PAPER - 1: ACCOUNTING PART ~ I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY FOR MAY 2020 EXAMINATION ‘A. Applicable for May, 2020 examination 1. Amendments in Schedule Ill (Division 1) to the Companies Act, 2013 In exercise of the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013), the Central Government made the following amendments in Division | of the Schedule III with effect from the date of publication of this notification in the Official Gazette: (A) under the heading “ll Assets’, under sub-heading ‘Non-current assets’, for the words “Fixed assets’, the words “Property, Plant and Equipment’ shall be ‘substituted; (8) in the ‘Notes’, under the heading “General Instructions for preparation of Balance Sheet", in paragraph 6,- (I) under the heading "B. Reserves and Surplus’, in iter (), in sub- item (c), the word “Reserve” shall be omitted; (I) inclause W., for the words “fixed assets”, the words “Property, Plant and Equipment’ shall be substituted. Il. Amendments in Schedule V to the Companies Act, 2013 In exercise of the powers conferred by sub-sections (1) and (2) of section 467 of the Companies Act, 2013, the Central Government hereby makes the following amendments to amend Schedule V. In PART Il, under heading “REMUNERATION’, in Section II - , (@) in the heading, the words “without Central Government approval’ shall be omitted; (0) in the first para, the words “without Central Government approval” shall be omitted; (c)__imitem (A), in the proviso, for the words "Provided that the above limits shall be doubled” the words “Provided that the remuneration in excess of above limits may be paid” shall be substituted; (4) in item (B), for the words “no approval of Central Government is required” the words "remuneration as per item (A) may be paid” shall be substituted; © The Institute of Chartered Accountants of India2 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 (@) inltem (8), in second proviso, for clause (i, the following shall be substituted, namely:- “(i the company has not committed any default in payment of dues to any bank ‘or publi financial institution or non-convertible debenture holders or any other ssecuted creditor, and in case of default, the prior approval of the bank or public, financial institution concemed or the non-convertble debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting."; (A) initem (8), in. second proviso, in clause (ii), the words “the limits laid down in” shall be omitted; In PART Il, under the heading “REMUNERATION’, in Section Ill, - (@) in the heading, the words “without Central Government approval’ shall be omitted; (b) in first para, the words “without the Central Government approval” shall be omitted; (c)_ in clause (b), in the long line, for the words “remuneration up to two times the amount permissible under Section II" the words “any remuneration to its managerial persons”, shall be substituted; Ill, Notification dated 13th June, 2017 to exempt startup private companies from preparation of Cash Flow Statement as per Section 462 of the Companies Act 2013 ‘As per the Amendment, under Chapter I, clause (40) of section 2, an exemption has been provided to a startup private company besides one person company, small company and dormant company. Accordingly, a startup private company is not required to include the cash flow statement in the financial statements ‘Thus the financial statements, with respect to one person company, small company, dormant company and private company (if such a private company is a start-up), may not include the cash flow statement. IV. Amendment in Higher Education Cess as per Finance Act, 2018 The rate of DDT is 15% excluding surcharge of 12% plus secondary and higher education cess is 4% (revised as per Finance Act, 2018). This revised effective rate 17.472% (that is, 15% plus surcharge@12% plus health and education cess @4%) will be considered for computation of corporate Dividend Tax in preparation of Financial Statements of companies. *Earlior this was 3%. © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 3 V. Amendment in AS 11 “The Effects of Changes in Foreign Exchange Rates” In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of the Companies Act, 1956, the Central Government, in consultation with National Advisory Committee on Accounting Standards, hereby made the amendment in the Companies (Accounting Standards) Rules, 2006, in the "ANNEXURE", under the heading "ACCOUNTING STANDARDS" under "AS 11 on The Effects of Changes in Foreign Exchange Rates", for the paragraph 32, the following paragraph shall be substituted, namely "32. An enterprise may dispose of its interest in a non-integral foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that operation. The payment of a dividend forms part of a disposal only when it constitutes @ retum of the investment. Remittance from a non-integral foreign operation by way of repatriation of accumulated profits does not form part of a disposal unless itconstitutes return of the investment. Inthe case of a partial disposal, only the proportionate share of the related accumulated exchange differences is included in the gain or loss. A write-down of the carrying amount of a non-integral foreign operation does not constitute a partial disposal. Accordingly, no part of the deferred foreign exchange gain or loss is recognized at the time of a write-down’. VI. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (reg. Issue of Bonus Shares) Alisted company, while issuing bonus shares to its members, must comply with the following requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: Regulation 295 - Conditions for Bonus Issue Subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed issuer shall be eligible to issue bonus shares to its members if: a) it is authorized by its articles of association for issue of bonus shares, capitalization of reserves, etc.: Provided that if there is no such provision in the articles of association, the issuer shall pass a resolution at its general body meeting making provisions in the articles of associations for capitalization of reserve; b) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; )__ithas not defaulted in respect ofthe payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus; @) any outstanding partly paid shares on the date of the allotment of the bonus shares, are made fully paid-up; e) any of its promoters or directors is not a fugitive economic offender. © The Institute of Chartered Accountants of India4 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Regulation 294 - Restrictions on a bonus issue (1) Anissuer shall make a bonus issue of equity shares only ifithaas made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily, Convertible debt instruments if any, in proportion to the convertible part thereof (2) The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments, shall be issued to the holder of such convertible debt instruments or warrants at the time of conversion of such convertible debt instruments, optionally convertible instruments, warrants, as the case may be, on the ‘same terms or same proportion at which the bonus shares were issued. (3) A bonus issue shall be made only out of free reserves, securities premium account or capital redemption reserve account and built out of the genuine profits or securities premium collected in cash and reserves created by revaluation of fixed assets shall not be capitalized for this purpose. (4) Without prejudice to the provisions of sub-regulation (3), bonus shares shall not be issued in lieu of dividends, (6)_Ifanissuer has issued Superior Voting Right (SR) equity shares to its promoters or founders, any bonus issue on the SR equity shares shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares.) Regulation 295 - Completion i (1) Anissuer, announcing a bonus issue after approval by its board of directors and ‘ot requiring shareholders’ approval for capitalization of profits or reserves for making the bonus issue, shall implement the bonus issue within fitteen days from the date of approval of the issue by its board of directors: Provided that where the issuer is required to seek shareholders’ approval for capitalization of profits or reserves for making the bonus issue, the bonus issue shall be implemented within two months ‘rom the date of the meeting of its board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’ approval Explanation For the purpose of bonus issue to be considered as ‘implemented’ the date of commencement