Afa Compilation

A COMPILATION OF ILLUSTRATIVE PROBLEMS IN
ADVANCED FINANCIAL
ACCOUNTINGI
FOR STUDENTS OF COP334

3RD SEMESTER, BACHELOR OF COMMERCE (PROFESSIONAL)
DEPARTMENT OF PROFESSIONAL STUDIES
CHRIST UNIVERSITY
NAME: __________________________________
REG. NO.:_________________ 3BCOMP ____
This compilation has been put together solely for the purpose of discussion and
illustrative problem-solving in the classroom, and should not be considered exhaustive
material for the purpose of preparation for examinations. Learners are advised to
consult reference books for additional problems, and solve them for thorough practice
for each topic under study.
SYLLABUS
UNIT TOPIC PAGES
Unit 1 Preparation of Financial Statements for Companies .............. 1 11
(i) Meaning of financial statements; form and contents of Statement of Profit
and Loss and Balance Sheet as per Schedule III to the Companies Act,
2013; general instructions for their preparation along with Notes to
Accounts; problems based on Trial Balance and common year-end
adjustments/ rectifications
(ii) Treatment of taxes deducted at source, advance payment of tax, and
provision for taxation
(iii) Treatment of interim and final dividend, and corporate dividend tax;
meaning of capital and revenue reserves; rules for declaration of dividend
out of reserves; simple problems
(iv) Computation and treatment of managerial remuneration, including
computation of net profit under Section 198 of the Companies Act, 2013
Unit 2 Alteration of Share Capital..... 12 17
(i) Bonus Shares: meaning; characteristics of bonus shares; circumstances for
issue; statutory provisions, including SEBI guidelines; reserves available/
not available for issue of bonus shares; accounting treatment
(ii) Equity shares with differential rights
(iii) Introduction to accounting for employee stock options
(iv) Buyback of equity shares: meaning; advantages; limitations prescribed
under the Companies Act, 2013; transfer to Capital Redemption Reserve;
accounting treatment; preparation of Balance Sheet after buyback
Unit 3 Redemption of Preference Shares and Debentures.. 18 23
(i) Redemption of preference shares: statutory provisions; arranging for cash
for the purpose of redemption, including fresh issue of shares; transfer to
Capital Redemption Reserve; treatment regarding premium on redemption;
preparation of Balance Sheet after redemption
(ii) Redemption of debentures: liability to create Debenture Redemption
Reserve (DRR); investment of DRR; methods of redemptionpayment in
lumpsum, payment in instalments, purchase in open market; simple
problems
Unit 4 Underwriting of Shares.... 24 26
Meaning; statutory provisions, including relevant SEBI guidelines; types of
underwriting; marked and unmarked applications; computation of gross liability,
commission, and net liability; entries in the books of the company and the
underwriters
Unit 5 Valuation of Goodwill and Shares...... 27 33
(i) Valuation of goodwill: meaning; circumstances for valuation of goodwill;
factors influencing the value of goodwill; methods of valuationaverage
profit method, super profit method, capitalisation of average profit method,
capitalisation of super profit method, annuity method
(ii) Valuation of shares: meaning; need for valuation; factors affecting
valuation; methods of valuationintrinsic value method, yield method or
earning capacity method, fair value of shares
(iii) Right issue and valuation of right issue
Advanced Financial AccountingI (COP334) 3rd Semester BCOM (Professional)
Unit 1: Preparation of Financial Statements for Companies
PART I BALANCE SHEET

Name of the Company.
Balance Sheet as at
(Rupees in)
Particulars Note Figures as at the Figures as at the

No. end of current end of the previous
reporting period reporting period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share
warrants
(2) Share application money pending
allotment
(3) Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (net)
(c) Other Long term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
TOTAL
II. ASSETS
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
Page 1 of 33
(2) Current assets

(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL
PART II STATEMENT OF PROFIT AND LOSS

Name of the Company.
Profit and loss statement for the year ended
(Rupees in)
Particulars Note Figures as at the Figures as at the

end of current end of the previous
No. reporting period reporting period
1 2 3 4
I Revenue from operations Xxx Xxx
II Other income Xxx Xxx
III Total Revenue (I + II) Xxx Xxx
IV Expenses:
Cost of materials consumed Xxx Xxx
Purchases of stock-in-trade Xxx Xxx
Changes in inventories of finished
goods, work-in-progress and
stock-in-trade Xxx Xxx
Employee benefits expense Xxx Xxx
Finance costs Xxx Xxx
Depreciation and amortization
expense Xxx Xxx
Other expenses Xxx Xxx
Total expenses Xxx Xxx
V Profit before tax (III - IV) Xxx Xxx

VI Tax expense:
(1) Current tax Xxx Xxx
(2) Deferred tax Xxx Xxx
VII Profit (Loss) for the period (V - VI) Xxx Xxx
Page 2 of 33
Question 1.1
You are required to prepare the Balance Sheet and Statement of Profit and Loss from the
following Trial Balance of Harla Chemicals Ltd. for the year ended 31 March 2015.
Debit balances Rs. Credit balances Rs.

Inventory 6,80,000 Equity Capital (Rs. 10 each) 25,00,000
Furniture 2,00,000 11% Debentures 5,00,000
Discount 40,000 Bank loans 6,45,000
Loan to directors 80,000 Trade payables 2,81,000
Advertisement 20,000 Sales 42,68,000
Bad debts 35,000 Rent received 46,000
Commission 1,20,000 Transfer fees 10,000
Purchases 23,19,000 Profit and Loss Account 1,39,000
Plant and Machinery 8,60,000 Provision for Depreciation
Rentals 25,000 - Machinery 1,46,000
Current account 45,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools and equipments 2,45,000
Goodwill 2,65,000
Trade receivables 4,40,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 72,000
Distribution freight 54,000
Debenture interest 20,000
85,35,000 85,35,000
Closing inventory on 31 March 2015 was valued at Rs. 8,23,000.
Page 3 of 33
Question 1.2
The following are some of the balances from the ledger of Mount View Hotel Ltd. on
31 March 2015:
Rs.
Rates, taxes and insurance 1,713
Salaries 2,400
Wages 4,305
Inventories on 31 March 2014:
- Wines, Spirits and Beer 1,782
- Minerals, Cigars and Cigarettes 261
- Sundry Provision and Stores 333
Purchases
- Meat, Fish and Poultry 7,587
- Wines, Spirits and Beer 5,223
- Minerals, Cigars and Cigarettes 1,290
- Sundry Provision and Stores 5,220
Laundry 951
Coal and gas 2,160
Electricity 1,128
General expenses 1,710
Sales
Wines, Spirits and Beer 10,068
Minerals, Cigars and Cigarettes 2,550
Meals 23,829
Rooms 9,375
Fires in bedroom 582
Washing charges 219
Depreciation 2,214
The manager is entitled to a commission of 5% on the net profits after charging his
commission. The tax liability is estimated at Rs. 4,300 and the directors propose to declare
a dividend at the rate of 6%.
Inventories on 31 March 2015 were valued as under:
Wines, Spirits and Beer at Rs. 1,704
Minerals, Cigars and Cigarettes at Rs. 426
Sundry Provision and Stores at Rs. 240
Prepare the Statement of Profit and Loss if the paid-up capital of the company is Rs. 56,685.
Question 1.3
The following is the Trial Balance of Omega Limited as on 31 March 2015:
Page 4 of 33
Debit balances Rs. 000 Credit balances Rs. 000

