Suggested Answer_Syl2008_Jun2014_Paper_16

FINAL EXAMINATION
GROUP IV
(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

JUNE 2014

Paper- 16 : ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Time Allowed : 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.
Part A questions are compulsory. Attempt all of them.
Part B has seven questions. Attempt any five of them.

Please: (1) Write answers to all parts of a question together.

(2) Open a new page for answer to a new question.
(3) Attempt the required number of questions only.
(4) Indicate in the front page of the answer book the questions attempted.

Part A : (25 Marks)

1. (a) In each of the cases given below, one out of four alternatives is correct. Indicate the
correct answer (= 1 mark) and give your workings/reasons briefly in support of your
answer ( = 1 mark): 2x8=16

(i) ANKITA LTD. has three segments with their assets inclusive of Deferred Tax Assets
as shown below:
Segment Total Assets (` in lakh) Deferred Tax Assets (` in lakh)
M 20 10
N 60 80
P 120 6
Reportable segments as per AS-17 are
A. M, N and P
B. M and N only
C. M and P only
D. P and N only

(ii) ARYAN LTD. acquired 80% shares of SUNNY LTD. on April 01, 2013 for a price of `
4,50,000. The Share Capital of SUNNY LTD. consists of 5,000 equity shares of ` 100
each. During the consolidation of accounts, it is noticed that the Sundry Creditors
of ARYAN LTD. include ` 20,000 for goods purchased from SUNNY LTD. on which it
made profit of ` 5,000. If half of the goods were still in the stock of ARYAN LTD. as
on March 31, 2014, the unrealised profit in the Consolidated Balance Sheet as on
March 31, 2014 as per AS-21 will be:
A. ` 2,000
B. ` 2,500
C. ` 4,000
D. ` 16,000

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(iii) PRAKASH LTD. declares the following information:
Exchange Rate (`/US $)
Purchased goods on 12.3.2013 of US $ 1,00,000 56.60
Exchange rate as on 31.3.2013 57.00
Date of actual payment is 12.4.2013 57.50
What will be the gain/loss to be booked in the financial year 2013-14?
A. ` 90,000 (loss)
B. ` 40,000 (loss)
C. ` 50,000 (loss)
D. ` 1,30,000 (loss)

(iv) Mr. P bought a forward contract for three months of US $ 1,00,000 on 1st
December, at 1 US $ = ` 57.10, when exchange rate was 1 US $ = ` 57.02. On 31st
December, when he closed his accounts, exchange rate was 1 US $ = ` 57.15. On
31st January, he decided to sell the contract at ` 57.18 per US $. What amount of
profit will be recognised from this contract?
A. ` 8,000
B. ` 3,000
C. ` 16,000
D. ` 5,000

(v) NUPUR LTD. has equity share capital of ` 30 lakhs consisting of fully paid equity
shares of ` 10 each. Net profit for the year 2013-14 was ` 45 lakhs. It has also
issued 27,000, 10% convertible Debentures of ` 50 each. Each Debenture is
convertible into 5 equity shares. The applicable tax rate is 30%. Compute the
diluted earnings.
A. ` 46,35,000
B. ` 44,59,500
C. ` 45,94,500
D. ` 45,00,000

(vi) RAM LTD. acquired a machine for ` 6.40 crores on 1st January, 2011. It has a life of
5 years with a Salvage value of ` 80 lakhs. Calculate the impairment loss as on
31.3.2014, if any, when the present value of future cash flow is ` 2.60 crores and
net selling price is ` 2.40 crores.
A. No impairment loss
B. ` 16 lakhs
C. ` 8 lakhs
D. ` 20 lakhs

(vii) A firm obtained a contract for constructionof a fly-over. Following information is

available for the year ended 31.3.2014:
Total contract Price = ` 1500 lakhs
Work certified = ` 800 lakhs
Work not certified = ` 460 lakhs
Estimated further cost to completion = ` 380 lakhs
Progress payment received = ` 700 lakhs
What will be the foreseeable loss to be shown in the accounts of 2013-14 as per
AS-7?
A. No effect in 2013-14
B. `100 lakhs
C. `560 lakhs
D. `140 lakhs

(viii)From the following information of X LTD. for the year ended 31.3.2014, compute
the actual return on plan assets.

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Benefits paid = ` 4,20,000
Employer contribution = ` 3,00,000
Fair market value of plan assets as on 31.3.2014 = ` 15,75,000
Fair market value of plan assets as on 31.3.2013 = ` 12,50,000
A. ` 4,45,000
B. ` 3,25,000
C. ` 25,000
D. ` 7,45,000

(b) Choose the most appropriate one from the stated options and write it down (only
indicate A,B,C,D as you think correct). 1x5=5

(i) According to AS-3 (Revised), cash flows arising from interest paid in the case of a
financial enterprise is classified as cash flow from
A. Operating Activities
B. Financing Activities.
C. Both (A) and (B)
D. Investing Activities

(ii) A Ltd. holds 51% of B Ltd.; B Ltd. holds 51% of O Ltd.; and Z Ltd. holds 49% of O Ltd.
Which of the following is not related party to each other as per AS-18?
A. A Ltd. to O Ltd.
B. B Ltd. to O Ltd.
C. B Ltd. to Z Ltd.
D. Z Ltd. to O Ltd.

(iii) Which one of the following is within the purview of AS-13?

A. Mutual Fund
B. Investment of retirement benefit plans
C. Investment in shares
D. Finance Lease

(iv) According to AS-29, Restructuring Cost does not include

A. The cost of retraining or relocating continuing staff
B. Marketing cost
C. Both (A) and (B)
D. Cost of sale or termination of line of business

(v) A sale is recognised

A. When cash is collected from customer
B. When goods sent to customer
C. When the seller raised the invoice
D. When certainty of collection is confirmed

(c) X Ltd. purchased a plant from Y Ltd. on 30.9.2013 with a quoted price of ` 250 lakhs. Y
Ltd. offer 3 months credit with a condition that discount of 1.5% will be allowed, if the
payment was made within 1 month. VAT is 12% on the quoted price. Company
incurred 5% of quoted price on transportation and erection costs. Pre-operative cost
amount to ` 2.50 lakhs. Company took a term loan of ` 180 lakhs at an interest rate of
12.50% per annum to finance the purchase of the machinery. The machine was ready
for use on 31.12.2013; however, it was put to use only on 1.2.2014:

(i) Find out the original cost of the machine

(ii) Suggest the accounting treatment for the cost incurred during the period between
the date the machine was ready for use and the actual date the machine was put
to use. 3+1=4

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Answer:

1. (a)
(i) D: P and N are reportable segments.
According to AS-17 "Segment Reporting", segment Assets do not include
income tax assets.
Therefore, the revised total assets are ` 176 lakh [200 lakh - (10+8+6)]
Segment M holds total assets of ` 10 lakh (20-10)
Segment N holds total assets of ` 52 lakh (60-8)
Segment P holds total assets of ` 114 lakh (120-6)
Thus P and N hold more than 10% of total assets and hence P and N are
reportable segment.