of trading shall be considered. (2) Abonus issue, once announced, shall not be withdrawn. Vil. Companies (Share Capital and Debentures) Amendment Rules, 2019 ~ reg. Debenture Redemption Reserve In exercise of the powers conferred by sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Govemment made the Companies (Share Capital and Debentures) Amendment Rules, 2019 dated 16th August, 2019 to © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 5 amend the Companies (Share Capital and Debentures) Rules, 2014. As per the Companies (Share Capital and Debentures) Amendment Rules, under principal rules, in rule 18, for sub-rule (7), the following sub-rule shall be substituted, namely: - “(7) The company shall comply with the requirements with regard to Debenture Redemption Reserve (DRR) and investment or deposit of sum in respect of debentures maturing during the year ending on the 31st day of March of next year, in accordance with the conditions given below:- (@) Debenture Redemption Reserve shall be created out of profits of the company available for payment of dividend; (0) the limits with respect to adequacy of Debenture Redemption Reserve and investment or deposits, as the case may be, shall be as under;~ (i) Debenture Redemption Reserve is not required for debentures issued by All India Financial Institutions regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures; (i) For other Financial Institutions within the meaning of clause (72) of section 2 of the Companies Act, 2013, Debenture Redemption Reserve shall be as applicable to Non Banking Finance Companies registered with Reserve Bank of india (ii) Forlisted companies (other than All India Financial Institutions and Banking Companies as specified in sub-clause (i), Debenture Redemption Reserve is not required in the following cases - (A) in case of public issue of debentures - A. for NBFCs registered with Reserve Bank of India under section 45-1A of the RBI Act, 1934 and for Housing Finance Companies registered with National Housing Bank; B. for other listed companies; (B) in case of privately placed debentures, for companies specified in sub- items A and B. (iv) for unlisted companies, (other than All India Financial Institutions and Banking Companies as specified in sub-clause ()) - (A). for NBFCs registered with RBI under section 45-1A of the Reserve Bank of India Act, 1934 and for Housing Finance Companies registered with National Housing Bank, Debenture Redemption Reserve is not required in case of privately placed debentures. (8) for other unisted companies, the adequacy of Debenture Redemption Reserve shall be ten percent. of the value of the outstanding debentures; (v)_ Incase a company is covered in item (A) or item (B) of sub-clause (i) of clause (b) or item (B) of sub-clause (iv) of clause (b), it shall on or before the 30th day of April in each year, in respect of debentures issued by a © The Institute of Chartered Accountants of India6 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 company covered in item (A) or item (B) of sub clause (i) of clause (b) or item (B) of sub-clause (iv) of clause (b), invest or deposit, as the case may be, a sum which shall not be less than fifteen per cent., of the amount of its debentures maturing during the year, ending on the 31st day of March of the next year in any one or more methods of investments or deposits as provided in sub-clause (vi) Provided that the amount remaining invested or deposited, as the case may be, shall not at any time fall below fifteen percent. of the amount of the debentures maturing during the year ending on 31st day of March of that year. (vi) for the purpose of sub-clause (v), the methods of deposits or investments, as the case may be, are as follows:— (A) in deposits with any scheduled bank, free from any charge or lien; (B) in unencumbered securities of the Central Government or any State Government; (C) in unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882; (D) in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882 Provided that the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above. (c) in case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule, (@) the amount credited to Debenture Redemption Reserve shall not be utilized by the company except for the purpose of redemption of debentures.” NOTE: Chapter 8 “Redemption of Debentures” of the Intermediate Paper 1 ‘Accounting Study Material (Module II) has been revised and uploaded on the BoS Knowledge Portal ofthe Institute's website. It's advised to refer the updated chapter uploaded on the BoS Knowledge Portal of the Institute's website at the link: https:/Iresource.cdn ical orq/55831b0s452290p8.pdf. B. Not applicable for May, 2020 examination Non-Applicability of Ind ASs for May, 2020 Examination, The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards) Rules, 2015 on 16" February, 2016, for compliance by certain class of companies. These Ind AS are not applicable for May, 2020 Examination. © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 7 Exclusion of Accounting Standards and topics from the Curriculum of Accounting we. May, 2020 Examination The following topics! sub-topics/ Accounting Standards have been excluded from the Curriculum of Accounting w.e-f. May, 2020 Examination: ‘© Application of Accounting Standards: AS 4; AS 5; AS 17 and AS 22; ‘* Accounting for Tax: Concept of deferred tax asset and deferred tax liability inline with ‘AS 22 under Company Accounts; Dissolution of partnership firms including piecemeal distribution of assets; ‘Amalgamation of partnership firms; Conversion of partnership firm into a company and Sale to a company; Issues related to accounting in Limited Liability Partnership. E: July 2049 Edition of the Study Material on Paper 1 Accounting is applicable for May, 2020 Examination. PART - Il: QUESTIONS AND ANSWERS: QUESTIONS Preparation of Financial Statements of Companies 1, On 31s March 2019, Gaurav Ltd. provides you the following particulars: Particulars Debit ?[ Credit & Equity Share Capital (Face value of € 100 each) 12,60,000 Call in Arrears 1,250 Land & Building 6,87,500 Plant & Machinery 6,56,250 Furniture 62,500 General Reserve 2,62,500 Loan from State Financial Corporation 41,87,500 Stock Raw Materials 62,500 Finished Goods 2,50,000 3,12,500 Provision for Taxation 1,60,000 Trade receivables 2,50,000 Advances: 53,375 Profit & Loss Account 1,08,375 © The Institute of Chartered Accountants of India8 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Cash in Hand Cash at Bank Unsecured Loan Trade payables 37,500 3,08,750 The following additional information is also provided: (i) 2,500 Equity shares were issued for consideration other than cash. (ii) Debtors of & 65,000 (included in trade receivables) are due for more than 6 months. (ii) The cost of the Assets were: Building ® 7,50,000, Plant & Machinery ® 8,75,000 and Furniture & 78,125 (iv). The balance of & 1,87,500 in the Loan Account with State Finance Corporation is inclusive of % 9,375 for Interest accrued but not due. The loan is secured by hypothecation of Plant & Machinery. (v) Balance at Bank includes % 2,500 with Global Bank Ltd., which is not a Scheduled Bank. You are required to prepare the Balance sheet of Gaurav Ltd. as on 31% March, 2019 as per Schedule III to the Companies Act, 2013. Managerial Remuneration 2. The following is the Draft Profit & Loss Alc of Harsha Ltd., the year ended 31st March, 20X1. z z To |Administrative, Selling and By [Balance bid 28,61,750 \distribution expenses} 41,12,710|" [Balance from} —201,26,825 Directors fees 6,73,900) Trading Alc Interest on debentures] 1,56,200|* [Subsidies received| —13,69,625] Managerial remuneration | 14,26,750| _|from Gove. " |Depreciation on fixed] —26,12,715] lassets " |Provision for Taxation 62,12,500 " |General Reserve 20,00,000 * |Investment Revaluation Reserve 62,500} " |Balance old 71,00,925 243,58,200 243,58,200} © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 9 Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was % 28,76,725. You are required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013, Cash Flow Statement 3. The following figures have been extracted from the books of X Limited for the year ended 0 31.3.2019. You are required to prepare a cash flow statement as per AS 3 using indirect, method. (i) Net profit before taking into account income tax and income from law suits but after taking into account the following items was & 20 lakhs: (2) Depreciation on Property, Plant & Equipment € 5 lakhs. (b) Discount on issue of Debentures written off € 30,000. (c) Interest on Debentures paid & 3,50,000. (4) Book value of investments € 3 lakhs (Sale of Investments for € 3,20,000) (e) Interest received on investments = 60,000. (f) Compensation received = 90,000 by the company in a suit filed. (i) Income tax paid during the year % 10,50,000 (i) 15,000, 10% preference shares of % 100 each were redeemed on 31.3.2019 at a premium of 6%. Further the company issued 50,000 equity shares of & 10 each ata premium of 20% on 2.4.2018. Dividend on preference shares were paid at the time of redemption. (iv) Dividend paid for the year 2017-2018 & 5 lakhs and interim dividend paid & 3 lakhs for the year 2018-2019, (v) Land was purchased on 2.4.2018 for & 2,40,000 for which the company issued 20,000 equity shares of 10 each at a premium of 20% to the land owner as consideration. (vi) Current assets and current liabilities in the beginning and at the end of the years were as detailed below: son 31.3.2018 | As on 31.3.2019 zg zg Inventory 12,00,000 13,18,000 Trade receivables 2,58,000 2,53100 Cash in hand 41,96,300 36,300 Trade payables 2,11,000 2,11,300 Outstanding expenses 75,000 81,80010 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Profit/Loss prior to Incorporation 4, The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P) Ltd. with effect from 1" January, 2018. However, company Could be incorporated only on 1** June, 2018. The business was continued on behalf of the company and the consideration of & 6,00,000 was settled on that day along with interest @ 12% per annum. The company availed loan of % 9,00,000 @ 10% per annum on ‘June, 2018 to pay purchase consideration and for working capital. The company closed its accounts for the first time on 31% March, 2019 and presents you the following summarized profit and loss account z z Sales 19,80,000, Cost of goods sold 11,88,000 Discount to dealers 46,200 Directors’ remuneration 60,000 Salaries 90,000 Rent 1,35,000 Interest 1,05,000 Depreciation 30,000 Office expenses 105,000 Sales promotion expenses 33,000 Preliminary expenses (to be writen off in first year itself) | __16,000] 18,07,200 Profit 1,72,800 Sales from June, 2018 to December, 2018 were 2% times of the average sales, which further increased to 3% times in January to March quarter, 2019. The company recruited additional work force to expand the business. The salaries from July, 2018 doubled. The ‘company also acquired additional showroom at monthly rent of € 10,000 from July, 2018. You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-incorporation and post-incorporation periods. ‘Accounting for Bonus Issue 5. The following is the summarised Balance Sheet of Bumbum Limited as at 31 March, 2019: zg Sources of funds Authorized capital 50,000 Equity shares of & 10 each 5,00,000 10,000 Preference shares of & 100 each (8% redeemable) 10,00,000 15,00,000 © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING " I rit and pai 30,000 Equity shares of € 10 each 3,00,000 5,000, 8%Redeemable Preference shares of € 100 each 5,00,000 Reserves & Surplus Securities Premium 6,00,000 General Reserve 6,50,000 Profit & Loss Alc 40,000 Trade payables 4,20,000 25,10,000 Application of funds PPE (net) 7,80,000 Investments (market value & 5,80,000) 4,90,000 Deferred Tax Assets 3,40,000 Trade receivables 620,000 Cash & Bank balance 2,80,000 25,10,000 In Annual General Meeting held on 20% June, 2019 the company passed the following resolutions: (i) To split equity share of & 10 each into 5 equity shares of & 2 each from 1* July, 2019. (ii) To redeem 8% preference shares at a premium of 5%. (ii) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date. On 10" July, 2019 investments were sold for € 5,55,000 and preference shares were redeemed, ‘The bonus issue was concluded by 12 September, 2019 You are required to joumalize the above transactions including cash transactions and prepare Balance Sheet as at 30 September, 2019. All working notes should form part of your answer. Right Issue 6. Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing shareholders. Zeta Ltd. is offering one new share for every two shares held by the shareholder. The market value of the share is % 360 and the company is offering one share of & 180 each. Calculate the value of aright. What should be the ex-right market price ofa share? © The Institute of Chartered Accountants of India2 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Redemption of Preference Shares 7. The capital structure of Chand Ltd. consists of 20,000 Equity Shares of €10 each fully paid up and 1,000 8% Redeemable Preference Shares of 7100 each fully paid up (issued on 1.4.20X1) Undistributed reserve and surplus stood as: General Reserve % 60,000; Profit and Loss Account ® 20,000; Investment Allowance Reserve is 10,000 out of which & 5,000 is not free for distribution as dividend; Cash at bank amounted to % 98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserve and surplus, subject to the concitions that a sum of % 20,000 shal be retained in general reserve and which should not be utilize. Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will appear in the Balance Sheet of the company after the redemption carried out Redemption of Debentures 8. The following balances appeared in the books of Lakshya Ltd. as on 1-4-20X1 ()) 10% Debentures % 37,50,000 (il) Balance of ORR & 1,25,000 (ii) DRR Investment 5,62,500 represented by 10% % 5,625 Secured Bonds of the Government of India of & 100 each, Annual contribution to the DRR was made on 3ist March every year. On 31-3-20X2, balance at bank was & 37,50,000 before receipt of interest. Interest on Debentures had already been paid. The investment were realized at par for redemption of debentures at a premium of 10% on the above date Lakshya Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC), You are required to prepare Debenture Redemption Reserve Account, Debenture Redemption Reserve Investment Account and Bank Account in the books of Lakshya Ltd. for the year ended 31st March, 20X2. Investment Accounts 9, Meera carried out the following transactions in the shares of Kumar Ltd. (1) On 1# Apri, 2019 she purchased 40,000 equity shares of & 1 each fully paid up for 60,000. (2) On 15th May 2019, Meera sold 8,000 shares for ® 15,200 (3) Ata meeting on 15% June 2019, the company decided: (i) Tomake a bonus issue of one fully paid up share for every four shares held on ‘st June 2019, and © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING B (i) To give its members the right to apply for one share for every five shares held ‘on 1st June 2019 at a price of & 1.50 per share of which 75 paise is payable on ‘or before 15th July 2019 and the balance, 75 paise per share, on or before 15th September, 2019 The shares issued under (i) and (i) were not to rank for dividend for the year ending 31" December 2019 (@) Meera received her bonus shares and took up 4,000 shares under the right issue, paying the sum thereon when due and selling the rights of the remaining shares at 40 paise per share; the proceeds were received on 30" September 2019, (0) On 15th March 2020, she received interim dividend from Kumar Ltd. of 15 per cent in respect ofthe current financial year. (c) On 30% March 2020, she received € 28,000 from the sale of 20,000 shares. You are required to record these transactions in the Investment Account in Meera’s books for the year ended 31*: March 2020 transferring any profits or losses on these transactions, to Profit and Loss account. Apply average cost basis. Expenses and tax to be ignored. Insurance Claim for loss of stock or loss of profit 10. A trader intends to take a loss of proft policy with indemnity period of 6 months, however, he could not decide the policy amount. From the following details, suggest the policy amount: g Tumover in ast financial year 36,00,000 Standing charges in last financial year 7,20,000 Net profit eamed in last year was 10% of turnover and the same trend expected in subsequent year. Increase in turnover expected 25%. To achieve additional sales, trader has to incur additional expenditure of % 50,000. Hire Purchase Transactions 11. On January 1, 20X1 Kasturi Ltd. acquired a Pick-up Van on hire purchase from Shorya Ltd The terms of the contract were as follows: (a) The cash price of the van was % 25,000 (b) % 10,000 were to be paid on signing of the contract (c)_ The balance was to be paid in annual instalments of & 5,000 plus interest. (@)_ Interest chargeable