18203rtp finalold may10 paper1

8/6/2019 18203rtp Finalold May10 Paper1

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PAPER -1 : A DVANCED ACCO UNTING

QUESTIONS

H old in g C om p an y A cc ou nts

1. The Balance Sheets of Bat Ltd. andB a l l L td . a s o n 3 1.3 .2 00 9 a re a s fo llows :

Bat Ltd . Ball Ltd . Bat Ltd . Ball Ltd .

R s. R s. R s. R s.

Share Capita l Investm ents

(Shares of Rs. 10 Shares in B a l l

each) 1,60,000 2,00,000 Ltd. 1,96,000

P rofit and Loss Debtors - 1,20,000account 50,000 60,000

Creditors 16,000 S tock 80,000

Cash at Bank 70,000

----- ----- Cash in hand 14,000 6,000

2,10,000 2,76,000 2,10,000 2,76,000

P artic ula rs o f B at L td .:

(1 ) This com pany was form ed on 1.4 .2008.

(2 ) I t acquired the shares ofB a l l Ltd. as u nde r:

Date of Acquisition No.of Shares Cost

R s.

1.4.2008 8,000 1,10,000

31.7.2008 6,000 86,000

(3) The shares purchased on 31.7.2008 are ex-dividend and ex-bonus from existingholders.

(4) On 31.7.2008 dividend at 10% was received fromB a l l Ltd. and was credited toP ro fit a nd L os s A cc ou nt.

(5) On 31.7 .2008 it received bonus shares fromB a l l Ltd. in the ra tio of one share one very fou r shares he ld.

(6) Bat Ltd . incurred an expenditure of Rs. 500 per m onth on behalf ofB a l l L td . a nd th iswas debited to the P rofit and Loss Account of Bat Ltd., but nothing has been donein the books ofB a l l Ltd.

(7) The balance in the Profit and Loss Account as on 31.3 .2009 included Rs. 36,000being the net profit m ade during the year.

(8) D ividend proposed for 2008-2009 at 10% was not provided for as yet.


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P artic ula rs o f B all L td .:

(1) The balance in the P rofit and Loss Account as on 31.3.2009 is after the issueof bonus shares m ade on 31.7 .2008.

(2) The net profit m ade during the year is R s. 24,000 including R s. 6,000 receivedfrom insurance com pany in settlem ent of the claim tow ards loss of stock by fireo n 30 .0 6.20 08 (C ost R s. 10,80 0 in clude d in o pen ing sto ck).

(3) D ividend proposed for 2008-2009 at 10% w as not provided for in the accounts.

P repare the C onsolidated B alance S heet of B at Ltd . as on 31.3.2009.

S ta tu to ry Fin an cia l S ta tem en ts o f a C om pa ny

2. On 1st November, 2008 Yash Ltd . was incorpora ted w ith an authorized capital of Rs.1 ,000 crores. It issued to its prom oters equity capital of R s. 50 crores w hich w as paid forin full. O n that day it purchased the running business of Vijay Ltd. for R s. 200 crores andallo tted at par equity capital of R s. 200 crores in discharge of the consideration . The netassets taken over from Vijay Ltd. were valued as follows: Fixed Assets Rs. 150 crores,Inventory R s. 10 crores, C ustom ers ' dues R s. 70 crores and C reditors R s. 30 crores.

Yash Ltd. carried on business and the follow ing inform ation is furnished to you:

(a) S ummary of cash/bank transactions (for year ended 31st O ctober, 2009).

E q uity c ap ita l ra is ed :

P romoters (a s sh ow n ab ove)

Others

Co lle ctio ns fr om cus tomers

S ale procee ds of fixed assets (co st R s.18 cro res)

(R s. in c ro re s)

50

250 300

4,000

____1Q

4,320

2,000

700

500 3,200

100

60050 650

270

50

_ _ _ _QQ

4,320

P a yments to s up plie rs

P ayme nts to emp lo ye es

P ayme nt fo r e xp en se s

Investm en ts in U pka r L td.

P aym en ts to sup plie rs o f fixe d a sse ts:

In sta lm e nt d ueInterest

Tax p ayme nt

Dividend

C lo sin g c as h/b an k b ala nc e

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(b) O n 31st O ctober, 2009 Yash Ltd .'s asse ts and liabilities w ere:

In ve nto ry a t c os t

Customers 'dues

P r ep a id expens e s

Adv an ce s to s up plie rs

Amounts due to suppliers of goods

Amounts due to suppliers of fixed asse ts

Ou ts ta nding expens es

(c) D eprecia tion for the year under:

(i) Companies Act, 1956

(ii) Income tax Act, 1961

(R s. in c ro re s)

15

400

10

40

260

750

30

R s. 18 0 cro res

R s. 2 00 cro res

(d) P rovide for tax at 38.5% of "total income". There are no disa llowables for thepurpose of incom e taxation. P rovision for tax is to be rounded off.

Yash Ltd. asks you to prepare :

(i) Revenue statem ent for the year ended 31st October, 2009 and

(ii) Balance Sheet as on 31 st O ctober, 2009 from the above inform ation.

Co rpo ra te Re s tr u ct ur in g

Am alg am atio n o f C om p an ie s

3. System Ltd. andHRD Ltd. decided to am algam ate as on 01.04.2008. Their BalanceS heets as on 31.03.2008 w ere as follow s:

(R s. in '0 00 )

Particulars System Ltd. HRD Ltd.

S ou rc e o f F un ds :

Equity share capita l (R s. 10 each) 150 140

9% p re fe re nce s ha re C ap ita l (R s. 1 00 e ac h) 30 20

Inve stmen t a llowance Re se rv e 5 2

P rofit and Loss Account 10 6

1 0% Debe ntu re s 50 30

Sundry C reditors 25 15

Tax provision 7 4

Equ ity D iv id end P ropo sed lQ 28

Total 307 245

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Applic atio n o f F un ds :

Building 60 50

P la nt a nd Ma ch in er y 80 70

Investm ents 40 25

Sundry Debtors 45 35

Stock 36 40

Cash and Bank 40 25

Pre limina ry Expenses _

Total 307 245

From the follow ing inform ation, you are required to prepare the draft B alance S heet as on01.04.2008 of a new com pany, Intranet Ltd ., w hich w as form ed to take over the businessof both the com panies and took over all the assets and liabilities:

(i) 50 % Debenture are to be converted into Equity Shares of the New Com pany.

(ii) O ut of the investm ents, 20% are non-trade investm ents.

(iii) Fixed Assets of System s Ltd. were valued at 10% above cost and that ofHRD Ltd.a t 5% above cost.

(iv) 10 % of sundry Debtors were doubtful for both the com panies. S tocks to be carrieda t c os t.

(v) P reference shareholders were discharged by issuing equal number of 9%prefere nce sh are s a t pa r.

(vi) Equity shareholders of both the transferor companies are to be discharged byissuing Equity shares of Rs. 10 each of the new company at a prem ium of Rs. 5 pershare.

Ama lgamation is in th e n ature o f p urch ase.

In tern al R eco nstru ctio n o f a C om pan y

4. The Balance Sheet of Neptune Ltd . as on 31.3 .2009 is given below :

Liab ilities Rs. Rs. Assets Rs.

Equity shares of Rs.1 0 each 8,00,000 Freehold property 5,00,000fu lly p aid (8 0,0 00 s ha re s)

6% Cumulative pref. shares 5,00,000 P lant& machinery 1,80,000of 100 each fully paid (5,000shares)

6% Debentures (secured by 3,75,000 Trade investm ent 1,70,000f reehold p rope rty) ( at c o st)

Arrear interest 22,500 3,97,500 Sundry debtors 4 ,50,000

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Sundry c red itor s

Di rec to r's l oan

17,500 S tock in trade

3,00,000 D eferredadvertisementexpenditure

P ro fit a nd Los sAlc

2,00,000

1,50,000

3,65,000

20,15,000 20,15,000

The C ourt approved a schem e of re-organisation to take effect on 1.4 .2009 and the term sa re g iv en b elow:

(i) P reference shares are to be written down to Rs.75 each and equity shares to Rs.2

each.(ii) P reference dividend in arrear for 4 years to be waived by 75% and for the balance

equity shares of R s.2 each to be allotted.

(iii) Arrear of debenture interest to be paid in cash.

(iv) D ebentureholders agreed to take one freehold property (B ook value R s.3,00,000) ata valuation of R s.3,00,000 in part paym ent of their holding. Balance debentures tore main as lia bility of th e compan y.

(v) D eferred A dvertisem ent E xpenditure to be w ritten off.

(vi) S tock val u e to be w ritten off fully in the books.

(vii) 50% of the Sundry Debtors to be written off as bad debt.(viii) R em aining freehold property (after take over by D ebentureholders) to be valued at

Rs.3,50,000.

(ix) Investm en ts sold ou t for R s.2,00 ,0 00 .

(x) 80% of the D irector's loan to be waived and for the balance equity shares of Rs.2each to be issued.

(xi) C om pany's contractual com mitm ents am ounting to R s.5,00,000 to be cancelled bypa ying pe na lty a t 3% o f con tract value.

(xii) C ost of R e-con stru ctio n S cheme is R s.20 ,0 00 .

Show the Journal entries (w ith narra tion) to be passed for giving effect to the abovetransactions and draw B alance S heet of the com pany after effecting the S chem e.

B uy -B ac k o f S ha re s

5. Dee Lim ited furnishes the follow ing Balance Sheet as a t 318 1 Ma rc h, 2 00 9:

Liabilities

Sha re Cap it al :

Au tho ri se d Cap it al

Is su ed a nd s ub sc rib ed c ap ita l:

R s . 'O O O R s .'O O O

30,00

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2,50,000 equity shares of R s.1 0 each fully paid up

2,000, 10% Preference shares of R s.1 00 each

(Issued two m onths back for the purpose of buy back)

R es erv es a nd S urp lu s:

Cap it al Rese rve

Revenue Re se rv e

Secu rit ie s P remium

P ro fit a nd L ossAlc

25,00

2,00

27,00

10,00

30,00

22,00

35,00

97,00

14,00

1,38,00

Rs. 'OOO

93,00

30,00

15,00

1,38,000

Cu rre nt lia bilitie s a nd p rovis io ns :

Assets

Fixed as se ts

Investments

Curre nt a ss ets , lo an s a nd a dv an ce s

(Inc lu din g c as h a nd ba nk b ala nc e)

The company passed a resolution to buy back 20% of its equity capital @ Rs.50 pershare. For this purpose, it sold all of its investm ents for Rs.22,00,000.

You are required to pass necessary journal entries and prepare the Balance Sheet.