(i) B: `2,500.
Half of the stock remained unsold= ` 20,000/2 = ` 10,000
Profit = (` 5000/` 20000) = 25%
Unrealized profit share = 0.80 × 2,500 = ` 2,000
Total unrealized profit is ` 2,500
The entire unrealized profit (` 2,500) is to be eliminated as per AS-21.

(ii) C: `50,000 (loss).

As per AS-11, exchange difference on settlement of monitory items should
be transferred to Profit & Loss A/c. Here loss to be debited to Profit & Loss
A/C as: ` (1, 00,000 x 57.50) - (1, 00,000 x 57.00) = `50,000.

(iii) A: `8,000.
Sale rate `57.18
Less, contract rate `57.10
Premium on contract `0.08
Contract amount US $ 1,00,000
Total profit = (1,00,000 x 0.08) = `8,000.

(iv) C: `45,94,500.
Interest on debenture @ 10% for the year = 27,000 × 50 ×10%
= `1,35,000
Tax on interest `40,500.
Diluted earnings = `(45,00,000 + 1,35,000 – 40,500) = ` 45,94,500.

(v) B: `16 lakhs.

Cost of machine `6.40 crores.
Less: depreciation (39/60) months (on cost – Salvage value) `3.64 crores.
So, Carrying amount on 31.03.2014 `2.76 crores
Impairment loss = Carrying amount – (higher of further cash flow and net
selling price)
= `2.76 – 2.60 crores.
= `16 lakhs.

(vi) D: `140 lakhs

Total cost of construction `(800 + 460 + 380) = `1,640 lakhs.
Less: total contract price `1,500 lakhs.
So, foreseeable loss to be recognised in 2013 – 2014 = `140 lakhs.

(vii) A: `4,45,000
Fair value of plan asset as on 31.03.2013 `12,50,000
Add: employer contribution ` 3,00,000

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Less: benefits paid ` 4,20,000
Total `11,30,000
Fair market value of plan asset at 31.03.2014 `15,75,000
Actual return on plan asset ` 4,45,000

(b) (i) (A)

(ii) (C)
(iii) (C)
(iv) (C)
(v) (D)

(c) (i) Original cost of the machine:

Particulars ` in lakhs ` in lakhs

Quoted price 250.00
Less: discount 1.50% 3.75 246.25
Add: VAT @ 12% (250 × 12%) 30.00
Transportation and erection cost @ 5% 12.50
Pre- operative cost 2.50
Financial cost (12.50% on `1,80,000 for the period 5.63
01.10.13 to 31.12.13)
Total 296.88

(ii) Finance cost incurred during the period between the date the machine was
ready for use and the actual date the machine was put to use, amounting to
`1.88 lakhs (12.50% on `180 lakhs for the period 01.01.2014 to 01.02.2014 i.e. for one
month) will be charged to Profit and Loss A/c as per AS – 16.

Part B : (75 Marks)

Attempt any five questions.

2. (a) Neel Company has provided the following Profit and Loss A/c for the year ended 31st
March, 2014. You are required to prepare Gross Value Added Statement.

Particulars Amount (`) ‘000 Amount (`) ‘000

Income : Sales 28,500
Other Income 750 29,250
Expenditure: Operating Cost 25,600
Excise Duty 1,700
Interest on Bank Overdraft 100
Interest on 12% Debentures 1,150 28,550
Profit before Depreciation 700
Less: Depreciation 250
Profit before Tax 450
Less: Tax Provision 270
Net Profit after Tax 180
Less: Transfer to Replacement Reserve 30
Balance of Profit 150
Less: Dividend 50
Retained profit 100

Additional Information:
(i) Sales are net sales after deducting Discounts, Returns and Sales Tax.
(ii) Operating cost includes `10,200(000) towards wages, salaries and other benefits to

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 Suggested Answer_Syl2008_Jun2014_Paper_16
employees.
(iii) Bank Overdraft is a temporary source of finance.
(iv) Provision for tax includes `70(000) for Deferred Tax. 7

(b) An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the
fair value of the equipment are ` 3,00,000. The amount will be paid in 3 installments
and at the termination of lease, lessor will get back the equipment. The unguaranteed
residual value at the end of 3 years is ` 40,000. The Internal Rate of Return (IRR) of the
investment is 10%. The present value of annuity factor of ` 1 due at the end of 3rd year
at 10% IRR is 2.4868. The present value of ` 1 due at the end of 3rd year at 10% rate of
interest is 0.7513.
(i) State with reason whether the lease constitutes finance lease.
(ii) Calculate unearned finance income. 4+4=8

Answer:

2. (a)
Gross Value Added Statements of Neel Company for year ended 31, March 2014

Particulars Amount Amount

(`) „000 (`) „000
Sales 28,500
Less: Cost of Materials and services
Operating Cost (25,600 – 10,200) 15,400
Excise Duty 1,700
Interest on Bank Overdraft 100 17,200
Value Added by manufacturing and trading activities 11,300
Add: Other Income 750
TOTAL GROSS VALUE ADDED 12,050

Application of total gross value added

1. To pay employees Wages, Salaries and other benefits 10,200 84.65%

2. To pay government Corporation Tax (Tax provision –
Defered tax)i.e. (270 -70) 200 1.66%
3. To pay providers of capital Interest on 12% Debentures 1,150
Dividend 50
1,200 9.96%
4. To provide for maintenance and expansion of the company
Depreciation 250
Replacement Tax 30
Deferred Tax 70
Retained Profit 100 450 3.73%
Total Application 12,050 100%

(b) P. V. of unguaranteed residual value (`40,000  0.7513) = `30,052

P.V. of Minimum Lease Payment (MLP) should be `(3,00,000 – 30,052) = `2,69,948
As at the beginning of lease period the P.V. of MLP cover substantially the initial fair
value i.e., 2,69,948 /3,00,000 = 89.98% approx.
Moreover lease period covers major part of the lease of the asset.
Hence, it is a financial lease.

