2.1
Paper 2A Company Accounts
Syllabus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2
Bird's-Eye View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
Line Chart Showing Relative Importance of Chapters . . . . . . . . . . . . . . . . 2.5
Table Showing Importance of Chapter on the Basis of Marks . . . . . . . . . . 2.6
Table Showing Importance of Chapter on the Basis of Marks
Compulsory Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7
Legends for the Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8
Study Material Based Contents
1. (Study I) Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
2. (Study II) Accounting for Share Capital . . . . . . . . . . . . . . . . . . . . . 2.21
3. (Study III) Issue and Redemption of Debentures . . . . . . . . . . . . . . 2.65
4. (Study IV) Underwriting of Issues and Acquisition of Business . . . 2.87
5. (Study IV) Final Accounts of Joint Stock Companies . . . . . . . . . . . 2.112
6. (Study V) Consolidation of Accounts . . . . . . . . . . . . . . . . . . . . . . . 2.159
7. (Study VI) Valuation of Shares and Intangible Assets . . . . . . . . . . 2.238
8. Objective Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.270
Question Paper of June, 2012 . . . . . . . . . . . . . . . . . . . . 2.294
Question Paper of December, 2012 . . . . . . . . . . . . . . . 2.297
Question Paper of June, 2013 . . . . . . . . . . . . . . . . . . . . 2.302
Question Paper of December, 2013 . . . . . . . . . . . . . . . 2.306
2.2
Syllabus
Paper 2 Company Accounts, (100 marks)
Cost and Management Accounting
Part A (50 marks)
Company Accounts
Level of knowledge: Working knowledge.
Objective: (i) To provide working knowledge of accounting principles and procedures
for companies in accordance with the statutory requirements.
Detailed Contents
1. Accounting standards - relevance and significance; national and international
accounting standards.
2. Accounting for share capital transactions - issue of shares at par, at premium and
at discount; forfeiture and re-issue of shares; buy-back of shares; redemption of
preference shares; rights issue.
3. Issue of debentures - accounting treatment and procedures; redemption of
debentures; conversion of debentures into shares.
4. Underwriting of issues; acquisition of business; profits prior to incorporation;
treatment of preliminary expenses.
5. Preparation and presentation of final accounts of joint stock companies as per
company law requirements; bonus shares.
6 Holding and subsidiary companies - accounting treatment and disclosures;
consolidation of accounts.
7. Valuation of Share and intangible assets.
2.3
Bird's-Eye View
Paper 2A
Company Accounts
Question Paper Based Contents of Last Five Examinations
Years Q. No. Chapter Page
No.No. Name
2011Dec.
1.2. (a)
(b)3. (a)
(b)
86432
Objective QuestionsConsolidation of AccountsUnderwriting of Issues and Acquisition of BusinessIssue and Redemption of DebenturesAccounting for Share Capital
282184
937540
4. (a)(b)(i)
(ii)(iii)(iv)
25775
" "Final Accounts of Joint Stock CompaniesValuation of Shares and Intangible Assets " "Final Accounts of Joint Stock Companies
42120240240120
2012June
1.2. (a)
(b)(c)
3. (a)(b)
4. (a)(b)
86424573
Objective QuestionsConsolidation of AccountsUnderwriting of Issues and Acquisition of BusinessAccounting for Share CapitalUnderwriting of Issues and Acquisition of BusinessFinal Accounts of Joint Stock CompaniesValuation of Shares and Intangible AssetsIssue and Redemption of Debentures
285190
973198
151250
77
2012Dec.
1.2. (a)
(b)3. (a)
(b)4. (a)
(b)(c)
82463753
Objective QuestionsAccounting for Share CapitalUnderwriting of Issues and Acquisition of BusinessConsolidation of AccountsIssue and Redemption of DebenturesValuation of Shares and Intangible AssetsFinal Accounts of Joint Stock CompaniesIssue and Redemption of Debentures
28744
100192
78252122
71
2013June
1.2. (a)
(b)(c)
8742
Objective QuestionsValuation of Shares and Intangible AssetsUnderwriting of Issues and Acquisition of BusinessAccounting for Share Capital
289254103
32
2.4
3. (a)(b)
4. (a)(b)
6224
Consolidation of AccountsAccounting for Share Capital" " "Underwriting of Issues and Acquisition of Business
195464794
2013
Dec.
1.
2. (a)
(b)
3. (a)
(b)
(c)
4. (a)
(b)
(c)
8
6
4
7
4
5
2
5
3
Objective Questions
Consolidation of Accounts
Underwriting of Issues and Acquisition of Business
Valuation of Shares and Intangible Assets
Underwriting of Issues and Acquisition of Business
Final Accounts of Joint Stock Companies
Accounting for Share Capital
Final Accounts of Joint Stock Companies
Issue and Redemption of Debentures
291
198
104
255
94
153
50
122
79
2.5
Line Chart Page
2.6
Table Showing Importance of Chapters on the Basis of Marks
Chap.
No.
Years
Chapter Name
09
June
09
Dec.
10
June
10
Dec.
11
June
11
Dec.
12
June
12
Dec.
13
June
13
Dec.Total Ave.
1. Accounting Standards 3 3 3 9 0.9
2. Accounting for Share Capital 9 3 3 18 14 3 6 22 5 83 8.3
3. Issue and Redemption of... 8 3 9 7 6 10 5 48 4.8
4. Underwriting of Issues and... 6 6 4 12 9 8 10 55 5.5
5. Final Accounts of Joint Stock... 18 18 18 24 9 6 9 5 9 116 11.6
6. Consolidation of Accounts 9 9 15 9 11 6 9 9 9 86 8.6
7. Valuation of Shares and Intangible... 6 12 9 6 6 6 9 6 6 7 73 7.3
8. Objective Questions 15 20 20 20 20 20 20 20 20 20 195 19.5
2.7
Table Showing Importance of Chapter on the Basis of Marks Compulsory Questions
Chap.
No.
Years
Chapter Name
09
June
09
Dec.
10
June
10
Dec.
11
June
11
Dec.
12
June
12
Dec.
13
June
13
Dec.Total Ave.
1. Accounting Standards
2. Accounting for Share Capital
3. Issue and Redemption of... 5 5 0.5
4. Underwriting of Issues and...
5. Final Accounts of Joint Stock...
6. Consolidation of Accounts
7. Valuation of Shares and Intangible...
8. Objective Questions 15 20 20 20 20 20 20 20 20 20 195 19.5
2.8
Legends for the GraphsS
ho
rt N
ote
s
Dis
tin
gu
ish
Be
twe
en
De
sc
rip
tiv
e
Pra
cti
ca
l
2.9
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter jjj
1 Accounting Standards
This Chapter Includes : Meaning; Significance; Need; Scope; Compliance of
Accounting Standards; Accounting Standards Board; Procedure of Issuing
Accounting Standards; Indian Accounting Standards; International Accounting
Standards; International Financial Reporting Standards.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(ii) In India, corporate financial statements in general do not include a cash flow
statement to explain movement of cash during the accounting period. (2 marks)
2.10 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(iv) The Accounting Standard !21 mandates an Indian company to present
consolidated financial statements. (2 marks)
Answer :
(ii) Correct: The preparation and presentation of cash flow statement in India is not
mandatory for all types of corporate enterprises. However the companies which
are required to prepare and present such statements should prepare and present
cash flow statements as per revised Accounting Standard (AS) ! 3.
(iv) Incorrect: The Companies Act, 1956 does not make it obligatory on the part of
the holding company to prepare group accounts or consolidated accounts. In
case, if a holding company prepares and present consolidated financial
statements, it has to follow the principles and procedures as laid down under
Accounting Standard (AS) ! 21.
2008 - Dec [1] {C} (c) Re !write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(i) Accounting as a 'language of business' communicates the financial results of
corporate enterprise to various _______ by means of financial statements.
(1 mark)
(iv) Accounting Standard ! 17 : Segment reporting is mandatory for all commercial,
industrial and business reporting corporate enterprises, whose turnover for the
accounting period exceeds ` _______ . (1 mark)
Answer :
(i) Interested parties / stakeholders
(iv) 50 crores
2009 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(i) Accounting Standards (AS) are formulated by International Accounting Standard
Board. (2 marks)
Answer :
Incorrect: The Institute of Chartered Accountants of India constituted the Accounting
Standard Board (ASB) in April 1977. The Central Government in consultation with the
National Advisory Committee on Accounting Standard, Issues Accounting Standards
under companies (Accounting Standard) Rules 2006.
2009 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
(iv) Accounting standards are formulated under the authority of the ______.
(1 mark)
Answer :
(iv) Council of the Institute of Chartered Accountants of India
[Chapter #### 1] Accounting Standards OOOO 2.11
2010 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(i) Accounting policies vary from enterprise to enterprise. (2 marks)
Answer :
This statement is correct : Reason :- Accounting policies is differ from enterprise to
enterprise based on the circumstances of the industry. All significant accounting policies
adopted in the preparation and presentation of financial statements should be disclosed.
Variation may be in the following areas such as—
(a) method of depreciation:
(b) depletion :
(c) valuation of inventories
(d) valuation of investment
(e) expenditure during construction.
2010 - June [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(i) Indian accounting standards are formulated under the authority of the—
(a) Council of the Institute of Chartered Accountants of India
(b) National Advisory Committee on Accounting Standards
(c) International Accounting Standard Board
(d) Account Standard Board. (1 mark)
Answer :
(a) Council of the Institute of Chartered Accountants of India
2010 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(i) Accounting Standard-15 deals with earnings per share. (2 marks)
(iii) As per Accounting Standard-26, intangible asset arising from research should
not be recognised as an asset. (2 marks)
Answer :
(i) False : Accounting Standard (AS) - 15 deals with Employee Benefits while
Accounting Standard (AS) - 20 deals with Earning Per Share
(iii) True : Intangible assets arising from research is recognized as an expense
when it is incurred as per Accounting Standard (AS) -26, hence it is not an
intangible asset.
2010 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(ii) The International Financial Reporting Standard-4 deals with !
(a) Share based payments
(b) Financial investments
2.12 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(c) Insurance contracts
(d) Evaluation of mineral resources. (1 mark)
Answer :
(c) Insurance contracts
2010 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
(iii) The International Financial Reporting Standard-8 deals with ____. (1 mark)
(iv) _________ advises the Central Government on the formulation and
implementation of Accounting Standards in India. (1 mark)
Answer
(iii) The International Financial Reporting Standard-8 deals with Operating
Segments,
(iv) National Advisory Committee on Accounting Standards (NACAS) advises
the Central Government on the formulation and implementation of Accounting
Standards in India.
2011 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(v) International Accounting Standard-1 deals with valuation of inventories.
(2 marks)
Answer :
The statement is false:– International accounting standard 1 deals with the financial
statement the standard provides the minimum structure and contend of the basic
financial statements.
2011 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(ii) International Accounting Standards (IAS)/International Financial Reporting
Standards (IFRS) are issued by the __________. (1 mark)
Answer :
(ii) International Accounting Standard Board.
2012 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iv) International Financial Reporting Standards are issued by _________.
(1 mark)
(c) Write the most appropriate answer from the given options in respect of the following:
(v) Accounting Standards —
(a) Harmonise accounting policies
(b) Eliminate the non-comparability of financial statements
[Chapter #### 1] Accounting Standards OOOO 2.13
(c) Improve the reliability of financial statements
(d) All of the above. (1 mark)
Answer :
(iv) International Accounting Standards Board/IASB.
(v) (d) All of the above.
2012 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) To determine whether an intangible asset is impaired, an enterprise applies
Accounting Standard on ________ .
(iv) International Accounting Standards (IAS)/International Financial Reporting
Standards (IFRS) are issued by the ________ . (1 mark each)
Answer :
(iii) impairment of assets
(iv) International Accounting Standards Board.
2013 - June [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iii) As per Accounting Standard-28, an impairment loss should be recognised
whenever the recoverable amount of an asset is less than its —
(a) Original cost
(b) Opportunity cost
(c) Carrying amount
(d) None of the above. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(v) International Accounting Standards are issued by the ________. (1 mark)
Answer :
(iii) (c) Carrying amount.
(v) International Accounting Standard Board.
2013 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iv) Accounting standards standardise diverse accounting policies. (2 marks)
2013 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(v) Accounting Standard - 26 relates to !
(a) Impairment of assets
(b) Intangible assets
(c) Earnings per share
(d) Interim financial reporting. (1 mark)
2.14 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
2013 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(ii) International Accounting Standards/International Financial Reporting Standards
are issued by the ________ . (1 mark)
SHORT NOTES
2008 - Dec [2] (a) Write short notes on the following :
(i) Objectives of international accounting standards (3 marks)
Answer :
Objectives of international Accounting Standards : The objectives of the
international Accounting Standard are to improve and to harmonise company reporting
around the world. Basically the IAS has two objectives:
1. To formulate and publish international Accounting Standards.
2. To promote their worldwide acceptance and observation.
With regard to the first objectives the IAS issues financial accounting standards on
specific problems concerning elementary as well as sophisticated accounting issues.
As to the second objective, to promote worldwide acceptance and observation of the
IAS, the IASC has no inherent authority to do this and instead relies on its members
organisations, who have pledged to use their best efforts to have the standard adopted
by their national authoritative standards setting bodies.
2009 - June [2] (a) Write short notes on the following :
(i) Accounting Standard-10 : Accounting for fixed assets (3 marks)
Answer :
AS-10 Accounting for fixed Assets:- The Standard on Accounting for fixed assets has
been made mandatory with effect from 1.04.1991. Accounting to Accounting Standard
10 which deals with the accounting for fixed assets, the term, fixed assets, connotes an
asset held with the intention of being used for the purpose of producing or providing
goods or services and which not held for sale in the normal course of business.
1. Acquisition of Assets: Any expenditure which results in acquisition of an assets
and defined in the above paragraph must be capitalised.
2. Determination the Cost of an Assets: According to AS-10, the cost of an asset
comprises the purchase price, including import duties and other taxes or levies and
any directly attributable cost of bringing the asset to its working condition.
3. Revaluation of Assets: Fixed assets may be restated in value with the help of
appraisal undertaken by competent valuers. Such change in the value of the assets
is called revaluation.
[Chapter #### 1] Accounting Standards OOOO 2.15
4. Disposal of Assets: As per Accounting Standard 10, items that have been retired
from active use and that are held for disposal should be stated at the lower among
the net book value and net reliable value. Such assets must also be shown
separately in the Financial Statements.
2010 - June [2] (a) Write short notes on the following:(i) Non-acceptability of International Accounting Standards (3 marks)
Answer :Non acceptability of International Accounting Standards : Accounting practices indifferent countries vary due to divergent legislative requirements, social and economicconditions, long standing practices, tax structure and organized professionalaccounting. Often, multinational companies have a different viewpoint than nationalcompanies. Worldwide conflicts of views have been noticed in the national standardssetting bodies and international bodies. There is a glaring diversity in accountingpractices in different countries which require harmonization for evolving uniformaccounting standards for world wide application. Western countries have comparativelygreater access to international standards setting agencies. These factors are theprimary reason for non acceptability of international Accounting Standards throughoutthe world.
However, in the present era of globalization and liberalization, the world hasbecome a global village. A number of multinational companies have established theirbusiness in emerging economies. This has resulted in adoption or convergence ofInternational Accounting Standards or International Financial Reporting Standards bynational standards setting bodies.
DESCRIPTIVE QUESTIONS
2009 - Dec [4] (c) “Accounting Standards are mandatory for all companies.” Comment.(3 marks)
Answer :According to Section 211 (3 A, 3B and 3C) of the Companies Act, 1956 provided thatthe Accounting Standard recommended by the Institute of Chartered Accountants ofIndia, as may be prescribed by the Central Government in consultation with the NationalAdvisory Committee on Accounting Standard are mandatory and applicable to allcompanies while preparing profit and loss account and balance sheet of the company.
Where the profit and loss account and balance sheet of the company do notcomply with the accounting standard, such companies shall disclose in its profit andloss account and balance sheet the following :(a) the deviation from the accounting standard;(b) the reasons for such deviation; and(c) the financial effect, if any, arising due to such deviation.
2.16 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
CS Inter Gr. I
SHORT NOTES
2007 - Dec [2] (a) Write short notes on the following :
(ii) Effect of uncertainties on revenue recognition (AS-9) (4 marks)
(iii) Outsourcing of accounting functions. (4 marks)
Answer :
(ii) Accounting Standard on Revenue Recognition : Date of issue : November
1985; made mandatory w.e.f. 1.4.91.
This standard deals with the bases for recognition of revenue in the
statement of profit and loss of an enterprise. This is concerned with the
recognition of revenue arising in the course of the ordinary activities of the
enterprise from:
(i) Sale of goods,
(ii) Rendering of Services, and
(iii) The use by others of the resources of the enterprise yielding interest,
royalties and dividend.
The standard lays the provisions regarding the timing of revenue recognition.
Revenue from sale transactions should be recognised when the following
conditions have been fulfilled.
(a) The property on the ownership in the goods has passed fully from the
seller to the buyer.
(b) No uncertainty exist as to the amount of consideration that will be derived
from the sale of the goods.
In a transaction involving the rendering of Services, Performance should
be measured either under completed service contract method or percentage
completion method.
In the above cases revenue should be recognised provided it is reasonable
to expect collection. Otherwise, revenue recognition should be postponed.
(iii) Now a days there is a growing trend for outsourcing of the accounting functions
to a third Party. The Purpose for doing this outsourcing accounting function is to
save cost and to utilize the expertise of the party to whom the outsourcing has
been given. The third party maintains the accounting software and the client
data, does the processing and hands over the report from time to time the
concerned Party.
[Chapter #### 1] Accounting Standards OOOO 2.17
(a) Advantages of outsourcing the accounting functions :-
(i) The organisation is able to utilize the expertise of the outside party in
undertaking the accounting work.
(ii) Storage and maintenance of the data in the hands of professional
people who are undertaking the outsourcing work.
(b) Disadvantages of outsourcing the accounting function :-
(i) The data of the organization is handed over to a third Party and this
may raise the issues of security and confidentiality.
(ii) The cost may ultimately be higher than initially envisaged and third
party may delay in delivering the services.
DESCRIPTIVE QUESTIONS
2004 - June [1] {C} (c) What do you mean by 'accounting standards'? (4 marks)
Answer :
Accounting Standards : The term accounting standard is defined at written statements
issued from time to time by institutions of the accounting profession or institutions in
which there is sufficient involvement and which are established expressly for this
purpose. Such accounting institutions or bodies are currently found in many countries
of the world, e.g. Accounting Standard Board (India), Financial Accounting Standard
Board (US), Accounting Standard committee (UK); Accounting Standard Committee
(canada), etc.
As the International level, International Accounting Standard Committee (IASC) has
been created to formulate and publish, in the public interest, basic standard to be
observed in the presentation of audited accounts and financial statements and to
promote their worldwide acceptance and observance”.
2004 - Dec [1] {C} Attempt the following :
(ii) Enumerate the procedure for disclosure with regard to AS-22 Accounting for
Taxes on Income. (5 marks)
Answer :
The following disclosure procedure as per As -22 "Accounting for Taxes on income
should be follows :
(a) An enterprise should offset assets liabilities representing current tax if the
enterprise.
(i) Has a legally enforceable right to set off the recognised amounts, and
(ii) Intends to settle the asset and the liabilities on a net basis.
2.18 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(b) An enterprise should offset deferred tax assets and deferred tax liabilities if.
(i) The enterprise has a legally enforceable right to set off assets against
liabilities representing current tax, and
(ii) The deferred tax assets and the deferred tax liabilities relate to taxes on
income levied by the same governing taxation laws.
2005 - June [1] {C} (a) What is the significance of 'accounting standards'? (4 marks)
Answer :
Significance of Accounting Standard :
Accounting Standards can play an important role. Accounting standards facilitate
uniform preparation and reporting of general purpose financial statements published
annually for the benefit of shareholders, creditors , employees and the public at large.
The standard issued should be consistent with the provisions of law. Thus, they are very
useful to the investors and other external groups in assessing the progress and
prospects of alternative investments in different companies in the different countries.
Standards will help public accountants (Chartered Accountants in India) to deal with
their clients by providing rules of authority to which the accountants can appeal, in their
task of preparing financial statements on a true and fair basis. It is so because
accounting reports prepared in accordance with standards are reliable, uniform and
consistent. Thus, they can firmly but politely refuse a demand by clients to accept
reports that the accountants believe to be incorrect or misleading, confident that some
other public accountant will not accept the risk and provide the service, thereby getting
the client’s business. Accounting standards will raise the standards of audit itself in its
task of reporting on the financial statements. Government officials and others will find
accounting reports produced in accordance with established standards to be more
easily aggregated and used, particularly if they are concerned with the meaningfulness
of the numbers for the purposes of economic planing, market analysis and the like. All
of these factors have been important determinants of the establishment of accounting
standards.
2005 - Dec [1] {C} Attempt the following :
(i) Discuss the significance of 'accounting standards'. (4 marks)
(vi) Briefly explain the concept of 'generally accepted accounting principles' (GAAP).
(4 marks)
Answer :
(i) Please refer 2005 - June [1] [c] (a) on page no.18
(vi) The phrase ‘Generally Accepted Accounting Principles’ (GAAP) is a technical
accounting term that encompasses the conventions, rules and procedures
necessary to define accepted accounting practices at a particular time. It
includes not only broad guidelines of general applications but also detailed
[Chapter #### 1] Accounting Standards OOOO 2.19
practices and procedures. These conventions, rules and procedures provide a
standard to measure financial presentations.
This Generally Accepted Accounting Principal (GAAP) are the common set
of accounting principles, standard and procedure that companies use while
preparing their financial statements. GAAPs are a combination of authoritative
standards and simply the commonly accepted ways of recording and reporting
accounting information. They originate from a combination of tradition,
experience and official decree and require authoritative support and some
means of enforcement.
2006 - June [1] {C} Attempt the following :
(i) Explain ‘events occurring after the balance sheet date’ as per Accounting
Standard-4 (Revised). (5 marks)
Answer :
Accounting Standard - 4 : Contingencies and events occurring after the balance sheet
date :
Contingencies : Accounting Standard 4 define contingency as a condition or situation;
the ultimate outcome of which, Whether a profit or a loss, will be known or determined
only on the occurrence or non-occurrence of one or more uncertain future events.
*A few contingencies are listed below by way of illustration :
(i) A suit filed against the company for under : Payment of excise duty gives rise
to a contingent liability for the company till such time the court passes an order.
(ii) A suit filed by the company for damages may be decided in favour of the
company at a future date and give rise to a contingent gain.
*Events occurring after the Balance Sheet date : The standard defines the event
occurring after the balance sheet date as those events that take place after the date as
on which the balance sheet has been drawn up but before approval of the financial
statements by the approving authority (say. the board of directors)
According to AS 4, assets and liabilities of a business should be adjusted for event
that occur after the balance sheet and provide additional evidence to assist the
estimation of amount relating to conditions existing at the balance sheet date.
2006 - Dec [1] {C} Attempt the following :
(i) Mention the procedure for issuing ‘accounting standards’. (5 marks)
Answer :
Accounting Standard in India: The Institute of chartered Accountants of India
constituted the Accounting Standard Board (ASB) in April 1977, recognising the need
to harmonise the diverse Accounting Policies and Practice in India and keeping in view
the international development in the field of accounting.
2.20 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
The ASB is entrusted with the following function :
1. To formulate accounting standards which may be established by the council of ICAI
in India. While formulating standards, the ASB is required to take into consideration
the applicable laws; custom and usages and business environment; it is also
required to give due consideration to International Accounting Standard issued by
IASC and to integrate them, to the extent possible, in the light of the conditions and
practices prevailing in India.
2. To propagate the Accounting Standards and Persuade the concerned parties to
adopt them in the preparation and presentation of financial statements.
3. To issue guidance notes on the Accounting Standards and give clarifications an
issues arising therefrom.
4. To review the accounting standards at Periodic intervals.
2008 - June [2] (a) “Accounting standards are formulated in conformity with the
provisions of the applicable laws, customs, usages and business environment of a
country.” Comment. (5 marks)
Answer :
Every effort is made to issue accounting standards which are in conformity with the
provisions of the applicable laws, customs, usages and business environment of our
nation. However, if due to subsequent amendments in the law, a particular accounting
standard is found to be not in conformity with such law, the provision of the said law will
prevail and the financial statements should be prepared in conformity with such law.
The accounting standards by their very nature cannot and do not override the local
regulations which govern the preparation and presentation of financial statements in our
country. However, the Institute of Chartered Accountants of India will determine the
disclosure requirements to be made in the financial statements and auditor's reports.
Such disclosure may be by way of appropriate notes explaining the treatment of
particular items. Such explanatory notes will only be in the nature of clarification and
therefore, need not be treated as adverse comments on the related financial
statements. The accounting standards are intended to apply to items which are material.
Any limitations with regard to the applicability of a specific standard will be made clear
by the Institute from time to time. The Institute will use its best endeavours to persuade
the Government, appropriate authorities, industrial and business community to adopt
these standards in order to achieve uniformity in the presentation of financial
statements. In formulation of Accounting Standards, the emphasis would be on laying
down accounting principles for application and implementation thereof.
2.21
Star Rating
On the basis of Maximum marks from a chapter jjj
On the basis of Questions included every year from a chapter j
On the basis of Compulsory questions from a chapter jj
2 Accounting for Share Capital
This Chapter Includes : Introduction; Books of Accounts; Persons responsible for
keeping the Books of Account; Statutory Books; Statistical Books; Shares and Share
Capital; Issues of Shares; Stock-invest Scheme; forfeiture of Shares; Lien of Shares;
Buy-Back of Shares; Redemption of Preference Shares; right Issue.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(i) The bonus share issue cannot be made unless the existing partly paid shares
are fully paid !up. (2 marks)
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Answer :
(i) Correct: The bonus shares are always fully paid-up and issued to existing
shareholders on a pro-rata basis. Bonus issue is not made unless the partly paid
shares, if any, existing are made fully paid up.
2008 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) Securities premium money can be used for —
(a) Payment of dividend
(b) Writing off goodwill
(c) Issuance of fully paid bonus shares
(d) None of the above. (1 mark)
(iv) The balance of forfeited shares after reissue of the same is transferred to —
(a) Capital reserve account
(b) Share capital account
(c) Profit and loss account
(d) Debenture redemption fund account. (1 mark)
(v) Divisible profits include —
(a) General reserves
(b) Profit on revaluation of assets
(c) Profit prior to incorporation period
(d) Capital reserve. (1 mark)
Answer :
(i) (c) Issuance of fully paid bonus shares;
(iv) (a) Capital reserve account;
(v) (a) General reserves;
2008 - Dec [1] {C} (c) Re!write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(ii) If a company offers to its equity shareholders the right to buy one equity share
of ` 100 each at ` 120 for every 4 equity share of ` 100 each and the market
value of a share is ` 180, then the value of the right is ` _________ .
(iii) The bonus share can be issued only if _______ of the company permits such an
issue. (1 mark each)
Answer :
(ii) ` 12
(iii) Articles of Association
2009 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(ii) A joint stock company cannot purchase its own shares. (2 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.23
(iii) If the rate of dividend declared by a company is 22%, then under the Companies(Transfer of Profits to Reserves) Rules, 1975 the percentage of profits to betransferred to reserves should be 10%. (2 marks)
Answer :(ii) Incorrect : Section 77 A of the Companies (Amendment) Act, 1999 has
empowered Companies to purchase their own shares or other specifiedsecurities subject to the certain condition.
(iii) Correct : Under the Companies (Transfer of Profit to Reserve) Rules, 1975 asamended, if the rate of proposed dividend is more than 20%, then 10% of currentprofit is to be transferred to reserve.
2009 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements arecorrect or incorrect :(iii) Partly paid-up preference shares can be redeemed. (2 marks)(iv) Dividend can be paid on calls-in advance. (2 marks)
Answer :(iii) Incorrect : According to Section 80 of the Companies Act, 1956 unless the
partly paid preference shares are fully paid-up they cannot be redeemed.(iv) Incorrect : Calls in advance is not to be treated as part of the paid-up capital
and as such they cannot rank for payment of dividend.
2009 - Dec [1] {C} (b) Choose the most appropriate answer from the given options inrespect of the following :
(i) As per the provisions laid down in Table-A of Schedule-I of the Companies Act,1956, the amount of call as the percentage of the face value of shares should notexceed —(a) 10%(b) 25%(c) 20%(d) None of the above. (1 mark)
(ii) The minimum percentage of the face value of shares that should be called foras application money is —(a) 5(b) 10(c) 15(d) 20.
(v) As per section 77A of the Companies Act, 1956 every buy-back should becompleted within a period of —(a) 3 months from the date of passing special resolution(b) 12 months from the date of passing special resolution(c) 6 months from the date of passing special resolution
(d) 1 month from the date of passing special resolution. (1 mark)
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Answer :
(i) (b) 25%
(ii) (a) 5
(v) (b) 12 months from the date of passing special resolution
2009 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaceswith appropriate word (s)/figure(s) :(iii) If forfeited shares are re-issued at a discount, the amount of discount should
in no case exceed the amount credited to______. (1 mark)Answer :Shares of forfeited account.2010 - June [1] {C} (a) State, with reasons in brief, whether the following statementsare correct or incorrect:
(iii) Securities premium money can be distributed as dividend. (2 marks)Answer :
(iii) This statement is Incorrect: Reason :- According to Section 78 of the CompaniesAct,1956, Securities premium can not be treated as profit and hence, cannot bedistributed as dividend. Securities premium may be utilised, in paying upunissued shares as —(a) fully paid bonus shares;(b) writing off preliminary expenses;(c) writing off expenses, or commission paid and (d) Providing for premium on redemption of redeemable preference
shares/debentures2010 - June [1] {C} (b) Choose the most appropriate answer from the given options inrespect of the following:
(ii) As per section 79 of the Companies Act, 1956 from the date of receiving thesanction of the Central Government, a company must issue shares at discountwithin a period of—(a) One month(b) Two months(c) Three months(d) Six months. (1 mark)
Answer :(b) Two months.2010 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements aretrue or false :
(iv) No buy-back of partly-paid shares is allowed. (2 marks)Answer :
(iv) True : Buy-back of shares is allowed only in case of fully paid-up existing shares
in accordance with Section 77 of the Companies Act, 1956.
[Chapter #### 2] Accounting for Share Capital OOOO 2.25
2010 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iii) Which one is not a statistical book !
(a) Shares calls book
(b) Register of share warrants
(c) Register of power of attorneys
(d) Register of directors’ shareholdings.
(iv) Securities premium account is shown on the liability side under the heading !
(a) Share capital
(b) Reserves and surplus
(c) Current liabilities and provisions
(d) None of the above. (1 mark each)
Answer :
(iii) (d) Register of directors' shareholdings
(iv) (b) Reserve and surplus
2010 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
(v) The voluntary return of shares by a shareholder to the company for cancellation
is called . (1 mark)
Answer
(v) The voluntary return of shares by a shareholder to the company for cancellation
is called surrender of shares .
2011 - June [1] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(i) As per section 77A(4) of the Companies Act, 1956 from the date of passing the
special resolution, every buy-back should be completed within—
(a) 12 Months
(b) 3 Months
(c) 6 Months
(d) 9 Months. (1 mark)
Answer :
(i) (a) 12 Months
2011 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)figure(s) :
(iv) The value of the right is the difference between ________and the _________of
the share. (1 mark)
Answer :
(iv) Market value; Average price
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2011 - June [1] {C} (c) State, with reasons in brief, whether the following statementsare true or false :
(i) According to section 80 of the Companies Act, 1956, the redemption ofpreference shares by a company shall be taken as reducing the amount of itsauthorised share capital.
(iv) A company can enforce its lien by forfeiting the shares.(v) A limited company can retain excess application money as calls-in-advance even
if there is no provision in the articles of association. (2 marks each)Answer :
(i) False : According to Section 80 of the companies Act, the redemption ofpreference shares shall not be taken as reducing the amount of its authorisedcapital. The main object of Section 80, is to protect the interests of the creditorsof the company. As such the capital structure of the company will remainunaffected even after the Redemption of Preference Shares.
(iv) False : A company cannot enforce its lien by forfeiting the shares because byvirtue of lien, the company has prior right to the shares over any creditor to whomthey are given as security for a loan unless the company was given prior noticeof an existing mortgage or pledge of these shares.
(v) False : A limited company can retain excess application as calls in advance whenthe following two conditions are satisfied : (a) The Articles of the company provide for the acceptance of calls in advance.(b) The consent of the applicant has been taken either by a separate letter or by
inserting a clause in the company's prospectus or application form. 2011 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements aretrue or false:
(ii) The logic behind the creation of the capital redemption reserve is to maintain thecapital structure of the company intact after redemption. (2 marks)
Answer :(ii) The statement is true:– The most important purpose for the creation of capital
redemption reserve is to maintain the capital intact. The capital structure of thecompany will remain unaffected even after the redemption of redeemablepreference shares. Therefore, the capital redemption reserve can be used onlyfor issue of bonus shares, otherwise its amount has to be kept intact.
2011 - Dec [1] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(v) Premium on issue of shares can be used for —(a) Issue of bonus shares(b) Distribution of profit(c) Meeting loss on sale of a fixed asset(d) None of the above. (1 mark)
Answer :
(v) (a) Issue of bonus shares.
[Chapter #### 2] Accounting for Share Capital OOOO 2.27
2011 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(i) Shares forfeited account is to be shown in the balance sheet by way of _______
to the paid-up share capital on the liabilities side until the concerned shares are
re-issued.
(iv) According to section 209(4A) of the Companies Act, 1956, a company must
preserve its books of account and its relevant vouchers for a minimum period of
_____.
(v) A company cannot issue redeemable preference shares for a period exceeding
_____. (1 mark each)
Answer :
(i) Addition.
(iv) Eight years.
(v) Twenty years.
2012 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(i) A company can issue debentures with voting rights. (2 marks)
(v) No dividend is paid on calls-in-advance. (2 marks)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(iii) Partly paid-up preference shares cannot be ________.
(v) Bonus shares are issued by a company free of charge to its existing shareholders
on ______ basis. (1 mark)
(c) Write the most appropriate answer from the given options in respect of the following:
(i) A company cannot issue redeemable preference shares for a period
exceeding—
(a) 5 Years
(b) 10 Years
(c) 15 Years
(d) 20 Years. (1 mark)
(ii) Which one of the following should be deducted from the share capital to find out
paid-up share capital —
(a) Share forfeiture
(b) Discount on issue of shares
(c) Calls-in-arrears
(d) Calls-in-advance. (1 mark)
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Answer :
(a) (i) The statement is False:- The company cannot issue debentures with voting
rights. The debenture holders does not have right to vote in the companies
general meeting, but where there is a effect in the rights attached to the
debentures they can vote.
(v) The statement is True:- The dividend is paid on paid-up capital only. Such
capital does not include money received on calls-in-advance.
(b) (iii) Redeemed.
(v) Pro-rata.
(c) (i) (d) 20 Years.
(ii) (c) Calls-in-Arrears.
2012 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(i) Rights shares mean the shares which are issued to promoters for their services.
(2 marks)
(b) Write the most appropriate answer from the given options in respect of the
following :
(ii) Discount allowed on the re-issue of forfeited shares cannot exceed !
(a) 10% of the paid-up capital
(b) 10% of the capital re-issued
(c) The amount received on forfeited shares
(d) The amount not received on forfeited shares.
(iii) Redemption of preference shares of a company is !
(a) Compulsory
(b) Optional
(c) Conditional
(d) None of the above.
(iv) Which method is legally allowed for redemption of preference shares !
(a) Issue of fresh equity shares
(b) Sale of assets of the company
(c) Issue of debentures
(d) Loan from the bank. (1 mark each)
(c) e-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(ii) A company may allot fully paid-up shares to promoters or any other party for the
services rendered by them without payment is known as issue of shares
________ . (1 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.29
Answer :
(i) This Statement is false
Reason: When a company which has already issued shares wants to raise capital
through the further issue of shares. it is under a legal obligation to first offer
the fresh shares to its existing shareholders unless the company has
resolved otherwise by a special resolutions. So right share are not issued to
promoter for their services.
(b) (ii) (c) The amount received on forfeited shares,
(iii) (a) Compulsory,
(iv) (a) issue of fresh equity shares
(c) (ii) For consideration other than cash.
2013 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(i) The existing equity shareholders are necessarily to accept the rights offer.
(v) Redemption of preference shares amounts to reduction in the capital of the
company. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following:
(i) Discount allowed on the re-issue of forfeited shares cannot exceed —
(a) 10% of paid-up capital
(b) 10% of the capital re-issued
(c) The amount received on forfeited shares
(d) Capital reserve account. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Section 81 of the Companies Act, 1956, provides that where a public company
proposes to increase its subscribed capital at any time after the expiry of
__________year(s) of its formation or at any time after the expiry of __________
year(s) from the first allotment of shares whichever is earlier, it should satisfy
certain conditions. (1 mark)
Answer :
(a) (i) This Statement is false.
Reason : According to Section 81 of the Companies Act, the new shares must
be offered to the existing equity shareholder to the paid up capital on the share
held by them. This is a right not an obligation to the shareholder accept the offer
so made. This is known as right issue.
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(v) This Statement is false.
Reason : Redemption of preference share does not amount to reduction of
share capital of the company. Redemption of preference shares can be made
out of dividend or fresh issue of shares or both.
(b) (i) (c) The amount received on forfeited shares.
(c) (i) Two and one
2013 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) The shares which can be issued to shareholders for no payment are called rights
shares.
(ii) Partly paid-up preference shares cannot be redeemed. (2 marks each)
2013 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iv) On re-issue of forfeited shares, balance in shares forfeited account is transferred
to !
(a) Share capital account
(b) Capital reserve account
(c) Securities premium account
(d) Profit and loss account. (1 mark)
2013 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) Shares are issued at premium under section _____ of the Companies Act, 1956.
(1 mark)
SHORT NOTES
2009 - June [2] (a) Write short notes on the following :
(ii) Issue of shares at a discount (3 marks)
Answer :
Issue of Share at discount:
A Company issues share at a discount when shares are issued at a price less than their
face value. Sec 79 lays down the conditions, under mentioned, to be fulfilled for such
issue :
(i) The shares which are to be issued at a discount must be of a class already
issued.
(ii) The issue of shares at a discount must have been authorised by a resolution
passed by the company in its general meeting and sanctioned by the Central
Government.
[Chapter #### 2] Accounting for Share Capital OOOO 2.31
(iii) The resolution must specify the rate of discount which must not exceed 10%,
until and unless the Central Government is in the opinion that a higher % of
discount may be allowed in special circumstances of the case.
(iv) At least one year must have elapsed since the date when the company was
entitled to commence the business.
(v) The shares must be issued within 2 months after date of sanction from the
Central Government or within such extended time as it is decided by the Central
Government.
(vi) Every Prospectus relating to the issue of shares at a discount shall disclose the
particulars of discount allowed or that amount as has not been written - off on the
date of issue of prospectus.
2011 - June [3] (a) Write short notes on the following :
(iii) Lien on shares. (3 marks)
Answer :
Lien on Shares : A lien is a right to retain the possession of the property belonging to
the debtor until he clears his dues. In the context of a company it means that a member
will not be permitted to transfer his shares unless he pays his debts to the company.
This right of lien is not inherent and should be expressly provided for, in the articles. It
is safer to adopt clauses 9 to 12 of Table A which provide for this right.
Regulation 9 to Table A states that the company shall not only have a first and
paramount lien on every partly paid-up shares for all moneys called in respect of that
share, but the right of lien shall extend to all dividends payable thereon as well.
2012 - June [2] (c) Write a brief note on ‘buy-back of shares’. (3 marks)
Answer :
Buy-Back of Shares 77-A
Section 77A of the Companies Act state that not with standing any thing containing
in this Act, a company can buy-back its own shares or other specified securities from -
(i) its free reserves,
(ii) its securities premium A/c;
(iii) proceeds of any shares or other specified securities.
Conditions for Buy-Back of Shares-77A(2)
Under section 77A(2), the following conditions must be satisfied in order to buy -
back of shares are:-
1. The buy-back is authorized by its articles.
2. The buy-back does not exceed twenty-five percent of the total paid-up capital and
free reserves of the company.
3. The ratio of the debt owned by the company is not more than twice the capital and
its free reserves after such buy-back.
2.32 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
4. All the shares or other specified securities for buy-back are fully paid-up.
5. The buy-back of the shares or other specified securities listed on any recognised
stock exchange should be in accordance with the regulations made by the SEBI.
6. Every buy-back must be completed within 12 months from the date of passing of
special resolution or a resolution passed by the Board.
2013 - June [2] (c) Write a note on ‘buy-back of shares’. (4 marks)
Answer :
Please refer 2012 - June [2] (c) on page no. 31
DISTINGUISH BETWEEN
2008 - Dec [4] (a) Distinguish between the following :
(iii)' Calls!in!arrears' and 'calls!in!advance'. (3 marks)
Answer :
Calls-in-arrears : Sometimes amounts due on allotment or calls are not received from
the shareholders within specified time. The allotment and call accounts in such
circumstances, will show debit balances representing the unpaid amounts. The total
unpaid amounts on account of various instalments is known as “Calls-in-Arrear”.
Calls-in-Advance : When a shareholders pays in advance any amount in respect of a
call yet to be made the amount so received is known as 'Calls-in-Advance'.
2011 - June [2] (a) Distinguish between the following :
(i) ‘Bonus shares’ and ‘rights shares’. (3 marks)
(iii) ‘Statutory books’ and ‘statistical books’. (3 marks)
Answer :
(i) A company may issue fully paid up bonus shares by capitalizing its profits
provided Articles of association contains provision in this regard. When a
company is prosperous and accumulates large distributable profits, it converts
these accumulated profits into capital and divides the capital among the existing
members in proportion to their entitlements. The members do not have to pay
any amount for such shares. The bonus shares allotted to the members do not
represent taxable income in their hands. The vesting of the rights in the bonus
shares takes place when the shares are actually allotted and not from any earlier
date.
According to Section 81(1) of the companies Act, provides that whenever a
company proposes to increase the subscribed capital of the company through
a further issue of share, it is to be first offered to the existing members of the
company, if the issue is being made.
[Chapter #### 2] Accounting for Share Capital OOOO 2.33
(a) at any time after the expiry of two years from the formation of the company;
or
(b) at any time after the expiry of one year from the first allotment of shares;
which ever is earlier.
The shares which are offered to the existing members are called RIGHT
SHARES.
(iii) Every company incorporated under the Act, is required to keep at its registered
office. The following statutory books and registers are given below :
(i) Register of investments in securities not held in company name
(ii) Register of charges
(iii) Register of fixed deposits
(iv) Register of members
(v) Books of accounts
(vi) Register of director's shareholdings
(vii) Dividend register
(viii) Register of buy back of shares
Statistical Books
A company usually maintains a no. of other books in order to keep complete
records of the numerous details connected with the business operations.
For e.g :
1. Share application and allotment book
2. Share calls books
3. Share certificate books
4. Debenture application & allotment book
5. Debenture calls books
6. Dividend book
7. Agenda book
8. Register of share transfer book
9. Register of proxy book
10. Register of Employee stock option.
DESCRIPTIVE QUESTIONS
2008 - Dec [3] (a) Comment on the following statements :
(i) As a matter of prudence, whole of free reserves should not be utilised in the case
of buy! back of shares.
(iii) In case of under! subscription of shares, question of returning the money does
not arise at all. (3 marks each)
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Answer :
(i) According to Section 77 A of the Company (Amendment) Act, 1999 states that
a company may purchase its own shares or other specified securities from out
of:
1. its free reserves; or
2. the securities premium account; or
3. the proceeds of any shares other than specified securities [Sec. 77A(I)].
However, as a matter of prudence, the entire free reserve should not be
utilized for the purpose of buy-back and the following items should be adjusted
against free reserves to arrive at the net amount of free reserve that can be
utilized for the purpose of buy-back;
(a) Unamortised deferred revenue expenditure.
(b) Contingent liabilities likely to mature and not provided for.
(c) Purchase goodwill.
(d) Any diminution of long term investments not provided for.
(iii) In practical situation, it rarely happens that the number of shares applied for is
exactly equal to the number of shares offered to public for subscription. In case
of under subscription of shares, the number of shares applied is less than the
number of shares issued. All applications are accepted in full.
If the minimum subscription has not been subscribed, all applications money
may be required to be returned.
However, in case of over subscription of shares, the shares issued are less
than the number of shares applied, such situation is called over subscription of
shares.
2010 - June [4] (c) “Buy-back may be misused by the corporate entities at the cost of
innocent investors.” Give your comments. (3 marks)
Answer :
It is feared that the buy-back may be misused by the corporate entities at the cost of
innocent investor because of the following reasons :-
(i) It will provide enough opportunity for insider trading —The promoters, before the
buy-back may understate the earning by manipulating accounting policies in
respect of depreciation, valuation of inventories etc. This would lead to a fall in
the quoted prices of shares and the promoter would buy them at low quotations.
In this way, the insiders would earn extra money when the company buy-backs
these shares at a lowest price.
(ii) Buy back may lead to artificial manipulation of stock prices.
2011 - June [4] (b) What are the conditions which must be fulfilled for redemption of
preference shares ? (6 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.35
Answer :
As per Section 80, the conditions which must be fulfilled for redemption of preference
shares are as follows :
1. Such shares must be fully paid up
2. Such shares shall be redeemed only out of distributed profits or out of the proceeds
of a fresh issue of shares made for the purpose of redemption.
3. Premium payable on preference shares, if any, can be paid only out of profits of the
company or out of Companies Securities Premium Account and it undertakes to
pay the debenture-holders their principal and interest and normally charges its
property as security and declares a trust in favour of the debenture holders. It also
contains other provisions concerning meetings of the debenture-holders,
supervision of the assets charged and keeping of a register of debenture holders.
4. No company limited by shares shall after the commencement of the companies
(Amendment) Act, 1996 issue any preference shares which is irredeemable or is
redeemable after the expiry of a period of twenty years from the date of issue [80
(5A)].
5. The redemption of preference shares by a company shall not be taken as reducing
the amount of its authorised share capital.
6. If new shares are issued for the purpose of redemption of preference shares, it will
not be treated as increase of capital.
7. If a company fails to comply with the legal provisions of this section, the company
and every officer of the company who is in default shall be punishable with fine
which may extend to ten thousand rupees.
PRACTICAL QUESTIONS
2008 - Dec [2] (b) Following is the balance sheet of Anupam Ltd. as on 31st March,
2008 :
Liabilities `
2,00,000, 14% Preference shares
of ` 100 each, fully called 2,00,00,000
Less : Calls in arrears 4,00,000 1,96,00,000
@ ` 20 per share
10,00,000 Equity shares of ` 10
each, ` 8 per share called 80,00,000
Less : Calls-in-arrears 20,000
79,80,000
Add : Calls-in-advance 10,000 79,90,000
2.36 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Securities premium 5,10,000
General reserve 1,50,00,000
10,000, 15% Debentures @ ` 1,000 each, fully paid 1,00,00,000
Current liabilities and provisions 10,00,000
5,41,00,000
Assets
Fixed assets 1,30,00,000
Investments 28,00,000
Other current assets 2,15,00,000
Cash and bank balances 1,68,00,000
5,41,00,000
On 1st April, 2008, the Board of directors decided that —
(i) The fully paid preference shares are to be redeemed at a premium of 4% on 1st
May, 2008 and for that purpose 6 lakh equity shares of ` 10 each are to be
issued at a premium of 5%.
(ii) 3,000 Equity shares owned by Mohan, an existing shareholder, who has failed
to pay the allotment money and the first call money @ ` 3 and ` 2.50 per share
respectively, equity shares are to be forfeited on 31st May, 2008.
(iii) The final call of ` 2 per share is to be made on 7th July, 2008 on equity shares.
All the above are duly complied with according to schedule. The amount due on the
issue of fresh issue and on final call are also duly received except from Sohan who had
failed to pay the first call for his 1,400 equity shares, has again failed to pay the final call
also. These shares of Sohan are to be forfeited on 31st August 2008.
Show the necessary journal entries. (9 marks)
Answer :
Journal Entries
Date Particulars Dr. (`̀̀̀) Cr. (`̀̀̀)
2008
May
Bank A/c
To Equity Shares Capital A/c
To Securities Premium A/c
(Being Equity Shares issued at premium)
Dr. 63,00,000
60,00,000
3,00,000
Securities Premium A/c
To Premium on Redemption of
Redeemable Preference Shares A/c
(Being Premium on Redemption of
Preference shares provided)
Dr. 7,20,000
7,20,000
[Chapter #### 2] Accounting for Share Capital OOOO 2.37
General Reserve A/c
To Capital Redemption Reserve A/c
(Being capital redemption reserve account
created)
Dr. 1,20,00,000
1,20,00,000
14% Preference Share Capital A/c
Premium on Redemption A/c
To Preference Shareholders A/c
(Being amount due to preference
shareholders)
Dr.
Dr.
1,80,00,000
7,20,000
1,87,20,000
Preference Shareholders A/c
To Bank A/c
(Being paid to preference shareholders)
Dr. 1,87,20,000
1,87,20,000
May
31
Equity Share Capital A/c
To Equity Shares Allotment A/c
To Equity Share 1st Call A/c
To Forfeited Shares A/c
(Being 3,000 shares forfeited due to non-
payment of calls)
Dr. 24,000
9,000
7,500
7,500
July 7 Equity Share Final Call A/c
To Equity Shares Capital A/c
(Being final call due on equity shares)
Dr. 19,94,000
19,94,000
Bank A/c
Calls in Advance A/c
To Equity Share Final Call A/c
(Being Final Call received on Equity Shares)
Dr.
Dr.
19,81,200
10,000
19,91,200
Aug
31
Equity Share Capital A/c
To Equity Share 1st Call A/c
To Equity Share 2nd Call A/c
To Forfeited Shares A/c
(Being 1,400 shares forfeited due to non-
payment of calls)
Dr. 14,000
3,500
2,800
7,700
2009 - June [4] (a) Jolly Ltd. has the following balance sheet as on 31st March, 2008:
Liabilities `
Share capital :
Issued, subscribed and fully paid-up (10,000 equity shares of `100 each) 10,00,000
5,000 Preference shares of `100 each 5,00,000
Capital reserve 1,00,000
Securities premium account 1,00,000
2.38 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
General reserve 2,00,000
Profit and loss account 1,00,000
Current liabilities 10,00,000
30,00,000
Assets
Fixed assets 22,00,000
Current assets 8,00,000
30,00,000
The preference shares are to be redeemed at 10% premium. Fresh issue of equity
shares is to be made to the extent it is required under the Companies Act, 1956 for the
purpose of this redemption. The shortfall in funds for the purpose of the redemption after
utilising the proceeds of the fresh issue are to be met by taking a bank loan. Show
journal entries. (6 marks)
Answer :
(a) Journal Entries in the Books of Jolly Ltd.
Particulars Dr. (`̀̀̀) Cr. (`̀̀̀)
Securities Premium A/c Dr.
To Premium on Redemption of Preference
Shares Account
(Utilization of securities premium on Redemption of
Preferences Shares)
50,000
50,000
General Reserves Dr.
Profit & Loss Account Dr.
To Capital Redemption Reserve A/c
(Creation of Capital Redemption Reserve to the maximum
possible extent)
2,00,000
1,00,000
3,00,000
Bank Dr.
To Equity Share Application and Allotment A/c
(Receipt of money for equity shares of ` 2,00,000)
2,00,000
2,00,000
Equity Share Application and Allotment Account Dr.
To Equity Share Capital Account
(Allotment of equity shares of the face value of ̀ 2,00,000
at par)
2,00,000
2,00,000
Preference Share Capital Account Dr.
Premium on Redemption of Preference Share A/c Dr.
To Sundry Preference Shareholders A/c
(Amount payable to sundry preference shareholders to
redeem 5,000 preference shares of ` 100 each at a
premium of ` 10 per share)
5,00,000
50,000
5,50,000
[Chapter #### 2] Accounting for Share Capital OOOO 2.39
Bank Dr.
To Bank Loan Account
(Raising a bank loan to pay off the amount due to sundry
preference shareholders)
3,50,000
3,50,000
Sundry Preference Shareholders Account Dr.
To Bank
(Payment made to sundry preference shareholders)
5,50,000
5,50,000
2009 - Dec [3] (c) Ronny Ltd. forfeited 200 shares of ` 10 each, ` 8 per share being
called-up on which a shareholder paid application and allotment money of ̀ 5 per share
but did not pay the first call money of ` 3 per share. Of these forfeited shares, 150
shares were subsequently re-issued by the company as fully paid-up for ̀ 8 per share.
Give journal entries for the forfeiture and re-issue of shares. (3 marks)
Answer : Journal Entries
Particulars Dr. (`) Cr. (`)
Share Capital A/c (200 × `8) Dr.
To Share Forfeited A/c (200 × `5)
To Share First Call A/c (200 × `3)
(Forfeiture of 200 shares of ` 10/-each `8 being called up for
non-payment of first call money of `3 per share as per Board`s
resolution dated ..............)
1,600
1,000
600
Bank A/c (150 x ` 8) Dr.
Share Forfeited A/c Dr.
To Share Capital A/c
(Re-issue of 150 forfeited shares of `10 each as fully paid for
`8 per share i.e. at a discount of `2 per share as per Board`s
Resolution dated ......................)
1,200
300
1,500
Share Forfeited A/c Dr
To Capital Reserve A/c
(Transfer of capital profit proportionate to forfeited shares re-
issued i.e. on 150 shares to Capital Reserve A/c)
450
450
2011 - June [4] (a) Alex Ltd. forfeited 100 shares of ` 10 each issued at a premium of
20% (to be paid at the time of application money) on which allotment money of ` 4 and
first call money of ` 3 were not received; the final call money of ` 2 is not yet called.
These shares were originally allotted in the ratio of 4:5. These shares were
subsequently re-issued at a discount of ` 1 per share, credited as ` 8 paid-up.
Pass journal entries in the books of Alex Ltd. (3 marks)
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Answer :
In the books of Alex Ltd.