Valu atio n o f S ha re s

6. The following abridged Balance Sheet as at 31st March, 2009 pertains to Omega Ltd.

Liabilities Rs. in lakhs Assets Rs. in lakhs

Share Capital: Goodwill, at cost 420

180 lakh Equity shares of Rs. O ther Fixed Assets 11,16610 each, fully p aid up 1,800Current Assets 2,910

90 lakh Equity shares of Rs. 10 Loans and Advances 93 3each, Rs. 8 paid up 720 Miscellaneous Expenditure 171

150 lakh Equity shares of Rs. 5each, fully paid-up 750

Reserves and Surplus 5,628

Secured Loans 4,500

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Current Liabi li ties

Provisions

1,242

~15,600

You are required to calcula te the follow ing for each one of the three categories of equitys ha re s a pp ea rin g in th e a bo ve m en tio ne d B ala nc e S he et:

(i) Intrinsic value on the basis of book values of Assets and Liabilities includinggoodwill ;

(ii) Value per share on the basis of dividend yie ld.

N orm al ra te of dividend in the concerned industry is 15% , w hereas G lorious Ltd . has

been paying 20% dividend for the last four years and is expected to maintain it inthe next few years; and

(iii) Value per share on the basis ofEPS .

For the year ended 31st March, 2009 the company has earned Rs. 1,371 lakh as profitafter tax, which can be considered to be normal for the company. AverageEPS for afully paid share of Rs. 10 of a Com pany in the sam e industry is R s. 2 .

Valu atio n o f G o odwill

7. From the follow ing inform ation supplied to you, ascertain the value of goodw ill of A Ltd.,which is carrying on business as re tail trader, under Super P rofit M ethod (at 5 years 'p urc ha se o f S up er P ro fits ):-

Balance Sheet as on 315t Ma rc h, 2 00 9

Rs. Rs.

50,000

2,20,000

Paid up capita l: G oodw ill at cost

5 ,000 shares of Rs.100 each 5,00,000 Land and Build ing at costf ully p a id

Bank Overdraft 1,16,700 P lant a nd Machinery at cost

Sundry C reditors 1,81,000 S tock in trade

P rovision for taxation 39,000 Book debts less provision forb ad d eb ts

Profit& Loss Appropria tionAlc 1,13,300

9,50,000

2,00,000

3,00,000

1,80,000

9,50,000

The company commenced opera tions in 1990 w ith a paid up capital of Rs.5 ,00,000.P rofits fo r recen t yea rs (after taxatio n) h ave b een as follow s:-

Year ended 3181 March

2005

2006

Rs.

40,000 (Loss)

88,000

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Adm inistration expenses (Factory) (b)

Interest (c)

Depreciation

P ro fit b ef or e t ax es

P rovis ion f or t ax es

P ro fit a fte r ta x

B ala nce a s p er la st B ala nce S he et

(d )

33

29

17 720

225

_.lQ

195

_jQ

205

45

~140

_

205

Tra ns fe rre d to Gene ra l R e se rv e

D iv id end paid

S urp lu s c arrie d to B ala nc e S he et

Notes :

(a ) P ro du ction a nd O pe ra tio na l e xp en se s

Con sumptio n o f raw ma te ria ls

Con sumptio n o f s to re s

S ala rie s, Wage s, G r atu itie s e tc . (Admn .)C es s a nd L oc al ta xe s

O th er manu fa ct uring expen se s

R s. in lak hs

293

59

8 2

98

109

641

(b) A dm inistration expenses include salaries, commission to D irectors R s.9.00 lakhsP rovision for doubtful debts R s. 6.30 lakhs.

R s. in lak hs

9

10

8__ 2

~(d) The charges for taxation include a transfer of R s. 3.00 lakhs to the credit of D eferred

Tax Accoun t.

(c) Interest on loan fromICICIBank fo r work in g c ap ita l

In te re st o n lo an fromICICIB an k fo r fix ed lo an

In te re st o n lo an fromIFCIfo r fix ed lo anIn te re st on Debent ur es

(e) Cess and Local taxes include Excise Duty, w hich is equal to 10% of cost of bought-inmaterial.

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E cono mic Value A dd ed

10. (a) W hat is econom ic value added and how is it calculated? D iscuss.

(b) Calculate econom ic value added (EVA) w ith the help of the follow ing inform ationSun L im i te d .

F in an cia l le ve ra ge : 1 .4 tim e s;

E qu ity C ap ita l R s.1 70 la kh ;

R ese rve an d surplu s R s.1 30 lakh;

10% D eb en tu res R s.40 0 la kh;

C ost of E qu ity: 1 7.5%Incom e Tax R ate: 30% .

H um an R es ou rc e A cc ou ntin g

11. From the follow ing details , compute value of human resources according to Lev andS chwa rtz (1 97 1) m od el.

(i) Annual average earning of an em ployeetill th e

r et ir emen t ag e

Ag e o f re tiremen t

D is count r ate

No . o f emplo ye esAve ra ge a ge

Rs.50,000

(ii)

(iii)

(iv)(v )

6 5 y ea rs

15%

2062 y ea rs

C o rp ora te S oc ia l R ep ortin g

12. (a) "The content of corpora te socia l report is essentia lly based on social objectives."

Discuss.

(b) From the follow ing information of S tee l India Ltd. for the year ended 31st March,2009, prepare their S ocial B alance S heet as on that date:

A specialist has valued their hum an asse ts at R s.828 lakhs.

T he ir investm en ts w ere cla ssified a s:

Buildings

Equipments

Residential

17.00

2.80

Hospital

1.00

1.00

School

1.40

1.00

(R s. in la kh s)

Welfare

0.80

Wa te r, e lectricity a nd g as sup ply system s to ta lled R s.1 lakh.

Their N et ow ned funds w ere R s.26 lakhs.

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F in an cia l R ep ortin g o fFinancial Institutions

13. W rite short notes on:

(i) M inimum net owned fund in the context ofNBFC

(ii) Valuation of portfolio for a m utual fund

(iii) O bliga tions of stock broker on inspection by the Board

(iv) Books of account required to be maintained by a Stock Broker

(v) Asse t m anagement company in the context of a mutual fund

14. A Mutual Fund ra ised 100 lakh on April 1 , 2009 by issue of 10 lakh units of Rs . 10 perunit. The fund invested in severa l capita l m arket instrum ents to build a portfolio of Rs. 90lakhs . The initia l expenses amounted to Rs. 7 lakh. During April, 2009, the fund soldcerta in securities of cost Rs. 38 lakhs for Rs . 40 lakhs and purchased certain othersecurities for Rs. 28.20 lakhs. The fund m anagem ent expenses for the m onth am ountedto Rs. 4 .50 lakhs of which Rs. 0 .25 lakh was in arrears. The dividend earned was Rs.1 .20 lakhs. 75% of the rea lized earnings were dis tributed . The market value of theportfolio on 30.04.2009 was Rs. 101.90 lakh. Determ ine NAV per unit.

15 . K rishna Finance Ltd. is a non-banking finance company.I t makes available to you thecosts and m arket price of various investm ents held by it.

(R s. in /a kh s)

Cost Market p rice

Equity Shar es :

Scrip A 40.00 40.80

Scrip B 21.00 16.00

Scrip C 40.00 24.00

101.00 80.80

Mu tu al F un ds

MF1 26.00 16.00

MF2 20.00 24.00

46.00 40.00

Gover nmen t S e cu rit ie s

GV1 50.00 44.00

GV2 50.00 58.00

100.00 102.00

(i) Can the company adjust deprecia tion of a particu lar item of investm ent within acategory?

(ii) W hat should be the value of investm ents?

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Ac co un tin g fo r N o t-fo r-p ro fit O rg an iz atio ns

16. A University receives two grants - one from the M inistry of Human Resources to beused for A ids R esearch. This grant is for R s. 45,00,000, w hich includes R s. 3,00,000 tocover indirect expenses incurred in adm inistering the grant. The second grant of Rs.35,00,000 received from a reputed Trust is to be used to set up a centre to conductsem inars on Aids related m atters from tim e to tim e. D uring the year, it a lso received R s.5 ,00,000 worth of equipment donated by a well w isher to be used for Aids research .D uring the year 2008-2009, the U niversity spent R s. 32,25,000 of the governm ent grantand incurred R s. 3,00,000 overhead expenses. R s. 28,00,000 w ere spent from the grantreceived from the Trust. S how the necessary Journal E ntries.

Ind ian AS , IFRS and US GAAPs17. S tate the treatm ent of the follow ing item s w ith reference to Indian A ccounting S tandards

and IF RS :

(i) Im pairm ent of assets

(ii) B usine ss combin ation s.

A cc ou nting S tan dard s an d G uid an ce N otes


(i) D isclosure of carrying am ounts of financial asse ts and financia l liabilities in B alanceSheet

(ii) F ina ncia l gu ara ntee contra ct

( iii) De -r ecogn it io n o ff in anc ia llia b ilit y

(iv) Im pairm ent of asset and its applica tion to inventory


G raded vesting under an em ployee stock option plan

P re se nta tio n o f MAT c re dit in th e fin an cia l s ta teme nts

A ccou nting fo r investm en t b y a ho ldin g com pany in sub sidia ries.

P rovision s of A S 2 6 re lating to retire ment an d disp osal of intan gib le a sse ts.

C ha ng e in a cc ou ntin g e stim ate s.

M r. 'X ' as a contractor has just entered into a contract w ith a local m unicipal bodyfor build ing a flyover. As per the contract term s, 'X ' w ill receive an additional R s.2

crore if the construction of the flyover were to be finished with in a period of twoyears of the com mencem ent of the contract. M r. X w ants to recognize this revenue

since in the past he has been able to m eet sim ilar targets very easily.

Is X correct in h is p rop osal? D iscuss.

(i )

(ii)

( i i i)

(iv)

(v )

20. (i)

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(ii) The accounting year of X Ltd. ends on 30th September, 2009 and it makes itsreports quarterly. However for the purpose of tax, year ends on 31 s t M arch everyyear. For the Accounting year beginning on 1-10-2008 and ends on 30-9-2009, thequarterly incom e is as under:-

1stquarter e nding o n 31-12-2008 Rs. 200 crores

2nd q ua rte r e nd in g o n 3 1-3 -2 00 9

3rd q ua rte r e nd in g o n 3 0-6 -2 00 9

4 thqua rt er e nd ing on 30-9- 2009

Total

R s. 2 00 c ro re s

R s. 2 00 c ro re s

R s. 2 00 c ro re s

R s. 8 00 c ro re s

Average actual tax rate for the financial year ending on 31-3-2009 is 20% and forfinancial year ending 31-3-2010 is 30% . C alculate tax expense for each quarter.

(iii) P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, PLtd. directly enjoys voting right of 14% in R Ltd. R Ltd. is a listed company andregularly supplies goods to P Ltd. The management of R Ltd. has not disclosed itsre la tio ns hip w ith P L td .

How would you assess the situation from the viewpoint of AS -18 on Related PartyDisclosures?

