loss account into three sections i.e., Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Only Profit and Loss Account may be prepared covering items appearing in Trading Account and Profit and Loss Appropriation Account. The Profit and Loss Appropriation section of the Profit and Loss Account shows the appropriation of profit and is popularly known as below the line (a) is the correct answer. There is no term above the line (b) in accounting in this context. Profit and loss adjustment account, (c) is the final account depicting rectification of errors that are found after preparation of final accounts. Specific reserve (d) is appropriation of profit for specific purpose either for acquisition of an asset or amortization of expenditure or redemption of a liability and has no relevance. General reserve (e) is the reserve created out of net profits which is not the correct answer. (e) All the statements given in (a), (b), (c) and (d) are true in respect of FIFO system of inventory valuation. Hence (e) is true. (a) Net value added is derived by deducting depreciation from the gross value added and not vice versa. Thus statement in alternative (a) is false. The value added is not the most relevant concept and the statement forms part of social responsibility reporting (b). It is arrived at by deducting only the cost of bought in materials and services (c). It measures the value of increase in resources (d). The approaches adopted are additive approach and subtractive approach in computing value added (e). Thus, the alternatives (b), (c), (d) and (e) are true. 246

35.

36.

37.

38.

39. 40.

Part III

Part B: Problems
1. (d) Computation of Closing Capital Employed Particulars Assets Land and buildings Plant and machinery Stock Debtors Cash at bank Less: Current liabilities Sundry creditors Provision for taxation Closing capital employed 2. (e) Particulars Profit for the year Less: Non-trading income Less: Income tax (50%) Current years profit Closing capital employed Less: 1/2 of current years profit (excluding non-trading income) after tax Average capital employed 3. (e) Average annual profit 60,000 10,000 Less: Transfer to general reserve Profit for equity shareholder 50,000 Equity share capital = Return on equity = = Normal rate of return = 10% Value of equity share = Rs.10 x 25%/10% = Rs.25. 4. (d) Since the allotment is made pro rata. The calculation of shares allotted to Pramod is as under: 420 x 10,000/14,000 = 300 shares allotted. Hence the amount paid @ 2 per application = 2 x 420 shares The amount actually adjusted for application = 2 x 300 shares Surplus amount utilized for adjustment of allotment money = Rs.840 = Rs.600 = Rs.240 20,000 x Rs.10 = Rs.2,00,000 Profit for equity share holder/Outstanding balance of equity share capital Rs.50,000/Rs.2,00,000 x 100 = 25% Rs. Rs. 1,52,000 10,000 1,42,000 71,000 71,000 7,88,000 35,500 7,52,500 54,000 30,000 84,000 3,94,000 1,70,000 1,80,000 50,000 45,000 33,000 4,78,000 Rs. Rs.

247

Financial Accounting II

5.

(b) When shares are forfeited, if the premium amount is already collected, the share premium account will not be reversed. The amount actually collected is credited to the share premium account and the share amount due is credited to share call accounts hence reversing the earlier debit to call accounts and credit to share capital account. Thus, the journal entry is Share capital a/c To Share forfeiture a/c To Share first call a/c To share second and final call a/c Dr. Rs.6,000 Rs.3,000 Rs.1,800 Rs.1,200 Dr. (Rs.) Share Capital A/c. (300 x Rs.10) To Share First Call A/c. (300 x Rs.3) To Share Second and Final Call A/c. (300 x Rs.2) To Shares Forfeited A/c. (300 x Rs.5) (Being the forfeiture of 300 equity shares of Ramesh on nonpayment of first and final call) Bank A/c. (300 x Rs.9) Shares forfeited A/c. (300 x Rs.1) To Share Capital A/c. (300 x Rs.10) (Being the reissue of 300 shares @ Rs.9 per share and discounted amount of Re.1 per share is to be transferred from share forfeiture a/c) Shares forfeited A/c. To Capital Reserve A/c. (Being the profit on reissue of forfeited shares transferred to Capital Reserve) Dr. 1,200 1,200 Dr. Dr. 2,700 300 3,000 Dr. 3,000 900 600 1,500 Cr. (Rs.)

6.

(d) The journal entry on forfeiture of shares is Particulars

7.

(a) Purchased on June 30, 2000 hence interest for the period of April June i.e., 3 months = 3/12 x 200 x 100 x 12% = Rs.600 is to be paid exclusive of the price of Rs.96 on shares = Rs.96 x 200 shares = Rs.19,200. Total payment = Rs.600 + Rs.19,200 = Rs.19,800. The journal entry in this respect is Rs. Own Debenture account Interest on debentures A/c. To Cash A/c. Dr. Dr. 19,200 600 19,800 Rs.

8.

(e) The interest accrued = 5 months (April 1 to Aug 31) = 5/12 x 12% x 10,000 = Rs.500. The price paid is Rs.97 cum-dividend = 97 x 100 shares = Rs.9,700. This amount is inclusive of Rs.500 interest. Therefore, the amount debited to own debenture account = Rs.9,700 less Rs.500 = Rs.9,200. The journal entry to be made is Rs. Own Debentures account Interest on Debentures A/c. To Cash A/c. Dr. Dr. 9,200 500 9,700 Rs.

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9.

(b) The journal entry to be made for the issue is Bank Account Dr. Loss on issue of debentures Dr. To 15% Debentures A/c To Premium on Redemption of Debentures Hence the correct answer is (b). Rs. 4,75,000 50,000 Rs.

5,00,000 25,000

10.

(b) Following is the computation of Strong Ltd. share in capital profits of Weak Ltd. = 3,200/4,000 = 80% Capital Profit General reserve Profit and loss account Rs. 3,40,000 72,000 4,12,000 Add: Revaluation of land and buildings Less: Revaluation of plant and machinery 40,000 (20,000) 4,32,000 Less: Bonus shares 4,000 x 1/4 x 100 Share of Strong Ltd. 2,65,600 Share of Weak Ltd. 66,400 1,00,000 3,32,000

11.

(d) Computation of cost of control: Rs. Price of investment (3,200 + 800 bonus) Less: Cost of investment = 4,000 x Rs.100 Capital profit Goodwill (e) Minority interest share = 800 shares/4,000 shares Minority interest computation Share capital 800 shares x Rs.100 each Share of capital profits 3,00,000 x 20% Share of revenue profits 1,00,000 x 20% Total minority interest reflected in balance sheet (c) Particulars Shares underwritten Less: Benefit of unmarked applications 5:3:2 (20,000 19,000) Less: Marked applications Less: Benefit of Z s surplus in the ratio of 5:3 Net liability Rs. 6,80,000

4,00,000 2,65,600 6,65,600 14,400 = 20% Rs. = 80,000 = 60,000 = 20,000 Rs.1,60,000 Total X Y Z 25,000 12,500 7,500 5,000

12.

13.

1,000

500

300

200

24,000 12,000 7,200 4,800 19,000 10,000 3,000 6,000 5,000 2,000 4,200 1,200 750 1,250 450 +1,200 3,750 Nil 249

Financial Accounting II

14. 15.

(b) The called up amount being Rs.8, the amount shall be credited to share capital account. (c) Since shares are forfeited Journal entry is: Rs. Share capital account (called up) To Share forfeiture account To Share first call account On reissue only of 6 shares @6 each Bank account (6 x 6) Share forfeiture account (2 x 6) To Share capital account (8 x 6) In respect of the 6 shares Share forfeiture (credit) = 6 x 6 Less: Discount (reissue) Balance transferred to Capital Reserve = Rs.36 = Rs.12 = Rs.24 Dr. 36 Dr. 12 48 Dr. 80 60 20 Rs.

16.

(d) Since the discount on reissue of forfeited shares should not exceed the amount forfeited since the discount is written off as a charge against the share forfeiture account. In the above Rs.6 is called up. The maximum discount on reissue should not exceed Rs.6. Hence the minimum amount at which forfeited share can be reissued as fully paid i.e., Rs.10 is Rs.10 less maximum discount Rs.6 = Rs.4. (b) Dr. To Balance b/d 10% Government securities 18% Preference shares Equity shares To Debentures redemption fund a/c (gain) 10% Government securities 18% Preference shares Dr. Particulars To Debenture investment a/c redemption fund 1,000 2,500 1,02,500 Debenture Redemption Fund a/c Rs. 7,500 Particulars By Balance b/d By Debenture redemption 9,000 86,000 1,02,500 fund investment a/c (Rs.1,000 + Rs.2,500) 3,500 1,02,500 Rs. 99,000 1,02,500 Cr. 19,000 45,000 35,000 Debenture Redemption Fund Investment Account Particulars Rs. Particulars By Bank 10% Government securities 18% Preference shares Equity shares By Debentures redemption fund a/c Equity shares 7,500 20,000 47,500 27,500 Rs. Cr.

17.

To Debenture holders a/c (Premium on debentures) To General reserve

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18.

(a) The listed companies are allowed to pay brokerage on private placement of capital at a maximum rate of 0.5 %. Hence the maximum amount of brokerage that can be paid by M/s. Sundar Ltd. is 1,000 shares x Rs.100x 0.5% = Rs.500.

19.

(c) The amount required for redemption of preference shares is Rs.20,000 x Rs.10 = Rs.2,00,000. The proceeds from the issue of debentures cannot be utilized for the purpose of redemption of preference shares. Hence, the amount to be transferred to capital redemption reserve is Rs.2,00,000. (a) Particulars Sale proceeds [(50,000 x 95%) (50,000 x 10% x 3/12)] Less: Cost of investments (50,000 x 3,00,000/4,00,000) Profit on sale of investments Rs. 46,250 37,500 8,750

20.

21. (c) The entries to be recorded at the time of purchase of own debentures is 01.05.2003 Own debentures account Interest account To Cash account 01.06.2003 Own debentures account Interest account Dr. Dr. Rs.18,000 Rs.1,000 Dr. Dr. Rs.36,400 Rs.1,600 Rs.38,000

To Cash account Rs.19,000 Hence, the balance in own debentures account is Rs.18,000 + Rs.36,400 = Rs.54,400. 22.

r (e) Value of right = (M S) N+r


Where, r N = = No of rights issued No. of existing shares

M = Market price S = Issue price of rights. Value of rights = [2/(2 + 3)] x (Rs.500 Rs.300) = Rs.80. 23. (a) Cost of control/goodwill = Cost of investment = 3,00,000 Less: Par value Less: Share of capital profits Goodwill Consolidate Balance sheet Total Rs. = Total Assets of H Ltd. (given) Add: Total assets of S Ltd. Less: Investment account in H Ltd. Add: Goodwill (results) 17,65,000 4,35,000 22,00,000 (3,00,000) + 60,000 19,60,000 1,80,000 60,000 2,40,000 60,000

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Financial Accounting II

24. (b) Dr. Particulars To Balance b/d To Investments To Equity (including premium) Cash Account Rs. 50,000 2,00,000 shares 3,55,000 Particulars By Preference shareholders (Rs.3,00,000 x 110%) By Balance c/d Cr. Rs. 3,30,000 25,000

1,05,000 3,55,000 No. of equity shares = Rs.1,05,000 / Rs.105 = 1000 shares. = Rs.3 x 2,500 shares = Rs.3 x 2,000 shares = Rs.7,500 Rs.6,000 = Rs.1,500/2,000

25.

(b) The amount received on application The amount adjusted against application money The amount to be adjusted against allotment Amount per share adjusted against allotment = Rs.7,500 = Rs.6,000 = Rs.1,500 = Re.0.75 = Rs.6,500 = Rs.1,625

Amount receivable on allotment = (Rs.4 Re.0.75) x 2000 shares Amount to be paid by Mr.Jagir on allotment = (Rs.4 Re.0.75) x 500 shares Amount received on allotment 26. (a) Rs. 5,20,000 4,30,000 1,10,000 40,000 90,000 60,000 70,000 13,20,000 Sundry creditors 20,000 13,00,000 Add: Calls-in-arrear 20,000 Net assets 13,20,000 Value of fully-paid equity share = Rs.13,20,000/10,000 = Rs.132 Particulars Land and buildings Plant and machinery Furniture Investments Stock Sundry debtors Cash = Rs.6,500 Rs.1,625

= Rs.4,875.

Note: Investments (whether trading or non-trading) will be considered for valuation of shares. 27. (a) March 31, 2001 March 31, 2002 March 31, 2003 Rs. Rs. Rs. Sales 5,00,000 6,50,000 7,80,000 Less: Other expenses 2,60,000 3,10,000 4,50,000 Interest on debentures 48,000 48,000 48,000 Pre-tax profit 1,92,000 2,92,000 2,82,000 Less: Tax @40% 76,800 1,16,800 1,12,800 Post-tax profits 1,15,200 1,75,200 1,69,200 Average post-tax profits = (Rs.1,15,200 + Rs.1,75,200 + Rs.1,69,200)/3 = Rs.1,53,200 Goodwill = Rs.1,53,200 x 4 = Rs.6,12,800 Particulars

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28.

(a) Particulars Land and buildings Plant and machinery Furniture and fixtures Sundry debtors Inventories Cash Less: 18% Debentures Sundry creditors Bank overdraft Provision for taxation Capital employed Particulars Profit for the year 2002-2003 Less: Depreciation on land and buildings Add: Depreciation on plant and machinery Less: Bad debts Profit Rs. 5,00,000 2,00,000 1,90,000 95,000 75,000 25,000 10,85,000 1,50,000 75,000 25,000 50,000 7,85,000 Rs. 1,10,000 5,000 3,000 5,000 1,03,000

Return on capital employed = Rs.1,03,000/Rs.7,85,000 = 13.12% 29. (b) Particulars Paid-up capital as on April 01, 2002 (50,000 x Rs.10) Bonus shares (50,000/2) x Rs.10 Rights shares (75,000 x 2/5) x Rs.10 Share capital as on March 31, 2003 (b) Particulars Profit Add: Subsidy received from the government Profit from sale of plant (original cost: Rs.2,50,000 and written down value: Rs.1,50,000) Rs. 5,00,000 2,50,000 3,00,000 10,50,000 Rs. 9,50,000 2,50,000 1,00,000 13,00,000 Less: Interest on debentures Interest on secured loans Interest on unsecured loans Directors remuneration Profit for the purpose of calculating managerial remuneration Managerial remuneration = Rs.11,90,000 x 5% = Rs.59,500 30,000 50,000 20,000 10,000 11,90,000

30.

253

Financial Accounting II

31.

(e) Balance Sheet of M/s. Silver Spoon Ltd . Liabilities Share capital (28,000 shares of Rs.100 each Share premium (30,000 x Rs.10 each) Shares forfeited account (2,000 shares x Rs.70 per share) Capital reserve (3,000 shares x Rs.60 per share) Dr. Particulars To Share application To Share allotment To Share first and final call To Share capital Rs. 28,00,000 3,00,000 1,40,000 1,80,000 34,20,000 Bank account Rs. 7,20,000 16,80,000 7,50,000 2,70,000 34,20,000 34,20,000 Particulars By balance c/d Rs. 34,20,000 34,20,000 Cr. Assets Bank Rs. 34,20,000

32.

(d) At the time of consolidation, the debtors and creditors should be reduced by Rs.4,000.

254

Part III

Model Question Paper II


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. According to the Companies Act, the underwriting commission should not exceed a. b. c. d. e. 2. a. b. c. d. e. 3. 5% of the nominal value of shares and 2.5% for debentures 2.5% of the nominal value of shares and 2.5% for debentures 5% of the issue price of shares and 2.5% for debentures 5% of the issue price of shares and debentures 2% of the nominal value of shares and 3% for debentures. One of the ways of creating secret reserves is to value inventory and cost of sales on FIFO basis. Total amount of depreciation to be allocated over the useful life of the asset is the difference between total acquisition cost and replacement value. The terms depreciation, depletion and amortization refer to one and the same. Depreciation is essentially an equitable allocation of the cost of a fixed asset over the period during which the asset is used. Both (a) and (d) above.

Total Points: 100

Which of the following statement(s) is/are true?

Share premium account cannot be used for a. Issue of bonus shares b. c. d. e. Writing off of preliminary expenses Declaration of dividend Writing off of commission or discount on issue of shares and debentures Providing for premium payable on redemption of debentures.

4.

The preference shares of a company shall be redeemed, from the time of issue, not later than a. b. c. d. e. 5 years 20 years 8 years 7 years 6 years.

5.

6.

Profit on reissue of forfeited shares is transferred to a. Profit and loss account b. General reserve account c. Profit and loss appropriation account d. Capital reserve account e. Forfeited shares account. Which of the following methods of revenue recognition does not follow matching concept? a. Percentage completion method. b. Proportionate method. c. Completed contract method. d. Both (a) and (b) above. e. Both (b) and (c) above. 255

Financial Accounting II

7.

The shares can be forfeited by a. b. c. d. e. The director on non-payment of a call The director on non-payment of interest on calls-in-arrears The shareholder Both (a) and (b) above Both (b) and (c) above. Capital reserve account P & L account General reserve account Capital redemption account Profit and Loss appropriation account. Gross Value Added + Depreciation Gross Value Added + Interest Gross Value Added Depreciation Gross Value Added Inventory Gross Value Added Net Inventory. Understate cost of goods manufactured in that period Overstate current assets Overstate gross profit Understate net income in that period Overstate net income in that period. It must be treated as capital gain They are paid to shareholders of holding company The amount of dividend received is credited to the P & L a/c Both (a) and (b) above Both (a) and (c) above. 12% p.a. 10% p.a. 8% p.a. 6% p.a. 5%. p.a. In the first Annual General Meeting of the company. Within one month from the date of registration of the company. Within 3 months from the date of registration of the company. Within 6 months from the date of registration of the company. Within 12 months from the date of registration of the company.

8.

The premium collected on the issue of debentures is transferred to a. b. c. d. e.

9.

Which of the following equations is equal to Net Value Added? a. b. c. d. e.

10.

Understatement of W.I.P at the end of the period will a. b. c. d. e

11.

If dividend is received from pre acquisition profits of subsidiary company a. b. c. d. e.

12.

The rate of interest paid on calls-in-advance is a. b. c. d. e.

13.

When should the first auditor of the company be appointed by the Board of Directors? a. b. c. d. e.

256

Part III

14.

If preference shares are redeemed out of distributable profits, an amount equal to the face value of shares redeemed is transferred to a. b. c. d. e. General reserve account Share premium account Capital reserve account Reserve capital account Capital redemption reserve account.

15.

Which of the following statements is not true with regard to FIFO system of inventory valuation? a. b. c. d. e. The goods in stock represent the most recent purchases. The profits shown under the FIFO system are fictitious in nature. The inventory flow assumption underlying FIFO does not correspond with the actual physical flow of inventory items. In this system older prices and less useful inventory value are not reflected. The FIFO system avoids spoilage, obsolescence and the like. The maximum rate of discount can be 15%. At least one year should have elapsed from the commencement of business before shares are issued at a discount. The discount on shares appears under the head current assets. The shares which are issued at a discount should not be of a class already issued. Sanction of Central Government is not required.

16.

Which of the following is true with regard to issue of shares at a discount? a. b. c. d. e.

17.

Which of the following will be shown under Current Assets, according to Schedule VI of the Companies Act, 1956? a. b. c. d. e. Livestock. Loose tools. Development of property. Railway sidings. Leaseholds. Compulsory credit rating is required if conversion of FCDs is made after 18 months from the date of allotment. The discount on non-convertible portion of PCDs need not be disclosed in prospectus. Issue of FCDs with a conversion period of more than 36 months will not be permissible. Premium on conversion of FCDs shall be predetermined. Any conversion, in part or whole, will be optional at the hands of the debenture holder, if it takes place after 18 months from the date of allotment.

18.

Which of the following statements is not true regarding the issue of convertible debentures? a. b. c. d. e.

19.

While calculating managerial remuneration, which of the following should not be deducted from net profit? a. b. c. d. e. Directors remuneration. Debts considered bad and written off during the year. Interest on debentures issued by the company. Loss on sale of undertaking. Liability arising from a breach of contract. 257

Financial Accounting II

20.

Discount allowed on reissue of forfeited shares is debited to a. b. c. d. e. Share capital account Profit & Loss account Capital redemption reserve account Forfeited shares account Capital reserve account.

21.

Which of the following area(s) is/are prone to multiplicity of accounting policies to inflate or deflate profits? a. b. c. d. e. Valuation of inventories. Conversion of foreign currency items. Depreciation methods. Recognition of revenues/expenses. All of the above. They can be issued for cash. They can be issued for consideration other than cash. They can be issued as collateral security. They can be issued in lieu of dividends. Only (a), (b) and (c) of the above. General reserve. Revaluation reserve. Debenture redemption reserve. Share premium. Capital redemption reserve. The application money should not be less than 5% of the issue price of share. The application money should not be less than 5% of the nominal value of share. The application money should not be less than 10% of the issue price of share. The application money should be 10% of the nominal value of share. The amount of application money to be collected, is left to the discretion of the company. Loss on issue of debentures. Expenses on issue of debentures. Discount on issue of debentures. Premium on redemption of debentures. Premium on issue of debentures. (v) only. Both (iv) and (v) above. Both (iii) and (iv) above. (ii), (iii), (iv) and (v) above. All (i), (ii), (iii), (iv) and (v) above.

22.

Which of the following is/are true with respect to debentures? a. b. c. d. e.

23.

Which of the following cannot be utilized for issue of bonus shares? a. b. c. d. e.

24.

Which of the following statements is true with regard to issue of shares? a. b. c. d. e.

25.

Which of the following is not considered as capital loss? i. ii. iii. iv. v. a. b. c. d. e.

258

Part III

26.

27.

28.

29.

30.

31.

According to the guidelines of SEBI, in which of the following situations is debenture redemption reserve to be created? a. Where the debentures are partly convertible. b. Where the debentures are redeemable at a premium. c. Where the debentures have a charge over the assets. d. Where the debentures have a maturity of more than 18 months. e. Where the debentures are issued for consideration other than cash. The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage of profits which will have to be compulsorily transferred to reserve is a. 2.5% b. 5.0% c. 7.5% d. 10.0% e. 12.5%. Which of the following is not true of the Guidelines for issue of Bonus Shares? a. Reserves created by revaluation of fixed assets are not permitted to be capitalized. b. Bonus issue shall not be made in lieu of dividend. c. Bonus issue shall be made within 12 months of any public issue. d. Bonus issue is permitted only after the existing partly paid shares are made fully paid-up. e. Share premium and free reserves can be utilized for bonus issue. Which of the following is not a consideration in determining the useful life of an intangible asset? a. Legal, regulatory, or contractual provisions. b. Provisions for renewal or extension. c. Expected actions of competitors. d. Initial cost. e. None of the above. Revenues of an entity are normally measured by the exchange values of the assets or liabilities involved. Recognition of revenues does not occur until a. The revenue is recognized and assured of collection b. The revenue is realized and earned c. Products or services are exchanged for cash or claims to cash d. The company has substantially accomplished what it agreed to do e. The revenue is earned and recorded. Issue of bonus shares by the subsidiary company out of pre-acquisition profits a. Does not affect the cost of control b. Does not affect the revenue profits of the subsidiary company c. Affects the cost of control d. Both (a) and (b) above e. Both (b) and (c) above. Which of the following is not considered as Research and Development costs? a. Testing in search for product alternatives. b. Legal work on approval of patent rights. c. Modification of design of a process. d. Searching for application of new research findings. e. The design of tools, moulds and dies involving new technology. 259

32.

Financial Accounting II

33.

Which of the following statements is true? a. b. c. d. e. Capital profit realized in cash can be used for paying dividends. Dividend and interest can be paid out of capital. Dividend can be paid out of capital but interest cannot be paid out of capital. Premium on issue of debentures can be utilized for paying dividends. Capital profit transferred to capital reserve can be used for paying dividends. Redemption in lump sum after the expiry of certain period. Drawing of lots. By conversion. Redemption by purchase in the open market. All of the above. Profit or loss on sale of an asset. Subsidy received from Central Government. Provision for taxation. Interim dividend. Penalty paid under dispute. Prospectus Trial Balance Bank Reconciliation Statement Financial Statements Statement of Cash Flow. The dividend can be paid out of capital. The shareholders can reduce the dividend at the Annual General Meeting. The shareholders can enhance the dividend at the Annual General Meeting. The dividend recommended by the directors is termed as Declared Dividend. The dividend must be paid within 45 days from the date of declaration of dividend. Gross Value Added + Depreciation. Gross Value Added + Interest. Gross Value Added Depreciation. Gross Value Added Inventory. Gross Value Added Net Inventory. Nature of business. Economic policies of the Government. Demand and supply of shares. Both (b) and (c) above. All of (a), (b) and (c) above.

34.

Under which of the following method(s) can a company redeem its Debentures? a. b. c. d. e.

35.

Which of the following appears in the profit & loss appropriation account? a. b. c. d. e.

36.

The primary means of communicating important accounting information to users is a. b. c. d. e.

37.

Which of the following statements is true? a. b. c. d. e.

38.

Which of the following equations is equal to Net Value Added? a. b. c. d. e.

39.

Which of the following is/are factors to determine the value of shares of a company? a. b. c. d. e.

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Part III

40.

Annual Reports must be submitted to the registrar within _______ days of Annual General Meeting. a. b. c. d. e. 10 20 25 30 60.

Part B: Problems (60 Points)


1. On October 1, 2000, Sun Ltd., acquired 13,500 equity shares of Rs.100 each of Moon Ltd., at a price of Rs.2,02,500. The share of Sun Ltd., constitutes 75%. i. ii. iii. On April 1, 2000, the balances of general reserve and profit and loss account of Moon Ltd., stood at Rs.30,000 and Rs.36,000 (credit balance) respectively. On March 31, 2001 the balances of General reserve and Profit and loss account in the Balance Sheet of Moon Ltd., stood at Rs.30,000 and Rs.60,000 respectively. On the date of acquisition, the plant and machinery account standing in the books of Moon Ltd., at Rs.1,20,000 was revalued at Rs.1,44,000. Ignore depreciation.

The Share of Sun Ltd., in the capital profits (pre acquisition) and the revenue profits (post acquisition profits) of Moon Ltd., is a. b. c. d. e. 2. Rs.67,500; Rs.18,000 Rs.58,500; Rs.36,000 Rs.76,500; Rs.9,000 Rs.67,500; Rs.36,000 Rs.58,500; Rs.3,000. (3 points) On October 1, 2000, Sun Ltd., acquired 13,500 equity shares of Rs.100 each of Moon Ltd., at a price of Rs.2,02,500. The share of Sun Ltd., constitutes 75%. Moon Ltd., declared a dividend of 10% on its share capital for the year 1999-2000. Sun Ltd., received this dividend in October 2000 and credited to its profit and loss account. If Sun Ltd., share in capital profits (pre-acquisition) profits and revenue profits (postacquisition) profits are Rs.76,500 and Rs.54,000 respectively, the Cost of Control is a. b. c. d. e. 3. Rs.67,500 (Goodwill) Rs.50,625 (Goodwill) Rs.22,500 (Capital reserve) Rs.60,000 (Capital reserve) Rs.24,000 (Goodwill). (2 points) The following is the balance sheet of Sintex Ltd., as on March 31, 2001. Liabilities (Rs.) Assets 10,00,000 Land and Building at cost 1,00,000 equity shares of Rs.10 each, fully paid 7,50,000 Plant and Machinery at cost 1,00,000 equity shares of Rs.10 each, Rs.7.50 paid-up 5,00,000 Patent and copyrights 1,00,000 equity shares of Rs.10 each, Rs.5 paid-up Capital reserves 3,00,000 Investment at cost General reserves 4,00,000 Closing stock (Rs.) 12,00,000 14,00,000 2,00,000 1,50,000 6,00,000

261

Liabilities Profit and loss account Share premium account Sundry creditors Workers compensation fund Dividend equalization fund Provision for depreciation on plant and machinery Provision for bad and doubtful debts

(Rs.) Assets 2,00,000 Sundry debtors 5,00,000 Bank balance 5,10,000 Preliminary expenses 60,000 1,00,000 2,00,000 30,000 45,50,000

(Rs.) 8,00,000 1,60,000 40,000

45,50,000

The balance sheet as on March 31, 2001 does not contain a provision for unassessed income taxes, which are estimated to be Rs.75,000. The present market value of the assets is as follows: Land and Buildings Plant and Machinery Patent and Copyrights Investment Current Assets The net assets of Sintex Ltd., is a. Rs.40,00,000 b. Rs.39,25,000 c. Rs.40,39,000 d. Rs.41,14,000 e. Rs.46,24,000. 4. (3 points) The net assets of Humphury Ltd., were valued at Rs.41,54,000. The share capital of the company comprises of 1,00,000 equity shares of Rs.10 each fully paid 1,00,000 equity shares of Rs.10 each, Rs.7.50 called-up and paid-up 1,00,000 equity shares of Rs.10 each, Rs.5 called-up and paid-up 10,00,000 7,50,000 5,00,000 Rs.15,00,000 Rs.13,00,000 Rs. 1,00,000 Rs. 1,80,000 At their book value but bad debt provision should be maintained at 2% of sundry debtors

5.