on the outstanding balance was 6% p.a. © The Institute of Chartered Accountants of India“4 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 (e) Depreciation at 10% p.a. is to be written-off using the straight-line method. You are required to show the Van account & Shorya Ltd. account in the books of Kasturi Ltd. from January 1, 20X1 to December 31, 20X3. Departmental Accounts 12. (a) How will you allocate the following expenses among different departments: (i) Rent, rates and taxes, repairs and maintenance, insurance of building: (i) Maintenance of capital assets (ii) PF/ESI contributions (iv) Carriage inward! Discount received (v) Lighting and Heating expenses (b) There is transfer/sale among the three departments as below: Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost. Department Y sells goods to X and Z ata profit of 15% and 20% on sales respectively, Department Z charges 20% and 25% profit on cost to Departments X and Y respectively. Department Managers are entitled to 10% commission on net profit subject to Urealised profit on departmental sales being eliminated Departmental profits after charging Managers’ commission, but before adjustment of Unrealised profit are as under: z Department X 180,000 Department Y 4,35,000 Department Z 90,000 Stocks lying at different Departments at the end of the year are as under: Dept. X Dept.Y | __Dept.Z Transfer from Department X - 75,000} $7,000 Transfer from Department Y 70,000 =| 60,000 Transfer from Department Z 30,000 25,000 : Find out the correct departmental profits after charging Managers’ commission. © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 15 Branch Accounting 13. On 31st March, 2019 Chennai Branch submits the following Trial Balance to its Head Office at Lucknow: Debit Balances Tinlacs Furniture and Equipment 18 Depreciation on furniture 2 Salaries 25 Rent 10 Advertising 6 Telephone, Postage and Stationery 3 Sundry Office Expenses 1 Stock on 1st April, 2018 60 Goods Received from Head Office 288 Debtors 20 Cash at bank and in hand 8 Carriage Inwards a1 448 Credit Balances Outstanding Expenses 3 Goods Retumed to Head Office 5 Sales 360 Head Office 80 448 Additional Information: Stock on 31st March, 2019 was valued at & 62 lacs. On 29th March, 2019 the Head Office dispatched goods costing = 10 lacs to its branch. Branch did not receive these goods before ‘1st April, 2019. Hence, the figure of goods received from Head Office does not include these goods. Also the head office has charged the branch @ 1 lac for centralized services for which the branch has not passed the entry You are required to (i) pass Joumal Entries in the books of the Branch to make the necessary adjustments and (i) prepare Final Accounts of the Branch including Balance Sheet. © The Institute of Chartered Accountants of India16 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Accounts from Incomplete Records 14. The books of account of Mr. Maan of Mumbai showed the following figures: 313.2018 31.3.2019 z z Furniture & fixtures 2,60,000 2,34,000 Stock 2,45,000 | 3,20,000 Debtors 4,25,000 ? Cash in hand & bank 4,10,000 ? Creditors 135,000 | 1,90,000 Bills payable 70,000 80,000 Outstanding salaries 19,000 20,000 ‘An analysis ofthe cash book revealed the following: = Cash sales 16,20,000 Collection from debtors 10,58,000 Discount allowed to debtors 20,000 Cash purchases 6,15,000 Payment to creditors 9,73,000 Discount received from creditors 32,000 Payment for bills payable 4,30,000 Drawings for domestic expenses 4,20,000 Salaries paid 2,36,000 Rent paid 4,32,000 Sundry trade expenses 81,000 Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Mr. Maan maintains a steady gross profit rate of 25% on sales. You are required to prepare Trading and Profit and Loss account for the year ended 318 March, 2019 and Balance Sheet as on that date. Framework for Preparation and Presentation of Financial Statements 15. A Ltd, has entered into a binding agreement with Gamma Ltd. to buy a custom-made ‘machine @ 1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 7 change its method of production. The new method will not require the machine ordered and it will be scrapped after delivery. The expected scrap value is nil You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-X2, Applicability of Accounting Standards ‘AS 1 Disclosure of Accounting Policies 16. (a) ABC Ltd. was making provision for non-moving inventories based on no issues for the last 12 months up to 31.3.2019. The company wants to provide during the year ending 31.3.2020 based on technical evaluation: Total value of inventory % 100 lakhs Provision required based on 12 months issue 3.5 lakhs Provision required based on technical evaluation 72.5 lakhs Does this amount to change in Accounting Policy? Can the company change the method of provision? (b) State whether the following statements are "True’ or ‘False’. Also give reason for your answer. 1. Certain fundamental accounting assumptions underline the preparation and presentation of financial statements. They are usually specifically stated because their acceptance and use are not assumed. 2 If fundamental accounting assumptions are not followed in presentation and preparation of financial statements, a specific disclosure is not required. 3. All significant accounting policies adopted in the preparation and presentation of financial statements should form part ofthe financial statements. 4. Any change in an accounting policy, which has a material effect should be disclosed. Where the amount by which any item in the financial statements is affected by such change is not ascertainable, wholly or n pat, the fact need not to be indicated. AS 2 Valuation of Inventories 47. (@) | Particulars Kg. z Opening Inventory Finished Goods 1,000 | 25,000 Raw Materials 1,100 11,000 Purchases 10,000 | 1,00,000 © The Institute of Chartered Accountants of India8 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Labour 76,500 Overheads (Fixed) 75,000 Sales 10,000 | 2,80,000 Closing Inventory Raw Materials 300 Finished Goods 1200 ‘The expected production forthe year was 15,000 kg of the finished product. Due to fallin market demand the sales price forthe finished goods was € 20 per kg and the replacement cost for the raw material was & 9.50 per kg on the closing day. You are required to calculate the closing inventory as on that date. AS 3 Cash Flow Statements (0) Classify the following activities as (1) Operating Activities, (2) Investing Activites, (3) Financing Activities (4) Cash Equivalents. a. Proceeds from long-term borrowings. b. Proceeds from Trade receivables. ©. Trading Commission received. 4. Redemption of Preference Shares. @. Proceeds from sale of investment Interim Dividend paid on equity shares. g. Interest received on debentures held as investment. h. Dividend received on shares held as investments. i. Rent received on property held as investment. j. Dividend paid on Preference shares. k. Marketable Securities ‘AS 10 Property, Plant and Equipment 18. (a) Entity Ahas a policy of not providing for depreciation on PPE capitalized in the year Until the following year, but provides for a full year's depreciation in the year of disposal of an asset. Is this acceptable? (b) Entity A purchased an asset on 1st January 2016 for & 1,00,000 and the asset had an estimated useful lfe of 10 years and a residual value of nil. On tst January 2020, the directors review the estimated ife and decide thatthe asset will probably be useful for a further 4 years. Calculate the amount of depreciation for each year, if company charges depreciation on Straight Line basis. © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 19 (c)_ The following items are given to you’ ITEMS (1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); (2) Costs of conducting business in a new location or with a new class of customer {including costs of staff training); (3) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management (4) Costs of opening a new facility or business, such as, inauguration costs; (6) Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. With reference to AS 10 “Property, Plant and Equipment’, classify the above items Under the following heads: HEADS (i) Purchase Price of PPE (i) Directly attributable cost of PPE or (ii) Cost not included in determining the carrying amount of an item of PPE. ‘AS 11 The Effects of Changes in Foreign Exchange Rates 19. (a) (i) AXE Limited purchased fixed assets costing § 5,00,000 on 1st Jan. 2018 from ‘an American company M/s M&M