Land at cost 220 Equity Capital (Rs. 10 each) 300
Plant and Machinery at cost 770 10% Debentures 200
Trade receivables 96 General reserve 130
Inventories (31 March 2015) 86 Profit and Loss Account 72
Bank 20 Securities Premium 40
Purchases (adjusted) 320 Sales 700
Factory expenses 60 Trade payables 52
Administration expenses 30 Provision for Depreciation 172
Selling expenses 30 Suspense Account 4
Debenture interest 20
Interim dividend paid (incl. DDT) 18
1,670 1,670
Additional information:
(a) The authorised capital of the company is 40,000 shares of Rs. 10 each.
(b) On the advice of an independent valuer, the land is to be revalued at Rs. 3,60,000.
(c) Proposed final dividend @ 10%.
(d) Suspense account of Rs. 4,000 represents cash received for the sale of income of
the machinery on 1 April 2014. The cost of the machinery was Rs. 10,000 and the
accumulated depreciation thereon was Rs. 8,000.
(e) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Ltd.s Balance Sheet and Statement of Profit and Loss
as on 31 March 2015. Assume Dividend Distribution Tax applicable @ 20%.
Question 1.4
For the year ended 31 March 2011, a provision for income-tax was made for Rs. 30,00,000.
Advance payment of tax for that year amounted to Rs. 28,00,000 and tax deducted at source
on income earned by the company amounted to Rs. 23,000. On 10 December 2011, the
assessment was completed and tax liability was determined at Rs. 35,45,000. Advance
payment of tax for the year 2011-12 was Rs. 34,00,000. Show the necessary accounts for
the year ending 31 March 2012 assuming a provision for income-tax at Rs. 38,00,000 for the
year ending 31 March 2012.
Question 1.5
The Trial Balance of Complex Ltd. as at 31 March 2012 shows the following items:
Dr. (Rs.) Cr. (Rs.)

Advance payment of income-tax 2,20,000
Provision for income-tax for the year ended 31 March 2011 1,20,000
Page 5 of 33
The following additional information is provided to you:

(a) Advance payment of income-tax includes Rs. 1,40,000 for FY 2010-11.
(b) Actual tax liability for FY 2010-11 amounts to Rs. 1,52,000 and no effect for the same
has so far been given in accounts.
(c) Provision for income-tax has to be made for 2011-12 for Rs. 1,60,000.
You are required to prepare the following accounts and also show how they will appear in
the companys Balance Sheet and Statement of Profit and Loss:
(a) Provision for income-tax account
(b) Advance payment of income-tax account
(c) Liability for taxation account
Declaration of dividend out of reserves

In the event of inadequacy or absence of profits in any year, a company may declare
dividend out of surplus subject to the fulfillment of the following conditions:
1. Maximum dividend rate = average rate of dividend declared in the three preceding years
(not applicable if no dividend declared during all three preceding years)
2. Maximum amount drawn = 10% of paid-up share capital and free reserves*
3. Amount drawn to be first used to set off current year loss before declaration of dividend
4. Balance of reserves after withdrawal cannot fall below 15% of paid-up share capital*
5. Previous years losses or unabsorbed depreciation, whichever is less, to be first set-off
against current year profit
* as per the latest audited financial statement
Question 1.6
Due to inadequacy of profits during the year ended 31 March 2015, XYZ Ltd. proposes to
declare 10% dividend out of general reserves. From the following particulars, ascertain the
amount that can be utilised from general reserves.
Rs.
17,500 9% Preference shares of Rs. 100 each, fully paid-up 17,50,000
8,00,000 Equity shares of Rs. 10 each, fully paid-up 80,00,000
General reserves as on 1 April 2014 25,00,000
Capital reserves as on 1 April 2014 3,00,000
Revaluation reserves as on 1 April 2014 3,50,000
Net profit for the year ended 31 March 2015 3,00,000
Average rate of dividend declared during the preceding five years was 12%.
Page 6 of 33
Managerial remuneration payable by public companies having adequate profits
Such net profit is calculated as per Section 198 of the Companies Act, 2013 (see next page)
Managerial remuneration payable by public companies having no profit or inadequate

profits (Without approval of the Central Government, under normal circumstances)
Where the effective capital** is (Rs.) Limit of yearly remuneration

payable shall not exceed* (Rs.)
(i) Negative or less than 5 crores 30 lakhs
(ii) 5 crores and above but less than 100 crores 42 lakhs
(iii) 100 crores and above but less than 250 crores 60 lakhs
(iv) 250 crores and above 60 lakhs plus 0.01% of the
effective capital in excess of
Rs. 250 crores
* The above limits shall be doubled if the shareholders pass a special resolution
** Effective capital means:

Paid-up share capital (excluding share application money or advances against shares)
(+) Share premium account
(+) Reserves and surplus (excluding revaluation reserve)
(+) Long-term loans/ deposits repayable after one year (excluding working capital
loans, overdrafts, interest on loans, bank guarantee, other short-term arrangements)
(-) Investments (except in case of an investment company)

(-) Accumulated losses and preliminary expenses not written off
Page 7 of 33
Question 1.7
The following extract of the Balance Sheet of X Ltd. for the year ended 2015 was obtained:
Authorised capital: Rs.
20,000 14% preference shares of Rs. 100 each 20,00,000
2,00,000 Equity shares of Rs. 100 each 2,00,00,000
2,20,00,000
Issued and subscribed capital:
15,000 14% preference shares of Rs. 100 each full paid-up 15,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Share suspense account 20,00,000
Capital reserves (Rs. 1,50,000 is Revaluation Reserve) 1,95,000
Securities premium 50,000
15% debentures (secured) 65,00,000
Public deposits (unsecured) 3,70,000
Cash credit loan from SBI (short-term) 4,65,000
Trade payables 3,45,000
Assets:
Investment in shares, debentures, etc. 75,00,000
Profit and Loss Account 15,25,000
Share suspense account represents application money received on shares, the allotment of
which is not yet made.
You are required to determine the maximum managerial remuneration payable by the
company assuming:
(a) X Ltd. is not an investment company
(b) X Ltd. is an investment company
Computation of Net Profit under Section 198
GROSS PROFIT
ADD: Credit allowed

(+) bounties and subsidies received from any Government
(+) profit on sale of depreciable asset limited to original cost less WDV
Credits not allowed

(x) capital profit (e.g. profit on sale of undertaking, profit on sale of investment)
(x) revaluation profit
(x) premium on issue or sale of shares/ debentures
(x) profit on sale of forfeited shares
Page 8 of 33
LESS: Debits allowed

(-) usual working charges
(-) directors sitting fee
(-) bonus/ commission to company staff
(-) interest on debentures, mortgages, loans and advances
(-) repairs to property (excluding repairs of a capital nature)
(-) loss on sale of depreciable assets limited to WDV less sale proceeds
(-) charitable contribution (as allowed under Section 181)
(-) depreciation (to the extent specified under Schedule II)
(-) compensation/ damages as per law (excludes voluntary/ ex-gratia compensation)
(-) insurance premium/ charges for meeting any legal liability
(-) bad debts written off/ adjusted
(-) prior period losses not yet deducted
Debits not allowed