The value of equity shares on which Rs.10 is fully paid, Rs.7.50 paid-up and Rs.5 paid-up using the asset backing method is a. Rs.17.00 ; Rs.16.75 ; Rs.16.50 b. Rs.16.35 ; Rs.13.85 ; Rs.11.35 c. Rs.14.00; Rs.11.50; Rs.9.00 d. Rs.18.75 ; Rs.16.25; Rs.13.75 e. Rs.15.25 ; Rs.12.75; Rs.10.25. (2 points) Singhania Ltd., issued 10,000 shares of Rs.100 each at a premium of Rs.20 per share. The entire issue was underwritten by three underwriters as follows: Underwriter A 5,000 shares Underwriter B 3,000 shares Underwriter C 2,000 shares Applications were received for 9,000 shares of which marked applications were as follows: Underwriter A Underwriter B Underwriter C 3,500 shares 1,400 shares 1,600 shares 262

The final liability A, B and C is a. 250 shares ; 850 shares ; Nil b. 150 shares ; 250 shares ; 550 shares c. 187 shares ; 813 shares ; Nil d. 813 shares ; Nil ; 187 shares e. Nil ; Nil ; Nil. (2 points) 6. The following balances stood in the books of Varsha Ltd., as on March 31, 2001. 16% Debentures a/c Rs.50,000 Debenture redemption fund a/c Rs.34,200 The above fund was invested in the following securities and shares. Particulars Rs. Rs.16,000, 10% Government loan 17,000 Rs.18,000, 15% Government loan 17,200 Total 34,200 The above investments were sold on the same day as under: 10% Government loan at par 15% Government loan at 96% On April 1, 2001 the company redeemed the debentures at a premium of 10%. The amount transferred to General reserve account is a. b. c. d. e. 7. Rs.30,280 Rs.27,280 Rs.28,200 Rs.23,280 Rs.28,280. (2 points) The following is the balance sheet of Praxair Ltd., as on March 31, 2001. Balance Sheet as on March 31, 2001 Rs. Assets 7,50,000 Goodwill 1,00,000 2,30,000 1,50,000 2,80,000 1,40,000 Plant and Machinery Land and Buildings Stock-in-trade Sundry debtors Cash at bank Discount on issue of shares Preliminary expenses Rs. 60,000

Liabilities 75,000 equity shares of Rs.10 each fully paid General reserve Profit & loss a/c Bank loan (20%) Sundry creditors Provision for taxation

6,00,000 2,50,000 1,10,000 4,00,000 90,000 50,000 90,000 16,50,000 16,50,000 Sundry debtors include a debt of Rs.90,000 of which only Rs.60,000 is likely to be recovered. A provision has to be made for the balance. The net tangible assets (for computation of goodwill) of Praxair Ltd., is a. Rs.13,00,000 b. Rs.10,20,000 c. Rs.8,80,000 d. Rs.8,50,000 e. Rs.7,90,000. (2 points) 263

8.

The profits earned by the company after payment of tax at the rate of 40% in the last 4 years were as under: 1997-1998 1998-1999 1999-2000 2000-2001 Rs.1,00,000 Rs.1,10,000 Rs.1,30,000 Rs.1,40,000

The dividends paid by the company for the last 4 years were as follows: 1997-1998 1998-1999 1999-2000 2000-2001 11.0% 12.0% 14.5% 14.5%

The total value of business considering the above data to the nearest hundreds is a. b. c. d. e. 9. Rs.9,40,000 Rs.9,23,000 Rs.10,14,000 Rs.10,80,000 Rs.12,00,000. (2 points) The authorized capital of a company is Rs.10,00,000, which is divided into 1,00,000 equity shares of Rs.10 each. Out of which, 80,000 shares have been called-up and paid-up to the extent of Rs.8 per share. The company has decided in a general meeting to capitalize part of the above reserves for the following: i. ii. a. b. c. d. e. To make partly paid shares into fully paid shares by paying bonus of Rs.2 per share. To issue one bonus share for every eight shares held. Rs.1,00,000 Rs.1,60,000 Rs.1,40,000 Rs.2,20,000 Rs.2,60,000. (2 points) 10. The following balances were extracted from the books of SNL Ltd., on March 31, 2001. Particulars 1. 2. 3. 4. 5. 6. 7. 2,500 11% Redeemable preference shares 30,000 Equity shares of Rs.10 each, fully paid up Profit prior to incorporation Capital reserve Share premium General reserve Profit & loss account Rs. 2,50,000 3,00,000 40,000 40,000 20,000 85,000 80,000

The amount of bonus to be declared is

264

The preference shares were due to be redeemed and the company redeemed all the preference shares at a premium of 10%. As the divisible profits were inadequate, the company issued the minimum amount of equity shares of Rs.10 each at a discount of 10%. The number of equity shares to be issued is a. b. c. d. e. 11. 10,000 equity shares 9,000 equity shares 8,000 equity shares 7,000 equity shares 7,500 equity shares. (3 points) Following is the balance sheet of Super Bright Ltd., as on March 31, 2001. Balance Sheet as on March 31, 2001 Liabilities Equity share capital of Rs.10 each fully paid 11% Preference share capital of Rs.100 each fully paid Capital redemption reserve General reserve Profit & loss a/c 12% Debentures Sundry creditors Provision and taxation Additional Information: Assets are estimated as: Plant and machinery Rs.8,00,000 Land and buildings Rs.6,50,000 Receivables Rs.70,000 All the investments were non-trading investments. The total capital employed (for computation of goodwill) by Super Bright Ltd., is a. Rs.16,92,000 b. Rs.17,02,000 c. Rs.16,92,000 d. Rs.15,52,000 e. Rs.14,47,000. (2 points) 12. The following data pertains to Nagarjuna Ltd. i. Average profits after charging income tax of 50% for last 5 years is Rs.1,70,000. ii. Fair return is 10%. iii. The capital employed of the company is Rs.15,50,000. The goodwill based on five years purchase of super profits is a. Rs.50,000 b. Rs.60,000 c. Rs.70,000 d. Rs.75,000 e. Rs.85,000. (2 points) 265 Rs. 6,00,000 Goodwill Assets Rs. 55,000 7,15,000 6,20,000 58,000 1,10,000 80,000 62,000 30,000 17,30,000

5,00,000 Plant and machinery 80,000 Land and buildings 60,000 Investment (10% Securities, Market value Rs.60,000) 1,50,000 Stock-in-trade (at market value) 2,00,000 Receivables 80,000 Cash and Bank 60,000 Preliminary expenses 17,30,000

13.

The share capital of Sunny Ltd., comprises of equity share capital (Rs.10 each) of Rs.3,00,000. Harry Ltd., acquired 24,000 shares in Sunny Ltd., on July 1, 2000 @12.50 per share. The cost of the investment and the holding percentage of Harry Ltd., in Sunny Ltd., is a. b. c. d. e. Rs.2,40,000; 85% Rs.3,00,000; 70% Rs.2,40,000; 80% Rs.1,25,000; 80% Rs.3,00,000; 80%.

14.

(2 points) The preference shares to be redeemed of Maximin Ltd., is Rs.1,00,000 at a premium of 10% and for this purpose makes a fresh issue of shares of Rs.40,000 at a premium. Assuming the company has sufficient free reserves, compute the amount to be transferred to Capital Redemption Reserve account. a. b. c. d. e. Rs.40,000 Rs.60,000 Rs.66,000 Rs.70,000 Rs.56,000.

15.

(2 points) The preference shares of Rotomac Ltd., is Rs.1,00,000 to be redeemed at par. The company resolves to make a fresh issue of shares for this purpose of Rs.40,000 at a discount of 10%. The amount to be transferred to Capital Redemption Reserve account is a. b. c. d. e. Rs.40,000 Rs.60,000 Rs.64,000 Rs.70,000 Rs.56,000. (1 point)

16.

Sanjay Ltd., proposed to issue 6,000 equity shares of Rs.100 each at a premium of 40%. The minimum amount of application money to be collected per share is a. b. c. d. e. Rs.5.00 Rs.6.00 Rs.7.00 Rs.8.40 Rs.10.00. (1 point)

17.

Consider the following balance sheet of Sudha Ltd., as on March 31, 2003 Liabilities Share capital: Equity shares of Rs.10 each 18% Preference shares of Rs.10 each Reserves and surplus: General reserve Profit and loss account 18% Debentures Sundry creditors Bank overdraft Rs. 1,00,000 45,000 4,000 4,000 20,000 2,000 5,000 1,80,000 Assets Land and buildings Plant and machinery Furniture and fixtures Investments Sundry debtors Inventories Cash Preliminary expenses Rs. 50,000 45,000 20,000 20,000 25,000 8,000 2,000 10,000 1,80,000 266

The intrinsic value of equity share of the company is a. b. c. d. e. 18. Rs.9.50 Rs.16.30 Rs.10.80 Rs.14.30 Rs.9.80. (1 point) Sampath Ltd., issued 1,00,000 equity shares of Rs.100 each, payable as under: On application On allotment On first call On final call a. b. c. d. e. 19. Rs.40 Rs.20 Rs.20 Rs.20

The applications received for 1,70,000 shares were dealt with as under: Applicants of 20,000 shares were allotted in full. Applicants of 1,40,000 shares were allotted 80,000 shares pro rata. Applications for 10,000 shares were rejected. Rs.20,00,000 Rs.8,00,000 Rs.16,00,000 Rs.4,00,000 Rs.24,00,000. (2 points) Consider the following data pertaining to Mahima Ltd., as on March 31, 2003: Particulars Land and buildings Plant and machinery Furniture and fixtures Non-trading investments purchased on September 01, 2001 (5,000, 12% debentures of Rs.100 each) Sundry debtors Inventories Cash Preliminary expenses Sundry creditors Bank overdraft Rs. 8,90,600 6,45,500 2,35,900 5,30,400 45,300 68,500 23,100 56,000 98,500 45,600

The excess of application money received that can be adjusted towards allotment money, is

The profit of the company for the year ended March 31, 2003 is Rs.2,60,000. The average capital employed of the company for the purpose of calculation of goodwill is a. b. c. d. e. Rs.22,95,200 Rs.16,64,800 Rs.17,64,800 Rs.21,65,200 Rs.16,34,800. (2 points) 267

20.

Consider the following data pertaining to three underwriters, Ajay, Samay and Vijay Particulars Shares underwritten Marked applications a. b. c. d. e. Rs.3,200 Rs.2,320 Rs.3,000 Rs.3,100 Rs.880. (2 points) Ajay 8,000 6,000 Samay 16,000 8,000 Vijay 24,000 11,000

If total applications received are for 44,800 shares, the final liability of Vijay is

21.

Prosperous Ltd., issued 10,000 equity shares of Rs.10 each at a premium of 20% payable as under: On application On allotment On first and final call Rs.5 (inclusive of premium) Rs.4 Balance amount

Applications were received for 15,000 shares and allotment was made on pro rata. Mr. Lazy, to whom 140 shares were allotted, failed to pay the allotment money. His shares were forfeited after the final call was made. All forfeited shares were reissued to Mr. Zeal at a discount of 10% as fully paid-up. The amount transferred to capital reserve is, a. b. c. d. e. 22. Rs.560 Rs.630 Rs.420 Rs.140 Rs.700.

23.

(2 points) Jasmine Ltd., issued 40,000 debentures of Rs.10 each at a premium of 15%. Mr. Wright has underwritten 38,000 debentures. Applications were received for 36,000 debentures. The maximum amount of underwriting commission which can be paid to Mr. Wright is, a. Rs.19,000 b. Rs.21,850 c. Rs.20,700 d. Rs.10,925 e. Rs.10,350. (1 point) Wealth Ltd., acquired 55% shares of Gold Ltd., on February 01, 2002. Wealth Ltd., sells goods at cost plus 20%. During the year 2002-03, it supplied goods worth Rs.90,000 to Gold Ltd.,, out of which, 60% are still in stock of Gold Ltd., as on March 31, 2003. The unrealized profit on stock to be adjusted while preparing Consolidated Balance Sheet as on March 31, 2003 is a. Rs.4,950 b. Rs.5,940 c. Rs.9,900 d. Rs.10,800 e. Rs.6,000. (1 point)

268

24.

25.

On July 01, 2003, Castles Ltd., declared a dividend of Rs.10 per share on 50,000 paid-up equity shares of Rs.100 each. On the same day the company has issued 50,000, 10% cumulative preference shares of Rs.100 each. Shareholders on record on June 30, 2003 are eligible for dividend, which is to be paid on July 08, 2003. On July 01, 2003, the accounting entry to be made by Castles Ltd., is a. No accounting entry b. General reserve account Dr. Rs.5,00,000 To Declared dividend Rs.5,00,000 c. Profit and loss account Dr. Rs.5,00,000 To Declared dividend Rs.5,00,000 d. General reserve account Dr. Rs.10,00,000 To Declared dividend Rs.10,00,000 e. Declared dividends account Dr. Rs.10,00,000 To Cash account Rs.10,00,000. (1 point) The profits for the past 5 years of Suhas Ltd., are as under: Year 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 The weighted average profit of the company is a. Rs.55,172 b. Rs.51,619 c. Rs.48,065 d. Rs.62,354 e. Rs.52,456. Profit (Rs.) 42,364 43,456 53,126 56,789 62,354

(1 point) 26. The post-tax profits of M/s.Hima Ltd., for the last four years are: Year 1999-2000 2000-2001 2001-2002 2002-2003 Additional Information: The profits for the year 2001-2002 are calculated by taking an excess depreciation of Rs.10,000. During the year 2000-2001, there was a loss of Rs.20,000 due to a fire accident. In view of the diversification of business and resultant workload, it is expected to appoint two additional employees for a salary of Rs.10,000 each per annum. If the tax rate is 50%, the future maintainable post-tax profit is a. Rs.1,90,000 b. Rs.1,87,500 c. Rs.2,00,000 d. Rs.2,10,000 e. Rs.1,86,250. (2 points) 269 Rs. 1,50,000 1,65,000 2,20,000 2,50,000

27.

On October 01,2002, M/s.Sun Ltd., acquired 60% shares in M/s.Moon Ltd., at a cost of Rs.18,75,000. On October 01, 2002 the profit and loss account and Capital reserve of M/s.Moon Ltd., showed credit balances of Rs.2,50,000 and Rs.4,50,000 respectively. Following is the Balance Sheet of M/s.Moon Ltd., as on March 31, 2003: Rs. Share capital 15,75,000 (2,00,000 shares Rs.10 each) 7,35,000 Capital reserve 6,00,000 5,40,000 Profit and loss account 4,00,000 1,95,000 Short-term loan 2,00,000 1,20,000 Sundry creditors 30,000 35,000 30,000 32,30,000 32,30,000 On November 15, 2002 M/s.Moon Ltd., declared a dividend of 10% out of its previous years profits. Amount of goodwill that is to be shown in the Consolidated Balance Sheet as on March 31, 2003 is a. b. c. d. e. Rs.2,55,000 Rs.2,85,000 Rs.6,75,000 Rs.3,75,000 Rs.1,35,000. (3 points) Liabilities Rs. 20,00,000 Assets Land and buildings Machinery Furniture and fittings Sundry debtors Closing inventory Cash on hand Cash at bank

28.

Mr. Rakesh Bothra, the Managing Director of M/s.Solar Processors Ltd.,, is entitled to a commission of 5% on net profits before charging such commission. The net profit of M/s. Solar Processors Ltd., for the year ended March 31, 2003 was reported to be Rs.25,50,000. Subsequently, it was noticed that the following transactions were omitted: Particulars Payment of Directors remuneration Sale of a plant (cost price Rs.5,00,000; written down value Rs.4,00,000) Payment of bonus to production executive Payment of taxes (income tax and sales tax) Issue of 40,000 shares of Rs.10 each at a premium of Rs.2 a. b. c. d. e. Rs.1,26,250 Rs.1,25,000 Rs.1,29,000 Rs.1,20,000 Rs.1,27,500. (2 points) Rs. 50,000 5,50,000 75,000 25,000 4,80,000

The commission payable by the company to Mr. Rakesh Bothra for the year 2002-2003 is

29.

M/s.Rising Sun Ltd., issued 1,00,000 equity shares of Rs.10 each at a premium of 20%, payable as under: On application On allotment On first call On final call Rs.2 Rs.5 (including premium) Rs.3 Rs.2

270

Mr. Vikram Thakur, to whom 1,000 shares were allotted, failed to pay the first call money and his shares were forfeited before final call is made. The journal entry to record the forfeiture by the company is Rs. a. Share capital a/c Share premium a/c To Share first call a/c To Share forfeiture a/c b. Share capital a/c Share premium a/c To Share first call a/c To Share final call a/c To Share forfeiture a/c c. Share capital a/c To Share first call a/c To Share forfeiture a/c d. Share capital a/c To Share first call a/c To Share forfeiture a/c e. Share capital a/c To Share premium a/c To Share first call a/c To Share forfeiture a/c 30. Dr. 10,000 2,000 3,000 5,000 (2 points) On July 01, 2002, M/s. Silver Spoon Ltd., acquired 7,000 equity shares of M/s. Pure Products Ltd., for a consideration of Rs.8,00,000. The share capital of M/s. Pure Products Ltd., consists of 10,000 equity shares of Rs.100 each. The balances of General reserve and Profit and loss account of M/s. Pure Products Ltd., are as under: As on July 01, 2002 Rs. General reserve Profit and loss account 1,70,000 1,50,000 As on March 31, 2003 Rs. 2,00,000 1,75,000 Dr. 10,000 3,000 7,000 Dr. 8,000 3,000 5,000 Dr. Dr. 10,000 2,000 3,000 2,000 7,000 Dr. Dr. 8,000 2,000 3,000 7,000 Rs.

The amount of minority interest shown in Consolidated Balance Sheet as on March 31, 2003 is a. b. c. d. e. Rs.4,57,500 Rs.3,60,000 Rs.3,07,500 Rs.4,05,000 Rs.4,12,500. (2 points) 271

31.

M/s. Bright Light Ltd., issued 10,000 12% debentures of Rs.10 each at a discount of 10%, redeemable at a premium of 5%. The journal entry to record the issue of debentures is a. Bank a/c Dr. Discount on issue of debentures a/c Dr. To 12% Debentures a/c Bank a/c Dr. Discount on issue of debentures a/c Dr. Loss on issue of debentures a/c Dr. To 12% Debentures a/c To Premium on redemption of debentures Bank a/c Dr. To 12% Debentures a/c Bank a/c Dr. Discount on issue of debentures a/c Dr. To 12% Debentures a/c 12% Debentures a/c Dr. Loss on issue of debentures a/c Dr. To Bank a/c Rs. 90,000 15,000 90,000 10,000 5,000 1,00,000 5,000 90,000 90,000 90,000 10,000 1,00,000 90,000 10,000 1,00,000 (2 points) Rs. 50,000 48,000 48,000 1,000 50,000 Rs.

1,05,000

b.

c. d.

e.

32.

Consider the following data pertaining to M/s.Orion Ltd.: Particulars Nominal equity share capital Issued and called-up equity share capital Paid-up equity share capital Calls in advance 10% Preference share capital (fully paid-up) a. b. c. d. e. Rs.10,100 Rs.10,000 Rs.9,900 Rs.9,800 Rs.4,800. (1 point)

If the company declares a dividend of 10%, the total dividend payable is

272

Part III

Model Question Paper II


Suggested Answers
Part A: Basic Concepts
1. 2. 3. (c) According to the Companies Act, 1956, the underwriting commission payable shall not exceed 5 percent on the issue price of shares and 2.5 percent of debentures. (d) Depreciation is essentially an equitable allocation of the cost of a fixed asset spread over the period during which the asset is used. (c) Premium collection on issue of shares can be used for issuing bonus shares, writing-off preliminary expenses, writing-off commission or discount on issue of shares and debentures and providing premium payable on redemption of debentures. However, it cannot be used to pay dividend for the shareholders. (b) As per the Companies Amendment Act, 1988, only preference shares, which are redeemable within 20 years, can be issued. (d) Profit on reissue of forfeited shares is a capital natured profit and is transferred to Capital Reserve a/c. (c) In order to determine the profits or losses accrued in an accounting period, the expenses must relate to the goods and services sold during the period. Thus, it is clear that the cost derives its relevance only from the sale and not vice-versa. It is for this reason that revenue recognition always precedes the matching of cost. If revenue or sale is not defined, the cost cannot be defined either. (d) Shares can be forfeited by the board of directors on non-payment of a call or on nonpayment of interest on calls-in-arrears in accordance with the Articles of Association of the company. (a) The premium collected on the issue of debenture is a capital profit and is transferred to Capital Reserve a/c. (c) Net value added is derived by deducting depreciation from the gross value added. Gross value added is arrived at by deducting cost of all materials and services and other extraordinary expenses from sales revenue and any other income. Therefore, Net value added = Gross value added Depreciation. (d) Understatement of work-in-progress at the end of the period over estimates the cost of goods manufactured and understates net income in that period. (a) If the whole of the dividend is from the pre-acquisition profits, it must be treated as capital gain and must be used either for reducing the cost of shares and thereby reducing goodwill or for increasing the capital reserve. This dividend is not available to the shareholders of the holding company and hence cannot be taken to the revenue profits of the holding company. (d) The rate of interest on calls-in-advance account is 6%. Hence (d) is correct. (b) According to the provision of the Companies Act, the first auditor of a company should be appointed by the board of directors within one month from the date of registration of the company. Hence (b) is true. (e) If preference shares are redeemed out of distributable profits the amount equal to the face value of shares redeemed is transferred to capital redemption reserve account. Hence (e) is correct. (c) The FIFO method of identifying inventory is based on the assumption that costs are charged against revenue in the order in which they occur. The inventory remaining on hand is presumed to consist of the most recent costs. Theoretically, FIFO approximates the results that would be obtained by the specific identification method if items were sold in the order in which they were purchased.

4. 5. 6.

7.

8. 9.

10. 11.

12. 13.

14.

15.

273

16.

(b) According to Section 79 of the Companies Act, 1956, a company can issue shares at a discount if the following conditions are satisfied. a. b. c. d. e. The shares that are to be issued at a discount should be of a class, which has already been issued. This should be authorized by passing a resolution at the general meeting and sanctioned by the Central Government. The maximum rate of discount at which the shares are to be issued should be specified in the resolution and the maximum limit is 10 percent. At least a year should have been elapsed from commencement of the business by the company before the shares are issued at a discount. The shares should be issued at a discount within two months after the sanction from the company law board has been obtained or as specified by the company law board.

17.

(b) According to Schedule VI of the Companies Act 1956, loose tools should be indicated in current assets. Livestock, development of property, railway sidings and leaseholds are to be indicated under fixed assets. (b) Convertible debentures are subject to the following guidelines issued by the SEBI. i. Issue of Fully Convertible Debentures (FCDs) having a conversion period of more than 36 months will not be permissible, unless conversion is made optional with put or call option. Compulsory credit rating will be required if conversion is made for FCDs after 18 months. Premium amount on conversion, time of conversion in stages if any shall be predetermined and stated in the prospectus. The issuer will freely determine interest rates for the above debentures. Any conversion in part or whole of the debentures will be optional at the hands of debenture holder, if the conversion takes place at or after 18 months from the date of allotment but before 36 months. In case of NCDs/PCDs, credit rating is compulsory when maturity exceeds 18 months. Premium amount at the time of conversion for the PCD shall be determined and stated in the prospectus. Redemption amount, period of maturity yield on redemption for the PCDs/NCDs shall be indicated in the prospectus. The discount on the non-convertible portion of the PCD in case they are traded and the procedure for their purchase on spot trading basis must be disclosed in the prospectus.

18.

ii. iii.

iv.

v. vi.

vii.

19.

(d) Loss on sale of undertaking should not be deducted from the net profit for computation of managerial remuneration which is based on percentage of adjusted net profit. Other expenses given in (a), (b), (c) and (e) can be deducted from net profit for computation of managerial remuneration. Hence (d) is correct. (d) If forfeited shares are reissued at discount, the discount amount on such shares should be debited to forfeited shares account. Hence (d) is true. (e) The valuation of inventories (a) can be a tool to inflate or deflate the actual profits by adoption of various methods depending on economic conditions. While translating the foreign currency transactions (b) into reporting currency, different rates can be adopted to manipulate the profits. Various depreciation methods (c) change the value of depreciation where by profits can be inflated or deflated. The policy of recognizing expenses/incomes (d) as capital revenue matters considerably and changes the profits of a business thus, in all the areas (a), (b), (c) and (d), the changes in existing accounting policies result in inflation or deflation of profits. These are prone to multiplicity of accounting policies. (e) Debenture can be issued for cash or consideration other than cash. It can be issued as collateral security, but it cannot be issued in lieu of dividends. Hence (e) is true.

20. 21.

22.

274

23.

(b) Revaluation reserve cannot be utilized for issuing bonus shares. However the capital reserve, debenture redemption reserve, share premium and capital redemption reserve can be utilized for issuing bonus shares. (b) The application should be filed with the company or its bankers and should be accompanied by the application money. The company fixes the application money. The application money fixed by the company should not be less than 5 percent of nominal value of the shares. (a) The loss on issue of debentures, expenses on issue of debentures, discount on issue of debentures and premium on redemption of debentures are all capital losses. However, the premium on issue of debentures is a capital profit. (d) According to SEBI guidelines, the debenture redemption reserve is to be created if the debentures have a maturity of more than 18 months. (c) Where the dividend proposed exceeds 15 percent but does not exceed 20 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 7.5 percent of the current profits. (c) Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of bonus shares shall be subject to the prescribed SEBI guidelines, which inter alia provide for the following. i. ii. iii. iv. Bonus issue shall not be made within 12 months of any public/rights issue. Reserves created out of revaluation of fixed assets shall not be capitalized. Bonus issue shall not be made in lieu of dividend. Bonus issue shall not be made unless partly paid shares, if any, existing is made fully paid-up.

24.

25.

26. 27.

28.

29. 30.

(c) Expected actions of the competitors are taken in to account in determining the useful life of an intangible asset. (d) Revenues of an entity are normally measured by the exchange values of the assets or liabilities involved. Recognition of revenues does not occur until the company has substantially accomplished what it agreed to do. (d) If bonus shares are issued by the subsidiary company out of pre-acquisition profit, there is no change in the accounting treatment. While calculating the cost of control, the holding companys share in the pre-acquisition profit is reduced at one hand and on the other hand, the paid-up value of shares is increased. Hence, there is no effect on cost of control. Also it does not affect the revenue profits of the subsidiary company. Hence (d) is correct. (b) AS-8 deals with the treatment of costs of research and development in financial statements. According to this, the costs incurred comprising research and development are attributable to research and development costs and other expenses are to be treated as general expenses and be accounted for accordingly. Legal work on approval of patent rights (b) is not associated with research and development and cannot be treated as R&D costs. The other expenses, testing in search for product alternatives (a) modification of design of a process (c); searching for application of new research findings (d) and the design of tools moulds and dies involving new technology are considered to be Research and Development costs. (a) According to the Companies Act, capital profit realized in cash can be used for payment of dividends to the shareholders. Other statements mentioned in (b), (c), (d) and (e) are not correct. Hence, (a) is true. (e) Redemption of debentures means the repayment of debentures. A company can redeem its debentures by any of the methods (a), (b), (c), (d) or all of them. Redemption on expiry of certain fixed period mentioned in prospectus (a) they are redeemable debentures (a). Company can redeem its debentures by drawing lots (b). A company may issue convertible debentures in which the debentures are redeemed by issue of shares by conversion (c). At times, a company may purchase the debentures in the open market (d) and redeem them as per its convenience.

31.

32.

33.

34.

275

35.

(d) Of the given alternatives, interim dividend paid to the investors is an appropriation of profit and hence appears in profit and loss appropriation account. Other items mentioned in (a), (b), (c) and (e) are chargeable to profit and loss account. (d) The users of accounting information of a company are investors, bankers, creditors, shareholders, management, employees, customers, government and regulatory agencies who are interested in the affairs of a company. The means of communicating information are financial statements; (d) i.e., profit and loss account and balance sheet. These are the means through which inferences like ratio analysis are drawn. Prospectus (a) is the document inviting the public to subscribe to its securities and there may be certain accounting statistics which are useful to the users. But it is not comprehensive. Hence it is false. Trial balance (b) is a summary of all ledger accounts prepared in a tabular form from which no useful inference can be drawn. Hence, it is not the correct answer. Bank reconciliation statement (c) is a statement prepared by a business only in the event of difference between balance as per bank statement and bank column of cash book, which has no relevance to the users. Hence, it is false. Statement of cash flow (e) is the statement depicting inflow and outflow of cash irrespective of nature of source and relevance of period. It is more or less of receipts and payments account of non-profit organization which has no significance to the users and it is false. (b) According to the provisions of the Companies Act, dividend cannot be paid out of capital and must be paid within 30 days from the date of declaration of dividend. Recommended dividend is not treated as declared dividend. The directors generally recommend the percentage of dividend payable to equity shareholders. The shareholders in the annual general meeting may pass a resolution adopting the recommendation or may reduce the dividend recommended. The shareholders do not have the power to enhance the dividend recommended by the directors. Hence, the alternative (b) is true. (c) Net value added is derived by deducting depreciation from the gross value added. Gross value added is arrived at by deducting cost of all materials and services and other extraordinary expenses from sales revenue and any other income. Therefore, Net value added = Gross Value Added Depreciation. (e) The value of shares of a company depends on the nature of business, economic policies of the government, demand and supply of shares. So, all the factors stated in (a), (b) and (c) are correct in respect of value of shares of a company. (d) According to the Companies Act, 1956, Annual Reports of a company must be submitted to the registrar within 30 days of Annual General Meeting.

36.

37.

38.

39.

40.

