paper 2a company accounts - sauda.com · valuation of shares and intangible assets issue and...

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


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


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


(c) Insurance contracts

(d) Evaluation of mineral resources. (1 mark)

Answer :




(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.


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.


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


(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


(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.


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


(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.


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


(v) Accounting Standard - 26 relates to !

(a) Impairment of assets

(b) Intangible assets

(c) Earnings per share

(d) Interim financial reporting. (1 mark)




(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.


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.


CS Inter Gr. I

SHORT NOTES


(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.


(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.


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.


(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.


(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


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.


(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.


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.



OBJECTIVE QUESTIONS



(i) The bonus share issue cannot be made unless the existing partly paid shares

are fully paid !up. (2 marks)


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.



(i) Securities premium money can be used for —

(a) Payment of dividend

(b) Writing off goodwill

(c) Issuance of fully paid bonus shares


(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


(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



(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)


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.




(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



(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


(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


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


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.




(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.


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)


(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)


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.


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)


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.


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)


following:

(i) Discount allowed on the re-issue of forfeited shares cannot exceed —

(a) 10% of paid-up capital



(d) Capital reserve account. (1 mark)


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.


(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


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)



(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)



(i) Shares are issued at premium under section _____ of the Companies Act, 1956.

(1 mark)

SHORT NOTES


(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.


(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.


(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.


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.


(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.


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)


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)


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


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


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


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


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.


(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


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)


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.


To Equity Share Capital A/c

(Re-issued of 100 forfeited shares issued

@ `̀̀̀ 7 per share `̀̀̀ 8 being paid-up)

700

100

800



(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


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.


(Being preference shares redeemed)

75

75

Revenue Reserves A/c Dr.


(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




(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:


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


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


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


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


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)


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


(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


Amount

(`̀̀̀)

Credit

Amount

(`̀̀̀)

12% Redeemable Preference Shares Capital A/c Dr.

Premium on redemption A/c Dr.


(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


General Reserve A/c Dr.


(Being the amount of redeemed out of profits

transferred to capital redemption reserve account)

1,00,000

1,00,000


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


Amount

(`̀̀̀)

Credit

Amount

(`̀̀̀)

Bank Dr.

To Share Application A/c

(Being application money received on 45,000 shares

@ ` 2 each)

90,000

90,000


Share Application A/c Dr.



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 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.


(Being share first call due on 30,000 shares @ ` 3

each)

90,000

90,000

Bank Dr.


(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.


(Being share final call due on 29,400 shares @ ` 2

each)

58,800

58,800


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 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.


(Being 1,200 shares reissued @ ` 9 each full paid)

10,800

1,200

12,000


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


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)


CS Inter Gr. I

SHORT NOTES


(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.


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.


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


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


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


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


(Utilisation of general reserves and profit and loss account to

meet buy back requirements)

Dr.

Dr.

15

15

30


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)


Answer : Futuristic India Ltd.

Journal Entries

Particulars Dr. (`) Cr.(`)

Bank Dr.

To Equity Share Application And Allotment 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.


(Being Transfer of the amount to the Equity Share Capital

A/c)

10,00,000

10,00,000



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


Equity share Application & Allotment 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


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


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


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.


Balance Sheet of Danny Ltd.

(after buy back)

(` in 000s)


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)


Answer :

Particulars Dr.(`̀̀̀) Cr.(`̀̀̀)

Equity Share Application 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



(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


(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 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 Balance c/d

1,18,800

1,800

3,74,550

3,59,550

By Balance c/d 3,59,550

3,74,550


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


Bank A/c Dr.



(16,381 equity shares of `10 each at a premium of 5%)

1,72,000

1,63,810

8,190


Profit & Loss A/c Dr.

To Premium on Redemption of Preference Shares A/c

(Premium provided for redemption)

16,190

3,810

20,000


Profit & Loss A/c Dr.


(Amount transferred to capital Redemption Reserve not

covered by fresh issue)

36,190

36,190


Premium on Redemption of Preference Shares A/c Dr.


(Payment due to preference shareholders)

2,00,000

20,000

2,20,000


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:


(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


(Transfer of balance of forfeited Share Account to

Reconstruction Account after reissue of all the forfeited

shares)

Dr. 15,000

15,000


Provision for Taxes 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


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


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 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.



OBJECTIVE QUESTIONS



(iv) Discount on the issue of debenture is a_______ loss. (1 mark)


(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



(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.