Limited. The amount was payable after 6 months. The company entered into a forward contract on ‘st January 2018 for five months @ 62.50 per dollar. The exchange rate per dollar was as follows (On 1* January, 2018 © 60.75 per dollar On 31% March, 2018 63.00 per dollar You are required to state how the profit or loss on forward contract would be recognized in the books of AXE Limited for the year ending 2017-18, as per the provisions of AS 11 (i) Assets and liabilities and income and expenditure items in respect of integral foreign operations are translated into Indian rupees at the prevailing rate of ‘exchange at the end of the year. The resultant exchange differences in the case of prot, is carried to other Liabilities Account and the Loss, ifany, is charged to revenue. You are required to comment in line with AS 14 © The Institute of Chartered Accountants of India20 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 AS 12 Accounting for Government Grants (b) How would you treat the following in the accounts in accordance with AS 12 "Government Grants’? (i) % 35 Lakhs received from the Local Authority for providing Medical facilities to the employees. (i) 100 Lakhs received as Subsidy from the Central Government for setting up @ unit in a notified backward area (ii) € 10 Lakhs Grant received from the Central Government on installation of anti- pollution equipment AS 13 Accounting for Investments 20. (a) Omega Equity Investments Ltd., wants to re-classiy its investments in accordance with AS 13. State the values, at which the investments have to be reclassified in the following cases: (i) Long term investments in Company A, costing & 8.5 lakhs are tobe re-classitied as current. The company had reduced the value of these investments to 7 6.5 lakhs to recognize a permanent decline in value. The fair value on date of transfer is € 6.8 lakhs, (i) Current investment in Company C, costing % 10 lakhs are to be re-classiied as long term as the company wants to retain them. The market value on date of transfer is ® 12 lakhs. (ii) Certain long term investments no longer considered for holding purposes, to be reclassified as current investments. The original cost ofthese investments was. % 18 lakhs but had been writen down to % 12 lakhs to recognize permanent decline as per AS 13. AS 16 Borrowing Costs (b) Govind Ltd. issued 12% secured debentures of % 100 Lakhs on 01.04.2018, to be utilized as under: | Particulars ‘Amount (in lakhs) Construction of factory building 40 Purchase of Machinery 35 Working Capital 25 In March 2019, construction ofthe factory bulding was completed and machinery was installed and ready for its intended use. Total interest on debentures for the financial year ended 31.03.2019 was & 12,00,000. During the year 2018-19, the company had © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 2 invested idle fund out of money raised from debentures in banks’ fixed deposit and had eamed an interest of & 3,00,000. You are required to show the treatment of interest under Accounting Standard 16 and also explain nature of assets. SUGGESTED ANSWERSIHINTS 1 Gaurav Ltd. Balance Sheet as on 31% March, 2019 Particulars Notes z Equity and Liabilities 1 Shareholders’ funds a Share capital 1 12,48,750 b Reserves and Surplus 2 3,70,875 2 Non-current liabilities Long-term borrowings 3 3,29,375 3 Current liabilities Trade Payables 2,50,000 Other current liabilities 4 9375 © Short-term provisions 5 1,60,000 Total 23,68,375 Assets 1 Non-current assets PPE 6 14,06,250, 2 Current assets a Inventories 7 3,12,500 b Trade receivables 8 2,50,000 © Cash and cash equivalents 9 3,46,250 4 Short-term loans and advances 53,375 Total 23,68,375 © The Institute of Chartered Accountants of India22 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Notes to accounts z 1 Share Capital Equity share capital Issued & subscribed & called up 12,500 Equity Shares of € 100 each (of the above 2,500 shares have been issued for consideration other than cash) 12,50,000 Less: Cals in arrears (1,250) | _12,48,750 Total 12,48,750 2. Reserves and Surplus General Reserve 2,62,500 Surplus (Profit & Loss Alc) 41,08,375 Total 3,170,875 3° Long-term borrowings Secured Term Loan State Financial Corporation Loan (1,87,500 - 9,375) (Secured by hypothecation of Plant and Machinery) 41,78,125 Unsecured Loan 4,51,250 Total 3,29,375 4. Other current liabilities Interest accrued but not due on loans (SFC) 9,375 5. Short-term provisions Provision for taxation 1,60,000 6 PPE Land and Building 7,50,000 Less: Depreciation (62,500) | 6,87,500 Plant & Machinery 8,75,000 Less: Depreciation 218,750) | 6,56,250 Fumiture & Fittings 78,125 Less: Depreciation 15,625) 62,500 Total 14,06,250 7 Inventories Raw Materials 62,500 Finished goods 2,50,000 © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING Total 8 Trade receivables Outstanding for a period exceeding six months Other Amounts Total 9 Cash and cash equivalents Cash at bank with Scheduled Banks 3,06,250 with others (Global Bank Ltd.) 2,500 Cash in hand Calculation of net profit u/s 198 of the Companies Act, 2013 308,750 37,500 [ z = Balance from Trading Alc 201,26,825 ‘Add: Subsidies received from Government 13,69,625, 214,986,450 Less: Administrative, selling and distribution | 41,12,710 expenses Director's fees 6,73,900 Interest on debentures 41,56,200 Depreciation on fixed assets as per Schedule I! | 28,76,725 | (78,19.535 Profit uls 198 136,76,915 Maximum Managerial remuneration under Companies Act, 2013 = 11% of & 136,76,915= & 15,04,461 X Ltd, Cash Flow Statement for the year ended 31% March, 2019 z z Cash flow from Operating Activities Net profit before income tax and extraordinary items: 20,00,000 Adjustments for: Depreciation on PPE 5,00,000 © The Institute of Chartered Accountants of India24 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Discount on issue of debentures 30,000 Interest on debentures paid 3,50,000 Interest on investments received (60,000) Profit on sale of investments (20,000) | __8,00,000 Operating profit before working capital changes 28,00,000 Adjustments for: Increase in inventory (1,18,000) Decrease in trade receivable 4,900 Increase in trade payables 300 Increase in outstanding expenses 6,800 | _(1,06,000 Cash generated from operations 26,94,000 Income tax paid 10,50,000) 16.44,000 Cash flow from extraordinary items: Compensation received in a suit filed 30,000 Net cash flow from operating activities 17,34,000 Cash flow from Investing Activities Sale proceeds of investments 3,20,000 Interest received on investments 60,000 Net cash flow from investing activities 3,80,000 Cash flow from Financing Activities Proceeds by issue of equity shares at 20% premium 6,00,000 Redemption of preference shares at 5% premium (15,75,000) Preference dividend paid (1,50,000) Interest on debentures paid (3,50,000) Dividend paid (6,00,000 + 3,00,000) (8,00,000 Net cash used in financing activities (22,75,000) Net decrease in cash and cash equivalents during the (1.61,000) year ‘Add: Cash and cash equivalents as on 31.3.2018 1,96,300 Cash and cash equivalents as on 31.3.2019 35,300 Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been considered in the cash flow statement as it does not involve any cash transaction. © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 5 Shreya (P) Limited Profit and Loss Account for 15 months ended 31% March, 2019 Pre. inc.| Post inc. Pre. inc.