Paper 18

Revisionary Test Paper_Final_Syllabus 2012_Jun2014
Paper 18 – Corporate Financial Reporting
Question No.1(a)
What is 'discontinuing operations' as per AS-24?
Answer:
As per Para 3 of the standard, a discontinuing operation is a component of an enterprise:-

(i) that the enterprise, pursuant to a single plan is:
disposing of substantially in its entirety such as selling the component in a single
transaction or by demerger or spin off of ownership of the component to the enterprise's
shareholders ; or
disposing of piecemeal, such as by selling off the components assets and setting its
liabilities individually; or
terminating through abandonment and
(ii) that represents separate major line of business or geographical area of operation, and
(iii) that can be distinguished operationally and for financial reporting purposes.
It may be construed that discontinuing operation is relatively large component of an

enterprise which is major line of business or geographical segment, this is distinguishable
operationally or for financial reporting such component of business is being disposed on the
basis of an overall plan in its entirety or in piecemeal. Discontinuance will be carried either
through demerger or spin-off, piecemeal disposal of assets and settling of liabilities or by
abandonment.
Question No.1(b)
ABC Ltd. shows a net profit of `10,80,000 for 3rd quarter after incorporating the following:
(i) Bad debt of `60,000 incurred during the year, 65% of the bad debts have been deferred to
the next quarter
(ii) Extraordinary loss of `56,000 incurred during the quarter has been fully recognized in this
quarter
(iii) Additional depreciation of `18,000 resulting from the change of method of depreciation.
Do you agree with the treatment adopted by the company? If not, find out correct quarterly
income as per AS-25.
Solution:
In the above case, the quarterly income has not been correctly stated. As per AS-25, "Interim
Financial Reporting", the quarterly income should be adjusted and restated as follows:
`
Net Profit as per P&L A/c 10,80,000
Adjustments for:
Bad debt of `60,000 has been incurred during the current quarter. Out of (39,000)
this, the company has deferred 65% i.e. `39,000 to the next quarter. This is
not correct. So, `39,000, should therefore be deducted from `10,80,000,
as it is wrongly overstated
Treatment of Extra-ordinary loss of `56,000 is correct, hence no ----
adjustment is required to be made against profits for this quarter
Treatment of recognizing the additional depreciation of `18,000 is in line ----
with the provisions of AS-25, hence, no adjustment is required
Net Profit(adjusted) 10,51,000
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
Question No.1(c)
State the applicability of Accounting Standards to non-corporate entities.
Answer:
Applicability of Accounting Standard to Non-corporate Entities:
For applicability of Accounting Standards to Non-corporate entities, Non-corporate entities

are classified into three broad heading as Level I, Level II & Level III entities as given below –
Level I Entities
Non-corporate entities which fall in any one or more of the following categories, at the end
of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on any
stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on
insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(iv) All commercial, industrial and business reporting entities having borrowings (including
public deposits) in excess of rupees ten crore at any time during the immediately
preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.
Level II Entities (SMEs)
Non-corporate entities which are not Level I entities but fall in any one or more of the
following categories are classified as Level II entities:
(i) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees forty lakh but does not exceed rupees fifty crore in the
immediately preceding accounting year.
(ii) All commercial, industrial and business reporting entities having borrowings (including
public deposits) in excess of rupees one crore but not in excess of rupees ten crore at
any time during the immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
Level III Entities (SMEs)
Non-corporate entities which are not covered under Level I and Level II are considered as
Level III entities.
Question No.1(d)
State the applicability and scope of International Accounting Standards on Impairment of

Assets (IAS) 36.
Answer:
International Accounting Standard 36 Impairment of Assets (IAS 36) should be applied:

(a) on acquisition to goodwill and intangible assets acquired in business combinations for
which the agreement date is on or after 31 March 2004.
(b) to all other assets, for annual periods beginning on or after 31 March 2004. Earlier
application is encouraged.
Scope
This Standard shall be applied in accounting for the impairment of all assets, other than:
(a) inventories;
(b) assets arising from construction contracts;
(c) deferred tax assets;

(d) assets arising from employee benefits;
(e) financial assets that are within the scope of IAS 39 Financial Instruments: Recognition
and Measurement;
(f) investment property that is measured at fair value;
(g) biological assets related to agricultural activity that are measured at fair value less
estimated point-of-sale costs;
(h) deferred acquisition costs, and intangible assets, arising from an insurer‘s contractual
rights under insurance contracts within the scope of IFRS 4 Insurance Contracts; and
(i) non-current assets (or disposal groups) classified as held for sale in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations.
Question No.2(a)
State the features of an Asset.
Answer:
The features of an asset are:

(i) the future economic benefit embodied in an asset is the potential to contribute directly or
indirectly, to the flow of cash and cash equivalents to the entity. Potential to contribute may
be either productive (e.g. property, plant and equipment) or it allows the convertibility into
cash or cash equivalent (e.g. receivables).
(ii) future economic benefit embodied in an asset flows to the entity in different manner and
accordingly to be tested for asset recognition:
 usage in the production of goods and services;
 exchange for other assets;
 use to settle a liability;
 distribution to owners.
(iii) Assets are not necessarily characterized by physical form (like plant, property,
equipment). Copyright, trademark, patents( intangibles) etc. also qualify as assets based on
the concept of future economic benefit embodied in an asset is the potential to contribute,
directly or indirectly, to the flow of cash and cash equivalents to the entity.
(iv) Assets signified by legal right (asset under lease) may not be with ownership right. Still they
are recognized as assets based on the concept of future economic benefit embodied in an
asset has the potential to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity.
(v) There is a close association between incurring expenditure and generating assets but the
two do not necessarily coincide. Incurring expenditure ( development expenditure may not
satisfy the test of asset) is not conclusive proof of asset creation. On the other hand,
incurrence of expenditure is not an essential condition for asset recognition (asset may arise
out of Government grant).
Question No.2 (b)
B Ltd. has an office building whose carrying amount is `100 crores. The company decides to
enter into a sale and leaseback transaction. The selling price for the asset is `140 crores,
whereas the fair value of the asset is `120 crores. The transaction is an operating lease and
the lease payment is `25 crores for 5 years. Pass journals to record the same.
Solution:
(i) To record the transaction of sale

` `
Bank A/c .................Dr. 140.00
To, Building A/c 100.00
To, Profit on Sale of Building A/c 20.00
To, Deferred Income (Gain on sale of asset) 20.00
[Asset sold and gain (fair value - carrying amount) is recognized, but excess profit
( selling price - fair value) is deferred]
(ii) To record amortization of gain over the useful/remaining life of the asset ( this is to be
recorded for all the 5 years)
` `
Deferred Income(Gain on sale of asset)............Dr. 4.00
To Other Income 4.00
(Gain amortized)
Question No.2 (c)
AB Ltd. Seeks you advise about the treatment of the following in the final statement of
accounts for the year ended 31st March 2014:
―As a result of a recent announced price revision, granted by the Government of India with
effect from 1st July,2013, the company stands to receive ` 12 lakhs from its customers in
respect of sales made in 2013-14‖.
Solution:
The company is preparing the financial statements for the year ended 31.3.14. Due to price
revision granted by the Government of India, the company has to receive an additional
sales revenue of ` 12 lakhs in respect of sales made during the year 2013-14.
As per AS-9, where uncertainty exists in collection of revenue, its recognition is postponed to
the extent of uncertainty involved and it should be recognized as revenue only when it is
reasonably certain about its collection.
In view of the above statement, if there is no uncertainty exists as to the collect ability of ` 12
lakhs, it should be recognized as revenue in the financial statements for the year ended
31.3.14.
Question No.2 (d)
Z Ltd.purchased a machine costing ` 8 lakhs for its manufacturing operations and paid
transportation costs ` 80,000. Z Ltd. spent an additional amount of ` 50,000 for testing and
preparing the machine for use. What amount should Z Ltd. record as the cost of the machine?
Solution:
As per Para 20 of AS-10, the cost of the fixed asset should comprise its purchase price and
any attributable cost of bringing the asset to its working condition for its intended use. In this
case, the cost of machinery includes all expenditures incurred in acquiring the asset and
preparing it for use. Cost includes the purchase price, freight and handling charges,
insurance cost on the machine while in transit, cost of special foundations, and costs of
assembling, installation and testing. Therefore, the cost to be recorded is ` 9,30,000 (= 8,00,000
+ 80,000 + 50,000).
Question No.3 (a)
Samrat Ltd. acquired a patent at a cost of `60 lacs for a period of 5 years and the product-life
cycle is also 5 years. The company capitalized the cost and started amortizing the asset at
`10 lacs per annum. After two years it was found that the product life-cycle may continue for
another 4 years from then. The net cash flows from the product during these 4 years were
expected to be `49,50,000; `54,00,000; `58,50,000 and `63,00,000. Find out the amortization
cost of the patent for each of the year.
Solution:
As per AS-26, "Intangible Assets", the amortization method used should reflect the pattern in
which the asset's economic benefits are consumed by the enterprise, if that pattern cannot
be determined reliably, the straight line method should be used.
In the instant case, the pattern of economic benefit in the form of net cash flows is
determined reliably after two years. In the initial two years, the pattern of economic benefits
could not have been reliably estimated therefore amortization was done at straight-line
method, i.e. `10 lacs per annum. However, after two years pattern of economic benefits for
the next five years in the form of net cash flows is reliably estimated as under and therefore
amortization will also be done as per the pattern of cash inflows:
Cash inflows (`) Amount of amortization in the next 4 years (`)

49,50,000 [40,00,000 x 49,50,000/2,25,00,000] = 8,80,000
54,00,000 [40,00,000 x 54,00,000/2,25,00,000] = 9,60,000
58,50,000 [40,00,000 x 58,50,000/2,25,00,000] = 10,40,000
63,00,000 [40,00,000 x 63,00,000/2,25,00,000] = 11,20,000
2,25,00,000 Balance of WDV = 40,00,000
Question No.3 (b)
Explain the impact of the followings in line with AS-29.
(i) A company follows a policy of refunding money to the dissatisfied customers if they claim
within thirty days from the date of purchase and return the goods. It appears from the past
experience that in a month only 0.30% of the customers claim refunds. The company sold
goods amounting to `50 lacs during the last month of the financial year. Is there any
contingency?
Answer:
There is a probable present obligation as a result of past obligating event. The obligating
event is the sale of product. Provision should be recognized as per AS-29. The best estimate
for provision is ` 15,000 (50,00,000 x 0.30%).
(ii) A company needs to retrain staff because of introduction of ERP packages. Is that a
contingent liability? Is there any need for provisioning? At the balance sheet date, no
retraining of staff has taken place.
Answer:
It is a restructuring cost. There is no obligation because no obligating event (

retraining) has taken place. No provision is recognized.
(iii) An airline is required by law to overhaul its aircraft once every three years. The expenses
to be incurred as classified as 'refurbishment costs'. Is there any provision to be recognized?
Answer:
The airline company has to overhaul its aircraft/s once every three years. There is no present
obligation. Hence, no provision is recognized. The costs of overhauling aircraft are not
recognized as a provision because at the balance sheet date no obligation of overhauling
aircraft exists independently of the company's future actions. Even a legal requirement to
overhaul does not make the cost of overhaul/refurbishment cost a liability, because no
obligation exists to overhaul the aircraft independently of the enterprise's future actions - the
enterprise could avoid the future expenditure by its future actions, for example by selling the
aircrafts.
Question No.3 (c)
A company has invested a substantial amount in the shares of another company under the
same management. The market price of the shares of the aforesaid company is about half of
that at which these shares were acquired by the company. The management is not prepared
to provide for the fall in the value of shares on the ground that the loss is only notional till the
time the shares are actually sold?
Solution:
As per AS-13, for the purpose of determining carrying amount of shares the investment has to
be classified into long-term and current. In the instant case, it appears that the investment is
long-term, hence it should be carried at cost, unless there is a permanent diminution in value
of investment. At the market price, investment is half of its cost. The reduction appears to be
heavy and permanent, hence the provision for permanent diminution (decrease) in value of
investment should be made. The contention of management is not as per AS-13.
Question No.3 (d)
In the context of relevant Accounting Standards, give your comment on the following matter
for the financial year ending 31 st March, 2013:
―Increase in pension liability on account of wage revision in 2012-13 is being provided for in 5
instalments commencing from that year. The remaining liability of `300 lakhs as redetermined
in actuarial valuation will be provided for in the next 2 years‖.
Solution:
As per AS-15, the costs arising from an alteration in the retirement benefits to employees
should be treated as follows:
(i) The cost may relate to the current year of service or to the past years of service.
(ii) In case of costs relating to the current year, the same may be charged to Profit and Loss
Account
(iii) Where the cost relates to the past years of service these should be charged to Profit and
Loss Account as ‗prior period‘ items in accordance with AS-5.
(iv) Where retirement benefit scheme is amended in a manner which results in additional
benefits being provided to retired employees, the cost of the additional benefits should
be taken as ― Prior Period and Extraordinary Items‖ as per AS-5.
In view of the above, the method adopted for accounting the increase in pension liability is
not in consonance to the provisions mentioned in AS-15.
Question No.4 (a)

The following summarized Balance Sheets of Alpha Ltd. and Beta Ltd. as at 31st March, 2012
are given to you :
Alpha Ltd. Beta Ltd.

` `
Liabilities:
Equity Share capital
of `10 each 30,00,000 10,00,000
General Reserve 4,00,000 2,00,000
Profit and Loss Account 3,20,000 20,000
10% Debentures — 6,00,000
Current liabilities 4,00,000 1,80,000
41,20,000 20,00,000
Assets:
Fixed Assets 20,00,000 1,00,000
Sundry Debtors 5,80,000 3,00,000
Stock 9,60,000 4,20,000
20,000 shares in Beta Ltd. 3,00,000 —
60,000 shares in Alpha Ltd. — 10,00,000
Cash at bank 2,80,000 1,80,000
41,20,000 20,00,000
Beta Ltd. traded raw material which were required by Alpha Ltd. for manufacture of its
products. Stock of Alpha Ltd. includes ` 2,00,000 for purchases made from Beta Ltd. on which
the company (Beta Ltd.) made a profit of 12% on selling price. Alpha Ltd. owed ` 50,000 to
Beta Ltd. in this respect. It was decided that Alpha Ltd. should absorb Beta Ltd. on the basis of
the intrinsic value of the shares of the two companies. Before absorption, Alpha Ltd. declared
a dividend of 10%. Alpha Ltd. also decided to revalue the shares in Beta Ltd. before recording
entries relating to the absorption.
Show the journal entries, which Alpha Ltd. must pass to record the acquisition and prepare its
balance sheet immediately thereafter. All workings should from part of your answer.
Solution:
Part I - Purchase consideration - Net Asset Method.

WN #1: Net assets excluding intercompany investment at the time of Amalgamation
`
Particulars Alpha Ltd. Beta Ltd.

Fixed Assets 20,00,000 1,00,000
Stock 9,60,000 4,20,000
Cash 2,80,000 1,80,000
Dividend Receivable 60,000
Less :
10% Debentures — (6,00,000)
Current liabilities (4,00,000) (1,80,000)
Proposed Dividend (3,00,000)
31,20,000 2,80,000
WN # 2 : Intrinsic value of investment
Let, Net Assets of Alpha Ltd. is A and that of Beta Ltd. is B
A = 31,20,000 + 0.2 B
B = 2,80,000 + 0.2 A
A = 31,20,000 + 0.2 (2,80,000 + 0.2A)
A = 31,20,000 + 56,000 + 0.04A
0.96A = 31,76,000
A = 33,08,333.33
B = 2,80,000 + 0.2 (33,08,333.33)
= 9,41,666.67
Summary :
Particulars Alpha Ltd. Beta Ltd.

(a) Net Assets (` ) 33,08,333 9,41,667
(b) No. of shares outstanding 3,00,000 1,00,000
(c) Intrinsic value per share ` 11 ` 9.4
WN # 3: Purchase consideration
Total no. of Beta Ltd.‘s shares outstanding 1,00,000
Less: No. of shares held by Alpha Ltd 20,000
Shares held by outsiders 80,000
Value of the above shares (80,000 × ` 9.40) ` 7,52,000
Number of shares issuable at intrinsic value (7,52,000÷11) 68,364
Less: Number of shares already held by Beta Ltd. 60,000
Number of shares to be issued 8,364
Purchase consideration (8,364 x 11) ` 92,004
In Shares In Cash
` 92,000 `4
Part II - In the books of Selling Company - Beta Ltd.

Section A: Pre-Amalgamation Event
Particulars Debit Credit

i. Dividend Receivable
Dividend Receivable A/c Dr. 60,000
To Profit and Loss A/c 60,000
Note : Revised Profit and Loss A/c balance = ` 20,000 + 60,000

= ` 80,000
Section B : Entries relating to Amalgamation

Realisation Account
Dr. Cr.
Particulars Amount Particulars Amount

To Fixed Assets 1,00,000 By Debentures 6,00,000
To Debtors 3,00,000 By Creditors 1,80,000
To Stock 4,20,000 By Alpha Ltd.‘s A/c (Purchasing Co.) 92,004
To Cash 1,80,000 By Share Capital (Head as Investment) 2,00,000
To Dividend Receivable 60,000
To Profit transferred 12,004
to share holders
10,72,004 10,72,004

` `
1. Transfer to Realisation Account
a. Transfer of Assets
Realisation A/c Dr. 10,60,000
To Fixed Assets A/c 1,00,000
To Debtors A/c 3,00,000
To Stock A/c 4,20,000
To Cash A/c 1,80,000
To Dividend Receivable A/c 60,000
(Being assets taken over by transferred
to Realisation A/c)
b. Transfer of Liabilities
10% Debentures A/c Dr. 6,00,000
Creditors A/c Dr. 1,80,000
To Realisation A/c 7,80,000
(Being liabilities taken over by Alpha Ltd.
transferred to Realisation A/c)
2.
a. Purchase consideration due:
Alpha Ltd A/c Dr. 92,004
To Realisation A/c 92,004
b. Receipt of Purchase Consideration :
Cash A/c Dr. 4
Equity shares of Alpha Ltd A/c Dr. 92,000
To Alpha Ltd A/c 92,004
3. Cancellation of paid up capital to the extent
of Alpha Ltd‘s Interest (Purchasing Co.) :
Share Capital A/c Dr. 2,00,000
To Realisation A/c 2,00,000
4. a. Amount due to outside shareholders :
Transfer of remaining Share capital and all reserves

Share Capital A/c Dr. 8,00,000
General Reserve A/c Dr. 2,00,000
Profit & Loss A/c Dr. 80,000
To Shareholders A/c 10,80,000
b. Transfer of profit on realisation to shareholders :
Realisation A/c Dr. 12,004
To Shareholders A/c 12,004
5. Settlement of amount to outsiders
Shareholders A/c(10,80,000 + 12,004) Dr. 10,92,004

To Equity shares of Alpha Ltd. (10,00,000 + 92,000) 10,92,000
To Cash A/c 4
PART III - In the books of Alpha Ltd (Purchasing co.)

Section A - Pre Amalgamation Events.

1. Proposed dividend :
Profit & Loss A/c Dr. 3,00,000
To Proposed Dividend A/c 3,00,000
2. Revaluation of Investments
Profit and Loss A/c Dr. 1,12,000
To Investments A/c [3,00,000 - (20,000 × 9.4)] 1,12,000
Section B - Amalgamation events

Nature of Amalgamation : Merger
Method of Accounting : Pooling of Interest
(`)

3. For Purchase Consideration Due :
Business Purchase A/c Dr. 92,004
To Liquidator of Beta Ltd.‘s A/c 92,004
4. For assets and liabilities taken over :
a. Aggregate investment
Consideration Paid
i. Investment of Alpha Ltd. in Beta Ltd. 1,88,000
ii. Paid to outsiders.
I. Now issued 92,004
II. Already held
by Beta Ltd. 10,00,000 10,92,004
12,80,004
III. Less: Paid up capital (10,00,000)
IV. Excess 2,80,004
b. Above excess to be adjusted against

i. General reserve of Beta Ltd. 2,00,000
ii. P & L A/c of Beta Ltd. 80,000
c. Balance of Beta Ltd. reserve to be 2,80,000

incorporated
i. General reserve (2,00,000 – 2,00,000) Nil
ii. Profit and Loss A/c (80,000 – 80,000) Nil
Fixed Assets A/c Dr. 1,00,000

Sundry Debtors A/c Dr. 3,00,000
Stock A/c Dr. 4,20,000
Cash at Bank A/c (90,000 + 2) Dr. 1,80,004
Dividend Receivable A/c Dr. 60,000
To Debentures A/c 6,00,000
To Creditors A/c 1,80,000
To Business Purchase A/c 92,004
To Investments in Beta Ltd. Ltd A/c 1,88,000
5. Discharge of Purchase Consideration:
Liquidator of Beta Ltd. A/c Dr. 92,004
To Equity Share Capital A/c 83,636
To Securities Premium A/c 8,364
To cash A/c 4
6. Others
a. Cancellation of inter-company dividends
Proposed Dividend A/c Dr. 60,000
To Dividend Receivable A/c 60,000
b. Cancellation of inter-company owings
Creditors A/c Dr. 50,000
To Debtors A/c 50,000
c. Creation of Stock Reserve
Profit & Loss A/c Dr. 24,000
To Stock Reserve A/c 24,000
Name of the Company: Alpha Ltd.

Balance Sheet as at 31.03.2012
Ref Note As at 31st As at 31st
No. Particulars No. March, March,
2012 2011
` `
I. Equity and Liabilities

1 Shareholders‘ funds
(a) Share capital 1 30,83,640
(b) Reserves and surplus 2 2,92,364

2 Non-current liabilities
(a) Long-term borrowings 3 6,00,000
3 Current Liabilities
(a )Other current liabilities 4 5,30,000

(b) Short-term provisions 5 2,40,000
Total 47,46,004
II. Assets
1 Non-current assets
(a) Fixed assets

(i) Tangible assets 6 21,00,000
2 Current assets
(a) Inventories 7 13,56,000
(b ) Trade receivables 8 8,30,000
(c) Cash and cash equivalents 9 4,60,004

Total 47,46,004
(` )
As at 31st As at 31st
Note 1. Share Capital March, March,
2012 2011
Authorised, Issued,and paid up Capital of ` 100 each (out of which 30,83,640
8,364 shares were issued for consideration other than cash)
Total 30,83,640
RECONCILATION OF SHARE CAPITAL

FOR EQUITY SHARE :- As at 31st March, 2012 As at 31st March, 2011
Nos Amount (`) Nos Amount (`)
Opening Balance as on 01.04.11 3,00,000 30,00,000 NIL NIL
Add: Fresh Issue ( Incld Bonus shares , NIL NIL

Right shares, split shares, shares issued 8,364 83,640
other than cash)
3,08,364 30,83,640 NIL NIL
Less: Buy Back of shares - - - -
3,08,364 30,83,640 NIL NIL
Note 2. Reserves and Surplus
March, 2012 March, 2011
Securities Premium 8,364
General Reserve 4,00,000
Profit and Loss A/c (1,16,000)
Total 2,92,364
Note 3. Long Term borrowing
10% Debentures 6,00,000
Total 6,00,000
Note 4. Other Current Liabilities
Current Liabilities 5,30,000
Total 5,30,000
Note 5. Short-term provision
Proposed Dividend 2,40,000
Total 2,40,000
Note 6. Tangible
Fixed Assets (20,00,000 + 1,00,000) 21,00,000
Total 21,00,000
Note 7. Inventories
Stock (960 + 420) 13,80,000
Less : Reserves 24,000 13,56,000
Total 13,56,000
Note 8. Trade
Debtors (580+300) 8,30,000
Total 8,30,000
Note 9. Cash and Cash Equivalent
Cash at Bank 4,60,004
Total 4,60,004
Question No.4 (b)
J Ltd., and K Ltd., had the following summarized financial position as at 31st March, 2012.
Liabilities J Ltd. K Ltd. Assets J Ltd. K Ltd.
` ` ` `
Share capital : 48,00,000 36,00,000 Goodwill 30,00,000 6,00,000
Equity shares of `100
each fully paid
General Reserve 18,00,000 12,00,000 Fixed Assets 24,00,000 42,00,000
Investment - 18,00,000 Investment at cost 18,00,000 12,00,000
Allowance Reserve
Current Liabilities 24,00,000 9,00,000 Current Assets 18,00,000 13,00,000
90,00,000 75,00,000 90,00,000 75,00,000
It was decided that J Ltd. will take over the business of K Ltd., on that date, on the basis of the
respective share values adjusting, wherever necessary, the book values of assets and
liabilities on the strength of information given below :
i. Investment of K Ltd., included 6,000 shares in J Ltd., acquired at a cost of ` 150 per share.
The other investments of K Ltd., have a market value of ` 1,50,000;
ii. Investment Allowance Reserve was in respect of additions made to Fixed assets by K Ltd.,
in the years 2007-2012 on which Income Tax relief has been obtained. In terms of the
Income Tax Act, the company has to carry forward till 2014, reserve of ` 9,00,000 for
utilisation;
iii. Goodwill of J Ltd., and K Ltd., are to be taken at ` 24,00,000 and ` 12,00,000 respectively;
iv. The market value of investments of J Ltd., was ` 12,00,000;
v. Current assets of J Ltd., included ` 4,80,000 of stock in trade obtained from K Ltd. which
company sold at a profit of 25% over cost ;
vi. Fixed assets of J Ltd., and K Ltd., are valued at ` 30,00,000 and ` 45,00,000 respectively.
Suggest the scheme of absorption and show the journal entries necessary in the books of
J Ltd. Also prepare the Balance Sheet of that company after takeover of the business of K
Ltd.
Solution :
Part I: Purchase Consideration

WN # 1 : Intrinsic Value of Shares
Particulars J Ltd. (`) K Ltd. (`)

Goodwill 24,00,000 12,00,000
Fixed assets 30,00,000 45,00,000
Investment-Outside 12,00,000 1,50,000
-Inter Co [6,000 Shares @` 125 each] ------ 7,50,000
Current assets 18,00,000 15,00,000
Liabilities (24,00,000) (9,00,000)
Net assets 60,00,000 72,00,000
No. of shares outstanding 48,000 36,000
Intrinsic Value per share (60,00,000/48,000); 125 200
(72,00,000/36,000)
WN # 2 : Purchase Consideration
Particulars K Ltd. (`)
Total no. of Shares outstanding in K Ltd. 36,000
Value of Shares @`200 each 72,00,000
No. of shares issuable on the basis of intrinsic value of share (72,00,000÷125) 57,600
Less: Shares already held (6,000)
No. of Shares to be issued 51,600
Shares price 125
Purchase Consideration (51,600×125) 64,50,000
Part II : In the Books of J Ltd.

Nature of Amalgamation-Purchase
Method of Accounting-Purchase
Particulars Debit (`) Credit (`)
1. For Purchase Consideration Due
Business Purchase A/C Dr. 64,50,000
To Liquidator of K Ltd. A/C 64,50,000
2. For Assets and Liabilities taken over:
Goodwill A/C Dr. 12,00,000
Fixed Assets A/C Dr. 45,00,000
Investment A/C Dr. 1,50,000

Current Assets A/C Dr. 15,00,000
To Liabilities A/C 9,00,000
To Business Purchase A/C 64,50,000
3. For Discharge of purchase consideration
Liquidator of K Ltd. A/C Dr. 64,50,000
To Equity Share Capital A/C 51,60,000
To Securities Premium A/c 12,90,000
4. Contra entry for statutory reserve
Amalgamation adjustment A/C Dr. 9,00,000
To Investment allowance A/c 9,00,000
5. For adjustment of stock reserve
Goodwill A/C Dr. 96,000
To Stock reserve A/C 96,000
Name of the Company: J Ltd.
Ref No. Note No. As at 31st As at 31st

Particulars
` `

(a) (a) Share capital 1 99,60,000 —
(b) (b) Reserves and surplus 2 39,90,000 —
(a) (a) Other current liabilities 3 33,00,000 —
Total 1,72,50,000 —
II. Assets
(a) (a) Fixed assets
(i) (i) Tangible assets 4 69,00,000 —

(ii) (ii) Intangible assets 5 42,96,000 —
(b) (b) Non-current investments 6 19,50,000 —

(c) (c) Other non-current assets 7 9,00,000 —
2 Current assets
(a) (a)Other current assets 8 32,04,000 —
Total 1,72,50,000 —
(` )
Note 1. Share Capital
Authorised, Issued, Subscribed and paid up:- 99,60,000

99,600 Eqity Shares of ` 100 (of which 51,600 shares of ` 1,00 each
issued for consideration other than cash)
Total 99,60,000

Opening Balance as on 01.04.11 48,000 48,00,000 NIL NIL
Add: Fresh Issue (Incld Bonus shares, NIL NIL

Right shares, split shares, shares issued 51,600 51,60,000
other than cash)
99,600 99,60,000 NIL NIL
99,600 99,60,000 NIL NIL
Securities Premium 12,90,000
Investment allowance Reserve 9,00,000
Total 39,90,000
Current Liabilities 33,00,000
Total 33,00,000
Note 4. Tangible assets
Fixed Assets (24,00,000+45,00,000) 69,00,000
Total 69,00,000
Note 5. Intangible assets
Goodwill 42,96,000
Total 42,96,000
Note 6. Non-Current Investments
Investment at cost 19,50,000
Total 19,50,000
Note 7. Other Non Current Assets
Amalgamation Adjustment Accounts 9,00,000
Total 9,00,000
Note 8. Other Current Assets
Current Assets (33,00,000 – 96,000) 32,04,000
Total 32,04,000
Question No.4 (c)
Shiva Ltd. and Hari Ltd. decided to amalgamate as on 01.04.2014. Their Balance Sheets as on
31.03.2014 were as follows: (` in ‗000)
Particulars Shiva Ltd. Hari Ltd.