(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



(i) Issue of debentures to vendors is known as issue of debentures______.

(1 mark)

Answer :

for consideration other than cash



(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 :


[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


(iii) Collateral security implies security given for a loan. (1 mark)

Answer :

(iii) additional


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.



(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.



(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.



(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



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.



(i) The balance of sinking fund account is transferred to —


(b) General reserve account


(d) Sinking fund investment account. (1 mark)

(ii) When interest on own debentures becomes due, it will be credited to —


(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.


are true or false:

(iv) Debentureholders are not the members of the company. (2 marks)


word(s)/figure(s):

(i) Interest on debentures is a _________ against the profits of the company.

(1 mark)


(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



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.


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)


(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)


SHORT NOTES


(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.


(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.


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.


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)


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


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)


Answer :

Journal Entries


Bank A/c Dr.

Loss on issue of Debentures A/c Dr.


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)


Answer :

Dr. 12% Debentures Account Cr.

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.


`̀̀̀


`̀̀̀

30 Dec. 09

30 Dec. 09

31 Mar. 10



(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.


`̀̀̀


`̀̀̀

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


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)


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


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 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


Tax Deducted at Source A/c Dr.

To Bank A/c

(Being TDS and Interest Paid)

10,800

1,200

12,000


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


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%)


(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.


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


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.


(Being the amount due to debenture holders

opted for (I) option)

2,40,000

4,800

2,44,800


To 6% Cumulative Preference

Share Capital 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


(ii) 9% Debenture A/c Dr.

Premium on Redemption A/c Dr.


(Being the amount due to debenture holders

opted for (ii) option)

3,60,000

7,200

3,67,200


Discount on Issue of Debenture A/c Dr.


(Being the issue of 3,825 debentures of ` 100

each @ ` 96 each)

3,67,200

15,300

3,82,500


(iv) The following balances appeared in the books of a company on 1st April, 2004:

`


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.


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.


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


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


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


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)


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


4,40,000

4,00,000

40,000

(iii) Bank A/c Dr.

Loss on issue of Debenture A/c Dr.


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.



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


(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.


(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 :



(Being the amount due to debenture holders)

95,000

95,000


(ii) Additional entry in case of (i)

Debenture holders' A/c Dr.


(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)


Discount on Issue of Shares A/c Dr.


(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)



(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.



OBJECTIVE QUESTIONS




(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


(d) Capital reduction account. (1 mark)

Answer :

(a) Goodwill account;



(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.



(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.



(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


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.



(v) Loss suffered from the date of acquisition of business to the date of incorporation

should be debited to !




(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


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.


(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.


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


(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



SHORT NOTES


(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


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.


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.


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)


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


Share Application A/c Dr


(Transfer of Application money)

90,00,000

90,00,000

Share Allotment A/c Dr


(Money due on allotment)

60,00,000

60,00,000

Bank A/c Dr


(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.


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:


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


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


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


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


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:


(iv) Underwriting Commission Account Dr. 1,50,000

To X 90,000

To Y 45,000

To Z 15,000


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)


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


(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


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)


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.


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.



(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.


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


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.


(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.



(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.


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


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)


Answer :

Balance Sheet of Abrol Ltd.



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.


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


6. Dr. M/s Smart Bulls Cr.


To 9% Mortgage Debentures 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.


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.


[Chapter #### 5] Final Accounts of Joint Stock Companies OOOO 2.113


OBJECTIVE QUESTIONS



(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.



(iii) Pre-paid expenses are shown in balance sheet as —

(a) Current assets


(c) Wasting assets

(d) Fixed assets. (1 mark)

Answer :

(a) Current assets;




(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.



(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.



(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.



(iv) Preliminary expenses are —

(a) Current liability (b) Current assets

(c) Fictitious assets (d) Contingent liability. (1 mark)

Answer :

(iv) (c) Fictitious assets



(ii) In the absence of declaration of dividend, there is no need to provide for

depreciation in the accounts of companies. (2 marks)


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.



(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)



(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



(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




(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.


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.



(iv) The item ‘unpaid dividend’ appears in the balance sheet of a company under the

heading —

(a) Current assets, loans and advances


(c) Secured loans

(d) Current liabilities and provisions. (1 mark)

Answer :

(iv) (d) Current liabilities and provision.


2012 - June [1] {C} (c) Write the most appropriate answer from the given options in


(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.