Journal Entries
Particulars Dr.
`̀̀̀
Cr.
`̀̀̀
Equity Share Capital A/c Dr.
To Share Forfeited A/c (Refer W. Note)
To Share Allotment A/c
To Share First Call A/c
(Forfeiture of 100 shares for non-payment of
allotment money and first call)
800
175
325
300
Bank A/c Dr.
Share Forfeited A/c Dr.
To Equity Share Capital A/c
(Re-issued of 100 forfeited shares issued
@ `̀̀̀ 7 per share `̀̀̀ 8 being paid-up)
700
100
800
Share Forfeited A/c Dr.
To Capital Reserve A/c
(Profit on re-issue of 100 forfeited shares
transferred to Capital Reserve A/c)
75
75
Working Note :
No. of Shares Allotted = 100
No. of Shares applied for = 100 × 5/4 = 125
Application money received including premium of ` 2
125 × ` 3 = `̀̀̀ 375
Less : Transferred to Securities Premium A/c (100 × ` 2) = `̀̀̀ 200
Balance amount received transferred to share Forfeited A/c `̀̀̀ 175
2011 - Dec [3] (b) Reliable Ltd. furnishes you with following balance sheet as on 31st
March, 2011:
Balance Sheet
Liabilities `̀̀̀ in Crores
Share capital:
12% Redeemable preference shares @ ` 100 each, fully paid-up 75
Equity shares of ` 10 each, fully paid-up 25
Reserves and surplus:
Capital reserve 15
Securities premium 25
[Chapter #### 2] Accounting for Share Capital OOOO 2.41
Revenue reserve 260
Current liabilities and provisions:
Current liabilities 40
440
Assets `̀̀̀ in Crores
Fixed assets 100
Less provision for depreciation 100 Nil
Investments (Market value ` 400 crore) 100
Current assets 340
440
The company redeemed preference shares on 1st April, 2011. It also bought back 50
lakh equity shares of ̀ 10 each at ̀ 50 per share. The payment for the above are made
out of the huge bank balance, which appeared as a part of current assets.
Make journal entries to record the above and prepare balance sheet as on 1st April,
2011 after redemption of preference shares and buy-back of equity shares. (8 marks)
Answer :
In the books of Reliable Ltd.
Journal Entries
`̀̀̀ in crores
Date Particulars Debit
Amount (`̀̀̀)
Credit
Amount (`̀̀̀)
12% Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being preference shares redeemed)
75
75
Revenue Reserves A/c Dr.
To Capital Redemption Reserve A/c
(Being amount equal to par value of preference shares
redeemed out of profits, transferred to capital
redemption reserve)
75
75
Preference Shareholders A/c Dr.
To Bank A/c
Being amount paid to preference shareholders)
75
75
Equity Share Capital A/c Dr.
Securities Premium a/c Dr.
To Equity shareholders A/c
(Being cancellation of 5% lakh equity shares of ` 10
each @ ` 50 each , premium paid out of securities
premium)
5
20
25
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Securities Premium A/c Dr.
To Capital Redemption Reserve A/c
(Being transfer made to Capital Redemption Reserve
on buy back as required by section 77AA)
5
5
Equity Shareholders A/c Dr.
To Bank
(Being amount paid to equity shareholders)
25
25
Balance Sheet of Reliable Ltd.
as on 1st April 2011
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital
Equity Shares of ` 10 each fully
paid up 20
Reserves and Surplus
Capital Reserve 15
Capital Redemption Reserve 80
Current Liabilities and Provisions
Current Liabilities 40
340
Fixed Assets NIL
Investments (Market value
` 400 crores) 100
Current Assets 240
340
2011 - Dec [4] (a) The balance sheet of Ashoka Ltd. as on 31st March, 2011 was as
follows:
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital: Sundry assets 17,00,000
Authorised:
1,50,000 Equity shares of
` 10 each 15,00,000
Issued, subscribed, called-up and paid-up:
80,000 Equity shares of ` 7.50 per share
called and paid-up 6,00,000
Reserves and surplus:
Capital redemption reserve 1,50,000
Plant revaluation reserve 20,000
Securities premium 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
[Chapter #### 2] Accounting for Share Capital OOOO 2.43
The company wanted to issue bonus shares to its shareholders at the rate of one sharefor every two shares held. Necessary resolution was passed. Give necessary journalentries and prepare amended balance sheet. (6 marks)Answer :
In the books of Ashoka Ltd.Journal Entries
Date particulars DebitAmount (`̀̀̀)
CreditAmount (`̀̀̀)
Equity Share Final Call A/c Dr.To Equity Share Capital A/c
(Being the final call money due on 80,000shares @ ` 2.50 per share as per Board'sresolution no. dated_________________)
2,00,0002,00,000
General Reserve A/c Dr.To Equity Share Final Call A/c
(Being bonus issue made to make partly paidup shares full paid.)
2,00,0002,00,000
Capital Redemption Reserve A/c Dr.Securities Premium A/c Dr.General Reserve A/c Dr.
To bonus to shareholders A/c(Being one bonus share payable for two sharesheld as per shareholders resolution no.dated______)
1,50,0001,50,0001,00,000
4,00,000
Bonus to shareholders A/c Dr.To Equity Share Capital A/c
(Being issue of 4,00,000 shares of ` 10 each asper Board's resolution no. dated____________)
4,00,0004,00,000
Amended Balance Sheet of Ashoka Ltd.as on 31st March 2011
Liabilities `̀̀̀ Assets `̀̀̀
Authorised Capital 1,50,000 Equity Shares of` 10 each Issued, Subscribed and ProfitUp 1,20,000 Equity Shares of ` 10each (including 40,000 bonusshares)
15,00,000
12,00,000
Sundry Assets 17,00,000
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Reserves and Surplus:Plant Revaluation ReserveDevelopment Rebate ReserveInvestment Allowance Reserve
20,0002,30,000
2,50,00017,00,000
17,00,000
2012 - Dec [2] (a) The summarised balance sheet of AB Ltd. as on 31st March, 2012 isas follows:
Equity and Liabilities `
Equity shares of `10 each `
` 8 called up 80,000Less : calls in arrears
`2 per share 300 79,7001,000, 11% preference shares
of `100 each fully paid-up 1,00,000Less : calls in arrears on 250 shares 5,000 95,000Securities premium 5,300Investment allowance 55,000General reserve 50,000Profit and loss (Surplus) 90,000Trade payables 25,000
4,00,000Assets Land and building 1,50,000Plants 50,000Furniture 25,000Investments (Face value `50,000) 45,000Stock in trade 20,000Trade receivables 30,000Cash at bank 80,000
4,00,000The company resolved to :
(i) Realise investments at `40,000. (ii) Forfeit equity shares on which calls are in arrears.(iii) Issue 500, 14% debentures of `100 each at premium of 5%.(iv) Forfeit preference shares on which the call money remained unpaid immediately
before the redemption of preference shares, holders of 200 shares paid theirdues before forfeiture.
(v) Re-issue the forfeited preference shares at `50 each.
(vi) Re-issue the forfeited equity shares at `12 each as `8 paid-up.
Pass necessary journal entries to give effect to the above. (6 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.45
Answer:
Amt in ` Amt in `
(i) Bank Dr.
Profit & Loss a/c Dr.
To Investment
(Sale of Investment & Loss of ` 5,000/-)
40,000
5,000
45,000
(ii) Equity share capital a/c Dr.
To Calls in Arrears a/c
To Equity Share Forfeited a/c
(Forfeiture of 150 equity Shares for non-
payment of Calls-in-arrears)
1,200
300
900
(iii) Bank
To 14% Debentures a/c
To Securities Premium a/c
(Issue of 500, 14% debentures of ̀ 100 each at
a premium of 5%)
52,500
50,000
2,500
(iv) (a) Bank Dr.
To Calls in Arrear
(calls in arrears received from holders of 200,
11% preference shares)
4,000
4,000
(iv) (b) 11% Preference Share Capital a/c Dr.
To Calls in Arrears a/c
To 11% Preference Share Forfeited a/c
(Forfeiture of 50, 11% Preference Shares for
non-payment of Calls-in-arrears)
5,000
1,000
4,000
(v) (a) Bank Dr.
11% Preference Share Forfeited a/c Dr.
To 11% Preference Share Capital a/c
(Re-issue of forfeited preference shares @ 50
per shares)
2,500
2,500
5,000
(v) (b) Bank Dr.
To Equity Share Capital
To Securities Premium a/c
(Re-issue of Forfeited Preference Shares @ 50
per shares)
1,800
1,200
6,00
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(vi) 11% Preference Share Forfeited a/c Dr.
Equity Share Forfeited a/c Dr.
To Capital Reserve a/c
(Balances of share forfeited a/c transferred to
capital reserve a/c)
2,500
900
3,400
(vii) General Reserve a/c Dr.
Profit and Loss a/c Dr.
To Capital Redemption Reserve a/c
(Redemption of preference share out of free
reserve)
50,000
50,000
1,00,000
(viii) 11% Preference Share Capital a/c Dr.
To Bank
(Amount due on redemption paid to preference
shareholders)
1,00,000
1,00,000
2013 - June [3] (b) Shreya Ltd. had an issue of 1,000 12% redeemable preference
shares of ` 100 each, repayable at a premium of 10%. These shares are to be
redeemed now out of the accumulated reserves, which are more than the necessary
sum required for redemption. Show the necessary entries in the books of the company,
assuming that the premium on redemption of shares has to be written off against the
company’s securities premium reserve account. (6 marks)
Answer :
In the books of Shreya Ltd.
Journal Entries
Date Particulars Debit
Amount
(`̀̀̀)
Credit
Amount
(`̀̀̀)
12% Redeemable Preference Shares Capital A/c Dr.
Premium on redemption A/c Dr.
To Preference Shareholders A/c
(Being the amount due to redeemable preference
shareholders on redemption)
1,00,000
10,000
1,10,000
Securities Premium Reserve A/c Dr.
To Premium on redemption A/c
(Being premium on redemption provided out of
securities premium reserve)
10,000
10,000
[Chapter #### 2] Accounting for Share Capital OOOO 2.47
General Reserve A/c Dr.
To Capital Redemption Reserve A/c
(Being the amount of redeemed out of profits
transferred to capital redemption reserve account)
1,00,000
1,00,000
Preference Shareholders A/c Dr.
To Bank
(Being amount paid on redemption to preference
shareholders)
1,10,000
1,10,000
2013 - June [4] (a) A limited company issued a prospectus inviting applications for
30,000 shares of ̀ 10 each at a premium of ̀ 2 per share. The amount was payable as
follows:
`
On application — 2
On allotment — 5 (including premium)
On first call — 3
On second and final call — 2
Applications were received for 45,000 shares and allotment was made on pro-rata basis
to the applicants of 36,000 shares. Money overpaid on applications was employed on
account of sum due on allotment.
Ramesh, to whom 600 shares were allotted, failed to pay the allotment money and on
his subsequent failure to pay the first call, his shares were forfeited. Mohan, the holder
of 900 shares failed to pay the two calls and his shares were forfeited after the second
and final call.
Of the shares forfeited, 1,200 shares were sold to Krishna credited as fully paid for ` 9
per share, the whole of Ramesh’s share being included.
Show journal and cash book entries and prepare the balance sheet. (12 marks)
Answer :
In the books of A Ltd.
Journal Entries
Date Particulars Debit
Amount
(`̀̀̀)
Credit
Amount
(`̀̀̀)
Bank Dr.
To Share Application A/c
(Being application money received on 45,000 shares
@ ` 2 each)
90,000
90,000
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Share Application A/c Dr.
To Share Capital A/c
To Share Allotment A/c
To Bank
(Being application for 36,000 shares allotted 30,000
shares and application of 9,000 shares refunded.
Excess application money transferred to share
allotment A/c)
90,000
60,000
12,000
18,000
Share Allotment A/c Dr.
To Share Capital A/c
To Securities Premium Reserve A/c
(Being share allotment amount due on 30,000 shares
@ ` 5 each including a premium of ` 2 each)
1,50,000
90,000
60,000
Bank Dr.
To Share Allotment a/c (Working Note 3)
(Being amount due on allotment received except from
the holder of 600 shares)
1,35,240
1,35,240
Share First Call A/c Dr.
To Share Capital A/c
(Being share first call due on 30,000 shares @ ` 3
each)
90,000
90,000
Bank Dr.
To Share First Call A/c
(Being amount received on first call except from the
holders of 600 shares and 900 shares)
85,500
85,500
Share Capital A/c (600 × 8) Dr.
Securities Premium Reserve A/c
To Share Allotment A/c (600 × 5 ! 120 × 2)
To Share First Call A/c (600 × 3)
To Shares Forfeited A/c (720 × 2)
(Being 600 shares forfeited on non-payment of share
allotment and first call money)
4,800
1,200
2,760
1,800
1,440
Share Second and Final Call A/c (29,400 × 2) Dr.
To Share Capital A/c
(Being share final call due on 29,400 shares @ ` 2
each)
58,800
58,800
[Chapter #### 2] Accounting for Share Capital OOOO 2.49
Bank Dr.
To Share Second and Final Call A/c
(Being amount received on final call except from the
holder of 900 shares)
57,000
57,000
Share Capital A/c (900 × 10) Dr.
To Share First Call A/c
To Share Second and Final A/c
To Shares Forfeited A/c
(Being 900 shares forfeited on non-payment of first
and second call money)
9,000
2,700
1,800
4,500
Bank (1,200 × 9) Dr.
Shares Forfeited A/c Dr.
To Share Capital A/c
(Being 1,200 shares reissued @ ` 9 each full paid)
10,800
1,200
12,000
Shares Forfeited A/c Dr.
To Capital Reserve A/c (Working Note 4)
(Being profit on reissue of 1,200 shares transferred to
capital reserve)
3,240
3,240
Balance Sheet of A Ltd.
Particulars Amount (`̀̀̀)
I. EQUITIES AND LIBILITIES
1. Shareholder’s Funds
(a) Share capital
Issued capital (30,000 Equity shares @ ` 10 each)
Paid up capital (29,700 @ ` 10 each)
Shares Forfeited A/c
(b) Reserve and Surplus
Capital Reserve
Securities Premium Reserve A/c
Total
II. Assets
1. Non Current Assets
2. Current Assets
Bank
Total
3,00,000
2,97,000
1,500
3,240
58,800
3,60,540
3,60,540
3,60,540
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Working Notes
1. For shares allotted 30,000, shares applied are 36,000
For shares allotted 600, shares applied =
= 720 shares
For shares allotted 900, shares applied =
= 1,080 shares
2. Amount received on application for 36,000 shares (36,000 × 2) = ` 72,000
Amount used in application (30,000 × 2) = ` 60,000
Amount transferred to share allotment (` 72,000 ! 60,000) = ` 12,000
3. Amount to be received on allotment (30,000 × 5) = ` 1,50,000
Less : Amount already received with application money = ` 12,000
Less : Amount not received by the holder of 600 shares
(600 × 5 ! 120 × 2) = ` 2,760
Amount received on allotment ` 1,35,240
4. Share forfeited amount on 600 shares of Ramesh = ` 1,440
Share forfeited amount on 600 shares of Mohan = `
= ` 3,000
Total forfeited amount = ` 4,440
Less: Discount on reissue = ` 1,200
Capital Reserve = ` 3,240
2013 - Dec [4] (a) X Ltd. having sufficient balance to the credit of profit and loss account
decides as follows:
(i) To redeem 4,000, 11% redeemable preference shares of ` 100 each fully paid-
up at a premium of 5%.
(ii) Capital redemption reserve arising as a result of redemption be utilised in
allotting the unissued shares of the company as fully paid equity shares of ` 10
each by way of bonus to its members.
Show the journal entries for the redemption of preference shares and bonus issue.
(5 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.51
CS Inter Gr. I
SHORT NOTES
2004 - Dec [1] {C} Attempt the following :
(iv) What are the provisions of the Companies Act, 1956 with regard to maintenance
of books of account by a company ? (5 marks)
Answer :
According to Section 209 of the Companies Act,. 1956. requires that every company
shall keep at its registered office proper book of account regarding.
(a) All sums of money received and expended by the company and the matters in
respect of which the receipt and expenditure take place;
(b) All sales and purchases of goods by the company;
(c) the assets and liabilities of the company; and
(d) in the case of the company engaged in production, processing, manufacturing or
mining activities, such particulars relating to utilisation of material or labour or other
items of cost as may be prescribed by the Central Government, provided the
Central Government so directs to any such class of companies or any particular
company.
The books of account shall give a true and fair view of the state of affairs of
the company or the branch office, as the case may be. Proper book of account
shall be deemed to be kept with respect to the matters specified in Section 209.
(a) If such books give a true and fair view of the state of affairs of the company or
branch office as the case may be, and explain its transactions; and.
(b) If such books are kept on a accrual basis and according to the double entry
system of accounting.
2006 - June [1] {C} Attempt the following :
(ii) Who are responsible for the maintenance of books of account under the
Companies Act, 1956 ? (5 marks)
Answer :
The statutory responsibility for keeping the accounts of a company where it has a
managing director or manager is laid on the managing director or manager and all
officers and agents acting or purporting to act on behalf of the company, and in any
other cases on the directors.
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PRACTICAL QUESTIONS
2004 - June [3] (b) Sukriti Ltd. forfeited 100 shares of ̀ l0 each for non-payment of final
call of ` 2. Of these, 60 shares were re-issued @ ` 9 per share as fully paid. Pass
journal entries in the books of Sukriti Ltd. clearly showing how much amount was
credited to shares forfeited account and what amount was transferred to capital reserve
account. (3 marks)
Answer :
Journal Entries
Dr.(`) Cr.(`)
(i) Share Capital Account Dr.
To Shares Forfeited Account
To Calls in - Arrears Account
(Being the shares forfeited for non-payment of final call)
1,000
800
200
(ii) Bank A/c Dr.
Shares Forfeited A/c Dr.
To Share Capital Account
(Being 60 shares reissued@ `9/- per share)
540
60
600
(iii) Shares Forfeited A/c Dr.
To Capital Reserve
(Being the profit on re-issue of 60 shares transferred to
Capital Reserve Account)
420
420
2004 - Dec [2] (a) The balance sheet of Sunny Electrical Ltd. as on 31st March, 2004
stood as under :
Liabilities ` Assets `
Share Capital: Fixed assets 2,73,60,000
20,00,000 Equity shares Investments 75,00,000
of `10 each, fully paid 2,00,00,000 Stock 47,80,000
General reserve 25,00,000 Debtors 40,20,000
Premium on securities 22,00,000 Cash & bank balances 15,40,000
Profit and loss account 15,00,000
9% Debentures 75,00,000
Term loans 80,00,000
Creditors 29,00,000
Provisions for tax 6,00,000
4,52,00,000 4,52,00,000
[Chapter #### 2] Accounting for Share Capital OOOO 2.53
At a meeting of the shareholders held on the date of the above stated balance
sheet, the following decisions were taken :
(i) 15% of the paid-up shares would be bought back @ ` 16 each.
(ii) 10% Debentures of ̀ 20,00,000 at a premium of 15% would be issued to finance
the buy-back.
(iii) General reserve would be used leaving a balance of ` 10,00,000.
(iv) Investments worth ` 20,00,000 would be sold out for ` 28,00,000.
You are required to pass the necessary journal entries to give effect to the above
transactions and also to prepare the balance sheet after the buy-back. (10 marks)
Answer :
Sunny Electricals Limited
Journal Entries` in Lakhs
Particulars Dr.
(`)
Cr.
(`)
Bank
To Investment A/c
To Profit and Loss A/c
(Sale of investments, the profit being transferred to Profit and
Loss Account as per Shareholder’s special resolution)
Dr. 28
20
8
Shareholders A/c
To Bank
(Buy-back of 3 lakh shares @ ` 15 each)
Dr. 48
48
Equity Share Capital A/c
Premium on Securities A/c
To Shareholders A/c
(Cancellation of 3,00,000 equity shares bought back and
securities premium utilized as per shareholders' special
resolution)
Dr.
Dr.
30
18
48
General Reserve A/c
Profit and Loss A/c
To Capital Redemption Reserve A/c
(Utilisation of general reserves and profit and loss account to
meet buy back requirements)
Dr.
Dr.
15
15
30
2.54 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Bank
To 10% Debentures A/c
To Premium on Securities A/c
(Issue of debentures at a premium of 15% to finance the buy-
back of shares)
Dr. 23
20
3
Balance Sheet of Sunny Electricals Ltd.
(After buy-back of shares)
Liabilities (` in
lakhs)
Assets (` in
lakhs)
Share Capital:
Issued and Paid-up Capital 17,00,000
equity shares of ` 10 each
General Reserve
Premium on Securities
Capital Redemption Reserve
Profit and Loss A/c
9% Debentures
10% debentures
Term Loans
Creditors
Provision for Tax
170
10
7
30
8
75
20
80
29
6
Fixed Assets
Investments
Stock
Debtors
Cash and Bank Balance
273.6
55.0
47.8
40.2
18.4
435 435
Note: It is assumed that securities premium has been utilised exclusively for the
payment of premium on buy-back of shares. Hence, as a matter of prudence, for the
transfer of nominal value of shares bought back to capital Redemption Reserve, the
available balance in general reserve and profit and loss account is taken into account.
2004 - Dec [3] (b) Futuristic India Ltd. has a part of its share capital in the form of
10,000, 9% redeemable preference shares of ̀ 100 each repayable at premium of 10%.
Now the shares are fully ready for redemption, it has been decided that the whole
amount would be redeemed by way of a fresh issue of 1,00,000 equity shares of ` 10
each at a premium of ` 15 each.
Show necessary journal entries assuming that the whole amount is received in
cash and 9% preference shares are redeemed. (4 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.55
Answer : Futuristic India Ltd.
Journal Entries
Particulars Dr. (`) Cr.(`)
Bank Dr.
To Equity Share Application And Allotment A/c
To Securities Premium A/c
(Being issue of 1,00,000 equity shares of ` 10 each at a
premium of ` 15 per share)
25,00,000
10,00,000
15,00,000
Equity Share Application and Allotment A/c Dr.
To Equity Share Capital A/c
(Being Transfer of the amount to the Equity Share Capital
A/c)
10,00,000
10,00,000
9% Redeemable Preference Share Capital A/c Dr.
Securities Premium A/c Dr.
To 9% Redeemable Preference Shareholders
(Amount due to 9% Redeemable Preference Shareholders
on Redemption)
10,00,000
1,00,000
11,00,000
9% Redeemable Preference Shareholders Dr.
To Bank
(Amount due to 9% Redeemable Preference Shareholders
on redemption paid)
11,00,000
11,00,000
2005 - Dec [1] {C} Attempt the following:
(iii) The paid-up share capital of Foresight Ltd. includes 5,000, 9% redeemable
preference shares of `100 each, repayable at a premium of 6%. As the shares
have become ready for redemption, the company has decided to redeem the
entire amount out of the proceeds of a fresh issue of 50,000 equity shares of
` 10 each at ̀ 10.60 per share. The company realised the entire amount of equity
issue in cash and redeemed the preference shares on date. You are required to
show the journal entries in the books of the company. (4 marks)
Answer :
Journal Entries in the Books of Foresight Ltd.
Particulars Dr.(`) Cr.(`)
Bank
To Equity Share Application and Allotment A/c
Application money on 50,000 equity shares @ `10.60
per share including a premium of `0.60 per share)
Dr. 5,30,000
5,30,000
2.56 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Equity share Application & Allotment A/c
To Equity Share Capital A/c
To Securities Premium A/c
(Allotment of 50,000 equity shares of ̀ 10 each issued at
a premium of `0.60 per share as per Board's resolution
dated...........)
Dr. 5,30,000
5,00,000
30,000
9% Redeemable to Preference Share Capital A/c
Premium on Redemption of Preference Shares A/c
To 9% Preference Shareholders A/c
(Amount due to 9% Preference Shareholders on
redemption at a premium of 6%).
Dr.
Dr.
5,00,000
30,000
5,30,000
Securities Premium A/c
To Premium on Redemption of Preference
Shares A/c
(Application of Securities Premium Account to write off
premium on Redemption of Preference Shares)
Dr. 30,000
30,000
9% Preference Shareholders A/c
To Bank
(Amount due to 9% Preference Share holders on
redemption paid)
Dr. 5,30,000
530,000
2006 - June [2] (b) Following is the balance sheet of Danny Ltd. as on 31st March,
2005 :
Liabilities (`’000)
Issued and paid-up capital :
3,00,000 Equity shares of ` 10 each 3,000
General reserve 100
Securities premium 5
10% Debentures 1,400
Sundry creditors 1,560
6,065
Assets
Land and building 630
Plant and machinery 2,350
Furniture and fittings 350
Investments 370
Stock 1,200
Sundry debtors 590
Cash and bank balance 575
6,065
[Chapter #### 2] Accounting for Share Capital OOOO 2.57
On 1st April, 2005, the shareholders of the company have approved the scheme of
buy-back of equity shares as under :
(i) 15% of the equity shares would be bought-back at ` 11 per share.
(ii) Balance in the general reserve and securities premium account may be utilised
to the fullest extent for this purpose.
(iii) Issue 12% redeemable preference shares of ̀ 10 each as per the requirements.
Pass the journal entries to record the above transactions and prepare the balance
sheet of the company immediately after the buy-back of shares. (10 marks)
Answer :
Journal Entries in the Books of Danny Ltd. (` in 000)
Particulars Dr.(`) Cr. (`)
Equity Share capital A/c
Securities Premium A/c
General Reserve A/c
To Shareholders A/c
(Being the cancellation of equity shares on buy back
and transfer of securities premium and balance from
general reserve for payment of premium)
Dr.
Dr.
Dr.
450
5
40
495
Bank A/c
To 12% Preference Share Capital A/c
(Being the issue of 39,000 12% preference shares of
` 10 each)
Dr. 390
390
Shareholders A/c
To Bank A/c
(Being the buy back of 45,000 equity shares @ ` 11)
Dr. 495
495
General Reserve A/c
To Capital Redemption Reserve
(Being the amount transferred from general reserve to
meet buy-back requirement)
Dr. 60
60
Note : As the nominal value of equity shares bought back is ` 4,50,000, and the
balance available in General Reserve being ` 60,000, after transferring ` 40,000 to
shareholders for payment of premium, 39,000 12% redeemable preference shares of
` 10 each be issued in order to comply with the provisions of Section 77AA of the
Companies Act, 1956.
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Balance Sheet of Danny Ltd.
(after buy back)
(` in 000s)
Liabilities ` Assets `
Share Capital :
Issued and paid up
2,55,000 equity shares of `10 each fully
paid up
39,000 12% preference shares of `10
each
Reserves and Surplus :
Capital Redemption Reserve
Secured Loans:
10% Debentures
Current Liabilities and Provisions:
Sundry creditors
2,550
390
60
1,400
1,560
Fixed Assets :
Land and building
Plant and machinery
Furniture and fitting
Investments
Current Assets, loans and
Advances:
Stock
Sundry debtors
Cash and bank balances
630
2,350
350
370
1,200
590
470
5,960 5,960
2006 - Dec [2] (a) The following particulars are given from the records of Maxel Ltd.
relating to issue and forfeiture of equity shares. The amount per share was payable as
` 3 on application; ̀ 5 on allotment (including ̀ 2 as premium); and ̀ 4 on first and final
call :
Category No. of No. of
Shares Shares
Allotted Applied
I 20,000 30,000
II 10,000 10,000
III — 5,000 (Application money refunded)
Allotments were made pro rata in Category-I. Raj, who applied for 450 shares in
Category-I, failed to pay the allotment money and call money and his shares were
forfeited by the company. Subsequently, 200 forfeited shares were issued to Hari as
fully paid for ` 9 per share
Show the journal and cash book entries to record the above transactions.
(5 marks)
[Chapter #### 2] Accounting for Share Capital OOOO 2.59
Answer :
Particulars Dr.(`̀̀̀) Cr.(`̀̀̀)
Equity Share Application A/c
To Equity Share Capital A/c
To Equity Share Allotment A/c
(Being application money on 30,000 Shares transferred
to share capital and excess application money on 10,000
shares transferred to share allotment account)
Dr. 1,20,000
90,000
30,000
Equity Share Allotment A/c
To Equity Share Capital A/c
To Securities Premium A/c
(Being allotment money due on 30,000 Shares including
share premium money)
Dr. 1,50,000
90,000
60,000
Equity Share First and Final Call A/c
To Equity Share Capital A/c
(Being call money due on 30,000 shares @ ` 4 each)
Dr. 1,20,000
1,20,000
Equity Share Capital (300×`10) A/c
securities Premium (300× ` 2) A/c
To Shares Forfeited A/c
To Share Allotment A/c
To Share First and Final Call A/c
(Being forfeiture of 300 shares on which allotment and
call moneys have not been paid)
Dr.
Dr.
3,000
600
1,350
1,050
1,200
Shares Forfeited A/c
To Equity Share Capital
To Capital Reserve
(Being discount on re-issue of 200 forfeited shares of
Re.1 per share debited to shares forfeitured account and
proportionate profit on forfeited shares transferred to
capital reserve)
Dr. 900
200
700
Dr. Cash Book Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Equity Share Application A/c
To Equity Share Allotment A/c
1,35,000
1,18,950
By Equity Share
Application A/c 15,000To Equity Share First & Final Call A/c
To Equity Share Capital A/c
To Balance c/d
1,18,800
1,800
3,74,550
3,59,550
By Balance c/d 3,59,550
3,74,550
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2007 - June [2] (a) Zutshi Ltd. has 12% redeemable preference share capital of
` 2,00,000 consisting shares of ̀ 100 each fully called and paid-up. The company wants
to redeem them at 10% premium. The ledger accounts show the following balances :
Profit and loss account ` 40,000 and securities premium account ` 8,000. The
company desires to make a minimum fresh issue of equity shares of ` 10 each at 5%
premium for redemption of the preference shares. You are required to ascertain the
amount of such fresh issue to be made by the company and pass necessary journal
entries regarding fresh issue and redemption of preference shares. (9 marks)
Answer :
No. of shares to be calculated as follows:
Total liability = Preference Share Capital to be redeemed %Profit and Loss Account
balance % Proceeds of Fresh issue.
` 2,20,000 = ` 8,000 % ` 40,000 % x %
= `48,000 % Or `1,72,000 =
= 21x = ` 34,40,000 Or x = `1,63,810
Amount of fresh issue :
No. of shares = 16,381
Equity share capital = ` 1,63,810
Securities premium = ` 8,190
Total = ` 1,72,000
Journal Entries
Particulars Dr.(`) Cr.(`)
Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
(16,381 equity shares of `10 each at a premium of 5%)
1,72,000
1,63,810
8,190
Securities Premium A/c Dr.
Profit & Loss A/c Dr.
To Premium on Redemption of Preference Shares A/c
(Premium provided for redemption)
16,190
3,810
20,000
[Chapter #### 2] Accounting for Share Capital OOOO 2.61
Profit & Loss A/c Dr.
To Capital Redemption Reserve A/c
(Amount transferred to capital Redemption Reserve not
covered by fresh issue)
36,190
36,190
12% Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
To Preference Shareholders A/c
(Payment due to preference shareholders)
2,00,000
20,000
2,20,000
Preference Shareholders A/c Dr.
To Bank
(Payment made)
2,20,000
2,20,000
2007 - Dec [3] (b) Following is the balance sheet of Navyug Construction Ltd. as on 31st
March, 2007:Liabilities: Authorised capital :20,000 Equity shares of ` 10 each Issued, subscribed and paid-up capital:12,000 Equity shares of ` 10 eachLess: Calls in arrear (` 3 per share on 3,000 shares)
Sundry creditorsProvision for taxes
` 1,20,000
` 9,000
`
2,00,000
1,11,00015,425
4,000 1,30,425
AssetsGoodwill Land and buildings Machinery Stock Book debts Cash at bank Preliminary expenses Profit and loss account:Balance as per last balance sheet Less: Profit for the year
` 22,000` 1,200
10,00020,50050,85010,27515,000
1,5001,500
20,8001,30,425
The directors have had a valuation made of the machinery and found it overvaluedby ̀ 10,000. It is proposed to write down this asset to its true value and to extinguish thedeficiency in the profit and loss account and to write off goodwill and preliminaryexpenses by adoption of the following scheme:
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(i) Forfeit the shares on which the calls are outstanding.
(ii) Reduce the paid-up capital by ` 3 per share.
(iii) Re-issue the forfeited shares at ` 5 per share.
(iv) Utilise the provision for taxes, if necessary.
The shares on which the calls were in arrear were duly forfeited and re-issued as fully
paid shares of ` 7 each on payment of ` 5 per share.
You are required to pass necessary journal entries and prepare the balance sheet of
the company after carrying out the terms of the scheme as set-out above. (9 marks)
Answer :
Dr. Cr.
Particulars ` `
Equity Share Capital (`10 each) Account
To Calls in arrear Account
To Forfeited Share Account
(Forfeiture of 3,000 equity shares of ` 10 each for non-
payment of call @ ` 3 per share as per Resolution
No....... of the Board of Directors)
Dr. 30,000
9,000
21,000
Equity Share Capital (` 10 each) Account
To Equity Share Capital (`7 each) Account
To Reconstruction Account
(Allotment of 9,000 fully paid equity shares of ̀ 7 each in
lieu of 9,000 fully paid equity shares of `7 each in lieu of
9,000 fully paid equity shares of ̀ 10 each as per scheme
of reconstruction confirmed by Court vide Order No.........
Dated........)
Dr. 90,000
63,000
27,000
Bank
Forfeited share Account
To Equity Share Capital (`7 each) Account
(Reissue of 3,000 equity shares of ̀ 7 each as fully paid
@ `5 per share)
Dr.
Dr.
15,000
6,000
21,000
Forfeited Share Account
To Reconstruction Account
(Transfer of balance of forfeited Share Account to
Reconstruction Account after reissue of all the forfeited
shares)
Dr. 15,000
15,000
[Chapter #### 2] Accounting for Share Capital OOOO 2.63
Provision for Taxes Account
To Reconstruction Account
(Utilisation of the provision for taxes for purposes of
reconstruction to the extent necessary)
Dr. 300
300
Reconstruction Account
To Goodwill Account
To Machinery Account
To Preliminary Expenses Account
To Profit and Loss Account
(The Balances of Goodwill account, Preliminary
Expenses Account and Profit and Loss Account written
off and the Reduction made in the value of Machinery as
per scheme of reconstruction.)
Dr. 42,300
10,000
10,000
1,500
20,800
Balance Sheet of Navyug Construction Ltd. as on 31st March, 2007
Liabilities ` Assets `
Share Capital
Authorised :
20,000 Equity Shares of
` 7 each
Issued and Subscribed:
12,000 Equity Shares of
` 7 each fully paid
Current Liabilities &
Provisions:
(A) Current Liabilities
Sundry Creditors
(B) Provisions
Provisions for Tax
1,40,000
84,000
15,425
3,700
Fixed Assets
Goodwiil
Less: Amount written
off under Scheme
of Reconstruction
dated...
Land & Building
Machinery
Less: Amount written
off under scheme
of Reconstruction
dated...
Current, Assets, Loans &
Advances:
(A) Current Assets:
Stock
Book Debts
Cash at Bank
(B) Loans and Advances
10,000
10,000
50,850
10,000
NIL
20,500
40,850
10,275
15,000
16,500
NIL
1,03,125 1,03,125
2.64 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Repeatedly Asked Questions
No. Question Frequency
1 Write short notes on ‘buy-back of shares’.
12 - June [2] (c), 13 - June [2] (c) 2 Times
3 Practical Questions
11 - Dec [3] (b), 13 - June [4] (a) 2 Times
2.65
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter Nil
3 Issue and Redemption of Debentures
This Chapter Includes : Loan Capital; Issue of Debentures; Interest of Debentures;
Redemption of Debentures; Protection of the Interest of the debenture holders;
Interest on Own Debentures; Cum-interest and ex-interest quotations; Conversion
of Debentures into shares.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2009 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iv) Discount on the issue of debenture is a_______ loss. (1 mark)
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(v) If the purchase price of the debenture includes the interest for the expired period.
it is known as_______. (1 mark)
Answer :
(iv) Capital
(v) Cum-interest purchase/quotation
2009 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(i) Interest on debentures is payable only when there is profit. (2 marks)
Answer :
Incorrect : Interest on debenture is obligatory and it must be payable to the debenture
holder whether the company carries profit or not. It is a charge against profit. Hence,
company is liable to pay interest on debenture even if no profit earned.
2009 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iii) Debentures issued as collateral security will be debited to —
(a) Bank account
(b) Debentures suspense account
(c) Debentures account
(d) Collateral security account. (1 mark)
Answer :
(b) Debentures suspense account
2009 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
(i) Issue of debentures to vendors is known as issue of debentures______.
(1 mark)
Answer :
for consideration other than cash
2010 - June [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(iv) Profit on cancellation of own debentures should be transferred to—
(a) Profit and loss account
(b) Profit and loss appropriation account
(c) Capital reserve account
(d) Reserve capital account. (1 mark)
Answer :
(c) Capital reserve account
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.67
2010 - June [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iii) Collateral security implies security given for a loan. (1 mark)
Answer :
(iii) additional
2010 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(ii) Premium on issue of debentures shall be credited to debentures account along
with nominal value of debentures. (2 marks)
Answer :
(ii) False: Premium on issue of debentures shall be credited to Securities Premium
Account.
2010 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) In case of part redemption of debentures, the balance in sinking fund is equal
to !
(a) 50% of the amount of debentures issued till that date
(b) 75% of the amount of debentures issued till that date
(c) In proportion to the issue of debentures till that date
(d) No limit. (1 mark)
Answer :
(i) (a) 50% of the debentures issued till date.
2010 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
(ii) The debentures issued as collateral security has to be mentioned by way of a
note in the balance sheet under__________. (1 mark)
Answer
The debentures issued as collateral security has to be mentioned by way of a
note in the balance sheet under specific loan account.
2011 - June [1] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(iv) Sinking fund for the redemption of debentures is an instance of —
(a) Reserve
(b) Provision
(c) Reserve fund
(d) Reserves and surplus. (1 mark)
Answer :
(c) Reserve fund
2.68 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
2011 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(iv) A debenture issued at a discount cannot be redeemed at a premium.
(2 marks)
Answer :
The statement is false:– The debentures issued at a discount can be redeemed
at a premium. The loss to be recognized at the time of the issue of such
debentures will be equal to the total of the amount on issue and the amount of
premium on redemption.
2011 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) The balance of sinking fund account is transferred to —
(a) Share capital account
(b) General reserve account
(c) Profit and loss account
(d) Sinking fund investment account. (1 mark)
(ii) When interest on own debentures becomes due, it will be credited to —
(a) Profit and loss account
(b) Own debentures account
(c) Debenture interest account
(d) Interest on own debentures account. (1 mark)
Answer :
(i) (b) General Reserve Account.
(ii) (d) Interest on own debenture account.
2012 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(iv) Debentureholders are not the members of the company. (2 marks)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Interest on debentures is a _________ against the profits of the company.
(1 mark)
(c) Write the most appropriate answer from the given options in respect of the following:
(iii) At the time of conversion of debentures redeemable at par into equity shares to
be issued at discount, the amount to be credited in the equity share capital
account shall be —
(a) Nominal value of debentures only
(b) Nominal value of debentures plus discount on issue of shares
(c) Nominal value of debentures minus discount on issue of shares
(d) None of the above. (1 mark)
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.69
Answer :
(a) (iv) The statement is True: Debentureholders are long term loan providers.
Neither they are the members nor the owner of the company. Only the
shareholders are the members of the company.
(b) (i) Charge.
(c) (iii) (b) Nominal value of debentures plus discount on issue of shares.
2012 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(iii) As per SEBI guidelines, an amount equal to 50% of the debenture issue must be
transferred to debenture redemption reserve before redemption begins.
(2 marks)
Answer:
(iii) This Statements is True: The company shall create debentures Redemption
Reserve equivalent to at-least 50% of the amount of debentures issued before
starting the redemption of debentures.
2013 - June [1] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(iv) When a company issues debentures at par or at a discount which areredeemable at a premium, the premium payable on redemption of thedebentures is to be treated as —(a) Revenue loss(b) Capital loss(c) Deferred revenue expenditure(d) None of the above. (1 mark)
Answer :(iv) (b) Capital loss.
2013 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements aretrue or false:
(iii) As per SEBI guidelines, an amount equal to 50% of the debentures issued mustbe transferred to debenture redemption reserve account before redemptionbegins. (2 marks)
2013 - Dec [1] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(i) The balance of debenture redemption fund investment account after therealisation of investment is transferred to !(a) Profit and loss account (b) Profit and loss appropriation account(c) Debenture account(d) Debenture redemption fund account. (1 mark)
2.70 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
SHORT NOTES
2008 - Dec [2] (a) Write short notes on the following :
(ii) Loss on issue of debentures (3 marks)
Answer :
Loss on Issue of Debentures : “Discount on Debentures” or “Loss on Issue of
Debentures” is a capital loss and is shown under the heading “Miscellaneous
Expenditure” on the asset side of the Balance Sheet until written off. It is advisable to
write off these accounts from the books through the Profit and Loss A/c as early as
possible particularly within the life time of the debentures. These accounts may also be
written off against:
(i) Share premium account or
(ii) Any capital reserve.
2011 - June [3] (a) Write short notes on the following :
(i) Purchase of own debentures in the market by a company (3 marks)
Answer :
A company can buy its own debentures in the open market if it is authorized by its
article of association. The debentures so purchased can be used either for immediate
cancellation or redemption of debentures or for investment. The debentures so
purchased for investment can subsequently either be reissued to fulfill additional
requirement of cash or can be cancelled if the company so desires.
Debentures when purchased for investment are popularly known as 'OWN
DEBENTURES.'
DISTINGUISH BETWEEN
2009 - June [3] (c) Differentiate between 'shares' and 'debentures'. (3 marks)
Answer :
Basis Debentures Shares
1. Status Debenture holders is only a
Creditor of the Company.
But a shareholder or a member is
a joint owner of the company.
2. Voting
Rights
They do not have any voting
right.
They enjoy voting rights.
3. Income Interest on debenture is
payable if no profit is available.
But dividend on share is to be
paid only out of profit and not
otherwise.
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.71
4. Repayment Debentures are repayable/
redeemable as per terms of
the issue.
Share, are not refundable unless
the Company goes into
liquidation.
5. Repurchase A company may purchase its
own debenture unless they are
perpetual or irredeemable.
Where as it is not open to a
company to purchase its own
shares as per section 77.
6. Discount on
issue
Debenture can be issued at a
discount
Where as shares cannot be
issued at a discount
7. Security Debentures are generally
secured and carry a charge on
the asset of the Company.
Where as shares have do not
Carry any charges.
DESCRIPTIVE QUESTIONS
2012 - Dec [4] (c) Explain ‘cum-interest’ and ‘ex-interest’ in case of purchase of own
debentures. (4 marks)
Answer:
Cum interest: The price quoted includes the interest for the expired period.
Ex-interest: The price does not include the interest for the expired period.
PRACTICAL QUESTIONS
2009 - June [1] {C} (c) Gaurav Ltd. had issued 12%, ` 10,00,000 debentures @ ` 100
each in the past. For the purpose of redemption, it maintains a debenture redemption
fund with an annual contribution of ` 90,000. On 1st April, 2008, the fund stood at
` 4,50,000 represented by 6%, `5,00,000 government loan.
On 31st March, 2009, ` 2,00,000 government loan was sold @ ` 93.50 and the
proceeds were utilised to purchase debentures for cancellation @ ` 85 each. Assume
that ̀ 20,000 debentures have been redeemed out of capital and the balance with face
value of `1,80,000 has been redeemed out of debenture redemption fund account.
Prepare debenture account, debenture redemption fund account and debenture
redemption fund investment account. (5 marks)
2.72 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer : 12% Debentures Account
Dr. Cr.
Date Particulars ` Date Particulars `
31.3.09 To Debenture holders
To Profit on Redemption
of Debentures A/c
To Balance c/d
1,70,000
30,000
8,00,000
1.4.08 By Balance b/d 10,00,000
10,00,000 10,00,000
1.4.09 By Balance b/d 8,00,000
Debenture Redemption Fund Account
Date Particulars `̀̀̀ Date Particulars `̀̀̀
31.3.09 To Capital Reserve
(` 30,000+7,000)
To General Reserve
To Balance c/d
37,000
1,80,000
3,90,000
1.4.08 By Balance b/d
By P&L Appropriation A/c
By Interest on Debenture
Redemption Fund
Investment (DRFI) A/c
(6% of 5,00,000)
By DRFI A/c (profit on
sale of investment)
By Profit on Redemption
of Debentures
4,50,000
90,000
30,000
7,000
30,000
6,07,000 6,07,000
Debenture Redemption Fund Investment Account
Date Particulars `̀̀̀ Date Particulars `̀̀̀
1.4.08
31.3.09
To Balance b/d
To Bank
To DR Fund A/c (profit
on sale)
4,50,000
1,20,000
7,000
31.3.09 By Bank
By Balance c/d
1,87,000
3,90,000
5,77,000 5,77,000
2009 - Dec [2] (c) Give the necessary journal entries both at the time of issue and
redemption of debentures in the following case :
Eagle Ltd. issued ` 1,00,000, 15% debentures of ` 100 each at a discount of 5%,
but redeemable at a premium of 5% at the end of 4 years. (3 marks)
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.73
Answer :
Journal Entries
Particulars Dr. (`) Cr. (`)
Bank A/c Dr.
Loss on issue of Debentures A/c Dr.
To 15% Debentures A/c
To Premium on Redemption of Debentures A/c
(Being the issue of debentures at a discount of 5% to be
redeemed at 5% premium)
95,000
10,000
1,00,000
5,000
Profit & Loss Appropriation A/c Dr.
To General Reserve A/c
(Being transfer of amount equivalent to the nominal value of
debenture redeemed out of profit)
1,00,000
1,00,000
15% Debentures A/c Dr.
Premium on Redemption of Debenture A/c Dr.
To Debenture holders A/c
(Being amount due on redemption)
1,00,000
5,000
1,05,000
Debenture holders A/c Dr.
To Bank A/c
(Being the payment made to debenture holders)
1,05,000
1,05,000
2011 - June [4] (c) Zohar Ltd. has 12%, ̀ 4,00,000 debentures outstanding in its books
on 1st April, 2009. It also had ` 2,40,000 balance in sinking fund account represented
by 8% investments (face value of ` 3,00,000).
On 30th December, 2009, it sold investments of face value of ̀ 40,000 @ ` 90 and
purchased own debentures of the face value of ` 40,000 out of the proceeds, for
immediate cancellation.
The interest dates for both debentures and investments are 30th September and 31st
March respectively. All transactions are made on cum interest basis. Show debenture
account, sinking fund account and sinking fund investment account. (6 marks)
2.74 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer :
Dr. 12% Debentures Account Cr.
Date Particulars Amount
`̀̀̀
Date Particulars Amount
`̀̀̀
30 Dec. 09
30 Dec. 09
31.Mar. 10
To Bank A/c
To Sinking Fund A/c
(Profit on cancellation
of debentures)
(W. Note 1)
To Balance c/d
34,800
5,200
3,60,000
4,00,000
1 April 09
01 Apr. 10
By Balance b/fd
By Balance b/d
4,00,000
4,00,000
3,60,000
Dr. Sinking Fund Account Cr.
Date Particulars Amount
`̀̀̀
Date Particulars Amount
`̀̀̀
30 Dec. 09
30 Dec. 09
31 Mar. 10
To General Reserve A/c
To Capital Reserve A/c
(t/f on profit on
cancellation)
To Balance c/d
40,000
5,200
2,26,400
2,71,600
01 April 09
30 Dec. 09
30 Dec. 09
31 Mar. 10
By Balance b/fd
By sinking Fund
investment A/c
(Profit on sale of
Investment)
By 12%
Debentures A/c
(Profit on
Cancellation)
By Interest on
Sinking Fund
Account
2,40,000
3,200
5,200
23,200
2,71,600
Dr. Sinking Fund Investment Account Cr.
Date Particulars Amount
`̀̀̀
Date Particulars Amount
`̀̀̀
01 April 09
30 Dec. 09
01 Apr. 10
To Balance b/fd
To Sinking Fund A/c
To Balance b/d
2,40,000
3,200
2,43,200
2,08,000
30 Dec. 09
31 Mar. 10
By Bank A/c
By Balance c/d
35,200
2,08,00
2,43,200
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.75
Working Note :
(1) Profit on Sale of Investments:
`̀̀̀ `̀̀̀
Nominal value of investments: 40,000
Sale proceeds of investments (cum interest) 36,000
Less: Interest on investments for
3 months @ 8% (01/10/09 to 30/12/09)
800
Sale Price of investments 35,200
Less: Purchase price of investments
(2,40,000/3,00,000 × 40,000) 32,000
Profit on sale of investments 3,200
(2) Profit on Cancellation of Debentures
Nominal value of debentures ` 40,000
Sale proceeds of investments @ ` 90 ` 36,000
Less: Interest on debentures for 3 months
@ 12% (01/10/09 to 30/12/09)
` 1,200
Net Sales Proceeds ` 34,800
Profit on cancellation of debentures = ` 40,000 - ` 34,800 = ` 5,200
(3) Interest on Sinking Fund Investment Account during the year
Half yearly interest received on 30th September 2009
on ` 3,00,000 @ 8% = ` 12,000
Add : Interest on investments for 3 months @ 8% on ` 40,000 = ` 800
Half yearly interest received on 31st March 2010 on
2,60,000 @ 8% = ` 10,400
Total ` 23,200
2011 - Dec [3] (a) On 1st April, 2010, Rosy Ltd. issued 20,000, 13% debentures of ̀ 100
each at 5% discount. Debentureholders have an option to convert their holdings in 14%
preference shares of ` 100 each at a premium of ` 25 per share. On 31st March, 2011,
one year’s interest has accrued on these debentures and has remained unpaid. A
holder of 100 debentures notified his intention to convert his holdings in 14% preference
shares. Journalise these transactions. Also show workings for number of preference
shares to be issued in exchange. (7 marks)
2.76 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer :In the books of Rosy Ltd.
Journal Entries
Date particulars DebitAmount (`̀̀̀)
CreditAmount (`̀̀̀)
1/04/2010 Bank Dr.To Debentures Application & Allotment A/c
(Being application money received on 20,000
debentures @ ` 95 each)
19,00,00019,00,000
1/04/2010 Debentures Application & Allotment A/c Dr.Discount on Issue of Debentures A/c Dr.
To 13% Debentures A/c(Being the issue of 20,000, 13% Debentures of
` 100 each at 5% discount)
19,00,0001,00,000
20,00,000
31/03/2011 Debenture Interest A/c Dr.To Debentureholders A/c
(Being interest due on 2,000 debentures of
` 100 @ 13%)
2,60,0002,60,000
31/03/2011 Profit and Loss A/c Dr.To Debentures Interest A/c
(Being transfer of debenture interest account toProfit and Loss A/c)
2,60,0002,60,000
31/03/2011 13% Debentures A/c Dr.To 14% preference Share Capital A/cTo Premium on issue of Preference
shares A/cTo Discount on Issue of Debentures A/c
(Being conversion of 100, Debentures of ` 100
each at 5% discount to Preference Shares of `100 each issued at 5% premium)
10,0007,600
1,900500
Working Notes:Calculation of Number of Preference shares to be issued:Nominal Value of 100, 13% Debentures (` 100 × 100) ` 10,000
Less: 5% Discount ` 500Amount Received for 100 Debentures ` 9,500Issue Price of Preference Shares (` 100 + 25) ` 125Number of Preference Shares to be issued (` 9,500/125) 76Face Value of Preference Shares (100 × 76) ` 7,600Premium on issue of Preference shares ` 1,900
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.77
2012 - June [4] (b) A company issued 12% debentures of the face value of ` 2,00,000
at 10% discount on 1st January, 2010. Debenture interest after deducting tax at source
@ 10% was payable on 30th June and 31st December every year. All the debentures
were to be redeemed after the expiry of 5 years period at 5% premium.
Pass the necessary journal entries. (6 marks)
Answer :
S.N. Date Particulars Amount
Dr.
Amount
Cr.
1 1.1.2010 Bank A/c Dr.
Debenture discount A/c Dr.
Loss on Issue of Debentures A/c Dr.
To 12% Debentures A/c
To Premium on Redemption of
Debenture A/c
(For issue of debentures at discount
redeemable at Premium)
1,80,000
20,000
10,000
2,00,000
10,000
2 30.6.2010 Debentures Interest A/c Dr.
To Debentures holders A/c
To Tax deducted at Source A/c
(Being TDS deducted and debenture
interest is recognised)
12,000
10,800
1,200
3 30.6.2010 Debenture Holders A/c Dr.
Tax Deducted at Source A/c Dr.
To Bank A/c
(Being TDS and Interest Paid)
10,800
1,200
12,000
4 31.12.2010 Debentures Interest A/c Dr.
To Debentures holders A/c
To Tax deducted at Source
(Being TDS deducted and debenture
interest is recognised)
12,000
10,800
1,200
5 31.12.2010 Debenture Holders A/c Dr.
Tax Deducted at Source A/c Dr.
To Bank A/c
(Being TDS and Interest Paid)
10,800
1,200
12,000
2.78 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
6 31.12.2010 Profit & Loss A/c Dr.
To Loss on issue of Debentures A/c
(Being proportionate Loss on issue of
debenture written off (i.e. 30,000 × 1/5)
6,000
6,000
7 31.12.2010 Profit & Loss A/c Dr.
To Debentures Interest A/c
(Being transfer of debenture interest to P&L
A/c)
24,000
24,000
8 31.12.2014 Debentures A/c Dr.
Premium on Redemption of debentures
A/c Dr.
To Debentureholder A/c
(Being redemption of Debentures)
2,00,000
10,000
2,10,000
9 31.12.2014 Debenture Holders A/c Dr.
To Bank A/c
(Being Payment to Debentureholders)
2,10,000
2,10,000
Entries no. 2, 3, 4, 5, 6, 7 to be repeated every year till 31.12.2014. In 2014 following
extra entries to be passed.