| Post inc. (6 months)| (10 months) (6 months)| (10 months) () @ () ( To Cost of sales 1,80,000| 10,08,000/By Sales | 3,00,000| 16,80,000, To Gross profit 1,20,000 6,72,000](W.N.1) 3,00,000] 16,80,000 To Discount to 7,000/ 39,200) By Gross dealers profit To Directors’ 60,000] By Loss 750 remuneration To Salaries (W.N.2) 18,750] 71,250 To Rent (W.N.3) 15,000] 1,20,000 To Interest (W.N.4) 30,000] 75,000 To Depreciation 10,000] 20,000 To Office expenses 35,000] 70,000 To Preliminary -| 18,000 expenses To Sales promotion 5,000] 28,000 expenses To Net profit -| 473.550 1,20,750| 6,72,000 1,20,750| _6,72,000 Working Notes: 1. Calculation of sales ratio: Let the average sales per month in pre-incorporation period be x ‘Average Sales (Pre-incorporation) =xX5=5x Sales (Post incorporation) from June to December, 2018 = 2%xX7 = 17.5x From January to March, 2019 =3AKXS =_10.5x Total Sales 28.0x Sales ratio of pre-incorporation & post incorporation is 5x : 28x26 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 2. Calculation of ratio for salaries Let the average salary be x Pre-incorporation salary = x X 5= 5x Post incorporation salary June, 2018 = duly 18 to March, 2019 Ratio is 5: 19 3. Calculation of Rent z Total rent 1,35,000 Less: Additional rent for 9 months @ % 10,000 p.m. _90,000 Rent of old premises apportioned in time ratio 45,000 Apportionment Pre Inc. Post Inc, Old premises rent 15,000 30,000 Additional Rent 90,000 15,000 1,20,000 4, Calculation of interest Pre-incorporation period from January, 2018 to May, 2018 (sonatas £30,000 10012 Post incorporation period from June, 2018 to March, 2019 (2oneon:t0xt0) = 275.000 10x12) 1,05,000 5. Bumbum Limited Journal Entries 2019) De®] Cr) ‘July 1 | Equity Share Capital A/c (& 10 each) Dr. | 3,00,000 To Equity share capital Al (& 2 each) 3,00,000 © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING a (Being equity share of & 10 each splitted into 5 equity shares of & 2 each) (1,50,000 X 2} July 10. |Cash & Bank balance Ac Dr. | 5,585,000 To Investment Alc 4,90,000 To Profit & Loss Alc 65,000 (Being investment sold out and profit on sale credited to Profit & Loss Ac) ‘July 10 [8% Redeemable preference share capital Alc Dr. | 5,00,000 Premium on redemption of preference share Ale Dr.| 25,000 To Preference shareholders Alc 5,25,000 (Being amount payable to preference share holders on redemption) July 10 | Preference shareholders Alc Dr. | 5,25,000 To Cash & bank Ale 5,25,000 (Being amount paid to preference shareholders) July 10 |General reserve Alc Dr.| 5,00,000 To Capital redemption reserve Alc 5,00,000 (Being amount equal to nominal value of preference shares transferred to Capital Redemption Reserve Alc on its redemption as per the law) ‘Sept. 12 {Capital Redemption Reserve Alc Dr. | 1,00,000 To Bonus to shareholders Alc 4,00,000 (Being balance in capital redemption reserve Capitalized to issue bonus shares) ‘Sept. 12 |Bonus to shareholders Alc Dr.| 1,00,000 To Equity share capital Alc 41,00,000 (Being 50,000 fully paid equity shares of € 2 each issued as bonus in ratio of 1 share for every 3 shares held) ‘Sept. 30 | Securities Premium Alc Dr. | 25,000 ‘To Premium on redemption of preference shares Alc 25,000 (Being premium on preference shares adjusted from securities premium account) © The Institute of Chartered Accountants of India28 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Balance Sheet as at 30 September, 2019 Particulars Notes z Equity and Liabilities 1 Shareholders’ funds Share capital 4,00,000 Reserves and Surplus 2 12,30,000 2 Current liabilities Trade Payables 4,20,000 Total 20,50,000 Assets 1 Non-current assets PPE 7,80,000 Deferred tax asset 340,000 2 Current assets Trade receivables 6,20,000 Cash and cash equivalents 3,10,000 Total 20,50,000 Notes to accounts 1 | Share Capital x z Authorized share capital 2,50,000 Equity shares of & 2 each 5,00,000 10,000 8% Preference shares of 7100 each 10,00,000 | 15,00,000 Issued, subscribed and paid up 2,00,000 Equity shares of € 2 each 4,00,000 2_ | Reserves and Surplus Securities Premium Ale Balance as per balance sheet 6,00,000 Less: Adjustment for premium on preference Shares (25,000) Balance 5,75,000 Capital Redemption Reserve (5,00,000-1,00,000) 400,000 General Reserve (6,50,000 ~ 5,00,000) 1,50,000 (¢ of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 29 Profit & Loss Alc ‘Add: Profit on sale of investment Working Notes: : 1. Redemption of preference shares 5,000 Preference shares of % 100 each 5,00,000 Premium on redemption @ 5% 25,000 Amount Payable 5,25,000 2. Issue of Bonus Shares Existing equity shares after spit (30,000 x 5) 150,000 shares Bonus shares (1 share for every 3 shares held) tobe issued 50,000 shares 3. Cash and Bank Balance Balance as per balance sheet 2,80,000 Add: Realization on sale of investment 5.55.00 8,35,000 Less: Paid to preference share holders (5,25,000 Balance 3.10,000 6. Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares + Rights No. of shares) = (& 360 x 2 Shares + € 180 x 1 Share) / (2 + 1) Shares % 900 / 3 shares = % 300 per share. Cum-right value of the share ~ Ex-right value ofthe share % 360 - ¥ 300 = 60 per share. Hence, any one desirous of having a confirmed allotment of one share from the company at & 180 will have to pay @ 120 (2 shares x % 60) to an existing shareholder holding 2 ‘shares and willing to renounce his right of buying one share in favour of that person. Value of right 1. Journal Entries Date | Particulars Dr.) [Cr (@) Bank Alc Dr. | 25,000 To Equity Share Capital Alc 25,000 (Being the issue of 2,500 Equity Shares of & 10 © The Institute of Chartered Accountants of India30 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 each at par as per Board's Resolution No....dated......) 8% Redeemable Preference Share Capital Alc 1,00,000, Premium on Redemption of Preference Shares Alc. 10,000 To Preference Shareholders Alc (Being the amount paid on redemption transferred to Preference Shareholders Account) Preference Shareholders Alc | pr. | 4,10,000 To Bank Alc 4,10,000 (Being the amount paid on redemption of preference shares) Profit & Loss Alc To Premium on Redemption of Preference Shares Alc (Being the premium payable on redemption is adjusted against Profit & Loss Account) General Reserve Alc Profit & Loss Alc Investment Allowance Reserve Alc To Capital Redemption Reserve Alc (Being the amount transferred to Capital Redemption Reserve Account as per the |__| requirement of the Act) Balance Sheet as on ... Particulars Notes No. zg EQUITY AND LIABILITIES 1. | Shareholders’ funds a | Share capital 1 2,25,000 b | Reserves and Surplus 2 1,02,000 Total 2 ASSETS 2. | Current Assets Cash and cash equivalents 13,000 (98,000 + 25,000 — 1, 10,000) Total 2 © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING u Notes to accounts 4. Share Capital 22,500 Equity shares (20,000 + 2,500) of €10 each fully paid up __2,25,000 2. Reserves and Surplus General Reserve 20,000 Capital Redemption Reserve 75,000 Investment Allowance Reserve 5,000 1,00,000 Working Note: No of Shares to be issued for redemption of Preference Shares: Face value of shares redeemed 100,000 Less: Profit available for distribution as dividend: General Reserve: %(80,000-20,000) 60,000 Profit and Loss (20,000 ~ 10,000 set aside for adjusting premium payable on redemption of preference shares) 10,000 Investment Allowance Reserve: (® 10,000-5,000) 5,000 _(® 75,000) 25,000 Therefore, No. of shares to be issued = 25,000/%10 = 2,500 shares. 8. Debenture Redemption Reserve Account Date [Particulars T [Date [Particulars z 31 March, [To General reserve 18 April, [By Balance bid 4,25,000 20x2—"|Alo note 1 (Refer| 3,75,000 20x1 Note 1) 4 _Apri,|By Profit and loss Alc] 2,50,000] 20x1 | (Refer Note 1) 3.75,000 3.75,000 10% Secured Bonds of Govt. (DRR Investment) Alc z z 1 April, 20X1 | To Balance bid | 5,562,500 | 31% March, | By Bank Alc | 5,62,500 20x2 5,62,500 5.62.50 Bank Account © The Institute of Chartered Accountants of India32 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 z x ‘31% March, | To Balance b/d 37,50,000 | 31 March, | By Debenture holders) 41,25,000 20x2 [To Interest on) 86,250|20X2 | Ale DRR Investment. (110% of 37,50,000) (5,62,500X 10%) To DRR By Balance cid 243,750 Investment Alc 562,500 43,68,750. 43,68,750_ Working note ~ Calculation of DRR before redemption = 10% of & 37,50,000 = 3,75,000 Available balance = & 1,25,000 DRR required =3,75,000 - 1,25,000 = € 2,50,000. 9. Investment Account (Shares in Kumar Limited) in the books of Meera Dato] Particulars | No. ofincome| AmounfDate Pariculars | No. of Income] Amour, shares Share 018 teore prt To Bank 40,009] 60,000)ay 158y Bank (Sale) | 8,000] | 45,200 (Purchases) ay 15 fo Proft & Loss} 3.20 Ne (WNA) June18 ffo Bonus issue | 8,000 wileo20 July 15 |To Bank (@ 75 p,| 4,000) 3,000Mar. [By Bank 4,800] paid on 400 ls (Oivgena shares) @. 