Part B: Problems
1. (c) Analysis of profit Pre-acquisition from Post-acquisition from 1.4.2000 to 30.9.2000 1.10.2000 to 31.3.2001 (Rs.) (Rs.) 30,000 36,000 12,000 24,000 1,02,000 Minority interest (25%) Share of holding company (75%) 25,500 76,500 12,000 0 12,000 3,000 9,000

General reserve as on April 1, 2000 Profit and loss account as on April 1, 2000 Profit for the year 2000-2001 (Rs.60,000 Rs.36,000 = Rs.24,000) Profit on revaluation of plant (Rs.1,44,000 Rs.1,20,000)

276

2.

(c) Cost of Control Particulars Cost of acquisition of shares Less: Nominal value of 13,500 shares Capital profits Dividend for 1999-2000 (to be adjusted against cost of control) Capital Reserve 1,35,000 76,500 13,500 2,25,000 22,500 Rs. 15,00,000 13,00,000 1,00,000 1,80,000 6,00,000 7,84,000 1,60,000 46,24,000 5,10,000 75,000 5,85,000 40,39,000 (Rs.) Net assets = Total assets less total liabilities Add: Notional calls 1,00,000 equity shares x Rs.2.50 1,00,000 equity shares x Rs.5.00 Net value of assets Value of each equity share = =
Net value of assets Number of equity shares
49,04,000 = Rs.16.35 3,00,000

Rs.

Rs. 2,02,500

3.

(c) Value of Assets Assets Land and Buildings Plant and Machinery Patents and copyrights Investments Closing stock Sundry debtors less provision for bad and doubtful debts (98% of Rs.8,00,000) Bank balance Total assets Liabilities Sundry creditors Tax provision Total liabilities Net assets = Total assets less Total liabilities

4.

(b) 41,54,000 2,50,000 5,00,000 49,04,000

Value of each Rs.10 paid equity share = Rs.16.35 Value of each Rs.10 each, 7.50 paid-up = Rs.16.35 Rs.2.50 = Rs.13.85 Value of each Rs.10 each, 5.00 paid-up = Rs.16.35 Rs.5.00 = Rs.11.35.

277

5.

(c) Statement of Liability of Each Underwriter Particulars Shares underwritten Less: Allocation of unmarked 2,500 shares apportioned in the ratio 5 : 3 : 2 Less: Marked application Shortfall/(Surplus) Credit of Cs oversubscription to A & B at the ratio of 5 : 3 Liability (rounded off) of underwriters Workings: Marked applications A B C 3,500 shares 1,400 shares 1,600 shares 6,500 shares 2,500 shares 9,000 shares A (units) 5,000 1,250 3,750 3,500 250 (63) 187 B (units) 3,000 750 2,250 1,400 850 (37) 813 C (units) 2,000 500 1,500 1,600 (100) 100 1,000 Total (units) 10,000 2,500 7,500 6,500 1,000

6.

Unmarked applications (balance fig.) Total applications (e) Varsha Ltd., Dr. 31.3.2001 To Balance b/f 16000, 10% Govt. loan 18000, 15% Govt. loan Particulars Rs.

Debenture Redemption Fund Investment Account Particulars 31.3.2001 By Bank (sale) 17,000 10% Govt. loan (at par)

Cr. Rs.

16,000 17,280

17,200 15% Govt. loan (Rs.18,000 96%) To Debenture redemption fund a/c (gain) 15% Govt. loan 80 80 By Debenture Redemption fund a/c (loss) 10% Govt. loan 1,000 34,280 Dr. Debenture Redemption Fund a/c Particulars 1.4.2001 To Debenture Redemption fund investment account (loss on sale) To Debenture holders account (premium on debentures) To General Reserve a/c Rs. 1,000 1.4.2001 By Debenture Redemption fund (Profit on sale) Particulars 31.3.2001 By Balance b/f

1,000 34,280 Cr. Rs. 34,200

5,000 28,280 34,280

80

34,280

278

7.

(d) Computation of Net Tangible Assets Particulars Plant and machinery Land and buildings Stock-in-trade Sundry debtors Cash at bank Less: Liabilities: Bank loan (20%) Sundry creditors Provision for taxation Provision for bad debt Net tangible assets (b) Average profit after tax = Rs. 6,00,000 2,50,000 1,10,000 4,00,000 90,000 14,50,000 Rs.1,50,000 Rs.2,80,000 Rs.1,40,000 Rs.30,000

6,00,000 8,50,000

8.

Rs.1, 00, 000 + Rs.1,10, 000 + Rs.1,30, 000 + Rs.1, 40, 000 4 4,80,000 = = Rs.1,20,000 4 11% + 12% + 14.5% + 14.5% Average dividend paid = 4

= Total value of the business = = 9. (e)

52% 4

= 13% = Normal rate of dividend

Average maintainable profit x 100 Normal rate of dividend

Rs.1,20,000 = Rs.9,23,077 9,23,000 13%


Rs. 1,60,000

10.

Amount of bonus to be declared to make the partly paid shares into fully paid 80,000 x Rs.2 80,000 To cover bonus shares of 8 = 10,000 shares x Rs.10 Total bonus (a) Premium payable on redemption

1,00,000 2,60,000 = 10% of 2,500 x Rs.100 = 10% of Rs.2,50,000 = Rs.25,000 = Rs.20,000 = Rs.25,000 Rs.20,000 = Rs.5,000 = Rs.2,50,000 + Rs.5,000 Rs.85,000 Rs.80,000 = Rs.90,000 = Rs.1,00,000 since the proceeds are after discount of 10%. 10,000 shares. 279

Balances of share premium account Shortfall in share premium account Issue price of new equity share Nominal value of new equity share Number of equity shares

11.

(d) Capital Employed Particulars Total assets as per balance sheet Less: Goodwill Investment Preliminary expenses Add: Appreciation of plant and machinery (Rs.8,00,000 Rs.7,15,000) Appreciation of land and buildings (Rs.6,50,000 Rs.6,20,000) Less: Decreased value of receivables (Rs.80,000 Rs.70,000) Less: Current liabilities Sundry creditors Provision and taxation Capital employed (d) Super Profit Particulars Average profit after tax for last 5 years Less: Normal return (10% on capital employed) Super profit Goodwill (5 years x Rs.15,000) = Rs.75,000 Rs. 1,70,000 1,70,000 1,55,000 15,000 Rs. 55,000 58,000 30,000 85,000 30,000 1,15,000 17,02,000 10,000 16,92,000 80,000 60,000 Rs. 17,30,000

1,43,000 15,87,000

1,40,000 15,52,000

12.

13.

(e) From the above data Cost of investment = 24,000 shares x 12.50 = Rs.3,00,000 Shareholding % = 24,000 shares / 30,000 shares = 80%.

14. 15.

(b) Rs.60,000 because premium on issue of shares and premium on redemption of preference shares will not affect Capital Redemption Reserve Account. (c) Rs.40,000 of equity shares at 10% discount implies the total proceeds from issue of shares = Rs.36,000. Therefore, Rs.1,00,000 less Rs.36,000 = Rs.64,000.

16. 17.

(a) The application money should not be less than 5% of the nominal value of the shares. Hence, the minimum amount of application money is Rs.5 per share. (e) Particulars Land and building Plant and machinery Furniture and fixtures Investments Sundry debtors Inventories Cash Rs. 50,000 45,000 20,000 20,000 25,000 8,000 2,000 280

Particulars

Rs. 1,70,000

Less: Sundry creditors 2,000 Bank overdraft 5,000 18% Preference shares of Rs.10 each 45,000 18% Debentures 20,000 72,000 Net assets available for equity shareholders 98,000 Value per share = Net assets/Number of equity shares = Rs.98,000/10,000 = Rs.9.8 18. (c) No. of shares applied No. of shares Amount allotted received on application Amount Amount Amount Amount adjusted available for available for refunded towards adjustment to adjustment application allotment to first call money money Rs. 8,00,000 32,00,000 Rs. 16,00,000 8,00,000 Rs. Rs. 4,00,000 Rs. 2,60,000 60,000 2,00,000 Rs. 8,90,600 6,45,500 2,35,900 45,300 68,500 23,100 19,08,900 98,500 45,600 17,64,800 1,00,000 16,64,800 Ajay 8,000 3,300 4,700 6,000 (1,300) 1,300 Nil Samay 16,000 6,600 9,400 8,000 1,400 520 880 Vijay 24,000 9,900 14,100 11,000 3,100 780 2,320 Total 48,000 19,800 28,200 25,000 3,200 Nil 3,200 281

Rs. 20,000 1,40,000 10,000 19. (b) 20,000 80,000 8,00,000 56,00,000 4,00,000

Particulars Profit Less: Income from investments Profit to be considered for calculating goodwill Particulars Land and buildings Plant and machinery Furniture and fixtures Sundry debtors Inventories Cash Gross Assets Less: Sundry creditors Bank overdraft Closing capital employed Less: 50% of profit for the year 2002-2003 Average capital employed (b) Particulars Shares underwritten Less: Unmarked applications (in the ratio 1:2:3) Less: Marked applications Less: Surplus of Ajays share (in the ration 2:3) Final liability

20.

21.

22.

23.

24.

25.

(b) Issued at a premium of 20% = Rs.10 x 20% = Rs.2 Issue price per share = Rs.10 + Rs.2 = Rs.12 Amount called up on first and final call = Rs.12 (Rs.5 + Rs.4) = Rs.3 Amount paid by Mr. Lazy = Rs.5 x 140 x 15,000/10,000 = Rs.1,050 Amount of share premium paid by Mr. Lazy = Rs.2 x 140 shares = Rs.280 Amount transferred to share forfeited account = Rs.1,050 Rs.280 = Rs.770 Reissued at a discount of 10% = Rs.10 x 10% = Re.1 Amount of discount to Mr. Zeal = 140 shares x Re.1 = Rs.140 Amount transferred to capital reserve = Rs.770 Rs.140 = Rs.630 (d) The underwriting commission should not exceed 2.5% of the issue price in case of debentures. Issue price of the debentures is Rs.10 x 115% = Rs.11.5 Hence, the maximum commission payable to Mr.Wright is 38,000 x Rs.11.5 x 2.5% = Rs.10,925. (a) Value of goods in stock = Rs.90,000 x 60% = Rs.54,000 Profit included in the goods = Rs.54,000 x 20 / 120 = Rs. 9,000 Unrealized stock to be adjusted = Rs.9,000 x 55% = Rs. 4,950 (b) Whenever dividends are declared, they are recorded on their declaration date by a debit to retained earnings i.e., general reserve and a credit to declared dividend. The dividend is payable on outstanding paid-up capital on the date of declaration of dividend. Hence, the dividend payable is 50,000 x Rs.10 = Rs.5,00,000 General Reserve a/c Dr. Rs.5,00,000 To Dividend declared Rs.5,00,000 (a) Year 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 Profit (Rs.) 42,364 43,456 53,126 56,789 62,354 Weight 1 2 3 4 5 15 Product 42,364 86,912 1,59,378 2,27,156 3,11,770 8,27,580

Average profit = Rs.8,27,580 / 15 = Rs.55,172 26. (a) 1999-2000 2000-2001 2001-2002 (Rs.) (Rs.) (Rs.) Post-tax profits 1,50,000 1,65,000 2,20,000 Pre-tax profits 3,00,000 3,30,000 4,40,000 Add: Excessive depreciation 10,000 Abnormal loss 20,000 3,00,000 3,50,000 4,50,000 3, 00, 000 + 3,50, 000 + 4,50, 000 + 5, 00, 000 Average pre-tax profits = 4 = Rs.4,00,000 Rs.20,000 Less: Additional salaries Rs.3,80,000 Less: Tax @50% Rs.1,90,000 Future maintainable profits Rs.1,90,000 Particulars 2002-2003 (Rs.) 2,50,000 5,00,000 5,00,000

282

27.

(a) Capital Profits Pre-acquisition reserve Pre-acquisition profits Less: Dividend (20,00,000 x 10%) (Rs.) 4,50,000 2,50,000 7,00,000 2,00,000 5,00,000 Particulars Cost of investments Face value of investments (20,00,000 x 60%) Capital profits Rs.(5,00,000 x 60%) Dividend out of pre-acquisition profits Rs.(2,00,000 x 60%) Goodwill 12,00,000 3,00,000 1,20,000 16,20,000 2,55,000 Particulars Net Profit as calculated Add: Revenue Profit on sale of plant Less: Directors remuneration Bonus paid to production executive Net Profit 50,000 75,000 1,25,000 25,25,000 Rs. Rs. 25,50,000 1,00,000 26,50,000 (Rs.) (Rs.) 18,75,000

28.

(a)

Where the amount for which the fixed asset is sold exceed the written-down value, credit shall be given for so much of the excess as is not higher than the difference between the original cost of the fixed asset and its written down value. Hence, Rs.1,00,000 (Rs.5,00,000 Rs.4,00,000) should be added. The directors remuneration and the bonus paid to any member of companys staff should be deducted whereas Income tax and Sales tax should not be deducted. Credit should not be given to profits by way of premium on shares Managing Directors Commission = 25,25,000 5% = Rs.1,26,250 29. (c) When shares are forfeited, the share capital account should be debited with called up amount (excluding premium) and corresponding credit should be given to share call account with amount not received and share forfeiture account with amount received. If the premium is already received, the same should not be reversed. Hence the entry is Share capital a/c To Share first call a/c To Share forfeiture a/c 30. (e) Particulars Nominal value of 3,000 shares @ Rs.100 per share Share of capital Profit (1,70,000 + 1,50,000) 30% Share of Revenue Profit [(2,00,000 1,70,000) + (1,75,000 1,50,000)] 30% Minority interest Rs. 3,00,000 96,000 16,500 4,12,500 Dr. Rs.8,000 Rs.3,000 Rs.5,000

283

31.

(b) In case of issue of debentures at discount and redeemable at a premium, discount on issue of debentures a/c should be debited with the amount of discount, loss on issue of debentures a/c should be debited with the amount of premium payable on redemption and Bank account should be debited with actual amount received. Corresponding credit should be given to debentures a/c with face value of debentures and premium on redemption of debentures a/c with amount of premium. (d) Dividend is paid on paid-up capital Equity share capital + Preference share capital = Rs.48,000 + Rs.50,000 = Rs.98,000 = 10% of Rs.98,000 = Rs.9,800.

32.

284

Part III

Model Question Paper III


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. The appropriate attribute to use while measuring damaged inventory is a. Historical cost b. Current cost c. Current market value d. Net realizable value e. Present value of future cash flows. 2. Profit on reissue of forfeited shares must be transferred to a. Share premium b. General reserve c. Share capital d. Capital redemption reserve e. Capital reserve. 3. Which of the following statements is true? a. Dividend is payable on the calls paid in advance by the shareholder. b. Capital redemption reserve can be utilized for writing off miscellaneous expenses and losses. c. Profit on cancelation of debentures is to be transferred to general reserve. d. Any dividend remaining unpaid after 3 years from the date on which it became due can be transferred to capital reserve. e. When the proposed dividend does not exceed 10%, it is not obligatory on the company to transfer any profits to its reserve. 4. Which of the following is to be deducted from the assets, while valuing the equity shares under intrinsic value method? a. Preference share capital. b. Dividend equalization reserve. c. Contingency reserve. d. Debenture redemption fund. e. Capital redemption reserve. 5. Which of the following is not true of the Guidelines for issue of Bonus Shares? a. Reserves created by revaluation of fixed assets are not permitted to be capitalized. b. Bonus issue shall not be made in lieu of dividend. c. Bonus issue shall be made within 12 months of any public issue. d. Bonus issue is permitted only after the existing partly paid shares are made fully paid-up. e. Share premium and free reserves can be utilized for bonus issue. 6. Which of the following increases the earning capacity in the business? a. Bank overdraft. b. Prepaid insurance. c. Trademarks. d. Sundry debtors. e. Cash at bank. 285

Total Points: 100

7.

Capital profits are a. b. c. d. e. Profits earned by the subsidiary company up to the date of acquisition of shares by the holding company Post-acquisition profits of the subsidiary company Post-acquisition profits of the holding company Pre-acquisition profits of the holding company Profits earned by the subsidiary company by unusual transactions.

8.

Annual reports must be submitted to the registrar within ________ days of Annual General Meeting. a. b. c. d. e. 7 14 30 40 60. Dividend and interest can be paid out of capital. Premium on issue of debentures can be utilized for paying dividends. Capital profit realized in cash can be used for paying dividends. Capital profit transferred to capital reserve can be used for paying dividends. Dividends can be paid out of capital but interest cannot be paid out of capital. For cash For consideration other than cash As collateral security In lieu of dividends All of (a), (b) and (c) above.

9.

Which of the following statements is correct? a. b. c. d. e.

10.

Debentures can be issued a. b. c. d. e.

11.

On issue of shares, the application money should not be less than a. b. c. d. e. 5% of nominal value of shares 5% of the issue price of the shares 10% of nominal value of shares 10% of issue price of shares None of the above.

12.

The time interval between the dates of balance sheets of holding company and subsidiary company for the purpose of consolidation of accounts a. b. c. d. e. Can be more than 1 year Can be more than 9 months but less than 1 year Can be more than 6 months but less than 9 months Cannot be more than 6 months Cannot be more than 2 months.

286

13.

AS-2 on inventory valuation does not cover the inventories such as a. b. c. d. e. Work-in-progress arising under service contracts Inventories of forest products Land or other property held for sale Both (a) and (b) above Both (a) and (c) above.

14.

According to the Companies Act, the underwriting commission should not exceed a. b. c. d. e. 5% of the nominal value of shares and 2.5% for debentures 2.5% of the nominal value of shares and 2.5% for debentures 5% of the issue price of shares and 2.5% for debentures 5% of the issue price of shares and debentures 2% of the nominal value of shares and 3% for debentures.

15.

The intangible asset goodwill represents the a. b. c. d. e. High profits earned in the past Potential that earned high profits in the past Excess of acquisition cost over the gross assets acquired Capitalization of expected future profits All of the above.

16.

Human resource is not taken as asset in accounting books because of a. b. c. d. e. Cost concept Money measurement concept Consistency concept Business entity concept Conservatism concept.

17.

Net worth of the company is equal to a. b. c. d. e. Total assets at market value Liabilities Total assets at market value Liabilities Preference shareholders claims Total assets at book value Liabilities Total assets at market value (including fictitious assets) Liabilities Preference shareholders claim Total assets at market value (excluding fictitious assets) Outside Liabilities Preference shareholders claims.

18.

Unless expressly restricted, each shareholder of equity share capital carries all of the following rights except a. b. c. d. e. The right to share current profits The right to share voting rights The right to share companys assets on liquidation To cumulation of dividends To participate in rights issue of the same class of shares. 287

19.

Bonus shares issued by subsidiary company out of pre-acquisition profits a. b. c. d. e. Does not affect the cost of control Affects the cost of control Does not affect the revenue profits of the subsidiary company Both (a) and (b) above Both (a) and (c) above.

20.

When shares are issued to promoters for the services offered by them, the account that will be debited with the nominal value of shares is a. b. c. d. e. Preliminary expenses Goodwill Asset account Share capital Loss on issue of shares. Brokerage is the sum paid to a person for placing shares. Brokerage is payable at the rate of 1.5% in all types of public issue of industrial securities. Brokerage will not be allowed in respect of shares taken up by directors. Brokerage can be paid in respect of the rights issue taken up by the existing shareholders. Brokerage cannot be paid on the applications made by the institutions against their underwriting commitments. 2.5% of current profits 5% of current profits 7.5% of current profits 10% of current profits 15% of current profits. The post-acquisition profits of subsidiary company The post-acquisition profits of holding company The profits earned by the subsidiary company from regular transactions The profits earned by the holding company from regular transactions None of the above. Patent right. Trademark. Franchise. Goodwill. Copyright.

21.

Which of the following statements is not true? a. b. c. d. e.

22.

When the proposed dividend is 14% the amount to be transferred to reserve is a. b. c. d. e.

23.

Revenue profits are a. b. c. d. e.

24.

Which of the following intangible assets is considered an unidentifiable intangible asset? a. b. c. d. e.

288

25.

As per AS-10, fixed assets that have been retired from active use and held for disposal should be stated in balance sheet at a. b. c. d. e. Realizable value Net book value Original cost Higher of net book value or realizable value Lower of net book value or realizable value. Prospectus Trial balance Bank Reconciliation Statement Financial statements Statement of cash flow.

26.

The primary means of communicating important accounting information to users is a. b. c. d. e.

27.

Which of the following statements is true with regard to the debentures? 10% debenture means that a. b. c. d. e. 10% of the outstanding amount is redeemed every year. The debentures are issued @10% premium. The debentures are issued @10% discount. 10% of the outstanding amount shall not be redeemed. The debentures carry coupon of 10%. Conversion cost Conversion cost + Administration cost Conversion cost + Administration cost + Selling costs + Profits Conversion costs + Opening stock Conversion costs + Opening stock + Closing stock.

28.

Value addition is equal to a. b. c. d. e.

29.

30.

31.

The process of converting cost of intangible assets to expense is called a. Depreciation b. Amortization c. Depletion d. Deterioration e. None of the above. When debentures are issued at par and redeemed at premium a. Loss on issue of debenture a/c is debited b. Premium on redemption of debenture is credited c. Premium on redemption of debenture is debited d. Both (a) and (b) above e. Both (a) and (c) above. Which of the following appears in the profit and loss appropriation account? a. Provision for bad debts. b. Provision for taxation for current year. c. Directors remuneration. d. Interim dividend. e. Penalty paid for delay in payment of tax. 289

32.

The discount allowed on reissue of forfeited shares is debited to a. b. c. d. e. Share capital account Profit & loss account Capital redemption reserve account Forfeited shares account Capital reserve account.

33.

A dividend must be paid by the company within _______ of its declaration. a. b. c. d. e. 45 days 42 days 40 days 35 days 30 days.

34.

Issue of bonus shares by a subsidiary company out of its capital profits will a. b. c. d. e. Decrease cost of control Increase cost of control Have no effect on cost of control Increase revenue profit Decrease revenue profit.

35.

The maximum rate of discount that is allowed as per the provisions of the Companies Act in the event of a company issuing shares at a discount is a. b. c. d. e. 5% 8% 10% 12% 15%.

36.

The books of account of every company shall be preserved for a period of not less than _____ years. a. b. c. d. e. 12 10 8 6 5.

37.

Under which of the following heads is claims against a company not acknowledged as debts shown? a. b. c. d. e. Notes to balance sheet. Current liability. Current asset. Secured loan. Unsecured loan.

290

38.

Which of the following reports has/have to be submitted before the companys Annual General Meeting as per the Companies Act? a. b. c. d. e. Directors report. Auditors report. Profit & loss account. Balance sheet. All of the above. A loss on issue of debentures appears on the assets side of the balance sheet. A company can purchase its own debentures in a stock exchange for immediate cancelation. A company cannot purchase its own debentures in the open market for investments. Debenture can be issued for cash, consideration other than cash or as collateral security. The interest on debentures is payable whether a company makes profit or not. Liabilities side under current liabilities Liabilities side under provisions Assets side under current assets Assets side under loans and advances Assets side under miscellaneous expenditure.

39.

Which of the following statements is not true? a. b. c. d. e.

40.

Tax deducted at source appears in the balance sheet on the a. b. c. d. e.

Part B: Problems (60 Points)


Solve all the problems. Points are indicated against each problem. 1. The following is the balance sheet of A-Joy Ltd. as on March 31, 2002: Liabilities Share Capital 40,000 equity shares of Rs.10 each General reserve Profit & loss a/c Taxation reserve Workmens Savings a/c Sundry Creditors 4,00,000 Land & buildings 1,00,000 Plant at cost less depreciation 90,000 Furniture 50,000 Stock 60,000 Sundry debtors 50,000 Cash at bank Preliminary expenses 7,50,000 The company has revalued the following assets during the year: Rs. Goodwill 50,000 Plant 2,50,000 Furnitures 1,00,000 Stock 75,000 Sundry debtors include Rs.6,000 which has become bad. 291 2,40,000 2,20,000 80,000 80,000 60,000 60,000 10,000 7,50,000 Rs. Assets Rs.

The value of the equity share using the intrinsic value method is a. Rs.18.50 b. Rs.14.50 c. Rs.17.98 d. Rs.18.125 e. Rs.16.75. 2. (3 points) Following is the data pertaining to Lamtex Ltd. for the year ended March 31, 2002. i. ii. iii. The share capital of the company comprised of 40,000 equity shares of Rs.10 each. It is practice of the company to transfer 10% of the profits to reserve account. The profits before tax for past 3 years of the company were as follows: 1999-2000 2000-2001 2001-2002 iv. Rs.1,30,000 Rs.1,20,000 Rs.1,46,000

The normal yield in the similar business is 10% per annum. Income tax rate is 35%.

The value of equity share using the yield method is a. b. c. d. e. Rs.18 Rs.10 Rs.14.50 Rs.15.05 Rs.19.305. (2 points) 3. H Ltd. acquired 80% shares of S Ltd. on April 1, 2001. The authorized and subscribed share capital of S Ltd. comprised of 30,000 shares of Rs.10 each. As on date of acquisition, the following balances were revealed in the books of S Ltd.: General reserve Profit & loss account Rs.1,00,000 Rs.60,000 (cr.)

The balances in the Balance Sheet as on March 31, 2002 were General reserve Profit & Loss account Rs.1,50,000 Rs.1,30,000

H Ltd. received a dividend of Rs.24,000 from S Ltd. on the date of acquisition and credited the amount to investment account. The share of H Ltd. in the Capital profits and Revenue profits profits is a. b. c. d. e. Rs.1,50,000 ; Rs.1,30,000 Rs.1,04,000; Rs.1,20,000 Rs.1,10,000; Rs.85,000 Rs.1,60,000; Rs.1,20,000 Rs.1,28,000; Rs.96,000. (3 points)

292

4.

H Ltd. acquired 80% shares of S Ltd. on April 1, 2001 at Rs.3,20,000. The authorized and subscribed share capital of S Ltd. comprised of 30,000 shares of Rs.10 each. If the share of H Ltd. in the capital profits (pre acquisition) and revenue profits of S Ltd. are Rs.1,04,000 and Rs.1,50,000 respectively, the Cost of Control is a. b. c. d. e. Rs.66,000 (Goodwill) Rs.70,000 (Capital reserve) Rs.24,000 (Capital reserve) Rs.1,74,000 (Capital reserve) Rs.1,74,000 (Goodwill). (1 point)

5.

H Ltd. acquired 80% shares of S Ltd. on April 1, 2001. The authorized and subscribed share capital of S Ltd. comprised of 30,000 shares of Rs.10 each. The accountant of H Ltd. computes the capital profits (pre acquisition) and revenue profits (post acquisition) of S Ltd. as Rs.1,30,000 and Rs.1,50,000 respectively. The value of minority interest in the Consolidated Balance Sheet is a. b. c. d. e. Rs.60,000 Rs.86,000 Rs.90,000 Rs.1,16,000 Rs.1,19,000. (3 points)

6.

H Ltd. acquired 80% shares of S Ltd. on April 1, 2001. The balance sheets of H Ltd. and S Ltd. as on March 31, 2002 are as follows: Balance Sheets of H Ltd. and S Ltd. as on March 31, 2002 Liabilities Share capital (Rs.10 each) General Reserve Profit & Loss a/c Sundry Creditors Bills payable H Ltd. (Rs.) S Ltd. (Rs.) Assets 9,00,000 3,90,000 1,90,000 1,00,000 60,000 3,00,000 1,50,000 1,30,000 Land & Buildings Plant & Machinery Furniture & Fixtures H Ltd. (Rs.) S Ltd. (Rs.) 4,20,000 3,90,000 1,90,000 3,20,000 90,000 1,20,000 70,000 40,000 16,40,000 2,40,000 1,30,000 90,000 20,000 50,000 1,00,000 40,000 20,000 6,90,000

60,000 Investments 50,000 Stock Sundry Debtors Bills Receivable Cash & Bank

16,40,000 Additional Data:

6,90,000

i. The cost of control is Rs.24,000 (Capital reserve). ii. Sundry debtors of H Ltd. include Rs.10,000 due from S Ltd. iii. Total bills payable of S Ltd. consists of bills drawn by H Ltd. and the same were discounted with the bank by H Ltd. 293

The total of the Consolidated Balance Sheet is a. b. c. d. e. Rs.20,00,000 Rs.20,10,000 Rs.19,50,000 Rs.20,30,000 Rs.23,30,000. (2 points) 7. XLNC Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 1999-2000. Interest on debentures is payable half yearly on September 30 and March 31 every year. The company has power to purchase its own 10% debentures in the open market for cancelation. The following purchases were made during the year 2001-2002: On July 1, 2001 400 its own 10% Debentures at the rate of Rs.96 ex-interest. The journal entry for purchase of debentures as investment is a. Own Debenture account Interest on debentures A/c To Cash A/c b. 12% Debentures account Interest on debentures A/c To Cash c. d. 12% Debentures account To Cash Own Debentures account Interest on Debentures A/c To Cash A/c e. Own Debentures account Interest on Debentures A/c To Cash A/c 8. Dr. Dr. 37,400 5,000 42,400 (2 points) Linda Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 1999-2000. Interest on debentures is payable half yearly on September 30 and March 31 of every year. The company has power to purchase its own 10% debentures in the open market for cancelation. The following purchases were made during the year 2001-2002: On July 1, 2001 400 its own 10% Debentures at the rate of Rs.96 ex-interest. On December 1, 2001 300 its own 10% Debentures at the rate of Rs.102 cum-interest. The company canceled all the above debentures on March 31, 2002. The amount transferred to Capital Reserve account on account of cancelation of own debentures is a. b. c. d. e. Rs.4,000 Rs.6,500 Rs.4,000 Rs1,500 Rs.70,000. (2 points) Dr. Dr. 38,400 1,000 39,400 Dr. 40,000 40,000 Dr. Dr. 37,400 10,000 47,400 Dr. Dr. 37,400 1,000 38,400

294

9.