2012 - Dec [3] (b) Fortune Ltd. issued `70,000, 12% debentures of `100 each at a
premium of 5% redeemable at 110%.
You are required to !
(i) Show by means of journal entries how you would record the above issue.
(ii) Also show how they would appear in the balance sheet. (6 marks)
Answer:
(i) Bank Dr. 73,500
Loss on issue of debentures Account Dr. 7,000
To 12% debentures Account 70,000
To premium on issue of debentures account 3,500
To premium on redemption of debentures account 7,000
(Issue of ` 70,000, 12% debenture of ` 100
each at a premium of 5% and redeemable
at a premium of 10%)
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.79
(ii) Fortune Limited
Balance Sheet
I. Equities and Liabilities
Reserve and Surplus Amount in `
Securities premium 3,500
Less: Loss on issue of debentures (7,000) (3500)
Non- Current Liabilities
12% debenture 70,000
Debenture redemption premium 7,000
Total 73,500
ASSETS
Current Assets
Balance with Bank 73,500
TOTAL 73,500
2013 - Dec [4] (c) Following balances appeared in the books of Global Textiles Ltd. as
on 31st March, 2012:
20% Debentures ` 1,00,000
Debentures redemption reserve ` 1,18,000
Debentures redemption fund investment ` 1,20,000
On 1st June, 2012, the investments were sold for ` 1,23,000 and debentures were
redeemed together with accrued interest. Interest on debentures up to 31st March, 2012
had been paid.
Make necessary journal entries for the above transactions in the books of the company.
(5 marks)
CS Inter Gr. I
PRACTICAL QUESTIONS
2004 - June [1] {C} (a) On 31st December, 2002, Brightlight Industries Ltd. showed in
their accounts debenture redemption fund of ` 1,50,000 which was represented by
` 1,51,000, 5% municipal bonds purchased for ` 1,50,000.
On 28th February, 2003, the company had a balance of ` 28,000 at their bank and
they paid into the bank account, the proceeds of sale of foregoing investments for
` 1,50,500. On 1st March, 2003, the debentures of the value of ` 1,50,000 were paid.
2.80 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
You are required to prepare debenture redemption fund account and debenture
redemption fund investments account in the books of the company. Calculations are to
be made to the nearest rupee. (4 marks)
Answer :
Bright Light Industries Ltd.
Debenture Redemption Fund A/c
Dr. Cr.
`̀̀̀ `̀̀̀
28.2.03
1.03.03
To Debenture
Redemption Fund
Investment A/c
To General Reserve
Account (Transfer)
758
1,50,500
31.12.02 By Balance b/d
By Bank
(Interest for two
months)
1,50,000
1,258
1,51,258 1,51,258
Debenture Redemption Fund Investment A/c
`̀̀̀ `̀̀̀
31.12.02 To Balance b/d
(FV 1,51,000:-5%
Municipal Bonds)
1,50,000 28.02.03
28.02.03
By Bank
(Sale proceeds)
By debenture
Redemption Fund
A/c (loss-transfer)
1,49,242
758
1,50,000 1,50,000
Working Notes:
Interest for two months = ` 1,51,000 × = ` 1,258
Profit/Loss on sale of Investments :
`
Sale of investments 1,50,500
Less: Interest on 2 months 1,258
1,49,242
Less: Cost price of investments 1,50,000
Loss on sale of Investments 758
2004 - Dec [4] (b) In 1999, Gem Ltd. issued 10% ̀ 20,00,000 debentures at a discount
of 10%, the debentures were redeemable in 2004. In 2004, the company gave the
debenture holders the option of coverting the debentures into equity shares of face
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.81
value of ̀ 10 at premium of 2.5%. One debentureholder holding ̀ 4,00,000 debentures
wants to exercise the option. What is the face value of the shares that he will get?
(2 marks)
Answer :
Amount payable on conversion of redemption of debentures:
As the option is exercised by the debenture holders
on the due date of redemption, the total face value
of debenture is entitled for redemption by conversion ` 4,00,000
The conversion price of equity share = (Face value + Premium)
= ` 10 + ` 2.50 ` 12.50
Equity shares to be issued on conversion = ` 4,00,000/12.50 32,000
The face value of the equity shares to be issued to the debenture
holder = (32,000 × ` 10) ` 3,20,000
2005 - June [1] {C} (b) Zenith Ltd. gave notice of its intention to redeem its outstanding
`6,00,000, 9% debentures at 102% and offered the holders the following options to
apply for the redemption moneys to subscribe for :
(i) 6% Cumulative preference shares of ` 20 each at ` 22.50 per share; and
(ii) 10% Debentures of ` 100 each at ` 96.
The holders of ` 2,40,000 debentures accepted the proposal (i); and ` 3,60,000
debentureholders accepted the proposal (ii) above.
Pass the necessary journal entries to give effect to the abovementioned
transactions. (4 marks)
Answer :
Journal Entries in the Books of Zenith Ltd.
`̀̀̀ `̀̀̀
(i) 9% Debenture A/c Dr.
Premium on Redemption A/c Dr.
To Debenture holders A/c
(Being the amount due to debenture holders
opted for (I) option)
2,40,000
4,800
2,44,800
Debenture holders A/c Dr.
To 6% Cumulative Preference
Share Capital A/c
To Securities Premium A/c
(Being the issue of 10,880–6% cumulative
Preference Shares of ` 20 each for ` 22,50)
2,44,800
2,17,600
27,200
2.82 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(ii) 9% Debenture A/c Dr.
Premium on Redemption A/c Dr.
To Debenture holders A/c
(Being the amount due to debenture holders
opted for (ii) option)
3,60,000
7,200
3,67,200
Debenture holders A/c Dr.
Discount on Issue of Debenture A/c Dr.
To 10% Debentures A/c
(Being the issue of 3,825 debentures of ` 100
each @ ` 96 each)
3,67,200
15,300
3,82,500
2005 - Dec [1] {C} Attempt the following:
(iv) The following balances appeared in the books of a company on 1st April, 2004:
`
12% Debentures 8,00,000
12% Debenture sinking fund. 6,00,000
12% Debenture sinking fund investments
(represented by 10% Govt. bonds secured of ` 7,20,000) 6,00,000
Annual contributions of ` 1,28,000 to sinking fund is to be made on 31st
March every year. On 31st March, 2005, balance at bank was ` 4,00,000 after
receipt of interest. The company sold the investments at 80% and debentures
were redeemed. You are required to prepare — (i) 12% debentures account; (ii)
debenture sinking fund account; (iii) debenture sinking fund investments
account; and (iv) bank account. (4 marks)
Answer :
Dr. 12% Debentures A/c Cr.
Date Particulars `̀̀̀ Date Particulars `̀̀̀
31.3.2005 To Bank (Debenture
redeemed)
8,00,000 1.4.2004 By Balance b/d 8,00,000
8,00,000 8,00,000
Dr. 12% Debentures Sinking Fund A/c Cr.
Date Particulars `̀̀̀ Date Particulars `̀̀̀
31.3.2005 To Debenture Sinking
Fund Investment A/c
(Loss on sale of
investment)
24,000 1.4.2004
31.3.2005
By Balance b/d
By Profit & Loss
Appropriation A/c
(Yearly transfer)
6,00,000
1,28,000
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.83
31.3.2005 To General Reserve
A/c (transfer-
balancing figure)
7,76,000
31.3.2005 By Bank Interest
on Sinking Fund) 72,000
8,00,000 8,00,000
12% Debentures Sinking Fund Investment A/c
Date Particulars `̀̀̀ Date Particulars `̀̀̀
1.4.2004 To Balance b/d
(NV ` 7,20,000) 6,00,000
31.5.2005
31.3.2005
By Bank (sale proceeds)
By 12% Debentures
Sinking Fund A/c
5,76,000
24,000
6,00,000 6,00,000
Bank Account
Date Particulars `̀̀̀ Date Particulars `̀̀̀
31.3.2005
31.3.2005
To Balance b/d
(Including interest on
sinking fund)
To 12% Debenture
Sinking Fund Inves-
tment A/c
4,00,000
5,76,000
31.3.2005
31.3.2005
By 12% Debentures A/c
By Balance c/d
8,00,000
1,76,000
9,76,000 9,76,000
Working Notes :
1. Proceeds on sale of investment = ` 7,20,000 × 80/100 = ` 5,76,000
2. Interest received on Sinking Fund = ` 7,20,000 × 10/100 = ` 72,000
2006 - June [3] (a) Journalise the following transactions :
(i) Issue at 10% discount, 3,000, 9% debentures of ̀ 100 each, redeemable at par.
(ii) Issue at 10% premium, 4,000, 10% debentures of ` 100 each, redeemable at
par.
(iii) Issue at par, 2,000, 8% debentures of ` 100 each, redeemable at premium of
5%.
(iv) Issue at 10% discount, 2,000, 9% debentures of ` 100 each, redeemable at
premium of 5%.
Also give journal entry in case of (iv) above at the time of redemption of
debentures. (Note: Narrations need not be given). (5 marks)
2.84 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer : Journal Entries
Particulars Dr.
(`̀̀̀)
Cr.
(`̀̀̀)
(i) Bank A/c Dr.
Discount on issue of Debenture A/c Dr.
To 9% Debenture A/c
2,70,000
30,000
3,00,000
(ii) Bank A/c Dr.
To 10 % Debenture A/c
To Securities Premium A/c
4,40,000
4,00,000
40,000
(iii) Bank A/c Dr.
Loss on issue of Debenture A/c Dr.
To 8 % Debenture A/c
To Premium on Redemption of Debentures.
2,00,000
10,000
2,00,000
10,000
(iv) Bank A/c Dr.
Loss on issue of Debenture A/c Dr.
To 8 % Debenture A/c
To Premium on Redemption of Debentures A/c
1,80,000
30,000
2,00,000
10,000
(v) 9% Debentures A/c Dr.
Premium Redemption of
Debentures A/c Dr.
To Bank A/c
2,00,000
10,000
2,10,000
2006 - Dec [3] (a) Aman Ltd. made the following issues of debentures :
(i) 6,000, 9% Debentures of ` 100 each for cash at 10% discount.
(ii) To bank for a loan of ` 7,00,000 as collateral security, 10,000 debentures of
` 100 each.
(iii) Aman Ltd. also purchased building and machinery worth ` 5,40,000 and
` 4,60,000 respectively from Baman Ltd. The purchase consideration was settled
at ` 9,50,000 to be satisfied by issue of 9,500, 15% debentures of ` 100 each.
Journalise the above transactions in the books of Aman Ltd. (5 marks)
Answer :
Aman Ltd.
Journal Entries
Journal Entries Dr. (`̀̀̀) Cr. (`̀̀̀)
(i) Bank Dr.
Discount on issue of Debenture A/c Dr.
To 9% Debenture A/c
5,40,000
60,000
6,00,000
[Chapter #### 3] Issue and Redemption of Debentures OOOO 2.85
(Issue of 6,000 debentures of ` 100 each, payment
being received @ ` 90/- per debenture ` 10 per
debenture being the discount allowed on issue of
debentures)
(ii) No entry
(Alternatively, following entry may be passed)
Debentures Suspense Account Dr.
To Debentures (Collateral Security) Account
(Debentures issued to bank by way of collateral
security for a loan of ` 7,00,000 taken from it)
10,00,000
10,00,000
(iii) Building A/c Dr.
Machinery A/c Dr.
To Baman Ltd.
To Capital Reserve A/c
(Purchase of sundry assets and transfer of capital
profit as per agreement with vendor dated......)
5,40,000
4,60,000
9,50,000
50,000
(iv) Baman Ltd. Dr.
To 15 % Debentures A/c
(Being issue of debentures allotted to vendors for
consideration other than cash as per Board resolution)
9,50,000
9,50,000
2007 - Dec [4] (c) Journalise the following transactions:
(i) 950, 14% Debentures of ̀ 100 each, issued at par and redeemable at par, were
converted into equity shares of ` 10 each issued at par.
(ii) 950, 14% Debentures of ̀ 100 each, issued at par and redeemable at par, were
converted into equity shares of ` 10 each issued at a discount of 5%.
(iii) ` 95,000, 14% debentures of ` 100 each, issued at par and redeemable at par,
were converted into equity shares of ` 10 each issued at ` 9.50 paid!up.
(2 marks each)
Answer :
Journal Entries
Particulars Dr. (`̀̀̀) Cr. (`̀̀̀)
(i) Entry in all cases :
14% Debentures A/c Dr.
To Debenture holders A/c
(Being the amount due to debenture holders)
95,000
95,000
2.86 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(ii) Additional entry in case of (i)
Debenture holders' A/c Dr.
To Equity Share Capital A/c
(Being the issue of 9,500 equity shares of ` 10 each at
par on conversion of 950 debentures)
95,000
95,000
(iii) Additional entry in case of (ii)
Debenture holders' A/c Dr.
Discount on Issue of Shares A/c Dr.
To Equity Share Capital A/c
(Being the issue of 10,000 equity shares of ̀ 10 each at
5% discount on conversion of 950 debentures)
95,000
5,000
1,00,000
Additional entry case of (iii)
Debenture holders' A/c Dr.
To Equity Share Capital A/c
(Being the issue of 10,000 equity shares of ` 10 each
as ` 0.50 paid up on conversion of 950 debentures)
95,000
95,000
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Practical 5
Total 5
2.87
Star Rating
On the basis of Maximum marks from a chapter j
On the basis of Questions included every year from a chapter jj
On the basis of Compulsory questions from a chapter j
4 Underwriting of Issues and
Acquisition of Business
This Chapter Includes : Underwriting Agreement; Underwriters and Brokers;
Types of Underwriting; Underwriting Commission; Marked and Unmarked
Applications; Liability of Underwriters; Acquisition of Business; Ascertain Profit or
Loss Prior to Incorporation; Preliminary exp.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
2.88 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(ii) Loss suffered from the date of acquisition of business to the date of incorporation
should be debited to —
(a) Goodwill account
(b) Profit and loss account
(c) Capital reserve account
(d) Capital reduction account. (1 mark)
Answer :
(a) Goodwill account;
2009 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(iv) The law limits the commission in case of issue of shares to 10% of the issue
price of shares and in case of debentures to 5% or such lower rate as is provided
in the articles of association. (2 marks)
Answer :
(iv) Incorrect: The Companies Act, 1956 limits the Commission in case of issue of
shares to 5 percent of the issue Price of Shares and in case of debentures to 2.5
percent of such lower rate mentioned in the Articles of Association.
2009 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(ii) An underwriter while entering into a contract for issue of shares should be a
company. (2 marks)
Answer :
(ii) Incorrect : The underwriters may be individual/partnership or Joint Stock
Companies.
2009 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
(ii) Profit prior to incorporation should be credited to______account. (1 mark)
Answer :
(ii) Capital reserve
2010 - June [1] {C} (b) Choose the most appropriate answer from the given options inrespect of the following:
(v) Profit prior to incorporation is transferred to—(a) General reserve(b) Capital reserve(c) Goodwill account(d) Profit and loss account. (1 mark)
Answer :(v) (b) Capital reserve
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.89
2010 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(v) An underwriter while entering into a contract for issue of shares should be a
registered company. (2 marks)
Answer :
(v) False: The underwriter need not be a registered company, it can be an individual
or partnership firm also.
2010 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(v) Loss suffered from the date of acquisition of business to the date of incorporation
should be debited to !
(a) Goodwill account
(b) Profit and loss account
(c) Capital reserve account
(d) Capital reduction account (1 mark)
Answer :
(v) (a) Goodwill account.
2010 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaceswith appropriate word (s)/figure(s) :
(i) The applications bearing the stamp of the respective underwriters arecalled____. (1 mark)
Answer:(i) The applications bearing the stamp of the respective underwriters are called
marked applications.2011 - June [1] {C} (a) Write the most appropriate answer from the given options inrespect of the following :
(ii) Profit prior to incorporation is transferred to —(a) General reserve (b) Capital reserve(c) Profit and loss account(d) None of the above.
(v) At the time of issuance, shares can be underwritten by —(a) Only one underwriter (b) At least 2 or more persons jointly(c) Any number of underwriters (d) None of the above. (1 mark each)
Answer :(ii) (b) Capital reserve (v) (c) Any number of underwriters
2.90 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
2011 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements aretrue or false:
(iii) Underwriting commission and brokerage both cannot be provided to anyindividual underwriter. (2 marks)
Answer :(iii) The statement is false:– Underwriting commission is the consideration payable
to the underwriters for underwriting the issue of shares or debentures of acompany.
The commission payable to brokers who induce their constituents tosubscribe for the shares is terms as brokerage but they do not take anyresponsibility of subscribing to the shares or debentures of the company.
2011 - Dec [1] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(iii) Expenses incidental to the creation and floatation of a company are called —(a) Underwriting expenses(b) Preliminary expenses(c) Trade expenses(d) Establishment expenses. (1 mark)
Answer :(iii) (b) Preliminary expenses.
2011 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaceswith appropriate word(s)/figure(s):
(iii) Unless loss prior to incorporation is completely written off, it must be shown asan asset in the assets side of the balance sheet under the heading ________.
(1 mark)Answer :
(iii) Miscellaneous expenditure.
2012 - June [1] {C} (a) State, with reasons in brief, whether the following statementsare true or false:
(ii) The apportionment of profit or loss of the business between pre-incorporationand post-incorporation periods can be done on time basis only. (2 marks)
Answer :(ii) The statement is False: Time basis apportionment of expenses principle is
based on the assumption that profits are carved by the business evenlythroughout the year. But in reality, since no business can be expected to earnits profit evenly throughout the year, apportionment of profit or loss solely on thebasis of time is not at all satisfactory.
Hence, apportionment of profit and loss of the business between pre and
post incorporations should be done on equitable basis that is time basis or turn
over basis depending on the nature of each particular items.
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.91
2012 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements aretrue or false :(ii) Both underwriting commission and brokerage cannot be provided to an individual
underwriter. (2 marks)(b) Write the most appropriate answer from the given options in respect of the
following :(v) Profit prior to incorporation of a company is transferred to !
(a) General reserve(b) Capital reserve(c) Goodwill account(d) Statement of profit and loss. (1 mark)
Answer:(ii) (a) This Statement is false:
Both underwriting commission i.e. brokerage can be paid to an individual asunderwriting commission is paid to an underwriter in addition to brokerage fortaking the responsibility to get full subscription to the shares and debentures of thecompany.
(v) (b) Capital reserve.
2013 - June [1] {C} (b) Write the most appropriate answer from the given options inrespect of the following:
(v) Expenses incidental to the creation and floatation of a company are called —(a) Underwriting expenses(b) Preliminary expenses(c) Trade expenses(d) Establishment expenses. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s):
(ii) Preliminary expenses being of capital nature may be written-off against_______.(1 mark)
Answer :(b) (v) (b) Preliminary expenses.(c) (ii) Capital profits2013 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(ii) Carriage outwards should be divided between pre-incorporation and post-
incorporation periods !
(a) In time ratio
(b) In weighted time ratio
(c) In sales ratio
(d) None of the above. (1 mark)
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SHORT NOTES
2008 - Dec [2] (a) Write short notes on the following :
(iii) Firm underwriting. (3 marks)
Answer :
If an underwriter enters into an agreement with the company that he will purchase a
certain number of shares or debentures of the company without carrying as to the
number of shares which will be taken up by the public on the basis of the prospectus.
It is known as Firm Underwriting. For example a company has issued 3,00,000 shares
of ` 10 each out of which firm underwriting is 10,000 shares. Public has subscribed for
3,00,000 shares. As 10,000 shares are reserved for underwriters, only 3,00,000-10,000
i.e.290,000 shares will be issued to the public and application money of remaining
(3,00,000!2,90,000) or 10,000 shares will be returned to the public. Normally an
underwriter can not set off his firm underwriting liability, but if the contract provides
setting off firm under writing out of underwriting liability, it may be done.
DISTINGUISH BETWEEN
2008 - Dec [4] (a) Distinguish between the following :
(i) 'Underwriters' and 'brokers'.
(ii) 'Marked applications' and 'unmarked applications'. (3 marks each)
Answer :
(i) Underwriter : An underwriter guarantee that if the public do not take up all the
shares, the underwriter will himself purchase the remaining shares and thus the
company is able to obtain subscription for all the shares issued. The company
undertakes to pay an underwriting commission should not exceed 5 per cent of
the nominal value of a share and 21/2 per cent in the case of debentures.
Brokers : A brokerage contract is different from an underwriting contract. A
broker undertakes only to find buyers who are willing to buy shares and
debentures and does not guarantee the sale of a specified number of securities
(Shares, debentures). Thus if shares and debentures could not be sold by the
company, the broker will not buy the securities which have not been subscribed
for.
(ii) When shares and debentures of the company are issued to the public, whatever
shares and debentures are issued by the underwriters to the public, they place
a seal of their name and address on the application form, and when the form
bearing a seal of the under writers is received by the company, it becomes clear
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.93
to the company as to how many forms are due to the efforts of a particular
underwriter. Such applications which bear the seal of the name and address of
the underwriter are called marked applications or forms. This is necessary in the
case of such companies whose shares are underwritten by a number of
underwriters. Those applications are called unmarked which do not bear the seal
of any underwriter.
DESCRIPTIVE QUESTIONS
2011 - Dec [2] (b) What do you mean by ‘profits prior to incorporation’? How such
profits are apportioned and utilised? (4 marks)
Answer :
Any profit arising during the period prior to incorporation, being capital in nature, is
credited to capital reserve account. Such capital reserve may be utilized for writing off
goodwill created at the time of acquisition of business or capital losses such as
preliminary expenses, discount on issue of shares or debentures or underwriting
commission etc.
Accounting Treatment of pre-incorporation profit:
Any profit prior to incorporation may be dealt with as follows:-
(i) Credited to capital reserve account
(ii) Credited to Goodwill account to reduce the amount of goodwill arising from
acquisition of business.
(iii) Utilize to write down the value of fixed assets acquired.
NOTE: The apportionment of profits between the pre-incorporation and post
incorporation periods can be done on any one of the following basis.
(i) On the basis of time: Under this approach it is assumed that profits have been
earned evenly throughout the year. Therefore, net profit or net loss for the year
is divided between pre and post incorporation periods in the ratio of time.
(ii) On the basis of sales: Under this approach it is assumed that sales (turnover)
is spread evenly throughout the year. Therefore, profit or loss of the whole year
is allocated between pre and post incorporation period in the ratio of sales.
(iii) Equitable Basis: The assumptions under the above two approaches are not
realistic. Under the equitable basis method each item of income and expenses
is allocated between pre and post incorporation periods on a base suitable to its
nature. The expenses of fixed nature are allocated in the ratio of time and
expenses which vary with sales, are allocated in the ratio of turnover.
2.94 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
2013 - June [4] (b) Explain the nature of profit or loss prior to incorporation. How is it
treated in the books of accounts? (3 marks)
Answer :
Profit prior to incorporation : Please refer 2011 - Dec [2] (b) on page no. 93
Loss prior to incorporation : Loss, is a capital nature, should be debited to Separate
Account called loss prior to Incorporation Account which can be written off against other
capital profits of the company or it can be treated as goodwill and debited to goodwill
account.
2013 - Dec [3] (b) Firm underwriting is a definite commitment by the underwriters.
Explain. (4 marks)
PRACTICAL QUESTIONS
2009 - Dec [2] (b) Suraj Ltd. issued to public 1,50,000 equity shares of ` 100 each at
par. ` 60 per share were payable along with the application and the balance on
allotment. This issue was underwritten equally by A, B, and C for a commission of 3%.
Applications for 1,40,000 shares were received as per details given below :
Underwriter Firm Marked Total
Underwriting Applications Applications
Applications
A 5,000 40,000 45,000
B 5,000 46,000 51,000
C 3,000 34,000 37,000
Unmarked Applications — — 7,000
1,40,000
It was agreed to credit the unmarked applications to A and C. Suraj Ltd. accordingly
made the allotment and received the amounts due from the public. The underwriters
settled their accounts.
You are required to– (i) prepare a statement of liability of the underwriters
assuming that the benefit of firm underwriting is given to individual underwriters; and (ii)
journalise the above transactions (including cash) in the books of Suraj Ltd.
(6 marks)
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.95
Answer :In the Books of Suraj Ltd.
Statement showing number of shares to be taken-up by each underwriterShares
Particulars A B C TotalNo of shares underwritten 50,000 50,000 50,000 1,50,000Less: Firm underwriting 5,000 5,000 3,000 13,000
45,000 45,000 47,000 1,37,000Less: Marked Applications 40,000 46,000 34,000 1,20,000
5,000 (1000) 13,000 17,000Less: Unmarked Applications (1:1) 3,500 - 3,500 7,000Less: Surplus of B`s shares 1,500 (1000) 9,500 10,000transferred (1:1) 500 (1000) 500 ---Net liability 1,000 — 9,000 10,000Add: Firm underwriting 5,000 5,000 3,000 13,000Total Liability 6,000 5,000 12,000 23,000
Journal Entries
Particulars Dr.(`̀̀̀) Cr.(`̀̀̀)
Bank A/c Dr. To Share Application A/c(Application money on 1,40,000 shares)
84,00,00084,00,000
A A/c Dr.C A/c Dr.
To Share Application Account(Application money due from A and B on shares unsubs-cribed)
60,0005,40,000
6,00,000
Underwriting Commission DrTo A A/cTo B A/c
To C A/c (Underwriting commission due)
4,50,0001,50,0001,50,0001,50,000
A A/c Dr.B A/c Dr.
To Bank A/c (Excess amount paid to A and B)
90,0001,50,000
2,40,000
Bank A/c Dr
To C
(Balance amount of application money received from C)
3,90,000
3,90,000
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Share Application A/c Dr
To Share Capital A/c
(Transfer of Application money)
90,00,000
90,00,000
Share Allotment A/c Dr
To Share Capital A/c
(Money due on allotment)
60,00,000
60,00,000
Bank A/c Dr
To Share Allotment A/c
(Amount received on allotment)
60,00,000
60,00,000
2010 - June [4] (b) Rax Ltd. invited applications from public for 1,00,000 equity sharesof ` 10 each at a premium of ` 5 per share. The entire issue is underwritten by theunderwriters A, B, C, and D to the extent of 30%, 30%, 20%, and 20% respectively withthe provision of firm underwriting of 3,000, 2,000, 1,000 and 1,000 shares respectively.Underwriters are entitled to maximum commission as per law. The company hasreceived applications for 70,000 shares from public out of which applications for 19,000,10,000 21,000, and 8,000 shares were marked in favour of A, B, C and D respectively.Calculate the liability of each underwriter treating firm underwriting on par with markedapplications. Also ascertain the underwriting commission @ 2.5% payable to eachunderwriter. (6 marks)Answer :
Liability of Underwriters (No. of shares)
Particulars Total A B C D
Gross Liability
Less: Unmarked
Applications
Balance
Less: Marked Applications
Balance
Less: Firm Underwriting
Balance
Adjustment
Net Liability
Total Liability including
firm underwriting
1,00,000
12,000
88,000
58,000
30,000
7,000
23,000
!
23,000
30,000
30,000
3,600
26,400
19,000
7,400
3,000
4,400
&1,650
2,750
5,750
30,000
3,600
26,400
10,000
16,400
2,000
14,400
&1,650
12,750
14,750
20,000
2,400
17,600
21,000
&3,400
1,000
&4,400
+4,400
&
1,000
20,000
2,400
17,600
8,000
9,600
1,000
8,600
&1,100
7,500
8,500
Underwriting Commission
The underwriting commission is payable at the rate of 2.5% of the issue price of shares.
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.97
Thus, commission payable to A = 30,000 × ` 15 × = ` 11,250
B = ` 11,250
C = 20,000 × ` 15 × = ` 7,500
D = ` 7,500
2012 - June [2] (b) The Underwriters Ltd. agreed to underwrite the new issue of 50,000
equity shares of ̀ 100 each of A Ltd. The agreed commission was 5% payable as 40%
in cash and rest in fully paid-up equity shares. The public subscribed for 30,000 shares
and the rest had to be taken by the underwriters. These shares were subsequently
quoted in the market at 10% discount.
Pass the necessary journal entries in the books of A Ltd. (6 marks)
Answer :
Journal Entries in the books of A Limited
`̀̀̀ `̀̀̀
Bank A/c Dr.
To Equity share Application A/c
(Being application money received on 30,000 shares)
30,00,000
30,00,000
Equity share Application A/c Dr.
To Equity share Capital A/c
(Being equity shares allotted)
30,00,000
30,00,000
Underwriters Ltd. A/c Dr.
To Equity share capital A/c
(Being 20,000 shares allotted to underwriter against liability)
20,00,000
20,00,000
Underwriting Commission A/c Dr.
To Underwriters Ltd. A/c
(Being Underwriting Commission due)
2,50,000
2,50,000
*Bank A/c Dr.
To Underwriters Ltd. A/c
(Being amount received against liability)
20,00,000
20,00,000
*Underwriters Ltd. A/c Dr.
To Bank
To Equity share Capital A/c
(Being Underwriting Commission paid)
2,50,000
1,00,000
1,50,000
*Note: Following entries can be passed as alternate answers if commission amount
is adjusted from the equity shares Liability:
2.98 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Bank account Dr. ` 18,50,000
To Underwriters Ltd. A/c ` 18,50,000
(Being ` 1,50,000/- is adjusted against Commission in Equity Shares)
Underwriters Ltd. A/c Dr. ` 1,00,000
To Bank A/c ` 1,00,000
(Being Commission of ` 1,00,000/- is paid in cash and ` 1,50,000/ is adjusted for the
underwriting liability)
2012 - June [3] (a) Moon Ltd. was incorporated on 30th September, 2009 to takeover
the business of Star Ltd. from 1st April, 2009. The financial accounts for the business
for the year ended 31st March, 2010 disclosed the following information:
`̀̀̀
Sales from 1-04-2009 to 30-09-2009 1,20,00,000
Sales from 1-10-2009 to 31-03-2010 1,80,00,000
Cost of sales 1,95,00,000
Salaries 15,00,000
Other administrative expenses (rent and rates) 4,50,000
Selling expenses 3,00,000
Directors’ remuneration 75,000
Depreciation of fixed assets 1,50,000
Interest on debentures 9,000
You are required to prepare the profit and loss account for the year ended 31st March,
2010 showing computation of profit between the periods prior to and after incorporation.
(6 marks)
Answer :
Step 1 : Calculation of Time Ratio
Time Ratio = Pre incorporation period: post incorporation period
= (01.04.2009 to 30.09.2009): (01.10.2009 to 31.3.2010)
= 1:1
Step 2 : Calculation of Sales Ratio
Sales Ratio = Pre incorporation period sales: Post incorporation period sales
= 1,20,00,000:1,80,00,000
= 2 : 3
Step 3 : Calculation of Gross Profit
Total Sales = ` 1,20,00,000 + 1,80,00,000
= ` 3,00,00,000
Gross Profit = Total Sales - Cost of Sales
= ` 3,00,00,000 - ` 1,95,00,000
= ` 1,05,00,000
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.99
Step 4 :
Profit and Loss A/c showing Pre Incorporation and Post Incorporation Profit
Particulars Basis Amount Particulars Basis Amount
Pre.
Incorp
`̀̀̀
Post
Incorp
`̀̀̀
Pre.
Incorp
`̀̀̀
Post
Incorp
`̀̀̀
To Salaries Time 7,50,000 7,50,000 By GP Sales 42,00,000 63,00,000
To other Adm Exp. Time 2,25,000 2,25,000
To Selling Exp. Sales 1,20,000 1,80,000
To Director’s Post
Remuneration Incorp 75,000
To Depreciation Time 75,000 75,000
To Interest on Post
Debenture Incorp 9,000
To Capital
Reserve 30,30,000
To Net Profit 49,86,000
42,00,000 63,00,000 42,00,000 63,00,000
Alternative Solution for Step 4
Particulars Basis Amount Particulars Basis Amount
Pre.
Incorp
`̀̀̀
Post
Incorp
`̀̀̀
Pre.
Incorp
`̀̀̀
Post
Incorp
`̀̀̀
To Salaries Time 7,50,000 7,50,000 By GP Sales 42,00,000 63,00,000
To other Adm Exp. Time 2,25,000 2,25,000
To Selling Exp. Sales 1,20,000 1,80,000
To Director’s Post
Remuneration Incorp 37,500 37,500
To Depreciation Time 75,000 75,000
To Interest on Time
Debenture* 4,500 4,500
To Capital Reserve 29,88,000
To Net Profit 50,38,000
42,00,000 63,00,000 42,00,000 63,00,000
2.100 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
It is assumed that
• The Directors fee of old company is also included in the director fee and the old
company is also having same No. of directors at the same salary level.
• Old company was also having debentures of the same value.
2012 - Dec [2] (b) Astro Ltd. has authorised capital of ̀ 50,00,000 divided into 1,00,000equity shares of `50 each. The company issued for subscription 50,000 shares at thepremium of `10 each. The entire issue was underwritten as follows :
Underwriter ! X 30,000 shares (firm underwriting ! 5,000 shares)Underwriter ! Y 15,000 shares (firm underwriting ! 2,000 shares)Underwriter ! Z 5,000 shares (firm underwriting ! 1,000 shares)
Out of the total issue, 45,000 shares including firm underwriting were subscribed. Thefollowing were the marked forms:
Underwriter ! X 16,000 sharesUnderwriter ! Y 10,000 sharesUnderwriter ! Z 4,000 shares
You are required to !(i) Calculate the liability of each underwriter; and(ii) Make the accounting entries required to be passed in this regard.
(9 marks)Answer:
Statement of Underwriter’s liability(Firm underwriting shares are treated as marked)
Particulars Liability of underwriters
X Y Z Total
Gross Liability 30,000 15,000 5,000 50,000
Less : Marked Applications 21,000 12,000 5,000 38,000
Balance 9,000 3,000 Nil 12,000
Less : Unmarked application in the
ratio of gross liability 4,200 2,100 700 7,000
Balance 4,800 900 (700) 5,000
Particulars Liability of underwriters
X Y Z Total
Credit of Z in ration of Gross Liability (467) (233) 700 —
Underwriters’ liability 4,333 667 0 5,000
Add : Firm Applications 5,000 2,000 1,000 8,000
Total liability 9,333 2,667 1,000 13,000
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.101
Total Application 45,000
Less : Marked Application 30,000
Firm Underwriting 8,000 38,000
Unmarked Application 7,000
Journal Entries Amt in `
(i)X Dr. 5,59,980
Y Dr. 1,60,020
Z Dr. 60,000
To Share Capital 6,50,000
To Securities Premium 1,30,000
(Shares allotted to underwriters in
ratio of their liability)
(ii) Underwriting Commission Account
Dr. 1,25,000
To X 75,000
To Y 37,500
To Z 12,500
(Underwriting commission due to
underwriters. Rate assumed as 5% of
face value of shares)
(iii) Bank Account Dr. 6,55,000
To X 4,84,980
To Y 1,22,520
To Z 47,500
(Balance payment received from
underwriters)
Entries for commission that underwriting commission is 5% of the value at which
shares are issued and premium is considered in calculation of underwriting
commission, then journal entry would be:
2.102 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(iv) Underwriting Commission Account Dr. 1,50,000
To X 90,000
To Y 45,000
To Z 15,000
(Underwriting commission due to
underwriters. Rate assumed as 5% of
face value of shares)
Accordingly the value due from underwriters/payable to underwriter will change.
Alternatively
Calculation of liability of underwriters
(Firm underwriting shares are treated as un-marked)
Particulars Liability of underwriters
X Y Z Total
Gross liability 30,000 15,000 5,000 50,000
Less: Marked Applications 16,000 10,000 4,000 30,000
Balance 14,000 5,000 1,000 20,000
Less: Unmarked application in the
ratio of gross liability
9,000 4,500 1,500 15,000
Balance 5,000 500 -500 5,000
Credit of Z in ration of Gross Liability -333 -167 500 500
Underwriters’ liability 4,667 333 0 5,000
Add Firm Applications 5,000 2,000 1,000 8,000
Total liability 9,667 2,333 1,000 13,000
Total application 45,000
Less: Marked Application 30,000
Unmarked Application 15,000
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.103
(i) X Dr. 5,80,020
Y Dr. 1,39,980
Z Dr. 60,000
To Share capital 6,50,000
To Securities premium 1,30,000
(Shares allotted to underwriters in
ratio of their liability)
(ii) Underwriting Commission
Account
Dr. 1,25,000
To X 75,000
To Y 37,500
To Z 12,500
(Underwriting commission due to
underwriters. Rate assumed as
5% of face value of shares)
(iii) Bank Account Dr. 6,55,000
To X 5,05,020
To Y 1,02,480
To Z 47,500
(Balance payment received from
underwriters)
2013 - June [2] (b) KBC Ltd. issued 50,000 equity shares. The whole of the issue was
underwritten as follows:
Underwriter – K : 40%
Underwriter – B : 30%
Underwriter – C : 30%
Applications for 40,000 shares were received in all, out of which applications for 10,000
shares had the stamp of Underwriter - K; those for 5,000 shares that of Underwriter- B;
and those for 10,000 shares for Underwriter - C.
The remaining applications for 15,000 shares did not bear any stamp.
Determine the liability of the underwriters. (5 marks)
2.104 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer :
Calculation of Net Liability of Underwriters
Particulars K B C
Gross Liability in the agreed ratio of 40:30:30
Less: Market Applications
Balance Left
Less: Unmarked Applications in the ratio of
gross liability
Net liability
20,000
10,000
10,000
6,000
4,000
15,000
5,000
10,000
4,500
5,500
15,000
10,000
5,000
4,500
500
2013 - Dec [2] (b) Star Ltd. was incorporated on 1st July, 2012 to acquire a running
business w.e.f. 1st April, 2012. The accounts for the year ended 31st March, 2013
disclosed the following:
(i) There was a gross profit of ` 3,00,000.
(ii) The sales for the year amounted to ̀ 12,00,000 of which ̀ 2,40,000 were for the
first six months.
(iii) The expenses debited to profit and loss account included !
Directors’ fees ! ` 15,000
Bad debts ! ` 3,600
Advertising ! ` 12,000 (under a contract amounting to
` 1,000 per month)
(iv) Salaries and general expenses ` 64,000.
(v) Preliminary expenses written-off ` 5,000.
(vi) Donation to a political party given by the company ` 5,000.
Prepare a statement showing the amount of profit made before and after incorporation.
(6 marks)
CS Inter Gr. I
SHORT NOTES
2004 - June [3] (a) Write a short note on 'preliminary expenses'. (3 marks)
Answer :
These are expenses incidental to the formation of a company and the amount there of
must appear in the prospectus.
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.105
This includes:
(i) Cost of preparation of memorandum of association and articles of association;
(ii) Registration Cost;
(iii) Prospectus Cost;
(iv) Cost of preliminary agreements and stamp duties thereon;
(v) Cost of companies seal and statutory books;
(vi) Valuer’s fees for report, certificates etc; and
(vii) Cost of printing and stamping letters of allotment.
The preliminary expenses are debited to preliminary expenses account and
credited to bank account. Strictly speaking, preliminary expenses are of capital nature
and should be shown on the assets side of the balance sheet under the heading ‘
Miscellaneous Expenditure; It may be written off against capital profits. Alternatively, it
may be treated as deferred revenue expenditure and written off over a number of years.
DESCRIPTIVE QUESTIONS
2004 - Dec [1] {C} Attempt the following:
(iii) What are the different bases of apportionment of pre-incorporation and post-
incorporation profits ? (5 marks)
Answer :
The question of apportionment of profits between pre-incorporation and post
incorporation periods arises when the trading and profit and loss account of a company
is prepared for the whole accounting period. This is done on any of the following basis.
1. Time Basis : Total profit of the year is divided in proportion of the time of the prior
period and subsequent period. Suppose prior period months are 4 and months of
the subsequent period are 8, then total profit will be divided in the ratio of 4:8 . This
division is made on the assumption that profits are evenly earned throughout the
year. But this method is not correct because profits are not made evenly throughout
the year.
2. Turnover method : Total profit of the year is allocated in the ratio of sales of the
prior period and the sales of the subsequent period. This is comparatively better
method of allocation of profit.
3. Equitable Basis : The assumptions under the above two approaches are not
realistic. Under the equitable basis method each item of income and expenses is
allocated between pre-and post incorporation periods on a base suitable to its
nature. The expenses of fixed nature are allocated in the ratio of time and
expenses which vary with sales, are allocated in the ratio of turnover. For
allocating gross profit it is assumed that there is no change in the gross profit ratio,
hence this is allocated in the ratio of turnover.
2.106 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
2006 - Dec [4] (a) Explain the meaning and accounting treatment of preliminary
expenses’ and ‘pre-operative expenses’. (5 marks)
Answer :
Preliminary expenses : These are expenses incidental to the formation of a company
and the amount thereof must appear in the prospectus. The following items are usually
included under the head, preliminary expenses:
(i) Cost of registering the company, fees and stamps duties thereon.
(ii) Cost of preparing and printing Memorandum and Articles of Association.
(iii) Cost of preparing, printing, circulating and advertising prospectus.
(iv) Cost of preliminary agreements and stamp duties thereon.
Pre-operative expenses are expenses incurred by a company after the stage of
incorporation till the time it is in a position to start its operations and earn revenue.
These expenses are also accumulated and treated as deferred revenue expenditure
and recovered through profit and loss account over a period of 3 to 5 years.
PRACTICAL QUESTIONS
2004 - Dec [4] (a) Cybertech Ltd. issued 1,00,000 shares for public subscription and
these were underwritten by A, B and C in the ratio of 25%, 30% and 45% respectively.
Applications were received for 80,000 shares and of these applications for 16,000
shares had the stamp of A, those for 20,000 shares had the stamp of B and those of
24,000 shares had the stamp of C. The remaining applications did not bear any stamp.
On the basis of above information, work out the liability of the individual
underwriters. (3 marks)
Answer :
Computation of Net Liability of Underwriters
A
(25%)
Shares
B
(30%)
Shares
C
(45%)
Shares
Gross liability in the agreed
Ratio - 25:30:45
Less: Marked application
25,000
16,000
30,000
20,000
45,000
24,000
9,000 10,000 21,000
Less: Unmarked applications in the ratio of gross liability
i.e. 25.30.45 5,000 6,000 9,000
Net Liability 4,000 4,000 12,000
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.107
2005 - June [1] {C} (c) P Ltd. purchased the business of Q Ltd. for ̀ 10,80,000 payable
in fully paid shares. Accordingly, P Ltd. allotted equity shares of `10 each fully paid in
full satisfaction of the claim of Q Ltd. Pass the necessary journal entries in the books of
P Ltd. based on following assumptions :
(i) shares are issued at par; and
(ii) shares are issued at a premium of 25%. (4 marks)
Answer :
Journal Entries in the Books of Zenith Ltd.
`̀̀̀ `̀̀̀
Sundry Assets
To Q. Ltd.
(Purchase of assets from Q. Ltd. as per
agreement dated .....)
Dr. 10,80,000
10,80,000
If shares are issued at par:
Q Ltd.
To Equity Share Capital A/c
(Allotment of 1,08,000 equity shares of ` 10
each to vendors as fully paid-up for
consideration other than cash as per Board’s
resolution dated ....)
Dr. 10,80,000
10,80,000
If shares are issued at a premium of 25%:
Q Ltd.
To Equity Share Capital A/c
To Securities Premium A/c
(Allotment of 86,400 equity shares of ̀ 10 each
at a premium of ` 2.50 per share to vendors as
fully paid-up for consideration other than cash
as per Board’s resolution dated........)
Dr. 10,80,000
8,64,000
2,16,000
2005 - June [3] (b) Airlinks Ltd. made a public issue of 2,50,000 equity shares of ` 10
each, the entire amount payable on application. The entire issue was underwritten as
follows :
Red - 30%; Yellow - 25%; Green - 25%; and White—20% of public issue
respectively.
Red, Yellow, Green and White had also agreed on firm underwriting of 8,000;
12,000; nil and 30,000 shares respectively. The total subscriptions excluding firm
underwriting, including marked applications were 1,80,000 shares.
2.108 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
The marked applications received were as under :
Underwriter No. of shares
Red – 48,000
Yellow – 40,000
Green – 24,000
White – 48,000
Ascertain the net liability of each underwriter. (4 marks)
Answer :
Working Notes:
Shares
(i) Total issue size 2,50,000
Less: Shares subscribed
(including firm underwriting)
(1,80,000 + 50,000) 2,30,300
Shares not subscribed for 20,000
(ii) Total shares subscribed for 2,30,000
Less: Firm underwriting 50,000
Marked applications 1,60,000 2,10,000
Unmarked Applications 20,000
Statement Showing Liability of Underwriters (Shares)
Particulars Total Red Yellow Green White
Gross Liability 2,50,000 75,000 62,500 62,500 50,000
Less: Firm underwriting 50,000 8,000 12,000 Nil 30,000
2,00,000 67,000 50,500 62,500 20,000
Less: Marked Applications 1,60,000 48,000 40,000 24,000 48,000
40,000 19,000 10,500 38,500 (28,000)
Less: Unmarked
applications in gross ratio 20,000 6,000 5,000 5,000 4,000
Liability 20,000 13,000 5,500 33,500 (32,000)
Less: Excess of
subscription of White
divided amongst in their
ratio of underwriting — 12,000 10,000 10,000 (32,000)
Less: Excess of
subscription of Yellow
divided amongst Red &
Green in their ratio.
20,000
—
1,000
2,455
(4,500)
(4,500)
23,500
2,045
Nil
Nil
(1,455) 21,455
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.109
Less: Excess of
subscription of Red
transferred to Green (1,455) (1,455)
Net Liability 20,000 Nil Nil 20,000 Nil
Note: The firm underwritten shares are treated as marked applications.
2005 - Dec [2] (a) Biggie Ltd. made an issue of 10,000, 10% mortgage debentures of
` 100 each at ` 96. The whole of the issue was underwritten by Smart Bulls. 8,500
debentures were applied for and allotted to the public. The underwriters discharged their
liability and were paid commission at the rate of 2% on the nominal value of the
debentures. Show the journal entries. (5 marks)
Answer :
Journal Entries
Particulars Dr. Cr.
Underwritten Commission A/c
To M/s Smart Bulls
(Underwriting commission due to M/s Smart Bulls on
10,000 10% Mortgage Debentures of ̀ 100 each @ 2% of
nominal value of Debentures underwritten)
Dr. 20,000
20,000
10% Mortgage Debenture Applications & Allotment A/c
Discount of issue of Debenture A/c
To 10% Mortgage Debentures Account
(Allotment of 8,500 10% Mortgage Debentures of ` 100
each at a discount of ` 4 per debenture)
Dr.
Dr.
8,16,000
34,000
8,50,000
M/s Smart Bulls
Discount on Issue of Debentures A/c
To 10% Mortgage Debentures Account
(1,500 10% Mortgage Debentures of ` 100 each taken up
by the underwriters @ ` 96 per debenture)
Dr. 1,44,000
6,000
1,50,000
Bank Account
To M/s Smart Bulls
(Being balance due received from M/s Smart Bulls)
Dr. 1,24,000
1,24,000
2006 - June [4] (a) Abrol Ltd. offered to the public 5,000, 9% mortgage debentures of
` 100 each at ̀ 105 and 80% of the issue was underwritten by Smart Bulls for maximum
commission allowed by law. Applications were received from public for 4,000
debentures which were allotted. Show the balance sheet of the company.
(5 marks)
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Answer :
Balance Sheet of Abrol Ltd.
Liabilities `̀̀̀ Assets `̀̀̀
Reserves and Surplus :
Securities Premium
Secured Loans:
9% Mortgage Debentures
24,000
4,80,000
Current Assets, Loans and
Advances:
Current Assets:
Cash at Bank
Loans and Advances
Miscellaneous Expenditure:
Underwriting Commission
4,93,500
—
10,500
5,04,000 5,04,000
Working Notes:
No. of debentures
1. Calculation of underwriter's liability
Gross Liability = 80% of 5,000 4,000
Less: 80% of 4,000 Debentures 3,200
Net Liability 800
2. Debentures allotted to public 4,000
Add: Debentures taken up by M/s Smart Bulls 800
Total number of debentures allotted 4,800
3. Underwriting commission at 2-1/2% of issue price of 4,000 debentures
` = ` 10,500
4. Note: Underwriting commission has been calculated @ 2.5% as the maximum
allowed by the Companies Act. However, underwriting commission @ 1.5% on
amount subscribed by the public and 2.5% on amount devolving on the
underwriters is also in vogue.
5. Dr. Cash Book (Bank Columns) Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To 9% Mortgage Debentures
Application & Allotment A/c
To M/s Smart Bulls
4,20,000
73,500
By Balance c/d 4,93,500
4,93,500 4,93,500
[Chapter #### 4] Underwriting of Issues and Acquisition... OOOO 2.111
6. Dr. M/s Smart Bulls Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To 9% Mortgage Debentures A/c
To Securities Premium A/c
80,000
4,000
By Underwriting Comm. A/c
By Bank a/c (Settlement)
10,500
73,500
84,000 84,000
7. Dr. Securities Premium Account Cr.
Particulars `̀̀̀ Particulars `̀̀̀
To Balance c/d 24,000 By 9% Mortgage Debenture
Application & Allotment A/c
By M/s Smart Bulls
20,000
4,000
24,000 24,000
2007 - June [4] (a) Sampada Ltd. was formed with a capital of ̀ 20,00,000 divided into
2,00,000 equity shares of ` 10 each. All shares were issued to public for subscription.
The issue was underwritten as follows :
Ajay : 80,000 shares; Bijoy : 60,000 shares; and Rajat : 60,000 shares.
Marked applications were received in favour of Ajay for 32,000 shares; Bijoy for
58,000 shares and Rajat for 42,000 shares. Applications for 30,000 shares were not
marked.
Prepare a statement showing net liability of each underwriter. (5 marks)
Answer :
Statement showing the Liability of Underwriters
Particulars Total Ajay Bijoy Rajat
Gross Liability 2,00,000 80,000 60,000 60,000
Less: Marked applications 1,32,000 32,000 58,000 42,000
68,000 48,000 2,000 18,000
Less: Unmarked applications in the ratio
of 4:3:3 30,000 12,000 9,000 9,000
38,000 36,000 -7,000 9,000
Bijoy's surplus distributed to Ajay and
Rajat in the ratio of 4:3 — (4,000) +7,000 (3,000)
Net liability 38,000 32,000 — 6,000
2.112
Star Rating
On the basis of Maximum marks from a chapter jjjj
On the basis of Questions included every year from a chapter jjj
On the basis of Compulsory questions from a chapter jjjj
5 Final Accounts of
Joint Stock Companies
This Chapter Includes : Introduction; Preparation and Presentation of Final
Accounts; Form and Contents of Balance Sheet and Profit & Loss Account;
Schedule VI of the Companies Act, 1956; Managerial Remuneration; Appropriation
of Profits.; transfer of Profits to Reserves; Meaning of Dividend and Interim
Dividend; Declaration of Dividends out of Reserves; Guidelines for Issue of Bonus
Shares; Payment of Interest out of Capital.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.113
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(iii) A company is not under any legal obligation to make good its past losses before
distributing its current profits as dividends. (2 marks)
(v) In India, corporate financial statements are prepared recognising legal forms of
the transaction and ignoring the substance. (2 marks)
Answer :
(iii) Incorrect: In general a company is under no legal obligation to make good a
debit balance in its profit and loss account resulting from past losses before
distributing its current profits. But so much of the loss sustained by a company
in the past years as is attributable to the amount of provisions made for
depreciation must be set off against the current profit of the company before a
dividend is declared. But from the view point of sound commercial policy, it is
desirable to apply current profits in making good lost capital before distribution
of dividends.
(v) Incorrect: Transactions and other events are accounted for and presented in
accordance with their substance and financial reality and not merely with their
legal form. While the legal form of a lease agreement is that the lessee may
acquire no legal title to the leased asset, in the case of financial leases, the
substance and financial reality are that the lessee acquires the economic
benefits of the use of the leased assets for the major part of its economic life.
Therefore, a financial lease is recognized in the lessee's balance sheet both as
an asset and as an obligation to pay future lease payments.
2008 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iii) Pre-paid expenses are shown in balance sheet as —
(a) Current assets
(b) Intangible assets
(c) Wasting assets
(d) Fixed assets. (1 mark)
Answer :
(a) Current assets;
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2009 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(iii) If the rate of dividend declared by a company is 22%, then under the Companies
(Transfer of Profits to Reserves) Rules, 1975 the percentage of profits to be
transferred to reserves should be 10%. (2 marks)
Answer :
(iii) Correct : Under the Companies (Transfer of Profit to Reserve) Rules, 1975 as
amended, if the rate of proposed dividend is more than 20%, then 10% of current
profit is to be transferred to reserve.
2009 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) According to the provisions of section 198 of the Companies Act, 1956,
maximum limit on the total managerial remuneration payable by public company
is_______ of net profits.
(ii) A company must pay the dividends within_______ days of its declaration.
(iii) Preliminary expense is a _________ asset. (1 mark each)
Answer :
(i) 11% (ii) 30 days (iii) fictitious asset.
2009 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(v) Interest cannot be paid out of capital during construction period. (2 marks)
Answer :
(v) Incorrect : Section 208 of the Companies Act- provides that payment of interest
during the period of construction should be charged to capital and the amount
of interest, therefore paid should be added to the cost of respective asset as part
of the cost of construction.
2009 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(iv) Preliminary expenses are —
(a) Current liability (b) Current assets
(c) Fictitious assets (d) Contingent liability. (1 mark)
Answer :
(iv) (c) Fictitious assets
2010 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(ii) In the absence of declaration of dividend, there is no need to provide for
depreciation in the accounts of companies. (2 marks)
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.115
Answer :
(ii) This statement is Incorrect : Reason : Depreciation represents wear and tear
of assets due to stable use unless, depreciation is provide for, the accounts will
not reflect a “ true and fair” view of the state of affairs of the company.
Therefore, even if no dividend is declared depreciation is to be provided in the
accounts of companies.
