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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
FR Mock Test 3
Time Allowed-3 hours
9th October 2015
Maximum Marks- 100
Q 1 is compulsory.
Answer any 5 from the remaining.
Q1
(a)
A company organizing trade fairs and exhibitions charges 5% contingency charges
from the participants and outside agencies. The rent for the space booked by the
participants in the trade fair includes the contingency charges. In dealing with
outside agencies, the contingency charges are levied separately in the invoice.
The intention of levying these charges is to meet any unforeseen liability, which may
arise in future. The instances of such unforeseen liabilities may be on account of
injury or loss of lift to visitors or exhibitors due to fire, terrorist attack, stampede,
natural calamities and other public and third party liability. The chance of occurrence
of these events are high because of large crowds that visit the fair. The decision to
levy 5% contingency charges was based on assessment only as actual liability
cannot be estimated.
The following accounting treatment and disclosure was made by the company in its
financial statements:
a. 5% contingency charges are treated as income and matching provision for
the same is also made in accounts
b. A suitable disclosure to this effect is also made in the notes forming part of
accounts
Required:
(i)
Whether the creation of provision for contingencies under the facts and
circumstances of the case is in conformity with AS 29
(ii)
If the answer to (i) above is no then what should be the treatment of the
provision which is already created in the balance sheet
(5 Marks)
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(b)
i.
ii.
iii.
iv.
v.
Net profit of Rs.5,40,000 has been determined before tax for third quarter ended 31st
December 2010. The net profit has been calculated considering following items:
Extra-ordinary loss of Rs.50,000 has been incurred on 2nd November 2010. 50% has
been allocated to 4th quarter
Extra-ordinary gain of Rs.90,000 was earned on 1st May 2010. It has been allocated
equally to 1st, 2nd and 3rd quarter.
Bad debts of Rs.80,000 was incurred on 5th September 2010. 50 % has been
allocated to 3rd quarter.
Provision for warranty costs is Rs.20,000. Out of this Rs.15,000 provision relates to
2nd quarter due to wrong estimate in 2nd quarter. However, Rs.20,000 deducted in 3rd
quarter.
Depreciation method was changed on 31st December 2010. Excess depreciation of
Rs.75,000 has been provided in 3rd quarter. However, only Rs.15,000 of excess
depreciation is related to current quarter.
Calculate income for the quarter ended 31st December 2010.
(5 Marks)
(c)
Take Ltd. has borrowed Rs.30 lakhs from SBI during the year 2012 – 13. The
borrowings are used to invest in shares of Give Ltd., a subsidiary of Take Ltd., which
is implementing a new project, estimated to cost Rs.50 lakhs. As on 31st March
2013, since the said project is yet not complete, the directors of Take Ltd. have
decided to capitalize the interest cost of Rs.4 lakhs and add it to the cost of
investments. Comment on the basis of requirements of AS 13.
(4 Marks)
(d)
Grant Medicare Ltd. acquired 5 units of Brain Scan Equipment for USD 5,00,000 in
April 2010 incurring Rs.20,00,000 on sea freight and USD 12,000 per unit towards
transit insurance, bank charges, etc. Purchase was partly funded by government
grant of Rs.94 lakhs. Prevailing exchange rate is Rs.50 per USD.
Company estimated useful life of equipment at 4 years with an estimated salvage
value of approximately 13%. Grant was considered as deferred income up to 2012 –
13 and in April 2013 company had to return the entire grant received due to non
fulfillment of certain conditions.
You are required to show depreciation and the grant that is to be recognized in
profit and loss account for the period commencing from 2010 – 11 and onwards.
What accounting entry shall be passed for return of grant in April 2013?
Company follows WDV method of depreciation.
(6 Marks)
(Assessed answer papers should be collected from
NEW CLASS on 17th October 2015)
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Q2
(a)
Following information is available about Lookdown Ltd.:
Equity shares of Rs.100 each of which
Rs.75 has been called up
Equity shares in respect of which calls are in arrears
@ Rs.25 per share
General reserve
Profit and Loss account (balance at beginning of the year)
Profit / (Loss) for the year
Industry average profitability
8% Debentures of Rs.10 each
5,00,000
Rs.1,00,000
Rs.10,00,000
(Rs.25,00,000)
(Rs.1,80,000)
12.50 %
8,00,000
Lookdown Ltd. is proposing to hire the services of Mr. X to turn the company around.
Minimum take home salary per month demanded by Mr. X
Average income tax rate on salaries
Provident fund contribution by employer per month
Profits over and above target profit expected by hiring Mr. X
Rs.4,00,000
25 %
Rs.50,000
10 %
You are required to analyse the proposal and see whether it is worthwhile to employ
Mr. X and also suggest the maximum emoluments that could be paid to him.