High Power Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows: On application On allotment On final call Rs.5 (including premium) Rs.4 Rs.3

The company received 7,000 applications. 1,000 applications were rejected by the company and allotment was made on pro rata basis to the applicants of 6,000 shares. Money overpaid on applications was adjusted on account of sums due on allotment. The journal entry for the adjustment and appropriation made to the money received on application is a. Share application account To Share capital account To Share premium account b. Share application account To Bank To Share capital account To Share premium account To Share allotment account c. Share application account To Share capital account To Share premium account To Bank d. Share application account To Share capital account To Share premium account e. Share application account To Share premium account To Share capital account To Share first and final call account 10. Dr. 35,000 10,000 20,000 5,000 Dr. 35,000 25,000 10,000 Dr. 35,000 18,000 12,000 5,000 Dr. 35,000 5,000 15,000 10,000 5,000 Dr. 35,000 25,000 10,000

(2 points) Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows: On application On allotment On final call Rs.5 (including premium) Rs.4 Rs.3

Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Beejay to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares, failed to pay call money. All these shares were forfeited after proper notice. The Journal entry for the forfeiture of 160 shares is a. Share capital account Share premium account To Share allotment account To Share final call account To Share forfeiture account Dr. Dr. 1,600 320 180 480 1,260 295

b.

Share capital account To Share final call account To Share forfeiture account

Dr.

1,420 480 940

c.

Share capital account To Share allotment account To Share final call account To Share forfeiture account

Dr.

1,600 240 480 880

d.

Share capital account To Share final call account To Share forfeiture account

Dr.

1,600 480 1,120

e.

Share capital account To Share allotment account To Share final call account To Share forfeiture account

Dr.

1,600 180 480 940 (2 points)

11.

An amount of Rs.940 is credited in the share forfeiture account on account of forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid only Rs.7 per share. On a later date, the company reissued the forfeited shares of Mr. Raj (i.e., 100 shares) to Mr. Balraj at a price of Rs.8 per share as fully paid. The amount transferred to the Capital reserve account is a. b. c. d. e. Rs.700 Rs.200 Rs.500 Rs.740 Rs.640. (2 points)

12.

The following is the balance sheet of Quick-Do Ltd. as on March 31, 2002: Liabilities Share capital 50,000 equity shares of Rs.10 each General reserve Profit and loss account Bank overdraft Sundry creditors Provision for taxation Rs. Assets Rs. 5,00,000 4,00,000 1,00,000 80,000 1,60,000 60,000 13,00,000

5,00,000 Buildings & land 3,00,000 Plant & machinery 1,00,000 Furniture 2,00,000 Stock 1,20,000 Sundry debtors 80,000 Cash at bank 13,00,000

The company has furnished the following information: The market value of the assets were as follows: Plant & machinery Furniture Stock Rs.5,00,000 Rs.2,00,000 Rs.1,00,000

296

The amount of Closing Capital employed of the Company is a. b. c. d. e. 13. Rs.11,20,000 Rs.13,00,000 Rs.9,00,000 Rs.15,20,000 Rs.16,00,000. (2 points) The capital employed of Manchuria Ltd. is Rs.12,00,000. i. Net profit of the company for the last 4 (four) years before providing taxation was as follows: 1st year 2nd year 3rd year 4th year ii. iii. a. b. c. d. e. 14. Rs.2,00,000 Rs.2,50,000 Rs.2,10,000 Rs.3,00,000

Income tax rate is 35%. Normal rate of return in the similar business is 10%. Rs.2,40,000 Rs.1,56,000 Rs.1,20,000 Rs.1,44,000 Rs.1,08,000. (2 points)

The value of goodwill on the basis of 4 years purchase of super profits of the company is

The following information is extracted from the books of Jeet and Company. Particulars Opening stock (1/4/2001) Purchases and sales Returns Manufacturing wages Carriage inwards Sundry Manufacturing Expenses Debit 1,86,420 7,18,210 11,69,900 12,680 1,09,740 4,910 19,240 9,850 Credit

On March 31, 2002 outstanding manufacturing wages stood at Rs.1,890. On the same date stock was valued at Rs.1,24,840. The Gross Profit for the year is a. b. c. d. e. Rs.2,51,500 Rs.2,60,000 Rs.2,61,250 Rs.2,70,100 Rs.2,80,900. (2 points)

297

15.

Anand is a wholesaler in textile goods. On January 1, 1998 he had stocks of main varieties A and B valued at Rs.14,000 and Rs.24,000 respectively. During the six months ended June 30, 1998 his purchases were Rs.72,000 and Rs.1,44,000 respectively. He had taken for personal and family use one bale of variety A costing Rs.6,000. On 30th June his stocks were : A Rs.8,000 and B Rs.18,000. Goods were sold by Anand at the retail prices fixed by the manufacturer which yield 25% gross profit on sales. The total sales figure of Anand for the six months is a. b. c. d. e. Rs.2,84,000 Rs.2,77,500 Rs.2,40,000 Rs.2,96,000 Rs.3,00,000. (2 points)

16.

The pre-tax profits of Mitra Ltd. for the past four years are as under: Profit (Rs.) 1999-2000 1,32,000 2000-2001 1,45,000 2001-2002 1,50,000 2002-2003 1,80,000 The closing stock of the year 2000-2001 was overvalued by Rs.20,000. Year During the year 2002-2003, Rs.15,000 was incurred towards a major repair of the machinery to increase its operating capacity and the same was charged to revenue. The profit for the year 1999-2000 includes income of Rs.2,000 from non-trading investments. The tax rate is 35%.

The average annual post-tax profits of Mitra Ltd., for the purpose of valuation of goodwill, is a. b. c. d. e. 17. Rs.1,00,750 Rs.97,500 Rs.1,55,000 Rs.1,50,000 Rs.95,875. (2 points) The share capital of Sanjana Ltd. is Rs.10,00,000 consisting of fully-paid shares of 1,000, 15% preference shares of Rs.100 each and 9,000 equity shares of Rs.100 each. The profit of the company for the year 2002-2003 is Rs.1,23,000. The normal rate of return is 8%. The value of equity share of the company is a. b. c. d. e. Rs.171 Rs.125 Rs.154 Rs.150 Rs.263. (2 points)

298

18.

On July 01, 2001, Sign Ltd. issued 50,000, 12% debentures of Rs.10 each. The interest on debentures is payable on June 30 and December 31, every year. On March 01, 2003, the company purchased 2,000 own debentures at 98 % cum-interest. On June 30, 2003, the debenture interest account will be debited with a. b. c. d. e. Rs.28,800 Rs.29,400 Rs.28,000 Rs.29,600 Rs.32,000. (1 point)

19.

Success Ltd. has proposed a dividend of 18% of the paid-up capital. The minimum percentage of current profits that has to be transferred to reserves is a. b. c. d. e. 5.0% 2.5% 7.5% 10.0% 15.0%. (1 point)

20.

Leo Ltd. has a share capital of 6,000 equity shares of Rs.100 each having a market value of Rs.176 per share. The company wants to raise additional funds and offers to existing equity shareholders the right to apply for a new share at Rs.120 per share for every three shares held by them. The value of right is a. b. c. d. e. Rs.176 Rs.120 Rs.56 Rs.40 Rs.14. (1 point)

21.

Consider the following data pertaining to Wise Ltd., as on March 31, 2002: Particulars 400 Equity shares of Rs.100 each 1,000 Preference shares of Rs.10 each 12% Debentures of Rs.10 each Sundry creditors Fixed assets Current assets The asset backing per equity share is a. b. c. d. e. Nil 1 time 2 times 3 times 4 times. (2 points) Rs. 40,000 10,000 5,000 10,000 50,000 15,000

299

22.

Teja Company purchased land and building from Avanti Company for a book value of Rs.2,00,000. The consideration was paid by issue of 12% debentures of Rs.100 each at a discount of 20%. The debenture account is credited with a. b. c. d. e. Rs.2,60,000 Rs,2,50,000 Rs.2,40,000 Rs.1,00,000 Debentures cannot be issued otherwise than for cash. (1 point)

23.

Consider the following data pertaining to XLNT Ltd. as on April 1, 2001: Particulars Rs. 12% Debentures 50,000 Debenture sinking fund 40,000 Debenture sinking fund investment (represented by 18%, Rs.46,000 secured bonds). 40,000 The company sold the investments at 80% on March 31, 2002 and the debentures were paid-off. The loss incurred on account of sinking fund investment account is a. b. c. d. e. Rs.6,000 Rs.4,000 Rs.3,700 Rs.3,200 Rs.2,300.

24.

(2 points) M/s.Z Ltd. issued 10,000 equity shares of Rs.100 each at par, out of which only Rs.85 is called-up. Mr. A did not pay the call money of Rs.25 and hence all the 500 shares allotted to him were forfeited. If all these shares are to be reissued as fully paid-up, the minimum amount to be collected is a. b. c. d. e. Rs.20,000 Rs.50,000 Rs.7,500 Rs.30,000 Rs.12,500.

25.

(1 point) M/s. Sunshine Ltd. issued 32,500 equity shares of Rs.10 each. The issue was underwritten by A, B and C as follows: A 15,000 shares B 10,000 shares C 7,500 shares The company received applications for 31,500 shares, of which marked applications were as follows: A 12,000 shares B 8,000 shares C 8,900 shares The final liability of B is a. 2,000 shares b. 1,000 shares c. Nil shares d. 600 shares e. 400 shares. (2 points) 300

26.

M/s.Fair Ltd. issued 1,500 5% preference shares of Rs.100 each at par, which are redeemable at a premium of 5%. For the purpose of redemption, the company issued 10,000 equity shares of Rs.10 each at a premium of Rs.2 per share. At the time of redemption of preference share capital, the amount to be transferred by the company to the capital redemption reserve account is a. b. c. d. e. Rs.50,000 Rs.30,000 Rs.1,00,000 Rs.1,20,000 Rs.37,500. (2 points)

27.

M/s.AB Ltd. earned a profit of Rs.20,000 during the year 2002-2003. The following balances are extracted from the books of the company as on March 31, 2003: Particulars Land and building Machinery Patents and copyrights Furniture and fittings Sundry debtors Cash in hand Cash at bank Sundry creditors Short-term loan Stock-in-hand Preliminary expenses The average capital employed of the company is a. b. c. d. e. Rs.3,85,000 Rs.3,95,000 Rs.3,75,000 Rs.4,00,000 Rs.4,10,000. (2 points) Rs. 1,00,000 1,50,000 50,000 60,000 30,000 6,000 4,000 10,000 15,000 10,000 20,000

28.

The following data is extracted from the books of M/s.Rich Ltd. as on March 31, 2003: Share capital (40,000 shares of Rs.100 each) Rs.40,00,000 Net assets Rs.60,00,000 Dividend declared 6.25% If the return in other companies in the similar industry is 5%, the fair value of equity share of M/s.Rich Ltd. is a. b. c. d. e. Rs.150.00 Rs.125.00 Rs.137.50 Rs.106.25 Rs.105.00. (2 points)

301

29.

30.

31.

32.

Consider the following data pertaining to M/s.Bright Sun Ltd. as on March 31, 2003: Per share Particulars Face value Rs. Paid-up value Rs. Share Capital: 1,00,000 equity shares 10 10 50,000 equity shares 10 8 50,000 equity shares 10 7 If net assets of the company are Rs.25,50,000, the value per share of Rs.8 paid-up share is a. Rs.12.00 b. Rs.14.00 c. Rs.10.75 d. Rs.15.67 e. Rs.12.75. (2 points) M/s.Ram Ltd. holds 80% shares of M/s.Shyam Ltd. As on March 31, 2003, the bills payable of M/s.Shyam Ltd. consists of Rs.10,000 out of which bills worth Rs.3,000 were drawn by M/s.Ram Ltd. and the same were discounted with the bank. If the Balance Sheet of M/s.Ram Ltd. does not figure any amount under bills payable, the amount of bills payable to be shown in the Consolidated Balance Sheet as on March 31, 2003 is a. Rs.10,000 b. Rs.7,000 c. Rs.4,000 d. Rs.13,000 e. Rs. Nil. (1 point) M/s.Superpower Ltd. issued 6,000 12% Debentures of Rs.100 each in the month of April 2001. The company purchased its own debentures as under: Date of purchase No. of debentures Price Rs. September 30, 2002 1,000 96 (ex-interest) March 31, 2003 1,500 98 (cum-interest) If interest is payable on June 30 and December 31 every year, the balance of Own debentures account as on March 31, 2003 is a. Rs.2,43,000 b. Rs.2,38,500 c. Rs.2,40,000 d. Rs.2,41,500 e. Rs.2,43,500. (2 points) Consider the following data pertaining to M/s.Super Bright Ltd.: Year Pre-tax profits (Rs.) Return on capital employed (%) 1999-2000 5,60,000 10.0 2000-2001 6,50,000 12.5 2001-2002 7,00,000 17.0 2002-2003 6,90,000 20.5 If the tax rate is 40%, the total value of the business considering the above data is a. b. c. d. e. Rs.6,50,000 Rs.26,00,000 Rs.3,90,000 Rs.43,33,333 Rs.97,500. (2 points) 302

Part III

Model Question Paper III


Suggested Answers
Part A: Basic Concepts
1. 2. 3. (d) The appropriate attribute to use while measuring damaged inventory is net realizable value. (e) The profit on reissue of forfeited shares is a capital profit and is transferred to capital reserve a/c. (e) Dividend is payable on the paid-up capital. It is not obligatory on the company to transfer any profits to its reserve if proposed divided does not exceed 10%. A company can purchase its own debentures in the open market. The purchase may be at the price less than the paid-up value of the debentures. In such case the company earns profits on cancelation of such debentures. The said profit is a capital profit and it can be used for writing-off of any capital loss such as discount on issue of debentures, etc., or it can be transferred to capital reserve. According to the Companies Amendment Act, 1999, if the dividend is not claimed within 7 years from the date of its transfer, the amount must be transferred to the Investor Education and Protection Fund. (a) Dividend equalization reserve, Contingency reserve, Debenture redemption fund and Capital redemption reserve should not be deducted while calculating the value of equity shares under intrinsic value method. However, the preference share capital is to be deducted. (e) Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of bonus shares shall be subject to the prescribed SEBI guidelines, which inter alia provide for the following. i. Bonus issue shall not be made within 12 months of any public/rights issue. ii. Reserves created out of revaluation of fixed assets shall not be capitalized. iii. Bonus issue shall not be made in lieu of dividend. iv. Bonus issue shall not be made unless partly paid shares, if any, existing is made fully paid-up. (c) Patents, trademarks and know-how are the intangible assets which increase the earning capacity of a business. Bank overdraft is a liability which is to be repaid out of earnings of a business. Prepaid insurance is the premium that is unexpired during the preceding financial year. Sundry debtors are the current assets which are not meant for increase in the earning capacity of a business. Cash at bank is a current asset and do not directly help in increasing the earning capacity of a business. (a) Profits existing in or earned by the subsidiary company up to the date of acquisition of shares by the holding company are capital profits. Any increase in the value of fixed assets of the subsidiary company, whether before or after the date of acquisition will also be treated as capital profits and if there is reduction in the value of the fixed assets as on the date of acquisition, it must be treated as capital loss and debited to the goodwill account. (c) According to the Companies Act, 1956, annual reports must be submitted to the Registrar within 30 days of the Annual General Meeting. (c) Capital profit realized in cash can be utilized for paying dividends. Dividend and interest cannot be paid out of capital. Premium on issue of debentures cannot be utilized for paying dividends. The premium collected on the issue of debenture is in the nature of a capital profit and hence the same is to be transferred to capital reserve account and shall be shown in the balance sheet under the heading Reserves and Surplus of the liabilities side. (e) Debentures can be issued for cash or for consideration other than cash or as collateral security. (a) The company fixes the application money. The application money so fixed by the company should not be less than 5 percent of nominal value of the shares. (d) According to the subsection 2(c) of Section 212 of the Companies Act, the time interval between the dates of balance sheets of the holding company and the subsidiary company should not be more than 6 months and hence the other points stated in (a), (b), (c) and (e) are not correct. 303

4.

5.

6.

7.

8. 9.

10. 11. 12.

Financial Accounting II

13.

14. 15.

16.

17. 18.

19.

20.

21.

22.

23.

24.

(d) AS-2 prescribes the accounting treatment for inventories under the historical cost system. This standard should be applied in financial statements prepared in the context of the historical cost system in accounting for inventories other than: a. Work-in-progress arising under construction contracts, including directly related service contracts; b. Financial instruments; and c. Producers inventories of livestock, agricultural and forest products, and mineral ores to the extent that they are measured at net realizable value in accordance with well-established practices in certain industries. (c) According to the Companies Act, 1956, the underwriting commission payable shall not exceed 5 percent on the issue price of shares and 2.5 percent of debentures. (d) Goodwill like any other intangible asset lacks physical substance but possess economic value. It represents the excess of the price paid for the fair value of the net identifiable assets. It represents the capitalization of expected future profits. It neither represents the high profits earned nor the potential capacity of the entity to earn high profits in the past. It represents the acquisition cost over the net assets acquired and not the value of the gross assets. (b) In financial accountancy, a record is made only when the information can be expressed in monetary terms. Recording, classification and summarization of business transactions requires a common unit of measurement, which is taken as money. If events cannot be quantified in monetary terms, then they do not facilitate accounting. Hence, human resource cannot be taken as asset in accounting books. (e) Net worth = Total assets (excluding fictitious assets) Outside liabilities Preference shareholders claim. (d) Unless expressly restricted, each shareholder of equity share capital carries the rights to share cumulative profits, voting rights, companys assets on liquidation and the fresh issue of same class of shares (rights shares). However they do not have the right to share cumulative dividend. (e) If bonus shares are issued out of pre-acquisition profits, there will be no change in the accounting treatment. While calculating the cost of control, the holding companys share in the pre-acquisition profit is reduced at one hand and on the other hand, the paid-up value of shares is increased. Hence, there is no effect on the cost of control on the bonus shares issued out of the pre-acquisition profits. (b) When shares are issued to promoters for the services offered by them, the account that will be debited with the nominal value of shares is goodwill account. They are not the expenses incurred prior to incorporation to be debited to preliminary expenses, neither a loss on issue of shares to be debited to loss on issue of shares. It is not a tangible value to debit to asset account on the other hand share capital is credited but not debited. (d) Brokerage is the sum paid to a person for placing shares. Brokerage is payable at the rate of 1.5% in all types of public issue of industrial securities. Brokerage will not be allowed in respect of shares taken up by directors. Brokerage cannot be paid against the underwriting commitments. Also brokerage can be paid in respect of the rights issue taken up by existing shareholders. (b) Where the dividend proposed exceeds 12.5 percent but does not exceed 15 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 5 percent of the current profits. (a) Profits earned and reserves built-up subsequent to the date of purchase are treated as revenue profits. If the fall in the value of assets occurs after the date of acquisition, the loss should be treated as an ordinary revenue loss. (d) Intangible assets lack physical substance but possess economic value and are long-term assets of a firm. Intangible assets are sometimes classified as either identifiable or unidentifiable. Patents, licenses, and trademarks are identifiable intangibles; they can be sold individually (although, of course, they are not sold in the ordinary course of business). By contrast, customer loyalty and reputation for quality are unidentifiable intangibles; they cannot be realized without selling the entire enterprise.

304

Part III

25. 26.

27. 28.

29.

30. 31.

32.

33.

34.

(e) As per AS-10, fixed assets which are not in active use should be shown in the balance sheet at net book value or realizable value whichever is less. (d) The users of accounting information of a company are investors, bankers, creditors, shareholders, management, employees, customers, government and regulatory agencies who are interested in the affairs of a company. The means of communicating information are financial statements; (d) i.e., profit and loss account and balance sheet. These are the means through which inferences like ratio analysis are drawn. Prospectus (a) is the document inviting the public to subscribe to its securities and there may be certain accounting statistics, which are useful to the users. But it is not comprehensive. Hence it is false. Trial balance (b) is a summary of all ledger accounts prepared in a tabular form from which no useful inference can be drawn. Hence, it is not the correct answer. Bank reconciliation statement (c) is a statement prepared by a business only in the event of difference between balance as per bank statement and bank column of cashbook, which has no relevance to the users. Hence, it is false. Statement of cash flow (e) is the statement depicting inflow and outflow of cash irrespective of nature of source and relevance of period. It is more or less of receipts and payments account of non-profit organization which has no significance to the users and it is false. (e) 10% debentures means the debentures carry coupon of 10% i.e., 10% interest is payable on the debentures. (c) According to the additive approach, all the items that create value such as wages and salaries, interest, depreciation, rent, rates and insurance, employee benefits, other overhead expenses and profit before tax are all added up to give the sum of value added. In short, value addition (according to the additive approach) = Conversion cost + Administration cost + Selling costs + Profits. (b) Amortization is the method of converting cost of intangible assets to expense. Intangible assets like patents, trademarks, franchises are amortized over a period of time. The other alternatives a. Depreciation is the process of allocating to expense the cost of fixed assets over its useful life in a rational and systematic manner. c. Depletion is the process of allocating the cost of natural resources like coal petroleum etc., to expense in a rational and systematic manner. d. Deterioration is the physical process of wearing out. e. Thus, the alternatives (a), (c), (d) and (e) are not relevant to intangible assets. (d) When debentures are issued at par and redeemed at premium loss on issue of debenture a/c is debited and premium on redemption of debenture a/c is credited. (d) Profit and loss appropriation account depicts appropriation of net profit. Interim dividend (d) is appropriation of part of net profit to owners. It appears in profit and loss appropriation account. Provisions for bad debts (a) provision for taxation for current year (b) Directors remuneration (c) penalty paid for delay in payment of tax (e) all are charged against profit and loss account. Hence, the alternatives (a), (b), (c) and (e) are not the correct answers. (d) If a company reissues the forfeited shares at a discount, that discount amount will be debited to forfeited share account. According to the Companies Act, the company cannot debit share capital account, profit and loss account, capital redemption reserve account and capital reserve account for the amount of discount allowed on reissue of forfeited shares. (e) As per the Companies Act, a shareholder can claim the dividends only after the approval of the proposed dividend at the Annual General Meeting. The dividend so approved should be paid within 30 days from the date of declaration. (c) If the bonus shares are issued out of capital (or pre-acquisition) profit, it will not have any effect on the consolidated balance sheet. Because it will cause decrease in the holding companys share of pre-acquisition profit and on the other hand, paid-up value of the equity shares held by the holding company will be increased by the same amount. So, the amount of goodwill or capital reserve will be the same. Hence, the points stated in (a), (b), (d) and (e) are not correct. 305

Financial Accounting II

35.

(c) A company cannot issue shares at a discount except as provided in Section 79 of the Companies Act. According to the said section, the maximum rate of discount at which the shares can be issued is 10%. If it exceeds 10% an approval from the Company Law Board is required. These conditions are intended to ensure that the discount is not unreasonable. (c) As per the Companies Act, the books of account of every company together with the vouchers relevant to any entry in such books shall be preserved for a period of not less than 8 years. (a) If the claim against a company is not fixed-up as debt, that information should be disclosed in the financial statement. This type of claim cannot be treated either as current asset or current liability or secured loan or unsecured loan in the balance sheet, because it is of the nature of a contingent liability. (e) All the reports indicated in (a), (b), (c) and (d) are required to be submitted in the Annual General Meeting. (c) According to the provisions of the Companies Act, a company can purchase its own debentures in the open market for immediate cancelation or for investment. So, the statement given in (c) is false. The other statements, stated in (a), (b), (d) and (e) are correct. (a) Tax deducted at source is the liability of the company towards the tax authority. It is also payable to the tax authority within very short period. So, it is the item of current liabilities. It cannot be treated as provisions or assets.

36.

37.

38. 39.

40.

Part B: Problems
1. (c) Intrinsic Value Method Assets Goodwill Land & building Plant Furniture Stock Sundry debtors (Rs.60,000 Rs.6,000) Cash at bank Less: Liabilities Workmens savings Sundry creditors Rs.60,000 Rs.50,000 1,10,000 Rs. 50,000 2,40,000 2,50,000 1,00,000 75,000 54,000 60,000 8,29,000

2.

Net assets 7,19,000 Intrinsic value per share = 7,19,000/40,000 = Rs.17.98 or Rs.18. (e) Profits for three years = Rs.1,30,000 + Rs.1,20,000 + Rs.1,46,000 = Rs.3,96,000 Average profits = Rs.3,96,000/3 = Rs.1,32,000 Less: Income tax @ 35% = Rs.46,200 Profit after tax = Rs.85,800 Less: Transfer to Reserves10% = Rs.8,580 Profits available for dividend = Rs.77,220 Expected rate of dividend = 77,220/4,00,000 x 100 = 19.305% Value per share = 19.305%/10% x 10 = Rs.19.305. 306

Part III

3.

(b) i. ii.

Shares of H Ltd. = 80% Minority = 20% Dividend received from S Ltd. out of pre-acquisition profit has been credited to investment account. Capital Profit Particulars Balance as on date of acquisition General reserve Profit & loss account Less: Dividend (Rs.24,000 x 100/80) H Ltd. 80% Rs.1,04,000 Minority 20% Rs.26,000 Revenue Profit Particulars General reserve (Rs.1,50,000 Rs.1,00,000) Profit & loss account (Rs.1,30,000 Rs.30,000) H Ltd. 80% Rs.1,20,000 Minority 20% Rs.30,000. Rs. 50,000 1,00,000 1,50,000 Rs. 1,00,000 Rs.60,000 Rs.30,000 30,000 1,30,000

iii.

4.

(c) Cost of Control/Goodwill Particulars Rs. Cost of investment Less: Nominal value of shares (80% of Rs.3,00,000) 2,40,000 Capital profit 1,04,000 Capital reserve (d) Shares of H Ltd. = 80% Minority = 20% Share Capital of Minority Interest = 20% of Rs.3,00,000 = Rs.60,000 Minority in capital profits = 20% of Rs.1,30,000 = Rs.26,000 Minority in revenue profits = 20% of Rs.1,50,000 = Rs.30,000 Total minority interest = Rs.1,16,000 (a) The total of the Consolidated Balance Sheet is computed as follows: Rs. 3,20,000 3,44,000 24,000

5.

6.

The total of the Balance sheet of H Ltd. The total of the Balance sheet of S Ltd. The total of assets Adjustments: Eliminate whole of investment value of H Ltd. in S Ltd. Adjustment for inter owing in debtors (3,20,000) Goodwill if any (add) Nil Bills accepted by S Ltd. in favor of H Ltd. have been discounted (10,000) by H Ltd. These bills are no more intercompany debts. Total of Consolidated Balance Sheet 20,00,000

Rs. 16,40,000 6,90,000 23,30,000

307

Financial Accounting II

7.

(d) Purchased on July 1, 2001 hence interest for the period of April June i.e., 3 months = 3/12 x 400 x 100 x 10% = Rs.1,000 is to be paid exclusive of the price of Rs.96 on shares = Rs.96 x 400 shares = Rs.38,400. Total payment = 1,000 + Rs.38,400 = Rs.39,400. The journal entry in this respect is Own Debenture account Interest on debentures A/c To Cash A/c Dr. Dr. 38,400 1,000 39,400. Cr.
Nominal (Rs.) Interest (Rs.) 2,000 3,500 70,000 70,000 Cost (Rs.)

8. Dr.
Date 1.7.2001

(d) Own Debentures Investment A/c


Particulars To Bank Nominal (Rs.) 40,000 30,000 70,000 Interest (Rs.) 1,000 500 4,000 5,500 Cost Date (Rs.) Particulars By Debenture 38,400 30.9.2001 interest By Debenture 30,100 31.3.2002 interest By 10% Debenture account 1,500 70,000 70,000 5,500 70,000

1.12.2001 To Bank To Profit & Loss 31.3.2002 account To Capital reserve (Profit on cancelation)

9.

(b) Particulars Amount received (7,000 x Rs.5) Less: Applications rejected (1,000 x Rs.5) Less: Applications money for 5,000 shares (5,000 x Rs.5) Surplus The amount on applications rejected is credited to Bank account. Share capital account Share premium account Share application a/c To Bank a/c To Share capital a/c To Share premium a/c To Share allotment a/c 5,000 x 3 = Rs.15,000 5,000 x 2 = Rs.10,000 Dr. Rs.35,000 Rs.5,000 Rs.15,000 Rs.10,000 Rs.5,000 Rs. Share capital account (160 x 10) To Share allotment account (60 x 3) To Share final call account (160 x 3) Dr. 1,600 180 480 Rs. Rs. 35,000 5,000 30,000 25,000 5,000

The amount on applications in respect of 5,000 shares allotted is credited to

The amount of surplus is credited towards the share allotment amount due.

10.

(e) The journal entry is

To Share forfeiture account (240 + 100 x 7) 940 (Forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid only Rs.7 per share.) Shares allotted = 60 Share applied = 60 x

5, 000 = 72 6, 000

= 72 x 5 = Rs.360 120 = 240. 308

Part III

11.