2010 - June [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following:
(iii) As per section 387 of the Companies Act, 1956, total remuneration to manager
should not exceed the rate of net profit of the company except with approval of
the Central Government—
(a) 5%
(b) 2%
(c) 11%
(d) 10%. (1 mark)
Answer :
(iii) (a)
2010 - June [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(i) Goodwill is asset.
(ii) Preliminary expenses being of capital nature may be written-off against .
(iv) Interim dividend is a dividend declared at any time between the
where the final dividend is declared. (1 mark each)
Answer :
(i) intangible
(ii) capital profit.
(iv) two annual general meeting
2011 - June [1] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(iii) Dividends are usually paid on —
(a) Paid-up capital
(b) Authorised capital
(c) Called up capital
(d) Subscribed capital. (1 mark)
Answer :
(iii) (a) Paid up capital
2.116 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
2011 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)figure(s) :
(i) Preliminary expenses being of capital nature may be written-off against_______.
(ii) Companies declaring, distributing or paying dividends are liable to pay tax on the
same at prescribed rate which is known as _________. (1 mark each)
Answer :
(i) Capital Profits
(ii) Tax on distributed Profits
2011 - June [1] {C} (c) State, with reasons in brief, whether the following statements
are true or false :
(ii) A profit and loss account is a point statement whereas a balance sheet is a
period statement. (2 marks)
Answer :
(ii) False : A profit & Loss account is a periodic statement and a balance sheet is
a point statement. Balance sheet is prepared at the end of the financial year
whereas profit and loss account is prepared for the financial year.
2011 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) The term ‘distributable profits’ means profits which would otherwise be available
for dividends. (2 marks)
Answer :
(i) The statement is true:– The profits which are available legally for distribution of
dividend are called distributable profit. The profits which the law allows the
company to distribute to the share holders by way of dividend. In other words,
dividend is nothing but the distribution of divisible or distributable profits of a
company among its share holders.
2011 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iv) The item ‘unpaid dividend’ appears in the balance sheet of a company under the
heading —
(a) Current assets, loans and advances
(b) Reserves and surplus
(c) Secured loans
(d) Current liabilities and provisions. (1 mark)
Answer :
(iv) (d) Current liabilities and provision.
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.117
2012 - June [1] {C} (c) Write the most appropriate answer from the given options in
respect of the following:
(iv) In case of company intends to declare dividend @ 20%, it is required to transfer
an amount to general reserve —
(a) Not less than 10% of current profit
(b) Not less than 7½% of current profit
(c) Not less than 5% of current profit
(d) Not less than 2½% of current profit. (1 mark)
Answer :
(iv) (b) Not less than 7½% of current profits.
2012 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(iv) Preliminary expenses is an example of intangible asset.
(v) Interim dividend paid is a charge against the profits. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following :
(i) Under section 205C of the Companies Act, 1956, the amount in the unpaid
dividend account is transferred to the Investor Education and Protection Fund
after the lapse of !
(a) 3 Years
(b) 5 Years
(c) 7 Years
(d) 10 Years. (1 mark)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) Sections 349 and 350 of the Companies Act, 1956 contain the provisions
relating to the manner of determination of net profits for the purpose of
calculating the ________ .
(v) Deferred tax assets are shown under the head ________ in the balance sheet
of a company. (1 marks each)
Answer:
(a) (iv) This Statement is false: Preliminary expenses is an example of fictitious
asset and not of an intangible assets
(v) This Statement is false: interim Dividend thus paid is an appropriation of
profit and not a charge against the profit.
(b) (i) (c) 7 years.
(c) (i) Managerial remuneration
(v) Non-current assets.
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2013 - June [1] {C} (a) State, with reasons in brief, whether the following statementsare true or false:
(iv) In case of inadequacy of profits, dividend can be paid out of capital reserve.(2 marks)
(b) Write the most appropriate answer from the given options in respect of thefollowing:
(ii) Sections 349 and 350 of the Companies Act, 1956 contain the provisionsrelating to the manner of determination of net profit for the purpose ofcalculating the —(a) Disposal of net profit(b) Managerial remuneration(c) Fair value of assets(d) Fair value of shares. (1 mark)
Answer :(a) (iv) This Statement is false.
Reason : The dividend cannot be paid out of capital reserve unless certainconditions are satisfied. The amount of divided should only be declared outof current year profits but after meeting all the expenses, providing fordepreciation of all assets used in the business, taxation or writing off losses.
(b) (ii) (b) Managerial remuneration.2013 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(v) Prepaid expenses and deferred revenue expenses are the same. (2 marks)
2013 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(iii) Deffered tax assets are shown under the head _____ in the balance sheet of a
company.
(iv) ______ expenses refer to those expenses incidental to the creation and flotation
of a company. (1 mark each)
SHORT NOTES
2009 - June [2] (a) Write short notes on the following :
(iii) Taxation on distributed profits. (3 marks)
Answer :
Corporate dividend tax : As per finance Act, 1997 introduced additional income tax,
called tax on distributed profits, on Joint stock companies on the account of their profits
distributed by them among the shareholder as dividends. This tax is known as corporate
dividend tax.
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.119
According to Section 115!0(1) of the Income tax Act provides that any amount
declared, distributed or paid by domestic company by way of dividends, whether interim
or otherwise shall be charged tax on distributed profits at the rate of 10%.
As per section 115 !0(3) provides that the tax has to be paid within 14 days from the
date of :
(i) Declaration of dividend
(ii) Distribution of dividend, or
(ii) Payment of dividend, whichever is earliest.
Note : Like rates of income tax, the rate of corporate dividend tax may vary from one
financial year to another financial year.
2010 - June [2] (a) Write short notes on the following:(ii) Capitalisation of profits and reserves (3 marks)
Answer :Capitalisation of profits and reserves: Sometimes companies have largeundistributed profits which they want to distribute among their existing shareholders.Instead of distributing these profits as dividend, they issue fully paid-up shares to themfree of charge in proportion to their existing share holdings. These shares are calledBonus Shares. As a result of this issue, the company’s issued capital increaseswhereas the assets of the company remain intact.It is for this reason that the issue of bonus shares is called the “Capitalisation of theUndistributed Profits” of the company.Characteristics :
(i) Bonus shares are issued to existing shareholders.(ii) Bonus shares must be fully paid-up
Bonus shares can be issued out of the following :-(i) Balance in the Profit and Loss Account.(ii) General Reserve (iii) Securities Premium Account(iv) Capital Redemption Reserve Account(v) Realised Capital Profits and Reserve.
2011 - June [3] (a) Write short notes on the following :
(ii) Tax on distributed profit (3 marks)
Answer :
Tax on distributed Profits : is chargeable on any amount declared, distributed or paid
by a domestic company by way of dividend whether interim or otherwise. It is paid in
addition to the income tax chargeable on total income. Tax on distributed profit is
payable to the credit of Central Government within 14 days from the date of declaration,
distribution or payment whichever is earlier. The present rate of tax is 15% plus
education cess and secondary and higher education cess plus surcharge.
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2011 - Dec [4] (b) Write short notes on the following:(i) Provision for taxation and advance payment of tax (3 marks)
(iv) Capitalisation of profits and reserves. (3 marks)Answer :
(i) Provision for Taxation: Provision for Income Tax to be created for current yearis shown in the debit side of profit and loss account as well as under provisionin liabilities side in the balance sheet. If rate of Income Tax is given it will beapplied on net profit. Surcharge if any, will be calculated on Income Tax, whilecalculating income tax provision as a percentage of net profit. Some adjustmentmay be required. Net profit as shown by profit and loss account may be differentfrom the taxable profit. Advance Tax:- Any advance tax paid by company will be shown on the assetsside of the balance sheet under 'Loans and Advances'. Alternatively, it may beshown as a deduction from provision for Income Tax. If amount of advance taxis more than the amount of tax assessed, the excess is refundable by income.Tax department. This excess will be shown in the assets side under 'Loans andAdvances' until refund is received.
(iv) Please refer 2010 - June [2] (a) (ii) on page no. 119
DISTINGUISH BETWEEN
2011 - June [2] (a) Distinguish between the following :
(ii) ‘Interim dividend’ and ‘final dividend’. (3 marks)
Answer :
'Interim dividend' & 'Final dividend'
A dividend declared in between two Annual General Meeting of the Company by the
Directors is known as Interim dividend.
Certain Sub-Sections have been inserted in Section 205 by the companies
(Amendment) Act, 2000.
According to Sub-Section (1A) the Board of Directors may declare interim dividend and
the amount of dividend including interim dividend shall be deposited in a Separate Bank
account within five days from the date of declaration of such dividend.
According to Sub-Section (1B) the amount of dividend including interim dividend so
deposited under Sub-Section (1A) shall be used for payment of interim dividend.
Final dividend - it is declared at the end of the financial year. Sanction of the
Shareholders at the general meeting is required. Section 205 is applicable to final
dividend as it is based on annual profit and loss account.
Note : With the enactment of the companies (Amendment) Act, 2000 interim dividend
stands on the same footing as that of the final dividend. Both interim and final dividend
when declared become debt are payable within 30 days of declaration of such dividend.
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.121
DESCRIPTIVE QUESTIONS
2008 - Dec [3] (a) Comment on the following statements :
(ii) As a matter of sound commercial policy, current profits are to be applied while
'paying dividend out of current profits without making good past losses.'
(3 marks)
Answer :
Please refer 2004 - June [2] (b) on page no. 154
2009 - Dec [3] (b) What do you understand by ‘provision for taxation’ ? What factors are
to be considered while estimating the provision for taxation? (6 marks)
Answer :
Provision for taxation :- Provision for Income-Tax to be created for current year is
shown in the debit side of profit and loss account as well as under provision in liabilities
side in the balance sheet. If rate of Income-Tax is given it will be applied on net profit.
Surcharge, if any, will be calculated on Income Tax, while calculating income tax
provision as a percentage of net profit. Some adjustment may be required. Net profit
as shown by profit and loss account may be different from the taxable profit.
While making the estimate of provision for taxation, due consideration should be given
to the following points:-
(i) Whether the income tax has been computed at the rates prescribed.
(ii) Whether profit sur- tax is payable or not.
(iii) Whether capital gains tax is payable or not.
(iv) Whether penalty is payable under any tax laws.
(v) Whether rebates are available for double taxation.
(vi) Whether adjustment has made for the last year`s actual tax liability or not.
2009 - Dec [4] (b) “Issue of bonus shares by the subsidiary company does not affect the
cost of control.” Comment. (6 marks)
Answer :
Issue of bonus shares by the subsidiary Company will be recorded in the book of
accounts in which manner is depended upon the fact that from which source the bonus
shares has been issued. Issue of bonus shares may or may not affect the cost of
control depending upon whether such shares are issued out of pre-acquisition profit or
out of post acquisition profit.
(i) Issue of bonus out of capital profit (Pre acquisition profit) : If the bonus
shares have been issued out of pre-acquisition profit or reserve, then it does not
have any effect on the consolidated balance sheet. The reason for this is that
due to issue of bonus shares, the share of holding company in pre-acquisition
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profit is reduced and on the other hand paid-up value of the shares held by them
is increased. Hence cost of control or goodwill remains the same as it was
before the issue of bonus shares.
(ii) Regarding the issue of bonus share out of post-acquisition profit : If the
bonus shares have been issued out of post acquisition profit, then it does not
affect the consolidated balance sheet. Due to this issue of bonus shares, the
share of holding company will reduce in post-acquisition profit that is revenue
profit and there will be increase in the paid-up value of shares held by the
Company. Due to increase in paid up value, there will decrease in cost of control
or increase in capital profit.
2012 - Dec [4] (b) State the legal requirements relating to transfer of profits to reservesprior to declaration and payment of dividend. (5 marks)Answer: Dividend can be declared out of past years profit transferred to reserves. In this case,the company has to comply with the rules framed by Central Government, viz;, TheCompanies (Declaration, of dividend out of reserves) Rules, 1975 The rules lay downthe following conditions subject to which a dividend may be declared by a company inthe event of in adequancy or absence of profits in any year out of profits earned by inprevious years and transferred to reserved.1. The rate of dividend shall not exceed the average of the rates of dividend declared
in the preceding 5 years or 10 percent of the paid-up capital, which ever is less.2. The amount drawn from the reserves for the purpose shall not exceed 1/10 th of
the aggregate of its paid-up capital and free reserve, and the amount so drawn isfirst utilised to set off the losses incurred in that year: and
3. The balance of reserves offer such drawing must not fall below 15% of the paid-upcapital.It is interesting to note here that above restrictions apply only for declaring dividendout of reserves. If profits have not been transferred to reserves but kept in profitand loss account, above restriction do not apply.
2013 - Dec [4] (b) Discuss when a joint stock company can pay dividend out of capital
profits. (5 marks)
PRACTICAL QUESTIONS
2009 - June [3] (b) Following is the profit and loss account of Azad Ltd. for the year
ended 31st March, 2009 :
`
To Office and administrative expenses 3,10,000
To Selling and distribution expenses 1,92,000
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.123
To Directors' fees 39,500
To Managerial remuneration 1,70,000
To Interest on debentures 18,500
To Donation to charitable trust 15,000
To Compensation for breach of contract 27,000
To Depreciation on fixed assets 3,12,000
To Investment revaluation reserve 12,500
To Provision for taxation 7,40,000
To General reserve 2,50,000
To Balance c/d 8,46,500
29,33,000
By Balance b/d 3,43,200
By Gross profit b/d 24,15,000
By Subsidies 1,39,300
By Interest on investment 9,500
By Transfer fees 1,000
By Profit on sale of machinery (W.D.V. ` 30,000) 25,000
29,33,000
Additional information :
— Original cost of the machinery sold was ` 40,000.
— Depreciation on fixed assets as per Schedule XIV of the Companies Act, 1956
was ` 3,42,000.
You are required to calculate managerial remuneration in the following situations :
(i) when there is only whole-time director;
(ii) when there are two whole-time directors; and
(iii) when there are two whole-time directors, a managing director and a part-time
director. (6 marks)
Answer :
` `
Gross profit as per Profit & Loss Account 24,15,000
Add: Subsidies 1,39,300
Interest on investments 9,500
Transfer fees 1,000
Profit on sale of machinery (Cost—W.D.V.)
(40,000 - 30,000) 10,000 1,59,800
25,74,800
Less: Office and administrative expenses 3,10,000
Director’s fees 39,500
Selling and distribution expenses 1,92,000
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Interest on debentures 18,500
Compensation for breach of contract 27,000
Depreciation as per Schedule XIV 3,42,000 9,29,000
16,45,800
Computation of managerial remuneration :(i) When there is only one whole-time director :
5% of ` 16,45,800 ` 82,290(ii) When there are two whole-time directors:
10% of ` 16,45,800 ` 1,64,580(iii) When there are two whole-time directors,
a managing director and a part-time director:11% of ` 16,45,800 ` 1,81,038
2009 - June [4] (b) Silver Ore Co. Ltd. was formed on 1st April, 2007 with an authorisedcapital of `6,00,000 in shares of `10 each. Of these, 52,000 shares had been issuedand subscribed but there were calls-in-arrears on 100 shares. From the following trialbalance as on 31st March,2008, prepare the trading and profit and loss account and thebalance sheet :
` `
Cash at bank 1,05,500 —Share capital — 5,19,750Plant 40,000 —Sale of silver — 1,79,500Mines 2,20,000 —Promotional expenses 6,000 —Interest on fixed deposit upto 31st December — 3,900Dividend on investment less 22% tax — 3,200Royalties paid 10,000 —Railway track and wagons 17,000 —Wages of miners 74,220 —Advertising 5,000 —Carriage on plant 1,800 —Furniture and buildings 20,900 —Administrative expenses 28,000 —Repairs 900 —Coal and oil 6,500 —Cash 530 —Investments in shares of Tin Mines 80,000 —Brokerage on Tin Mines 1,000 —6% Fixed deposit in Syndicate Bank 89,000 —
7,06,350 7,06,350
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.125
Depreciate plant and railway track and wagons by 10%, furniture and building by5%. Write off one-third of the promotional expenses. Value of silver on 31st March, 2008was ̀ 15,000. On 10th December, 2007, the directors forfeited 100 shares of which only` 7.50 per share had been paid. Ignore corporate dividend tax. (9 marks)Answer :
Silver Ore Ltd.Trading and Profit & Loss A/c
(For the year ending March 31, 2008)Particulars `̀̀̀ Particulars `̀̀̀
To Royalities 10,000 By Sales 1,79,500To Wages of Mines 74,220 By Stock of Silver 15,000To Coal and Oil 6,500To Depreciation on Plant 4,180To Depreciation on Railway
Trace and Wagons 1,700To Gross Profit 97,900
1,94,500 1,94,500To Administrative Expenses 28,000 By Gross Profit 97,900To Promotion Expenses 2,000 By Interest on F.D. 3,900To Advertising 5,000 Add: Accrued 1,440 5,340To Depreciation on Furniture By Dividend on Investment
and Building 1,045 (Grossed - 100/78 3,200) 4,103×
To Repairs 900To Net Profit carried to
Balance Sheet 70,398 1,07,343 1,07,343
Working Note:
1. Dividend on Investments = 3,200 × = ` 4,103
2. Carriage on plant has been added to the cost of plant and depreciation is changedaccordingly.
Balance Sheet of Silver Ore Ltd.(As on March 31, 2008)
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital:
Authorised Capital
60,000 shares of
` 10 each 6,00,000
Fixed Assets:
Mines
Railway Track
and Wagons 17,000
2,20,000
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Issued Capital:
52,000 Shares of ` 10 each
Subscribed Capital:
51,900 shares of ` 10 each
fully paid
Add: Share forfeited account
(100 7.50)×
Reserves and Surplus
Profit and Loss Account
5,20,000
5,19,000
750
5,19,750
70,398
5,90,148
Less:
Depreciation 1,700
Plant 41,800
Less:
Depreciation 4,180
Building and
Furniture 20,900
Less:
Depreciation 1,045
Investment at cost:
Shares of Tin Mines
Current Assets:
Stock of Silver Ore
Cash at Bank
Cash in hand
Accrued Interest
Loan and Advance:
Fixed Deposit
Tax Deducted at Source
Miscellaneous Expenditure:
Promotion Expenses.
15,300
37,620
19,855
81,000
15,000
1,05,500
530
1,440
89,000
903
4,000
5,90,148
Name of the Company....... Silver Ore Co. Ltd.
Statement of Profit and loss for the year ended 31st March, 2008
(As per New Schedule VI)
(`̀̀̀ in ...........)
Particulars
Note No. Figures
for the
current
reporting
period
Figures
for the
previous
reporting
period
I. Revenue from operations 1 1,79,500
II. Other income 2 9,443
III. Total Revenue (I + II) 1,88,943
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.127
IV. Expenses :
Cost of materials consumed
Purchases of Stock-in Trade 3 16,500
Changes in inventories of finished
Goods works-in progress and 4 (15,000)
Stock-in-Trade
Employee benefits expense 5 74,220
Finance costs
Depreciation and amortization expenses 6 6,925
Other expenses 7 39,900
Total expenses 1,18,545
V. Profit before exceptional and extra-
ordinary items and tax (III-IV)
66,398
VI. Exceptional items
VII. Profit before extraordinary items and tax
(V-VI)
VIII. Extraordinary Items
IX. Profit before tax (VII-VIII)
X. Tax expense :
1. Current tax
2. Deferred tax
XI. Profit (Loss) for the period from
continuing operations (VII-VIII)
XII. Profit/(loss) from discontinuing operations
XIII. Tax expense of discontinuing operations
XIV. Profit/(loss) from discontinuing
operations (after tax) (XII-XIII)
XV. Profit (loss) for the period (XI + XIV)
XVI. Earnings per equity share:
1. Basic
2. Diluted
Notes :
1. Revenue from Operations :
Sales (Net) 1,79,500
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2. Other Income Interest on fixed deposit 3,900Add. Outstanding 1,440Dividend on Investment (Working Notes -1) 4,103
9,4433. Purchase of Stock-in-trade
Coal & Oil 6,500Royalties 10,000 16,500
4. Changes in inventories of finished goods :Stock of silver 15,000
5. Employee Benefits Expenses :Wages - mines 74,220
6. Depreciation & Amortisation Expenses : Depreciation on plant (Working Notes - 2) 4,180Depreciation on Railway track wagons 1,700Depreciation on furniture and building 1,045
6,9257. Other Expenses :
Administrative Expenses 28,000Promotion Expenses 2,000Advertising 5,000Repairs 900Miscellaneous Expenses 4,000
39,900Name of the Company - Silver Ore Co. Ltd.
Balance Sheet as at - 31.3.2008 (As per New Schedule VI)
(`̀̀̀ in ...........)
Particulars Note
No.
Figures
as at the
end of
current
reporting
period
Figures
as at the
end of the
previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 1 5,19,750
(b) Reserves and surplus 66,398
(c) Money received against share
warrants
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.129
(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 5,86,148
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 2 2,92,775
(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 3 89,000
(e) Other non-current assets
(2) Current assets
(a) Current investments 4 81,000
(b) Inventories 5 15,000
(c) Trade receivables
(d) Cash and cash equivalents 6 1,06,030
(e) Short-term loans and advances
(f) Other current assets 7 2,343
TOTAL 5,86,148
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Notes to Accounts :(1) Miscellaneous Expenditure is written off fully.Schedules :1. Share Capital :
Authorised Capital 6000 shares @ ` 10 6,00,000
Issued Capital (52,000 Shares @ ` 10) 5,20,000
Subscribed Capital (51,900 Share @ ` 10) 5,19,000
Share forfeiture 750
5,19,750
2. Tangible Assets :Mines 2,20,000
Railway Track and Wagons 17,000
Less: Depreciation 1,700 15,300
Plant 41,800
Less: Depreciation 4,180 37,620
Building and Furniture 20,900
Less: Depreciation 1,045 19,855
2,92,775
3. Long-term Loan & Advances :Fixed Deposit 89,000
4. Current investments :Shares of Tin Mines 81,000
5. Inventories :Stock of Silver Ore 15,000
6. Cash and Cash equivalents :Cash at bank 1,05,500Cash in hand 530 1,06,030
7. Other Current Assets :Accrued Interest 1,440Advance Tax Paid 903
2,3432009 - Dec [4] (a) Anuj Ltd. had an accumulated amount of general reserve of` 5,00,000. The directors of Anuj Ltd. decided to declare bonus shares out of thegeneral reserve and to utilise the dividend in the following manner :
(i) To make 10,000 partly paid shares of ̀ 10 each paid-up at ̀ 6 each, as fully paid-up.
(ii) To distribute 4 fully paid bonus shares of ` 10 each at ` 12 each, for 5 fully paidexisting 20,000 shares of ` 10 each.
Show journal entries in the books of Anuj Ltd. to give effect to the above adjustments.(6 marks)
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.131
Answer :
In the Books of Anuj Ltd.
Journal entries
Particulars Dr.(`) Cr.(`)
Equity Share Final Call A/c Dr.
To Equity Share Capital A/c
(Being final call money due on 10,000 shares @ `4/-
each as per Board`s Resolution dated .........................)
40,000
40,000
General Reserve A/c Dr
To Bonus to Shareholders A/c
(Being bonus payable on 10,000 shares @ ` 4 each
as per shareholders`s resolution
dated...........................)
40,000
40,000
Bonus to Shareholders A/c Dr
To Equity Share Final Call A/c
(Being utilization of bonus towards final call)
40,000
40,000
General Reserve A/c Dr.
To Bonus to Shareholder A/c
(Being bonus shares payable in the ratio 5 : 4 of ` 10/-
each at `12 as per shareholders`resolution
dated..............)
1,92,000
1,92,000
Bonus to shareholders A/c Dr.
To Equity Share Capital A/c
To Security Premium A/c
(Being issue of 16,000 bonus shares of `10/-each at
`12 per shareholders` resolution dated...........)
1,92,000
1,60,000
32,000
2010 - June [3] The following balances have been extracted from the books of Pioneer
Traders Ltd. as on 30th September, 2009:
(` ‘000)
Dr. Cr.
Share capital (Authorised and issued):
Equity (15,00,000) Shares of ` 100 each) — 1,50,000
8% Redeemable preference (40,000 shares) — 4,000
Securities premium — 2,500
Preference share redemption 4,800 —
General reserve — 10,000
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Land (cost) 30,000 —
Buildings (cost less depreciation) 70,000 —
Furniture (cost less depreciation) 2,000 —
Motor vehicle (cost less depreciation) 3,500 —
Trading account!Gross profit — 90,000
Establishment charges 25,000 —
Rate, taxes and insurance 1,200 —
Commission 600 —
Discount received — 500
Interest on investments — 800
Depreciation 6,000 —
Sundry office expenses 6,000 —
Payment to auditors 400 —
Sundry debtors and creditors 10,660 2,560
Profit and loss account (as on 30.9.2008) — 1,000
Unpaid dividend — 200
Cash in hand 1,200 —
Cash at bank in current account 19,500 —
Security deposit 1,000 —
Outstanding expenses — 600
Investments in G.P. Notes 20,000 —
Stock in trade (at or below cost) 35,300 —
Provision for taxation (year ended 30.9.2008) — 7,000
Income-tax paid under dispute (year ended 30.9.2008) 10,000 —
Advance payment of income-tax 22,000 —
2,69,160 2,69,160
The following further details are available:
(i) The preference shares were redeemed on 1st October, 2008 at a premium of
20% but no entries were passed for giving effect thereto, expect payment
standing to the debit of preference share redemption account.
(ii) Depreciation as provided upto 30th September, 2009 is as follows:
(a) Building!` 21,000
(b) Furniture!` 2,000.
(c) Motor vehicles!` 6,000.
(iii) Establishment charges include ` 1,800 paid to managing director as
remuneration in terms of agreement which provides for a remuneration of 5% of
annual net profits.
(iv) Payment to auditors includes ` 100 for taxation work in addition to audit fees.
(v) Market value of investments on 30th September, 2009 is ` 18,000
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.133
(vi) Sundry debtors include ` 4,000 due for a period exceeding six months.
(vii) All receivables and deposits are considered good for realisation.
(viii) Income-tax demand for the year ended 30th September, 2008 ` 10,000 has not
been provided for against which appeal is pending.
(ix) Income-tax is to be provided @ 34%. Also provide for tax on divisible profit @
16%.
(x) Directors recommended payment of dividend on equity shares at the rate of
12%.
(xi) Ignore previous year’s figures.
You are required to prepare the profit and loss account for the year ended 30th
September, 2009 and a balance sheet as at that date. (15 marks)
Answer :
Profit and Loss Account of Pioneer Traders Ltd.
for the year ended 30th September, 2007
(` in 000's)
Dr. Cr.
Particulars ` ` Particulars `
To Establishment
Charges 25,000
Less: Remuneration
to M.D. 1,800
To Rates, taxes and insurance
To Commission
To Depreciation
To Sundry office expenses
To Payment to auditors:
Audit fees 300
Fees for taxation work 100
To Remuneration to
managing director
@ 5% on Profits
` 53,900 (i.e.
` 91,300 !
` 37,400)
To Provision for taxation
To Net Profit c/d
23,200
1,200
600
6,000
6,000
400
2,695
17,410
33,795
91,300
By Gross profit b/d
By Discount received
By Interest on Investment
90,000
500
800
91,300
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To Provision for taxation
for the year ended
30.9.2008
3,000
By Balance as per last
year
By Profit for the year b/d
1,000
33,795
To General reserve (2.5% of
current year’s profit)
To Proposed dividend @ 12% on
paid-up capital
To Tax on Distributed
Profit @ 16%
To Balance c/d
845
18,000
2,880
10,070
34,795 34,795
Balance Sheet of Pioneer Traders Ltd., as at 30th September,2009
(` in 000's)
Liabilities ` Assets `
Share Capital:
Authorised Capital-
15,00,000 Equity Shares
of ` 100 each
Issued and Subscribed Capital
15,00,000 Equity Shares of
` 100 each, fully paid-up
Reserves and Surplus:
Capital Redemption
Reserve Account
Securities Premium Account
General Reserve as
Per last year’s
Balance Sheet 10,000
Less: Transfer to
Capital Redemption
Reserve 4,000
6,000
Added during
the year 845
Profit and Loss Account
Secured Loan:
1,50,000
1,50,000
4,000
1,700
6,845
10,070
&
Fixed Assets:
Land at Cost
Building at Cost 91,000
Less: Depreciation
to date 21,000
Furniture 4,000
Less: Depreciation
to date 2,000
Motor Vehicles 9,500
Less: Depreciation
to date 6,000
Investments:
Investments in G.P.
Note (market value
` 18,000 thousand)
Current Assets,
Loans and Advances:
A. Current Assets:
Stock-in-trade
(at or below cost)
30,000
70,000
2,000
3,500
20,000
35,300
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.135
Unsecured Loan:
Current Liabilities and
Provisions:
A. Current Liabilities:
Sundry creditors
Unpaid dividend
Outstanding expenses
Remuneration payable to
Managing Director:
Remuneration @ 5% on
Net profit 2,695
Less: Amount
already paid 1,800
B. Provisions
Provision for taxation
for 2007-08
Provision for taxation
for 2008-09
Proposed dividend
Tax on Distributed Profit
&
2,560
200
600
895
10,000
17,410
18,000
2,880
Sundry Debtors:
Debts Outstanding
For more than
6 months 4,000
Other debts 6,660
Cash in hand
Bank balance in
Current Account
B. Loans and Advances:
Security deposit
income-tax paid
Under dispute
Advance payment of tax
10,660
1,200
19,500
1,000
10,000
22,000
2,25,160 2,25,160
Name of the Company Pioneer Traders Ltd.
Statement of Profit and loss for the year ended 30th September, 2009
(As per New Schedule VI)
(`̀̀̀ in 000's)
Particulars Note No.
Figures for
the current
reporting
period
Figures for
the previous
reporting
period
I. Revenue from operations 1 90,000
II. Other income 2 1,300
III. Total Revenue (I + II) 91,300
IV. Expenses :
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished
2.136 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
goods works-in-progress and
Stock-in-Trade
Employee benefits expense
Finance costs
Depreciation and amortization
expenses
Other expenses
Total expenses
3
4
2,695
6,000
31,400
40,095
V. Profit before exceptional and
extraordinary items and tax (III-IV)
51,205
VI. Exceptional items —
VII. Profit before extraordinary items
and tax (V-VI)
51,205
VIII. Extraordinary Items —
IX. Profit before tax (VII-VIII) 51,205
X. Tax expense :
(1) Current tax 5 20,410
(2) Deferred tax
XI. Profit (Loss) for the period from
continuing operations (VII-VIII)
30,795
XII. Profit /(loss) from discontinuing
operations
—
XIII. Tax expense of discontinuing
operations
—
XIV. Profit /(loss) from discontinuing
operations (after tax) (XII-XIII)
—
XV. Profit (loss) for the period (XI +XIV) 30,795
XVI. Earnings per equity share :
(1) Basic
(2) Diluted
Notes :
1. Revenue from Operations
2. Other income :
Discount received
Interest on investment
500
800
90,000
1,300
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.137
3. Employee Benefit Expenses :
Remuneration to MD
4. Other expenses :
Rates, Tax & insurance
Establishment Charges 25,000
Less : Remuneration to M.D. 1,800
Commission
Sundry office expenses
Audit fees
Fees for taxation work
1,200
23,200
600
6,000
300
100
2695
31,400
5. Current Tax :
Provision for tax
Provision for tax for the year 30.9.2008
17,410
3,000
20,410
Name of the Company Pioneer Traders Ltd.
Balance Sheet as at - 30th September, 2009
(As per New Schedule VI)
(`̀̀̀ in, 000)
Particulars Note No.
Figures as
at the end
of current
reporting
period
Figures as at
the end of
the previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders' funds
(a) Share capital 1 1,50,000
(b) Reserves and surplus 2 43,495
(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)
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(c) Other Long-term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 3 2,560
(c) Other current liabilities 4 1,695
(d) Short-term provisions 5 27,410
TOTAL 2,25,160
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 6 1,05,500
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments 7 20,000
(c) Deferred tax assets (net)
(d) Long-term loans and advances
8 1,000
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories 9 35,300
(c) Trade receivables 10 6,660
(d) Cash and cash equivalents 11 20,700
(e) Short-term loans and advances
12 32,000
(f) Other current assets 13 4,000
TOTAL 2,25,160
Schedules :-1. Share Capital :-
Authorised Share Capital1500 Equity shares of ` 100 each 1,50,000Issue & Subscribed :1500 equity shares of ` 100 each 1,50,000
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.139
2. Reserve & Surplus :-Opening Profit & Loss 1,000Profit & Loss for Current Year 30,795Capital Redemption Reserve 4,000Securities Premium 1,700General Reserve 10,000(-) Transfer of Capital Redemption Reserve 4,000 6,000
43,4953. Trade payables :-
Sundry Creditors 2,5604. Other Current Liabilities :-
Unpaid Dividend 200O/S Exp. 600Remuneration to MD (2,695 - 1,800) 895
1,6955. Short term provisions :-
Provision for tax (2008-2009) 17,410Provision for tax (2007-2008) 10,000 27,410
6. Tangible Assets :-Land at Cost 30,000Building at Cost 91,000Less: Depreciation to date 21,000 70,000Furniture 4,000Less: Depreciation to date 2,000 2,000Motor Vehicles 9,500Less : Depreciation to date 6,000 __3,500
1,05,5007. Non current investment :-
Investment in G/P notes 20,000(market value ` 18,000)
8. Long term loan & advances :Security Deposit 1,000
9. Inventories :-Stock in trade 35,300
10. Trade receivables :-Other Debts 6,660
11. Cash & Cash equivalent :-Cash in hand 1,200Cash at bank 19,500
20,700
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12. Short-term Loans & Advances :-
Income tax paid 10,000
Advance tax payment 22,000
32,000
13. Other Current Assets :-
Debts Outstanding for more than 6 months 4,000
2010 - Dec [2] (b) The balance sheet of Zed Ltd. as on 31st March, 2010 was as follows:
Liabilities ` Assets `
Issued and paid-up capital : Freehold property 2,00,000
20,000 Equity shares of Stock 1,20,000
` 10 each 2,00,000 Sundry debtors 1,00,000
Profit and loss account 1,80,000 Cash at bank 1,80,000
10% Debentures 1,20,000
Sundry creditors 1,00,000
6,00,000 6,00,000
It was resolved at the annual general meeting :
(i) To pay a dividend of 10% and corporate dividend tax @ 12.5% and surcharge
of 10% and 2% education cess.
(ii) To issue one bonus share for every four shares held.
(iii) To give existing shareholders the option to buy one share of `10 @ ` 14 for
every four shares held prior to the bonus issue.
(iv) To redeem the debentures at a premium of 5%. All the debentureholders took
up the option.
Pass necessary journal entries. (9 marks)
Answer :Journal Entries
Particulars Dr. (`) Cr. (`)
Profit and Loss Appropriation A/c Dr.
To Proposed Equity Dividend A/c
To Corporate Dividend Tax A/c
(Being dividend proposed and tax payable on it)
22,805
20,000
2,805
Proposed Equity Dividend A/c Dr
To Equity Dividend Payable A/c
(Being Dividend Declared)
20,000
20,000
Equity Dividend Bank A/c Dr
To Bank A/c
(Being amount transferred to dividend Bank A/c)
20,000
20,000
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.141
Equity Dividend Payable A/c Dr
To Equity Dividend Bank A/c
(Being Dividend Paid)
20,000
20,000
Corporate Dividend Tax A/c Dr.
To Bank A/c
(Being corporate dividend tax paid)
2,805
2,805
Profit and Loss Appreciation A/c Dr
To Bonus to Shareholders A/c
(Being bonus declared for shareholders)
50,000
50,000
Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c
(Being 5000 equity shares allotted to shareholders)
50,000
50,000
Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
(Being 5,000 shares issued at premium)
70,000
50,000
20,000
Securities Premium A/c Dr.
To Premium on Redemption of Debentures A/c
(Being premium on redemption provided)
6,000
6,000
10% Debentures A/c Dr.
Premium on Redemption of Debentures A/c
To Bank A/c
(Being debentures redeemed)
1,26,000
1,26,000
2010 - Dec [3] The authorised capital of Moon Ltd. is ̀ 5,00,000 consisting of 2,000, 6%
preference shares of ` 100 each and 30,000 equity shares of ` 10 each. The following
was the trial balance of Moon Ltd. as on 31st March, 2010 :
Debit Balances `
Investment in shares at cost 50,000
Purchases 4,90,500
Selling expenses 79,100
Stock on 1st April, 2009 1,45,200
Salaries and wages 52,000
Cash in hand 12,000
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Interim preference dividend for the half year ended
30th September, 2009 6,000
Discount on issue of debentures 2,000
Preliminary expenses 1,000
Bills receivable 41,500
Interest on bank overdraft 7,800
Interest on debentures upto 30th September, 2009 3,750
Sundry debtors 50,100
Freehold property at cost 3,50,000
Furniture at cost less depreciation of ` 15,000 35,000
Income-tax paid in advance for 2009-10 10,000
Technical know-how fees at cost, paid during the year 1,50,000
Audit fees 5,000
14,90,950
Credit Balances
Sundry creditors 87,850
6% Preference share capital 2,00,000
Equity share capital fully paid-up 2,00,000
5% Mortgage debentures secured on freehold properties 1,50,000
Dividends 4,250
Profit and loss account (1st April, 2009) 28,500
Sales (Net) 6,70,350
Bank overdraft secured by hypothecation of stocks and receivables 1,50,000
14,90,950
You are required to prepare profit and loss account for the year ended 31st March, 2010
and the balance sheet as on that date after taking into account the following :
(i) Closing stock was valued at ` 1,42,500.
(ii) Purchases include ̀ 5,000 worth of goods and articles distributed among valued
customers.
(iii) Salaries and wages include ` 2000 being wages incurred for installation of
electrical fittings which were recorded under furniture.
(iv) Bills receivable include ̀ 1,500 being dishonoured bills, 50% of which had been
considered irrecoverable.
(v) Bills receivable of ` 2,000 maturing after 31st March, 2010 were discounted.
(vi) Depreciation on furniture to be charged @ 10% on written down value.
(vii) ` 1,000 discount on issue of debentures to be written off.
(viii) Interest on debentures for the half year ended on 31st March, 2010 was due on
that date.
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.143
(ix) Provide provision for taxation ` 4,000.
(x) Technical know-how fees is to be written off over a period of 10 years.
(xi) ` 500 of preliminary expenses are to be written off.
(xii) Salaries and wages include ` 10,000 being directors’ remuneration.
(xiii) Sundry debtors include ` 6,000 debts due for more than 6 months.
(xiv) Rate of corporate dividend tax is 12 ½% and surcharge of 10% and 2%
education cess.
Keeping in mind the requirements of Part-I and Part-II of Schedule VI of the Companies
Act, 1956, prepare the profit and loss account for the year ended 31st March, 2010 and
balance sheet as on that date of Moon Ltd. as close thereto as possible. Figures for the
previous year can be ignored. (15 marks)
Answer :
Moon Ltd.
Dr. Profit and Loss Account for the year ended 31 st March, 2010 Cr.
Particulars ` Particulars `
To Opening stock
To Purchases 4,90,500
Less : Cost of articles
issued as sample
treated as advertise-
ment expenditure 5,000
To Gross Profit c/d
1,45,200
4,85,500
1,82,150
By Sales (net)
By Closing stock
6,70,350
1,42,500
8,12,850 8,12,850
To Salaries and wages 52,000
Less Director's
remuneration 10,000
42,000
Less : Capitalisation of
Wages incurred for
installation of
electrical fitings 2,000
To Directors’ remuneration
To Selling expenses
To Discount on issue of
debentures
To Interest on bank overdraft
To Interest on debentures 3,750
Add: Outstanding 3,750
40,000
10,000
79,100
1,000
7,800
7,500
By Gross profit b/d
By Dividend
1,82,150
4,250
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To Audit fees
To Technical know-how written off
To Preliminary expenses written off
To Provisions for bad debts
To Depreciation on furniture
To Advertisement (sample goods)
To Provision for taxation
To Net profit
5,000
15,000
500
750
3,700
5,000
4,000
7,050
1,86,400
1,86,400
To Interim dividend on preference
shares paid
Corporate dividend
tax(750+75+17)
To Balance c/d
6,000
842
28,708
By Balance b/d
By Net profit
28,500
7,050
35,550 35,550
Balance Sheet of Moon Ltd. as at 31.3.2010
Liabilities ` Assets `
Share CapitalAuthorised :
2,000 - 6% Preference shares
of `100 each
30,000 Equity shares of
` 10 each
2,00,000
3,00,000
Fixed AssetsFreehold property at cost
Furniture at cost 52,000
(35,000+15,000+ 2,000)
Less : Depreciation to date 18,700
Technical knowhow:
3,50,000
33,300
1,35,000
5,00,000
Issued and subscribed
2,000 6% Preference shares
of ` 100 each fully paid
20,000 Equity shares of
` 10 each fully paid
Reserves & Surplus
Profit and loss account
Secured loans
2,00,000
2,00,000
28,708
InvestmentsInvestments in shares at cost
Current Assets, loans and
advances(A) Current Assets :
Stock in trade
Sundry debtors :
50,000
1,42,500
5% Mortgage debentures
(secured on freehold property)
Interest Outstanding
1,50,000
3,750
(a) Dabts outstanding for a
period exceeding 6 months
(b) Other Debts
Cash in hand
6,000
44,850
12,000
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.145
Bank overdraft
(secured by hypothecation of
stock and receivable)
Unsecured Loans
Current Liabilities and
Provision.
(A) Current Liabilities
Sundry creditors
(B) Provisions :
Provision for taxation
corporate dividend tax
1,50,000
---
87,850
4,000
842
(B) Loans and AdvancesBills Receivable
Advance tax for 2009-10
Miscellaneous Expenditure
(to the extent not written off)
Preliminary expanses
Discount on issue of debentures
40,000
10,000
500
1,000
8,25,150 8,25,150
Notes:
(i) A contingent liability for bills discounted ` 2,000 which will mature after
31.3.2010.
(ii) Half year Preference dividend of ` 6,000 is not provided for in the account.
Working Notes:
(i) Depreciation on furniture `
Furniture at cost less depreciation 35,000
Add: Installation charge of electric fittings wrongly included
in salaries and wages 2,000
37,000
Depreciation at 10% 3,700
Gross value of furniture (35,000+ 15,000+ 2,000) 52,000
Less: Accumulated Depreciation (15,000 + 3,700) 18,700
33,300
(ii) Sundry debtors
As per trial balance 50,100
Less: Debts due for more than 6 months 6,000
44,100
Add: Bills dishonoured 1,500
45,600
Less: Provision for bad debts 750
44,850
(iii) Bills receivable
Balance as per trial balance 41,500
Less: Bills dishonoured' 1,500
40,000
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(iv) Provision for taxation and advance tax
Advance tax has been shown as a separate item pending the final assessment
when the company might get refund in due course.
Name of the Company Moon Ltd.
Statement of Profit and loss for the year ended 31st March, 2010
(As per New Schedule VI)
(` in..........)
Particulars Note No.
Figures
for the
current
reporting
period
Figures
for the
previous
reporting
period
I. Revenue from operations 1 6,70,350
II. Other income 2 4,250
III. Total Revenue (I + II) 6,74,600
IV. Expenses :
Cost of materials consumed
Purchases of Stock-in Trade 3 4,85,500
Changes in inventories of finished
Goods works-in progress and Stock-in-
Trade
4 2,700
Employee benefits expense 5 50,000
Finance costs 6 23,300
Depreciation and amortization expenses 7 18,700
Other expenses 8 90,850
Total expenses 6,71,050
V. Profit before exceptional and extra-
ordinary items and tax (III-IV)
3,550
VI. Exceptional items
VII. Profit before extraordinary items and tax
(V-VI)
VIII. Extraordinary Items
IX. Profit before tax (VII-VIII)
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.147
X. Tax expense :
1. Current tax
2. Deferred tax
9 4,000
XI. Profit (Loss) for the period from
continuing operations (VII-VIII)
(450)
XII. Profit/(loss) from discontinuing operations
XIII. Tax expense of discontinuing operations
XIV. Profit/(loss) from discontinuing
operations (after tax) (XII-XIII)
XV. Profit (loss) for the period (XI + XIV)
XVI. Earnings per equity share:
1. Basic
2. Diluted
Notes :
1. Revenue from Operation :
Sales (Net) 6,70,350
2. Other Income
Dividend 4,250
3. Purchase of Stock-in-Trade
Purchases 4,90,500
Less: Cost of goods/articles distributed among 5,000 4,85,500
customers free of cost
4. Changes in inventories :
Opening Stock 1,45,200
(-) Closing Stock 1,42,500
2,700
5. Employee Benefit Expenses :
Salaries and wages 52,000
Less: Director’s remuneration 10,000
42,000
Less: Wages for installation of electrical fitting 2,000 40,000
Directors’ remuneration 10,000
50,000
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6. Finance Costs:
Discount on issue of debentures 2,000
Preliminary expenses written-off 1,000
Interest on Bank overdraft 7,800
Interest on debentures 3,750
Add: Outstanding 3,750 7,500
Interim Dividend 6,000
23,300
(Note : Discount on issue of debentures and Preliminary expenses are written-off as per
requirements of New Schedule VI)
7. Depreciation & Amortisation :
Furniture 3,700
Technical know-how (written off) 15,000 18,700
8. Other Expenses :
Selling Expenses 79,100
Preliminary Expenses 1,000
Bad debts 750
Audit fees 5,000
Advertisement 5,000 90,850
9. Current Tax:
Provision for tax 4,000
Name of the Company Moon Ltd.
Balance Sheet as at - 31st March, 2010
(As per New Schedule VI)
(` in..........)
Particulars Note No.
Figures
as at the
end of
current
reporting
period
Figures
as at the
end of the
previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 1 4,00,000
(b) Reserves and surplus 2 28,050
(c) Money received against share
warrants
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.149
(2) Share application money pending
allotment
(3) Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long-term liabilities 3 1,50,000
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings 4 1,50,000
(b) Trade payables 5 87,850
(c) Other current liabilities 6 3,750
(d) Short-term provisions 7 4,000
TOTAL 8,23,650
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 8 3,83,300
(ii) Intangible assets 9 1,35,000
(iii) Capital work-in-progress
(iv) Intangible assets under
development
(b) Non-current investments 10 50,000
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets 11 6,000
(2) Current assets
(a) Current investments
(b) Inventories 12 1,42,500
(c) Trade receivables 13 84,850
(d) Cash and cash equivalents 14 12,000
(e) Short-term loans and advances 15 10,000
(f) Other current assets
TOTAL 8,23,650
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Notes to Accounts :
1. Share Capital :
Authorised
2,000, 6% Preference Shares of ` 100 each 2,00,000
30,000 Equity Share of ` 10 each 3,00,000 5,00,000
Issued and Subscribed
2,000, 6% Preference Shares of ` 100 each 2,00,000
20,000 equity share of ` 10 each 2,00,000 4,00,000
2. Reserve & Surplus
Opening Profit & Loss 28,500
Profit & Loss Account (450) 28,050
3. Other long-term Liabilities :
5% mortgage debenture 1,50,000
4. Short term borrowings :
Bank overdraft 1,50,000
5. Trade payables :
Sundry Creditors 87,850
6. Other Current liabilities :
Outstanding interest 3,750
7. Short term provisions :
Provision for tax 4,000
8. Tangible Assets :
Freehold Property (at cost) 3,50,000
Furniture (at cost) 52,000
Less: Accumulated depreciation (Working Notes 1) 18,700 33,300
3,83,300
9. Intangible Assets :
Technical know-how 1,50,000
Less: Written-off 15,000 1,35,000
10. Non-current investment :
Investment in shares (at cost) 50,000
11. Other Non-current Assets :
Debts outstanding for a period exceeding 6 months 6,000
12. Inventories :
Stock in trade 1,42,500
13. Trade receivables :
Debtors (Working Notes 2) 44,850
Bills Receivable (Working Notes 3) 40,000 84,850
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.151
14. Cash & Cash equivalents :
Cash in hand 12,000
15. Short term loan & advances
Advance taxation for 2009-10 (Working Notes 4) 10,000
2011 - June [3] (c) A limited company has a paid-up equity share capital of ̀ 15,00,000
divided into 1,50,000 shares of ` 10 each and 11% preference share capital of
` 5,00,000 divided into 5,000 shares of ̀ 100 each. The balance of profit brought forward
from the previous balance sheet was ` 38,000:
The profit for the year ended 31st March, 2010 amounted to ` 5,80,000 after tax. The
directors proposed a dividend of 24% on equity share capital after providing for — (i)
statutory minimum transfer to general reserve; and (ii) dividend on preference shares.
Ignore tax on distributed profit. Prepare profit and loss appropriation account.
(3 marks)
Answer :
Profit and Loss Appropriation Account
Dr. for the year ended 31st March, 2010 Cr.
Particulars Amount
`̀̀̀
Particulars Amount
`̀̀̀
To General Reserve A/c
(Refer Note)
To Preference Dividend
To Proposed Dividend on
Equity Share Capital @ 24%
To balance c/d
58,000
55,000
3,60,000
1,45,000
6,18,000
By Balance b/fd
By Net profits for the year b/d
By balance b/d
38,000
5,80,000
6,18,000
1,45,000
Note : Proposed Dividend exceeds 20% of the paid up capital. Therefore transfer to
General reserve should be minimum 10% of the current year profits.
2012 - June [3] (b) The balance sheet of Do Well Ltd. as on 31st March, 2010 was as
follows:
Liabilities `̀̀̀ Assets `̀̀̀
Share capital in ` 10 per share 2,00,000 Freehold property 1,00,000
Profit and loss account 1,20,000 Stock 1,20,000
6% Debentures 1,20,000 Debtors 80,000
Creditors 60,000 Balance at bank 2,20,000
Proposed dividend 20,000
5,20,000 5,20,000
2.152 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
At the annual general meeting held on 18th April, 2010 it was resolved:
(i) To declare dividend of 10% for the accounting year ended on 31st March, 2010.
(ii) To issue one bonus share for every 4 shares held out of profit and loss account.
(iii) To give existing shareholders the option to purchase for cash one share for ̀ 15
for every 4 shares held prior to the bonus distribution. This option was accepted
by all the shareholders. (On this no bonus share will be given).
(iv) To redeem the debentures at a premium of 3%.
Assuming that the authorised share capital is enough and dividends have been paid in
full, pass necessary journal entries and prepare the balance sheet after these
transactions are completed. Ignore dividend distribution tax. (9 marks)
Answer :
Date Particulars Amount
(`)
Amount
(`)
1 Proposed Dividend A/c Dr.
To Dividend Payable A/c
(Being dividend declared)
20,000
20,000
2 Dividend Bank A/c Dr.
To Bank A/c
(Being amount transfer to dividend bank account)
20,000
20,000
3 Dividend payable A/c Dr.
To Dividend Bank A/c
(Being dividend paid)
20,000
20,000
4 Profit and Loss A/c Dr.
To Bonus to Shareholders A/c
(Being bonus declared for shareholders)
50,000
50,000
5 Bonus to Shareholders A/c Dr.
To Equity Capital A/c
(Being 5000 bonus shares allotted to shareholders)
50,000
50,000
6 Bank A/c Dr.
To Equity Capital A/c
To Security Premium A/c
(Being 5000 equity shares issued at premium)
75,000
50,000
25,000
7 Securities premium A/c Dr.
To Premium on Redemption of debentures A/c
(Being Premium on Redemption of debentures provided)
3,600
3,600
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.153
8 6% Debentures A/c Dr.
Premium on Redemption of Debenture A/c Dr.
To Bank A/c
(Being Debentures redeemed)
1,20,000
3,600
1,23,600
Note: In case of Entry No. 2 & 3 one consolidated entry may be done
Dividend Payable A/c Dr. 20,000
To Bank A/c 20,000
(Being Dividend Paid)
Balance Sheet as on December 31st 2009
Liabilities Amount
(`̀̀̀)
Assets Amount
(`̀̀̀)
Share Capital ` 10 per share
Profit and Loss A/c
Securities Premium A/c
Creditors
3,00,000
70,000
21,400
60,000
Freehold Property
Stock
Debtors
Balance at Bank
1,00,000
1,20,000
80,00
1,51,400
Total 4,51,400 Total 4,51,400
2013 - Dec [3] (c) Extract from the trial balance of ABC Ltd. as on 31st March, 2013 is
as under:
Account Dr. (`) Cr. (`)
Advance income tax 2011-12 1,10,000 !
Advance income tax 2012-13 1,15,000 !
Provision for income tax 2011-12 ! 1,00,000
Adjustments :
(i) The income tax assessment of 2011-12 completed during the year showed gross
tax demand of ` 1,20,000 but no effect has been given for this in the accounts.
(ii) Provision for income tax is to be made for ` 1,05,000 for 2012-13.
Show the journal entries and the relevant extract in the final accounts. (4 marks)
CS Inter Gr. I
DESCRIPTIVE QUESTIONS
2004 - June [1] {C} (d) What are the statutory books prescribed under the Companies
Act, 1956? (4 marks)
2.154 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer :
Every Company is under statutory obligation to maintain the following books and
registers at its registered office.
1. Register of investments not held in company’s name;
2. Register of charges;
3. Register of members;
4. Index of members where their number is more than 50;
5. Register of debenture holders;
6. Index of debenturesholders where their number is more than 50.
7. Foreign register of members and debenture holders if any;
8. Minutes book;
9. Book of Account;
10. Register of directors, managing directors manager and secretary;
11. Register of the shareholdings of the directors.
2004 - June [2] (b) Can a company pay dividend out of current profits without making
good past losses? (3 marks)
Answer :
Yes. A company pay dividend out of current profits without making good past losses.
The dividend can be declared or paid by a company for any financial year only-
(i) Out of profits of the company for that year arrived at offer providing for
depreciation in the manner laid down in the Act, or
(ii) Out of the profits of the company for any previous financial year arrived at after
providing for depreciation, and remaining undistributed, or
(iii) Out of both. or
(iv) Out of money provided by the Central Government or a State Government for
the payment of dividend in pursuance of a guarantee given by that government.