(iv) On March 01, 2009, X Ltd. purchased Rs. 5 lakhs worth of land for a factory site.Company demolished an old building on the property and sold the m aterial for Rs.10,000. C om pany incurred additional cost and realized salvaged proceeds during

the M arch 2009 as follow s:

Legal fees for purchase contract and recording ow nership

Title g ua ra nte e in su ra nc e

C ost fo r d em olitio n o f b uild in g

Rs.25,000

R s. 1 0,0 00

Rs.50,000

Compute the balance to be shown in the land account on M arch 31, 2009 balancesheet.

(v) The closing inventory at cost of a com pany am ounted to R s. 2,84,700. The follow ingitem s w ere included at cost in the total:

(a) 400 coats, which had cost R s. 80 each and normally sold for Rs. 150 each.

Owing to a defect in m anufacture, they were all sold after the balance sheetdate at 50% of their normal price. Selling expenses amounted to 5% of theproceeds.

(b) 800 skirts , which had cost Rs. 20 each. These too were found to be defective.Rem edial w ork in April cost R s. 5 per skirt, and selling expenses for the batchtotaled R s. 800. They were sold for R s. 28 each.

W hat should the inventory value be according to AS 2 after considering the aboveitems?

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21. (i) A Ltd. acquired 45% of B Ltd. shares on April 01, 2008, the price paid was Rs.

15,00,000. Follow ing are the extract of balance sheet of B Ltd.:

Paid up Equity Share Capital Rs. 10,00,000

Securities P rem ium Rs. 1,00,000

Reserve & Surplus Rs. 5,00,000

B Ltd. has reported net profits of R s. 3,00,000 and paid dividends of Rs. 1,00,000.Calculate the amount at which the investm ent in B Ltd. should be shown in theconsolidated balance sheet of A Ltd. as on M arch 31, 2009.

(ii) Mr. X set up a new factory in the backward area and purchased plant for Rs. 500

lakhs for the purpose. Purchases were entitled for the CENVAT credit of Rs. 10lakhs and also G overnm ent agreed to extend the 25% subsidy for backward areadevelopm ent. D eterm ine the depreciable value for the asset.

(iii) The follow ing date apply to 'X ' Ltd. defined benefit pension plan for the year ended31.03.09, calculate the actual return on plan assets:

- B en efits p aid

- Employer cont ribu tion

- Fair m arket value of plan assets on 31.03.09

- Fair m arket value of plan asset as on 31.03.08

2,00,000

2,80,000

11,40,000

8,00,000

22. The following are the summarized Balance Sheet of S tar Ltd. as on 318 1

March, 2008 and2009:

( R s . ' O OO )

2008 2009

Equity share capital of Rs.1 0 each 3,400 3,800

P ro fit a nd Los sAlc 400 540

Securities P rem ium 40 80

Debentures 800 900

Long term borrowings 180 240

Sundry Credi to rs 360 440Provision for Taxation 20 40

Proposed Dividend 300 480

5,500 6,520

Sun dry F ix ed A ss ets :

G ross Block 3,200 4,000

L e s s :Depreciation 640 1,440

Net Block 2,560 2,560

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Investm ent 1 ,200 1,400

Inventories 1 ,000 1,400

Sundry Debtors 640 900

C ash an d B an k B alan ce _j .QQ. 260

5,500 6,520

The P rofit and Loss account for the year ended 318 1 Ma rc h, 2 00 9 d is clo se d:

( R s . ' OOO )

780ro fit b efo re Tax

Less: Taxation

P rof it a ft er t ax

160

620

480

140

Less: Proposed d iv idends

Re ta in ed P rof it

T he fo llowin g in fo rm atio n is a ls o a va ila ble :

(1) 40,000 equity share issued at a prem ium of Re.1 per share.

(2) The C om pany paid taxes of R s.1 ,40,000 for the year 2008-09.

(3) During the period it discarded fixed asse ts costing RsA lacs, (accumulatedd ep re cia tio n R s.8 0,0 00 ) a t R sAO ,OOOo nly.

You are required to prepare a cash flow sta tem ent as per A S-3 (R evised), using indirectm e th od . Ig no re d eb en tu re in te re st.

23 . (i) S Ltd. grants 1,000 stock options to its employees on1A .2005 at R s.60. Thevesting period is two and a half years. The maximum period is one year. Marketprice on that date is R s.90. A l l the options were exercised on 31.7.2008.Journalize , if the face value of equity share is R s.1 0 per share.

(ii) Moon Ltd. entered into agreement w ith Sun Ltd. for sale of goods of Rs.8 lakhs at aprofit o f 2 0% on cost. The sale transaction took place on 18 1 February, 2009. O n thesame day Sun Ltd. entered into another agreement w ith Moon Ltd. to resell thesame goods at R s. 10.80 lakhs on 18 1 Aug us t, 2 00 9. T he p re -d ete rm in ed re -s ellin gprice covers the holding cost of Sun Ltd. S ta te the treatm ent of this transaction in

the fin an cial statem ents of M oon Ltd. as on 3 1.03 .0 9.(iii) xy Ltd. was m aking provisions for non-m oving stocks based on no issues for the

last 12 m onths upto 31.03.08. B ased on technical evaluation the com pany w ants tom ak e p ro vis io ns d urin g th e y ea r 3 1.0 3.0 9.

Tota l value of stock --- R s. 150 lakhs.

P rovisions required based on 12 m onths issue R s. 4 .0 lakhs.

P rovision s re qu ired b ased o n tech nical e va lua tion R s. 3.20 la kh s.

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Does this amount to change in accounting policy? Can the company change theme th od o f p ro vis io n?

(iv) From the follow ing inform ation rela ting to X Ltd., calcula te D ilu ted Earnings PerShare as per AS 20:

N et P rofit fo r the curren t yea r

N umb er o f e qu ity s ha re s o utsta nd in g

B asic ea rnings p er sh are

N um ber of 11 % convertible debentures of R s.1 00 each

E ach d eb enture is con ve rtible in to 8 e quity sha res.

Intere st expe nse for th e cu rren t ye arTax sa ving rela ting to in te rest exp en se (3 0% )

Rs.2,00,00,000

40,00,000

Rs.5.00

50,000

Rs.5,50,000Rs.1,65,000

24. (i) A company is engaged in the business of ship build ing and ship repair. Oncompletion of the repair work, a work completion certificate is prepared and

countersigned by ship ow ner (custom er). S ubsequently, invoice is prepared basedon the w ork com pletion certifica te describing the nature of w ork done together w ith

the rate and the amount. Customer scrutinizes the invoice and any varia tion is

inform ed to the com pany. Negotiations take place between the com pany and thecustom er. N egotiations m ay result in a deduction being allow ed from the invoiced

amount e ither as a lum psum or as a percentage of the invoiced amount. Thea cco un tin g trea tm ent follow ed by th e compan y is as follow s:

(i) W hen the invoice is raised, the custom er's account is debited and ship repairincome a cco un t is cre dited w ith the invo iced am oun t.

(ii) Deduction, if any, arrived after negotiation is treated as trade discount byd ebitin g the ship rep air incom e accou nt.

(iii) A t the close of the year, negotia tion in respect of certa in invoices had not beencompleted . In such cases, based on past experience, a provision foranticipated loss is created by debiting the P rofit and Loss account. Thepro vision is d isclosed in B alan ce S hee t.

F ollowin g tw o a sp ec ts a re s ettle d in th e n eg otia tio ns :

(i) E rrors in billing arising on account of varia tion between the quantities as

per work com pletion certificate and invoice and other clerical errors inp re pa rin g th e in vo ic e.

(ii) D isagreem ent betw een the com pany and custom er about the ra te /cost onw hich prior agreem ent has not been reached betw een them .

Comment whether the accounting treatm ent of deduction as trade discount iscorrect? If n ot, sta te the correct a cco un tin g trea tm ent.

(ii) A major fire has damaged the asse ts in a factory of a Lim ited Company on 5th April- five days after the year end and closure of accounts. The loss is estim ated at

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Rs.10 crores out of which Rs.7 crores will be recoverable from the insurers. Expla inbriefly how the loss should be trea ted in the fina l accounts for the previous year.

(iii) X Ltd . is a subsidiary of Y Ltd . It holds 9% Rs.100 5-year debentures of Y Ltd . anddesignated them as held to maturity as per AS 30 "Financial Instruments:Recognition and Measurement". Can X Ltd. designate this financia l asse t ash ed gin g instru men t fo r m an agin g fore ig n cu rre ncy risk ?

(iv) Rose Ltd. had made an investment of Rs.500 lakhs in the equity shares of NoseLtd . on 10.01.2009. The realizable value of such investm ent on 31.03 .2009 becam eRs.200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. fo llows financialyear as accounting year. How will you recognize th is reduction in Financialstatem en ts fo r th e y ea r 20 08 -0 9?

25. (i) Axe Lim ited began construction of a new plant on 1st April, 08 and obta ined aspecia l loan of Rs .4, 00,000 to finance the construction of the plant. The ra te ofinteres t on loan was 10% .

The expenditure that was m ade on the project of p lant is as fo llows:

Rs.

5,00,000st April, 0 8

1st Aug u st, 0 8 12,00,000

1st January, 09 2,00 ,000

The com pany's other outstanding non-specific loan w as R s.23,00 ,000 at an interestrate of 12% . The construction of the plant comple ted on 31st March, 09 . You arerequired to calculate the am ount of interest to be capita lized as per the provisions ofA S-1 6 "B orrowin g c os t".

(ii) X Ltd . has entered in to a contract by which it has the option to se ll its identifiedProperty, P lant and Equipment (PPE) toy Ltd. for Rs.100 m illion after 3 yearswhereas its current m arket price is Rs.180 m illion. Is the put option of X Ltd. afinancia l instrument? Is the written put option of Y Ltd . a financial instrument?Explain.

(iii) X Ltd . received a revenue grant of Rs.1 0 cores during 2006-07 from G overnm ent forwelfare activities to be carried on by the company for its employees. The grantprescribed the conditions for utilizations. However during the year 2008-09, it wasfound that the prescribed conditions were not fulfilled and the grant should bere fu nd ed to th e G o ve rnme nt.

S ta te how this m atter w ill have to be dealt w ith in the financia l sta tem ents of X Ltd .for the year ended 2008-09.

(iv) G oods of Rs.5,00 ,000 were destroyed due to flood in September, 2006. A Claimwas lodged with insurance company. But no entry was passed in the books forinsurance cla im . In M arch, 2009, the claim was passed and the com pany received apaym ent of Rs.3 ,50,000 against the cla im . Expla in the trea tm ent of such receipt infina l accounts for the year ended 31st Marc h, 2 00 9.

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SUGGESTED ANSWERS IH IN TS

1. Conso lida ted Balance Sheet o f Bat Ltd . and its subs id iary Ba ll Ltd .

a s a t 31s t M arch, 2009

Liab ilities Amount Assets Amount

Rs. Rs.

Share Capital S tock 80,000

(Shares of Rs. 10 each) 1,60,000 Debtors 1,20,000

M inority Interest 50,800 Cash at Bank 70,000

Capital Reserve 3,040 Cash in hand 20,000

Profit and Loss Account 44,160

C reditors 16,000

Proposed Dividend 161000

21901000 21901000

Wo rkin g N ote s:

(1 ) Analysis of profits of Ball Ltd . Capital RevenueProfits Profits

Rs. Rs.