Calculation of unearned finance income:

Annual lease payment = 2,69,948/2.4868 = `1,08,552
Gross investment in lease - 1,08,552  3 = `3,25,656

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`40,000
Unguaranteed residual value -
3,65,656
Less: P. V. of Gross investment in lease 3,00,000
Unearned finance income 65,656

3. R Ltd. and S Ltd. propose to amalgamate. Their Balance Sheets as at 31st March, 2014 are
as follows:
Liabilities R Ltd. (`) S Ltd. (`) Assets R Ltd. (`) S Ltd. (`)
Share Capital: Fixed Assets less 15,00,000 6,00,000
Equity Shares of ` 10 20,00,000 8,00,000 Depreciation
each Investments (non-trade) 6,00,000 ----
General Reserve 8,00,000 60,000 (Face value of `6
Profit & Loss A/c 2,00,000 40,000 lakhs,5% tax free G.P.
Creditors 4,00,000 1,00,000 Notes)
Stock 7,00,000 2,00,000
Debtors 5,00,000 1,00,000
Cash and Bank 1,00,000 1,00,000
Total 34,00,000 10,00,000 Total 34,00,000 10,00,000

The details of Net Profit (after taxation) are as follows:

Year R Ltd. (`) S Ltd. (`)
2011-12 3,50,000 1,20,000
2012-13 3,90,000 1,45,000
2013-14 4,60,000 1,55,000
Nominal trading profit may be considered as 15% on closing capital employed. Closing
capital employed be calculated by equity method for the purpose of goodwill, which
may be taken as 4 years purchase of average super profits. The stock of R Ltd. and S Ltd.
are to be taken at ` 8,60,000 and ` 2,40,000 respectively for the purpose of
amalgamation. T Ltd. is formed for the purpose of amalgamation of two companies.
(a) Suggest a scheme of capitalization of T Ltd. and ratio of exchange of shares; and
(b) Draft the opening Balance Sheet of T Ltd. (Schedules are not required). 15

Answer:

3. (a) Scheme of capitalization of T Ltd. and ratio of exchange of shares.

Computation of Net Assets of amalgamating companies:

R Ltd. (`) S Ltd. (`)
Goodwill (W. N. 2) 40,000 20,000
Fixed Assets 15,00,000 6,00,000
5% Investment (Non - trade) 6,00,000
Stock 8,60,000 2,40,000
Debtors 5,00,000 1,00,000
Cash and bank 1,00,000 1,00,000

Less: Creditors 36,00,000 10,60,000

Net Assets 4,00,000 1,00,000
32,00,000 9,60,000
No. of equity share 2,00,000 80,000
Intrinsic value of a share `16 `12

No. of share to be issued by T Ltd. to

R Ltd. 2,00,000 × 16/10 3,20,000 shares
S Ltd. 80,000 × 12/10 96,000 shares

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 Suggested Answer_Syl2008_Jun2014_Paper_16
In total 3,20,000 + 96,000 = 4,16,000 shares will be issued by T Ltd.
Ratio of exchange of shares will be as follows:
1. A shareholder holding 10 shares in R Ltd. will get 16 shares in T Ltd.
2. Similarly, a shareholder holding 10 shares in S Ltd. will get 12 shares in T. Ltd.

Investment is assumed to be held for all the three years. Since investments are tax free,
tax liability will not change for the three years. So, tax effect is not applicable for
excluding investment income.

(b)
Balance Sheet of T Ltd. as at 31st March,2014
(the opening Balance Sheet)
Liabilities (`) Assets (`)
Share Capital: Fixed Assets:
4,16,000 Equity Shareholders Goodwill (W. N. 2) (40,000 + 20,000) 60,000
of ` 10 each 41,60,000 Other fixed Asset (15,00,000+60,000) 21,00,000
(Issued for consideration Investment in 6% Tax free G.P Notes 6,00,000
other than cash, pursuant to Current Assets:
scheme of amalgamation) Stock (8,60,000 + 2,40,000) 11,00,000
Current Liabilities: Debtors(5,00,000 + 1,00,000) 6,00,000
Creditors (4,00,000 + 1,00,000) 5,00,000 Cash and Bank (1,00,000+1,00,000) 2,00,000
46,60,000 46,60,000

Working Notes:

A. Calculation of closing capital employed (equity method)

R Ltd. (`) S Ltd. (`)
Share Capital 20,00,000 8,00,000
General Reserve 8,00,000 60,000
Profit & Loss A/c 2,00,000 40,000
30,00,000 9,00,000
Less: Non - trade investment 6,00,000 -
24,00,000 9,00,000

B. Calculation of value of goodwill

(i) Average Profit
R Ltd. (`) S Ltd. (`)
2011-12 3,50,000 1,20,000
2012-13 3,90,000 1,45,000
2013-14 4,60,000 1,55,000
12,00,000 4,20,000
Average of 3 years profit 4,00,000 1,40,000
Less: Income from non-trade investments (6,00,000x5%) 30,000 ---
3,70,000 1,40,000

(ii) Super Profits

R Ltd. (`) S Ltd. (`)
Average trading profit 3,70,000 1,40,000
Less: Normal Profit
R Ltd. 24,00,000 x 15% 3,60,000
S Ltd. 9,00,000 x 15% 1,35,000
10,000 5,000

(iii)
R Ltd. (`) S Ltd. (`)
Value of goodwill at 4 years Purchase of super profit 40,000 20,000

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4. The summarised Balance Sheet of Apple Ltd., Orange Ltd. and Banana Ltd. as on 31st
March, 2014 are given below: (` in, 000)
Liabilities Apple Orange Banana Assets Apple Orange Banana
Ltd. Ltd. Ltd. Ltd. Ltd. Ltd.
Share Capital: Equity 300 200 120 Fixed Assets 140 240 206
Shares of ` 10 each
fully paid up
Reserves 100 80 60 Investment (at cost):
Shares in Orange Ltd. 180
Shares in Banana Ltd. 80 100
Profit & Loss A/c 120 100 80 Stock-in-trade 80 60 40
Sundry Creditors 60 70 50 Sundry Debtors 40 50 60
Apple Ltd. — 20 16 Due from:
Orange Ltd. 24
Banana Ltd. 16
Cash in Hand 20 20 20
Total 580 470 326 Total 580 470 326

Additional information:
(i) Apple Ltd., held 16,000 shares of Orange Ltd. and 3,600 shares of Banana Ltd.
(ii) Orange Ltd. held 7,200 shares of Banana Ltd.
(iii) All investments were made on 1st July, 2013
(iv) The following were the balances on 1st July, 2013:

Orange Ltd. Banana Ltd.