Source of Funds :
Equity share capital (` 10 each) 150 140
9% preference share capital (` 100 each) 30 20
Investment allowance reserve 5 2
Profit and Loss Account 10 6
10 % Debentures 50 30
Sundry Creditors 25 15
Tax provision 7 4
Equity Dividend Proposed 30 28
Total 307 245
Application of Funds :
Building 60 50
Plant and Machinery 80 70
Investments 40 25
Sundry Debtors 45 35
Stock 36 40
Cash and Bank 40 25
Preliminary Expenses 6 ----
Total 307 245
From the following information, you are to prepare the draft Balance Sheet as on 01.04.2014
of a new company, Indra Ltd., which was formed to take over the business of both the
companies and took over all the assets and liabilities:
(i) 50 % Debentures are to be converted into Equity Shares of the New Company.
(ii) Out of the investments, 20% are non-trade investments.
(iii) Fixed Assets of Shivas Ltd. were valued at 10% above cost and that of Hari Ltd. at 5%
above cost.
(iv) 10 % of sundry Debtors were doubtful for both the companies. Stocks to be carried at
cost.
(v) Preference shareholders were discharged by issuing equal number of 9% preference

shares at par.
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing
Equity shares of ` 10 each of the new company at a premium of ` 5 per share. Amalgamation
is in the nature of purchase
Solution:
[as per Revised Schedule VI]
` in lakhs
Particulars Note Figures as at the Figures as at the
No. end of current end of previous
reporting period reporting period
I EQUITY AND LIABILITIES
(1) Shareholders‘ funds :
(a) Share Capital 1 3,27,990 —
(b) Reserves and Surplus 2 1,45,995 —
(2) Non-current liabilities :
(a) Long-term borrowings 3 40,000 —
(3) Current Liabilities :
(a) Trade Payables 4 40,000 —
(b) Short-term provisions 5 11,000 —
Total 5,64,985 —
II. ASSETS
(1) Non-current assets :
(a) Fixed assets
(i) Tangible assets 6 2,80,000 —
(b) Non-current Investment 7 65,000 —
(2) Current assets :
(b) Inventories 8 76,000 —
(c) Trade receivables 9 72,000 —
(d) Cash and Cash equivalents 10 64,985 —
(f) Other Current assets 11 7,000 —
Total 5,64,985 —

Particulars Amount (`)
Share Capital 3,63,840 Equity shares of ` 10 each 36,38,400
(Issued for consideration other than cash, pursuant to scheme of
amalgamation)
Total 36,38,400
Note 2. Trade Payables
Particulars Amount
(`)
Creditors 4,50,000
Total 4,50,000
Note 3. Tangible Assets

Particulars Amount (`)
Other fixed Assets (12,00,000 + 3,00,000) 15,00,000
Total 15,00,000
Note 4. Intangible Assets
Particulars Amount
(`)
Goodwill (W.N. 2) 4,40,400
(` 3,19,200 + ` 1,21,200)
Total 4,40,400
Note 5. Short-term Provisions
Particulars Amount
(`)
Tax provision (` 7,000 + ` 4,000) 11,000
Total 11,000
Particulars Amount
(`)
Building (` 66,000 + ` 52,500) 1,18,500
Plant and Machinery (` 88,000 + ` 73,500) 1,61,500
Total 2,80,000
Note 7. Non-current Investments

Particulars Amount
(`)
Investments (` 40,000 + ` 25,000) 65,000
Total 65,000
Note 8. Inventories
Particulars Amount
(`)
Stock (` 36,000 +` 40,000) 76,000
Total 76,000
Note 9. Trade Receivables
Particulars Amount
(`)
Sundry Debtors 72,000
90% of (` 45,000 + ` 35,000)
Total 72,000
Note 10. Cash and Cash Equivalent
Particulars Amount
(`)
Cash and Bank 64,985
(` 40,000 + ` 25,000 - ` 15)
Total 64,985

Particulars Amount
(`)
Amalgamation adjustment account 7,000
Total 7,000
Working Notes:
1. Calculation of value of equity shares issued to transferor companies
Shiva Ltd. Hari Ltd.
` `
Assets taken over:
Building 66,000 52,500
Plant and machinery 88,000 73,500
Investments (trade and non-trade) 40,000 25,000
Stock 36,000 40,000
Sundry Debtors 40,500 31,500
Cash & Bank 40,000 25,000
3,10,500 2,47,500
Less: Liabilities:
10% Debentures 50,000 30,000
Sundry Creditors 25,000 15,000
Tax Provision 7,000 82,000 4,000 49,000
2,28,500 1,98,500
Less: Preference Share Capital 30,000 20,000
1,98,500 1,78,500
2. Number of shares issued to equity shareholders, debenture holders and preference shareholders
Shiva Ltd. Hari Ltd. Total
share (including ` 5 premium)
Equity shares issued @ ` 15 per
1,98,500 divided by 15 13,233 shares*
1,78,500 divided by 15 11,900 sh 25,133 sh
Equity share capital @ ` 10 ` 1,32,330 ` 1,19,000 ` ,51,330
Securities premium @ ` 5 ` 66,165 ` 59,500 ` ,25,665
` 1,98,495 ` 1,78,500 ` 3,76,995
50% of Debentures are converted into equity shares @ ` 15 per share
25,000 divided by 15 1,666 shares**
15,000 divided by15 1,000 shares 2,666 shares
Equity share capital @ ` 10 ` 16,660 ` 10,000 ` 26,660
Security premium@ ` 5 ` 8,330 ` 5,000 ` 13,330
` 24,990 ` 15,000 ` 9,990
9% Preference share capital issued ` 30,000 ` 20,000 ` 50,000
* Cash paid for fraction of shares = ` 1,98,500- ` 1,98,495 = ` 5.
** Cash paid for fraction of shares = ` 25,000- ` 24,990 = ` 10.
Question No. 5 (a)
A Ltd. acquired 5,000 Shares of S Ltd. at ` 48 per Share Cum-Dividend constituting 62.50% holding
in the latter. Immediately after purchase, S Ltd. declared and distributed a dividend at ` 4 per
Share, which S Ltd. credited to its Profit and Loss Account.
One year later, S Ltd. declared a Bonus of 1 fully paid Equity Share of ` 10 each for every 5
Shares held. Later on, S Ltd. proposed to raise funds and made a Rights Issue of 1 Share for 5
held at ` 36 per Share. A Ltd. exercised its right.
After some time, at its AGM, S Ltd. had decided to split its Equity Share of ` 10 into Two Equity
Shares of ` 5 each. The necessary resolutions were passed and share certificates issued to all its
existing shareholders.
To increase its stake in S Ltd. to 80%, A Ltd. acquired sufficient number of shares at ` 30 each.
Ascertain the Cost of Control as on 31st December if S‘s share in Capital Profits (duly adjusted for
purchase in lots) as on that date was ` 3,15,000.
Solution:
A. Cost of Investment
Particulars Shares `
Cost of First Acquisition (5,000 x ` 48) 5,000 2,40,000

Less: Pre-Acquisition Dividend (5,000 × ` 4 per Share) N.A. (20,000)
Corrected Cost of Investment 5,000 2,20,000

Add: Bonus Shares (1/5 × 5,000 Shares) 1,000 –
Cost after Bonus Shares 6,000 2,20,000

Add: Rights Shares (1/5 x 6,000 Shares x ` 36) 1,200 43,200
Cost after Rights Issue before Share Split 7,200 2,63,200
Cost after share split (WN 1) (2 Sh. for 1 for 7,200 Sh = 7,200 x 2) 14,400 2,63,200
Add: Acquisition to increase holding to 80% (WN 2) (4,032 x ` 30) 4,032 1,20,960
Balance on date of Consolidation 18,432 3,84,160
Notes:
• Share Split: In case of Share Split, the Cost of Acquisition will not undergo any change. Only
the number of Equity Shares and the face value will change. This is similar to adjustment for
Bonus Issue. However, for Bonus Issue, the face value and paid up value of the share will be
the same as the original share. In share split, the face value and paid up value will be lesser
than that of the original shares.
• Calculation of Number of Shares to be acquired to increase stake to 80%

Particulars Shares
a. Shares held before acquisition 14,400
b. % of holding 62.5%
c. Hence, Total Number of Shares of S Ltd. (a ÷ b) = (14,400 ÷ 62.50%) 23,040
d. 80% of above (c x 80%) = (23,040 x 80%) 18,432
e. Number of Shares to be acquired (d - a) = (18,432 - 14,400) 4,032
2. Cost of Control
Particulars `
Cost of Investment (A) (from 1 above) 3,84,160
Nominal Value of Equity Capital (18,432 x ` 5 per Share) 92,160

Share in Capital Profit 3,15,000
Total of Above (B) 4,07,160
Capital Reserve (if B < A) (B-A) 23,000
Question No.5 (b)
(a) The following are the Balance Sheets of Sky Ltd. and Star Ltd. as on 31.03.2012 -
Liabilities Sky (` ) Star (` ) Assets Sky (` ) Star (` )
Share Capital: Fixed Assets:
Equity Shares of ` 10 each 5,00,000 2,00,000 Goodwill (Purchased) 60,000 40,000
Machinery 1,00,000 60,000
12% Pref. Shares of ` 100 each 1,00,000 50,000 Vehicles 1,80,000 70,000
Reserves: Furniture 50,000 30,000
General Reserve 1,00,000 60,000 Investment:
Profit & Loss A/c 1,50,000 90,000 Shares of Star (Cost) 3,80,000 –
Current Liabilities & Provisions: Current Assets:
Creditors 60,000 70,000 Stock 70,000 1,40,000
Debtors 1,00,000 1,65,000
Income Tax 70,000 60,000 Bank Balance 40,000 25,000
Total 9,80,000 5,30,000 Total 9,80,000 5,30,000
The following further information is furnished:
i. Sky Ltd. acquired 12,000 Equity Shares and 400 Preference Shares on 01.04.2011 at a cost
of ` 2,80,000 and ` 1,00,000 respectively.
ii. The Profit & Loss Account of Star Ltd. had a credit balance of ` 30,000 as on 01.04.2011
and that of General Reserve on that date was ` 50,000.
iii. On 01.07.2011, Star Ltd. declared dividend out of its pre-acquisition profit, 12% on its Share
Capital; Sky Ltd. credited the receipt of dividend to its Profit & Loss Account.
iv. On 01.10.2011 Star Ltd. issued one Equity Share for every three shares held, as Bonus
Shares, at a face value of ` 100 per share out of its General Reserve. No entry has been
made on the books of Sky Ltd. for the receipt of these bonus shares.
v. Star Ltd. owed Sky Ltd. ` 20,000 for purchase of goods from Sky Ltd. The entire stock of
goods is held by Star Ltd. on 31.03.2012. Sky Ltd. made a profit of 25% on cost.
Prepare a Consolidated Balance Sheet as at 31.03.2012.
Solution:
A. Basic Information
Company Status Dates Holding Status
Holding Company = Sky Ltd. Acquisition: 01.04.2011 Holding Company = 80%

Subsidiary = Star Ltd Consolidation: 31.03.2012 Minority Interest = 20%
Shareholding Status: Shares held on 31.03.2012 = 12,000+ 1/3 x 12,000 (Bonus) = 16,000 out of
20,000 = 80%.
Note: Share distribution pattern can be determined as under –

Date Particulars Held by Sky Ltd. % of Holding Total Shares
01.04.2011 Opening Balance 12,000 NIL 15,000
01.10.2011 Bonus Shares 4,000 80%

5,000
(1/3 x 12,000)
31.03.2012 Closing Balance 16,000 80% 20,000

(16,000/20,000) (From Balance
Sheet Given)
B. Analysis of Reserves & Surplus of Star Ltd.

(a) General Reserve
Balance on 31.03.2012 ` 60,000
Balance on 01.04.2011 (acquisition) 50,000 Transfer during 2011-12 60,000
(bal. fig) Revenue Reserve
Less: Bonus Issue (1/3 x 15,000 Shares x ` 10) 50,000
Capital Profit Nil
(b) Profit & Loss Account

Balance on 31.03.2012 ` 90,000
Balance on 01.04.2011 (acquisition) 30,000 Profit for 2011-12 ` 84,000
Less: Dividend on pre-acquisition profit Less: Preference Dividend ` 6,000
(12% x 15,000 shares x ` 10 each) (18,000) ` 78,000
Less: Preference dividend (6,000) Revenue
(50,000 x 12%) Profit
Balance Capital Profits ` 6,000
C. Analysis of Net Worth of Star Ltd.

Particulars Total Sky Ltd Minority
100% 80% 20%
(a) Share Capital: Equity 2,00,000 1,60,000 40,000
Preference
50,000 40,000 10,000
(b) Capital Profits: General Reserve Nil

Profit & Loss Account 6,000
6,000 4,800 1,200
(c) Revenue Reserve:
60,000 48,000 12,000
(d) Revenue Profit: Profit & Loss Account
of Star Ltd. for the year 78,000 62,400 15,600
(e) Preference Dividend
6,000 4,800 1,200
Minority Interest 80,000
D. Cost of Control
Particulars `
Cost of Investment: Equity Shares of Star Ltd. 2,80,000
Preference Shares of Star Ltd. 1,00,000
Total Cost of Investment 3,80,000
Less: Dividend out of Pre-acquisition profits
Preference Shares (400 Shares x ` 100 each x 12%) 4,800
In Equity Shares (12,000 Shares x ` 10 each x 12%) 14,400 (19,200)
Adjusted Cost of Investment 3,60,800

Less: (1) Nominal Value of Equity Share Capital 1,60,000
(2) Nominal Value of Preference Share Capital 40,000
(3) Share in Capital Profit of Star Ltd. 4,800 (2,04,800)
Goodwill on Consolidation 1,56,000
E. Consolidation of Reserves & Surplus

Particulars Gen. Res P&L A/c
Balance as per Balance Sheet of Sky Ltd. 1,00,000 1,50,000

Add: Share of Revenue Profits/ Reserves of Star Ltd. 48,000 62,400
Add: Share of Preference Dividend from Star Ltd. – 4,800
Less: Dividend out of Pre-acquisition Profits (` 4,800 + ` 14,400) – (19,200)
Less: Preference Dividend payable for the current year by Sky Ltd. – (12,000)
Less: Stock Reserve on Closing Stock (20,000 x 25 /125) – (4,000)
Adjusted Consolidated Balance 1,48,000 1,82,000
Name of the Company: Sky Ltd. And its subsidiary Star Ltd.
Consolidated Balance Sheet as at 31st March 2012
Ref No. Particulars Note As at 31st As at 31st
No. March, 2012 March, 2011
` `
A EQUITY AND LIABILITIES
(a) Share capital @ ` 10 each 1 600,000 -
(b) Reserves and surplus 2 330,000 -
2 Minority Interest 80,000 -
3 Current liabilities
(b) Trade payables 3 110,000 -
(d) Short-term provisions 4 142,000 -
TOTAL (1+2+3+4) 1,262,000 -
B ASSETS
(a) Fixed assets
(i) Tangible assets 5 490,000 -
(ii) Intangible assets ( goodwill) 6 256,000 -
2 Current assets
(b) Inventories 7 206,000 -
(c) Trade receivables 8 245,000 -
(d) Cash and cash equivalents 9 65,000 -
TOTAL (1+2) 1,262,000 -
Note 1. Share Capital Note 2. Reserve and Surplus :-

Current Previous
Year Year Current Year Previous Year
Authorised Capital - - General Reserve 1,48,000 -
Issued and Paid Up - Profit and loss 1,82,000 -
Equity Share capital @ `

10 5,00,000 - - -
12% Preference Share 1,00,000 - 3,30,000 -
6,00,000 -
Note 3. Trade Payable Note 4. Short Term Provisions
Current Previous Current Previous

Year Year Year Year
Prov. For taxations

Sundry Debtors (70000+60000) 1,30,000 -
Proposed Pref. Dividend

Sky 60,000 - payable Sky Ltd. 12,000 -
Star 70,000 - 1,42,000 -
1,30,000 -
Less: set off 20,000 -
1,10,000 -
Note 5. Tangible Assets :- Note 6. Intangible Assets:-
Previous Previous
Current Year Year Current Year Year
Fixed Assets Goodwill
Machinery
(100000+60000) 1,60,000 - Sky 60,000 -
Vehicles Star 40,000 -
(180000+70000) 2,50,000 - 1,00,000 -
Furniture Goodwill on
(50000+30000) 80,000 - consolidation 1,56,000 -
- - 2,56,000 -
4,90,000 -
Note 7. Inventories :- Note 8. Trade Receivable :-

Previous Previous
Current Year Year Current Year Year
Stock Sky 1,00,000 -
Sky 70,000 - Star 1,65,000 -

Star 1,40,000 - 2,65,000 -
2,10,000 - Less: Set off 20,000 -
Less: Stock Reserve 4,000 - 2,45,000 -
2,06,000 -
Note 9. Cash and cash equivqlent :-
Previous
Current Year Year
sky 40,000 -
star 25,000 -
65,000 -
Notes:
• Stock Reserve i.e. unrealized profits on Closing Stock have been eliminated in full against
Holding Company‘s Profits, as it arose from downstream transaction (i.e. Holding to
Subsidiary).
• Inter Company Owings have been eliminated in full.
Question No. 5(c)
Globetrotters Ltd. has two divisions – ‗Inland‘ and ‗International‘. The summarized Balance
Sheet as at 31st December, 2010 was as under:
Inland International Total
( ` crores) ( ` crores) ( ` crores)
Fixed Assets:
Cost 300 300 600
Depreciation 250 100 350
W.D.V. (written down value) 50 200 250
Net Current Assets:
Current assets 200 150 350
Less: Current liabilities 100 100 200
100 50 150
Total 150 250 400
Financed by:
Loan funds:
50 50
(Secured by a charge on fixed assets)
Own Funds:
Equity capital (fully paid up ` 10 shares) 25
Reserves and surplus 325

? ? 350
Total 150 250 400
It is decided to form a new company ‗Beautiful World Ltd.‘ for international tourism to take
over the assets and liabilities of international division.
Accordingly ‗Beautiful World Ltd.‘ was formed to takeover at Balance Sheet figures the
assets and liabilities of international division. ‗Beautiful World Ltd.‘ is to allot 2.5 crore
equity shares of ` 10 each in the company to the members of ‗Globetrotters Ltd.‘ in full
settlement of the consideration. The members of ‗Globetrotters Ltd.‘ are therefore to
become members of ‗Beautiful World‘ as well without having to make any further
investment.
i. You are asked to pass journal entries in relation to the above in the books of
‗Globetrotters Ltd.‘ and also in ‗Beautiful World Ltd‘. Also show the Balance Sheets of
both the companies as on 1st January, 2011 showing corresponding figures, before
the reconstruction also.
ii. The directors of both the companies ask you to find out the net asset value of equity
shares pre and post-demerger.
iii. Comment on the impact of demerger on ―shareholders wealth‖.
Solution:
Journal of Globetrotters Ltd.

(` in Crores)
Particulars Dr. (`) Cr.(`)
Current liabilities A/c Dr. 100
Loan fund (Secured) A/c Dr. 50
Provision for depreciation A/c Dr. 100
Loss on reconstruction A/c (Balancing figure) Dr. 200
To Fixed assets A/c 300
To Current assets A/c 150
(being the assets and liabilities of International division
taken out of the books on transfer of the division to
Beautiful World Ltd.; the consideration being allotment to
the members of the company of one equity share of `10
each of that company at par every share held in the
company vide scheme of reorganization)*
Journal of Beautiful World Ltd.

(` in cores)
Particulars Dr. (`) Cr.(`)

Fixed assets A/c (300 – 100) Dr. 200
Current assets A/c Dr. 150
To current liabilities A/c 100
To Loan funds (secured) A/c 50
To Equity share capital A/c 25
To capital reserve A/c 175

(being the assets and liabilities of international division of
Globetrotters Ltd. taken over by Beautiful World Ltd. and
allotment of 2.5 crore equity shares of `10 each at par as
fully paid up to the members of Globetrotters Ltd.)
Name of the Company: Globetrotters Ltd.

Balance Sheet as at: 1st January, 2011 (` in cores)
After Before
Note No.
Ref No.
Reconstruction Reconstruction
Particulars
As at 1st As at 1st As at 1st As at 1st
Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010

1 Shareholder‘s Fund
(a) Share capital 1 25 25
(b) Reserves and surplus 2 125 325
(a) Short-term borrowings 3 50
(b)Other current liabilities 4 100 200
Total (1+2+3+4) 250 600
II ASSETS
(a) Fixed assets
(i) Tangible assets 5 50 250
2 Current assets
(a) Other current assets 6 200 350
Total (1+2) 250 600
(` in Crores)
After Before
Note 1. Share Capital As at 1st As at 1st As at 1st As at 1st

Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Authorized, Issued, Subscribed and

paid-up Share capital:
Equity share of ` 10 each 25 25
Total 25 25
RECONCILIATION OF SHARE CAPITAL

After Before
FOR EQUITY SHARE As at 1st As at 1st As at 1st As at 1st
Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Nos. Amount Nos. Amount Nos. Amount Nos. Amount
(` ) (` ) (` ) (` )
Opening Balance as on 1st 2.5 25 2.5 25

January ,2010
Add: Fresh Issue (Including
Bonus shares, right shares, split
shares, share issued other
than cash)
2.5 25 2.5 25
Less: Buy Back of share
Total 2.5 25 2.5 25
After Before
Note 2. Reserve & Surplus As at 1st As at 1st As at 1st As at 1st
Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Reserve & Surplus 125 325

Total 125 325
After Before
Note 3. Short term Borrowings As at 1st As at 1st As at 1st As at 1st

Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Secured Loans (Assumed to be 50

payable within 1 year)
Total 50
After Before
Note 4. Other Current Liabilities As at 1st As at 1st As at 1st As at 1st

Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Other Current Liabilities 100 200
Total 100 200
After Before
Note 5. Tangible Assets As at 1st As at 1st As at 1st As at 1st
Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Fixed Assets Less Depreciation 50 250
(`300-`250)
(`600-`350)
Total 50 250
After Before
Note 6. Other Current Assets As at 1st As at 1st As at 1st As at 1st
Jan, 2011 Jan, 2010 Jan, 2011 Jan, 2010
Other Current Assets 200 350
Total 200 350
Computation of Reserves and Surplus

(` in Crores)
After Before
Particulars ` `
A. Reserves and surplus 325 325
Less: Loss on reconstruction 200 -
125 325
Note to Accounts: Consequent to reconstruction of the company and transfer of

international divisions of Globetrotters Ltd. to newly incorporated Company Beautiful World
Ltd.; the members of the company have been allotted 2.5 crore equity shares of `10 each at
par of ‗Beautiful World Ltd.;
Name of the Company: Beautiful World Ltd.

Balance Sheet as on January 01, 2011 (` in Crores)
Ref No. Note As at 1st As at 1st
Particulars
No. Jan, 2011 Jan, 2010
` `
(c) (a) Share capital 1 25
(d) (b)Reserves and surplus 2 175
(b) (a) Short-term borrowings 3 50
(c) (b) Other current liabilities 4 100
Total 350
II. Assets
(d) (a) Fixed assets
(iii) (i) Tangible assets 5 200
2 Current assets
(b) (a)Other current assets 6 150
Total 350
Notes to Accounts
` `
Note 1. Share Capital As at 1st As at 1st
Jan, 2011 Jan, 2010
Share Capital 2.5 Equity shares of ` 10 each (Issued for consideration 25
other than cash, pursuant to scheme of amalgamation)
Total 25
Reconciliation for Equity Share Capital As at 1st As at 1st

Jan, 2011 Jan, 2010
No. Amount No. Amount
(`) (`)
Opening Balance as on 1.01.2010 - - - -
Add: Fresh Issue 2.5 25
Less: Buy Back - -
Total 2.5 25
Note 2. Reserves and Surplus As at 1st As at 1st

Jan, 2011 Jan, 2010
Reserves and Surplus 175
Total 175
Note 3. Short term Borrowings As at 1st As at 1st

Jan, 2011 Jan, 2010
Secured Loans (to be payable within 1 year) 50
Total 50
Note 4. Other Current Liabilities As at 1st As at 1st

Jan, 2011 Jan, 2010
Current Liabilities 100
Total 100
Note 5. Tangible Assets As at 1st As at 1st

Jan, 2011 Jan, 2010
Fixed Assets 200
Total 200
Note 6. Other Current Assets As at 1st As at 1st

Jan, 2011 Jan, 2010
Current Assets 150
Total 150
A. Net Asset Value of an equity share
Particulars
Globetrotters Ltd. Pre – Demerger `350 Post – Demerger `150
Crores 2.5 Crore Crores 2.5 Crore Shares
Share = `140 = `60
` 200 Crores
= `80
Beautiful World Ltd. 2.5 Crore Shares
B. Demerger into two companies has no impact on ‗net asset value‘ of shareholding.
Pre- Demerger, it was `140 per share. After Demerger, it is `60 + `80 = `140 per original
share.
It is only the yield valuation that is expected to changes because of separate focusing on
two distinct business whereby profitability is likely to improve in account of de – merger.
Question No. 5(d)
The following are the summarized Balance Sheet of Anurag Ltd. and Farhan Ltd.as at
31.12.2014
Anurag Ltd.
Liabilities ` ‘000 Assets ` ‘000
Share Capital Fixed Assets 3,400
3,00,000 Equity shares of ` 10 each 3,000 Stock ( pledge with secured loan 18,400
10,000 Preference shares of ` 10 creditors)
each 1,000 Other Current Assets 3,600
General Reserves 400 Profit and Loss Account 16,600
Secured Loans ( secured against 16,000
pledge of stocks)
Unsecured Loans 8,600
Current Liabilities 13,000
42,000 42,000
Farhan Ltd.
Liabilities `‘000 Assets ` ‘000
Share Capital Fixed Assets 6,800
1,00,000 Equity shares of ` 10 each 1,000 Current Assets 9,600
General Reserves 2,800
Secured Loans 8,000
Current Liabilities 4,600
16,400 16,400
Both the companies go into liquidation and Oscar Ltd. is formed to take over their businesses.
The following information is given-
(a) All current Assets of two companies, except pledged stock are taken over by Oscar Ltd.
The realizable value of all Current Assets are 80% of book values in case of Anurag Ltd. and
70% for Farhan Ltd. , Fixed assets are taken over at book value .
(b) The braek up of Current liabilities ` -
Particulars Anurag Farhan Ltd.
Ltd.
Statutory Liabilities 72,00,000 10,00,000
( including ` 22 lakhs in case of Anurag Ltd. , incase of claim
not having been admitted shown as contingent liability)
Liabilities to employees 30,00,000 18,00,000
Balance of Current liability is miscellaneous creditors
(c) Secured Loan include ` 16,00,000 accrued interest in case of Farhan Ltd.
(d) 2,00,000 equity shares of `10 each are allotted by Oscar Ltd., at par against cash
payment of entire face value to the shareholders of Anurag Ltd. and Farhan Ltd. in the ratio of
shares held by them in Anurag Ltd. and Farhan Ltd.
(e) Preference shareholders are issued Equity shares worth ` 2,00 in lieu of present holding
(f) Secured Loan Creditors agree to continue the balance amount of their loans to Oscar Ltd. ,
after adjusting value of pledged security in case of Anurag Ltd. and after waiving 50% of
interest due in the case of Farhan Ltd.
(g) Unsecured Loans are taken over by Oscar Ltd. at 25% of loan amount.
(h) Employees are issued fully paid Equity Shares in Oscar Ltd. in full settlement of their dues
(i) Statutory liabilities are taken over by Oscar Ltd. at full values and miscellaneous creditors
are taken over at 80% of the book value.
Solution:
WN 1 Value of miscellaneous creditors taken over by Oscar Ltd.

Anurag Ltd. Farhan Ltd.
` `
Given in balance sheet 13,000 4,600
Less:
Statutory Liabilities 5,000 1,000
Liability to employees 3,000 1,800
Miscellaneous creditors 5,000 1,800
80% thereof 4,000 1,440
WN 2 Value of total liabilities taken over by Oscar Ltd.

` ` ` `
Current liabilities
Statutory liabilities 7,200 1,000
Liabilities to employees 3,000 1,800
Miscellaneous liabilities (WN 1) 4,000 14,200 1,440 4,240
Secured Loans
Given in Balance Sheet 16,000 8,000 7,200
Interest waived - 800
Value of Stock 14,720 1,280
(80% of `184 lakhs )
Unsecured Loans 2,150 --
(25% of `86 lakhs)
17,630 11,440
WN 3 Assets taken over by Oscar Ltd.

Fixed Assets (at Book Value) 3,400 6,800
Current Assets 2,880 6,720
(3,600 × 80%) (9,600 × 70%)
Total of Assets Taken Over 6,280 13,520
WN 4 Goodwill/Capital Reserve on amalgamation

Liabilities taken over (WN 2) 17,630 11,440
Equity shares to be issued to 200 --
Preference shareholders
A 17,830 11,440
Less: total assets taken over (W.N 6,280 13,520
3) B
A-B 11,550 (2080)
Goodwill Capital Reserve
Net Goodwill 9,470
D. Balance Sheet of Oscar Ltd. as at 31.12.2014

[as per Revised Schedule VI]
` in ‗000
(a) Share Capital 1 7,000 —
(a) Short-term borrowings 2 10,630 —
(b) Trade Payables 3 5,440 —
(c) Other current liabilities 4 8,200 —
Total 31,270 —
II. ASSETS
(a) Fixed assets
(i) Tangible assets 5 10,200 —
(ii) Intangible assets 6 9,470 —
(a) Cash and Cash equivalents 7 2,000 —
(b) Short-term loans and advances — —
(c) Other Current assets 8 9,600 —
Total 31,270 —

Particulars Amount
(`)
7,00,000 Equity Shares of `10 each , fully paid (5,00,000 Equity Shares 7,000
issued for consideration other than cash)
Total 7,000
Note 2. Short term Borrowings

Particulars Amount
(`)
Secured Loans (`1,280 + ` 7,200) 8,480
Unsecured Loans 2,150
Total 10,630

Particulars Amount
(`)
Miscellaneous Creditors (`4,000 + `1,440) 5,440
Total 5,440

Particulars Amount
(`)
Statutory Liabilities (` 5,000 + ` 2,200 + ` 1,000) 8,200
Total 8,200
Particulars Amount
(`)
Fixed assets (` 6,800 + ` 3,400) 10,200
Total 10,200
Particulars Amount
(`)
Goodwill 9,470
Total 9,470
Note 7. Cash and Cash Equivalents
Particulars Amount
(`)
Cash/ Bank (from raising Equity) 2,000
Total 2,000
Particulars Amount
(`)
Current assets (` 2,880 + `6,720) 9,600
Total 9,600
Question No.6 (a)
The Balance Sheet of X Ltd. before reconstruction is:
Liabilities ` Assets `
Building at cost
12,000 7% Preference Less: Depreciation 4,00,000
shares of ` 50 each 6,00,000 Plant at cost
7,500 Equity shares of ` 100 Less: Depreciation 2,68,000
each 7,50,000 Trade Marks and Goodwill
at Cost 3,18,000
(Note : Preference dividend is Stock 4,00,000
in arrear for five years) Debtors 3,28,000
Loan 5,73,000 Preliminary expenses 11,000
Sundry creditors 2,07,000 Profit and Loss A/c 4,40,000
Other liabilities 35,000
Total 21,65,000 Total 21,65,000

Note: Loan is assumed to be of less than 12 months, hence treated as short term borrowings
(ignoring interest)
The Company is now earning profits short of working capital and a scheme of reconstruction
has been approved by both classes of shareholders. A summary of the scheme is as follows:
a. The Equity Shareholders have agreed that their ` 100 shares should be reduced to ` 5 by
cancellation of ` 95 per share. They have also agreed to subscribe in each for the six
new Equity Shares of ` 5 each for two Equity Share held.
b. The Preference Shareholders have agreed to cancel the arrears of dividends and to
accept for each `50 share, 4 new 5 per cent Preference Shares of `10 each, plus 3 new
Equity Shares of ` 5 each, all credited as fully paid.
c. Lenders to the Company of ` 1,50,000 have agreed to convert their loan into share and
for this purpose they will be allotted 12,000 new preference shares of `10 each and
6,000 new equity share of ` 5 each.
d. The Directors have agreed to subscribe in cash for 20,000, new Equity Shares of ` 5 each
in addition to any shares to be subscribed by them under (a) above.
e. Of the cash received by the issue of new shares, ` 2,00,000 is to be used to reduce the
loan due by the Company.
f. The equity Share capital cancelled is to be applied:
i. to write off the preliminary expenses;

ii. to write off the debit balance in the Profit and Loss A/c ; and
iii. to write off ` 35,000 from the value of Plant.
Any balance remaining is to be used to write down the value of Trade Marks and
Goodwill.
Show by journal entries how the financial books are affected by the scheme and prepare the
balance sheet of company after reconstruction. The nominal capital as reduced is to be
increased to the old figures of ` 6,00,000 for Preference capital and ` 7,50,000 for Equity
capital.
Solution :

1. Reduction of Equity capital
Equity Share capital A/c (Face Value ` 100) Dr. 7,50,000
To Equity Share capital (Face value ` 5) A/c 37,500
To Reconstruction A/c 7,12,500
2. Right issue : (7,500 × 3 = 22,500 Shares)
(a) Bank A/c Dr. 1,12,500
To Equity Share Application A/c 1,12,500
(b) Equity Share Application A/c Dr. 1,12,500
To Equity Share Capital A/c 1,12,500
3. Cancellation of arrears of preference dividend
NO ENTRY (as it was not provided in the Books of Accounts)
Note :
(a) On cancellation, it ceases to be a contingent
liability and hence no further disclosure
(b) Preference shareholders have to forego
voting rights presently enjoyed at par with
equity share holders
4. Conversion of preference shares
7% Preference Share Capital A/c Dr. 6,00,000
Reconstruction A/c (balancing figure) Dr. 60,000
To 5% Preference Share Capital (12,000×4×10) 4,80,000
To Equity Share Capital (12,000 × 3 × 5) 1,80,000
5. Conversion of Loan
Loan A/c Dr. 1,50,000
To 5% Preference Share Capital A/c 1,20,000
6. Subscription by directors:
(a) Bank A/c Dr. 1,00,000
To Equity Share Application A/c 1,00,000
(b) Equity Share Application A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000

7. Repayment of loan
Loan A/c Dr. 2,00,000
To Bank 2,00,000
8. Utilisation of reconstruction surplus
Reconstruction A/c Dr. 6,52,500
To Preliminary Expenses A/c 11,000
To Profit and Loss A/c 4,40,000
To Plant A/c 35,000
To Trademark and Goodwill A/c 1,66,500
Reconstruction Account
Dr. Cr.

To Preference shareholders 60,000 By Equity Share capital (FV ` 50) 7,12,500
To Preliminary expenses 11,000
To Plant A/c 35,000
To Trademark and Goodwill 1,66,500
7,12,500 7,12,500
Bank Account
Dr. Cr.

To Equity share application A/c 1,12,500 By Loan A/c 2,00,000
To Equity share application A/c 1,00,000 By Balance c/d 12, 500
2,12,500 2,12,500
Name of the Company: X Ltd.
Balance Sheet as at 31st March, 2012 (and Reduced)
Ref Particulars Note As at 31st As at 31st
No. No. March, 2012 March, 2011
(` ) (` )
(b) Reserves and surplus 2 -
(a) Short-term borrowings 3 2,23,000
(b) Trade payables 4 2,07,000
(c) Other current liabilities 5 35,000

Total 15,25,000
II. Assets
(a) Fixed assets
(ii) Intangible assets 7 1,51,500
2 Current assets
(b) inventories 8 4,00,000
(c) trade receivables 9 3,28,000
(d) Cash and cash equivalents 10 12,500
Total 15,25,000
(` )
As at As at
Note 1. Share Capital 31st March, 31st March,
2012 2011
Authosired Share Capital
60,000 5% Preference Shares of ` 10 each 6,00,000
1,50,000 Equity shares of ` 5 each 7,50,000
13,50,000
Issued, subscribed and paid-up
92,000 Equity shares of ` 5 each 4,60,000

60,000 5% Preference Shares of ` 10 each 6,00,000
Total 10,60,000
FOR EQUITY SHARE :- 31.3.2012 31.3.2011

Opening Balance as on 01.04.11 7500 37,500.00 NIL NIL
Add: Fresh Issue (Incld Bonus shares , 84,500.00 422,500.00 NIL NIL
Right shares, split shares, shares issued
other than cash)
92000 460,000.00 NIL NIL
Less: Buy Back of shares - - -
92000 460,000.00 NIL NIL
FOR 5% PREFERENCE SHARE :- 31.3.2012 31.3.2011

Opening Balance as on 01.04.11 60000 600,000.00 NIL NIL
Add: Fresh Issue (Incld Bonus shares , - - NIL NIL

other than cash)
60000 600,000.00 NIL NIL
60000 600,000.00 NIL NIL
As at
As at
Note 2. Reserves and Surplus 31st March,
31st March, 2011
2012
Profit and Loss A/c (4,40,000)
Less: Written off 4,40,000
Total 0.00
As at
As at
Note 3. Short term borrowings 31st March,
31st March, 2011
2012
Loan 5,73,000
Less: Reduced 3,50,000
Total 2,23,000
As at
As at
Note 4. Trade Payables 31st March,
31st March, 2011
2012
Sundry Creditors 2,07,000
Total 2,07,000
As at
As at
Note 5. Other Current Liabilities 31st March,
31st March, 2011
2012
Other Liabilities 35,000
Total 35,000
As at
As at
Note 6. Tangible Assets 31st March,
31st March, 2011
2012
Building at cost Less Depreciation 4,00,000
Plant at Cost
Less Depreciation
(2,68,000-35,000) 2,33,000
Net Block 6,33,000
As at
As at
Note 7. Intangible assets 31st March,
31st March, 2011
2012
Trade Mark at Goodwill at cost 3,18,000
Less: Reduction 1,66,500
Total 1,51,500
As at
As at
8. Inventories 31st March,
31st March, 2011
2012
Inventories 4,00,000
Total 4,00,000
As at
As at
9. Trade receivables 31st March,
31st March, 2011
2012
Debtors 3,28,000
Total 3,28,000
As at
As at
10. Cash & Cash Equivalents 31st March,
31st March, 2011
2012
Bank 12,500
Total 12500
Note: Loan is assumed to be of less than 12 months. Hence, treated as short term borrowings
(ignoring
As at
As at
11. Other Current Assets 31st March,
31st March, 2011
2012
Preliminary Expenses 11,000
Less: Reduced 11,000
Total NIL
Question No.6 (b)
K Ltd. furnishes you with the following Balance Sheet as at 31 st March, 2012 :
(` in Crores)
Sources of Funds
Share capital :
Authorised 200
Issued :
12% redeemable preference shares of ` 100 each fully paid 150

Equity shares of ` 10 each fully paid 50 200
Reserves and surplus
Capital Reserve 30
Securities Premium 50
Revenue Reserves 520 600
800
Funds employed in :
Fixed assets (Tangible) : cost 200
Less: Provision for depreciation 200 nil
Investments at cost (Market value ` 800 Cr.) 200
Current assets 680
Less : Current liabilities 80 600
800
The company redeemed preference shares on 1 st April 2012. It also bought back 100 lakh
equity shares of ` 10 each at ` 50 share. The payments for the above were made out of the
huge bank balances, which appeared as a part of Current assets.
You are asked to :

i. Pass journal entries to record the above.
ii. Value equity share on net asset basis.
Solution:
Part I - Journal entries in the books of K Ltd.

