Suggested Answers to Question —AFA

FINAL EXAMINATION
GROUP IV
(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

JUNE 2013

Paper-16 : ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Time Allowed : 3 Hours Full Marks : 100

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

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

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

PART A : (25 Marks)

1. (a) In each of the cases given below, one out of four alternatives is correct. Indicate the
correct answer (= 1 mark)and give workings/reasons briefly in support of your answer ( = 1
mark): 2x8=16
(i) SMITH LTD. had 1000000 equity shares outstanding on April 01, 2012. The average fair
value per share during the year 2012-13 was ` 50. The Company has given share
option to its employees of 2,00,000 shares at option price of ` 40. If net profit
attributable to equity shareholders for the year ended March 31, 2013 is ` 21 lakh,
what would be DILUTED EPS as per AS-20?
A. ` 2.10
B. ` 2.06
C. ` 2.02
D. None of (A), (B), (C)
(ii) VASUDA CONSTRUCTION LTD. undertook a contract on January 1, 2013 to construct
a building for ` 70 lakh. The Company found on March 31, 2013 that it had already
spent ` 52 lakh on the construction. Prudent estimate of additional cost for
completion was ` 28 lakh. SContract value to be recognized as Turnover in the final
accounts for the year ended March 31, 2013 as per AS-7 (revised) will be
A. ` 52.5 lakh
B. ` 50.4 lakh
C. ` 45.5 lakh
D. None of these
(iii) BANSAL LTD. had acquired 75% share of NAVINA LTD. for ` 27 lakh. The Net Assets of
NAVINA LTD. on the day are ` 24 lakh. During the year Bansal Ltd. sold the
investment for ` 32 lakh and Net Assets of Navina Ltd. on the date of disposal was ` 40
lakh. The Profit/Loss on disposal of this investment to be recognized in consolidated
financial statement is
A. Profit ` 800 lakh
B. Profit ` 200 lakh

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 1
Suggested Answers to Question —AFA

C. Loss ` 700 lakh

D. Insufficient Information
(iv) The fair values of Pension Plan Assets of ZOOM LTD. at the beginning and end of the
year 2012-13 were ` 5,60,000 and ` 6,20,000 respectively. The actual return on
Pension Plan Assets for the year was ` 63,000. If benefit payments made to the
retirees are ` 64,000, the employer's contribution to the plan during the year as per
AS-15 would be
A. ` 52,000
B. ` 61,000
C. ` 65,000
D. None of (A), (B), (C)
(v) MS. DEEPASHREE purchased 1000 shares in SPECTRUM LTD. at ` 600 per share in 2010.
There was a rights issue in 2013 at one share for every two held at price of ` 150 per
share. If Ms. Deepashree subscribed to the rights, what would be carrying cost of
1,500 shares as per AS-13.
A. ` 6,00,000
B. ` 6,75,000
C. ` 7,00,000
D. Data insufficient
(vi) SWIFT LTD. has an asset, which is carried in the Balance Sheet on 31.3.2013 at ` 600 lakh.
As at that date value in USE is ` 400 lakh. If the net selling price is ` 450 lakh,
Impairment loss of the Asset as per AS-28 will be
A. ` 200 lakh
B. `150 lakh
C. ` 50 lakh
D. None of (A), (B), (C)
(vii) PARTHAN LTD. reports quarterly and estimates an annual income of ` 200 crores.
Assume Tax rates on first ` 100 crores at 30% and on the balance income at 40%.
The estimated quarterly incomes are ` 15 crores, ` 50 crores, ` 75 crores and ` 60
crores respectively. The Tax expenses to be recognized in the last quarter as per
AS-25 is
A. ` 24 crores
B. ` 21 crores
C. ` 19 crores
D. Insufficient Information
(viii) BHARAT LTD. bought a forward contract for three months of US $ 150000 on 1st
March, 2013 at 1 US $ = ` 54.10 when exchange rate was 1US $ = ` 54.12. On 31st
March, 2013 when the books were closed forward exchange rate for two months
was US $ 1= ` 54.16. On 30th April, 2013 the contract was sold at ` 54.20 per US Dollar.
As per AS-30 the profits from sale of contract to be recognized in the Profit & Loss A/c
will be
A. ` 6,000
B. ` 8,000
C. ` 12,000
D. None of these

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

(i) The objective of AS-1 is

A. To prohibit any change in accounting policies
B. To ensure disclosure of accounting policies
C. To ensure that the effect of any change in accounting policy is adequately
disclosed
D. Both B and C above
(ii) As per AS-3 (Revised) Interest and Dividends received in the case of a manufacturing