Reserves 50,000 30,000
Profit & Loss A/c 40,000 50,000

(v) Orange Ltd. invoiced goods to Apple Ltd. for ` 8,000 at a cost plus 25% in December,
2013. The closing stock of Apple Ltd. includes such goods valued at ` 10,000.
(vi) Apple Ltd. proposed dividend at 15%.

Prepare the consolidated Balance Sheet as per Revised Schedule VI of the group as on
31st March, 2014. Working notes should form part of the answer. 15

Answer:

4.
Consolidated Balance Sheet of Apple Ltd. and
its Subsidiaries Orange Ltd. and Banana Ltd.
as on 31st March 2014
Particulars Note No `
I. EQUITY AND LIABILITIES
(1) Shareholder's Funds
(a) Share Capital 3,00,000
(b) Reserves and Surplus 1 3,44,200
(2) Share application money pending allotment
(3)Minority Interest 2 1,08,800
(4) Non-current liabilities
(5)Current Liabilities
(a)Trade Payables 3 1,80,000
(b)Other current liabilities 4 45,000
Total 9,78,000
II. ASSETS

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 Suggested Answer_Syl2008_Jun2014_Paper_16
(1) Non-current assets
(a) Fixed assets 5 5,86,000
(2) Current assets
(a) Inventories 6 1,78,000
(b) Trade receivables 7 1,50,000
(c) Cash and cash equivalents 8 64,000
Total 9,78,000

[Relevant Notes]

1. Reserve and Surplus ` `

Capital Reserve (WN – 3) 52,000
Other Reserves (WN – 6) 1,47,400
Profit and Loss A/c (WN – 5) 1,44,800 3,44,200
2 Minority interest
Orange Ltd. 82,800
Banana Ltd. 26,000 1,08,800
3. Trade Payables
Apple Ltd. 60,000
Orange Ltd. 70,000
Banana Ltd. 50,000 1,80,000
4 Other current Liabilities
Proposed Dividend 45,000
5 Fixed Assets
Apple Ltd. 1,40,000
Orange Ltd. 2,40,000
Banana Ltd. 2,06,000 5,86,000
6 Inventories
Apple Ltd 80,000
Less: Unrealised profit 2,000 78,000
Orange Ltd 60,000
Banana Ltd 40,000 1,78,000
7 Trade Receivables
Apple Ltd. 40,000
Orange Ltd. 50,000
Banana Ltd. 60,000 1,50,000
8 Cash and cash equivalents
Cash in hand
Apple Ltd. 20,000
Orange Ltd. 20,000
Banana Ltd. 20,000 60,000
Cash in Transit 4,000 64,000

Working Notes:

Shareholding Pattern:

Number of shares % of holding

In Orange Ltd.
Apple Ltd. 16,000 80%
Minority Interest 4,000 20%
In Banana Ltd.
Apple Ltd. 3,600 30%

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 Suggested Answer_Syl2008_Jun2014_Paper_16
Orange Ltd. 7,200 60%
Minority Interest 1,200 10%

1. Analysis of profit of Banana Ltd.

Pre-acquisition Post acquisition
Capital Reserve Revenue Reserve Revenue Profit
Reserve as on 1.7.2013 30,000 - -
Profit and Loss A/c on 01.07.2013 50,000 - -
Increase in Reserves - 30,000 -
Increase in Profit - - 30,000
80,000 30,000 30,000
Less: Minority Interest (10%) 8,000 3,000 3,000
72,000 27,000 27,000
Share of Apple Ltd 24,000 9,000 9,000
Share of Orange Ltd 48,000 18,000 18,000

2. Analysis of profit of Orange Ltd.

Pre-acquisition Post acquisition
Capital Reserve Revenue Reserve Revenue Profit
Reserve as on 1.7.2013 50,000 - -
Profit and Loss A/c on 1.7.2013 40,000 - -
Increase in Reserves - 30,000 -
Increase in Profit - - 60,000
90,000 30,000 60,000
Share in profit of Banana Ltd. - 18,000 18,000
(post acquisition)
90,000 48,000 78,000
Less: Minority Interest (20%) 18,000 9,600 15,600
Share of Apple Ltd. 72,000 38,400 62,400

3. Cost of control
` `
Investment in Orange Ltd 1,80,000
Investment in Banana Ltd
By Orange Ltd 1,00,000
By Apple Ltd 80,000 1,80,000
3,60,000
Less: Paid value of shares
In Orange Ltd. 1,60,000
In Banana Ltd. 1,08,000 2,68,000
Capital Profit of Apple Ltd
In Orange Ltd 72,000
In Banana Ltd. 24,000 96,000
Capital Profit of Orange Ltd in Banana Ltd. 48,000 4,12,000
Banana Reserve
Capital Ltd 52,000

4. Minority Interest
Orange Ltd Banana Ltd
(`) (`)
Share Capital 40,000 12,000
Capital Profit 18,000 8,000
Revenue Reserve 9,600 3,000

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Revenue Profit 15,600 3,000
83,200 26,000
Less: Unrealised profit on stock 20% of (` 10,000 x 25/125) 400 -
82,800 26,000

5. Profit and Loss A/c - Apple Ltd.

`
Balance as per separate Balance Sheet 1,20,000
Less: Proposed dividend 45,000
75,000
Add: Share of Orange Ltd 62,400
Share of Banana Ltd 9,000
1,46,400
Less: Unrealised profit on Stock (10,000 x 25/125 x 80%) 1,600
1,44,800

