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Pinnacle Academy
Mock Tests for
November 2015 C A Final Examination
201-202, Florence Classic, Besides Unnati Vidhyalay,
10, Ashapuri Society, Jain Derasar Rd., Akota, Vadodara-20. ph: 98258 561 55
Financial Reporting Mock Test 1
Conducted on 17th August 2015
[Solution is at the end with marking for self-assessment]
Time Allowed-2 hours
Maximum Marks- 60
Q 1 is compulsory.
Answer any 2 from the remaining.
Q1
(a)
(b)
A Company is in the process of setting up a production line for manufacturing a new
product. Based on trial runs conducted by the company, it was noticed that the
production lines output was not of the desired quality. However, company has taken
a decision to manufacture and sell the sub-standard product over the next one year
due to the huge investment involved. In the background of the relevant accounting
standard, advise the company on the cut-off date for capitalization of the project
cost.
(4 Marks)
Sun Ltd. has entered into a sale contract of Rs.5 crores with X Ltd. during 2011 – 12
financial year. The profit on this transaction is Rs.1 crore. The delivery of goods is to
take place during the first month of 2012 – 13 financial year. In case of failure of Sun
Ltd. to deliver within the schedule, a compensation of Rs.1.5 crores is to be paid to X
Ltd. Sun Ltd. planned to manufacture the goods during the last month of 2011 – 12.
As on the balance sheet date (31.03.12) the goods were not manufactured and it
was unlikely that Sun Ltd. will be in a position to meet the contractual obligation.
(i)
(ii)
(c)
Should Sun Ltd. provide for contingency as per AS 29?
Should provision be measured as the excess of compensation to be paid
over the profit?
(4 Marks)
Tiger Motor Car Limited signed an agreement with its employees union for revision
of wages on 01.07.2011. The revision of wages is with retrospective effect from
01.04.2008. The arrear wages up to 31.3.2011 amounts to Rs. 40,00,000 and that
for the period from 01.04.2011 to 01.07.2011 amount to Rs. 3,50,000. In view of the
provisions of AS 5 “Net Profit or Loss for the period, Prior Period Items and Changes
in Accounting Policies”, decide whether a separate disclosure of arrear wages is
required while preparing financial statements for the year ending 31.3.2012.
(4 Marks)
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(d)
From the following information relating to X Ltd., calculate Diluted Earnings Per
Share as per AS 20:
Net Profit for the current year
Number of equity shares outstanding
Basic earnings per share
Number of 11% convertible debentures of Rs.100 each
Each debenture is convertible into 8 equity shares.
Interest expense for the current year
Tax saving relating to interest expense (30%)
Rs.2,00,00,000
40,00,000
Rs.5.00
50,000
Rs.5,50,000
Rs.1,65,000
(4 Marks)
(e)
A Company follows April to March as its financial year. The Company recognizes
cheques dated 31st March or before, received from customers after balance sheet
date, but before approval of financial statement by debiting ‘Cheques in hand
account’ and crediting ‘Debtors account’. The ‘cheques in hand’ is shown in the
Balance Sheet as an item of cash and cash equivalents. All cheques in hand are
presented to bank in the month of April and are also realised in the same month in
normal course after deposit in the bank. State with reasons, whether the collection of
cheques bearing date 31st March or before, but received after Balance Sheet date is
an adjusting event and how this fact is to be disclosed by the company?
(4 Marks)
(f)
Plymouth Ltd. is engaged in research on a new process design for its product. It had
incurred Rs.10 lakhs on research during first 5 months of the financial year 2012-13.
The development of the process began on 1st September, 2012 and upto 31st
March, 2013, a sum of Rs. 8 lakhs was incurred as Development Phase
Expenditure, which meets assets recognition criteria. From 1st April, 2013, the
Company has implemented the new process design and it is likely that this will result
in after tax saving of Rs.2 lakhs per annum for next five years. The cost of capital is
10%. The present value of annuity factor of Rs. 1 for 5 years @ 10% is 3.7908.