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)


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)


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.


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)



(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


(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.


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.


(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.


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.



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


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


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



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


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)


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


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


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


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


(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


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


Building and Furniture 20,900


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)


Answer :

In the Books of Anuj Ltd.

Journal entries


Equity Share Final Call A/c Dr.


(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 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


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


(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



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)


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


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


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


(`̀̀̀ 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


III. Total Revenue (I + II) 91,300

IV. Expenses :


Purchases of Stock-in-Trade



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



30,795

XII. Profit /(loss) from discontinuing

operations

—

XIII. Tax expense of discontinuing

operations

—

XIV. Profit /(loss) from discontinuing


—

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


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


(`̀̀̀ in, 000)


Figures as

at the end

of current

reporting

period

Figures as at

the end of

the previous

reporting

period


(1) Shareholders' funds


(b) Reserves and surplus 2 43,495


warrants


allotment









(b) Trade payables 3 2,560

(c) Other current liabilities 4 1,695

(d) Short-term provisions 5 27,410

TOTAL 2,25,160



(i) Tangible 6 1,05,500



(iv) Intangible assets under development

(b) Non-current investments 7 20,000


(d) Long-term loans and advances

8 1,000


(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


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


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


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:


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


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


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


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


(Being bonus declared for shareholders)

50,000

50,000

Bonus to Shareholders A/c Dr.


(Being 5000 equity shares allotted to shareholders)

50,000

50,000

Bank A/c Dr.



(Being 5,000 shares issued at premium)

70,000

50,000

20,000



(Being premium on redemption provided)

6,000

6,000


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


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


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.


(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


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 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


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


Bank overdraft

(secured by hypothecation of

stock and receivable)

Unsecured Loans

Current Liabilities and

Provision.

(A) Current Liabilities

Sundry creditors

(B) Provisions :


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


(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


(` in..........)


Figures

for the

current

reporting

period

Figures

for the

previous

reporting

period

I. Revenue from operations 1 6,70,350


III. Total Revenue (I + II) 6,74,600

IV. Expenses :


Purchases of Stock-in Trade 3 4,85,500


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)


X. Tax expense :

1. Current tax

2. Deferred tax

9 4,000



(450)

XII. Profit/(loss) from discontinuing operations

XIII. Tax expense of discontinuing operations

XIV. Profit/(loss) from discontinuing


XV. Profit (loss) for the period (XI + XIV)

XVI. Earnings per equity share:

1. Basic

2. Diluted

Notes :

1. Revenue from Operation :


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


50,000


6. Finance Costs:

Discount on issue of debentures 2,000

Preliminary expenses written-off 1,000

Interest on Bank overdraft 7,800


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


(` in..........)


Figures

as at the

end of

current

reporting

period

Figures

as at the

end of the

previous

reporting

period




(b) Reserves and surplus 2 28,050


warrants



allotment




(c) Other Long-term liabilities 3 1,50,000



(a) Short-term borrowings 4 1,50,000

(b) Trade payables 5 87,850


(d) Short-term provisions 7 4,000

TOTAL 8,23,650



(i) Tangible 8 3,83,300

(ii) Intangible assets 9 1,35,000



development

(b) Non-current investments 10 50,000



(e) Other non-current assets 11 6,000

(2) Current assets


(b) Inventories 12 1,42,500



(e) Short-term loans and advances 15 10,000

(f) Other current assets

TOTAL 8,23,650


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 :


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


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

`̀̀̀


(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:


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%.

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 :


(`)

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.


(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


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


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 !


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


2004 - June [1] {C} (d) What are the statutory books prescribed under the Companies

Act, 1956? (4 marks)


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.


(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


(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


(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.


`

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.


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


Advance Payment of Income Tax Account


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


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.


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


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;



OBJECTIVE QUESTIONS




(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



(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.



(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.



(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


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.


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)


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



(v) The minority shareholders’ share of pre-acquisition losses of subsidiary company

shall be deducted from the amount of _______ . (1 mark)


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.


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


Bills Receivable-Less:

Asha Ltd.

Bipasha Ltd.