6. Other Reserve-Apple Ltd.

`
Balance as per separate Balance Sheet 1,00,000
Share of Orange Ltd. 38,400
Share of Banana Ltd. 9,000
1,47,400

7. Cash in transit
`
Due to Apple Ltd .from Orange Ltd. 24,000
Less: Due by Orange Ltd. 20,000
4,000

5. (a) The following details are given for TROMA LTD. for the year ended March 31, 2014:
(Amount in ` lakhs)
MP Division:
Sales to PQ Division 916
Other Domestic Sales 18
Export Sales 1,226
2,160
PQ Division:
Sales to HN Division 10
Export Sales to Europe 60
70
HN Division:
Export Sales to USA 54

Amount in ` Lakh
Particulars Head Office MP Division PQ Division HN Division
Pre-tax Operating Result — 48 6 (2)
Head Office Cost Reallocated — 14 8 6
Interest Costs — 2 2 2
Fixed Assets 16 60 12 36
Net Current Assets 14 36 12 26
Long-term Liabilities 12 6 4 36

Require:

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 Suggested Answer_Syl2008_Jun2014_Paper_16
Prepare a SEGMENTAL Report of TROMA LTD. for publication for the year ended March
31, 2014, keeping in view the relevant Accounting Standard (AS-17). 8

(b) Konkan Ltd. provides the following Balance Sheet as at 31.03.2014:

` in Crores
Sources of Funds:
Share Capital: Authorised 100
Issued: 12% Redeemable Pref. Shares of ` 100
each fully paid up 75
Equity Shares of ` 10 each fully paid 25 100
Reserves and Surplus: Capital Reserves 15
Securities Premium 25
Revenue Reserves 260 300
400
Application of Funds:
Fixed Asset: Cost 100
Less: Provision for Depreciation 100 Nil
Investments at cost: (Market Value ` 400 crores) 100
Current Assets: 340
Less: Current Liabilities 40 300
400

Additional Information:
The company redeemed preference shares on 01.04.2014. It also bought back 50
lakh equity shares of 10 each at ` 50 per share. The payments for the above were
made out of the huge bank balances which appeared in the accounts at Current
Assets.

You are required to:

(i) Pass the necessary Journal Entries for recording the above transactions;
(ii) Compute the value of Equity Share on Net Asset Basis; and
(iii) Prepare the modified Balance Sheet. 7

Answer:

5. (a)
TROMA LTD.
Segment Reporting
(` in lakh)
Particulars MP PQ HN Inter Segment Consolidated
Division Division Division elimination total
Segment Sales Revenue
Domestic 18 --- --- --- 18
Export 1,226 60 54 --- 1,340
Total external sales 1,244 60 54 --- 1,358
Inter Segment Sales 916 10 --- 926 ---
Total revenue 2,160 70 54 (926) 1,358
Segment result (given) 48 6 (2) --- 52
Head Office Expenses (28)

Operating profit 24
Interest expenses 6
Profit before tax 18
Information in relation to assets and liabilities:

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Fixed assets 60 12 36 108
Net current assets 36 12 26 74
Segment assets 96 24 62 182
Unallocated corporate assets 30
Total assets 212
Segment liabilities 6 4 36 --- 46
Unallocated corporate liabilities 12
Total liabilities --- --- 58

Sales revenue by geographical market:

(` in lakh)
Domestic Export sales Export to Export to Consolidated
sales (by MP division) Europe USA total
External sales 18 1,226 60 54 1,358

(b) (i)
Journal Entries in the Books of Konkan Ltd.
(` in crores)
i. 12% Preference Share Capital A/c Dr. 75
To, Preference Shareholders A/c 75
(Being, Redemption of Preference Shares due on 01.04.2014)
ii. Preference Shareholders A/c Dr. 75
To, Bank 75
(Being, payment made to Preference Shareholders on the
due date)
iii. Shares bought back A/c 25
To, Bank A/c 25
(Being, Shares bought back for 50 lakh shares @ ` 50 per
shares)
iv. Equity Share Capital A/c (50 lakhs x ` 10) Dr. 5
Securities Premium A/c (50 lakhs x ` 40) Dr. 20
To, Shares bought back A/c 25
(Being, cancellation of Equity Share Capital)
v. Revenue Reserve A/c Dr. 80
To, Capital Redemption Reserve A/c 80
(Being, creation of Capital Redemption Reserve to the
extent of the face value of Preference Shares redeemed
and Equity Shares bought back)

(ii)
Net Asset value of equity shares
` in Crores
Particulars Amount Amount
Fixed Assets NIL
Investments (at Market Value) 400
Current Assets 240 640
Less: Current Liabilities (-) 40
Net Assets available for Equity Shareholders 600
No. of Equity Shares Outstanding (in Crores) 2
Value per Equity Shares of ` 10 each = (600 / 2) ` 300

(iii)

Balance Sheet of Konkan Ltd. as at 1. 04. 2014 (Revised Schedule VI – Extracts)

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 Suggested Answer_Syl2008_Jun2014_Paper_16
Ref Note As at 1st As at 1st
Particulars
No. No. April, 2014 April, 2013
(` in Crores) (` in Crores)
I. EQUITY AND LIABILITIES
1 Shareholders‟ funds

(a) Share capital 1 20.00

(b) Reserves and surplus 2 280.00
2 Share application money pending allotment

3 Non-current liabilities
4 Current Liabilities
(a) Other current liabilities 40.00

Total 340.00
II. ASSETS

1 Non-current assets

(a) Fixed assets

(i) Tangible assets 3 Nil

(b) Non-current investments 4 100.00

2 Current assets

(a) Other current assets 5 240.00

Total 340.00

(` in Crores)
Note 1. Share Capital
Authorised Issued and subscribed Capital As at 1st As at 1st
April, 2014 April, 2013
200 lakhs Equity Share capital of `10 each 20.00
12% Redeemable Preference Share of `100 each Nil
[Redeemed at par]
Total 20.00

RECONCILATION OF SHARE CAPITAL

FOR EQUITY SHARE : As at 1st April, 2014 As at 1st April, 2013

Nos Amount (`) Nos Amount (`)

Opening Balance as on 01.04.13 2.50 25.00 NIL NIL

Add: Fresh Issue ( Incld Bonus shares , Right - - - -

shares, split shares, shares issued other than
cash)