2004 - Dec [1] {C} Attempt the following :
(v) Enumerate the provisions of the Companies Act, 1956 with regard to providing
depreciation on the assets of a company. (5 marks)
Answer :
According to Section 205 (2) depreciation shall be provided either :
(i) to the extent specified in Section 350 ; or
(ii) in respect of each item of depreciable asset, for such an amount as is arrived at
by dividing 95% of the original cost thereof to the Company by the specified
period in respect of such asset; or
(iii) on any other basis approved by the Central Government which has the effect of
writing off the way of depreciation 95% of the original cost to the company of
each such depreciable asset on the expiry of the specified period; or
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.155
(iv) as regards any depreciable asset for which no rate of depreciation has been laid
down under Companies Act depreciation should be charged on such basis as
may be approved by the Central Government by any general order published in
the official gazette or by any special order in any particular case.
2005 - June [1] {C} (d) What are the sources from which bonus shares can be issued?
(4 marks)
Answer :
Sources that can be utilized for Bonus Issue :
1. For Issuing fully paid bonus shares : Un appropriated profits in profit and loss
A/c, any Revenue Reserve A/c Development Rebate Reserve A/c, Investment
Allowance Reserve A/c, Share Premium A/c and Capital Redemption Reserve A/c.
2. For Paying up any call on shares : All the sources mentioned above except
Share Premium A/c and Capital Redemption Reserve A/c.
As per guidelines, capital reserve appearing in the Balance Sheet as a result of
revaluation of assets or without accrual of cash resources are not available for
distributions of bonus shares.
PRACTICAL QUESTIONS
2005 - Dec [1] {C} Attempt the following:
(v) Yash Ltd. has only one type of capital, viz., 40,000 equity shares of `100 each.
It also has got reserves totalling `20,00,000. The company closes its books on
31st March each year. It has paid dividends @ 12½ % upto 2001-02 and 15%
thereafter. In 2004-05, the company suffered a loss of `2,50,000; therefore, it
wishes to draw required amount out of the reserves to pay dividend at 12%.
Advise the company. (4 marks)
Answer :
The Rules governing utilization of reserves for payment of dividend restrict the
withdrawals to the lower of;
(i) An amount sufficient to ensure dividend at the average rate for the previous 5
years or 10% whichever is less; and
(ii) 1/10th of paid up capital and free reserves, subject to the remaining balance in
reserves being atleast 15% of the paid up capital.
The average dividend for 5 years is 13.5% i.e. Therefore, in the
first instance only 10% dividend will be allowed. This will absorb `6,50,000.
2.156 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
`
Loss 2,50,000Dividend @ 10% 4,00,000
6,50,000But more than 1/10th of the paid up capital and free reserves cannot be withdrawn
from reserves. The paid-up capital being ` 40,00,000 and the reserves being` 20,00,000, the amount that can be drawn is ` 6,00,000. The balance then left will bemore than 15% of the paid-up capital. The withdrawal from reserves must first be usedto set off the loss which is ` 2,50,000. The balance of ` 3, 50,000 may be paid asdividend. The rate will then be 8.75%. The Company must be satisfied with paying thisdividend.
2006 - Dec [1] {C} Attempt the following :(v) The trial balance of a company as at 31st March, 2005 shows the following
items :Dr. Cr. (`) (`)
Provision for income-tax account — 70,000Advance payment of income-tax account 1,55,000 —You are also given the following information :— Advance payment of income tax account includes ̀ 65,000 for the financial
year 2004-05.— Actual tax liability for the financial year 2004-05 amounts to ` 68,000 and
no effect for the same has been given so far in the accounts.— Provision for income-tax to be made for the financial year 2005-06 is
` 80,000.Prepare provision for income-tax account and advance payment of income-tax account, and also show how relevant items will appear in the balancesheet of the company. (5 marks)
Answer : Dr. Provision for Income Tax Account Cr.
Date Particulars ` Date Particulars `
31/03/0
6
To Advance Payment of
Income Tax A/c
To Liability for Taxation
A/c
To Profit & Loss A/c
To Balance c/d
65,000
3,000
2,000
80,000
01/04/05
31/03/06
By Balance b/d
By Profit &
LossA/c
70,000
80,000
1,50,000 1,50,000
[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.157
Advance Payment of Income Tax Account
Date Particulars ` Date Particulars `
01/04/05 To Balance b/d 1,55,000 31/03/06 By Provision for
Income Tax A/c
By Balance c/d
65,000
90,000
1,55,000 1,55,000
Balance Sheet as at 31st March, 2006
Liabilities ` Assets `
A. Current Liabilities :
Liability for Taxation (2004-05)
B. Provisions :
Provision for Income-tax
(2005-06)
3,000
80,000
Loans & Advance:
Advance Payment of Income
tax (2005-06) 90,000
2007 - Dec [1] {C} (c) Following particulars are available from the books of Rajat Ltd. :
`
Net profit before provision for income-tax and managerial remuneration,
but after depreciation and provision for repairs
Depreciation provided in the books
Provision for repairs of machinery during the year
Depreciation allowable under Schedule XIV of the Companies Act, 1956
Actual expenditure incurred on repairs during the year
98,04,100
35,00,000
2,50,000
28,00,000
1,50,000
You are required to calculate the managerial remuneration in the following cases:
(i) If there is one whole-time director; and
(ii) If there are two whole-time directors, a part-time director and a manager.
(5 marks)
Answer :
Sections 198 and 309 of the Companies Act, 1956 prescribe the maximum percentage
of profit that can be paid as managerial remuneration. For this purpose, profit is to be
calculated in the manner as prescribed in Section 349 of the Companies Act.
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Calculation of net profit u/s 349 of the Companies Act, 1956
` `
Net profit before provision for income-tax and
managerial remuneration, but after depreciation and
provision for repairs
Add: Depreciation provided in the books
Provision for repairs of machinery
Less: Depreciation allowable under Schedule XIV
Actual expenditure incurred on repairs
35,00,000
2,50,000
98,04,100
37,50,000
28,00,000
1,50,000
1,35,54,100
29,50,000
1,06,04,100
Calculation of managerial remuneration
(i) If there is only one whole-time director:
Managerial remuneration = 5% of net profit = 5% of `1, 06, 04,100
= `5,30,205
(ii) If there are two whole-time directors, a part time director and a manager:
Managerial remuneration = 11% of net prof it = 11% of `1, 06, 04,100
= ` 11,66,451
Repeatedly Asked Questions
No. Question Frequency
1 Write short notes on Tax on distributed profit
09 - June [2] (a) (iii), 11 - June [3] (a) (ii)
2 Times
2 Write short notes on ‘Capitalisation of profits and reserves’
10 - June [2] (a) (ii), 11 - Dec [4] (b) (iv)
2 Times
3 Discuss when a joint stock company can pay dividend out of
capital profits. 04 - June [2] (b), 13 - Dec [4] (b) 2 Times
2.159
Star Rating
On the basis of Maximum marks from a chapter jjjjj
On the basis of Questions included every year from a chapter jjjj
On the basis of Compulsory questions from a chapter Nil
6 Consolidation of Accounts
This Chapter Includes : Definitions; Legal requirements for Preparation and
Presentation of Final Accounts of Holding Company its Subsidiary; Consolidated
Balance Sheet and Profit and Loss Account; Minority Interest; Pre-acquisition profits
losses of subsidiary company; Inter-company transactions; Contingent Liabilities;
Preference Shares in Subsidiary Company; Bonus Shares; treatment of Dividend
received from Subsidiaries;
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2008 - Dec [1] {C} (c) Re !write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
2.160 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(v) Consolidated financial statements are presented by a ______ company to
provide financial information about the economic activities of its group.
(1 mark)
Answer :
(v) holding
2009 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(v) Contingent liabilities relating to outsiders must be shown on the liability side of
the consolidated balance sheet. (2 marks)
Answer :
(v) Incorrect: Contingent liabilities relating to outsiders are not shown on the liability
size of the consolidated balance sheet. It will be shown as contingent liability by
way of not/footnote.
2010 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(iv) For calculating minority interest, there is a need to distinguish between capital
and revenue profits of the subsidiary. (2 marks)
(v) While preparing the consolidated balance sheet, a contingent liability in respect
of a transaction between the holding and the subsidiary companies is
disappeared from the foot note. (2 marks)
Answer :
(iv) This statement is Incorrect : Reason : The shares of shareholders other than
holding company in the share capital, reserve and profit of subsidiary company.
In order to ascertain minority interest, capital profit and revenue profit need not
be distinguished.
(v) This statement is Correct : Reason : If the contingent liabilities relate to
outsider. It must be shown by way a foot note in the consolidated balance sheet.
But a contingent liabilities in respect of a transaction between holding companies
and subsidiary companies will disappear from the foot note as they appear as
actual liability in the consolidated balance sheet.
2010 - June [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(v) Stock reserve for unrealised profit in respect of inter-company transactions
should be created by debiting and crediting while
preparing consolidated profit and loss account. (1 mark)
Answer :
(v) consolidated Profit and Loss Account and Stock Reserve Account.
[Chapter #### 6] Consolidation of Accounts OOOO 2.161
2012 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(iii) Contingent liability in respect of a transaction between holding and subsidiary
companies must be shown by way of a footnote in the consolidated balance
sheet. (2 marks)
Answer :
(iii) The statement is False: Contigent liability relate to the outsiders must be shown
by way of a foot note in the consolidated Balance Sheet. But a contigent liability
in respect of transaction between Holding and Subsidiary company will not
appear in the foot note.
2013 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(ii) Contingent liability in respect of a transaction between holding and wholly owned
subsidiary companies will not appear in the footnote of the consolidated balance
sheet.
(iii) In case of inter-company unrealised profits included in unsold goods, minority
shareholders are not affected in any way. (2 marks each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(iv) Accumulated losses of the subsidiary company upto the date of acquisition of
shares by the holding company are called _________ losses. (1 mark)
Answer :
(a) (ii) This Statement is true.
Reason : Contingent liabilities relating to outsider must be shown by way of a
footnote in the consolidated balance sheet. But a contingent liabilities in respect
of a transaction between holding and subsidiary company will not appear in the
footnote since it become internal contingent liability.
(iii) This Statement is true.
Reason : The unrealized profit should be deducted from the current revenue
profits of the company which had sold goods and same should also be deducted
from the value of the stock in trade of the company.
(c) (iv) Pre-acquisition
2013 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(v) The minority shareholders’ share of pre-acquisition losses of subsidiary company
shall be deducted from the amount of _______ . (1 mark)
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PRACTICAL QUESTIONS
2008 - Dec [3] (b) Following are the balance sheets of Asha Ltd. and Bipasha Ltd. as
on 31st March, 2008 :
Liabilities Asha Ltd. Bipasha Ltd.
(`) (`)
Capital (` 10 per share) 10,00,000 8,00,000
Profit and loss account 4,00,000 2,00,000
Loan from Asha Ltd. — 80,000
Bills payable 80,000 60,000
14,80,000 11,40,000
Assets
Machinery 3,00,000 2,80,000
Furniture 50,000 20,000
Debtors 2,50,000 8,00,000
Loan to Bipasha Ltd. 80,000 —
Shares in Bipasha Ltd. 7,00,000 —
Bills receivable 1,00,000 40,000
14,80,000 11,40,000
Asha Ltd. purchased 75% shares of Bipasha Ltd. for ` 7,00,000 on 31st March,
2008. Bills payable of Bipasha Ltd. include bills of ` 20,000 accepted in favour of Asha
Ltd. Prepare a consolidated balance sheet. (9 marks)
Answer: Consolidated Balance Sheet of Asha Ltd. and Bipasha Ltd.
As on 31st March, 2008
Liabilities `̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
Share Capital
Shares of ` 10 each
Minority Interest
Reserve and Surplus:
Profit and Loss A/c
Capital Reserve
Current Liabilities:
Loan from Asha Ltd.
Less: Inter Co. debts
Bills payable
Asha Ltd.
Bipasha Ltd.
Less: Inter Co. debts.
80,000
80,000
80,000
60,000
1,40,000
20,000
10,00,000
2,50,000
4,00,000
50,000
Nil
1,20,000
Machinery:
Asha Ltd.
Bipasha Ltd.
Furniture:
Asha Ltd.
Bipasha Ltd.
Debtors:
Asha Ltd.
Bipasha Ltd.
Loan to Bipasha Ltd.
Less: Inter Co. debts
3,00,000
2,80,000
50,000
20,000
2,50,000
8,00,000
80,000
80,000
5,80,000
70,000
10,50,000
Nil
[Chapter #### 6] Consolidation of Accounts OOOO 2.163
Bills Receivable-Less:
Asha Ltd.
Bipasha Ltd.
Less: Inter Co. debts
1,00,000
40,000
1,40,000
20,000 1,20,000
18,20,000 18,20,000
Working Notes:1. Allocation of capital profit of Bipasha Ltd.
`
Profit & Loss Account balance as on 31.3.2008 2,00,000Share of Asha Ltd. - 75% 1,50,000Share of Minority Shareholders 50,000
2. Calculation of Capital Reserve:Paid-up value of shares 6,00,000Share of capital profit 1,50,000
7,50,000Less : Cost of shares 7,00,000Capital reserve 50,000
3. Calculation of Minority Interest:Paid-up values of shares 2,00,000Share of Capital Profit 50,000
2,50,000As per New Schedule VI
Consolidated Balance Sheet of Asha with Bipasha Ltd. as on 31.3.2008
(` in..........)
Particulars Note
No.
Figures
as at the
end of
current
reporting
period
Figures
as at the
end of the
previous
reporting
period
1 2 3 4
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 10,00,000
(b) Reserves and surplus 1 4,50,000
(c) Money received against share warrants
(d) Minority Interest (W.No. 3) 2,50,000
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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 2 1,20,000
(c) Other current liabilities
(d) Short-term provisions
TOTAL 18,20,000
II. ASSETS Non-current assets
1. (a) Fixed assets
(i) Tangible 3 6,50,000
(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
2. Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables 4 11,70,000
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL 18,20,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.165
Schedules :
1. Reserves & Surplus:
Capital reserve (Working Note (2))
Profit & Loss
50,000
4,00,000
4,50,000
2. Trade Payables:
Bills payable
Asha Ltd.
Bipasha Ltd.
80,000
60,000
Less: Inter Co. debts.
1,40,000
20,000 1,20,000
3. Tangible Assets:
` `
Machinery:
Asha Ltd.
Bipasha Ltd.
Furniture:
Asha Ltd.
Bipasha Ltd.
3,00,000
2,80,000
50,000
20,000
5,80,000
70,000
6,50,000
4. Trade Receivables:
Debtors:
Asha Ltd.
Bipasha Ltd.
Bills Receivables:
Asha Ltd.
Bipasha Ltd.
2,50,000
8,00,000
1,00,000
40,000
10,50,000
Less : Inter Co. debts
1,40,000
20,000 1,20,000
11,70,000
2009 - June [2] (b) Following are the abridged balance sheets of Harry Ltd. and Say
Ltd. as on 31st March, 2009 :
Liabilities Hary Ltd. Say Ltd.
(`) (`)
Equity share capital (`100 each) 10,00,000 4,00,000
General reserve 1,00,000 1,70,000
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Profit and loss account 1,60,000 1,30,000
Current liabilities 4,40,000 2,00,000
17,00,000 10,00,000
Assets
Fixed assets 4,80,000 2,50,000
Investment in shares of Say Ltd. 5,00,000 —
Current assets 7,20,000 7,50,000
17,00,000 10,00,000
Additional information :
(i) On 1st July, 2008, Hary Ltd. acquired 3,000 shares in Say Ltd. The reserves and
surplus position of Say Ltd. as on 1st April, 2008 was as under :
General reserve ` 2,50,000
Profit and loss a/c (Cr.) ` 1,20,000
(ii) On 1st October, 2008, Say Ltd. issued one equity share for every four shares
held as bonus shares out of general reserve. No entry has been made in the
books of Say Ltd. for issue of bonus shares.
(iii) On 30th September, 2008, Say Ltd. declared a dividend out of pre-acquisition
profits @ 25% on ` 4,00,000, its capital on that date. Hary Ltd. credited the
dividend to its profit and loss account.
(iv) Say Ltd. owed Hary Ltd. ̀ 50,000 for purchase of stock from Hary Ltd. The entire
stock is held by Say Ltd. on 31st March, 2009. Hary Ltd. made a profit of 25%
on cost.
Prepare a consolidated balance sheet of Hary Ltd. and its subsidiary Say Ltd. as on
31st March, 2009. (9 marks)
Answer :
Consolidation Balance Sheet of Hary Ltd. and its Subsidiary Say Ltd. on
31.3.2009
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital
Equity Share Capital (` 10
each)
Minority Interest
Reserves & Surplus :
Capital Reserve
General Reserve
10,00,000
2,00,000
1,01,875
1,00,000
Fixed Assets:
Hary Ltd. 4,.80,000
S Ltd. 2,50,000
Current Assets:
Hary Ltd. 7,20,000
Say Ltd. 7,50,000
14,70,000
7,30,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.167
Profit & Loss Account:
Hary Ltd. 1,60,000
Less: Dividend
wrongly credited 75,000
85,000
Add: H. Ltd’s
share in Revenue
profit of Say Ltd 73,125
1,58,125
Less: Unrealised Profit 10,000
Current Liabilities :
Hary Ltd. 4,40,000
Say Ltd. 2,00,000
6,40,000
Less: Mutual Owing 50,000
1,48,125
5,90,000
Less: Mutual Owings 50,000
14,20,000
Less: Unrealised profit 10,000 14,10,000
21,40,000 21,40,000
Working Notes :(i) Capital Profits (Pre-acquisition profits)
` `
General Reserve ( 1.4.2008) 2,50,000Less: Bonus 1,00,000Pre-acquisition Reserve 1,50,000Profit & Loss A/c (1.4.2008) 1,20,000Less: Dividend out of pre-acquisitions profit (25% on ` 4,00,000) 1,00,000 20,000Profit of Current Year (pre-acquisition)
(1.4.2008 to 30.6.2008) 32,5002,02,500
Hary Ltd.’s share (75%) 1,51,875Minority Interest 50,625
(ii) Revenue Profits (1.7.2008 to 31.3.2009) `
Profit & Loss A/c as on 31.3.2009 1,30,000Less: Opening Balance (1,20,000 - 1,00,000) 20,000
1,10,000Add: Transfer to Reserve (` 1,70,000 - 1,50,000) 20,000Profit earned during the year 1,30,000Profit for the pre-acquisition period (`1,30,000 3/12) 32,500×
Profit for the post-acquisition period (` 1,30,000 9/12) 97,500×
Hary Ltd. Share (3/4) 73,125
Minority Interest 24,375
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(iii) Calculation of Capital Reserve `
Paid up capital 3,00,000
Share of bonus shares 75,000
Share of capital profit 1,51,875
5,26,875
Less: Cost of Investment 5,00,000
Less: Dividend out of capital profit
credited to Profit & Loss Account 75,000 4,25,000
Capital Reserve 1,01,875
(iv) Minority Interest
Share Capital 1,00,000
Share of bonus shares 25,000
Share of capital profits 50,625
Share of revenue profits 24,375
2,00,000
As per New Schedule VI
Consolidated Balance Sheet of Harry Ltd.
with Say Ltd. as at 31.3.2009
(`̀̀̀ in ...........)
Particulars Note
No.
Figures as
at the end
of current
reporting
period
Figures as
at the end
of the
previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 10,00,000
(b) Reserves and surplus 1 3,50,000
(c) Money received against share
warrants
(d) Minority Interest (w.n (iv)) 2,00,000
(2) Share application money pending
allotment
(3) Non - current liabilities
(a) Long - term borrowings
[Chapter #### 6] Consolidation of Accounts OOOO 2.169
(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 2 5,90,000
(d) Short-term provisions
TOTAL 21,40,000
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 3 7,30,000
(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
(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 4 14,10,000
TOTAL 21,40,000
Schedules:
1. Reserves & Surplus:
Capital Reserve (Working Note(iii))
General Reserve
Consolidated Profit and Loss (Working Note(v))
1,01,875
1,00,000
1,48,125
3,50,000
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2. Other Current Liabilities:
Harry Ltd.
Say Ltd.
4,40,000
2,00,000
Less: Mutual Owing
6,40,000
50,000 5,90,000
3. Tangible Assets:
Fixed Assets:
Harry Ltd.
S. Ltd.
4,80,000
2,50,000 7,30,000
4. Other Current Assets:
Harry Ltd.
Say Ltd.
7,20,000
7,50,000
Less: Mutual Owings
14,70,000
50,000
Less: Unrealized Profit
14,20,000
10,000 14,10,000
2010 - June [2] (b) Following are balance sheets of H Ltd. and S Ltd. as at 31st March,2009:Liabilities H Ltd. S Ltd.
(`) (`)Share capital (Shares of ` 100 each) 5,00,000 2,00,000General reserve as on 1st April, 2008 1,00,000 60,000Profit and loss account 1,40,000 90,000Bills payable — 40,000Creditors 80,000 50,000
8,20,000 4,40,000AssetsGoodwill 40,000 30,000Other fixed assets 3,60,000 2,20,0001,500 Shares in S Ltd. at cost 2,40,000 —Stock 1,00,000 90,000Debtors 20,000 75,000Cash at bank 60,000 25,000
8,20,000 4,40,000The profit and loss account of S Ltd. showed a balance of ` 50,000 on 1st April, 2008.A dividend of 15% was paid on 15th October, 2008 for the year 2007-08. The dividendwas credited by H Ltd. to its profit and loss account. H Ltd. acquired shares on 1st
October, 2008. The bills payable of S Ltd. were all issued in favour of H Ltd. and thesame were got discounted by H Ltd. Included in the creditors of S Ltd. are ` 20,000 for
[Chapter #### 6] Consolidation of Accounts OOOO 2.171
goods supplied by H Ltd. The stock of S Ltd. includes goods to the value of ` 8,000which were supplied by H Ltd. at a profit of 33.33% on cost. Prepare consolidatedbalance sheet of H Ltd. and S Ltd. as on 31st March, 2009. (9 marks)Answer :
Consolidated Balance Sheet of H Ltd. and S Ltd. as on March 31, 2009
Liabilities ` ` Assets ` `
Share Capital : 5,000 Shares
of ` 100 each
Minority Interest
General Reserve
Profit & Loss A/c 1,40,000
Add: Post
acquisition profit 26,250
1,66,250
Less: Pre-acquisition
Dividend 22,500
Unrealised Profit 2,000
Bills Payable
Sundry Creditors :
H Ltd. 80,000
S Ltd. 50,000
1,30,000
Less: Common debts 20,000
5,00,000
87,500
1,00,000
1,41,750
40,000
1,10,000
Fixed Assets :
Goodwill 70,000
Less: Capital Reserve 18,750
Other Fixed Assets :
H Ltd. 3,60,000
S Ltd. 2,20,000
Cash at Bank
Sundry Debtors
(` 20,000 + ` 75,000
! ` 20,000)
Stock
H Ltd. 1,00,000
S Ltd. 90,000
1,90,000
Less: Unrealised Profit 2,000
51,250
5,80,000
85,000
75,000
1,88,000
9,79,250 9,79,250
Working Note :
(i) S Ltd.’s Profit and Loss Account
Particulars ` Particulars `
To Dividend for 2007-08 @
15% on ` 2,00,000
To Balance c/d
30,000
90,000
By Balance b/d
By Net profit for the year
(balancing figure)
50,000
70,000
1,20,000 1,20,000
Net profit for the year ended 31st March, 2009 = ` 70,000Net profit for six months, i.e. Post-acquisition Profits = ` 70,000 × 6/12
= ` 35,000H Ltd.’s share = 75% of ` 35,000 = ` 26,250
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(ii) Capital Profits :
`
General reserve as on 1st April, 2008 60,000
Add: Balance of profit and loss account as on 1st April, 2008 50,000
Half of net profit for the year 2008-2009 35,000
Less: Dividend on equity share @ 15% 1,45,000
Capital profit 30,000
H Ltd.’s share = 75% of ` 1,15,000 = ` 86,250 1,15,000
(iii) Capital reserves on consolidation :
Paid up value of shares acquired 1,50,000
H Ltd.’s share of capital profits 86,250
Dividend received out of pre-acquisition profits 22,500
2,58,750
Less: Amount paid 2,40,000
Capital Reserve 18,750
(iv) Minority Interest :
Paid-up value of 500 shares in S Ltd. 50,000
25% of S Ltd.’s General reserve 15,000
25% of S Ltd.’s Profit and Loss Account 22,500
87,500
As per New Schedule VI
Consolidated Balance Sheet of H Ltd.
with S Ltd. as at 31.3.2009
(Rupees in ...........)
Particulars Note.No.
Figuresas at theend ofcurrent
reportingperiod
Figuresas at theend the
previousreporting
period
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 5,00,000
(b) Reserves and surplus 1 2,60,500
(c) Money received against share warrants
(d) Non-controlling interest/minorityInterest (W. Note IV) 87,500
[Chapter #### 6] Consolidation of Accounts OOOO 2.173
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 2 1,50,000
(c) Other current liabilities
(d) Short-term provisions
TOTAL 9,98,000
II. Non-current assets
1. (a) Fixed assets
(i) Tangible 5,80,000
(ii) Intangible assets 70,000
(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
2. Current assets
(a) Current investments
(b) Inventories 1,88,000
(c) Trade receivables 3 75,000
(d) Cash and cash equivalents 85,000
(e) Short-term loans and advances
(f) Other current assets
TOTAL 9,98,000
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Schedules :
1. Reserves & Surplus:
Consolidated Profit & Loss (Working Note 7)
Capital Reserve (Working Note 3)
General Reserve
1,41,750
18,750
1,00,000
2,60,500
2. Trade Payables:
Creditors:
(!) Mutual set off
Bills payable
1,30,000
20,000 1,10,000
40,000
1,50,000
3. Trade receivables:
Debtors
(!) mutual owing
95,000
20,000
75,000
2010 - Dec [4] On 1st October, 2009, Poddar Ltd. acquired 12,000 equity shares of
Bhansali Ltd. of the face value of ̀ 10 each at a price of ̀ 1,70,000. The balance sheets
of two companies as on 31st March, 2010 are as follows:
Liabilities Poddar Ltd. Bhansali
(`) (`)
Equity shares of ` 10 each 10,00,000 2,00,000
General reserve (1st April, 2009) 4,20,000 1,00,000
Profit and loss account (1st April, 2009) 90,000 40,000
Profit for the year 1,70,000 45,000
Creditors 2,40,000 92,000
Bills payable 80,000 60,000
20,00,000 5,37,000
Assets
Goodwill 3,00,000 70,000
Land and building 4,00,000 1,00,000
Plant and machinery 5,00,000 1,00,000
Stock 2,00,000 40,500
Debtors 3,00,000 1,34,500
Investments 2,00,000
Bills receivable 20,000 30,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.175
Bank 60,000 50,000
Cash 20,000 12,000
20,00,000 5,37,000
Out of the debtors and bills receivable of Poddar Ltd. ` 50,000 and ` 16,000
respectively represented those due from Bhansali Ltd. The stock in the hands of
Bhansali Ltd. includes goods purchased from Poddar Ltd. at ` 20,000 which includes
profit charged by latter company @ 25% at cost. Prepare a consolidated balance sheet
as on 31st March, 2010 and also show your workings. (15 marks)
Answer :
Consolidated Balance Sheet of Poddar Ltd. and its
Subsidiary Bhansali Ltd. as on 31.3. 2010
Liabilities ` Assets `
Share Capital
Equity Shares of ` 10 each
Minority Interest
Reserves & Surplus:
General Reserve
Profit & Loss Account
Current Liabilities:
Creditors
Poddar Ltd. 2,40,000
Bhansali Ltd. 92,000
3,32,000
Less:: Inter Co.Debts 50,000
Bills Payable
Poddar Ltd. 80,000
Bhansali Ltd. 60,000
1,40,000
Less: Inter Co. Debts 16,000
10,00,000
1,54,000
4,20,000
2,69,500
2,82,000
1,24,000
Goodwill
Land and Building `
Poddar Ltd. 4,00,000
Bhansali Ltd. 1,00,000
Plant and Machinery
Poddar Ltd. 5,00,000
Bhansali Ltd. 1,00,000
Investments
Stock :
Poddar Ltd. 2,00,000
Bhansali Ltd. 40,500
2,40,500
Less: Stock
Reserve 4,000
Debtors :
Poddar Ltd. 3,00,000
Bhansali Ltd. 1,34,500
4,34,500
3,22,500
5,00,000
6,00,000
30,000
2,36,500
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Less : Inter
Co.Debts 50,000
Bills Recelvables :
Poddar Ltd. 20,000
Bhansali Ltd. 30,000
50,000
Less: Inter Co.
Debts 16,000
Bank :
Poddar Ltd. 60,000
Bhansali Ltd. 50,000
Cash :
Poddar Ltd. 20,000
Bhansali Ltd. 12,000
3,84,500
34,000
1,10,000
32,000
22,49,500 22,49,500
Working Notes:
(1) Statement showing the allocation of Profits of Bhansali Ltd.
Particulars Total Profit Minority Share Share of Holding Company
(`) (`)
Capital
Profits
(`)
Revenue
Profits
(`)
Pre acquisition :
General Reserve 1.4.09
Profit & Loss A/c 1.4.09
Profit & Loss A/c
1.4.09 to 30.9.09
Post Acquiaition:
Profit & Loss A/c
1.10.09 to 31.3.10
1,00,000
40,000
22,500
22,500
1,85,000
40,000
16,000
9,000
9,000
74,000
60,000
24,000
13,500
—
97,500
—
—
—
13,500
13,500
(2) Calculation of Cost of Control / Goodwill:`
Cost of shares 1,70,000Less: Face value of shares 1,20,000Cost of Control/Goodwill 50,000
(3) Calculation of Minority Interest: `
Paid-up value of capital 80,000Share of profits 74,000
1,54,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.177
(4) Calculation of Final Profit & Loss A/c balance of Poddar Ltd.`
Profit & Loss A/c-:Balance on 01.04.2009 90,000Current year profit 1,70,000 2,60,000Shares in Bhansali Ltd. 13,500
2,73,500Less : Stock Reserve 4,000
2,69,500(5) Calculation of value of Goodwill for Balance Sheet:
Cost of Control 50,000Goodwill - Poddar Ltd. 3,00,000Goodwill - Bhansali Ltd. 70,000
4,20,000Less: Capital Profit (as above) 97,500Goodwill 3,22,500
As per New Schedule VIConsolidated Balance Sheet of Poddar Ltd.
with Bhansali Ltd. as at 31.3.2010(` in..........)
Particulars Note
No.
Figures as
at the end
of current
reporting
period
Figures
as at the
end of the
previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 10,00,000
(b) Reserves and surplus 1 6,89,500
(c) Money received against share warrants
(d) Minority Interest (W.N 3) 1,54,000
(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
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(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 2 4,06,000
(c) Other current liabilities
(d) Short-term provisions
TOTAL 22,49,500
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 3 11,00,000
(ii) Intangible assets 4 3,22,500
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments 30,000
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories 5 2,36,500
(c) Trade receivables 6 4,18,500
(d) Cash and cash equivalents 7 1,42,000
(e) Short-term loans and advances
(f) Other current assets
TOTAL 22,49,500
Notes to Accounts :
1. Reserves & Surplus :
General reserve 4,20,000
Profit & Loss (Working Notes 4) 2,69,500
6,89,500
[Chapter #### 6] Consolidation of Accounts OOOO 2.179
2. Trade payables :Creditors : 3,32,000
Less: ICD 50,000 2,82,000
Bills Payable 1,40,000
Less: ICD 16,000 1,24,000
4,06,000
3. Tangible Assets :Land & Buildings: 5,00,000
Plant & Machinery : 6,00,000
11,00,000
4. Intangible Assets :
Goodwill (W.N. No. 5) 3,22,500
3,22,500
5. Inventories :
Stock: 2,40,500
Less: Unrealised Profit 4,000
2,36,500
6. Trade receivables :Debtors : 4,34,500
Less: ICD 50,000 3,84,500
Bill Receivable 50,000
Less: ICD 16,000 34,000
4,18,500
7. Cash & Cash equivalents :Bank 1,10,000
Cash 32,000
1,42,000
2011 - June [2] (b) Following are the balance sheets of H Ltd. and S Ltd. as at 31st
December. 2010 :Liabilities H Ltd. S Ltd.
(`) (`)Equity share of ` 100 each fully paid 5,00,000 2,00,000General reserve 1,00,000 —Profit and loss account 80,000 —14% Debentures — 1,00,000Creditors 75,000 45,000
7,55,000 3,45,000
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Assets
Fixed assets 3,50,000 1,50,000
Stock 90,000 40,000
Debtors 60,000 30,000
14% Debentures in S Ltd. (at par) 60,000 —
Equity shares in S Ltd. @ ` 80 per share 1,20,000 —
Bank 75,000 25,000
Profit and loss account — 1,00,000
7,55,000 3,45,000
H Ltd. acquired 1,500 shares in S Ltd. on 1st May, 2010. The profit and loss account of
S Ltd. showed a debit balance of ̀ 1,50,000 on 1st January, 2010. During March, 2010,
goods costing ` 6,000 were destroyed by fire, against which the insurance company
paid ` 2,000 only to S Ltd. Creditors of S Ltd. include ` 20,000 for goods supplied by H
Ltd. on which H Ltd. made a profit of ̀ 2,000. Half of the goods were sold out of this. An
item of plant (included in fixed assets) of S Ltd. had book value of ̀ 15,000. It was to be
revalued at ` 20,000 on 1st January, 2010 (ignore depreciation). Prepare consolidated
balance sheet as on 31st December, 2010. (9 marks)
Answer :
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31st December 2010
Liabilities Amount
(`̀̀̀)
Assets Amount
(`̀̀̀)
Share capital
5,000 equity shares @
` 100 each
Minority Interest
Reserve & Surplus
General Reserve
Profit & Loss A/c 80,000
Add : Profit from S Ltd. 27,000
1,07,000
Less : Unrealised profit 1,000
Secured Loans
14% Debentures 1,00,000
Less: Inter co. Invest. 60,000
5,00,000
26,250
1,00,000
1,06,000
40,000
Goodwill
Fixed Assets:
H Ltd 3,50,000
S Ltd 1,55,000
Current Assets:
Stock
H Ltd 90,000
S Ltd 40,000
1,30,000
Less : Unrealised
Profit 1,000
Debtors
H Ltd. 60,000
S Ltd. 30,000
90,000
68,250
5,05,000
1,29,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.181
Current Liabilities:
Creditors:
H Ltd. 75,000
S Ltd. 45,000
1,20,000
Less: Mutual Owings 20,000 1,00,000
8,72,250
Less: Inter company
owing 20,000
Bank
H Ltd. 75,000
S Ltd. 25,000
70,000
1,00,000
8,72,250
As per New Schedule VI
Consolidated Balance Sheet of H Ltd.
with S Ltd. as at 31.3.2010
(`̀̀̀ in............)
Particulars Note No.
Figures as
at the end
of current
reporting
period
Figures as at
the end of
the previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 5,00,000
(b) Reserves and surplus 1 2,06,000
(c) Money received against share
warrants
(d) Non-controlling interest (W.N 3) 26,250
(2) Share application money pending
allotment
(3) Non-current liabilities
(a) Long-term borrowings 2 40,000
(b) Deferred tax liabilities (Net)
(c) Other Long-term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 3 1,00,000
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(c) Other current liabilities
(d) Short-term provisions
TOTAL 8,72,250
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 5,05,000
(ii) Intangible assets (working
Note 4)
68,250
(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
(2) Current assets
(a) Current investments
(b) Inventories 4 1,29,000
(c) Trade receivables 5 70,000
(d) Cash and cash equivalents 1,00,000
(e) Short-term loans and
advances
(f) Other current assets
TOTAL 8,72,250
Working note1:
Calculation of Trading Profit of S Ltd. earned during the year.
Balance of P&L at Beg. of year (2010) 15,000
Add: Loss incurred due to fire (6,000 !2,000) 4,000
1,54,000
Less: Balance of Profit & Loss as on 31/12/2010 10,000
Trading Profit during the year 54,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.183
Pre acquisition Profit 54,000× = 18,000
Post acquisition Profit 54,000× = 36,000
Working Note 2 :
Analysis of S Ltd. Profits:
Capital Revenue
Debit balance of P/L A/c (1,50,000) !
Loss by fire (4,000) !
Trading Profit earned during the year (working note 1) 18,000 36,000
Revenue Profit 5,000 !
(1,31,000) 36,000
Share of H Ltd. (98,250) 27,000
Share of minority (32,750) 9,000
Working Note 3:
Calculation of M.I.
Paid up value of Share held (500×100) 50,000
Share capital loss 32,750
Share in Revenue Profit 9,000
26,250
Calculation of cost of control:
Cost of Shares held by H Ltd. 1,20,000
Less: Paid up value of share held 1,50,000
Less: Share in capital loss 8,250 5,750
Goodwill 68,250
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Schedules : Notes to A/cs1. Reserves & Surplus :
1. Consolidated General Reserve 1,00,000
Consolidated P&L A/c H Ltd. 80,000Shares in S Ltd. (Working note 2) 27,000
1,07,000Less: Stock Reserve 1,000 1,06,000
2,06,000
2. Long term Borrowings :
14% Debenture(-) Inter Company Holdings
1,00,000(60,000)
40,000
3. Trade payables :
Creditors(-) Inter Company Holding
1,20,000(20,000) 1,00,000
4. Inventories :H Ltd. 90,000S Ltd. 40,000
1,30,000Loss unrealised Profit 1,000
1,29,0005. Trade Receivable :
Debtors(-) Inter Company Holding
90,000(20,000)
(-) Profits 70,000
70,000
2011 - Dec [2] (a) The balance sheets of H Ltd. and its subsidiary S Ltd. as on 31st
March, 2011 are as follows:Liabilities H Ltd. S Ltd.
(`̀̀̀) (`̀̀̀)Equity shares of ` 100 each 30,00,000 15,00,000General reserve (1st April, 2010) 8,00,000 4,00,000Profit and loss account (1st April, 2010) 2,00,000 2,50,000Net Profit for the year 6,00,000 4,00,00015% Debentures 10,00,000 —Creditors 4,00,000 2,70,000Bills payable 60,000 30,000
60,60,000 28,50,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.185
Assets H Ltd. S Ltd.
(`̀̀̀) (`̀̀̀)
Premises 14,00,000 9,00,000
Machinery 12,00,000 7,00,000
Investment in shares of S Ltd. 17,00,000 —
Inventories 7,00,000 4,50,000
Debtors 5,00,000 4,20,000
Bills receivable 1,80,000 80,000
Cash and bank 3,80,000 2,00,000
Misc. expenditure — 1,00,000
60,60,000 28,50,000
The following are the additional information:
(i) H Ltd. acquired 12,000 equity shares in S Ltd. on 1st April, 2010.
(ii) Bills receivable of H Ltd. include ` 30,000 accepted by S Ltd.
(iii) Accounts receivable of H Ltd. include ` 1,00,000 due from S Ltd.
(iv) Inventories of S Ltd. include goods purchased from H Ltd. for ̀ 1,25,000 which
were invoiced by H Ltd. at a profit of 25% on cost.
(v) Both H Ltd. and S Ltd. have proposed 10% dividend for the year 2010-11 but
no effect has been given in the balance sheets.
Prepare a consolidated balance sheet giving proper working notes. (11 marks)
Answer :
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31st March 2011
Liabilities Amount
(`̀̀̀)
Amount
(`̀̀̀)
Assets Amount
(`̀̀̀)
Amount
(`̀̀̀)
Share capital30,000 Equity shares @` 100 each Minority InterestReserves and Surplus General ReserveProfit & Loss A/cSecured Loans15% Debentures
30,00,0004,60,000
7,95,0008,00,000
10,00,000
Fixed AssetsGoodwill
PremisesH. Ltd.S Ltd.
MachineryH Ltd.S Ltd.
14,00,000 9,00,000
12,00,000 7,00,000
60,000
23,00,000
19,00,000
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Current Liabilitiesand ProvisionsCreditors:
H Ltd.S Ltd.
Less: Mutual OwingsBills Payable:
H Ltd.S Ltd.
Less: Mutual OwingsProposed Dividend
4,00,0002,70,0006,70,000
1,00,000
60,00030,00090,00030,000
5,70,000
60,0003,30,000
70,15,000
Current AssetsLoans and AdvancesInventories
H Ltd.S Ltd.
Less: Profit on Unrealized StockDebtors
H Ltd. S Ltd.
Less: Mutual Owings Bills Receivable:
H Ltd.S Ltd.
Less: Mutual OwingsCash and Bank
H Ltd.S Ltd.
7,00,000 4,50,000
11,50,000
25,000
5,00,0004,20,0009,20,0001,00,000
1,80,000 80,0002,60,000
30,0003,80,0002,00,000
11,25,000
8,20,000
2,30,000
5,80,00070,15,000
Working Notes:(1) Pre-acquisition profits and reserves of S Ltd.
`̀̀̀
Profit & Loss A/c as on 1st April 2010 2,50,000Add: General Reserves as on 1st April 2010 4,00,000
Total 6,50,000H Ltd.'s share (4/5th of 6,50,000) 5,20,000Minority Interest (1/5th of 6,50,000) 1,30,000
(2) Post-acquisition profits of S Ltd. `̀̀̀
Profit for the year ending 31st March 2011 4,00,000Less: Proposed Dividend (10% of 15,00,000) 1,50,000
2,50,000H Ltd.'s share (4/5th of 2,50,000) 2,00,000Minority Interest (1/5th of 2,50,000) 50,000
(3) Calculation of Cost Control or Goodwill `̀̀̀
Paid up value of 12,000 equity shares held by H Ltd.(12,000 × 100) 12,00,000Add: 4/5th share in Pre-acquisition profits and reserves 5,20,000
17, 20,000Less: 4/5th share of Miscellaneous Expenditure 80,000Intrinsic value of shares on the date of acquisition 16,40,000Investments by H Ltd. in S Ltd. for 12,000 shares 17,00,000Less: Intrinsic value of shares on the date of acquisition 16,40,000Goodwill 60,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.187
(4) Calculation of Minority Interest `̀̀̀
paid up value of 3,000 equity shares (3,000 × 100) held by outsiders 3,00,000
Add: 1/5th share in Pre-acquisition profits and reserves 1,30,000
1/5th share in Post-acquisition profits 50,000
4,80,000
Less: 1/5th share of Miscellaneous Expenditure 20,000
4,60,000
(5) Unrealised profit on Stock `̀̀̀
Value of Unsold Stock 1,25,000
Profit on unsold stock (20% of Selling Price)= (20% of 1,25,000) 25,000
As per AS-21 Full Amount is to be fallen 25,000
(6) Proposed Dividend `̀̀̀
Dividend Proposed by H Ltd. 3,00,000
Minority shareholders' share in Proposed Dividend of S Ltd.
(1/5th of 1,50,000) 30,000
Total 3,30,000
(As per New Schedule VI)
Name of the Company - H Ltd.
with S Ltd. as on 31.3.2011
(`̀̀̀ in ...........)
Particulars Note
No.
Figures
as at the
end of
current
reporting
period
Figures as
at the end
of the
previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 30,00,000
(b) Reserves and surplus 1 15,95,000
(c) Money received against share warrants
(d) Minority Interest (w.n. (4)) 4,60,000
(2) Share application money pending
allotment
(3) Non - current liabilities
(a) Long - term borrowings 10,00,000
(b) Deferred tax liabilities (Net)
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(c) Other Long-term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 2 6,30,000
(c) (Working Note 6) 3,30,000
(d) Short-term provisions
TOTAL 70,15,000
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 3 42,00,000
(ii) Intangible assets G/W (Working
Note 3) 60,000
(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
(2) Current assets
(a) Current investments
(b) Inventories 4 11,25,000
(c) Trade receivables 5 10,50,000
(d) Cash and cash equivalents 5,80,000
(e) Short-term loans and advances
(f) Other current assets
TOTAL 70,15,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.189
Working Notes:
Consolidated Profit & Loss Account:
Particulars Amount `̀̀̀ Amount `̀̀̀
Profit & Loss as on 1.4.10
Add: Net profit during the year
i.e. Share in Post Profits of S Ltd.
(Working Note 3) 2,00,000
+ Shares in proposed dividend S Ltd.
(1,50,000× ) 1,20,000
6,00,000
3,20,000
2,00,000
9,20,000
Less: Proposed dividend (10% of 30,00,000)
Inter Company Profits
(3,00,000)
(25,000)
11,20,000
(3,25,000)
7,95,000
Schedules:
1. Reserves & Surplus:
General Reserve
Profit and Loss Account (Working note)
Capital Reserves
8,00,000
9,95,000
20,000
17,15,000
2. Trade Payables:
Creditors
(-) Inter Company Debt
6,70,000
1,50,000 5,70,000
Bills Payable
(-) Inter Company Debt
90,000
30,000 60,000
6,30,000
3. Tangible
Premises
Machinery
23,00,000
19,00,000
42,00,000
4. Inventories
Inventories
(-) Inter Company Profits (As per AS-21 Whole Amount of stock H
Ltd. is total deducted)
11,50,000
(25,000)
11,25,000
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5. Trade Receivables:
Debtors
(-) Inter Company Debt
9,20,000
(1,00,000) 8,20,000
Bills Receivable
(-) Inter Company Debt
2,60,000
(30,000) 2,30,000
10,50,000
2012 - June [2] (a) The following are the balance sheets of X Ltd. and its subsidiary YLtd. as on 31st March, 2011:Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
(`̀̀̀) (`̀̀̀) (`̀̀̀) (`̀̀̀)Equity shares of Equipments 2,50,000 95,000 ` 10 each 4,00,000 1,00,000 Investment (9,000 equityProfit and loss account 50,000 20,000 shares in Y Ltd. onExternal liabilities 7,50,000 4,80,000 1st April, 2010) 1,40,000 —
Other assets 8,10,000 5,05,00012,00,000 6,00,000 12,00,000 6,00,000
On 1st April, 2010, profit and loss account of Y Ltd. showed a credit balance of`̀̀̀ 8,000 and equipments of Y Ltd. were revalued by X Ltd. at 20% above its bookvalue of ` 1,00,000 (but no such adjustment affected in the books of Y Ltd.)Prepare the consolidated balance sheet as on 31st March, 2011. (6 marks)
AnswerW.No. - 1
Distribution of pre Acquisition profit between Holding Company and MinorityShare HolderTotal No. of Shares in Y Ltd. Total share Capital/Face value per share
= 1,00,000/10= 10,000
X Share Holding 9,000 sharesMinority Share Holding 1,000 sharesPre acquisition Profit i.e. on 01-04-2010 — 8,000X Share 8,000*9,000/10,000 = 7,200Minority share in pre acquisition profit 8,000 - 7,200 = 800
W.No. - 2Revaluation of EquipmentBook Value of Equipment as on 01-04-2010 — 1,00,000Revaluation @ 20% above the book value 20,000Share of X Ltd. in Revaluation Profit (90%) 18,000Minority’s Share in Revaluation Profit 2,000Depreciation Rate (1,00,000 - 95,000)/1,00,000 = 5%Additional Depreciation on appreciated value(5% of ` 20,000) 1,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.191
W.No. - 3Distribution of Post Acquisition profit between Holding Company andMinority Share HolderProfit of Y Limited as on 31-03-2011 20,000Less: Profit as on 01-04-2011 8,000Profit of the year 2010-2011 12,000Less: Additional Depreciation 1,000Profit after additional Depreciation 11,000Share of X Limited i.e. 90% 9,900Minority Share in Post Acquisition Profit 1,100
W.No. - 4Calculation of Minority ShareholdingPaid up value of shares held 10,000Add: Share in Pre-acquisition profit 800
Share in Profit on revaluation 2,000Share in Post acquisition profit 1,100
Total 13,900W.No. - 5
Cost of Control (Goodwill/Capital reserve)Cost of Investment in Y Limited 1,40,000Less: Face Value of Shares 90,000
Share in Pre Acquisition Profit 7,200Profit on Revaluation 18,000 1,15,200
Goodwill 24,800Consolidated Balance Sheet of X Ltd. an its subsidiary Y Ltd.
on 31st March, 2011
Liabilities Amount Assets ` `
Share Capital
Issued, subscribed, called up
and paid up capital (40,000
equity shares of ` 10 each) 4,00,000
Equipment
X Ltd.
Y Ltd.
Less: Depreciation
on Y Limited
2,50,000
1,20,000
3,70,000
6,000 3,64,000
Minority Interest (W.No. - 4) 13,900 Goodwill 24,800
Profit & Loss A/c 50,000 X Ltd. 8,10,000
Share in Y Limited Profit 9,900 59,900 Y Ltd. 5,05,000 13,15,000
External Liabilities
X Limited 7,50,000
Y Limited 4,80,000 12,30,000
17,03,800 17,03,800
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2012 - Dec [3] (a) Following are the balance sheets of H Ltd. and its subsidiary S Ltd.
as on 31st March, 2012 :
Equity and Liabilities H Ltd. S Ltd.
(`) (`)
Fully paid-up equity shares of `10 each 6,00,000 2,00,000
General reserve 3,40,000 80,000
Profit and loss (Surplus) 1,00,000 60,000
Trade payables 70,000 35,000
11,10,000 3,75,000
Assets
Machinery 3,90,000 1,35,000
Furniture 80,000 40,000
Investments (80% shares in S Ltd. at cost) 3,40,000 !
Stock 1,80,000 1,20,000
Trade receivables 50,000 30,000
Cash at bank 70,000 50,000
11,10,000 3,75,000
The following additional information is provided :
(i) Surplus in the profit and loss statement of S Ltd. stood at `30,000 on 1st April,
2011 whereas general reserve has remained unchanged since that date.
(ii) H Ltd. acquired 80% shares in S Ltd. on 1st October, 2011 for `3,40,000 as
mentioned above.
(iii) A sum of `10,000 due from H Ltd. for goods sold at a profit of 25% on cost price
is included in trade receivables of S Ltd. Till 31st March, 2012, only half of the
goods had been sold while the remaining goods were lying in the godowns of H
Ltd. as on that date.
You are required to prepare the consolidated balance sheet as on 31st March, 2012.
Show all calculations. (9 marks)
Answer:
Working notes:
1. Minority interest = 20% (as 80% Shares held by H Ltd.)
Pre acquisition period i.e. from 1st April, 2011 to 30th September, 2011 = 6 Months
Post acquisition period i.e. from 1st October, 2011 to 31st March, 2012 = 6 Months
Unsold goods in H limited which was purchased from S Ltd. = ̀ = ̀ 5,000
Unrealized profit = ` 5,000* 25/125 = ` 1,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.193
2. Distribution of Capital Profit
General & reserve = ` 80,000
Profit & Loss (1 - 4 - 2011) = ` 30,000
Pre acquisition profit in current year profit
(` 60,000 - ` 30,000) × = ` 15,000
Total = ` 1,25,000
Share of H Limited (80%) = ` 1,25,000 × = ` 1,00,000
Share of Minority shareholders = ` 1,25,000 × = ` 25,000
3. Cost of control/capital reserve
Amount paid for 80% share = ` 3,40,000
Less: Paid up value of shares held by H Ltd. = ` 1,60,000
Shares in Capital Profit = ` 1,00,000
Goodwill = ` 80,000
4. Share of H Ltd in revenue profit of S Ltd.
Profit from 01-4-2011 to 31st March, 2012 = ` 60,000 - ` 30,000
= ` 30,000
Profit from 01-10-2012 to 31st March, 2012 = ` 30,000 ×
= ` 15,000
Share of H Limited = ` 15,000 ×
= ` 12,000
Share of Minority shareholders = ` 3,000 (` 15,000 - ` 12,000)
5. Minority Interest
Share capital 20% of ` 20,000 = ` 40,000
Share in capital profit = ` 25,000
Share in revenue profit = ` 3,000
Total = ` 68,000
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd
as on 31st March, 2012
I. EQUITY AND LIABILITIES
Amount in `
(1) Shareholders’ funds
(a) Share Capital;
60,000 Equity shares of ` 10 each 6,00,000
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(b) Reserve and Surplusa. General reserve 3,40,000b. Profit and Loss A/c 1,00,000Share in S Ltd.’s revenue profit 12,000
1,12,000Less: Unrealized profit 1,000 1,11,000
(2) Current LiabilitiesTrade payablea. H Ltd. 70,000b. S Ltd 35,000
1,05,000Less: Mutual Owings 10,000 95,000Minority Interest 68,000TOTAL 12,14,000
ASSETS1. Non-current assets
a. Fixed AssetsTangible Assets:Machinery1. H Ltd. 3,90,0002. S Ltd. 1,35,000 5,25,000Furniture3. H Ltd. 80,0004. S Ltd. 40,000 1,20,000 6,45,000
Non-Tangible Assets:Goodwill 80,000
2. Current assets(a) Stock
i. H Ltd. 1,80,000ii. S Ltd. 1,20,000
3,00,000Less: unrealized profit 1,000 2,99,000
(b) Trade receivablesi. H Ltd. 50,000ii. S Ltd. 30,000
80,000Less: Mutual Owings 10,000 70,000
(c) Balance with banki. H Ltd. 70,000
ii. S Ltd. 50,000 1,20,000
TOTAL 12,14,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.195
2013 - June [3] (a) The following are the balance sheets of H Ltd. and its subsidiaryS Ltd. as on 31st March, 2012:
Equity and Liabilities H Ltd. S Ltd.(`) (`)
Shareholders’ funds:Share capital
Shares of ` 100 each fully paid 5,00,000 2,00,000Reserves and surplus:
General reserve 1,00,000 —Profit and loss account 80,000 (–) 1,00,000
Non-current liabilities:6% Debentures — 1,00,000
Current liabilities:Trade payables 75,000 45,000
7,55,000 2,45,000AssetsNon-current assets:
Fixed assets 3,50,000 1,50,000Non-current investments:
6% Debentures in S Ltd. (acquired at cost) 60,000 —1,500 Shares in S Ltd. at ` 80 each 1,20,000 —
Current assets:Inventories 90,000 40,000Trade receivables 60,000 30,000Cash 75,000 25,000
7,55,000 2,45,000H Ltd. acquired the shares on 1st August, 2011. The profit and loss account of S Ltd.showed a debit balance of ` 1,50,000 on 1st April, 2011. During June, 2011 goods of SLtd. costing ` 6,000 were destroyed by fire against which insurer paid only ` 2,000.Trade payables of S Ltd. include ̀ 20,000 for goods supplied by H Ltd. on which H Ltd.made a profit of ` 2,000. Half of the goods were still in stock on 31st March, 2012.Prepare a consolidated balance sheet and show the complete working. (9 marks)Answer :
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.as on 31st March 2012
Particulars Amount (`̀̀̀) Amount (`̀̀̀)
I. EQUITIES AND LIBILITIES
1. Shareholder’s Funds
(a) Share capital
5,000 Equity shares @ ` 100 each 5,00,000
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(b) Reserves and Surplus
General Reserve
Profit & Loss A/c
H Ltd.