Notes:
a. PF contributions are tax exempt
b. Take home salary is that remaining after employee’s contribution to PF @
Rs.50,000 per month and after deduction of income tax on salary
(6 Marks)
(b)
From the following Profit & Loss Account for the year ended 31st March 2014 of XYZ
Ltd. prepare Gross Value Added Statement:
Notes
Sales less return
Trading Profit
Less: Depreciation
Interest
1
2
Add: Other income
Provision for tax
Profit after tax
Less: Extraordinary items
Less: Proposed Dividend
Retained Profit
Amount
Amount
(Rs. 000) (Rs. 000)
21,350
3
4
1,920
302
140
442
1,478
80
1,558
688
870
15
855
340
515
Notes:
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Amount Amount
(Rs. 000) (Rs. 000)
1. Trading Profit is arrived at after charging the following:
Salaries, wages, etc. to employees
Directors’ remuneration
Audit Fees
Hire of equipment
3,685
360
220
290
2. Interest figure is ascertained as below:
Interest paid on bank loans and overdraft
Less: Interest Received
160
20
140
35
20
15
3. Extra-ordinary items are:
Loss of goods by fire
Less: Surplus on sale of properties
4. Charge of taxation include a transfer of Rs.1,48,000
to the credit of deferred tax account
(10 Marks)
Q3
Following is the consolidated balance sheet of A Ltd. and its subsidiary S Ltd. and its
jointly controlled entity B Ltd. as on 31st March 2014:
Liabilities
Share Capital of Rs.100 each
General Reserve
Profit and Loss account
6% Debentures
Creditors
Assets
Fixed Assets
Stock
Debtors
6% Debentures of B Ltd. acquired at par
Shares of B Ltd. (1,500 shares at Rs.80)
Cash at bank
Profit and loss account
A Ltd.
B Ltd.
6,00,000
2,00,000
80,000
----75,000
9,55,000
2,00,000
--------1,50,000
67,500
4,17,500
A Ltd.
B Ltd.
4,50,000
1,40,000
80,000
90,000
1,20,000
75,000
--------9,55,000
1,50,000
60,000
45,000
--------12,500
1,50,000
4,17,500
A Ltd. acquired the shares on 1st August 2013. The profit and loss account of B Ltd.
showed a debit balance of Rs.2,25,000 on 1st April 2013. During June 2013, goods
costing Rs.9,000 were destroyed against which the insurer paid only Rs.3,000.
Creditors of B include Rs.30,000 for goods supplied by A Ltd. on which A Ltd. has
made profit of Rs.3,000. Half of these goods were still in stock of B Ltd. as on
31.03.14. Prepare consolidated balance sheet of A Ltd. following the proportionate
consolidation method.
(16 Marks)
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Q4
As part of its expansion strategy, White Ltd. has decided to amalgamate its business
with that of Black Ltd. and a new company, Black and White Ltd., is to be
incorporated from 1st September 2010 having authorized equity capital of 2 crore
shares of Rs.10 each. Black and White Ltd. shall in turn acquire the entire ownership
of White Ltd. and Black Ltd. in consideration for issuing its equity at 25% premium on
1st October 2010. It has also agreed that the consideration be based on the product
of profits available to equity shareholders of each entity, times its PE multiple. The
preference shareholders and the debenture holders are to be satisfied by the issue
of similar instruments in Black and White Ltd. on 1st October 2010 in lieu of their
existing holdings. Accordingly, following information is made available to you:
Ordinary shares of Rs.10 each (Nos.)
8% Preference shares of Rs.10 each (Nos.)
5 % Debentures of Rs.10 each (Nos.)
Profit before interest and tax (Rs.)
Average PE Ratio
White Ltd.
3 lakh
6,00,000
15
Black Ltd.
1.2 lakh
1 lakh
0.8 lakh
4,40,000
10
To augment the cash retention level of Black and White Ltd., it is decided that on 1st
October 2010, Black and White Ltd. shall collect full share application money for the
issue of 20,00,000 equity shares at 40% premium under private placement.
The allotment of the shares will be made on 31st December 2010 and such shares
shall qualify for dividend from 2011 only.
Black and White Ltd. shall also avail a 12.5% TOD of Rs.15 lakhs to meet its
preliminary expenses and cost of working amounting to Rs.12 lakhs and Rs.2 lakhs
respectively. The TOD will be availed on 1st November 2010 and closed on 31st
December 2010. Preliminary expenses are tax deductible at 20% each year.
Due to an accounting omission the opening inventory of Black Ltd. of Rs.5 lakhs
(actual value) and the closing stock of White Ltd. of Rs.2.2 lakhs was understated
and overstated by 5% and 10% respectively.
The dividend schedule proposed is that all companies would pay interim dividend for
equity for the period from 1st October 2010 to 31st December 2010. The rates of
dividend being White Ltd. @ 5%, Black Ltd. @ 2% and Black and White Ltd. @
3.5%. The preference shareholders and debenture holders dues for the post take
over period are discharged on 31.12.2010.
It is proposed that in the period October-December 2010, Black and White Ltd.,
would carry out trade in futures that would generate an absolute post tax return by
18% by using the funds generated from private placement. The trades would be
squared off on 31st December 2010. Proceeds from such transactions are not liable
to withholding taxes. You are required to prepare projected Profit and Loss A/c for
the period ended 31st December 2010 and a Balance Sheet on that date for Black
and White Ltd. Consider corporation tax rate for the company to be 40%.