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 2
Suggested Answers to Question —AFA

enterprise should be classified as cash flow from

A. Operating activities
B. Financing activities
C. Investing activities
D. Both (B) and (C)
(iii) According to AS-28, estimates of future cash flow should not include
A. Cash flow from financing activities
B. Cash flow from the continuing use of the assets
C. Cash flow to be received for disposal of asset at the end of its useful life
D. None of (A), (B), (C)
(iv) M Ltd. holds 51% of N Ltd. N Ltd. holds 51% of P Ltd. and O Ltd. holds 49% of P Ltd. The
Related parties as per AS-18 are
A. M Ltd., N Ltd. and P Ltd.
B. M Ltd. and P Ltd.
C. N Ltd. and P Ltd.
D. M Ltd. and N Ltd. only
(v) According to AS-11 (Revised) the difference between the forward rate and the
exchange rate at the date of transaction should be
A. Ignored
B. Recognized as income or expense
C. Adjusted to Shareholders' interests
D. None of (A), (B), (C)

(c) (i) From the following information, determine the possible value of brand under potential
earning model:
Particulars ` in lakhs
Profit before tax 650
Income Tax 150
Tangible Fixed Assets 1000
Identifiable Intangibles other than brand 500
Expected normal return on Tangible Fixed Assets 300
Appropriate Capitalisation Factor for Intangibles 25 %
2
(ii) Mohan Ltd. purchased a plant for US $ 15000 on 31st December, 2012, payable after 4
months. The Company entered into a forward contract for 4 months @ ` 52.50 per Dollar.
On 31st December, 2012, the exchange rate was ` 51.10 per Dollar. How the
Company will recognize the profit or loss on forward contract in its books for the year
ended 31st March, 2013. 2

Answer 1.
(a) (i) C: `2.02
Number of incremental Shares issued for no consideration
[200000 x (50 – 4)] ÷ 50 40,000
Weighted number of Equity Shares: (1000000 + 40000) 10,40,000
Adjusted earning : `21 lakh
Diluted EPS: (21 lakh ÷ 10.40 lakh) = `2.02

(ii) C: `45.50 lakh

Contract work-in-progress (52 ÷ 80) lakh = 65%
Proportion of total contract value to be recognized as Turnover = 0.65 x `70,00,000
= `45.50 lakh.

(iii) C: Loss `7.00 lakh in Lakh

Proceeds from the sale of investment: 32.00
Less: Bansal Ltd.‟s Share in net Assets (40 lakh x 0.75) = 30.00
2.00

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 3
Suggested Answers to Question —AFA

Less: Goodwill in the Consolidated Financial Statement:

`in lakh
Cost of Investment: 27.00
Less: Bansal Ltd.‟s share in net asset on the date
(24 lakh x 0.75) 18.00 9.00
7.00
(iv) B: `61,000
As per As – 15 the employer‟s Contribution
= the difference in values of the assets on opening and closing dates + benefit
payments – Actual Return on plan.

= (620000 – 560000) + 64000 – 63000 `61000

(v) B: `675000
Cost of original holding (Purchase) (1000 x 600) = 6,00,000
Amount paid for Rights (500 x 150) = 75,000
Total carrying cost of 1500 shares: `6,75,000

(vi) B: `150 Lakh

Recoverable amount is higher of Value in use `400 lakh and net selling price `450
lakh.
Recoverable amount = `450 lakh.
Impairment loss = Carried Amount – Recoverable amount
= `(600 – 450) = `150 lakh.

(vii) B: `21 Crores.

Tax Expenses : 30% on `100 Crores = `30 Crores.
40% on remaining `100 Crores = `40 Crores.
Total Tax = (30 + 40) = `70 Crores.

Weighted average Annual Income Tax Rate [70 ÷ 200] = 35%

Tax expenses to be recognized in last quarter:
35% on `60 Crores = `21 Crores.

(viii) A : `6000
Rs.
Sales Rate : 54.20
Less: Fair Value on 31.03.2013 : 54.16
0.04
Premium on Contract: US$ 150,000

Contract Amount:
Total Profit (15000 x 0.04) : `6,000

(b) (i) D
(ii) C
(iii) A
(iv) A
(v) B

(c) (i)
Calculation of Possible Value of Brand
Particulars `in lakh
Profit after Tax (650 – 150): 500
Less: Profit allocated to transible fixed assets: 300
Profit relating to intangible assets including Brand: 200

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 4
Suggested Answers to Question —AFA

Capitalization factor 25%

200
Capitalized value of intangibles including brand x100 800
25
Less: Indentified intangibles other than Brand:
500
Brand Value 300

(ii)
Calculation of profit or loss to be recognized
In the books of Mohan Ltd.

Forward contract rate: `52.50

Less: Spot rate : `51.10

Loss: ` 1.40

Forward Contract Amount: $ 15,000

Total loss on entering into forward contract
= ($ 15,000 x `1.40): `21.00

Contract period: 4 months

Loss for the period 1st January, 2013 to 31st March, 2013, i.e.,

3
3 months falling in the year 2011 – 12 will be `21,000 x = `15,750
4

Balance loss of `5,250 (i.e., `21,000 – `15,750)

for the months of April, 2013 will be recognized in the financial year 2013 – 2014.

PART B : (75 Marks)

Attempt any five questions.