S Ltd.
Less: Unrealised Profit
2. Minority Interest
3. Non Current Liabilities
15% Debentures
Less : Held by H Ltd.
4. Current Liabilities
Trade payables:
H Ltd.
S Ltd.
Less: Mutual Owings
Total
80,000
27,000
1,70,000
1,000
1,00,000
60,000
75,000
45,000
1,20,000
20,000
1,00,000
1,06,000
25,000
40,000
1,00,000
8,71,000
II. Assets
1. Non Current Assets
(a) Fixed Assets
(i) Tangible Assets
H Ltd.
S Ltd.
(ii) Intangible Assets
Goodwill
2. Current Assets
inventories
H Ltd.
S Ltd.
Less: Profit of Unrealized Stock
Trade Receivables
H Ltd.
S Ltd.
Less: Mutual Owings
3,50,000
1,50,000
90,000
40,000
1,30,000
1,000
60,000
30,000
90,000
20,000
5,00,000
72,000
1,29,000
70,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.197
Cash
H Ltd.
S Ltd.
Total
75,000
25,000 1,00,000
8,71,000
Working Notes:
(1) Ratio of share capital held by H Ltd. and Minority Shareholders = 3 : 1
(2) Pre-acquisition losses of S Ltd.
`
Losses as per Profit & Loss A/c as on 31st March 2011 1,50,000
H Ltd.’s share (3/4th of 1,50,000) 1,12,500
Minority interest (1/4th of 1,50,000) 37,500
(3) Additional Pre-acquisition profits of S Ltd. `
Accumulated Losses as on 31st March 2011 1,50,000
Less: Accumulated Losses as on 31st March 2012 1,00,000
Profits during the year 2011-12 50,000
Add: Loss of stock by fire (6,000 ! 2,000) 4,000
Adjusted profit 54,000
Profits for pre acquisition period
(from 01/04/2011 to 01/08/2011) 54,000 × 4/12 18,000
Less: Loss of stock by fire 4,000
Total pre acquisition profits 14,000
H Ltd.’s share (3/4th of 14,000) 10,500
Minority interest (1/4th of 14,000) 3,500
(4) Calculation of Cost of Control or Goodwill
` `
Paid up value of 1,500 equity shares held
by H Ltd. (1,500 × 100) 1,50,000
Add: 3/4th share in Pre-acquisition profits
and reserves 10,500
1,60,500
Less: 3/4th share of Pre-Acquisition Losses 1,12,500
Intrinsic value of shares on the date of acquisition 48,000
Investments by H Ltd. in S Ltd. for 1,500 shares
(1500 × 80) 1,20,000
Less: Intrinsic value of shares on the date of acquisition 48,000
Goodwill 72,000
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(5) Post Acquisition profits `
Profits for the post acquisition period
(from 01/08/2011 to 31/03/2012) 54,000 × 8/12 36,000
H Ltd.’s share in Post-acquisition profits of S Ltd. 27,000
Minority interest in Post-acquisition profits of S Ltd. 9,000
(6) Calculation of Minority interest `
Paid up value of 500 equity shares (500 × 100)
held by outsiders 50,000
Add: 1/4th share in Pre-acquisition profits and reserves 3,500
1/4th share in Post-acquisition profits 9,000
62,500
Less: 1/4th share in Pre-acquisition losses 37,500
Minority interest 25,000
(7) Unrealised profit on Stock
Value of Unsold Stock 10,000
Unrealised Profit on unsold stock
(2,000/20,000 × 10,000) 1,000
2013 - Dec [2] (a) The following are the balance sheets of H Ltd. and S Ltd. as at 31st
March, 2013:
I EQUITY AND LIABILITIES H. Ltd.(`) S. Ltd.(`)
(1) Shareholders’ Funds
(a) Share capital (` 100 each) 5,00,000 2,00,000
(b) Reserves and surplus
General reserve (1.4.2012) 1,00,000 60,000
Surplus (Profit & Loss a/c) 1,40,000 90,000
(2) Current Liabilities
Trade payables 80,000 90,000
TOTAL 8,20,000 4,40,000
II ASSETS
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 3,60,000 2,20,000
(ii) Goodwill 40,000 30,000
(b) Investments (1,500 shares is S. Ltd.) 2,40,000 !
[Chapter #### 6] Consolidation of Accounts OOOO 2.199
(2) Current assets
(a) Inventories 1,00,000 90,000
(b) Trade receivables 20,000 75,000
(c) Cash 60,000 25,000
TOTAL 8,20,000 4,40,000
The profit and loss account of S Ltd. showed a balance of ` 53,000 on 1st April, 2012.
A dividend of 15% was paid on 15th October, 2012 for the year 2011-12. Corporate tax
@15% was also paid on the dividend. The dividend was credited by H Ltd. in its profit
and loss account. H Ltd. acquired the shares on 1st October, 2012. The trade payables
of S. Ltd. include ` 20,000 for goods supplied by H. Ltd. The stock of S Ltd. includes
goods to the value of ̀ 8,000 which were supplied by H Ltd. at a profit of 33 % on cost.
Prepare a consolidated balance sheet. (9 marks)
CS Inter Gr. I
PRACTICAL QUESTIONS
2004 - June [3] (c) On 1st April, 2002, Broad Ltd. acquired 20 lakh fully paid equity
shares of ̀ 10 each in Ways Ltd. for ̀ 3.75 crore. The balance sheets of two companies
as on 31st March, 2003 are given below:
Liabilities (Rupees in Lakhs)
Broad Ltd. Ways Ltd.
Equity share capital of ` 10 each, fully paid 500 250
Securities premium 50 —
General reserve 60 140
Profit and loss account 230 75
Creditors 95 85
Proposed dividends 75 —
1,010 550
Assets
Land and buildings 90 80
Plant and machinery 210 135
Furniture and fixtures 100 25
Shares in Ways Ltd. 375 —
Stock 110 145
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Debtors 75 85
Cash at bank 50 70
Preliminary expenses — 10
1,010 550
Additional information is as under:
(i) The balances of general reserve and profit and loss account on the date of
acquisition of shares by Broad Ltd. were ` 100 lakh and ` 15 lakh respectively.
(ii) In July, 2002, Ways Ltd. distributed 10% dividend for the year 2000-01. Broad
Ltd. credited the entire amount of dividend received to its profit and loss account.
(iii) On 31st March, 2003, Ways Ltd. owed ` 30 lakh to Broad Ltd. for goods
purchased from it, which sold goods at cost plus 25%. Goods costing ` 15 lakh
to Ways Ltd. were still lying unsold with Ways Ltd. on 31st March, 2003.
(iv) No part of preliminary expenses has been written off during the year.
You are required to prepare the consolidated balance sheet of Broad Ltd. and its
subsidiary Ways Ltd. as on 31st March, 2003. (9 marks)
Answer :
Consolidated Balance Sheet of Broad Ltd. and its
subsidiary Ways Ltd. as on 31.3.2003
(`̀̀̀ in Lakhs)
Liabilities `̀̀̀ Assets `̀̀̀
Equity share capital
`10 each fully paid
Minority interest
Securities premium
General reserve
Profit & Loss A/c
As per Balance sheet
Add: Share of revenue profit
Less: Pre-Acquisition Dividend
Less: Unrealised Profit on
unsold stock
Creditors :
Broad Ltd.
Ways Ltd.
Less: Inter-company owings
Proposed dividends
230
100
330
20
3
95
85
180
30
500
91
50
60
307
150
75
Goodwill
Land & Building :
Broad Ltd.
Way Ltd.
Plant & Machinery:
Broad Ltd.
Ways Ltd.
Furniture & Fixtures:
Broad Ltd.
Way ltd.
Stock:
Broad Ltd.
Ways Ltd.
Less: Unrealised
Profit on
unsold
stock
90
80
210
135
100
25
110
145
255
3
91
170
345
125
252
[Chapter #### 6] Consolidation of Accounts OOOO 2.201
1,233
Debtors :
Broad Ltd.
Ways Ltd.
Less: Inter-co.
Owings
Cash at Bank:
Broad Ltd.
Way Ltd.
75
85
160
30
50
70
130
120
1,233
Working Notes :Date of Acquisition : 1.4.2002Date of Balance Sheet : 31.3.2003Pre-acquisition period : NilPost-acquisition Period : 12 MonthsRatio of shareholding : 20,00,000 : 5,00,000
4 : 1 (i) Analysis of Profits Ways Ltd.
(` in lakhs)Capital Profits Revenue Profits
General Reserve 100 50Profit & Loss Account 15 75Less: Dividends Paid (25) &
90Less : Preliminary Expenses
not written off 10 &
Available for apportionment 80 125Board Ltd. 64 100Minority Interest 16 25
(ii) Amount payable to :(` in lakhs)
Broad Ltd. Minority InterestEquity share capital 200 50Share of capital profit 64 16Share of revenue profit - 25Amount payable 264 91
(iii) Cost of ControlCost of Investments 375Less: Pre-acquisition dividends (25×4/5) 20
355264
Less: Amount Payable Goodwill 91
2.202 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(iv) Unrealised profit on unsold stock
Unsold stock 15.00 lacs
Unrealized profits = 15 × 25/125 = ` 3 lacs
As per New Schedule VI
Consolidated Balance Sheet of Broad Ltd.
with Ways Ltd. as at 31.3.2003
(`̀̀̀ in...........)
Particulars Note
No.
Figures
as at the
end of
current
reporting
period
Figures
as at the
end of the
previous
reporting
period
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 500
(b) Reserves and surplus 1 492
(c) Money received against share warrants
(d) Minority Interest (w.n. (i)) 91
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 2 150
(c) Other current liabilities
(d) Short-term provisions
TOTAL 1,233
[Chapter #### 6] Consolidation of Accounts OOOO 2.203
II. ASSETS Non-current assets
1. (a) Fixed assets
(i) Tangible 3 640
(ii) Intangible assets 4 91
(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
2. Current assets
(a) Current investments
(b) Inventories 5 252
(c) Trade receivables 6 130
(d) Cash and cash equivalents 7 120
(e) Short-term loans and advances
(f) Other current assets
TOTAL 1,233
Schedules:
1. Reserve & Surplus:
Securities Premium
General Reserve
Profit & Loss (Working Notes (v))
50
60
382
492
2. Trade Payables:
Creditors:
Broad Ltd.
Ways Ltd.
95
85
Less: Inter-company owings
180
30 150
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3. Tangible Assets:
Land & Building:
Broad Ltd.
Way Ltd.
Plant & Machinery:
Broad Ltd.
Ways Ltd.
Furniture & Fixtures:
Broad Ltd.
Ways Ltd.
90
80
210
135
100
25
170
345
125
640
4. Intangible Assets:
Cost of Investments
Less: Pre-acquisition dividend (25 × 4/5)
Face Value of Shares
Pre-Acquisition Profit
Goodwill
375
(20)
(200)
(64)
91
5. Inventories :
Stock:
Broad Ltd.
Ways Ltd.
110
145
Less: Unrealized Profit on unsold stock (W.No. (iv)
255
3 252
6. Trade Receivables:
Debtors:
Broad Ltd.
Ways Ltd.
Less: Inter-co. Owings
75
85
160
30 130
7. Cash & Cash equivalents:
Cash at Bank:
Broad Ltd.
Ways Ltd.
50
70 120
[Chapter #### 6] Consolidation of Accounts OOOO 2.205
2004 - Dec [4] (c) The following are the balance sheets of Vijay Ltd. and Jyoti Ltd. ason 31st March 2004 :
Balance Sheets as on 31st March, 2004Liabilities Vijay Ltd. Jyoti Ltd.
(`) (`)Share Capital:
10% Preference shares of ` 10 each — 8,00,000Equity shares of ` 10 each 30,00,000 10,00,000General reserve 10,00,000 4,50,000Profit and loss account 5,00,000 4,00,00012% Debentures of ` 100 each — 2,00,000Proposed dividend:— on equity shares 3,00,000 1,00,000— on preference shares — 80,000Debentures interest accrued — 24,000Sundry creditors 12,50,000 5,00,000
60,50,000 35,54,000Assets Vijay Ltd. Jyoti Ltd.
(`) (`)Fixed assets 25,00,000 22,00,000Investments:
60,000 Equity shares in Jyoti Ltd. 12,00,000 —60,000 Preference shares in Jyoti Ltd. 6,00,000 —1,000, 12% Debentures in Jyoti Ltd. 1,00,000 —
Current assets 16,50,000 13,54,00060,50,000 35,54,000
The following additional information are available :(i) Vijay Ltd. accquired the shares in Jyoti Ltd. on 31st March, 2003.(ii) Jyoti Ltd. issued fully paid bonus shares of ` 2,00,000 on 31st March. 2004 to
the existing shareholders by drawing upon its general reserve. The effect on thistransaction did not appear in the books of Jyoti Ltd.
(iii) The debenture interest due from Jyoti Ltd. for the year ended 31st March, 2004has not been given effect to in the books of Vijay Ltd.
(iv) The balance of profit and loss account of Jyoti Ltd. as on 31st March, 2004 ismade up as under :
`
Balance as on 31st March, 2003 1,62,000Add : Net profit for the year ended 31st March, 2004 4,18,000
5,80,000Less : Provision for proposed dividend 1,80,000
4,00,000
2.206 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(v) The balance of profit and loss account of Jyoti Ltd. as on 31st March, 2003 isafter providing for proposed dividend of ` 50,000 and preference dividend of `80,000 both of which were subsequently paid and credited to profit and lossaccount of Vijay Ltd.
(vi) The general reserve of Jyoti Ltd. as on 31st March, 2003 was ` 4,50,000.Prepare the consolidated balance sheet of Vijay Ltd. with its subsidiary Jyoti Ltd.as on 31st March, 2004. (10 marks)
Answer : Consolidated Balance Sheet of Vijay Ltd. and itsSubsidiary Jyoti Ltd. as on 31st March, 2004
Liabilities ` Assets `
Share Capital:
Equity Shares of
` 10 each 30,00,000
Fixed Assets:
Goodwill
Other Fixed Assets:
1,42,800
Minority Interest
Reserves and Surplus:
General Reserve
Profit and Loss A/c
Add: Deb. Interest
Profit from
Jyoti Ltd.
Less: Dividend
from Jyoti Ltd.
for 2002-03
Secured Loans:
12% Debentures
Less: Mutual
Obligation
Debenture Interest
outstanding
Current liabilities
and Provisions:
A. Current Liabilities
Creditors
Vijay Ltd.
Jyoti Ltd.
B. Provisions
Proposed Dividend
5,00,000
12,000
2,50,800
7,62,800
90,000
2,00,000
1,00,000
12,50,000
5,00,000
10,12,000
10,00,000
6,72,800
1,00,000
12,000
17,50,000
3,00,000
78,46,800
Vijay Ltd.
Jyoti Ltd.
Investments
Current Assets, Loans
and Advances:
Vijay Ltd.
Jyoti Ltd.
Deb. Interest due
Less: Mutual
Obligation
B. Loans and Advances
25,00,000
22,00,000
16,50,000
13,54,000
12,000
12,000
47,00,000
)
30,04,000
78,46,000
Working Notes :
1. Capital Profit `
General reserve (Jyoti Ltd) 4,50,000
Profit and Loss A/c (Jyoti Ltd) 1,62,000
6,12,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.207
Less: Bonus Shares 2,00,000 4,12,000
Holding Company (60%) 2,47,200Minority interest (40%) 1,64,800
2. Revenue ProfitProfit and Loss A/c 4,00,000Less: Balance on 31.03.2003 1,62,000
2,38,000Add: Proposed dividend for current
Year i.e. after acquisition of shares 1,80,000 4,18,000
Holding Company (60%) 2,50,800Minority Interest (40%) 1,67,200
3. Bonus Shares 2,00,000Holding Company (60%) 1,20,000Minority Interest (40%) 80,000
4. Goodwill/Cost of AcquisitionCost of shares acquisitionCost of shares acquired:Equity shares 12,00,000Preference shares 6,00,000
18,00,000Less: Dividend for - 2002 - 03Equity (50,000 × 60%) 30,000Preference (6,00,000 × 10%) 60,000 90,000
17,10,000Less: paid-up value of shares acquired:Equity shares 6,00,000Preference shares 6,00,000Capital profit 2,47,200Bonus shares (equity) 1,20,000 15,67,200Goodwill 1,42,800
5. Minority interestShare capital (Equity) 4,00,000Bonus shares (Equity) 80,000Preference capital 2,00,000Capital profit 1,64,800Revenue profit 1,67,200
10,12,000
2.208 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
As per New Schedule VI
Consolidated Balance Sheet of Vijay Ltd.
with Jyoti Ltd. as at 31.3.2004
(`̀̀̀ in............)
Particulars Note No.
Figures as
at the end
of current
reporting
period
Figures as at
the end of
the previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 30,00,000
(b) Reserves and surplus 1 19,72,800
(c) Money received against share
warrants
(d) Minority Interest (w.n. 5) 10,12,000
(2) Share application money pending
allotment
(3) Non-current liabilities
(a) Long-term borrowings 2 1,00,000
(b) Deferred tax liabilities (Net)
(c) Other Long-term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 3 17,50,000
(c) Other current liabilities 4 12,000
(d) Short-term provisions
TOTAL 78,46,800
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 5 47,00,000
(ii) Intangible assets 6 1,42,800
(iii) Capital work-in-progress
[Chapter #### 6] Consolidation of Accounts OOOO 2.209
(iv) Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advance
(e) Other non-current assets
(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 7 30,04,000
TOTAL 78,46,800
Schedules :-
1. Reserves & Surplus :
General Reserve 10,00,000
Consolidated Profit & Loss (WN-3) 9,72,800
19,72,800
2. Long Term Borrowings :
12% Debenture 2,00,000
Less: Mutual
Obligation 1,00,000 1,00,000
3. Trade Payables :
Creditors
Vijay Ltd. 12,50,000
Jyoti Ltd. 5,00,000 17,50,000
4. Other Current Liabilities :
Debenture Interest Outstanding 12,000
5. Tangible Assets :
Vijay Ltd. 25,00,000
Jyoti Ltd. 22,00,000 47,00,000
2.210 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
6. Intangible Assets :Cost of shares acquired :Equity shares 12,00,000Preferences shares 6,00,000
18,00,000Less : Dividend for 2002-03:
Equity (50,000 × 60%) 30,000Preference (6,00,000 × 10%) 60,000
Face value of shares acquired :Equity shares 6,00,000Preference shares 6,00,000Capital profit 2,47,000Bonus shares (equity) 1,20,000 16,57,200Goodwill 1,42,800
7. Other Current Assets :
Vijay Ltd. 16,50,000
Jyoti Ltd. 13,54,000 30,04,000
2005 - June [4] (b) The following are the figures extracted from the books of the
undermentioned companies for the last two years :
Rose Ltd. Milk Ltd.
31.3.2003 31.3.2004 31.3.2003 31.3.2004
Liabilities (`) (`) (`) (`)
Equity share capital of `10
each, fully paid up 5,00,000 5,00,000 1,00,000 1,00,000
Capital reserve 1,00,000 1,00,000
General reserve 1,20,000 1,50,000 20,000 30,000
Profit and loss account 40,000 80,000 15,000 30,000
Creditors (including
`19,000 from Milk Ltd.) 1,49,000 1,69,000 36,000 42,000
Bills payable (including
` 4,000 to Rose Ltd.) 21,000 26,000 4,000 6,000
Bank overdraft — — 6,000 10,000
Proposed dividend — — — 20,000
9,30,000 10,25,000 1,81,000 2,38,000
Rose Ltd. Milk Ltd.
31.3.2003 31.3.2004 31.3.2003 31.3.2004
Assets (`) (`) (`) (`)
Freehold properties 2,30,000 2,30,000 20,000 20,000
Furniture 20,000 18,000 6,000 5,400
[Chapter #### 6] Consolidation of Accounts OOOO 2.211
Plant and equipments 2,00,000 1,70,000 15,000 12,000Investment 8,000 Equity shares in Milk Ltd. as on 1.10.2003 1,20,000 1,20,000 — —Stocks 2,14,000 2,68,000 86,000 1,32,000Debtors (including
` 19,000 to Rose Ltd.) 87,000 92,000 37,000 42,000Bills receivable (including
`2,000 to Milk Ltd.) 35,000 79,000 8,000 18,000Cash and bank balances 24,000 48,000 9,000 8,600
9,30,000 10,25,000 1,81,000 2,38,000You are required to prepare the consolidated balance sheet of Rose Ltd. and its
subsidiary Milk Ltd. as at 31st March, 2004. (Working notes form part of the answer.)(9 marks)
Answer :Consolidated Balance Sheet of Rose Ltd. and its Subsidiary Milk Ltd. as on
31.3.2004
Liabilities `̀̀̀ Amount
(`̀̀̀)
Assets (`̀̀̀) Amount
(`̀̀̀)
Equity Share Capital
Minority Interest
Capital Reserve
(` 1,00,000% `6,000)
Profit & Loss A/c
Balance
Add: Share of
Revenue profit
General Reserve
Creditors:
Rose Ltd.
80,000
18,000
1,69,000
5,00,000
36,000
1,06,000
98,000
1,50,000
Freehold Properties:
Rose Ltd.
Milk Ltd.
Furniture:
Rose Ltd.
Milk Ltd.
Plant and Equipments:
Rose Ltd.
Milk Ltd.
Stocks:
Rose Ltd.
2,30,000
20,000
18,000
5,400
1,70,000
12,000
2,68,000
2,50,000
23,400
1,82,000
Milk Ltd.
Less: Inter Co. Owings
Bills Payable:
Rose Ltd.
Milk Ltd.
42,000
2,11,000
19,000
26,000
6,000
32,000
2,000
1,92,000
30,000
Milk Ltd.
Debtors:
Rose Ltd.
Milk Ltd.
Less: Inter Co. Owings
Bills Receivable:
Rose Ltd.
Milk Ltd.
Less: Inter Co. Owings
1,32,000
92,000
42,000
1,34,000
19,000
79,000
18,000
97,000
2,000
4,00,000
1,15,000
95,000
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Less: Inter Co. Owings
Bank Overdraft:
Rose Ltd.
Milk Ltd.
Nil
10,000
10,000
11,22,000
Cash and Bank
Balance
Rose Ltd.
Milk Ltd.
48,000
8,600 56,600
________
11,22,000
Working Notes:
1. Date of Acquisition : 1.10.2003
2. Date of Balance Sheet : 31.3.2004
3. Pre Acquisition Period : 1.4.2003 ! 1.10.2003 = 6 months
Post Acquisition Period : 1.10.2003 ! 31.3.2004 = 6 months
Time ratio 1 : 1
4. Ratio of shareholding in Milk Ltd.
8000 : 2000 4 : 1
(i) Analysis of Profits in Milk Ltd.
Profits (`)
Capital Revenue
1. General Reserve (1.4.2003) 20,000 &
2. Profit & Loss a/c (1.4.2003) 15,000 &
3. Profit earned during the year
(Profit as on 31.3.2004) 30,000
Add: Proposed dividend 20,000
50,000
Less: Opening Balance 15,000
(to be dividend equally) 35,000 17,500 17,500
4. Increase in General Reserve 5,000 5,000
(30,000 !20,000)
Total: 57,500 22,500
Holding Co. (Rose Ltd.) 4/5 46,000 18,000
Minority Interest (Outsiders) 1/5 11,500 4,500
(ii) Amount Payable to Rose Ltd. Minority Interest
` `
Equity Share Capital 80,000 20,000
Share of Capital Profits 46,000 11,500
Share of revenue Profits & 4,500
1,26,000 36,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.213
(iii) Calculation of Cost of Control
Investments made by Rose Ltd. `
As per Balance Sheet 1,20,000
Amount receivable from Milk Ltd. 1,26,000
Capital Reserve 6,000
As per New Schedule VI
Consolidated Balance Sheet of Rose Ltd.
with Milk Ltd. as at 31.3.2004 (`̀̀̀ in...........)
ParticularsNote
No.
Figures
as at the
end of
current
reporting
period
Figures
as at the
end of the
previous
reporting
period
1 2 3 4
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 5,00,000
(b) Reserves and surplus 1 3,54,000
(c) Money received against share warrants
(d) Minority Interest (w.no. (i)) 36,000
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 2 10,000
(b) Trade payables 3 2,20,000
(c) Other current liabilities
(d) Short-term provisions
TOTAL 11,20,000
2.214 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
II. ASSETS Non-current assets
1. (a) Fixed assets
(i) Tangible 4 4,55,400
(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
2. Current Assets
(a) Current investments
(b) Inventories 5 4,00,000
(c) Trade receivables 6 2,08,000
(d) Cash and cash equivalents 7 56,600
(e) Short-term loans and advances
(f) Other current assets
TOTAL 11,20,000
Notes to Accounts:1. Reserve & Surplus:
Capital reserve (1,00,000 + 6,000)Consolidated Profit & Loss (Working Note(iv))General Reserve
1,06,00098,000
1,50,000
3,54,000
2. Short-term Borrowings:
Bank Overdraft:Rose Ltd.Milk Ltd.
Nil10,000 10,000
3. Trade Payables:
Creditors:Rose Ltd.Milk Ltd.
1,69,00042,000
2,11,000
Less: Inter Company Owings 19,000 1,92,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.215
Bills payable
Rose Ltd.
Milk Ltd.
26,000
6,000
Less: Inter Company Owings
32,000
4,000 28,000
2,20,000
4. Tangible Assets:
Freehold Properties:
Rose Ltd.
Milk Ltd.
2,30,000
20,000 2,50,000
Furniture:
Rose Ltd. 18,000
Milk Ltd. 5,400 23,400
Plant and equipments:
Rose Ltd.
Milk Ltd.
1,70,000
12,000 1,82,000
4,55,400
5. Inventories:
Stocks:
Rose Ltd.
Milk Ltd.
2,68,000
1,32,000
4,00,000
6. Trade Receivables
Debtors:
Rose Ltd.
Milk Ltd.
92,000
42,000
Less: Inter Company Owings
1,34,000
19,000 1,15,000
Bills Receivable:
Rose Ltd.
Milk Ltd.
79,000
18,000
97,000
Less: Inter Company Owings 4,000 93,000
2,08,000
2.216 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
7. Cash & Cash equivalents:
Cash and Bank Balance
Rose Ltd.
Milk Ltd.
48,000
8,600
56,600
2006 - June [4] (b) Jai Ltd. acquired 15,000 shares in Hind Ltd., for ` 1,55,000 on 1st
July, 2004. The balance sheet of the two companies as on 31st March, 2005 were as
follows :
Liabilities Jai Ltd. Hind Ltd.
(`) (`)
Equity shares of Rs 10 each, fully paid!up 9,00,000 2,50,000
General reserves 1,60,000 40,000
Profit and loss account 80,000 25,000
Bills payable 40,000 20,000
Creditors 50,000 30,000
12,30,000 3,65,000
Assets
Machinery 7,00,000 1,50,000
Furniture 1,00,000 70,000
Investments 1,55,000 —
Stock 1,00,000 50,000
Debtors 60,000 35,000
Cash at bank 90,000 40,000
Bills receivable 25,000 20,000
12,30,000 3,65,000
Additional information :
(i) General reserve appearing in the balance sheet of Hind Ltd., has remained
unchanged since 31st March, 2004.
(ii) Profit earned by Hind Ltd. for the year ended 31st March, 2005 amounted to
` 20,000.
(iii) On 1st February, 2005, Jai Ltd. sold to Hind Ltd. goods costing `8,000 for
` 10,000. There was no unsold stock with Hind Ltd. on 31st March, 2005.
However, creditors of Hind Ltd. include ` 4,000 due to Jai Ltd. on account of
these goods.
(iv) Out of Hind Ltd.’s acceptance, ` 7,000 were those which were accepted in
favour of Jai Ltd.
You are required to draw a consolidated balance sheet as on 31st March. 2005.
(10 marks)
[Chapter #### 6] Consolidation of Accounts OOOO 2.217
Answer : Consolidated Balance Sheet of Jai Ltd. and its
Subsidiary Hind Ltd. As at 31.3.2005
Liabilities ` Assets `
`
Share Capital:
Equity share capital
`10 each fully paid up
Minority Interest
Reserves and Surplus :
General Reserve
Capital reserve
capital Reserve
Profit and Los A/c 80,000
Add: Share of Revenue 9,000
Current Liabilities:
Bills Payable:
Jai Ltd. 40,000
Hind Ltd. 20,000
60,000
Less : Inter co.owings 7,000
Creditors:
Jai Ltd. 50,000
Hind Ltd. 30,000
80,000
Less: Inter co.owings 4,000
9,00,000
1,26,000
1,60,000
25,000
89,000
53,000
76,000
14,29,000
`
Fixed Assets:
Machinery:
Jai Ltd. 7,00.000
Hind Ltd. 1,50,000
Furniture:
Jai Ltd. 1,00,000
Hind Ltd. 70,000
Current Assets:
Stock:
Jai Ltd. 1,00,000
Hind Ltd. 50,000
Debtors:
Jai Ltd. 60,000
Hind Ltd. 35,000
95,000
Less: Inter
co.owings 4,000
Cash at bank:
Jai Ltd. 90,000
Hind Ltd. 40,000
Bills Receivable:
Jai Ltd. 25,000
Hind Ltd. 20,000
Less: Inter 45,000
Co.owings 7,000
8,50,000
1,70,000
1,50,000
91,000
1,30,000
38,000
14,29,000
Working Notes:
Date of Acquisition : 1.7.2004
Date of Balance Sheet : 31.3.2005
Pre-Acquisition period and Post Acquisition period: 3 : 9 OR 1 : 3
Ratio of shareholding between majority and minority shareholding in Hind Ltd.
15,000 : 10,000 = 3 : 2
2.218 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(1) Analysis of Profits of Hind Ltd.
Capital Profits Revenue Profits
(`) (`)
General Reserve (1.4.2004) 40,000
Profit & Loss A/c (1.4.2004) 5,000
Profit earned during the Year 5,000 15,000
50,000 15,000
Jai Ltd's. Share- 3/5 30,000 9,000
Minority Shareholders-2/5 20,000 6,000
(2) Minority Interest: `
Share Capital 1,00,000
Share of Capital Profits 20,000
Share of Revenue Profits 6,000
1,26,000
(3) Calculation of Cost of Control or Capital Reserve
Investments in ind Ltd. = ` 1,55,000
Intrinsic value of shares = ` 1,80,000
Capital Reserve ` 25,000
As per New Schedule VI
Consolidated Balance Sheet of Jai Ltd.
with Hind Ltd. as at 31.3.2005
(`̀̀̀ in ...........)
Particulars Note
No.
Figures as
at the end
of current
reporting
period
Figures as
at the end
of the
previous
reporting
period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 9,00,000
(b) Reserves and surplus 1 2,74,000
(c) Money received against share warrants
(d) Minority Interest (w.n. 2) 1,26,000
(2) Share application money pending
allotment
[Chapter #### 6] Consolidation of Accounts OOOO 2.219
(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 2 1,29,000
(c) Other current liabilities
(d) Short term provisions
TOTAL 14,29,000
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 3 10,20,000
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) In tang ib le assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories 4 1,50,000
(c) Trade receivables 5 1,29,000
(d) Cash and cash equivalents 6 1,30,000
(e) Short-term loans and advances
(f) Other current assets
TOTAL 14,29,000
2.220 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Schedules:
1. Reserves & Surplus:
General Reserve
Capital Reserve (Working Note(ii))
Profit and Loss A/C
Add: Share of Post-Acquisition Profit (Working
Note(i))
80,000
9,000
1,60,000
25,000
89,000
2. Trade Payables:
Bills Payable:
Jai Ltd.
Hind Ltd.
40,000
20,000
Less: Inter co. owings
60,000
7,000 53,000
Creditors :
Jai Ltd.
Hind Ltd.
50,000
30,000
Less: inter Co. owings
80,000
4,000 76,000
1,29,000
3. Tangible Assets:
Machinery:
Jai Ltd.
Hind Ltd.
7,00,000
1,50,000 8,50,000
Furniture:
Jai Ltd.
Hind Ltd.
1,00,000
70,000 1,70,000
10,20,000
4. Inventories:
Stock:
Jai Ltd.
Hind Ltd.
1,00,000
50,000
1,50,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.221
5. Trade Receivables:
Debtors:
Jai Ltd.
Hind Ltd.
60,000
35,000
Less: Inter co. owings
95,000
4,000 91,000
Bills Receivable:
Jai Ltd.
Hind Ltd.
25,000
20,000
Less: Inter co. owings
45,000
7,000 38,000
1,29,000
6. Cash and Cash equivalent:
Cash at bank:
Jai Ltd.
Hind Ltd.
90,000
40,000
1,30,000
2006 - Dec [3] (b) The following are the balance sheets of Snow Ltd. and White Ltd. asat 31st March, 2006 :
Liabilities Snow Ltd. White Ltd.(`) (`)
Share capital of `10 each 14,00,000 2,00,000General reserve 1,00,000 60,000Profit and loss account 2,00,000 60,000Sundry creditors 1,80,000 1,00,000Bills payable 20,000 30,000Liabilities for expenses 10,000 30,000
19,10,000 4,80,000Assets Snow Ltd. White Ltd.
(`) (`) Land and building 6,00,000 2,00,000Plant and machinery 5,60,000 1,00,00014,000 Shares in White Ltd. 2,00,000 —Stock 1,40,000 1,00,000Sundry debtors 3,00,000 40,000Bills receivable 20,000 —Cash and bank balances 90,000 40,000
19,10,000 4,80,000
2.222 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
The additional information is as under :
(i) All the bills receivable of Snow Ltd. including those discounted accepted by
White Ltd.
(ii) At the time of acquisition of shares on 1st July, 2005 by Snow Ltd. , in White Ltd.
the general reserve was ` 40,000 and ` 10,000 credit in profit and loss account
as on 1st April, 2005.
(iii) The stock of White Ltd. includes ̀ 40,000 purchased from Snow Ltd., which has
made 25% profit on cost
(iv) White Ltd. had declared and paid dividend equivalent to 20% for the period
ended 31st March, 2005 and Snow Ltd. had credited to its profit and loss
account.
You are required to prepare the consolidated balance sheet as at 31st March, 2006.
(10 marks)
Answer :
Consolidated Balance Sheet of Snow Ltd. and its subsidiary white Ltd.
as on 31.3.2006
Liabilities (`̀̀̀) Assets (`̀̀̀)
Share Capital of `10 each (`)
Minority Interest
General Reserve
Profit & Loss A/c 2,00,000
Less: Pre-Acquisition
Dividend 28,000
1,72,000
Less: Unrealised profit on
Unsold stock 8,000
1,64,000
Add: Share of revenue
Profit 57,750
Sunday Creditors:
Snow Ltd 1,80,000
White Ltd. 1,00,000
Bills payable:
Snow Ltd. 20,000
White Ltd 30,000
50,000
Less: Inter-Co. owings 20,000
14,00,000
96,000
1,00,000
2,21,750
2,80,000
30,000
Goodwill (`)
Land & Buildings
Snow Ltd 6,00,000
White Ltd. 2,00,000
Plant & Machinery
Snow Ltd. 5,60,000
White Ltd. 1,00,000
Stock: :
Snow Ltd. 1,40,000
White Ltd. 1,00,000
2,40,000
Less: Unrealised
Profits 8,000
Sundry Debtors
Snow Ltd. 3,00,000
White Ltd. 40,000
Bills Rceivable:
Snow Ltd. 20,000
White Ltd. &
20,000
Less: Inter-
Co.owings 20,000
5,750
8,00,000
6,60,000
2,32,000
3,40,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.223
Liability for Expenses:
Snow Ltd. 10,000
White Ltd. 30,000 40,000
________
21,67,750
Cash & Bank
Balances:
Snow Ltd. 90,000
White Ltd. 40,000 1,30,000
21,67,750
Notes:
1. Date of Acquisition : 1-7-2005
2. Date of balance Sheet: 31.3.2006
3. Pre-acquisition and Post acquisition Period : 3 : 9 = 1 : 3
4. Ratio of Shareholding between Snow Ltd. and others in white Ltd. 14,000 :
6,000 = 7 : 3
Working Notes :
(i) Analysis of Profits of White Ltd.
Capital Profits Revenue Profits
` `
General Reserve (1.4.2005) 40,000
Profit & Loss (1.4.2005) 10,000
Profit earned during the year (`1,10,000) 27,500 82,500
77,500 82,500
Less: Pre-acquisition dividend declared
and paid 40,000 _____
37,500 82,500
Snow : Ltd : 7/10 26,250 57,750
Minority Shareholders: 3/10 11,250 24,750
(ii) Amount payable to:
Snow Ltd. Minority
Shareholders
` `
Equity Share Capital 1,40,000 60,000
Share of Capital Profits 26,250 11,250
Share of Revenue Profits & 24,750
1,66,250 96,000
(iii) Cost of Control or Goodwill:
` `
Amount realisable from White Ltd. 1,66,250
Amount invested in Snow Ltd. 2,00,000
Less: Pre-acquistion dividend
` 40,000,× 7/10 28,000 1,72,000
Goodwill 5,750
2.224 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(iv) Profit earned during the year : `
Profit and Loss A/c As on 31.3.2006 60,000
Add: dividend paid (of 31.3.2005) @ 20% 40,000
1,00,000
Less: Opening balance of profit 10,000
90,000
Add: Transfer to General Reserve during the year
`(60,000 ! 40,000) 20,000
Profit earned during the year 1,10,000
(v) Unrealised profit on unsold stocks : `
Unsold Stock = 40,000
Unrealised profit = × `40,000 8,000
As per New Schedule VI
Consolidated Balance of Snow Ltd.
with White Ltd. as at 31.3.2006
(`̀̀̀ in..........)
Particulars Note
No.
Figures as
at the end
of current
reporting
period
Figures
as at the end
of the prev-
ious repo-
rting period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 14,00,000
(b) Reserves and surplus 1 3,21,750
(c) Money received against share warrants
(d) Minority Interest (w.n. (i)) 96,000
(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
[Chapter #### 6] Consolidation of Accounts OOOO 2.225
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 2 3,10,000
(c) Other current liabilities 3 40,000
(d) Short-term provisions
TOTAL 21,67,750
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 4 14,60,000
(ii) Intangible assets 5 5,750
(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
(2) Current assets
(a) Current investments
(b) Inventories 6 2,32,000
(c) Trade receivables 7 3,40,000
(d) Cash and cash equivalents 8 1,30,000
(e) Short-term loans and advances
(f) Other current assets
TOTAL 21,67,750
Schedules:
1. Reserves & Surplus :
General reserve 1,00,000
Consolidated Profit & Loss (Working Notes (vi)) 2,21,750
3,21,750
2. Trade payables :
Sundry Creditors :
Snow Ltd. 1,80,000
White Ltd. 1,00,000 2,80,000
2.226 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Bills Payable :
Snow Ltd. 20,000
White Ltd. 30,000
50,000
Less: Inter-Co. owings 20,000 30,000
3,10,000
3. Other Current Liabilities :
Liability for Expenses :
Snow Ltd. 10,000
White Ltd. 30,000
40,000
4. Tangible Assets :
Land & Buildings:
Snow Ltd. 6,00,000
White Ltd. 2,00,000 8,00,000
Plant & Machinery :
Snow Ltd. 5,60,000
White Ltd. 1,00,000 6,60,000
14,60,000
5. Intangible Assets :
`̀̀̀ `̀̀̀
Cost of Investment 2,00,000
Less: Face Value of Shares & Pre-Acquisition Profits 1,66,250
Pre-Acquisition Dividend (` 40,000 × )
28,000 1,94,250
Goodwill 5,750
6. Inventories :
Stock:
Snow Ltd. 1,40,000
White Ltd. 1,00,000
2,40,000
Less: Unrealised Profit (W.N.(v)) 8,000 2,32,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.227
7. Trade receivables :
Sundry Deditors :
Snow Ltd. 3,00,000
White Ltd. 40,000 3,40,000
Bills Receivable :
Snow Ltd. 20,000
White Ltd. !
20,000
Less: Inter-Co. owings 20,000 !
3,40,000
8. Cash & Cash equivalents :
Cash & Bank Balance :
Snow Ltd. 90,000
White Ltd. 40,000
1,30,000
2007 - June [4] (b) Balance Sheets of H Ltd. and S Ltd. as at 31st March, 2006 are
given below:
H Ltd. S Ltd.
Liabilities (`) (`)
Share capital of ` 10 each, fully paid 5,00,000 2,00,000
General reserve 1,00,000 50,000
Profit and loss account 60,000 35,000
Creditors 80,000 60,000
7,40,000 3,45,000
H Ltd. S. Ltd.
Assets (`) (`)
Fixed assets 3,00,000 1,00,000
60% Shares in S Ltd., at cost 1,62,400 —
Current assets 2,77,600 2,39,000
Preliminary expenses — 6,000
7,40,000 3,45,000
H Ltd. acquired the shares on 1st April, 2005 and on that date general reserve and
profit and loss account of S Ltd. showed balances of ̀ 40,000 and ̀ 8,000 respectively.
No part of preliminary expenses was written off during the year ended 31st March, 2006.
Prepare a consolidated balance sheet of H Ltd. and its subsidiary S Ltd. as on 31st
March, 2006. (10 marks)
2.228 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Answer :
Consolidated Balance Sheet of H. Ltd. and its Subsidiary
S Ltd. as at 31st March, 2006
Liabilities `̀̀̀ Assets `̀̀̀
Share Capital in fully paid
up shares of `10 each
Minority Interest
General Rserve
Profit and Loss Account:
H Ltd. 60,000
Add: H. Ltd's Share of
Revenue profits of S. Ltd.
`37,000×60/100 22,200
Creditiors:
H Ltd. 80,000
S Ltd. 60,000
5,00,000
1,11,600
1,00,000
82,200
1,40,000
Goodwill
Other Fixed Assets:
H Ltd. 3,00,000
S Ltd. 1,00,000
Current Assets:
H Ltd. 2,77,600
S Ltd. 2,39,000
17,200
4,00,000
5,16,600
9,33,800 9,33,800
Working Notes:
(i) Capital Profit: `
General Reserve 40,000
Profit & Loss Account 8,000
48,000
Less : Preliminary Expenses 6,000
42,000
H. Ltd. 25,200
Minority Interest 16,800
(ii) Revenue Profit:
Dr. Profit & Loss Account Cr.
` `
To General Reserve
(`50,000 !`40,000)
To Balance c/d
10,000
35,000
By Balance b/d
By Net Profit for the year
(Balancing figure)
8,000
37,000
45,000 45,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.229
(iii) Calculation of Cost of Control or Goodwill:
` `
Amount Paid for 60% Shares of S. Ltd. 1,62,400
Less : Paid up value of 60% Shares of S Ltd. 1,20,000
Add : 60% of Capital Profits i.e. Profits Prior to
Acquistition ` 42,000 × 60/100 25,200 1,45,200
Goodwill 17,200
(iv) Calculation of minority interest:
Paid up value of 40% shares of S Ltd 80,000
Add: 40% of capital profits = ` 42,000 × 40/100 16,800
40% of Revenue Profits = ` 37,000 ×40/100 14,800
1,11,600
Alternatively, minority interest may be calculated as follows: `
Paid up value of 40% shares of S Ltd. 80,000
Add: 40% of General Reserves as on 31.3.2006
` 50,000 × 40/100 20,000
40% of Profit & Loss Account as on 31.3.206
` 35,000 × 40/100 14,000
1,14,000
Less : 40% of preliminary expenses ! ` 6000 × 40/100 2,400
1,11,600
As per New Schedule VI
Consolidated Balance Sheet of H Ltd.
with S Ltd. as at 31.3.2006
(Rupees in ..........)
Particulars Note
No.
Figures
as at the
end of
current
reporting
period
Figures
as at the
end of the
previous
reporting
period
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 5,00,000
(b) Reserves and surplus 1 1,82,200
(c) Money received against share warrants
(d) Non-controlling interest (W. Note IV) 1,11,600
2.230 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
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 2 1,40,000
(c) Other current liabilities
(d) Short-term provisions
TOTAL 9,33,800
II. ASSETS Non-current assets
1. (a) Fixed assets
(i) Tangible 3 4,00,000
(ii) Intangible assets 4 17,200
(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
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 5 5,16,600
TOTAL 9,33,800
[Chapter #### 6] Consolidation of Accounts OOOO 2.231
Notes to A/c :
1. Reserve & Surplus:
General Reserve
Consolidated Profit & Loss (Working Note (V))
1,00,000
82,200
1,82,200
2. Trade Payables:
Creditors:
H Ltd.
S Ltd.
80,000
60,000
1,40,000
3. Tangible Assets:
H Ltd.
S Ltd.
3,00,000
1,00,000
4,00,000
4. Intangible Assets:
` `
Cost of Investment G/w (Working Note (iii)
Less: Face Value of Shares of S Ltd
Pre-Acquisition Profits
1,20,000
25,000
1,62,400
1,45,200
Goodwill 17,200
5. Other Current Assets:
H Ltd.
S Ltd.
2,77,600
2,39,000
5,16,600
2007 - Dec [2] (b) From the following balance sheets of Exe Ltd. and Wye Ltd. as on
31st March, 2007, work out—(i) net amount due to minority interest; and (ii) cost of
control:
Balance Sheets of Exe Ltd. and Wye Ltd. as on 31st March, 2007
Exe Ltd. Wye Ltd.
Liabilities (`) (`)
Share capital :
Shares of ` 100 each 15,00,000 5,00,000
General reserve 1,50,000 1,00,000
Profit and loss account 2,00,000 75,000
Creditors 1,87,500 1,20,000
20,37,500 7,95,000
2.232 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
AssetsSundry assets 14,77,500 7,95,000Investments:
4,000 Shares of ` 100 each 5,60,000 —20,37,500 7,95,000
The assets of Wye Ltd. included equipments worth ` 1,50,000 which was revaluedat ` 1,25,000. The investments of Exe Ltd. were in shares of Wye Ltd. and the samewere acquired on 31st March, 2007. (7 marks)Answer :(1) Net amount due to Minority Interest: `
Paid up value of 1000 shares @ `100 1,00,000Add: 1/5th share of pre-acquisition profit (Note 1) 35,00
1,35,000Less : 1/5th share of loss on revaluation of equipments
(`1,50,000 !`1,25,000)× 1/5 5,000Net amount due to minority shareholders 1,30,000
(2) Cost of Control:Intrinsic value of shares in Wye Limited:4000 shares @ `100 4,00,000Add : 4/5th share of pre-acquisition profit (Note1) 1,40,000
5,40,000Less: 4/5th share of loss revaluation of equipments
(`1,50,000 !`1,25,000) ×4/5 20,000Intrinsic value of 4,000 shares 5,20,000Cost of Control/Goodwill = Amount Paid !Intrinsic value= `5,60,000 !`5,20,000 40,000Note 1 : Pre-acquisition Profits and Reserves :General Reserve in Wye Ltd. as on 31.03.07 1,00,000Profit and Loss A/c in Wye Ltd. as on 31.03.07 75,000Pre-acquisition Profit 1,75,000Holding Company's Share !` 1,75,000×4/5 1,40,000Minority Interest !`1.75,000 × 1/5 35,000
2008 - June [2] (b) Following are the balance sheets of H. Ltd. and its subsidiary S. Ltd.
as at 31st March, 2007 :
Liabilities H. Ltd. S. Ltd.
(`) (`)
Equity share capital :
Shares of ` 10 each fully paid 6,00,000 2,00,000
General reserve 3,40,000 80,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.233
Profit and loss account 1,00,000 60,000Creditors 70,000 35,000
11,10,000 3,75,000AssetsPlant and machinery 3,90,000 1,35,000Furniture 80,000 40,00080% Shares in S.Ltd. (at cost) 3,40,000 )
Stock 1,80,000 1,20,000Debtors 50,000 30,000Cash at bank 70,000 50,000
11,10,000 3,75,000Additional information :
(i) Profit and loss account of S. Ltd stood at ` 30,000 on 1st April, 2006 whereasgeneral reserve stood at ` 80,000 even on this date.
(ii) H. Ltd. acquired 80% shares in S.Ltd. on 1st October, 2006.(iii) S. Ltd.’s plant and machinery which stood at `1,50,000 on 1st April, 2006 was
considered worth ` 1,80,000 as on 1st October, 2006, this figure is to beconsidered while consolidating the balance sheets.
You are required to prepare consolidated balance sheet as at 31st March, 2007.(10 marks)
Answer : Consolidated Balance Sheet of H. Ltd. and its Subsidiary S Ltd.
As on 31.03.2007
Liabilities `̀̀̀ `̀̀̀ Assets `̀̀̀ `̀̀̀
Equity Share CapitalShares of `10 eachfully paidMinority InterestGeneral ReserveProfit & Loss A/c 1,00,000Add: H. Ltd.,Revenue Profit 10,500Creditors:
H Ltd. 70,000S. Ltd. 35,000
6,00,00075,125
3,40,000
1,10,500
1,05,000
GoodwillPlant and Machinery
H Ltd. 3,90,000S Ltd. 1,70,625
Furniture:H.Ltd 80,000S Ltd. 40,000
Stock:H.Ltd. 1,80,000S.Ltd. 1,20,000
Debtors :H.Ltd. 50,000S. Ltd. 30,000
Cash at Bank:H.Ltd. 70,000S Ltd. 50,000
50,000
5,60,625
1,20,00
3,00,000
80,000
1,20,000
12,30,625 12,30,625
2.234 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
Working Notes :
(i) Revised value of Plant and Machinery (`)
Book value of S Ltd's Plant and machinery as on 01.04.2006 1,50,000
Less: Book value of plant and machinery as on 31.3.2007 1,35,000
Depreciation for full year 15,000
Rate of depreciation = = 10%
Depreciation for six months
(i.e. upto 30.9.2006) = 15,000 × 6/12 = ` 7,500
`
Book Value as on 1.10.2006 = (` 1,50,000 !` 7,500) = 1,42,500
Appreciation made = ` 1,80,000
` 1,42,500
` 37,500
Book Value as on 31.3.2007 1,35,000
Appreciation 37,500
1,72,500
Less: Depreciation for six months @ 10% p.a. 1,875
Revised value as on 31.3.2007 1,70,625
(ii) Capital Profits
General Reserve 80,000
Profit and Loss Account as on 1.4.2006 30,000
Current year's profit upto 1.10.2006 15,000
(` 60,000 ! ` 30,000) 6/12
Appreciation in value of plant and machinery 37,500
1,62,500
H Ltd's share = `1,62,500 × 80% 1,30,000
Minority Shareholder Share (` 1,62,500!` 1,30,000) 32,500
(iii) Cost of control/Goodwill
`
Amount paid for 80% shares in S Ltd. 3,40,000
Less: Paid-up value of 80% shares in S Ltd. 1,60,000
H Ltd's share of capital profit 1,30,000 2,90,000
Cost of control/Goodwill 50,000
[Chapter #### 6] Consolidation of Accounts OOOO 2.235
`
(iv) Revenue Profits
Profit after 1-10-2006 = ` 6/12(` 60,000!` 30,000) 15,000
Less: Depreciation in respect of increase in the
Value of plant and machinery for six months 1,875
13,125
H Ltd.'s share = ` 13,125 × 80% = ` 10,500
Minority shareholder's share = ` 13,125 ! `10,500 = `2,625.
(v) Minority interest `
Paid-up Value of 20% Shares 40,000
Add: Capital Profits 32,500
Revenue Profits 2,625
75,125
As per New Schedule VI
Consolidated Balance Sheet of H Ltd.
with S Ltd. as at 31.3.2007
(`̀̀̀ in............)
Particulars Note No.
Figures as
at the end
of current
reporting
period
Figures as at
the end of
the previous
reporting
period
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital 6,00,000
(b) Reserves and surplus 1 4,50,500
(c) Money received against share
warrants
(d) Minority Interest (w.n (V)) 75,125
(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
2.236 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Executive Programme M-I Paper 2A
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables 2 1,05,000
(c) Other current liabilities
(d) Short-term provisions
TOTAL 12,30,625
II. ASSETS Non-current assets
(1) (a) Fixed assets
(i) Tangible 3 6,80,625
(ii) Intangible assets 50,000
(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
(2) Current assets
(a) Current investments
(b) Inventories 4 3,00,000
(c) Trade receivables 5 80,000
(d) Cash and cash equivalents 6 1,20,000
(e) Short-term loans and
advances
(f) Other current assets
TOTAL 12,30,625
Schedules :-
1. Reserves & Surplus :-
General Reserve
Consolidated Profit & Loss (Working note vi) P&L a/c of H. Ltd.
1,00,000
Share in postrage Profit (WN IV) 10,500
3,40,000
1,10,500
4,50,500
[Chapter #### 6] Consolidation of Accounts OOOO 2.237
2. Trade payables :-
Creditors :
H Ltd. 70,000
S. Ltd. 35,000
1,05,000
3. Tangible Assets :-
Plant and Machinery
H Ltd.