(` in Crore)
a. Redemption of Preference Shares on 1st April 2012

i. Due Entry
12% Preference Share Capital A/c Dr. 150
To Preference Share Hodlers A/c 150
ii. Payment Entry
Preference Shareholders A/c Dr. 150
To Bank A/c 150
b. Shares bought back
i. On buy back
Shares bought back A/c Dr. 50
To Bank A/c 50
(100 lakhs shares × ` 50 per share)
ii. On Cancellation
Equity Share capital A/c (100 Lakhs × ` 10) Dr. 10
Securities premium A/c (100 Lakhs × ` 40) Dr. 40
To Shares bought back A/c 50
iii. Transfer to Capital Redemption Reserve
Revenue reserve A/c Dr. 160

To Capital Redemption Reserve A/c 160
(Being creation of capital redemption reserve to the
extent of the face value of preference shares
redeemed and equity shares bought back)
Part - III - Net Asset Value of Equity Shares

(` in Crores)
Particulars Amount Amount
a. i. Fixed assets Nil

ii. Investments (at market value) 800
iii. Current assets 480 1,280
b. Less : Current liabilities (80)
Net assets available for equity share holders 1,200
c. No. of equity shares outstanding (in lakhs) 4
d. Value per equity share of ` 10 each = (1,200÷4) ` 300
Question No. 6(c)
The summarized Balance sheets of Aman Ltd. and its subsidiary Ayan Ltd. as at 31.3.2014
were as follows :
Liabilities Aman Ltd. Ayan Ltd. Assets Aman Ltd. Ayan

Ltd.
Share capital 50,00,000 10,00,000 Fixed assets 60,00,000 18,00,000
(Share of ` 10
each)
General reserves 50,00,000 20,00,000 Investment in Ayan 6,00,000 ---
Ltd. (60,000 shares)
Profit and Loss 20,00,000 15,00,000 Sundry debtors 35,00,000 5,00,000
account
Secured loan 20,00,000 2,50,000 Inventories 30,00,000 25,00,000
Current liabilities 30,00,000 2,50,000 Cash and bank 39,00,000 2,00,000
1,70,00,000 50,00,000 1,70,00,000 50,00,000
Aman Ltd. holds 60% of the paid-up capital of Ayan Ltd. and the balance is held by a foreign
company.
A memorandum of understanding has been entered into with the foreign company by Aman
Ltd. to the following effect:
(i) The shares held by the foreign company will be sold to Aman Ltd. at a price per share
to be calculated by capitalizing the yield at 15%. Yield, for this purpose, would mean
50% of the average of pre-tax profits for the last 3 years, which were ` 12 lakhs, ` 18
lakhs and ` 24 lakhs respectively. (Average tax rate was 40%).
(ii) The actual cost of shares to the foreign company was ` 4,40,000 only. Gains accruing
to the foreign company are taxable at 20%. The tax payable will be deducted from
the sale proceeds and paid to government by Aman Ltd. 50% of the consideration
(after payment of tax) will be remitted to the foreign company by Aman Ltd. and also
any cash for fractional shares allotted.
(iii) For the balance of consideration, Aman Ltd. would issue its shares at their intrinsic
value. It was also decided that Aman Ltd. would absorb Ayan Ltd. Simultaneously by
writing down the Fixed assets of Ayan Ltd. by 10%. The Balance Sheet figures included
a sum of `1,00,000 due by Ayan Ltd. to Aman Ltd. and stock of Aman Ltd. included
stock of `1,50,000 purchased from Ayan Ltd., who sold them at cost plus 20%. The
entire arrangement was approved and put through by all concern effective from
1.4.2014.
You are required to indicate how the above arrangements will be recorded in the books of
Aman Ltd. and also prepare a Balance Sheet after absorption of Ayan Ltd. Workings should
form part of your answer.
Solution:
Aman Ltd.
Balance Sheet as at 1st April, 2014
`
(a) Short-term borrowings 3 22,50,000 —
(c) Other current liabilities 4 31,50,000 —
Total 1,96,98,980 —
II. ASSETS
(a) Fixed assets
(b) Inventories 6 54,75,000 —
(c) Trade receivables 7 39,00,000 —
(d) Cash and Cash equivalents 8 27,03,980 —
Total 1,96,98,980 —

Particulars Amount
(`)
Share of `10 each 500000 shares 53,34,660
Share issued in lieu of purchase consideration 33,466 shares
(Share of ` 10 each)
Total 53,34,660

Particulars Amount
(`)
Capital Reserve 13,20,000
Profit and Loss Account (`20,00,000 – Unrealised Profit on stock ` 25,000) 19,75,000
Total 82,95,000
Note 3. Short term Borrowings
Particulars Amount
(`)
Secured Loans (` 20,00,000 + `2,50,000)[assumed to be for less than 12 22,50,000
months]
Total 22,50,000
Particulars Amount
(`)
Current Liabilities [(30,00,000 + 2,50,000) – Mutual Debt 1,00,000] 31,50,000
Total 31,50,000
Particulars Amount
(`)
Fixed Assets 76,20,000
(` 78,00,000 – Revaluation Loss ` 1,80,000)
Total 76,20,000
Note 6. Inventories
Particulars Amount
(`)
Inventories [(`30,00,000 +` 25,00,000) – Unrealised Profit on stock `25,000] 54,75,000
Total 54,75,000
Particulars Amount
(`)
Sundry Debtors [(`35,00,000 + ` 5,00,000) – Mutual Debt. `1,00,000] 39,00,000
Total 39,00,000
Particulars Amount
(`)
Total 27,03,980
Working Notes :
12 18 24
i. Average of Pre Tax Profit = =` 18lakhs
3
50
Yield = 18 × = ` 9 lakhs
100
ii. Price per share of Ayan Ltd:-

9 lakhs
Capitaised value of yield of Ayan Ltd. = ×100 = 60 lakhs.
15
No. of shares = 1,00,000
60 lakhs
Price per share = =` 60 per share
1lakhs
iii. Purchase consideration for 40% of share capital of Ayan Ltd.

40
= 1,00,000 x 60 x = ` 24,00,000
100
iv. Calculation of intrinsic value of shares of Aman Ltd.
Total Assets excluding Investments in Ayan Ltd. 1,64,00,000

Value of Investment 60,000 ×60 36,00,000
2,00,00,000
Less: Outside Liabilities:
Secured Loan 20,00,000
Current Liabilities 30,00,000 50,00,000
Net Assets 1,50,00,000
Net asset ` 1,50,00,000

Intrinsic value per share = = =` 30per share
No of shares 5,00,000
v. Discharge of purchase consideration by Aman Ltd.

Equity share Total
Cash `
capital
`
`
20 ---- 3,92,000 3,92,000
Payment of tax (24 - 4.40)× =
100
Issue of shares to foreign company
50% of (24 - 3.92) = 10.04lakhs
10,04,000
No. of shares issued by Aman Ltd.
30
= 33,466.666 shares
Value of shares capital = 33,466 × 30

10,03980 ---- 10,03980
Cash payment
50% of (24 - 3.92) =10.04 lakhs ---- 10,04,000 10,04,000
Cash for fractional shares ---- 20 20
0.6666 x 30
Total 10,03,980 13,96,020 24,00,000
vi. Calculation for Goodwill/Capital Reserve to Aman Ltd.

`
Total of Assets as per Balance Sheet of Ayan Ltd. 50,00,000
Less: 10% Reduction in the value of Fixed Assets 1,80,000
10
( ×18,00,000)
100
48,20,000
Less: Secured Loan ` 2,50,000

Current Liabilities ` 2,50,000 5,00,000
Net Assets 43,20,000
Less: Purchase consideration (outside shareholders) 24,00,000
19,20,000
Less: Investment in Ayan Ltd. as per Balance Sheet of Aman Ltd. 6,00,000
13,20,000
vii. Cash and Bank Balance of Aman Ltd. after acquisition of shares
`
Opening Balance (Aman Ltd.) 39,00,000
Cash and Bank Balance of Ayan Ltd. 2,00,000
41,00,000
Less: Remittance to the foreign company 10,04,020
30,95,980
Less: T.D.S. paid to Government 3,92,000 3,92,000
27,03,980
20
viii. Unrealised profit included in stock of Aman Ltd. 1,50,000 × =` 25,000
120
Question No. 6(d)
The following are the summarized Balance Sheet of Uttar Ltd. and Dakshin Ltd. as on 31 st
December, 2013.
Amount in `
Uttar Ltd Dakshin Ltd
Assets
Fixed Assets 7,00,000 2,50,000
Stock 2,40,000 3,20,000
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
Cash at Bank 1,10,000 40,000
Investment in :
6000 shares of Dakshin Ltd 80,000
5000 shares of Uttar Ltd 80,000
15,50,000 15,50,000
Liabilities
Share Capital :
Equity Shares of ` 10each 6,00,000 3,00,000
10% preference shares of ` 10 each 2,00,000 1,00,000
Reserve and surplus 3,00,000 2,00,000
12 % Debentures 2,00,000 1,50,000
Sundry Creditords 2,20,000 1,25,000
Bills Payable 30,000 25,000
15,50,000 15,50,000
Fixed assets of both the companies are to be revalued at 15% above book value and stock
and debtors are to be taken over at 5% less than their book values. Both the companies are
to pay 10% equity dividends having been paid already.
After the above transactions are given effect to, Uttar Ltd. will absorb Dakshin Ltd. on the
following terms:
(i) 8 equity shares of ` 10 each will be issued by Uttar Ltd. at par against 6 shares of Dakshin
Ltd.
(ii) 10% preference shares of Dakshin Ltd. will be paid off at 10% discount by issue of 10%
preference shares of ` 100 each of Uttar Ltd. at par.
(iii) 12 % Debenture holders of Dakshin Ltd. are to be paid off at a 8% premium by 12%
debentures in Uttar Ltd. issued at a discount of 10%
(iv) ` 30,000 to be paid by Uttar Ltd. to Dakshin Ltd. for liquidation expenses.
(v) Sundry creditors of Dakshin Ltd. include ` 10,000 due to Uttar Ltd.
Solution :
(a) Statement of Purchase Consideration payable by Uttar Ltd.

(i) 8 Equity Shares of Uttar Ltd. for every 6 Equity Shares of Dakshin Ltd.
8
30,000 shares X = 40,000 shares
6
Less: 1 5 already held by Uttar Ltd. of Dakshin Ltd. 8,000 shares
32,000 Shares
Less: 5,000 shares of Uttar Ltd. with Dakshin Ltd. 5,000 shares
27,000 Shares
27,000 equity shares at ` 10 `2,70,000
(ii) payment of 10% Preference Shares at 10% discount
by issue of 10% Preference Shares of Uttar Ltd. ` 100 each
90
(1,00,000 X ) ` 90,000
100
` 3,60,000
(b) Balance Sheet of Uttar Ltd. after its absorption of Dakshin Ltd.
`
(a) Long-term borrowings 3 3,80,000 —
(a) Trade Payables 4 3,35,000 —
(b) Other current liabilities 5 55,000 —
Total 23,06,000 —
II. ASSETS
(a) Fixed assets

(a) Inventories 7 5,44,000 —
(b) Trade receivables 8 6,10,500 —
(c) Cash and Cash equivalents 9 41,000 —
(d) Other Current assets 10 18,000 —
Total 23,06,000 —

Particulars Amount
(`)
Equity Share of `10 each 87,000 shares 8,70,000
(Out of above- share issued in lieu of purchase consideration 27,000
shares other than cash)
10% Preference Shares of ` 10 each 2,00,000
10% Preference Shares of ` 100 each 90,000
Total 11,60,000
Particulars Amount
(`)
Revaluation reserves (15% of ` 7,00,000) 1,05,000
Capital Reserve 25,000
Other Reserves 2,46,000
Total 3,76,000
Note 3. Long term Borrowings
Particulars Amount
(`)
12% debentures 3,80,000
Total 3,80,000
Particulars Amount
(`)
Sundry creditors (2,20,000+1,25,000-10,000) 3,35,000
Total 3,35,000
Particulars Amount
(`)
Bills Payables (30,000+25,000) 55,000
Total 55,000
Particulars Amount
(`)
Fixed Assets (`8,05,000+` 2,87,500) 10,92,500
Total 10,92,500
Note 7. Inventories
Particulars Amount
(`)
Stock [(`2,40,000 + ` 3,04,000) 5,44,000
Total 5,44,000
Particulars Amount
(`)
Debtors [(`3,60,000 + `1,80,500 - `10,000) – Mutual Debt. ` 1,00,000] 5,30,500
Total 5,30,500
Particulars Amount
(`)
Cash at Bank 41,000
Total 41,000
Particulars Amount
(`)
Discount on Issue of debentures [1,50,000 × 108% × (10/90)] 18,000
Total 18,000
Working Notes :
1. Calculation of Capital Reserve
Net assets taken over from Dakshin Ltd. `
Fixed Assets (2,50,000 X 115%) 2,87,500
Stock (3,20,000 X 95%) 3,04,000
Debtors (1,90,000 X 95%) 1,80,500
Bills Receivable 20,000
Cash at Bank 15,000
Total assets (A) 8,07,000
Less: Liabilities taken over
Debentures (1,50,000 X 108%) 1,62,000
Bills Payable 25,000
Total Liabilities (B) 3,12,000
Net Assets taken over(A-B) 4,95,000
Less: Investment Cancelled 80,000
4,15,000
Purchase Consideration 3,60,000
Less: Liquidation expenses reimbursed to Dakshin Ltd. 30,000
25,000
2. Cash taken over from Dakshin Ltd.

`
Cash balance given in Balance Sheet of Dakshin Ltd. 40,000
Add: Dividend received from Uttar Ltd. 5,000
45,000
Less: Dividend paid 30,000
15,000
3. Cash balance in Balance Sheet (after absorbtion)

`
Cash balance given in Balance Sheet of Uttar Ltd. 1,10,000
Add: Dividend received from Dakshin Ltd. 15,000
1,25,000
Less: Dividend Paid 60,000
Expenses on liquidation 30,000 90,000
35,000
Less: Dividend from Dakshin Ltd. 6,000
41,000
4. Other Reserves in the Balance Sheet (after absorption)

`
Reserves given in the Balance Sheet of Uttar Ltd. 3,00,000
Dividend from Dakshin Ltd. 6,000
3,06,000
Less: Dividend declared 60,000
2,46,000
Question No. 7(a)
The following are the summarised Balance Sheets of P Co. Ltd. and S Co. Ltd. as on 31.3.2014.
Liabilities P Co. Ltd. S Co. Ltd.
` `
Share Capital:
Authorised 70,00,000 30,00,000
Issued and Subscribed Capital
Equity shares of `10 each fully paid 50,00,000 20,00,000
Capital Reserve 5,00,000 3,10,000
Revenue Reserve 8,50,000 75,000
Profit and Loss Account 4,00,000 2,80,000
Sundry Creditors 2,50,000 2,25,000
Bills Payable 1,00,000 10,000
71,00,000 29,00,000
Assets
Land and Buildings 20,00,000 15,20,000
Plant and Machinery 20,00,000 8,00,000
Furniture 5,00,000 1,60,000
Investments 16,10,000 -
Stock 3,40,000 1,00,000
Bills Receivable 50,000 40,000
Bank 2,40,000 80,000
71,00,000 29,00,000
P Ltd. acquired 80% shares of S Ltd. on 30.09.2013 at a cost of `18,10,000. On 1.10.2013 S Ltd.
declared and paid dividend on Equity Shares. P Ltd. appropriately adjusted its share of
dividend in Investment Account.
On 1.4.2013, the Capital Reserve and Profit and Loss Account stood in the books of S Ltd. at
`50,000 and ` 2,75,000 respectively.
Land and Buildings standing in the books of S Ltd. at ` 16,00,000 on 1.4.2013, revalued at
`20,00,000 on 1.10.2013. Furniture, which stood in the books at `2,00,000 on 1.4.2013 revalued
at `1,50,000 on 1.10.2013. In both the cases the effects have not yet been given in the books.
S Ltd. bought an item of machinery from P Ltd. on hire-purchase basis. The following are the
balances in respect of this machinery in the books on 31.03.2014 :
`
Instalment due 20,000
Instalment not due 8,000
Hire-purchase stock reserve 1,600
The above items stood included under appropriate heads in Balance Sheet.
Prepare a Consolidated Balance Sheet of P Ltd. and its subsidiary S Ltd. as at 31.03.2014,
complying with the requirements of AS-21.
Solution:
Consolidated Balance Sheet as at 31st March, 2014

`
(a) Trade Payables 3 4,47,000 —
(b) Other current liabilities 4 1,10,000 —
Total 87,61,400 —
II. ASSETS
(a) Fixed assets
(b) Inventories 6 4,32,000 —
(c) Trade receivables 7 5,40,000 —
(d) Cash and Cash equivalents 8 3,20,000 —
(f) Other Current assets 9 90,000 —
Total 87,61,400 —
Particulars Amount
(`)
Authorised 70,00,000
Issued and subscribed Equity shares of `10 each, fully paid up 50,00,000
Total 50,00,000

Particulars Amount
(`)
Capital Reserve (W.N. 8) 12,18,000
Revenue Reserve (W.N. 9) 8,80,000
Profit and Loss A/c (W.N. 10) 4,92,400
Total 25,90,400
Particulars Amount
(`)
Sundry creditors [(` 2,50,000 + ` 2,25,000) – Mutual hire purchase 4,47,000
indebtedness `28,000]
Total 4,47,000
Particulars Amount
(`)
Bills Payables (`1,00,000 + `10,000) 1,10,000
Total 1,10,000
Particulars Amount
(`)
Land and Buildings (` 20,00,000 + ` 19,50,000) 39,50,000
Plant and Machinery [(`20,00,000 + ` 8,00,000) – Unrealised profit on 27,94,400
Hire purchase transaction ` 5,600]
Furniture (`5,00,000 + `1,35,000) 6,35,000
Total 73,79,400
Note 6. Inventories
Particulars Amount
(`)
Stock [(`3,40,000 - `1,00,000) – Hire purchase not due `8,000] 4,32,000
Total 4,32,000
Particulars Amount
(`)
Sundry Debtors [(`3,60,000 + `2,00,000) – Hire purchase instalment due 5,40,000
`20,000
Total 5,40,000
Particulars Amount
(`)
Cash and Bank (`2,40,000 + `80,000) 3,20,000
Total 3,20,000
Note 9. Other Current assets
Particulars Amount(`)
Bills Receivable (` 50,000 + ` 40,000) 90,000
Total 90,000
Working Notes:
1. Analysis of reserves and profits of S Co. Ltd. as on 31.03.2014.
Pre-acquisition Post-acquisition profits
profit upto (1.10.2011 – 31.3.2012)
30.09.2011 Capital Revenue Profit
Capital profits) reserve reserve and loss
account
Capital reserve as on 31.3.2014 3,10,000
Less: Balance as on 1.4.2013 50,000 50,000
Created during the year 2,60,000 1,30,000 1,30,000
Revenue reserve as on 31.3.2014 75,000
Less: balance as on 1.4.2013 -
Created during the year 75,000 37,500 37,500
Profit and loss account as on 2,80,000
31.3.2014
Add: Dividend paid on 1.10.2013 2,50,000
(out of pre-acquisition profits
5,30,000
Less: balance as on 1.4.2013 2,75,000
Earned during the year 2,55,000 1,27,500 1,27,500
Profit as on 1.4.2013 2,75,000

Less: Dividend paid
[(` 18,10,000 – ` 16,10,000) × 5/4] 2,50,000
Balance of pre-acquisition profit
as on 31.3.2014 25,000 25,000
Revaluation reserves as on 1.10.2013:
Profit on land and buildings (W.N. 2) 4,40,000
Loss on furniture (W.N. 2) (30,000)
Difference in depreciation (for 6
months) due to revaluation:
Short depreciation on land and building
(W.N. 3) (10,000)
Excess depreciation on furniture
(W.N. 3) 5,000
Total 7,80,000 1,30,000 37,500 1,22,500
Minority Interest (20%) 1,56,000 26,000 7,500 24,500
Share of P Co. Ltd. (80%) 6,24,000 1,04,000 30,000 98,000
2. Profit or loss on revaluation of assets in the books of S Ltd. and their book values as on
31.3.2014
`
Land and buildings
Book value as on 1.4.2013 16,00,000
Depreciation at 5% p.a. [(80,000 × 100)/16,00,000] for 6 months 40,000
15,60,000
Revalued on 1.10.2013 20,00,000
Profit on revaluation 4,40,000
Value as per balance sheet on 31.3.2014 15,20,000
Add: Profit on revaluation 4,40,000
19,60,000
Less: Short Depreciation (W.N. 3) 10,000
Value as on 31.3.2014 19,50,000
Furniture:
Book value as on 1.4.2013 2,00,000
Less: Depreciation @ 20% p.a. [(40,000 × 100)/2,00,000] for 6 months 20,000
1,80,000
Revalued on 1.10.2013 1,50,000
Loss on revaluation 30,000
Value as per balance sheet on 31.3.2014 1,60,000

Less: Loss on revaluation 30,000
1,30,000
Add: Excess depreciation written back (W.N. 3) 5,000
Value as on 31.3.2014 1,35,000
3. Calculation of short/excess depreciation

Building Furniture
Revalued figure as on 1.10.2013 20,00,000 1,50,000
Rate of depreciation 5% p.a. 20% p.a.
Depreciation for 6 months on revalued figure (1.10.2013 to 50,000 15,000
31.3.2014)
Depreciation already provided 40,000 20,000
Difference [(short)/excess] (10,000) 5,000
4. Calculation of cost of control

`
Share capital in S Ltd. 16,00,000
Add: Capital profit 6,24,000
22,24,000
Less: Cost of Investments 16,10,000
Capital Reserve 6,14,000
5. Calculation of minority interest

` `
Share capital 4,00,000
Capital (pre-acquisition) profits 1,56,000
Revenue (post-acquisition) profits:
Revenue reserve 7,500
Profit and loss 24,500 58,000
6,14,000
6. Stock reserve (plant and machinery)

1,600 ×100
Percentage of profit on hire purchase transaction = 20%
8,000
20% on ` 20,000 = ` 4,000
Total unrealized profit = ` ( 4,000 +1,600) =`5600
7. Elimination of mutual indebtedness

Elimination of mutual indebtedness in respect of sale of machinery on hire purchase basis will
be made as under in the Consolidated Balance Sheet.
Creditors Debtors Stock Plant and
machinery
` ` ` `
Total (P Ltd. and S Ltd.) 4,75,000 5,60,000 4,40,000 28,00,000
Less: Instalment due 20,000 20,000 - -
Less: Instalment not due 8,000 - 8,000 -
Less: Profit on plant

purchased by S Ltd. from
P Ltd. on hire purchase - - - 5,600
4, 47,000 5,40,000 4,32,000 27,94,400
For consolidated balance sheet purpose, the unrealised profits will be eliminated by
deducting ` 5,600 from Plant & Machinery and from profit and loss account.
8. Consolidated capital reserve as on 31.3.2014

`
Capital reserve of P Ltd. as on 31.3.2014 5,00,000
Add: Share in post acquisition capital reserve of S Ltd. (W.N. 1) 1,04,000
Add: Cost of control (W.N. 4) 6,14,000
12,18,000
9. Consolidated revenue reserve as on 31.3.2014

`
Revenue reserve of P Ltd. as on 31.3.2014 8,50,000
Add: Share in post acquisition revenue reserve of S Ltd. (W.N. 1) 30,000
8,80,000
10. Consolidated profit and loss account as on 31.3.2014

`
Profit and loss account balance of P Ltd. as on 31.3.2014 4,00,000
Add: Share in post acquisition profit and loss account of S Ltd. (W.N. 1) 98,000
Less: Unrealised profit on hire purchase (5,600)
4,92,400
Note : In the question, the balance of capital reserve and profit and loss account of S Ltd., as
on 1.4.2013 only has been given and not of revenue reserve. Hence, it has been assumed in
the above solution that the revenue reserve is created during the year from current year‘s
profits.
Question No.7 (b)
A Limited is a holding company and B Limited and C Limited are subsidiaries of A Limited.
Their Balance Sheets as on 31.12.2012 are given below:
A Ltd. B Ltd. C Ltd. A Ltd. B Ltd. C Ltd.
` ` ` ` ` `
Share Capital 3,00,000 3,00,000 1,80,000 Fixed Assets 60,000 1,80,000 1,29,000
Reserves 1,44,000 30,000 27,000 Investments
Profit & Loss Account 48,000 36,000 27,000 - Shares in B Ltd. 2,85,000
C Ltd. Balance 9,000 - Shares in C 39,000 1,59,000
Ltd.
Sundry Creditors 21,000 15,000 Stock in Trade 36,000
A Ltd. Balance 21,000 B Ltd. Balance 24,000
Sundry Debtors 78,000 63,000 96,000
_______ _______ _____ A Ltd. Balance _______ _______ 9,000
5,22,000 4,02,000 2,34,000 5,22,000 4,02,000 2,34,000
The following particulars are given:

(i) The Share Capital of all companies is divided into shares of ` 10 each.
(ii) A Ltd. held 24,000 shares of B Ltd. and 3,000 shares of C Ltd.
(iii) B Ltd. held 12,000 shares of C Ltd.
(iv) All these investments were made on 30.6.2012.

(v) On 31.12.2011, the position was as shown below:
B Ltd. C Ltd.
` `
Reserve 24,000 22,500
Profit & Loss Account 12,000 9,000
Sundry Creditors 15,000 3,000
Fixed Assets 1,80,000 1,29,000
Stock in Trade 12,000 1,06,500
Sundry Debtors 1,44,000 99,000
(vi) 10% dividend is proposed by each company.

(vii) The whole of stock in trade of B Ltd. as on 30.6.2012 (` 12,000) was later sold to A Ltd. for
`13,200 and remained unsold by A Ltd. as on 31.12.2012.
(viii) Cash-in-transit from B Ltd. to A Ltd. was ` 3,000 as at the close of business.
You are required to prepare the Consolidated Balance Sheet of the group as on
31.12.2012.
Solution:
Consolidated Balance Sheet of A Ltd.
and its subsidiaries B Ltd. and C Ltd.as on 31st December, 2012
` in crores
No. No. March,2012 March,2011
1 EQUITY AND LIABILITIES
2 Minority Interest (W.N.5) 1,13,460
(a) Trade payables 3 36,000
(b) Short-term provisions 4 30,000
Total(1+2+3) 6,60,375
II ASSETS
(a) Fixed assets
(ii) Intangible assets 6 16,575
2 Current assets
(a) inventories 7 34,800
(b ) trade receivables 8 2,37,000
(c) Cash and cash equivalents 9 3,000
Total(1+2) 6,60,375
Notes to the Accounts

` in crores
March,2012 March,2011
Authorized, Issued, Subscribed and paid-up Share capital:-
30,000 Equity share of ` 10 each 3,00,000
Total 3,00,000
Reconciliation of Share Capital
For Equity Share As at 31st As at 31st
Nos. Amount (` ) Nos. Amount (` )
Opening Balance as on 01.04.11( crores) 30,000 3,00,000
Add: Fresh Issue (Including Bonus shares, right

shares, split shares, share issued other than cash)
30,000 3,00,000
Total 30,000 3,00,000
Note 2. Reserve & Surplus As at 31st As at 31st

Reserve 1,47,975
Profit & Loss A/c 32,940
Total 180,915
Note 3. Trade payables As at 31st As at 31st

Sundry creditors- (21,000+15,000) 36,000
Total 36,000
Note 4. Short-term provision As at 31st As at 31st

Proposed dividend 30,000
Total 30,000

Fixed assets 3,69,000
Total 3,69,000
Note 6. Intangible Assets As at 31st As at 31st

Goodwill 16,575
Total 16,575
Note 7.Inventories As at 31st As at 31st

Stock in trade 36,000
Less: Provision for Unrealized profit 1,200
Total 34,800
Note 8. Sundry debtors As at 31st As at 31st

Sundry debtors (more than six months considered 2,37,000

good)(78,000+63,000+96,000)
Total 2,37,000
Note 9. Cash and cash equivalents As at 31st As at 31st

Cash in transit (24,000-21,000) 3,000
Total 3,000
Working Notes:
(1) Position on 30.06.2012
Reserves Profit and Loss
Account
B Ltd. ` `
Balance on 31.12.2012 30,000 36,000

Less: Balance on 31.12.2011 24,000 12,000
Increase during the year 6,000 24,000
Estimated increase for half year 3,000 12,000
Balance on 30.06.2012 27,000 (24,000+3,000) 24,000 (12,000 +
12,000)
C Ltd.
Balance on 31.12.2012 27,000 27,000
Balance on 31.12.2011 22,500 9,000

Increase during the year 4,500 18,000
Estimated increase for half year 2,250 9,000
Balance on 30.06.2012 24,750 (22,500+2,250) 18,000 (9,000 +
9,000)
(2) Analysis of Profits of C Ltd.

Capital Revenue Revenue
Profit Reserve profit
` ` `
Reserves on 30.6.2012 24,750
Profit and Loss A/c on 30.6.2012 18,000
Increase in reserves 2,250
Increase in profit 9,000
42,750 2,250 9,000
Less: Minority interest (1/6) 7,125 375 1,500
35,625 1,875 7,500
Share of A Ltd. (1/6) 7,125 375 1,500
Share of B Ltd. (4/6) 28,500 1,500 6,000
(3) Analysis of Profits of B Ltd.