2. (a) ALEENA LTD. is in the business of manufacturing and export of its product. Sometimes
back in 2010, the Government put restriction on export of goods exported by Aleena Ltd.
Due to that restriction Aleena Ltd. impaired its assets. The Company acquired at the end of
the year 2006 identifiable assets worth ` 5,000 lakh and paid ` 7,500 lakh, balance is
treated as Goodwill. The useful life of the identifiable assets are 15 years and depreciated
on straight-line basis. When Government put the restriction at the end of year 2010, the
Company recognized the impairment loss by determining the recoverable amount of
assets at ` 3,400 lakh.
In 2012, Government lifted the restriction imposed on the export and due to this
favourable change, Aleena Ltd. re-estimated recoverable amount, which was
estimated at ` 4,275 lakh.
The amortization period of Goodwill to be taken as 5 years as per AS-14.
Required:
(i) Calculation and allocation of Impairment loss in 2010.
(ii) Reversal of an Impairment loss and its allocation as per AS-28 at the end of year 2012.
4+4=8

(b) From the following information of Neel Ltd., compute the Economic Value Added(EVA):
Share Capital ` 3,000 lakhs
Reserves and Surplus ` 5,000 lakhs
Long Term Debt ` 500 lakhs
Tax Rate 40 %

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 5
Suggested Answers to Question —AFA

Risk Free Rate 8%

Market Rate of Return 15 %
Interest ` 50 lakhs
Beta Factor 1.05
Profit before Interest and Tax ` 3,000 lakhs 7

Answer 2.
(a) (i)
ALEENA LTD.
CALCULATION AND ALLOCATION OF IMPAIRMENT
LOSS FOR THE ASSETS AFTER END OF YEAR 2010
Amount in `lakh
Particulars Goodwill Identifiable Total
Assets
Historical Cost 2500.00 5000.00 7500.00
Accumulated / Amortization for 2007 to 2010 2000.00 1333.00 3333.00

Carrying Amount: 500.00 3667.00 4167.00

Recoverable amount at the End of 2010 = 3400

Impairment of Loss (4167 – 3400) = 767

Impairment Loss allocated first to Goodwill and balance to

other Assets.
Carrying Amount after 500.00 267.00 767.00
Impairment loss. NIL 3400.00 3400.00

(ii)
Reversal of an impairment loss and its allocation
For the assets at the end of year 2012

Goodwill Identifiable Assets Total

Carrying amount NIL 2782.00 2782.00
(3400 – 618)
(WN – 7)
Recoverable Amount 4275.00
Excess of Recoverable amount over in accordance with Para 28.23.1 1493.00
(Para 106 & 107 of As – 28)
The impairment loss to be reversed in 2012 will be as under :-

Carrying Amount of Asset in 2012 had no impairment loss in 2010 been recognized 3000.00
(WN – 2) (3667 – 667)

Carrying Amount of Asset at the end of 2012 after Recognizing impairment loss in 2782.00
2010 and depreciation for 2 years

ALLEENA Ltd. can increase the amount of the assets by (3000 – 2782) 218.00

Hence Reversal of impairment loss to be reversed in 2012 by Crediting the same to Profit / Loss
statement is `218 Lakh.

Working Notes:

1) [(3400)/11 years] x 2 years. = `618 (lakh)

5000
2) 3667 - x 2 = 3667 – 667 = `3000 Lakh
15

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 6
Suggested Answers to Question —AFA

(b)
NEEL Ltd.
Computation of Economic Value Added
Particulars `in Lakh
Net operating – Profit after tax 1,770
(Refer working note 5):

Add: Interest on long term fund

(Refer working note 2): 30
1,800
Less: Cost of Capital `8,500 lakhs x 14.80%:
(Refer working notes 3 & 4)
1,258
Economic Value Added: 542

Working Notes:
1) Cost of Equity = Risk free rate + Beta Factor (Market Rate – Risk Rate)
8% + 1.05 (15 – 8) = 8% + 7.35% = 15.35%

2) Cost of Debts
Interest : `50 lakhs

Less: Tax (40%) `20 lakhs

Interest after tax: `30 lakhs
30
Cost of Debt x 100 = 6%
500
3) Weighted Average cost of Capital:
Cost of Equity `8,000 lakhs x 15.35% (W.N.-1): `1228 lakhs

Cost of Debt `500lakhs x 6% (W.N. – 2.): ` 30 lakhs

`1258 lakhs
1258
WACC = = 14.80%
8.500
4) Capital Employed : `in lakhs
Share Capital : 3,000
Reserves and Surplus: 5,000
Long Term Debts: 500
8,500

5) Net Operating Profit after tax:

Profit before Interest + Tax: 3,000

Interest: 50
2,950
Tax 40% on `2,950 lakhs : 1,180

Operating profit after tax: 1,770

3. The following is an abstract of the Balance Sheet as on 31st March, 2013 of H LTD. and its two
Subsidiaries (B LTD. and C LTD).