P rofit and Loss A ccount on 1.4.2008

(60,000 - 24,000) 36,000

Profit for the year 24,000

A dd b ack :Loss by fire 41800

28,800

Less: E xp en se s n ot c on sid ere d 61000

22,800

P re -a cquis itio n p ro fit s= ~x 22,800 = 7,60012

Less: L oss in p re -a cq uisitio n p erio d= 41800 2,800Po st -a cquis itio n p ro fits

( 1~ x 22,800J -- 15)0038,800 15,200

Bat Ltd.'s share (80%*) 311040 121160

M in ority's s ha re (2 0% ) 7J60 31040

18


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8000.8,000+ 6 ,0 00 +B on us sh are s -' -I.e . 2 ,0 00

4 x10020,000

= 1 6,0 00 x1 00 =8 0%20,000

(2) M inority interest

Shar e c ap ita l

Capita l p ro fit s

R ev en ue p ro fits

(3) Cost of contral

F ac e va lu e o f in ve stm en ts

Capita l p ro fit s

Investm ent in B all Ltd.

Less: P re-acqui si ti on d iv idend

Capita l Re se rv e

(4) P rofit and Loss Account - Bat Ltd .

BalanceLess: P re -a cq uis itio n d iv id en d w ro ng ly c re dite d

Less: P ropo sed d iv id end

Add: E xpenses of B all Ltd. w ritten back

Add: S hare in B all Ltd.

2. Yash Ltd .

Balan ce S heet as at 31st O cto ber, 2009

Schedule

SOURCES OF FUNDS

(1) S hareholders' funds:

(a) Capital A

(b) Reserves and surplus

19

Rs.

40,000

7,760

3,040

50,800Rs.

1,60,000

31,040 1,91,040

1,96,000

8,000 (1,88,000)

3,040

Rs.

50,0008,000

42,000

16,000

26,000

6,000

12,160

44,160

(Rs . in c ra re s)

500

387

887


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P ro fit a nd L os s A c co un t

fo r the year ended 31st O ctober, 2009

Less: Creditors

(R s. in c ro re s)

4,330

10

2,190

2,200

____1Q

2,185

700

520 (3,405)

925

...iliQl

875

~695

2

697

(260)

437

iliQl387

(R s. in c ro re s)

15010

70

230

_lQ.

200

Sales

Expenditure:

S tock taken over from Vijay Ltd.

Purchases

C lo sin g s to ck

Inven to ry consumed /so ld

Emplo ye e c os t

Expenses

P ro fit b efo re in te re st, d ep re cia tio n a nd ta x

Interest

P ro fit a fte r in te re st b ut b efo re d ep re cia tio n

Depreciation

Pro fi t a ft er dep rec ia tion

P rofit on sale of fixed assets

P ro fit b efo re ta x

P ro vis io n fo r ta x

Ne t p ro fit

Dividend

Ba la nc e c arr ie d fo rw a rd

Wo rkin g N ote s:

(1) N et assets o f Vijay Ltd . taken over:

F ix ed As se tsInventory

C ustom ers ' d ue s

P urchase consideration: 20 crores equity shares of R s. 10 each.

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(2) Custom ers ' A ccoun t

Rs. R s.

To Business PurchaseA /c 70 By BankA /c 4,000

To Sales A lc (Balancing figure) 4 ,330 By Balancec /d 400

4,400 4,400

S up plie rs ' (G o od s) A cc ou nt

Rs. R s.

To BankA /c (2,000 - 40) 1,960 By Business PurchaseA /c 30

To Balance c /d 260 By PurchasesA lc 2,190(Ba lan cing f igu re )

2,220 2,220

S up plie rs ' (F ixe d A ss ets ) A cc ou nt

Rs. R s.

To BankA /c 650 By Fixed AssetsA lc 1,350

To Balance c /d (Loan funds) 750 (Balancing figure)

By InterestA /c _ _ _ _ Q .

1,400 1,400

F ix ed A ss ets A cc ou nt

Rs. R s.

To Business PurchaseA /c 150 By BankA /c 20

To P rofit and LossA /c 2 By Balancec /d 1,482

To Suppliers 'A /c 1,350

1,502 1,502

E xp en se s A c co un t

Rs. R s.

To BankA /c 500 By P rofit and LossA lc 520

To Balance c /d 30 (Balan cing f igu re )(Outstandingexpenses)

By Balance c /d

( P rep ai d expens es ) _jQ

530 530

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(3) C alcu la tion of tax provis ion :

P r of it b e fo re d ep re cia ti on

Less: D ep recia tio n un de r Incom e Tax A ct

Tota l incom e under Incom e Tax Act

Tax d ue th ere on@ 3 8.5% (rou nde d o ff)

R s.

875

200

675

260

A s sale proceeds of fixed assets are reduced from the appropria te "block of asse ts"for income tax purpose , and depreciation under Income Tax Act is given in thequestion, no adjustm ent for profit on sale of fixed assets R s. 2 crores needs to be

m ad e for tax p urp oses.

Notes:

(1) S tudents m ay provide for dividend distribution tax@ 15%.

(2) The par val u e of an equity share has been taken as Rs. 10.

3. M Is I nt ra n et L td .

D ra ft B ala nc e S heet a s a t 1 .4 .2 00 8

Liabilities

Equ ity s ha re c ap ita l

27,799 Equity shares of

Rs.10 each, fu lly paid up(W.N.2)

9% P re fere nce sh are ca pital(Share of Rs.100 each)(W.N.2)

S e cu ritie s p rem ium (WN .2 )

I nve stmen t a llowance r es er ve

(R s. 5 ,0 00 + R s. 2 ,0 00 )

10% Deben tu re s

(5 0% o f R s. 8 0,0 00 )

Sundry c red itor s

(R s. 2 5,0 00 + R s. 1 5,0 00 )

Tax prov is ion

(R s. 7 ,0 00 + R s. 4 ,0 00 )

(Rs.) Assets (Rs.)

Building 1,18,500

(Rs. 66, 000+Rs . 52 ,500) )

2,77,990 P lant a nd machinery 1,61,500

(Rs. 88 ,000+Rs. 73 ,500)

50,000 Investm ents 65,000

(R s . 4 0,0 00+ R s. 2 5,0 00 )

1,38,995 S tock 76,000

(R s . 3 6,0 00+ R s. 4 0,0 00 )

7,000 Sundry D ebtors 72,000

90% of (RsA5,000+ Rs.35,000)

40,000 Cash and Bank 64,985

(R sAO,OOO+ R s.25,00 0Rs.15)

40,000 Amalgamation Adjustm entAccount 7,000

11,000

5,64,985 5,64,985

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26/62

(vi) C apital R eductionAlc

To P rofit and LossAlc

To De fe rre d Adv ertis in g Exp en se sAlc

To S to ckAlc

To S un dry D eb to rsAlc

(B ein g th e v ario us a sse ts w ritte n o ff a s p er sc heme )

(vii) Freehold P ropertyAlc

To Capita l Reduct ion

(App re cia tio n in th e v alu e o f p ro pe rty i.e . (R s.3 ,5 0,0 00 -

2,00,000)

(viii) BankAlc

To Tra de In ve stm e nt

To Capita l Reduct ion

(T ra de In ve stm en t s old a nd p ro fit m ad e)

(ix) Director's LoanAlc

To E qu ity S ha re C ap italAlc

To Capita l Reduct ionAlc

(D ire cto rs lo an re du ce d b y 8 0% a nd rema in in g b ala nce

discharged by issue of equity shares of R s. 2 each)(x) Capital ReductionAlc

To B ankAlc

(Paym ent of 3% penalty for cancellation of CapitalCommitments)

(xi) C apital R eductionAlc

To B ankAlc

(Recons tr uc tio n expen se s p aid )

(xii) C apital R eduction A ccount

To Cap ita l R e se rv e Acc ou nt(Being balance of capital reduction accounttransferred)

Balan ce S heet o f N ep tu ne Ltd .

as a t 1 st A pril, 2009 (A s R ed uced )

Liabilities

Shar e Capita l

1,25,000, Equity Shares of

Rs. Assets

F reeho ld Prope rty

2,50,000 P lant

26

Dr. 9,40,000

Dr. 1,50,000

Dr. 2,00,000

Dr. 3,00,000

Dr. 15,000

Dr. 20,000

Dr. 1,80,000

3,65,000

1,50,000

2,00,000

2,25,000

1,50,000

1,70,000

30,000

60,000

2,40,000

15,000

20,000

1,80,000

Rs.

3,50,000

1,80,000


27/62


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Balance Sheet of Dee Lim ited as on1 st Ap ril, 2 00 9(A fter bu y back o f shares)

Liab i l i t i e s

Shar e Cap ita l

Au tho ri sed Capi ta l:

Is su ed a nd S ub sc rib ed C ap ita l:

2,0 0,00 0 e qu ity s ha re s o f R s.1 0 e ac hfullypaid up

2,000 10% Preference shares of R s.1 00 eachfullypaid up

R es erv e a nd S urp lu s:

Cap it al Rese rve

C ap ita l R ed emptio n R es erv e

Revenue Re se rv e

P ro fit a nd Los sA lc (35,00 - 8,00)

Cu rre nt L ia bilitie s a nd P rovis io ns

R s . 'O O O R s . 'O O O

20,00

2,00 22,00

10,00

3,00

29,00

27,00 69,00

14,00

10,500

F ixed Asse ts

Current assets loans and advances (including cash and bank balance)

(15,00+22 ,00- 25,00)

6.

(i) Intrinsic value on the basis of book values

Goodwill

O th er F ix ed A ss ets

Curren t Asse ts

L oa ns a nd Adv an ce s

L e s s :Secured lo an s

Current l iab il it ies

Provisions

A d d :Notionalcalion 90 lakhs equity shares @ Rs. 2 per share

Equivalent num ber of equity shares of R s. 10 each.

28

93,00

R s . in la kh s R s . in la kh s

420

11,166

2,910

~15,429

4,500

1,242

960 6,702

8,727

~8,907


29/62

F ully pa id shares o f R s. 1 0 e ach

Pa rt ly -p a id sh ar es a ft er no tion al c all

. [RS .150 lakhs ]Fully paid shares of R s. 5 each, x Rs. 5Rs.10

R s. in lak hs

180

90

. 89071akhsValue per equivalent share of R s. 10 each= Rs. ' R s.25.82

3 45 la kh s

H ence, intrin sic valu es o f e ach eq uity sha re are as follow s:

Value of fully paid share of Rs. 10=R s. 2 5.82 p er e quity sha re.Value of share of R s. 10, R s. 8 paid-up=Rs. 25.82 - Rs. 2=R s. 23.8 2 per equ ity sh are .