(c) Total of share forfeiture credit on account of 160 shares = 940 The amount of forfeiture credit on account of 100 shares = 700 Discount on reissue charged against this = 200 The amount of share forfeiture account transferred to capital reserve = (100 x Rs.7 100 x Rs.2) = Rs.500.

12.

(a) Net assets basis Building & Land Plant & machinery Furniture Stock Sundry debtors Cash at bank Less: Outside Liabilities Bank overdraft Sundry creditors Provision for taxation Capital employed Rs. Rs. 5,00,000 5,00,000 2,00,000 1,00,000 1,60,000 60,000 15,20,000

2,00,000 1,20,000 80,000

4,00,000 11,20,000

13.

(d) Calculation of Super Profit Particulars Rs. Profit 1st year 2,00,000 2nd year 2,50,000 3rd year 2,10,000 4th year 3,00,000 Average profit 9,60,000 4 Less: Income tax at the rate 35% Less: Normal return: (10% on Rs.12,00,000 capital employed) Super profit Goodwill = 4 years x Super profit = 4 x Rs.36,000 = Rs.1,44,000 (a) Particulars To Opening stock (1/4/2001) To Purchases Rs. Rs.

2,40,000 84,000 1,56,000 1,20,000 36,000

14.

Amount Amount Rs. Rs. Particulars Rs. 1,86,420 By Sales 11,69,900 7,18,210 Less: Returns 12,680 11,57,220 By Closing 9,850 7,08,360 stock 1,24,840 To Wages 1,09,740 + Outstanding 1,890 1,11,630 To Carriage inwards 4,910 To Sundry Manufacturing 19,240 expenses To Gross Profit 2,51,500 12,82,060 12,82,060 309

Financial Accounting II

15.

(d) Particulars Rs. Amount Particulars (Rs.) By Sales To Opening stock: Variety A: Variety B: To Purchases: Variety A Less: Used for Personal Variety B To Gross Profit (25% on sales) (Wn) Working Notes: Opening stock Add: Purchases Less: Closing stock Cost of goods sold Rate of Gross profit Gross profit The sales for the period Rs. 38,000 2,10,000 2,48,000 26,000 2,22,000 = 25% on sales or 25/75 on cost = 25/75 x Rs.2,22,000 = Rs.74,000. = Rs.2,96,000. 74,000 3,22,000 3,22,000 6,000 66,000 1,44,000 2,10,000 72,000 14,000 24,000 (Balancing fig) By Closing stock 38,000 Variety A: Variety B: 8,000 18,000 26,000 2,96,000 Rs. Amount (Rs.)

16.

(a) 1999-2000 2000-2001 2001-2002 2002-2003 Rs. Rs. Rs. Rs. Profits 1,32,000 1,45,000 1,50,000 1,80,000 Less: Overvaluation of closing stock (20,000) Add: Overvaluation of opening stock 20,000 Add: Major repair 15,000 Less: Income from non-trading investments (2,000) Adjusted pre-tax profits 1,30,000 1,25,000 1,70,000 1,95,000 Average pre-tax profits = (1,30,000 + 1,25,000 + 1,70,000 + 1,95,000)/4 = Rs.1,55,000 Particulars

17.

Average post-tax profits = Rs.1,55,000 x 65% = Rs.1,00,750. (d) Particulars Rs. Profit 1,23,000 Less: Preference dividend (1,00,000 x 15%) 15,000 Profits available to equity shareholders 1,08,000 Rate of return (1,08,000 /9,00,000) = 12% Value of equity share = (Expected rate of return/Normal return) x Paid-up value of share = (12/8) x 100 = Rs.150.

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Part III

18.

(d) Debenture Interest account will be debited with Rs.29,600 calculated as under: Interest on 48,000 debentures @12% for 6 months = Rs.28,800 Interest on 2,000 debentures @12% for 4 months = Rs.800 The entry will be: Debenture interest account Dr. To Bank a/c To Interest on own debentures a/c Rs.29,600 Rs.28,800 Rs.800

19. 20.

(c) Where the proposed dividend exceeds 15% but does not exceed 20% of the paid-up capital, the amount to be transferred to reserves shall be 7.5% of the current profits. (e) Value of right R =
r N+r

(M S)

1 3+1 1 4

x (Rs.176 Rs.120)

x Rs.56 = Rs.14.
Net assets available for equity shareholders Equity share capital

21.

(b) Asset backing per equity share =

= Rs.50,000 + Rs.15,000 (Rs.10,000 + Rs.5,000 + Rs.10,000) = Rs.65,000 Rs.25,000 = Rs.40,000 = 22.


Rs.40, 000 Rs.40, 000

= 1 time.

(b) Sometimes the companies may go for issue of debentures towards consideration for purchase of fixed asset. In such cases, the debentures may be issued at par/at discount/at premium. In the present case, the journal entry will be: For purchase of Land and Building: i. Land and Building a/c. To Avanti & Company a/c. (For issue of debentures at discount of 20%) ii. Avanti & Company a/c. Discount on issue of debentures To 12% Debentures a/c. Thus 12% debentures are figured at Rs.2,50,000. Dr. Rs.2,00,000 Dr. Rs.50,000 Rs.2,50,000 Dr. Rs.2,00,000 Rs.2,00,000

(Issue of 2,500 debentures of face value Rs.100 each at a discount of 20%) 23. (d) The loss on account of disposal of sinking fund investments is Rs.3,200 Rs. Balance Sale: Rs.46,000 x .8 Loss = = 36,800 3,200 311 = 40,000

Financial Accounting II

24.

(a) The discount on reissue of forfeited shares should not exceed the amount forfeited since the discount is written off as a charge against the share forfeiture account. Mr. A has paid Rs.60 (85 25) per share = Rs.60 x 500 = Rs.30,000 The maximum discount on reissue should not exceed Rs.30,000 Hence, the minimum amount to be collected = Rs.50,000 Rs.30,000 = Rs.20,000.

25.

(e) Particulars Shares underwritten Less: Unmarked applications (in the ratio 6:4:3) Less: Marked applications Less: Benefit of Cs surplus (in the ratio 6:4) Final liability A 15,000 1,200 13,800 12,000 1,800 1,200 600 B 10,000 800 9,200 8,000 1,200 800 400 C 7,500 600 6,900 8,900 (2000) 2000 Nil 1000 Total 32,500 2,600 29,900 28,900 1000

26. (a) Particulars Face value of shares to be redeemed (1,500 x 100) Less: Proceeds from fresh issue (10,000 x 10) Balance to be utilized from profit & loss a/c. Hence, amount to be transferred to capital redemption reserve (Rs.) 1,50,000 1,00,000 50,000

The premium received on fresh issue of shares should not be used for redemption of preference shares. However, the same can be used for the premium payable on redemption of preference shares. 27. (c) Particulars Land and building Machinery Patents and copyrights Furniture and fittings Sundry debtors Cash in hand Cash at bank Stock in hand Less: Sundry creditors Short-term loan Closing capital employed Less: 50% of profit for 2002-2003 Average capital employed (Rs.) 1,00,000 1,50,000 50,000 60,000 30,000 6,000 4,000 10,000 10,000 15,000 25,000 3,85,000 10,000 3,75,000 4,10,000 (Rs.)

312

Part III

28.

(c)

Value of share as per intrinsic value method =

Net assets Rs.60, 00, 000 = = Rs.150 No. of shares 40, 000
Rate of dividend x Value of share Normal dividend 6.25% x Rs.100 = Rs.125 5%

Value of share as per yield method = =

Value of share as per fair value method = 29. (a)

Rs.150 + Rs.125 = Rs.137.50. 2

Net assets Add: Notional call 50,000 x Rs.2 50,000 x Rs.3 Net assets available to equity share holders Net assets 28, 00, 000 Value of each fully paid share = = = Rs.14 No.of shares 2, 00, 000 Value of Rs.8 paid up share = Rs.14 Rs.2 = Rs.12. 30. 31. Date Sept 30, 2002

Rs. 25,50,000 1,00,000 1,50,000 28,00,000

(a) As the bills drawn by Ram Ltd. were already discounted with the bank, the same are no more intercompany debts. Hence, the bills payable should be shown at Rs.10,000. (b) The entries for purchases of own debentures are: Particulars Own Debentures a/c Interest on Debentures a/c To Bank a/c (Being purchase of 1,000 own debentures @ Rs.96 ex-interest) Own Debentures a/c Interest on Debentures a/c To Bank a/c (Being purchase of 1,5 00 own debentures @ Rs.98 cum-interest) Dr. Dr. Debit Rs. 96,000 3,000 Credit Rs.

99,000

Mar 31, 2003

Dr. Dr.

1,42,500 4,500 1,47,000

32.

Balance in own-debentures a/c is Rs.2,38,500. (b) Average pre-tax profits = Rs.5,60,000 + Rs.6,50,000 + Rs.7,00,000 + Rs.6,90,000 4 = Rs.6,50,000 Average post-tax profits Average dividend Value of the business = 6,50,000 x 60% = Rs.3,90,000 = = =

10 + 12.5 + 17 + 20.5 = 15% 4


Average post tax profit Average dividend

Rs.3,90, 000 = Rs.26, 00, 000. 15%


313

Financial Accounting II

Model Question Paper IV


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. As per Schedule VI, which of the following is true regarding the treatment of calls-inarrears in the final accounts of a company? a. b. c. d. e. 2. The amount will be shown under the head current assets on the assets side of the balance sheet. The amount will be deducted from the share capital in the balance sheet. The amount will be shown under the head current liabilities. The amount will be shown in the profit and loss account as a loss without showing it in the balance sheet. The amount will be added to the share capital in the balance sheet.

Total Points: 100

Which of the following methods is/are not considered for valuation of shares? a. b. c. d. e. Fair value method. Yield method. Super profit method. Intrinsic value method. Both (b) and (d) above.

3.

On bonus issue made by the company a. b. c. d. e. The revaluation reserve of the company would reduce Issued, subscribed and paid-up capital will increase Total liability of the company would increase Both (a) and (b) above All of (a), (b) and (c) above.

4.

Which of the following appears in the profit & loss appropriation account? a. b. c. d. e. Interest on debentures. Dividend. Provision of taxation. Provision for bad debts. Penalty paid for defective works.

5.

According to the guidelines for issue of bonus shares a. b. c. d. e. Partly paid shares must be made fully paid-up before bonus issue Revaluation reserves may be capitalized 20% of the average profits for previous three years should yield a dividend on c. expanded capital base @ 10% Both (a) and (c) above All of (a), (b) and (c) above.

314

Part III

6.

7.

8.

9.

10.

11.

12.

AS-9 on revenue recognition does not cover the revenue such as a. Interest, royalties received b. Government grants and subsidies c. Sales under hire purchase d. Both (a) and (b) above e. Both (b) and (c) above. Straight-line method of depreciation is also known as a. Revaluation method b. Equal installment method c. Diminishing balance method d. Reducing balance method e. None of the above. Calls-in-advance can be received only a. If authorized by articles b. With the sanction of National Company Law Tribunal c. With the approval of Central Government d. If authorized by a special resolution of the company e. If authorized by an ordinary resolution of the company. Which of the following methods involve creation of Sinking Fund in case of redemption of debentures? a. Redemption in lump sum. b. Drawings of lots. c. Redemption by purchase in open market. d. By conversion. e. All of the above. Which of the following statements is/are not true? a. FIFO approach avoids spoilage. b. FIFO meets the objectives of both income statement and balance sheet. c. FIFO method results in inflated profits. d. FIFO method is very useful when prices are rising. e. None of the above. As per AS-10 the cost of fixed assets includes a. Interest on loan taken for acquisition of asset up to the date of acquisition of asset b. Expenses incurred on test runs c. General expenses related to the construction of asset d. Both (a) and (b) above e. Cost incurred for maintaining the asset. Capital profits are a. b. c. d. e. The profits earned by the subsidiary company from sale of fixed assets The profits earned by the holding company as a result of consolidation The profits earned by the subsidiary company as a result of consolidation The profits earned by the holding company before the acquisition of shares by the holding company The profits earned by the subsidiary company before the acquisition of shares by the holding company. 315

Financial Accounting II

13.

Which of the following statements is/are correct? a. b. c. d. e. Share premium cannot be used for issue of bonus shares. The underwriting commission for shares should not exceed 5% of the face value of shares. Share premium can be used for providing for premium payable on redemption of debentures. Both (a) and (b) above. Both (a) and (c) above. 5 10 15 20 25. Bonus issue cannot be made in lieu of dividend. The underwriting commission payable on debentures is 2.5% of its issue price. Share premium account cannot be used for writing off prior period expenses. Both (a) and (b) above. Both (a) and (c) above. Decrease in cost of control as revenue profits will be capitalized Increase in cost of control as revenue profits will be capitalized No change in cost of control Decrease in the amount payable to minority interest No change in the amount payable to minority interest. Within 10 months of any public/rights issue. Within 12 months of any public/rights issue. Within 15 months of any public/rights issue. Within 18 months of any public/rights issue. Within 20 months of any public/rights issue. Reserves created by revaluation of fixed assets are not permitted to be capitalized. Dividend is not payable on the calls paid in advance by shareholders. Capital redemption reserve can be utilized for writing off miscellaneous expenses and losses. When proposed dividend does not exceed 10%, it is not obligatory on the company to transfer any profit to its reserve. Both (b) and (d) above.

14.

Preference shares should be redeemed within _______ years of issue. a. b. c. d. e.

15.

Which of the following statements is true? a. b. c. d. e.

16.

Issue of bonus shares out of post-acquisition profit shall result in a. b. c. d. e.

17.

As per the guidelines for issue of bonus shares, the bonus issue should not be made a. b. c. d. e.

18.

Which of the following is not true? a. b. c. d. e.

316

Part III

19.

Which of the following is not true? a. b. c. d. e. Equity is owners stake and debenture is debt. The interest on debenture is fixed. Debentureholders have no voting right. Debentureholders get preferential treatment over equity holders at the time of liquidation. None of the above.

20.

Amortization of intangible assets, such as copyrights or patents, is the accounting process of a. b. c. d. e. Determining the cash flow from operations for the current period Systematically allocating the cost of the intangible assets to the period of use Accumulating a fund for the replacement of the asset at the end of its useful life Systematically reflecting the change in general price level over the current period Asset valuation based on net realizable value at the statement of financial position. Remittances-in-transit Capital reserve Intra-group transactions Goodwill Minority interest.

21.

No disclosure is required in consolidated financial statements in respect of a. b. c. d. e.

22.

Which of the following appears under the head Miscellaneous expenditure on the assets side of the balance sheet? a. b. c. d. e. Bill discounted from bank. Prepaid insurance premium. Directors remuneration. Discount allowed on issue of shares. Income tax paid in advance.

23.

24.

25.

Which of the following is not considered as research and development costs? a. Testing in search for product alternatives. b. Legal work on patent application. c. Modification of design of a process. d. Searching for application of new research findings. e. The design of tools, moulds and dies involving new technology. AS-9 deals with a. Revenue recognition b. Research and development c. Construction contracts d. Fixed assets e. Depreciation. Which of the following appears in the debit side of profit & loss a/c? a. Bill discounted from bank. b. Prepaid insurance premium. c. Directors remuneration. d. Discount allowed on issue of shares. e. Income tax paid in advance. 317

Financial Accounting II

26.

Product costing system is also known as a. b. c. d. e. Specific identification method Perpetual inventory method Weighted average method Periodic inventory method None of the above.

27.

Consolidated financial statements are prepared when a parent-subsidiary relationship exists in recognition of the accounting concept of a. b. c. d. Materiality Objectivity Going concern Entity

28.

29.

30.

31.

32.

e. Both (c) and (d) above. Which of the following statements is not true? a. Preparation of consolidation of accounts statement is compulsory in India. b. Preparation of consolidation of accounts statements is not compulsory in India. c. Minority interest consists of face value of share capital only. d. Both (a) and (b) above. e. Both (a) and (c) above. If the holding company receives dividend out of pre-acquisition profits of the subsidiary company it will be a. Credited to the investment account b. Debited to the investment account c. Credited to the consolidated profit and loss account d. Debited to the consolidated profit and loss account e. Ignored completely. Which of the following is not a consideration in determining the useful life of an intangible asset? a. Legal, regulatory, or contractual provisions. b. Provision for renewal or extension. c. Expected actions of competitors. d. Initial cost. e. None of the above. Which of the following statements is true? a. Share application account is a nominal account. b. Partly paid preference shares can be redeemed. c. Redemption of preference shares cannot be made out of the proceeds from fresh issue of debentures. d. Share premium amount can be used for distribution of profits. e. Capital redemption reserve can be utilized in writing-off preliminary expenses. As per Accounting Standard-18, if two or more companies are subsidiaries of the same holding company, each subsidiary is known as ___________ of the other subsidiary. a. Fellow subsidiary b. Co-subsidiary c. Subsidiary d. Associate e. Sub-subsidiary.

318

Part III

33.

Which of the following is an unidentifiable asset? a. b. c. d. e. Investments. Patents. Goodwill. Trademark. Accounts Receivable. Authorized capital Issued capital Called-up capital Paid-up capital Reserve capital. Cost price less depreciation Cost price or market price whichever is lower Cost price Replacement price Net realizable value. Over a period of 5 years Immediately on incurring the expenditure Over the legal term of validity Over the working life of the patent Either (c) or (d) whichever is shorter. Profit and loss account Capital reserve account Share forfeiture account Share premium account Share capital account.

34.

Dividends are usually paid on a. b. c. d. e.

35.

The long-term investments are accounted for in the balance sheet at a. b. c. d. e.

36.

As per Accounting Standard-10, patents should be amortized a. b. c. d. e.

37.

If the forfeited shares are issued at a premium, the amount of the premium shall be credited to a. b. c. d. e.

38.

39.

According to Section 78 of the Companies Act, the amount in the Share Premium a/c cannot be used for the purpose of a. Issue of fully paid bonus shares b. Writing off losses of the company c. Writing off preliminary expenses d. Writing off commission or discount on issue of shares e. Providing premium payable on the redemption of preference shares or debentures of the company. The maximum rate of premium at which shares can be issued is a. 5% b. 10% c. 20% d. 100% e. No limit.

319

Financial Accounting II

40. Which of the following cannot be used for the purpose of creation of capital redemption reserve account? a. Profit and loss account (credit balance). b. General reserve account. c. Dividend equalization reserve account. d. Unclaimed dividends account. e. Both (b) and (d) above.

Part B: Problems (60 Points)


Solve all the problems. Points are indicated against each problem. 1. Motijheel Company issued 800 12% Debentures of Rs.100 each on July 1, 1999. Interest is payable on September 30 and March 31, every year. The company purchased the following debentures as investment during the year 2000-2001. On June 1, 2000 300 its own 12% Debentures at Rs.96 ex-interest. The journal entry for the purchase of debentures is a. Own Debenture account Interest on debentures A/c To Cash A/c 12% Debentures account Interest on debentures A/c To Cash A/c 12% Debentures account To Cash A/c Own Debentures account Interest on Debentures A/c To Cash A/c Own Debentures account Interest on Debentures A/c To Cash A/c Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Rs. 28,200 600 28,800 600 29,400 28,800 28,800 28,800 600 29,400 28,800 3,600 32,400 (2 points) 2. Pinky Ponk Company issued 1,000 12% Debentures of Rs.100 each on July 1, 1999. Interest is payable on September 30 and March 31, every year. The company purchased the following debentures as investment during the year 2000-2001. On December 1, 2000 100 its own 12% Debentures at Rs.98 cum-interest. The journal entry to be made on purchase of debentures is a. Own Debenture A/c Interest on debentures A/c To Cash A/c 12% Debentures A/c Interest on debentures A/c To Cash A/c 12% Debentures A/c To Cash A/c Own Debentures A/c Interest on Debentures A/c To Cash A/c Own Debentures A/c Interest on Debentures A/c To Cash A/c Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Rs. 9,600 200 9,600 200 9,800 9,800 9,800 9,800 200 10,000 9,800 1,200 11,000 (2 points) Rs. Rs.

28,800

b.

c. d.

e.

9,800

b.

c. d.

e.

320

Part III

3.

Lakhani Ltd. issued 800 12% Debentures of Rs.100 each on July 1, 1999. Interest is payable on September 30 and March 31, every year. The company purchased 400 of its own debentures at an amount of Rs.38,400. The company canceled all the above 400 debentures on October 1, 2001. The journal entry to be made on the cancelation of 400 debentures is a. b. c. Cash account To Own debentures account 12% Debentures account To Own debentures account 12% Debentures account To Own debentures account To Capital reserve account 12% Debentures account To Own debentures account To Loss on cancelation of debentures 12% Debentures account To Own debentures account Rs. Dr. 38,400 Dr. 40,000 40,000 Dr. 40,000 38,400 1,600 Dr. 40,000 38,400 1,600 Dr. 38,400 38,400 (2 points) Rs. 38,400

d.

e.

4.

On March 31, 2002 the directors of Pure Products Ltd. decided to redeem 12% Redeemable preference shares of Rs.100 each fully paid-up at a premium of 10%. The following balances appear in the Balance Sheet as on March 31, 2002. Rs. General Reserve Profit & Loss account Share premium 4,00,000 2,50,000 25,000

5.

For the above purpose the company decides to issue 27,500 equity shares of Rs.10 each at a premium of 10%. The amount to be transferred to the Capital Redemption Reserve account is a. Rs.8,00,000 b. Rs.8,80,000 c. Rs.5,77,500 d. Rs.5,25,000 e. Rs.1,25,000. (2 points) Alpha Ltd. has agreed to purchase the business carried on by Mr. Rao. For this purpose, goodwill is to be valued at 3 years purchase of the weighted average profits of the past 4 years. The profits of the previous years were: 1999 Rs.15,000 2000 Rs.18,000 2001 Rs.22,000 2002 Rs.25,000. The profits included non-recurring profits on an average basis of Rs.1,000 out of which it was deemed that even non-recurring profits had a tendency of appearing at the rate of Rs.600 p.a. The value of goodwill of the business will be a. Rs.65,100 b. Rs.63,900 c. Rs.60,000 d. Rs.58,800 e. Rs.66,300. (2 points) 321

Financial Accounting II

6.

The following data is extracted from the balance sheet of Excel Company as on March 31, 2002: Particulars 50,000 equity shares of Rs.10 each (Rs.8 per share paid-up) 3,000, 12% preference shares of Rs.100 each fully paid-up Sundry assets (other than goodwill) Liabilities Reserve Rs. 4,00,000 3,00,000 14,00,000 4,50,000 2,50,000

If the goodwill of the company is valued at Rs.2,18,000, the value of the equity share under intrinsic value method is a. b. c. d. e. 7. Rs.23.36 Rs.17.36 Rs. 2.92 Rs. 2.17 Rs. 8.00. (2 points) The profits before tax of Cream Ltd. for the last 4 years are as follows: Rs. 2,50,000 9,000 (abnormal) 3rd year 2,20,000 4th year 2,20,000 There has been no change in the market value and book value of assets and liabilities of the company. The average corporate tax rate is 35%. The normal yield on capital employed in similar business is 10%. If the capital employed of Cream Ltd. is Rs.9,50,000, then goodwill of the company valued at 3 years purchase of the super profit is 1st year 2nd year a. b. c. d. e. 8. Rs.2,18,000 Rs.1,50,000 Rs.4,05,000 Rs.1,63,500 No goodwill. (2 points) Silver Spoon Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium of Rs.2 per share. The entire issue was underwritten by 3 underwriters in the following percentage: Amal 30% Bimal 40% Kamal 30% The details of marked and unmarked applications received are: Marked applications of Amal Bimal Kamal Unmarked applications 22,000 shares 24,000 shares 28,000 shares 16,000 shares 90,000 shares

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The final liability of Amal, Bimal and Kamal is a. Nil; 2000 shares; 8,000 shares b. 8,000 shares; 2,000 shares; Nil c. 2,000 shares; 8,000 shares; Nil d. Nil; Nil; 2,000 shares e. 8,000 shares; Nil; Nil. 9. (2 points) H Ltd. acquired 3,000 equity shares of S Ltd. on April 1, 2001 at a price of Rs.3,60,000. The share capital of S Ltd. was Rs.5,00,000 (face value of Rs.100). On the date of acquisition, S Ltd. had the following balances: General reserve : Rs.1,20,000 Profit & Loss account (Cr.) : Rs.1,00,000 As on date of acquisition, the value of land and building and plant and machinery of S Ltd. were valued upwards by Rs.20,000 each. The share of H Ltd. in the capital profits for the purpose of consolidation is a. Rs.1,32,000 b. Rs.1,56,000 c. Rs.1,44,000 d. Rs.72,000 e. Rs.60,000. (2 points) H Ltd. acquired 3,000 equity shares of S Ltd. on April 1, 2001 at a price of Rs.3,60,000. The share capital of S Ltd. was Rs.5,00,000 (face value of Rs.100). If the share of H Ltd. in capital profits is Rs.1,56,000, and the share of revenue profits is Rs.58,800, the value of Cost of Control is a. Rs.2,04,000 (Goodwill) b. Rs.96,000 (Goodwill) c. Rs.60,000 (Goodwill) d. Rs.96,000 (Capital reserve) e. Rs.1,54,000 (Capital reserve). (2 points) H Ltd. acquired 3,000 equity shares of S Ltd. on April 1, 2001 at a price of Rs.3,60,000. The share capital of S Ltd. was Rs.5,00,000 (face value of Rs.100). If the total value of the Capital profits (pre-acquisition) and Revenue profits of S Ltd. were valued at Rs.2,60,000 and Rs.98,000 respectively, the amount of minority interest shown in the Consolidated Balance Sheet is a. Rs.1,04,000 b. Rs.1,43,200 c. Rs.3,43,200 d. Rs.2,00,000 e. Rs.3,58,000. (2 points) Ray Ltd. issued 1,000 shares of Rs.10 each. The called-up value is Rs.6 per share. The company forfeited 50 shares of Mr. De for non-payment of allotment money of Rs.4 per share. On forfeiture, share forfeiture account will be a. Credited with Rs.500 b. Debited with Rs.500 c. Credited with Rs.200 d. Debited with Rs.200 e. Credited with Rs.100. (1 point)

10.

11.

12.

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Financial Accounting II

13.

Following is the data of Kooshi Ltd. Preference shares to be redeemed Rs.1,00,000 at a premium of 10%. Profits shown in the Balance Sheet Profits Rs.15,000; Share premium Rs.2,000 If the new issue is to be made at a premium of 5% and face value is Re.1, the number of shares to be issued is a. b. c. d. e. Rs.80,000 Rs.88,571 Rs.74,256 Rs.82,252 Rs.74,112. (2 points)

14.

Novelties Ltd. issued 10,000 equity shares of Rs.10 each at a premium of Rs.2 per share, payable Rs.3 on application, Rs.5 on allotment (including premium) and the balance by two equal calls. All the shares were duly allotted and money on allotment duly received with the exception that Mr. Bonny holding 1,000 shares paid the entire money due along with the allotment. The journal entry to be made on receipt of allotment is a. Bank account To Share capital account To Share premium account Bank account To Share allotment account Bank account To Share allotment account To Calls-in-advance Account Bank account To Share allotment account Bank account To Share capital account To Calls-in-advance account To Share premium account Rs. Dr. 50,000 Rs. 30,000 20,000 Dr. 50,000 50,000 Dr. 54,000 50,000 4,000 Dr. 54,000 54,000 Dr. 54,000 30,000 4,000 20,000 (2 points)

b. c.

d. e.

15.

Duncan Ltd. issued 10,000 equity shares of Rs.10 each, payable Rs.3 on application; Rs.3 on allotment and the balance in two calls. All the calls were duly made and the amount so realized with exception of the following: i. ii. Mr. A holding 100 shares did not pay the amount due on first call; and Mr. B holding 100 shares did not pay the amount due on final call.

All the 200 shares were forfeited and the company later reissued 150 shares (full of A and Balance of B) to Mr. D at Rs.8 per share. The amount to be transferred to capital reserve account is a. b. c. d. e. Rs.1,400 Rs.1,100 Rs.700 Rs.400 Rs.100. (2 points)

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Part III

16.

Prosperous Ltd. issued 20,000 shares of Rs.100 each at a premium of Rs.20 per share payable as follows: On application On allotment On first call On second and final call Rs.20 Rs.50 (including premium) Rs.30 Rs.20

Applications were received for 30,000 shares and pro rata allotment was made to applicants of 24,000 shares. Money excess received on application was employed on account of sum due on allotment. Rahul, to whom 400 shares were allotted failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited and Mahesh, the holder of 600 shares failed to pay the two calls and his shares were forfeited after the second call. Of the forfeited shares, 800 shares were reissued to Kishore at a discount of 10%, the whole of Rahuls forfeited shares being reissued. The total of liabilities side of the Balance Sheet of the company after affecting the above transactions will be a. b. c. d. e. 17. Rs.24,00,000 Rs.24,03,600 Rs.28,00,000 Rs.27,80,000 Rs.23,78,000. (3 points) Narian, a sole proprietor, maintains a three columnar cash book to record his business transactions. Consider the following data pertaining to his business for the month of June, 2003: Particulars Opening cash on hand Balance at bank Cheque received from a customer (after allowing a discount of Rs.2,500) Paid the supplier by cheque (discount allowed: Rs.10,000) Salaries paid to staff in cash Received a cheque from Daulat Ram, a customer (who owed Rs.16,500 and was allowed a discount of 10%) Paid Bhavani and Co. in full settlement of their dues of Rs. 28,500 Received from Rama & Bros. (as against 38,900) in full and final settlement Rs. 25,000 3,50,000 50,000 1,00,000 20,000 14,850 26,250 36,200

The total amount of discount appearing on the debit side of the three columnar cash book for the month of June, 2003 is a. b. c. d. e. Rs.5,200 Rs.4,150 Rs. 6,850 Rs.12,250 Rs.13,900. (2 points) 325

Financial Accounting II

18.