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


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


2. Share application money pending

allotment

3. Non-current liabilities





4. Current liabilities


(b) Trade payables 2 1,20,000



TOTAL 18,20,000


1. (a) Fixed assets

(i) Tangible 3 6,50,000




development





2. Current Assets


(b) Inventories

(c) Trade receivables 4 11,70,000

(d) Cash and cash equivalents



TOTAL 18,20,000


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


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


(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


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


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


(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






warrants

(d) Minority Interest (w.n (iv)) 2,00,000


allotment

(3) Non - current liabilities

(a) Long - term borrowings






(a) Short term borrowings

(b) Trade payables

(c) Other current liabilities 2 5,90,000


TOTAL 21,40,000



(i) Tangible 3 7,30,000




development





(2) Current assets


(b) Inventories




(f) Other current assets 4 14,10,000

TOTAL 21,40,000

Schedules:


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


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


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


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


(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


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






(d) Non-controlling interest/minorityInterest (W. Note IV) 87,500



allotment











TOTAL 9,98,000

II. Non-current assets

1. (a) Fixed assets

(i) Tangible 5,80,000

(ii) Intangible assets 70,000



development





2. Current assets


(b) Inventories 1,88,000


(d) Cash and cash equivalents 85,000



TOTAL 9,98,000


Schedules :


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


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


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


Share Capital

Equity Shares of ` 10 each

Minority Interest

Reserves & Surplus:

General Reserve

Profit & Loss Account


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


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 `


Bhansali Ltd. 1,00,000

Plant and Machinery



Investments

Stock :



2,40,500

Less: Stock

Reserve 4,000

Debtors :



4,34,500

3,22,500

5,00,000

6,00,000

30,000

2,36,500


Less : Inter

Co.Debts 50,000

Bills Recelvables :

Poddar Ltd. 20,000


50,000

Less: Inter Co.

Debts 16,000

Bank :

Poddar Ltd. 60,000


Cash :

Poddar Ltd. 20,000


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


(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






(d) Minority Interest (W.N 3) 1,54,000

(2) Share application money pending allotment












TOTAL 22,49,500



(i) Tangible 3 11,00,000




(b) Non-current investments 30,000




(2) Current assets







TOTAL 22,49,500

Notes to Accounts :

1. Reserves & Surplus :


Profit & Loss (Working Notes 4) 2,69,500

6,89,500


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


Goodwill (W.N. No. 5) 3,22,500

3,22,500

5. Inventories :

Stock: 2,40,500


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


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


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



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




(`̀̀̀ in............)


Figures as

at the end

of current

reporting

period

Figures as at

the end of

the previous

reporting

period






warrants

(d) Non-controlling interest (W.N 3) 26,250


allotment


(a) Long-term borrowings 2 40,000










TOTAL 8,72,250



(i) Tangible 5,05,000

(ii) Intangible assets (working

Note 4)

68,250



development





(2) Current assets




(d) Cash and cash equivalents 1,00,000

(e) Short-term loans and

advances


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


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


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


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


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


(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


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






(d) Minority Interest (w.n. (4)) 4,60,000


allotment


(a) Long - term borrowings 10,00,000








(c) (Working Note 6) 3,30,000


TOTAL 70,15,000



(i) Tangible 3 42,00,000

(ii) Intangible assets G/W (Working

Note 3) 60,000







(2) Current assets




(d) Cash and cash equivalents 5,80,000



TOTAL 70,15,000


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:


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


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



Debtors


9,20,000

(1,00,000) 8,20,000

Bills Receivable


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


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


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


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


Amount in `


(a) Share Capital;

60,000 Equity shares of ` 10 each 6,00,000


(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


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


(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


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


(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


General reserve (1.4.2012) 1,00,000 60,000

Surplus (Profit & Loss a/c) 1,40,000 90,000

(2) Current Liabilities


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 !


(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


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)


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


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


(iv) Unrealised profit on unsold stock

Unsold stock 15.00 lacs

Unrealized profits = 15 × 25/125 = ` 3 lacs


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



(a) Share capital 500

(b) Reserves and surplus 1 492


(d) Minority Interest (w.n. (i)) 91


allotment








(b) Trade payables 2 150



TOTAL 1,233



1. (a) Fixed assets

(i) Tangible 3 640

(ii) Intangible assets 4 91



development





2. Current assets


(b) Inventories 5 252

(c) Trade receivables 6 130

(d) Cash and cash equivalents 7 120



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


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


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


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


(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


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


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



Consolidated Balance Sheet of Vijay Ltd.

with Jyoti Ltd. as at 31.3.2004

(`̀̀̀ in............)