Particulars H LTD. B LTD C LTD

` ` `

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 7
Suggested Answers to Question —AFA

Liabilities:
Share Capital:
Authorised and Issued Equity Shares of 50,00,000 25,00,000 10,00,000
`100 each fully paid
Reserves and Surplus:
Capital Reserve 5,00,000 1,50,000 1,00,000
Revenue Reserve 10,00,000 7,50,000 6,00,000
Current liabilities & Provisions :
Creditors 20,00,000 10,00,000 3,00,000
Income Tax 5,00,000 3,50,000 3,00,000
90,00,000 47,50,000 23,00,000
Assets:
Fixed Assets (at cost less depreciation) 32,00,000 16,00,000 3,00,000
Investments :
Shares in B Ltd. at cost 45,00,000
Shares in C Ltd. at cost 5,00,000 10,00,000 ---
Stock 2,00,000 9,00,000 7,00,000
Debtors 4,00,000 10,50,000 11,50,000
Bank Balance 2,00,000 2,00,000 1,50,000
90,00,000 47,50,000 23,00,000
Additional Information:
(a) B Ltd. acquired 6000 shares in C Ltd. on 01.4.2011 when the balance on Capital
Reserve had been ` 1,00,000 and Revenue Reserve ` 1,50,000.
(b) H Ltd. purchased 20000 shares in B Ltd. on 01.4.2012 when the latter's balance on
Consolidated Revenue Reserve had been ` 5,50,000. The Balance of Capital Reserve in
B Ltd. at that time was ` 1,50,000
(c) H Ltd. also acquired 3000 shares in C Ltd. on 01.4.2012 when the balance on Capital
Reserve had been ` 1,00,000 and Revenue Reserve ` 3,50,000.
Required :
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiaries as on March 31, 2013 together
with consolidation schedules. 15

Answer 3.
(a)
H LTD AND ITS SUBSIDIARIES B LTD. AND C LTD.
CONSOLIDATED BALANCE SHEET
AS ON 31ST MARCH, 2013

Liabilities ` Assets Rs.

Share Capital : Fixed Assets* 5100000
Authorized, issued --- (at cost less depreciation)

Issued, Subscribed and paid up: Goodwill : 2255000

50,000 Equity Shares of `100 each Investments: ---

fully paid 5000000
Current Assets, Loans* &
Reserves & Surplus: Advances:
Capital Reserve: 500000
Revenue Reserve: 1451000 Stock in trade: 1800000

Secured Loans : --- Sundry Debtors: 2600000

Unsecured Loans: ---
Cash at Bank: 550000
Current Liabilities & Provisions:
Sundry Creditors* 3300000

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 8
Suggested Answers to Question —AFA

Provisions for Income Tax* 1150000

Minority Interest 904000

12305000 12305000

Working Notes:
1) Analysis of Profit of C Ltd:
(a) From the view point of H Ltd.:
Capital Profit Revenue Profit
Rs. Rs.
Capital Reserve as on 01.04.2012: 100000
Revenue Reserve as on 01.04.2012: 350000
Increase in Revenue Reserve - 250000
450000 250000
Share of H Ltd. (3/10) 135000 75000

(b) Minority Interest in C Ltd.

Capital Reserve 1/10): 10000

Revenue Reserve (1/10): 60000

70000

(c) From the view point of B Ltd.

Capital Profit Revenue Profit
Rs. Rs.
Capital Reserve as on 01.04.2011: 100000
Revenue Reserve as on 01.04.2011: 150000
Increase in Revenue Reserve - 450000
250000 450000

Share of B Ltd. (3/5): 150000 270000

Share of Capital Profit of B in C will be taken to cost of control. However, share of Revenue Profit
of B Ltd. in C Ltd. will be divided between Capital and Revenue from the point of view of H Ltd. as
follows:

`
Increase in Capital Reserves of C Ltd. from 01.04.2011
to 01.04.2012 (`350000 – 150000): 200000

Increase in Capital / Revenue Reserves of C Ltd. from 01.04.2012

to 31.03.2013 (600000 – 350000): 250000

The derived Revenue profits of `270000 of B Ltd. from C Ltd. will therefore
be divided between Capital and Revenue in the ratio of 20 : 25 i.e., 4 : 5
Capital Profit : 270000 x 4/9 = `120000

Revenue Profit : 270000 x 5/9 `150000

2) Analysis of profit of B Ltd. from the view point of H Ltd.

Particulars Capital Revenue

Profit Profit
Rs. Rs.
Consolidated Reserve on 01.04.2012: 550000 ----
(including `120000 from C Ltd., its own being only `430000).