Decide the treatment of Research and Development Cost of the project.
(8 Marks)
Q2
(a)
Prepare a segment report for publication in Diversifiers Ltd. from the following details
for the year ended 31st March 2012:
Amount
(Rs. in ‘000s)
Forging Shop Division
Sales to Bright Bar Division
Other Domestic Sales
Export Sales to Maldives
Bright Bar Division
Sales to Fitting Division
Export sales to Rwanda
Fitting Division
Export Sales to Maldives
90
4,575
6,135
10,800
45
300
345
270
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Additional Information:
(Rs. in ‘000s)
Head Forging Bright Fitting
Office
Shop
Bar
240
30
(12)
72
36
36
6
8
2
75
300
60
180
72
180
60
135
57
30
15
180
Pre-tax operating result
Head office cost reallocated
Interest Cost
Fixed Assets
Net Current Assets
Long-term Liabilities
(6 Marks)
(b)
Following is the balance sheet of A Ltd. and its Australian subsidiary B Inc. as on 31st
March, 2012:
Particulars
Share Capital (fully paid shares
of Rs.10 / AU$10 each)
Profit and Loss Account
Secured Loans
Sundry Creditors
Taxation
Fixed Assets
Investment in B Inc. at cost
Stock
Debtors
Cash at Bank
A Ltd.
(INR.)
B Inc.
(AUD)
30,00,000
20,00,000
12,00,000
6,00,000
10,00,000
78,00,000
30,000
40,000
20,000
10,000
20,000
1,20,000
18,00,000
16,00,000
12,00,000
24,00,000
8,00,000
78,00,0000
20,000
30,000
60,000
10,000
1,20,000
Following additional information is available:
i.
ii.
iii.
A Ltd. acquired 80% of shares of B Inc. as on 1st April, 2011, on which date the profit
and loss account B Inc. was AU$23,000 (before dividend).
B Inc. paid a dividend of AU$3,000 on 30th September, 2011 for the year 2010-11.
The amount of dividend reflecting the share of A Ltd. has been remitted to India and
the same has been credited as dividend received in its books and the exchange rate
was 1AU$=Rs.40.
The exchange rates prevailing between India and Australia on relevant dates are as
under:
1.4.2011:
31.3.2012:
1AU$=Rs.30
1AU$=Rs.42
Based on the above information, prepare consolidated balance sheet of A Ltd. as on
31st March, 2012. Consider the foreign subsidiary to be integral foreign operation.
(10 Marks)
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Q3
(a)
Prepare a value added statement for the year ended on 31.3.2008 from the Profit
and Loss Account of Futures Ltd. for the year ended on 31.3.2008:
(Rs. in ‘000)
Income:
Sales
Other Income
24,400
508
24,908
Expenditure:
Operating cost
Excise duty
Interest on Bank Overdraft
Interest on 9% Debentures
21,250
1,110
75
1,200
23,635
1,273
405
868
320
548
48
500
Profit before Depreciation
Depreciation
Profit before tax
Provision for tax
Profit after tax
Proposed Dividend
Retained Profit
The following additional Information is given:
i.
ii.
iii.
(b)
Sales represent Net sales after adjusting Discounts, Returns and Sales tax.
Operating cost includes Rs.82,50,000 as wages, salaries and other employee
benefits
Bank overdraft is temporary.
(6 Marks)
Compute EVA on the basis of following information:
No. of equity shares of Rs.10 each
No. of 10% debentures of Rs.100 each
Free Reserves
Capital Reserve
Securities Premium
Tax rate
Beta
Market Return
Risk free rate
Debt-Equity Ratio
Operating profit after tax for the year
192 crores
?