Figures as

at the end

of current

reporting

period

Figures as at

the end of

the previous

reporting

period






warrants

(d) Minority Interest (w.n. 5) 10,12,000


allotment


(a) Long-term borrowings 2 1,00,000









TOTAL 78,46,800



(i) Tangible 5 47,00,000





development



(d) Long-term loans and advance


(2) Current assets


(b) Inventories




advances


TOTAL 78,46,800

Schedules :-


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



Jyoti Ltd. 22,00,000 47,00,000


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 :


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


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.


Bills Receivable:

Rose Ltd.

Milk Ltd.


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



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


(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


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






(d) Minority Interest (w.no. (i)) 36,000


allotment







(a) Short-term borrowings 2 10,000




TOTAL 11,20,000



1. (a) Fixed assets

(i) Tangible 4 4,55,400




development





2. 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


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


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


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


(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)


Answer : Consolidated Balance Sheet of Jai Ltd. and its

Subsidiary Hind Ltd. As at 31.3.2005


`

Share Capital:


`10 each fully paid up

Minority Interest


General Reserve

Capital reserve

capital Reserve

Profit and Los A/c 80,000

Add: Share of Revenue 9,000


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


(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


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






(d) Minority Interest (w.n. 2) 1,26,000


allotment



(a) Long - term borrowings



(d) Long term provisions





(d) Short term provisions

TOTAL 14,29,000



(i) Tangible 3 10,20,000



(iv) In tang ib le assets under

development





(2) Current assets







TOTAL 14,29,000


Schedules:


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



Debtors:

Jai Ltd.

Hind Ltd.

60,000

35,000


95,000

4,000 91,000

Bills Receivable:

Jai Ltd.

Hind Ltd.

25,000

20,000


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


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


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


(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


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






(d) Minority Interest (w.n. (i)) 96,000


allotment












TOTAL 21,67,750



(i) Tangible 4 14,60,000

(ii) Intangible assets 5 5,750



development





(2) Current assets







TOTAL 21,67,750

Schedules:



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


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


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


`̀̀̀ `̀̀̀

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


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


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)


Answer :

Consolidated Balance Sheet of H. Ltd. and its Subsidiary

S Ltd. as at 31st March, 2006


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


(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




(Rupees in ..........)

Particulars Note

No.

Figures

as at the

end of

current

reporting

period

Figures

as at the

end of the

previous

reporting

period






(d) Non-controlling interest (W. Note IV) 1,11,600



allotment











TOTAL 9,33,800


1. (a) Fixed assets

(i) Tangible 3 4,00,000

(ii) Intangible assets 4 17,200



development





2. Current Assets


(b) Inventories





TOTAL 9,33,800


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


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



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


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


`

(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




(`̀̀̀ in............)


Figures as

at the end

of current

reporting

period

Figures as at

the end of

the previous

reporting

period






warrants

(d) Minority Interest (w.n (V)) 75,125


allotment












TOTAL 12,30,625



(i) Tangible 3 6,80,625

(ii) Intangible assets 50,000



development





(2) Current assets






advances


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


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


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.



OBJECTIVE QUESTIONS



[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.



(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



(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.



(ii) The market value of a share is the product of price-earnings ratio and ______.

(1 mark)

Answer :

(ii) Earning per share.



(iii) Goodwill is an intangible asset, but is not a ________asset. (1 mark)

Answer :

(iii) Fictitious




(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


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


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.


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





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


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


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.


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


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


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


(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


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


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


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: `


Goodwill 3,20,000


Patents and trade marks 40,000

Stock 96,000

Debtors less bad debts 1,60,000


14,40,000

Less: Liabilities:


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


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


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


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:


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


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)

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


*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 :


Share capital :

30,000 Equity shares of `10 each 3,00,000


Capital reserve 40,000

Profit and loss (Surplus) 1,20,000


Trade payables 93,700

Income-tax payable 11,500


8,01,700

Assets `

Freehold property 1,20,000


Stock 3,10,000

Trade receivables 2,13,000


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)


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


Stock 3,10,000


Bank Balance 1,07,000

Cash in hand 1,700

9,91,700

Less: Current Liabilities

Proposed divided 34,000


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


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

=


=

= 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


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.