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 9
Suggested Answers to Question —AFA

Capital Reserve 01.04.2012 150000

Increase in Revenue Reserved since 01.04.2012 i.e.(750000–430000) 320000

Derived Revenue Profit from C Ltd.: 150000

700000 470000

Less: Minority Interest (1/5): 140000 94000

H Share of H Ltd. 560000 376000

3) Cost of Control:
Particulars Rs.
Amount Paid for Shares by H Ltd.
In B Ltd. 4500000
Amount Paid for Shares by H Ltd.
In C Ltd. 500000
Amount Paid for Shares by B Ltd.
In C Ltd. 1000000
6000000
Less: Paid up Value of Shares 600000 + 2000000 + 300000 : 2900000
Capital Profit in C Ltd.
Share of H Ltd.: 135000
Share of B Ltd.: 150000
Share of H Ltd. in Capital Profit of B Ltd.: 560000 3745000
Goodwill: 2255000

4)
Consolidated Revenue Reserve
Particulars Rs.
Revenue Reserve of H Ltd.: 1000000

Share of H Ltd. in C Ltd.: 75000

Share of H Ltd. in B Ltd.: 376000

1451000

5)
Minority Interest
Particulars Rs.
Paid up value of Shares
In B Ltd. 500000
In C Ltd. 100000
Share of Capital Profits
In B Ltd. 140000
In C Ltd. 10000
Share of Revenue Profits
In B Ltd. 94000
In C Ltd. 60000
904000

4. The following are the Balance Sheet of RITO LTD. and ARIMA LTD. as on March 31, 2013.
(Amounts in ` lakh)
Liabilities RITO ARIMA Assets RITO ARIMA

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 10
Suggested Answers to Question —AFA

LTD. LTD. LTD. LTD.

Share Capital:
Equity Shares of ` 100
each fully paid up 600 300 Fixed Assets - net of
Reserves & Surplus 240 --- depreciation 810 255
10% Debentures 150 --- Investments (including 210 ---
Loans from Banks 75 135 investment in Arima Ltd.)
Bank Overdrafts --- 15 Debtors 120 45
Sundry Creditors 90 90 Cash at Bank 75 ---
Proposed Dividends 60 --- Accumulated loss --- 240
Profit & Loss A/c
1215 540 1215 540
It was decided that ARIMA LTD. will acquire the business of RITO LTD. for enjoying the benefit
of carry forward of business loss.
The following scheme has been approved for the merger:
(i) ARIMA LTD. will reduce its shares to ` 10 per share and then consolidate 10 such shares
into one share of ` 100 each (New Shares).
(ii) Banks agreed to waive the loan of ` 18 lakh of Arima Ltd.
(iii) Shareholders of Rito Ltd. will be given one share (new) of Arima Ltd. in exchange of
every share held in Rito Ltd.
(iv) Sundry Creditors of Arima Ltd. includes ` 30 lakh payable to RITO Ltd.
(v) After merger the proposed dividend of Rito Ltd. will be paid to Shareholders of Rito Ltd.
(vi) RITO Ltd. will cancel 20% holding of Arima Ltd. investment which was held at a cost of `
75 lakh.
(vii) Authorised Capital of ARIMA LTD. will be raised accordingly to carry out the scheme.

Required:
Pass necessary entries in the books of ARIMA LTD. and prepare Balance Sheet (after
merger) as on March 31, 2013 15

Answer 4.

ARIMA LTD.
CALCULATION PURCHASE CONSIDERATION

RITO Ltd. 600000 Equity Shares will be issued: 600000

One Share (new) for each Share by ARIMA Ltd.

Less: Already held by Rito Ltd.
20% of 300000 = 60000
New converted into New Shares
Of 6000 of `100 each 6000
Number of Shares to be issued by Arima Ltd. to Rito Ltd. 594000

Total purchase Consideration : `594 Lakh

JOURNAL ENTRIES (IN THE BOOKS OF ARIMA LTD.)

(Amount in `Lakh)
Particulars Amount Amount
Dr. Cr.
Equity Share Capital A/c. (`100) Dr. 300

To Equity Share Capital A/c. (`10) 30

To Reconstruction A/c. 270
(Being reduction in share capital)
Equity Share Capital A/c. (`10 each) Dr. 30

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 11
Suggested Answers to Question —AFA

To Equity Share Capital A/c. (`100) 30

(Being consolidation of share)
Loan from Banks Dr. 18
18
To Reconstruction A/c.
(Being waiver of loan by Bank)
Reconstruction A/c. (`100) Dr. 288

To Profit and Loss A/c. 240

To Capital Reserve A/c. 48
(Being adjustment for accumulated loan)
Business Purchase A/c. Dr. 594

To Liquidator of RITO Ltd..

(Being purchase consideration for RITO Ltd.)
Fixed Assets A/c. Dr. 810
Other Investments A/c. Dr. 135
Sundry Debtors A/c. Dr. 120
Cash at Bank A/c. Dr. 75
Reserves A/c. Dr. 69

To Sundry Creditors A/c. 90

To 10% Debentures A/c. 150
To Loan from Banks A/c. 75
To Proposed Dividend A/c. 60
To Business Purchase A/c. 594
To Reserves A/c. 240
(Being entry on acquiring of Assets/Liabilities of
RITO Ltd.)
Proposed Dividend A/c. Dr. 60

To Bank A/c. 60
(Payment of Proposed dividend to Shareholders
of RITO Ltd.)
Liquidator or RITO Ltd. A/c. Dr. 594

To Equity Share Capital A/c. 594

(of Arima Ltd.)