Universe Ltd. issued 10,000 shares of Rs.100 each at a premium of 20% on December 01, 2002, payable as follows: On application On allotment On first and final call Rs.45 (inclusive of premium) Rs.25 Rs.50

Mr. Nanda, to whom 1,000 shares were allotted, has paid Rs.50,000 on January 01, 2003, at the time of remitting allotment money, he indicated that the excess money should be adjusted towards the call money. The directors of Universe Ltd. made the first and final call on June 1, 2003. The amount of interest payable to Mr. Nanda on calls-in-advance is a. b. c. d. e. Rs.625.00 Rs.520.80 Rs.1,250.00 Rs.1,500.00 Rs.750.00. (2 points) 19. Consider the following data pertaining to a company as on March 31, 2003: Per share Particulars Share Capital: 2,00,000 equity shares 1,00,000 equity shares 1,00,000 equity shares 10 10 10 10 8 7 Face value (Rs.) Paid-up value (Rs.)

If the value of net assets of the company is Rs.51,00,000, the value per share of Rs.8 paidup share is a. b. c. d. e. Rs.12.00 Rs.14.00 Rs.10.75 Rs.15.67 Rs.12.75. (2 points) 20. The nominal capital of Tarun Ltd. is Rs.1,00,00,000 divided into 1,00,000 shares. The company offers three shares for every five shares held by its existing shareholders. If the rights issue price is Rs.1,920 per share and the market value at the time of rights issue is Rs.2,400 per share, the value of right is a. b. c. d. e. 21. Rs.180 Rs.160 Rs.480 Rs.1,920 Rs.720. (1 point) Prospect Ltd. issued 20,000 equity shares of Rs.10 each, out of which, only Rs.8 is calledup and paid-up. As the company has accumulated free reserves, it declared a bonus issue. This bonus issue is made by converting the partly paid shares into fully paid-up and by issue of one share for every four shares held by the existing shareholders. 326

Part III

The total amount required for bonus issue is a. b. c. d. e. Rs.50,000 Rs.40,000 Rs.90,000 Rs.10,000 Rs.2,50,000. (1 point) 22. The Managing Director of Himaja Ltd. is entitled to a commission of 5% on net profits before charging such commission. The net profit of Himaja Ltd. for the year ended March 31, 2003 was reported to be Rs.51,00,000. Subsequently, it was noticed that the following transactions were omitted: Particulars Rs. Payment of Directors remuneration 1,00,000 11,00,000 Sale of a plant (cost price Rs.10,00,000; written down value Rs.8,00,000) Payment of bonus to Production Executive 1,50,000 Payment of taxes (income tax and sales tax) 50,000 Issue of 40,000 equity shares of Rs.10 each at a premium of Rs.2 4,80,000 The commission payable by the company to the managing director for the year 2002-2003 is a. b. c. d. e. Rs.2,52,500 Rs.2,60,000 Rs.2,58,000 Rs.2,40,000 Rs.2,55,000. (2 points) 23. Sunshine Ltd. issued 2,00,000 equity shares of Rs.10 each at a premium of 20%, payable: On application Rs.2 On allotment Rs.5 (including premium) On first call Rs.3 On final call Rs.2 Mr. Suresh, to whom 500 shares were allotted, failed to pay the first call money and his shares were forfeited before the final call is made. The journal entry to record the forfeiture by the company is a. Share capital a/c. Dr. Share premium a/c. Dr. To Share first call a/c. To Share forfeiture a/c. Share capital a/c. Dr. Share premium a/c. Dr. To Share first call a/c. To Share final call a/c. To Share forfeiture a/c. Share capital a/c. Dr. To Share first call a/c. To Share forfeiture a/c. Rs. 4,000 1,000 Rs.

1,500 3,500 5,000 1,000 1,500 1,000 3,500 4,000 1,500 2,500 327

b.

c.

Financial Accounting II

d.

e.

Share capital a/c. Dr. To Share first call a/c. To Share forfeiture a/c. Share capital a/c Dr. To Share premium a/c. To Share first call a/c. To Share forfeiture a/c.

5,000 1,500 3,500 5,000 1,000 1,500 2,500 (2 points)

24.

Duplex Ltd. acquired 60% shares of Simplex Ltd. on November 01, 2002. The profit and loss account showed a debit balance of Rs.90,000 on April 01, 2002 and showed a credit balance of Rs.1,50,000 on March 31, 2003. The share of Duplex Ltd. in the capital profit/loss of Simplex Ltd. to be shown in the Consolidated Balance Sheet as on March 31, 2003 is a. b. c. d. e. Rs.50,000 Rs.42,000 Rs.84,000 Rs.75,000 Rs.30,000. (2 points)

25.

M/s Neema Ltd. acquired 85% shares of M/s Seema Ltd. on December 12, 2001. M/s Neema Ltd. makes a profit of 20% on its sales. During the year 2002-03, it supplied goods worth Rs.45,000 to M/s Seema Ltd., out of which, 40% are still in stock of M/s Seema Ltd. as on March 31, 2003. The unrealized profit on stock to be adjusted while preparing Consolidated Balance Sheet is a. b. c. d. e. Rs.3,600 Rs.3,000 Rs.2,550 Rs.6,375 Rs.3,600. (1 point)

26.

Consider the following information pertaining to M/s Rainbow Ltd. as on March 31, 2003: Liabilities Share capital (50,000 shares Rs.10 each) Reserves and surplus Sundry creditors Short-term loan Rs. 3,60,000 2,70,000 4,60,600 1,75,000 50,000 90,000 80,000 60,000 75,000 10,000 35,000 15,600 10,90,600 10,90,600 The assets are to be revalued as under for the purpose of valuation of shares: Plant and machinery is to be revalued downwards by 10% Furniture is to be valued at Rs.1,80,000 Provision of 5% is to be provided for bad debts. 328 Rs. 5,00,000 Assets Land and buildings Plant and machinery Furniture Inventories Sundry debtors Loans and advances Cash on hand Cash at bank Preliminary expenses

Part III

The value of share of M/s Rainbow Ltd. is a. b. c. d. e. Rs.22.00 Rs.19.70 Rs.18.40 Rs.22.30 Rs.19.20. (2 points) 27. Consider the following profits pertaining to a company for the last 3 years: Year Profit (Rs.) 1 Rs.3,30,000 2 Rs.4,20,000 3 Rs.4,80,000 The weighted average profit of the company for the purpose of valuation of goodwill is a. b. c. d. e. Rs.4,50,000 Rs.4,35,000 Rs.4,10,000 Rs.3,85,000 Rs.3,50,000. (1 point) 28. M/s Sunder Ltd. issued 80,000 equity shares of Rs.10 each, payable as under: On application On allotment On first call Rs.3 Rs.4 Rs.2

On final call Rs.1 The applications received for 1,20,000 shares were dealt with as under: a. b. c. d. e. Applicants of 20,000 shares were allotted in full. Applicants of 80,000 shares were allotted 60,000 shares pro rata. Applications for 20,000 shares were rejected. Rs.1,20,000 Rs.2,40,000 Rs. 60,000 Rs.1,80,000 Rs.3,20,000. (2 points) 29. M/s Expert Ltd. issued 2,00,000 equity shares of Rs.10 each at a premium of Rs.2, of which 1,80,000 shares were subscribed. The issue price of Rs.12 is payable as under: On application On allotment (including premium) On first call On final call Rs.2 Rs.5 Rs.3 Rs.2

The amount available for adjustment towards allotment money is

329

Financial Accounting II

Mr. Santosh, who was allotted 1,000 shares, failed to pay the first call money. On his failure to pay the final call money also, his shares were forfeited. The balance in share premium account after forfeiture of shares is a. b. c. d. e. Rs.4,00,000 Rs.3,60,000 Rs.3,58,000 Rs.3,98,000 Rs.3,53,000. (2 points) 30. Consider the following data pertaining to a company: Average capital employed Rs.25,00,000 Closing capital employed Rs.30,00,000 The amount of capital employed at the beginning of the year is a. b. c. d. e. Rs.27,50,000 Rs.25,00,000 Rs.22,50,000 Rs.20,00,000 Rs.5,00,000. (1 point) 31. The following are the Balance Sheets of M/s. H Ltd. and its 80% subsidiary M/s S Ltd. as on March 31, 2003: H Ltd. Rs. 20,00,000 8,00,000 4,00,000 30,000 20,000 1,00,000 S Ltd. Rs. 6,00,000 1,00,000 80,000 20,000 Assets Land and buildings Plant and machinery Furniture and fittings Profit and loss account Sundry creditors Bills payable Short-term loan Investments in S Ltd. Sundry debtors Bills receivable Closing stock Cash in hand Cash at bank 33,50,000 8,00,000 H Ltd. Rs. 11,15,000 9,15,000 5,00,000 6,50,000 50,000 20,000 50,000 10,000 40,000 33,50,000 70,000 15,000 5,000 15,000 8,00,000 S Ltd. Rs. 3,70,000 2,50,000 75,000

Liabilities Share capital Capital reserve

The accountant of M/s H Ltd. started the process of preparation of Consolidated Balance Sheet and computed the following: Goodwill Minority interest H Ltd. share of revenue profits Rs.50,000 Rs.1,56,000 Rs.24,000

The closing stock of M/s S Ltd. includes goods worth Rs.10,000 supplied by M/s H Ltd., which made a profit of 20% on sales. The entire bills payable of M/s H Ltd. is drawn by M/s.S Ltd. The sundry creditors of M/s S Ltd. include an amount of Rs.10,000 due to M/s H Ltd. 330

Part III

The total of Consolidated Balance Sheet as on March 31, 2003 is a. b. c. d. e. Rs.35,18,400 Rs.35,20,000 Rs.35,28,400 Rs.35,18,100 Rs.41,50,000. (3 points) 32. M/s Good Look Ltd. issued 10,000 shares of Rs.100 each at a premium of Rs.20 per share. Mr. Ziden entered into an underwriting agreement for 80% of the issue with a firm liability of 6,000 shares under a clause of maximum commission. Marked applications were for 6,000 shares. The underwriting commission payable to Mr. Ziden is a. b. c. d. e. Rs.60,000 Rs.48,000 Rs.36,000 Rs.30,000 Rs.12,000. (2 points)

331

Financial Accounting II

Model Question Paper IV


Suggested Answers
Part A: Basic Concepts
1. 2. 3. (b) Calls-in-arrears will be deducted from the paid-up share capital in the balance sheet. (c) Super profit method is used for valuation of goodwill, it is not used for valuation of shares. Other methods stated in (a), (b) and (d) are used for valuation of shares. (b) If a company issues bonus shares to its shareholders, the issued, subscribed and paid-up capital will increase. But, there will be no change in the total liabilities, because issuing of bonus shares is mere capitalization of reserves. Reserves created by revaluation of fixed assets are not capitalized. Thus, revaluation reserve cannot be used for issue of bonus shares. (b) Interest on debentures, provision for taxation, provision for bad debts and penalty for defective works are charged to profit & loss a/c, it means these are all charged against profit. Dividend is the part of profit, so it appears in the profit & loss appropriation account. (a) Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of bonus shares shall be subject to the prescribed SEBI guidelines, which inter alia provide for the following. i. ii. iii. iv. v. 6. Bonus issue shall not be made within 12 months of any public/rights issue. Reserves created out of revaluation of fixed assets shall not be capitalized. Bonus issue shall not be made in lieu of dividend. Bonus issue shall not be made unless partly paid shares, if any, existing is made fully paid-up. The residual reserve after the proposed capitalization should be at least 40% of the increased paid-up capital.

4.

5.

7.

8.

9.

10.

(e) AS-9, Revenue Recognition, deals with the issues involved in recognition of revenue arising in the course of ordinary activities of an enterprise (for example, sale of goods, rendering of services, royalties and dividends, etc). (b) Under the straight-line method, the net acquisition cost or construction cost is charged off in equal proportion during the useful economic life and the quantum of depreciation is arrived at by dividing the net acquisition or construction cost by the number of years of useful economic life. The net acquisition or construction cost is calculated by deducting the salvage value from the acquisition or construction cost. Straight-line method of depreciation is also known as equal installment method. (a) If authorized by the articles of association, a company may receive from the shareholders the amount remaining unpaid on the shares held by them even though the amount has not been called-up. The amount so received is credited to the calls-in-advance account. When a call is made, the appropriate amount is transferred from the calls-inadvance account to the relevant call account. The company is compelled to pay interest on the calls-in-advance. Interest on calls-in-advance is paid from the date of receipt of advance to the date of appropriation @ 6 percent per annum. (a) Under redemption in lump sum method, the company redeems all the debentures in one lump sum after the expiry of a certain period agreed upon in the prospectus issued at the time of issue of debentures. One advantage of this method is that the company can plan for the financial resources, as the liability is known in advance. This will be done generally by creating a sinking fund or by taking an insurance policy. Under the Sinking Fund method, every year, certain amount is appropriated from the profits and the said amount is invested in outside securities. When the time of redemption comes, the securities are realized and the sale proceeds are utilized for the purpose of redemption. (d) FIFO method is very useful when prices are falling. Because, production being relatively overchanged, resulting in deflating the profits, and reducing the income tax liability. 332

Part III

11.

(a) The gross book value of an asset is the historical cost or the cost at which the asset is actually acquired. According to AS-10, it comprises the purchase price, including import duties and other taxes or levies and any directly attributable cost of bringing the asset to its working condition. Any trade discounts and rebates offered by the supplier are to be deducted. Examples of directly attributable costs are: i. ii. iii. iv. site preparation; initial delivery and handling costs; installation cost, such as special foundations for plant; and professional fees such as fees of architects and engineers.

12. 13.

(e) Profits existing in or earned by the subsidiary company up to the date of acquisition of shares by the holding company are capital profits. (c) Premium collection on issue of shares can be used for issuing bonus shares, writing-off preliminary expenses, writing-off commission or discount on issue of shares and debentures and providing premium payable on redemption of debentures. The underwriting commission for shares should not exceed 5 percent of the issue price of shares. (d) As per the Companies Amendment Act, 1988, only preference shares, which are redeemable within 20 years, can be issued. (d) Bonus issue cannot be made in lieu of dividend. The underwriting commission payable on debentures should not exceed 2.5% of its issue price. Share premium can be used for writing off prior period expenses. Thus only option (a) and (b) are true. (c) When the subsidiary company capitalizes profits by the issue of bonus shares out of the post-acquisition profits, it is necessary that the holding companys share in the revenue profits of the subsidiary company be calculated only after making an adjustment for such bonus shares from the post-acquisition profit. The adjustment will have the effect of reducing the share of holding company in the post-acquisition profits of the subsidiary company. Further, the cost of goodwill will be reduced as a result of increase in the paid-up value of shares without increasing the cost of shares and without reducing the preacquisition profits of the subsidiary company. (b) As per the guidelines issued by the SEBI, bonus issue shall not be made within 12 months of any public/rights issue. (c) According to the Companies Act, a company cannot utilize the capital redemption reserve account for writing off miscellaneous expenses and losses. The other statements stated in (a), (b) and (d) are correct. (e) All the statements given in (a), (b), (c) and (d) are correct. There is no false statement. (b) Amortization is the accounting process of systematically allocating cost of intangible assets to the period of use. It is not the process of determining cash flow from operations. It is not creating any fund to replace the asset. It is not the process of adjusting the change of price level, and it is not the asset valuation process. Hence (b) is correct. (c) No disclosure is required in consolidated financial statements in respect of intra-group transactions. The other items, Remittances-in-transit, capital reserve/Goodwill and minority interest are disclosed in consolidated financial statements. (d) Discount allowed on issue of shares is appeared under the head miscellaneous expenditure on the assets side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance are appeared under current assets of the balance sheet. Directors remuneration will be entered on the debit side of profit and loss account. Hence (d) is correct. (b) Legal work on patent application is not related to research and development work. Other activities referred in (a), (c), (d) and (e) are relevant to research and development work. Hence (b) is correct (a) AS-9 deals with the revenue recognition. 333

14. 15.

16.

17. 18.

19. 20.

21.

22.

23.

24.

Financial Accounting II

25.

26.

27.

28.

29.

30. 31.

32. 33.

(c) Discount allowed on issue of shares appears under the head miscellaneous expenditure on the asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance appears under current assets of the balance sheet. Directors remuneration will be entered in the debit side of profit and loss account. Hence (c) is correct. (b) The perpetual inventory system keeps a running, continuous record that tracks inventories and the cost of goods sold on a day-to-day basis. In a manufacturing company, the perpetual inventory method is called a product-costing system. (d) According to the business entity concept, the business assets, liabilities, income and expenses are different from that of the owners and thus, only those transactions that are related to business should be entered into the books of accounts of the business. In this case, since the owner of the company included his personal medical expenses in the companys accounts, it constitutes violation of the business entity principle. (e) Preparation of consolidation of financial statements is not compulsory for all holding companies, in India, minority interest includes proportionate share in paid-up capital. Revenue and capital profits and reserves. (a) If the holding company receives dividend out of pre-acquisition profits of the subsidiary company, it should be credited to investment account. It should not be debited to investment account. It should not be debited or credited to profit and loss account. Hence (a) is true. (c) Expected actions of competitors can never be a basis for determination of useful life of an intangible. (c) The Companies Act provides for two classes of shares equity and preference shares. Preference shareholders enjoy preferential treatment with regard to payment of dividend, and redemption of capital. The Companies Act provides that only preference shares which are redeemable within 20 years can be issued. They may be redeemed at par or at a premium. Redemption may be done out of the proceeds of fresh issue of shares or undistributed profits. Thus, the statement (c) is true as the preference shares cannot be redeemed out of fresh issue of debentures. The other alternatives Share application account is a (representative) personal account and not a nominal account hence (a) is false. One of the legal restrictions imposed on redemption of preference shares is that they cannot be redeemed unless they are fully paid-up. Thus, (b) is false. Share premium can be utilized only to (i) issue of unissued shares as fully paid bonus shares (ii) writing off preliminary expenses (iii) write-off commission of discount related to issue (iv) provide for the premium payable on the redemption of preference shares or debentures. It cannot be utilized for distribution as profits. Thus, (d) is false. Capital redemption reserve is created out of undistributed profits such as, the credit balance in profit and loss account, General reserve, Dividend Equalization reserve to keep the capital intact when the preference shares are redeemed without there being a corresponding issue of shares. The purpose of creating the above reserve is to match the capital needs. As such, it cannot be utilized to write off preliminary expenses. Thus (e) is false. (a) As per Accounting Standard-18, if two or more companies are subsidiaries of the same holding company, each subsidiary is known as Fellow Subsidiary. (c) Intangible assets lack physical substance but possess economic value. They are classified as either identifiable or unidentifiable. Goodwill is an unidentifiable intangible asset. Customer loyalty and a reputation for quality are unidentifiable intangibles. They cannot be realized without selling the entire enterprise. The evidence of its existence is not visible. Thus, Goodwill is an unidentifiable intangible asset. The other intangible assets: (b) Patents and (d) Trademarks are identifiable intangibles and can be sold individually, in times of bare necessity. They increase the earning capacity of a business. The other assets: (a) Investments and (e) Accounts receivable are tangible assets and possess physical existence. Thus the alternatives (a), (b), (d) and (e) are not unidentifiable assets. 334

Part III

34.

35.

36.

37.

38.

39.

40.

(d) Dividends may be termed as the share of profits that is payable to the shareholders of a company. The Companies Act lays down the dos and donts associated with declaration/payment of dividends. As per the Companies Act, that dividends are paid on paid-up capital which is part of the called-up capital that has been paid-up by the shareholders and made available with the company for utilization. Hence, it is proper to pay dividends on paid-up capital. The other alternatives a. Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in nature unless and until the entire amount is called up and paid-up. Since the entire amount is not made available for utility, dividends cannot be declared on authorized capital. b. Issued capital is the part of nominal capital that is offered to the public for subscription and the entire amount is not available for claiming dividend. c. Called up capital is that part of the subscribed capital which has been called-up and cannot be a base for calculation of dividend. d. Reserve capital is that part of uncalled capital which is to be called-up in the event of winding-up of a company and under any circumstances, dividend cannot be declared on it. Thus, the statements (a), (b), (c) and (e) are not correct. (c) Part (I) of Schedule VI of the Companies Act, 1956, specifies both the form and contents of balance sheet of a company. As per the provisions of the Act, the long-term investments are accounted for in the balance sheet at a cost price irrespective of their low/high market value. The other alternative methods of valuation and accounting for are: a. Depreciation is not applicable in case of long-term investments. Thus, the concept of cost less depreciation does not arise. b. As per the provisions of the Companies Act, investments are to be shown at cost price. Thus, they cannot be accounted for cost price or market price whichever is lower. d. Replacement price arises only in case of fixed assets where the existing depreciated asset is replaced by new asset. It is not applicable in case of long-term investments. e. Net realizable value is the amount that can be realized in the event of their disposal which has no relevance for their accounting as per the Companies Act. (e) As per Accounting Standard-10, patents should be amortized over their legal term of validity or over their working life, whichever is shorter. According to this standard, there is no such provision of amortization over the period of 5 years or immediately after its expenditure. Hence (e) is correct. (d) If the forfeited shares are reissued at a premium, that premium amount will be credited to share premium account. It is not credited to profit and loss a/c., capital reserve a/c., share forfeiture a/c and share capital a/c. Hence (d) is correct. (b) According to Section 78 of the Companies Act, the share premium amount cannot be used for the purpose of writing off losses of the company. It can be used for the purpose of issue of fully paid bonus shares, writing off preliminary expenses or commission or discount on issue of shares. It can also be used for providing premium payable on redemption of preference shares or debentures of the company. Hence (b) is correct. (e) When a share is issued at a price which is above its par (face) value then it is said to be issued at a premium. The abolition of the controller of capital issues and the introduction of free pricing by companies for their issue of shares and debentures encouraged the companies to issue shares at premium. Thus, free pricing resulted in issue of shares at a premium without any ceiling on rate of premium. The alternatives (a), (b), (c) and (d) have no relevance. (d) According to the provisions of the Company Act, unclaimed dividend cannot be used for the creation of capital redemption reserve account. Profit and loss (Cr. balance), general reserve, dividend equalization reserve are used to create the fund of capital redemption reserve a/c. 335

Financial Accounting II

Part B: Problems
1. (d) Purchased on June 1, 2000 hence interest for the period of April-May i.e., 2 months = 2/12 x 300 x 100 x 12% = Rs.600 is to be paid exclusive of the price of Rs.96 on shares = Rs.96 x 300 shares = Rs.28,800. Total payment = 600 + Rs.28,800 = Rs.29,400. The journal entry in this respect is Rs. Own Debenture account Interest on debentures A/c 2. Dr. 28,800 Dr. 600 Rs.

To Cash A/c 29,400 (a) The interest accrued = 2 months (Oct. 1 to Nov. 30 ) = 2/12 x 12% x 10,000 = Rs.200. The price paid is Rs.98 cum-dividend = 98 x 100 shares = Rs.9,800. This amount is inclusive of Rs.200 interest. Therefore, the amount debited to own debenture account = Rs.9,800 less Rs.200 = Rs.9,600. The journal entry to be made is Own debentures account To Cash A/c Dr. 9,600 200 9,800 Interest on debentures A/c Dr.

3.

(c) When debentures are purchased as investment, a separate own debentures account is opened. The investment account (Own debentures) will be debited by the actual amount paid irrespective of the nominal value of debentures purchased. The profit or loss on cancelation will be transferred to either the capital reserve or the general reserve account. Hence option (c) is the correct entry. (d) Amount transferred to capital redemption reserve account. Face value of preference share Less: Face value of shares 27,500 x 10 (funds available by way of fresh equity issue) Rs. 8,00,000

4.

2,75,000 5,25,000 Less: General reserve 4,00,000 Amount to be transferred from profit and loss account 1,25,000 When preference shares are redeemed out of profits, a sum equal to face/nominal value of redeemable preference shares must be transferred to Capital Redemption Reserve Account. Since the amount redeemed out of profits in the above case is Rs.4,00,000 + Rs.1,25,000 = Rs.5,25,000 is transferred to Capital Redemption Reserve account. 5. (b) Weighted average profit: 1999 2000 2001 2002 15,000 x 1 18,000 x 2 22,000 x 3 25,000 x 4 Amount Rs. = 15,000 = 36,000 = 66,000 = 1,00,000 2,17,000 21,700 1,000 600 21,300 Rs.63,900

Average profit 2,17,000/10 Less: Non-recurring profit Add: Recurring profit Average adjusted profit Value of goodwill 21,300 x 3 =

336

Part III

6.

(b) Valuation of equity shares Sundry assets other than goodwill Add: Goodwill Less: Liabilities Less: Preference share capital Value of equity shares = Rs.17.36. Value of equity share under intrinsic method = Rs.17.36 Rs. 14,00,000 2,18,000 16,18,000 4,50,000 11,68,000 3,00,000 8,68,000

Value of each equity share = Rs.8,68,000/50,000

7.

(d) Average profit of the company = 2,50,000 + 2,20,000 + 2,20,000/3 = Rs.2,30,000. (Profit of 2nd year being abnormal not considered. Since it was meager amount of Rs.9,000 it has been treated as abnormal.) Average profit Less: Corporate tax 35% Profit after tax Less: Normal return 10% on capital employed (i.e., 10% on Rs.9,50,000) Super profit Goodwill = 3 years x Super profit = 3 x Rs.54,500 = Rs.1,63,500. Rs. 2,30,000 80,500 1,49,500 95,000 Rs.54,500

8.

(c) Particulars Liability Less: Unmarked applications in the ratio of 3:4:3 of unstamped applications Less: Marked (Stamped) applications Less: Division of Kamals surplus (in the ratio of 3:4) Final liability of each underwriter (b) Capital profits Rs. General reserve Profit & loss account Add: Revaluation of assets: Land & buildings Machinery 20,000 20,000 2,60,000 H Ltd. Minority interest 3,000 shares/5,000 shares 2,000 shares/5,000 shares 60% Rs.1,56,000 40% Rs.1,04,000 1,20,000 1,00,000 2,20,000

(No. of shares) Amal Bimal Kamal Total 30,000 40,000 30,000 1,00,000 4,800 25,200 22,000 3,200 1,200 2,000 6,400 4,800 33,600 25,200 24,000 28,000 9,600 (2,800) 1,600 8,000 2,800 Nil 16,000 84,000 74,000 10,000 10,000

9.

337

Financial Accounting II

10.

(d) Cost of Control/Goodwill Cost of investment in S Ltd. Less: Nominal value of 3,000 shares Rs.3,00,000 Capital profit Rs.1,56,000 Capital reserve (c) Minority Interest Nominal value of 2000 shares Capital profit = 40% of Rs.2,60,000 Revenue profit = 40% of Rs.98,000 Minority interest shown in the Consolidated Balance Sheet (e) Rs. 3,60,000

4,56,000 96,000 Rs. 2,00,000 1,04,000 39,200 3,43,200

11.

12.

13.

14.

Called up value per share Rs.6 Less: Allotment money not paid Rs.4 Amount paid per share Rs.2 Share forfeiture account will be credited by = 50 shares x Rs.2 = Rs.100 (b) Let the fresh issue of shares be X Premium on fresh issue at 5% = 5X/100 Therefore, Rs.1,00,000 + Rs.10,000 = Rs.15,000 + Rs.2,000 + X (fresh issue) + 5X/100 ( premium) Or, Rs.1,10,000 = Rs.17,000 + X + 5X/100 Or, Rs.93,000 = X + 5X/100 Therefore, X = Rs.88,571. (c) Allotment amount due is 10,000 shares x Rs.5 (including premium) When the allotment amount becomes due on the basis of Board resolution, the following entry is made. Share Allotment account Dr. 50,000 To Share capital account 30,000 To Share premium account 20,000 Hence when the money is actually received the entry to be made is Bank account To Share allotment account To Calls-in-advance account 54,000 50,000 4,000 Rs. = = 600 800

15.

(c) Amount forfeited: 100 shares of A on which Rs.6 has been received 100 shares of B on which Rs.8 has been received Total amount received on forfeited shares Therefore, credit balance in share forfeiture account Less: Loss on reissue Less: Profit on remaining 50 shares (out of 100) Rs.8 x 100) i.e. Rs.800 x 50/100 Transferred to Capital reserve

= 1,400 = 1,400 300 1,100 400 700

338

Part III

16. (b) Prosperous Ltd. Balance Sheet (extract) Liabilities Share Capital: 19,800 shares of Rs.100 each fully paid Shares premium Shares forfeiture Capital reserve Thus, the total of liabilities side of Balance sheet is Rs.24,03,600. Working Notes: Rs. 1. Share application money received 30,000 Rs.20 Shares allotted on pro rata 20,000 against 24,000 applications 20,000 Rs.20 Shares rejected and money refunded 6,000 Rs.20 Surplus money available for allotment 2. Share allotment money 20,000 (Rs.30 + Rs.20) 10,00,000 Less: Available on account of share application excess money Less: Default on a/c of Rahul 400 (Rs.30 + Rs.20) (Rs.20,000 Rs.1,600) 18,400 9,01,600 Share applied by Rahul 400 80,000 Rs. 6,00,000 4,00,000 1,20,000 80,000 19,80,000 3,92,000 10,000 21,600 24,03,600 Rs.