Capital Revenue Revenue
Profit Reserve profit
` ` `
Reserves on 30.6.2012 27,000
Profit and Loss A/c on 30.6.2012 24,000
Increase in reserves 3,000
Increase in profit 12,000
Share in C Ltd. 1,500 6,000
51,000 4,500 18,000
Less: Minority interest (2/10) 10,200 900 3,600
Share of A Ltd. (8/10) 40,800 3,600 14,400
(4) Cost of control

` `
Investments in
B Ltd. 2,85,000
C Ltd. 1,98,000
4,83,000
Paid up value of investments in
B Ltd. 2,40,000
C Ltd. 1,50,000
(3,90,000)
Capital profits in
B Ltd. 40,800
C Ltd. 35,625
(76,425)
Goodwill 16,575
(5) Minority Interest ` `
Share Capital:
B Ltd. 60,000
C Ltd. 30,000 90,000
Share in profits and reserves (Pre and Post-Acquisitions)
B Ltd. 14,700
C Ltd. 9,000 23,700
1,13,700
Less: Provision for unrealized profit (20% of ` 1,200)
240
1,13,460
(6) Reserves – A Ltd. `

Balance as on 31.12.2012 (given) 1,44,000
Share in
B Ltd. 3,600
C Ltd. 375
1,47,975
(7) Profit and Loss Account – A Ltd. `
Balance as on 31.12.2012 (given) 48,000
Share in
B Ltd. 14,400
C Ltd. 1,500
63,900
Less: Proposed dividend (10% of ` 3,00,000) 30,000
Provision for unrealised profit on stock 960
80% of (` 13,200 – ` 12,000)
32,940
Note: The above solution has been done by direct method. Alternatively, students may
follow indirect method. In indirect method, the share in pre-acquisition profits of B Ltd. in
C Ltd. amounting ` 28,500 will be included as capital profit while analysing the profits of B
Ltd. and will not be considered for the purpose of cost of control. Thus, in this case, the
amounts of goodwill and minority interest will increase by ` 5,700 (2/10 of ` 28,500).
Goodwill and minority interest will be shown at ` 22,275 and ` 1,19,160 respectively in the
consolidated balance sheet. Therefore, the total of the assets and liabilities side of the
consolidated balance sheet will be ` 6,66,075.
Question 7 (c)
On 31st March, 2011 BA Ltd. became the holding company of CA Ltd. and DA Ltd. by
acquiring 1,800 lakhs fully paid shares in CA Ltd. for ` 27,000 lakhs and 960 lakhs fully paid
shares in DA Ltd. for ` 8,640 lakhs. On that date, CA Ltd. showed a balance of ` 10,200 lakhs
in General Reserve and a credit balance of ` 3,600 lakhs in Profit and Loss Account. On the
same date, DA Ltd. showed a debit balance of ` 1,440 lakhs in Profit and Loss Account. While
its Preliminary Expenses Account showed a balance of ` 120 lakhs.
After one year, on 31st March, 2012 the summarised Balance Sheets of three companies
stood as follows:
(` in lakhs)
Liabilities BA Ltd. CA Ltd. DA Ltd.
Fully paid equity shares of ` 10 each 1,08,000 30,000 12,000
General Reserve 1,32,000 12,600 -
Profit and Loss Account 36,000 4,800 3,000
60 lakh fully paid 9.5%
Debentures of ` 100 each - - 6,000
Loan from CA Ltd. - - 300
Bills Payable - - 600
Sundry Creditors 56,400 10,800 3,720
3,32,400 58,200 25,620
Assets
Machinery 1,56,000 30,000 8,400
Furniture and Fixtures 24,000 6,000 2,400
Investments:
1,800 lakhs shares in CA Ltd. 27,000 - -
960 lakhs shares in DA Ltd. 8,640 - -
12 lakhs debentures in DA Ltd. 1,176 - -
Stocks 66,000 12,000 6,000
Sundry Debtors 36,000 5,400 5,160
Cash and Bank balances 12,804 4,200 3,600
Loan to DA Ltd. - 360 -
Bills Receivable 780 240 -
Preliminary Expenses - - 60
3,32,400 58,200 25,620
The following points relating to the above mentioned Balance Sheets are to be noted:
(i) All the bills payable appearing in DA Ltd.‘s Balance Sheet were accepted in favour of
CA Ltd. out of which bills amounting to `300 lakhs were endorsed by CA Ltd. in favour of
BA Ltd. and bills amounting to `180 lakhs had been discounted by CA Ltd. with its bank.
(ii) On 29th March, 2012 DA Ltd. remitted `60 lakhs by means of a cheque to CA Ltd. to
return part of the loan; CA Ltd. received the cheque only after 31st March, 2012.
(iii) Stocks with CA Ltd. includes goods purchased from BA Ltd. for `800 lakhs. BA Ltd.
invoiced the goods at cost plus 25%.
(iv) In August, 2011 CA Ltd. declared and distributed dividend @ 10% for the year ended 31st
March, 2011. BA Ltd. credited the dividend received to its Profit and Loss Account.
You are required to prepare a Consolidated Balance Sheet of BA Ltd. and its subsidiaries CA
Ltd. and DA Ltd. as at 31st March, 2012.
Solution :
Consolidated Balance Sheet of BA Ltd. and its subsidiaries CA Ltd. and DA Ltd. as at 31st
March, 2012
` In Lakhs
(a) Share capital 1 1,08,000 —

(b) Reserves and surplus 2 1,73,600 —
2 Minority Interest (W.N.2) 21,948 —
(b) Trade payables 4 70,920 —

(c )Other current liabilities 5 180 —
Total (1+2+3+4) 3,79,448 —
II ASSETS
(a) Fixed assets

(ii) Intangible assets 7 984 —
2 Current assets
(a) inventories 8 83,840 —
(b ) trade receivables 9 46,560 —

(c) Cash and cash equivalents 10 20,664 —
(d) Other current assets 11 600 —

Total (1+2) 3,79,448 —
` In lakhs
Authorized, Issued, Subscribed and fully paid-up Share capital:-
10,800 Lakhs Equity share of ` 10 each 1,08,000
1,08,000

FOR EQUITY SHARE As at 31st March,2012 As at 31st
March,2011
Nos. Amount(`) Nos. Amount(`)
Opening Balance as on 01.04.11 10,800 1,08,000
Add: Fresh Issue (Including Bonus shares, right

shares, split shares, share issued other than cash)
10,800 1,08,000
Total 10,800 1,08,000

General Reserve (WN.4) 1,33,440
Profit & Loss A/c (WN.4) 40,160
Total 1,73,600
Note 3. Long- term borrowings As at 31st As at 31st

9.5% Debentures 4,800
Total 4,800
Note 4. Trade Payables As at 31st As at 31st

Sundry Creditors (56,400+10,800+3,720) 70,920
Total 70,920
Note 5. Other Current liabilities As at 31st As at 31st

Bills Payable 180
Total 180

Machinery 1,94,400
Furniture & Fixture 32,400
Total 2,26,800
Note 7.Intangible assets As at 31st As at 31st

Goodwill (WN.3) 984
Total 984
Note 8. Inventories As at 31st As at 31st

Stock 84,000
Less: unrealized profit 160
Total 83,840
Note 9.Trade Receivables As at 31st As at 31st

Debtors (more than six months considered good) – 46,560

(36,000+5,400+5,160)
Total 46,560

Cash and bank 20,604
Cash-in-transit 60
Total 20,664
Note 11.Other current assets As at 31st As at 31st

Bills receivables 1,020
Less: mutual debts(WN.5) 420
Total 600
Working Notes:
(i) Calculation of pre and post acquisition profits of subsidiaries:
(` in lakhs)
Pre-acquisition Post-acquisition
capital profit
General Profit/Loss
Reserve A/c
CA Ltd.
General Reserve (Cr.) 10,200 2,400
Profit and Loss A/c (Cr.) 3,600
(-) Dividend 3,000 600 4,200
10,800 2,400 4,200
Holding (60%) 6,480 1,440 2,520
Subsidiary (40%) 4,320 960 1,680
(` in lakhs)
Pre-acquisition Post-acquisition
capital profit
Preliminary Profit / Loss
expenses A/c
DA Ltd.
Profit and Loss A/c (Cr.) (1,440) 4,440
Preliminary expenses (Dr.) (120) 60
(1,560) 60 4,440
Holding (80%) (1,248) 48 3,552
Subsidiary (20%) (312) 12 888
(ii) Minority Interest (` in lakhs)

CA Ltd.
Share capital 12,000
Capital profit 4,320
Revenue General Reserve 960
Profit/Loss 1,680 6,960 18,960
DA Ltd.
Share capital 2,400
Capital profit (312)
Revenue profit (Cr.) 888
Add: Preliminary expenses written off 12 900 588 2,988
21,948
(iii) Cost of Control (` in lakhs)

CA Ltd.
Investment 27,000
Less: Dividend received and wrongly credited to Profit and Loss 1,800 25,200
Less: Paid-up share capital (60%) 18,000
Capital profit 6,480 24,480 720
Dee Ltd.
Investment in Shares 8,640
in debentures 1,176 9,816
Less: Paid-up share capital (80%) 9,600
Nominal value of debentures 1,200
Capital profit (1,248) 9,552 264
Goodwill 984
(iv) Consolidated General Reserve and Profit and Loss Account ( ` in Lakhs)
General Profit and Loss A/c
Reserve `
`
BA Ltd. 1,32,000 36,000
Less: Wrong dividend credited - 1,800
1,32,000 34,200
CA Ltd. 1,440 2,520
DA Ltd. (3,552 + 48) - 3,600
1,33,440 40,320
Less: Unrealised profit on stock - 160
1,33,440 40,160
(v) Mutual owing regarding bills = `(600 – 180) lakhs = `420 lakhs.
(vi) Unrealised profit
25
800x Lakhs
125
= ` 160 lakhs
(vii) Amount of dividend wrongly credited to Profit and Loss A/c

= 60% of `3,000 lakhs = `1,800 lakhs.
Question No.8(a)
Given below Balance Sheets of Madhu Ltd and Rahim Ltd. as on 31.3.2012. Rahim Ltd. was
merged with Madhu Ltd. with effect from 31.03.2012.
Summarised Balance Sheets as on 31.3.2012 (Before merger)
(`)
Liabilities Madhu Rahim Assets Madhu Rahim

Ltd. Ltd. Ltd. Ltd.
Share Capital : Sundry Fixed Assets (Tangible)9,50,000 4,00,000
Equity Shares of Investments (Non- 2,00,000 50,000
` 10 each 7,00,000 2,50,000 trade)
General Reserve 3,50,000 1,20,000 Stock 1,20,000 50,000
Profit and Loss A/c 2,10,000 65,000 Debtors 75,000 80,000
Export Profit Reserve 70,000 40,000 Advance Tax 80,000 20,000
12% Debentures 1,00,000 1,00,000 Cash and Bank 2,75,000 1,30,000
Sundry Creditors 40,000 45,000 balances
Provision for Taxation 1,00,000 60,000 Preliminary Expenses 10,000 —
Proposed Dividend 1,40,000 50,000
17,10,000 7,30,000 17,10,000 7,30,000
Madhu Ltd. would issue 12% Debentures to discharge the claims of the debenture holders of
Rahim Ltd. at par. Non-trade investments of Madhu Ltd. fetched @ 25% while those of Rahim
Ltd. fetched @ 18%. Profit (pre-tax) by Madhu Ltd and Rahim Ltd. during 2009-10, 2010-11 and
2011-12 and were as follows :
Year Madhu Ltd. Rahim Ltd.
` `
2009-10 5,00,000 1,50,000
2010-11 6,50,000 2,10,000
2011-12 5,75,000 1,80,000
Goodwill may be calculated on the basis of capitalisation method taking 20% as the pre-tax
normal rate of return. Purchase consideration is discharged by Madhu Ltd. on the basis of
intrinsic value per share. Both companies decided to cancel the proposed dividend.
Required Balance Sheet of Madhu Ltd. after merger.
Solution :
WN # 1: Purchase Consideration:
(i) Shares outstanding in Rahim Ltd. 25,000
(ii) Intrinsic Value per Share of Rahim Ltd. [WN # 2] ` 36.20
(iii) Value of Shares (a×b) ` 9,05,000
(iv) Intrinsic value per share of Madhu Ltd. [WN # 2] ` 40.40
(v) No. of shares to be issued by Madhu Ltd.

` 9,05,000 / ` 40.40 = 22,400.99
Shares Cash for fractions

22400 0.99 × 40.40 = 40
(vi) Purchase consideration

(a) 22400 shares @ 40.40
Capital [` 10 / Share] 2,24,000
Premium [` 30.40 / Share] 6,80,960 = 9,04,960
(b) Cash for fractional shares = 40
(c) Total purchase consideration payable = 9,05,000
WH # 2 : Intrinsic Value per share :
(`)
Madhu Ltd. Rahim Ltd.

(i) Assets
(a) Goodwill 13,65,000 3,80,000
(b) Sundry Fixed assets 9,50,000 4,00,000
(c) Investments 2,00,000 50,000
(d) Stock 1,20,000 50,000
(e) Debtors 75,000 80,000
(f) Advance Tax 80,000 20,000
(g) Cash and Bank Balance 2,75,000 30,65,000 1,30,000 11,10,000
(ii) Liabilities
(a) 12% Debentures 1,00,000 1,00,000
(b) Sundry creditors 40,000 45,000
(c) Provision for tax 1,00,000 (2,40,000) 60,000 (2,05,000)
(iii) Net Assets (i-ii) 28,25,000 9,05,000
(iv) No. of Outstanding Shares 70,000 25,000
(v) Intrinsic Value per share (iii)/(iv) 40.40 36.20
W # 3 : Valuation of Goodwill
A. Capital Employed

(i) Assets :
(a) Sundry Fixed assets 9,50,000 4,00,000
(b) Investment (Non-trade) - -
(c) Stock 1,20,000 50,000
(d) Debtors 75,000 80,000
(e) Advance tax 80,000 20,000
(f) Cash and Bank balance 2,75,000 15,00,000 1,30,000 6,80,000
(ii) Liabilities:
(a) 12% Debentures 1,00,000 1,00,000
(b) Sundry creditors 40,000 45,000
(c) Provision for tax 1,00,000 2,40,000 60,000 2,05,000
(iii) Capital Employed : (i) - (ii) 12,60,000 4,75,000

B. Average Pre-tax Profit :
Particulars Madhu Ltd. Rahim Ltd.

(i) 2009-10 5,00,000 1,50,000
(ii) 2010-11 6,50,000 2,10,000
(iii) 2011-12 5,75,000 1,80,000
(iv) Total (a+b+c) 17,25,000 5,40,000
(v) Simple Average [(iv)/3] 5,75,000 1,80,000
(vi) Less: Non-trading income (50,000) (9,000)
(vii) Average pre-tax profit 5,25,000 1,71,000
C. Computation of Goodwill :
a. Capital value of average profits 26,25,000 8,55,000
5,25,000 and 1,71,000
0.20 0.20
b. Capital Employed 12,60,000 4,75,000
c. Goodwill (a-b) 13,65,000 3,80,000
Journal Entries - Books of Madhu Ltd.

• Nature of Amalgamation – PURCHASE
• Method of Accounting – PURCHASE METHOD

a. For Business Purchase :
Business Purchase A/c Dr. 9,05,000
To Liquidator of Rahim Ltd. A/c 9,05,000
b. For Assets and Liabilities taken over
Goodwill A/c Dr. 3,80,000
Fixed Assets A/c Dr. 4,00,000
Investments A/c Dr. 50,000
Stock A/c Dr. 50,000
Debtors A/c Dr. 80,000
Advance tax A/c Dr. 20,000
Cash and Bank A/c Dr. 1,30,000
To 12% Debenture holders A/c 1,00,000
To Creditors A/c 45,000
To Provision for Taxation A/c 60,000
To Business Purchase A/c 9,05,000
c. For Discharge of Purchase Consideration:
Liquidator of Rahim Ltd. Dr. 9,05,000
To Equity Share capital A/c 2,24,000
To Securities premium A/c 6,80,960
To Cash A/c 40
d. Contra Entry
Amalgamation Adjustment A/c Dr. 40,000
To Export Profit Reserve A/c 40,000
Name of the Company: Madhu Ltd.
Balance Sheet as at 31.03.2012 (After merger)
Particulars
` `
(a) Long-term borrowings 3 2,00,000

(a) Trade payables 4 85,000
(b) Short-term provisions 5 1,60,000
Total 28,59,960
II. Assets
(a) Fixed assets
(ii) Intangible assets 7 3,80,000
(b) Non-current investments 8 2,50,000
(c) Long-term loans and advances 9 1,00,000
(d) Other non-current assets 10 40,000
2 Current assets
(b ) Trade receivables 12 1,55,000
(d) Other current assets 14 10,000
Total 28,59,960
`
Authorised, Issued , Subscribed and Paid up Share Capital 92,400 9,24,000
Equity Shares of ` 10 each (of which 22,400 shares were issued for
consideration other than cash)
Total 9,24,000
FOR EQUITY SHARE As at 31st March, 2012 As at 31st March, 2011

Nos. Amount (`) Nos. Amount (`)
Opening Balance as on 01.04.11 70,000 7,00,000 - -
Add: Fresh issue (Incld Bonus shares, 22,400 2,24,000 - -
Right shares, Split shares issued other
than cash)
92,400 9,24,000
Profit and Loss A/c ` 2,10,000

Add: Proposed Dividend Cancelled ` 1,40,000 3,50,000
Export Profit reserve (70,000+40,000) 1,10,000
Total 14,90,960
Note 3. Long-term borrowings
12% Debentures of ` 100 each (1,00,000+1,00,000) 2,00,000
Total 2,00,000
Sundry Creditors 85,000
Total 85,000
Note 5. Short term Provisions
Provision for Tax (1,00,000 + 60,000) 1,60,000
Total 1,60,000
Sundry Fixed assets(9,50,000+4,00,000) 13,50,000
Total 13,50,000
Note 7. Intangible assets
Goodwill 3,80,000
Total 3,80,000
Note 8. Noncurrent Investments
Investment 2,50,000
Total 2,50,000
Note 9. Long-term Loans and advances
Advance Tax 1,00,000
Total 1,00,000
Note 10.Other Noncurrent assets
Amalgamation Adjustment A/c 40,000
Total 40,000
Note 11. Inventories
Stock (1,20,000+50,000) 1,70,000
Total 1,70,000
Note 12. Trade receivables
Debtors (75,000+80,000) 1,55,000
Total 1,55,000
Cash and Bank balance (2,75,000 + 1,30,000-40) 4,04,960
Total 4,04,960
Total 10,000
Question No.8(b)
The Balance Sheets of Big Ltd. and Small Ltd. as on 31.03.2012 were as follows:
Summarized Balance Sheet as on 31.03.2012
Big Ltd. Small Ltd. Big Ltd. Small Ltd.
(`) (`) (`) (`)
Equity Share 8,00,000 3,00,000 Building 2,00,000 1,00,000
Capital (`10)
10% Preference Machinery 5,00,000 3,00,000
Share Capital 2,00,000 Furniture 1,00,000 60,000
(` 100)
General reserve 3,00,000 1,00,000 Investment:
Profit and Loss 2,00,000 1,00,000 6,000 shares of
Account Small Ltd. 60,000
Creditors 2,00,000 3,00,000 Stock 1,50,000 1,90,000
Debtors 3,50,000 2,50,000
Cash and Bank 90,000 70,000

Preliminary 50,000
________ ________ Expenses 30,000
15,00,000 10,00,000 15,00,000 10,00,000
Big Ltd. has taken over the entire undertaking of Small Ltd. on 30.09.2012, on which date the
position of current assets except Cash and Bank balances and Current Liabilities were as
under:
Big Ltd. Small
Ltd.
(`) (`)
Stock 1,20,000 1,50,000
Debtors 3,80,000 2,50,000

Creditors 1,80,000 2,10,000
Profits earned for the half year ended on 30.09.2012 after charging depreciation at 5% on
building, 15% on machinery and 10% on furniture, are:
Big Ltd. ` 1,02,500

Small Ltd. ` 54,000
On 30.08.2012 both Companies have declared 15% dividend for 2011-12.

Goodwill of Small Ltd. has been valued at ` 50,000 and other Fixed assets at 10%
above their book values on 31.03.2012. Preference shareholders of Small Ltd. are to be
allotted 10% Preference Shares of Big Ltd. and equity shareholders of Small Ltd. are to receive
requisite number of equity shares of Big Ltd. valued at ` 15 per share in satisfaction of their
claims.
Show the Balance Sheet of Big Ltd. as of 30.09.2012 assuming absorption is through by
that date.
Solution :
Name of the Company: Big Ltd.

Consolidated Balance Sheet as at 30th September,2012
Ref Particulars Note As at 30th Sept, As at 30th Sept,
No. No. 2012 2011
` `
(a) Share capital 1 12,96,000 -
(b) Reserves and surplus 2 6,40,500 -
2 Share Application money pending allotment 19,36,500 -
(a) Trade payables 3 3,90,000 -
TOTAL (1+2+3) 23,26,500 -
B ASSETS
(a) Fixed assets
(i) Tangible assets 4 12,30,500 -
2 Current assets
(a) Inventories 5 2,70,000 -
(b) Trade receivables 6 6,30,000 -
(c) Cash and cash equivalents 7 1,46,000 -
(d) Other current assets 8 50,000 -
TOTAL (1+2) 23,26,500 -
Notes to Accounts
Note 1. Share Capital As at 30th As at 30th

Sept, 2012 Sept, 2011
Share Capital in Equity Shares 10,96,000
10% Preference Share Capital 2,00,000
Total 12,96,000
FOR EQUITY SHARE As at 30th Sept, 2012 As at 30th Sept, 2011

Opening Balance as on 01.04.11 80,000 8,00,000 - -
than cash)
1,09,600 10,96,000
FOR 10% PREFERENCE SHARE As at 30th Sept, 2012 As at 30th Sept, 2011
Opening Balance as on 01.04.11 - - - -
than cash)
20,000 2,00,000
Note 2. Reserves and Surplus As at 30th As at 30th

Sept, 2012 Sept, 2011
Capital Reserves 1,000
Profit & Loss A/c 1,91,500
Total 6,40,500
Note 3. Trade Payables As at 30th As at 30th

Sept, 2012 Sept, 2011
Total 3,90,000
Note 4. Tangible assets As at 30th As at 30th

Sept, 2012 Sept, 2011
Building 3,02,500
Machinery 7,70,000
Furniture 1,58,000
Total 12,30,500
Note 5. Inventories As at 30th As at 30th

Sept, 2012 Sept, 2011
Stock (1,20,000+1,50,000) 2,70,000
Total 2,70,000
Note 6. Trade receivables As at 30th As at 30th

Sept, 2012 Sept, 2011
Sundry Debtors (3,80,000+2,50,000) 6,30,000
Total 6,30,000
Note 7. Cash and Cash Equivalents As at 30th As at 30th

Sept, 2012 Sept, 2011
Cash and Bank 1,46,000
Total 1,46,000
Note 8. Other Current Assets As at 30th As at 30th

Sept, 2012 Sept, 2011
Total 50,000
Working Notes:
1. Ascertainment of Cash and Bank Balances as on 30th September, 2012
Balance Sheets as at 30th September, 2012
Liabilities Big Ltd. Small Ltd. Assets Big Ltd. Small Ltd.
(`) (`) (`) (`)
Equity Share 8,00,000 3,00,000 Building** 1,95,000 97,500
Capital
10% Preference Machinery** 4,62,500 2,77,500
Share Capital 2,00,000
General reserve 3,00,000 1,00,000 Furniture** 95,000 57,000
Profit and Loss 1,91,500 89,000 Investment 60,000
Account*
Creditors 1,80,000 2,10,000 Stock 1,20,000 1,50,000
Debtors 3,80,000 2,50,000
Cash and Bank 1,09,000 37,000
(Balancing
figure)
Preliminary 50,000 30,000
Expenses
14,71,500 8,99,000 14,71,500 8,99,000
*Balance of Profit and Loss Account on 30th September, 2012.

Big Ltd. Small Ltd.
(`) (`)
Net profit (for the first half) 1,02,500 54,000
Balance brought forward 2,00,000 1,00,000
3,02,500 1,54,000
Less: Dividend on Equity Share Capital Paid 1,20,000 45,000
1,82,500 1,09,000
Less: Dividend on Preference Share Capital 20,000
Paid
1,82,500 89,000
1
Add: Dividend received 45,000 9,000
5
1,91,500 89,000
**Fixed Assets on 30th September, 2012 (Before absorption)

Big Ltd. Small Ltd.
(`) (`)
(1) Building
As on 1.4.1995 2,00,000 1,00,000
Less: Depreciation (5% p.a.) 5,000 2,500
1,95,000 97,500
(2) Machinery
As on 1.4.1995 5,00,000 3,00,000
4,62,500 2,77,500
(3) Furniture
As on 1.4.1995 1,00,000 60,000
95,000 57,000
2. Calculation of Shares Allotted

Assets taken over: `
Goodwill 50,000
Building 1,00,000
Add: 10% 10,000
1,10,000
Less: Depreciation 2,500
1,07,500
Machinery 3,00,000
Add: 10% 30,000
3,30,000
3,07,500
Furniture 60,000
Add: 10% 6,000
66,000
63,000
Stock 1,50,000
Debtors 2,50,000
Cash and Bank 37,000
9,65,000
Less: Liabilities taken over:
Creditors 2,10,000
Net assets taken over 7,55,000
Less: Allotment of 10% Preference Shares
to preference shareholders of Small Ltd. 2,00,000
5,55,000
Less: Belonging to Big Ltd.*** 1,11,000
1
5,55,000 _______
5
Payable to other Equity Shareholders 4,44,000
Number of equity shares of ` 10 each to
be Issued (valued at ` 15 each) 4,44,000
15
= 29,600
[*** 6,000 shares out of 30,000 shares of Small Ltd. are already with Big Ltd.]
3. Ascertainment of Goodwill / Capital Reserve
`
(A) Net Assets taken over 7,55,000
(B) Preference shares allotted 2,00,000
Payable to other equity 4,44,000
shareholders
Cost of investments 60,000
7,04,000
(C) Capital Reserve [(A) – (B)] 51,000
(D) Goodwill taken over 50,000
(E) Final figure of Capital Reserve 1,000
[(C) – (D)]
Question No. 8(c)
Sky Ltd., as listed company, entered into an expansion programme on 1 st October,2011. On

that date the company purchased from Cloud Ltd. its investments in two Private Limited
Companies. The purchase was of
(a) the entire share capital of Sun Ltd.
And
(b) 50% of the share capital of Moon Ltd.
Both the investments were previously owned by Cloud Ltd. after acquisition by Sky Ltd., Moon
Dry Ltd. was to be run by Sky Ltd. and Cloud Ltd. as a jointly controlled entity.
Sky Ltd. makes its financial statements up to 30 th September each year. The terms of
acquisition were :
Sun Ltd.
The total consideration was based on price earning ratio (P/E) of 12 applied to the reported
profit of ` 20 Lakhs of Sun Ltd. for the 30 th Sept. 2011. The consideration was settled by Sky Ltd.
issuing 8% debentures for ` 140 lakhs (at par) and the balance by a new issue of ` 1 equity
shares, based on its market value of ` 2.50 each.
Moon Ltd.
The market value of Moon Ltd. on first Oct, 2011 was mutually agreed as `375 lakhs. Sky Ltd.
satisfied its share of 50% of this amount by issuing 75 lakhs `1 equity shares (market value
`2.50 each) to Cloud Ltd.
Sky Ltd. has not recorded in its books the acquisition of the acquisition of the above
investments or the discharge of the consideration.
The summarized statements of financial position of the three entities at 30st Sept,2012 are:
` in thousands
Assets Sky Ltd. Sun Ltd. Moon Ltd.
Tangible Assets 34,260 27,000 21,060
Inventories 9,640 7,200 18,640
Debtors 11,200 5,060 4,620
Cash -- 3,410 40
55,100 42,670 44,360
Liabilities
Equity Capital: ` 1 each 10,000 20,000 25,000

Retained earnings 20,800 15,000 4,500
Trade and other payables 18,660 5,270 14,100
Provision for taxes 5,640 2,400 760
55,100 42,670 44,360
The following information is relevant.
(a) The book values of net assets of Sun Ltd. and Moon Ltd. on the date of acquisition were
considered to be a reasonable approximation to their fair values.
(b) The current profits of Sun Ltd. and Moon Ltd. for the year ended 30 th Sept, 2012 were `80
lakhs and `20 lakhs respectively. No dividends were paid by any of the companies
during the year.
(c) Moon Ltd., the jointly controlled entity, is to be accounted for using proportional
consolidation, in accordance with AS 27 ―Interests in joint venture‖.
(d) Goodwill in respect of the acquisition of Moon Ltd. has been impaired by `10 lakhs at
30th Sept, 2012. Gain on acquisition, if any, will be separately accounted.
Prepare the consolidated Balance Sheet of Sky Ltd. and its subsidiaries as at 30 th Sept,2012.
Solution:
Consolidated Balance Sheet of Sky Ltd. With its Subsidiary Sun Ltd. and Jointly controlled
Moon Ltd. As at 30th Sept, 2012
` in thousand
(a) Share Capital 1 21,500 —
(b) Reserves and Surplus 2 49,050 —
(a) Trade Payables 4 30,980 —
(b) Short-term provisions 5 8,420 —
Total 1,23,950 —
II. ASSETS
(a) Fixed assets
(i) Tangible assets 6 71,790 —
(ii) Intangible assets 7 4,000 —
(a) Inventories 8 26,160 —
(b) Trade receivables 9 18,570 —
(c) Cash and Cash equivalents 10 3,430 —
Total 1,23,950 —

Particulars Amount
(` in thousand)
Equity Share Capital (` 10,000+ `4,000+ ` 7,500) 21,500
(Out of the above 11,500 thousand shares have been issued for
consideration other than cash)
Total 21,500
Particulars Amount
(` in thousand)
Retained Earnings (W.N 4) 28,800
Capital Reserve (W.N 5) 3,000
Total 49,050
Note 3. Long term Borrowings
Particulars Amount
(` in thousand)
8% debentures 14,000
Total 14,000
Particulars Amount
(` in thousand)
Trade and other payables (`18,660+ ` 5,270 + ` 7,050) 30,980
Total 30,980
Note 5. Short term Provision
Particulars Amount
(` in thousand)
Provision for taxes (` 5,680+ `2,400 + `380) 8,420
Total 8,420
Note 6. Tangible assets
Particulars Amount
(` in thousand)
Tangible assets (`34,260+ `27,000+ `10,530) 71,790
Total 71,790
Particulars Amount
(` in thousand)
Goodwill (W.N 6) 4,000
Total 4,000
Note 8. Inventories
Particulars Amount
(` in thousand)
Inventories (`9,640 + ` 7,200 + ` 9,320) 26,160
Total 26,160
Particulars Amount
(` in thousand)
Debtors (`11,200 + ` 5,060 + ` 2,310) 18,570
Total 18,570
Particulars Amount
(` in thousand)
Cash [(`3,412 + `20) Less Overdraft ` 1,540] 1,890
Total 1,890
Working Notes :
1. Purchase consideration paid to Sun Ltd.
Earnings per share for the year 30 th Sept. ,2011
20,00,000
= = ` 0.10 per share
2,00,00,000
Market price per share = ` 0.10 x 12 (i.e. P/E ratio) = ` 1.20 per share
Purchase consideration to be paid as under:
8% Debentures `14,000 thousand
Equity Shares `10,000 thousand
Purchase consideration paid to Sun Ltd. will be `24,000 thousands.
2. Consideration Paid to Moon Ltd.