Rs.1,440 crores
Rs.960 crores
Rs.480 crores
30%
1.05
14 %
10 %
1:2
Rs.1,848 crores
(4 Marks)
(c)
From the following information, calculate value of a share if you want to –
(i) buy a small lot of shares
(ii) buy a controlling interest in the company
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Year
Profit
2007
2008
2009
2010
55,00,000
1,60,00,000
2,20,00,000
2,50,00,000
Capital
Employed
3,43,75,000
8,00,00,000
10,00,00,000
10,00,00,000
Dividend
(%)
12
15
18
20
Market Expectation is 12%. Use suitable weighted averaging if required. Paid up
value per share is Rs.100.
(6 Marks)
Q4
(a)
(b)
Southern Ltd. purchased a plant on 30.09.10 with a quoted price of Rs.180 lakhs
from Tatamaco Ltd. Tatamaco Ltd. offer 3 months credit with a condition that
discount of 1.25% will be allowed if payment were made within one month. VAT is
12.5% on the quoted price. Company incurred 2% on transportation cost and 3% on
erection cost of the quoted price. Preoperative costs amount to Rs.1.5 lakhs. To
finance the purchase of the machinery company took a term bank loan of Rs.125
lakhs on 01.10.10 at 14.5% p.a. The machine was ready for use on 31.12.10.
Further, expenditure of Rs.2.72 lakhs was incurred on 31.01.11. The machine was
put to use on 01.04.11. At what cost shall the machine be recorded in books?
Consider plant to be a qualifying asset within the meaning of AS 16.
(8 Marks)
Sky Ltd. wishes to obtain a machine costing Rs.30 lakhs by way of lease. The
effective life of the machine is 14 years, while the lease period shall be 5 years. The
lease rent shall be Rs.3 lakhs p.a. in the first three years and Rs.5 lakhs in the
remaining two. Implicit interest rate in the lease is 15%. How should the lease be
classified and treated?
(8 Marks)
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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Solution of
FR Mock Test 1
Conducted on 17th August 2015
Q1
(a)
As per provisions of AS 10 ‘Accounting for Fixed Assets’, expenditure incurred on
start-up and commissioning of the project, including the expenditure incurred on test
runs and experimental production, is usually capitalized as an indirect element of the
construction cost. However, the expenditure incurred after the plant has begun
commercial production i.e., production intended for sale or captive consumption, is
not capitalized and is treated as revenue expenditure even though the contract may
stipulate that the plant will not be finally taken over until after the satisfactory
completion of the guarantee period.
(2 Marks)
In the present case, the company did not stop production even when the output was
not of the desired quality, and continued the sub-standard production due to huge
investment involved in the project. Capitalization should cease at the end of the trial
run, since the cut-off date would be the date when the trial run was completed.
(2 Marks)
(b)
(i)
As per AS 29, a provision should be recognized if an enterprise has present
obligation on account of past event that probably requires an outflow of resources
and a reliable estimate can be made of the amount of obligation. Sun Ltd. has the
obligation to deliver the goods within the scheduled time as per the contract. It is
probable that Sun Ltd. will fail to deliver the goods within the stipulated time period.
Thus, Sun Ltd. should recognize a provision for the best estimate of the amount of
compensation payable.
(2 Marks)
(ii)
The goods are not yet manufactured as on the balance sheet date and hence no
profit has accrued. Provision should be recognized for the full amount of
compensation payable, which is Rs.1.5 crores.
(2 Marks)
(c)
It is given that revision of wages took place in July, 2011 with retrospective effect
from 1.4.2008. The arrear wages payable for the period from 1.4.2008 to 31.3.2011
cannot be taken as an error or omission in the preparation of financial statements
and hence this expenditure cannot be taken as a prior period item. Additional wages
liability of Rs.40,00,000 (from 1.4.2008 to 31.3.2011) should be included in current
year’s wages. It may be mentioned that additional wages is an expense arising from
the ordinary activities of the company.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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Although abnormal in amount, such an expense does not qualify as an extraordinary
item. However, as per AS 5, 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. However, wages payable for
the current year (from 1.4.2011 to 1.7.2011) amounting Rs.3,50,000 is not a prior
period item hence need not be disclosed separately. This may be shown as current
year wages.