20, 000 = 480 24, 000


= 480 Rs.20 9,600 8,000 1,600 20,000 1,600 18,400 6,00,000 12,000 18,000 5,70,000

Amount paid by him on application Balance available for allotment Amount due on allotment

Less: Adjusted for application money = 400 Rs.20

Less: Application money available for adjustment Amount defaulted by Rahul 3. Share first call money 20,000 Rs.30 Less: Default by Rahul 400 Rs.30 Mahesh 600 Rs.30 Share second call money 19,600 Rs.20 Less: Default by Mahe 600 Rs.20

4.

3,92,000 12,000 3,80,000 339

Financial Accounting II

Rs. 5. Shares forfeiture: Money received on shares held by Rahul Shares held by Mahesh 600 Rs.50 (Rs.20 + Rs.30) Less: 800 shares issued at 10% discount 800 Rs.10 Less: Balance transferred to capital reserve on reissued shares (400) 480 Rs.20 = Rs.9,600 Rs.8,000 = 1,600 400 Rs.50 = 20,000 Balance in shares forfeiture a/c Share capital a/c Total shares forfeited + re-issued 9,600 30,000 39,600 8,000

Rs.

21,600 10,000

6.

17.

18.

19.

20.

19,80,00 20,000 (400 + 600) + 800 = 19,800 Rs.100 0 7. Share premium 20,000 400 = 19,600 Rs.20 3,92,000 8. Capital reserve 21,600 (c) Discount recorded on debit side of cash book represents the discount allowed to the customers. Rs. = Cheque received and allowed discount 2,500 + Discount allowed to Rama & Bros (Rs.38,900 Rs.36,200) 2,700 + Cheque received from Daulat Ram discount allowed 10% of 16,500 1,650 Rs.6,850 (a) Interest on calls-in-advance is to be paid @ 6% per annum. Calls-in-advance paid by Mr.Nanda = Rs.50,000 (1,000 x 25) = Rs.25,000. Interest period from January 01, 2003 to June 01, 2003 = 5 months. 5 Interest = 25, 000 6% = Rs.625 . 12 (a) Rs. Net assets 51,00,000 Add: Notional calls on uncalled-up shares 2,00,000 1,00,000 Rs.2 3,00,000 1,00,000 Rs.3 Net assets available to equity shareholders 56,00,000 Net assets Rs.56, 00, 000 Value of each fully paid share = = = Rs.14 No.of shares 4, 00, 000 Value of Rs.8 paid-up share = Rs.14 Rs.2 = Rs.12. (a) r Value of right = (M S) N+r Where, r = No. of rights issued N = No. of old shares M = Market price S = Issue price of rights 3 Value of rights = (Rs.2, 400 Rs.1,920) = Rs.180. 5+3

340

Part III

21.

(c) Rs. Amount to make partly paid shares into fully paid (20,000 Rs.2) 40,000 50,000 90,000

20, 000 Rs.10 Amount of bonus shares 4


Amount of bonus issue 22. (a) Particulars Net Profit as calculated Add: Revenue profit on sale of plant Rs. Rs. 51,00,000 2,00,000 53,00,000 Less: Directors remuneration Bonus paid to production executive Net Profit 1,00,000 1,50,000 2,50,000 50,50,000

Where the amount for which the fixed asset is sold exceed the written-down value, credit shall be given for so much of the excess as is not higher than the difference between the original cost of the fixed asset and its written down value. Hence only Rs.2,00,000 (Rs.10,00,000 Rs.8,00,000) should be added. The directors remuneration and the bonus paid to any member of companys staff should be deducted whereas income tax and sales tax should not be deducted. Credit should not be given to profits by way of premium on shares Managing Directors Commission = 50,50,000 5% = Rs.2,52,500. 23. (c) When shares are forfeited, the share capital account should be debited with called-up amount (excluding premium) and corresponding credit should be given to share call account with amount not received and share forfeiture account with amount received. If the premium is already received, the same should not be reversed. Hence the entry is Share capital a/c Dr. Rs.4,000 Rs.1,500 Rs.2,500

To Share first call a/c To Share forfeiture a/c 24.

(e) Profit made during the year 2002-2003 = Rs.1,50,000 + Rs.90,000 = Rs.2,40,000 Profit made for the period April 01, 2003 to November 01, 2003 = Rs.2,40,000 x 7/12 = Rs.1,40,000 The credit balance in profit and loss account as on November 01, 2003 is Rs.1,40,000 Rs.90,000 = Rs.50,000 Hence capital profit = Rs.50,000 Share of M/s Duplex Ltd. in the capital profit = Rs.50,000 x 60% = Rs.30,000.

25.

(a) Unrealized profit on stock to be adjusted while preparing consolidated balance sheet = Rs.45,000 x 20% x 40% = Rs.3,600

341

Financial Accounting II

26.

(c) Particulars Land and buildings Plant and machinery (Rs.2,70,000 Rs.90%) Furniture Inventories Sundry Debtors (Rs.60,000 95%) Loans and advances Cash Bank Less: Sundry creditors Short-term loan Net assets
Rs.9, 20, 000 = Rs.18.40 50, 000

Rs.

Rs. 3,60,000 2,43,000 1,80,000 90,000 57,000 75,000 10,000 35,000 10,50,000

50,000 80,000 1,30,000 9,20,000

Value of share = 27.

(b) Weighted average profit Year 1 Year 2 Year 3 Rs.3,30,000 1 Rs.4,20,000 2 Rs.4,80,000 3 6 Rs. 3,30,000 Rs. 8,40,000 Rs.14,40,000 Rs.26,10,000

Weighted average profit = Rs.26,10,000 6 = Rs.4,35,000. 28. (c) No. of shares Applied No. of shares allotted Amount paid Amount adjusted towards application Rs. 60,000 1,80,000 Amount available Rs. 60,000 Amount refunded Rs. 60,000

Rs. 20,000 80,000 20,000 29. 20,000 60,000 60,000 2,40,000 60,000

(b) Amount of share premium = 1,80,000 Rs.2 = Rs.3,60,000. As Mr. Santosh paid the share premium, the share premium account will not be reversed when the shares are forfeited.

30.

(d) Average capital employed = (Opening capital employed + Closing capital employed)/2 2 Rs.25,00,000 = Opening capital employed + Rs.30,00,000 Opening capital employed = Rs.50,00,000 Rs.30,00,000 = Rs.20,00,000.

342

Part III

31.

(a) Consolidated Balance Sheet as on March 31, 2003 Liabilities Share capital Capital reserve Profit and loss a/c H Ltd. S Ltd. Sundry creditors Minority interest Short-term loan 4,00,000 22,400 40,000 1,56,000 1,00,000 Rs. 20,00,000 8,00,000 Assets Goodwill Land and buildings Plant and machinery Furniture and fittings Sundry Debtors Bills receivable Inventories (Rs.65,000 Rs.1,600) Cash Bank 35,18,400 Rs. 50,000 14,85,000 11,65,000 5,75,000 40,000 70,000 63,400 15,000 55,000 35,18,400

32.

(b) Underwriting commission on shares is 5% of the issue price of the shares or any rate prescribed in the articles whichever is less. Since, the maximum rate 5% is considered to be rate of commission. Shares underwritten = 80% of the issue = 80% of 10,000 = 8,000 shares Marked applications = 6,000 Issue price per share = Rs.100 + Rs.20 = Rs.120 Value of 8,000 applications = 8,000 Rs.120 = Rs.9,60,000 Underwriting commission @ 5% on issue price =
9, 60, 000 5 = Rs.48, 000. 100

343

Financial Accounting II

Model Question Paper V


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. The discount allowed on reissue of forfeited shares is debited to a. Share capital account b. Profit and loss account c. Discount allowed account d. Forfeited shares account e. Capital reserve account. 2. Forfeiture of shares is invalid if a. The Articles of Association does not authorize the company to forfeit the shares b. Notice is not given to the member prior to the forfeiture c. The payment of the call is not overdue d. It is not carried out in good faith and not for the benefit of the company e. All of (a), (b), (c) and (d) above. 3. Who among the following persons should lay before the shareholders, the annual accounts at every annual general meeting? a. The Auditor. b. The Board of Directors. c. The Company Secretary. d. The Chairman. e. The Managing Director. 4. Transfer to the capital redemption reserve account implies a. The face value of redeemable preference shares is more than proceeds from new issue b. The face value of redeemable preference shares is less than the proceeds from the new issue c. The balance amount in the new share capital d. Both (a) and (b) above e. Both (b) and (c) above. 5. The item Interest Accrued on Investments appears in the Balance Sheet of a company under the category of a. Loans and advances b. Current assets c. Investments d. Current liabilities e. Reserves and surplus. 6. Gross value added is arrived at by a. Deducting from sales revenue the cost of all material and services and other extraordinary expenses b. Deducting from sales revenue the direct costs c. Deducting from sales the manufacturing costs d. Deducting from sales revenue the material costs e. None of the above. 344

Total Points: 100

Part III

7.

Product costing system is also known as a. b. c. d. e. Perpetual inventory method Specific identification method Weighted average method Periodic inventory method None of the above. Straight-line method. Diminishing balance method. Sum of the year digits method. Units of production method. Annuity method. The goods are produced The goods are transferred There is certainity of cash receipt for goods transferred Both (b) and (c) above None of the above. Efficient management. Favorable location. Superior technology. Both (a) and (b) above. All of the above. Valuation on the basis of asset backing. Valuation on the basis of earnings. Valuation on the basis of dividend. Valuation on the basis of fair value. Valuation on the basis of return on capital employed. Authorized capital Issued capital Called-up capital Paid-up capital Reserve capital. Profit & Loss Appropriation Account General Reserve Account Capital Redemption Reserve Debentures Redemption Fund Capital Reserve. 345

8.

Which of the following methods of depreciation is related to the usage of the asset? a. b. c. d. e.

9.

Revenue can be realized when a. b. c. d. e.

10.

Which of the following is a factor that contributes to the value of goodwill of a concern? a. b. c. d. e.

11.

Which of the following is more appropriate for valuation of small block of shares? a. b. c. d. e.

12.

Dividends are usually paid on a. b. c. d. e.

13.

Premium collected on the issue of debentures is transferred to a. b. c. d. e.

14.

AS-2 on inventory valuation does not cover the inventories such as a. b. c. d. e. Work-in-progress arising under service contracts Inventories of forest products Land or other property held for sale Both (a) and (b) above Both (a) and (c) above. Bonus issue can be made out of revaluation reserves. Bonus issue shall not be made within 12 months of any public/rights issue. Bonus issue shall not be made in lieu of dividend. Both (a) and (b) above. Both (b) and (c) above. Salaries of employees involved in research activities Cost of plant and machinery used in research work Depreciation on plant and machinery used in research work Both (a) and (b) above Both (a) and (c) above. Interest charges paid after the asset is ready to be put to use. Expenditure incurred on test runs and experimental production. Administration expenses related to any specific fixed asset. Both (a) and (b) above. Both (b) and (c) above. Shareholders can enhance the dividends recommended by the Board of Directors by passing a special resolution. The declared dividend must be paid within 30 days of its declaration. Proposed dividend becomes declared dividend on its adoption by the shareholders in the AGM. Both (a) and (b) above. Both (a) and (c) above. FIFO method LIFO method Specific identification method Weighted average method None of the above. Reserves and surplus Secured loans Unsecured loans Current liabilities Provisions. 346

15.

Which of the following statements is true? a. b. c. d. e.

16.

Research and development costs comprises of a. b. c. d. e.

17.

Which of the following expenditures should be capitalized as per AS-10? a. b. c. d. e.

18.

Which of the following statements is/are not true? a. b. c. d. e.

19.

The appropriate method of valuation for costlier items is a. b. c. d. e.

20.

As per Schedule VI to the Companies Act, 1956, unclaimed dividends are to be shown as a. b. c. d. e.

Part III

21.

Which of the following is/are true with respect to debentures? a. b. c. d. e. They can be issued for cash. They can be issued for consideration other than cash. They can be issued as collateral security. They can be issued in lieu of dividends. Only (a), (b) and (c) above. Brokerage should be paid only to a person carrying on business as a broker. The brokerage payable in all types of public issues of industrial securities is 1.5%. Brokerage will be allowed in respect of all the shares including promoters quota. The Articles of Association must provide for the payment of brokerage. The listed companies are allowed to pay brokerage on private placement of capital at a maximum rate of 0.5%. Gross profit Cost of capital Gross profit Average cost of capital Net operating profit before tax Cost of capital Net operating profit after tax Weighted average cost of capital Net operating profit before tax Depreciation. Diminishing balance method Equal installment method Revaluation method Units-of-production method None of the above. Dividend can be paid out of capital. Interim dividend can be declared by the directors after obtaining approval of shareholders. Dividend is payable on the calls paid in advance. Dividend is payable on authorized capital. Dividend is payable on paid-up capital. General reserve account Capital reserve account Revaluation reserve account Capital redemption reserve account Forfeited shares account. Current asset Current liability Fictitious asset Fixed asset None of the above. 347

22.

Which of the following statements is false? a. b. c. d. e.

23.

Economic value addition can be computed as a. b. c. d. e.

24.

Written down value method of depreciation is also known as a. b. c. d. e.

25.

Which of the following statements is/are true? a. b. c. d. e.

26.

The discount allowed on reissue of forfeited shares is debited to a. b. c. d. e.

27.

Loss on issue of debentures is shown as a a. b. c. d. e.

28.

Which of the following statements is true? a. b. c. d. e. The application money on shares should not be less than 5% of nominal value of the shares. The application money on shares should be less than 5% of nominal value of shares. A company can receive calls-in-advance only if authorized by its articles. Both (a) and (b) above. Both (a) and (c) above. Every holding company is required to present a consolidated balance sheet under the Companies Act, 1956. Issue of bonus shares out of the pre-acquisition profits by the subsidiary company has no effect on the accounting treatment. For calculating minority interest there is no need to distinguish between capital and revenue profits of the subsidiary company. There is no need to show the inter company dividends in the consolidated balance sheet. No holding company can become the subsidiary of another company. The proceeds from fresh issue of equity shares The proceeds from issue of debentures The proceeds from issue of fixed deposit The sale proceeds from investments Both (a) and (b) above. Contingent liability is a potential liability that may become an actual liability in the future. If the contingency is probable and likely to occur and the amount can be reasonably estimated, it should be recorded in the books of accounts. If the contingency is only reasonably possible and could happen, then it need to be disclosed only in the notes accompanying financial statements. If the contingency is remote and is unlikely to occur, it neither be recorded nor be disclosed.

29.

Which of the following statements is true? a. b. c. d. e.

30.

Which of the following can be utilized for redemption of preference shares? a. b. c. d. e.

31.

Which of the following statements is/are true? a. b. c. d.

32.

e. All of the above. Which of the following statements is not true? a. b. c. d. e. A company can redeem its preference shares. Preference shareholders are creditors of a company. The part of the authorized capital which can be called up only in the event of liquidation of a company is called reserve capital. Capital redemption reserve can be utilized for issuing fully paid bonus shares. Profit on reissue of forfeited shares is transferred to capital reserve account. Expensive and time taking to implement. Time consuming and costly maintenance. Reduced cycle times. Commitment to a single vendor. Availability of multiple options.

33.

Which of the following is not the disadvantage of Enterprise Resource Planning (ERP)? a. b. c. d. e.

348

Part III

34.

Which of the following methods is/are followed for amortization of intangible assets? a. b. c. d. e. Straight-line method. Written down method. Sum of the years digits method. Annuity method. Both (a) and (b) above. The proceeds of fresh issue of equity shares. The proceeds of issue of debentures. The proceeds of issue of fixed deposit. The sale proceeds of investments. Both (a) and (b) above. Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses. Capital profit realized in cash can be used for payment of dividend. Reserves created by revaluation of fixed assets are not permitted to be capitalized. Bonus issue cannot be made within 12 months of any rights issue. Dividend is payable on the calls paid in advance by shareholders. Credit balance of profit & loss account. General reserve. Dividend equalization reserve. Surplus arising out of a change in the method of charging depreciation. Capital redemption reserve. Nominal capital is the value of shares which a company is authorized to issue by its Memorandum. Subscribed capital is the part of paid-up capital which has been subscribed by the public. Called-up capital is the part of subscribed capital which has been called-up in order to carry on the business. Uncalled capital is the part of subscribed capital which has not yet been called-up. Issued capital is the part of authorized capital which is issued to the public for subscription. 12% p.a. 10% p.a. 8% p.a. 6% p.a. 5%. p.a. 349

35.

Which of the following can be utilized for redemption of preference shares? a. b. c. d. e.

36.

Which of the following statements is not true? a. b. c. d. e.

37.

Which of the following cannot be used for issue of bonus shares? a. b. c. d. e.

38.

Which of the following statements is not true? a. b. c. d. e.

39.

The rate of interest paid on calls-in-advance is a. b. c. d. e.

40.

If preference shares are redeemed out of distributable profits, an amount equal to the face value of shares redeemed is transferred to a. General reserve account b. Share premium account c. Capital reserve account d. Reserve capital account e. Capital redemption reserve account.

Part B: Problems (60 Points)


Solve all the problems. Points are indicated against each problem. 1. H Ltd. acquired 80% equity shares of S Ltd. on April 1, 2001 at a price of Rs.5,00,000. i. On the date of acquisition S Ltd. had the following balances: Profit & loss A/c. Rs.30,000 (credit balance) General reserve Rs.1,00,000. ii. The Plant & Machinery of S Ltd. has been revalued upwards by Rs.30,000 on the date of acquisition. iii. On March 31, 2002 S Ltd. had the following balances: Profit & loss A/c. Rs.80,000 (credit balance) General reserve Rs.1,60,000. iv. S Ltd. declared and paid interim dividend at the rate of 5% in the month of October 2001. The Share of H Ltd. in the capital profits and revenue profits of S Ltd. is a. Rs.1,04,000 ; Rs.88,000 b. Rs.1,04,000 ; Rs.1,08,000 c. Rs.1,28,000 ; Rs.88,000 d. Rs.1,28,000 ; Rs.1,08,000 e. Rs.1,28,000 ; Rs.1,68,000. (3 points) 2. Hilda Ltd. acquired 80% equity shares of Sicca Ltd. on April 1, 2001 at a price of Rs.5,00,000. The share capital of Sicca Ltd. consists of 50,000 shares of Rs.100 each. If the share of the capital profits and revenue profits of Hilda Ltd. in Sicca Ltd. are Rs.1,28,000 and Rs.1,08,000 respectively, the Cost of Control of Hilda Ltd. in Sicca Ltd. is a. Rs.1,00,000 (Goodwill) b. Rs.28,000 (Goodwill) c. Rs.28,000 (Capital reserve) d. Rs.1,36,000 (Capital reserve) e. Rs.2,64,000 (Goodwill). (2 points) 3. On April 01, 2002 Hima Ltd. acquired 80% shares of Bindu Ltd. The Accountant of Hima Ltd. is preparing the Consolidated Financial statements of Hima Ltd. and its subsidiary Bindu Ltd. The following additional information is given. The closing stock of S Ltd. as on March 31, 2003 includes Rs.10,000 received from H Ltd. who has made a profit of 33 1/3 % on cost. The required adjustment in consolidated Balance Sheet is a. Reduce Rs.8,000 from inventory and consolidated Revenue profits. b. Reduce Rs.2,500 from inventory and consolidated Revenue profits. c. Reduce Rs.8,000 from inventory and Minority interest d. Reduce Rs.2,000 from inventory and Minority interest e. Reduce Rs.8,000 from inventory and Goodwill.
P P

(2 points) 350

Part III

4.

The following is the Balance Sheet of Sai Rama Steel Ltd. as on March 31, 2002. Liabilities 50,000 Equity shares of Rs.10 each 3,000, 10% Preference shares of Rs.100 each General reserve Profit & loss a/c 10% Debentures Fixed deposits Current liabilities & provisions Rs. 5,00,000 3,00,000 4,00,000 1,20,000 2,00,000 1,00,000 3,80,000 Assets Goodwill Fixed Assets Investments Current Assets Rs. 1,30,000 12,00,000 3,00,000 3,70,000

20,00,000 On March 31, 2002 the company has revalued the assets as follows: i. ii. iii. a. b. c. d. e. 5. Goodwill Rs.1,50,000 Fixed Assets Rs.14,00,000 Investments Rs.4,00,000 Rs.10.00 Rs.12.50 Rs.20.40 Rs.26.80 Rs.32.80.

20,00,000

The intrinsic value of equity share is

(3 points) The subscribed capital of Bhoomi Ltd. consists of 50,000 Equity shares of Rs.10 each, and 3,000, 10% Preference shares of Rs.100 each i. Net profits after tax of the company for the last 4 years were as under: Year 1 Rs.1,80,000 Year 2 Rs.2,10,000 Year 3 Rs.2,00,000 Year 4 Rs.2,10,000 The company transfers 15% of its net profit every year to general reserve. Normal return in the similar business is 14% per annum. Rs.10.00 Rs.12.50 Rs.17.50 Rs.19.15 Rs.20.00. (3 points) 6. If the intrinsic value of equity share of Mythili Ltd. is valued at Rs.12.50 and its value using yield method is Rs.22.50, the fair value of the equity share is a. b. c. d. e. Rs.35.00 Rs.17.50 Rs.10.00 Rs.20.00 Rs.23.75. (1 point) 351

ii. iii. a. b. c. d. e.

The value of the equity share using yield method is

7.

The following data pertains to Lumbini Ltd. for the year ended March 31, 2002. Closing capital employed (Excluding non-trading investments) is Rs.9,80,000. Profit before tax for the year is Rs.1,60,000. The above profit includes Rs.5,000 income from non-trading investments. Income tax rate is 40%. The average capital employed for the purpose of calculation of Goodwill is a. b. c. d. e. Rs.9,32,000 Rs.8,87,000 Rs.9,33,500 Rs.10,26,500 Rs.10,28,000. (2 points)

8.

The following data pertains to Parekha Ltd. for the year ended March 31, 2002. i. ii. iii. a. b. c. d. e. The profit after tax (excluding non-trading income) is Rs.1,05,000. The Average capital employed (excluding non-trading investments) of the company is Rs.9,10,000. Normal return on capital employed in the similar business is 10%. Rs.28,000 Rs.42,000 Rs.91,000 Rs.36,000 Rs.56,000. (2 points)

The Goodwill of the company computed on the basis of 4 years purchase of super profits is

9.

Golden Spoon Ltd. issued 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share payable as follows: On application On allotment Rs.7 (including premium) Rs.3

On first & final call Rs.2 The company has received 6,000 applications for 5,000 equity shares. The allotment was made on pro rata. Excess application moneys were utilized towards dues on allotment. Mr. Yuvraj, who held 200 shares, failed to pay allotment money and first & final call. These shares were forfeited. The amount to be credited to Share forfeiture account is a. b. c. d. e. Rs.1,000 Rs.1,200 Rs.1,400 Rs.1,680 Rs.2,000. (2 points)

352

Part III

10.

Mr. Harsha, who was allotted 500 shares of Rs.10 each, failed to pay allotment money and first & final call. These shares were forfeited. An amount of Rs.3,500 was credited to Share forfeiture account. The company reissued 375 shares out of 500 forfeited shares to Mr. Dinkar as fully paid for Rs.8 per share. The amount transferred to capital reserve on account of reissue is a. b. c. d. e. Rs.2,750 Rs.2,625 Rs.1,875 Rs.1,000 Rs. 875. (2 points)

11.

On April 1, 2001 the balance of 12% Debentures of Rs.100 each of Feel Good Ltd. was Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase in the open market. Interest on debentures is payable on September 30 and March 31 every year. On July 1, 2001, the company purchased 1,000 of its own 12% Debentures as investment at Rs.99 cum-interest. The journal entry for the purchase of debentures as investment is a. Own Debenture account Interest on debentures A/c To Cash A/c 12% Debentures account Interest on debentures A/c To Cash 12% Debentures account To Cash Own Debentures account Interest on Debentures A/c To Cash A/c Own Debentures account Interest on Debentures A/c To Cash A/c Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. 96,000 3,000 99,000 96,000 3,000 99,000 99,000 99,000 87,000 12,000 99,000 87,000 12,000 99,000 (2 points)

b.

c. d.

e.

12.

On April 1, 2001 the balance of 12% Debentures of Rs.100 each of Feel Good Ltd. was Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase in the open market. Interest on debentures is payable on September 30 and March 31 every year. On July 1, 2001, the company purchased 1,000 of its own 12% Debentures as investment at Rs.98 ex-interest. The company canceled its own 1,000 debentures on March 31, 2002. The profit on cancelation of debentures transferred to Capital reserve is a. b. c. d. e. Rs.3,000 Rs.6,000 Rs.4,000 Rs.2,000 Rs.1,000. (2 points) 353

13.

Anush Ltd. issued to public 1,50,000 equity shares of Rs.100 each at par. Rs.60 per share was payable along with application and the balance on allotment. This issue was underwritten equally by A, B and C for a commission of 3 percent. Applications for 1,40,000 shares were received as per details below: Underwriter Firm application Marked application

A 5,000 40,000 B 5,000 46,000 C 3,000 34,000 If it is agreed to credit the unmarked applications equally to A and C, then the total liability of A, B and C is a. b. c. d. e. 14. 5,000; 5,000; 3,000 5,000; 5,000; 5,000 6,000; 5,000; 6,000 6,000; 5,000; 12,000 5,000; 12,000; 6,000. (3 points) Shershah Ltd. had the undernoted balances: Rs. Development rebate reserves General reserve Share premium account 5,00,000 3,40,000 1,40,000

The directors propose to redeem 10% 1,00,000 Redeemable Cumulative Preference shares of Rs.10 each at a premium of 10% and for that purpose made a fresh issue of equity shares of Rs.10 each at par. The directors were of the opinion that Rs.2,00,000 of the Development Rebate Reserve was free for distribution as dividend. The amount of fresh issue to be made is a. b. c. d. e. Rs.5,40,000 Rs.4,60,000 Rs.1,60,000 Rs.3,20,000 Rs.3,00,000. (3 points) 15. The following is the abridged profit and loss account of ABC Ltd. for the year ended March 31, 2002. Particulars To General expenses To Staff salaries and Bonus To Repairs to buildings (including extension cost of Rs.2,00,000) To Directors fees To Travelling (including directors travel of Rs.18,000) To Depreciation u/s 350 To Income tax Net Profit Amount Particulars Rs. Rs. 2,00,000 By Gross Profit 5,00,000 By Profit on sale of a branch 4,00,000 Profit on sale of plant (Cost price 20,00,000 WDV 12,00,000) 80,000 Government Subsidy 21,000 16,000 1,00,000 43,000 13,60,000 Amount Rs. 3,00,000 1,00,000 8,00,000

1,60,000

13,60,000

354

Part III

The Managing Director is entitled to a commission of 3% of the net profit after charging such commission. The commission payable to the MD is a. b. c. d. e. 16. Nil, as computed net profit is negative Rs.6,553 Rs.9,987 Rs.4,747 Rs.7,077. (3 points) An equity share of Rs.10 on which Rs.10 is called-up is forfeited for non-payment of the final call of Rs.2 per share. If the share is to be reissued as fully paid-up, the minimum amount to be collected is a. b. c. d. e. 17. Rs.10 Rs.8 Rs.6 Rs.4 Rs.2. (2 points) Consider the following data pertaining to Odeyssey Ltd.: Particulars Rs. Nominal equity share capital 75,000 Issued and called-up equity share capital 72,000 Paid-up equity share capital 72,000 Calls-in-advance 2,000 10% Preference share capital (fully paid-up) 75,000 If the company declares a dividend of 10%, the total dividend payable by the company is a. b. c. d. e. 18. Rs.15,200 Rs.15,000 Rs.14,800 Rs.14,700 Rs.7,200. (1 point) Consider the following balances of Wren Ltd. as on March 31, 2003: Particulars Share Capital 12% Bank loan Sundry creditors Bills payable Land & buildings Cash at bank Office equipment Furniture Closing stock Bills receivable Sundry debtors Petty cash Cash on hand Rs. 5,76,900 1,50,000 50,000 10,000 4,36,000 23,500 1,99,700 2,00,000 38,000 9,000 55,000 210 9,400 355

The net profit for the year ended March 31,2003 as per the Profit and Loss account was Rs.1,33,731. The adjustments affected in the profit and loss account are as under: Depreciation on Office equipment: Rs.19,970; Furniture: Rs.30,000 Reserve for discount on Sundry creditors is Rs.720 and Provision for discount on Sundry debtors is Rs.779 Creditors include a debt of Rs.8,000 due to Mr.Madhukar who is also in the list of debtors for the same amount.

Accrued commission receivable amounted to Rs.13,000 and prepaid printing charges aggregated to Rs.1,850; accrued interest on bank loan is of Rs.15,000. After considering the above adjustments that are affected in the profit and loss account, the total of Balance Sheet of the company as at March 31, 2003 is Rs.9,36,911 Rs.9,27,631 Rs.9,26,911 Rs.9,13,911 Rs.9,26,970. (3 points)

a. b. c. d. e. 19.