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 Suggested Answer_Syl2008_Jun2014_Paper_16
Less: Buy Back of shares 0.50 5.00 NIL NIL

2.00 20.00 NIL NIL

FOR 12% REDEEMABLE PREFERENCE SHARE : As at 1st April, 2014 As at 1st April, 2013

Nos Amount (`) Nos Amount (`)

Opening Balance as on 01.04.13 0.75 75.00 NIL NIL

Add: Fresh Issue ( Incld Bonus shares , Right - - - -

shares, split shares, shares issued other than
cash)

Less: Redeemed at par 0.75 75.00 NIL NIL

NIL NIL NIL NIL

As at 1st As at 1st
Note 2. Reserve & Surplus
April, 2014 April, 2013
Capital Reserve 15.00
Securities Premium (25-20) 5.00
Capital Redemption Reserve (5 +75) 80.00
Revenue Reserve (260 – 80) 180.00
Total 280.00

As at 1st As at 1st
Note 3. Tangible Assets
April, 2014 April, 2013
Fixed Asset (at cost) 100.00
Less: Prov. For depreciation 100.00
Total Nil

As at 1st As at 1st
Note 4. Non-current Investments
April, 2014 April, 2013
Investment (Market Value ` 400 crores) 100.00
Total 100.00
As at 1st As at 1st
Note 5. Other Current assets
April, 2014 April, 2013
Other current assets (340 - 100) 240.00
Total 240.00

6. (a) Srihari Ltd. granted 500 options to each of its 2,500 employees in 2005 at an exercise
price of ` 50 when the market price was the same. The contractual life (vesting and
exercise period) of the options granted is 6 years with the vesting period and exercise
period being 3 years each. The expected life is 5 years and the annual forfeitures are
expected at 3%. The fair value per option is arrived at ` 15. Actual forfeitures in 2005
were 5%. However at the end of 2005, the management of Srihari Ltd. still expects that

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 Suggested Answer_Syl2008_Jun2014_Paper_16
the actual forfeiture would average only 3% over the entire vesting period. During
2006, the management decide to revise its estimated forfeiture rate at 10% per
annum. Of the 2,500 employees, 1,900 employees have completed the 3 year vesting
period, 1,000 employees exercise their right to obtain shares vested in them in
pursuance of ESOP at the end of 2009 and 500 employees exercise their right at the
end of 2010. The rights of the remaining employees expire unexercised at the end of
2010. The face value per share is ` 10.
Show the necessary journal entries with suitable narrations. Working should form part
of your answer. 10

(b) An enterprise reports quarterly, estimates an annual income ` 10 lakhs. Assume tax
rates on 1st ` 5,00,000 at 30% and on the balance at 40%. The estimated quarterly
incomes are ` 75,000; ` 2,50,000; ` 3,00,000 and ` 3,75,000.
Calculate the tax expense to be recognised in each quarter as per AS-25. 5

Answer:

6. (a)
Journal Entries
In the books of Srihari Ltd.

Year Particulars Debit (`) Credit (`)

2005 Employee Compensation Expenses A/c Dr 57,04,205
(i) To, Employees Stock Options Outstanding A/c 57,04,205
(Being the compensation expenses recognized in
respect of the ESOP)
(ii) Profit and Loss A/c Dr 57,04,205
To, Employees Compensation Expenses A/c 57,04,205
(Being expenses of the year transferred to Profit and
Loss A/c)
2006 Employee Compensation Expenses A/c Dr 34,08,295
(i) To, Employees Stock Options Outstanding A/c 34,08,295
(Being the compensation expenses recognized in
respect of the ESOP)
(ii) Profit and Loss A/c Dr 34,08,295
To, Employees Compensation Expenses A/c 34,08,295
(Being expenses of the year transferred to Profit and
Loss A/c)
2007 Employee Compensation Expenses A/c Dr 51,37,500
(i) To, Employees Stock Options Outstanding A/c 51,37,500
(Being the compensation expenses recognized in
respect of the ESOP)
(ii) Profit and Loss A/c Dr 51,37,500
To, Employees Compensation Expenses A/c 51,37,500
(Being expenses of the year transferred to Profit & Loss
A/c)
2009 Bank A/c Dr 2,50,00,000
(i) Employee Stock Options Outstanding A/c Dr 75,00,000
To, Share Capital A/c 50,00,000
To, Securities Premium A/c 2,75,00,000
(Being shares issued to employees against options
vested in them in pursuance of ESOP)
2010 Bank A/c Dr 1,25,00,000
(i) Employee Stock Options Outstanding A/c Dr 37,50,000
To, Share Capital A/c 25,00,000

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 Suggested Answer_Syl2008_Jun2014_Paper_16
To, Securities Premium A/c 1,37,50,000
(Being shares issued to employees against options
vested in them in pursuance of the ESOP)

(ii) Employees Stock Options Outstanding A/c Dr 30,00,000

To, General Reserve A/c 30,00,000
(Being the balance standing to the credit of stock
options outstanding account, in respect of vested
options expired unexercised, transferred to General
Res. A/c)

Working Notes:

A. Fair value of options recognized as expenses:

Year 2005
Number of Options expected to vest = 500 x 2,500 x 0.97 x 0.97 x 0.97
= 11,40,841 options
Fair value of Options expected to vest = 11,40,841 x ` 15 = ` 1,71,12,615
One third of the fair value recognized as expenses = ` 1,71,12,615/3 = ` 57,04,205

Year 2006
Fair value of Options revised in the year = 500 x 2,500 x 0.90 x 0.90 x 0.90 x ` 15
= 1,36,68,750
Revised cumulative expenses in the year 2006 = ` 1,36,68,750 x 2/3 = ` 91,12,500
Less: Already recognized in year 2005 = ` 57,04,205
Expenses to be recognized in year 2006 = ` 34,08,295

Year 2007
Number of options actually vested = 1,900 x 500 = 9,50,000
Fair value of options actually vested = 9,50,000 x 15 = 1,42,50,000
Less: Expenses recognized till the year 2007 = 91,12,500
Balance amount to be recognized = 51,37,500.