(16 Marks)
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Q5
(a)
Quite Ltd. announced SAR Scheme to its employees on 1st April 2011. The salient
features of the scheme are given below:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
The scheme will be applicable to employees who have completed three years
of continuous service with the company
Each eligible employee can claim cash payment amounting to excess of
Market Price of the company’s shares on exercise date over exercise price in
respect of 60 (sixty) shares
Exercise price is fixed at Rs.75 per share
Option to exercise SAR is open from 1st April 2014 for 45 days and the same
vested on 975 employees
Intrinsic value of SAR on date of closing (15th May 2014) was Rs.30 per
share
Fair value of SAR was Rs.20 in 2011 – 12; Rs.25 in 2012 – 13 and Rs.27 in
2013 – 14
In 2011 – 12 expected rate of employee attrition was 5% which rate was
doubled in the next year
Actual attrition year wise was as under:
2011 – 12
2012 – 13
2013 – 14
35 employees of which 5 had served the company for less than 3 years
30 employees of which 20 employees served for more than 3 years
20 employees of which 5 employees served for less than 3 years
You are required to show Provision for SAR Account by fair value method.
(10 Marks)
(b)
Capital structure of Define Ltd. is as under:
80,00,000 Equity shares of Rs.10 each:
1,00,000 12% Preference shares of Rs.250 each:
1,00,000 10% Debentures of Rs.500 each:
Term Loans from Bank @ 10%:
Rs.800 lakhs
Rs.250 lakhs
Rs.500 lakhs
Rs.450 lakhs
Company’s statement of profit and loss for the year showed retained profit after tax
of Rs.100 lakhs after payment of preference dividend and equity dividend @ 20%.
Tax rate is 40%.
T-Bill yield is 6.5% p.a. and beta of company is 1.5. Long run market rate of return is
16.5%.
Calculate Economic Value Added (EVA).
(6 Marks)
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
6
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Q6
(a)
Jade Ltd. has earned Rs.48 lakhs in the year 2013. It wants you to ascertain the
value of business based on following information:
I.
Tax rate for 2013 is 36 %. Future tax rate is estimated at 34 %.
II. Company’s equity shares are quoted at Rs.120 on balance sheet date. The
company has equity share capital of Rs.100 lakhs divided into shares of
Rs.50 each.
III. Profit for the year 2013 has been calculated after considering following in the
Profit and Loss Account:
i. Subsidy of Rs.2 lakhs received from government has been withdrawn
and hence is not receivable in future.
ii. Interest of Rs.8 lakhs is on term loan. Final instalment of this term
loan was fully settled in this year.
iii. Managerial remuneration is Rs.15 lakhs, which is going to increase by
Rs.6 lakhs from next year.
iv. Loss on sale of fixed assets and investments amounting to Rs.8 lakhs
(8 Marks)
(b)
Provider Ltd. is a non-banking finance company who accepts public deposits and
also deals in hire purchase business. It provides you with the following information
regarding major hire purchase deals as on 31.03.09:
Few machines were sold on hire purchase basis. The hire purchase price was set as
Rs.100 lakhs against the cash price of Rs.80 lakhs. The amount was payable as
Rs.20 lakhs down payment and balance in 5 equal instalments. The hire vendor
collected 1st instalment as on 31.03.10 but could not collect the second instalment
which was due on 31.03.11. The company was finalizing accounts for the year
31.03.11. Till 15.05.11; the date on which the Board of Directors signed the
accounts, the second instalment was not collected. Presume IRR to be 10.42%.
(i)
What should be the principal outstanding as on 01.04.10? Should the
company recognize financial charge for the year 2010 – 11 as income?
(ii)
What should be the net book value of assets as on 31.03.11 so far as
Provider Ltd. is concerned as per NBFC prudential norms requirement for
provisioning?
(iii)
What should be the amount of provision to be made as per prudential norms
for NBFC laid down by RBI?
(8 Marks)
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Q7
Answer any four:
(a)
Perfect Ltd. manufactures machinery used in Power Plants. In response to the
tenders issued by Power Plants, Perfect Ltd quotes its price. As per terms of
contract, full price of machinery is not released by the power plants, but 10% thereof
is retained and paid after one year if there is satisfactory performance of the
machinery supplied. From past experience, it is observed that Perfect Ltd. normally
performs satisfactorily and fulfills the expectations of Power Plants. Perfect Ltd.
accounts for only 90% of the invoice value as sales revenue and books the balance
amount in the year of receipt to the extent of actual receipts only. Comment on the
treatment done by the company.
(4 Marks)
(b)
Win Ltd. has entered into a three year finance lease arrangement with a Sports Club
in respect of fitness equipments costing Rs.16,99,999.50. Annual lease payments to
be made at the end of each year are structured in such a way that the sum of the
Present Values of the lease payments and that of the residual value together equal
to the cost of the equipments leased out. The residual value of the equipment at the
expiry of the lease is estimated to be Rs.1,33,500. The assets would revert to the
lessor at the end of the lease. IRR is 10%. You are required to compute annual
lease rent and the total unearned finance income. Consider PVF at 10 % for 3 years
to be 2.486 and for 3rd year to be 0.751.
(4 Marks)
(c)
P Ltd. has three business segments which are FMCG, Batteries and Sports
Equipment. Battery segment is consistently underperforming and P Ltd. has decided
to discontinue the same.
Under the agreement with Labour Union the employees of Battery Segment will earn
no further benefit except the benefits already accrued till the segment got
discontinued. As a result of curtailment, the company’s obligations that were arrived
on the basis of actuarial valuations before the curtailment have come down.
Following information is available:
a. Value of gross obligations before the curtailment on actuarial basis was
Rs.4,000 lakhs
b. Value of unamortised past service cost is Rs.100 lakhs
c. Curtailment will bring down gross obligations by Rs.500 lakhs and P Ltd.
anticipates a proportional decline in value of unamortised past service cost as
well
d. Fair value of plan assets on date is estimated at Rs.3,250 lakhs
You are required to determine gain from curtailment and also show liability to be
recognized in balance sheet of P Ltd. after curtailment.