(x) income-tax paid/ payable
(x) managerial remuneration
(x) provisions (e.g. tax provision, provision for doubtful debts, proposed dividend)
(x) revaluation loss
(x) capital loss (e.g. loss on sale of undertaking, loss on sale of investment, scientific
research capital expenditure, preliminary expenses)
Question 1.8
From the following particulars of Ganga Limited, you are required to calculate the maximum
managerial remuneration payable in the following situations:
(a) There is only one whole time director
(b) There are two whole time directors
(c) There are two whole time directors, a part time director and a manager
Rs.
Net profit before provision for income-tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II 2,60,000
Actual expenditure incurred on repairs during the year 15,000
Page 9 of 33
Question 1.9
Following is the draft Profit and Loss A/c of Mudra Ltd. for the year ended 31 March 2015:
Rs. Rs.
To Administrative, selling and By Balance b/d 5,72,350
distribution expenses 8,22,542 By Balance from Trading A/c 40,25,365
To Directors fees 1,34,780 By Govt. subsidies received 2,73,925
To Interest on debentures 31,240
To Managerial remuneration 2,85,350
To Depreciation 5,22,543
To Provision for taxation 12,42,500
To General Reserve 4,00,000
To Investment Reval. Reserve 12,500
To Balance c/d 14,20,185
48,71,640 48,71,640
Depreciation on fixed assets as per Schedule II was Rs. 5,75,345. You are required to
determine if the managerial remuneration charged by the company is within the legally
permissible limit.
Question 1.10
From the following information given by Swatantra Ltd. for the year ended 31 March 2012,
calculate the commission payable to the Managing Director and the other Directors of the
company, fixed @ 5% and 2%, respectively, on the profit of the company before charging
their commission.
Rs. Rs.
Salaries and wages 20,00,000 Gross profit 51,00,000
Rent, rates and taxes 4,50,000 Govt. bounties and subsidies 1,00,000
Repairs and renewals 60,000 Profit on sale of fixed assets 80,000
Miscellaneous expenses 1,40,000 Premium on issue of shares 20,000
Workmen compensation (inc. Profit on sale of forfeited
Rs. 10,000 legal compensation) 25,000 shares 10,000
Interest on bank overdraft 40,000
Interest on debentures 50,000
Directors fees 18,000
Donation 35,000
Depreciation 1,00,000
Loss on sale of investments 25,000
Development Rebate Reserve 1,00,000
Provision for taxation 10,00,000
Page 10 of 33
Reserve for Redemption of

Redeemable Pref. Shares 1,50,000
Balance c/d 11,17,000
53,10,000 53,10,000
Additional information:
Rs.
Original cost of the fixed assets sold 1,90,000
Sale proceeds of the fixed assets sold 2,20,000
Donation allowable under Section 181 25,000
Depreciation allowable under Schedule II 80,000
Page 11 of 33
Unit 2: Alteration of Share Capital
Bonus Shares
Bonus shares are additional shares with similar rights given to existing shareholders
without any additional cost (free of charge), based upon the number of shares that a
shareholder already owns. Therefore, though the total number of shares increases, the
ratio of shares held by each shareholder remains the same. This is done by utilising the
existing reserves of the company (capitalisation of reserves) and hence, does not change
the companys value.
Companies Act, 2013
a) Fully-paid bonus shares can be issued to members out of a companys:
free reserves (reserves which are free for distribution of dividend*);
securities premium account; or
capital redemption reserve account
b) Bonus shares cannot be issued out of reserves created by revaluation of assets
c) No company shall capitalise its profits/ reserves for issuing bonus shares unless:
it is authorised by its articles**
it is authorised in a general meeting on recommendation of the Board of directors
it has not defaulted in payment of interest/ principal on deposits/ debt securities
it has not defaulted in payment of employee statutory dues (PF, gratuity, bonus)
the partly paid-up shares, if any on the date of allotment, are made fully paid-up
d) Bonus shares cannot be issued in lieu of dividend
e) Bonus issue, once announced, cannot be withdrawn
f) Post bonus issue, if the subscribed/ paid-up capital exceeds the authorised capital, a
resolution shall be passed at a general body meeting for increasing the latter
SEBI Guidelines (applicable for listed companiesin addition to above provisions)
a) If there are pending FCDs/ PCDs, similar benefit of bonus issue should be extended
to holders of such debentures (through reservation of proportionate shares)
b) The reserved shares may be issued at the time of conversion on the same terms
c) Free reserves capitalised must be built out of genuine profits
(e.g. surplus arising from change in method of depreciation cannot be used)
d) Securities premium capitalised must be collected in cash only
(e.g. securities premium on issue of shares on amalgamation cannot be utilised)
e) After board of directors approval, bonus issue to be implemented:
within 15 days, if articles do not also require shareholders approval
within 2 months, if articles also require shareholders approval
f) A certificate signed by the company (counter-signed by statutory auditor/ CS)
confirming compliance with above provisions shall be forwarded to SEBI
* Includes Dividend Equilisation Reserve; excludes Capital Reserve; excludes Debenture
Redemption Reserve before redemption takes place; and excludes Investment Allowance
Reserve/ Development Rebate Reserve before expiry of 8 years of creation
** If there is no such provision, the company may amend its articles at a general meeting
Page 12 of 33
Question 2.1
Moon and Lal Ltd. has 80,000 equity shares of Rs. 10 each, fully paid. It also has
Rs. 40,000 in Capital Reserve, Rs. 40,000 in Securities Premium Account, Rs. 1,40,000 in
Capital Redemption Reserve and Rs. 3,00,000 in General Reserve. The company proposes
to issue 1 bonus share for every 4 shares held. Pass journal entries to record the same.
Question 2.2
The Balance Sheet of A Ltd. as at 31 March 2012 is as follows:
Liabilities Rs. Assets Rs.

Authorised capital: Sundry Assets 17,00,000
1,50,000 equity shares of Rs. 10 each 15,00,000
Issued, subscribed and paid-up capital:
80,000 equity shares of Rs. 10 each,
Rs. 7.5 each called and paid-up 6,00,000
Reserves:
Capital Redemption Reserve 1,50,000
Plant Revaluation Reserve 20,000
Securities Premium Account 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
General Reserve 3,00,000
17,00,000 17,00,000
The company wanted to issue bonus shares to its shareholders at the rate of one share for
every two shares held. Necessary resolutions were passed and requisite legal requirements
were complied with. You are required to give effect to the proposal by passing journal
entries in the books of A Ltd. and show the amended Balance Sheet.
Question 2.3
The following figures are extracted from the books of ABC Ltd. as on 31 March 2012:
Authorised capital: Rs.
50,00,000 equity shares of Rs. 10 each 5,00,00,000
Issued, subscribed and paid-up capital:
45,00,000 equity shares of Rs. 10 each, fully paid-up 4,50,00,000
Reserves and surplus:
Surplus Account 1,10,00,000
Capital Reserves 30,00,000
Securities Premium Account 15,00,000
14% Partly Convertible Debentures of Rs. 100 each 1,25,00,000
Page 13 of 33
The company decided to capitalise its reserves by way of bonus issue at the rate of 1 share
for every 4 shares held. Capital reserves include Rs. 20,00,000 profit on sale of fixed
assets. It may be assumed that securities premium has been realised in cash. 40% of 14%
debentures are convertible into equity shares of Rs. 10 each fully pain on 30 September
2012.
Show the necessary journal entries in the books of the company and prepare the extract of
the Balance Sheet immediately after the bonus issue but before conversion of debentures.
Equity shares with differential rights