Satya Ltd. acquired 3,000 equity shares and 1,800, 10% preference shares of Nitya Ltd. on January 01, 2003 at a cost of Rs.5,20,000 and Rs.2,00,000 respectively. The balances of general reserve and profit and loss account of Nitya Ltd. as on the date of acquisition were Rs.2,50,000 and Rs.1,00,000 respectively. The paid-up capital of Nitya Ltd. consists of 5,000 equity shares of Rs.100 each and 2,500, 10% preference shares of Rs.100 each. The cost of control to be shown in the Consolidated Balance Sheet as on March 31, 2003 is a. b. c. d. e. Rs.10,000 (Goodwill) Rs.16,000 (Capital reserve) Rs.40,000 (Capital reserve) Rs.30,000 (Goodwill) Rs.25,000 (Goodwill). (2 points)

20.

Sumesh Ltd. issued 15,000 shares of Rs.100 each at a discount of 5%. Mr. Satish to whom 200 shares were allotted, failed to pay the final call of Rs.20. These shares were forfeited and re-issued to Mr. Suresh at a discount of 8%. The journal entry to record the reissue of forfeited shares by the company is a. Bank a/c Discount on issue of shares a/c To Share capital a/c Bank a/c Share capital a/c To Shares forfeiture a/c Bank a/c Shares forfeiture a/c To Share capital a/c Bank a/c To Share capital a/c Bank a/c Discount on issue of shares a/c Shares forfeiture a/c To Share capital a/c Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Rs. 18,400 1,600 18,400 1,600 20,000 18,400 1,600 20,000 18,400 18,400 18,400 1,000 600 20,000. (1 point) 356 Rs.

20,000

b.

c.

d. e

Part III

21.

22.

23.

24.

25.

Suhasi Ltd. issued 20,000 shares of Rs.10 each at a discount of 10%. Mr. Harish to whom 500 shares were allotted failed to pay the final call of Rs.3 and hence, his shares were forfeited. The amount to be transferred to the credit of shares forfeiture account is a. Rs.1,500 b. Rs.3,500 c. Rs.3,000 d. Rs.4,500 e. Rs.5,000. (2 points) A company forfeited 2,000 shares of Rs.10 each (which were issued at par) held by Mr. Wester for non-payment of allotment money of Rs.3 per share. The called-up value per share was Rs.8. On forfeiture, the amount debited to share capital is a. Rs.4,000 b. Rs.6,000 c. Rs.14,000 d. Rs.16,000 e. Rs.20,000. (1 point) On August 01, 2002, Sawan Ltd. purchased 5,000, 15% own debentures of Rs.10 each for 95% cum-interest. The company cancelled its own debentures on March 31, 2003. Interest on debentures is payable on September 30 and March 31, every year. The profit transferred to capital reserve is a. Rs.5,000 b. Rs.2,500 c. Rs.5,625 d. Rs.47,500 e. Rs.45,000. (1 point) Consider the following data pertaining to Svalabh Ltd.: Year Profits (Rs.) 2000-01 5,75,000 2001-02 5,90,000 2002-03 5,55,000 The profit for the year 2001-2002 includes an abnormal income of Rs.25,000. If normal rate of return is 15% and the capital employed is Rs.30,00,000, the super profit of the company is a. Rs.1,23,333 b. Rs.1,31,667 c. Rs.7,66,666 d. Rs.25,000 e. Rs.1,15,000. (1 point) Mr. Atish purchased 50 equity shares of M/s.Info Engineers Ltd. at a price of Rs.60 (Face value Rs.10) per share. Mr. Atish received a dividend at the rate of 15%. The yield on investment is a. 15.0% b. 12.5% c. 10.0% d. 5.0% e. 2.5%. (1 point) 357

26.

The nominal capital of M/s.Modern Textiles Ltd. is Rs.1,00,00,000 divided into 1,00,000 shares of Rs.100 each. The company offers one share for every five shares held by its existing shareholders. If the rights issue price is Rs.300 per share and the market value at the time of rights issue is Rs.420 per share, the value of right is a. b. c. d. e. Rs.20 Rs.60 Rs.120 Rs.360 Rs.420. (1 point)

27.

The authorized share capital of M/s.Rockwood Ltd. consists of 10,000 equity shares of Rs.100 each. The company issued 5,000 equity shares of Rs.100 each payable as under: On application Rs.25 On allotment Rs.50 On first call Rs.10 On final call Rs.15 The company received applications for 4,500 shares. The directors of M/s.Rockwood Ltd. made first call on March 15, 2003. Mr. Rakesh, an allottee of 500 shares, failed to pay the first call money. Mr. Kumar who was allotted 1,000 shares paid a total of Rs.95,000 so that the excess amount can be adjusted against money due on final call. The share capital figured in the Balance Sheet of the company as on March 31, 2003 is a. b. c. d. e. Rs.5,05,000 Rs.5,15,000 Rs.3,77,500 Rs.3,87,500 Rs.3,67,500. (2 points)

28.

M/s.Highfi Ltd. issued 10,000 equity shares of Rs.10 each, out of which only Rs.8 is calledup and paid-up. As the company has accumulated free reserves, it declared a bonus issue. This bonus issue is made by converting the partly paid shares into fully paid-up and by issue of one share for every four shares held by the existing shareholders. The total amount required for bonus issue is a. b. c. d. e. Rs.25,000 Rs.20,000 Rs.45,000 Rs.5,000 Rs.1,25,000. (1 point)

29.

RV Ltd. is registered with a share capital of Rs.1,00,000 of Rs.10 each. The company offered 8,000 shares to the public. The company called-up only Rs.6 per share and calls-inarrears amounted to Rs.5,000. The called-up capital is a. b. c. d. e. Rs.1,00,000 Rs.80,000 Rs.48,000 Rs.43,000 Rs.38,000. (1 point) 358

Part III

30.

The creditors of H Ltd. include Rs.5,000 due to S Ltd. and the debtors of H Ltd. include Rs.3,000 owed by S Ltd. At the time of consolidation, the adjustment entry will be to a. b. c. d. e. Reduce total creditors by Rs.5,000 Reduce total debtors by Rs.3,000 Reduce total debtors and creditors by Rs.2,000 Reduce total debtors and creditors by Rs.3,000 Reduce total debtors and creditors by Rs.5,000. (1 point)

31.

Future maintainable profits of Tilak & Co. for the last 5 years were as follows: 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 a. b. c. d. e. Rs.14,54,000 Rs.10,90,500 Rs.8,72,400 Rs.4,36,200 Rs.2,90,800. (2 points) Rs.1,32,000 Rs.2,44,000 Rs.2,74,000 Rs.3,15,000 Rs.3,32,000

The weighted average profits of the company are

32.

The following information pertains to OverLand Ltd. i. ii. iii. iv. a. b. c. d. e. Equity share capital called up Calls-in-arrear Calls-in-advance Proposed dividend Rs.75,000 Rs.72,750 Rs.71,250 Rs.69,000 Rs.65,250. (2 points) Rs.5,00,000 Rs.40,000 Rs.25,000 15%

The amount of dividend payable is

359

Financial Accounting II

Model Question Paper V


Suggested Answers
Part A: Basic Concepts
1. 2. 3. 4. (d) The discount allowed on reissue of forfeited shares should be debited to forfeited shares account. (e) Forfeiture of shares is invalid in all the given circumstances. (b) At every annual general meeting, the Board of Directors should lay before the shareholders, balance sheet and profit and loss account. (a) Where the preference shares are redeemed without there being a corresponding issue of shares and the redemption is made out of distributable profits, the gap created in the capital needs are to be filled up. For this purpose, an amount equal to the face value of the shares redeemed is transferred to the Capital Redemption Reserve from the undistributed profits such as the credit balances in profit and loss account, general reserve and dividend equalization reserve. (b) The item interest accrued on investments appears in the Balance Sheet of a company under the category of current assets. (a) Gross value added = Sales revenue and any other direct income and investment income minus the cost of all materials and services and other extraordinary expenses. Whereas, net value added = Gross value added Depreciation. (a) The perpetual inventory system keeps a running, continuous record that tracks inventories and the cost of goods sold on a day-to-day basis. In a manufacturing company, the perpetual inventory method is called a product-costing system. (d) Under the units of production method, depreciation is calculated based on the units produced by the machinery during that period. (b) Revenue is recognized only when the goods are transferred. (e) All the above factors contribute to the value of goodwill of a concern. (c) Valuation on the basis of dividend is more suitable for valuation of small block of shares. Other methods like asset backing method, earnings method, fair value method and return on capital employed method are not appropriate for valuation of small block of shares. Hence (c) is true. (d) Dividends may be termed as the share of profits that is payable to the shareholders of a company. The Companies Act lays down the dos and donts associated with declaration/ payment of dividends. As per the Companies Act, that dividends are paid on paid-up capital which is part of the called-up capital that has been paid-up by the shareholders and made available with the company for utilization. Hence, it is proper to pay dividends on paid-up capital. The other alternatives a. Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in nature unless and until the entire amount is called-up and paid-up. Since the entire amount is not made available for utility, dividends cannot be declare on authorized capital. Issued capital is the part of nominal capital that is offered to the public for subscription and the entire amount is not available for claiming dividend. Called-up capital is that part of the subscribed capital which has been called-up and cannot be a base for calculation of dividend. Reserve capital is that part of uncalled capital which is to be called-up in the event of winding-up of a company and under any circumstances, dividend cannot be declared on it.

5. 6.

7.

8. 9. 10. 11.

12.

b. c. e.

Thus, the statements (a), (b), (c) and (e) are not correct. 360

13.

(e) The premium collected on the issue of debenture is in the nature of a capital profit and hence the same is to be transferred to the capital reserve account and shall be shown in the balance sheet under the heading Reserves and Surplus of the liabilities side. (d) AS-2 prescribes the accounting treatment for inventories under the historical cost system. This Standard should be applied in financial statements prepared in the context of the historical cost system in accounting for inventories other than: a. b. c. work-in-progress arising under construction contracts, including directly related service contracts; financial instruments; and producers inventories of livestock, agricultural and forest products, and mineral ores to the extent that they are measured at net realizable value in accordance with well-established practices in certain industries.

14.

15.

(e) Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of bonus shares shall be subject to the prescribed SEBI guidelines, which inter alia provide for the following: Bonus issue shall not be made within 12 months of any public/rights issue. Reserves created out of revaluation of fixed assets shall not be capitalized. Bonus issue shall not be made in lieu of dividend. Bonus issue shall not be made unless partly paid shares, if any, existing is made fully paid-up. The residual reserve after the proposed capitalization should be at least 40% of the increased paid-up capital.

16.

(e) Research and Development costs should comprise all costs that are directly attributable to research and development activities or that can be allocated on a reasonable basis to such activities. Research and Development costs include: The salaries, wages and other employment related costs of personnel engaged in research and development activities; The costs of materials and services consumed in research and development activities; The depreciation of property, plant and equipment to the extent that these assets are used for research and development activities; Overhead costs, other than general administrative costs, related to research and development activities. These costs are allocated on bases similar to those used in allocating overhead costs to inventories; and Other costs, such as the amortization of patents and licenses, to the extent that these assets are used for research and development activities.

17.

(e) The gross book value of an asset is the historical cost or the cost at which the asset is actually acquired. According to AS-10, it comprises the purchase price, including import duties and other taxes or levies and any directly attributable cost of bringing the asset to its working condition. Any trade discounts and rebates offered by the supplier are to be deducted. Examples of directly attributable costs are: i. ii. iii. iv. site preparation; initial delivery and handling costs; installation cost, such as special foundations for plant; and professional fees such as fees of architects and engineers.

18.

(a) The proposed dividend becomes declared dividend on its adoption by the shareholders in the Annual General Meeting. The company must pay the dividend to the shareholders within 30 days from the date of announcement of the dividend (earlier 42 days). Shareholders cannot have powers to enhance or decrease the dividends recommended by the Board of Directors by passing any resolution. 361

19.

(c) Specific identification method is used for valuation of costlier items. Each item of inventory is identified with its cost. The total of the various costs so identified constitutes the value of inventory. (d) Unclaimed dividends means the dividends which are not claimed by shareholders within 30 days of the dividends declared. It is a liability. Thus, it should be shown under the current liabilities in the liabilities side of the balance sheet. (e) Debentures can be issued for cash or consideration other than cash. It can be issued as collateral security, but it cannot be issued in lieu of dividends. Hence, (e) is true. (c) Brokerage will be allowed in respect of all shares but it will not be allowed in respect of promoters quota, including amounts taken up by the directors, their friends and employees and in respect of rights issues taken up or renounced by the existing shareholders. Therefore, this statement is false. Other statements mentioned in (a), (b), (d) and (e) are true. (d) Economic value addition = Net operating profit after tax Weighted average cost of capital. (a) Under the diminishing balance method (or reducing or decline balance or written down value method), a depreciation percentage rate is applied to the acquisition or construction cost at the beginning of the accounting period rather than the original cost. This depreciation percentage rate is significantly higher than a comparable depreciation rate under the straight-line method. That is, the depreciation charged off during the year is deducted from the cost of the asset at the beginning of the accounting period and the balance is known as the book value or written down value (WDV). Depreciation is charged at a specified rate on the original cost of the asset in the first year and on book value or written down value of the previous year from the 2nd year onwards. Under this method, the balance in the asset account can never be zero. Depreciation written off under this method will reduce year by year. Thus, it is also known as Diminishing Balance method.

20.

21. 22.

23. 24.

25.

(e) Dividend is payable only on paid-up capital. It is not payable on calls-in-advance account, it is not payable on authorized capital account. Dividend cannot be paid out of capital. Interim dividend can be declared by the directors without any approval of shareholders. Therefore (e) is true. (e) Discount allowed on reissue of forfeited shares is debited to forfeited shares account. It cannot be debited to general reserve account, capital reserve account, revaluation reserve account and capital redemption reserve account. (c) Loss on issue of debentures is a fictitious asset and is shown on the assets side of the balance sheet. (e) The application should be filed with the company or its bankers and should be accompanied by the application money. The company fixes the application money. The application money fixed by the company should not be less than 5 percent of nominal value of the shares. (b) If the subsidiary company issues bonus shares out of its pre-acquisition profit, there will be no change in the accounting treatment, while calculating the cost of control, the holding companys share in the pre-acquisition profit is reduced at one hand and on the other hand, the paid-up value of shares is increased. Hence there is no effect on the cost of control on the bonus shares issued out of the pre-acquisition profit. So this statement is true. Other statements stated in (a), (c), (d) and (e) are not correct. (a) Preference shares are redeemed from the proceeds of fresh issue of shares. It cannot be redeemed out of the proceeds of issue of debentures, fixed deposit and the sale proceeds of investment. Hence, (a) is correct. (e) A contingent liability is a potential liability that may become a liability in future. If the contingency is probable it is to be recorded in the books and if it is reasonably possible it is to be disclosed in the notes and if it is remote it need not be either recorded or disclosed. Thus, as per AS-4 all the above statements are true. 362

26.

27. 28.

29.

30.

31.

32.

(b) Preference shareholders enjoy preferential treatment with regard to payment of dividend and refund of capital. They are owners of a company and are not creditors. Hence (b) is false. The other alternatives a. As per the Companies Act, only preference shares which are redeemable within 20 years can be issued. As such, the statement that a company can redeem its preference share is true. Reserve capital is companys uncalled capital which has to be called up only in the event of winding-up of a company which is true. Capital redemption reserve is created to keep the capital intact. As such, it can be utilized for issuing fully paid bonus shares. Capital reserve is generally created out of profits or gains of capital nature. Profit on reissue of forfeited shares is a capital profit and transferred to capital reserve account.

c. d. e.

Thus, the statements (a), (c), (d) and (e) are not false. 33. (c) The main disadvantages of Enterprise Resource Planning (ERP) are stated in option numbers (a), (b), (d) and (e). It means it is expensive, time taking to implement, time consuming and costly, commitment to a single vendor and availability of multiple options. But reduced cycle times is the advantage of ERP. Hence (c) is not the disadvantage of ERP. (a) Straight-line method is used to amortize the intangible assets. Other methods like written down method, sum of the years digits method and annuity method are not used for amortization of intangible assets. Hence (a) is correct. (a) Preference shares are redeemed from the proceeds of fresh issue of shares. It cannot be redeemed out of the proceeds of issue of debentures, fixed deposit and the sale proceeds of investment. Hence (a) is correct. (e) Dividend is not payable on the calls in advance paid by the shareholders. It is payable on the outstanding balance of called-up shares minus calls-in-arrear amount. Other statements mentioned in (a), (b), (c) and (d) are true. Hence (e) is false. 37. (d) Bonus shares are allotted to the existing shareholders without receiving any consideration. It is one method of capitalizing the profits of the company. They can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. They are subject to prescribed SEBI guidelines. The surplus due to change in method of charging depreciation cannot be utilized for issue of bonus shares. The other alternatives a. b. c. e. Credit balance of profit and loss account, and General reserve, are undistributed profits and can be utilized for issue of bonus shares. The balance in dividend equalization reserve reflects the amount of undistributed profits at the disposal of shareholders and can be utilized for issue of bonus shares. Capital redemption reserve is created out of credit balance in profit and loss account, General reserve, dividend equalization reserve which are the balances of undistributed profits and bonus shares can be issued out of this.

34.

35.

36.

Thus, bonus shares can be issued out of balances in (a), (b), (c) and (e) and not (d). 38. (b) Subscribed capital is the part of issued capital which has been subscribed by the public and it is not the part of paid-up capital. Hence (b) is false. Other statements mentioned in (a), (c), (d) and (e) are all true. (d) The rate of interest on calls-in-advance account is 6%. Hence (d) is correct. (e) If preference shares are redeemed out of distributable profits the amount equal to the face value of shares redeemed is transferred to capital redemption reserve account. Hence (e) is correct.

39. 40.

363

Part B: Problems
1. (d) a. b. Share of H Ltd. Share of S Ltd. Capital profit: General reserve Profit & loss A/c. Revaluation profit (Plant & Machinery) H Ltd. S Ltd. c. 80% 20% Rs.1,28,000 Rs.32,000 (Rs.) Rs. 1,00,000 30,000 30,000 1,60,000 80% 20%

Revenue profit:

General reserve (Rs.1,60,000 Rs.1,00,000) 60,000 Profit & loss = Rs.50,000 (Rs.80,000 Rs.30,000) Add: Interim dividend = Rs.25,000 75,000 1,35,000 H Ltd. 80% of Rs.1,08,000 S Ltd. 2. 20% of Rs.27,000 (Rs.) (Rs.) 5,00,000 (c) Cost of Control/Goodwill Cost of investment Less: Nominal value of shares 4,00,000 1,28,000 5,28,000 Capital profit Capital reserve 28,000 (b) Adjustment to the extent of unrealized profits only should be made. Unrealized profit: Share of H Ltd.: Rs.10,000 x 25% = Rs.2,500 Hence, only Rs.2,500 adjustment is made in the inventory and the same amount is also reduced from the Consolidated Profits (Revenue profits) as the amount of unrealized profits should be totally eliminated. 4. (d) Value of share Under Intrinsic value method: Rs. Net Assets: Goodwill Fixed assets Investments Current assets Rs. 1,50,000 14,00,000 4,00,000 3,70,000 23,20,000

3.

Less: Liabilities: 10% Debentures 2,00,000 Fixed deposits 1,00,000 Current liabilities & provisions 3,80,000 10% Preference shares 3,00,000 9,80,000 Funds available for equity 13,40,000 shareholders Intrinsic value of equity shares = Rs.13,40,000/50,000 = Rs.26.80 364

5.

(e) Under Yield method: Year 1 2 3 4 Profit after tax Rs. 1,80,000 2,10,000 2,00,000 2,10,000 8,00,000

Rs. 2,00,000 30,000 1,70,000 Less: Preference dividend 30,000 Profit available for equity shareholders 1,40,000 Capitalization value of profit = Rs.1,40,000/14% = Rs.10,00,000. Average profit = Rs.8,00,000/4 Less: Transfer to reserve (15%) Value of equity share = Rs.10,00,000/50,000 6. = Rs.20. (b) Fair value of equity Value of equity using intrinsic value + Value of equity using yield method = 2 Fair value of equity = 7. (c)
Rs.12.50 + Rs.22.50 = Rs.17.50 2

Average Capital Employed Rs. Closing capital employed Less: 1/2 of current years profit Profit before tax Less: Non-trading income Less: Income tax 40% 1/2 of profit (i.e. 1/2 Rs.93,000) Average Capital Employed 9,80,000 1,60,000 5,000 1,55,000 62,000 93,000

46,500 9,33,500

8.

(e) Rs. Profit after tax (excluding non-trading income) Normal profit = 10% x Rs.9,10,000 Super profits Goodwill is 4 years purchase of super profits 1,05,000 91,000 14,000 56,000

9.

Value of Goodwill (4 x Rs.14,000) (b) Number of Shares forfeited are 200.

Since Yuvraj was allotted 200 shares implies, the total shares applied for = 240 shares Amount paid by Yuvraj (excluding premium) Therefore, the share forfeiture account is credited with 240 x 5 10. = Rs.5 per share = Rs.1,200

(c) Amount received in respect of 500 shares and credited to Share forfeiture = Rs.3,500 account Less: Proportionate amount of Share forfeiture account value in respect of = Rs.875 125 shares remaining unissued 125/500 x 3,500 Amount in share forfeiture account proportionate to 375 reissued shares = Rs.2,625 365

11.

In respect of 375 shares reissued Rs. Amount in share forfeiture account 2,625 Less: Discount @ 2 = 2 x 375 750 Amount transferred to Capital reserve 1,875 (a) Cum interest implies including dividend. The interest = April 1 to July 1 i.e., for a period of 3 months. Amount of interest = 1,000 x 100 x 12% x 3/12 = Rs.3,000 The price to be paid is Rs.99 x 1,000 = Rs.99,000 (including interest) Therefore, the principle amount = Rs.99,000 less interest i.e. Rs.3,000 = Rs.96,000. Therefore, the correct entry is Own Debentures account Dr. 96,000 Interest on debentures account Dr. 3,000

12.

To Cash account 99,000 (d) On the purchase of debentures as investment the journal entry to be made Own Debentures account Dr. 98,000 Interest on debentures account Dr. 3,000 To Cash account 1,01,000 On cancelation of the above debentures the journal entry to be made is 12% Debentures Dr. 1,00,000 To Own debentures account 98,000 To Capital reserve 2,000 (d) Statement showing number of shares to be taken up Particulars Total A B No. of shares Underwrittten 1,50,000 50,000 50,000 Less: Benefit of unmarked applications 7,000 3,500 1,43,000 46,500 50,000 Less: Benefit of marked applications 1,20,000 40,000 46,000 23,000 6,500 4,000 Less: Benefits of firm underwriting 13,000 5,000 5,000 10,000 1,500 1,000 Less: Benefit of Bs surplus in the ratio of 1:1 500 +1,000 10,000 1,000 Underwriters total liability to be calculated as under:

13.

C 50,000 3,500 46,500 34,000 12,500 3,000 9,500 500 9,000

14.

15.

Firm underwriting 5,000 5,000 3,000 Add: Open shares subscribed 1,000 9,000 Total liability of underwriters 6,000 5,000 12,000 (b) The amount of share premium on redemption of preference shares is transferred from share premium account. The amount required for the redemption of preference shares is Rs.10,00,000. Amount transferred to capital redemption reserve = 2,00,000 Development Rebate Reserve + 3,40,000 General reserve = Rs.5,40,000 Fresh issue of capital to be made = Rs.4,60,000 (e) Rs. Net Profit as per profit and loss account 43,000 Add: Income tax 1,00,000 Extension of building 2,00,000 3,43,000 Less: Profit on branch sale 1,00,000 Profit for the purpose of commission 2,43,000 Commission = 3/103 x 2,43,000 = Rs.7,077.67 366

16.

(e) Share forfeiture account has a credit balance of Rs.8 paid-up. Hence the maximum discount allowed on reissue = Rs.8 Hence the minimum amount that is to be collected = Rs.10 less max. discount = Rs.2.

17.

(d) Dividend is paid on paid-up capital Equity share capital + Preference share capital = Rs.72,000 + Rs.75,000 = Rs.1,47,000 = 10% of Rs.1,47,000 = Rs.14,700.

18.

(c) Balance Sheet of Wren Ltd. as on March 31, 2003 Liabilities Share capital Profit and loss account 12% Bank loan Add: Outstanding interest Sundry creditors Less: Debtors set off Provision for discount on creditors Bills payable 8,000 720 1,50,000 50,000 Rs. Rs. Assets 5,76,900 Land & buildings 1,33,731 Office equipment Less: Depreciation Less: Depreciation Closing stock Sundry debtors Less: Provision for 41,280 discount on debtors Creditors set-off 10,000 Bills receivable Cash at bank Petty cash Accrued commission Prepaid printing Cash on hand 9,26,911 (d) Degree of control = 3,000/5,000 = 3/5 = 60% Particulars Cost of investment (Rs.5,20,000 + Rs.2,00,000) Less: Face value of shares held: Equity 10% Preference Capital profit (Rs.3,50,000 x 3/5) Goodwill Rs. 55,000 779 8,000 46,221 9,000 23,500 210 13,000 1,850 9,400 9,26,911 Rs. 7,20,000 15,000 1,65,000 Furniture 1,99,700 19,970 1,79,730 2,00,000 30,000 1,70,000 38,000 Rs. Rs. 4,36,000

19.

3,00,000 1,80,000 2,10,000

6,90,000 30,000

20.

(e) When the forfeited shares were originally issued at a discount and also reissued at a discount, the amount of original discount should be debited to discount on issue of shares and the excess of discount on re-issued shares is to be debited to shares forfeited account. The amount received should be debited to bank account and the face value of the shares is to be credited to share capital account. Hence, the entry to record the reissue is Bank a/c Discount on issue of shares a/c Shares forfeiture a/c To Share capital a/c Dr. Dr. Dr. Rs. 18,400 1,000 600 Rs.

20,000 367

21.

(c) The shares were issued at a discount of 10% i.e., they were issued for Rs.9 per share. Mr. Harish failed to pay the final call of Rs.3. Hence he has paid Rs.6 (Rs.9 Rs.3). The amount to be credited to shares forfeited account is Rs.6 x 500 shares = Rs.3,000.

22. 23.

(d) The amount to be debited to share capital account on forfeiture is the amount called-up i.e. Rs.8 x 2,000 shares = Rs.16,000. (a) On purchase of debentures, the journal entry to be made is Rs. Own debentures a/c Interest on debentures a/c To Cash a/c The journal entry to be made on cancellation of the debentures, is 15% Debentures a/c To Own debentures To Capital reserve Dr. 50,000 45,000 5,000 Dr. Dr. 45,000 2,500 47,500 Rs.

24.

(e) Average profit (Rs.5,75,000 + Rs.5,90,000 Rs.25,000 + Rs.5,55,000) /3 = Rs.5,65,000 Normal profit = Rs.30,00,000 x 15% = Rs.4,50,000 Super profit = Rs. 5,65,000 Rs.4,50,000 = Rs.1,15,000.

25.

(e) Dividend = 15% on 50 shares Rs.10 each = Rs.75 Yield on investment =


Rs.75 Rs.6050 shares

x 100 =

Rs.75 Rs.3,000

x 100 = 2.5%.

26.

(a) Value of right

r N + r (M S)

Where, r N M S

= = = =

No. of rights issued No. of old shares Market price Issue price of rights

1 Value of rights = (Rs.420 Rs.300) = Rs.20. 5 +1


27. (c)

Rs. Called-up capital (4,500 x Rs.85) Less: Calls-in-arrears (500 x Rs.10) Paid-up share capital 3,82,500 5,000 3,77,500

The calls-in-advance of Rs.10,000 will be indicated separately and will not be included in share capital.
368

28.

(c)

Rs. Amount to make partly paid shares into fully paid (10,000 Rs.2) 20,000 25,000 45,000

10,000 x Rs.10 Amount of bonus shares 4


Amount of bonus issue
29.

(c) Called-up capital is that part of the issued capital which has been called-up on the shares.

Called-up value per share No. of shares issued to public Called-up capital

= Rs.6 = 8,000 = No. of shares x called-up value per share = 8,000 x Rs.6 = Rs.48,000.

30.

(d) At the time of consolidation, inter company debts should be eliminated. In the present instance, it is a resultant of goods sold on credit. The minimum amount of Rs.3,000 is to be eliminated from sundry debtors as well as sundry creditors. Hence the answer (d) reduce total debtors and creditors by 3,000 is correct.

The other alternatives a. b. c. e.


31. (e)

The inter company debt is only Rs.3,000 and reducing total creditors by Rs.5,000 is incorrect and only one aspect of the inter company debt is dealt with. Reducing total debtors by Rs.3,000 is incorrect as the dual aspect of transaction is not taken care. Hence, the answer is incorrect. Reduce total creditors and debtors by Rs.2,000 is not correct because the amount of inter company debt is Rs.3,000. The minimum amount of inter company debt is Rs.3,000 only. As such, reduction of 5,000 is not correct. Year 1996-97 1997-98 1998-99 1999-2000 2000-2001 Profit (Rs.) 1,32,000 2,44,000 2,74,000 3,15,000 3,32,000 Total
Rs.43,62,000 15

Weight 1 2 3 4 5 15 = Rs.2,90,800.

Total (Profit & Weigh) Rs. 1,32,000 4,88,000 8,22,000 12,60,000 16,60,000 43,62,000

Weighted average profit =


32. (d)

Particulars Equity shares called up Less: Calls-in-arrear Outstanding balance

Rs. 5,00,000 40,000 4,60,000

Dividend = 15% on Rs.4,60,000 = Rs.69,000.

369

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