` in thousands
Total market value (as given) 37,500
50% Shares acquired by Sky Ltd. ( 75,00,000shares @ `2.50 18,750
each)
3. Analysis of retained earnings of Sun Ltd. as on 30.09.2012

` in thousands
Retained earnings given in balance sheet on 30.09.2012 15,000
Less: Current profits for the year ended 30.09.2012 ( Post 8,000
acquisition)
Pre acquisition retained earnings 7,000
Sky Ltd. has 100% share in pre acquisition profits of Sun Ltd.
4. Retained earnings in the consolidated Balance Sheet

` in thousands
Balance in Sky Ltd. balance sheet 20,800
Add: Share in post acquisition profits of Sun Ltd. 8,000
Add: Share in post acquisition profits of Moon Ltd. (joint 1,000
venture)
29,800
Less: Goodwill (written off) 1,000
28,800
5. Capital Reserve
` in thousands
Amount Paid 24,000
Less: Paid up value of shares 20,000
Pre-acquisition profit 7,000 27,000

6. Goodwill
` in thousands
Amount paid for shares of Moon Ltd. (` 37,500 × 50%) 18,750
Less: Paid up value of shares (`25,000 × 50%) 12,500
Pre- acquisition profit (`2,500 × 50%) 1,250
Goodwill 5,000
Less: Impairment (Written off) 1,000
4,000
Question No.9 (a)
The summarized Balance Sheets of Spring Ltd. and its subsidiary Winter Ltd. as on 31st March,
2012 are as under:
Liabilities Spring Winter Ltd. Assets Spring Winter
Ltd. Ltd. Ltd.
` ` ` `
Equity shares of ` 10 4,80,000 2,00,000 Goodwill 45,000 30,000
each Plant and machinery 1,20,000 50,000

10% Preference shares of Motor vehicles 95,000 75,000
` 10 each 70,000 38,000
General reserve 55,000 42,000 Furniture and
Profit and loss account 1,00,000 60,000 fittings 65,000 40,000
Bank overdraft 12,000 7,000 Investments 2,60,000 45,000
Sundry creditors 43,000 48,000 Stock 45,000 72,000
Bills payable - 16,000 Cash at bank 22,500 21,000
Debtors 93,000 78,000
________ ________ Bills receivable 14,500 -
7,60,000 4,11,000 7,60,000 4,11,000
Details of acquisition of shares by Spring Ltd. are as under:

Nature of shares No. of shares acquired Date of acquisition Cost of acquisition
`
Preference shares 1,425 1.4.2008 31,000
Equity shares 8,000 1.4.2009 95,000
Equity shares 7,000 1.4.2010 80,000

Other information:
(i) On 1.4.2011 profit and loss account and general reserve of Winter Ltd. had credit
balances of ` 30,000 and ` 20,000 respectively.
(ii) Dividend @ 10% was paid by Winter Ltd. for the year 2010-2011 out of its profit and loss
account balance as on 1.4.2011. Spring Ltd. credited its share of dividend to its profit
and loss account.
(iii) Winter Ltd. allotted bonus shares out of general reserve at the rate of 1 share for every
10 shares held. Accounting thereof has not yet been made.
(iv) Bills receivable of Spring Ltd. were drawn upon Winter Ltd.
(v) During the year 2011-2012 Spring Ltd. purchased goods from Winter Ltd. for ` 10,000 at a
sale price of ` 12,000. 40% of these goods remained unsold at close of the year.
(vi) On 1.4.2010 motor vehicles of Winter Ltd. were overvalued by ` 10,000. Applicable
depreciation rate is 20%.
(vii) Dividends recommended for the year 2012-2013 in the holding and the subsidiary
companies are 15% and 10% respectively.
Prepare consolidated Balance Sheet as on 31st March, 2013.
Solution:
Consolidated Balance Sheet of Spring Ltd. and its subsidiary Winter Ltd. as on 31st March,
2013
2 Minority Interest (W.N.3) 98,675
(a) Short-term borrowings 3 20,500
(b) Trade payables 4 91,000
(c )Other current liabilities 5 1,500
(d) Short-term provisions 6 79,000
Total (1+2+3) 9,61,450
II ASSETS
(a) Fixed assets
(ii) Intangible assets 8 94,750
(b) Non-current investments 9 99,000
2 Current assets
(a) inventories 10 1,16,200
(b ) trade receivables 11 1,71,000
(c) Cash and cash equivalents 12 43,500
Total (1+2) 9,61,450
Notes on the Accounts (` )

Authorized Share capital:-
Equity share of `10 each 4,80,000
10% Preference Share Capital of `10 each 70,000
5,50,000
Issued, Subscribed and paid-up
48,000 Equity share of `10 each 4,80,000
7,000,10% Preference Share Capital of ` 10 each 70,000
5,50,000

General Reserve (W.N. 5) 71,500
Profit and Loss account (W.N. 4) 50,775
Total 1,22,275
Note 3. Short-Term Borrowings As at 31st As at 31st

Bank Overdraft- Spring Ltd. 12,000
Winter Ltd. 7,000
Total 19,000

Sundry Creditors- Spring Ltd. 43,000
Winter Ltd. 48,000
Total 91,000
Note 5. Other Current liabilities As at 31st As at 31st

Bills Payable- Winter Ltd. 16,000
Less: Mutual debts (14,500)
Total 1,500
Note 6. Short Term Provisions As at 31st As at 31st

Proposed dividend
- Equity 72,000
- Preference 7,000
Total 79,000
Note No. 7 Tangible Assets As at 31st As at 31st

(i) Plant and Machinery- Spring Ltd. 1,20,000
Winter Ltd. 50,000 1,70,000
(ii) Motor Vehicles - Spring Ltd. 95,000
Winter Ltd. (75,000-10,000+2,000) 67,000 1,62,000
(iii) Furniture & Fittings- Spring Ltd. 65,000
Winter Ltd. 40,000 1,05,000
Total (i+ii+iii) 4,37,000
Note 8. Intangible Assets As at 31st As at 31st

Goodwill - Spring Ltd. 45,000
Winter Ltd. 30,000
75,000
Add: Goodwill on Consolidation (W.N.2) 19,750
Total 94,750
Note 9.Non-current Investments As at 31st As at 31st

Investment in other companies - Spring Ltd. (2,60,000-2,06,000) 54,000
Winter Ltd. 45,000
Total 99,000

Stock - Spring Ltd. 45,000
Winter Ltd. 72,000 1,17,000
Less: Unrealized Profits 800
Total 1,16,200
Note 11.Trade Receivables As at 31st As at 31st

Debtors (more than six months considered good) - Spring Ltd. 93,000
Winter Ltd. 78,000
Total 1,71,000

Cash at bank - Spring Ltd. 22,500
- Winter Ltd. 21,000
Total 43,500
Working Notes:
(1) Analysis of Profits of Winter Ltd. Capital Revenue Revenue
Profits Reserve Profit
` ` ` `
(a) General Reserve as on 1.4.2012 20,000
Less: Bonus issue (1/10 of ` 2,00,000) 20,000 - -
(b) Addition to General Reserve during 2012-2013

(` 42,000 - ` 20,000) 22,000
(c) Profit and Loss Account balance as on 1.4.2010 30,000
Less: Dividend paid for the year 2011-2012 20,000 10,000
(d) Profit for the year 2012-2013

(` 60,000 – ` 10,000) 50,000
(e) Adjustment for over valuation of motor vehicles (10,000)
(f) Adjustment of revenue profit due to

overcharged depreciation (20% on ` 10,000) 2,000
(g) Preference dividend for the year 2012-2013 @

10% (3,800)
- 22,000 48,200
Spring Ltd.‘s share (3/4) 16,500 36,150
Minority Interest (1/4) 5,500 12,050
22,000 48,200
(2) Cost of Control `
Cost of investments in Winter Ltd. 2,06,000
Less: Paid up value of equity shares (including

bonus shares) [8,000 + 7,000 + (10% of 15,000)] ` 10 1,65,000
Paid-up value of preference shares 14,250
Pre-acquisition dividend1* 7,000 1,86,250
Cost of control/Goodwill 19,750
(3) Minority Interest
Equity share capital [` 50,000 + ` 5,000 (Bonus)] 55,000
Preference share capital 23,750

(` 38,000 - ` 14,250)
Share of revenue reserve 5,500
Share of revenue profit 12,050
Proposed preference dividend 2,375
98,675
(4) Profit and Loss Account – Spring Ltd.
Balance 1,00,000
Share in profit of Winter Ltd. 36,150
Share in proposed preference dividend of

Winter Ltd. 1,425
1,37,575
Less: Pre-acquisition dividend credited to profit and

loss account 7,000
Unrealised profit on stock (40% of ` 2,000) 800
Proposed equity dividend 72,000
Proposed preference dividend 7,000 86,800
50,775
(5) General reserve – Spring Ltd.
Balance 55,000
Add: Share in Winter Ltd. 16,500
71,500
Note:
No information has been given in the question regarding date of bonus issue by Winter. It is
also not mentioned whether the bonus shares are issued from pre-acquisition general reserve
or post-acquisition general reserve. The above solution is given on the basis that Winter Ltd.
allotted bonus shares out of pre-acquisition general reserve.
Question No.9 (b)
Mitra Ltd acquired 25% of shares in Friend Ltd as on 31.03.2012 for `9 Lakhs. The Balance
Sheet of Friend Ltd as on 31.03.2012 is given below-
Liabilities Amount Assets Amount
` `
Share Capital 15,00,000 Fixed Assets 15,00,000

Reserves and Surplus 15,00,000 Investments 6,00,000
Current Assets 9,00,000
Total 30,00,000 Total 30,00,000
Following additional information are available for the year ended 3103.2013 –
i. Mitra Ltd received dividend from Friend Ltd for the year ended 31.03.2012 at 40% from
the Reserves.
ii. Friend Ltd made a profit After Tax of ` 21 Lakhs for the year ended 31.03.2013.
iii. Friend Ltd declared a dividend @ 50% for the year ended 31.03.2010 on 30.04.2013.
Mitra Ltd is preparing consolidated Financial Statements in accordance with AS – 21 for its
various subsidiaries.
Calculate Goodwill if any on acquisition of Friend Ltd.‘s shares.
How Mitra Ltd will reflect the value of investment in Friend Ltd in the consolidated
Financial Statements?
How the dividend received from Friend Ltd will be shown in the consolidated Financial
Statements?
Solution:
A. Basic Information
Mitra‘s stake in Friend Ltd Nature of Investment in Friend Ltd. Date of Consolidation
25% Shares Associate in terms of AS 23 31.03.2013
B. Calculation of Goodwill (` in lakhs)

Particulars ` lakhs
Mitra‘s share in the Equity of Friend Ltd (as at the date of investment)
[25% of `30 lakhs (Equity Capital `15 Lakhs + Reserves `15 Lakhs)]
7.50
Less: Cost of Investment
(9.00)
Goodwill (1.50)
A. Extract of Consolidate Profit and Loss Account of Mitra Ltd for the year ended 31.03.2013
(ìn lakhs)
Particulars
March, 2013 January, 2012
Other Income 5.25
(ìn lakhs)
Note to the Profit and Loss Account As at 1st As at 1st
Other Income January, January,
2011 2010
Share of Profit from Friend Ltd.(25% ×`21 lakhs) i.e. 5.25 lakhs 5.25
Dividend from Friend Ltd. (15 Lakhs ×25% ×40%) i.e. 1.50 lakhs NIL
Less: Transfer to Investment in Friend Ltd. A/c i.e. 1.50 lakhs
Total 5.25
B. Extract of Consolidated Balance Sheet of Mitra Ltd as at 31.03.2013 (ìn lakhs)

Particulars
March, 2013 January, 2012
Assets ` `
Non-current investments 12.75
(ìn lakhs)
Note to the Balance Sheet As at 1st As at 1st
Non-current Investments January, January,
2011 2010
Investment in Friend Ltd. `(9.00+5.25-1.5) `11.25 12.75
Goodwill `1.50
Total 12.75
Note: Dividend declared on 30.04.2013 will not be recognized in consolidated Financial

Statements.
Question No.10(a)
Discuss the concept of Triple Bottom Line Reporting.
Answer:
The concept of TBL reporting refers to the publication of economic, environmental and social
information in an integrated manner that reflects activities and outcomes across these three
dimensions of a company's performance.
Economic information goes beyond the traditional measures contained within statutory
financial reporting that is directed primarily towards shareholders and management. In a TBL
context, economic information is provided to illustrate the economic relationships and
impacts, both direct and indirect, that the company has with its stakeholders and the
communities in which it operates.
The concept of TBL does not mean that companies are required to maximise returns across
three dimensions of performance - in terms of corporate performance, it is recognized that
financial performance is the primary consideration in assessing its business success.
• An expanded spectrum of values and criteria for measuring organizational and societal
success - economic, environmental, social.
• In the private sector, a commitment to CSR implies a commitment to some form of TBL
reporting.
The Triple Bottom Line is made up of "Social, Economic and Environmental"
"People, Planet, Profit "

The trend towards greater transparency and accountability in public reporting and
communication is reflected in a progression towards more comprehensive disclosure of
corporate performance to include the environmental, social and economic dimensions of
an entity‘s activities.
Reporting information on any one or more of these three elements is referred to as TBL (Triple
Bottom Line) Reporting. This trend is being largely driven by stakeholders, who are
increasingly demanding information on the approach and performance of companies in
managing the environmental and social/community impact of their activities and obtaining
a broader perspective of their economic impact.
Question No.10(b)
(i) Define a Financial Instrument. Give examples
Answer:
A financial instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity.
Examples of financial instruments:
 financial investments - like, listed and unlisted debt securities; listed equity securities;
private equity and other unlisted equity investments
 originated and purchased loans
 repurchase agreements and securities lending/borrowing transactions
 derivative instruments (whether held for trading or hedging purposes)
 trade and other receivables
 cash and cash equivalents
 trading liabilities (short provisions and derivatives with negative fair values)
 trade and other payables and accruals
 current and long-term bank borrowings
 Bonds, debentures and notes issued.
(ii) Define derivatives instrument
Answer:
A derivative is a financial instrument or other contract with all three of the following
characteristics:
 its value changes in responses to a change in specified interest rate, financial instrument
price, commodity price, foreign exchange rate, index of prices or rates, credit rating or
credit index, or other variable (known as the underlying items)
 it requires no initial net investment or an initial net investment that is smaller than would
be required for other types of contracts that would be expected to have a similar
response to changes in market factors.
 it is settled at a future date.
(iii) Define Embedded derivative.
Answer:
An embedded derivative is a financial instrument (derivative instrument) which is combined

with a non-derivative host contract.
Example: Y Ltd. holds convertible debentures of Z Ltd., which is convertible in equity shares.
Host Contract - Debenture. Embedded derivative - conversion option.
Question No. 10(c)
Write a note on - Reversal of an Impairment Loss.
Answer:
Reversal of an Impairment Loss

As per AS 28 on Impairment of Assets, an enterprise should assess at each balance sheet
date whether there is any indication that an impairment loss recognised for an asset in prior
accounting periods may no longer exist or may have decreased. If there is any such
indication , the enterprise should estimate the recoverable amount of that asset. In assessing
whether there is any indication that an impairment loss recognised for an asset in prior
accounting periods may no longer exist or may have decreased, an enterprise should
consider , as a minimum, the following indications:
External sources of information
(a) the asset‘s market value has increased significantly during the period;
(b) there are significant changes with a favourable effects on the enterprise have taken
place during the period, or will take place in the near future, in the technological
market, economic or legal environment in which the enterprise operates or in the
market to which the asset is dedicated;
(c) market interest rates or other market rates of return on investments have decreased
during the period, and those decreases are likely to affect the discount rate used in
calculating the asset‘s value in use and increase the asset‘s recoverable amount
materially.
Internal sources of information
(a) significant changes with a favourable effect on the enterprise have taken place during
the period, or are expected to take place in the near future, to the extent to which, or
manner in which, the asset is used or is expected to be used. These changes include
capital expenditure that has been incurred during the period to improve or enhance an
asset in excess of its originally assessed standard of performance or a commitment to
discontinue or restructure the operation to which the asset belongs;
(b) evidence is available from internal reporting that indicates that the economic
performance of the asset is, or will be, better than expected.
Question No. 10(d)
What is 'discontinuing operations' as per AS-24?
Answer:
As per Para 3 of the standard, a discontinuing operation is a component of an enterprise:-

(i) that the enterprise, pursuant to a single plan is:
disposing of substantially in its entirety such as selling the component in a single
transaction or by demerger or spin off of ownership of the component to the enterprise's
shareholders ; or
disposing of piecemeal, such as by selling off the components assets and setting its
liabilities individually; or
terminating through abandonment and
(ii) that represents separate major line of business or geographical area of operation, and
(iii) that can be distinguished operationally and for financial reporting purposes.
It may be construed that discontinuing operation is relatively large component of an

enterprise which is major line of business or geographical segment, this is distinguishable
operationally or for financial reporting such component of business is being disposed on the
basis of an overall plan in its entirety or in piecemeal. Discontinuance will be carried either
through demerger or spin-off, piecemeal disposal of assets and settling of liabilities or by
abandonment.
Question No.11(a)
From the following information of Beta Ltd. calculate Earnings Per Share (EPS) in accordance
with AS-20:
(`)
Year 31.3.13 Year 31.3.12
Net profit before tax 3,00,000 1,00,000
Current tax 40,000 30,000
Tax relating to earlier years 24,000 (13,000)
Deferred tax 30,000 10,000
Profit after tax 2,06,000 73,000
Other information:
(i) Profit includes compensation from Central
Government towards loss on account of 1,00,000 NIL
earthquake in 2010(non-taxable)
(ii) Outstanding convertible 6% Preference shares 1,000 issued and paid on 30.9.2011.
Face value `100, Conversion ratio 15 equity shares for every preference share.
(iii) 15% convertible debentures of `1,000 each total face value `1,00,000 to be
converted into 10 Equity shares per debenture issued and paid on 30.6.2011.
(iv) Total no. of Equity shares outstanding as on 31.3.2013, 20,000 including 10,000
bonus shares issued on 01.01.2013, face value `100.
Solution:
Calculation of Earnings Per Share (EPS) of Beta Ltd.

` `
Year ended Year ended
31.3.13 31.3.12
A. Earning after extra ordinary items 2,00,000 70,000
(2,06,000 – 6,000) (73,000 – 3,000)
B. No. of Equity Shares 20,000 20,000
C. Basic Earnings Per share [A/B] 10.00 3.50
A. Earning before extra ordinary items 1,00,000 70,000

B. No. of Equity Shares 20,000 20,000
C. Basic Earnings Per share [A/B] 5.00 3.50
Tax Rate applicable
40,000 + 30,000/2,00,000 35% --

30,000 + 10,000/1,00,000 -- 40%
A. Dividend on Weighted Average 6,000 3,000

Preference Shares
B. Incremental shares 15,000 7,500
C. EPS on Incremental Shares [A/B] 0.40 0.40
(dilutive) (dilutive)
Convertible Debentures
A. Increase in earnings
15 9,750
(1,00,000 0 .65)
100
15 9 6,750
( 1,00,000 0 .60 )
100 12
B. Increase in shares 1,000 750
C. Increase in EPS [A/B] 9.75 9.00
(Anti dilutive) (Anti dilutive)
It is anti-dilutive as it increases the EPS from continuing ordinary operations

(Para 39, AS 20)
Calculation of Diluted EPS Year ended Year ended
31.3.13 31.3.12
` `
A. Profit from continuing ordinary activities
before Preference Dividend 1,06,000 73,000
No. of ordinary equity shares 20,000 20,000
Adjustment for dilutive potential of 6%
convertible pref. shares 15,000 7,500
B. Total no. of shares 35,000 27,500
C. Diluted EPS from continuing ordinary
operations [A/B] 3.02 2.65
D. Profit including extra ordinary items 2,06,000 73,000
E. Adjusted No. of shares 35,000 27,500
F. Diluted EPS including extra ordinary items 5.88 2.65
[D/E]
Disclosure of EPS in accordance with AS 20 in the Profit and Loss Account
Earnings per share (Face value `100) 31.3.13 (`) 31.3.12 (`)
Basic EPS from continuing ordinary 5.00 3.50
operations
Diluted EPS from continuing ordinary 3.02 2.65
operations
Question No.11(b)
(i) What is the objective of AS-32?
Answer:
The objective of "AS-32 - Financial Instruments - Disclosures "is to require entities to provide
disclosures in their financial statements, that enable users to evaluate:
 the significance of financial instruments for the entity's financial position and
performance; and
 the nature and extent of risks arising from financial instruments to which the entity is
exposed during the period and at the reporting date, and how the entity manages
those risks.
(ii) Briefly explain the nature of risks as classified under AS-32
Answer:
Under AS -32, the risks are classified as - credit risk, liquidity risk and market risk
 Credit risk - the risk that one party to a financial instrument will cause a financial loss
for the other party, by failing to discharge an obligation
 Liquidity risk - the risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities
 Market risk - the risk that the fair value or future cash flow of a financial instrument will
fluctuate because of changes in market prices. This risk can again be sub-classified as
currency risk (changes in foreign exchange rates), interest rate risk (changes in
market interest rates) and other price risk (changes in market prices other than those
arising from interest rate risk or currency risk).
Question No.11(c)
ABC Ltd. shows a net profit of `10,80,000 for 3rd quarter after incorporating the following:
(i) Bad debt of `60,000 incurred during the year, 65% of the bad debts have been deferred to
the next quarter
(ii) Extraordinary loss of `56,000 incurred during the quarter has been fully recognized in this
quarter
(iii) Additional depreciation of `18,000 resulting from the change of method of depreciation.
Do you agree with the treatment adopted by the company? If not, find out correct quarterly
income as per AS-25.
Solution:
In the above case, the quarterly income has not been correctly stated. As per AS-25, "Interim
Financial Reporting", the quarterly income should be adjusted and restated as follows:
`
Net Profit as per P&L A/c 10,80,000
Adjustments for:
Bad debt of `60,000 has been incurred during the current quarter. Out of (39,000)
this, the company has deferred 65% i.e. `39,000 to the next quarter. This is
not correct. So, `39,000, should therefore be deducted from `10,80,000,
as it is wrongly overstated
Treatment of Extra-ordinary loss of `56,000 is correct, hence no ----
adjustment is required to be made against profits for this quarter
Treatment of recognizing the additional depreciation of `18,000 is in line ----
with the provisions of AS-25, hence, no adjustment is required
Net Profit(adjusted) 10,51,000
Question No.11(d)
B Ltd. has an office building whose carrying amount is `100 crores. The company decides to
enter into a sale and leaseback transaction. The selling price for the asset is `140 crores,
whereas the fair value of the asset is `120 crores. The transaction is an operating lease and
the lease payment is `25 crores for 5 years. Pass journals to record the same.
Solution:
(i) To record the transaction of sale

` `
Bank A/c .................Dr. 140.00
To, Building A/c 100.00
To, Profit on Sale of Building A/c 20.00
To, Deferred Income (Gain on sale of asset) 20.00
[Asset sold and gain (fair value - carrying amount) is recognized, but excess profit
( selling price - fair value) is deferred]
(ii) To record amortization of gain over the useful/remaining life of the asset ( this is to be
recorded for all the 5 years)
` `
Deferred Income(Gain on sale of asset)............Dr. 4.00
To Other Income 4.00
(Gain amortized)
Question No.12 (a)
The following particulars in respect of stock option granted by a Company are available:
Grant date 01.04.2009
Number of employees covered 300
Vesting condition: Continuous employment upto 31.03.2012
Nominal Value per share (`) 10
Exercise Price per share (`) 40
Exercise date 31.07.2012
Fair value of Option per share on grant date(`) 20
The number otions to vest per employees shall depend on Company‘s average annual
earning after tax during vesting period as per the table below:
Average Annual earning after tax Number of Option per employee
Less than `100 crores NIL
`100 crores to less than `120 crores 30
` 120 crores to less than `150 crores 45
Above `150 crores 60
Position on 31.03.2010 Position on 31.03.2011
The Company expects to earn `115 The Company expects to earn `130
crores after tax on average per year crores after tax on average per year
during vesting period. during vesting period.
No. of employees expected to be No. of employees expected to be
entitled to option = 280 entitled to option = 270
Position on 31.03.2012 Position on 31.07.2012
The Company earned `128 crores after No. of employees excercising option =
tax on average per year during vesting 265
period.
No. of employees entitled to option =
275
Compute expenses to recognize in each year.
Solution:
A. Expense for 2009-10

Fair value of option per share `20
Expected Average Profits `110Cr.
No. of shares under option per Employee 30
No. of employees expected to be eligible 280
Number of Shares expected to vest under the scheme (280 8,400
Employee×30shares)
Total Fair Value of the Option vesting under the Scheme =8,400shares 1,68,000
×`20
Vesting period (01.04.2009 to 31.03.2012) 3 years
Value of Option recognised as expense in 2009-10 `1,68,000/3 56,000
B. Expense for 2010-11

Employee×45shares)
Total Fair Value of the Option vesting under the Scheme =12,150 2,43,000
shares ×`20
Vesting period (01.04.2009 to 31.03.2012) 3 years
Value of Option recognised as expense in 2010-11 1,06,000
C. Expense for 2010-11

Employee×45shares)
Total Fair Value of the Option vesting under the Scheme 2,47,500
=12,375shares ×`20
Less: Value of the Option recognised as expenses in 2009-10 and (1,62,000
2010-11
Value of option to be recognised in Fy 2011-12 85,500
D. Forfeiture in 2012-13 and Transfer General Reserves
Total Eligible Employee 275
Less: Employees Exercising the option 265
Employees forfeiting their rights 10
No. of shares under option per employee 45
Number of shares forfeited 450
Fair value of the Option Forfieted 450 shares 9,000
×`20
Question No.12 (b)
What is Sustainability Reporting?
Answer:
A sustainability report is an organizational report that gives information about economic,

environmental, social and governance performance.
For companies and organizations, sustainability – the capacity to endure, or be maintained –
is based on performance in these four key areas.
An increasing number of companies and organizations want to make their operations
sustainable. Establishing a sustainability reporting process helps them to set goals, measure
performance, and manage change. A sustainability report is the key platform for
communicating positive and negative sustainability impacts.
To produce a regular sustainability report, organizations set up a reporting cycle – a
progMadhu of data collection, communication, and responses. This means that their
sustainability performance is monitored on an ongoing basis. Data can be provided regularly
to senior decision makers to shape company strategy and policy, and improve performance.
Sustainability reporting is therefore a vital step for managing change towards a sustainable
global economy – one that combines long term profitability with social justice and
environmental care Sustainability reporting can be considered as synonymous with other
terms for non-financial reporting; triple bottom line reporting, corporate social responsibility
(CSR) reporting, and more. It is also an intrinsic element of integrated reporting ; a recent
development that combines the analysis of financial and non-financial performance.
A sustainability report enables companies and organizations to report sustainability
information in a way that is similar to financial reporting. Systematic sustainability reporting
gives comparable data, with agreed disclosures and metrics.
Major providers of sustainability reporting guidance include:
 The Global Reporting Initiative (The GRI Sustainability Reporting FMadhuework and
Guidelines)
 Organization for Economic Cooperation and Development (OECD Guidelines for
Multinational Enterprises)
 The United Nations Global Compact (the Communication on Progress) International
Organization for Standardization (ISO 26000, International Standard for social
responsibility)
 Uptake of sustainability reporting is increasing among organizations of all sizes: here
are some statistics .
Benefits:
An effective sustainability reporting cycle should benefit all reporting organizations.
Internal benefits for companies and organizations can include:
 Increased understanding of risks and opportunities
 Emphasizing the link between financial and non-financial performance
 Influencing long term management strategy and policy, and business plans
 Streamlining processes, reducing costs and improving efficiency
 Benchmarking and assessing sustainability performance with respect to laws, norms,
codes, performance standards, and voluntary initiatives
 Avoiding being implicated in publicized environmental, social and governance
failures
Comparing performance internally, and between organizations and sectors
External benefits of sustainability reporting can include:
 Mitigating - or reversing - negative environmental, social and governance impacts
 Improving reputation and brand loyalty
 Enabling external stakeholders to understand company‘s true value, and tangible
and intangible assets
 Demonstrating how the organization influences, and is influenced by, expectations
about sustainable development.
Question 12(c)
Venus Ltd. has an asset, which is carried in the Balance Sheet on 31.3.2014 at `1000 lakhs. As
at that date the value in use is ` 800 lakhs and the net selling price is `750 lakhs.
From the above data :
(i)Calculate impairment loss.
(ii) Prepare journal entries for adjustment of impairment loss.
(iii)Show, how impairment loss will be shown in the Balance Sheet.
Solution:
(i) Impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Thus, Impairment loss = Carring amount – Recoverable amount*
= ` 1000 lakhs – ` 800 lakhs = ` 200 lakhs

*Recoverable amount is higher of asset‘s net selling price ` 750 lakhs and its value in use
`800 lakhs.
Recoverable amount = `800 lakhs
(ii) Journals
Dr. Cr.
Particulars Amount Amount
` in lakhs ` in lakhs
(a) Impairment loss A/c Dr. 200
To Assets A/c 200
(Being the entry for accounting impairment loss)
(b) Profit and loss A/c Dr. 200
To Impairment loss A/c 200
(Being the entry to transfer impairment loss to profit and
loss account)
(iii)
Balance Sheet of Venus Ltd. as on 31.3.2014 ` in lakhs

Fixed Assets 1000
Asset less depreciation 200
Less: Impairment loss 800
Question 12(d)
(i) Ashmit Ltd. entered into a sale deed for its immovable property before the end of the
year. But registration was done with registrar subsequent to Balance Sheet date. But
before finalisation, is it possible to recognise the sale and the gain at the Balance Sheet
date? Give your view with reasons.
(ii) A private limited company manufacturing fancy terry towels had valued its closing
stock of inventories of finished goods at the realisable value, inclusive of profit and the
export cash incentives. Firm contracts had been received and goods were packed for
export, but the ownership in these goods had not been transferred to the foreign buyer.
Comment on the valuation of the stocks by the company.
(iii) During the year, the Software division supplied a special program for a foreign firm on a
consideration of `200 lakhs. It was found on June 1st, 2013 that the foreign firm has
become bankrupt. The company had received an advance of `100 lakhs in the year
ended 31st March, 2013 from the foreign firm. Please discuss.
Solution (i)
Yes, it is possible for Ashmit Ltd. to recognise the sale and the gain at the balance sheet date
according to AS 9 ‗Revenue Recognition‘. It is evident that the significant risks and rewards of
ownership had passed before the balance sheet date and the delay in transfer of property
was merely because of formality in getting the transfer deed registered. Further the
registration post the balance sheet date confirms the condition of sale at the balance sheet
date as per AS 4 ‗Contingencies and Events occurring after the Balance Sheet Date‘.
Solution (ii)
Accounting Standard 2 ―Valuation of Inventories‖ states that inventories should be valued at

lower of historical cost and net realisable value. AS 9 on ―Revenue Recognition‖ states, ―at
certain stages in specific industries, such as when agricultural crops have been harvested or
mineral ores have been extracted, performance may be substantially complete prior to the
execution of the transaction generating revenue. In such cases, when sale is assured under
forward contract or a government guarantee or when market exists and there is a negligible
risk of failure to sell, the goods invoiced are often valued at Net-realisable value.‖
Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly,
taking into account the facts stated, the closing stock of finished goods (Fancy terry towel)
should have been valued at lower of cost and net-realisable value and not at net realisable
value. Further, export incentives are recorded only in the year the export sale takes place.
Therefore, the policy adopted by the company for valuing its closing stock of inventories of
finished goods is not correct.
Solution (iii)
Sales to foreign firm: This is an event occurring after the balance sheet date and the
accounts are only at draft stage. In accordance with para 13 of AS-4 (Revised) on
Contingencies and Events Occurring after the Balance Sheet Date, adjustments to assets
and liabilities are required. Hence the sum of ` 100 lakhs (` 200 lakhs – advance of `100 lakhs)
should be provided for by way of provision for bad debts.
Question No.13 (a)
What is a "Grant Date" as per IFRS-2. Mention the vesting conditions.
Answer:
"Grant Date" is the date at which the entity and the employee (or other party providing
similar services) agree to share based payment arrangement signifying by shared
understanding of the terms and conditions of stock option. The term 'agree' is used in usual
sense - there must be 'offer' and ' acceptance'. Therefore, the date on which the entity
makes the offer becomes the grant date as 'acceptance' is either by explicit arrangement to
which the employees have already agreed to implicit evidenced by commencement of
their work.
Vesting Conditions:
These are conditions which are to be satisfied by the counterparty to be entitled to receive
cash, other assets or equity instruments of the entity under share based payment
arrangement. Examples of vesting conditions:
(i) service condition- an employee should complete a minimum period of service from the
grant date;
(ii) performance condition - an employee should achieve a specified sales target or profit
target.
However, no vesting condition other than market condition should be taken into account for
the purpose of determining fair value of stock option.
Question No.13 (b)
Equity Share Capital ` 10,00,000

Reserves & Surplus ` 3,00,000
12% Preference Share Capital ` 2,00,000
10% Debenture ` 4,00,000
Immovable property (held as investment) ` 1,00,000
Profit after tax ` 2,00,000
Rate of tax 40%
Companies with Beta factor of 1 in similar business have market rate of return 15% . Beta
factor of Anant Ltd. is 1.1 calculate EVA assuming Risk Free Return-7%.
Solution:
EVA = (Return on operating capital – weighted average cost of capital ) X Operating Capital
=(12.44%-13.33%) X 18,00,000 = (16,020)
Working Note – 1
Operating Capital `
Equity Share Capital 10,00,000
Reserves & Surplus 3,00,000
12% Preference Share Capital 2,00,000
10% Debenture 4,00,000
Total 19,00,000
Less: Non operating Investment 1,00,000
Operating Capital 18,00,000
Working Note – 2
Calculation of Return on operating Capital
`
NOPAT = Profit after Tax 2,00,000
+ Taxes 2,00,000 40 / 60 1,33,333
3,33,333
+Interest Expense 40,000
Operating EBIT 3,73,333
(-) Economic taxes @ 40% 1,49,333
NOPAT 2,24,000
Working Note – 3
Calculation of WACC
Kd = 10% (1-0.40) X 4,00,000/19,00,000=1.26
Kp = 12% X 2,00,000/19,00,000 = 1.26%
Ke = 7% + 1.1(15%-7%) = 15.8% X 13/19 = 10.81=13.33%
Working Note – 4
Return on operating capital (%) = (`2,24,000/`18,00,000)×100=12.44%
Question No. 13(c)
On 1st April, 2014 Good Morning Ltd. offered 100 shares to each of its 550 employees at `50
per share. The employees are given a month to decide whether or not to accept the offer.
The shares issued under the plan (ESPP) shall be subject to lock-in on transfers for three years
from grant date. The market price of shares of the company on the grant dated is ` 60 per
share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the
plan is estimated at `56 per share.
On 30th April, 2014 , 400 employees accepted the offer and paid `30 per share purchased .
Normal value of each share is ` 10.
Record the issue of shares in the books of the company under the aforesaid plan.
Solution:
Fair value of an ESPP = ` 56 - ` 50 = ` 6.00

Number of shares issued = 400 employees X 100 shares / employee= 40,000 shares
Fair value of ESPP which will be recognized as expenses in the year 2014-2015
= 40,000 shares × ` 6 = ` 2,40,000
Vesting period = 1 month
Expenses recognized in 2014-2015 = ` 2,40,000
Journals
Date Particulars Dr. Cr.
` `
30.04.2014 Bank A/c (40,000 shares X `50) Dr. 20,00,000
Employees compensation expenses A/c Dr. 2,40,000
To, Share Capital A/c (40,000 shares X ` 10) 4,00,000
To, securities Primium (40,000 shares X ` 46) 18,40,000
( Being shares issued under ESPP @ ` 50.00)
Question No. 13(d)
Beautiful Ltd. acquired 30% of Ugly Ltd. Shares for `4,00,000 on 01-06-2013. By such an
acquisition Beautiful Ltd. can exercise significant influence over Ugly Ltd. During the financial
year ending on 31.03.2013 Ugly Ltd. earned profits ` 1,60,000 and declared a dividend of
`1,00,000 on 12.08.2013. Ugly Ltd. reported earnings of `6,00,000 for the financial year on
31.03.2014 and declared dividends of `1,20,000 on 12.06.2014.
Calculate the carrying amount of investment in :
(i) Separate financial statements of Beautiful Ltd. as on 31.03.2014
(ii) Consolidated Financial Statements of Beautiful Ltd. as on 31.03.2014
(iii) What will be the carrying amount as on 30.06.2014 in consolidated financial Statements?
Solution:
(i) Carrying Amount of Investment in Separate Financial Statement of Beautiful Ltd. as on

31.03.2014
`
Amount paid for investment in Associate ( on 1.06.2013) 4,00,000
Less: Pre- acquisition dividend (`1,00,000 X 30% ) 30,000
Carrying amount as on 31.03.2014 as per AS 13 3,70,000
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page
100
(ii) Carrying Amount of Investment in Consolidated Financial Statements of Beautiful Ltd. as

on 31.03.2014 as per AS 23
`
Carrying amount as per separate financial statement 3,70,000
Add: Proportionate Share of Profit of investee as per equity method 1,80,000
(30% of ` 6,00,000)
Carrying amount as on 31.03.2014 5,50,000
(iii) Carrying Amount of Investment in Consolidated Financial Statement of Beautiful Ltd. as on