Share with differential rights means an equity share that is issued with differential rights
as to dividend, voting, or otherwise, in accordance with the Companies Act, 2013.
a) A company may issue equity shares with differential dividend/ voting rights if:
authorised by its articles
authorised at a general meeting (approval by postal ballot for listed companies)
shares with differential rights shall not exceed 26% of the total post-issue paid-up
equity share capital (including shares with differential rights)
it has consistent track record of distributable profits for the last 3 years
it has not defaulted in filing financials/ annual returns for 3 preceding FYs
it has no subsisting default in payment of dividend, interest on deposits/
debentures, repayment of deposits, redemption of preference shares/ debentures
it has not defaulted in repayment of any loan from financial institutions or a
scheduled bank or interest thereon or statutory employee dues, etc.
it has not been penalised by any Court or Tribunal during the last 3 years of any
offence under any Act under which it is being regulated
b) Conversion of existing equity share capital with voting rights into equity share capital
carrying differential voting rights or viceversa not permitted (must be a fresh issue)
c) Holders of equity shares with differential rights shall enjoy all other rights which the
other equity shareholders are entitled to, e.g. bonus issue, rights issue, etc.
d) Necessary disclosures to be made in the explanatory statement, report of the board of
directors, Register of members, etc.
Shares with Differential Voting Rights (DVR)
A company can issue shares with lower voting rights. For example, it can issue shares
where the voting right is one for every ten shares. The management generally issues
such shares where the capital is raised without much dilution in the voting power. In a
way, the controlling management can have fewer shares but a greater effective control
in managing the company. As compensation, such shares are likely to be available at a
lower price and/ or given a higher rate of dividend.
Shares with DVR come to the managements rescue at the time of take-over threats. DVR
can be used to prevent hostile takeovers since, for all practical purposes, they separate
dividend rights and voting rights.
Page 14 of 33
Shares with DVR are mainly targeted at passive investors. In most cases, small or retail
investors, hardly exercise their voting rights or know enough to influence corporate
actions. They look only for economic returns when they invest in a company and are not
interested in running it or having any say in its management. So, they give away their
voting rights in favour of those investors who run the company and have management
control.
The strict eligibility criteria prescribed for issue of shares with differential rights are to
minimise possible misuse of voting power by the promoters against other shareholders.
Employee Stock Options

An employee stock option (ESO) is a stock option granted to certain eligible employees of
a company. ESOs offer the option-holder the right to buy a specified number of the
companys shares at a predetermined price for a specific period of time. This scheme is
generally framed in order to retain high caliber employees or to give them a sense of
belonging in the company.
Getting stock options is not the same thing as getting shares of the company. The option
is the right, but not the obligation, to purchase the shares at a specific price (exercise
price), at a specific time. Before an employee can exercise the option to purchase the
share, it has to be earned by becoming vested in those shares.
Grant date is the date on which stock options are issued to certain employees. They are
granted by specifying the vesting conditions (incentives) which need to be satisfied to be
eligible to exercise the options. This may include requiring the employee to continue in
service for a certain period of time from the grant date (vesting period) or achieving a
profit/ performance target. The vesting date is the date from which the options are
available for exercise by the eligible employees. The period of time available to such
employees to exercise their options by purchasing the companys shares is the exercise
period, at the end of which the unexercised options expire.
The employees gain the excess of market price of the share at the time of exercise over
the specified exercise price. This gain is recognised by the company in its books as
compensation expense (employee benefit expense) over the vesting period.
Shares issued under such plans may have a lock-in period of specified years from the
date of allotment during which the employee are restricted from selling the shares.
Page 15 of 33
Buyback of Shares
a) Only fully paid-up shares can be bought back for cancellation
b) Only the following funds may be utilised for the purpose of buyback:
companys free reserves (reserves which are free for distribution of dividend)
companys securities premium account
proceeds of a fresh issue of shares/ specified securities (other than of the kind
being bought back)
c) Buyback out of the companys free reserves or securities premium account shall be
matched by the transfer of a sum equal to the nominal amount of the shares bought
back, from such accounts to a reserve called the Capital Redemption Reserve A/c*
d) Max. amount of buyback per offer = 25% x (paid-up capital + free reserves**)
Max. no. of equity shares bought back in a FY = 25% of paid-up equity capital only
e) Maximum debt equity ratio post buyback = 2 : 1
[where equity = paid-up capital (equity + preference) + free reserves**]
f) No offer of buyback shall be made within one year from closure of preceding offer
g) No new issue of the same kind of shares shall be made within a period of six months
(except bonus issue/ discharge of subsisting obligations)
h) Procedural/ disclosure/ eligibility/ documentation requirements as per the Companies
Act, 2013 to be complied with (additionally, SEBI regulations for listed shares)
* may be applied to issue fully paid-up bonus shares to members

** for the purpose of buyback of shares, Free Reserves includes Securities Premium Account
Question 2.4
Following figures have been extracted from the books of ABC Ltd. as on 31 March 2012:
Rs. Rs.
50,00,000 equity shares of Capital reserves 30,00,000
Rs. 10 each, fully paid-up 5,00,00,000 Securities premium 15,00,000
General reserve 80,00,000 14% debentures 50,00,000
Surplus account 20,00,000 Cash and bank 1,00,00,000
The company decided to buyback 25% of the paid-up equity share capital. To fund the
buyback, it was decided to issue further 14% debentures of Rs. 50,00,000 at par. Pass the
necessary journal entries to record these transactions if the shares were bought back:
(a) at face value
(b) at Rs. 12.50 each
(c) at Rs. 8 each
Page 16 of 33
Question 2.5
On 31 March 2012, following were the liabilities and assets of New Era Ltd.:
Liabilities Rs. lakhs Assets Rs. lakhs

Equity shares (Rs. 10 each) 2,400 Machinery 3,600
Securities Premium 350 Furniture 452
General Reserve 930 Investments 148
Surplus Account 340 Stock 1,200
12% Debentures 1,500 Debtors 520
Creditors 750 Cash 740
Provisions 390
6,660 6,660
On 1 April 2012, the company announced the buy-back of 25% of its equity shares @ Rs. 15
per share. For this purpose, it sold all its investments for Rs. 150 lakhs and issued 2,00,000
14% preference shares of Rs. 100 each at par, the entire amount being payable with
application. The issue was fully subscribed and the company achieved the buyback target.
Later, the company issued 1 bonus share for every 4 equity shares held.
Pass the necessary journal entries to record these transactions.
Question 2.6
Ledger balances from the books of Premier Ltd. as on 31 March 2012 are given below:
Cr. Balances Rs. Dr. Balances Rs.

Equity shares (Rs. 10 each) 12,00,000 Fixed Assets 36,00,000
Free Reserves 18,00,000 Stock 10,00,000
Securities Premium 6,00,000 Debtors 8,00,000
Debentures 25,00,000 Cash/ Bank 18,00,000
Creditors 11,00,000
72,00,000 72,00,000
On the above date, shares are bought back by the company to the extent possible, at a
premium of Rs. 20 per share. Pass journal entries to give effect to the transaction and
prepare the Balance Sheet after the buyback of shares.
Page 17 of 33
Unit 3: Redemption of Preference Shares and Debentures
Redemption of Preference Shares
a) Preference shares issued by a company must necessarily be redeemable

b) They should be redeemed within a period of 20 years (except for infrastructure projects)
c) Only fully paid-up preference shares can be redeemed
d) Only the following funds may be utilised for the purpose of redemption:
companys profits otherwise available for dividend
proceeds of a fresh issue of shares made specifically for the redemption
e) Redemption out of the companys profits shall be reflected by the transfer of a sum
equal to the nominal amount of the shares to be redeemed, from such profits to a
reserve called the Capital Redemption Reserve A/c*
f) Premium, if any, on redemption shall be provided for out of the companys profits or its
securities premium a/c
g) Where a company is not in a position to redeem any preference shares, it shall follow
the specified procedure under the Companies Act, 2013
* may be applied to issue fully paid-up bonus shares to members
Question 3.1
Following are the liabilities and assets of Redeemable Ltd.:

Paid up Share Capital Bank 90,000
50,000 equity shares 5,00,000 Other Assets 8,10,000
of Rs. 10 each
1,000 10% Red. Pref.
shares of Rs. 1,00,000
100 each
Less: Calls in arrears
(Rs. 20 per share on (1,000) 99,000
50 shares)
Reserves & Surplus
Development Rebate Reserve 50,000
Other Liabilities 1,51,000
9,00,000 9,00,000
The redeemable preference shares were redeemed on the following basis:

(a) Further 4,500 equity shares were issued at a premium of 10%.
(b) Of the 50 preference shares on which calls are in arrears, holders of 40 shares paid
their dues before the date of redemption. The balance 10 shares were forfeited for
Page 18 of 33
non-payment of calls before redemption. The forfeited shares were reissued as fully
paid on receipt of Rs. 500 before redemption.
(c) The preference shares were redeemed at a premium of 10%, and the amount of
securities premium was utilised in full for the purpose.
Show the necessary journal entries and the summarised Balance Sheet after redemption.
Question 3.2
Software Ltd.s liabilities and assets as on 31 March 2012 are as follows:

Share Capital Fixed Assets 3,45,000
650 7% Redeemable Preference Investments 18,500
Shares of Rs. 100 each fully paid-up 65,000 Bank 31,000
4,500 Equity Shares of Rs. 50 each
fully paid-up 2,25,000
Surplus Account 48,000
Sundry Creditors 56,500
3,94,500 3,94,500
In order to facilitate the redemption of the preference shares at a premium of 7.5% on

1 April 2012, the company decided:
(a) to sell all the investments for Rs. 16,000;
(b) to finance part of the redemption from the companys funds, subject to leaving a
balance of Rs. 12,000 in the Surplus Account; and
(c) to issue sufficient equity shares of Rs. 50 each at a premium of Rs. 13 per share to
raise the balance funds required.
Record the journal entries for the above transactions provided the equity shares were
subscribed in full and the preference shares were redeemed on the due date.
Question 3.3
The balance sheet of XYZ Ltd. as on 31 December 2011 inter alia includes the following:
Rs.
8% preference shares of Rs. 100 each Rs. 70
50,000 35,00,000
paid up
1,00,000 Equity shares of Rs. 100 each fully paid up 1,00,00,000
Securities premium 5,00,000
Capital redemption reserve 20,00,000
General reserve 50,00,000
Under the terms of their issue, the preference shares are redeemable on 31 March 2012 at a
premium of 5%. In order to finance the redemption, the company issues 50,000 equity
Page 19 of 33
shares of Rs. 100 each at Rs. 110 per share, Rs. 20 payable on application, Rs. 35
(including premium) on allotment and the balance on 1 January 2013.
The issue was fully subscribed and allotment made on 1 March 2012. The moneys due on
allotment were received by 30 March 2012. The preference shares were subsequently
redeemed on the due date by making minimum utilisation of the general reserve.
Pass the necessary journal entries and show the relevant extracts from the Balance Sheet
as on 31 March 2012 with the corresponding figures on 31 December 2011.
Question 3.4
Following are the ledger balances taken from the books of Trinity Ltd. as at 31 March 2011:
Cr. Balances Rs. Dr. Balances Rs.

Authorised Share Capital Fixed Assets
10,000 10% Redeemable. Pref. 1,00,000 Gross Block 3,00,000
shares of Rs. 10 each Less: Dep. (1,00,000) 2,00,000
90,000 equity shares of Rs. 10 each 9,00,000 Investments 1,00,000
10,00,000 Current Assets

Issued, Subscribed & Paid-up Capital Inventory 25,000
10,000 10% Redeemable. Pref. Debtors 25,000
shares of Rs. 10 each 1,00,000 Cash and Bank 50,000
10,000 equity shares of Rs. 10 each 1,00,000 Miscellaneous
Reserves and Surplus Expenditure 20,000
Securities Premium 70,000
Surplus Account 18,500
Current Liabilities 11,500
4,20,000 4,20,000
For the year ended 31 March 2012, the company made a net profit of Rs. 15,000 after
providing Rs. 20,000 for depreciation and writing off the entire miscellaneous expenditure.
The following additional information is provided:
(a) The preference dividend for the year ended 31 March 2012 was paid during the year.
(b) Except Cash and Bank, all current assets/ liabilities were the same as above.
(c) The company redeemed the preference shares at a premium of 10%.
(d) The company issued bonus shares in the ratio of 1:1 on 31 March 2012.
(e) To meet the cash requirements of redemption, the company sold a portion of the
investments, so as to leave a minimum balance of Rs. 30,000 after redemption.
(f) Investments were sold at 90% of cost on 31 March 2012.
Pass the necessary journal entries, and prepare the Cash and Bank Account and the
Balance Sheet after considering all of the above.
Page 20 of 33
Redemption of Debentures4 Methods:
a) Purchase (debentures purchased from open market and then cancelled)

b) Annual drawings (annual draw of lottery/ random selection of debentures to be repaid)
c) Conversion (debentures converted to equity/ pref. shares or new class of debentures)
d) Debenture Redemption Reserve/ Sinking fund method (funds set aside/ invested
over time to finance the redemption)
Question 3.5
On 1 January 1996, C Ltd. issued 1,000 12% debentures of Rs. 100 each at Rs. 95. The
terms of issue provided that beginning with 1997, debentures of Rs. 20,000 should be
redeemed, either by drawings at par or by purchase in the open market every year. The
company wrote off Rs. 1,000 from the discount on debentures every year.
In 1997, the debentures to be redeemed were repaid at the end of the year by drawings. On
31 December 1998, the company purchased for cancellation 200 debentures at the ruling
price of Rs. 95, the expenses being Rs. 100. Interest is payable yearly.
Pass journal entries in the books of C Ltd. and show the Balance Sheet with the relevant
items as on 31 December 1998.
Question 3.6
D Ltd. issued 1,000 12% debentures of Rs. 100 each on 1 January 1997. Interest is payable
on June 30 and December 31 every year. On 1 April 1998, the company purchased 100 of
its debentures at Rs. 98 ex-interest for immediate cancellation. On 1 October 1998, the
company purchased another 100 of its debentures at Rs. 98 cum-interest and cancelled
them immediately. The company closes its books of account on 31 December every year.
Pass the necessary journal entries and show the relevant items of the Balance Sheet as on
31 December 1998.
Question 3.7
On 1 January 1995, Green Ltd. issued 250 5% debentures of Rs. 1,000 each at Rs. 950.
The debenture holders have an option to convert at par their holdings into 7% preference
shares of Rs. 100 each, at a premium of Rs. 25 per share, at any time after three years.
On 1 January 1998, holders of 50 debentures exercised their option. Show journal entries
relating to the issue and conversion of debentures and the relevant items of the Balance
Sheet as on 1 January 1998. Ignore interest.
Page 21 of 33
Question 3.8
A Ltd. gave notice of its intention to redeem its outstanding Rs. 40,00,000 4.5% debenture
stock at 102% and offered the holders the following options:
(a) Subscribe for 6% cumulative preference shares of Rs. 20 each at Rs. 22.50 per share.
(b) Subscribe for 6% debentures at 96%.
(c) Have their holdings redeemed for cash.
Holders of Rs. 17,10,000 opted for proposal (a). Holders of Rs. 14,40,000 opted for
proposal (b), and the remaining for proposal (c).
Pass the necessary journal entries to record the above redemption.
Journal Entries for Debenture Redemption Reserve method

At the end of the first year
1. Amount set aside every year:

Surplus A/c Dr. xxxx
To Debenture Redemption Reserve A/c xxxx
2. Amount set aside for redemption invested in securities:

DRR Investment A/c Dr. xxxx
To Bank A/c xxxx
At the end of the second and subsequent year/s