1% of © 32,000) \Sept. [To Bank (@ 75 p. || 3,000/Mar. |By Bank (Sale) | 20,000) -| 28,000) paid on 4,000 bo shares) 2020 |ro Proft & Loss s.4ss|iar. |By Balonce ci | 24,000) | 29.455 IMer.31] Ale (W.N2} fs fo Proft & Loss| -| 4200 Ne | |_| 2.000} 4.900) 72.655 sz000| «a00) 72.655 Working Notes: © The Institute of Chartered Accountants of India(1) | Profit on Sale on 15-5-2019: Cost of 8000 shares @ &1.50 12,000 Less: Sales price 215,200 Profit 3,200 (2) | Cost of 20,000 shares sold: Cost of 44,000 shares (48,000 + 6,000) 54,000 324,545 *- Cost of 20,000 shares ( £54000 _ 420, othr 44,000 shares Profit on sale of 20,000 shares (& 28,000 ~ & 24,546) £3455 10. (a) Calculation of Gross Profit Gross Prost = NetPro + Standing Charges 495 Tumover = (G,60,000+7,20,000)/36,00,000= 30% {b) Calculation of policy amount to cover loss of profit z Tumover in the last financial year 36,00,000 ‘Add: 25% increase in turnover 9.00,000 45,00,000 Gross profit on increased turnover 43,50,000 ‘Add: Additional standing charges 50,000 Policy Amount 14,00,000 n, PAPER - 1 : ACCOUNTING 33 1.1.20X3 {To |Balance bid ‘Therefore, the trader should go in for a loss of profit policy of & 14,00,000. Ledger Accounts in the books of Kasturi Van Account © The Institute of Chartered Accountants of India 20,000 |31.12.20x3 |By [Depreciation A/c | 2,50034 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 ___|81.12.20x3 By [Balance eld 20,000 Shorya Ltd. Account Date Particulars ie Date Particulars ¥ 1.4.20X1 To |Bank Alc 10,000) 1.1.20X1 By |Van Alc 26,000 31.12.20X1 | To | Bank Alc 5,900] 31.12.20X1 | By | Interest A/c 900 31.12.20X1 |To | Balance cid | 10,000 25,900 25,900 31.12.20X2 | To | Bank Alc 5,600] 1.1.20X2 | By | Balance bid 10,000 31.12.20X2 | To | Balance cid 5,000] 31.12.20X2 | By | Interest Alc 600 10,600 10,600 31.1220%3 |To |Bank Ale | §,300]1.1.20x3 By [Balance bid 5,000 31.12.20X3 | By | Interest Alc 300 5,300 5,300 42. (a) (i) Floor area occupied by each department (i given) otherwise on time basis; ( (i) Value of assets of each department otherwise on time basis; (ii) Wages and salaries of each department; (iv). Purchases of each department; (v) Consumption of energy by each department (b) Calculation of Correct Profit Department | Department | Department x y Zz z @ z Profit after charging managers’ | 1,80,000| 1,35,000 90,000 ‘commission ‘Add back: Managers’ commission (19) 20,000| 15,000) 10,000 2,00,000) 1,50,000} —1,00,000 Less: Unrealized profit on stock (W.N.) | (24,500) (22,500) | (10,000) Profit before Manager’s commission 4,75,500) 1,27,500] 90,000 Less: Commission for Department Manager @ 10% 17,550) | (12,750) (9,000 Departmental Profits after manager's ‘commission 1.57.950| _114750| 81,000 Working Note: © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 35 Stock lying with Depl. X Depl. Y Dept. Z Total z z e = Unrealized Proft of Department X 415x75,000| 20/120%57,000] 24,500 = 15,000 = 9,500] Department Y 0.15*70,000] 0.20%60,000| 22,500 = 10,500 = 12,000 Department Z 20112030,000| 25/125*25,000 10,000 = 5,000) = 5,000 13. (i) Books of Branch Journal Entries (Rinlacs) Dr. Cr. (Goods in Transit Ale Dr. | 10 To Head Office Ale 10 (Goods dispatched by head office but not received by branch before 1% April, 2019) Expenses Alc Or} 1 To Head Office Ale 1 (Amount charged by head office for centralised services) (ii Trading and Profit & Loss Account of the Branch for the year ended 31* March, 2019 Tinlacs Tin lacs To Opening Stock 60 | By Sales 360 To Goods received from By Closing Stock 62 Head Office 288 Less: Returns 6) 283 To Carriage Inwards 7 To Gross Profit eld 2 _ 422 422 To Salaries 25 | By Gross Profit bd 72 To Depreciation on Furniture 2 To Rent 10 To Advertising 6 To Telephone, Postage & Stationery 336 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 To Sundry Office Expenses 1 To Head Office Expenses 1 To Net Profit Transferred to Head Office Alc 24 = R R Balance Sheet as on 31% March, 2019 | Liabilities Zinlacs | Assets Zinlacs Head Office 80 Furniture & Equipment | 20 ‘Add: Goods in transit 10 Less: Depreciation | 18 Head Office Expenses 1 ‘took in hand 62 Net Profit 24| 115 | Goods in Transit 10 Outstanding Expenses 3 | Debtors 20 | Cash at bank and in hand aa) 118 418 14. Trading & Profit and Loss Account In the books of Mr. Maan for the year ended 31% March, 2019 Particulars Amount| Particulars Amount @ q| To Opening stock 2,45,000 | By Sales: To Purchases: Cash 16,20,000 Cash 615,000] Credit (W.N.3) | 11,00,000 Credit (WN. 2) 15,00,000 | By Closing stock 3,20,000 To. Gross profit old 6,80,000 30,40,000 30,40,000 To. Salaries (W.N.5) 237,000 | By Gross profitbid 6,80,000 To. Rent 1,32,000 | By Discount received | 32,000 To Sundry trade expenses 81,000 To Discount alowed 20,000 To. Depreciation on furniture & fixtures 26,000 To_Net profit 2,16,000 7.12,000 7.12,000 Balance SheetPAPER - 1 : ACCOUNTING as at 31% March, 2019 a7 Liabilities Amount Amount z| z Capital Fixed assets Opening balance (W.N.7) 5,16,000 Furniture & fitures | 2;34,000 ‘Add: Net profit 2,16,000 Current assets: 7,32,000 Stock 3.20,000 Less: Drawings 1,20,000 | 6,12,000 | Debtors (W.N.4) 1,47,000 Current liabilities & provisions: Cash & bank (W.N.6) | 2,01,000 Creditors 4,90,000 Bills payable 80,000 Outstanding salaries 20,000 9,02,000 9,02,000 Working Notes: 1 Bills Payable Account z = To CashiBank 4,30,000 | By Balance bid 70,000 To Balance cid 80,000 | By Trade creditors (Bal. fig.) | 4.40,000 5,10,000 5,10,000 2 Creditors Account z = To Cash/Bank 9,73,000 | By Balance b/d 1,35,000 To Bills payable Alc | 440,000 | By Credit purchases | 15,00,000 (WN) (Bal. fig.) To Discount received 32,000 To Balance cld 4,90,000 16,356,000 16,35,000 3. Calculation of credit sales = Opening stock 2,45,000 Add: Purchases38 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Cash purchases 6,15,000 Credit purchases 15,00,000 21.15,000 23,60,000 Less: Closing Stock 3.20.00 Cost of goods sold 20,40,000 Gross profit ratio on sales 25% 400 27,20,000 Total sales |: 20,40,000 x al 15 Less: Cash sales 16,20,000 Credit sales 11,00,000 4. Debtors Account & z To. Balance bid 1,25,000 | By Cash/Bank 10,58,000 To Credit sales | 11,00,000 | By Discount allowed 20,000 (W.N3) —— | 8y Balance cld (Bal. fig) | 1.47,000 12.25.00 12,25,000 5. = Salaries paid during the year 2,36,000 ‘Add: Outstanding salaries as on 31.3.2019 20,000 2,56,000 Less: Outstanding salaries as on 31.03.2018 49,000 2,37,000 6 Cash | Bank Account z a To Balance bid 1,10,000 | By Cash purchases 6,15,000 To Cash sales 16,20,000 | By Creditors 9,73,000 To Debtors 10,58,000 | By Bills payable 4,30,000 By Drawings 1,20,000 By Salaries 2,36,000 By Rent 41,32,000PAPER - 1 : ACCOUNTING 39 By Sundry trade| 81,000 expenses By Balance cid 2,01,000 27,88,000 27,88,000 7. Balance Sheet as at 31* March, 2018 (a & Creditors 1,35,000 | Furniture & fixtures 2,60,000 Bills payable 70,000 | Stock 2,45,000 Outstanding salaries 19,000 | Debtors 1,25,000 Capital (Bal. fig.) 5,16,000 | Cash & bank 410,000 7,40,000 7,40,000 15. A liability is recognised when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognise a liability of & 1,00,000 to Gamma Lid. \When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the present case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should be recognised as an expense. Journal entry Loss on change in production method To Gamma Ltd (Loss due to change in production method) Profit and loss Alc To Loss on change in production method (Loss transferred to profit and loss account) Or. 4,00,000 4,00,000 16. (a) (i) The decision of making provision for non-moving inventories on the basis of technical evaluation does not amount to change in accounting policy. ‘Accounting policy of a company may require that provision for non-moving inventories should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate can be made. In the given case, considering the total value of inventory, the change in the amount of required provision of non-moving inventory from & 3.5 lakhs to & 2.5 lakhs is also not material. The disclosure can be made for such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. forthe © The Institute of Chartered Accountants of India40 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 year 2019-20: “The company has provided for non-moving inventories on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profitfor the year and the corresponding effect on the year ‘end net assets would have been lower by @ 1 lakh.” (b) 1. False; As per AS 1 "Disclosure of Accounting Policies", certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usvally not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. 2. False: As per AS 1, ifthe fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. fa fundamental accounting assumption isnot followed, the fact should be disclosed. 3. True; To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and. presentation of financial statements should be disclosed. The disclosure of the significant accounting policies as such should form part of the financial statements and they should be disclosed in one place. 