(2 Marks)
(d)
Adjusted Net profit for the current year
= 2,00,00,000 + 5,50,000 – 1,65,000 = Rs.2,03,85,000
Number of equity shares resulting from conversion of debentures
= 50,000 × 8 = 4,00,000 equity shares
(2 Marks)
Total number of equity shares resulting from conversion of debentures =
40,00,000 + 4,00,000 = 44,00,000 shares
Diluted Earnings per share = 2,03,85,000 / 44,00,000= Rs.4.63
(2 Marks)
(e)
Even if the cheques bear the date 31st March or before, the cheques received after
31st March does not represent any condition existing on the balance sheet date i.e.
31st March. Thus, the collection of cheques after balance sheet date is not an
adjusting event.
(2 Marks)
Cheques that are received after the balance sheet date should be accounted for in
the period in which they are received even though the same may be dated 31st
March or before as per AS 4. Moreover, the collection of cheques after balance
sheet date does not represent any material change affecting financial position of the
enterprise, so no disclosure is necessary.
(2 Marks)
(f)
Research Expenditure – According to AS 26 ‘Intangible Assets’, the expenditure on
research of new process design for its product Rs.10 lakhs should be charged to
Profit and Loss Account in the year in which it is incurred. It is presumed that the
entire expenditure is incurred in the financial year 2012-13. Hence, it should be
written off as an expense in that year itself.
(2 Marks)
Cost of internally generated intangible asset – it is given that development phase
expenditure amounting Rs.8 lakhs incurred up to 31st March, 2013 meets asset
recognition criteria. As per AS 26, for measurement of such internally generated
intangible asset, fair value should be estimated by discounting estimated future net
cash flows. This is determined as under:
Savings (after tax) from implementation
of new design for next 5 years
Company’s cost of capital
Annuity factor @ 10% for 5 years
Present value of net cash flows
(2 lakhs x 3.7908)
Rs.2 lakhs p.a.
10 %
3.7908
Rs.7.582 lakhs
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The cost of an internally generated intangible asset would be lower of cost value Rs.
8 lakhs or present value of future net cash flows Rs. 7.582 lakhs.
(4 Marks)
Hence, cost of an internally generated intangible asset will be Rs. 7.582 lakhs. The
difference of Rs.0.418 lakhs (i.e. 8 lakhs – 7.582 lakhs) will be amortized by
Plymouth for the financial year 2012-13.
Amortisation - The company can amortise Rs.7.582 lakhs over a period of five
years by charging Rs. 1.516 lakhs per annum from the financial year 2013-2014
onwards.