B. Amount recorded in Share Capital Account and Securities Premium Account

upon issue of shares

Particulars 2009 2010

Number of employees exercising option 1,000 500
Number of shares issued upon exercise of option @
500 per employee 5,00,000 2,50,000
Exercise price received @ ` 50 per share 2,50,00,000 1,25,00,000
Corresponding amount recognized in the Employee
Stock Options Scheme A/c @ ` 15 per option 75,00,000 37,50,000
Total Consideration 3,25,00,000 1,62,50,000
Amount to be recorded in Share Capital A/c @ `10
per share 50,00,000 25,00,000
Amount to be recorded in Securities Premium A/c @ `
55 per share (`65 – `10) 2,75,00,000 1,37,50,000
3,25,00,000 1,62,50,000

(b) Income tax expense to be recognized in each interim period based on the best
estimate of the weighted Average annual income tax rate expected for the financial
year.

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 Suggested Answer_Syl2008_Jun2014_Paper_16
Estimated annual income ` 10,00,000
Tax expenses : - 30% on ` 5,00,000 ` 1,50,000
40% on ` 5,00,000 ` 2,00,000
Total ` 3,50,000

 Weighted average annual income tax rate is = 3,50,000 x 100 / 10,00,000 = 35%

Tax expense to be recognized in each of the quarterly reports:

Quarter I 75,000 x 35% ` 26,250

Quarter II 2,50,000 x 35% ` 87,500
Quarter III 3,00,000 x 35% ` 1,05,000
Quarter IV 3,75,000 x 35% ` 1,31,250
Total ` 3,50,000

7. (a) The summarised Balance Sheet of Golden Ltd. as at 31st March, 2014 is as follows:
(` in Lakhs)
Liabilities Assets
Share Capital Goodwill, at cost 210
90 lakhs equity shares of ` 10 each fully paid up 900 Other Fixed Assets 5,583
45 lakhs equity shares of ` 10 each, ` 8 paid up 360 Current Assets 1,455
75 lakhs equity shares of ` 5 each, fully paid up 375 Loans and Advances 466
Reserve and Surplus 2,728
Secured Loans 2,250
Current Liabilities 621
Provisions 480
Total 7,714 Total 7,714

You are required to calculate the following for each one of the three categories of
equity shares appearing in the above mentioned Balance Sheet:
(i) Intrinsic value per share on the basis of book values of Assets and Liabilities
including goodwill;
(ii) Value per share on the basis of dividend yield, Normal rate of dividend in the
concerned industry is 12%, whereas Golden Ltd. has been paying 16% dividend
for the last four years and is expected to maintain it in the next few years; and
(iii) Value per share on the bais of EPS.
For the year ended 31st March, 2014 the company has earned ` 685 lakhs as
profit after tax, which can be considered to be normal for the company. Average
EPS for a fully paid share of ` 10 of a company in the same industry is ` 3. 10

(b) A company purchased at Plant for ` 100 lakhs during the financial year 2013-14 and
installed it immediately. The price charged by the Vendor included excise duty
(CENVAT credit available) of ` 8 lakhs. During the year, the company also produced
excisable goods on which Excise Duty chargeable is `7 lakhs. Show the journal
entries describing CENVAT credit treatment. At what amount should the Plant be
capitalised? 5

Answer:

7. (a) (i) Intrinsic Value on the basis of book values

` in lakhs ` in lakhs
Goodwill 210
Other Fixed Assets 5,583
Current Assets 1,455
Loans and Advances 466

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 Suggested Answer_Syl2008_Jun2014_Paper_16
7,714
Less: Secured Loans 2,250
Current Liabilities 621
Provision 480 3,351
4,363
Add: Notional call on 45 lakhs equity shares@ ` 2 per share 90
4,453

Equivalent number of equity shares of ` 10 each:

` in lakhs
Fully paid shares of ` 10 each 90
Partly-paid shares after notional call 45
Fully paid shares of ` 5 each,(75/10 x 5) 37.5
172.5

Value per equivalent share of ` 10 each = 4,453/172.5 =`25.81

Hence, intrinsic value of each equity share will be:

Fully paid share of ` 10 each = `25.81

Share of ` 10, ` 8 paid-up = `25.81 - `2.00 =` 23.81.
Fully paid share of ` 5 = ` 25.81/2 =`12.90.

(ii) Valuation on dividend yield basis:

Fully paid share of ` 10. = 16/12 x 10 = ` 13.33

Share of ` 10, ` 8 paid-up = 16/12 x 8 = ` 10.67.
Fully paid share of `5 each =16/12 x 5 = ` 6.67.

(iii) Valuation On the basis of EPS:

Profit after tax = ` 685 lakhs.

Total share capital = ` (900+360+375)lakhs = ` 1,635 lakhs.
Earning per rupee of share capital = ` 685/1,635 = ` 0.419.

Earnings per fully paid share of ` 10 = `0.419 x 10 = ` 4.19.

Earnings per share of ` 10, ` 8 paid-up = ` 0.419 x 8 = `3.35.
Earnings per fully paid share of ` 5 = `0.419 x 5 = ` 2.10.

Value of fully paid share of ` 10 = ` 4.19/3 x 10= ` 13.97.

Value of share of ` 10, ` 8 paid-up = ` 3.35/3 x 10= ` 11.17.
Value of fully paid share of ` 5. = ` 2.10/3 x 10= ` 7.00

(b)
Journal Entries
Year Particulars Debit (`) Credit (`)
2013-14 Fixed Assets A/c Dr 92,00,000
CENVAT Credit Receivable (capital goods) A/c Dr 4,00,000
CENVAT Credit Deferred (capital goods) A/c Dr 4,00,000
To, Vendor/Bank A/c 1,00,00,000
(Being the plant purchased, including immediate
CENVAT credit available of 50%,balance 50% credit
available in subsequent year)

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 Suggested Answer_Syl2008_Jun2014_Paper_16
Excise Duty A/c Dr 4,00,000
To,CENVAT Credit Receivable (capital goods) A/c 4,00,000
(Being set off of CENVAT credit during the year)
Excise Duty A/c Dr 3,00,000
To, Bank A/c 3,00,000
(Being balance excise duty payable `7,00,000-
`4,00,000 set off, now settled)
2014-15 CENVAT Credit Receivable (capital goods) A/c Dr 4,00,000
To, CENVAT Credit Deferred (capital goods)A/c 4,00,000
(Being transfer of balance CENVAT credit available
on capital goods)

Balance Sheet (abstract)

Liabilities ` Assets `
Fixed Assets: Plant at cost 92,00,000
Current Assets, Loans and Advances: 4,00,000
CENVAT Credit Deferred (capital goods)

8. Write short notes on any three of the following: 5x3=15

(a) Role of Public Accounts Committee;

(b) Corporate Social Reporting;
(c) Human Resource Accounting;
(d) Reporting Requirements of Environmental Accounting.