30.06.2014 as per AS 23
`
Less: Dividend Received received (` 1,20,000 X 30%) 36,000
Question No.14 (a)
From the following information in respect of Upkar Ltd., prepare a value added statement for
the year 2012
` ‘000
Turnover 2,300
Plant and Machinery (net) 1,080
Depreciation on Plant and Machinery 275
Dividends to ordinary shareholders 146
Debtors 195
Creditors 127
Total stock of all materials, WIP and finished goods
Opening Stock 160
Closing Stock 200
Raw materials purchased 625
Cash at Bank 98
Printing and Stationary 22
Auditor‘s remuneration 28
Retained Profits (Opening balance) 994
Retained Profits for the year 288
Rent, Rates and Taxes 165
Other expenses 85
Ordinary share capital issued 1,500
Interest on borrowing 40
Income tax for the year 276
Wage and Salaries 327
Employees State Insurance 35
PF- Contribution 28
Calculate the Value added per employee, average earning per employee and sales per
employee on the basis that 95 employees work in Upkar Ltd.
Solution :
Gross Value Added Statement
Sales 2,300
Add: Increase in Stock (200-160) 40
Total (A) 2,340
Cost of Bought in goods & services
101
Raw materials 625

Printing & Stationary 22
Rent 165
Other Expenses 85
Auditor‘s remuneration 28 Total (B) 925
GVA 1,415
Application Towards
Employee (28+35+327) 390
P/ Finance 40
Government-tax 276
Share Holder 146
Entity( 275+288) 563
1,415
1,415
(i) Value Added = =14.89
95
288
(ii) 3.03
95
2,300
(iii) 24.21
95
Question No.14 (b)
The following is the Profit and Loss Account of Morning Glory Ltd. for the year ended
31.03.2012. Prepare a Gross Value Added Statement of Morning Glory Ltd. and show also the
reconciliation between Gross Value Added and Profit before taxation.
Summarized Profit and Loss Account for the year ended 31.03.2012
(` in lakhs)
Notes Amount
Income:
Sales - 890
Other Income - 55
945
Expenditure:
Production and operational expenses (a) 641 -
Administration expenses (Factory) (b) 33 -
Interest (c) 29 -
Depreciation 17 720
Profit before taxes - 225
Provision for taxes (d) - 30
Profit after tax - 195
Balance as per last Balance Sheet - 10
205
Transferred to General Reserve 45 -
Dividend paid 95 -
140 -
Surplus carried to Balance Sheet 65 -
205 -
Notes :
(i) Production and Operational expenses ` in lakhs
Consumption of raw materials 293
Consumption of stores 59
Salaries, Wages, Gratuities etc. (Admn.) 82
Cess and Local taxes 98
Other manufacturing expenses 109
102
641
(ii) Administration expenses include salaries, commission to Directors ` 9.00 lakhs .Provision
for doubtful debts ` 6.30 lakhs.
(iii)
` in lakhs
Interest on loan from ICICI Bank for working capital 9
Interest on loan from ICICI Bank for fixed loan 10
Interest on loan from IFCI for fixed loan 8
Interest on Debentures 2
29
(iv) The charges for taxation include a transfer of ` 3.00 lakhs to the credit of Deferred Tax
Account.
(v) Cess and Local taxes include Excise Duty, which is equal to 10% of cost of bought-in
material.
Solution :
Morning Glory Ltd.
Gross Value Added Statement for the year ended 31st March, 2012
` in lakhs ` in lakhs
Sales 890
Less: Cost of bought in materials and services:
Production and operational expenses (293 + 59 + 109) 461
Administration expenses (33 – 9) 24
Interest on working capital loan 9
Excise duty (Refer working note) 55 549
Value added by manufacturing and trading activities 341
Add: Other income 55
Total value added 396
Application of Value Added
%
To Employees
Salaries, wages, gratuities etc. 82 20.71%
To Directors 9 2.27%
Salaries and commission
To Government
Cess and local taxes (98 – 55) 43
Income tax 27 70 17.68%
To Providers of capital
Interest on debentures 2
Interest on fixed loan 18
Dividends 95 115 29.04%
To Provide for maintenance and expansion of the
company 17
Depreciation 45
General reserve 3
Deferred tax 55 120 30.30%
Retained profits (65 – 10)
396 100%
Statement showing reconciliation of Gross Value Added with Profits before taxation
` in lakhs
Profits before taxes 225
Add:
103
Depreciation 17
Directors‘ remuneration 9
Salaries, wages & gratuities etc. 82
Cess and local taxes 43
Interest on debentures 2
Interest on fixed loan 18
171
Total value added 396
Working Note:
Calculation of Excise Duty
Say cost of bought in materials and services is ‗x‘
Excise Duty is 10% of x = x/10
x = 461 + 24 + 9 + x/10
x = 494 + x/10 = 549 (approx.)*
Excise Duty = 549 – 494 = ` 55
* The above calculated excise duty is not exactly 10% of cost of bought in material
amounting ` 549. The difference is due to approximation.
Question No.14 (c)
Answer:
State the principles of derecognition of Securitised Asset in the books of Originator.
(i) Derecognition Criterion: Securitised Assets should be derecognized in the Originator‘s

Books, if and only if the Originator loses control of the contractual rights that comprise the
securitised asset, either by a single transaction or by a series of transactions taken as a
whole. The Originator loses such control if it surrenders the rights to benefits specified in
the contract.
(ii) Analysis of Conditions: Whether or not the Originator has lost control over the securitised
asset should be determined on the basis of the facts and circumstances of the case by
considering all the evidence available. If the position of either the Originator or SPE
indicates that the Originator has retained control, the Originator should not remove the
securitised asset from its balance sheet.
(iii) No Loss of Control: The Originator will not be deemed to have lost control over the
securitized asset, in each of the following cases – (Hence, derecognition may not be
permissible in the following cases)
 Creditors‘ Rights: Creditors of the Originator are entitled to attach or otherwise deal
with the securitised assets;
 No Rights to SPE: SPE does not have the right (to the extent it was available to the
Originator) to pledge, sell, transfer or exchange for its own benefit the securitised
asset;
 Resumption of Control: Originator has the right to reassume control of the

securitised asset except –
• Where it is entitled to do so by a Call Option, where such Call Option can be

justified on its own commercial terms as a separate transaction between the SPE
104
and the Originator, e.g. Where the Call Option is exercisable at fair value of the
asset on the date of exercise of the Option; or
• Where it is entitled to do so by a Clean-up Call Option.

(d) Originator‘s Obligation of Repurchase:
(i) Obligation Only: Sometimes the securitised asset may be beyond the control of the
Originator, but the Originator may be under an obligation (not an entitlement) to
repurchase the Securitised Asset at a later date, at a specified price. Such obligation
accepted by the Originator should be accounted for as per AS - 4 and a provision
should be created for the contingent loss arising from the obligation.
(ii) Obligation-cum-Entitlement: Where the Originator is both entitled and obligated to

repurchase the securitised asset at a pre-determined price, the Originator has not
lost control over the securitised asset. So, it should not be removed (i.e. should not be
derecognized) from the Originator‘s Balance Sheet.
Question No.15 (a)
Mr. lnvestor buys a stock option of Z Ltd. in July 2012 with a Strike Price on 30 th July, 2012 `350
to be expired on 30th August, 2012. The premium is `20 per unit and the market lot is 100. The
margin to be paid is `120 per unit. Show the accounting treatment in the books of Buyer
when:
(a) the option is settled by delivery of the asset, and
(b) the option is settled in cash and the Index price is `360 per unit.
Solution: Journal Entries in the Books of Investor/Buyer
1. When the option is settled by delivery of the asset
S. No. Particulars Debit ` Credit `
1 Equity Stock Option Premium (Z Ltd.) A/c Dr. 2,000

30.7.12 To Bank Account 2,000
(Being Premium Paid on Stock Option of Z Ltd. purchased at `20
per unit for 100 units constituting one lot)
2 Equity Shares of Z Ltd. A/c Dr. 35,000

30.8.12 To Bank A/c 35,000
(Being Call Option exercised and the shares acquired)
3 P rofi t & Loss A /c D r. 2,000

30.8.12 To Equity Stock Option Premium A/c 2,000
(Being Premium on option written off on exercise of option)
105
Note: No entries have passed in respect of Margin Payments. This is because, the buyer of the
option contract is not required to pay any margins.
2. When the option is settled in cash and the Index Price is ` 260 per unit
S.No. Particulars Debit ` Credit `
1 Equity Stock Option Premium (Z Ltd.) A/c Dr. 2,000

30.7.12 To Bank Account 2,000
(Being Premium Paid on Stock Option of Z Ltd. purchased at `20 per
unit for 100 units constituting one lot)
2 Bank A/c Dr. 1,000

30.8.12 To Profit & Loss A/c 1,000
(Being the profit on exercise of option received. Profit = Market Lot
of 100 x (Index Price of `360 Less Strike Price of `350)
3 Profit & Loss A/c Dr. 2,000

30.8.12 To Equity Stock Option Premium 2,000
(Being Premium on option written off on exercise of option)
Question No.15 (b)
Discuss "Non-Performing Assets‖ as per NBFC Prudential Norms (RBI) directions.
Answer:
―Non Performing Asset‖ as per NBFC Prudential Norms (RBI) directions means:
(i) An asset, in respect of which, interest has remained past due for six months;
(ii) A term loan inclusive of unpaid interest, when the instalment is overdue for more
than six months of which interest amount remained past due for six months;
(iii) A bill which remained overdue for six months;
(iv) The interest in respect of a debt or the income on receivables under the head
‗other current assets‘ in the nature of short term loans/advances that remained
overdue for a period of six months;
(v) Any dues on account of sales of assets or services rendered or reimbursement
expenses made, which remained overdue for a period of six months;
(vi) The lease rental and hire purchase instalment, which has become overdue for a
period of more than twelve months;
(vii) In respect of loans, advances and other credit facilities (including bills purchased
and discounted), the balance outstanding under the credit facilities made
available to borrower /beneficiary when anyone of the credit facilities becomes
NPA.
However, an NBFC may classify each such account on the basis of record of recovery
as regards hire purchase and lease transactions.
106
Question No.15 (c)
State the differences between Equity Index Options and Equity Stock Options.
Answer:
Difference between Equity Index Options and Equity Stock Options.
Particulars Equity Index Options Equity Stock Options
Meaning Derivative instruments whereby a Derivative instruments whereby a person

person gets the right to buy/sell an gets the right to buy/sell an agreed
agreed amount of equity index on amount of equity stock on or before the
the specified future date. specified future date.
Underlying Asset Equity Index itself. Equity Shares of a Company.
Time of European Style, i.e., Buyer/Holder American Style, i.e., the Buyer/Holder can
Settlement can exercise his option only on the exercise his option at any time before the
day on which the option expires. expiry date or on the date of expiry itself.
Mode of Since delivery cannot be made, the Settlement either through delivery of shares
Settlement difference between the or by payment of the difference between
strike/exercise price and the value strike/exercise price and the value of the
of the index on the maturity date, is share in cash
paid or received in cash.
Question No. 15(d)

Briefly discuss inspection of Stock Broker‘s books by SEBI.
Answer:
SEBI may appoint one or more persons as inspecting authority to inspect the books of
account, and other records and documents of the Stock Brokers for –
(a) Ensuring that books of accounts and other books are being maintained in the manner
required;
(b) To confirm compliance with the statutory requirements under Act, Rules and
Regulations;
(c) Investigating into the complaints received from investors, other stock brokers, sub-
brokers or any other person on any matter affecting the stock-broker‘s activities.
(d) Investigating in the interest of Securities Business or Investor‘s interest into the affairs of
Stock Brokers.
Question No.16 (a)
107
Stock & Commodity market intermediaries (theory)

(i) What are derivatives and what are its characteristics?
(ii) Explain currency options related to foreign exchange.
(iii) Write short note on Interest Rate Swaps.
Answer:
(i) Derivative is a product whose value is derived from the value of one or more basic
variables, called bases (underlying asset, index or reference rate), in a contracted
manner. The underlying asset can be equity, forex, commodity or any other asset. For
example, farmers may wish to sell their harvest of wheat at a future date to eliminate the
risk of a change in prices by that date. Such a transaction is an example of a derivative.
The price of the derivative is driven by the spot price of wheat which is the ―underlying
asset‖.
Derivative financial instruments can either be on the balance-sheet or off the
balance sheet and include options contract, interest rate swaps, interest rate flows,
interest rate collars, forward contracts, futures etc. A derivative instrument is
therefore a financial instrument or other contract with the following three
characteristics:
(a) It has one or more underlying and one or more notional amounts or payments
provisions or both. These terms determine the amount of settlement or
settlements and in some cases, whether or not settlement is required;
(b) It requires no initial net investment or an initial net investment that is smaller than
what is required for similar responses to changes in market factors.
(c ) Its terms require or permit net settlement; it can readily be settled net by means
outside the contract or it provides for delivery of an asset that puts the recipient
in a position not substantially different from net settlement.
Accounting for foreign exchange derivatives is guided by AS 11 (Revised 2003). The ICAI
has also issued a Guidance Note dealing with the accounting procedures to be
adopted while accounting for Equity Index Options and Equity Stock Options.
(ii) Currency Options give the client the right, but not the obligation, to buy/sell a specific
amount of currency at a specific price on a specific date. Currency options provide a
tool for hedging foreign exchange risk arising out of the firm‘s operations. Currency
options enable the business house to remove downside risk without limiting the upride
potential. Options can be put option or call option. A put option is a contract that
specifies the currency that the holder has the right to sell. A call option is a contract that
specifies the currency that the holder has the right to buy.
(iii) Interest rate swap can be defined as a financial contract between two parties
(called counter parties) to exchange on a particular date in the future, one series of
cash flows (fixed interest) for another series of cash flows (variable or floating interest)
in the same currency on the same principal (an agreed amount called notional
principal) for an agreed period of time. The contract will specify the interest rates,
the benchmark rate to be followed, the notional principal amount for the
transaction, etc. Interest rates are of two types, fixed interest rates and floating rates
which vary according to changes in a standard benchmark interest rate. An investor
holding a security which pays a floating interest rate is exposed to interest rate risk.
The investor can manage this risk by entering into an interest rate swap.
Question No.16 (b)
Mr. Investor buys a stock option of ABC Co. Ltd. in July, 2012 with a strike price on
30.07.2012 of ` 250 to be expired on 30.08.2012. The premium is ` 20 per unit and the
market lot is 100. The margin to be paid is ` 120 per unit.
Show the accounting treatment in the books of Buyer when:
108
(i) the option is settled by delivery of the asset, and

(ii) the option is settled in cash and the index price is `260 per unit.
Answer:
Accounting entries in the books of buyer
2012 At the time of inception ` `
July Stock option premium A/c Dr. 2,000
To Bank A/c 2,000
(Being premium paid to buy a stock option)
Deposit for margin money A/c Dr. 12,000

To Bank A/c 12,000
(Being margin money paid on stock option)
At the time of settlement
August (i) Option is settled by delivery of the asset
Shares of ABC Ltd. A/c Dr. 25,000
To Deposit for margin money A/c 12,000
To Bank A/c 13,000
(Being option exercised and shares acquired, `
12,000 margin money adjusted and the balance
amount was paid)
Profit and loss A/c Dr. 2,000
To Stock option premium A/c 2,000
(Being the premium transferred to Profit And Loss
Account on exercise of option)
(ii) Option is settled in cash
Profit and loss A/c Dr. 2,000
To Stock option premium A/c 2,000
(Being the premium transferred to Profit And Loss
Account)
Bank A/c (` 100 10) Dr.
1,000
To Profit and loss A/c 1,000
(Being profit on exercise of option)
Bank A/c Dr. 12,000
To Deposit for margin money A/c 12,000
(Being margin on equity stock option
received back on exercise of option)
Question No. 16(c)
Write short notes on maintenance of Books of Account by Stock Brokers.
Answer:
I. Required by Statute: A Members is required to maintain the following books as per Rule 15
of Securities Contracts (Regulation) Rules, 1957, and Rule 17 of SEBI (Stock Brokers and Sub-
Brokers) Rules, 1992 –
a. Transactions Register (Sauda Book) / Daily Transaction List.

109
b. Clients Ledger and General Ledger.
c. Journals and Cash Book.

d. Bank Pass Book.
e. Securities Inward – Outward Register for particulars of Shares / Securities received and
delivered.
f. Members‘ Contract Book for all contracts entered into by him with other Members of
the same exchange or counterfoils or duplicates of memos of confirmation issued to
such other Member.
g. Counterfoils/Duplicates of Contract Notes issued to Clients.
h. Written Consent of Clients in respect of contracts entered into as principles.
i. Margin Deposit Book.

j. Register of Accounts of Sub-Brokers.
k. Agreement with a Sub-Broker giving the scope of authority and responsibilities of the
Stock-Broker & such Sub-Brokers.
II. Required by the Exchange: The following additional books / documents / registers may
be required under the Rules /Regulations / Bye-Laws of the concerned Stock Exchange –
a. Copies of all Margin Statements downloaded from the Exchange.
b. Copies of Spot Delivery Transactions entered into (including securities delivered and
payments made to Members).
c. Client Database and Broker Client Agreement.
d. Copy of Registration Certificate of each sub-Broker issued by SEBI.
e. Copy of approval for each Remisier given by the Exchange.
f. Copy of Power of Attorney / Board Resolution authorizing Directors / Employees to sign

Contract Notes.
g. Copies of Pool Account Statements.

III. Other Conditions:
(a) A Member should maintain separate sets of books of accounts / documents / records, if
he holds membership – (i) of any other recognized Stock Exchange, or (ii) in a different
segment of the same Stock Exchange.
(b) A member should intimate of SEBI, the place where the books of accounts, records and
documents are maintained.
The books of accounts and other records maintained under Regulation 17 should be
preserved for a minimum period of 5 years.
Question No.17 (a)
Discuss
110
(i) Market value added and

(ii) Shareholders value added
Answer:
(i) Market Value Added (MVA)

Market value Added (MVA) is the difference between the current market value of a firm and
the capital contributed by investors. If MVA is positive, the firm has added v alue. If it is
negative the firm has destroyed value.
To find out whether management has created or destroyed value since its inception, the
firm‘s MVA can be used:
MVA=Market value of capital – capital employed
This calculation shows the difference between the market value of a company and the
capital contributed by investors (both bondholders and shareholders). In other words, it is the
sum of all capital claims held against the company plus the market value of debt and
equity. Calculated as:
The higher the MVA, the better. A high MVA indicates the company has created substantial
wealth for the shareholders. A negative MVA means that the value of the actions and
investments of management is less than the value of the capital contributed to the company
by the capital markets, meaning wealth or value has been destroyed.
The aim of the company should be to maximize MVA. The aim should not be to maximize the
value of the firm, since this can be easily accomplished by investing ever-increasing amounts
of capital.
(ii) Shareholder Value Added (SVA)
Shareholder Value Added (SVA) represents the economic profits generated by a business
above and beyond the minimum return required by all providers of capital. ―Value‖ is added
when the overall net economic cash flow of the business exceeds the economic cost of all
the capital employed to produce the operating profit. Therefore, SVA integrates financial
statements of the business (profit and loss, balance sheet and cash flow) into one meaningful
measure.
The SVA approach is a methodology which recognizes that equity holders as well as debt
financiers need to be compensated for the bearing of investment risk in Government
businesses. Historically, it has been apparent that debt financiers have been explicitly
compensated, however, this has not been the norm for providers of equity capital. Such
inequalities can lead to inefficiencies in the allocation and use of capital.
The SVA methodology is a highly flexible approach to assist management in the decision
making process. Its applications include performance monitoring, capital budgeting, output
pricing and market valuation of the entity.
Calculation of SVA
SVA = Net Operating Profit After Taxes (NOPAT) – (Capital WACC)

The first step in calculating SVA is to calculate NOPAT; the second step is to estimate capital
employed; the third is to estimate the appropriate WACC; the fourth step is to calculate the
capital charges; and the fifth step is to calculate SVA.
NOPAT is operating performance measure after taking account of taxation, but before any
financing costs. Interest is totally excluded from NOPAT as it appears implicitly in capital
charge. NOPAT also requires further equity-equivalent adjustments.
Capital costs include both the cost of debt finance and the cost of equity finance. The cost
of these sources of finance is reflected by the return required by the funds provider, be they
a lender or a shareholder. These capital cost is referred to as Weighted Average Cost of
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Capital (WACC) and is determined having regard to the related capital structure of the
business. The WACC is used in SVA as the minimum hurdle rate of return the GBE needs to
exceed for value to be added.
SVA is a useful concept as it enables both actual results and forecasts to be used to assess
whether value has been added in the past and/or whether the financial forecasts and
investment decisions will lead to value being added in future. If forecasted balance sheet
and income statements indicate that value will be diminished, the strategic decisions which
underpin the forecasts will of course need to be reviewed. As such, SVA provides a further
basis for evaluating the potential ‗investor value impact‘ of forecasts and capital projects
contained in corporate plans.
Question No.17 (b)
Why Human Resources Asset is not recognised in the Balance sheet?
Answer:
Although human beings 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 resources. Human
resources are not recognized in balance sheet as there are no measurement criteria for
recognition of human resources. Human resource accounting is at developing stage and
no accounting principles have been established for valuation of human assets. Costs
incurred on human resources are recognised as expenses in profit and loss account.
Leading public sector units like OIL, BHEL, NTPC and SAIL etc. have started reporting
human resources in their annual reports as additional information.
Question No.17 (c)
Write notes on Liquid Asset Requirements of NBFCs.
Answer:
I. Minimum Liquid Assets: NBFCs accepting public deposits should maintain Liquid Assets
the minimum level of 15% of public deposits outstanding as on the last working day of the
second preceding quarter. [Section 45 – IB of RBI Act]
II. Break Up for Minimum Level:
(a) Government Securities / Guaranteed Bonds: Of this minimum level, not less than 10%
must be invested in approved securities i.e. in Government Securities or Government
Guaranteed Bonds. The liquid assets in form of investments in approved Securities must
be maintained in dematerialized form only.
(b) Term Deposits: The remaining 5% of Minimum Liquid Assets can be invested in
unencumbered Term Deposits with any Scheduled commercial Bank.
III. Utilisation: The Liquid Assets maintained as above are utilized for payment of claims of
depositors. However, the Deposits being unsecured, the depositors do not have any direct
claim on Liquid Assets.
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Question No.17 (d)
Write notes on Asset Liability Management.
Answer:
I. Definition: Asset Liability Management (ALM) is a Risk Management Tool that helps a
bank or NBFC to manage its liquidity risk and interest rate risk. This helps Banks or NBFCs plan
Long Term Financial, Funding and capital Strategy using present value Analysis.
II. Application / Uses of ALM:
(a) With ALM, a bank or NBFC can model interest income and expenses for analysis and re-
price Assets and Liabilities.
(b) Based on ALM position, Banks or NBFCs can also model effects of Competitive pricing
to create innovative and imaginative Banking products.
(c) ALM also helps regulatory compliance for Banks or NBFCs by through appropriate
investment or Disinvestment Decisions to maintain the required Statutory Liquidity ratio
(SLR), credit reserve Ratio (CRR) and other ratios specified by RBI Guidelines.
III. Components of ALM: ALM involves Structural Liquidity Gap Analysis, Interest rate gap
analyses Duration Gap analysis, Trend Analyses, comparative analysis, Present Value Analysis,
Forward analysis and Scenario Analysis.
Question No.18 (a)
Life of Debenture = 5 years

Face Value = ` 100 lacs
Interest rate = 12%
Maturity value = ` 100 lacs.
Yield = 10%
Conversion option to holder at the end of 3 years. Consideration - `122 lacs.
Give required accounting treatments taking the debenture as an embedded derivative
instrument.
Answer:
Fair value of debt = `12 x 3.791 + `100 x 0.621

= ` 45.49 + `62.10
= ` 107.59
Now, the total consideration will be divided in two parts
Liability = `107.59 issuer prospective
Equity = `14.41
Date Particular Debit ` Credit `
31.03.2012 Bank A/c Dr. 122

To, To Liability 107.59
To, Equity (security premium) 14.41
113
In the Books of Investors

Investment in debt A/c Dr. 107.59
Investment in Derivative A/c Dr. 14.41
To Bank A/c 122
Question No.18 (b)
XYZ Ltd. has the following capital structure on of 31st March 2012.
Particulars ` in Crores
a. Equity Share capital (Shares of ` 10 each) 300
b. Reserves :
General Reserve 270
Security Premium 100
Profit and Loss A/c 50
Export Reserve (Statutory reserve) 80
c. Loan Funds 800
The shareholders have on recommendation of Board of Directors approved vide special

resolution at their meeting on 10th April 2012 a proposal to buy back maximum permissible
equity shares considering the huge cash surplus following A/c of one of its divisions.
The market price was hovering in the range of ` 25/- and in order to induce existing
shareholders to offer their shares for buy back, it was decided to offer a price of 20% above
market.
Advice the company on maximum number of shares that can be bought back and record
journal entries for the same assuming the buy back has been completed in full within the
next 3 months.
If borrowed funds were ` 1200 Lakhs, and 1500 Lakhs respectively would your answer
change?
Solution :
Maximum shares that can be bought back
Situation I Situation II Situation III

a. Shares outstanding test (WN # 1 ) 7.5 7.5 7.5
b. Resources test (WN # 2) 6 6 6
c. Debt Equity ratio test (WN # 3) 10.67 4 —
d. Maximum number of shares for 6 4 —
buy back - LEAST of the above
Particulars Situation I Situation II

Debit Credit Debit Credit
a. Shares bought back A/c Dr. 180 120
To Bank A/c 180 120
[Being purchase of shares from public]
b. Share capital A/c Dr. 60 40
Securities premium A/c Dr. 100 80
General reserve A/c (balancing figure) Dr. 20 —
To Shares bought back A/c 180 120
[Being cancellation of shares bought on
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buy back]
c. General Reserves A/c 60 40
To Capital Redemption Reserve A/c 60 40
[Being transfer of reserves to capital
redemption reserve to the extent
capital is redeemed]
Note : Under situation III, the company does not qualify the debt equity ratio test. Therefore
the company cannot perform the buyback of shares (Under section 77A of the Companies
Act, 1956)
WORKING NOTES :
WN # 1 : Shares outstanding test
Particulars Amount
a. No. of shares outstanding 30 crores
b. 25% of shares outstanding 7.5 crores
WN # 2 : Resources test (` in Crores)
Particulars Amount
a. Paid up capital 300
b. Free reserves 420
c. Shareholders fund (a+b) 720
d. 25% of shareholders fund 180
e. Buyback price per share ` 30
f. Number of shares that can be bought back 6 Crores
WN # 3 : Debt Equity ratio test : (` in Crores)
Particulars Situation I Situation II Situation III

a. Borrowed Funds 800 1,200 1,500
b. Minimum equity to be maintained
after buy back in the ratio 2:1 400 600 750
c. Present equity 720 720 720
d. Maximum possible dilution in equity 320 120 —
e. Maximum shares that can be 10.67 4 —
bought back @ ` 30/- per share
Question No.18 (c)
What are the principles relating to Asset Classification and Provisioning for NPA in NBEC‘s
Answer:
Principles relating to Asset Classification and Provisioning for NPA in NBEC‘s
I. Classification: Every NBFC shall, after taking into account the degree of well defined
credit weaknesses and extent of dependence on collateral security for realization, classify its
lease/ hire purchase assets, loans and advances and any other forms of credit into –
(a) Standard Assets;
(b) Sub – Stander Assets;
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(c) Doubtful Assets; and
(d) Loss Assets.
Note: The above class of assets shall not be upgraded merely as a result of rescheduling,
unless it satisfies the conditions required for the upgradation.
II. Provisioning requirements: Every NBFC shall, after taking into account the time lag
between an account becoming non- performing, its recognition as such, the realisation of
the security and the erosion over time in the value of security charged, make provision
against – (a) Sub-Standard Assets, (b) Doubtful Assets and (c) Loss Assets as under –
(a) For Loans, Advances and other credit facilities including Bills Purchased and Discounted
Type of Asset Provisioning Norms
(1) Sub- Standard Assets 10% of Total outstanding.
(2) Doubtful Assets 100% of the Unsecured portion i.e. extent to which the
advance is not covered by the realizable value of the
security;
Additional Provision as under –
Period for which the Asset is doubtful Additional Provision
Upto 1 year 20% of Secured portion.
1-3 years 30% of Secured portion
More than 3 years 50% of Secured portion
(3) Loss Assets The entire asset shall be written off. If the assets are permitted to
remain in the books for any reason, 100% of the outstanding
should be provided for.
(b) Lease and HP Assets:

Basic Provision: In respect of HP assets, provision should be made for the total dues
(overdue and future installments taken together) as reduced by – (a) Finance charges not
credited to P & L Account and carried forward as unmatured finance charges; and (b)
depreciated value of the underlying asset. For provisioning purpose, depreciated value of
the asset shall be notionally computed as original / Actual cost Less depreciation at 20% p.a.
on SLM basis.
Additional Provision: For lease and Hp Assets, additional provisioning will be as under –
Type of Asset Period of overdue Provisioning Norms
(1) Sub- Standard More than 12 months but up to 24 months 10% of Net Book Value.
Assets
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(2) Doubtful Assets More than 24 months but up to 36 months 40% of Net Book Value.
More than 36 months but up to 48 months 70% of Net Book Value.
(3) Loss Assets More than 48 months 100% of Net Book value.
Note: On expiry of a period of 12 months after the due date of the last installment of hire
purchase / leased asset, the entire Net Book Value shall be fully provided for.
Additional Points:
Caution Money / Margin Money or Security Deposits kept by the borrower with the
NBFC in pursuance of the HP agreement may be deducted against the basic provision,
if not already taken into account while arriving at the EMI‘s under the agreement. The
value of any other security available in pursuance to the HP agreement may be
deducted only against the additional provisions.
Security Deposits kept by the borrower with the NBFC in pursuance to the lease
agreement together with the value of any other security available in pursuance to the
lease agreement may be deducted only against the additional provisions described
above.
Income Recognition on and provisioning against NPAs are two different aspects of
prudential norms. The fact that income on an NPA has not been recognised cannot be
taken as reason for not making provision.
An asset which has been renegotiated or rescheduled shall be as sub- standard asset
or continue to remain in the same category in which it was prior to its renegotiation or
reschedulement as a doubtful asset or a loss asset as the case may be. Necessary
provision is required to be made as applicable to such asset till it is upgraded.
III. Disclosed of Provisions in the Balance Sheet:
(a) Every NBFC shall separately disclose in its Balance Sheet the provisions made as
above without netting them from the income or against the value of assets. The
provisions shall be distinctly indicated under separate heads of accounts as – (i)
provisions for bad and doubtful debts; and (ii) provisions for depreciation in
investments.
(b) Such provisions shall not be appropriated from the General Provisions and Loss
Reserves held, if any, by the NBFC.
(c) Such provisions for each year shall be debited to the P&L Account. The excess of
provisions, if any, held under the heads ―General Provisions and Loss Reserves‖ may
be written back without making adjustment against them.
Question No.19 (a)
The business of P Ltd. was being carried on continuously at losses. The following are the
extracts from the Balance Sheet of the Company as on 31st March, 2012.
Balance Sheet as on 31st March, 2012
117
Liabilities Amount Assets Amount

` `
Authorised, Issued and Goodwill 50,000
Subscribed Capital : Plant 3,00,000
30,000 Equity Shares of ` 10 Loose Tools 10,000
each fully paid 3,00,000 Debtors 2,50,000
2,000 8% Cumulative Pref. Stock 1,50,000
Shares of ` 100 each fully paid 2,00,000 Cash 10,000
Securities Premium 90,000 Bank 35,000
Unsecured Loan(From Director) 50,000 Preliminary Expenses 5,000
Sundry creditors 3,00,000 Profit & Loss Account 2,00,000
Outstanding Expenses 70,000
(including Directors‘
remuneration ` 20,000)
10,10,000 10,10,000
Note : 1) Dividends on Cumulative Preference Shares are in arrears for 3 years.
2) Unsecured loans (from director) is assumed to be of less than 12 months hence,
treated as short term borrowings. (ignoring interest)
The following scheme of reconstruction has been agreed upon and duly approved by the
Court.
1. Equity shares to be converted into 1,50,000 shares of ` 2 each.
2. Equity shareholders to surrender to the Company 90 per cent of their holding.
3. Preference shareholders agree to forego their right to arrears to dividends
inconsideration of which 8 percent Preference Shares are. to be converted into 9 per
cent Preference Shares.
4. Sundry creditors agree to reduce their claim by one fifth in consideration of their
getting shares of ` 35,000 out of the surrendered equity shares.
5. Directors agree to forego the amounts due on account of unsecured loan and
Director‘s remuneration.
6. Surrendered shares not otherwise utilised to be cancelled.
7. Assets to be reduced as under :
Goodwill by ` 50,000
Plant by ` 40,000
Tools by ` 8,000
Sundry Debtors by ` 15,000
Stock by ` 20,000
8. Any surplus after meeting the losses should be utili sed in writing down the value of the
plant further.
9. Expenses of reconstruction amounted to ` 10,000.
10. Further 50,000 Equity shares were issued to the existing members for increasing the
working capital. The issue was fully subscribed and paid-up.
A member holding 100 equity shares opposed the scheme and his shares were taken over
by the Director on payment of ` 1,000 as fixed by the Court.
You are required to pass the journal entries for giving effect to the above arrangement and
also to draw up the resultant Balance Sheet of the Company.
Solution :