1. Interest received on investment:
Bank A/c Dr. xxxx
To Interest on DRR Investment A/c xxxx
2. Interest transferred to Debenture Redemption Reserve:
Interest on DRR Investment A/c Dr. xxxx
3. Annual amount set aside:
Surplus A/c Dr. xxxx
4. Annual investment plus interest invested in securities:
To Bank A/c xxxx
Page 22 of 33
At the end of the last year (when debentures are to be redeemed)

1. Amount realised on the sale of securities:
Bank A/c Dr. xxxx
To DRR Investment A/c xxxx
2. Profit on sale of investment (reverse entry for loss on sale of investment):
3. Amount paid to debentureholders for redemption:

Debentures A/c Dr. xxxx
To Bank A/c xxxx
4. Transfer of balance in Debenture Redemption Reserve:
Debenture Redemption Reserve A/c Dr. xxxx
To General Reserve A/c xxxx
Question 3.9
A company issued Rs. 2,00,000 in 5% debentures of Rs. 100 each at par, repayable at the
end of five years at a premium of 6%. A Debenture Redemption Reserve at 4% compound
interest is created for the redemption of debentures.
You are required to prepare Debenture Redemption Reserve Account and Debenture
Redemption Reserve Investment Account for five years (Re. 1 per year at 4% compound
interest amounts to Rs. 5.4163 in five years).
Question 3.10
A Ltd. issued 2,000 6% debentures of Rs. 100 each on 1 January 2007. They are repayable
at par on 31 December 2011 with the option to redeem them at any time after this date at
Rs. 103. On 1 January 2012, the balance in the Debenture Redemption Reserve stood at
Rs. 1,07,000 which was invested.
On 30 June 2012, a notice was given for redemption of the above debentures with the option
to receive one new 9% debenture of Rs. 100 each at Rs. 98 and Rs. 5 in cash for each 6%
debenture in place of Rs. 103 in cash.
The holders of 1,800 debentures exercised this option and the remaining were paid in cash.
The company sold investment costing Rs. 72,000 for Rs. 87,400. The company completed
the redemption.
Prepare necessary ledger accounts affected by the above transactions, ignoring interest
payments.
Page 23 of 33
Unit 4: Underwriting of Shares
Companies Act and Rules

A company may pay commission to any person in connection with the subscription or
procurement of subscription to its securities subject to the following conditions:
a) payment of such commission shall be authorised by the articles of association
b) commission may be paid out of proceeds of the issue or the profit of the company
c) maximum rate of commission (on issue price) = 5% (shares) & 2.5% (debentures)
d) necessary disclosures regarding underwriting to be made in the prospectus
e) no commission shall be paid on securities not offered for public subscription
f) copy of the contract for commission to be delivered to the Registrar
SEBI Guidelines
a) Where the company does not receive the minimum subscription of 90% of the issue,
the entire subscription is required to be refunded to the applicants
b) The lead managers must satisfy themselves about the net worth of the underwriters
and the outstanding commitments and disclose the same to SEBI
c) The underwriters agreement may be filed with the stock exchange
d) Maximum rate of commission on equity shares restricted to 2.5%
Question 4.1
A public limited company, with a capital of Rs. 10,00,000 divided into equity shares of Rs. 10
each, places its entire issue in the market, and the whole issue has been underwritten as
follows:
Peterson & Co. 30,000 shares Prince & Co. 15,000 shares
Singh & Co. 35,000 shares Talukdar & Co. 2,000 shares
Mazumdar & Co. 10,000 shares Bannerjee & Co. 8,000 shares
The applications received on the forms marked by the underwriters are:
Peterson & Co. 25,000 shares Prince & Co. 1,000 shares
Singh & Co. 23,500 shares Talukdar & Co. 2,000 shares
Mazumdar & Co. 6,500 shares Bannerjee & Co. 7,000 shares
Applications for 20,000 equity shares are received on unmarked application forms.
Calculate the liability of the individual underwriters. In terms of the underwriting agreement,
the relevant proportion is to be ascertained not as per the original liability ratios but after
giving credit for marked forms.
Page 24 of 33
Question 4.2
Yesman Ltd. issued 80,000 equity shares which were underwritten as follows:
Mr. X48,000 shares; Y & Co.20,000 shares; and Z Corp.12,000 shares
These underwriters also made a firm underwriting as follows:
The total applications excluding firm underwriting were for 40,000 shares, including marked
applications as under:

You are required to show the allocation of liability.
Question 4.3
X Ltd. issued 10,000 equity shares of Rs. 10 each for public subscription. The issue was
underwritten as follows:
A30% B30% C20%

However, the company received applications for 8,000 shares only.
Determine the liability of the respective underwriters.
Question 4.4
A Ltd. has an authorised capital of Rs. 50,00,000 divided into 1,00,000 equity shares of
Rs. 50 each. The company issued for subscription 50,000 shares at a premium of Rs. 10
each. The entire issue was underwritten as follows:
X30,000 shares (Firm underwriting5,000 shares)
Y15,000 shares (Firm underwriting2,000 shares)

Z5,000 shares (Firm underwriting1,000 shares)
Out of the total issue, 45,000 shares (including firm underwriting) were subscribed to. The
following is a break-up of the marked forms (excluding firm underwriting):
X16,000 shares Y10,000 shares Z4,000 shares
Calculate the liability of each underwriter assuming:
(a) Shares under firm underwriting are treated as marked applications

(b) Shares under firm underwriting are treated as unmarked applications
Also calculate the gross commission payable to each underwriter if the maximum
permissible commission as per law was agreed to be paid.
Page 25 of 33
Question 4.5
Libra Ltd. came up with an issue of 20,00,000 equity shares of Rs. 10 each at par.
5,00,000 shares were issued to the promoters and the balance offered to the public was
underwritten by three underwritersAnand, Vijay, and Ashokequally, with firm underwriting
of 50,000 shares each. Subscriptions totalled 12,97,000 shares including the marked forms,
which wereAnand 4,25,000 shares, Vijay 4,50,000 shares, and Ashok 3,50,000 shares.
The underwriters had applied for the number of shares covered by firm underwriting. The
amounts payable on application and allotment were Rs. 2.5 and Rs. 2 respectively. The
agreed commission was 5%.
Pass necessary journal entries for the allotment of shares, commission due, and net cash
paid/ received.
Question 4.6
X Ltd. issued 10,000 shares of Rs. 100 each at a premium of 15%, with 50% of the face
value to be collected as application money and the remaining (including premium) upon
allotment. 90% of the issue was underwritten by Broker & Co. at a commission of 1% on the
issue price. Applications were received for 8,000 shares. The accounts with Broker & Co.
were settled. During allotment, money was received from all but one applicant for 1,000
shares. These shares were eventually forfeited and re-issued and allotted for Rs. 75 per
share received in cash.
Show journal entries to record the transactions.
Question 4.7
A enters into a contract with B Ltd. to underwrite B Ltd.s 5,000 shares of Rs. 10 each in
consideration for 5% commission. He also enters into an agreement with C to
sub-underwrite 1,000 shares of B Ltd. at a commission of 3%. The public subscribes for
2,000 shares only and subsequently, the shares were taken up by A, who sold his shares
@ Rs. 9 per share. The shares taken up by C were sold @ Rs. 10 per share. Expenses of
underwriting amount to Rs. 600.
Prepare Underwriting Account in the books of A.
Page 26 of 33
Unit 5: Valuation of Goodwill and Shares
GoodwillAverage Profit Method

a) Adjusted profits* of agreed no. of pre-valuation years are averaged (simple/weighted)
b) Goodwill = x years purchase of average profit (multiplication)
(x represents no. of years benefit from past association if expected to be derived)
* Computation of adjusted/ future/ maintainable profit