4, False; Any change in the accounting policies which has @ material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be indicated, 17. (a) Calculation of cost for closing inventory Particulars z Cost of Purchase (10,200 x 10) 102,000 Direct Labour 76,500 75,000 x 10,200 Fined Overhead MOREA 51,000 Cost of Production 2,29,500 Cost of closing inventory per unit (2,29,500/10,200) 22.50 Net Realisable Value per unit 20.00 Since net realisable value is less than cost, closing inventory will be valued at 220. ‘As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost ie. & 9.50. © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING a Therefore, value of closing inventory: Finished Goods (1,200 x 20) ® 24,000 Raw Materials (900 x 9.50) = 8550 332,550 (b) Operating Activities: b, 6 Investing Activities: e, gh, i Financing Activities: a, d, fj Cash Equivalent: k 18. (a) The depreciable amount of a tangible fixed asset should be allocated on a systematic, basis over its useful life. The depreciation method should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity Useful life means the period over which the asset is expected to be available for use by the entity. Depreciation should commence as soon as the asset is acquired and is available for use. Thus, the policy of Entity Ais not acceptable, (b) The entity has charged depreciation using the straight-line method at & 10,000 per annum i.e (1,00,000/10 years). On ‘st January 2020, the asset's net book value is [100,000 ~ (10,000 x 4)] = & 60,000, The remaining useful life is 4 years. The company should amend the annual provision for depreciation to charge the unamortized cost over the revised remaining life of four years. Consequently, it should charge depreciation for the next 4 years at % 15,000 per annum ie. (60,000 | 4 years). Depreciation is recognized even ifthe Fair value of the Asset exceeds its Carrying Amount. Repair and maintenance of an asset do not negate the need to depreciate it (c) (1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment) will be classified as “Directly attributable cost of PPE" (2) Costs of conducting business in @ new location or with a new class of customer (including costs of staff training) will be classified under head (iijas it will not be included in determining the carrying amount of an item of PPE () Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management willbe included in determination of Purchase Price of PPE (4) Costs of opening a new facility or business, such as, inauguration costs will be classified under head (i) as it will not be included in determining the carrying ‘amount of an item of PPE. (8) Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates will be included in determination of © The Institute of Chartered Accountants of India42 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 Purchase Price of PPE. 19. (a) (i) As per AS 11 "The Effects of Changes in Foreign Exchange Rates’, an enterprise may enter into a forward exchange contract to establish the amount of the reporting currency required, the premium or discount arising at the inception of such a forward exchange contract should be amortized as expenses ‘or income over the life of the contract. Forward Rate & 62.50 Less: Spot Rate (& 60.75) Premium on Contract 8175 Contract Amount US$ 5,00,000 Total Loss (5,00,000x 1.75) 8,75,000 Contract period 5 months 3 months falling in the year 2017-18; therefore loss to be recognized in 2017-18 (8,75,00015) x3= & 5,25,000. Rest & 3,50,000 will be recognized inthe following year 2018-19. (i) Financial statements of an integral foreign operation (for example, dependent foreign branches) should be translated using the principles and procedures described in paragraphs 8 to 16 of AS 11 (Revised 2003). The individual items in the financial statements of a foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself. Individual items in the financial statements of the foreign operation are translated at the actual rate on the date of transaction. The foreign currency monetary items (for ‘example cash, receivables, payables) should be reported using the closing rate at each balance sheet date. Non-monetary items (for example, fixed assets, inventories, investments in equity shares) which are carried in terms of historical ‘cost denominated in a foreign currency should be reported using the exchange date at the date of transaction. Thus the cost and depreciation of the tangible fixed assets is translated using the exchange rate at the date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value, translation should be done using the rate existed on the date of the valuation. The cost of inventories is translated at the exchange rates that existed when the cost of inventory was incurred and realizable value is translated applying ‘exchange rate when realizable value is determined which is generally closing rate. Exchange difference arising on the translation ofthe financial statements of integral foreign operation should be charged to profit and loss account. Thus, the treatment by the management of translating all assets and liabilities; income and expenditure items in respect of foreign branches at the prevailing © The Institute of Chartered Accountants of IndiaPAPER - 1 : ACCOUNTING 43 rate at the year end and also the treatment of resultant exchange difference is not in consonance with AS 11 (Revised 2003). (b) (i) © 35 lakhs received from the local authority for providing medical facilites to the employees is a grant received in the nature of revenue grant. Such grants are generally presented as a credit in the profit and loss statement, either separately or under a general heading such as ‘Other Income’. Altematively, & 35 lakhs may be deducted in reporting the related expense ie. employee benefit expenses. (li) As per AS 12 ‘Accounting for Government Grants’, where the government grants ae in the nature of promoters’ contribution, ie. they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. In the given case, the subsidy received from the Central Government for setting Up a unit in notified backward area is neither in relation to specific fixed asset nor in relation to revenue. Thus, amount of Z 100 lakhs should be credited to capital reserve. (ii) % 10 lakhs grant received for installation anti-poliution equipment is a grant related to specific fixed asset. Two methods of presentation in financial statements of grants related to specific fixed assets are regarded as acceptable alternatives. Under first method, the grant is shown as @ deduction from the gross value of the asset concerned in arriving at its book value. The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge. Under the second method, grants related to depreciable assets are treated as deferred income wiih is recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset Thus, & 10 lakhs may either be deducted from the cost of equipment or treated 2s deferred income to be recognized on a systematic basis in profit & Loss A/c over the useful life of equipment. 20. (a) As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer. And where investments are reclassified from current to long term, transfers are made at lower of cost and fair value on the date of transfer. Accordingly, the re-classifcation will be done on the following basis: (i) _Inthis case, carying amount of investment on the date of transfer is less than the cost; hence this re-classified current investment should be cartied at © 6.5 lakhs in the books. © The Institute of Chartered Accountants of India44 INTERMEDIATE (NEW) EXAMINATION: MAY, 2020 (i) Inthis case, reclassification of current investment into long-term investments will be made at & 10 lakhs as cost is less than its market value of & 12 lakhs. (ii) In this case, the book value of the investment is & 12 lakhs, which is lower than its cost i. % 18 lakhs. Here, the transfer should be at carrying amount and hence this re-classified current investment should be carried at & 12 lakhs. (b) According to AS 16 “Borrowing Costs’, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred Italso states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. Thus, eligible borrowing cost 12,00,000 - & 3,00,000 = %9,00,000 Sr. |Particulars |Nature of Interest tobe | Interest to be No. assets capitalized (%)) charged to Profit & Loss Account| (i Construction | Qualifying |9,00,000x40/100 | NIL. of factory | Asset = 8 3,60,000 building ii | Purchase of | Nota Qualifying | NIL 9,00,000x35/100 Machinery | Asset =%3,15,000 iii | Working Not a Qualifying | NIL 9,00,000x25/100 Capital Asset =%2,25,000 Total .3.60,000 5.40.00 © The Institute of Chartered Accountants of India