` `
a. Sub Division of Shares
Equity Share Capital (` 10 each) A/c Dr. 3,00,000
To Equity Share Capital (` 2 each) A/c 3,00,000
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b. Surrender of Shares
Equity Share Capital (` 2) A/c Dr. 2,70,000
To Shares Surrendered A/c 2,70,000
c. Conversion of Preference Share Capital
8% Cumulative Preference Share Capital A/c Dr. 2,00,000
To 9% Cumulative Preference Share Capital A/c 2,00,000
d. Surrendered shares issued to creditors
under reconstruction scheme
Shares Surrendered A/c Dr. 35,000
e. Expenses Paid
Expenses A/c Dr. 10,000
To Bank A/c 10,000
f. Cancellation of unissued surrendered shares
Shares Surrendered A/c Dr. 2,35,000
To Capital Reduction A/c 2,35,000
g. Amount sacrificed by Directors
Unsecured Loan A/c Dr. 50,000
Sundry Creditors A/c Dr. 60,000
Outstanding Expenses A/c Dr. 20,000
To Capital Reduction A/c 1,30,000
h. Assets Written off
Capital Reduction A/c Dr. 3,65,000
To Goodwill A/c 50,000
To Loose tools A/c 8,000
To Sundry debtors A/c 15,000

` `
To Stock - in - trade A/c 20,000
To Preliminary expenses A/c 5,000
To Expenses A/c 10,000
To Plant A/c 57,000
i. Issue of Shares
Applications received
Bank A/c Dr. 1,00,000
To Share Application A/c 1,00,000
Allotment of Shares
Share Application A/c Dr. 1,00,000
To Share Capital A/c 1,00,000
(Being 50000 equity shares of ` 2 each
issued as fully paid as per Board‘s
Resolution dated... )
Note 1 : a. Cancellation of Preference dividend need not be journalised; on cancellation
it cease to be contingent liability and hence no further disclosure.
b. Preference shareholders have to forego policy rights presently enjoyed at par
with Equity Shareholders.
Note 2 : The transfer of 100 shares by the dissentient shareholders to the director
concerned need not be journalised.
Note 3 : It has been assumed that the share premium account is to be kept infact since
the scheme is silent about it.
Name of the Company: P Ltd.
119

No. Particulars No. March, March,
2012 2011
` `
(b) Reserves and surplus 2 90,000
(a) Trade payables 3 2,40,000
(b)Other current liabilities 4 50,000

Total 7,45,000
II. Assets
(a) Fixed assets

2 Current assets
(b) Trade receivables 7 2,35,000

Total 7,45,000

Nos Amount ( `) Nos Amount ( `)
Opening Balance as on 01.04.11 82,500 165,000,000 NIL NIL
Add: Fresh Issue ( Incld Bonus shares, NIL NIL
other than cash)
82,500 165,000,000 NIL NIL
82,500 165,000,000 NIL NIL

Total 90,000
120

Sundry creditors 2,40,000
Total 2,40,000
Note 4.Other Current Liabilities As at 31st As at 31st

Outstanding Expenses 50,000
Total 50,000
Note 5. Tangible assets As at 31st As at 31st

Plant ` 3,00,000
less: Amount written off under the sceme of ` 57,000
reconstruction 2,43,000
Total 2,43,000

Stock-in trade 1,30,000
Loose tools 2,000
Total 1,32,000
Note 7. Trade receivables As at 31st As at 31st

Debtors 2,35,000
Total 2,35,000
8. Cash and Cash Equivalents As at 31st As at 31st

Cash in Hand 10,000
Total 1,35,000
Question No.19 (b)
A factory started it activities on 1 st April, 2012. From the following data, compute the value of
closing stock on 30th April, 2012.
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Raw Materials purchased during April - 40,000 kg at `24 (out of which Excise Duty =
` 4 per kg). Stock on hand as on 30 th April – 2,500 kg.
Production during April – 7,000 units (of which 5,000 units were sold). In addition to
the production, 500 units were lying as WIP on 30 th April (100% complete as to
Materials and 60% complete as to conversion).
Wages and Production Overheads - `60
Selling Price - ` 220 per unit (of which Excise Duty is `20 per unit).
Solution:
Particulars Computation `
1. Raw Material Valuation (net of Input Excise 2,500kg x ` 20 per kg 50,000
Duty)
2. WIP Valuation (net of RM input duty) (`100 + 60% of `60) x 500 units 68,000
3. Finished Goods Valuation (including ED on SP) (RM 100 + Lab & OH 60 + ED 20) = 3,60,000
`180 x (7,000 units – 5,000 units)
Total 4,78,000
Computation of Cost per unit of production:

• Raw Materials: (40,000 – 2,500) = 37,500 kg for 7,500 units total = 5 kg x ` 20 (net of ED) =
`100
• Wages and Production Overhead = `60 per completed unit (given)
Question No.19 (c)
What are the accounting issues involved in Environmental Accounting?
Answer:
Major Accounting Issues in Environmental Accounting are –

(i) Environmental Expenditure vs. Normal Business Expenditure: Many machines may have
state-of-the-art environmental technology. Hence, a portion of such capital costs and
also the running and maintenance expenditure may be treated as environment
related expenditure. There should be proper guidelines for allocating the capital and
revenue expenditures between Environmental Expenditure and Normal Business
Expenditure.
(ii) Capitalisation vs. Charging Off of Environmental Expenditure: Environmental protection

costs relating to prior periods and current period are generally very high. If these are
expensed off in one year, EPS may be adversely affected. Some Companies may
capitalise such expenditure and amortise the same over say 10 years. Uniformity is
required for comparative analysis of Financial Statements.
(iii) Recognition of Environment related Contingent Liabilities: Environmental Contingent

Liabilities are a matter of increasing concern. Recognizing a liability for hazardous
waste remediation frequently depends on the ability to estimate remediation costs
reasonably. Developing a reliable estimate requires evaluation of technological,
122
regulatory and legal factors, each of which calls for exercise of management
judgement to reach a supportable accounting conclusions.
Question No. 19(d)
Why Human Resources are not recognized as an asset in the Balance Sheet?
Answer:
Human Resource is generally not recognized in the Balance Sheet due to the following
reasons -
(i) Difficulty in Measurement: An asset to be recognized in the Balance Sheet should be
measured first. An asset is generally valued / measured based on cost of acquisition or
expected future benefits. Generally human resources are not bought, but only hired.
Future benefits can be measured tangibly for machineries, furniture as their
performance follows predictable lines. However, human nature and performance is
generally not on predictable lines.
(ii) Subjectivity: The various models of Human Resources Valuation deal with capitalisation
of Historical Costs, Replacement Costs, Estimated Future Earnings etc. The amounts
associated with such costs, and also the determination of various probabilities and
discount rates are subjective in nature.
(iii) Timing: Unlike the owned physical resources (Fixed Assets), the Company does not
―own‖ the human resources as such. Hence, the timing as to when such resources
should be recognised in financial reporting, is an issue to be addressed.
(iv) Human vs. Non-Human Capital: Traditional Accounting focusses on recognition of non-
human capital i.e. physical resources. Entries in the P&L Account on Salaries and Wages
are the only reference to Human Capital. The concept of capitalisation of Human
Resources is not recognised in the accounting framework.
(v) Sensitive: Unlike physical resources, human assets are highly sensitive to the values
placed on them.
(vi) Useful Life: Physical Resources have a defined Useful Life or Economic Life, which can be
reasonably estimated by the Company. However, the duration of an individual serving
the Company can only be determined probabilistically.
(vii) Qualitative Factors: All models of HR Valuation attempt to fix a monetary value on the
Human Resources. Qualitative factors like attitude, morale, loyalty, commitment, job
satisfaction, work culture, behavioural factors etc. are ignored.
Question No.20 (a)
Write a note on Methods of Government Accounting.
Answer:
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The mass of the Government accounts being on cash basis is kept on Single Entry. There is,
however, a portion of the accounts which is kept on the Double Entry System, the mai n
purpose of which is to bring out by a more scientific method the balance of accounts in
regard to which Government acts as banker or remitter, or borrower or lender. Such
balances are, of course, worked out in the subsidiary accounts of single entry compilations as
well but their accuracy can be guaranteed only by a periodical verification with the
balance brought out in the double entry accounts.
Business and merchant accounting methods are different than government accounting
system because government accounting system is ruling over the nation and keeps various
departments i.e. production, service utility or entertainment industry etc. The operations of
department of government sometimes include under taking of a commercial or quasi -
commercial character and industrial factory or a store. It is still necessary that the financial
results of the undertaking should be expressed in the normal commercial form so that the
cost of the services or undertaking may be accurately known.
Question No.20 (b)
Write a note on IFRS.
Answer:
The term IFRS refers to the International Financial Reporting Standards issued by International
Accounting Standard Board (IASB). It also encompasses the International Accounting
Standards (IAS) issued by the International Accounting Standard Committee (IASC).
Interpretations of IASs and IFRSs are developed by the International Financial Reporting
Interpretations Committee (IFRIC). IFRIC is the new name for the Standing Interpretations
Committee (SIC) approved by the IASC Foundation Trustees. IFRS includes these
interpretations also.
Question No.21 (a)
Discuss the process of Triple Bottom Line Reporting.
Answer:
The major steps involved in undertaking the reporting process are:

1. Planning for Reporting
• Understand the national, international and industry sector trends in Triple Bottom Line
Reporting (TBL) reporting
• Identify key stakeholders
• Establish the 'business case' and set high-level objectives for TBL reporting
• Secure support from the Board and senior executives
• Identify resource requirements and determine budget
2. Setting the Direction for TBL Reporting
• Engage with stakeholders to understand their requirements
• Prioritise stakeholder requirements and concerns
• Set overall objectives for TBL reporting
• Review current approach and assess capability to deliver on reporting objectives
• Identify gaps and barriers associated with current approach, and prioritise risks associated
with overall reporting objective
• Review of associated legal implications
124
• Develop TBL reporting strategy

• Determine performance indicators for inclusion in report
• Establish appropriate structure and content of the report
3. Implementation of TBL Reporting Strategy
• Implementation of TBL reporting strategy (including required data collection and review
processes)
• Clarify relationship to statutory financial reporting
4. Publication of TBL Report
• Prepare draft report
• Review content and structure of report internally, and modify accordingly
• Obtain independent assurance - external verification
• Publish TBL report
• Seek feedback from stakeholders and incorporate into planning for the next period's
reporting.
Question No.21 (b)
Summarized Balance Sheet of P Ltd. and Q Ltd. as at 31.12.2012 is given below (` in 000‘s)-
Liabilities P Q Liabilities P Q
Equity Share Capital (` 10) 5,000 2,400 Goodwill 300 200
Securities Premium 200 140 Buildings 1,000 1,000
General Reserve 1,000 1,600 Machinery 4,000 2,440
Profit & Loss Account 900 600 Investment in Shares:
8% Debentures 2,000 1,000 -1,92,000 Shares of Q Ltd. 1,500
Trade Creditors 800 400 Investments in Debentures:
Outstanding Expenses 270 180 - In Q Ltd. (Face Value ` 4,00,000) 450
- In P Ltd. (Face Value ` 2,00,000) 220
Sundry Debtors 1,500 1,000
Stock 1,000 1,000
Cash and Bank 200 100
Preliminary Expenses 100 50
Outstanding Income 120 310
Total 10,170 6,320 Total 10,170 6,320
1. When the Shares were acquired, Q Ltd. had ` 2.2 Lakhs in General Reserve and ` 1,00,000
in Securities Premium, ` 3,00,000 (Dr.) in Profit and Loss Account.
2. Two years after the date of acquisition Bonus Shares at 1 to 1 were issued out of General
Reserve.
3. One year after the Bonus issue, Rights Shares were issued at 10% Premium at 1 for 5 held
and P Ltd. purchased all the shares offered to it.
4. P Ltd. received ` 1,92,000 dividend for the last year and ` 96,000 interim dividend in the
current year, i.e. 3 years after the Rights Issue.
125
5. For the current year 15% dividend (including Interim Dividend) has been proposed by Q
Ltd., 10% by
P Ltd., but no effect has yet been given in the accounts.
6. On the same day referred to in (5) above, Bonus Dividend has been declared at 1 to 2,
but no effect has yet been given.
7. 50% of the shares originally purchased in Q Ltd. were paid for to the shareholders of Q
Ltd. by 50,000 shares of P Ltd. issued at 10% premium.
8. Debenture Interest of both the Companies falls due on 31st December, but payments are
made a week later.
Estimate the Cost of Control
Solution:
1. Basic Information
Company Status Dates Holding Status
Holding Company = P Ltd. Consolidation: 31.12.2012 Holding Company = 80%
Subsidiary = Q Ltd. Minority Interest = 20%
Shares held as on 31.12.2012 1,92,000

Add: Second Bonus Issue (1,92,000 x 1/2) 96,000
Actual Shareholding 2,88,000
DOA - 1 (Original First Bonus Issue DOA - 2 Rights Second Bonus Issue
Acquisition) (1 : 1 as at DOA-1) Issue (1 :2 as at DOA-2)
80,000 80,000 32,000 96,000
(balancing figure) [(1,92,000 - 32,000) ÷ 2] [1,92,000 x 1 ÷ (5 + 1)]
40,000 40,000
For Cash For Shares of P Ltd.
2. Analysis of Reserves & Surplus of Q Ltd.

(a) Securities Premium
Balance on 31.12.2012 ` 1,40,000
DOA-1 ` 1,00,000 Proceeds from Rights Issue ` 40,000

Capital Profit
Capital
(b) General Reserve

Shares held as on 31.12.2012 16,00,000
Add: Second Bonus Issue (24,00,000 x 1/2) 12,00,000
Adjusted Balance 4,00,000
DOA-1 ` 22,00,000 Additions upto Consolidation

Less: First Bonus (` 10,00,000) (80,000 Shares/80% x ` 10) (balancing figure) ` 4,00,000
Less: Second Bonus (` 12,00,000) Revenue Reserve
Capital Profit ` NIL
Note: In the absence of information in this regard, it is presumed that the second bonus issue
has been made out of reserves as on the date of controlling acquisition.
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(c) Profit & Loss Account

Balance as on 31.12.2012 6,00,000
Less: Debenture Interest (10,00,000 x 8%) (80,000)
Add: Debenture Interest from P (2,00,000 x 8%) 16,000
Less: Proposed Dividend (24,00,000 x 15% – Interim 1,20,000)(2,40,000)
Adjusted Balance 2,96,000
DOA - 1 Additions to P&L A/c

(` 3,00,000) Debit balance given ` 5,96,000
Capital Profit Revenue Profit
Note: Interim Dividend received by Holding Company = ` 96,000 for 80% holding. Hence,
Total Interim
Dividend paid by Subsidiary = ` 96,000 ÷ 80% = ` 1,20,000
3. Analysis of Net Worth of Q Ltd.

Particulars Total P Minority
100% 80% 20%
(a) Equity Share Capital: 36,00,000 28,80,000 7,20,000
(including Bonus ` 12,00,000) 1,00,000
(b) Capital Profits: Securities NIL
Premium Account (3,00,000)
General Reserve (50,000)
Profit & Loss Account (2,00,000) (50,000)
Preliminary Expenses (2,50,000) 32,000 8,000
40,000 3,20,000 80,000
(c) Securities Premium (after acquisition 4,76,800 1,19,200
4,00,000
date) 1,92,000 48,000
5,96,000
(d) Revenue Reserves: General Reserve
2,40,000
(e) Revenue Profits: Profit & Loss A/c
(f) Proposed Equity Dividend
Minority Interest 9,25,200
4. Cost of Control
Particulars `
Cost of Investment 15,00,000
Less: (1) Nominal Value of Equity Capital 28,80,000
(2) Share in Capital Profit of Q Ltd. (2,00,000) (26,80,000)
Capital Reserve on Consolidation (11,80,000)
Question No.22 (a)
R Ltd. owns 80% of S and 40% of T and 40% of Q. T is jointly controlled entity and Q is an
associate. Summarized Balance Sheet of four companies as on 31.03.2012 are:
Assets R Ltd. S T Q
` ` ` `
Investment in S 1,200 - - -
Investment in T 1,800 - - -
Investment in Q 1,800 - - -
Fixed Assets 1,500 1,200 2,100 1,500
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Current Assets 3,300 4,950 4,875 5,475

Total 7,800 6,150 6,975 6,975
Liabilities
Share capital `1 Equity Share 1,500 600 1,200 1,200
Retained Earnings 6,000 5,100 5,400 5,400
Creditors 300 450 375 375
Total 7,800 6,150 6,975 6,975
R Ltd. acquired shares in ‗S‘ many years ago when ‗S‘ retained earnings were `780 lakhs. R
Ltd. acquired its shares in ‗T‘ at the beginning of the year when ‗T‖ retained earnings were
`600 lakhs. R Ltd. acquired its shares in ‗Q‘ on 01.04.2011 when ‗A‘ retained earnings were
`600 Lakhs.
The balance of goodwill relating to ‗S‘ had been written off three years ago. The value of
goodwill in ‗T‘ remains unchanged.
Prepare the Consolidated Balance Sheet of R Ltd. as on 31.03.2012 as per AS 21, 23 and 27.
Solution:
Name of the Company: R Ltd.

Consolidated Balance Sheet as at 31st December,2012
No. No. December, December,
2012 2011
` `

(a) Share capital 1 1,500 -
(b) Reserves and surplus 2 13,200 -
(c)Money received against share warrants - -
14,700 -
2 Minority Interest 1,140 -
(a) Long-term borrowings (10% debentures) - -
(b) Deferred tax liabilities (net) - -
(c) Other long-term liabilities - -
(d) Long-term provisions - -
-
(a) Short-term borrowings - -
(b) Trade payables 3 900 -
(c) Other current liabilities - -
(d) Short-term provisions - -
900 -
TOTAL (1+2+3+4) 16,740 -
128

No. No. December, December,
2012 2011
` `
B ASSETS
(a) Fixed assets
(i) Tangible assets 4 3,540 -
(ii) Intangible assets 5 180 -
(iii) Capital work-in-progress - -
(iv) Intangible assets under development - -
(v) Fixed assets held for sale - -
(b) Non-current investments 6 2,820
(c) Deferred tax assets (net) - -
(d) Long-term loans and advances - -
(e) Other non-current assets - -
6,540 -
2 Current assets
(a) Current investments - -
(b) Inventories - -
(c) Trade receivables - -
(d) Cash and cash equivalents - -
(e) Short-term loans and advances - -
(f) Other current assets 7 10,200 -
10,200 -
TOTAL (1+2) 16,740 -
Notes to Accounts
December, December,
2012 (`) 2011(`)
Share Capital in Equity Shares 1,500
Total 1,500

December, December,
2012 (`) 2011(`)
Retained Earnings (W.N 2) 13,200
Total 13,200

December, December,
2012 (`) 2011(`)
Creditors [300+450+40% of 375] 900
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Total 900
Note 4. Tangible assets As at 31st As at 31st
December, December,
2012 (`) 2011(`)
Fixed Assets [1,500 +1,200 + 840(2,100×40%)] 3,540
Total 3,540
Note 5. Intangible assets As at 31st As at 31st

December, December,
2012 (`) 2011(`)
Goodwill (W.N 1) 180
Total 180
Note 6. Noncurrent investments As at 31st As at 31st

December, December,
2012 (`) 2011(`)
Investment in Associates (W.N 4) 2,820
Total 2,820
Note 7. Other current assets As at 31st As at 31st

December, December,
2012 (`) 2011(`)
Current Assets [3,300+4,950+ 1,950 (4,875 × 40%)] 10,200
Total 10,200
Working Notes :
1.Computation of Goodwill
S Ltd.(subsidiary)
` in lakhs
Cost of Investment 1,200
Less :Paid up value of shares acquired 480
Share in pre-acquisition profits of S Ltd. (780 × 80%) 624 1,104
Goodwill 96
T (Jointly Controlled Entity)

` in lakhs
Cost of Investment 900
Less:Paid up value of shares acquired (40% of 1,200) 480
Share in pre-acquisition profits (40% of 600) 240 720
Goodwill 180
Note: Jointly controlled entity ‗T‘ to be consolidated on proportionate basis i.e. 40% as per AS
27
Associate Q (AS 23)
` in lakhs
Cost of investment 900
Less:Paid up value of shares acquired (1,200 × 40%) 480
Share in pre-acquisition profits (400 × 40%) 240 720
130
Goodwill 180
Goodwill shown in the Consolidated Balance Sheet
` in lakhs
Goodwill of ‗T‘ 180
Goodwill of ‗S‘ 96
Less: Goodwill written off of ‗S‘ 96
Goodwill 180
2. Consolidated Retained Earnings

` in lakhs
R Ltd. 6,000
Share in post acquisition profits of S - 80% (5,100 – 780) 3,456
Share in post acquisition profits of T - 40% (5,400 – 600) 1,920
Share in post acquisition profits of Q - 40% (5,400 – 600) 1,920
Less: Goodwill written off (96)
1,3200
3. Minority Interest ‗S‘
` in lakhs
Share Capital (20% of 600) 120
Share in Retained Earnings (20% of 5,100) 1,020
1,140
4. Investment in Associates
` in lakhs
Cost of Investments (including goodwill ` 180 lakhs) 900
Share of post acquisition profits 1,920
Carrying amount of Investment (including goodwill ` 180 lakhs) 2,820
Question No.22 (b)
Write a note Committee on Public Undertaking.
Answer:
The Committee on Public Undertakings exercises the same financial control on the public
sector undertakings as the Public Accounts Committee exercises over the functioning of the
Government Departments. The functions of the Committee are:
i. to examine the reports and accounts of public undertakings.
ii. to examine the reports of the Comptroller & Auditor General on public undertakings.
iii. to examine the efficiency of public undertakings and to see whether they are being
managed in accordance with sound business principles and prudent commercial practices.
The examination of public enterprises by the Committee takes the form of comprehensive
appraisal or evaluation of performance of the undertaking. It involves a thorough
examination, including evaluation of the policies, progMadhumes and financial working of
the undertaking.
The objective of the Financial Committees, in doing so, is not to focus only on the individual
irregularity, but on the defects in the system which led to such irregularity, and the need for
correction of such systems and procedures.
Question No.23 (a)
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Mukta Crop. has 60% shares in joint venture with Indra Crop. Mukta Crop. Sold a plant WDV of
`80 lakhs for `100 lakhs. Calculate how much profit the NDA Crop. Should recognize in its
book in case joint venture is
Jointly controlled operation

Jointly controlled asset
Jointly controlled entity
Solution:
As per AS – 27 (refer point 27.2) in case of jointly controlled operation and jointly controlled
assets joint venture, the venture should recognize the profit to the extent of other venturer
interest.
In the instant case, Mukta Crop. Should recognize profit of `(100 – 80) = `20 x 40/100 = `8
lakhs only.
However in case of jointly controlled entities Mukta Crop. Should recognize full profit of `20
lakhs in its separate financial statements. However while preparing consolidated financial
statements it should recognize the profit only to the extent of 40% i.e. 8 lakhs.
Question No.23 (b)
Beautiful Ltd. acquired 30% of Ugly Ltd. Shares for ` 4,00,000 on 01-06-2011. By such an
acquisition Beautiful Ltd. can exercise significant influence over Ugly Ltd. During the financial
year ended on 31.03.2011 Ugly Ltd. earned profits `1,60,000 and Declared a dividend of `
1,00,000 on 12.08.2011. Ugly Ltd. reported earnings of ` 6,00,000 for the financial year on
31.03.2012 and declared dividends of ` 1,20,000 on 12.06.2012.
Calculate the carrying amount of investment in :

(i) Separate financial statements of Beautiful Ltd. as on 31.03.2012
(ii) Consolidated Financial Statements of Beautiful Ltd. as on 31.03.2012
(iii)What will be the carrying amount as on 30.06.2012 in consolidated financial Statements?
Solution:
(i) Carrying Amount of Investment in Separate Financial Statement of Beautiful Ltd. as on

31.03.2012
`
Amount paid for investment in Associate ( on 1.06.2011) 4,00,000
Less: Pre- acquisition dividend (` 1,00,000 X 30% ) 30,000
Carrying amount as on 31.03.2012 as per AS 13 3,70,000
(ii) Carrying Amount of Investment in Consolidated Financial Statements of Beautiful Ltd. as

on 31.03.2012 as per AS 23
`
Add: Proportionate Share of Profit of investee as per equity method 1,80,000
(30% of ` 6,00,000)
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(iii) Carrying Amount of Investment in Consolidated Financial Statement of Beautiful Ltd. as

on 30.06.2012 as per AS 23
`
Less: Dividend Received received (` 1,20,000 X 30%) 36,000
Question No.24 (a)
The following figures for a period were called out from the books of Asha Corporation:
Particulars `
sales 24,80,000
Purchase of raw materials 10,00.000
Agent‘s commission 20,000
Consumable stores 25,000
Packing material 10,000
Stationery 10,000
Audit fees 4,000
Staff welfare expenses 1,58,000
Insurance 26,000
Rent rate & taxes 16,000
Managing director‘s remuneration 84,000
Traveling expenses 21,000
Fuel and oil 9,000
Electricity 5,000
Material used in repairs:
1. Materials to plant and machinery 24,000
2. Materials to buildings 10,000
Advertisement 25,000
Salaries and wages 6,30,000
Postage and telegMadhus 14,000
Contribution to provident fund, etc. 60,000
Directors‘ sitting fees & traveling expenses 40,000
Subscription paid 2,000
Carriage 22,000
Interest on loans taken 18,000
Dividend to shareholders 30,000
Depreciation provided 55,000
Income-tax provided 1,00,000
Retained earnings 1,25,000
Opening stock : raw Material 85,000
Finished goods 2,00,000
Closing Stock: raw Material 1,08,000
Finished goods 2,40,000
From the above you are required to prepare a statement detailing the source and disposal to
added value.
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Solution:
Statement showing the sources and disposal of Added Value
Sources: Amount Amount

(`) (`)
Sales 24,80,000
Less: Agents‘ commission 20,000
Add change in finished stocks (W.N 1) 40,000
Gross Output 25,00,000
Less:
(a) Raw Materials :
Purchases 10,00,000
Less: Change in Stock 23,000
9,77,000
Other Materials:
Consumables 25,000
Packing Materials 10,000
Stationary 10,000
Fuel & oil 9,000
Electricity 5,000
Repair – Plant & Machinery 24,000
Repair – Building 10,000
Cost of brought in inputs 10,70,000
(b) Purchased Services:

Audit Fees 4,000
Insurance 26,000
Rent, Rates & Taxes 16,000
Traveling Expenses 21,000
Advertisement 25,000
Postal & Telegraph 14,000
Subscription 2,000
Staff Welfare Expenses 1,58,000
Carriage 22,000
13,58,000
Add Value 11,42,000
Disposal:
To Employee Costs
MD Remuneration 84,000
Director Sitting Fees & Expenses 40,000
Salaries & Wages 6,30,000
Contribution to PF 60,000 8,14,000
To Government
Tax Provided 1,00,000
Provider of Finance
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Interest on Loan 18,000

To, Pay Share Holders
Dividend 30,000
To Entity
Depreciation 55,000
Retained Earnings 1,25,000 1,80,000
Added Value 11,42,000
W.N 1 This adjustment is necessary because the cost relating to this closing stock stands
included in purchase.
Question No.24 (b)

What are the advantages of preparation of Value Added (VA) statements?
Answer:
Various advantages of preparation of Value Added (VA) Statements are as under:

(i) Reporting on VA improves the attitude of employees towards their employing companies.
This is because the VA statement reflects a broader view of the company‘s objectives and
responsibilities.
(ii) VA statement makes it easier for the company to introduce a productivity linked bonus
scheme for employees based on VA. The employees may be given productivity bonus on
the basis of VA / Payroll Ratio.
(iii) VA based ratios (e.g. VA / Payroll, taxation / VA, VA / Sales etc.) are useful diagnostic
and predictive tools. Trends in VA ratios, comparisons with other companies and international
comparisons may be useful.
(iv) VA provides a very good measure of the size and importance of a company. To use sales
figure or capital employed figures as a basis for company‘s rankings can cause distortion.
This is
because sales may be inflated by large bought-in expenses or a capital-intensive company
with
a few employees may appear to be more important than a highly skilled labour–intensive
company.
(v) VA statement links a company‘s financial accounts to national income. A company‘s VA
indicates the company‘s contribution to national income.
(vi) VA statement is built on the basic conceptual foundations which are currently accepted
in balance sheets and income statements. Concepts such as going concern, matching,
consistency and substance over form are equally applicable to VA statement.
Question No.25 (a)
Write a note on Extensible Business Reporting Language (XBRL).
Answer:
XBRL stands for eXtensible Business Reporting Language. It is one of a family of ―XML‖
languages which is becoming a standard means of communicating information between
businesses and on the internet. XBRL provides major benefits in the preparation, analysis and
communication of business information and is fast becoming an accepted reporting
language globally. It offers major benefits to all those who have to create, transmit, use or
analyse such information.
Potential XBRL applications:
135
(a) XBRL for Financial Statements - financial statements of all sorts used to exchange
financial information
(b) XBRL for Taxes -specification for tax returns which are filed and information exchanged
for items which end up on tax returns
(c) XBRL for Regulatory Filings – specifications for the large number of filings required by
government and regulatory bodies
(d) XBRL for Accounting and Business Reports - management and accounting reporting
such as all the reports that are created by your accounting system rendered in XML to
make re-using them possible
(e) XBRL for Authoritative Literature - a standard way for describing accounting related
authoritative literature published by the AICPA, FASB, ASB, and others to make using
these resources easier, ―drill downs‖ into literature from financials possible
Question No.25 (b)
(i) Advise P Co. Ltd. about the treatment of the following in the Final Statement of Accounts
for the year ended 31st March, 2012.
A claim lodged with the Railways in March, 2009 for loss of goods of ` 2,00,000 had
been passed for payment in March, 2012 for ` 1,50,000. No entry was passed in the
books of the Company, when the claim was lodged.
(ii) The notes to accounts of X Ltd. for the year 2011-2012 include the following:
―Interest on bridge loan from banks and Financial Institutions and on Debentures
specifically obtained for the Company‘s Fertiliser Project amounting to ` 1,80,80,000
has been capitalized during the year, which includes approximately ` 1,70,33,465
capitalised in respect of the utilization of loan and debenture money for the said
purpose.‖ Is the treatment correct? Briefly comment.
Solution:
(i) Prudence suggests non-consideration of claim as an asset in anticipation. So receipt

of claims is generally recognised on cash basis. Para 9.2 of AS 9 on Revenue Recog -
nition states that where the ability to assess the ultimate collection with reasonable
certainty is lacking at the time of raising any claim, revenue recognition is postponed
to the extent of uncertainty involved. Para 9.5 of AS 9 states that when recognition of
revenue is postponed due to the effect of uncertainties, it is considered as revenue
of the period in which it is properly recognised. In this case it may be assumed that
collectability of claim was not certain in the earlier periods. This is supposed from the
fact that only ` 1,50,000 were collected against a claim of ` 2,00,000. So this
transaction cannot be taken as a Prior Period Item.
In the light of revised AS 5, it will not be treated as extraordinary item. However,
para 12 of AS 5 (Revised) states that when items of income and expense within profit
or loss from ordinary activities are of such size, nature, or incidence that their
disclosure is relevant to explain the performance of the enterprise for the period, the
nature and amount of such items should be disclosed separately. Accordingly, the
nature and amount of this item should be disclosed separately as per para 12 of AS 5
(Revised).
(ii) The treatment done by the company is not in accordance with AS 16 ‗Borrowing
Costs‘. As per para 10 of AS 16, 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. Hence, the capitalisation of
borrowing costs should be restricted to the actual amount of interest expenditure i.e.
` 1,70,33,465. Thus, there is an excess capitalisation of ` 10,46,535. This has resulted in
overstatement of profits by ` 10,46,535 and amount of fixed assets has also gone up
by this amount.
136
Question No.26 (a)

Discuss the general principles of Government Accounting in India and its basic structure.
Answer:
The general principles of Government Accounting are as follows:

1. The Government Expenditure are classified under Sectors, major heads, minor heads,
sub-heads and detailed heads of account, the accounting is more elaborate that that
followed in commercial accounts. The method of budgeting and accounting under the
service heads is not designed to bring out the relation in which Government stands to its
material assets in use, or its liabilities due to be discharged at more or less distant dates.
2. In its Budget for a year, Government is interested to forecast with the greatest possible
accuracy what is expected to be received or paid during the year, and whether the
former together with the balance of the past year is sufficient to cover the later. Similarly,
in the compiled accounts for that year, it is concerned to see to what extent the
forecast has been justified by the facts, and whether it has a surplus or deficit balance
as a result of the year‘s transactions. On the basis of the budget and the accounts,
Government determines (a) whether it will be justified in curtailing or expanding its
activities (b) whether it can and should increase or decrease taxation accordingly.
3. In the field of Government accounting, the end products are the monthly accounts and
the annual accounts. The monthly accounts serve the needs of the day-to-day
administration, while the annual accounts present a fair and correct view of the
financial stewardship of the Government during the year.
Basic Structure of the form of the accounts:
(1) Period of Accounts: The annual accounts of the central, state and union territory
government shall record transactions, which take place during financial year
running from 1st April to 31st March.
(2) Cash basis Accounts: With the exception of such book adjustments as may be
authorized by these rules on the advice of the Comptroller and Auditor General of
India (CAG). The transaction in government accounts shall represents the actual
cash receipt and disbursement during a financial year.
Form of Accounts: There are mainly three parts i.e. consolidated fund, contingency fund
and public account.
In consolidated fund there are two divisions i.e. revenue consisting of section for receipts
heads and expenditure heads [Revenue Accounts] capital, public debts, loan consisting
of section of receipts heads [capital accounts] where as contingency fund accounts
shall be recorded to the transactions connected with the government set up under
article 267 of the constitution and Public account transacti ons relating to the debt
deposit, advances, remittances and suspense shall be recorded.
Question No.26 (b)