S Ltd. (W. N. (i))
Furniture :
H Ltd.
S Ltd.
3,90,000
1,70,625
80,000
40,000
5,60,625
1,20,000
6,80,625
4. Inventories :-
Stock :
H Ltd.
S Ltd.
1,80,000
1,20,000
3,00,000
5. Trade receivables :-
Debtors :
H Ltd.
S Ltd.
50,000
30,000
80,000
6. Cash & Cash equivalent :-
Cash at Bank :
H Ltd.
S Ltd.
70,000
50,000
1,20,000
2.238
Star Rating
On the basis of Maximum marks from a chapter jj
On the basis of Questions included every year from a chapter jjjjj
On the basis of Compulsory questions from a chapter Nil
7 Valuation of Shares and
Intangible Assets
This Chapter Includes : Need for Valuation of Shares; Methods of Valuation of
Shares; Produce for Valuation of Preference Shares; Meaning identical;
Recognition of intangible asset; Treatment of goodwill; Dmortization of intagible
asset.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
CS Executive Programme (Module I)
OBJECTIVE QUESTIONS
2009 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word (s)/figure(s) :
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.239
(v) Yield basis valuation of shares may take the form of valuation based on rate
of return and ______. (1 mark)
Answer :
(v) Productivity factor.
2011 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)figure(s) :
(iii) An intangible asset should be ______ on disposal or when no future economic
benefits are expected from its use and subsequent disposal. (1 mark)
Answer :
(iii) Derecognized or eliminated from balance sheet
2011 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)figure(s) :
(v) The fair value of a share is the average of the value of the share obtained by the
_________ method and ________method. (1 mark)
Answer :
(v) Net assets; Yield
2011 - June [1] {C} (c) State, with reasons in brief, whether the following statements
are true or false :
(iii) Internally generated goodwill should not be recognised as an asset.
(2 marks)
Answer :
(iii) True : An internally generated goodwill should not be recognized as an asset.
However, intangible assets arising from development phase should be
recognized only if certain conditions are fulfilled.
2012 - June [1] {C} (b) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(ii) The market value of a share is the product of price-earnings ratio and ______.
(1 mark)
Answer :
(ii) Earning per share.
2013 - June [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s):
(iii) Goodwill is an intangible asset, but is not a ________asset. (1 mark)
Answer :
(iii) Fictitious
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2013 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(iii) Fair value method of valuation of shares is considered most appropriate
because, it is based on !
(a) Earnings
(b) Net assets
(c) Earnings and net assets
(d) None of the above. (1 mark)
SHORT NOTES
2010 - June [2] (a) Write short notes on the following:
(iii) Phases of generation of intangible assets. (3 marks)
Answer :
(iii) Phases of generation of intangible assets:-
Internally generated goodwill should not be recognised as an asset.
The generation of asset is classified into two phases.
A. Research Phase :- Expenditure on research should not be recognised as
an intangible asset. These should be recoginsed as an expenses when it
is incurred.
B. Development Phase :- An intangible asset arising from Development
phase should be recognised only if following conditions are fulfilled.
(a) the technical feasibility of completing the intangible asset so that it will
be available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
2011 - Dec [4] (b) Write short notes on the following:
(ii) Purposes of valuation of shares (3 marks)
(iii) Fair value of shares (3 marks)
Answer :
(ii) Please refer 2004 - Dec [2] (b) on page no. 255
(iii) The fair value of a share is the average of the value of shares obtained by net
assets method and yield method. Under the net assets method, the value of an
equity share is arrived at by valuing the assets of a company and deducting
therefrom all the liabilities and claims of preference share holders and dividing
the resultant figure by the total number of equity shares with the same paid-up
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.241
value under yield method, the value of an equity share is arrived at by comparing
the expected rate of return with the normal rate of return.
If the expected rate of return is more than normal rate of return the Paid-up value
of the shares is increased proportionately.
The fair value of shares can be calculated by using the following formula:
Fair value of shares =
Note : This method is also known as dual method of share valuation. This method
attempts to minimise the demerits of both the methods.
DESCRIPTIVE QUESTIONS
2009 - Dec [2] (a) What is amortisation period of intangible assets? Can useful life of
the intangible assets exceed the period of legal rights? (6 marks)
Answer :
Amortisation period of intangible assets :
Depreciable amount of an intangible asset should be allocated on a systematic basis
over the best estimate of its useful life. Normally, it is presumed that useful life will not
exceed 10 years unless there is persuasive evidence that intangible asset has higher
useful life.
Review of Amortisation period and Amortisation method: The amortisation period
and the amortisation method should be reviewed at least at each end of financial year.
If the expected useful life of the asset is significantly different from previous estimates,
the amortization period should be charged accordingly, If there has been a significant
change in the expected pattern of economic benefits from the assets; the amortisations
method should be changed to reflect the changed pattern.
Retirement and Disposal : An intangible asset should be derecognized or disposal or
when no future economic benefits are expected from its use and subsequent disposal.
PRACTICAL QUESTIONS
2008 - Dec [4] (b) Following is the balance sheet of Ramesh Ltd. as on 31st March,
2008 :
Liabilities `
Equity shares of ` 10 each 10,00,000
12% Preference shares of `100 each 10,00,000
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General reserve 6,00,000
Profit and loss account 4,00,000
15% Debentures 10,00,000
Creditors 8,00,000
48,00,000
Assets
Goodwill 5,00,000
Building 15,00,000
Plant 10,00,000
Investment in 10% stock (market value of ` 5,20,000, and
nominal value ` 5,00,000) 4,80,000
Stock 6,00,000
Debtors 4,00,000
Cash 1,00,000
Preliminary expenses 2,20,000
48,00,000
Additional information :
Assets are revalued as follows :
Building : ̀ 32,00,000; Plant : ̀ 18,00,000; Stock : ̀ 4,50,000; and Debtors : ̀ 3,60,000.
Average profit before tax of the company is ` 12,00,000 and 12.5% of the profit is
transferred to general reserve, rate of taxation being 50%. Normal dividend expected
on equity shares is 8% while fair return of capital employed is 10%. Goodwill may be
valued at 3 years' purchase of super profits .
Ascertain the value of each equity share under fair value method. (9 marks)
Answer :
`
Assets
Building 32,00,000
Plant 18,00,000
Stock 4,50,000
Debtors 3,60,000
Cash 1,00,000
59,10,000
Less: Liabilities :
Creditors 8,00,000
Debentures 10,00,000 18,00,000
Capital Employed 41,10,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.243
Calculation of Actual Profit:
Average Profit 12,00,000Less: Income from Investment 50,000
11,50,000Less: Income Tax 50% 5,75,000
Actual Profit 5,75,000Less: Transfer to Reserve 12.50% 71,875
5,03,125Less: Preference Dividend 1,20,000Profit for Equity Shareholders 3,83,125Super Profit = Actual Profit ! Normal ProfitNormal Profit (Return) = 10% on Capital Employed= ` 41,10,000 × 10% = ` 4,11,000Super Profit = ` 5,75,000 ! ` 4,11,000 = ` 1,64,000Goodwill = ` 1,64,000 × 3 = ` 4,92,000Net assets for equity shareholders = Capital Employed + Goodwill + Investment !Preference Capital= ` 41,10,000 + ` 4,92,000 + ` 4,80,000 ! ` 10,00,000 = ` 40,82,000Value per share (intrinsic value) = ` 40,82,000 / 1,00,000 = ` 40.82
Value per share yield method =
Expected rate of dividend = = 38.31%
Value per Share = = ` 47.89
Value per share as per fair value method =
=
= ` 44.36 approx.
Note:
(i) Debentures are excluded from capital employed for calculating super profit.
(ii) Normal profit is calculated on capital employed. It may also be calculated on
average capital employed, then answers will change accordingly.
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2009 - June [3] (a) Abridged balance sheet of Rama Ltd. as on 31st March, 2009 is as
follows:
Liabilities `
Share capital 6,00,000
Reserves and surplus 50,000
Bank overdraft 10,000
Creditors 60,000
Provision for taxation 1,10,000
Proposed dividend 60,000
8,90,000
Assets
Fixed assets 3,70,000
Current assets 5,20,000
8,90,000
The net profits of the company after deducting working expenses but before providing
for taxation were as under :
Year `
2006 ! 07 3,18,000
2007 ! 08 3,40,000
2008 ! 09 3,12,000
On 31st March, 2009, fixed assets were at ̀ 4,50,000. Sundry debtors on the same date
included `10,000 which is irrecoverable. Having regard to the type of business, a 10%
return on average capital employed is considered as reasonable. Ascertain the value
of goodwill on the basis of three years purchase of annual super profits. Also calculate
goodwill by capitalisation of average maintainable profits. Depreciation on fixed assets
is charged @ 10% per annum and the rate of tax is 30% (6 marks)
Answer :
Calculation of Average Capital Employed `
Fixed Assets 4,50,000
Current Assets ` (5,20,000 - 10,000) 5,10,000
9,60,000
`
Less: Bank overdraft 10,000
Creditors 60,000
Provision for taxation 1,10,000 1,80,000
Capital employed 7,80,000
Less: Half of the profit after tax of the current year 1,09,200
Average capital employed 6,70,800
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.245
Calculation of Average Adjusted ProfitsTotal profits for last 3 years 9,70,000Less: Provision for bad debts 10,000
9,60,000Average Profit 3,20,000Less: Depreciation on revaluation of fixed assets 10%
` (4,50,000 - 3,70,000) (8,000)3,12,000
Less: Income Tax @ 30% (93,600)Average maintainable profit 2,18,400Less: Normal Profit 10 % of 6,70,800 (67,080)Super Profit 1,51,320Goodwill at 3 years purchases = Super profit No. of years×
= ` 1,51,320 3 = ` 4,53,960×
Goodwill as per Capitalization Method = Capitalized value - Actual capitalemployedCapitalized value = (Average maintainable profit 100) / Normal rate of profit×
= ` (2,18,400 100) / 10×
= ` 21,84,000Goodwill = ` 21,84,000 - ` 7,80,000 = ` 14,04,000
2009 - Dec [3] (a) On the basis of following information, compute the value of an equity
share and a preference share of both Chelsi Ltd. and Nensi Ltd.— (i) when only a few
shares are sold; and (ii) when controlling shares are to be sold :
Chelsi Ltd. Nensi Ltd.
(`) (`)
Profit after tax 10,00,000 10,00,000
12% Preference share capital
(shares of `100 each) 10,00,000 20,00,000
Equity share capital
(shares of ` 10 each) 50,00,000 40,00,000
Assume that market expectation for both companies is 15%; and 80% of the profits are
distributed. (6 marks)
Answer :
Valuation of Equity Share
Chelsi Ltd. Nensi Ltd.
Profit after tax (`) 10,00,000 10,00,000
Less: Pref.Dividend (`) 1,20,000 2,40,000
Profits available to equity shareholders(`) 8,80,000 7,60,000
No of equity shares 5,00,000 4,00,000
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Earning per share = 1.76 = 1.90Profit to be distributed 80% 80%Dividend per share 80% of 1.76 80% of 1.90
= ` 1,408 = ` 1.52(i) When few shares are sold: 1,408/15×100 152/15×100
= `9.39 = `10.13(ii) When controlling shares are sold:
Value of share 1.76/15×100 1.90/15×100 ` 11.73 = ` 12.67
In the given problem, no separate market expectation rate is given for preferenceshares. Since preference shares are fixed-dividend bearing shares,they have a slightlylesser capitalization rate say 13% in this case. Further, Chelsi Ltd., has betterpreference dividend coverage of 8.83 (10,00,000/1,20,000) as compared to NensiLtd.,`s coverage of 4.17 (10,00,000/2,40,000). Accordingly, market expectation rate forNensi Ltd.,should be slightly more say by 0.50%. Thus market expectation rate forChelsi Ltd. and Nensi Ltd. have been taken as 13% and 13.5% respectively. (This rateis subjective).
Chelsi Ltd. Nensi Ltd.Rate of Dividend 12% 12%Market Expectation Rate 13% 13.5%Value of a Preference Share 12/13×100 12/13.5×100
= ` 92.31 = `88.992010 - June [4] (a) Balance sheet of Diamond Ltd. as at 30th June, 2009 is given below:
Liabilities `
Share capital: 40,000 Shares of ` 10 each 4,00,000
General reserve 80,000
Profit and loss account 64,000
Sundry creditors 2,56,000
Income-tax reserve 1,20,000
9,20,000
Assets
Land and buildings 2,20,000
Plant and machinery 2,60,000
Patents and trade marks 40,000
Preliminary expenses 24,000
Stock 96,000
Debtors 1,76,000
Bank balance 1,04,000
9,20,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.247
The expert valuer valued the land and buildings at ` 4,80,000, goodwill at
` 3,20,000 and plant and machinery at ` 2,40,000. Out of the total debtors, it is found
that debtors of ` 16,000 are bad. The profits of the company have been as follows:
31st March, 2007 : ` 1,84,000
31st March, 2008 : ` 1,76,000
31st March, 2009 : ` 1,92,000
The company follows the practice of transferring 25% of profits to general reserve.
Similar type of companies earn at 10% of the value of their shares. Plant and
machinery, and land and buildings have been depreciated at 15% and 10%
respectively. Ascertain the value of shares of the company by using—
(i) Intrinsic value method;
(ii) Yield value method; and
(iii) Fair value method. (6 marks)
Answer :
(a) Diamond Ltd.
Valuation of shares
(i) Intrisic value method
Assets: `
Land and buildings 4,80,000
Goodwill 3,20,000
Plant and machinery 2,40,000
Patents and trade marks 40,000
Stock 96,000
Debtors less bad debts 1,60,000
Bank balance 1,04,000
14,40,000
Less: Liabilities:
Sundry creditors 2,56,000
Net assets 11,84,000
Intrinsic value of shares (each share) =
= = ` 29.60
(ii) Yield value method
`
Total profit of last three years 5,52,000
Less: Bad debts 16,000
5,36,000
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Average profit = = 1,78,667
Add: Decrease in depreciation on plant and machinery
@ 15% on ` 20,000 3,000
1,81,667
Less: Increase in depreciation on land and
building @ 10% on ` 2,60,000 26,000
Average profit 1,55,667
Less: Transfer to reserve
@ 25% of ` 1,55,667 38,917
Profit available for dividend 1,16,750
Rate of dividend =
Yield value of share =
= = ` 29.19
(iii) Fair value method
Fair value of each share =
= = ` 29.40
2010 - Dec [2] (a) Following are the information of two companies for the year ended31st March, 2010 :
Company-A Company-B(`) (`)
Equity shares of ` 10 each 8,00,000 10,00,00010% Preference shares of `10 each 6,00,000 4,00,000Profit after tax 3,00,000 3,00,000Assuming that the market expectation is 18% and 80% of the profits are distributed,what is the price per share you would pay for the equity shares of each company!! (i) if you are buying a small lot; and (ii) if you are buying controlling interestshares ? (6 marks)
Answer :Calculation of earning per share and dividend per share
Particulars Company A Company BProfit after tax (`) 3,00,000 3,00,000Less: Preference Dividend (`) 60,000 40,000Profit for Equity Shareholders (`) 2,40,000 2,60,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.249
No. of Equity shares issued 80,000 1,00,000
Distributable Profit as Dividend
(80% of profit for Equjty Shareholders) 1,92,000 2,08,000
Earning per share (`) 3.00 2.60
Dividend per share (`) 2.40 2.08
Earning per share = Profit available for equity shareholders / Number of equity shares
Dividend per share = Distributable Profits / Number of Equity Shares
Value per share for buying a small lot Value per share = Dividend per share / Market capitalization rate x 100Company A = ` 2.40/18 x 100 = `13.33 Company B = ` 2.08 /18 x 100 = `11.56 Value Per Share for Controlling Interest Value per share = Earning per share / Market capitalization rate x 100 Company A = `3.00/18 x 100 = `16.67 Company B = `2.60/18 x 100 = ` 14.44 2011 - June [3] (b) The following particulars of Jag Apna Ltd. are available : (i) Share capital :
& 10,000 Equity shares of `10 each fully paid& 1,000, 12% Preference shares of ` 100 each fully paid
(ii) Reserves and surplus : ` 15,000(iii) External liabilities :
& Creditors : ` 12,000& Bills payable : ` 6,000
(iv) The average normal profits (after taxation) earned each year by the company :` 28,500.
(v) Assets of the company include one fictitious item of ` 800.(vi) The fair or normal rate of return in respect of the equity shares of this type of
company is ascertained at 10%.Calculate the value of each equity share by using — (i) assets backing method; (ii) yieldmethod; and (iii) fair value method. (6 marks)Answer :(i) Asset backing Method: `̀̀̀
Equity share capital 1,00,00012% Preference Share Capital 1,00,000Reserve & Surplus 15,000External Liabilities (12,000 + 6,000) 18,000Gross Assets 2,33,000Less: Fictitious Assets 800
Less: External Liabilities 18,000 18,800
Net Assets available for all shareholders 2,14,200
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Less: Preference Share Capital 1,00,000
Net Assets available for equity shareholders 1,14,200
Number of Equity Shares 10,000
Intrinsic value per share = = = ` 11.42
(ii) Yield Method:
`̀̀̀
Average Profit after tax 28,500
Less: Preference dividend @ 12% on ` 1,00,000 12,000
Profit available for equity shareholders 16,500
Expected Rate of return on equity capital
= × 100
= ×100 = ` 16.50%
Normal rate of return (given) 10%
Value per share
=
(iii) Fair Value Method:
Fair value of share =
= = ` 13.96
2012 - June [4] (a) Following was the balance sheet of Raman Ltd. as on 31st March,
2011:
Liabilities `̀̀̀ Assets `̀̀̀
4,000 Equity shares of ` 100 each 4,00,000 Building at cost 60,000
Reserve fund 1,00,000 Furniture 5,000
Profit and loss account (including Stock (market value) 4,00,000
` 3,00,000 before tax for 2010-11) 4,00,000 5% Investments (at cost) 3,00,000
Depreciation fund: Debtors 3,00,000
Building 15,000 Bank 35,000
Investment 30,000 45,000
6% Debentures 1,00,000
Creditors 45,000
Provision for doubtful debts 10,000
11,00,000 11,00,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.251
The present value of building is worth ` 1,10,000.
Public companies doing similar business show a profit earning capacity of 12% on
capital employed on the business. The real value of goodwill may be taken at `
2,00,000. You are required to calculate the yield value of the shares of the company
assuming that the tax rate is 35%. (9 marks)
Answer :
Step 1 : Capital Employed
Present value of Assets: `̀̀̀
Goodwill
Building
Furniture
Stock
Debtors
Bank
2,00,000
1,10,000
5,000
4,00,000
3,00,000
35,000
10,50,000
Less: Present value of Liabilities
Creditors 45,000
Provision for D.Debts 10,000
Provision for taxation 1,05,000 1,60,000
8,90,000
Step 2 : Calculation of Profit for Equity Shareholders
`̀̀̀
Profit* 3,15,000
Less: Income from investments 15,000
Less: Income tax @35% of 3,00,000 1,05,000
1,95,000
Add: Debenture Interest** 6,000
2,01,000
Step 3 : Value Per Share
Actual rate of earning = Profit Earned/Capital Employed × 100
= ` 2,01,000/` 8,90,000 × 100
= 22.58%
Value per share = Actual rate of Earning/Normal rate of earning × 100
= (22.58/12) × 100
= ` 188.20
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*Since investment is stated at cost, it is assumed that Interest Income on Investment
has been accrued but not due in books so while calculating the Profit for calculation of
return on capital employed, it will not be deducted from Profit.
**Tax effect on debenture Interest has been ignored.
2012 - Dec [4] (a) Following is the summarised balance sheet of Victory Ltd. as on 31st
March, 2012 :
Equity and Liabilities `
Share capital :
30,000 Equity shares of `10 each 3,00,000
General reserve 1,20,000
Capital reserve 40,000
Profit and loss (Surplus) 1,20,000
Proposed dividend 34,000
Trade payables 93,700
Income-tax payable 11,500
Provision for tax 82,500
8,01,700
Assets `
Freehold property 1,20,000
Plant and machinery 50,000
Stock 3,10,000
Trade receivables 2,13,000
Bank balance 1,07,000
Cash in hand 1,700
8,01,700
Net profit (before taxation) for the past 3 years ended :
`
31-3-2010 1,38,000
31-3-2011 1,83,000
31-3-2012 1,97,000
On 31st March, 2012 freehold property was valued at `1,80,000 and plant and
machinery at `80,000. Average yield in this type of business is 15% on capital
employed.
Goodwill of the company is `1,00,000. The company transfers 20% of net profits to
general reserve, rate of tax is 50%.
You are required to find out !
(i) Value of each equity share; and
(ii) Fair value of each share. (6 marks)
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.253
Answer:
(A) (i) Value of share as per net assets method
(B) Calculation of net assets `
Goodwill 1,00,000
Freehold property at market value 1,80,000
Plant and machinery 80,000
Stock 3,10,000
Trade receivables 2,13,000
Bank Balance 1,07,000
Cash in hand 1,700
9,91,700
Less: Current Liabilities
Proposed divided 34,000
Trade payables 93,700
Income Tax payable 11,500
Provision for tax 82,500 2,21,700
Net Assets 7,70,000
Intrinsic value per share =
= `
= ` 25.67 ans.
(C) Value of per share as per yield method:
Average profit on weighted average basis
year Profit Weight Product
2010 1,38,000 1 1,38,000
2011 1,83,000 2 3,66,000
2012 1,97,000 3 5,91,000
6 10,95,000
Weighted average profit (Before tax) = `
= ` 1,82,500
Less: Income tax @ 50% = ` 91,250
Profit after Tax (PAT) = ` 91,250
Less: transfer to general reserve @ 20% = ` 18,250
Expected profit available for equity Share holders = ` 73,000
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Calculation of expected dividend yield
Expected Yield Rate =
=
= ` 24.33
Calculation of Yield Value per Share
Value Per Shares = × Paid up value per share
= ` × 10
= ` 16.22 ans.
(a) (ii) Fair value Per Share =
= `
= ` 20.95
2013 - June [2] (a) Calculate the value of one equity share from the following inform-
ation:
(i) 60,000 equity shares of ` 10 each, ` 7 paid-up.
(ii) ` 2,00,000, 10% preference shares of ` 100 each, fully paid-up.
(iii) Expected annual profits before tax ` 4,00,000.
(iv) Tax rate 35%.
(v) Transfer to general reserve 20% of profits every year.
(vi) Normal rate of return 20%. (6 marks)
Answer :
Calculation of value of one equity share
Particulars Amount (`̀̀̀)
Expected Annual profits before tax
Less: Tax @ 35% of ` 4,00,000
Profit alter tax (PAT)
Less: Transfer to General Reserve @20% of PAT
Profit after tax and transfer to General Reserve
Less: Preference Dividend @10% on ` 2,00,000
Profit available for equity shareholders
4,00,000
(1,40,000)
2,60,000
(52,000)
2,08,000
(20,000)
1,88,000
Expected rate of earning per share
=
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.255
=
= 44.762%
Total paid up equity share capital = ` 60,000 × ` 7 = ` 4,20,000
Value of one equity share
=
=
= ` 15.67
2013 - Dec [3] (a) The following particulars are available in relation to Indu Ltd. :
(i) Capital : 450, 6% preference shares of ̀ 100 each fully paid-up and 4,500 equity
shares of ` 10 each fully paid.
(ii) External liabilities ` 7,500.
(iii) Reserves and surplus ` 3,500.
(iv) The average normal profit (after tax) but before transfer to general reserve, i.e.
10% earned every year by the company is ` 8,505.
(v) The normal rate of profit earned on the market value of fully paid-up equity
shares of the same type of company is 9%.
Calculate the fair value of shares assuming that out of the total assets worth ` 350 are
fictitious. (7 marks)
CS Final Gr. I
DESCRIPTIVE QUESTIONS
2004 - Dec [2] (b) What are the different circumstances under which valuation of shares
becomes necessary? (3 marks)
Answer :
The valuation of shares may arise under the following circumstances:
1. Assessment under various direct tax laws.
2. Purchase of a block of shares generally involving acquisition of controlling interest
in the company.
3. Purchase of shares by employees of the company.
4. Formulation of schemes of amalgamation, absorption etc.
5. Acquisition of interest of dissenting shareholder under a scheme of reconstruction.
6. Advancing loans on the security of shares.
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7. Conversion of shares say preference into equity.
8. Resolving a deadlock in the management of a private limited company on the
basis of the controlling block of shares being given to either of the parties
PRACTICAL QUESTIONS
2004 - June [1] {C} (b) On the basis of the following information, calculate the value ofequity share:
`
5,000, 6% Preference shares of ` 100 each, fully paid 5,00,00030,000 Equity shares of ` 10 each, fully paid 3,00,000Total tangible assets (other than goodwill) 9,49,000Total outside liabilities 95,000Average net profit after tax 62,560
Expected normal yield for equity shares is 7% of capital employed. Goodwill is tobe taken at 5 years' purchase of super profits, if any. (4 marks)Answer :Computation of value of intrinsic value of equity shares :
(i) Calculation of capital employed :
Total Tangible Assets - Outside Liabilities
` 9,49,000 - ` 95,000 = ` 8,54,000
(ii) Normal Profit:
× Capital Employed = × ` 8,54,000 = ` 59,780
(iii) Calculation of Super Profit:
Average Net Profit after tax - Normal Profit
` 62,560 - ` 59,780 = ` 2,780
(iv) Calculation of Goodwill on 5 years' Purchase
` 2,780 × 5 = ` 13,900
(v) Calculation of Intrinsic Value of Equity share
`
Capital Employed 8,54,000
Add: Goodwill 13,900
8,67,900
Less: Preference Share Capital 5,00,000
Assets available to equity shareholders 3,67,900
Value of an Equity Share = = ` 12.26
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.257
2004 - June [2] (c) Precision Ltd. proposed to purchase the business carried on by
Fastners Pvt. Ltd. The goodwill for this purpose is agreed to be valued at five years'
purchase of the weighted average profit for the past four years (Use appropriate
weights). Profits for the past four years are as follows:
Year Profit
(`)
1999-2000 2,52,500
2000-2001 3,10,000
2001-2002 2,50,000
2002-2003 3,50,000
On scrutiny of the books of account, the following matters were revealed:
(i) On 1st December, 2001, a major repair was made in respect of the plant
incurring ̀ 75,000 which was charged to revenue. The said sum is agreed to be
capitalised for goodwill calculation subject to adjustment of depreciation @ 10%
on reducing balance method.
(ii) The closing stock for the year 2000-01 was overvalued by ` 30,000,
(iii) To cover management costs, an annual charge of ` 60,000 should be made for
the purpose of valuation of goodwill.
You are required to compute the value of goodwill. (9 marks)
Answer :
Working Note :
Calculation of Adjusted profits `
Profits 1999!2000 2,52,500
Less: Management Expenses 60,000
Adjusted Profits ! (1999 !2000) 1,92,500
Profits 2000!2001 3,10,000
Less: Overvaluation of Closing Stock 30,000
2,80,000
Less: Management Expenses 60,000
Adjusted Profits (2000-2001) 2,20,000
Profit 2001-2002 2,50,000
Add: Overvaluation of Opening Stock 30,000
Major repairs to be treated as Capital
Expenditure charged to Revenue Account 75,000
3,55,000
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Less: Depreciation on Capital Expenditure
2,500
3,52,500
Less: Management Expenses 60,000
Adjusted Profits (2001-2002) 2,92,500
Profit 2002 !2003 3,50,000
Less: Management Expenses 60,000
2,90,000
Less: Depreciation @ 10% on 72,500 7,250
(75,000 !2,500)
Adjusted Profits (2002 !2003) 2,82,750
Calculation of Average Profits
Year Ended 31st March Profits weights Product
1999-2000
2000-2001
2001-2002
2002-2003
(`)
1,92,500
2,20,000
2,92,500
2,82,750
1
2
3
4
10
(`)
1,92,500
4,40,000
8,77,500
11,31,000
26,41,000
Average Profits = ` 26,41,000/10 = ` 2,64,100
Goodwill at Five years Purchase = ` 2,64,100×5 = ` 13,20,500
2005 - June [4] (a) The following is the balance sheet of Best Ltd. as at 30th June,
2004 :
Liabilities `
Share capital :
4,00,000 Equity shares of `10 each, fully paid-up 40,00,000
4,00,000 Equity shares of `10 each, paid-up `7.50 per share 30,00,000
4,00,000 Equity shares of `10 each, paid-up `5 per share 20,00,000
Reserves and surplus 56,00,000
Provision for bad debts 1,20,000
Sundry creditors 20,40,000
Dividend equalisation fund 6,40,000
1,74,00,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.259
Assets
Patent and copyrights 8,00,000
Land and buildings 48,00,000
Plant and machinery 48,00,000
Stock 24,00,000
Investments at cost 6,00,000
Debtors 32,00,000
Bank 6,40,000
Preliminary expenses 1,60,000
1,74,00,000
Additional information are as follows :
(i) The normal average profit (after tax) for the company is estimated to be
` 21,60,000.
(ii) The applicable capitalisation rate is 12%.
(iii) The revised values of —
— Patent and copyrights are estimated @ 50% of its value; and
— Land and buildings and plant and machinery are revalued at ` 60,00,000
and `52,00,000 respectively,
(iv) Investments have a market value of `7,20,000.
(v) Provision for bad and doubtful debts to be maintained @ 2%.
(vi) The balance sheet as at 30th June, 2004 does not contain a provision for
income-tax, which are estimated at `3,00,000.
You are required to calculate the value of fully and partly paid-up equity share
(per share) by:
(i) the asset backing method (excluding goodwill) on the notional call method; and
(ii) the earning capacity method. (6 marks)
Answer :
(i) Calculation of value of Shares :
Net Asset Method : `
(i) Patent and copyrights 4,00,000
(ii) Land and Buildings 60,00,000
(iii) Plant and Machinery 52,00,000
(iv) Investments 7,20,000
(v) Stock 24,00,000
(vi) Debtors less provisions for bad debts 31,36,000
(vii) Bank 6,40,000
Total Assets : 1,84,96,000
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Less: Liabilities `
Sundry creditors 20,40,000
Tax provisions 3,00,000 23,40,000
Net Assets 1,61,56,000
Add: Notional Calls (Calls-in-Arrears)
4,00,000 × `2.50 10,00,000
4,00,000 × `5.00 20,00,000
Asset backing value for fully paid equity shares 1,91,56,000
value of each fully paid-up equity share =
= = ` 15.96
Value of Partly paid-up share capital :
Value of each `7.5 paid equity share = ` 15.96 !2.50 = ` 13.46
Value of each `5.0 paid equity share = ` 15.96 !5.00 = ` 10.96
(ii) Earning Capacity Method :
The capitalized value of profits = = ` 1,80,00,000
The present total paid-up capital = ` 90,00,000
Assuming this represents equivalent to 9,00,000 shares.
ˆ value of each fully paid-up equity share = =` 20
value of each ` 7.50 paid share = ¾ × 20 = ` 15.00
value of each ` 5.00 paid share = ½ ×20 = ` 10.00
2005 - Dec [3] (b) The balance sheet of Super Sound Ltd. as at 31st March, 2005 is
given below:
Liabilities ` Assets `
Share capital: Buildings 2,25,000
9,000 Equity shares of `100 each, Machinery 3,30,000
fully paid-up 9,00,000 Stock 4,50,000
Profit and loss account 75,000 Sundry debtor 2,40,000
Bank overdraft 15,000 Bank 90,000
Creditors 90,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.261
Provision for taxation 1,65,000
Provision for dividends 90,000
13,35,000 13,35,000
The net profits of the company after deducting usual working expenses but before
providing for taxation were as under :
Year `
2002-03 3,00,000
2003-04 3,60,000
2004-05 3,30,000
On 31st March, 2005, building was revalued at ̀ 3,00,000; machinery at ̀ 3,75,000
and sundry debtors on the same date include ̀ 10,000 as irrecoverable. Having regard
to nature of the business, 10% return on net tangible capital invested is considered
reasonable.
You are required to value the company's share ex-dividend. Valuation of goodwill
may be based on three years' purchase of annual super profits. Rate of depreciation on
buildings is 2% and on machinery is 10%. The income-tax rate is to be assumed at
35%. All workings should form part of your answer. (10 marks)
Answer :
In the Books of Super Sound Limited
Calculation of Value of equity share :
(`) (`)
Goodwill - WN. (v) 2,72,800
Buildings (revalued value) 3,00,000
Machinery (revalued value) 3,75,000
Stock 4,50,000
Sundry Debtors 2,30,000
Bank 90,000
Total Assets: 17,17,800
Less: Liabilities:
Bank Overdraft 15,000
Creditors 90,000
Provision for taxation 1,65,000
proposed Dividend 90,000 3,60,000
Net assets 13,57,800
value of an equity share = Net Assets/No. of Equity Shares
= ` 13,57,800/9,000= ` 150.87
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Working Notes:
(i) Calculation of Average Capital Employed:
Closing Capital Employed: `
Building (revalued) 3,00,000
Machinery (revalued) 3,75,000
Sundry debtors (less bad debts) 2,30,000
Stock 4,50,000
Bank 90,000
14,45,000
Less: Liabilities:
Bank Overdraft 15,000
Sundry Creditors 90,000
Closing Capital employed 13,40,000
Less: 50% of Profit before tax 1,65,000
Average Capital employed 11,75,000
(ii) Calculation of normal rate of returns on average capital employed:
Average capital Employed × Normal Rate of Return/100
= ` 11,75,000 × 10/100 = 1,17,500
(iii) Calculation of Future Maintainable Profits:
Average profits of last three years
= ` 3,00,000 % ` 3,60,000 % ` 3,30,000
`
Cumulative Profits = 9,90,000
Less: Bad debts 10,000
9,80,000
Average Profits = ` 9,80,000/3 = 3,26,667
Less: Depreciation on revaluation
of assets `
2% on ` 75,000 = 1,500
10% on ` 45,000 = 4,500 6,000
3,20,667.00
Less: Income Tax @ 35% 1,12,233.45
Future Maintainable profit 2,08,433.55
(iv) Calculation of Super Profits:
Future Maintainable Profit !Normal Rate of Return
= ` 2,08,433.55!` 1,17,500 = ` 90,933.55
(v) Calculation of Goodwill:
Super Profits ×3 years purchase = ` 90,933.55×3 = ` 2,72,800
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.263
2006 - June [3] (b) Following is the summarised balance sheet of Royal Ltd. as on 31st
March, 2005 :
Liabilities `
3,000, 6% Preference shares of
` 100 each, fully paid!up 3,00,000
1,30,000 Equity shares of ` 10 each,
fully paid-up 13,00,000
Profit and loss account 9,00,000
8% Debentures 6,00,000
Sundry creditors 4,78,500
35,78,500
Assets
Goodwill 1,00,000
Free-hold property 7,50,000
Plant and machinery less depreciation 7,00,000
Stock 7,40,000
Debtors (net) 7,98,500
Cash and bank balances 4,90,000
35,78,500
The following are additional information :
(i) The profit after tax for the three financial years 2002-03, 2003-04 and 2004-05,
after charging debenture interest, were ` 4,41,000,
` 6,45,000 and ` 4,80,000 respectively.
(ii) The normal rate of return is 10% on the net assets attributed.
(iii) The value of freehold property is to be ascertained on the basis of 8% return.
The current rental value is ` 1,00,800.
(iv) The rate of tax applicable is 40%.
(v) 10% of profits for the financial year 2003-04 referred to above arose from a
transaction of non-recurring nature.
(vi) A provision of ` 31,500 on sundry debtors was made in the financial year 2004-
05 which is no longer required; profit for the year 2004-05 is to be adjusted for
this item.
(vii) A claim of ̀ 16,500 against the company is to be provided and adjusted against
profit for the financial year ended on 31st March, 2005.
(viii) Goodwill may be calculated at 3 times adjusted average profits of the 3 years.
(ix) Capital employed may be taken as on 31st March, 2005.
You are required to ascertain the value of goodwill of the company.
(10 marks)
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Answer :Working Notes:1. Net Assets (Capital employed) of the company:
Freehold property `
(`100,800× 100/8) 12,60,000Plant and machinery (less depreciation) 7,00,000Stock 7,40,000Debtors (net) ` 7,98,500Add: Provision Written back ` 31,500 8,30,000Cash and bank balances 4,90,000Total Assets: 40,20,000Less : Liabilities : `
Sundry creditors 4,78,500Outstanding claim 16,5008% Debentures 6,00,000 10,95,000
Net Assets 29,25,0002. Calculation of Normal Rate of Return @ 10%
Capital Employed ×
= ` 29,25,000 × = ` 2,92,500
3. Calculation of Future Maintainable Profit
2000-03
`̀̀̀
2003-04
`̀̀̀
2004-05
`̀̀̀
Profits
Less: Non-recurring Profit @ 10% for
2003-04
Less: Omission of claim
Add: Provision for debtors no longer required
Adjusted Profit
Less: 40% tax on ` 15,000
(40% on `31,500!`16,500)
Adjusted profit (after tax adjustment)
Total profit for 3 years
4,41,000
!
!
!
4,41,000
!
4,41,000
6,45,000
64,500
!
!
5,80,500
!
5,80,500
4,80,000
16,500
31,500
4,95,000
6,000
4,89,000
15,10,500
Average profits = = `5,03,500
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.265
4. Calculation of super profits:= Future maintainable profits !Normal profits= ` 5,03,500 ! `2,92,500 Super profits = ` 2,11,000
Value of Goodwill= (Super profits × 3 years purchase)` 2,11,000 × 3 = `6,33,000
Note : From the detailed information given in the question, it is expected that goodwillmay be calculated by super profit method as given above. However it is mentioned inthe question that goodwill may be calculated at 3 times adjusted average profit of the3 years. There fore, the value of goodwill may also be calculated by using simple profitmethod.
Then, Goodwill = Future maintainable profit × 3= ` 5,03,500 × 3 ` 15,10,500
2006 - Dec [4] (b) On 31st March,2006 the balance sheet of Himalaya Ltd. disclosed thefollowing position :
Liabilities ` Subscribed share capital of ` 10 each, fully paid 4,00,000General reserve 1,90,000Profit and loss account 1,20,00014% Debentures 1,00,000Current liabilities 1,30,000
9,40,000Assets
Goodwill 40,000Other fixed assets 5,00,000Current assets 4,00,000
9,40,000On the above mentioned date, the tangible fixed assets were independently valued
at ̀ 3,50,000 and goodwill at ̀ 50,000. The net profits for three years were — 2003-04:`1,03,200; 2004-05 : ` 1,04,000; and 2005-06 : ` 1,03,300 of which 20% wastransferred to general reserve, this proportion being considered reasonable in theindustry in which the company is engaged and where a fair return on investment maybe taken at 18%. Compute the value of the company’s share by (i) the net assetsmethod; and (ii) the yield method. Ignore taxation. (10 marks)Answer :
`
(i) Net Asset Method :Goodwill as revalued 50,000Tangible Fixed Assets as revalued 3,50,000Current Assets as per Balance Sheet 4,00,000
8,00,000
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`
Less: 14% Debentures 1,00,000
Current Liabilities 1,30,000 2,30,000
5,70,000
Value per share = Net Assets/No. of Shares
= ` 5,70,000/40,000
= ` 14.25
(ii) Yield Method :
Total Profits for the last three years `
= `1,03,200 % `1,04,000 % `1,03,300) 3,10,500
Average profits for last three years = `3,10,500/3 1,03,500
Less: Transfer to General Reserve @ 20% 20,700
Expected profits after transfer to General Reserve 82,800
Expected Return on Equity Share Capital:
= × 100
= ×100 =20.70%
Value per share :
= × Paid up value of share
= × 10 = ` 11.50
2007 - June [1] {C} (b) The average net profit before adjustment (s) is ̀ 5,14,000. The
profit includes interest at 8% on non-trading investments. The cost of these investments
is `1,98,200 while the face value is ` 2,00,000. Expenses amounting to ` 7,000 per
annum are likely to be discontinued in future. The provision for income-tax be made at
30%. The normal rate of return may be taken at 10%. The average capital employed in
the business (including investments) is ` 18,98,200.
Assuming four year’s purchase of super-profits, what is the value of goodwill ?
(5 marks)
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.267
Answer :
Calculation of Goodwill
`
Average Net profit (before adjustment) 5,14,000
Less: Interest @ 8% on non-trading investments 16,000
4,98,000
Add: Expenses expected to discontinue in future 7,000
5,05,000
Less: Income Tax at 30% 1,51,500
Future maintainable net profit 3,53,500
Average capital employed (As given) 18,98,200
Less: Cost of non trading investments 1,98,200
Average capital employed 17,00,000
Normal Profit @ 10% on ` 17,00,000 1,70,000
Super profit (`3,53,500 !1,70,000) 1,83,500
Goodwill at 4 years purchase of super profits (1,83,500×4) 7,34,000
2007 - Dec [3] (a) The subscribed share capital of a company consists of 10,000, 14%
preference shares of ̀ 100 each and 2,00,000 equity shares of ̀ 10 each. All the shares
are fully paid-up.
The average annual profit of the company after providing depreciation but before
taxation is ` 25,00,000. It is considered necessary to transfer ` 1,25,000 to general
reserve before declaring any dividend. Rate of taxation is 50%.
The normal return expected by investors on equity shares from the type of business
carried on by the company is 20%.
From the above information, calculate the following:
(i) Amount available for equity dividend;
(ii) Rate of dividend; and
(iii) Value of an equity share. (2 marks each)
Answer :
`
Average annual profit before tax 25,00,000
Less: Income Tax @50% 12,50,000
12,50,000
Less: Transfer to General Reserve 1,25,000
Amount available for dividend 11,25,000
Less: Preference dividend @ 14% on ` 10,00,000 1,40,000
Amount available for equity dividend 9,85,000
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Rate of dividend = 49.25%
Normal rate of return expected = 20%
Value of an equity share = = ` 24.63
2008 - June [4] (b) Beta Ltd. proposed to purchase the business run by Akram on 31st
March, 2007. Goodwill for the purpose is agreed to be valued at three years’ purchase
of weighted average of past four years’ profits. The appropriate weights to be used and
profits for these years were :
Year Weight Profit
(`)
2003-04 1 20,200
2004-05 2 24,800
2005-06 3 20,000
2006-07 4 30,000
On scrutiny of accounts, the following matters were revealed :
(i) On 1st December, 2005, a major overhauling was made in respect of the plant
incurring ` 6,000 which was charged to revenue. The said amount is agreed to
be capitalised for goodwill calculation subject to adjustment of yearly
depreciation of 10% per annum on reducing balance method.
(ii) The closing stock for the year 2004-05 was overvalued by `2,400.
(iii) To cover the management cost, an annual charge of ̀ 4,800 should be made for
the purpose of valuation of goodwill.
Compute the value of goodwill of the business of Akram. (10 marks)
Answer :
Statement of actual average profits
Particulars 2003-04
`
2004-05
`
2005-06
`
2006-07
`
Profits(As given)
Add: Capitalised value of machine
wrongly charged to revenue
expenditure
20,200
!
20,200
24,800
!
24,800
20,000
6,000
26,000
30,000
!
30,000
[Chapter #### 7] Valuation of Shares and Intangible Assets OOOO 2.269
Less: Charge of management cost
Less: Over valuation of Closing Stock
Add: Overvalue of Opening Stock
4,800
15,400
!
15,400
!
15,400
4,800
20,000
2,400
17,600
!
17,600
4,800
21,200
!
21,200
2,400
23,600
4,800
25,200
!
25,200
!
25,200
Less: Deprecation @ 10% p.a. on
capitalized value of machine
i.e. `6,000 for four months
Less: Depreciation @ 10% p.a. on
`5,800 (6000-200)
Adjusted Profit
Weights
Weighted Profits (weight × Profit)
!
15,400
15,400
1
15,400
!
17,600
17,600
2
35,200
200
23,400
23,400
3
70,200
!
25,200
580
24,620
4
98,480
Weighted average profits
=
= ` 2,19,280/10 ` 21,928
Goodwill (On the basis of three years purchase) = ` 21,928 × 3 = ` 65,784
2.270
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter Nil
On the basis of Compulsory questions from a chapter jjjjj
8 Objective Questions
CS Executive Programme (Module I)
2008 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
correct or incorrect :
(i) The bonus share issue cannot be made unless the existing partly paid shares
are fully paid !up. (2)
(ii) In India, corporate financial statements in general do not include a cash flow
statement to explain movement of cash during the accounting period. (1)
(iii) A company is not under any legal obligation to make good its past losses before
distributing its current profits as dividends. (5)
(iv) The Accounting Standard !21 mandates an Indian company to present
consolidated financial statements. (1)
(v) In India, corporate financial statements are prepared recognising legal forms of
the transaction and ignoring the substance. (5)
(2 marks each)
Answer :
(i) Correct: The bonus shares are always fully paid-up and issued to existing
shareholders on a pro-rata basis. Bonus issue is not made unless the partly paid
shares, if any, existing are made fully paid up.
(ii) Correct: The preparation and presentation of cash flow statement in India is not
mandatory for all types of corporate enterprises. However the companies which
are required to prepare and present such statements should prepare and present
cash flow statements as per revised Accounting Standard (AS) ! 3.
(iii) Incorrect: In general a company is under no legal obligation to make good a
debit balance in its profit and loss account resulting from past losses before
distributing its current profits. But so much of the loss sustained by a company
in the past years as is attributable to the amount of provisions made for
depreciation must be set off against the current profit of the company before a
dividend is declared. But from the view point of sound commercial policy, it is
desirable to apply current profits in making good lost capital before distribution
of dividends.
[Chapter #### 8] Objective Questions OOOO 2.271
(iv) Incorrect: The Companies Act, 1956 does not make it obligatory on the part of
the holding company to prepare group accounts or consolidated accounts. In
case, if a holding company prepares and present consolidated financial
statements, it has to follow the principles and procedures as laid down under
Accounting Standard (AS) ! 21.
(v) Incorrect: Transactions and other events are accounted for and presented in
accordance with their substance and financial reality and not merely with their
legal form. While the legal form of a lease agreement is that the lessee may
acquire no legal title to the leased asset, in the case of financial leases, the
substance and financial reality are that the lessee acquires the economic
benefits of the use of the leased assets for the major part of its economic life.
Therefore, a financial lease is recognized in the lessee's balance sheet both as
an asset and as an obligation to pay future lease payments.
2008 - Dec [1] {C} (b) Choose the most appropriate answer from the given options in
respect of the following :
(i) Securities premium money can be used for —
(a) Payment of dividend
(b) Writing off goodwill
(c) Issuance of fully paid bonus shares
(d) None of the above. (2)
(ii) Loss suffered from the date of acquisition of business to the date of incorporation
should be debited to —
(a) Goodwill account
(b) Profit and loss account
(c) Capital reserve account
(d) Capital reduction account. (4)
(iii) Pre-paid expenses are shown in balance sheet as —
(a) Current assets
(b) Intangible assets
(c) Wasting assets
(d) Fixed assets. (5)
(iv) The balance of forfeited shares after reissue of the same is transferred to —
(a) Capital reserve account
(b) Share capital account
(c) Profit and loss account
(d) Debenture redemption fund account. (2)
(v) Divisible profits include —
(a) General reserves
(b) Profit on revaluation of assets
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(c) Profit prior to incorporation period
(d) Capital reserve. (2)
(1 mark each)
Answer :
(i) (c) Issuance of fully paid bonus shares;
(ii) (a) Goodwill account;
(iii) (a) Current assets;
(iv) (a) Capital reserve account;
(v) (a) General reserves;
2008 - Dec [1] {C} (c) Re !write the following sentences after filling !up the blank
spaces with appropriate word (s)/ figure (s) :
(i) Accounting as a 'language of business' communicates the financial results of
corporate enterprise to various ___ by means of financial statements. (1)
(ii) If a company offers to its equity shareholders the right to buy one equity share
of ` 100 each at ` 120 for every 4 equity share of ` 100 each and the market
value of a share is ` 180, then the value of the right is ` _________ . (2)
(iii) The bonus share can be issued only if _______ of the company permits such an
issue . (2)
(iv) Accounting Standard ! 17 : Segment reporting is mandatory for all commercial,
industrial and business reporting corporate enterprises, whose turnover for the
accounting period exceeds ` _______ . (1)
(v) Consolidated financial statements are presented by a ______ company to
provide financial information about the economic activities of its group. (6)
(1 mark each)
Answer :
(i) Interested parties / stakeholders
(ii) ` 12
(iii) Articles of Association
(iv) 50 crores
(v) holding
2009 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect :
(i) Accounting Standards (AS) are formulated by International Accounting Standard
Board. (1)
(ii) A joint stock company cannot purchase its own shares. (2)
(iii) If the rate of dividend declared by a company is 22%, then under the Companies
(Transfer of Profits to Reserves) Rules, 1975 the percentage of profits to be
transferred to reserves should be 10%. (5)
[Chapter #### 8] Objective Questions OOOO 2.273
(iv) The law limits the commission in case of issue of shares to 10% of the issue
price of shares and in case of debentures to 5% or such lower rate as is provided
in the articles of association. (4)
(v) Contingent liabilities relating to outsiders must be shown on the liability side of
the consolidated balance sheet. (6)
(2 marks each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s) :(i) According to the provisions of section 198 of the Companies Act, 1956,
maximum limit on the total managerial remuneration payable by publiccompany is_______ of net profits. (5)
(ii) A company must pay the dividends within___ days of its declaration. (5)(iii) Preliminary expense is a _________ asset. (5)(iv) Discount on the issue of debenture is a_______ loss. (3)(v) If the purchase price of the debenture includes the interest for the expired
period. it is known as_______. (3)(1 mark each)
Answer :(a) (i) Incorrect: The Institute of Chartered Accountants of India constituted the
Accounting Standard Board (ASB) in April 1977. The Central Government inconsultation with the National Advisory Committee on Accounting Standard,Issues Accounting Standards under companies (Accounting Standard) Rules2006.
(ii) Incorrect : Section 77 A of the Companies (Amendment) Act, 1999 hasempowered Companies to purchase their own shares or other specifiedsecurities subject to the certain condition.
(iii) Correct : Under the Companies (Transfer of Profit to Reserve) Rules, 1975 asamended, if the rate of proposed dividend is more than 20%, then 10% ofcurrent profit is to be transferred to reserve.
(iv) Incorrect: The Companies Act, 1956 limits the Commission in case of issueof shares to 5 percent of the issue Price of Shares and in case of debenturesto 2.5 percent of such lower rate mentioned in the Articles of Association.
(v) Incorrect: Contingent liabilities relating to outsiders are not shown on theliability size of the consolidated balance sheet. It will be shown as contingentliability by way of not/footnote.
(b) (i) 11%(ii) 30 days(iii) fictitious asset.(iv) Capital(v) Cum-interest purchase/quotation
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2009 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements arecorrect or incorrect :
(i) Interest on debentures is payable only when there is profit. (3)(ii) An underwriter while entering into a contract for issue of shares should be a
company. (4)(iii) Partly paid-up preference shares can be redeemed. (2)(iv) Dividend can be paid on calls-in advance. (2)(v) Interest cannot be paid out of capital during construction period. (5)
(2 marks each)(b) Choose the most appropriate answer from the given options in respect of the
following :(i) As per the provisions laid down in Table-A of Schedule-I of the Companies
Act, 1956, the amount of call as the percentage of the face value of sharesshould not exceed —(a) 10%(b) 25%(c) 20%(d) None of the above. (2)
(ii) The minimum percentage of the face value of shares that should be called foras application money is —(a) 5(b) 10(c) 15(d) 20. (2)
(iii) Debentures issued as collateral security will be debited to —(a) Bank account (b) Debentures suspense account(c) Debentures account(d) Collateral security account. (3)
(iv) Preliminary expenses are —(a) Current liability(b) Current assets(c) Fictitious assets(d) Contingent liability. (5)
(v) As per section 77A of the Companies Act, 1956 every buy-back should becompleted within a period of —(a) 3 months from the date of passing special resolution(b) 12 months from the date of passing special resolution(c) 6 months from the date of passing special resolution
(d) 1 month from the date of passing special resolution. (2)
(1 mark each)
[Chapter #### 8] Objective Questions OOOO 2.275
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word (s)/figure(s) :
(i) Issue of debentures to vendors is known as issue of debentures______. (3)
(ii) Profit prior to incorporation should be credited to______account. (4)
(iii) If forfeited shares are re-issued at a discount, the amount of discount should
in no case exceed the amount credited to______. (2)
(iv) Accounting standards are formulated under the authority of the _____. (1)
(v) Yield basis valuation of shares may take the form of valuation based on rate
of return and ______. (7)
(1 mark each)
Answer :
(a) (i) Incorrect : Interest on debenture is obligatory and it must be payable to the
debenture holder whether the company carries profit or not. It is a charge
against profit. Hence, company is liable to pay interest on debenture even if no
profit earned.
(ii) Incorrect : The underwriters may be individual/partnership or Joint Stock
Companies.
(iii) Incorrect : According to Section 80 of the Companies Act, 1956 unless the
partly paid preference shares are fully paid-up they cannot be redeemed.
(iv) Incorrect : Calls in advance is not to be treated as part of the paid-up capital
and as such they cannot rank for payment of dividend.
(v) Incorrect : Section 208 of the Companies Act- provides that payment of interest
during the period of construction should be charged to capital and the amount
of interest, therefore paid should be added to the cost of respective asset as part
of the cost of construction.
(b) (i) (b)
(ii) (a)
(iii) (b)
(iv) (c)
(v) (b)
(c) (i) for consideration other than cash
(ii) Capital reserve
(iii) Shares of forfeited account.
(iv) Council of the Institute of Chartered Accountants of India
(v) Productivity factor.