Profits xxx
(+) Abnormal losses/ expenses not likely to recur xx
(+) Likely future profits, e.g. from new line of business xx
(-) Expenses not provided earlier but to be incurred in the future (xx)
(-) Profits not likely to recur (xx)_
Adjusted profit xxx_
Question 5.1
P Ltd. proposed to purchase the business carried on by Mr. R. For this purpose, goodwill is
agreed to be valued at three years purchase of the (i) simple average profits and
(ii) weighted average profits of the past four years. The appropriate weights to be used are:
20091 20102 20113 20124
The profits (in Rs.) for these years are:

20091,01,000 20101,24,000 20111,00,000 20121,50,000
On a scrutiny of the accounts, the following observations were made:
(a) On 1 September 2011, a major repair of Rs. 30,000 was made to the plant, the amount
being charged to revenue. Plant is depreciated at 10% using the WDV method.
(b) The closing stock for 2010 was over-valued by Rs. 12,000.
(c) Additional management cost of Rs. 24,000 p.a. is expected to be incurred from 2013.
Compute the value of goodwill of Mr. Rs firm.
GoodwillCapitalisation of Average Profit Method

a) Ascertain average adjusted/ future/ maintainable profit
b) Capitalise this profit at the suitable rate of return for the business under consideration
c) Compute net tangible assets (assets less outside liabilities, including pref. capital)
d) Goodwill = difference between (b) and (c)
Question 5.2
Ascertain the value of goodwill of Q Ltd. carrying on business as retail traders from the
following information (as on 31 December 2011) according to capitalisation method:
Page 27 of 33

Equity shares (Rs. 100 each) 2,50,000 Goodwill 25,000
Surplus Account 56,650 Land & Building 1,10,000
Bank Overdraft 58,350 Plant & Machinery 1,00,000
Sundry Creditors 90,500 Stock 1,50,000
Provision for Taxation 19,500 Book Debts 90,000
4,75,000 4,75,000
The companys profits before tax (in Rs.) were as follows:
2007: 61,000 2008: 64,000 2009: 71,500 2010: 78,000 2011: 85,000
You may assume that income-tax at the rate of 50% was payable on these profits. The
average dividend paid by the company for the four years is 10%, which is considered a
reasonable return on the capital invested in the business.
GoodwillSuper Profit Method

a) Capital employed
= Fixed assets + Trade investments + Current assets Debentures Current liabilities
= Paid-up capital + Reserves & Surplus Fictitious assets Non-trading investments
b) Average capital employed
= 1/2 (capital employed at the beginning + capital employed at the end of the year)
= Capital employed at the end of the year 1/2 (current years profit after tax)
= Capital employed at the beginning of the year + 1/2 (current years profit after tax)
c) Normal profit = Normal rate of return x Capital employed or Average capital employed
d) Super profit = Average profit Normal profit
e) Goodwill = x years purchase of super profit (multiplication)
Question 5.3
Compute the average capital employed from the following information as on 31 March 2012:
Liabilities Rs. lakhs Assets Rs. lakhs

Equity Shares (Rs. 10 each) 50.00 Land & Building 25.00
9% Preference Shares 10.00 Plant & Machinery 80.25
General Reserve 12.00 Furniture & Fixtures 5.50
Surplus Account 20.00 Vehicles 5.00
16% Debentures 5.00 Investments 10.00
16% Term Loan 18.00 Stock 6.75
Cash Credit 13.30 Debtors 4.90
Sundry Creditors 2.70 Cash/ Bank 10.40
Provision for Taxation 6.40 Preliminary Expenses 0.50
Proposed Dividend 10.90
148.30 148.30
Page 28 of 33
Non-trade investments were 20% of the total investments. Balances as on 1 April 2011 were
as follows: Surplus AccountRs. 8.70 lakhs; General ReserveRs. 6.50 lakhs
Question 5.4
Following particulars are available in respect of the business carried on by a trader:
(a) Profits earned for three years (in Rs.):
2009-10: 2,00,000 2010-11: 2,40,000 2011-12: 2,20,000
(b) Normal rate of return = 10%
(c) Capital employed = Rs. 12,00,000
(d) Profit of 2010-11 included non-recurring income of Rs. 6,000
(e) Profit of 2009-10 was reduced by Rs. 10,000 due to stock destroyed by fire
(f) Profit of 2011-12 include income of Rs. 4,000 from non-trading investment
(g) During 2010-11, closing stock was under-valued by Rs. 10,000
(h) The stock is not insured and it is thought prudent to insure the stock in future at an
annual premium of Rs. 3,000.
Compute the value of goodwill at five years purchase of super profits.
Question 5.5
From the following particulars as on 31 March 2012, compute the value of goodwill on the
basis of three years purchase of super profits:

Equity Shares (Rs. 10 each) 2,50,000 Buildings 1,50,000
10% Preference Shares 50,000 Plant & Machinery 2,00,000
Surplus Account (1.4.2011) 30,000 Investment @ 8% p.a. 50,000
Profit for 2011-12 1,70,000 Stock 40,000
Creditors 20,000 Debtors 60,000
Cash 20,000
5,20,000 5,20,000
(a) The building is worth Rs. 3,00,000

(b) Profits for the last three years have shown an increase of Rs. 30,000 annually
(c) Investments are non-trading in nature
(d) Normal rate of return is 12.5% p.a.
(e) Taxation may be assumed at 40%
Question 5.6
Negotiations are on for transfer of X Ltd. on the basis of its Balance Sheet as on
31 March 2012 and the additional information that follows:
Page 29 of 33

Equity Shares (Rs. 10 each) 10,00,000 Goodwill 1,00,000
Reserves & Surplus 4,00,000 Land & Building 3,00,000
Creditors 3,00,000 Plant & Machinery 8,00,000
Investment 1,00,000
Stock 2,00,000
Debtors 1,50,000
Cash/ Bank 50,000
17,00,000 17,00,000
Profit before tax for 2011-12 was Rs. 6,00,000 including Rs. 10,000 as interest on
non-trading investment. Henceforth, an additional amount of Rs. 50,000 p.a. shall be
required to be spent for smooth running of the business.
Market values of Land & Buildings and Plant & Machinery are estimated at Rs. 9,00,000 and
Rs. 10,00,000 respectively. In order to match the above figures, further depreciation to the
extent of Rs. 40,000 should be taken into consideration (not deductible for tax purposes).
Income-tax rate may be taken at 50%. Return on capital at the rate of 20% before tax may
be considered normal for this business at the present stage.
It has been agreed that four years purchase of super profit shall be taken as the value of
goodwill for the purpose of the deal. Compute the goodwill of the company.
GoodwillCapitalisation of Super Profit Method

Goodwill = ____Super Profit_____ x 100
Normal Rate of Return
GoodwillAnnuity Method
Goodwill = Super profit x Present value of an annuity of Re. 1 for x no. of years
at the normal rate of return
Question 5.7
Consider question 5.3 and re-compute goodwill under the following methods:
(a) Capitalisation of super profit method
(b) Annuity method
It is provided that the present value of an annuity of Re. 1 for five years at 10% is 3.78.
Page 30 of 33
SharesIntrinsic Value Method

a) Intrinsic value of equity share = Net value of assets available for equity shareholders
Number of equity shares
b) Net value of assets available for equity shareholders = Net value of assets available to
shareholders Amounts payable to preference shareholders
c) Net value of assets available to shareholders = Market value of assets external
liabilities (excludes fictitious assets)
Question 5.8
On 31 March 2012, ledger balances taken from the books of Menon Ltd. were as follows:
Credit balances Rs. Debit balances Rs.

