IPCC-PAPER 5: ADVANCED ACCOUNTING
Review Test -3
Advanced Accounting-Full Course
Date: 17/10/2015.
Duration: 3 Hrs.
Marks: 100 Marks.
Q 1 is compulsory.
Answer any 5 from the remaining
1.
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 is 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:
1) 5% contingency charges are treated as income and matching provision for the
same is also made in accounts
Page 1 of 11
2) 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)
b) 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 the 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 @ 40%.
(5 Marks)
c) 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.
(5 Marks)
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d) Annual Lease Rent = Rs.40,000 at end of each year
Lease Period = 5 years
Guaranteed Residual Value = Rs.14,000
Fair value at the inception of lease = Rs.1,50,000
Interest rate implicit in lease = 12.6%
PVF at 12.6%:
1 – 0.89;
2 – 0.79;
3 – 0.7;
4 – 0.622;
5 – 0.552
Show the journal entry to record the asset taken on finance lease in the books of
lessee.
(5 Marks)
2. Ajay Enterprises, a Partnership firm in which A, B and C are three partners sharing
profits and losses in the ratio of 4:3:3. The balance sheet of the firm as on 31st
December, 2011 is as below:
Liabilities
A' Capital
B's Capital
C's Capital
B's Loan
Sundry creditors
`
15,000
7,500
15,000
4,500
16,500
58,500
Assets
Factory Building
Plant & Machinery
Debtors
Stock
Cash at Bank
`
24,160
16,275
5,400
12,390
275
58,500
On balance sheet date all the three partners have decided to dissolve their
partnership. Since the realization of assets was protracted, they decided to distribute
amounts as and when feasible and for this purpose they appoint C who was to get as
his remunerations 1% of the value of the assets realized other than cash at Bank and
10% of the amount distributed to the partners.
Assets were realized piece-meal as under:
Particulars
First installment
Second installment
Third installment
Last installment
Dissolution expenses were provided for estimated amount of
The creditors were settled finally for
`
18,650
17,320
10,000
7,000
3,000
15,900
Prepare a statement showing distribution of cash amongst the partners by ‘Highest
Relative capital method’.
(16 Marks)
Page 3 of 11
3.
a) Victory Ltd. issued 2,00,000 equity shares and got the entire issue underwritten as
follows:
A - 60% shares, B - 25% shares and C - 15% shares.
In addition to the above-mentioned arrangement, there was the following firm
underwriting:
A - 10,000 shares, B - 8,000 shares and C - 6,000 shares.
Total subscriptions including firm underwriting were 1,70,000 shares.
Marked applications were as follows:
A - 38,000 shares, B - 40,000 shares and C - 12,000 shares.
The shares underwritten firm were treated as unmarked applications as benefit of firm
underwriting is not given to individual underwriters.
Calculate the liability of each one of the underwriters in shares.
(8 marks)
b) The following balances appeared in the books of Paradise Ltd on 1-4-2011:
12 % Debentures:
` 7,50,000
Balance of Sinking Fund:
` 6,00,000
Sinking Fund Investment:
` 6,00,000
(Represented by 10% ` 6,50,000 secured bonds of government of India)
Annual contribution to the Sinking Fund was ` 1,20,000 made on 31st March each
year.
On 31-3-2012, balance at bank was ` 3,00,000 before receipt of interest. The
company sold the investment at 90%, for redemption of debentures at a premium of
10% on the above date.
You are required to prepare the following accounts for the year ended 31st march,
2012:
1) Debentures Account
2) Sinking Fund Account
3) Sinking Fund Investment Account
4) Bank Account
5) Debenture Holders Account
(8 Marks)
Page 4 of 11
4. Hari Ltd. and Narayan Ltd. are to be amalgamated into Hari Narayan Ltd. The new
company is to take over all the assets and liabilities of the amalgamating companies.
Assets and Liabilities of Hari Ltd. are to be taken over at book values in exchange of
shares in Hari Narayan Ltd. Three shares in the new company are to be issued at a
premium of 20% for every two shares of Hari Ltd.
The approved scheme for Narayan Ltd. is as follows:
a) 10% Preference shareholders are to be allowed two 15% Preference shares of `
100 each in Hari Narayan Ltd. for three Preference shares held in Narayan Ltd.
b) The Debentures of Narayan Ltd. are to be paid off at 5% discount by the issue of
debentures of Hari Narayan Ltd. at par.
c)
The Equity shareholders of Narayan Ltd. are to be allowed as many shares at par
in Hari Narayan Ltd. as will cover the balance on their account and for this
purpose, plant and machinery is to be valued less by 15% and obsolete stock
forming 10% of the overall stock value is to be treated as worthless.