Value of fully paid share of Rs. 5= R s.25.82 R s.12.91 per equity share.2

(ii) Valuation on dividend yie ld basis:

Value of fully paid share of Rs. 10= 2 0 x R s.1 0 = R s.13 .3 315

Value of share of R s. 10, R s. 8 paid-up= 20 x R s. 8 = R s.1 0 .6715

Value of fully paid share of Rs. 5= 20 x 5 = Rs. 6 .6715

(iii) Valuation on the basis ofEPS:

P ro fit a fte r ta x=R s. 1 ,3 71 la kh sTota l s ha re c ap ita l=Rs . (1 ,8 00 + 720 + 7 50 ) la kh s=R s. 3 ,2 70 lakhs

. . 1371 lakhsE arn ing per rupe e of sh are ca pital= Rs. ' = Re. 0.419

3,2701akhs

Earning per fully paid share of R s. 10=Re. 0.419 x 10=Rs . 4 .1 9Earning per share of R s. 10 each, Rs. 8 paid-up=Re. 0.419 x 8=R s. 3 .3 5

E arning per share of R s. 5, fu lly paid-up=Re. 0 .419 x 5=R s. 2 .1 0Value of fully paid share of Rs. 10= R s. 4.19 x 10= R s. 20.95

2

Value of share of R s. 10, R s. 8 paid-up= R s. 3 .35 x 10 = R s.16.752

Value offully paid share of Rs. 5= Rs . 2 .1 0 x 10=R s .1 0.5 02

2 9


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31/62

Adjustments

Increase in remuneration -20,000

Saving in cost of materials +40,000 20,000

2,13,667

Less: Taxation @ 50% 1,06,833

Super Profits 1,06,834

8. Valuation of Business

D is co un ted ea rn in gs m eth od

(R s. in la kh s)

Year Earnings Discount Factor@ Pre sent v alu e20%

225.75 0.8333 188.117

2 242.68 0.6944 168.517

3 260.88 0.5787 150.971

4 280.45 0.4823 135.261

5 301.48 0.4019 121.165

6 324.09 0.3349 108.538

7 348.40 0.2791 97.238

8 374.53 0.2326 87.116

9 402.62 0.1938 78.028

10 432.82 0.1615 69.900

1204.851

Value of the business=R s.1 20 4.85 1 L ak hsD isco unted cash flow m etho d

(R s. In la kh s)

Year Earnings Discount Factor@ Pre sent v alu e20%

287.55 0.8333 239.615

2 306.24 0.6944 212.653

3 326.15 0.5787 188.743

4 347.35 0.4823 167.527

5 369.92 0.4019 148.671

6 393.97 0.3349 131.941

7 419.58 0.2791 117.105

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89

10

446.85

475.89

506.83

0.2326

0.1938

0.1615

103.937

92.227

81.853

1484.272

9.

Value of the business=R s.1 48 4.2 72 L ak hsG an pa ti L td .

G ross Valu e A dd ed S tatem en t fo r the year en ded 31st M arch, 2009

SalesL ess : C ost o f b ou gh t in m ate ria ls a nd se rv ic es :

P rodu ction and opera tion al expenses (2 93 + 59 + 109)

A dm inistration expenses (33 - 9)

In te re st o n work in g c ap ita l lo an

E xc ise d uty (R efe r w ork in g n ote )

Valu e a dd ed b y m an ufa ctu rin g a nd tra din g a ctiv itie s

A dd : O th er in come

Tota l v alu e a dd ed

A pp licatio n o f Valu e A dd ed

To Em ployees

S ala rie s, w ag es , g ra tu itie s e tc .

To D irectors

S a la rie s a nd commis sion

To G overnm ent

Cess and local taxes (98 - 55)

In come ta x

To Providers of capita l

In te re st o n debentu re s

In te re st o n fix ed lo an

Dividends

To Provide for m aintenance and expansion of the com pany

Depreciation

32

Rs. in lakhs Rs. in lakhs

890

461

24

9

__M 549

341

__M

396

%

82 20.71%

9 2.27%

43

27 70 17.68%

2

18

95 115 29.04%

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Gener al re se rv e

De fe rre d ta x

R etained profits (65 - 10)

45

3

55 120 30.30%

396 100%

S ta tem en t sh ow ing re co nc ilia tion o f G ro ss Valu e A dd ed w ith P rofits be fore taxa tio n

R s. in lak hs

Profits before taxes 225

Add:

Depreciation

Direc tors' remunera t ion

Sa la ri es , wages& gra tu it ie s e tc .

C ess and local taxes

In te re st o n debentu re s

In te re st o n fix ed lo an

Tota l v alu e a dd ed

17

9

82

43

2

j.. _ill

396

Wo rk in g N ote :

C alculation o f E xcise D uty

Say cost of bought in m aterials and services is 'x'

Excise Duty is 10% of x = x/10

x =461 +24+9+x/10

x = 494 + x/10 = 549 (approx.)*

Excise Duty = 549 - 494 = Rs. 55

10. (a) Econom ic Value Added (EVA) is primarily a benchmark to measure earnings

efficiency. EVA as a residual income measure of financial performance is simply

the operating profit after tax less a charge for the capital employed, equity as well

as debt, used in the business.

Mathematically EVA= OPBT - Tax - (TCEx COC)

Where :

O PBT = O pening Profit Before Tax

TCE = Total Capital Em ployed

* The abo ve calcula ted excise duty is no t exactly 10% of cost of bo ught in m aterial am ountingR s. 5 49 . T he d iffe re nc e is d ue to a pp ro xim atio n.

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COC =Cos t o f C on tro lBecause EVA includes both profit and loss as well as balance sheet efficiency aswell as the opportunity cost of investor capital - it is better linked to changes inshareholders w ealth and is superior to traditional financial m easures such as PAT orpercentage of return m easures such as R OC E or R OE .

E VA , additionally, is a tool for m anagem ent to focus on the im pact of their decisionsin increasing shareholders w ealth . These include both strategic decisions such aswhat investm ents to make, which business to exit, what financing structure isoptim al; as w ell as opera tional decisions involving trade-offs betw een profit andasse t efficiency such as w hether to m ake inhouse or outsource, repair or replace anequipm ent, w hether to m ake short or long production runs etc.

M ost im portantly the real key to increasing shareholders w ealth is to integrate E VAframework in four key areas, viz., to measure business performance, to guidem an ag eria l d ecisio n m aking, to alig n m ana gerial in cen tive s w ith th e sh are ho lde rs 'in terests and to improve the financia l and business literacy throughout theorganisation.

(b) Financia l Leverage= EBIT EB IT 1 .40E BIT -In te re st E BIT -1 0% o f4 00

EBIT={(10% of 400)x 1AO ] /O AO= 140EBIT (1- t) = 140 (1 - 0.30)=98Equit y c ap it al=170 + 130 =300Debt C a pita l=400P ost-ta x cost o f d ebt= 10% (1 - 0.30)=7%Ove ra ll co st o f ca pita l [P os t-ta x]= 17.5% of 300+ 7% of 400=80.5E conom ic Value A dded (E VA )

=E BIT (I - t) - O verall cost of capital (P ost-tax)=98 - 80.5=1 7.5 (R s. L ak h)11. Value of em ployees as per Lev and S chw artz m ethod:

= __50_,0_0=0~+ 50,000 + 50,000(1+ 0.15)(65-62) (1+ 0 .15) (65 -63 ) ( 1+ 0.15)(65-64)

=32,875.81 + 37,807.18 + 43,4 78.26=1 , 14 ,161 .25Tota l v al u e o f em plo ye es is R s.1 , 1 4,1 61 .2 5x 20 =Rs.22,83,225.

12. (a) The content of Corpora te Socia l Report is essentially based on the social

objectives. B rummet identified five areas w here in social objectives can be traced

out, namely, Net Income Contribution, Human Resource Contribution, Public

C on trib utio n, E nv iro nm e nta l C on trib utio n a nd P ro du ct o r S ervice C on trib utio n.

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(b )

In view of the social objectives, the importance of earning objective is notundersta ted; ra ther atta inment of social objectives is dependent on earningobjective . A sick business entity becom es liability to the society and sustains socialc os ts in ste ad o f g en era tin g s oc ia l b en efits .

Human Resource Contribution is the indica tor of the impact of organiza tionalactivities (viz. pay and allow ances, perks and incentives, recruitm ent, tra ining anddevelopm ent, placem ent, prom otion and transfer, w elfare m easure , e tc.) on peopleo f the o rg aniza tion. P ublic C on tributio n is the ind icator o f g ene ral ph ilan thro py in thecultural and social w elfare program mes and contribution to national exchequer byw ay of tax and duties.

Industrial activity is supposed to consum e irreplaceable resources and producessolid w astes. B y this process it pollutes a ir and w ater, causes noise and spoils theenvironm ent. These are term ed as negative social effects. The corpora te socialobjective is the abatem ent of such negative effect. It is covered by environm entalcontribution.

A lthough B rummet covered w ide range of objectives, still these are not essentiallyexhaustive . S ocia l objectives are determ ined by socio-econom ic conditions of acountry. It is d ifficult to set universal list of social objectives to be pursued by thecorporate sector. For exam ple , in India , regional im balance, unem ploym ent,reservation for w eaker sections of the population, scarcity of foreign exchange,energy deficit, popula tion pressure and illiteracy are som e of the w idely acceptedsocio-econom ic problem s. And obviously the genera l expectation is that thecorporate sector w ill positive ly contribute to such socio-econom ic problem s. S incethe socio-econom ic problem s of a country change over tim e or the priority a ttachedto a p rob lem shifts.

S ocial B alan ce S heet o fS te el In diaLtd.

a s a t 31 .03.2009

(R s. in /a kh s)

Liabilities:

Organiza tion Equ ity

Socia l Equit y (Con tr ibu tion by s ta ff)

TotalAssets:

26.00

828.00

854.00

Socia l Cap it al I nv es tmen t:

(a ) B uild in gs

(i) R eside ntia l 17.00

(ii) H os pita l 1.00

( iii) S ch oo l 1.40

( iv ) We lfa re 0.80 20.20

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also provide copies of docum ents or other m ateria ls which, in the opinion of thein sp ec tin g a uth ority a re r ele va nt.

T he inspecting authority , in the course of inspection , shall be entitled to exam ine orrecord sta tem ents of any m em ber, director, partner, proprie tor and em ployee of thes tock- broker. It shall be the duty of every director proprie tor, partner, officer andem ployee of the s tock broker to give to the inspecting authority all assistance inconnection w ith the inspection, w hich the stock broker m ay be reasonably expectedto g iv e.