2010 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are correct or incorrect:
(i) Accounting policies vary from enterprise to enterprise. (1)
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(ii) In the absence of declaration of dividend, there is no need to provide fordepreciation in the accounts of companies. (5)
(iii) Securities premium money can be distributed as dividend. (2)(iv) For calculating minority interest, there is a need to distinguish between capital
and revenue profits of the subsidiary. (6)(v) While preparing the consolidated balance sheet, a contingent liability in respect
of a transaction between the holding and the subsidiary companies isdisappeared from the foot note. (6)
(2 marks each)(b) Choose the most appropriate answer from the given options in respect of the
following:(i) Indian accounting standards are formulated under the authority of the—
(a) Council of the Institute of Chartered Accountants of India(b) National Advisory Committee on Accounting Standards(c) International Accounting Standard Board(d) Account Standard Board. (1)
(ii) As per section 79 of the Companies Act, 1956 from the date of receiving thesanction of the Central Government, a company must issue shares atdiscount within a period of—(a) One month(b) Two months(c) Three months(d) Six months. (2)
(iii) As per section 387 of the Companies Act, 1956, total remuneration tomanager should not exceed the rate of net profit of the company except withapproval of the Central Government—(a) 5%(b) 2%(c) 11%(d) 10%. (5)
(iv) Profit on cancellation of own debentures should be transferred to—(a) Profit and loss account(b) Profit and loss appropriation account(c) Capital reserve account(d) Reserve capital account. (3)
(v) Profit prior to incorporation is transferred to—(a) General reserve(b) Capital reserve(c) Goodwill account(d) Profit and loss account. (4)
(1 mark each)
[Chapter #### 8] Objective Questions OOOO 2.277
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Goodwill is asset. (5)
(ii) Preliminary expenses being of capital nature may be written-off against
. (5)
(iii) Collateral security implies security given for a loan. (3)
(iv) Interim dividend is a dividend declared at any time between the
where the final dividend is declared. (5)
(v) Stock reserve for unrealised profit in respect of inter-company transactions
should be created by debiting and crediting while
preparing consolidated profit and loss account. (6)
(1 mark each)
Answer :
(a) (i) This statement is correct : Reason :- Accounting policies is differ from
enterprise to enterprise based on the circumstances of the industry. All
significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. Variation may be in the following
areas such as—
(a) method of depreciation:
(b) depletion :
(c) valuation of inventories
(d) valuation of investment
(e) expenditure during construction.
(ii) This statement is Incorrect : Reason :- Depreciation represents wear and
tear of assets due to stable use unless, depreciation is provide for, the
accounts will not reflect a “ true and fair” view of the state of affairs of the
company.
Therefore, even if no dividend is declared depreciation is to be provided in the
accounts of companies.
(iii) This statement is Incorrect :Reason :- According to Section 78 of the
Companies Act,1956, Securities premium can not be treated as profit and
hence, cannot be distributed as dividend. Securities premium may be utilised,
in paying up unissued shares as —
(a) fully paid bonus shares;
(b) writing off preliminary expenses;
(c) writing off expenses, or commission paid and
(d) Providing for premium on redemption of redeemable preference
shares/debentures
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(iv) This statement is Incorrect : Reason :- The shares of shareholders other
than holding company in the share capital, reserve and profit of subsidiary
company. In order to ascertain minority interest, capital profit and revenue
profit need not be distinguished.
(v) This statement is Correct : Reason :- If the contingent liabilities relate to
outsider. It must be shown by way a foot note in the consolidated balance
sheet. But a contingent liabilities in respect of a transaction between holding
companies and subsidiary companies will disappear from the foot note as
they appear as actual liability in the consolidated balance sheet.
(b) (i) (a)
(ii) (b)
(iii) (a)
(iv) (c)
(v) (b)
(c) (i) intangible
(ii) capital profit.
(iii) additional
(iv) two annual general meeting
(v) consolidated Profit and Loss Account and Stock Reserve Account.
2010 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(i) Accounting Standard-15 deals with earnings per share. (1)
(ii) Premium on issue of debentures shall be credited to debentures account along
with nominal value of debentures. (3)
(iii) As per Accounting Standard-26, intangible asset arising from research should
not be recognised as an asset. (1)
(iv) No buy-back of partly-paid shares is allowed. (2)
(v) An underwriter while entering into a contract for issue of shares should be a
registered company. (4)
(2 marks each)
(b) Choose the most appropriate answer from the given options in respect of the
following :
(i) In case of part redemption of debentures, the balance in sinking fund is equal
to !
(a) 50% of the amount of debentures issued till that date
(b) 75% of the amount of debentures issued till that date
(c) In proportion to the issue of debentures till that date
(d) No limit. (3)
[Chapter #### 8] Objective Questions OOOO 2.279
(ii) The International Financial Reporting Standard-4 deals with !
(a) Share based payments
(b) Financial investments
(c) Insurance contracts
(d) Evaluation of mineral resources. (1)
(iii) Which one is not a statistical book !
(a) Shares calls book
(b) Register of share warrants
(c) Register of power of attorneys
(d) Register of directors’ shareholdings. (2)
(iv) Securities premium account is shown on the liability side under the heading !
(a) Share capital
(b) Reserves and surplus
(c) Current liabilities and provisions
(d) None of the above. (2)
(v) Loss suffered from the date of acquisition of business to the date of
incorporation should be debited to !
(a) Goodwill account
(b) Profit and loss account
(c) Capital reserve account
(d) Capital reduction account (4)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word (s)/figure(s) :
(i) The applications bearing the stamp of the respective underwriters are
called____. (4)
(ii) The debentures issued as collateral security has to be mentioned by way of
a note in the balance sheet under__________. (3)
(iii) The International Financial Reporting Standard-8 deals with _______. (1)
(iv) _________ advises the Central Government on the formulation and
implementation of Accounting Standards in India. (1)
(v) The voluntary return of shares by a shareholder to the company for
cancellation is called . (2)
(1 mark each)
Answer
(a) (i) False : Accounting Standard (AS) - 15 deals with Employee Benefits while
Accounting Standard (AS) - 20 deals with Earning Per Share
(ii) False: Premium on issue of debentures shall be credited to Securities
Premium Account.
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(iii) True : Intangible assets arising from research is recognized as an expense
when it is incurred as per Accounting Standard (AS) -26, hence it is not an
intangible asset.
(iv) True : Buy-back of shares is allowed only in case of fully paid-up existing
shares in accordance with Section 77 of the Companies Act, 1956.
(v) False: The underwriter need not be a registered company, it can be an
individual or partnership firm also.
(b) (i) (a) 50% of the debentures issued till date.
(ii) (c) Insurance contracts
(iii) (d) Register of directors' shareholdings
(iv) (b) Reserve and surplus
(v) (a) Goodwill account.
(c) (i) The applications bearing the stamp of the respective underwriters are called
marked applications.
(ii) The debentures issued as collateral security has to be mentioned by way of
a note in the balance sheet under specific loan account.
(iii) The International Financial Reporting Standard-8 deals with Operating
Segments,
(iv) National Advisory Committee on Accounting Standards (NACAS)
advises the Central Government on the formulation and implementation of
Accounting Standards in India.
(v) The voluntary return of shares by a shareholder to the company for
cancellation is called surrender of shares .
2011 - June [1] {C} (a) Write the most appropriate answer from the given options in
respect of the following :
(i) As per section 77A(4) of the Companies Act, 1956 from the date of passing the
special resolution, every buy-back should be completed within—
(a) 12 Months
(b) 3 Months
(c) 6 Months
(d) 9 Months. (2)
(ii) Profit prior to incorporation is transferred to —
(a) General reserve
(b) Capital reserve
(c) Profit and loss account
(d) None of the above. (4)
[Chapter #### 8] Objective Questions OOOO 2.281
(iii) Dividends are usually paid on —(a) Paid-up capital (b) Authorised capital (c) Called up capital (d) Subscribed capital. (5)
(iv) Sinking fund for the redemption of debentures is an instance of —(a) Reserve (b) Provision (c) Reserve fund(d) Reserves and surplus. (3)
(v) At the time of issuance, shares can be underwritten by —(a) Only one underwriter (b) At least 2 or more persons jointly(c) Any number of underwriters (d) None of the above. (4)
(1 mark each)(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)figure(s) :(i) Preliminary expenses being of capital nature may be written-off
against_______. (5)(ii) Companies declaring, distributing or paying dividends are liable to pay tax on
the same at prescribed rate which is known as _________. (5)(iii) An intangible asset should be _________ on disposal or when no future
economic benefits are expected from its use and subsequent disposal. (7)(iv) The value of the right is the difference between ________and the
_________of the share. (2)(v) The fair value of a share is the average of the value of the share obtained by
the _________ method and ________method. (7)(1 mark each)
(c) State, with reasons in brief, whether the following statements are true or false :(i) According to section 80 of the Companies Act, 1956, the redemption of
preference shares by a company shall be taken as reducing the amount of itsauthorised share capital. (2)
(ii) A profit and loss account is a point statement whereas a balance sheet is aperiod statement. (5)
(iii) Internally generated goodwill should not be recognised as an asset. (7)(iv) A company can enforce its lien by forfeiting the shares. (2)(v) A limited company can retain excess application money as calls-in-advance
even if there is no provision in the articles of association. (2)(2 marks each)
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Answer :
(a) (i) (a) 12 Months
(ii) (b) Capital reserve
(iii) (a) Paid up capital
(iv) (c) Reserve fund
(v) (c) Any number of underwriters
(b) (i) Capital Profits
(ii) Tax on distributed Profits
(iii) Derecognized or eliminated from balance sheet
(iv) Market value; Average price
(v) Net assets; Yield
(c) (i) False : According to Section 80 of the companies Act, the redemption of
preference shares shall not be taken as reducing the amount of its authorised
capital. The main object of Section 80, is to protect the interests of the
creditors of the company. As such the capital structure of the company will
remain unaffected even after the Redemption of Preference Shares.
(ii) False : A profit & Loss account is a periodic statement and a balance sheet
is a point statement. Balance sheet is prepared at the end of the financial year
whereas profit and loss account is prepared for the financial year.
(iii) True : An internally generated goodwill should not be recognized as an asset.
However, intangible assets arising from development phase should be
recognized only if certain conditions are fulfilled.
(iv) False : A company cannot enforce its lien by forfeiting the shares because by
virtue of lien, the company has prior right to the shares over any creditor to
whom they are given as security for a loan unless the company was given
prior notice of an existing mortgage or pledge of these shares.
(v) False : A limited company can retain excess application as calls in advance
when the following two conditions are satisfied :
(a) The Articles of the company provide for the acceptance of calls in
advance.
(b) The consent of the applicant has been taken either by a separate letter
or by inserting a clause in the company's prospectus or application form.
2011 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) The term ‘distributable profits’ means profits which would otherwise be available
for dividends. (5)
(ii) The logic behind the creation of the capital redemption reserve is to maintain the
capital structure of the company intact after redemption. (2)
[Chapter #### 8] Objective Questions OOOO 2.283
(iii) Underwriting commission and brokerage both cannot be provided to any
individual underwriter. (4)
(iv) A debenture issued at a discount cannot be redeemed at a premium. (3)
(v) International Accounting Standard-1 deals with valuation of inventories. (1)
(2 marks each)
(b) Write the most appropriate answer from the given options in respect of the following:
(i) The balance of sinking fund account is transferred to —
(a) Share capital account
(b) General reserve account
(c) Profit and loss account
(d) Sinking fund investment account. (3)
(ii) When interest on own debentures becomes due, it will be credited to —
(a) Profit and loss account
(b) Own debentures account
(c) Debenture interest account
(d) Interest on own debentures account. (3)
(iii) Expenses incidental to the creation and floatation of a company are called —
(a) Underwriting expenses
(b) Preliminary expenses
(c) Trade expenses
(d) Establishment expenses. (4)
(iv) The item ‘unpaid dividend’ appears in the balance sheet of a company under the
heading —
(a) Current assets, loans and advances
(b) Reserves and surplus
(c) Secured loans
(d) Current liabilities and provisions. (5)
(v) Premium on issue of shares can be used for —
(a) Issue of bonus shares
(b) Distribution of profit
(c) Meeting loss on sale of a fixed asset
(d) None of the above. (2)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Shares forfeited account is to be shown in the balance sheet by way of _______
to the paid-up share capital on the liabilities side until the concerned shares are
re-issued. (2)
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(ii) International Accounting Standards (IAS)/International Financial Reporting
Standards (IFRS) are issued by the __________. (1)
(iii) Unless loss prior to incorporation is completely written off, it must be shown as
an asset in the assets side of the balance sheet under the heading ________.
(4)
(iv) According to section 209(4A) of the Companies Act, 1956, a company must
preserve its books of account and its relevant vouchers for a minimum period of
___________. (2)
(v) A company cannot issue redeemable preference shares for a period exceeding
___________. (2)
(1 mark each)
Answer :(a)(i) The statement is true: The profits which are available legally for distribution of
dividend are called distributable profit. The profits which the law allows thecompany to distribute to the share holders by way of dividend. In other words,dividend is nothing but the distribution of divisible or distributable profits of acompany among its share holders.
(ii) The statement is true: The most important purpose for the creation of capitalredemption reserve is to maintain the capital intact. The capital structure of thecompany will remain unaffected even after the redemption of redeemablepreference shares. Therefore, the capital redemption reserve can be used onlyfor issue of bonus shares, otherwise its amount has to be kept intact.
(iii) The statement is false: Underwriting commission is the consideration payableto the underwriters for underwriting the issue of shares or debentures of acompany.
The commission payable to brokers who induce their constituents tosubscribe for the shares is terms as brokerage but they do not take anyresponsibility of subscribing to the shares or debentures of the company.
(iv) The statement is false: The debentures issued at a discount can be redeemedat a premium. The loss to be recognized at the time of the issue of suchdebentures will be equal to the total of the amount on issue and the amount ofpremium on redemption.
(v) The statement is false: International Accounting Standard 1 deals with thefinancial statement the standard provides the minimum structure and contend ofthe basic financial statements.
(b) (i) (b) General Reserve Account.(ii) (d) Interest on own debenture account.(iii) (b) Preliminary expenses.(iv) (d) Current liabilities and provision.(v) (a) Issue of bonus shares.
[Chapter #### 8] Objective Questions OOOO 2.285
(c) (i) Addition.
(ii) International Accounting Standard.
(iii) Miscellaneous expenditure.
(iv) Eight years.
(v) Twenty years.
2012 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(i) A company can issue debentures with voting rights. (2)
(ii) The apportionment of profit or loss of the business between pre-incorporation
and post-incorporation periods can be done on time basis only. (4)
(iii) Contingent liability in respect of a transaction between holding and subsidiary
companies must be shown by way of a footnote in the consolidated balance
sheet. (6)
(iv) Debentureholders are not the members of the company. (3)
(v) No dividend is paid on calls-in-advance. (2)
(2 marks each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Interest on debentures is a _________ against the profits of the company. (3)
(ii) The market value of a share is the product of price-earnings ratio and ____.
(7)
(iii) Partly paid-up preference shares cannot be __________. (2)
(iv) International Financial Reporting Standards are issued by _________. (1)
(v) Bonus shares are issued by a company free of charge to its existing
shareholders on __________ basis. (2)
(1 mark each)
(c) Write the most appropriate answer from the given options in respect of the following:
(i) A company cannot issue redeemable preference shares for a period
exceeding—
(a) 5 Years
(b) 10 Years
(c) 15 Years
(d) 20 Years. (2)
(ii) Which one of the following should be deducted from the share capital to find out
paid-up share capital —
(a) Share forfeiture
(b) Discount on issue of shares
(c) Calls-in-arrears
(d) Calls-in-advance. (2)
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(iii) At the time of conversion of debentures redeemable at par into equity shares tobe issued at discount, the amount to be credited in the equity share capitalaccount shall be —(a) Nominal value of debentures only(b) Nominal value of debentures plus discount on issue of shares(c) Nominal value of debentures minus discount on issue of shares(d) None of the above. (3)
(iv) In case of company intends to declare dividend @ 20%, it is required to transferan amount to general reserve —(a) Not less than 10% of current profit(b) Not less than 7½% of current profit(c) Not less than 5% of current profit(d) Not less than 2½% of current profit. (5)
(v) Accounting Standards —(a) Harmonise accounting policies(b) Eliminate the non-comparability of financial statements(c) Improve the reliability of financial statements(d) All of the above. (1)
(1 mark each)Answer :(a) (i) The statement is False: The company cannot issue debentures with voting
rights. The debenture holders does not have right to vote in the companiesgeneral meetings, but where there is a effect in the rights attached to thedebentures they can vote.
(ii) The statement is False: Time basis apportionment of expenses principal isbased on the assumption that profits are carved by the business evenly wholeof the year. But in reality, since no business can be expected to earn its profitevenly whole of the year, apportionment of profit or loss slow on the basis of timeis not at all satisfactory.
Hence, apportionment of profit and loss of the business between pre and postincorporations should be done on equitable basis that is time basis or turn overbasis depending on the nature of each particular items.
(iii) The statement is False: Contigent liability relate to the outsiders must be shownby way of a footnote in the consolidated Balance Sheet. But a contigent liabilityin respect of a transaction between Holding and Subsidiary company will notappear in the footnote.
(iv) The statement is True: Debenture-holders are long term loan providers. Neitherthey are the members nor the owner of the company. Only the shareholders arethe members of the company.
(v) The statement is True: The dividend is paid on paid-up capital only. Such
capital does not include money received on calls-in-advance.
[Chapter #### 8] Objective Questions OOOO 2.287
(b) (i) Charge.
(ii) Earning per share.
(iii) Redeemed.
(iv) International Accounting Standards Board/IASB.
(v) Pro-rata.
(c) (i) (d) 20 years.
(ii) (c) Calls-in arrears.
(iii) (b) Nominal value of debentures plus discount on issue of shares.
(iv) (b) Not less than 7½% of current profits.
(v) (d) All of the above.
2012 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false :
(i) Rights shares mean the shares which are issued to promoters for their
services. (2)
(ii) Both underwriting commission and brokerage cannot be provided to an
individual underwriter. (4)
(iii) As per SEBI guidelines, an amount equal to 50% of the debenture issue must
be transferred to debenture redemption reserve before redemption begins. (3)
(iv) Preliminary expenses is an example of intangible asset. (5)
(v) Interim dividend paid is a charge against the profits. (5) (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following :
(i) Under section 205C of the Companies Act, 1956, the amount in the unpaid
dividend account is transferred to the Investor Education and Protection Fund
after the lapse of !
(a) 3 Years
(b) 5 Years
(c) 7 Years
(d) 10 Years. (5)
(ii) Discount allowed on the re-issue of forfeited shares cannot exceed !
(a) 10% of the paid-up capital
(b) 10% of the capital re-issued
(c) The amount received on forfeited shares
(d) The amount not received on forfeited shares. (2)
(iii) Redemption of preference shares of a company is !
(a) Compulsory
(b) Optional
(c) Conditional
(d) None of the above. (2)
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(iv) Which method is legally allowed for redemption of preference shares !(a) Issue of fresh equity shares(b) Sale of assets of the company(c) Issue of debentures(d) Loan from the bank. (2)
(v) Profit prior to incorporation of a company is transferred to !(a) General reserve(b) Capital reserve(c) Goodwill account(d) Statement of profit and loss. (4) (1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriateword(s)/figure(s) :(i) Sections 349 and 350 of the Companies Act, 1956 contain the provisions
relating to the manner of determination of net profits for the purpose ofcalculating the ________ . (5)
(ii) A company may allot fully paid-up shares to promoters or any other party forthe services rendered by them without payment is known as issue of shares________ . (2)
(iii) To determine whether an intangible asset is impaired, an enterprise appliesAccounting Standard on ________ . (1)
(iv) International Accounting Standards (IAS)/International Financial ReportingStandards (IFRS) are issued by the ________ . (1)
(v) Deferred tax assets are shown under the head ________ in the balance sheetof a company. (5) (1 mark each)
Answer: (a) (i) This Statement is false
Reason: When a company which has already issued shares wants to raisecapital through the further issue of shares. it is under a legal obligation to firstoffer the fresh shares to its existing shareholders unless, the company hasresolved otherwise by a special resolutions. So right share are not issued topromoter for their services.
(ii) This Statement is false:Both underwriting commission i.e. brokerage can be paid to an individual asunderwriting commission is paid to an underwriter in addition to brokerage fortaking the responsibility to get full subscription to the shares and debentures ofthe company.
(iii) This Statements is True: The company shall create debentures Redemption Reserve equivalent to at-least 50% of the amount of debentures before starting the redemption ofdebentures.
[Chapter #### 8] Objective Questions OOOO 2.289
(iv) This Statement is false: Preliminary expenses is an example of fictitious asset
and not of an intangible assets
(v) This Statement is false: interim Dividend thus paid is an appropriation of profit
and not a charge against the profit.
(b) (i) (c) 7 years.
(ii) (c) The amount received on forfeited shares,
(iii) (a) Compulsory,
(iv) (a) Issue of fresh equity shares
(v) (b) Capital reserve.
(c) (i) Managerial remuneration
(ii) For consideration other than cash.
(iii) Impairment of assets
(iv) International Accounting Standards Board.
(v) Non current assets.
2013 - June [1] {C} (a) State, with reasons in brief, whether the following statements
are true or false:
(i) The existing equity shareholders are necessarily to accept the rights offer. (2)
(ii) Contingent liability in respect of a transaction between holding and wholly owned
subsidiary companies will not appear in the footnote of the consolidated balance
sheet. (6)
(iii) In case of inter-company unrealised profits included in unsold goods, minority
shareholders are not affected in any way. (6)
(iv) In case of inadequacy of profits, dividend can be paid out of capital reserve.
(5)
(v) Redemption of preference shares amounts to reduction in the capital of the
company. (2)
(2 marks each)
(b) Write the most appropriate answer from the given options in respect of the following:
(i) Discount allowed on the re-issue of forfeited shares cannot exceed —
(a) 10% of paid-up capital
(b) 10% of the capital re-issued
(c) The amount received on forfeited shares
(d) Capital reserve account. (2)
(ii) Sections 349 and 350 of the Companies Act, 1956 contain the provisions relating
to the manner of determination of net profit for the purpose of calculating the —
(a) Disposal of net profit
(b) Managerial remuneration
(c) Fair value of assets
(d) Fair value of shares. (5)
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(iii) As per Accounting Standard-28, an impairment loss should be recognised
whenever the recoverable amount of an asset is less than its —
(a) Original cost
(b) Opportunity cost
(c) Carrying amount
(d) None of the above. (1)
(iv) When a company issues debentures at par or at a discount which are
redeemable at a premium, the premium payable on redemption of the
debentures is to be treated as —
(a) Revenue loss
(b) Capital loss
(c) Deferred revenue expenditure
(d) None of the above. (3)
(v) Expenses incidental to the creation and floatation of a company are called —
(a) Underwriting expenses
(b) Preliminary expenses
(c) Trade expenses
(d) Establishment expenses. (4)
(1 mark each)
(c) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Section 81 of the Companies Act, 1956, provides that where a public company
proposes to increase its subscribed capital at any time after the expiry of
__________year(s) of its formation or at any time after the expiry of __________
year(s) from the first allotment of shares whichever is earlier, it should satisfy
certain conditions. (2)
(ii) Preliminary expenses being of capital nature may be written-off against_______.
(4)
(iii) Goodwill is an intangible asset, but is not a ________asset. (7)
(iv) Accumulated losses of the subsidiary company upto the date of acquisition of
shares by the holding company are called _________ losses. (6)
(v) International Accounting Standards are issued by the ________. (1)
(1 mark each)
Answer :
(a) (i) This Statement is false.
Reason : According to Section 81 of the Companies Act, the new shares must
be offered to the existing equity shareholder to the paid up capital on the share
held by them. This is a right not an obligation to the shareholder accept the offer
so made. This is known as right issue.
[Chapter #### 8] Objective Questions OOOO 2.291
(ii) This Statement is true.
Reason : Contingent liabilities relating to outsider must be shown by way of a
footnote in the consolidated balance sheet. But a contingent liabilities in respect
of a transaction between holding and subsidiary company will not appear in the
footnote since it become internal contingent liability.
(iii) This Statement is true.
Reason : The unrealized profit should be deducted from the current revenue
profits of the company which had sold goods and same should also be
deducted from the value of the stock in trade of the company.
(iv) This Statement is false.
Reason : The dividend cannot be paid out of capital reserve unless certain
conditions are satisfied. The amount of divided should only be declared out of
current year profits but after meeting all the expenses, providing for depreciation
of all assets used in the business, taxation or writing off losses.
(v) This Statement is false.
Reason : Redemption of preference share does not amount to reduction of
share capital of the company. Redemption of preference shares can be made
out of dividend or fresh issue of shares or both.
(b) (i) (c)The amount received on forfeited shares.
(ii) (b)Managerial remuneration.
(iii) (c)Carrying amount.
(iv) (b)Capital loss.
(v) (b)Preliminary expenses.
(c) (i) Two and one
(ii) Capital profits
(iii) Fictitious
(iv) Pre-acquisition
(v) International Accounting Standard Board.
2013 - Dec [1] {C} (a) State, with reasons in brief, whether the following statements are
true or false:
(i) The shares which can be issued to shareholders for no payment are called rights
shares. (2)
(ii) Partly paid-up preference shares cannot be redeemed. (2)
(iii) As per SEBI guidelines, an amount equal to 50% of the debentures issued must
be transferred to debenture redemption reserve account before redemption
begins. (3)
(iv) Accounting standards standardise diverse accounting policies. (1)
(v) Prepaid expenses and deferred revenue expenses are the same. (5)
(2 marks each)
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2013 - Dec [1] {C} (b) Write the most appropriate answer from the given options in
respect of the following:
(i) The balance of debenture redemption fund investment account after the
realisation of investment is transferred to !
(a) Profit and loss account
(b) Profit and loss appropriation account
(c) Debenture account
(d) Debenture redemption fund account. (3)
(ii) Carriage outwards should be divided between pre-incorporation and post-
incorporation periods !
(a) In time ratio
(b) In weighted time ratio
(c) In sales ratio
(d) None of the above. (4)
(iii) Fair value method of valuation of shares is considered most appropriate
because, it is based on !
(a) Earnings
(b) Net assets
(c) Earnings and net assets
(d) None of the above. (7)
(iv) On re-issue of forfeited shares, balance in shares forfeited account is transferred
to !
(a) Share capital account
(b) Capital reserve account
(c) Securities premium account
(d) Profit and loss account. (1)
(v) Accounting Standard - 26 relates to !
(a) Impairment of assets
(b) Intangible assets
(c) Earnings per share
(d) Interim financial reporting. (5) (1 mark each)
2013 - Dec [1] {C} (c) Re-write the following sentences after filling-in the blank spaces
with appropriate word(s)/figure(s) :
(i) Shares are issued at premium under section _____ of the Companies Act, 1956.
(2)
(ii) International Accounting Standards/International Financial Reporting Standards
are issued by the ________ . (1)
(iii) Deffered tax assets are shown under the head _____ in the balance sheet of a
company. (5)
[Chapter #### 8] Objective Questions OOOO 2.293
(iv) ______ expenses refer to those expenses incidental to the creation and flotation
of a company. (5)
(v) The minority shareholders’ share of pre-acquisition losses of subsidiary company
shall be deducted from the amount of _______ . (6)
(1 mark each)
Table Showing Marks of Compulsory Questions
Year 09
J
09
D
10
J
10
D
11
J
11
D
12
J
12
D
13
J
13
D
Objective 15 20 20 20 20 20 20 20 20 20
Total 15 20 20 20 20 20 20 20 20 20
2.294
June - 2012
Company Accounts
Paper 2A
Part — A
(Answer Question No. 1 which is compulsory
and any two of the rest from this part.)
1. (a) State, with reasons in brief, whether the following statements are true or false:
(i) A company can issue debentures with voting rights.
(ii) The apportionment of profit or loss of the business between pre-
incorporation and post-incorporation periods can be done on time basis
only.
(iii) Contingent liability in respect of a transaction between holding and
subsidiary companies must be shown by way of a footnote in the
consolidated balance sheet.
(iv) Debentureholders are not the members of the company.
(v) No dividend is paid on calls-in-advance. (2 marks each)
(b) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s):
(i) Interest on debentures is a _________ against the profits of the company.
(ii) The market value of a share is the product of price-earnings ratio and
______.
(iii) Partly paid-up preference shares cannot be __________.
(iv) International Financial Reporting Standards are issued by _________.
(v) Bonus shares are issued by a company free of charge to its existing
shareholders on __________ basis. (1 mark each)
(c) Write the most appropriate answer from the given options in respect of the
following:
(i) A company cannot issue redeemable preference shares for a period
exceeding—
(a) 5 Years
(b) 10 Years
(c) 15 Years
(d) 20 Years.
(ii) Which one of the following should be deducted from the share capital to
find out paid-up share capital —
(a) Share forfeiture
(b) Discount on issue of shares
Question Papers OOOO 2.295
(c) Calls-in-arrears
(d) Calls-in-advance.
(iii) At the time of conversion of debentures redeemable at par into equity
shares to be issued at discount, the amount to be credited in the equity
share capital account shall be —
(a) Nominal value of debentures only
(b) Nominal value of debentures plus discount on issue of shares
(c) Nominal value of debentures minus discount on issue of shares
(d) None of the above.
(iv) In case of company intends to declare dividend @ 20%, it is required to
transfer an amount to general reserve —
(a) Not less than 10% of current profit
(b) Not less than 7½% of current profit
(c) Not less than 5% of current profit
(d) Not less than 2½% of current profit.
(v) Accounting Standards —
(a) Harmonise accounting policies
(b) Eliminate the non-comparability of financial statements
(c) Improve the reliability of financial statements
(d) All of the above. (1 mark each)
2. (a) The following are the balance sheets of X Ltd. and its subsidiary Y Ltd. as on
31st March, 2011:
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
(`̀̀̀) (`̀̀̀) (`̀̀̀) (`̀̀̀)
Equity shares of Equipments 2,50,000 95,000
` 10 each 4,00,000 1,00,000 Investment (9,000 equity
Profit and loss account 50,000 20,000 shares in Y Ltd. on
External liabilities 7,50,000 4,80,000 1st April, 2010) 1,40,000 —
Other assets 8,10,000 5,05,000
12,00,000 6,00,000 12,00,000 6,00,000
On 1st April, 2010, profit and loss account of Y Ltd. showed a credit balance
of `̀̀̀ 8,000 and equipments of Y Ltd. were revalued by X Ltd. at 20% above its
book value of ` 1,00,000 (but no such adjustment affected in the books of Y
Ltd.)
Prepare the consolidated balance sheet as on 31st March, 2011. (6 marks)
(b) The Underwriters Ltd. agreed to underwrite the new issue of 50,000 equity
shares of ` 100 each of A Ltd. The agreed commission was 5% payable as
40% in cash and rest in fully paid-up equity shares. The public subscribed for
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30,000 shares and the rest had to be taken by the underwriters. These shares
were subsequently quoted in the market at 10% discount.
Pass the necessary journal entries in the books of A Ltd. (6 marks)
(c) Write a brief note on ‘buy-back of shares’. (3 marks)
3. (a) Moon Ltd. was incorporated on 30th September, 2009 to takeover the business
of Star Ltd. from 1st April, 2009. The financial accounts for the business for the
year ended 31st March, 2010 disclosed the following information:
`̀̀̀
Sales from 1-04-2009 to 30-09-2009 1,20,00,000
Sales from 1-10-2009 to 31-03-2010 1,80,00,000
Cost of sales 1,95,00,000
Salaries 15,00,000
Other administrative expenses (rent and rates) 4,50,000
Selling expenses 3,00,000
Directors’ remuneration 75,000
Depreciation of fixed assets 1,50,000
Interest on debentures 9,000
You are required to prepare the profit and loss account for the year ended
31st March, 2010 showing computation of profit between the periods prior to
and after incorporation. (6 marks)
(b) The balance sheet of Do Well Ltd. as on 31st March, 2010 was as follows:
Liabilities `̀̀̀ Assets `̀̀̀
Share capital in ` 10 per share 2,00,000 Freehold property 1,00,000
Profit and loss account 1,20,000 Stock 1,20,000
6% Debentures 1,20,000 Debtors 80,000
Creditors 60,000 Balance at bank 2,20,000
Proposed dividend 20,000
5,20,000 5,20,000
At the annual general meeting held on 18th April, 2010 it was resolved:
(i) To declare dividend of 10% for the accounting year ended on 31st March,
2010.
(ii) To issue one bonus share for every 4 shares held out of profit and loss
account.
(iii) To give existing shareholders the option to purchase for cash one share
for ̀ 15 for every 4 shares held prior to the bonus distribution. This option
was accepted by all the shareholders. (On this no bonus share will be
given).
(iv) To redeem the debentures at a premium of 3%.
Question Papers OOOO 2.297
Assuming that the authorised share capital is enough and dividends have
been paid in full, pass necessary journal entries and prepare the balance
sheet after these transactions are completed. Ignore dividend distribution tax.
(9 marks)
4. (a) Following was the balance sheet of Raman Ltd. as on 31st March, 2011:
Liabilities `̀̀̀ Assets `̀̀̀
4,000 Equity shares of ` 100 each 4,00,000 Building at cost 60,000
Reserve fund 1,00,000 Furniture 5,000
Profit and loss account (including Stock (market value) 4,00,000
` 3,00,000 before tax for 2010-11) 4,00,000 5% Investments (at cost) 3,00,000
Depreciation fund: Debtors 3,00,000
Building 15,000 Bank 35,000
Investment 30,000 45,000
6% Debentures 1,00,000
Creditors 45,000
Provision for doubtful debts 10,000
11,00,000 11,00,000
The present value of building is worth ` 1,10,000.
Public companies doing similar business show a profit earning capacity
of 12% on capital employed on the business. The real value of goodwill may
be taken at ` 2,00,000. You are required to calculate the yield value of the
shares of the company assuming that the tax rate is 35%. (9 marks)
(b) A company issued 12% debentures of the face value of ` 2,00,000 at 10%
discount on 1st January, 2010. Debenture interest after deducting tax at
source @ 10% was payable on 30th June and 31st December every year. All
the debentures were to be redeemed after the expiry of 5 years period at 5%
premium.
Pass the necessary journal entries. (6 marks)
December - 2012
Company Accounts
Paper 2A
Part — A
Answer Questions No. 1 which is compulsory
and any two of the rest from this part.
1. (a) State, with reasons in brief, whether the following statements are true or
false:
(i) Rights shares mean the shares which are issued to promoters for their
services.
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(ii) Both underwriting commission and brokerage cannot be provided to an
individual underwriter.
(iii) As per SEBI guidelines, an amount equal to 50% of the debenture issue
must be transferred to debenture redemption reserve before redemption
begins.
(iv) Preliminary expenses is an example of intangible asset.
(v) Interim dividend paid is a charge against the profits. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following :
(i) Under section 205C of the Companies Act, 1956, the amount in the
unpaid dividend account is transferred to the Investor Education and
Protection Fund after the lapse of !
(a) 3 Years
(b) 5 Years
(c) 7 Years
(d) 10 Years.
(ii) Discount allowed on the re-issue of forfeited shares cannot exceed !
(a) 10% of the paid-up capital
(b) 10% of the capital re-issued
(c) The amount received on forfeited shares
(d) The amount not received on forfeited shares.
(iii) Redemption of preference shares of a company is !
(a) Compulsory
(b) Optional
(c) Conditional
(d) None of the above.
(iv) Which method is legally allowed for redemption of preference shares !
(a) Issue of fresh equity shares
(b) Sale of assets of the company
(c) Issue of debentures
(d) Loan from the bank.
(v) Profit prior to incorporation of a company is transferred to !
(a) General reserve
(b) Capital reserve
(c) Goodwill account
(d) Statement of profit and loss. (1 mark each)
Question Papers OOOO 2.299
(c) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :
(i) Sections 349 and 350 of the Companies Act, 1956 contain the provisions
relating to the manner of determination of net profits for the purpose of
calculating the ________ .
(ii) A company may allot fully paid-up shares to promoters or any other party
for the services rendered by them without payment is known as issue of
shares ________ .
(iii) To determine whether an intangible asset is impaired, an enterprise
applies Accounting Standard on ________ .
(iv) International Accounting Standards (IAS)/International Financial
Reporting Standards (IFRS) are issued by the ________ .
(v) Deferred tax assets are shown under the head ________ in the balance
sheet of a company. (1 mark each)
2. (a) The summarised balance sheet of AB Ltd. as on 31st March, 2012 is as
follows:
Equity and Liabilities `
Equity shares of `10 each `
` 8 called up 80,000
Less : calls in arrears
`2 per share 300 79,700
1,000, 11% preference shares
of `100 each fully paid-up 1,00,000
Less : calls in arrears on 250 shares 5,000 95,000
Securities premium 5,300
Investment allowance 55,000
General reserve 50,000
Profit and loss (Surplus) 90,000
Trade payables 25,000
4,00,000
Assets
Land and building 1,50,000
Plants 50,000
Furniture 25,000
Investments (Face value `50,000) 45,000
Stock in trade 20,000
Trade receivables 30,000
Cash at bank 80,000
4,00,000
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The company resolved to :
(i) Realise investments at `40,000.
(ii) Forfeit equity shares on which calls are in arrears.
(iii) Issue 500, 14% debentures of `100 each at premium of 5%.
(iv) Forfeit preference shares on which the call money remained unpaid
immediately before the redemption of preference shares, holders of 200
shares paid their dues before forfeiture.
(v) Re-issue the forfeited preference shares at `50 each.
(vi) Re-issue the forfeited equity shares at `12 each as `8 paid-up.
Pass necessary journal entries to give effect to the above. (6 marks)
(b) Astro Ltd. has authorised capital of ` 50,00,000 divided into 1,00,000 equity
shares of ̀ 50 each. The company issued for subscription 50,000 shares at the
premium of `10 each. The entire issue was underwritten as follows :
Underwriter ! X 30,000 shares (firm underwriting ! 5,000 shares)
Underwriter ! Y 15,000 shares (firm underwriting ! 2,000 shares)
Underwriter ! Z 5,000 shares (firm underwriting ! 1,000 shares)
Out of the total issue, 45,000 shares including firm underwriting were
subscribed. The following were the marked forms:
Underwriter ! X 16,000 shares
Underwriter ! Y 10,000 shares
Underwriter ! Z 4,000 shares
You are required to !
(i) Calculate the liability of each underwriter; and
(ii) Make the accounting entries required to be passed in this regard.
(9 marks)
3. (a) Following are the balance sheets of H Ltd. and its subsidiary S Ltd. as on 31st
March, 2012 :
Equity and Liabilities H Ltd. S Ltd.
(`) (`)
Fully paid-up equity shares of `10 each 6,00,000 2,00,000
General reserve 3,40,000 80,000
Profit and loss (Surplus) 1,00,000 60,000
Trade payables 70,000 35,000
11,10,000 3,75,000
Assets
Machinery 3,90,000 1,35,000
Furniture 80,000 40,000
Investments (80% shares in S Ltd. at cost) 3,40,000 !
Question Papers OOOO 2.301
Stock 1,80,000 1,20,000
Trade receivables 50,000 30,000
Cash at bank 70,000 50,000
11,10,000 3,75,000
The following additional information is provided :
(i) Surplus in the profit and loss statement of S Ltd. stood at `30,000 on 1st
April, 2011 whereas general reserve has remained unchanged since that
date.
(ii) H Ltd. acquired 80% shares in S Ltd. on 1st October, 2011 for `3,40,000
as mentioned above.
(iii) A sum of ̀ 10,000 due from H Ltd. for goods sold at a profit of 25% on cost
price is included in trade receivables of S Ltd. Till 31st March, 2012, only
half of the goods had been sold while the remaining goods were lying in
the godowns of H Ltd. as on that date.
You are required to prepare the consolidated balance sheet as on 31st
March, 2012. Show all calculations. (9 marks)
(b) Fortune Ltd. issued `70,000, 12% debentures of `100 each at a premium of
5% redeemable at 110%.
You are required to !
(i) Show by means of journal entries how you would record the above issue.
(ii) Also show how they would appear in the balance sheet. (6 marks)
4. (a) Following is the summarised balance sheet of Victory Ltd. as on 31st March,
2012 :
Equity and Liabilities `
Share capital :
30,000 Equity shares of `10 each 3,00,000
General reserve 1,20,000
Capital reserve 40,000
Profit and loss (Surplus) 1,20,000
Proposed dividend 34,000
Trade payables 93,700
Income-tax payable 11,500
Provision for tax 82,500
8,01,700
Assets `
Freehold property 1,20,000
Plant and machinery 50,000
Stock 3,10,000
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Trade receivables 2,13,000
Bank balance 1,07,000
Cash in hand 1,700
8,01,700
Net profit (before taxation) for the past 3 years ended :
`
31-3-2010 1,38,000
31-3-2011 1,83,000
31-3-2012 1,97,000
On 31st March, 2012 freehold property was valued at ̀ 1,80,000 and plant and
machinery at ̀ 80,000. Average yield in this type of business is 15% on capital
employed.
Goodwill of the company is `1,00,000. The company transfers 20% of net
profits to general reserve, rate of tax is 50%.
You are required to find out !
(i) Value of each equity share; and
(ii) Fair value of each share. (6 marks)
(b) State the legal requirements relating to transfer of profits to reserves prior to
declaration and payment of dividend. (5 marks)
(c) Explain ‘cum-interest’ and ‘ex-interest’ in case of purchase of own debentures.
(4 marks)
June - 2013
Company Accounts
Paper 2A
Part — A
(Answer Question No. 1 which is compulsory
and any two of the rest from this part.)
1. (a) State, with reasons in brief, whether the following statements are true or false:
(i) The existing equity shareholders are necessarily to accept the rights
offer.
(ii) Contingent liability in respect of a transaction between holding and
wholly owned subsidiary companies will not appear in the footnote of the
consolidated balance sheet.
(iii) In case of inter-company unrealised profits included in unsold goods,
minority shareholders are not affected in any way.
Question Papers OOOO 2.303
(iv) In case of inadequacy of profits, dividend can be paid out of capital
reserve.
(v) Redemption of preference shares amounts to reduction in the capital of
the company. (2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following:
(i) Discount allowed on the re-issue of forfeited shares cannot exceed —
(a) 10% of paid-up capital
(b) 10% of the capital re-issued
(c) The amount received on forfeited shares
(d) Capital reserve account.
(ii) Sections 349 and 350 of the Companies Act, 1956 contain the
provisions relating to the manner of determination of net profit for the
purpose of calculating the —
(a) Disposal of net profit
(b) Managerial remuneration
(c) Fair value of assets
(d) Fair value of shares.
(iii) As per Accounting Standard-28, an impairment loss should be
recognised whenever the recoverable amount of an asset is less than
its —
(a) Original cost
(b) Opportunity cost
(c) Carrying amount
(d) None of the above.
(iv) When a company issues debentures at par or at a discont which are
redeemable at a premium, the premium payable on redemption of the
debentures is to be treated as —
(a) Revenue loss
(b) Capital loss
(c) Deferred revenue expenditure
(d) None of the above.
(v) Expenses incidental to the creation and floatation of a company are
called —
(a) Underwriting expenses
(b) Preliminary expenses
(c) Trade expenses
(d) Establishment expenses. (1 mark each)
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(c) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s):
(i) Section 81 of the Companies Act, 1956, provides that where a public
company proposes to increase its subscribed capital at any time after
the expiry of __________year(s) of its formation or at any time after the
expiry of __________ year(s) from the first allotment of shares
whichever is earlier, it should satisfy certain conditions.
(ii) Preliminary expenses being of capital nature may be written-off
against_______.
(iii) Goodwill is an intangible asset, but is not a ________asset.
(iv) Accumulated losses of the subsidiary company upto the date of
acquisition of shares by the holding company are called _________
losses.
(v) International Accounting Standards are issued by the ________.
(1 mark each)
2. (a) Calculate the value of one equity share from the following inform-ation:
(i) 60,000 equity shares of ` 10 each, ` 7 paid-up.
(ii) 2,00,000, 10% preference shares of ` 100 each, fully paid-up.
(iii) Expected annual profits before tax ` 4,00,000.
(iv) Tax rate 35%.
(v) Transfer to general reserve 20% of profits every year.
(vi) Normal rate of return 20%.
(6 marks)
(b) KBC Ltd. issued 50,000 equity shares. The whole of the issue was
underwritten as follows:
Underwriter – K : 40%
Underwriter – B : 30%
Underwriter – C : 30%
Applications for 40,000 shares were received in all, out of which applications
for 10,000 shares had the stamp of Underwriter - K; those for 5,000 shares
that of Underwriter- B; and those for 10,000 shares for Underwriter - C.
The remaining applications for 15,000 shares did not bear any stamp.
Determine the liability of the underwriters. (5 marks)
(c) Writer a note on ‘buy-back of shares’. (4 marks)
Question Papers OOOO 2.305
3. (a) The following are the balance sheets of H Ltd. and its subsidiary S Ltd. as on
31st March, 2012:
Equity and Liabilities H Ltd. S Ltd.
(`) (`)
Shareholders’ funds:
Share capital
Shares of ` 100 each fully paid 5,00,000 2,00,000
Reserves and surplus:
General reserve 1,00,000 —
Profit and loss account 80,000 (–) 1,00,000
Non-current liabilities:
6% Debentures — 1,00,000
Current liabilities:
Trade payables 75,000 45,000
7,55,000 2,45,000
Assets
Non-current assets:
Fixed assets 3,50,000 1,50,000
Non-current investments:
6% Debentures in S Ltd. (acquired at cost) 60,000 —
1,500 Shares in S Ltd. at ` 80 each 1,20,000 —
Current assets:
Inventories 90,000 40,000
Trade receivables 60,000 30,000
Cash 75,000 25,000
7,55,000 2,45,000
H Ltd. acquired the shares on 1st August, 2011. The profit and loss account of
S Ltd. showed a debit balance of ` 1,50,000 on 1st April, 2011. During June,
2011 goods of S Ltd. costing ` 6,000 were destroyed by fire against which
insurer paid only ̀ 2,000. Trade payables of S Ltd. include ̀ 20,000 for goods
supplied by H Ltd. on which H Ltd. made a profit of ` 2,000. Half of the goods
were still in stock on 31st March, 2012.
Prepare a consolidated balance sheet and show the complete working.
(9 marks)
(b) Shreya Ltd. had an issue of 1,000 12% redeemable preference shares of
` 100 each, repayable at a premium of 10%. These shares are to be
redeemednow out of the accumulated reserves, which are more than the
necessary sum required for redemption. Show the necessary entries in the
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books of the company, assuming that the premium on redemption of shares
has to be written off against the company’s securities premium reserve
account. (6 marks)
4. (a) A limited company issued a prospectus inviting applications for 30,000 shares
of ` 10 each at a premium of ` 2 per share. The amount was payable as
follows:
`
On application — 2
On allotment — 5 (including premium)
On first call — 3
On second and final call — 2
Applications were received for 45,000 shares and allotment was made on pro-
rata basis to the applicants of 36,000 shares. Money overpaid on applications
was employed on account of sum due on allotment.
Ramesh, to whom 600 shares were allotted, failed to pay the allotment money
and on his subsequent failure to pay the first call, his shares were forfeited.
Mohan, the holder of 900 shares failed to pay the two calls and his shares
were forfeited after the second and final call.
Of the shares forfeited, 1,200 shares were sold to Krishna credited as fully
paid for ` 9 per share, the whole of Ramesh’s share being included.
Show journal and cash book entries and prepare the balance sheet.
(12 marks)
(b) Explain the nature of profit or loss prior to incorporation. How is it treated in
the books of accounts? (3 marks)
December - 2013
Company Accounts
Paper 2A
Part — A
(Answer Question No.1 which is compulsory and
any two of the rest from this part.)
1. (a) State, with reasons in brief, whether the following statements are true or false:
(i) The shares which can be issued to shareholders for no payment are
called rights shares.
(ii) Partly paid-up preference shares cannot be redeemed.
Question Papers OOOO 2.307
(iii) As per SEBI guidelines, an amount equal to 50% of the debentures
issued must be transferred to debenture redemption reserve account
before redemption begins.
(iv) Accounting standards standardise diverse accounting policies.
(v) Prepaid expenses and deferred revenue expenses are the same.
(2 marks each)
(b) Write the most appropriate answer from the given options in respect of the
following:
(i) The balance of debenture redemption fund investment account after the
realisation of investment is transferred to !
(a) Profit and loss account
(b) Profit and loss appropriation account
(c) Debenture account
(d) Debenture redemption fund account.
(ii) Carriage outwards should be divided between pre-incorporation and post-
incorporation periods !
(a) In time ratio
(b) In weighted time ratio
(c) In sales ratio
(d) None of the above.
(iii) Fair value method of valuation of shares is considered most appropriate
because, it is based on !
(a) Earnings
(b) Net assets
(c) Earnings and net assets
(d) None of the above.
(iv) On re-issue of forfeited shares, balance in shares forfeited account is
transferred to !
(a) Share capital account
(b) Capital reserve account
(c) Securities premium account
(d) Profit and loss account.
(v) Accounting Standard - 26 relates to !
(a) Impairment of assets
(b) Intangible assets
(c) Earnings per share
(d) Interim financial reporting. (1 mark each)
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(c) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :
(i) Shares are issued at premium under section _____ of the Companies Act,
1956.
(ii) International Accounting Standards/International Financial Reporting
Standards are issued by the ________ .
(iii) Deffered tax assets are shown under the head _____ in the balance sheet
of a company.
(iv) ______ expenses refer to those expenses incidental to the creation and
flotation of a company.
(v) The minority shareholders’ share of pre-acquisition losses of subsidiary
company shall be deducted from the amount of _______.
(1 mark each)
2. (a) The following are the balance sheets of H Ltd. and S Ltd. as at 31st March,
2013:
I EQUITY AND LIABILITIES H. Ltd.(`) S. Ltd.(`)
(1) Shareholders’ Funds
(a) Share capital (` 100 each) 5,00,000 2,00,000
(b) Reserves and surplus
General reserve (1.4.2012) 1,00,000 60,000
Surplus (Profit & Loss a/c) 1,40,000 90,000
(2) Current Liabilities
Trade payables 80,000 90,000
TOTAL 8,20,000 4,40,000
II ASSETS
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 3,60,000 2,20,000
(ii) Goodwill 40,000 30,000
(b) Investments (1,500 shares is S.
Ltd.)
2,40,000 !
Question Papers OOOO 2.309
(2) Current assets
(a) Inventories 1,00,000 90,000
(b) Trade receivables 20,000 75,000
(c) Cash 60,000 25,000
TOTAL 8,20,000 4,40,000
The profit and loss account of S Ltd. showed a balance of ` 53,000 on 1st
April, 2012. A dividend of 15% was paid on 15th October, 2012 for the year
2011-12. Corporate tax @15% was also paid on the dividend. The dividend
was credited by H Ltd. in its profit and loss account. H Ltd. acquired the
shares on 1st October, 2012. The trade payables of S. Ltd. include ` 20,000
for goods supplied by H. Ltd. The stock of S Ltd. includes goods to the value
of ̀ 8,000 which were supplied by H Ltd. at a profit of 33 % on cost. Prepare
a consolidated balance sheet. (9 marks)
(b) Star Ltd. was incorporated on 1st July, 2012 to acquire a running business
w.e.f. 1st April, 2012. The accounts for the year ended 31st March, 2013
disclosed the following:
(i) There was a gross profit of ` 3,00,000.
(ii) The sales for the year amounted to ̀ 12,00,000 of which ̀ 2,40,000 were
for the first six months.
(iii) The expenses debited to profit and loss account included !
Directors’ fees ! ` 15,000
Bad debts ! ` 3,600
Advertising ! ` 12,000 (under a contract amounting to `
1,000 per month)
(iv) Salaries and general expenses ` 64,000.
(v) Preliminary expenses written-off ` 5,000.
(vi) Donation to a political party given by the company ` 5,000.
Prepare a statement showing the amount of profit made before and after
incorporation. (6 marks)
3. (a) The following particulars are available in relation to Indu Ltd. :
(i) Capital : 450, 6% preference shares of ̀ 100 each fully paid-up and 4,500
equity shares of ` 10 each fully paid.
(ii) External liabilities ` 7,500.
(iii) Reserves and surplus ` 3,500.
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(iv) The average normal profit (after tax) but before transfer to general
reserve, i.e. 10% earned every year by the company is ` 8,505.
(v) The normal rate of profit earned on the market value of fully paid-up
equity shares of the same type of company is 9%.
Calculate the fair value of shares assuming that out of the total assets
worth ` 350 are fictitious.
(7 marks)
(b) Firm underwriting is a definite commitment by the underwriters. Explain.
(4 marks)
(c) Extract from the trial balance of ABC Ltd. as on 31st March, 2013 is as under:
Account Dr. (`) Cr. (`)
Advance income tax 2011-12 1,10,000 !
Advance income tax 2012-13 1,15,000 !
Provision for income tax 2011-12 ! 1,00,000
Adjustments :
(i) The income tax assessment of 2011-12 completed during the year
showed gross tax demand of ̀ 1,20,000 but no effect has been given for
this in the accounts.
(ii) Provision for income tax is to be made for ` 1,05,000 for 2012-13.
Show the journal entries and the relevant extract in the final accounts.
(4 marks)
4. (a) X Ltd. having sufficient balance to the credit of profit and loss account decides
as follows:
(i) To redeem 4,000, 11% redeemable preference shares of ̀ 100 each fully
paid-up at a premium of 5%.
(ii) Capital redemption reserve arising as a result of redemption be utilised in
allotting the unissued shares of the company as fully paid equity shares
of ` 10 each by way of bonus to its members.
Show the journal entries for the redemption of preference shares and
bonus issue. (5 marks)
(b) Discuss when a joint stock company can pay dividend out of capital profits.
(5 marks)
Question Papers OOOO 2.311
(c) Following balances appeared in the books of Global Textiles Ltd. as on 31st
March, 2012:
20% Debentures ` 1,00,000
Debentures redemption reserve ` 1,18,000
Debentures redemption fund investment ` 1,20,000
On 1st June, 2012, the investments were sold for ` 1,23,000 and debentures
were redeemed together with accrued interest. Interest on debentures up to
31st March, 2012 had been paid.
Make necessary journal entries for the above transactions in the books of the
company. (5 marks)
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