Discharge of purchase Consideration in the Form

of equity Shares of Arima Ltd.
Sundry Creditors A/c. Dr. 30

To Sundry Debtors A/c. 30

Cancellation of Inter Company ownings.

BALANCE SHEET OF ARIMA LTD.

As on March 31, 2013
(after merger)
(Amount in `Lakh)
Liabilities Amount Assets Amount
Share Capital Fixed Assets – net of
624000 Equity Shares of `100 Depreciation : 1065
each. (30000 + 594000) 624
Investment: 135

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 12
Suggested Answers to Question —AFA

Capital Reserves: 48
Sundry Debtors: 135
General Reserves: (240 – 69) 171
Cash at Bank: (75 – 60) 15
10% Debentures: 150

Loan from Banks: 192

Bank Overdrafts: 15

Sundry Creditors: 150

1350 1350

5. (a) Arrange and redraft the following Cash Flow Statement in proper order keeping in mind
the requirements of AS-3: 8

Particulars ` in lakhs ` in lakhs

Net Profit 80,000
Add: Sale of Investments 60,000
Depreciation on Assets 14,000
Issue of Preference Shares 10,000
Loan Raised 5,000
Decrease in Stock 11,000
1,80,000
Less: Purchase of Fixed Assets 50,000
Decrease in Creditors 5,000
Increase in Debtors 10,000
Exchange Gain 10,000
Profit on Sale of Investments 15,000
Redemption of Debenture 6,500
Dividend Paid 2,000
Interest Paid 1,500 1,00,000
80,000
Add: Opening Cash and Cash Equivalent 14,450
Closing Cash and Cash Equivalent 94,450
(b) As per requirement of Revised Clause-49 issued by SEBI, the Board shall lay down a Code
of Conduct for all Board members and senior management of the company. For this
purpose, state the meaning of "senior management". 2
(c) State the powers of Audit Committee. 2
(d) Why internally generated goodwill is not recognized in financial statement? 3

Answer 5.
(a) Cash Flow Statement
`in Lakh
Cash flow from operating activities:
Net Profit: 80,000

Less: Exchange gain: (10,000)

Less: Profit on Sale Investments: (15,000)
55,000

Add: Depreciation on assets: 14,000

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 13
Suggested Answers to Question —AFA

69,000

Changes in current assets and current liabilities:

(-) Increase in debtors (10,000)

+ Decrease in Stock : 11,000

(-) Decrease in creditors: (5,000) (4,000)
Net Cash from operating activities: 65,000

Cash flow from investing activities:

Sale of investments : 60,000

Purchase of fixed assets: (50,000)
10,000
Net cash from investing activities:

Cash flows from financing activities:

Issue of preference shares: 10,000
Loan raised 5,000
Redemption of Debentures: (6,500)
Interest paid: (1,500)
Dividend paid: (2,000)
Net Cash from financing activities: 5,000
Net increase in cash & cash equivalents: 80,000
Add: Opening cash and cash equivalents: 14,450
Closing cash and cash equivalents: 94,450

(b) The term „Senior Management‟ shall mean, personnel of the company who are members
of its core management team excluding Board of Directors. Normally, this would comprise
all members of management one level below the executive directors, including all
functional heads.

(c) The Audit Committee shall have powers, which should include the following:
(i) To investigate any activity within its term of reference.
(ii) To seek information from any employee.
(iii) To obtain outside legal or other professional advice.

(d) The enterprise while doing business, slowly develops the goodwill. Goodwill generated in
the process of doing business is called internally generated goodwill. This type of goodwill
may be generated because of number of factors, like good business practice, good and
trained employees, advertisement, continuous training to employees, etc. certainly, to
generate the goodwill internally involves cost, but this cost cannot be measured reliably.
As the cost cannot be measured reliably, the self generated goodwill is not recognized in
books / financial statements.

6. (a) Following information is given of two companies for the year ended 31st March, 2013:
Particulars Company X Company Y
` `
Equity Shares of ` 100 each 12,00,000 15,00,000
10% Preference Shares of 100 each 9,00,000 6,00,000
Profit after Tax 4,50,000 4,50,000
Assume market expectation is 15% and 80% of the profits are distributed.
(i) What is the rate you would pay to the Equity Shares of each company?
(a) if you are buying a small lot.
(b) if you are buying controlling interest in the company.
(ii) If you plan to invest only in Preference Shares, which company's Preference Shares is

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 14
Suggested Answers to Question —AFA

better? 8

(b) AB Ltd. has entered into a contract by which it has the option to sell its specified asset to
XY Ltd. for ` 100 lakhs after 3 years, whereas the current market price is ` 150 lakhs.
Company always settles account by delivery. What type of option is this? Is it a financial
instrument? Explain with reference to the relevant accounting standard. 4

(c) How is liability determined in the case of a finance lease? 3

Answer 6.
(a) (i) (a) buying a small lot of equity shares : If the purpose of valuation is to provide data
base to aid a decision of buying a mall (non-controlling) position of the equity of
the companies, dividend capitalization method is most appropriate. Under this
method, value of equity shares will be

Dividend per Share/Market Capitalisation rate x 100

Company X : `(24 ÷ 15) x 100 = `160.00

Company Y : `(20.80 ÷ 15) x 100 = `138.67

(b) Buying controlling interest equity shares : If the purpose of valuation is to provide
data base to aid a decision of buying controlling interest in the company, EPS
Capitalisation method is most appropriate. Under this method, value of equity is
given by

Earning per Share / Market capitalization rate x 100

Company – X : `(30 ÷ 15) X 100 = `200.00

Company – Y : `(26 ÷ 15) x 100 = `173.00

(ii) Preference dividend coverage ratio of both companies are to be compared to

make such decision.