Discuss CAG‘s role in the context of Government accounting in India.
Answer:
CAG‘s Role
137
Under section 10 of the Comptroller and Auditor General‘s (Duties, Powers and Conditions of
Service) Act, 1971 (56 of 1971), the Comptroller and Auditor General shall be responsible-
(a) for compiling the accounts of the Union and of each State from the initial and subsidiary
accounts rendered to the audit and accounts offices under his control by treasuries,
offices or departments responsible for the keeping of such accounts; and
(b) for keeping such accounts in relation to any of the matters specified in clause (a) as
may be necessary;
Provided that the President may, after consultation with the Comptroller and Auditor
General, by order, relieve him from the responsibility for compiling-
(i) the said accounts of the Union (either at once or gradually by the issue of several
orders); or
(ii) the accounts of any particular services or departments of the Union;
Provided further that the Governor of a State with the previous approval of the President and
after consultation with Comptroller and Auditor General, by order, relieve him from the
responsibility for compiling-
(i) the said accounts of the State (either at once or gradually by the issue of several
orders); or
(ii) the accounts of any particular services or departments of the State;
Provided also that the President may, after consultation with the Comptroller and
Auditor General, by order, relieve him from the responsibility for keeping the accounts of
any particular class or character.
(2) Where, under any arrangement, a person other than the Comptroller and Auditor
General has, before the commencement of this Act, been responsible-
(i) for compiling the accounts of any particular service or department of the Union or
of a State, or
(ii) for keeping the accounts of any particular class or character, such arrangement
shall, notwithstanding anything contained in subsection (1), continue to be in force
unless, after consultation with the Comptroller and Auditor General, it is revoked in
the case referred to in clause (i), by an order of the President or the Governor of the
State, as the case may be, and in the case referred to in clause (ii) by an order of
the President.
Question No.27 (a)

Discuss the role of GASAB towards Government Accounting in India.
Answer:
Government Accounting Standards Advisory Board (GASAB) has been constituted by

Comptroller and Auditor General of India (CAG), with the support of Government of India
through a notification dated 12th August, 2002.
The decision to set-up GASAB has been taken in the backdrop of the new priorities emerging
in the Public Finance Management and to keep pace with the International trends.
The new priorities focus on good governance, fiscal prudence, efficiency & transparency in
public spending instead of just identifying resources for public scheme funding.
The accounting systems, the world over, are being revisited with an emphasis on transition
from rule to principle based standards and migration from cash to accrual based system of
accounting.
GASAB, as a nodal advisory body in India, is taking similar action to establish and improve
standards of government accounting and financial reporting and enhance accountability
mechanisms.
Responsibilities of the Board
138
1. To establish and improve standard of Government accounting and financial reporting in

order to enhance accountability mechanisms.
2. To formulate and propose standards that improve the usefulness of financial reports
based on the needs of the users.
3. To keep the standards current and reflect change in the Governmental environment;
4. To provide guidance on implementation of standards.
5. To consider significant areas of accounting and financial reporting that can be
improved through the standard setting process.
6. To improve the common understanding of the common understanding of the nature
and purpose of information contained in the financial reports.
Question No.27 (b)
Write short notes on the objective and scope of the following GASAB‘s:
(i) IGAS – 1 – Guarantees given by Government : Disclosure requirements

(ii) IGAS - 2 - Accounting and Classification of Grants-in-aid
Answer:
(i) Guarantees given by Governments: Disclosure Requirements

The Union Government and the State Governments give Guarantees for repayment of
borrowings within such limits, if any, as may be fixed upon the security of the Consolidated
Fund of India or of the State, as the case may be, in terms of Articles 292 and 293 of the
Constitution of India. Guarantees are also given by the Union Government for payment of
interest on borrowings, repayment of share capital and payment of minimum annual
dividend, payment against agreements for supplies of materials and equipments on credit
basis on behalf of State Governments, Union Territories, local bodies, railways, government
companies/ corporations, joint stock companies, financial institutions, port trusts, electricity
boards and co-operative institutions. Guarantees are also given by the Union Government to
the Reserve Bank of India, other banks and financial institutions for repayment of principal
and payment of interest, cash credit facility, financing seasonal agricultural operations and
for providing working capital in respect of companies, corporations, co-operative societies
and co-operative banks. Further, Guarantees are also given in pursuance of agreements
entered into by the Union Government with international financial institutions, foreign lending
agencies, foreign governments, contractors and consultants towards repayment of principal,
payment of interest and payment of commitment charges on loans. The Union Government
also gives performance guarantees for fulfilment of contracts/projects awarded to Indian
companies in foreign countries as well as foreign companies in foreign countries besides
counter-guarantees to banks in consideration of the banks having issued letters of credit to
foreign suppliers for supplies/ services made/ rendered by them on credit basis in favour of
companies/ corporations. Furthermore, Guarantees are given by the Union Government to
railways, and electricity boards for due and punctual payment of dues and freight charges
by the companies and corporations. Similarly, Guarantees are also given by the State
Governments.
As the statutory corporations, government companies, co-operative institutions, financial
institutions, autonomous bodies and authorities are distinct legal entities, they are responsible
for their debts. Their financial obligations may be guaranteed by a Government and thus the
Government has a commitment to see that these are fulfilled. When these entities borrow
directly from the market, it reduces a Government‘s budgetary support to them and the
magnitude of a Government‘s borrowings. However, it adds to the level of Guarantees given
by the Governments. In consideration of the Guarantees given by the Governments, the
beneficiary entities are required to pay guarantee commission or fee to the Governments.
139
The Guarantees have an important economic influence and result in transactions or other
economic flows when the relevant
Event or conditions actually occur. Thus guarantees normally constitute contingent liabilities
of the Government.
Objective
The objective of this Standard is to set out disclosure norms in respect of Guarantees given by
the Union and the State Governments in their respective Financial Statements to ensure
uniform and complete disclosure of such Guarantees.
Scope
This Standard applies to preparation of the Statement of Guarantees for inclusion and
presentation in the Financial Statements of the Governments. Financial Statements should
not be described as complying with this Standard unless these comply with all its
requirements.
The Authority in the Government which prepares the Statement of Guarantees for inclusion
and presentation in the Financial Statements shall apply this Standard. The Accounting
Authority is responsible for inclusion and presentation of the Statement of Guarantees in the
Financial Statements as provided by the Authority in the Government.
(ii) IGAS 2 - Accounting and Classification of Grants-in-aid.
A n swe r :
Grants-in-aid are payments in the nature of assistance, donations or contributions made by

one government to another government, body, institution or individual. Grants-in-aid are
given for specified purpose of supporting an institution including construction of assets. The
general principle of grants-in-aid is that it can be given to a person or a public body or an
institution having a legal status of its own. Such grants-in-aid could be given in cash or in kind
used by the recipient agencies towards meeting their operating as well as capital
expenditure requirement.
Grants-in-aid are given by the Union Government to State Governments and by the State
Governments to the Local Bodies discharging functions of local government under the
Constitution. This is based on the system of governance in India, which follows three-tier
pattern with the Union Government at the apex, the States in the middle and the Local
Bodies (LBs) consisting of the Panchayati Raj Institutions (PRIs) and the Urban Local Bodies
(ULBs) at the grass root level. Accounts of these three levels of Government are separate and
consequently the assets and liabilities of each level of government are recorded separately.
Grants-in-aid released by the Union Government to the State Governments are paid out of
the Consolidated Fund of India as per Articles 275 and 282 of the Constitution. The Union
Government releases grants-in-aid to the State/ Union Territory Government under Central
Plan Schemes and Centrally Sponsored Schemes. Sometimes, the Union Government
disburses funds to the State Governments in the nature of Pass-through Grants that are to be
passed on to the Local Bodies. Funds are also released directly by the Union Government to
District Rural Development Agencies (DRDAs) and other specialized agencies including
Special Purpose Vehicles (SPVs) for carrying out rural development, rural employment, rural
housing, other welfare schemes and other capital works schemes like construction of roads,
etc.
The 73rd and 74th Constitutional Amendment Acts envisage a key role for the Panchayati Raj
Institutions (PRIs) and the Urban Local Bodies (ULBs) in respect of various functions such as
education, health, rural housing, drinking water, etc. The State Governments are required to
devolve funds, functions and functionaries upon them for discharging these functions. The
extent of devolution of financial resources to these bodies is to be determined by the State
Finance Commissions. Such funds received by the Local Bodies from the State Governments
as grants-in-aid are used for meeting their operating as well as capital expenditure
140
requirements. The ownership of capital assets created by Local Bodies out of grants-in-aid
received from the States Government lies with the Local Bodies themselves.
Apart from Grants-in-aid given to the State Governments, the Union Government gives
substantial funds as Grants-in-aid to other agencies, bodies and institutions. Similarly, the
State Governments also disburse Grants-in-aid to agencies, bodies and institutions such as
universities, hospitals, cooperative institutions and others. The grants so released are utilized
by these agencies, bodies and institutions for creation of capital assets as well as for meeting
day-to-day operating expenses.
Objective
The objective of this Standard is to prescribe the principles for accounting and classification
of Grants-in-aid in the Financial Statements of Government both as a grantor as well as a
grantee. The Standard also aims to prescribe practical solutions to remove any difficulties
experienced in adherence to the appropriate principles of accounting and classification of
Grants-in-aid by way of appropriate disclosures in the Financial Statements of Government.
Scope
This Standard applies to the Union Government and the State Governments in accounting
and classification of Grants-in-aid received or given by them. The Financial Statements
should not be described as complying with this Standard unless they comply with all the
requirements contained therein. This Standard encompasses cases of Pass-Through Grants
mentioned in paragraph 2 above.
Question No.28 (a)
Write short notes on the objective and scope of the following GASAB‘s:
IGAS – 3 – Cash Flow Statements
Answer:
IGAS 3 - Cash Flow Statements
In India, the Governments at both Union and the States level prepare Finance Accounts and
Appropriation Accounts on yearly basis. These accounts are presented before the Parliament
and respective State Legislatures and thereafter released in public domain. Governments in
India follow cash based system of accounting while preparing above accounts. In
conventional cash based accounting system, information about the cash receipts, cash
payments and cash balances are made available but information regarding the
Government‘s ability to finance its various operations may not be available. Disclosure of
information on matters such as whether cash has been generated from taxes, fines, fees, etc.
or the sale of capital assets or borrowings or whether cash was expended to meet operating
costs, acquisition of capital assets or for retirement of debt and classifying them in different
categories based on their nature, would enhance transparency and accountability of
financial reports. These disclosures will also facilitate more informed analysis and assessment
of the Governments‘ current cash flows and the likely sources and sustainability of future
cash inflows.
The cash flow statement identifies the sources of cash inflows, the items on which cash was
expended during the reporting period, and the cash balance as at the reporting date.
Information about the cash flows of a Government is useful in providing users of financial
statements with information for both accountability and decision making purposes. Cash
flow information allows users to ascertain how a government raised the cash it required to
fund its activities and the manner in which that cash is used. In making and evaluating
141
decisions about the allocation of resources, such as the sustainability of the Government‘s
activities, users require an understanding of the certainty of cash flows.
Objective
The objective of this Standard is to provide information about the historical changes in cash
and cash equivalents of the Government by means of a cash flow statement, which classifies
cash flows during the period into operating, investing and financing activities.
Scope
The cash flow statement should be presented as an integral part of Financial Statements of
the Union and State Governments for each period for which such Financial Statements are
presented. It should be prepared in accordance with the requirements of this Standard. The
Financial Statements should not be described as complying with this Standard unless they
comply with all its requirements. The transactions that do not require the use of cash or cash
equivalents (non-cash transactions) should be excluded from a cash flow statement
Information about cash flows may be useful to users of the Government Financial Statements
in assessing its cash flows and assessing compliance with legislation and regulations
(including authorized budgets where appropriate). Accordingly this Standard requires
Governments to present a cash flow statement.
Some activities undertaken by Government do not have direct impact on their current cash
flows. The exclusion of non-cash transactions from the cash flow statement is consistent with
the objective of a cash flow statement as these items do not involve cash flows in the current
period. Examples of non-cash transactions include accounting for interest payable on
provident fund deposits of employees, conversion of debt into equity of an entity. Summary
and impact of such non-cash transactions should be disclosed in the notes to Cash Flow
Statement forming part of the Financial Statements in a way that provides all the relevant
information about these activities.
Benefits of Cash Flow Information
The Cash Flow Statement provides benefit to the users by giving information about the cash
flows of a Government to predict the future cash requirements of the Government. The Cash
Flow Statement also gives information about Government‘s ability to generate cash flows in
the future and to determine the changes in the scope and nature of its activities. A Cash
Flow Statement also provides the Government means to discharge its accountability for cash
inflows and cash outflows during the reporting period.
A cash flow statement, when used in conjunction with other financial statements, provides
information that enables users to evaluate the changes in its financial structure (including its
liquidity and sustainability) and its ability to affect the amounts of cash flows in order to adapt
to changing circumstances and opportunities.
Historical cash flow information is often used as an indicator of the amount, timing and
certainty of future cash flows. It is also useful in checking the accuracy of past assessments of
future cash flows.
Question No.28(b)
Write short note on

(i) Consolidated Fund of India and
(ii) Contingency Fund of India in the light of applicable statute in India.
Answer:
(i) Consolidated Fund of India

Subject to assignment of certain taxes to the States,
142
- all revenues received by the Government of India,

- all loans raised by the Government and
- all moneys received by that Government in repayment of loans
Shall form one consolidated fund to be called ―the Consolidated Fund of India‖
• No moneys shall be appropriated out of the Consolidated Fund of India except in
accordance with law.
• No money can be issued out of Consolidated Fund of India unless the expenditure is
authorised by an Appropriation Act.
(ii) Contingency Fund (Article 267) and Contingency Fund of India Act, 1950
• Parliament may by law establish a Contingency Fund in the nature of an imprest to be
called ―the Contingency Fund of India.
• Fund shall be placed at the disposal of the President to enable advances to be made
for meeting unforeseen expenditure, pending authorization by Parliament
Question No.29 (a)
X Ltd. has 2 divisions A and B.

Division A has been making constant profits while Division B has been invariably suffering
losses. On 31st March, 2012 the division-wise summarized Balance Sheet was :
(` Crores)
A B Total
Fixed Assets cost (Tangible) 250 500 750
Depreciation 225 400 625
(i) 25 100 125
Current Assets : 200 500 700
Less : Current liabilities 25 400 425
(ii) 175 100 275
(i) + (ii) 200 200 400
Financed by :
Loan — 300 300
Capital : Equity ` 10 each 25 _ 25
Surplus 175 (100) 75
200 200 400
Division B along with its assets and liabilities was sold for ` 25 crores to Y Ltd. a new comapny,
who allotted 1 crore equity shares of ` 10 each at a premium of ` 15 per share to the
memebers of B Ltd. in full settlement of the consideration in proportion to their shareholding in
the company.
Asssuming that there are no other transactions, you are asked to :
i. Pass journal entries in the books of X Ltd.
ii. Prepare the Balance Sheet of X Ltd. after the entires in (i).
iii. Prepare the Balance Sheet of Y Ltd.
Solution :
Part I - Books of A Ltd :

Basic Information :
X Ltd.
Division A Division B
Profit Making Loss Making
Retained by X Ltd Assets and Liabilites
transferred to Y Ltd for
consideration of ` 25 Crores.
I. Journal Entries
143
(` Crores)

i. Sale of Assets and Liabilities to Y Ltd.
Y Ltd A/c Dr. 25
Loan A/c Dr. 300
Current liabilities A/c Dr. 400
Provision for depreciation A/c Dr. 400
To Fixed Assets A/c 500
To Current Assets A/c 500
To Capital Reserve A/c (bal fig) 125
ii. Receipt of consideration from B Ltd.
Equity shares in Y Ltd. Dr. 25
To Y Ltd. A/c 25
II.
Name of the Company: X Ltd.
Particulars
(` in Crore) (` in Crore)
(a) Share capital 1 25.00
(b) Reserves and surplus 2 200.00
(a) Other current liabilities 3 25.00
Total 250.00
II. Assets
(a) Fixed assets
(i) Tangible assets 4 25.00
(b) Non-current investments 5 25.00
2 Current assets
(a) Other current assets 6 200.00
Total 250.00
Note :
Division ‗B‘ was sold to M/s. Y Ltd. The consideration received for the transfer was equity
shares of Y Ltd. of ` 10 each fully paid, issued at a premium of ` 15.
Total value of consideration = 1 Crore shares × (` 10 + ` 15)
= 1 Crore × ` 25
144
= ` 25 Crores
(` in Crore)
Authorised, Issued, Subscribed and paid up:- -
2.5 crores Equity share of ` 10 Each 25.00
Total 25.00

Nos Amount Nos Amount (`)
(`)
Opening Balance as on 01.04.11 - - NIL NIL
Add: Fresh Issue ( Incld Bonus shares , 2.50 25.00 NIL NIL
other than cash)
2.50 25.00 NIL NIL

2.50 25.00 NIL NIL
Note 2. Reserve and Surplus
Capital Reserve 125.00
Profit & loss(existing) 75.00
Total 200.00
Note 3. Other Current liabilities
Current liabilities 25.00 -
Total 25.00 -
Fixed Assets 250.00 -
Less : Provision for Depreciation 225.00
Total 25.00 -
(It is assumed that all Fixed Asset are Tangible Fixed Assets)
145
Note 5. Non Current Investment
Investment in Equity Share of Y Ltd. (Face value of ` 10 25.00 -
subscribed at a Premium of ` 15 each)
Total 25.00 -
Current Assets 200.00 -
Total 200.00 -
Part II - In the books of Y Ltd.
Journal Entries
(` in Crore)

a. For Business purchase
Business Purchase A/c Dr. 25
To X Ltd A/c 25
b. Assets and liabilities taken over
Fixed Assets A/c Dr. 100
Current Assets A/c Dr. 500
Goodwill A/c (Balancing Figure) Dr. 125
To Loan A/c 300
To Current liabilities A/c 400
To Business Purchase A/c 25
c. Discharge of liability
X Ltd A/c Dr. 25
To Equity Share capital A/c 10
To Securities premium A/c 15
Name of the Company: Y Ltd.

Particulars
` in Crore ` in Crore
(a) Share capital 1 10.00
(b) Reserves and surplus 2 15.00
(a) Long-term borrowings 3 300.00
(a )Other current liabilities 4 400.00
146
Name of the Company: Y Ltd.

Particulars
` in Crore ` in Crore
Total 725.00
II. Assets
(a) Fixed assets
(i) Tangible assets 5 100.00
(ii) Intangible assets 6 125.00
2 Current assets
(a) Other current assets 7 500.00
Total 725.00
( ` in Crore)
Authorised, Issued, Subscribed and fully paid up :- -
1 crore Equity share of ` 10 Each 10.00
Total 10.00

Nos Amount ( `) Nos Amount ( `)
Opening Balance as on 01.04.11 - - NIL NIL
Add: Fresh Issue ( Incld Bonus shares , 1 10.00 NIL NIL
Right shares, split shares, shares issued other
than cash)
1 10.00 NIL NIL
1 10.00 NIL NIL
Note 2. Reserve and Surplus
Securities Premium 15.00
Total 15.00
147
Note 3. Long Term borrowing
Loan Fund 300.00 -
Total 300.00 -
Note 4. Other Current Liablities
Current Liablities and Provision 400.00 -
Total 400.00 -
Other Fixed Assets 100.00 -
Total 100.00 -
Goodwill 125.00 -
Total 125.00 -
Other Current Assets 500.00 -
Total 500.00 -
Note :
a) Goodwill due to business purchase should be amortized over a period of 5 years.
b) Fixed assets :
Gross Block 500
Less : Accumulated Depn. 400
Net Blcok 100
Question No.29 (b)
From the following information determine the amount of unrealized profit to be eliminated
and the apportionment of the same. Om Ltd. holds 80% Equity shares of Shanti Ltd.
i. Om Ltd. sold goods costing `15,00,000 to Shanti Ltd. at a profit of 25% on Cost Price.
Entire stock were lying unsold as on the date of Balance Sheet.
ii. Again, Om Ltd. sold goods costing `13,50,000 on which it made a profit of 25% on Sale
Price. 60% of the value of goods were included in closing stock of Shanti Ltd.
iii. Shanti Ltd. sold goods to Om Ltd. for `24,00,000 on which it made a profit of 20% on
Cost . 40% of the value of goods were included in the closing stock of Om Ltd.
148
Solution:
Situation I
Transaction Sale by Om Ltd. to Shanti Ltd.
[Holding Subsidiary]
Nature of Transfer Downstream Transaction
Profit on Transfer Cost `15,00,000 × Profit on Cost i.e. 25% = `3,75,000
% of Stock included in Closing
Stock 100%
Unlealised Profit to be eliminated ` 1,87,500 × 100% = `3,75,000
i.e. to be transferred to the Stock
Reserve
Share of Majority – Reduced from ` 1,87,500 × 100% = `3,75,000
Group Reserve
Share of Minority Unrealised Profit in case of a Downstream Transaction
is fully adjusted against Group Reserves. Minority
Interest is not relevant here.
Situation II
Transaction Sale by Om Ltd. to Shanti Ltd.
[Holding Subsidiary]
Nature of Transfer Downstream Transaction
Profit on Transfer Cost `13,50,000 × Profit on Sale Price i.e.25%

÷ Cost on Sale i.e. 75% = `4,50,000
% of Stock included in Closing 60%
Stock
i.e. to be transferred to the Stock
Reserve
Share of Majority – Reduced from 100% × `2,70,000 = `2,70,000
Group Reserve
Share of Minority Unrealised Profit in case of a Downstream Transaction
is fully adjusted against Group Reserves. Minority
Interest is not relevant here.
Situation III
Transaction Sale by Shanti Ltd. to Om Ltd.
[Subsidiary Holding]
Nature of Transfer Upstream Transaction
Profit on Transfer Sale `24,00,000 × Profit on Cost 20% ÷Sale to Cost
120% =`4,00,000
% of Stock included in Closing 40%
Stock
i.e to be reduced from Closing
Stock
Share of Majority – Reduced from Share of Majority i.e. 80% × Unrealised Profit `1,60,000
Group Reserve = `1,28,000
Share of Minority – Reduced from Share of Majority i.e. 20% × Unrealised Profit `1,60,000
Minority Interest = `32,000
149
Question No.29 (c)
State the principles of Government Accounting.
Answer:
The general principles of Government Accounting are as follows:
1. The Government Expenditure are classified under Sectors, major heads, minor heads,
sub-heads and detailed heads of account, the accounting is more elaborate that that
followed in commercial accounts. The method of budgeting and accounting under the
service heads is not designed to bring out the relation in which Government stands to its
material assets in use, or its liabilities due to be discharged at more or less distant dates.
2. In its Budget for a year, Government is interested to forecast with the greatest possible
accuracy what is expected to be received or paid during the year, and whether the
former together with the balance of the past year is sufficient to cover the later. Similarly,
in the compiled accounts for that year, it is concerned to see to what extent the
forecast has been justified by the facts, and whether it has a surplus or deficit balance
as a result of the year‘s transactions. On the basis of the budget and the accounts,
Government determines (a) whether it will be justified in curtailing or expanding its
activities (b) whether it can and should increase or decrease taxation accordingly.
3. In the field of Government accounting, the end products are the monthly accounts and
the annual accounts. The monthly accounts serve the needs of the day-to-day
administration, while the annual accounts present a fair and correct view of the
financial stewardship of the Government during the year.
Question No.30 (a)
Indian Engineering and Technological Institute, an autonomous body furnish es the

following information:
On 1.4.2012, unutilised restricted government grant (capital) balance is `40,00,000;

unutilised unrestricted government grant (revenue) balance is `9,00,000; Institute‘s own
corpus fund is `25,00,000. Besides, a private endowment fund of `18,50,000 is there on
that date. The entire endowment fund is in fixed deposit with a bank fetching interest of
9.5% p.a. half-yearly transferred on 30 th September and 31st March to current account
meant for scholarship and awards. The said current account has a debit balance of
`1,37,500. Apart from this, total cash and bank balance as on 1.4.12 is `85,00,000.
Following transactions took place during the year 2012-13:

(1) Salary paid out of own fund is `65,00,000.
(2) Salary to the research associates of a Government sponsored research scheme is
`4,00,000, paid out of unrestricted government grant.
(3) Cost of renovation of the administrative building borne out of the Institute‘s own fund
is `4,75,000. The renovation work was completed on 21 st November, 2012 which was also
the date of payment. Book value of the building was `38,00,000 on 1.4.12. The rate of
depreciation is 5% p.a. calculated at full year‘s rate if the asset exists for a period
exceeding 6 months, and at half-year‘s rate in other cases. The same principle is
followed by the Institute in all cases of depreciation.
150
(4) Tuition fees were received `85,00,000.

(5) Scholarships and awards of `1,43,000 were given on 9th December, 2012.
(6) A laboratory building was under construction for the last two years. Balance of
capital work-in-progress on 1.4.12 was `28,00,000. The work has been completed on 25 th
May, 2012. Final payment was made earlier on 29.4.2012. Total expenditure comes to
`37,00,000. Rate of depreciation on the laboratory building is 5%. The entire expenditure
will be spent from the restricted government (capital) Grant on certain conditions
attached by the government. The Institute follows the principles of AS 12 in the case of
use of revenue and capital grant. Since certain conditionality will apply over a period of
time, it is decided that deferred income method will be followed.
Show the following Ledger accounts:

(i) Restricted Government Grant (capital) A/c.
(ii) Unrestricted Government Grant (revenue) A/c.
(iii) Current A/c of Endowment and Scholarship.
(iv) Cash and Bank A/c.
Solution:
(a) Restricted Government Grant (Capital) Account

Dr. Cr.
Date Particulars ` Date Particulars `
31.3.13 To Income and Expenditure 37,00,000 1.4.12 By Balance b/d 40,00,000
A/c - Grant against laboratory
building
(recognized to the extent of
amount spent)
To Balance c/d 3,00,000
40,00,000 40,00,000
1.4.13 By Balance b/d 3,00,000
Unrestricted Government Grant (Revenue) Account

31.3.13 To Income & Expenditure A/c . 1.4.12 By Balance b/d .9,00,000
(salary paid to research 4,00,000
associates)
To Balance c/d 5,00,000

9,00,000 9,00,000
1.4.13 By Balance b/d 5,00,000
Current Account of Endowment and Scholarship Account

1.4.12 To Balance b/d 1,37,500 9.12.12 By Scholarship & awards 1,43,000
To Interest on fixed deposit
30.9.12 (9.5% of ` 18,50,000 for 6 31.3.13 By Balance c/d 1,70,250
87,875
months)
To Interest on fixed deposit
31.3.13 (9.5% of ` 18,50,000 for 6
months) 87,875
3,13,250 3,13,250
1.4.13 To Balance b/d 1,70,250
Cash and Bank Account
151

1.4.12 To Balance b/d 85,00,000 29.4.12 By Capital WIP 9,00,000
(37,00,000 –28,00,000)
31.3.13 To Tuition fee 85,00,000 21.11.12 By Administrative 4,75,000
Building A/c
31.3.13 By Salary 65,00,000
31.3.13 By Salary to research
associates 4,00,000
31.3.13 By Balance c/d 87,25,000
1,70,00,000 1,70,00,000
1.4.13 To Balance b/d 87,25,000
Question No.30 (b)
Describe the process of election of Public Accounts Committee.
Answer:
The Committee on Public Accounts is constituted by Parliament each year for examination of
accounts showing the appropriation of sums granted by Parliament for expenditure of
Government of India, the annual Finance Accounts of Government of India, and such other
Accounts laid before Parliament as the Committee may deem fit such as accounts of
autonomous and semi-autonomous bodies (except those of Public Undertakings and
Government Companies which come under the purview of the Committee on Public
Undertakings).
The Committee consists of not more than 22 members comprising 15 members elected by
Lok Sabha every year from amongst its members according to the principle of proportional
representation by means of single transferable vote and not more than 7 members of Rajya
Sabha elected by that House in like manner are associated with the Committee. The
Chairman is appointed by the Speaker from amongst its members of Lok Sabha. The
Speaker, for the first time, appointed a member of the Opposition as the Chairman of the
Committee for 1967-68. This practice has been continued since then. A Minister is not eligible
to be elected as a member of the Committee. If a member after his election to the
Committee is appointed a Minister, he ceases to be a member of the Committee from the
date of such appointment.
Question No.30 (c)
State the objectives & scope of Indian Government Accounting Standard 4 ―General purpose
Financial Statements of Government‖.
Answer:
Objectives
i. The purpose of this Standard is to lay down the principles to be followed in presentation
of general purpose financial reports of Governments and to prescribe the minimum
requirements relating to structure and contents of financial statements of government
prepared under cash basis of accounting.
ii. The statement of receipts and disbursements during the year and information about
cash flows of an Entity enable stakeholders to evaluate the likely sources and uses of
cash and the ability of an Entity to generate adequate cash in the future. This
information also indicates the expenditure priorities of the Entity in the delivery of goods
and services as well as the impact of the taxation policies of the Entity. Stakeholders can
152
then assess the sustainability of the Entity‘s activities (whether future budgetary resources
will be sufficient to sustain public services and to meet obligations as they become due)
and appraise financial accountability.
iii. All Financial Statements need to be standardized to obtain optimal information, to
ensure comparability with the Entity‘s own financial Statements of previous periods and
with those of other entities. The basis and policies of accounting need to be uniform to
permit meaningful consolidation to develop Whole of Government Accounts. Desirable
attributes need to defined to obtain a basic standard for financial reporting.
iv. To achieve these objectives, this Standard sets out the financial elements for the
presentation of financial reports prepared under the cash basis of accounting. It also
requires that the selection of accounting policy should ensure certain qualitative
characteristics in the information being presented. Desirable attributes of financial
reporting are required to heighten their value to the users.
v. General Purpose Financial Statements (GPFS) essentially consists of Finance Accounts
and Appropriation Accounts. The Financial Statements referred to in this standard are
the General Purpose Financial Reports (GPFR).
Scope
i. An Entity, which prepares and presents Financial Statements under the cash basis of
accounting as defined in this Standard, should apply the requirements o this Standard in
presentation of its financial statements.
ii. The standard applies to financial reports of a government – Union or State. The standard
does not apply to accounts of (i) local bodies and (ii) Government Business Enterprises or
Departmental Commercial Undertakings.
iii. An Entity whose Financial Statements comply with the requirements of this Standard
should disclose that fact. Financial Statements should not be described as complying
with this Standard unless they comply with all the requirements of this Standard.
iv. The standard lays down the minimum requirements that governments should folow in
presentation of financial reports. The requirements in terms of contents of the financial report
are the mandatory minimum requirements that financial reports should present.
153

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Revisionary Test Paper_Final_Syllabus 2012_Jun2014

Paper 18 – Corporate Financial Reporting

What is 'discontinuing operations' as per AS-24?

As per Para 3 of the standard, a discontinuing operation is a component of an enterprise:-

It may be construed that discontinuing operation is relatively large component of an

State the applicability of Accounting Standards to non-corporate entities.

Applicability of Accounting Standard to Non-corporate Entities:

For applicability of Accounting Standards to Non-corporate entities, Non-corporate entities

Level II Entities (SMEs)

Level III Entities (SMEs)

State the applicability and scope of International Accounting Standards on Impairment of

International Accounting Standard 36 Impairment of Assets (IAS 36) should be applied:

(b) assets arising from construction contracts;

(c) deferred tax assets;

(f) investment property that is measured at fair value;

State the features of an Asset.

The features of an asset are:

Question No.2 (b)

(i) To record the transaction of sale

Question No.2 (c)

Question No.2 (d)

Question No.3 (a)

Cash inflows (`) Amount of amortization in the next 4 years (`)

Question No.3 (b)

Explain the impact of the followings in line with AS-29.

It is a restructuring cost. There is no obligation because no obligating event (

Question No.3 (c)

Question No.3 (d)

Question No.4 (a)

Alpha Ltd. Beta Ltd.

Part I - Purchase consideration - Net Asset Method.

Particulars Alpha Ltd. Beta Ltd.

Particulars Alpha Ltd. Beta Ltd.

Part II - In the books of Selling Company - Beta Ltd.

Particulars Debit Credit

Note : Revised Profit and Loss A/c balance = ` 20,000 + 60,000

Section B : Entries relating to Amalgamation

Particulars Amount Particulars Amount

Particulars Debit Credit

Transfer of remaining Share capital and all reserves

Shareholders A/c(10,80,000 + 12,004) Dr. 10,92,004

PART III - In the books of Alpha Ltd (Purchasing co.)

Particulars Debit Credit

Section B - Amalgamation events

Particulars Debit Credit

b. Above excess to be adjusted against

c. Balance of Beta Ltd. reserve to be 2,80,000

Fixed Assets A/c Dr. 1,00,000

Name of the Company: Alpha Ltd.

I. Equity and Liabilities

(a) Share capital 1 30,83,640

(b) Reserves and surplus 2 2,92,364

(a )Other current liabilities 4 5,30,000

(a) Fixed assets

(b ) Trade receivables 8 8,30,000

(c) Cash and cash equivalents 9 4,60,004

RECONCILATION OF SHARE CAPITAL

Add: Fresh Issue ( Incld Bonus shares , NIL NIL

Question No.4 (b)

Part I: Purchase Consideration