Answer:

8. (a) The role of the Public Accounts Committee (PAC) is to assess the integrity, economy,
efficiency and effectiveness of government financial management. It achieves this
by:
 examining Government financial documents; and
 considering the reports of the Auditor – General.

A significant amount of the committee‟s work involves following up matters raised in

the reports to Parliament by the Auditor – General. This ensures that public sector
financial issues are scrutinized for the benefit of the Parliament and the public.

While scrutinizing the Appropriation Accounts of the Government of India and the
Reports of the Comptroller and Auditor General thereon, it is the duty of the
Committee to satisfy itself –

- that the money shown in the accounts as having been disbursed were legally
available for and applicable to the service or purpose to which they have been
applied or charged;
- that the expenditure confirms to the authority which governs it, and
- that every re-appropriation has been made in accordance with the provisions
made in this behalf under rules framed by competent authority.

An important function of the Committee is to ascertain that money granted by

Parliament has been spent by Government “within the scope of the demand”. The
functions of the Committee extend “beyond the formality of expenditure to its
wisdom, faithfulness and economy”. The Committee thus examines cases involving
losses, nugatory expenditure and financial irregularities.

It is also the duty of the PAC to examine the statement of accounts of autonomous
and semiautonomous bodies, the audit to which is conducted by the Comptroller &

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Auditor General either under the directions of the President or by a Statute of
Parliament.

(b) Corporate Social Reporting:

The term corporate social reporting refers to the information with respect to
discharging social responsibility of corporate entities. The stage of transition in the
accounting function from the historical cost based profitability accounting to social
responsibility accounting is a good concept, quite apt in the present day data
requirements of the "Users of Accounts".

The concept of Corporate Social Reporting is essentially based on the relevant social
objectives, usually termed as Net Income Contribution, Human Resources
Contribution, Public Contribution, Environmental Contribution and product or service
contribution.

Considering the major socio-economic problems of the country, the major significant
groups which can be evaluated towards reporting the corporate social reporting for
the Indian corporate.

These include the following:

 Employment opportunities
 Foreign exchange transactions
 Energy conservation
 Research and development
 Contribution towards Government Exchequer
 Social projects
 Environmental control
 Consumerism

In the initial stages, it is difficult to assess the social costs incurred by a corporate
house and the social benefits generated in monetary terms for evaluating the
financial impact on the business houses. Unless suitable methodologies are made
available for converting the relevant social costs-benefit in suitable monetary terms, it
would be a significant development to initiate with the concept of descriptive social
reporting.

Further research would be required in the relevant area which can develop either the
reporting segments of corporate social reporting in the changing context of a
dynamic socio-economic environment.

(c) Human Resource Accounting (HRA):

Human Resource Account (HRA) is an attempt to identify, quantify and report

investments made in human resources of an organization. Leading public sector units
like OIL, BHEL and NTPC have started reporting human resources in their annual
reports as additional information. Although human being are considered as the prime
mover for achieving productivity, and are placed above technology, equipment
and money, the conventional accounting practice does not assign significance to
the human resource. Human resources are not thus recognized as 'assets' in the
Balance Sheet, while investments in human resources are not considered as assets
and not amortized over the economic service life. The result is that the income and
expenditure statement comprising current revenue and expenditure gives an
incorrect picture of the real affairs of the organization. Accountants have been
severely criticized by the Behaviroral Scientists for their failure to value human

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 Suggested Answer_Syl2008_Jun2014_Paper_16
resources, as this has come out as a handicap for effective management. Human
resource accounting provides scope for planning and decision making in relation to
proper manpower planning. Also, such accounting can bring out the effect of
various new rules, procedures and incentives relating to work force, and in turn, can
act as an eye opener for modifications of existing laws and statutes.

(d) Reporting requirements of Environmental Accounting:

Environmental Accounting is an attempt to identify and bring in the lime light the resources
that are consumed and the relevant costs rendered reciprocally to the environment
by a business enterprise. Environmental Accounting constitutes a method of recording
environmental elements and includes:

 valuation of natural resources

 measuring the income there from
 keeping relevant records of the related costs
 estimating their quantities and providing depreciation on them.

Under a comprehensive Corporate Accounting framework on environmental issues, the

Board of Directors in their Report or Management discussions should include the following
aspects, namely
 Type of environmental issues which are pertinent to the enterprise and its specific
industry.
 Policy and programmes that have been implemented by the concerned company
with respect to the Environmental Protection Measures or where there is no policy or
programmes, such facts should be disclosed.
 Improvements made by the company in key areas, since the introduction of
the policy, or over the past five years, whichever is shorter.
 Environmental Emission Targets that the company has set) for itself and how the
company is performing relative to the pre determined targets.
 Extent to which Environmental Protection Measures have been undertaken as per
Government Legislation and the extent to which Governments requirements ( e.g.
time table for reduction of emissions are achieved).
 Where any material proceedings under environmental laws have been taken, a
disclosure of the known and potentially significant environmental problem shall be
disclosed.
 Financial or Operational effect of Environmental Protection Measures on the Capital
Expenditure and earnings of the company/enterprise for the current period and
any specific impact on future periods.
 Actual amount charged to operations in the current period, together with a
description of the relative environmental measures.
 Sub classification of the above actual amounts into the following:
 Liquid Effluent Treatment
 Water, Gas and Air Treatment
 Solid Waste Treatment
 Analysis Control and Compliance
 Remediation
 Recycling
 Others (e.g. accidents, safety, etc.)
 When material the actual amount capitalised during the current period,
accumulated amount capitalized to date, and the period for amortising, or
writing off, such amounts, together with a description of the environmental
measures to which they relate should be stated. Where it is not possible to segregate
the amount that relates to environmental measures this fact could be stated.

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