(4 Marks)
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(d)
You are required to identify equity and liability components and prepare Amortisation
Schedule on the basis of following information:
Number, Value and
Period
Proceeds received
Interest rate
Conversion
Prevailing market rate
PVF
4,000 bonds issued having face value of Rs.1,000 each
per bond (validity 3 years)
Rs.40,00,000
6 % p.a. payable annually
250 ordinary shares per bond at discretion of bond
holder
9 % p.a. for bonds issued without conversion option
6%: 3 years: 2.673 3rd Year: 0.840
9%: 3 years: 2.531 3rd Year: 0.772
(4 Marks)
(e)
Option Ltd. is engaged in manufacturing of steel. For its steel plant, it required
machineries of latest technology. It usually resorts to Long Term Foreign Currency
Loans (LTFCL) for its fund requirements. On 1st April 2011, it borrowed USD 1
million from International Funding Agency, USA when exchange rate was 1 $ =
Rs.52. The funds were used for acquiring machines on the same date to be used in
three different steel plants. The useful life of the machineries is 10 years and their
residual value is Rs.20,00,000.
Earlier, also the company used to purchase machineries out of LTFCL. The
exchange differences arising on such borrowings were charged to Profit and Loss
account and were not capitalized even though the company had an option to
capitalize it as per amended AS 11.
Now, for this new purchase of machinery, Option Ltd. is interested to avail the option
of capitalizing the same to the cost of asset. Exchange rate on 3st March 2012 is 1 $
= Rs.51. Assume that on 31st March 2012, Option Ltd. is not having any old LTFCL
except for the amount borrowed for machinery purchased on 1st April 2011.
Can Option Ltd. capitalize the exchange difference to the cost of the asset on 31st
March 2012? If yes, calculate amount of depreciation on machineries as on 31st
March 2012. Answer in lakhs of rupees.
(4 Marks)
(Assessed answer papers should be collected from
NEW CLASS on 17th October 2015)
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
9
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Solution of
FR Mock Test 3
Conducted on 9th October 2015
Q1
(a)
As per AS 29 “Provisions, Contingent Liabilities and Contingent Assets” a provision
should be recognized if –
(i)
(ii)
(iii)
There is present obligation on account of past event
It is probable that there shall be an outflow of resources to settle such
obligation and
A reliable estimate can be made for the amount of obligation
(1 Mark)
(i)
In the given case, there is neither any present obligation as a result of past event,
nor a reliable estimate can be made of the amount of obligation. Accordingly, a
provision cannot be recognized for such contingencies under the facts and
circumstances of the case.
(2 Marks)
(ii)
“Provision” is the amount retained by the way of providing for any known liability.
Since the contingencies stipulated by the company are not known at the balance
sheet date, the provision in this regard cannot be created. Therefore, the provision
so created by the company shall be treated as a “Reserve”.
(2 Marks)
(b)
AS 25 “Interim Financial Reporting” prescribes discrete view i.e. it considers each
interim period as a separate financial period. Hence, allocation of income and
deferment of expenditure of one interim period to another interim period is not
permissible. Further, if any accounting policy is changed in current interim period
effect of such change of previous interim periods should be provided in previous
interim periods since an accounting policy is changed retrospectively. However, if an
accounting estimate is changed in current interim period, its entire effect shall be
given in current interim period since an accounting estimate is changed
prospectively.
Calculation of Net Income for the quarter ended 31st December 2010:
Net Profit as given
Extra-ordinary loss wrongly allocated to 4th quarter
Extra-ordinary gain of 1st quarter wrongly allocated
to 3rd quarter
Bad debts of 2nd quarter wrongly allocated to 3rd quarter
Change in provision is change in accounting estimate
Excess Depreciation related to previous quarters
5,40,000
(25,000)
(30,000)
40,000
No Effect
60,000
5,85,000
(5 Marks)
Solution prepared by
CA. Ashish Lalaji
10
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(c)
As per AS 13 “Accounting for Investments”, the cost of investments includes
acquisition charges such as brokerage, commission and duties.
(2 Marks)
In the present case, Take Ltd. has used borrowed funds for purchasing shares of its
subsidiary Give Ltd. The interest cost of Rs.4 lakhs cannot be considered to be
acquisition charge / cost of investment and hence cannot be capitalized to the cost
of investment.
(2 Marks)
(d)
Determination of Landed Cost of Brain Scan Equipment:
Particulars
Amount
(Rs. in lakhs)
Purchase Cost ($5 X 50)
Add: Sea Freight
Transit Insurance, bank charges, etc. ($.12 X 5 X 50)
Landed Cost on 01.04.10
250
20
30
300
Company follows WDV method of depreciation, but WDV rate is not given.
WDV Rate of Depreciation
= 1 – (Residual Value / Cost of asset) 1/n
= 1 – (39 / 300) ¼
= (1 – 0.6) i.e. 0.4 i.e. 40%
(2 Marks)
Government grant of Rs.94 lakhs was received on 01.04.10, which has been treated
as deferred income. Every year transfer shall be taken from deferred government
grant account to profit and loss account in proportion of depreciation charged. This is
shown as under –
Year
2010 – 11
2011 – 12
2012 – 13
2013 – 14
Depreciation
Deferred Grant
@ 40% Recognized in P & L A/c
120.00
43.20*
72.00
25.92
43.20
15.55
25.92
9.33
261.12
94.00
* 94 X (120 / 261.12)
Government grant is refunded on 01.04.13, on which date balance in deferred
government grant account is Rs.9.33 lakhs.