(2 Marks)
Q2
(a)
Segment Report of Diversifiers Ltd. for the year ended 31st March 2012
(Rs. in ‘000s)
Forging Bright Fitting
Shop
Bar
Domestic
Export
External Sales
Inter-segment Sales
Segment Revenue (A)
4,575
6,135
10,710
90
10,800
--300
300
45
345
--270
270
--270
InterTotal
Segment
Elimination
--4,575
--6,705
--- 11,280
(135)
--(135) 11,280
External Expenses
Inter-segment Expenses
Segment Expenses (B)
10,560
--10,560
225
90
315
237
45
282
--- 11,022
(135)
--(135) 11,022
240
30
(12)
258
Segment Result (A
(given)
Head Office Expenses
Operating Profit
Interest Expenses
Profit Before Tax
–
B)
Fixed Assets
Net Current Assets
Segment Assets
Unallocated Assets (75 + 72)
Total Assets
Segment Liabilities
Unallocated Liabilities
Total Liabilities
Solution prepared by
(144)
114
(16)
98
300
180
480
60
60
120
180
135
315
540
375
915
147
1,062
30
15
180
225
57
282
CA. Ashish Lalaji
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Sales Revenue by Geographical Market
(Rs. in ‘000s)
India Maldives Rwanda
Total
External Sales 4,575
6,405
300 11,280
(5 Marks for report and 1 Mark for Geographical disclosures)
(b)
Working Notes:
(1) Profits earned by B Inc.:
Amount
($)
P & L A/c as on 31.03.99
40,000
Add: Dividend for 1997-98
3,000
43,000
Less: P & L A/c as on 01.04.98 23,000
20,000
(1 Mark)
(2) Analysis of Profits:
Capital
Revenue
Profits
Proftis
P & L A/c as on 01.04.98 23,000
---Profit earned in 1998-99
-----20,000
Dividend for 1997-98
(3,000)
-------20,000
20,000
Exchange rate
30
36
6,00,000 7,20,000
Minority Interest (20%) 1,20,000 1,44,000
Share of A Ltd. (80%) 4,80,000 5,76,000
(1 Mark)
(3) Translation of Foreign Balance sheet:
Share Capital
Capital Profit
Revenue Profit
Secured Loans
Creditors
Provision for tax
Fixed Assets
Stock
Debtors
Cash
Translation Gain
Debit
($)
------------------------20,000
30,000
60,000
10,000
Credit E. Rate
Debit
Credit
($)
(Rs.)
(Rs.)
30,000
30
----9,00,000
20,000
30
----6,00,000
20,000
36
----7,20,000
20,000
42
----8,40,000
10,000
42
----4,20,000
20,000
42
----8,40,000
----30
6,00,000
--------42
12,60,000
--------42
25,20,000
--------42
4,20,000
----48,00,000 43,20,000
----------4,80,000
48,00,000 48,00,000
(2 Mark)
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(4) Cost of Control:
Cost of investment
16,00,000
Less: Pre acquisition period dividend
[$3,000 X Rs.40 X 80%]
96,000
15,04,000
Less: Paid-up value
7,20,000
Share in capital profits
4,80,000
Goodwill
3,04,000
(1 Mark)
(5) Minority Interest:
Paid-up value of shares
1,80,000
Add: Share in profits
2,64,000
Share in translation gain [4,80,000 X 20%]
96,000
5,40,000
(1 Mark)
(6) Consolidated Reserves:
Reserves of A Ltd. as on 31.03.99
Add: Share in revenue profits
Pre-acquisition period dividend
Share in exchange fluctuation gain [4,80,000 X 20%]
20,00,000
5,76,000
(96,000)
3,84,000
28,64,000
(1 Mark)
st
Consolidated Balance sheet of A Ltd. as on 31 December 1999
Note
No.
Amount
(Rs.)
Amount
(Rs.)
Equity and Liabilities
1 Shareholders’ Funds
(a) Share Capital
(b) Reserves and Surplus
2
Minority Interest
3
Non Current Liabilities
Secured Loans
4
58,64,000
30,00,000
28,64,000
5,40,000
Current Liabilities
Trade Payables
Provision for tax
20,40,000
28,60,000
10,20,000
18,40,000
Total
1
Assets
Non Current Assets
Fixed Assets – Tangible
Fixed Assets – Intangible
1,13,04,000
27,04,000
24,00,000
3,04,000
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2
Current Assets
Stock
Debtors
Cash at bank
86,00,000
24,60,000
49,20,000
12,20,000
Total
1,13,04,000
(3 Marks)
Solution prepared by
Q3
(a)
CA. Ashish Lalaji
Value Added Statement of Futures Ltd.:
Amount
Sales
Less: Cost of bought-in material and services:
Operating cost [21,250 – 8,250]
Excise duty
Interest on bank overdraft
13,000
1,110
75
Add: Other income
Gross Value Added
Applied As To Pay Employees
Wages, salaries and other employee benefits
To Pay Government
Income tax
To Pay Providers of Capital
Interest on debentures
Dividend
For Maintenance and Future Expansion
Depreciation
Retained profit
Amount
24,400
14,185
10,215
508
10,723
%
(3 Marks)
8,250
320
1,200
48
405
500
1,248
905
10,723
(3 Marks)
(b)
Ke = 10 + 1.05 (14 – 10) = 14.2%
D / E ratio, 0.5 = Long Term Debt / (1,920 + 1,440 + 960 + 480)
Long Term Debt = 4,800 X .5 = 2,400
Post tax cost of debt = 10 (1 - .3) = 7%
Capital Employed = 4,800 + 2,400 = 7,200
WACC = 14.2 (4,800 / 7,200) + 7 (2,400 / 4,800) = 11.8%
EVA = 1,848 – (7,200 X 11.8%) = Rs.998.40 crores
(4 Marks)
Q5
(a)
Valuation of Equity Shares:
(i) Buying a small lot of shares:
Dividend yield method is preferred.