(iv) Every s tock broker is required to m ainta in the follow ing books of account andrecords as per R ule 15 of the Securities C ontracts (R egulation) R ules, 1957 andR egula tion 17 of the S EB I (S tock B rokers and S ub-B rokers) R ules, 1992:

(a) R egister of transactions (S auda book)/D aily transaction lis t;

(b) C lients ledger;

(c) G enera l ledger;

(d) Journals ;

(e) Cash book;

(f) Bank Pass Book;

(g) D ocum ents register/Inw ard-outw ard register show ing full particulars of sharesa nd s ec uritie s re ce iv ed a nd d eliv ere d;

(h) Mem bers ' contract book show ing deta ils of a ll contracts entered into by himw ith other mem bers of the stock exchange or counterfo ils or duplica tes ofm em os of confirm ation issued to such other m em bers ;

(i) C ounterfo ils or duplica tes of contract notes issued to clients ;

U ) Written c on se nt o f clie nts in re sp ect o f c on trac ts en te re d in to a s p rinc ip als;

(k) M argin deposit book;

(I) R egister of accounts of sub-brokers;

(m ) An agreem ent w ith a sub-broker specifying the scope of authority andre sp on sib ilitie s o f th e s to ck b ro ke r a nd s uc h s ub -b ro ke rs .

In addition to the above sta tu tory requirem ents, stock brokers are a lso required tom aintain scrip w ise client w ise lis t in respect of scrip ts of specified group, c lient uplas tate me nt, d up lica te c op ies o f se lf-ce rtifica tes su bm itted o n m on th ly b asis, c op ie s o fm argin sta tem ents dow nloaded by the stock exchange, copies of valan balancesheet (Form 31), deta ils of spot delivery transactions, client data base and brokerclie nt a gree me nt, co py o f re gistration c ertifica te of e ach su b-b ro ker is su ed by S EB I,copies of the power of a ttorney/board resolution authorizing directors andemp lo ye es a nd c op ie s o f po ol a cc ou nt s tate me nts .

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16 . Jou rnal En tries

(i )

Dr.

Rs.

D r. 80,00,000

Cr

Rs.

Bank Alc

To R ev en ue F un d (R es tric te d)Alc

(To record grants received from theG overnment Departm ent and P rivateorganisation)

80,00,000

(ii) ExpensesAlc

To BankAlc

Dr. 60,25,000

60,25,000

(To account for R s.32,25,000 spent from out ofG overnm ent grant and Rs.28,00,000 from outo f P riv ate g ra nt)

(iii) EquipmentAlc

To R estricte d R even ue F undAlc

(To record the receipt of donation of asse tsfrom awel lwisher)

D r. 5,00,000

5,00,000

(iv) R evenue Fund (R estricted)Alc Dr. 60,25,000

To In come (G ovt. g ran t)Alc 32,25 ,000

To In come (P riva te g ran t)Alc(To re co gn is e re ve nu e)

28,00,000

(v) Revenue Fund (Restricted)Alc

To BankAlc

(To accou nt for overh ea d exp ense s incurred)

17. Trea tm en t under Ind ian Accoun ting S tandards (AS )and In terna tionalF in an cia l R ep ortin g S ta nd ard s (IF RS )

Dr. 3,00,000

3,00,000

AS IFRS

(i ) Im pairm en t o f Assets are impaired at S im ilar to Indian AccountingAssets

higher of fair value less S tandard.costs to sell and value in However, assets areuse based o n d is co un te d classified and disclosedc a sh f lows. sep ara te ly on th e face of theImpairment test is to be balance sheet as held forconducted every year and if sale or disposal.there is upw ard increase inthe value of asset thanreversal of impairmentlo ss es is re qu ire d in c erta in

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circumstances.

A ssets are not separate lyclassified or disclosed asheld for sa le on the face ofth e b ala nc e s he et.

(ii) Business N o particular S tandard has A ll business acquisitions areCombinations been issued by ICAI till Combinations as perIFRS 3

d ate . H ow ev er a ll b us in essacqu isitions a re bu sine sscombinations exceptp oo ling of intere st m etho d

for ce rt ain ama lgama tions

18 . (i) As per AS 32, carrying am ounts of each of the follow ing categories, as defined inAS 30, should be disclosed either on the face of the balance sheet or in the notes:

(a) financia l assets a t fair value through profit or loss, show ing separa te ly (i) thosedesignated as such upon initial recognition and (ii) those classified as held fortrading in accordance w ith A S 30;

(b ) h eld -to -m atu rity in ve stm en ts ;

(c) loans and receivables;

(d ) a va ila ble -fo r-s ale fin an cia l a ss ets;

(e) financia l liabilities at fair value through profit or loss, showing separately (i)those designated as such upon initial recognition and (ii) those classified asheld for trading in accordance w ith A S 30; and

(f) financia l liabilities m easured at am ortised cost.

(ii) According to para 8.6 of AS 30, A financia l guarantee contract is a contract tha trequires the issuer to m ake specified paym ents to reim burse the holder for a loss itincurs because a specified debtor fa ils to m ake paym ent w hen due in accordancew ith th e origina l or m od ified te rm s of a de bt instrum ent.

(iii) In accordance w ith paragraphs 43 to 45 of AS 30, An entity should remove afinancial liability (or a part of a financial liability) from its balance sheet w hen, and

only when, it is extinguished i.e ., when the obligation specified in the contract isd is ch arg ed o r c an ce lle d o r e xp ire s.

An exchange between an existing borrower and lender of debt instruments w ithsubstantia lly different term s should be accounted for as an extinguishm ent of theorig inal financial liability and the recognition of a new financia l liability. S im ilarly, asubstantia l m odification of the term s of an existing financia l liability or a part of it(whether or not attributable to the financia l difficulty of the debtor) should beaccounted for as an extinguishment of the original financia l liability and there co gn itio n o f a n ew fin an cia l lia bility .

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S ale o f fix ed a sse ts

Pu rcha se o f in ve stments

C as h u se d fo r in ve stin g a ctiv itie s

(C) Cash flow from financing activities

Proceeds from issue of shares including prem ium(400 + 40)

P ro ce ed s from is su e o f 1 4% d eb en tu re s

P ro ce ed s from lo ng te rm borrowin gs

P aymen t o f D iv id en dC as h g en era te d from fin an cin g a ctiv itie s

N et increase in C ash and C ash equ ivalent (A +B+C )

C ash an d C ash e quivalent a t the opening

C ash an d C ash e quivalent a t the closing

Wo rkin g N ote s:

1. Income tax paid

Incom e tax e xpe nse s for the year

Add: Tax liab ility at th e beginning of the year

Less: Tax liab ility at th e end of th e year

2. Fixed asse ts purchased

C lo sin g g ro ss b lo ck

Add: C ost of assets discarde d du ring the year

40

_ j fQQ l

(1,360)

440

100

60

(300)300

160

_j.QQ

260

R s . ( ' OOO )

160

. . 1Q

180....1Q

140

4,000

_ _ . 1QQ

4,400

(3,200)

1,200

Less: O pe nin g g ro ss b lo ck

F ix ed a ss ets p urc ha se d d urin g th e y ea r

3 . Depreciation charged during the year

C losing accumulated depreciation 1,440

Add: Depreciation charged on asse ts discarded during the ___jillyear

Less: C lo sing a ccumu la te d d epre cia tio n

Dep re cia tio n c ha rg ed d urin g y ea r

46

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(640)

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23. (i) Books o f 5 Ltd .

J ou rn al E ntrie s

Date Particulars Debit C redit

R s.

31.3 .06 E mployees C om pensation E xpense A ccount

To Emp loye es S to ck O ptio n O utstand ing A cco un t

(Being compensation expense recognized in respect of1,000 options granted to em ployees at discount of Rs.30each, am ortized on stra ight line basis over 2~ years)

R s.

D r. 12,000

12,000

Profit and Loss Account D r. 12,000

To Employees Compensation Expense Account 12,000

(Being employees compensation expense of the yeartra ns fe rre d toP&LA/ c )

31.3 .07 Employees C om pensation E xpense A ccount

To Emp loye es S to ck O ptio n O utstand ing A ccoun t

(Being compensation expense recognized in respect of1,000 options granted to em ployees at discount of Rs.30each, am ortized on stra ight line basis over 2~ years)

D r. 12,000

12,000

Profit and Loss Account D r. 12,000

To Employees Compensation Expense Account 12,000(Being employees compensation expense of the yeartra ns fe rre d toP&LA/ c )

31.3 .08 Employees C om pensation E xpense

To Emp loye es S to ck O ptio n O utstand ing A ccoun t

(Being balance of compensation expense amortizedR s.3 0,0 00 le ss R s. 2 4,0 00 )

D r. 6 ,000

6,000

Profit and Loss Account D r. 6 ,000

To Employees Compensation Expense Account 6 ,000

(Being employees compensation expense of the year

tra ns fe rre d toP&LA/ c )

31.7 .08 Bank Account (R s. 60x 1,000) D r. 6 0,000

Employees S tock Option Outstanding Account D r. 30,000(Rs.30x1,000)

To E quity S hare C apital A ccoun t

To S ecuritie s P re mium A ccou nt

(Being exercise of 1 ,000 options at an exercise price ofR s .6 0 e ac h)

10,000

80,000

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APPENDIX-I

LIS T O F IN STITU TE 'S P UB LIC AT IONS R ELEVANT FOR MAY, 2010 E XAMINAT IONS

T he follow ing List of Institu te 's P ub licatio ns is relevant for th e forthcom ing exam ination i.e.May, 2010. Students may kindly take it into considera tion while preparing for theexaminations.

F in a l Exam inat ion

P ap er 1 : A dva nc ed A cc ou ntin g

I. S ta tem en ts and S tandards

1 . F ram ew ork for the P re paration and P resentatio n of F inancial S tatem ents

2. Accounting Standards (including lim ited revisions) - AS 1 to AS 32.

II. G uid an ce N otes on A cco unting A spects

1. G uidance Note on Treatm ent of Reserve Created on Revaluation of Fixed Assets.

2. G uidance Note on Accrual Basis of Accounting.

3. G uidance N ote on A ccou ntin g T rea tm ent for E xcise D uty.

4. Guid an ce N ote o n A cco un tin g fo r D ep re cia tio n in C ompa nie s.

5. Guid an ce N ote o n Ava ila bility o f R ev alu atio n R es erve fo r Is su e o f B on us s ha re s.

6. Guid an ce N ote o n A cco un tin g T re atm en t fo r MODVAT /CENVAT.

7. G uidance N ote on A ccou ntin g for C orpo rate D ivide nd Tax.

8. Guid an ce N ote o n A cco un tin g fo r Emp lo ye e S ha re -b ase d P ayme nts .

9. G uidance N ote on A ccou ntin g for F ringe B enefits Tax.

10. G uidance Note on Accounting for C redit Available in respect of M inim um Alternate Tax underth e Incom e Ta x A ct,1961.

11. G uidance Note on M easurem ent of Incom e Tax for In terim Financial Reporting in the contextof AS 25

Note: Official Announcem ents and Notifications (in re lation to syllabus) issued till 318 1

October, 2009will be applicable for M ay,2010 examination.