Accounting Entry:
Deferred Government Grant A/c
Dr.
9.33
Profit and Loss A/c
Dr.
84.67
To Bank A/c
(being return of grant received in April 2010 due to
non-fulfillment of conditions)
94
(4 Marks)
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Q2
(a)
Determination of Cost to Company in Employing Mr. X:
Salary before tax (4,00,000 X 12 i.e. 48,00,000 / 75%)
Add: Employee’s PF Contribution (50,000 X 12)
Employer’s PF Contribution (50,000 X 12)
Amount
(Rs.)
64,00,000
6,00,000
6,00,000
76,00,000
(2 Marks)
Determination of Capital Base:
Paid-up Equity Share Capital (5,00,000 shares X Rs.75)
Less: Calls in arrears
General Reserve
Profit and Loss Account (opening balance)
Profit for the year
8 % Debentures
Capital Base
Amount
(Rs.)
3,75,00,000
1,00,000
3,74,00,000
10,00,000
(25,00,000)
(1,80,000)
80,00,000
4,37,20,000
(2 Marks)
Determination of Maximum that can be paid to Mr. X:
Target Profit = 4,37,20,000 X 12.5% i.e. Rs.54,65,000
Profit that can be achieved if Mr. X is employed = 54,65,000 (1.1) = Rs.60,11,500
(1 Mark)
Conclusion:
Company is advised not to employ Mr. X as his CTC Rs.76,00,000 is more than
Rs.60,11,500
(1 Mark)
(b)
Determination of Cost of Bought-in materials and Services:
Sales
Less: Trading Profit
Total Cost
Less:
Salaries and Wages
Director’s remuneration
Cost of bought-in materials and services
Amount
(Rs. in ‘000s)
21,350
1,920
19,430
3,685
360
15,385
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
12
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Gross Value Added Statement of XYZ Ltd. for the year ended 31st March 2014:
(Rs. in ‘000s)
VALUE ADDED
Amount Amount
Sales less return
21,350
Less: Cost of bought-in materials and services
15,385
Value Added by manufacturing and trading activities
5,965
Add: Interest received
20
Other income
80
100
Less: Extraordinary items
Surplus on sale of properties
20
Loss of goods by fire
(35)
(15)
Gross Value Added
6,050
VALUE APPLIED
To Pay Employees:
Salaries, wages and other benefits
3,685
To Pay Directors:
Director’s remuneration
360
To Pay Government:
Income Tax (688 – 148)
540
To Pay Providers of Capital:
Interest on loans and overdraft
Proposed Dividend
160
340
To Provide for Maintenance and Expansion:
Depreciation
Transfer to Deferred Tax
Retained Profit
302
148
515
500
965
6,050
(8 Marks)
Q3
Holding of A Ltd. in JCE is 75%. However, proportionate consolidation method is to
be followed. Hence, JCE is not deemed to be subsidiary of A Ltd.
Working Notes:
(1) Profits earned by B Ltd. during 2013 – 14:
Amount
(Rs.)
Profit and Loss account as on 31.03.14
(1,50,000)
Add: Loss by fire (9,000 – 3,000)
6,000
(1,44,000)
Less: Profit and Loss account as on 01.04.13 (2,25,000)
81,000
(2 Marks)
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(2) Analysis of Profits of B Ltd.:
Capital Revenue
Profits
Profits
(Rs.)
(Rs.)
Profit and Loss account as on 01.04.13 (2,25,000)
--------Profit in 2013 – 14 (4:8)
27,000
54,000
(1,98,000)
54,000
Loss by fire in June 2013
(6,000)
--------(2,04,000)
54,000
A Ltd. (75%)
(1,53,000)
40,500
(2 Marks)
(3) Determination of Goodwill / Capital Reserve:
Cost of Shares
Less: Paid up Value
Share in capital profits
Goodwill
Amount
(Rs.)
1,20,000
1,50,000
(1,53,000)
1,23,000
(2 Marks)
(4) Consolidated Profit and Loss Account:
Profit and Loss account as on 31.03.14 of A Ltd.
Add: Share in Revenue Profits
Unrealised profit (3,000 X 50% X 75%)
Amount
(Rs.)
80,000
40,500
(1,125)
1,19,375
(2 Marks)
st
Consolidated Balance Sheet of A Ltd. as on 31 March 2014
I.
1.
(a)
(b)
Equity and Liabilities:
Shareholders’ Funds
Share Capital
Reserves and Surplus
2.
Non Current Liabilities
Long Term Borrowings (6% Debentures)
3.
II.
1.
Current Liabilities
Trade Payables (1,25,625 – 22,500)
Total
Assets:
Non Current Assets
Fixed Assets
- Tangible
- Intangible (Goodwill)
Non Current Investment
(Debentures of B Ltd.)
Note No.
Amount
1
6,00,000
3,19,375
Amount
9,19,375
1,12,500
1,12,500
1,03,125
1,03,125
11,35,000
7,75,500
5,62,500
1,23,000
90,000
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2.