Equity Capital (Rs. 100 each) 5,00,000 Land & Buildings 2,20,000
Surplus Account 1,03,000 Plant & Machinery 95,000
Bank Overdraft 20,000 Stock 3,50,000
Creditors 77,000 Sundry Debtors 1,55,000
Provision for Taxation 45,000
Proposed Dividend 75,000
8,20,000 8,20,000
In view of the nature of the business, it is considered that 10% is a reasonable return on
tangible capital. However, the net profits of the company after taxation were as under:
2007-08: 85,000 2008-09: 96,000 2009-10: 90,000
2010-11: 1,00,000 2011-12: 95,000
On 31 March 2012, Land & Building was valued at Rs. 2,50,000 and Plant & Machinery at
Rs. 1,50,000. After considering goodwill based on five years purchase of the super profits,
value the shares of the company.
Question 5.9
Your client intends to invest not more than Rs. 15,000 in equity shares of Iron Foundry Ltd.
and wants you to advise him the maximum number of shares he can expect to acquire with
the said amount on the basis of the following information available with him:
Issued and Paid-up Capital Rs.
6% Preference Shares of Rs. 100 each 5,00,000
Equity shares of Rs. 10 each 3,00,000
The average net profit of the business is Rs. 57,000. Expected normal yield is 7% in case of
such equity shares.
Total tangible assets (other than goodwill) are Rs. 9,49,000 and total outside liabilities are
Rs. 95,000. Goodwill is calculated at five years purchase of the super profits, if any.
Page 31 of 33
SharesYield Method/ Earnings Capacity Method

a) Value of share = Expected/ possible rate of return x Paid-up value of share
Normal rate of return
b) Rate of return could be the rate of dividend (suitable for acquiring a non-controlling
portion of shares) or the rate of earning (for acquiring a controlling portion of shares) =
Profit available for equity shareholders x 100
Equity shareholders funds
SharesFair Value Method

Value of share = Value of share on net asset basis + Value of share on earnings basis
2
Question 5.10
Compute the value of an equity share of each of the following companies: (a) when a few
shares are sold and (b) when controlling shares are sold. Following information is furnished:
Company A (Rs.) Company B (Rs.)
Profit after tax 10,00,000 10,00,000
12% Preference Shares of Rs. 100 each 10,00,000 20,00,000
Equity shares of Rs. 10 each 50,00,000 40,00,000
Assume that market expectation is 15% and 80% of profits are distributed.
Question 5.11
Following are the liabilities and assets of Desai Pvt. Ltd. as on 31 December 2011:

Equity Capital (Rs. 10 each) 1,00,000 Land & Buildings 70,000
General Reserve 50,000 Plant & Machinery 70,000
Surplus Account 30,000 Trademarks 20,000
Provision for Taxation 20,000 Stock 20,000
Workmens Compensation Fund 20,000 Debtors 48,000
Creditors 40,000 Cash 25,000
Preliminary Expenses 7,000
2,60,000 2,60,000
The Plant & Machinery is worth Rs. 60,000 and Land & Buildings are worth Rs. 1,30,000 as
valued by an independent valuer. Rs. 5,000 of the debtors is taken to be bad. The profits of
the company were:
2009: 50,000 2010: 60,000 2011: 70,000
It is the practice of the company to transfer 20% of the profits to reserve.
Page 32 of 33
Compute the value of the companys shares under the fair value method if shares of similar
companies quoted in the stock exchange yield a return of 12%. Goodwill of the company
may be taken at Rs. 1,00,000.
Right Issue
Right issue means offering shares to existing members in proportion to their existing
shareholding. The objective of a right issue is to ensure equitable distribution of shares.
Shares under a right issue are usually offered at a price lower than the prevalent market
price. A shareholder who is short of funds can renounce his right to a specified number of
shares by selling his right to a third-party subscriber of shares.
Value of Right = Cum-right market price Issue price of new share__
No. of existing shares required for one right share + 1
Value of Ex-Right Share = (Cum-right market price x No. of shares required) + Issue price
No. of existing shares required for one right share + 1
= Cum-right market price Value of right
Question 5.12
A company offers to its shareholders the right to buy one share of Rs. 20 each at Rs. 41 for
every two shares held. The company declared a dividend of Rs. 3 for the last year. One the
declaration of dividend and recommendation of the right, the shares are quoted at a price of
Rs. 53 cum-dividend and cum-right. Calculate the value of the right.
Question 5.13
Nitin Ltd. decided to make a right issue in the proportion of one new share of Rs. 200 each
at a premium of Rs. 50 each to the shareholders for every three existing shares. The market
value of the shares at the time of announcement of right issue is Rs. 500 each. Calculate
the value of right and ex-right value of a share.
Page 33 of 33
Compiled by:
Vishal R. Choradiya
Department of Professional Studies
Christ University
Email: vishal.choradiya@gmail.com

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A COMPILATION OF ILLUSTRATIVE PROBLEMS IN

FOR STUDENTS OF COP334

REG. NO.:_________________ 3BCOMP ____

Unit 1: Preparation of Financial Statements for Companies

PART I BALANCE SHEET

Particulars Note Figures as at the Figures as at the

Unit 1: Preparation of Financial Statements for Companies

(2) Current assets

PART II STATEMENT OF PROFIT AND LOSS

Particulars Note Figures as at the Figures as at the

V Profit before tax (III - IV) Xxx Xxx

Unit 1: Preparation of Financial Statements for Companies

Debit balances Rs. Credit balances Rs.

Closing inventory on 31 March 2015 was valued at Rs. 8,23,000.

Unit 1: Preparation of Financial Statements for Companies

Unit 1: Preparation of Financial Statements for Companies

Debit balances Rs. 000 Credit balances Rs. 000

Dr. (Rs.) Cr. (Rs.)

Unit 1: Preparation of Financial Statements for Companies

The following additional information is provided to you:

Declaration of dividend out of reserves

Unit 1: Preparation of Financial Statements for Companies

Managerial remuneration payable by public companies having adequate profits

Managerial remuneration payable by public companies having no profit or inadequate

Where the effective capital** is (Rs.) Limit of yearly remuneration

** Effective capital means:

(-) Investments (except in case of an investment company)

Unit 1: Preparation of Financial Statements for Companies

Computation of Net Profit under Section 198

ADD: Credit allowed

Credits not allowed

Unit 1: Preparation of Financial Statements for Companies

LESS: Debits allowed

Debits not allowed

Unit 1: Preparation of Financial Statements for Companies

Unit 1: Preparation of Financial Statements for Companies

Reserve for Redemption of

Unit 2: Alteration of Share Capital

Unit 2: Alteration of Share Capital

Liabilities Rs. Assets Rs.

Unit 2: Alteration of Share Capital

Equity shares with differential rights

Unit 2: Alteration of Share Capital

Employee Stock Options

Unit 2: Alteration of Share Capital

* may be applied to issue fully paid-up bonus shares to members

Unit 2: Alteration of Share Capital

Liabilities Rs. lakhs Assets Rs. lakhs

Cr. Balances Rs. Dr. Balances Rs.

Unit 3: Redemption of Preference Shares and Debentures

Redemption of Preference Shares

a) Preference shares issued by a company must necessarily be redeemable

Liabilities Rs. Assets Rs.

The redeemable preference shares were redeemed on the following basis:

Unit 3: Redemption of Preference Shares and Debentures

Liabilities Rs. Assets Rs.

In order to facilitate the redemption of the preference shares at a premium of 7.5% on

Unit 3: Redemption of Preference Shares and Debentures

Cr. Balances Rs. Dr. Balances Rs.

10,00,000 Current Assets

Unit 3: Redemption of Preference Shares and Debentures

Redemption of Debentures4 Methods:

a) Purchase (debentures purchased from open market and then cancelled)

REG. NO.:_____________ 3BCOMP