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APPEN DIX -/I

C om panies (A cco un tin g S tan dard s) A mend men t R ules, 2009 - Amen dm en ts in A nn exu re

NOT IFICAT ION NO. G .S .R .22S (E )

DATED 31- 3-2 00 9

In e xe rc is e o f th e p ow ers c on fe rre d b y c la us e (a ) o f s ub -s ec tio n (1 ) o f s ectio n 6 42 re ad w ith s ub -s ec tio n (1 )

of section 21A and sub-section (3C) of section 211 of the C om panies A ct, 1956 (1 of 1956), the Centra l

G ov ernme nt in c on su lta tio n w ith th e N atio na l A dv is ory C omm itte e o n A cc ou ntin g S ta nd ard s, h ere by m ak es

th e fo llowin g ru le s to am en de d th e C omp an ie s (A cc ou ntin g S ta nd ard s) R ule s, 2 00 6, n am e ly :-

1 . (1) T hese ru les m ay be ca lle d the C om panies (A ccoun ting S ta ndards) A men dm en t R ules , 200 9.

(2 ) T he y s ha ll c om e in to fo rc e o n th e d ate o f th eir p ub lic atio n in th e O ffic ia l G az ette .

2 . In the Companies (Accounting Standard) Rules , 2006, in the Annexure, under the head ing "8 .

AC CO UN TIN G S TAN DA RD S", in the sub-head ing "A ccoun ting S tandard (A S) 11" rela ting to "The

E ffects of C hang es in Foreign E xchange R ates", a fter pa ragraph 45, the follow ing shall b e inserted,

namely:-

"4 6. In re sp ec t o f a cc ou ntin g p erio ds c omm en cin g o n o r a fte r7th D ece mber, 2 006 an d endin g on or be fore

31st M arch, 2011, at the option of the enterprise (such op tion to be irrevocable and to be exercised

re tro sp ec tiv ely fo r s uc h a cc ou ntin g p erio d, fro m th e d ate th is tra ns itio na l p ro vis io n c om es in to fo rc e o r th e

firs t d ate o n w hic h th e c on ce rn ed fo re ig n c urre nc y m on eta ry ite m is a cq uire d, w hic he ve r is la te r a nd a pp lie d

to a ll s uc h fo re ig n c urre nc y mo ne ta ry item s), e xc ha ng e d iffe re nc es a ris in g o n re po rtin g o f lo ng -te rm fo re ig n

c urre nc y mo ne ta ry item s a t ra te s d iffe re nt from th os e a t w hic h th ey w ere in itia lly re co rd ed d urin g th e p erio d,o r re po rte d in p re vio us fin an cia l s ta tem en ts , in so fa r a s th ey re la te to th e a cq uis itio n o f a d ep re cia ble c ap ita l

asset, can be ad ded to or d educte d from the cost of the asset and shall be d epre cia ted o ver the ba lance life

of the asset, and in othe r cases , can be accum ulated in a "Foreign Currency M one tary Item Translation

D iffe re nc e A cc ou nt" in th e e nte rp ris e's fin an cia l s ta te me nts a nd amo rtiz ed o ve r th e b ala nc e p erio d o f s uc h

lo ng -te rm a ss et/lia bility b ut n ot b ey on d 3 1st M arch, 2011, by recognition as incom e or expense in each of

s uc h p erio ds , w ith th e e xc ep tio n o f e xc ha ng e d iffe re nc es d ea lt w ith in a cc ord an ce w ith p ara gra ph 1 5. F or th e

p urp os es o f e xe rc is e o f th is o ptio n, a n a ss et o r lia bility s ha ll b e d es ig na te d a s a lo ng -te rm fo re ig n c urre nc y

m on eta ry ite m, if th e a ss et o r lia bility is e xp re ss ed in a fo re ig n c urre nc y a nd h as a te rm o f 1 2 m on th s o r m ore

at the da te of orig in ation o f th e asset or liability . A ny difference pe rtainin g to acco unting pe riods w hich

c omm en ce d o n o r a fte r7th D ec em be r, 2 00 6, p re vio us ly re co gn iz ed in th e p ro fit a nd lo ss a cc ou nt b efo re th e

e xe rc is e o f th e o ptio n s ha ll b e re ve rs ed in so fa r a s it re la te s to th e a cq uis itio n o f a d ep re cia ble c ap ita l a ss etby addition or deduction from the cost of the asset and in othe r cases by transfer to "Fore ign C urrency

M one tary Item Translatio n D ifference A ccou nt" in both cases , by de bit or cred it, as th e case m ay b e, to the

gen eral re serve. If the option stated in th is pa ragraph is exercised, d isclo sure sha ll be m ade of th e fact of

s uc h e xe rc is e o f s uc h o ptio n a nd o f th e a mo un t re ma in in g to b e amo rtiz ed in th e fin an cia l s ta te me nts o f th e

p erio d in w hic h s uc h o ptio n is e xe rc is ed a nd in e ve ry s ub se qu en t p erio d s o lo ng a s a ny e xc ha ng e d iffe re nc e

remains unamor ti zed . "

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APPENDIX- 11 /

GN(A ) 24 (Issued 2006)

G UIDANCE NOTE ON MEASUREMENT OF INCOME TAX EXPENSE FORINTERIM FINANCIAL REPORTING IN THE CONTEXT OF AS 25

(T he following is the textof the G uidance N ote on M easurem entof Incom e-tax E xp ense forInte rim F in an cia l R ep orting in th e c on te xtof AS 25, issued by th e Coun cilof the Inst it ut e ofChart ered Accoun tan tsof India.)

1. Accounting Standard (AS) 25, 'Interim Financial Reporting ', issued by the Council of theInstitu te of Chartered Accountants of India (ICAI), prescribes the m inim um content of aninterim financia l report and the princip les for recognition and m easurem ent in com ple te orcondensed financial sta tem ents for an in terim period . A S 25 becam e m andatory in respect ofaccounting periods commencing on or after 181 April, 2 00 2. In a cc ord an ce w ith th e A cc ou ntin gS tandards In terpre ta tion (A SI) 27, 'Applicability of AS 25 to Interim Financia l R esults ', thereco gn ition an d m ea sure me nt p rin ciples laid d ow n in A S 25 sh ou ld b e ap plie d fo r reco gn itionand m easurem ent of item s conta ined in the in terim financial results presented under C lause41 of th e L is ting A gre em ent en te red in to b etw ee n sto ck exc ha ng es an d the liste d en te rp ris es.This G uidance Note deals with the m easurem ent of income tax expense for the purpose ofin clu sio n in th e in te rim fin an cia l re po rts .

2. The general princip les for recognition and measurement have been laid down in AS 25 asbelow:

"2 7. A n en te rp rise sho uld a pp ly the sa me accou ntin g p olic ies in its in te rim fina ncia ls ta tements as a re ap plied in its an nua l fin anc ia l s ta te me nts , exce pt fo r accou ntingp olic y ch an ge s m a de a fte r th e d ateof th e m o st re ce nt a nn ua l fin an cia l s ta tem en ts th ata re to b e re fle cte d in th e n ex t a nn ua l fin an cia l s ta te m en ts . H o we ve r, th e fre qu en cyofan en te rp rise 's reporting (annua l, h a lf-yea rly , o r quarte rly) shou ld no t a ffe ct themeasu r emen t of its annua l resu lts . T o ach ieve tha t ob jec tive , m easurem en ts fo rin te rim re po rtin g p urp ose s s ho uld b e m a de o na yea r- to -dat e ba s is .

28. R equiring tha t an enterprise apply the sam e accounting policies in its interim financialsta tem ents as in its annual financial sta tem ents m ay seem to suggest that interim periodm easurem ents are m ade as if each in terim period stands alone as an independent reportingp erio d. H ow ev er, b y p ro vid in g th at th e fre qu en cy o f a n e nte rp ris e's re po rtin g s ho uld n ot a ffe ctth e m ea sure me nt of its a nnu al re su lts , pa rag ra ph 2 7 ackn ow le dg es th at a n in te rim p eriod is apart of a financial year. Year-to-date m easurem ents m ay involve changes in es tim ates ofam ounts reported in prior interim periods of the current financia l year. But the princip les forrecognising asse ts, liab ilities, incom e, and expenses for in terim periods are the sam e as inannua l f inanci al s ta temen ts ."

3. P arag rap h 29 (c) of A S 2 5 illustra te s th e ap plica tion of th e g en eral p rin cip les fo r reco gn itiona nd m ea sure me nt of ta x e xp en se in in terim p eriod s, a s b elo w:

"29 . . .. .

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(b ) W he re b rou gh t fo rw ard losses exist (w hen de fe rre d ta x a sse t w as recog nise d onthe considerations of prudence as per AS 22): In such a situation , current taxw ould be com puted in the sam e m anner as explained in (a) above. H ow ever, inthe determ ination of deferred tax, the tax expense arising from the reversal ofth e d efe rre d ta x a ss et re co gn is ed p re vio us ly , to th e e xte nt o f re ve rs al o f d efe rre dta x a ss et in th e c urre nt y ea r, w ou ld a ls o b e co ns id ere d.

(iii) The enterprise w ould now have to calcula te the w eighted average annual effectivetax rate . T his ta x ra te w ou ld be d eterm ined by dividing the e stim ated tax expe nse a sarrived at step (ii) above by the estim ated annual accounting incom e as arrived atstep (i) above. W here different tax rates are applicable to different portions of thee stim a te d a nn ua l a cc ou ntin g in com e, e .g ., n orm al ta x ra te a nd a d iffe re nt ta x ra te fo r

capital gains, the weighted average annual effective tax rate would have to bec alc ula te d s ep ara te ly fo r s uc h p ortio ns o f e stim a te d a nn ua l a cc ou ntin g in come.

(iv) The w eighted average annual effective tax ra te arrived at step (iii) w ould be appliedto the accounting incom e for the in terim period for determ ining the incom e taxe xp en se to b e re co gn is ed in th e in te rim fin an cia l re po rts .

6. Accounting for interim period income-tax expense as suggested above is based on theapproach prescribed in A S 25 that the interim period is part of the w hole accounting year(often referred to as the 'integral approach') and, therefore , the said expense should bew ork ed o ut o n th e b as is o f th e e stim a te d w eig hte d a ve ra ge a nn ua l e ffe ctiv e in come -ta x ra te .A ccording to this approach, the sa id ra te is determ ined on the basis of the taxable incom efor the w hole year, and applied to the accounting incom e for the in terim period in order to

d ete rm in e th e am ou nt o f ta x e xp en se fo r th at in te rim p erio d. T his is in c on tra st to a cc ou ntin gfor ce rtain othe r e xp en ses such a s de pre ciation w hich is ba sed on the a pp roa ch p rescrib edin A S 2 5 that th e inte rim p eriod sho uld be co nside red o n sta nd -alo ne ba sis (ofte n refe rred toas the 'discre te a pp roa ch ') beca use expe nses such a s dep recia tion are w orke d o ut o n thebasis o f th e p erio d fo r w hich a fixe d asset w as ava ilab le for u se. T he a fo resa id trea tm entsare , how ever, consistent w ith the requirem ent contained in paragraph 27 of A S 25 that anente rprise shou ld ap ply the sam e accou nting po licies in its in te rim fin an cial sta tem en ts asa re a pp lie d in its a nn ua l fin an cia l s ta temen ts .