Current Assets
Inventories
Trade Receivables (1,13,750 – 22,500)
Cash and Cash Equivalents
Total
3,59,500
2
1,83,875
91,250
84,375
11,35,000
See accompanying notes to Consolidated Balance Sheet.
Notes forming part of Consolidated Balance Sheet
Note
No.
1
2
Amount
(Rs.)
Reserves and Surplus
General Reserve
2,00,000
Consolidated Profit and Loss Account 1,19,375
Inventories
As given [1,40,000 + (60,000 X 75%)]
Less: Unrealised Profit
Amount
(Rs.)
3,19,375
1,83,875
1,85,000
1,125
(8 Marks)
Q4
Determination of Number of Equity Shares to be issued:
Particulars
White Ltd. Black Ltd.
Profit before interest and tax (given)
Opening stock is understated (5,00,000 X 5%)
Closing stock is overstated (2,20,000 / 110% X 10%)
Debenture interest (80,000 X Rs.10 X 5%)
Adjusted Profit before tax
Less: Tax @ 40%
Adjusted Profit after tax
Less: Preference Dividend (1,00,000 X Rs.10 X 8%)
Adjusted Profit to equity shareholders
X PE Ratio
Total Value of Equity Shares
Agreed Issue price per equity share
New equity shares to be issued
6,00,000
----------(20,000)
----------5,80,000
2,32,000
3,48,000
----------3,48,000
15
52,20,000
12.5
4,17,600
4,40,000
(25,000)
----------(40,000)
3,75,000
1,50,000
2,25,000
80,000
1,45,000
10
14,50,000
12.5
1,16,000
(2 Marks)
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Determination of Bank Balance:
Particulars
Amount
(Rs.)
From issue of shares (20,00,000 X 14)
12.5 % Term Deposit (TOD)
Profit from trading in futures (pre-tax)
(2,80,00,000 X 18%) / 60%
Dividend Received from White (3,00,000 X Rs.10 X 5%)
Black (1,20,000 X Rs.10 X 2%)
Dividend Paid [4,17,600 + 1,16,000 i.e. 5,33,600 X 10 X 3.5%]
Preliminary expenses
Working expenses
TOD interest (15,00,000 X 12.5% X 2/12)
TOD settled
Debenture interest (80,000 X Rs.10 X 5% X 3/12)
Preference Dividend (1,00,000 X Rs.10 X 8% X 3/12)
2,80,00,000
15,00,000
84,00,000
1,50,000
24,000
(1,86,760)
(12,00,000)
(2,00,000)
(31,250)
(15,00,000)
(10,000)
(20,000)
3,49,25,990
(3 Marks)
Determination of Provision for Tax:
Particulars
Amount
(Rs.)
Profit from trading in futures (pre-tax)
Less:
Preliminary expenses (12,00,000 X 20%)
Working expenses
TOD interest
Debenture interest
Taxable Income
X Tax Rate
Provision for tax
84,00,000
2,40,000
2,00,000
31,250
10,000
79,18,750
40%
31,67,500
Notes:
(a)
In balance sheet preliminary expenses shall be netted from securities
premium. Hence, it does not represent a timing difference. Thus, deferred
taxes need not be provided for.
(b)
Dividends received are tax free and hence not considered in above working.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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Statement of Profit and Loss of Black and White Ltd. for the period 1st October
2010 to 31st December 2010:
Particulars
Note
No.
I. Revenue from Operations
(Dividend Received)
II. Other Income
(Profit from futures)
III. Total Revenue (I + II)
IV. Expenses:
Working expenses
TOD interest
Debenture interest
V. Profit before tax (III – IV)
VI. Tax Expenses
(a) Current tax
(b) Deferred tax
VII. Profit for the period (V – VI)
Amount
(Rs.)
Amount
(Rs.)
1,74,000
84,00,000
85,74,000
2,41,250
2,00,000
31,250
10,000
83,32,750
31,67,500
31,67,500
------------51,65,250
(3 Marks)
Balance Sheet of Black and White Ltd. as on 31st December 2010:
Note No.
I.
1.
(a)
(b)
Equity and Liabilities:
Shareholders’ Funds
Share Capital
Reserves and Surplus
2.
Non Current Liabilities
Long Term Borrowings
(5% Debentures)
3.
II.
1.
2.
Amount
Amount
3,94,28,490
1
2
2,63,36,000
1,30,92,490
8,00,000
8,00,000
Current Liabilities
Short Term Provision (Provision for tax)
Total
Assets:
Non Current Assets
Non Current Investment in subsidiaries:
Equity Shares
(52,20,000 + 14,50,000)
Preference shares
Debentures
Current Assets
Cash and Cash Equivalents
31,67,500
31,67,500
4,33,95,990
84,70,000
66,70,000
10,00,000
8,00,000
3,49,25,990
3,49,25,990
Total
4,33,95,990
See accompanying notes:
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Note
No.
1
Amount
(Rs.)
Share Capital:
2,63,36,000
(a) Equity Share Capital:
5,33,600 + 20,00,000 i.e. 25,33,600 equity
shares of Rs.10 each fully paid up
2,53,36,000
(of which 5,33,600 shares issued for
consideration other than cash)
(b) Preference Share Capital:
8 %, 1,00,000 Preference shares of Rs.10 each
2
Amount
(Rs.)