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


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


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


Less: Depreciation on Capital Expenditure

2,500

3,52,500


Adjusted Profits (2001-2002) 2,92,500

Profit 2002 !2003 3,50,000


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


Dividend equalisation fund 6,40,000

1,74,00,000


Assets

Patent and copyrights 8,00,000



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


Less: Liabilities `


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:


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



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


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


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


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




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)


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


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


`

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)


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


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


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 Compulsory questions from a chapter jjjjj

8 Objective Questions




(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.



(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 —




(d) Capital reduction account. (4)

(iii) Pre-paid expenses are shown in balance sheet as —

(a) Current 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


(d) Debenture redemption fund account. (2)

(v) Divisible profits include —

(a) General reserves

(b) Profit on revaluation of assets


(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;



(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



(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)


(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


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)



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.



(i) Accounting policies vary from enterprise to enterprise. (1)


(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)



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


(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.


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)


(ii) The International Financial Reporting Standard-4 deals with !

(a) Share based payments

(b) Financial investments


(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


(c) Current liabilities and provisions


(v) Loss suffered from the date of acquisition of business to the date of

incorporation should be debited to !




(d) Capital reduction account (4)

(1 mark each)


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.


(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 .



(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




(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)


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.


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)


(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 —


(b) General reserve account


(d) Sinking fund investment account. (3)

(ii) When interest on own debentures becomes due, it will be credited to —


(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


(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


(1 mark each)


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)


(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.


(c) (i) Addition.

(ii) International Accounting Standard.

(iii) Miscellaneous expenditure.

(iv) Eight years.

(v) Twenty years.


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)


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)



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 —




(d) Calls-in-advance. (2)


(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.


(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.


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)


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)





(d) The amount not received on forfeited shares. (2)


(a) Compulsory

(b) Optional

(c) Conditional



(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.


(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.


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:





(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)


(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


(c) Carrying amount


(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


(v) Expenses incidental to the creation and floatation of a company are called —



(c) Trade expenses

(d) Establishment expenses. (4)

(1 mark each)


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.


(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.


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)




(i) The balance of debenture redemption fund investment account after the

realisation of investment is transferred to !



(c) Debenture account

(d) Debenture redemption fund account. (3)



(a) In time ratio


(c) In sales ratio




(a) Earnings

(b) Net assets



(iv) On re-issue of forfeited shares, balance in shares forfeited account is transferred

to !




(d) Profit and loss account. (1)





(d) Interim financial reporting. (5) (1 mark each)



(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)


(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:


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 —



Question Papers OOOO 2.295


(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


(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


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


Depreciation of fixed assets 1,50,000


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:


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


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%.


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:


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


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.


(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)


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.





(d) The amount not received on forfeited shares.


(a) Compulsory

(b) Optional

(c) Conditional


(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)


(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 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


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


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


(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 :


(`) (`)

Fully paid-up equity shares of `10 each 6,00,000 2,00,000


Profit and loss (Surplus) 1,00,000 60,000


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


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%.


(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 :


Share capital :

30,000 Equity shares of `10 each 3,00,000


Capital reserve 40,000

Profit and loss (Surplus) 1,20,000



Income-tax payable 11,500


8,01,700

Assets `

Freehold property 1,20,000


Stock 3,10,000




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.)


(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.


(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)


following:





(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


(c) Carrying amount


(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


(v) Expenses incidental to the creation and floatation of a company are

called —



(c) Trade expenses

(d) Establishment expenses. (1 mark each)



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)


3. (a) The following are the balance sheets of H Ltd. and its subsidiary S Ltd. as on

31st March, 2012:


(`) (`)

Shareholders’ funds:

Share capital

Shares of ` 100 each fully paid 5,00,000 2,00,000


General reserve 1,00,000 —

Profit and loss account 80,000 (–) 1,00,000

Non-current liabilities:

6% Debentures — 1,00,000

Current liabilities:


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


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


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.)


(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.


(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)


following:

(i) The balance of debenture redemption fund investment account after the

realisation of investment is transferred to !



(c) Debenture account

(d) Debenture redemption fund account.



(a) In time ratio


(c) In sales ratio




(a) Earnings

(b) Net assets



(iv) On re-issue of forfeited shares, balance in shares forfeited account is

transferred to !




(d) Profit and loss account.





(d) Interim financial reporting. (1 mark each)



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


General reserve (1.4.2012) 1,00,000 60,000

Surplus (Profit & Loss a/c) 1,40,000 90,000

(2) Current Liabilities


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 !


(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.


(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. (`)



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)


(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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