7. A ppe nd ix B con ta ins example s of computin g w eigh ted a vera ge an nua l effe ctive ta x ra te .

A ppendix A

EXTRACTS FRO M APPENDIX 3 TO ACCOUNTING STANDARD (AS) 25,

IN TE RIM FINANCIA L R EP ORTING

Measu rin g In come Tax E xp en se fo r In terim P erio d

8. Interim period incom e tax expense is accrued using the tax rate that w ould be applicable toexp ected total a nn ual e arn ings, th at is, the e stim ated average an nu al e ffe ctive incom e tax ra teapplied to the pre-tax incom e of the interim period.

9. This is consistent w ith the basic concept set out in paragraph 27 that the sam e accountingrecognition and m easurem ent princip les should be applied in an interim financial report as are

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(Amou nt in R s. la kh s)

Quarter Quarter Quarter Quarter YearEnd ing End ing End ing End ing End ing31 Dec. 31 Mar. 30 June 30 Sep . 30 Sep.Y e a r 1 Y e a r 1 Y e a r 2 Y e a r 2 Y e a r 2

Tax E xp en se 30 30 40 40 140

Tax Deduc tions/Exempt ions

1 4. Tax statutes m ay p rovid e d edu ctio ns/exem ption s in com putation of income for d eterm iningtax payable . Anticipated tax benefits of this type for the full year are generally reflected inc omputin g th e e stim a te d a nn ua l e ffe ctiv e in come ta x ra te , b ec au se th es e d ed uc tio ns /e xemptio nsare calcula ted on an annual basis under the usual provisions of tax statutes. O n the other hand,tax benefits that re late to a one-tim e event are recognised in com puting incom e tax expense inthat interim period, in the sam e w ay that special tax rates applicable to particular ca tegories ofincom e are n ot ble nd ed in to a sin gle e ffective a nn ual ta x ra te .

Tax L os s C arry fo rw ard s

15. A deferred tax asset should be recognised in respect of carry forw ard tax losses to the extentthat it is virtually certain , supported by convincing evidence , that fu ture taxable incom e w ill be

available against w hich the deferred tax asse ts can be realised. The criteria are to be applied atthe end of each interim period and, if they are met, the effect of the tax loss carry forward isreflected in the com putation of the estim ate d ave rag e a nnu al e ffe ctive in come tax rate.

16. To illustra te , an enterprise that reports quarterly has an operating loss carryforw ard of R s100 lakhs for incom e tax purposes at the start of the current financial year for w hich a deferredtax asset has not been recognised. The enterprise earns Rs 100 lakhs in the first quarter ofthe current year and expects to earn Rs 100 lakhs in each of the three rem aining quarters.E xcluding the loss carryforw ard, the estim ated average annual incom e tax ra te is expected tobe 40 per cent. The estim ated paym ent of the annual tax on Rs. 400 lakhs of earnings for thecurrent year would be Rs. 120 lakhs {(Rs. 400 lakhs - Rs. 100 lakhs) x 40% }. Considering theloss carryforw ard, the estim ated average annual effective incom e tax ra te w ould be 30% {(R s.120 lakhs/R s. 400 lakhs) x 100}. This average annual effective income tax rate would beapplied to earnings of each quarter. A ccordingly, tax expense w ould be as follow s:

(Amou nt in R s. la kh s)

15t 2nd 3rd 4thQuarter Quarter Quarter Quarter Annual

Tax E xp en se 30.00 30.00 30.00 30.00 120.00

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A ppend ix BExam ples of C om puta tion of Weighted Average A nnual Effec tive Tax R ate

E xamp le 1 : W hen deferred tax asset was not recognised for carried forward losses fromearlie r accoun ting pe riods .

Quarter Quarter Quarter Quarter TotalI II III IV

Rs. Rs. Rs. Rs. Rs.

Estimated Pre-tax Income (after (25) 175 (25) 50 175c on sid erin g e stim a te d d ep re cia tio non the probable acquisition of fixe da sse ts d urin g th e y ea r)

Carried forward losses from earlie r (25)a cco un tin g p erio ds , th e d efe rre d ta xasse t in respect of which was notrecognised as it did not meet there qu ireme nts o f p ru de nc e la id d ow nin AS 22. During this year, in viewo f th e e xp ec te d ta xa ble in come , th isloss is expected to be se t offthereagainst. T herefore , itwill not

have any tax effect on futureperiods.

A dd itio na l e stim ate d d ep re cia tio n (50)as per tax laws as compared to theaccounting depreciation afterconsidering depreciation onprobable capital expenditure onacquisition of fixed assets duringth e y ea r.

Estimated taxable income on which 100ta x p ayab le .

Applicable tax rate (say) 30%

Estim ated current tax expense for 30th e y ea r.

Estimated deferred tax expense for 15th e ye ar (5 0x 30 /1 0 0)

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We ig hte d Ave ra ge A nn ua l E ffe ctive 30Tax R ate (cu rre nt ta x) -x100=17.14%175

We ig hte d Ave ra ge A nn ua l E ffe ctive 15Tax R ate (d efe rre d ta xL - x 100 =8.57%175

Tax e xp en se fo r th e in te rim p erio d

Current tax (4.29) 30 (4.29) 8.57 29.99

De fe rre d ta x (2.14) 1 .Q (2.14) 4.29 15.01

Total (6.43) 45 (6.43) 12.86 45.00

(a) The above calculation needs to be done for every interim period for which recognition and

m easurem ent of tax exp ense is required.

(b) It is presum ed that there are no other differences between accounting incom e and taxable

income.

E xam p le 2 : Wh en d efe rre d tax a sse t w as re co gn is ed fo r ca rried fo rw ard lo sses from ea rlie rt' 'dccoun m {] peno s.

Quarter Quarter Quarter Quarter Tota l

I II I I I IV

Rs. Rs. Rs. Rs. Rs.

Estimated Pre-tax Income (after (25) 175 (25) 50 175con sid er in g e stima te d d ep re cia tio no n th e p ro ba ble a cq uisitio n o f fix eda sse ts d urin g th e y ea r)

Carried forward losses from earlier (25)accounting periods, the deferredtax asset in respect of which wasrecognised on the basis ofconsiderations of AS 22. Duringthis year, in view of the expected

taxable income, this loss ise xp ec te d to b e s et o ff th ere ag ain st.This will result in reversal of thedeferred tax asset in the currentyear.

A dd itio na l e stim a te d d ep re cia tio n (50)as per tax laws as com pared to theaccounting depreciation afterconsidering depreciation onprobable capita l expenditure on

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acquisition of fixed assets duringth e yea r.

Estim ated taxable income on 100wh ic h ta x p ay ab le .

Applicable tax rate (say) 30%

E stim ated current tax expense for 30th e yea r.

Estim ated deferred tax expense for 22.5th e yea r:

(i) D efered tax liability on accounto f tim in g d iffe re nc e in d ep re cia tio n( 5 0 x 3 0 / 1 0 0 ) 15

(ii) R e ve rs al o f d efe rre d ta x a ss et

( 2 5 x 3 0 / 1 0 0 ) 7.5

Weighted Average Annual 30E ffe ctiv e Tax Ra te (Cu rre nt ta x) - x100=17.14%175

Weighted Average Annual22 .5 x100=12.86%

E ffe ctiv e Tax Ra te (D e fe rre d ta x) 175

Tax e xp en se fo r th e in te rim p erio d

Current tax (4.29) 30.0 (4.29) 8.57 29.99

De fe rr ed ta x .Q11l 22.5 .Q11l 6.43 22.51Total (7.50) 52.5 (7.50) 15.00 52.50

(a) The above calculation needs to be done for every interim period for w hich recognition and

m easurem ent of tax expense is required.

(b) It is presum ed that there are no other differences betw een accounting incom e and taxable

income.

E xam ple 3: Wh en p ro gre ss iv e ra te sof t ax a re appli cab le

Under the Indian tax system , the tax rates for corporates and firm s are not progressive (i.e., based

on levels of incom e), but are flat rates. Therefore, the tax rate to be applied in the interim period

w ould be the norm al rate applicable to the entity. H ow ever, the calculation of w eighted average

a nn ua l e ffe ctive ta x ra te ca n b e illu stra te d a s b elow whe re th e ta x ra te s a re p ro gre ssiv e:

E stim ate d a nn ua l in come

A ssum ed Tax R ates:

On first R s. 40,000 30%

R s.1 lak h

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On the balance income 40%

Tax expense: 30% of R s. 40,000+ 40% of R s. 60,000=Rs . 3 6,0 00

Weighted a ve rag e a nn ual e ffective tax rate= 36,000 x 100=36%-1,00,000

Supposing the estim ated incom e of each quarter is R s. 25,000, the tax expense of R s. 9 ,000

(36% of R s. 25,000) w ould be recognised in each of the quarterly financial reports.

Example 4 :Wh en d iffe re nt ra te sof ta x a re a pp lic ab le to d iffe re nt p ortio nsof th e e stim a te d a nn ua laccoun ting income ( re fe r pa ra5 (i ii ))

Estim ated annual income Rs. 1 lakhRs.20,000in clu siv e o f E stim ate d C ap ita l G a in s (e arn ed in Q ua rte r II)

A ss um ed Tax R ate s:

On Capita l G ains 10%

On o th er in come :

First R s. 40,000 30%

Balance income 40%

Assum ing there is no difference between the estim ated taxable incom e and the estim ated

a ccoun ting in come ,

Tax Expe ns e:

O n C apital G ains portion of annual incom e:

10% of Rs. 20,000 Rs.2 ,000

O n other incom e: 30% of R s. 40,000+ 40% of R sAO,O OO

Total:

We ig hte d Ave ra ge A nn ua l E ffe ctiv e Tax R ate :

On Capital G ains portion of annual incom e: 2,000 x 100= 10%20,000

Rs.28,000

Rs.30,000

On other income: 28,000 x 100=35%80,000

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Supposing the estim ated incom e of each quarter is R s.25,000, w hen incom e of Rs.25,000 for

2nd Quarter includes capital gains of Rs.20,000, the tax expense for each quarter will beca lc ula te d a s b elow:

Income Tax Expense

Quarter I: Rs.25,000 35% of R s. 25,000= Rs.8,750Quarter II : Capital G ains: Rs.20,000 10% of Rs. 20,000= Rs.2,000

O ther: Rs.5,000 35% of R s. 5,000= R s.1,750 R s.12,500Quarter I I I : Rs.25,000 35% of R s. 25,000= Rs.8,750Quarter IV: Rs.25,000 35% of R s. 25,000= Rs.8,750Total tax expense for the year Rs.30,000

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18203rtp finalold may10 paper1

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