Reserves and Surplus
Securities Premium
[(5,33,600 X 2.5) + (20,00,000 X 4)]
Less: Preliminary expenses
Profit and Loss Account
Opening Balance
Add: Profit for the period
Less: Dividend Paid
Equity
Preference
10,00,000
93,34,000
12,00,000
81,34,000
------------51,65,250
51,65,250
1,86,760
20,000
49,58,490
1,30,92,490
(6 Marks)
Q5
(a)
Number of employees on 01.04.11 is not available.
No. of
No. of
No. of
Employees
= Employees
+ Employees completing 3 years
On 01.04.11
With vested options
but leaving the organization
= 975 + (35 – 5) + 20 + (20 – 5)
= 975 + 30 + 20 + 15
= 1,040
(2 Marks)
Be free to send your suggestions / comments to
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Expense to be recognized for each year:
Date
Expected
Fair Value of
SAR
Provision
p.a. based
on FV
Cumulative
Provision to
be recognized
Provision
Already
Recognised
Provision
to be
Recognised
31.03.12
1,040 X .95 X .95 X
.95 X 60 X 20
i.e. 10,70,004
10,70,004
3
i.e. 3,56,668
3,56,668
---------
3,56,668
(1,040 – 30) i.e. 1,010
X .9 X .9 X 60 X 25
i.e. 12,27,150
12,27,150
3
i.e. 4,09,050
4,09,050 X 2 i.e.
8,18,100
3,56,668
4,61,432
975 X 60 X 27
i.e. 15,79,500
15,79,500
3
i.e. 5,26,500
5,26,500 X 3 i.e.
15,79,500
8,18,100
7,61,400
17,55,000
15,79,500
1,75,500
31.03.13
31.03.14
15.05.14
Cash to be paid:
975 X 60 X 30
i.e. 17,55,000
(4 Marks)
Provision for SAR Account
31.03.12
To Balance c/d
3,56,668
31.03.12
By Employee Compensation A/c
3,56,668
31.03.13
To Balance c/d
8,18,100
3,56,668
01.04.12
By balance b/d
3,56,668
31.03.13
By Employee Compensation A/c
4,61,432
8,18,100
31.03.14
To Balance c/d
15,79,500
8,18,100
01.04.13
By balance b/d
8,18,100
31.03.14
By Employee Compensation A/c
7,61,400
15,79,500
15.05.14
To Bank A/c
17,55,000
3,56,668
15,79,500
01.04.14
By balance b/d
15.05.14
By Employee Compensation A/c
17,55,000
15,79,500
1,75,500
17,55,000
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
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(b)
Determination of NOPAT:
PAT = Retained PAT + Preference Dividend + Equity Dividend
PAT = 100 + 30 + 160 = Rs.290 lakhs
PBT = PAT / 1 – t = 290 / 1 – 0.4 = Rs.483.33 lakhs
PBIT = PBT + Interest = 483.33 + 50 + 45 = Rs.578.33 lakhs
NOPAT = EBIT – Taxes = 578.33 – 40% = Rs.347 lakhs
(3 Marks)
Determination of Total Capital Employed (TCE):
Particulars
Equity Capital
Preference Capital
Long Term Debt (500 + 450)
TCE
Amount
(Rs. in lakhs)
800
250
950
2,000
Determination of WACC (ko):
Ke = 6.5 + 1.5 (16.5 – 6.5) = 21.5 %
Ko = 21.5 (800) + 12 (250) + 10 (1 - .4) (950) / 2,000 = 12.95 %
(2 Marks)
Computation of EVA:
EVA = NOPAT – [TCE X WACC(%)] = 347 – (2,000 X 12.95%) = Rs.88 lakhs
(1 Mark)
Q6
(a)
Determination of Future Maintainable Profit (FMP):
Particulars
Amount
(Rs. in lakhs)
PBT for 2013 [48 / .64]
Add: Subsidy not receivable in future
Interest on term loan not payable in future
Additional managerial remuneration
Loss on sale of fixed assets and investments
FMP before tax
Less: Tax @ 34 %
FMP to equity shareholders
75.00
(2.00)
8.00
(6.00)
8.00
83.00
28.22
54.78
(4 Marks)
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Determination of Capitalisation Rate and Value of Business:
Particulars
Amount
(Rs. in lakhs)
(a) PAT for the year 2013
(b) Number of equity shares (100 / 50)
(c) EPS (a / b)
(d) MPS
(e) PE Ratio (d / c)
(f) Capitalisation Rate [ 1 / PE Ratio]
(g) Value of Business [54.78 / 20%]
48.00
2.00
24.00
120.00
5.00
20 %
273.90
(4 Marks)
(b)
(i) Determination of Principal Outstanding as on 01.04.10:
Cash price is Rs.80 lakhs and down payment is Rs.20 lakhs. Hence, principal
amount of asset is Rs.60 lakhs on 31.03.09. Interest is to be determined @ 10.42%.
Loan repayment schedule is prepared as under:
Date
31.03.10
31.03.11
31.03.12
31.03.13
31.03.14
Loan at
Interest
beginning @ 10.42%
60
6.25
50.25
5.24
39.49
4.11
27.60
2.88
14.48
1.52*
Total Instalment Loan at
Dues
the end
66.25
16.00
50.25
55.49
16.00
39.49
43.60
16.00
27.60
30.48
16.00
14.48
16.00
16.00
---* balancing figure
It is evident from above table that principal outstanding on 01.04.10 is Rs.50.25
lakhs. Interest income in 2nd instalment for the year 2010 – 11 is Rs.5.24 lakhs. The
instalment was due on 31.03.11 but has not yet been collected till 15.05.11. The
instalment is not overdue for more than 12 months and hence is a performing asset.