Preference Dividend coverage ratio = Profit after tax / Profit Dividend x 100

Company – X : `4,50,000 ÷ 90,000 = 5 times

Company – Y : `4,50,000 ÷ 60,000 = 7.5 times

So, if we are planning to invest only in preference shares, we would prefer shares of Y
company as there is more coverage for preference dividend.
(b) As per AS-31 “Financial Instruments : Presentation”, a financial asset of one entity and a
financial liability or equity instrument of another entity. In the given case, AB Ltd. has
entered into a contract with XY Ltd. and company settles its account by delivery, and
does not give rise to any financial asset or financial liability. Hence there is no option.

Since, the above transaction does not give rise to a financial asset of one entity and a
financial liability or equity instrument of another entity, this is not a financial instrument. It is
only a financial contract.

(c) In the case of finance lease, the lessee should recognize a liability equal to the fair value
of leased asset at the inception of the lease. If the fair value of the leased exceeds the
present value of the minimum lease payments for the stand – point of the lessee, the

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 15
Suggested Answers to Question —AFA

amount recorded as an asset and a liability should be present value of minimum lease
payments from the stand point of lessee.

In calculating the present value of the minimum lease payments the discount rate is the
rate implicit in the lease, if this is practicable to determine, if not, the lessee‟s incremental
borrowing rate should be used.

7. The following is the Balance Sheet as at 31st March, 2012 of Hopeful Ltd.:
Liabilities ` Assets `
Share Capital: Fixed Assets (including
8,500 Equity Shares of ` 100 each goodwill of ` 1,00,000) 11,80,000
fully paid up 8,50,000 Investments 40,000
4,000 Cumulative Preference Stock in Trade 2,75,000
Shares of ` 100 each fully paid up Trade Debtors 1,50,000
Securities Premium 4,00,000 Bank Balances 65,000
General Reserve 20,000
Trade Creditors 60,000
3,80,000
17,10,000 17,10,000
Contingent liability:
Preference Dividends in arrears ` 60,000.
The Board of Directors of the company decided upon the following scheme of
reconstructions, which was duly approved by all concerned and put into effect from 1st
April, 2012.
(i) The Preference Shares are to be converted into 12% unsecured debentures of ` 100
each with regard to 70% of the dues (including arrears of dividends) and for the
balance Equity Shares of ` 50 paid up would be issued. The authorised Capital of the
company permitted the issue of additional shares.
(ii) Equity Shares would be reduced to share of ` 50 each paid up.
(iii) Since goodwill has no value, the same is to be written off fully.
(iv) The market value of investments are to be reflected at ` 60,000.
(v) Obsolete item in Stock of ` 75,000 are to be written off. Bad Debts to the extent
of 5% of the total debtors would be provided for. Fixed assets to be written down by `
1,80,000.
The company carried on trading for six months upto 30th September, 2012, and made a net
profit of ` 1,00,000 after writing off depreciation at 25% p.a. on the revised value of fixed
assets. The half yearly working resulted in an increase of Sundry Debtors by ` 80,000, stock
by ` 70,000 and Cash by ` 50,000.
You are required to show the Journal entries for giving effect to the above arrangement and
also draw the Balance Sheet of the company as at 30th September, 2012. 15

Answer 7.
Hopeful Ltd.
Balance Sheet as at 30 September, 2012

Liabilities Rs. Assets ` Rs.

Subscribed Capital Fixed Assets: 9,00,000
11,260 Equity Shares of `50 each: 5,63,000 Less: Depreciation 1,12,500 7,87,500

Securities Premium: 20,000 Investments: 60,000

Capital Reserve: 22,500 Stock-in-Trade: 2,70,000

(275000–75000+70000)
General Reserve: 60,000
Trade Debtors: 2,30,000

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 16
Suggested Answers to Question —AFA

Profit and Loss A/c.: 1,00,000

Less: Provision for
12% unsecured Debentures: 3,22,000 Doubtful Debt.: 7,500 2,22,500

Trade Creditors: 3,67,500 Cash & Bank Balance: 1,15,000

14,55,000 14,55,000

Working Notes:
1) No. of equity shares issued to cumulative preferences Shareholders: 2,760
No. of shares held by Equity Shareholders: 8,500
11,260

2) Calculation of Cash Balance:

Opening cash balance as on 31.03.2012: 65,000
Add: Changes in cash balance (as given in question) 50,000
1,15,000

3) Calculation of Creditors:
Profit and Loss upto 30.09.2012: 1,00,000

Add: Depreciation (Non-cash item): 1,12,500

Cash from operations (A): 2,12,500

Change in Current Assets:

Debtors: + 80,000
Stock: + 70,000
Cash: + 50,000
Cash out flow (B) 2,00,000

Decrease in Creditors:
Excess of (A) over (B); - 12,500

Add: Opening balance of Creditor : 3,80,000

Closing creditor (30.09.12): 3,67,500

Journal Entries:

In the books of Hopeful Ltd.