From the following summarised Balance Sheets of the two companies prior to
amalgamation you are required to show the Journal Entries and the Balance Sheet of
the amalgamated company immediately after amalgamation:
Liabilities
Equity Shares
Hari Ltd.
Narayan
Ltd.
Assets
6,40,000 12,50,000 Plant and Mach.
of ` 10 each
10% Pref. Share
Trade Debtors
-
7,50,000 Inventory
of ` 100 each
General Res.
Debentures
Trade Creditors
Cash and Bank
8,80,000
Hari Ltd.
12,80,000 20,00,000
1,52,000
1,25,000
1,00,000
1,50,000
1,08,000
1,00,000
-
3,50,000
- Profit & Loss A/c
-
5,00,000
1,20,000
2,25,000
16,40,000 27,25,000
Narayan
Ltd.
16,40,000 27,25,000
You are required to show the journal entries in the books of the amalgamated
company and the balance sheet immediately after amalgamation.
(16 Marks)
Page 5 of 11
5.
a) The following figures are extracted from the books of KLM Bank Ltd. as on 31-032012:
Particulars
`
Interest and discount received
Interest paid on deposits
Issued and subscribed capital
Salaries and allowances
Directors Fees and allowances
Rent and taxes paid
38,00,160
22,95,360
10,00,000
2,50,000
35,000
1,00,000
Postage and telegrams
Statutory reserve fund
Commission, exchange and brokerage
Rent received
Profit on sale of investment
Depreciation on assets
Statutory expenses
Preliminary expenses
Auditor's fee
65,340
8,00,000
1,90,000
72,000
2,25,800
40,000
38,000
30,000
12,000
The following further information is given:
1)
A customer to whom a sum of ` 10 lakhs was advanced has become insolvent
and it is expected only 55% can be recovered from his estate.
2)
There was also other debts for which a provisions of ` 2,00,000 was found
necessary.
3)
Rebate on bill discounted on 31-03-2011 was ` 15,000 and on 31-03-2012 was `
20,000.
4)
Income tax of ` 2,00,000 is to be provided.
5)
Classification of Non Performing Advances:
`
Standard
30,00,000
Sub-standard
1,20,000
Doubtful assets not covered by security
2,00,000
Doubtful assets covered by security for one year
Loss Assets
50,000
2,00,000
The directors desire to declare 5% dividend.
Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2012
and also show, how the Profit and Loss account will appear in the Balance Sheet if the
Profit and Loss account opening balance was NIL as on 31-03-2011.
(8 Marks)
Page 6 of 11
b) The following balances appeared in the books of Happy Life-Assurance Co. Balance
Sheet as on 31st March 2013.
Amount in
Particulars
Rs. lacs
Claims less re-assurance paid during the year
By Death
2200
By Maturity
1500
Annuities
6
Furniture and Office Equipment at cost( Including Rs. 40 Lacs bought
250
during the year)
Printed Stationery
77
Cash with bank on Current Account
1350
Cash and Stamps in hand
30
Surrenders
40
Commission
250
Expense of Management
3100
Sundry Deposits with Electricity Companies etc.
1
Advance payment of Income-tax
50
Sundry Debtors
50
Agents' Balances
100
Income Tax
450
Income Tax on Interest, Dividends and Rents
500
Loan and Mortgages
150
Loans on policies
3250
Sundry investments( Rs. 250 Lacs deposited with the RBI)
52000
Building at cost (including Rs. 85 lacs added during the year)
5400
Total
70754
Share Capital
10000
Life Assurance fund at the beginning of the year
40000
Premium less reassurances
15000
Claims less reassurances outstanding at the beginning of the year
By death
900
By Maturity
600
Credit Balance pending adjustment
60
Consideration for annuities granted
2
Interest, Dividends & Rents
1800
Registration and other fees
2
Page 7 of 11
Sundry Deposits
100
Taxation provisions
300
Premium Deposits
1150
Sundry Creditors
350
Contingency Reserve
150
Furniture and Office Equipment Depreciation account
40
Building Depreciation Account
300
Total
70754
From the forgoing balance and following information, prepare the Revenue Account
for the year ended on that date:
a)
Claims less reassurances outstanding at the end of the year: By death Rs. 600
lacs; By Maturity Rs. 400 Lacs.
b)
Expenses outstanding Rs. 60 Lacs and prepaid Rs. 15 Lacs.
c)
Provide Rs. 45 Lacs for depreciation of building, Rs. 15 Lacs for depreciation of
furniture and office equipment and Rs. 110 Lacs for taxation.
d)
Premium outstanding Rs. 2,028 Lakhs, commission thereon Rs. 65 Lacs.
e)
Interests, Dividends & Rents Outstanding (net) Rs. 30 Lacs and interest and
rents accrued (net) Rs. 350 Lacs.