Interest income of Rs.5.24 lakhs shall be recognized as income in 2010 – 11.
(3 Marks)
(iii) Determination of provision to be recognised:
Amount
(Rs. in lakhs)
16.00
48.00
64.00
Overdue instalment
Instalments not due (16 X 3)
Less: Finance charge not matured and hence not credited to P & L A/c
(4.11 + 2.88 + 1.52)
Less: Depreciated value of the underlying asset
[80 – (80 X 20% X 2 years) i.e. 80 – 32]
Provision to be recognized
8.51
55.49
48.00
7.49
The instalment is not overdue for more than 12 months and hence is a standard
asset. Hence, no further provision is required
(3 Marks)
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(ii) Determination of Net Book Value as on 31.03.11:
Amount
(Rs. in lakhs)
16.00
48.00
64.00
Overdue instalment
Instalments not due (16 X 3)
Less: Finance charge not matured and hence not credited to P & L A/c
(4.11 + 2.88 + 1.52)
8.51
55.49
7.49
48.00
Less: Provision recognized
Net Book value as on 31.03.11
(2 Marks)
Q7
(a)
As per AS 9 “Revenue Recognition”, revenue from sale of goods should be
recognsied when –
(i)
Property in goods has been transferred from seller to buyer, or significant
risks and rewards incident to ownership has been transferred from seller to
buyer and
Collection of revenue is certain
(ii)
(2 Marks)
In the present case, the goods, as well as risks and rewards incident to ownership
has been transferred to the power plants. Even the invoice is raised for full amount
by Perfect Ltd. though it receives 90 % and balance 10 % is kept as retention
money. Perfect Ltd. should recognize revenue at full invoice price i.e. 100% of sales
price. The company should make a separate provision for the balance 10 % amount
to reflect the uncertainty rather than to adjust the amount of revenue. Thus, the
practice adopted of recognizing only 90 % of sales price as revenue by Perfect Ltd.
is not in consonance with AS 9.
(2 Marks)
(b)
Computation of Lease Rent:
Let the lease rent charged at the end of the year be Rs.X.
Year
Lease
PVF
Receipt (10%)
1–3
X
2.486
3
1,33,500 0.751
PV
2.486X
1,00,258.5
1,00,258.5 + 2.486X
(2 Marks)
It is given that the above Present Value shall be equal to cost of asset i.e.
16,99,999.5. Thus –
1,00,258.5 + 2.486X = 16,99,999.5
X = 15,99,741 / 2.486 = Rs.6,43,500
(1 Mark)
Solution prepared by
CA. Ashish Lalaji
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Total Unearned Finance Income
= [(6,43,500 X 3) + 1,33,500] – 16,99,999.5
= 20,64,000 – 16,99,999.5
= Rs.3,64,000.5
(1 Mark)
(c)
Determination of Net Liability Before and After Curtailment:
Rs. in lakhs
Particulars
Before
Curtailment
After
Curtailment
Present Value of Obligation
4,000
Less: Fair Value of Plan Assets
Unamortised Past Service Cost
Net Liability
3,250
100
650
3,500
(4,000 – 500)
3,250
87.5*
162.5
(3 Marks)
Net Liability has reduced i.e. gain due to curtailment is Rs.487.5 lakhs (650 – 162.5)
(1 Mark)
* Proportion of reduction of obligation = 500 / 4,000 i.e. 12.5 %
Hence, past service cost has reduced by Rs.12.5 lakhs (100 X 12.5%)
(d)
Determination of Value of Debt Component:
Year
1–3
3
Cash
Outflows
2,40,000
40,00,000
PVF
(9%)
2.531
0.772
PV
6,07,440
30,88,000
36,95,440
Determination of Value of Equity Component:
Equity Component
= Total Amount Collected – Value of Debt
= 40,00,000 – 36,95,400
= Rs.3,04,560
(2 Marks)
Amortised Cost Schedule:
Year
(a)
1
2
3
Amortised
Cost at
Beginning
(b)
36,95,440
37,88,030
38,88,953
Interest
Expense
@ 9%
(c)
3,32,590
3,40,923
3,51,047*
Total
Amount
Instalment
Paid
(d) = b + c
40,28,030
41,28,953
42,40,000
(e)
2,40,000
2,40,000
2,40,000
Amortised
Cost at the
End
(f) = d - e
37,88,030
38,88,953
40,00,000
* Balancing Figure
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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(e)
Amended AS 11 provides an alternate treatment of exchange differences arising on
translation of LTFCL, whereby such exchange differences are adjusted to cost of
depreciable fixed assets acquired from use of such LTFCL.
Option Ltd. can avail this alternative treatment but once this option is exercised, it is
irrevocable.
(2 Marks)
Determination of amount of depreciation:
Particulars
Amount
(Rs. in lakhs)
Cost of machineries on 01.04.11 ($ 10 lakhs X 52)
Less: Exchange gain on translation of LTFCL
[$ 10 lakhs (52 – 51)]
Less: Depreciation for 2011 – 12 [510 – 20 / 10 years]
Carrying amount of machineries as on 31.03.12
520
10
510
49
461
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
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24