Since, dividend rates are rising weighted average is calculated.
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Year
2007
2008
2009
2010
Dividend
(%)
12
15
18
20
Weight
1
2
3
4
10
Weighted
Product
12
30
54
80
176
Average dividend rate = 176 / 10 i.e. 17.6%
(2 Marks)
Value per share = 17.6 / 12 X 100 = Rs.146.67
(1 Mark)
Solution prepared by
CA. Ashish Lalaji
(ii) Buying Controlling interest:
Earnings yield method is preferred.
As profit is exhibiting increasing trend, Earnings yield is determined on weighted
average basis.
Year
2007
2008
2009
2010
Profit /
Capital
Employed
(%)
16
20
22
25
Weight
Weighted
Product
1
2
3
4
10
16
40
66
100
222
Average earnings yield = 222 / 10 i.e. 22.2%
(2 Marks)
Value per share = 22.2 / 12 X 100 i.e. Rs.185
(1 Mark)
Q4
(a)
Determination of Cost of Plant:
Quoted Price
Less: Cash Discount @ 1.25%
Add: VAT @ 12.5% on quoted price
Transportation cost @ 2% on quoted price
Erection cost @ 3 % on quoted price
Preoperative cost
Borrowing cost (125 X 14.5 % X 3 / 12)
Cost of Plant
Amount
(Rs. in lakhs)
180.00
2.25
177.75
22.50
200.25
3.60
5.40
1.50
4.53
215.28
(8 Marks)
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Notes:
(i) VAT is determined on quoted price as demanded by question.
(ii) Borrowing cost is determined only for the period 01.10.10 to 31.12.10.
(iii) Costs incurred after the asset is available for use (though not put to use) cannot be
capitalized.
(b)
As per AS 19 “Leases”, a lease agreement should be classified into a finance lease
or operating lease at the inception of the lease agreement. One of the situations,
where a lease gets classified as finance lease is where the lease term covers major
part of useful life of the asset. In the given case, the lease covers only 5 years out of
14 years of useful life, which means lease does not cover major part of useful life.
One more situation, where a lease gets classified as finance lease is when present
value of Minimum Lease Payments (MLP) substantially covers the fair value of the
asset leased. PV of MLP is determined as under:
Year
Lease
Payments
1–3 3
4–5 5
PVF
PV
(15%)
2.283 6.85
1.069
5.35
12.20
(4 Marks)
PV of MLP covers 40.67 % (12.2 / 30) of fair value, which is not substantial (as less
than 90%). Thus, the given lease shall be classified as operating lease.
Lease payments under operating lease should be recognized as an expense in the
statement of profit and loss on straight line basis unless another systematic basis is
available. In the given case, the total lease rent for the period of 5 years is Rs.19
lakhs [(3 X 3 years) + (5 X 2 years)]. Hence, each year an expense of Rs.3.8 lakhs
(19 / 5) should be recognized.
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
13