(8 marks)
6.
a) M/s P and Co., had four departments A, B, C and D. Each department being managed
by manager whose commission was 10% of the respective departmental profit,
subject to a minimum of ` 6,000 in each case.
Interdepartmental transfers took place at a 'loaded' price as follows:
From Department A to Department B: 10% above cost
From Department A to Department D: 20% above cost
From Department C to Department D: 20% above cost
From Department C to Department B: 20% above cost
For the year ending on 31st March, 2014 the firm had already prepared and closed
the departmental Trading and Profit and Loss Account. Subsequently, it was
discovered that the closing stocks of departments had included interdepartmentally
transferred goods at loaded price instead of cost price.
Page 8 of 11
From the following information prepare a statement re-computing the departmental
profit or loss:
Dept. A
`
(38,000)
-
Particulars
Final profit (loss)
Inter departmental
transfers incl. at
loaded price in stock.
departmental
Dept. B
`
50,400
70,000
(` 22,000 from
A & ` 48,000
from C)
Dept. C
`
72,000
-
Dept. D
`
1,08,000
4,800
(` 3,600 from
C & ` 1,200
from A)
(8 Marks)
b) Ram of Chennai has a branch at Nagpur to which office; goods are invoiced at cost plus 25%. The
branch makes sales both for cash and on credit. Branch expenses are paid direct from Head Office
and the branch has to remit all cash received into the Head Office Bank Account at Nagpur.
From the following details, relating to the year 2009, prepare the accounts in Head Office Ledger
and ascertain Branch Profit as per stock and debtors method. Branch does not maintain any books
of accounts, but sends weekly returns to head office:
Particulars
`
Goods received from head office at invoice price
Returns to head office at invoice price
1,20,000
2,400
Stock at Nagpur branch on 1.1.2009 at invoice price
12,000
Sales during the year – Cash
40,000
Credit
72,000
Debtors at Nagpur branch as on 1.1.2009
14,400
Cash received from debtors
64,000
Discounts allowed to debtors
1,200
Bad debts during the year
800
Sales returns at Nagpur branch
1,600
Salaries and wages at branch
12,000
Rent, rates and taxes at branch
3,600
Office expenses at Nagpur branch
1,200
Stock at branch on 31.12.2009 at invoice price
24,000
(8 marks)
Page 9 of 11
7. Answer any four:
a) Win Ltd. has entered into a three year finance lease arrangement with a Sports Club
in respect of fitness equipments costing ` 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 ` 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)
b) 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 $ = ` 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 `
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 $
= ` 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 31 st
March 2012? If yes, calculate amount of depreciation on machineries as on 31st March
2012. Answer in lakhs of rupees.
(4 Marks)
Page 10 of 11
c) During the year 2012 – 13, R Ltd. was sued by competitor for Rs.15 lakhs for
infringement of a trademark. Based on the advice of the company’s legal counsel, R
Ltd. provided for a sum of Rs.10 lakhs in financial statements for the year ended 31st
March 2013. On 18th May 2013, the Court decided in favour of the party alleging
infringement of the trademark and ordered R Ltd. to pay the aggrieved party a sum of
` 14 lakhs. The financial statements were prepared by the company’s management on
30th April 2013 and approved by the board on 30th May 2013.
Should R Ltd. adjust its financial statements for the year ended 31st March 2013?
What would be the treatment of the above, in case the court decision was held on 1st
June 2013?
(4 Marks)
d) What are the liabilities of designated partners in a LLP. Explain in brief.
(4 Marks)
e) Umesh Ltd. (a listed company) has a share capital of ` 300 lakhs in equity shares of `
10 each. It also has free reserves worth ` 287 lakhs. It resolves to buy back
maximum possible fully paid equity shares (round off to nearest Lakhs) of ` 10 each
at ` 22 per share from the open market. For the purpose, it issues 1 lakh 11 %
preference shares of ` 10 each at par, the entire amount being payable with
applications. The company uses ` 16 lakhs of its balance in Securities Premium
Account apart from its adequate balance in General Reserve to fulfill the legal
requirements regarding buy-back. Give necessary journal entries to record the above
transactions.
(4 Marks)
---------Best of Luck-------- Please return the Question Paper along with the answer sheet.
 Assessed answer papers will be returned by 24th October, 2015.
________________________________________________________________________________________________________________________________________________________________________________________________
Questions and Solutions prepared by Jai Shah, CA & CFA (USA)
M: +91-9601258161; website: www.ashishlalaji.net
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