Particulars Dr. Cr.
Rs. Rs.
Cumulative preference share Capital A/c. Dr. 4,00,000
Capital Reduction A/c. Dr. 60,000

To Cumulative Preference Shareholders A/c. 4,60,000

(Being Cumulative preference shares and preference
Shareholders A/c.)
Cumulative preference Shareholders A/c. Dr. 4,60,000

To 12% unsecured Debentures A/c. 3,22,000

To Equity Share Capital A/c. 1,38,000
(Being the issue of 12% unsecured Debentures and
2760 Equity Shares of `100 each issued as `50 paid up)
Equity Share Capital A/c. Dr. 4,25,000
4,25,000
To Capital Reduction A/c.

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 17
Suggested Answers to Question —AFA

(Being the entry for reducing every share of `100 each

as `50 paid up, 8500 Equity shares @ 50 per share)
Investments A/c. Dr. 20,000
Capital Reduction A/c. (Balancing figure) Dr. 3,42,500

To Goodwill A/c. 1,00,000

To Stock A/c. 75,000
To Fixed Assets A/c. 1,80,000
To Provision for doubtful debts 7,500
(Being the change in value of assets)
Capital Reduction A/c. Dr. 22,500

To Capital Reserve A/c. 22,500

(Being transfer of Capital Reduction A/c. balance to
Capital Reserve)

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

(a) Advantages in the preparation of Value Added Statement;
(b) Jaggi and Lau model on valuation of group basis of Human Resources;
(c) Constitution of Public Accounts Committee;
(d) Convergence of Accounting Standards with IFRS.

Answer:
8. (a) The advantages in the preparation of Value Added Statements are as follows. These are:

Reporting on the aspects of Value Added Statements (VA) can to a great extent
improve the attitude of employees towards their relevant companies. This is mainly due
to the fact VA reflects a broader view of the company‟s objectives and responsibilities.
VA statement duly makes it advantageous for the company to introduce a productivity
linked bonus system for the employees based on the VA. The, employees may be given
a productivity bonus on the basis of VA/Payroll Ratio.
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.
VA provides a very good measure of the size and importance of a company. For using
the sales figure on capital employed figures as a basis for company‟s rankings can
cause distortion. This is because adopting the sales figure to get inflated through large
bought in expenses or a capital intensive – intensive company with a few employees
may appear to be more important than a highly skilled labour – intensive company.
VA Statement usually links a financial company‟s financial accounts to a national
income of an economy, and its relevant contribution.
VA Statement is built on the basic conceptual foundations which are currently
accepted in Balance Sheets and income Statements. The relevant statements and the
concepts like going concern, matching, consistency and substance over form are
equally applicable towards preparation of VA Statement.

(b) According to Jaggi and Lau Model, proper valuation of human resources is not possible
unless the contributions of individuals or individuals as a group are taken into consideration. A
group usually refers to a homogenous employee whether working in the same department
or division of the organisation or not. An individual‟s expected service tenure in the
organisation is difficult to predict. On a group basis it is relatively easy to estimate the
percentage of people in a group likely to leave the organisation in future. This model is
designed to calculate the present value of all existing employees in each rank. Such
relevant present value is measured with the help of the following steps.

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 18
Suggested Answers to Question —AFA

Ascertain the number of employees in each rank.

Estimate the probability that an employee will be in his rank within the within the organisation
or being terminated promoted in the next period. This probability will be estimated for a
specified group for a significant time period.

Ascertaining the economic value of an employee in a specified rank during each time
period.

The present of existing employees in each rank can be obtained by multiplying the above
three factors and applying an appropriate discounting rate.

Jaggi and Lau simplified the process of measuring the value of human resources by
considering a group of employees as a valuation base. But in the process, they ignored the
exceptional qualities of some skilled employees.

(c) 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 associated with the committee. This system of
election ensures that each Party/Group is represented on the committee in proportion to its
respective strength in the two Houses.

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.

(d) Convergence means to harmonize the Indian Accounting Standards with IFRS (International
Financial Reporting Standards). There are some differences between ASs and IFRS. To
Coverage means to sort-out these differences and agreed to one way of accounting
treatment which will be more investor friendly and also enhance the comparability of
financial statements. The ICAI has published the roadmap of convergence with IFRS. It has
also announced that it will converge with IFRS.

The convergence does not mean the adoption of the IFRS. We will not be adopting word by
word the IFRS. The local business environment will be considered while converging with IFRS.

INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 19